cloudalps (hidden peaks)

High Tech Economics – implications from a global(ized) perspective.

Swiss Franc Peg to Euro: Printing Money leads to Deflation?

While living in Switzerland (and paying for a mortgage in Swiss Francs) makes me wonder about the future of the Swiss economy in general and the Swiss Franc in particular, I am not sure Switzerland can be compared to Zimbabwe.

Jack Mackintosh (FT investment editor)  does exactly that when he compares the printing of Swiss currency with that of Zimbabwe in 2005 that led to hyperinflation. Foreign currency reserves reaching > 60% of GDP is a concern but the falling of the Swiss Franc to parity with the Euro (as experienced before the pegging introduced by the Swiss National Bank on September 6, 2011)  an even worse one.

Ultimately, we might just experience another challenge to a small but widely open economy that is surrounded by EU member states with a different approach to most economic decisions and different political situations.

Filed under: Uncategorized

Beyond the PC? A short history of Smartphones and why ultimately “productivity:cost” decides!

Recently, it has become popular again to announce the end of the “PC era” or even the death of the PC. From bloggers to IBM, many believe new devices like tablets and smartphones will replace PCs soon. It is refreshing to see the (online) readers of the Economist vote clearly against that proposition and for a PC-plus era!

With an order of magnitude more mobile devices than PCs projected by 2020, it seems worthwhile to think about the fundamental drivers of adoption and then the impact of all those mobile devices.

slightly adopted

Smartphones are highly personal by virtue of their (intended) primary use as a communications device, their storage of (very) private data and the performance of an intense tactile and graphic user experience which taken together made mankind adopt the iPhone so vigorously. It took people with enough funding to get devices that were far too expensive for a cell phone and then be proud to own such a fashion item.

It is easily forgotten today, that “mobile devices” have a history of some two decades with many iterations, numerous vendors and an ever evolving product concept. The IBM Simon of 1992 was the first product in 1993 but not ready for mass markets (also due to lack of ubiquitous mobile data networks). The smartphone concept was shelved and PDAs – led by US Robotics/3COM’s PalmPilot – became massively popular until about 2001 when sales started a never ending downward trend arriving at less than 3 million devices annually today.

PDAs were available since 1984 when the Psion Organizer was introduced, followed by HP’s MS-DOS PDA HP95LX in 1991, the Newton in 1992 from Apple (which coined the term PDA but utterly failed with its product) and the first “Handheld PC” based on Windows CE 1.0, the HP 300LX. The first Blackberry was introduced in 1999 as a two-way pager in Germany. What really is fascinating, is how intense the trial and error of adding features and functions to PDAs was at that time. Connectivity to PCs, cell phones, modems, cameras, LAN dominated the hopes of the industry while software capable of running on such small devices had to be invented at the same time. Capabilities exciting for geeks were often introduced while applications compelling to either consumers or businesses were still missing or under development at best. In summary, all PDAs were rather utilitarian and both the devices and their user interface (typically a black on light green LCD screen) lacked any kind of beauty.

Since 2001, mobile phones incorporated so many PDA capabilities that few kept carrying two mobile devices with them. This allowed the (then!) dominant cell phone vendors Nokia, Ericsson and Motorola – and a few software partners (most noteably OpenWave/Phone.com) – to grow their business massively together with mobile telcos. Those network service providers had to build out new mobile data networks capable of connecting all those devices and adding new layers of data traffic (in ever changing standards of W-CDMA, GPRS, EDGE, HSDPA and LTE) on top of their existing GSM and CDMA systems. Somehow, the industry thought it could force the world to live in a “walled garden“.

The mobile content and application concept pushed by incumbent cell phone vendors together with telcos was not an architecture that would allow enterprise applications and consumer content to become available on mobile devices quickly and broadly . Bringing plain internet to mobile devices, connecting the most important software applications (namely desktop mail, calendar, contacts, ERP, CRM etc.) and then adding software uniquely fitting the mobile experience (like music and games) would be a requirement for ubiquitous use. This and an intuitive user interface is probably what Apple’s iPhone has achieved for the entire industry since 2007. To this day, it has been wildly successful in the western hemisphere where people’s buying decisions argueably are different than in the eastern half of the world where buying power on average still is significantly lower.

Buying Power determines consumers’ behavior far more than we are used to think in the west where immense advertising budgets are used to create trends and fashion. They influence our decision making beyond the utilitarian needs that dominate in “less developed” regions — which is why PCs remain wildly successful in Asia. The general purpose versatility of a PC is hard to beat for a first or second computer at home or laptop on the go. It is less compelling as a fashion and lifestyle differentiator that people look for in their extra (Smartphone) devices that they carry around all the time.

People that lack the opportunity of PCs and broadband access at home (like most in Africa and many in BRIC countries), will jump on any connected mobile device that they can afford. This huge market will be served by less well-known brands like ZTE, Huawei that reach price points below USD 40.- for devices without subsidies. And these can no longer be called “feature phones” – these are smartphones with less prominent operating systems.

With the enormous value of advertising on smartphones – coincidentally led by mobile search – it remains to be seen, how rapidly the rising buying power of consumers in developing nations will indirectly allow them to afford higher end devices. It could well be that – in somewhat of an inverse adoption order – such consumers move from low to high-end smartphone, laptop and finally a plain “old” PC once their small business has grown enough.

Filed under: Digital Lifestyle, Hardware, , , ,

Euro Crisis – suffering in the safe haven of Switzerland

By now, it is widely accepted that the SNB (Swiss National Bank) was merely “passing the deflationary parcel” after months of severe suffering by the Swiss export industries (which tend to be critical for any small, open economy). The SNB is reacting to pressure “reacting to pressure that has arisen from the actions of other governments” which has become significant as the above graphs indicate – a negative Swiss Franc Swap rate underlines the same message of (irrational?) demand for the Franc even at negative interest.

The even more stunning result stems from the SNB’s announcement to do everything to keep the CHF/Euro forex rate at least at 1.20 – and this worked immediately without any change:

Filed under: Macroeconomics, , , ,

China – world’s biggest market for Cars, Mobile Phones and now: PCs!

This headline has much deeper implications than we might think at first because China did not just become the largest buyer of PCs (18.5m units in Q2CY2011 per IDC) but other markets lost some interest in commodity computers (US: 17.7m PCs in Q2CY2011)! And yes, HP’s aim to get rid of its PC business entirely is very much related to this breakthrough change: HP lost its shine in China and therefore critical market share.

While many Western consumers spend the extra money on iMacs, MacBooks or iPads, Apple’s premium price design products are not so popular in China and Asia in general. For most Asian buyers, if they get a PC it will be their first or will strictly be used for business, not pleasure or show off. The growing number of affluent citizens has however led to growing interest in tablets and therefore a slight slowdown in PC sales growth according to Lenovo’s CEO.

It is an important insight to understand that the growth potential for technology products in the Eastern hemisphere will not exactly be for those offerings that are most popular in the West at the same time. The actual upside is for PCs (mostly from Lenovo or Dell), Android phones, cloud software and is driven by globalization: the crossing of certain barriers of spendable income combined with the ambition to achieve specific “firsts” like getting kids through high school, trading items, booking vacations, launching a business.

This trend will be disruptive to many providers of technology goods since it underlines a different sort of growth in markets outside the Western hemisphere.

Filed under: Uncategorized

Googorola = patents + “user experience” + “software excellence” + branding

 (c)  bgr.com, Jonathan Geller

Assuming that Google’s acquisition of Motorola Mobility Holdings Inc. gets approved, several strategic changes are imposed on the mobile devices market:

1. Android can now be defended effectively against IP/patent disputes by Google (which benefits all its OEM/ODM partners)

2. Android users can expected an improved user experience over the entire lifecycle of their devices (virtually enforced by Googorola upon its OEM/ODMs)

3. Android will become a safer bet for future applications like mobile payments where technology choices (e.g. NFC) are still open and non-IT partner support (e.g. banks) matter

4. Google gains access to new eco-systems critical to the Android platform: Motorola sells not just smartphones but tablets, set-top-boxes, navigation devices and deskphones

5. Google gains a Hardware Brand – Motorola has been the global leader in analog mobile phones and after losses in 2007-9 has been turned around based on (An)Droid phones

6. Google TV – not exactly winning with Logitech hardware today – potentially has a lot to gain from Motorola STBs’ #1 position in the US and its established distribution channels

7. Google can gain in the enterprise business by integrating Google Apps with Android phones & tablets and Chrome notebooks – something Apple cannot match

8. Google’s commitment to the OS & app. business – essentially anything beyond their search cash cow – has just increased materially

9. China: Motorola has an explicit strategy for China (incl. #1 China Mobile partnership)  and since Nokia’s collapse good chances to grow – a great backdoor for Google

10. Culture – one can argue that the discipline required in a competitive hardware business might positively influence a company that launches products through online betas for years

 

Of course, these assets and benefits do not come for free! I do not just think of the $12.5bn acquisition price tag but other costs to Google:

1. Integration costs: size, industry differences, low margins, cultural differences make Motorola difficult to absorb, a potential distraction and a huge management challenge

2. Confusion in branding and partnerships, distribution channel conflicts, investor perceptions will have to be sorted out quickly

3. Strategic platform impact: by implementing Android (and later Chrome OS) itself, Google puts pressure on OEMs to follow its pace, innovation, pricing – while this makes Android more reliable and competitive, it also reduces the profit potential. The bottom-line impact in the overall smartphone competition might still be positive for Android OEMs!

 

Of the above benefits, the following might deserve some more detailed comments:

ad 2. Improved User Experience: besides the more obvious advantages of the vertical integration of hard- and software (à la Apple) that matter a lot in smartphones – where an OS alone typically consists of 4 parts (core, OEM/ODM, radio stack, carrier) – it is namely the various updates during a model’s life cycle that tend to dominate the actual user experience. How long does it currently take Samsung and its carrier partners to ship the Android updates to their global user base ? Due to the substantial improvements that the intense competition between iOS and Android brings about, this is more than just cosmetics and so are the security fixes whose frequency will increase. Googorola will have every incentive plus the skills and assets to produce high quality updates rapidly while its channel and partner clout should allow for quick distribution cycles.

ad 4. Non-phone platform extension: with iOS and Windows already powering additional device categories, Android can win in scale and hence relevance for developers while giving Google the power to compete for the living room, the car, the hotel room and other spots that have attractive upside potential for Google’s core advertising business. Motorola can help accelerate the link between the search/advertising and os/apps businesses which will add to Google’s differentiation in both streams.

ad 5. Hardware brand: with the obvious cultural differences, Google might opt to keep the new hardware business in a separate organisation – with defined engineering interfaces – and under separate brands. This would help avoid many internal and external challenges and keep the Google brand equity focused on search, online advertising and apps.

ad 8. Google’s commitment to its non-search-related businesses has been questioned because it could have been seen as just diluting net income. With the Motorola acquisition, the ambition of Google gets more than just a $12.5bn boost because this hardware business cannot provide the incremental profits required to avoid dilution. Hence profit growth has to come from the software business which gains various support from the hardware. Note that this is the reverse situation of Apple where hardware drives profits enabled by software!

ad 9: China is the largest single mobile market worldwide and hosts the largest mobile operator China Mobile with some 700m subscribers. Nokia is losing share at China Mobile rapidly, Motorola is winning and Apple still has no partnership which rumours say will change with the iPhone 5. Adding to this cocktail is Google’s withdrawal from the Chinese online search market in spring 2010. Seemingly, Motorola is all upside for Google in China.

 

Filed under: Uncategorized

Platforms – why the concept worked for Microsoft and how Google is porting it into the cloud

In essence, “platform” in the IT industry stands for some common foundation that is used by many independent providers (ISV, SI, ..) but typically controlled by just one or few companies (through a formal consortium or by contractual agreements). In the last few decades, large dominant companies have been established based on such platforms (IBM:Mainframe, Microsoft:Windows) that resulted from their R&D efforts. Their critical differentiation allowed them to orchestrate (i.e. control) evolving “value networks” and draw significant economic rents.

Microsoft, incorporated 1975, is arguably the most successful and instructive case of how an entirely new platform is built from scratch and extended into a dominant business that delivered $174bn of net income over the last 21 fiscal years. Over the longer term (>5y) such profits can only be sustained if the participating members of a value network continue to prosper and therefore have reason to continue supporting the rents extracted by the platform owners. Thousands of ISVs and hundreds of hardware vendors including e.g. Dell only exist because the PC has been so successful which led them to create billions of additional profits thereby strengthening the PC ecosystem and namely Microsoft.

What has been true for the many software companies (ISVs) created in the Windows ecosystem applies to those in the iOS ecosystem – however it is critical to understand that these are different companies, simply because paying 30% revenues (and therefore a multiple of profits) to Apple makes little sense to ISVs that run an established business for one or more decades. On the other end, the platform leaders become busy defending their position – both commercially and in terms of innovation lead. As long as the paradigm (e.g. the concepts of the mainframe, the PC, the AppStore, etc.) on which the leader has built its business remains unchallenged, it is hard for any competitor to challenge that leader.

Cloud Computing or Online Business (in the Web 2.0 sense) qualifies as a developing paradigm shift and hence old and new competitors position themselves to play a significant role, e.g. generate higher profits than those of a contributing member of a platform. Not only does a general platform leader in Cloud Computing not exist yet, but the web was originally  seen as a level playing field where thousands of independent “web services” would interact and deliver according to the requirement of customers. More recently, incumbent ISVs and service providers have positioned cloud computing as a mere extension of virtualized IT while targeting their traditional customer base of large, mature companies.

Google – the undisputed leader in online advertising - is building an unparalleled Cloud Platform which is seldom fully understood. While  its position during its first decade of existence was built as a consumer play (with the most eyeballs tracked in the most accurate details to attract the most advertising spend), Google’s visible ambitions today exceed consumer online search by far. Whatever Cloud Computing will turn out to be over the next 2-5 years (as per Gartner), it will leverage the gigantic scale of the web datacenters, access to individuals and firms ideally including a billing relationship, mobile devices, cloud-specific software development tools and experts.

Besides technological innovation, the biggest driver of Cloud Computing adoption will be Globalization or more specifically the entrance of new competitors from the Eastern hemisphere in most markets of the West. These new ventures from Asia and India will come without any legacy in terms of IT, supply chain and other infrastructure. The young entrepreneurs running them will be used to Web Services, mobile access and above all “frugal engineering”: highly efficient, functional design and exceptional value. It is hard to argue that anyone but Google is leading in that sort of services already.

[this was planned to be a short post that precedes a longer paper that I am currently writing - please excuse that it got lengthy]

Filed under: Cloud Computing, Online & Digital Lifestyle, Software

“Digital Lifestyle”: cause OR solution for “the filter bubble”?

With the advent of online media as a significant source of information for modern citizens, questions about perspective, unbiased perception and propagandism from consuming internet sources begin to surface. Are our Google search results – personalized intransparently based on our past search behavior, location and other factors – giving us what is actually relevant or just the segment of an information universe we tend to look at ? Are the newsfeeds on Facebook, Twitter, LinkedIn, Quora etc. just a narrow selection based on a set of criteria that puts us in an audience category which can be addressed by the advertisers that fund all these “free” platforms ?

The Economist reviews Eli Pariser’s book “The Filter Bubble: What the Internet is Hiding From You” and doubts some of his recommendations that include human curation of information, ombudsmen for social networks and others; however, the need for reflection on information creation and consumption online is reconfirmed.

Taking a step back from online media, it is worthwhile to think about how information was produced, distributed and consumed in the last 50 years of color TV. The gravitation from newspapers to TV originally started in the US where TV’s dominance in opinion making reaches back to about 1968; today it is ubiquitious around the globe. In sync with TV broadcast’s reach, the largest audience that advertisers could address were formed. With the modal shift of media to the internet, smaller but more homogenous audiences focused on specific interests and opinions were created.

Specialization typically enables innovation – in the more narrowly defined area – but the reduced generalized perspective comes at the cost of specialists missing certain insights outside their field of focus. Ultimately, nothing has really changed: a balanced and holistic perspective required TV spectators to watch different channels plus read some newspaper. The same goes for today’s adopters of a Digital Lifestyle: aside from using the most well known social networks and search engines, they have to read and digest other sources of information. Blogs, newspaper (online or even in print), news databases and hopefully some face-to-face conversations with trusted friends.

Filed under: Online & Digital Lifestyle

Globalization, Unemployment & the Cloud

Michael Spence, Nobel Laureate, Professor and Dean Emeritus at Stanford Business School, has just published an excellent article on the “Downside of Integrating Markets” in Foreign Affairs with the title “Globalization and Unemployment“.

Prof. Spence differentiates between MNCs in the tradeable sector that operate and continously optimize global value chains; the kind of companies that boosted GDP growth at rate of 4x since 1990 compared to the nontradeable sector (services and some goods that are consumed locally only). Jobs growth in the US since 1990 however, came almost purely from nontradeable industries of which almost half is directly government or somewhat indirectly (i.e. healthcare), hence a very unreliable source of future jobs growth.

Spence highlights that until about 2000, effects of globalization on wealth as well as jobs distribution were largely benign BUT as developing countries climbed up the value chain and got richer this is changing irreversibly. Aside from the economic, social and educational progress in such developing nations mainly in Asia, I would argue that the emerging Cloud offerings are a strong accelerator and multiplier of this trend.

Having access to virtually unlimited (cloud) compute power, storage capacity and communications channels through connected (mobile) devices that are affordable to citizens with an average income in such developing nations is enormously powerful. It allows them to compete more effectively in what they do today (for a living) but enables them to satisfy their hunger for more income, independence and education. To them, the cloud is a symbol for all sorts of personal and national upside potentials.

In the Western hemisphere and namely the US, establishing the primacy of education gets harder, not just because of government budget shortage but because a promise of rewarding employment for all income levels is out of sight today. Could the cloud become an accelerator for further jobless (GDP) growth in the West ?

Filed under: Cloud Computing, Macroeconomics

China – the disruptor’s 2nd phase will impact the West even more..

When Professor Jonathan Christensen talks about “Disruptive Innovation”, anyone caring about the future of the West (i.e. Europe, the Americas) better listen well. While Globalization provided growth for both hemispheres over the last 2 or 3 decades, its disruptive effects were mostly felt by the West. In an interview with Arabic Knowledge@Wharton, Prof. Christensens’ reply to the question if China is a disruptor was: “What will happen is the next waves of disruption will come from countries such as Vietnam and other Southeast Asian countries [..] Wage rates are going up at a very fast rate… [..] this will force China to not just knock off designs from the West. They’ll have to compete on innovation“.

The frightening implication of this unstoppable trend is, of course, that the West is about to lose its predominant position as Innovator & Designer – in the same way, it lost its Manufacturing position in all but the smallest and most high-end niche markets.

A Thomson Reuters report already announced China as the new Gobal Innovation Leader back in October of last year, based on its imminent lead in new Patent Filing for 2011. No further comment necessary..

Add on:
The Reuters report cited above has been put into perspective by the Economist as well as Fortune based on concerns about the average quality of Chinese patents (e.g. utility-based 10 year patents) as well as the robustness of the legal system required to enforce patents. My simplistic view on this is that while these concerns might be justified today, the directional and aspirational change of “China Inc.” cannot be overlooked.

While reaching full compatibility regarding patent quality and relevance will take some more time – like the resolution of other issues perceived by the West – the impact on Western companies starts today. In specific but important niches (e.g. batteries), Chines companies already lead the respective global market.

Filed under: Macroeconomics

Does Microsoft actually challenge itself in the Cloud?

Today, the Wall Street Journal commented on tomorrows expected announcement of the availability of Office365, Microsoft’s integrated Cloud offering that includes all of Microsoft Office plus the cloud-equivalent of server applications like Microsoft Exchange for mail, calendaring and so forth [http://bit.ly/jCfMRz]. The bottom line of the WSJ is that first and foremost, Microsoft is about to cannibalize itself.

At the scale of Microsoft’s software revenues in Office and Windows, it is not trivial to see the upside potential of cloud computing for the company. Much of what will come in through Office365 will come from existing customers that move to the cloud from their own datacenters in an attempt to gain some of the (Shared) economies of scale of running Microsoft’s software. This is a challenge both commercially – as the margin to Microsoft of running its software itself is bound to be smaller than the margin of just shipping  its code – and technically becasue the hundreds of millions of Microsoft Office seats require huge datacenters and internet pipes to be run centrally.

In developing economies, start-up and small businesses however, Office365 might very well generate actual incremental revenues for Microsoft.

With the choice of running their licenses themselves or let Microsoft do it, customers are actually the ones that are being challenged here: how many take the risk and move Microsoft applications out of their datacenter and into the cloud? Assuming that Office365 offers at least what current cloud competitors’ offerings do – and that should be a safe bet – this also translates into a challenge thrown out by Microsoft to its cloud competitors, including Google. With the existing concerns for privacy and security that run high in certain countries like Germany, the challenge also includes the public perception of cloud-based productivity applications like Office365.

While strategically, Office365 will be a challenge for Microsoft over the longer-term, the short-term challenge mostly hits its competitors, partners and customers.

Filed under: Cloud Computing, Software

About Thomas Rupp

Economist & MBA focused on leveraging Disruptive Technologies in IT and Telecommunications, mostly for Enterprise clients. More than a decade at Microsoft. Sloan Fellow 2010 (MSc in Management) at Stanford Business School. Marathoner, Foodie, Diver and Audiophile.
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