Why it’s Hard to Set a Standard and Maximize Short-Term Profit

After my post yesterday on Kevin Lynch’s move to Apple (link), Infinity Softworks CEO Elia Freedman sent me a followup question:

“This line is interesting: ‘You can’t set a standard in tech and maximize short-term profit at the same time.’ Talk more about this?”

He’s right, I did assert that without explaining it. So here goes:

There are a couple of different tech industry things that we call standards. The first type of standard is a product that almost everyone uses because it has critical mass: Microsoft Word, Internet Explorer, etc. The second type of standard is a technology or tech specification that almost everyone builds on or incorporates into relevant products: HTML, JPEG, etc.

Once in a while you can establish a standard without limiting your short-term revenue (Adobe Photoshop is probably an example; it's carried a premium price ever since it was introduced in 1990). But in most cases, to establish a tech standard you have to limit your near-term profitability. Sometimes that means lowering your margins for quarters or years until the standard is established. In other cases it means permanently giving up some revenue streams in order to create a position of power.

A few examples:

—Adobe gradually gave away PDF in order to solidify it as a standard for document interchange. At first Adobe made the PDF reader free of charge, and eventually it gave away the PDF standard itself, enabling other companies to create PDF readers and creators that competed with Adobe. This move enabled PDF to become one of the most resilient standards in computing. Think about it – despite the hostility of much of the Internet community, and full-bore attacks from Microsoft and others, PDF continues to be a standard today.

When Adobe gave up control over PDF, it reduced the near-term revenue it could have earned through selling PDF readers and creator apps. This undoubtedly lowered Adobe’s quarterly revenue for a while, but it enabled PDF to survive as a standard when many other Adobe standards have withered away. Plus Adobe managed to keep a nice business selling PDF management software to large companies.

—Amazon has been selling e-reader devices at cost for several years in order to jumpstart the market for ebooks. I doubt Amazon will ever make much money from its hardware, but it’s willing to make that sacrifice in order to control the ebook transition and establish itself as the standard electronic bookstore.

—Google doesn’t charge license fees to use Android in a smartphone. This played a huge role in the early adoption of Android by phone makers; I think there’s a good chance the OS would never have taken off if Google had tried to charge for it. Google obviously hopes to make the money back through bundled services, but it’s not clear how successful that will be, and in the meantime Android is a huge cost sink for Google.

—Many open source companies operate by giving away their software and then charging for services or other ancillary products related to them. This approach defers revenue until the software becomes established as a widely-adopted standard.

As I explain in Map the Future, strategies like this are very problematic for an analytical company that focuses on logical cost-benefit planning. The benefits of establishing a standard are usually nebulous and risky, while the costs are immediate and painful. Faced with that kind of choice, most analytical companies will focus on tangible near-term opportunities. Thus Adobe made the prudent and logical decision to make money from Flash Lite when it had the chance, rather than sacrificing revenue to possibly make it a standard in the future.

You made your choice, now you have to live with it.

In the tech industry, the road to hell is often paved with prudent business decisions.

Kevin Lynch and Adobe: Shooting the Messenger

There’s been some nasty commentary about Apple’s decision to hire Kevin Lynch from Adobe. John Gruber at Daring Fireball has been especially acerbic, and there certainly are some things Lynch has said that look dumb when you read them today. But while I usually agree with the Fireball, in this case I think you need to look beyond Lynch’s statements and understand the situation he was in at Adobe.

Let me start with a little history. Adobe is a software powerhouse, with a long and very successful history in publishing and multimedia. But despite all its successes, I think it deserves to go down in history as the company that choked when it had the opportunity to rule the world, not once but twice.

In the formative years of the Internet, Adobe could have set the standard for formatting web pages. Adobe PostScript was far more sophisticated and capable than HTML, which became core standard for displaying web pages. HTML is basically a text formatting specification. You give it a bunch of text tagged with suggestions for things like “this should be bold” or “underline this” or “this is a link,” and then the browser does its best to interpret the tags. HTML was derived from a formatting standard used in academia and government publishing, and it’s great for long text-only reports. But it was not designed to mix text and graphics. That’s why we still struggle to fully integrate great graphics with the web even today.

In contrast, PostScript is a programming language designed to mix text and graphics effortlessly. You can use it to control exactly where every pixel and image goes on the screen, and exactly how it looks. It was so powerful and so far ahead of its time that Steve Jobs’ NeXT chose it as the graphics language for its workstations. Using PostScript, you could easily draw things twenty years ago that we still can’t do on web pages today. The nagging incompatibilities and formatting weirdnesses we have to cope with from HTML, the fragile hacks and workarounds that web page designers live with every day...none of that had to happen.

Unfortunately, Adobe was so obsessed with making money selling PostScript interpreters that it was unwilling to make PostScript an open standard when it could have made a difference.  And so Adobe missed the chance to set the graphics standard for the web.

Fast forward a few years, and Adobe again fumbled the chance for greatness, this time with Flash. This wasn’t just Adobe’s fault; it was a joint project with Macromedia, which Adobe bought in 2005. Flash became the dominant animation and video playback standard for the web because, unlike the situation with PostScript, the player was free. There was no cost for users or tech companies to adopt the standard, and so it spread wildly, boosted by a bundling deal with Microsoft (link). There was a time in the early 2000s, prior to the iPhone and Android, when the mobile phone world was ripe for a takeover by software that would let you produce great visuals on a smartphone. Palm OS was too weak for the task, Windows CE was a mess, and Symbian was, well, Symbian. Macromedia, and later Adobe, could have set the standard for mobile phone graphics if they had given away the Flash player for mobile phones. But Macromedia had lucked into a licensing deal under which Japan’s NTT DoCoMo paid to put Flash on millions of mobile phones (link). Macromedia and Adobe fell in love with that revenue stream and decided they could extract money from every other mobile phone company in the world by charging for the player.

I’d call that move arrogant, but it was more than that – it was stupid. You can’t set a standard in tech and maximize short-term profit at the same time. For a few years of profit, Adobe sacrificed the opportunity to dominate the mobile phone market for a generation, and in the process fatally weakened Flash on the PC as well.

I could go on and on about the opportunities Adobe squandered: AIR, e-books...it’s a depressing list that reminds me of the stories people tell about Xerox PARC. If I thought Kevin Lynch was the executive responsible for those moves, I’d be shocked that Apple hired him. But as far as I can tell, they were made by other people, and he was stuck playing out the hand he was dealt. I’ve been there, I’ve done that. If you’re part of a team you do the best you can and trust that the folks around you will do theirs. If you want to fault Kevin for something, fault him for staying so long at a company that was putting quarterly profits ahead of long-term investment.

So my reaction to the Lynch hiring depends on what Apple’s going to ask him to do, and we don’t know that yet. If Apple wants him to run business strategy I’ll be worried, because I don’t think he had great role models at Adobe. If Apple wants him to run marketing I’ll be alarmed. But I think Apple has hired him as a technologist. In that role he’s extremely smart and easy to work with, and Apple fans, I think he can be an asset to the company.

Disclosure: I did a little bit of consulting for Adobe in the past, and have met Kevin Lynch. This article doesn’t include any confidential or inside information.

Coming Soon: My Book on Business Strategy

I’m getting ready to publish my book on business strategy, Map the Future. It’s all about how a business should plan for the future, and how to manage the functions that help you make those plans: competitive analysis, market research, and advanced technology. It’s not a case study book; it’s more like a business cookbook, with detailed how-to instructions on everything from segmenting the market for a new product to influencing people who don't want to listen.

I’ll post more about the book when it ships, but in the meantime I wanted to offer a review copy to any journalists or bloggers who want to look at it. If you’re interested, please write to me at the address here. Be sure to include the URL of your publication or blog.

Now that the book’s finally done, I can get back to blogging. There’s a lot of interesting stuff going on, and I’ve been dying to dig into it.

The Windows 8 Muddle

This isn't shaping up to be the transcendent week that Microsoft wanted it to be.  The Windows 8 announcement isn't a failure by any means, but the coverage is a lot more mixed and confused than I'm sure Microsoft would have liked.  That's partly due to some clever marketing by Microsoft's competitors, and partly due to some mistakes made by Microsoft itself.

The situation all came together for me this morning when I did a brief appearance on Bloomberg TV, a cable business channel in the US.  The segment was supposed to cover the new iPad Mini and Windows 8, with equal time given to each one.  The Bloomberg folks spent time with me yesterday prepping the questions on each subject.

The equal billing of iPad Mini with Windows 8 is itself bad news for Microsoft.  Windows 8 represents the reinvention of Microsoft, one of the biggest changes the company has ever made.  The iPad Mini is a follow-on product in the iPad line.  It's a very nice follow-on, and probably one that will sell very well, but it's not at the same level of importance as Windows 8.  However, hardware gets more attention in the tech press than software.  It's more tangible, and people react to it emotionally. So the Mini jumped right into the mix.

Apple very cleverly timed the Mini announcement a couple of days before the formal Windows 8 rollout, distracting the press from Microsoft's story.  It reminds me a bit of the way the iPhone rumors undercut the Microsoft Zune launch in late 2006.


Leaking Flagship

Even with the competitive game-playing, Microsoft's announcement should have been OK.  But then Microsoft failed to ship the Intel-compatible "Pro" version of its new Surface tablet on time.  Instead, the only Surface device being reviewed right now is the Windows RT version, which can't run existing Windows software.  Since Surface is the Windows 8 flagship, and hardware gets more coverage than software anyway, the concerns about Windows compatibility in Surface RT are dominating a lot of Windows 8 press coverage.

One of the most biting Surface reviews was David Pogue's in the New York Times, who compared Surface to owning "a new Ferrari...that has to be refueled every three miles."  (link).  PC Magazine called it "a disaster" (link).  You can see more reviews summarized here.

There's an answer to the concerns about Surface RT: wait and buy the pro version.  But the last thing a vendor wants to do right before the December buying season is tell customers not to buy.  You'll hurt sales of not just Surface RT, but all other Windows 8 products as well.  So Microsoft can't push that message aggressively.  (Hey, Microsoft -- you say you want to be a device company?  Lesson No. 1 is that you have to ship your high-end flagship product before Christmas, not right after it.)

The Windows 8 muddle was in full play for the Bloomberg segment, which started with video of Bloomberg's Sara Silverstein and Gizmodo's Sam Biddle trying to use Excel on Surface.  Sara tries and fails to copy a formula using the touchscreen.  Sam tells her Microsoft claims you can use all of Excel in the touch version.  Sara replies sarcastically, "I believe that you would...if you're making a spreadsheet about, you know, lemonade stands" (link).

Then the segment jumps to the iPad Mini, with a discussion of how it stacks up against Amazon's subsidized tablet hardware.  That's a great topic, and deserves a lot of thought.  In fact, it goes on so long that Bloomberg runs out of time and never comes back to Windows 8 (link).  So Apple and Amazon steal most of the oxygen, and the only impression you get about Windows 8 is that it's not ready for serious business use.

Not all the Windows 8 coverage is negative.  For example, Walt Mossberg did a nicely balanced piece on All Things D (link), and Wired was pretty positive about Surface (link).  But the story of Windows 8 is complicated.  In a world of quick sound bites, it's very easy for the press to caricature Windows 8 as "that touch screen thing that doesn't run your stuff properly."  Clever marketing by Apple is giving Microsoft less time in the press to explain the nuances of Windows 8, and the failure to ship Surface Pro on time makes Microsoft's job even tougher.  Microsoft has enough money to wait out the bad coverage, but I think it's less and less likely that Windows 8 will deliver the massive initial sales that Microsoft promised for it.

"Social" as a Business Tool, and Richard Windsor Unchained

I'd like to call your attention to two new information resources on the web.

"Social" as a business tool.  First, my friend and former colleague Nilofer Merchant has written an ebook on the role of "social" tools in business strategy and operations.  It's called "11 Rules for Creating Value in the Social Era," and is published through Harvard Business Review.  In the book, Nilofer addresses a flaw in thinking that we saw in many businesses while we were consulting at Rubicon: when you say "social," most established companies think of a new medium for marketing their products, like a new form of advertising.  So they assign social responsibility to their marketing team, and treat it as a method to shove one-way messages into the eyes and ears of customers.

But some companies, especially startups, are learning to integrate the full range of what we call "social" tools deeply into all of their business processes and decision-making.  It requires a fundamental rethinking of everything you expect a business to do.  To give you one very minor example from the startup I'm involved in, when you have a small team and Skype, do you really need to pay for office space and the time involved in commuting every day?  Do you even need all your team members to live in the same country?

It sounds simple to folks who live online, but you'd be amazed by how hard it is for an established company, even a tech company, to rethink its business processes.

Nilofer's book is, as she says, a "quick read" designed to help you rethink business from a social perspective.  You can learn more here.


Richard Windsor Unchained.  In this age of tweets and shared videos, I'm delighted to see a new old-fashioned blog on the mobile industry.  Richard Windsor has been for a long time one of my favorite financial analysts covering mobile.  His short bullet-point e-mails analyzing earnings reports were always pungent and on-point, and since he's based in London he's outside the Silicon Valley groupthink.  Richard recently left Nomura and is now free to share his opinions online, in a new blog here. 

An excerpt from his recent comments on RIM:

"•  RIMM also managed to grow the subscriber base by 2m to 80m but the mix and quality of these subscribers is falling fast despite this quarter’s blip.
•  Out go the high spending corporate executives spending $100+ per month and in come the teenage texters in Indonesia spending more like $5 a month."

Yup.

The Unanswered Question About Apple Maps

I agree with almost everyone else that Tim Cook was right to quickly apologize for the problems with Apple Maps.  If you're in the US, you can contrast his handling of the situation to the National Football League's handling of its referee lockout.  The lesson: Deny a problem and the public will feed on you like wolves on a crippled buffalo.  Acknowledge the problem and people will give you a second chance.  The apology is especially effective if it comes from a person (not a corporate statement) and sounds sincere.  Most of us want to be nice to one another, and a personal apology taps into that reflex.

So fine, I'm sure Apple will fix the app eventually, and in six months this whole thing will probably be a distant memory.

What I'm wondering about is a much more serious problem that may not be solved in six months, and that (unlike the Maps app itself) threatens Apple's long-term prosperity.  The question:

How in the world did Apple make a mistake like this in the first place?

I'm not talking about shipping an unsatisfying app; that happens to any company.  I'm talking about making an obviously underwhelming and unfinished app a centerpiece in a critically important new product announcement.  If you have an app that isn't perfect yet, position it that way.  Tell people that it's just getting started and needs more work.  Instead, Apple execs gushed about Maps on stage.  Scott Forstall made it the first feature in his iOS 6 demo, and spent more than two and a half minutes talking about it (link).  This sort of mismatch between message and delivery is a sign that Apple's product management and review process failed utterly somewhere along the line.

It's a little bit like NASA launching the space shuttle Challenger when people in the organization knew it might blow up.  The issue is not that there were flaws, it's that they went ahead with the launch despite the flaws.

Of course nobody has been killed by Apple Maps, so it's a very different sort of problem.  But both are related to organizational culture and business practices.  Like NASA's culture of safety, Apple is supposed to have a culture of great product functionality.  It's the center of what makes the company special.  That process failed spectacularly in the case of Apple Maps, and speaking as somebody who spent years reporting into the product management organization at Apple, there is absolutely no excuse for what happened.

Apple's marketing machine is so powerful that any major failure in a marquee feature gets magnified enormously.  Even Google can probably get away with a big feature failure or two; you expect Android to be a bit loose around the edges, and lord knows Google backtracks on initiatives all the time.  But Apple claims that it will amaze and delight us with its new products, and so people naturally expect greatness.  It's what justifies the intense coverage of Apple's announcements.

There are several possible explanations for what went wrong, all of them bad.  Maybe:

--The product managers on Apple Maps knew it had problems but didn't think users would care.  Or

--The managers of Apple Maps knew there were problems, and reported the problems, but were ignored by middle management.  Or

--The middle managers reported the problems, but senior management ignored them.  Or

--Maybe Apple has become so insular and self-satisfied that no one there realized the difference between a good looking maps app and a usable one.

It comes down to this: are you incompetent, bureaucratic, or out of touch?

Screw-ups like this happened occasionally at Apple under Steve Jobs.  Someone once described to me the experience of being in a group that was pulled into a meeting with Steve where he said, "you let me down, and you let the company down."  My friend said it was one of the worst feelings ever, and it also resulted in job changes for the people responsible.  That may be something Tim Cook will need to do.  But he also needs to ask some deeper questions.  Is this just a failure of a particular manager or team, or is there a cultural or process problem that needs to be fixed?  That's a very tough question to answer.  You don't want to mess up the culture and practices that Steve left behind, but at the same time you can't permit this sort of mistake to become a routine event.

When I was at Apple back in the 1990s, before Steve returned, we had a joke we told on ourselves:

Q:  What's the difference between an Apple salesman and a used-car salesman?
A: The used car salesman knows when he's lying.

Apple needs to be sure it doesn't slip back into that old habit.

Judging Apple: It's Really (Still) About Steve

It's been interesting to watch the passionate reactions flow back and forth about Apple's iPhone 5 announcement.  Most of them fall into two camps:

-Apple is failing.  The announcement was a boring disappointment, Apple is falling behind on features, and its execution is deteriorating.  Just look at the mapping app in iOS 6.

Or

-The Apple haters don't get it.  Look at the huge sales, Apple has always focused on functionality over feature list, and you have no idea how impressive it is that they packed that much circuitry into something so thin and elegant (link).  Oh, and that map thing is a tactical retreat to get a better long-term future.

Both sides have some valid points, but I think what's driving the peculiar energy in the debate is a question that almost no one's putting on the table, and that no one can answer yet: Can Apple without Steve Jobs still put lightning in a bottle?  Can it come up with that new category-busting product, like the iPhone and iPad, that overturns whole industries and makes us all nod our heads and say, "yes, of course, that's how the future should be"?

I think the Apple defenders generally believe that Apple can do it, and judge the current announcements as the normal incremental steps Apple takes between product revolutions.  The Apple critics don't take it for granted, and are studying each announcement for signs of bottled lightning.  When they don't get it, they feel uneasy, and that colors their comments.

The reality is that we don't know what the new Apple is capable of.  It's unfair (and unrealistic) to expect magic in every announcement.  The market can't absorb that much change, and no single company can produce it.  But until Apple rolls out a new category-changing product, we can't know if it is truly the same power it was before Steve died. 

Apple today is huge, rich company run by a bunch of middle-aged white guys who drive very expensive cars (link).  Like any company run by a homogenous team with low turnover, it makes them potentially vulnerable to getting out of touch with the real world.  That was also pretty much true before Steve died, but most people trusted that he had the mystical power of product design that enabled him to discern new product categories and make brilliant decisions about feature trade-offs.  We don't know if his acolytes can do that.  Is there a process for brilliance, or did that pass away with the founder?

When Apple made mistakes in the past, people trusted that it was an aberration that Steve would soon fix.  Now when there's a mistake, I think there's fear in many minds that this isn't an aberration, it's the new normal for Apple; that the company is turning into a big successful outfit that often does good incremental work but also makes big glaring errors because of inertia or internal politics, and is too self-absorbed to see them before they go splat in public -- like the abortive decision to withdraw from Epeat green certification (link), like the rescinded staffing changes in the Apple stores (link), and like the mapping situation.

Apple's success makes it a target for huge, powerful competitors: Samsung, Google, Microsoft, and others. Its ultimate defense has always been its ability to change the rules, to alter the competitive landscape in ways that put the other guys at a lasting disadvantage.  If Apple has lost its ability to change the world, the fear is that it'll become the business equivalent of the battleship Bismarck: a stationary target as more and more business firepower is concentrated against it.

We don't yet know what the new Apple can really do, and it'll take another two years or so to find out for sure.  Until then, we should expect the passionate debate between the faithful and the skeptics to be renewed every time Apple announces anything.  Just keep in mind that the debate won't really be about the products.  It'll really be about Steve.