The Network Garden - Mark Sigal's Blog

Capitalism 2.0: Burning Cortez’ Boat

This is a post about Safety Nets, and Cutting the Cord.
 
It’s about what I call Capitalism 2.0, a schema for figuring out, documenting and executing the going-forward economic paths and corresponding public policy positions needed to get to the other side of our Economic Storm in direct, honest, rapid and (wherever possible) market-driven fashion.  
 
What follows is a true story to frame what’s going on.
 
A friend of mine is a member of the Top 100 Club in his Industry. A wheeler-dealer, his industry group had a conference to probe everyone’s outlook for the year ahead. Government and private sector economists also took part in the session.
 
The event yielded some interesting conclusions. One, there remains a lot of overhang within the system.  By overhang, I mean a few things:

1. Assets where a preponderance of artificially high valuations support a financial myth. This has lead to a market where banks sit on falsely valued assets interminably because they expect the government to step in and make them whole.  At the same time, they are reporting record profits, a disturbing asymmetry if you think about it.
2. Assets that have loans coming due for which there is no one else willing to re-finance, including the CURRENT lender. Logically, this suggests a wave of massive capital calls and foreclosures is coming.
3. Lenders have been playing a game called Extend and Pretend whereby they avoid foreclosing on underwater assets so as to avoid the day of reckoning.
4. The bubble that burst in Residential Real Estate is actually dwarfed by the one yet to burst in Commercial Real Estate.
   

And this does not even touch upon the consumer spending side of this equation, which I will get to in a bit. 

So with that framing, what was the outlook of the attendees, all Big Cos and Experts in their fields?

1. One third of the attendees think that the year ahead will be better than the last;  
2. The next third think that we are at bottom, but that we will continue to traipse along the bottom in the year ahead; 
3. The last third think that things are only to get worse in the year ahead.

In other words, there is no consensus viewpoint. 

The most telling read: an old timer saying that his view of the road ahead has never been so cloudy.

Ruminate on what that means in terms of National Agenda 'plan of record' thinking for a bit.  How do you solve a global problem when no one can agree on the cure and/or effectiveness of different treatment protocols?

 
The Come to Jesus Moment Awaits Us
The above is an explicit admonition that there is no obvious answer; no clear precedents; and in some cases, that what is broken cannot be fixed.
 
The fundamental reset is that Cheap and Easy Credit is being replaced by rigorous, transparent underwriting standards, and that this reset will change our economic footprint moving forward.
 
And to be clear, credit availability contraction will not be pain-free, as we have seen in the past year.  
 
Given that, we need to holistically re-think things like safety nets, universal services and cost-inflation containment mechanisms with a 20-year horizon in mind, as the 2-4 year horizon variety will not get the job done.  
 
Why? Because the alternative is a slow unwinding and de-leveraging, which history shows us from Japan's lost decade.
 
In parallel, we need to improve upon our policing, enforcement and punishment levers so as to: A) Ensure fair pricing levels; B) Protect against fraud; and C) Make 'service-level' expectations and results transparent to the market.  
 
Sidebar: To help you marinate on the complexity of the topic, watch this 60 Minutes segment on Medicare Fraud.  Just shocking.

 

 
Burning Cortez’ Boat
So many of our consumption patterns have been driven by a lifestyle enabled by cheap and easy credit. As that pattern unwinds, it will materially change the flow of funds through our economy.
 
At the macro level, this means that we must take write-downs aggressively, but factor in the appropriate safety nets.  

In parallel, maybe we also need to re-think the construct of Moral Hazard by holding people personally responsible for the ethics of their companies (versus perennially hiding behind the corporate shell); something we can only honestly do if we have tort reform.
 
This is the fundamental challenge of our time. To stand up as a society and say, “Let me pay the true price NOW so my kids and their kids don’t have to in the future.”
 
When you net that out, it’s akin to Cortez’ Boat; burning the boat so that there is no turning back.

Related Posts:

1. Engine Failure: When Financial Markets Fail
   
2. Capitalism 2.0: TED Spreads and Lessons from Japan’s Lost Decade
   
3. Getting Real: On Doomsday, the Demise of So-Called Experts and the New Arbitrage 

iPhone Killers, Blackberries and Chicken Parts (Guest Column @ O'Reilly Radar)

(Backdrop: Recently, I upgraded to the Blackberry Tour, an experience that left me pondering why so many solution providers confuse delivering a bunch of 'chicken parts' with producing an actual, living, breathing chicken.)

MG Siegler, over at TechCrunch, has written an excellent article that shines a light on the cycle from hype to disappointment that goes with being dubbed an 'iPhone Killer.'

BlackBerry Storm, Palm Pre, the G2, and now Droid have all been touted as contenders to the mobile computing crown, yet the iPhone continues to kick butt.

No less, Apple has levered its market leadership position with iPhone (and the iPod Touch) to create a halo effect on the rest of its business, generating bottom line results that are industry-defining (see analysis of Apple's Q4 results HERE).

Meanwhile, conventional wisdom, shaped by the history of Apple vs Microsoft during the PC Wars, tells us that Android is 'destined' to be bigger than the iPhone worldwide.

And to be clear, would-be iPhone slayers are indeed establishing strategic positions that have the potential to become compelling and differentiated within the mobile market. Examples include:

• Android: We are more open than Apple;
• RIM: We are more enterprise-ready;
• Palm Pre: We are more web-native;
• Android, RIM, Nokia, et al: We are a heterogeneous device platform. 

But, alas, there is a fly in the ointment. Many of the above solutions are at a functional stage where they still fail to deliver a 'more than the sum of the parts' experience - at a time when Apple is clicking on all cylinders from a product innovation and new product pipeline perspective.

Read the full article HERE.

Related Posts: 

1. Android vs. iPhone: Why Openness May Not Be Best
2. The Right Stuff: Apple's Q4 Earnings Call
3. Rebooting the Book: One Apple iPad Tablet at a Time

The Right Stuff: Apple’s Q4 Earnings Call

Stock Price (January 20): $78.20
Stock Price (July 20): $152.91
Stock Price (October 20): $199.57

Okay, so let me net it out for you.  Yesterday’s call was about two things.  One, the iPhone Platform, continues to deliver the goods.  

In fact, the high profile wins for Google Android notwithstanding – Motorola’s CLIQ and Verizon’s Droid (rumored to be built by Motorola at Google’s direction) – the Android Platform still feels a good 12-18 months behind where the iPhone is today. (Sidebar: Pre just isn’t yet in the game). 

And, let me assert that everything I know about devices and platform plays tells me that Android isn’t the straight line to inevitability that a lot of people think that it is. 

Why? Just as people fail to appreciate the importance of the App Store and the difficulty getting the surrounding application platform (SDK) right, they are forgetting about the 'unfair advantage' of having iTunes in your arsenal. 

In other words, Apple is playing a hot, and complete hand, and they remain very much on offense. 

The moral to the story is that there is a cosmic and global appeal to the iPhone and the iPod Touch, and the Tablet is on its way.  

By the way, did I mention that Apple is launching iPhone in China, the largest global market, in about a month (via China Unicom)?

Now, I did say that the call was about two things.  The other thing was the continued impressive growth of the Mac, especially MacBooks. 

Some backstory first.  About eighteen months ago, I had this Holy Shit moment (Read: Holy Shit! Apple’s Halo Effect) when I realized that Apple was executing a leverage play that was right out of the Microsoft Global Domination Handbook, circa the PC Wars.

What tipped it for me then was the fact that somehow, despite seemingly overwhelming odds, the Mac was once again relevant.  (Long-term Mac owners remember all too well the dark days when Mac OS obsolescence seemed inevitable.)

The numbers don’t lie sometimes, and in this case, the year-over year Mac sales data was showing a rate of growth that was (as of eighteen months ago) ever-solidly 3.5X better than the PC industry. 

So where are we sitting eighteen months later? In the words of Apple CFO Peter Oppenheimer, “The Mac is showing fantastic momentum,” outpacing the market’s rate of growth in 19 of the past 20 quarters, and in this quarter grew 17% versus 2% for the rest of the market – 8.5X better than the PC industry!  Do you see a trend here?

Apple generated 3.05M sales this quarter, which was their best quarter ever by 440K Macs, a fact that I could tell they were very proud of.  The $29 upgrade pricing on Snow Leopard appears to have realized really good uptake, too.

Oh, and as before, the company is experiencing GOOD GROWTH, not just growth for the sake of optics. The Fourth Quarter, 2009 that ended September 26, 2009 was their most profitable quarter ever (read the FULL RELEASE HERE). Gross margins got better in a difficult economy, growing to 36.6 percent, up from 34.7 percent in the year-ago quarter. Operating margin was its highest-ever at 22%.

International sales accounted for 46 percent of the quarter's revenue (with 42% growth in Asia-Pacific). The company’s products are unquestionably compelling globally, something that felt very evident when I was in Paris earlier this year.

The company also added something REALLY special this quarter.  Another $2.9 billion to top off the $31.1B pile of cash that now constitutes a $34 billion rainy day fund.

On the product front, Portable sales were up 35% and were 74% of Apple’s Mac mix (starting to understand why the Tablet is an imminent add to the product line?)

The Apple Stores have done a brilliant job of bringing first-time Mac and iPod buyers into the Apple family, and same store sales, which had dipped back in the March and June quarters, have rebounded back to their prior levels of a $7.1M average per store. 

At $199, the iPod Touch (20M units sold, runs same software as iPhone, 30M units sold) is the perfect gateway into iTunes, App Store, and a coveted consumer Billing Relationship, adding to the 100M credit card-activated accounts that Apple already has secured.

RBC’s Mike Abramsky asked Apple COO, Tim Cook about “wannabe” phones and how iPhones will maintain their lead, particularly with the looming holiday season.

I liked Cook's answer. “We have significant momentum,” Cook says, as well as apps, which it has “a country mile more than anyone else…we feel very good about suiting up and competing against anyone.” Rivals are still trying to catch up with the first iPhone, he adds, and Apple has moved beyond that. 

If you appreciate what it means to have achieved such a strong level of Platform Status, you know that this is no empty chest beating.  Apple has really delivered the goods.

When you talk to iPhone/iPod Touch owners, a simple truth bubbles to the top again and again; namely, that the iPhone is the first truly 'personal' computer; more personal to its owners than the PC ever was.

In terms of Outlook for the Quarter ahead, Apple as always, sandbagged (i.e., quoting extremely conservative financial guidance so they can handily beat the numbers in the coming quarter).

On deck, they have the Holiday Quarter, armed with a diverse Product Matrix to fit all stocking sizes, and multiple sales channels to reach their base.  Plus, they have been diligent in finding the balance between maximizing operating margins, and not leaving Pricing Overhang for competitors to inculcate.Yet to come: the good tidings of a Strong Product Pipeline in the year ahead.  

Could anyone seriously question the assertion, as backed by tangible results, that Apple has The Right Stuff?

Related Posts:

1. Rebooting the Book (One Apple iPad Tablet at a Time)
2. Analysis: Apple June Quarter Earnings Call - Keeping it Real
3. Holy Shit! Apple’s Halo Effect

Land and Expand: Why Apple Allowing In-App Purchases in Free Apps is a Big Deal

A friend of mine, who also happens to be a VC, once told me about what he calls the ‘Land and Expand’ strategy.

In Land and Expand, you so totally reduce the barriers to customers adopting your product, that it’s relatively easy to get them to at least try your product (or service).

Then, once you have secured this ‘landing,’ there are numerous ways that you can then expand your position to deeper engagement, more mindshare and, hopefully, a higher margin revenue path.

With Land and Expand as a strategic backdrop, I got a 'boo-yah' grin yesterday when Apple announced (via a developer mass-mail) that iPhone app developers can now use In-App Purchase within their FREE apps to sell content, subscriptions, and digital services.

What’s the big deal? Simply put, freemium is now the perfect gateway to Land and Expand on the iPhone, since developers can release one app that can be segmented by price and functionality, and in a consumer-convenient fashion, toggled from free to fee to premium (or recurring subscription), the click action of which will inure the app with new functionality and/or content (e.g., additional chapters of a story, levels of a game and virtual goods to supercharge a user experience).

Previously, Apple held to the credo that “free apps should remain free,” lest customers ever feel the dread of bait and switch.

While intuitive and logical, this binary forking between free and paid forced developers into performing unnatural acts, like releasing (and supporting) separate 'lite' free apps and full-featured paid apps, not exactly the best mechanism for converting free users into paying customers (side note: since the launch of iPhone OS 3.0, paid apps have supported an In-App Purchase mechanism).

For consumers, this meant performing another kind of unnatural act; namely, that you had to purchase and download a ‘new’ piece of software and then uninstall the lite version when you wanted to upgrade to the paid version of the software. Needless to say, hardly a friction-free experience for what is otherwise an ultra consumer-friendly mobile platform.

To be clear, the new approach is not perfect. For example, Apple’s policies still preclude releasing a full functionality, but time-limited, free trial version.

And supporting In-App Purchase is more complex for developers than with ordinary paid apps, inasmuch as it requires them to add payment-tracking code in the app and operate a web service to support the underlying workflow (or piggyback off of the third-party commercial hosting services that have popped up to address this use case).

Moreover, it will force Apple to rework their Top Paid and Top Free listings within App Store (but not Top Grossing) since distinctions between Paid and Free no longer will be pristine.

But the bottom line is that my assumption is that this new model will take hold, which means a couple things.

One, as Marco Arment (of Tumblr and Instapaper fame) notes in his excellent review of the revised In-App Purchasing Policy:

Average prices can go up. People are more willing to pay for (relatively) higher-priced apps if they have free versions. Customers who try the free version and decide to pay for an upgrade no longer need to delete the old app or re-enter their data in the new one. This significantly reduces the friction to upgrade from free versions, which should dramatically increase the proportion of people who do.

Two, this is another sign that Apple gets it, that they are not tone deaf to the reality that in the iPhone Economy, providing developers the tools that they need to build and execute a disciplined plan for engaging and monetizing their target user base is a win for developers, consumers and Apple alike.

Yet another reason that the iPhone Platform remains the gold standard for mobile computing.

Related Posts:

1. Should Apple Give a Rat's Ass that Developers Aren’t Getting Rich off of the iPhone Platform?
2. Is the iPhone Platform Destined to Disrupt the Packaged Software Industry?
3. iPhones, App Stores and Ecosystems

60 Minutes passes 'Unfuckin Believable' test

In the latest craze that has killed several extreme adventurers, men don wing suits, jump off mountain tops and glide at speeds of 140 miles per hour. 

They're "The Birdmen," and this 60 Minutes segment from last night's show (with Steve Kroft reporting) is pretty 'unfuckin believable.'

Both the Video, visually speaking, and the Actual Story, from the perspective of the people behind it, are riveting.

TIP: WATCH IN FULL SCREEN MODE

Watch CBS News Videos Online

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Should Apple Give a Rat's Ass that Developers Aren’t Getting Rich off of the iPhone Platform?

In the Newsweek article, ‘Striking It Rich: Is There An App For That?’ Tony Dokoupil contemplates the many entrepreneurs rushing to create programs for Apple's App Store, who despite seeking fortune and fame, are finding the task pretty hard.

On the one hand, it is humorous to listen to the woes of aspiring millionaires quibble that: 

1. There is no free lunch;
2. It takes time, resources and repeated success to build sustainable wealth in the App Store model;
3. Apple makes the approval process "hard," despite the fact that 85K apps have gotten through in 18 months.

On the other, there is a valid argument that Apple's push to drive volume via “cheap” comes at the potential cost of cultivating breakout, transformational apps that cost more, require a longer sales cycle and more evangelizing to find their beachhead.

Mind you, this is independent of the argument that Apple has democratized the process of app developers achieving global distribution/reach, and monetizing same vis-a-vis the iPhone Platform, which they have unquestionably done.

The argument here is that a successful platform is defined by its developers, and one reason that Microsoft (with an arguably inferior platform) thrived for so long; namely, that they could show (and showcase) an ecosystem of third party entrepreneurs getting VERY RICH off of it. This includes hardware OEMs, software developers, VARs, integrators, etc.

After all, nothing motivates like good, old-fashioned greed.

Netting it out: At some point, I believe that Apple will need to figure out the path to breakout success for third-party developers, as the "born-on" date for the many articles referencing Steve Demeter of Trism, and his $250K windfall in two months, is pretty tired - yet there aren't obvious other breakout examples that come to mind.

Related Posts:

1. Is the iPhone Platform Destined to Disrupt the Packaged Software Industry?
   
2. iPhones, App Stores and Ecosystems
3. iPhone, the 'Personal' Computer: The Future of the Mobile Web 

Meme Schemes, Attention Seekers and M&A Flies in the Ointment

 

I have a love/hate opinion of the theater of the absurd that propagates across the “look at me” blogosphere. 

First, a mea culpa.  I am 100% guilty of suffering a case of pot calling the kettle black, so take my comments with some measure of humility and self-awareness.  

That said, I roll my eyes every time I read attention-seekers like Jason Calcanis quit blogging, announce same in a blog post, and then when no one cares, start blogging again as quickly as they see a story wave to ride/exploit. 

Stay or leave, Jason, I don’t care, but just don’t package up your self-promotion “look at me” moments as anything other than a cry for attention.

Similarly, it’s funny to see folks like Jason Fried of 37Signals get a soap box to stand upon (well earned, to be clear - by virtue of cultivating a conversation around good design; eating their own dog food with decent, if uninspiring, products; and driving Ruby on Rails innovation), and then acting like they own the joint (the joint being the Web Economy), arrogantly judging and dismissing the accomplishments of others, since, after all, Jason has found the one 'right' way to be a true entrepreneur. 

Fried first disses the founder of Mint.com (in a post derisively called ‘The next generation bends over’) for taking the money from Intuit, espousing upon the acquisition as “indicative of VC-induced 'cancer' that’s infecting our industry and killing off the next generation.”

Yeah, if cancer involves the entrepreneurial team high-fiving one another gleefully on being set for life, coupled with the gorilla of personal finance kissing your ring finger, let’s hope that 'disease' spreads. 

No less, anyone who knows the first thing about VCs, knows that these guys (VCs) will almost always encourage you to double down versus taking well-earned gains off the table, so Fried's core point is WAY off-base.

(Sinking deeper into “look at me” self-promotion, yet a week later Fried will mock Twitter’s recent $1B valuation in another link-baiting post).

Now, a full two weeks after Fried’s post on the Mint.com-Intuit deal, Dave McClure writes an over the top, expletive-filled “right back atcha” post that seems at least half purposed in making sure that everyone knows that Dave is an angel investor in Mint.com. 

In other words, nobody showboats about a company that I'm involved with without me getting MY whack at the Piñata first.  "Look at me!"

The irony is that McClure’s post is strangely coherent, well-argued and has a really solid thesis that is worth ruminating on before dismissing what can only be called Cirque du Blogosphere, in terms of unabashed theatricality:

1. The trend towards more and more innovation-challenged companies (Exhibit A: Intuit) turning to M&A to enhance their DNA and product pipeline as the Web matures is a long-term one;
   
2. Owing to this same maturity, more entrepreneurs can build a real business on less dollars than in days of old, obviating the need for mega VCs (in many cases), thereby creating an opportunity for savvy angels and micro-fund VCs;
   
3. More transactions are good for Startups Ecosystem (arguably, since small is easier to integrate than big, diversity is innovation, and there is a risk-reward balance for entrepreneurs, investors and acquirers alike).
   

There is, however, one fly in the ointment.  

Namely, that most acquiring companies do a really poor job on the post-acquisition ‘integration' part of M&A.

In other words, they know how to court startups.  They know how to paper a transaction.  

But most are fairly clueless about how to ensure that the core 2-3 'keepers' in terms of technical, product, marketing and/or sales human capital hang around in a long-term, deeply-engaged fashion. 

And, the silo'd nature of larger companies often guarantees that the outcome manifests in a 1+1<2 fashion in terms of whatever differentiation, magic, consumer engagement or product innovation culture they acquired being leeched out within six months of the deal closing.

Netting it Out: If the trend of big fish eating little fish is to be a long-term thing, and I think that it is, then acquiring companies have to get a lot more rigorous about the post M&A integration piece of their M&A strategy.

Did I forget to mention my experience in this domain?  "Look at me," "look at me," "look at me!" ;-)

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