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The Economist: How Not To Innovate

PaidContent has been following the little-noticed story of a very smart enterprise that has opened a window into its internal struggles with a Web 2.0 strategy.  It's a rare insight and makes for fascinating reading.

Basically, earlier this year The Economist magazine gave total freedom to an internal group of employees to spend 6 months brainstorming an entirely new online service using any content from within the Economist group.  The project's failure to produce a business plan or venture provides interesting lessons in how not to run group collaborations, some of which are quite counter-intuitive. 

Most amazingly, the team's shambolic process has been exposed to the public throughout, via the project blog, which was actively covered on Slashdot.  When the project was finally buried a few months ago, the group's leader, Economist CIO Mike Seery, wrote a detailed memo drawing out its lessons and making seven recommendations for future projects of its type.

The paper a seldom seen glimpse into the internal struggle that many companies must be going through in one guise or another.  It also usefully explodes some myths about the correlation between the degree of freedom and openness a working group is given and their capacity to innovate.  Worth a read for any CIO.

Whither Garmin?

So the battle of GPS giants ended with a bit of a whimper.  Garmin withdrew from the bidding for TeleAtlas and simultaneously announced an extended deal with Navteq, who will continue providing maps to Garmin until 2015.  It makes you wonder how much say Nokia, who is in the process of buying Navteq, had in the negotiation of the Garmin contract extension.

In spite of Garmin's denials, rumour continues to swirl that the company is considering building out its own map-making network.  That would be a heavy, multi-year investment and one Garmin's shareholders ought to be interested to hear about.   But it may also be the only way to to de-risk a business whose main offering now depends on a large potential rival that wants to own the navigation and location-based services (LBS) market.

For now, the markets appear relieved that Garmin did not overpay for TeleAtlas, sending Garmin's share price up 14%. The kind view is that Garmin's bid was anyway just a gambit to force TomTom into paying an outlandish price (38 x 2007 EBITDA) for its own mapmaker.  But Garmin's future now contains a big hairy unknown, which has yet to be priced into the stock...

Weekender: Duchovny on the dumber Web

I guess I'm collecting bubble-pricking quotes on all things Web two-dot-oh.  First Seinfeld, now David Duchovny in his role as ueber-randy blogger Hank Moody on Californication... Here it is in case you missed it last week:

Henry Rollins (playing a radio show host): What's your latest obsession?

Hank (being interviewed): Just the fact that people seem to be getting dumber and dumber. You know, I mean we have all this amazing technology and yet computers have turned us basically into four-fingered wank machines. The Internet was supposed to set us free, democratize us, but all it's really given us is Howard Dean's aborted candidacy and 24-hour-a-day access to kiddie porn. People...they don't write anymore - they blog. Instead of talking, they text, no punctuation, no grammar: LOL this and LMFAO that. You know, it just seems to me like a bunch of stupid people pseudo-communicating with a bunch of other stupid people in a proto-language that resembles more what cavemen used to speak than the King's English.

Henry Rollins: Yet you're part of the problem, I mean you're out there blogging with the best of them.

Hank: Hence my self-loathing.

The world is not ready for open phones

The Googleites have been a-twitter since Monday's long-awaited announcement ABOUT ANYTHING MOBILE PLEEAAASE dashed hopes of a gPhone hitting stores anytime soon.  Google made the sort of announcement that normally sinks like a stone when made by any other tech company like, say, IBM:

[Launch of the] Open Handset Alliance, which consists of more than 30 technology and mobile leaders including Motorola, Qualcomm, HTC and T-Mobile. Through deep partnerships with carriers, device manufacturers, developers, and others, we hope to enable an open ecosystem for the mobile world by creating a standard, open mobile software platform...

...yadayada....yawn.  But where is the damn phone?!?!? 

Well, Google isn't launching a phone after all.  What they are doing is similar to past forays into established markets, such as the release of Google Docs to unsettle the Office monopoly, or Google Desktop to put the fear into Yahoo.  It must be said that those initiatives have largely underwhelmed relative to their hyped-up launches.

In this instance, Google Android is creating some welcome unsease among established handset vendors and their software suppliers, in particular the operating system duopoly of Symbian and Windows Mobile. By tossing into the developer community a full mobile 'stack' -- operating system, middleware framework and basic apps --, Google is accelerating the commoditisation of the mobile phone platform and pushing the focus onto the application layer and the consumer experience.

This is all good, especially for consumers, who can expect to see more user interface innovation and -- in particular -- a lot more smartphone-style apps becoming available on basic mass market phones.

But will it lead to an open handset platform for which anyone can develop apps?  Will it democratise access to any content and any applications from mobiles?  I wouldn't bet on it in this decade.

There are two critical differences between mobiles and PCs.  One, mobiles run over what are still proprietary networks controlled by large powerful companies.  Even though most operators no longer force consumers to remain within their walled gardens, they sure make getting out of them hard.  In other words, they still have access control over your handset and they like it that way.  Network owners also keep tight control over which phone functions your applications can access -- witness efforts by Vodafone to block VOIP calls through Truphone for example.  The operators are under increasing pressure, but they will not let go of their consumers without a long, drawn-out fight.

Two, PCs have standard screen sizes, shapes and resolutions; mobiles don't.  Phone manufacturers aren't about to give up their last competitive differentiator -- handset design -- in order to faciliate their own commoditisation.  Continuing differences in screen layout and device capabilities mean that it's a lot harder to write standardised apps for mobile phones than it is for PCs.  Worse, it means you can't deliver any rich content without thinking about the device.

Looked at another way, Google's announcement simply throws the hat of yet another mobile OS into the ring, alongside market leaders Symbian and Microsoft, as well as Palm, Blackberry, iPhone and other flavours of Linux that have come and gone.  With Google's animal magnetism and financial clout, Android will undoubtedly get built into some heavy hitting Taiwanese manufacturers' 2008 phone line-up.  But will this translate into mobiles that consumers will have to have, like the iPhone, which benefits from totally integrated hardware and software design?

Rather than simplify the situation, the launch of Google Android highlights the fact that the mobile device universe is getting more heterogeneous (not less), and that serving content and applications to mobiles will remain more difficult than serving web content to PCs. 

How do operators and content owners deal with this complexity today?  Well, virtually all the major operators and many media and Internet companies use a "write once, deliver anywhere" platform from UK-based Volantis Systems (disclosure: Kennet portfolio company).  Volantis provides a carrier-grade content delivery platform with automatic rendering to most mobile devices (4,600 supported and counting).  Sound expensive?  It is. To date this platform has only been within reach of companies that deliver a lot of content, like the operators themselves or eBay or Disney.

But that is about to change.  On Tuesday, Volantis announced the release of its Mobility Server under the GPL 3.0 open source licence, and available immediately as a free download here.  CNET coverage is here. The Mobility Server packs in everything you need to deliver a website to any mobile device: a multi-channel server, development tools, a client-side widget library and the full database of 4,600 devices.  This is a full functional release, open to incremental development by community developers.  The only additional features you get if you upgrade to the Professional edition is technical support, free database updates, and support for multiple administrators and groups of content managers.

I'm not an expert on mobile technologies, but I am a consumer of online services.  I'd like to have a single experience across devices, with the same content.  I don't want to log into Yahoo Blackberry in the morning, Yahoo Web in the afternoon, and Yahoo Mobile in the evening.  How about just plain Yahoo?  It's about true Web portability, and not about a proliferation of device-specific Web sites.

Google Android is great because it will spur independent development of mobile applications across more mass market mobiles.  That in turn will drive demand for Web content from mobiles, which will require content owners to have a delivery strategy.  With Mobility Server, delivery to mobiles just got a lot easier, and cheaper.

Killing the entertainment goose

Great post here from Marc Andreesen on the Hollywood writers' strike -- worth a full read.  If the movie and TV bosses really think this is the right time for a showdown with their talent over a few pennies on the dollar in royalties, they may be in for a nasty surprise.  The longer the strike lasts, the more writers will discover the new distribution channels that are making the large studios obsolete.  It won't take long for new media companies to take their place...

For SNL's unveiling of studio head hypocrisy, check out these videos which NBC then tried to remove from the Web.

During the last writers strike in 1988, most people saw their favourite shows fizzle out over 22 weeks, but they did not hear much from the writers themselves.  This time the impact the backlash will be far greater -- so much TV and Web programming is just-in-time, written-yesterday, current-events-led.  And the writers' have more avenues to influence public opinion (blogs, YouTube, social networks, whole pages on Flickr devoted to the picket lines, etc) than their bosses could ever imagine. 

The incredible irony here is that the studios are alienating the very talent AND the very consumers who just might have been able to save them from obsolescence....

What price private sector diagnostics?

In spite of apparent hesitation by the Gordon Brown government in pushing ahead with Blair's healthcare reforms, a recent secondary buyout deal highlights investor expectations of continued private sector involvement in UK healthcare provision. 

Last week Bridgepoint announced the sale of Alliance Medical to Dubai International Capital (DIC) for a whopping £600m.   This crowns a very sucessful stewardship of the company by Bridgepoint, who bought the business for £86m in 2001 and led it through 16 acquisitions to build one of the largest diagnostic scanning services providers in Europe.  Today Alliance Medical runs 190 fixed and mobile scanners (MRI, CT, x-ray) for private clinics and public healthcare systems, benefiting from the increasing trend by hospitals to outsource imaging diagnostics.

The price paid by DIC represents 4.6 x 2006 revenues (£132m) or 16 x 2006 EBITDA (£37m), which is fairly rich for a business that is heavily exposed to the political flip-flops on reform that buffet the NHS on a regular basis.  DIC is clearly making a bet that the requirement by Western countries to improve diagnostic services and reduce patient waiting times will force them to involve the private sector in one guise or another. 

DIC is a new-ish guy on the block in the UK.  It is not technically a sovereign wealth fund like the China fund that recently took a stake in Blackstone, or the better known ones like Singapore's GIC or the Kuwait Investment Authority.  The DIC fund runs the personal wealth of Dubai's ruling emirs.  It has been active in the UK in the past 2 years and today owns Tussauds attractions group, Doncasters defence engineering group and the Travelodge hotels operator.

Whether there is any strategic interest by DIC to expand Alliance's services into the Gulf region remains to be seen.  But as a financial investment this deal rides continuing consolidation among pan-European providers of diagnostic and other healthcare services.  With or without the explicit consent of their health ministers, European hospitals are clearly finding ways to exploit private-sector solutions to their woes.

The battle for control of the GPS market comes to a head

 

This year's most exciting takeover battle in tech may be nearing a conclusion.  On Wednesday TomTom, maker of the ubiquitous GPS navigation devices, increased its bid for digital map-maker TeleAtlas by over 40% and snapped up 28% of the target's shares.  This follows an earlier hostile effort by archrival Garmin from the US to prevent TomTom from gaining control over the only remaining independent provider of maps.

This expensive bidding war caps a wave of consolidation in the industry which pits the two market leaders against each other and both against a new, gigantic entrant.  The opening shot of this set-piece was Nokia's agreement to acquire Navteq Corp, one of only two global providers of digital maps to the fast-growing GPS navigation industry.  Pretty much all the sat nav device and navigation software vendors depend on either Navteq or TeleAtlas for maps.  What Navteq and TeleAtlas do is expensive and time-consuming (hundreds of people driving around the world mapping roads), so they are not easily replaced. 

Garmin primarily uses Navteq and TomTom uses TeleAtlas.  In fact TomTom is TeleAtlas' largest customers, making up about 30% of revenues.  So when Nokia bid for Navteq (having already acquired navigation software vendor Gate5 last year), alarm bells must have gone off at Garmin's beach HQ in the Cayman Islands.  Nokia is gearing up to become a formidable competitor to the dedicated sat nav device market, planning to put GPS-absed navigation on both its high-end smartphones and mass market handsets.  To protect its own source of maps, TomTom made a heavily geared bid to acquire TeleAtlas for a whopping €2.1bn. 

The loser of this battle may well struggle to survive.  US anti-trust officials have not opposed the merger, but the European watchdog is still considering it.  They will of course require the winner to continue providing maps to the industry as a whole, including to the loser.  But for the ultimate winner there are many ways to make life difficult for rivals.  And huge margin benefits for itself -- saving TeleAtlas royalties could add as much as 15 or 20 points to TomTom's gross margin.

This is one fight TomTom cannot afford to lose.  Last week Garmin countered TomTom's initial bid with an unsolicited €2.4bn offer.  TomTom responded swiftly, raising its bid to €2.9bn this week.  At the same time it acquired 28% of TeleAtlas' shares from its leading shareholder and in the open market, effectively blocking any possibility of a Garmin victory. 

TomTom will surely win the day, but at what price?!  Its latest bid represents an 81% premium to TeleAtlas stock price before the bidding began.  TomTom will end up paying 9 x TeleAtlas' 2007 revenues or 38 x 2007 EBITDA.  For TomTom it's a choice between Winner's Curse or likely demise.  Meanwhile TeleAtlas' shareholders are laughing all the way to the bank.

From the sidelines, Microsoft and Google -- both of whom have a keen interest in mapping and navigation services for consumers -- are watching carefully...  If anyone could afford to fund the creation of a brand-new provider of global digital maps, it's them.  Watch this space.

Seinfeld regurgitates a blog

Jerry Seinfeld on The Daily Show yesterday, on blogs:

"Blaahg" -- is this the worst new word of our culture or what?  It's so unattractive; it sounds like something that you spit up...  and it congeals... and you kick dirt on it...

He has a point.

The Web is full of freeloaders after all, go figure

Thanks to ComScore we have some hard data now about Radiohead's experiment with pay-what-you-like music. This is a follow-up to my earlier post which quoted less scientific and clearly more optimistic survey figures.

According to the ComScore study, only 38% of downloaders were prepared to pay anything at all for the new Radiohead album, In Rainbows.  Among those who paid something the average price was $6.00, though this was higher in the U.S. ($8.05) than outside the U.S. ($4.64). That's a pretty shocking difference, as it means that the average price paid in Europe (and presumably emerging markets) amounted to €3.20 at today's exchange rates.

More than half the total dollar revenue to Radiohead (from downloads) came from the 12% of downloaders who paid the going iTunes rate for an album, or $8-12.  But if you average out the download revenues across all those who paid and who didn't pay, the average dollars spent per album is only $2.26.  So, does that mean that this music distribution model isn't financially viable? 

Well, that depends.  Without having to pay a studio its cut for distribution, Radiohead gets to keep a lot of that $2.26.  According to the ComScore blog, for each $1 earned on downloads, the band made $2 in sales of its $80 special box disc set, so average revenues per album are approaching $7 (albeit with higher packaging & distribution costs for the box set).  That may well be the new market clearing price for a  high-quality rock album....

I guess $7 is not unreasonable, but it clearly doesn't leave enough margin to support a studio-based music industry.  Tellingly, EMI announced today the release of another DRM-free Radiohead special box set and USB stick containing basically the band's entire back catalog (!).  Is EMI in Terra Firma's ownership brilliantly disrupting its own industry, or is this the last desperate gimmick of a studio on its deathbed?  Having paid over 18x EBITDA for the business, Guy Hands can't afford to hesitate....