malvasia bianca

I don’t normally blog about current events stuff here: that’s just not the kind of blog that this is, and that’s not exactly a niche in desperate need of filling on the internet. But, to somebody in the tech industry who lives in the same town as Google’s home office (they’re about a mile and a half down the road from me) and not much farther away from Apple’s and HP’s, and who is fascinated with technology and with disruption, there’s really only one response to the events of the week before last. So I figure I’ll write something about it here; and maybe some of the details might be of interest to some of my game-focused readers who haven’t been following this whole soap opera so closely.

One of my favorite blogs of the last year or so (is it two years old now? Wow) is Asymco. It’s written by Horace Dediu, a former Nokia analyst who is very interested in disruption (in the Clayton Christensen sense) in the mobile space. If you read that blog, you’ll see posts week after week slicing and dicing the data in different, interesting ways, all leading to the same story: the incumbent phone makers’ share of the profits in the industry has plummeted by a shocking extent, their revenue share is also in a dramatic decline, and their unit sales aren’t nearly as hot as it once was. Here’s a sample post (albeit with a somewhat less intelligible graph than he normally has): Apple is capturing most of the profits in the mobile phone space, and more than half the revenue.

Of course, the iPhone isn’t the only story there, in two different ways. One is that the iPhone isn’t the only source of disruption in the phone market: Android is also helping eat traditional phone vendors’ lunch. And the other is that it’s not the only way in which Apple’s business success is remarkable: going back to traditional spaces, Apple is capturing a proportion of the profit in the traditional computer space that’s completely out of line with their proportion of sales, and the iPad has singlehandedly created a new tablet market, a market with no other serious contenders and one that is eating into traditional computers’ market shares.

Which is pretty amazing: a single instance of disruption like that would be enough to make people sit up and take notice, but two back to back is really something. And it certainly makes people wonder what’s going on there: in particular, how much is Apple’s integrated hardware/software approach making a difference? (There’s also their increasing design for manufacturing expertise and their sales channels; I won’t talk about them much other than to note that the old story of Apple products being too expensive is quite out of date, with Apple maintaining healthy profit margins on the iPad while other competitors are unable to undercut them on price while maintaining any sort of decent manufacturing quality.)

In the phone operating system space (not yet in the tablet space, though maybe that will change), Google is of course their main competitor. And it’s a bloody, bloody battle, especially around patents. Not just between Apple and Google—Microsoft is making a quite credible amount of money off of patent licensing agreements with Android device manufacturers—but between Apple and Google it’s particularly bloody, because Apple has no apparent desire to license their patents: they’re trying to prevent distribution of competitors’ devices entirely.

This is, of course, a lousy thing: it’s bad for consumers, it’s bad for programmers, it’s bad for innovation. It is, however, fascinating to watch, and here my favorite source of information is the FOSS Patents blog. Its author, Florian Mueller, does a wonderful job of keeping track of all the various lawsuits in this area, both digging up primary documents and providing well-informed commentary. (And it’s not just about the Apple-Google fight, e.g. he covers the Lodsys patent battles better than anybody, and Google is also under heavy heavy attack from Oracle.)

Patents seem to clearly be an area where Apple is much better prepared to work than Google is: Google, to me, seems to be giving off an aura of not, at its core, believing that anybody would take software patents seriously. I’ve been shocked at how vulnerable they seem to be to Oracle’s attack, and when your Chief Legal Officer is made to look stupid on Twitter by Microsoft’s general counsel, you really are not doing a very good job fighting your battles.

Both of these stories led to Google’s announcement a week and a half ago of their plan to purchase Motorola Mobility. The big question there is: how does this fit into the above narratives? Is it a patent play, is it an integration play, is it both, does Google even have a clear plan for the acquisition? (In general, acquisitions do badly for the acquiring company, so the default assumption should be that this one won’t turn out well…)

The early coverage assumed that this was all about the patents: that with Motorola’s patents, finally Google would be able to defend themselves against Apple. The problem with that is that Apple was already going on the offensive against Motorola: so why should we assume that those patents will succeed in defending Android against Apple more broadly?

But if it’s an integration play, then that directly attacks Google’s main selling point of being a level playing field that all vendors can pick up and use on equal terms. There were already chinks in that the idealistic version of that story—Google didn’t release the Honeycomb source code, and the Skyhook fight makes it clear that Google will use their muscle to shut out third-party replacement of their components. But if Google turns into a major Android phone manufacturer, that story will be in tatters: maybe Samsung and HTC will stay strong Google partners, but my guess is that they’ll become a lot happier about adopting Windows Phone 7 and/or that we’ll see long-lived Android forks that evolve away from interoperability with the trunk.

I hope somebody at Google has a good answer to this, because I want there to be as many strong competitors in the mobile operating system space as possible—I certainly don’t trust Apple to behave themselves without frequent pushback!—but at least at first the Motorola deal seemed very rushed, especially for a 12.5 billion dollar acquisition. (With a 2.5 billion dollar kill fee, an amount that is shockingly high and suggests that Google didn’t have the upper hand in negotiations at all.)

So that’s the first half of the week; the second half of the week, however, brought the news that HP was not only stopping WebOS development (which was one of the few other plausible contenders, and probably the most plausible integrated stack play), but they were exiting the consumer PC business entirely! And in their announcement, they admitted that competition from tablets was a big part of the latter decision: basically, they were saying that they don’t know how to build a tablet that’s competitive in price and quality with the iPad, and that they (the largest computer manufacturer in the world!) also don’t know how to keep their profit margins on non-tablet PCs high enough for it to be worthwhile to stay in that business.

This is a classic disruption story: a new entrant has come in and redefined the bottom of the market in such a way that incumbents don’t have a good response; those incumbents, in turn, flee upmarket, which will help in the short term but who knows for how long. (With the extremely unusual twist that the new entrant isn’t new at all.) I was surprised when IBM sold off their laptop business to Lenovo a few years ago, but it looks like a great move in retrospect, getting out of the business while they could still sell it for a reasonable value while reinventing themselves as a service business. HP’s move seems a lot more desperate, though, and neither their Palm nor (I assume) their Compaq acquisitions have turned out at all well. Which puts quite a spin on the ten billion dollar acquisition of Autonomy that they announced the very same day; maybe that acquisition will do better, but personally I would not bet on that. (It does seem, however, that selling printer ink for thousands of dollars a gallon is still a good business to be in.)

But it’s one thing to read about classic disruption stories; it’s another thing to see them play out right in front of you in real time, involving three huge companies each of which is located a few miles away from your house. Definitely time to bring out the popcorn.

And, if WebOS is no longer a contender, Android is unable to produce competitive tablets (and is in for somewhat stormier weather in general), and Microsoft is insisting that desktop OSes are suitable for tablets, where is the iPad competition going to come from? My best guess right now is Amazon, but the way they’re treating developers in their app store (making Apple look good!) has me a lot less excited about that prospect than I once was. I really hope somebody succeeds, though, the idea of a monoculture doesn’t make me happy at all.

And, as it turns out, the news in this area didn’t end with HP’s dramatic shift out of the PC industry, which was when I’d started thinking about this post: the next week brought the sad announcement that Steve Jobs was retiring from Apple for health reasons. What I am most curious about in that regard is to what extent Apple has managed to successfully formalize their thought patterns. They’ve apparently been trying to do that over the last few years; I’m a big Toyota fan, and one of the ways in which Toyota impresses me the most is the extent to which they’ve built up a long-lasting company culture.

If Apple has been self-aware enough to do the same thing, then maybe the iPad isn’t the last great disruption to come out of there; and if others can learn about their culture the way others have learned about Toyota’s, then maybe that can transform design for the industry as a whole. Though the Toyota analogy suggests an alternate outcome: even if outsiders do learn about their culture, the vast majority of outsiders are unlikely to be able to learn enough from those lessons to really make a difference…