Nokia's N8: Dawn of the "Swiss Army Knife" Cellphone Handset

The mobile market has looked to Apple (AAPL), Google (GOOG), RIM (RIMM), and Microsoft (MSFT) as trendsetters in what smartphones can do. With all that attention, it’s easy to forget that Nokia (NOK) has been the world leading seller of smartphones. No longer. The newly announced Nokia N8 handset, with planned availability this summer, is a powerful combination of hardware and features that should leave the other companies nervous.

The N8 specs are striking in how much Nokia packed into a case that is shorter, thinner, and flatter than an iPhone:

    * claimed maximum 7 hours of talk time or 390 hours of standby on quad-band GSM
    * 12 megapixel camera sensor using Zeiss optics (a big deal if you know cameras) with xenon flash and a facing secondary VGA-resolution camera for video calls
    * HDMI, Bluetooth, and USB 2.0 connectors
    * Wi-Fi support for 802.11 b, g, and n (the latter being the fastest version and unusual in cell phones)
    * HTML 4.1 browser with Flash Lite 4.0 to play most Flash 10.1 content
    * ability to play H.264 720p HD video at 30 frames per second and record at 25 fps in either H.264 or MPEG-4
    * on-demand web-based TV with such channels as CNN and National Geographic
    * first phone to use the Symbian^3 OS touch interface
    * GPS with free navigation for driving or walking
    * compass, accelerometer, and proximity sensor
    * 16GB internal memory with up to 32GB expansion via microSD card
    * music playback and FM radio and transmitter, to send music to a radio in a car without Bluetooth support
    * integrated Twitter and Facebook support, with automated photo and video sharing
    * dedicated graphics processor with OpenGL 2.0 support for 3D gaming

In many areas, Nokia is catching up with other vendors. But when you look at the extras — high capacity image sensor, faster Wi-Fi, FM transmitter — the N8 goes beyond what competitors offer and, in doing so, breaks a fundamental barrier.

The consumer electronics industry has faced an old technology dichotomy. In IT circles, it’s called best of breed versus integrated systems. Consumers, like companies, have long had to choose either really good category-specific products — higher end still and video cameras, GPS systems, music players, and phones — or combination devices with convenience but lesser features.

Nokia pushes the cellphone to a true convergence device. Most consumers could buy one and very possibly not want for anything else. For example, I was recently headed on a trip and had accidentally destroyed my old phone. (Oh, for a true wash-and-wear model.) I picked up an older unlocked Motorola with a 5 megapixel camera to carry just one piece of equipment in my pocket. With an N8, I could probably drop the GPS as well. Download apps and who knows what else goes out the window?

Ah, but the business implications are significant. There is a limit on what consumers will spend for a single electronics device. Various companies have shown that although some people will pay $500 or more for a phone, most prefer subsidized prices of less than half that amount. The more they fork over for the handset, and the richer the handset features, the less most consumers will spend on other devices that they perceive as no longer necessary. It’s a question of perception. At what point do people see so little difference between best of breed and integrated offerings that they go with the latter? I think we’re about there.

That creates pressure on the individual device manufacturers. (Check this post about some problems of GPS manufacturers by my colleague Damon Brown.) However, convergence also creates problems for the handset vendors. Competition has turned the smartphone into the electronic über Swiss Army knife. All the hardware and software is expensive for an industry where companies control product costs to fractions of a penny. Vendors must keep adding to the phone package, and yet there is a practical ceiling for what they can charge. Maybe that’s one reason Apple just acquired another chip design company. The more you can fit on the silicon, the more you can control costs. Direct the chip design and you ensure that you have what you need.

Why Long-Suffering AOL Is Doomed to Go the Way of Palm

AOL is following Palm’s example as a company spinning its wheels, unable to get competitive or financial traction, and ultimately selling out to survive. And just as Hewlett-Packard has agreed to acquire Palm for $1.2 billion to advance its mobile strategy , it’s only a matter of time before AOL is scooped up by Microsoft, Yahoo or another Internet player in need of more online content and a little search.

AOL CEO Tim Armstrong says the company is looking for a search partner by year’s end, when its existing search alliance with Google expires. “We have a need for revenue, distribution and a holistic long-term partner,” Armstrong concedes. Like AOL, Yahoo has been hiring more journalists and bloggers to bolster its original content, and Microsoft is looking for ways to strengthen its Bing search effort.

The AOL-Palm parallels are notable. Palm has been stalled for more than a year, seeking to escape shrinking market share and revenues despite the release of new products.

The reasons why AOL’s solo flight will be short-lived were painfully evident in its latest quarterly results and a new round of negative data points, including a 58 percent decline in net earnings. Here is why AOL’s days are numbered:

    * AOL’s core revenue sources continue to decline. Its first quarter advertising revenues fell 19 percent and its subscription income plummeted another 28 percent. The company says it will be another year before it sees growth in domestic display advertising, which was supposed to help offset the expected demise of its dial-up subscription business.
    * Continued decline in high margin revenues from subscriptions and search (down 27 percent in the first quarter) is contributing to the deterioration of AOL’s free cash flow, which plunged 55 percent from a year ago to $125 million.
    * All of the company’s financial dynamics are jammed. AOL explained in its earnings press release that its content users search less than its dwindling subscribers. That is dragging down its highly profitable search, which only has about three percent of the market. AOL’s content and advertising businesses have higher overhead costs and lower profits.
    * AOL has become just another amorphous Internet content aggregator in search of a business model. The premium, niche content business on which it has a laser-like focus has yet to gain significant traction. NIche content must be supported by advertising, which AOL is having difficulty selling even in a gradually recovering economy.
    * Armstrong spins a better story than he delivers.  Much like his predecessor CEOs, Armstrong is promising to transform AOL into an ad-supported “Time Inc. of the 21st century.” Every quarter, there are new reasons why he can’t execute, which sound a lot like the old reasons — a problem Armstrong awkwardly defended in this week’s earnings call. Larger and more nimble content competitors are racing past AOL, which can’t seem to transform itself fast enough.
    * As part of yet another restructuring, AOL continues its chronic cost-cutting , demonstrating that companies cannot prosper by expense reductions alone. AOL most recently shrunk its work force to 5,000 from 7,000 and is looking to cut more jobs outside the US.
    * AOL is shedding noncore assets such as Bebo and ICQ, which makes it a leaner, more focused acquisition target.  AOL is selling ICQ to Russian-based Digital Sky Technologies for $179 million in cash, and says it soon will sell or shut down Bebo, which it acquired for $850 million in 2008.  AOL could use the sale proceeds to make tuck-in acquisitions such as Associated Content or Foursquare.

    * AOL can’t seem to keep a consistent management team in place that is empowered to effect change. the company is a revolving door for middle management executives, none of whom have the authority to be more enterprising. It has been siphoning executives from Google, who reportedly are complicating AOL’s revolving door dilemma with a new-hire screening process.

9 Reasons Why Apple Beat Microsoft

Yesterday Apple overtook Microsoft as the world’s most valuable technology company.  According to the New York Times, Apple shares are now worth $227.1 billion versus a measly $226.3 billion for Microsoft, You may think Apple is winning because Apple’s products are better. You may even think Apple is winning because Apple’s marketing is so great. The truth is that Microsoft made a series of strategic blunders that have blunted it’s once-unassailable market position, giving Apple the opening it’s needed to push past. This post contains the 10 wrong things that Microsoft has done, thereby transforming itself from an erstwhile avatar into a soon-to-be also-ran. I believe that Microsoft’s problems have been programmed into its culture and it will be very difficult — barring a complete change in top management — for the company to recover its long-lost industry leadership.

Bailing Out Apple

·         What They Did: Microsoft threw Apple a life preserver when it was about to go under in 1996.

·         Why They Did It: Microsoft was terrified that if its only competitor in the market went under, Microsoft would look even more like the monopoly that it was.

·         Why It Was Dumb: Getting yourself in the position where the only way you can keep yourself from being sued is by bailing out a competitor is, by definition, a lousy strategy.

·         What Resulted: Oy!  Apple’s success is locking Microsoft out of several key markets that represent the high growth areas of high tech.

·         The Obvious Alternative: If Microsoft hadn’t become a monopoly, hadn’t alienated the rest of market, and hadn’t acted generally like complete jackasses, they wouldn’t have been in the position where they needed to do something so dumb

Feature Bloat

·         What They Did: Microsoft’s flagship application product, Office, keeps acquiring more and ever-more-obscure features.

·         Why They Did It: Microsoft’s revenue became dependent on customers buying upgrades to existing products.  The new features were necessary to justify asking customers to belly up another few hundred dollars for something that they already owned.

·         Why It Is Dumb: As Microsoft’s products become more difficult and complex, they become more difficult to use.

·         What Resulted: Asking more money for minimal value added is always a good way to annoy your customers.  In addition, products with feature bloat are abandoned the moment a better alternative comes around.

·         The Obvious Alternative: Convert to a subscription service, with additional charge for features that are only activated if people need them.  The model would generate less revenue, but in the long run it would result in happier customers and a stronger market position.

Bureaucratic Bloat

·         What They Did: As it’s grown, Microsoft has become increasingly bureaucratic and hidebound, making it increasingly unable to move nimbly.

·         Why They Did It: Microsoft has pursued an organizational strategy tends to centralize power.  While there are exceptions, the overwhelming tendency among top management is empire-building.

·         Why It Is Dumb: As a general rule, high tech companies become increasingly less effective and less innovative as they grow larger.

·         What Resulted: Microsoft is now widely (and correctly) seen as a company that has enormous problems bringing high quality products to market.

·         The Obvious Alternative: Large high tech firms constantly struggle with this, but the best approach is usually to decentralize around product groups or distribution channels, even to the point of creating smaller subsidiaries with their own P&L.  Such a structure would also help dispel the (correct) perception of Microsoft as a monopolist.

Windows as a Religion

·         What They Did: Microsoft keeps trying to push the Windows interface onto devices for which it is wildly inappropriate.

·         Why They Did It: The success of Windows in the marketplace has created the “Windows Everywhere” religion.  In order to get ahead at Microsoft, you’ve got to drink this particular flavor of kool-aid.

·         Why It Is Dumb: Windows is based upon a human interface design that was pioneered 35 years ago.  While it’s proven resilient on large-screen desktops and laptops with attached keyboards, it’s just not all that usable in other formats.

·         What Resulted: Microsoft has been roundly trounced in the handheld market first by Palm, then by Blackberry, and now by Apple.

·         The Obvious Alternative: Develop or buy operating environments that are appropriate for the devices that you wish to create or support — even if it’s an implicit admission that the Windows environment has limitations.

Stealing Code

·         What They Did: Microsoft has admitted to stealing code from another software developer.

·         Why They Did It: It’s obviously not Microsoft policy to steal code and that theft is apparently the action of a development partner in China.  However, the theft builds upon rumors and suspicions that have floated around in the industry for years, and plays into memories of various patent problems that Microsoft has encountered in the past.

·         Why It Is Dumb: Microsoft employs thousands of programmers. Surely it’s possible to throw enough manpower at a problem so that the software can be developed without stealing?

·         What Resulted: Microsoft’s brand image already suffers from the perspective that it’s not an innovative company and that it doesn’t play fair.  Getting caught stealing code causes people to question Microsoft anew.

·         The Obvious Alternative: Kindergarten rule: Don’t take what doesn’t belong to you.

Imitating Not Innovating

·         What They Did: Microsoft is well known as a company that takes designs and concepts  productized at other companies and then comes out with a Microsoft version of them.

·         Why They Did It: By letting other companies generate the “proof of concept”, Microsoft eliminates the risk of developing a product that flops in the market.  Microsoft figures that with its deep pockets and market position, it can easily clobber the early market entry that did the pioneering work.

·         Why It Is Dumb: While Microsoft’s strategy sometimes works (e.g. xBox vs Playstation), innovation is the soul of high tech, and trying new things (and risking failures) is how high tech companies learn and remain competitive.

·         What Resulted: Microsoft keeps coming into key markets late with products that aren’t sufficiently differentiated to create any positive buzz (e.g. Zune vs iPod)  Unless those products are tied to Microsoft’s monopoly, they tend to fail, leaving the company with a reputation as an innovation also-ran.

·         The Obvious Alternative: Microsoft should have developed Microsoft Research along the lines of IBM Research or Xerox Parc and made it a fountain of products for the rest of the industry

Monopolistic Bullying

·         What They Did: Microsoft used the combination of its monopoly position and deep pockets to effectively drive competitors out of business.

·         Why They Did It: Microsoft’s corporate culture became convinced that they were the “natural” owners of every software category and that they were “helping the customer” with practices that drove competitors out of business.

·         Why It Was Dumb: Monopolies are bad for consumers and businesses because they suppress competition, resulting in products that are overpriced and low quality.  And what’s bad for consumers and businesses is ultimately bad for the companies who sell to them… even if they’re monopolies.

·         What Resulted: Microsoft became embroiled in a series of anti-trust lawsuits which for over a decade constantly reminded the public that Microsoft was a company that put its financial interests ahead of the customer’s interests.  In addition, the ongoing negative perception of Microsoft has prevented the company buying companies (Intuit, Yahoo) that could help it in key markets.

·         The Obvious Alternative: Microsoft, as monopoly, had a vested interest in keeping that fact as low visibility as possible.  The company should have walked on three layers of eggshells when it came to anything that might be construed as anti-competitive.

Alienating Key Partners

·         What They Did: Microsoft has encouraged companies to build innovative applications atop of Windows, and then released their own products that were directly competitive, giving their own products the inside track on distribution and support.

·         Why They Did It: Microsoft got greedy and wanted not just wallet share, but the whole damn wallet.  Microsoft knew that because they had a monopoly on the operating system, companies would still build products on Windows.

·         Why It Was Dumb: While it’s true that other software companies were forced, by the nature of the market, to build for Windows, most of them did do reluctantly and with the sinking feeling that they’d eventually get screwed.

·         What Resulted: Other software firms are always looking for a safer alternative, thereby giving any Microsoft competitor (Linux, Apple, etc.) a huge boost in the market.  Furthermore, Microsoft has created a string of enemies in the software business who hold a grudge against the company, leaving it with few friends and allies when Microsoft tries to do new things.

·         The Obvious Alternative: Microsoft should have set up an impermeable Chinese wall that created a level playing field so that its applications did not have an immediate competitive advantage over other products.

Backward Compatibility

·         What They Did: Microsoft’s operating system group still insists on supporting features and concepts that are decades old.

·         Why They Did It: Because Microsoft’s main advantage in the marketplace was always installed base rather than product quality, they’ve been terrified that the base might leave if they asked customers to upgrade to a significantly different architecture.

·         Why It’s Dumb: In high tech, you have to “eat your own young.”  In order to remain innovative, you sometimes have to dead end old technology and take the risk of losing customers to get back on the cutting edge.

·         What Resulted: When it comes to stability, security and usability, each version of Windows has varied between adequate (at best) and horrible (at worst).  For many people, the “blue screen of death” is Microsoft’s tag line. The constant problems, constant insecurity, and constant need for pricey support have created a constant drumbeat of bad feeling about Microsoft’s ability to release high quality products.

·         The Obvious Alternative: Microsoft should have designed a new operating system that dumped the backward compatibility features that have caused so many problems over the years, and then bit the bullet.  They would have weathered the loss of a few customers and gained a reputation as a company that can create a quality operating system.