Industry

This week has started with a bang: Google is acquiring Motorola Mobility for much more than a sarcastic math constant. Larry Page says this is largely a defensive move to acquire Motorola’s patent portfolio, so I presume David Drummond’s team did the appropriate diligence to confirm the patents are not “bogus”.

Macworld’s Dan Moren makes a good, sad point: we are in the middle of a cynical IP arms race that doesn’t appear to be slowing down. Over at The New Yorker, Nicholas Thompson laments the depressing irony of this move: just twelve days after fairly lamenting patent warfare as stifling, Google has forcefully decided a once-free company’s direction.

The patent harassment lawsuits between Apple, Microsoft, Google, and the Android OEMs won’t stop, but Google is at least less likely to lose now. It’ll likely end as it always does: with cross-licensing cease-fires, which may or may not trickle down to Google’s partners. Nilay Patel has a quick summary of the short-term legal fallout. He concludes:

 …it’s still curious why Google spent the full $12.5b on Motorola, instead of a smaller amount acquiring the rights to Moto’s patents — or the rights to litigate with those patents.

I think that’s pretty simple: Motorola is already a leading Android OEM and has little to gain from a mere licensing deal. It could certainly use the cash — the last three fiscal years have ended with net losses — but I think the executive team saw an opportunity to really alter the company’s future and played hardball. In that light, Motorola CEO Sanjay Jha’s recent public comments become much more interesting. In a two-day span last week, Jha said that he was interested in building Windows Phone 7 hardware, and that they may start flexing their IP against fellow Android OEMs. It’s now obvious that these were warning shots to Google during negotiations. Given the ludicrous price Google paid, I’d say it worked.

I think there’s more, though. Florian Mueller tweets:

Google’s original strategy for Android resulted in huge and fast-growing activation numbers. But something must have been missing.

A lot is missing, not the least of which is a stable platform. OS and app fragmentation will only get worse as more Android devices pop up. Google can solve this problem in a few ways, assuming the MMI acquisition goes through:

1. Choke the OEMs out of business with unified, best-of-breed Motorola devices.
2. Make it easier for Android developers to write multi-device native apps.
3. Make the browser a true first-class unifying platform on Android.

OEMs should definitely be afraid of option 1, but ad sales are still Google’s core business. Eyeballs are all that matter there, so momentum through a diverse flood of devices will continue to be Android’s goal for some time. But there’s little doubt that Motorola will be the preferred Android OEM moving forward, just as there’s little doubt that Nokia will be the preferred Windows Phone 7 OEM.

I don’t believe Google will solve the fragmentation problem at the native level; it’s just not in their self-styled DNA to apply the necessary focus or constraints, especially while growth is a priority. But I am willing to believe Google will try to solve the fragmentation problem with a rich web framework. And this is the point where we recall that Motorola acquired 280 North almost exactly one year ago.

280 North makes a framework called Cappuccino that allows you to write rich web applications using Objective-C syntax. (Objective-C is the language used to write native Mac and iOS applications.) The technology has produced some beautiful work, and could help Google woo iOS developers to Android with much less pain than they’re accustomed to.  We haven’t heard a whole lot since Motorola bought them, but I have to believe Google is interested in this technology. It’s produced some compelling work, I don’t believe it was a factor in the acquisition deal, but I do think Cappuccino has a future at Google.

Motorola has had problems for years, and Google is not a hardware company. Time will tell whether this marriage will actually work. For the time being, the winners are Motorola’s shareholders, and its executive team, who pulled off a hell of a deal.

(UPDATE: Florian Mueller has observed an unusually large $2.5B “breakup” fee for Motorola if the deal falls through. It really looks like Motorola got its way here.)

Google SVP and Chief Legal Officer David Drummond threw a public tantrum Wednesday over the recent patent auctions Google lost to Microsoft, Apple, and a number of other companies. This led to a heated exchange between Microsoft and Google over Twitter and the web. MG Siegler at TechCrunch has a nice recap if you’ve missed any of it.

More than enough holes have already been poked in Drummond’s logic. What’s truly astounding is that this was not a leaked memo or an investigative hit piece: it was a deliberate PR stunt that completely backfired. It is a textbook example of why you don’t open your mouth before you’re ready to talk. This was a chance to set the record straight and turn the tables in this debate, and Google blew it. Most of the mistakes made were simple, avoidable failures of communication.

The first failure was lack of clarity: specifically, letting the Chief Legal Officer write nearly 500 words of unstructured whining. How many ordinary people understand lawyers, let alone sympathize with them? A piece of communication this important should have been painstakingly reviewed: its prose; its tone; its presentation; its source; and my goodness, its facts. It’s quite clear that nobody examined the post with a level head.

The second failure was lack of disclosure. Microsoft’s General Counsel and Head of Communications immediately countered Google’s accusations with a conveniently missing piece of information:

Google says we bought Novell patents to keep them from Google. Really? We asked them to bid jointly with us. They said no.

This revelation forced Drummond to update his post with another two hundred frustrated words. In less than a day (and 140 characters), Google wound up against the same wall it tried to pin the opposition to. If Drummond had mentioned this little fact up front and quickly dismissed it, he’d have remained in the driver’s seat. Now he looks disorganized, disheartened, and dishonest.

The third failure was lack of awareness. Drummond attempted to rally the troops without so much as mentioning a very real, very relevant dilemma: the patent troll organization known as Lodsys, which has sued a growing number of Android (and iOS) app developers. The Droid Army is under siege, their livelihoods threatened, and the generals have finally stood up to… ask the troops to feel sorry for the generals. I’m sure they feel great today.

Nobody was waiting for Google to say something; Google stood up and demanded we all listen. If you walk up to the microphone like that, you need to have your story straight. It would not have been hard to spend a little more time preparing an impassioned and credible statement that appealed to the reader.

The sad thing about all of this is that the patent system in our industry is in fact horribly, cynically broken. Google had a terrific opportunity to make that case and shift public opinion in its (and I believe in the long term, everyone’s) favor. Instead, it cried like a rich kid who lost an auction.

Bad communication is bad business. I’ll call LG on it, I’ll call Apple on it, and I’ll call Google on it.

Netflix announced changes to its subscription pricing this week, and the world is up in arms. Details are on the Netflix blog, but the bottom line is that if you use both discs-by-mail and streaming, you’re about to pay an extra $6 per month. The price increase is on the by-mail side.

The overwhelming majority says Netflix is squeezing customers for money. I say Netflix is dumping the floppy drive. Under the old plan, DVDs by mail cost as little as $2 on top of the streaming charge. When I’m in the zone, I can get eight rentals per month on the single-disc plan. That’s 25 cents per rental. For that money, Netflix processes the discs; pays for postage in both directions; purchases new releases; maintains inventory; and services faulty discs. Oh, and the aging delivery channel behind it all is dying.

Do you want that business? Netflix clearly doesn’t. This new pricing model is a deterrent to get people off a dead technology that increasingly hurts the company’s bottom line, and ultimately its future. The sooner Netflix exits the physical arena, the sooner it can focus on competing with the likes of Apple and Google in the digital arena. (Enjoy the table scraps, Redbox.)

More importantly, Netflix’s licensing situation is about to get ugly. Just this week, CNNMoney reported that a number of existing streaming deals between Netflix and the studios are expiring in the next year. The studios will most definitely want their pound of flesh this time around, and so Netflix absolutely must accelerate streaming adoption. As its share of the streaming market increases, so should its leverage when negotiating with the studios. And by separating the streaming and by-mail audiences, it will have the data to prove where the market is going. What’s unclear is whether the studios will see these price changes as an act of confidence, or one of fear.

It’s a gamble that may or may not pay off, but the writing is on the wall. Netflix is smart to do this before it has no other choice.

Nearly a year ago I listed the major competitors in this decade’s mobile platform war. At that time, I couldn’t help but notice something:

RIM looks pretty bad here. They have little cash and no diversity, by comparison.

Ten months later, the cash and outlook aren’t much better, and we’re waiting for diversity in the form of the PlayBook: a tablet that runs BlackBerry Tablet OS, Adobe AIR, Flash, Android apps, and anything else that might possibly hopefully oh please be on the list of what you’re wanting in a tablet.

The rumored Android app support was officially confirmed this week. In true backward-looking enterprise fashion, it’s limited to the all-but-obsolete Android 2.3 “Gingerbread” runtime. (Android 3.0, “Honeycomb,” is the first Android version that Google considers tablet-worthy.)

If you’re wondering what this all means, let co-CEO (seriously) Jim Balsillie clear it up for you. The whole thing is an uncompromising miracle of confused CIO claptrap. If you own, or plan to own RIM stock, you must read it in its entirety.

You could argue that RIM is playing to its classic audience: business decision makers who just need a checklist covered and don’t care about much else. The problem is the genuinely good products out there now are already chipping away at the same list. “We have all that” is no longer enough. And no matter who your target audience is, clarity of message is important — only more so when you’re late to the game. John Gruber asks:

Which one of these is the native SDK for the PlayBook. Which one’s best? What is RIM’s advice for how developers should write PlayBook apps?

RIM has two CEOs and three COOs. Why is anyone expecting straight answers from a company that can’t even decide who’s in charge?

Here are some big takeaways for your next slide deck. RIM has:

• Very little cash
• Weak Q1 guidance
• No clear management structure
• No clear product strategy

If that’s not a win-win synergy of agile infrastructure assets, well you need to start pivoting.

Last week, Apple expanded its In App Purchase (IAP) technology to include support for content subscriptions. Without that native support, developers have been charging for subscriptions through their own billing systems. This is no longer the case, according to the latest App Store Review Guidelines. App Store apps now:

1. May only use IAP to sell content and services from within the app (Section 11.2)
2. Must not direct users to commerce or transactions outside the IAP system (Section 11.14)
3. Must price IAP and subscription content the same as, or lower than, equivalent content offered outside the app (Section 11.13)

First things first: IAP provides a superior user experience in most, if not all cases. I agree to buy something from my app and get it instantly with no hassle, no web forms and no worries that the provider is going to sell me out.

Isn’t that all a user cares about? Right now, perhaps. But if businesses play hardball — and they might, as Android adoption continues to accelerate — then iOS users can find themselves missing out on a lot of content. That would be bad for users, and it would be bad for Apple. So let’s go over the stickier points of this debate.

The 30% Cut

Some say the 70/30 revenue split that accompanies IAP is too high for subscriptions, but precedent wins here. 30% to Apple across the board — app sales, IAP, and now subscriptions — is consistent, clear, and uncheatable. That cheating bit is significant: a 10% commission for subscriptions, for example, would see developers adopting the subscription system en masse so they could keep more money. Apps that were once $2.99 would suddenly be asking for installments like late-night infomercials. This would not only be a huge headache for Apple, but it would be an awful user experience. Don’t expect subscriptions to deviate from a 70/30 split unless everything does.

This may in fact all be red herring: the New York Times reports “Publishers say their objections are less about the steep revenue split than the lack of data.” That “data” is, of course, your personal information — which they intend to monetize further in ways you probably wouldn’t like very much. This is one area that I hope Apple never compromises on.

The Pricing Trap

The requirement that IAP content be offered “at the same price or less than it is offered outside the app,” combined with the 70/30 split, means developers must make less money off of iOS by definition. They can’t price their IAP content higher to offset the commission, nor can they price their own retail content lower.

If I am interpreting this correctly, I can’t bring myself to see it as reasonable. Not only do businesses have every right to price their products on the open market as they see fit, but I would actually be willing to pay a premium for all the aforementioned advantages provided by IAP. Why not let them experiment?

I also don’t see how it’s even remotely enforceable. Are Apple staffers seriously going to check every vendor website for sale prices on a regular basis?

I think a great deal of this drama could go away if Apple dropped section 11.13 while keeping section 11.14: Your prices on your store are your business; just don’t be a jerk and advertise the difference all over ours.

The Monopoly Card

The Wall Street Journal claims that the DOJ and FTC are already looking into this. I’m not an antitrust lawyer, but I’ll say this much: anyone truly incensed by these new terms can — and should — take their ball and go to Android. It may be the best way to make a long-term statement that forces Apple’s hand. There’s a word for that: competition.

But are the terms so onerous as to justify leaving tens of millions of potential customers behind? Apple’s betting that they aren’t. And it’s not just the number of customers, but the type of customer: very recent data suggests that iOS users are spending almost twenty times as much money as Android users, despite being merely one and a half times as numerous. (It’s not clear whether the Nielsen numbers include iPad or iPod touch, but that’s still not enough to explain the huge discrepancy.) As long as iOS is where people are making money — regardless of market share — Apple will have the upper hand in policy discussions.

The relationship Apple is crafting here is the same relationship it already has with music companies: the other party is almost completely dependent on Apple’s whims. And if the DOJ hasn’t come down on iTunes, where Apple’s dominance is far less contested, I don’t see it touching this nascent market. (It’s worth noting that this is exactly the kind of relationship Apple hates being on the wrong side of — see Java and Flash.)

So What’s the Problem?

The problem is that Apple has changed the game on people. John Paczkowski clarified that “Apple’s made no change to its App Store guidelines–it’s simply enforcing a rule that’s been in them all along.” That doesn’t really close the book. Whatever the fine print says, Apple is no longer letting developers do things it had been letting them do — and build businesses on — for almost two years, and many developers are quite understandably upset about that.

In other words, I think we’d have had a much different conversation about this in June 2009, when iPhone OS 3.0 was released with IAP, than we’re having today. And that does matter, however objective you try to be on the subject.

This, ironically, is exactly why Apple’s terms tend to be so vague and tough at first: it’s easier to remove restrictions than to add them. We’ve seen this, as Craig Hockenberry reminds us, with user-generated content, flatulents, and politics; we’ve seen it with technology too. This kerfuffle is proof that Apple’s typical strategy, while often unpopular, is a saner approach.

Sign of the Times

Whenever a policy change like this occurs, I ask, How does this strengthen the platform? How does this sell more iPhones? I can’t answer either of those questions, and that, to me, is the most interesting part of this whole debate.

Third party products have historically made an indirect contributionto Apple’s revenues by making Apple’s own products more attractive. This indirect effect has become more important over time: Apple has never shared the credit for its success with third parties as willingly as it has in the last few years’ worth of iPhone commercials.

These new IAP rules mark a new, significant step in the evolution of that view: third party products are now a direct and significant revenue source — so much so that Apple is willing to risk alienating entire classes of apps from the platform in order to secure that revenue.

I never thought I’d see an Apple platform become large enough to yield this kind of discussion. For better or for worse, it’s an illustration of just how far the company has come in the last decade.

Thanks to my good friend Steve (not Jobs) for helping me think through some of these points.