The Long-Term Tablet War

So far, many have tried, but none have succeeded, in gaining significant share versus Apple in the tablet market.  Today, Amazon officially announced its tablet competitor to the Apple iPad - called the Kindle Fire, which has a 7-inch screen and sells for $200.  The $200 price tag seems to be its number one feature since storage is limited, the OS is an older version of Android, and there is no built-in 3g.  On the plus side, the Amazon skin on top of Android looks great, and so does the integration with Amazon video and music streaming and storage services.  Plus, lots of Android apps work on the device.

Others have taken different approaches.  Here's a summary of market activity in 2011:

• Samsung produced the Galaxy Tab II, which is a spectacular performer, but is stylistically too similar to the iPad.  Apple is suing to prevent its sale in most places around the world and, so far, is mostly winning.
• RIM released the Playbook, which is tied to the Blackberry.  You have to have a Blackberry to access mail. contacts, and your calendar.  Since more people are dumping Blackberries than buying them, this feature was unpopular.  Any day now, a new version of the RIM QNX operating system will come out that fixes this, but, in the meantime, it's like betting you'll win an NFL title with a 40 year-old Brett Favre at quarterback.  Who would do that? Oh, wait....
• HP released the TouchPad only seconds before deciding to spin-out its PC business and exit the tablet business.  Then, with over 200,000 unsold TouchPads lingering in warehouses and a sales channel with pitchforks marching on the castle, it put them on sale for $99 and sold a ton of them.  This was one sweet tablet - fast, intuitive, easy-to-use.  It's just that it had almost no apps beyond the ones that came with it.  All I can say is, it coulda been a contendah.  
• Motorola released the Xoom, which included wifi and 3g, but, if you wanted 4g connectivity, you had to send it back to them for a week for retrofitting.  People hug their tablets close almost every minute of every day like a firstborn child.  Who is going to send their child to camp at such a tender age - even if a free genetic upgrade comes bundled with the camp package?  Nobody knows what will happen when Motorola morphs into Googorola (in actions if not name).
• Asus, Acer, Lenovo, HTC, Vizio, and Toshiba have all weighed in with nice tablets that bring little differentiation to the market.  USB ports, HDMI, SD card slots - the iPad has none of those, and people don't care.  They really don't want their tablets connected to anything except for iTunes to sync - until iCloud comes out in a few weeks or months.
• Sony just launched to tablets that are fatter on one end than the other, feel incredibly comfortable in the hand, and have a software layer on top of Android that make using the tablet much easier.  It shows some promise, but I am not sure you can buy one yet. Time will tell whether the Sony approach creates a PHAT tablet or just a fat tablet.

You would think that, with so many new choices, sales would surge for several companies beyond Apple; however, the cash register has yet to ring for anyone but Apple.  Gartner believes that trend will continue for a very long time.  Here's what all the wannabes -  all huge names in computing and electronics - are missing that Apple has built:

• A truly integrated, simple approach to OS and applications software.
• A learning curve that takes an hour or less.
• A single huge marketplace for all things tablet.
• A cloud-based service that connects all devices easily with little or no technical knowledge required - if iCloud lives up to its promises.  MobileMe didn't.  Google has all these services, but connectivity can be curiously complicated.
• A brand against which all competitors are compared (and fail by comparison).  There can really only be one of these until someone flips the board.

Google had enabled many companies to get in the phone and tablet game. They have provided tools that enable each hardware manufacturer and carrier to create something different and unique.  They have provided Android for free, so that handset makers don't incur licensing fees, because they know that search and ad revenues will more than make up for Android's upfront costs. In the phone market, this has driven Android to a market leading position - great for Google - but 10+ handset makers sell Android phones.  It's likely only a few - Samsung, HTC, and Motorola, in particular - are big winners.  This approach hasn't translated to tablet sales, because users want a completely integrated experience on tablets.  Many consumer and business users have shifted their app use to tablets over the last year - at least on the iOS platform.  Android will continue to get better. Android tablet market share will rise on the tablet side, but frustratingly slowly.

So, who will challenge Apple's tablet dominance?  Their old nemesis, Microsoft, which is taking a marathon runner's approach to phone and tablet market share growth.  They have tens of billions in cash to invest.  They have Nokia as a huge global partner, which has bet its business and hopes for return to market share dominance on Microsoft.  And, somehow, the Nokia alliance hasn't scared away other handset makers that currently bet the ranch on Android.  All the biggies, except for Motorola, will be releasing Windows 7.5 phones.

Most importantly, Microsoft is highly motivated.  The Company wants and NEEDs to unify all these different devices - PC, phone, and tablet - to preserve their Windows, Office, and server software revenue streams.  Plus, making Bing and other cloud services profitable and successful, too, would be hugely helpful.  Having people running the show who have been through epic wars with well-armed competitors provides valuable lessons, too.

The initial reviews are good.  See the CNet roundup of all things Windows Phone 7.5 here:

• Windows Phone 7.5 is integrated experience especially for social networkers and heavy e-mail users.  
• Windows 8, which comes out next year, will be a unified experience on the PC, phones, and tablets.  
• Microsoft's online services seem to work much more easily on mobile devices than on the web, which is kind of weird.  
• Microsoft is taking a soft and nurturing approach to seeding the market - paying the best developers to write for their apps and targeting top influencers like Scott Adams of Dilbert fame and Molly Wood (here and here) of CNet, who, despite their best efforts, had good things to say about the new OS.  Note that Molly hasn't given up Android yet, but she said the phone was a good fit for people who were heavily tied to Microsoft services.

Right now, Google has the spotlight as the tablet challenger.  24 or 36 months from now, Mr. Gates and Mr. Ballmer may be taking the lead.

The Breathtaking Scope of Facebook

750 million people around the world have Facebook accounts.  Maybe 20 percent of them use the service pretty heavily.  The result is a social destination unlike any other ever invented.  I interact daily with friends from England, Belgium, and Australia.  I have connected with people who I barely knew in high school.  These days, we share tons of things in common. Millions of Facebook users have had experiences like this.

The business of Facebook has prospered as a result.  This week, Facebook is holding its developer's conference called f8.  SNL Comic, Andy Sandberg, kicked things off with a dead on Mark Zuckerberg imitation, except that he was saying and doing some very un-Zuck things.  It was quite funny.

Facebook's list of new features was quite outstanding, too, including a Timeline feature that allows you to map out your entire life in one Facebook page.  Then there are the partnerships:

• Facebook will enable Netflix streaming everywhere except in the US.  
• New games from social games developers are showing up a record pace. Zynga, which makes Farmville, Cityville, and several other hit titles, expects to go public - if economic conditions permit - largely due to the success of its Facebook games.  Note that Facebook takes a 30 percent cut on Zynga's Facebook revenues.  
• Facebook has linked up with Spotify - the hit music streaming service that just crossed the pond from the UK - and many others, including IMDb, Blockbuster, DirecTV, Hulu, Flixter - all partnering with Facebook to make money jointly.

Most importantly, from a business perspective, Facebook is hitting the ball out the park.

• CNet is reporting that Facebook revenues are projected to reach $4.27 billion this year - over double 2010 revenues.  Online credits - basically virtual currency - are expected to generate $470 million in real currency this year.  Amazing.
• Industry analysts believe that Facebook is now the runaway leader in display advertising with close to a 20 percent market share. Have you ever noticed how targeted those Facebook ads are on the right?  Creepy, huh?  It's all about your Likes.  The previous leader, Yahoo!, has felt the pinch - hence the departure of controversial CEO, Carol Bartz.
• fCommerce is now a tracked category of eCommerce and is growing faster than any other category.  Whole companies have been formed or repurposed just to exploit fCommerce.

Facebook is also bold when it comes to its service - having updated their user interface radically several times in the last 24 months.  The latest version came out a couple of days ago and has a lot users pining away for the old look-and-feel.  Users will get used it.  New products from Facebook and others will be fed into it.

As we all connect with friends, post links, and insert status updates, Facebook will be monetizing us as people.  We all want to feel like we're customers of Facebook.  We're not.  We're the product - sold to advertisers and product developers worldwide.  it all seems to work.  We just shouldn't assume that all these changes to the Facebook platform and business model are all about us.

A Note to Tech CEOs: Lessons from the TechCrunch Debacle

Over the past month, Silicon Valley has been filled with drama - not over patent wars in mobile technology or the inability of HP to get out of its own way, but over the fate of TechCrunch, the widely read blog that covers start-up technology companies.  About a year ago, AOL acquired TechCrunch for $30 million and, with it, the site's mercurial editor, Michael Arrington. TechCrunch is widely read, because it covers interesting, young companies in a provocative and insightful way.  It is both a champion for entrepreneurs and a check against entrepreneurial exuberance.  Mr. Arrington is another matter.

At the time of the AOL acquisition, Mr. Arrington wrote that he was really excited about taking the site to the next level through AOL and that he expected to be a happy and productive AOL employee for many years to come.  He might have thought that at the time, but, apparently, being part of the machine can be oppressive.  AOL reorganized its content properties and put Ariana Huffington of the much larger and more successful Huffington Post in charge of rationalizing them all, which she set about doing with vigor.

Apparently, Mr. Arrington believed that this rationalization didn't apply to him or TechCrunch.  A few months ago, he started investing in start-ups after years of swearing it off and announced plans to raise a $20 million venture fund.  AOL was incredibly "understanding" - even investing in the fund - but told Mr. Arrington that he couldn't be both a venture investor and cover the companies he invests in.  This seems like a basic journalistic principle, but this was just too much for Mr. Arrington.

First, he asked AOL if he could buy TechCrunch back after having pocketed a big check not so long ago.  He noted that he would have to raise money to do that - presumably not from his venture fund.  Then he opined that AOL was exerting too much editorial control and, as a conglomerate, really didn't understand journalism.  He did all this right before TechCrunch's annual conference that features the hottest in technology companies - taking most of the attention away from the markets and companies that TechCrunch covers.  In the end, AOL suggested - no doubt in a strongly worded letter along with some pointed in-person meetings - that Mr. Arrington resign, which, thankfully, he did.

CNN's excellent Sunday talk show, "Reliable Sources" hosted by Howard Kurtz, did an excellent job of summarizing the different points of view on the TechCrunch imbroglio by interviewing two people back-to-back with very different opinions on the matter:

• David Carr, a senior TechCrunch editor, who comes across as a "tech brat" with an entitlement complex, and 
• Kara Swisher, the excellent tech journalist with attitude and AllThingsD co-Managing Editor.  

There's a link to it here.  All I can say is, "Go Kara!"  She delivers a very concise paddling of Mr. Arrington and his cohorts in 5 minutes or less.  As a bonus, AllThinsD added this comic, which says sort of the same thing but even less nicely.

I am a strategy consultant for technology entrepreneurs.  Hundreds of my clients have raised significant amounts of money or been acquired. Operational strings and raised expectations are always attached.  Most of the time, the founding entrepreneurs don't survive the transaction for more than 24 months.  Here's why:

• In most big companies, the acquired company is a a new product line, not a transformer of events.  Acquiring companies have to balance new versus old.  They want to reallocate staff to give new opportunities to current employees.  They often have a sales force in place to sell the new product line.  They want to the acquired company to comply with their systems and processes, not invent new ones.  There's about a 100 percent chance that those systems and processes will be more complex and onerous than the ones the acquiree had, but that doesn't necessarily make them worse.  Entrepreneurs hate bureaucracy.  It chafes at them.  Most can't adjust.
• You will have a boss, who will have opinions and give orders.  Get over it.  Most entrepreneurs had one or more bosses before they started their companies; however, many also hope to never have a boss again.  A Board of Directors, sure, but someone telling him what to do every day, definitely not.  
• Different people for different times.  The truth is that there are start-up, mid-sized, and big company people.  Few people fit into all three as a company grows and, therefore, succeeds.  Here are a set of statistics that should put in perspective:

• In a $1 billion IPO or company sale, a company is generally on its third CEO and has replaced most or all of its founding management team.  The founding CEO makes - on average - $6 million off of the transaction, because, by this time, it's been several years and investment rounds since he roamed the halls.
• In a $100 million sale, the founding CEO also makes on average $6 million.  Why is that?  Because investors and new employees have taken many of the newer shares - diluting the founder's shares.

In both of these cases, the Company has gone through multiple scaling phases, where it needed new employees with different skills, more internal governance, and many new business processes.  If the Company didn't do these things, it likely would have gone out of business or never grown to a big size.  This type of dilution is both necessary and "worth it" to gain a high value exit for the largest shareholders, which are the usually institutional investors that funded the scaling efforts.

Mr. Arrington sealed his own fate but good; however, most successful start-up CEOs go through the same thing - albeit with far less drama and, hopefully, none of the ethical problems that Mr. Arrington didn't believe were actual problems.  Some people would say that this is a shame and that entrepreneurial spirit should live on forever.  The truth is, becoming big and successful with big company executives is a natural business occurrence.  Even better, it leaves entrepreneurial CEOs with the time and resources to do the "next, new thing."

A Financial Model That Works

Many entrepreneurs can tell a story with the best of 'em.  The words just flow, and the pictures complement the words.  When it comes to numbers, however, some start-up CEOs get lost trying to navigate a sea of Excel cells. Since most of my clients are in the Washington, DC, area, it could be that the federal government penchant for spending more than it makes is actually contagious, but, more likely, it's just that entrepreneurs would rather sell or build products than model out how they are going to generate revenues and profits.  In truth, there are few things that are more important for an entrepreneur than understanding the numbers that make the business tick.

NewPlan builds financial models for young companies all the time - usually in support of a fundraising effort.  We find that a robust financial model is important, because it shows how you plan to operate your company going forward.  It is a test of your business logic and ability to imagine scaling and growing your company.

Here are our secrets to building a useful financial model:

• Include all of the standard information.  By standard, I mean:

• Revenue calculations
• Costs calculations
• A Profit & Loss Statement
• A Balance Sheet
• A Statement of Cash Flow
• A Dashboard full of reports that cover key metrics\

• Build a monthly, 5 year model.  If it's late in the year, extend the model out an extra year.
• Create logical assumptions.  By logical assumptions, I mean things like:

• Achievable quotas for salespeople.
• Market tested salaries for employees.
• Appropriate levels of marketing spending.  For example, for software companies, marketing spending tends to be 5 to 7 percent of revenues - or slightly more - when the company exits the start-up phase.  The percentage declines some as the company gets bigger.
• Accurate projected costs for infrastructure - like data center, rent, and equipment costs.

• Whenever possible, have those assumptions calculate automatically based on revenue growth or some other key factor.
• Imagine how your organization will look in 5 years, and put that org chart in your model.  We generally build our cost models with three sections:  Go-to-Market, G&A, and Operations & Development.  Within each section, you would see a hierarchical organization that starts with the management position at the top and works downward to the most junior position.  For example, there might be:

• VP of Sales
• Director of Sales
• Senior Account Manager
• Account Manager
• Director of Pre-Sales
• Pre-Sales Specialist
• Direct of Telemarketing
• Telemarketer

• Some of those positions might not be staffed until year 4 or 5, but you'll get bonus points for realizing that you'll need that position when your company matures.
• Make sure that your model is readable.  Like a business plan or presentation, a financial model is a selling document.  If you are raising funds, an investor is going to want to review your model without you looking over his shoulder.  That means he needs to be able to figure out how it's built and change the key assumptions to see what happens

Finally, if you're not good at modeling, it's worth paying a "finance-type" to do the job for you.  More than likely, you'll be able to provide the guidance to build the model in the right way.  The mechanics of doing it are quite another matter.