Wak Oentoenk

It's two days later and I'm still confused.  When I saw the headline yesterday, my jaw literally dropped.  "Google bought who?  That's got to be a misprint.  They must have bought a mobile operator, like Sprint or something.  But Motorola?  Really?" 

Usually when a big tech merger happens you can see the logic behind it.  Even if you don't agree with the logic, you understand why they made the deal.  But in this case the more I think about it the more confused I get. 

Did Google buy Motorola for the patents?  If so, why isn't it spinning out the hardware business?  Or did Google buy Motorola because it wants to be in the hardware business?  If so, does it understand what a world of other problems that will create for Android and the rest of Google?  Seriously, if Google tries to integrate Motorola into its business we could end up citing this as the deal that permanently broke Google.

Why roll the dice like that?  Maybe I'm missing something, maybe Google has a screw loose, maybe both of the above.  Or maybe I'm wrong to look for airtight logic.  Companies sometimes make decisions on impulse, especially when they are under stress, and it's a sure thing that Google is under stress these days on IP issues.

So I have a lot more questions than answers.  My questions are about Google's intent, its next steps, and how other companies will react...


Why did Google do it, really?  The conventional answer is that Google wanted Motorola Mobility for its patents.  That's what Google itself implied, and Marguerite Reardon over at CNET agreed (link).  That might well be the explanation.  Om Malik had a really intriguing take: Google bought Motorola as a defensive move to prevent Microsoft from getting the Motorola patents (link).  And Richard Windsor of Nomura, who I respect deeply, said in an e-mail that this is all about the patents.  He predicts that Google's new patent portfolio will create a balance of power enabling Google to quickly force a settlement to the patent lawsuits against its licensees.

But if you wanted only the patents, I think you'd buy Motorola, keep the patents and then spin out the hardware company to avoid antagonizing your licensees.  Google says it intends to keep Motorola and run it.

Besides, as Andrew Sorkin pointed out in the New York Times, Google could have bought a different but also important mobile patent portfolio from InterDigital for about $10 billion less than Motorola (link).  Maybe there's some magic patent at Motorola that Google feels is worth $10 billion more, or maybe there are some terms in Motorola's patent cross-license agreements that Google desperately needs.  But again, if that's the case, why not keep the patents and resell the hardware business?

Unless Google is lying about keeping Motorola intact, I think Google intends to be in the mobile hardware business.  Which raises the next question...


Does Google know how to run a hardware business?  No, of course not.  The processes, disciplines, and skills are utterly different.  The same business practices that made Google good in software will be a liability in hardware.  Google's engineers-first, research driven product management philosophy is effective in the development of web software, because you can run experiments and revise your web app every day in response to user feedback.  But in hardware, you have to make feature decisions 18 months before you ship, and you have to live with those decisions for another 18 months while your product sells through.  You can't afford to wait for science.  Instead, you need dictatorial product managers who operate on artistry and intuition.  All of those concepts (dictatorship, artistry, intuition) are anathema to Google's culture.  Either Google's worldview will dominate and ruin Motorola, or worse yet the Motorola worldview will infect Google.  Google with Motorola inside it is like a python that swallowed a minivan.

To put it another way, I think Google has about as much chance of successfully managing a device business as Nokia had of running an OS business.

But the real question is, does Google realize that it doesn't know how to make hardware?  I doubt it.  Speaking as someone who worked at PalmSource for its whole independent history, an OS company always believes that it could do a better job of making hardware than its licensees.  It's incredibly frustrating to have a vision for what people should do with your software, and then see them screw it up over and over.  The temptation is to build some hardware yourself, just to show those idiots how to do it right.

I think maybe Google just gave in to that temptation.

But if Google really wants to sell hardware, that raises questions for the other Android licensees...


How will Google really manage Motorola?  Google says it's going to treat Motorola as an independent company without any special access to the Android team.  But what's the point in that?  Motorola hasn't exactly been dominating the mobile device world lately, so I find it very, very hard to believe that Google would buy it and leave it intact.  Wouldn't you want to have Motorola create special products that take advantage of the latest Android features?  Kind of like a flagship operation?  Then when you announce a new initiative at Google IO, you can have some nice new Motorola hardware ready to ship with it on day one.  Of course, the other Android licensees will be allowed to participate too.  They're welcome to run flat out to keep up with every Google software initiative, disregarding expense and business risk, just like Google's Motorola subsidiary will.

Which makes you wonder...


How will the Android licensees react?  I think we can safely disregard the positive quotes from the other Android licensees.  What would you do if your company depended utterly on Android, and Google called you up twelve hours before the announcement and asked for a quote?  Would you risk Google's anger by refusing to give a nice quote?  Of course not.

But would you honestly be happy?  Of course not.  In the last year, you gained share at the expense of Motorola.  Now instead of being a weak and failing vendor you can snack on, Motorola has infinite financial resources and cannot physically go broke.  Sure, I am happy to compete with that.

The other issue is the one everyone else has already pointed out -- even though Google says there will be a firewall between Motorola and Android, you suspect it'll be semi-permeable, meaning you'll always be at a bit of a disadvantage.

So what do you do?  A lot of people are predicting that Android could be in danger of losing licensees.  For example, Horace Dediu at Asymco drew a parallel to the Symbian consortium, whose members were uncomfortable because Nokia held the largest share of the ownership (link).  But when Symbian was launched, those companies were happy to sign up, despite the asymmetric ownership, because they thought Symbian was going to dominate the mobile OS market, and they were scared of Microsoft.  They dropped out only after it was proven conclusively that only Nokia was capable of making a Symbian phone that sold well in Europe. 

I can tell you from personal experience at Palm that licensees don't care about governance issues when they think your OS will help them sell a lot of units.  It's only after growth slows down that they get twitchy.  As long as Android continues to grow explosively, the licensees will be right there with it because they're terrified not to be.

Google probably knows the licensees can't go anywhere.  In fact, it has a history of treating them very roughly in private (check out the nasty tone in the private memos between Google and Samsung exposed by the Skyhook lawsuit here).  So in some ways the Motorola deal is just more of the same.

But there is still a risk to Google.  Android licensees will probably be more willing to talk to Microsoft now, and they might do a few more Windows Phone products, if only to get leverage against Google.  So Google has just thrown a lifeline to Windows Phone, which otherwise might have been headed for extinction if the first round of Nokia products failed.

This might also be an opportunity for other mobile platforms.  If there were any...


Is there a third path?  The Android licensees are probably pretty wary of both Google and Microsoft at this point, and may be wishing forlornly that there was a third alternative for mobile operating systems.

Unfortunately, I don't think there is.  The handset vendors' embrace of "royalty-free" Android strangled the other Linux mobile platforms.  TrollTech was bought by Nokia and then killed, while Access's evolution of Palm OS died for lack of customers.

There's speculation that HP might broadly license Web OS (link).  But HP has its own hardware conflict of interest (a much stronger one than either Google or Microsoft).  Far more importantly, keep in mind that mobile phone companies license an OS because they believe it's going to sell millions of units for them.  If HP, with all of its resources and channel presence and strong brand, can't sell significant numbers of Web OS phones, why would HTC or Samsung believe they could do it?

[Edit: In the original version of this post, I failed to mention MeeGo.  A couple of people have told me that was unfair, and I think they are right.  Based on past experience, I have a lot of skepticism about OS consortia, especially ones involving Intel.  But if MeeGo's ever going to get serious consideration from hardware companies, now is the time, and I should have acknowledged that.]

Hint to Android licensees: If you build up HTML 5 as a platform, you won't have to depend on anyone else's platform.  But in the meantime, your realistic choices are Android and Microsoft.

Speaking of Microsoft...


What will Microsoft do now?  Steve Ballmer faces a very interesting decision.  Windows Phone just got a boost because it's now seen as a more vendor-neutral platform than Android.  The door is probably open for Microsoft to build deeper relationships with Android licensees.  If Microsoft sill believes in its licensing model, it will focus on walking through that door.

But as others have pointed out, Microsoft's position is now a bit lonely in some ways.  The other major smartphone platforms (iOS and Android) now have captive hardware arms.  Even RIM has both hardware and OS, although it's been a while since RIM was held up as a model for others to emulate.  Will Microsoft feel exposed without its own hardware business?  And if it does feel exposed, will it buy Nokia?

I'd be very surprised if it did.  Buying Nokia would decisively end the Windows Mobile licensing business.  You'd be betting Microsoft's mobile future even more completely on the ability of Nokia to execute in hardware.  Besides, why buy the cow when you're already milking it?

I'd also like to think that Microsoft learned from the Zune debacle that it's not great at creating mobile hardware.

And then there's the fruit company...


What will Apple do?  Apple's history since Steve returned is that it doesn't react to competitors; it forces competitors to react to it.  Apple is brilliant at setting the terms of the competition so other companies are forced to compete on Apple's turf.  Everyone else is focused on building licensed commodity hardware, so Apple creates integrated systems.  Everyone else has optimized their supply chains to sell through third party retailers, so Apple creates its own stores.  Everyone else stopped making touchscreen smartphones, so what does Apple make?

You get the picture.  So I don't expect Apple to make any changes in response to the Motorola deal, but I would be shocked if Apple didn't have plans for changing the terms of the competition again now that Google is trying to build more integrated hardware and software.  There are all sorts of game-changing moves Apple could make -- do a much larger push in web services, create an iPhone Nano (fewer features and lower price), even create its own search engine or social network (potentially valuable just to make Google crazy).


What's next?

To sum it all up, it's impossible to predict what will happen.  Hopefully the new balance of power in patents will make the big lawsuits go away, although I doubt we'd see a resolution before the deal closes, and that could take many months.  If Google bought Motorola for the patents, it'll either sell the company or let it gracefully rot, and we'll go back to business as usual. 

On the other hand, if Google tries to integrate Motorola into its business, that's a noble mission, and I hope they'll succeed because the mobile industry needs more competition to Apple in systems design.  I dearly hope Google will take the challenge seriously and recognize that it'll need to make fundamental changes to its culture.  But those changes would be daunting even for a company experienced in mergers, and Google's never done a deal this big before.  I think the most likely outcome of the Google-Motorola merger is some flavor of train wreck.

I hope I'm wrong.

I wish I knew the inside story on Google's recent confrontation with the Chinese government. At first Google's announcement looked like a principled, well thought-out stand in a long behind-the-scenes dispute (link). But as more details have emerged, it has started to look as if Google didn't think through the consequences outside of its core search business. In the mobile market, those consequences could be significant. Here's why...

Google's Android OS has been gaining enormous support among mobile operators and handset vendors because it was viewed as the most feasible alternative to total domination by Apple. All of the other OS options had nasty baggage -- Microsoft was viewed as both controlling and unable to create demand, Symbian was seen as Nokia's pet, and the other flavors of Linux were all below critical mass.

In contrast, Google seemed technically competent, vendor-neutral, and capable of attracting users. (By the way, it says something about Apple's growing power in the mobile industry that a company as controlling as Google was seen as the safe partner; it's kind of like cozying up to a kodiak bear to escape a tiger.)

Google's dispute in China damages its image as a safe partner. A phone announcement in China involving Motorola, Samsung, and China Unicom has now been delayed because of the dispute, and it's not clear when it will be rescheduled. The public story on the delay is that Google demanded it (link), but I'm not sure I believe that. China Unicom is basically owned by the Chinese government, and I wouldn't be surprised if the delay was forced by them as a way to punish Google.

Either way, picture how this must feel to Motorola and Samsung. They have nothing to do with the dispute, but now they're trapped between Google and the Chinese government. That wouldn't be a big deal if we were talking about, say, the Cambodian phone market (no offense, Cambodia), but Samsung and Motorola both view China as a critical growth market. They can't afford to be pushed out of it.

Even aside from the political fears, real economic damage has already been done. Google's actions have delayed the imminent release of some major licensees' devices. Unless you have worked in a handset company, it's hard to understand how utterly unacceptable that is to them. Product launches are planned many months in advance, and are coordinated down to the day. Samsung and Motorola both have phone inventory waiting to be sold. There's cash tied up in that inventory, salespeople can't make their quotas, advertising was probably planned that now has to be rescheduled at additional cost, and so on. Plus, both companies now lose ground to competitors selling other devices. Most phones have a short lifetime anyway, so sales lost now probably can't be made up later. If you were a Motorola employee and you caused that sort of disruption, you'd probably get fired. But Motorola can't fire its OS supplier.

At least not immediately.

Because of problems like this, Google is now talking hopefully about retaining its business unit in China even if it closes down its search engine there (link). That raises the question of why Google threatened to completely pull out of China in the first place. If I were an official in the Chinese government, I'd view this flip-flop as a sign of vulnerability, and would be tempted to systematically go after targets like Android in an effort to put more pressure on Google. But for the moment the government appears to be moving cautiously, perhaps to avoid creating sympathy for Google.

Maybe in a week Google and the Chinese government will have come up with a neat, face-saving resolution to the whole problem. But even in that best-case scenario, Google's image as a supplier to the mobile industry has been damaged. The company has shown that its search business is more important to it (and more top-of-mind) than its mobile OS. Mobile operators outside of China won't care about this, but the handset vendors will. Some of them are based in China, and almost all manufacture there and sell into that market. Who's to say that Google won't end up in another dispute in China in another year? Add in Google's decision to start making its own phones in competition with licensees, and it now looks like a much less reliable OS supplier than it was six months ago.

To a Chinese phone company, relying on Android must now feel extremely uncomfortable. I bet Samsung went ballistic in private; it is completely intolerant of a supplier who's interested in anything other than making Samsung rich. I'd expect Samsung to put more emphasis on its other OS options in the future. And somewhere at Motorola, a harried executive is probably rolling his or her eyes and starting work on evaluating alternative smartphone operating systems, yet again.

The question is what alternative they'd choose. There's speculation that the LiMO alliance may be strengthened (link), and I could picture Chinese officials eventually trying to create a home-grown OS standard, just as they did in 3G (link). But the most straightforward alternative is Symbian, and I suspect it may get a quiet second look in many places -- although for the handset companies, that would feel like fleeing a tiger and a bear in order to hug an anaconda.

The bottom line: Google is now an OS company.

The fact that Google's recently-announced OS products are aimed at mobile devices and social networking sites is interesting, and I'll talk about the impact of that below. But it's secondary. I think the big, really important change is that Google has now jumped with both feet into the middle of the operating system world. That potentially has huge implications for the industry.

The impact will depend a lot on how Google follows up. If it pours substantial energy and resources into its OS offerings, it will be extremely bad news for Microsoft and other companies trying to charge money for their own platforms. On the other hand, if Google doesn't make a serious long-term commitment, it will embarrass itself deeply. This isn't like launching a new web application -- an OS has to be complete, and it has to work properly in version 1, or there won't be a version 2.


What they announced

It's kind of ironic. For years after Google became a prominent web company, people speculated about whether or when it would create its own OS. The logic was that Microsoft has its own OS, and Google was challenging Microsoft, so Google would create its own OS too. But then as the years went by and it didn't happen, people moved on to other subjects. The speculation died out. But one of my rules about the tech industry is that "obvious" things happen only after everyone in the industry has written them off. So I guess Google was due.

The company has been creeping toward the OS space for a while. Google Gadgets is an API to create small applications that run in web pages, and Google Gears is code that lets web apps run offline, making it easier for them to challenge desktop applications. But they were both relatively low-profile (or as low profile as anything Google ever does). But in the last couple of weeks, Google made two much more assertive announcements:

--OpenSocial is an effort to create a shared platform for applications that can be embedded within social websites (link).

--The Open Handset Alliance is an effort to create a shared platform powering mobile devices (link).

Although they're aimed at very different parts of the industry, they're both efforts to create a standard platform where there was fragmentation; and they're both alliances of numerous companies, with Google providing most of the code and the marketing glue. I think there's a recurring theme here.


Details on the Open Handset Alliance

Open Social was covered very heavily when it was announced a couple of weeks ago, so I won't recap it all here. If you want more details, Marc Andreessen did an enthusiastic commentary about it on his weblog (link).

The OHA announcement was today, and I want to call out some highlights:

--It's built around a Linux implementation called Android. Android will be free of charge and open source, licensed under terms that allow companies to use it in products without contributing back any of their own code to the public. This will probably annoy a lot of open source fans, but it's important for adoption of the OS, as many companies thinking about working with Linux worry that they will accidentally obligate themselves to give away their own source code.

--Google is creating a suite of applications that will be bundled with Android, but they can be replaced freely by companies that want to bundle other apps, according to Michael Gartenberg (link). There is a lot of speculation, though, that if you bundle the Google apps you'll get a subsidy from Google. The folks over at Skydeck estimate the subsidy could be about $50 per device (link). That might not sound like huge money to you and me, but keep in mind that mobile phone companies routinely turn backflips to squeeze 25 cents out of the cost of a phone. When you sell millions of phones a year, it adds up.

--A huge list of companies participated in the announcement. That's not as impressive as it sounds; when you have a well-known brand, a lot of companies will do a joint press release with you just for the publicity value. But a few stood out:

Hardware vendors. Samsung, Motorola, LG, and HTC all endorsed the OS. HTC and LG gave particularly enthusiastic quotes. The first three companies have all been playing with Linux for some time, so I wasn't surprised. But HTC is another matter -- it is the most innovative Windows Mobile licensee, and Microsoft must be very disturbed to see it blowing kisses at Google.

(A side comment on Motorola: For a company that said it wanted to consolidate down on a small number of platforms, Motorola is behaving strangely -- it jumped all over Symbian a couple of weeks ago, and now is supporting Android as well. I think it has now endorsed more mobile operating systems than any other handset vendor.)

Operators. Participants in the announcement included NTT DoCoMo (a long-time Linux lover), KDDI, China Mobile, T-Mobile, Telecom Italia, Telefonica, and Sprint. That's a very nice geographic spread, and ensures enough operator interest to make the handset vendors invest.

--Google claims all Android applications will have the same level of access to data on the phone. That's pretty interesting -- most smartphone platforms have been moving toward a multiple-level approach in which you need more rigorous security certification in order to access some features of the phone. I'll be interested to see how the security model on Android works.

--We'll get technical information on the OS November 12, and the first phones based on Android should ship in the second half of 2008.

--Although Android's first focus is mobile phones, the New York Times reports that it can be used in other consumer devices as well (link).


What it means to the mobile industry

It all depends on the quality of Google's work and the depth of its commitment. If Android has technical or performance problems, it could sink like a stone. If it doesn't have enough drivers or has poor technical support, the handset vendors will avoid it. If the developers can't create good applications, users won't want it. This is a very different business for Google -- handset vendors and operators will not tolerate the sloppy, indifferent technical support that Google provides for its consumer web apps.

If, on the other hand, Google's platform really works and the company invests in it, I think it could have some very important impacts.

Impact on Windows Mobile: Ugliness. The handset companies endorsing Android are also Microsoft's most prominent mobile licensees. I doubt any of them are planning to completely abandon Microsoft (they don't want to be captive to any single OS vendor), but any effort they put into Android is effort that doesn't go into Windows Mobile. So this is ominous.

The whole mobile thing just hasn't worked out the way Microsoft planned. First it couldn't get the big handset brands to license its software, so it focused on signing phone clone vendors in Asia, thinking it could use them to pull down the big guys. But Nokia and the other big brands used their volume and manufacturing skill to beat the daylights out of the small cloners.

Now Google is coming after the market with an OS that's completely free, and may even be subsidized. This will put huge financial pressure on not just Windows Mobile, but all of Windows CE. Even if Microsoft can hold share, its prospects of ever making good money in the sub-PC space look increasingly remote.

Impact on Access: Ugly ugliness. How do you sell your own version of Linux when the world's biggest Internet company is giving one away? I don't know.

Impact on Symbian: Hard to judge. Symbian is the preferred OS of Nokia. As long as Nokia continues to use Symbian, it stays in business. The question is how much it'll grow. After years of painful effort, Symbian just managed to get increased endorsements from Motorola and Samsung. Now Google is messing with both of them. Japan has been a very important growth market for Symbian, now Android is endorsed by both DoCoMo and KDDI. All of that must feel very uncomfortable. If nothing else, it's likely to produce pressure on Symbian to lower its prices. And Symbian should be asking what happens if Android turns out to be everything Google promises -- a free OS that lets handset vendors create great phones easily. It's not fun competing against a free product that's been subsidized by one of the richest companies in the world (just ask Netscape).

Maybe if Symbian agrees to enable Google services on its platform it can get the same subsidies as Android does. It's worth asking. If not, maybe Symbian should be looking for other places where it can add value in the mobile ecosystem.

Impact on mobile developers: Potentially great. Mobile developers have suffered terribly from two things: They have to work through operators to get their applications to market, and they have to rewrite their applications dozens of times for different phones. If Android produces a single consistent Java environment for mobile applications, that would be a big win. And if it can open up the distribution channels for mobile apps, that would be great as well. We don't have enough details to judge either outcome yet, and the app distribution one depends on business arrangements that may be outside Google's control.

Impact on Apple, RIM, and Palm: Probably none at all. A lot of the coverage of Android is positioning it as some sort of challenger to iPhone and RIM.

I don't buy it.

Apple, RIM, and Palm all make integrated systems in which the software and hardware are coordinated together to solve a user problem. Android, by contrast, is only an operating system. It's plumbing, not the whole house. Unless Google's handset licensees magically develop the ability to design for users -- a feat equivalent to a giraffe sprouting wings -- their products won't be any better as systems solutions than they are today. The OS hasn't been the thing holding them back, and changing OS won't alter the situation.

Android puts interesting financial pressure on Microsoft, but it doesn't directly solve any compelling user problems. If it eventually drives a great base of mobile applications, that might eventually be attractive to some users. But in that case the systems vendors could just add a copy of Google's application runtime (it's open source, they can grab it anytime they want). Or they could host their devices on Google's plumbing. Palm and RIM might both benefit if they could transfer engineers away from core OS and toward adding value that's visible to users.


Impact on the tech industry: This isn't just about mobile phones

I have no access to Google's internal thinking, but even if it sincerely believes it's only doing a mobile phone OS, I don't think it can or will stop there. Technology products often develop a momentum of their own, no matter what was intended at the start. The lines between the computing and mobile worlds are breaking down already, and if Google creates an attractive software platform that's free of charge, that platform will inevitably get sucked into other types of devices. I'm not saying that Android is going to end up in PCs, but if it's functional and well supported I think it could end up running on just about everything else that has a screen.

Besides, if you look across all of the recent Google announcements, I think it's clear that Google has a larger agenda: It wants to break down walled gardens, because they interfere with Google's ability to deliver its services. It has even developed a standard methodology for attacking them: Create a consortium so you don't look like a bully, and fund an "open" alternative to whatever is in the way. They are doing it to Facebook, and they're doing it to Windows Mobile. Google doesn't even have to make money from the consortium, as long as it clears the ground for its services to grow.

Take a lesson from evolutionary history. The most successful animals are not those that adapt to the environment; they are the ones that reshape the environment to match their needs. I think that's what Google is doing. It's going to use open source and alliances to suck the profitability out of anybody who creates a proprietary island that it can't target.

It'll be interesting to see if and how Google applies this principle to the upcoming frequency auction in the US.

Or to anyone else who gets in its way.

Several people have asked what I thought of the recent change in ownership at Palm. I don't have any inside information, so all I can do is speculate like everyone else, and try to apply the lessons I've learned from working at other companies.

Overall, I'm very happy for the folks at Palm, and cautiously hopeful about what this might mean for the company's prospects. I think this outcome is a lot more encouraging than any of the buyout rumors that were floated in the last few months. Palm's new part-owners clearly understand the value of systems design, which is Palm's biggest potential advantage in the market. I think we really need another great systems company to challenge Apple, and I would love to see Palm step up to that task.

Although a purchase by a Motorola or Nokia would have been very entertaining from a soap opera perspective, they don't really understand systems design, and it's very likely that they would have digested Palm without a trace. I'm reminded of a joke we used to tell at Apple in the 1990s when there were rumors that IBM would buy the company:

Q: "What do you get when you combine Apple and IBM?"
A: "IBM."

The other buyout option what was circulating, a full purchase by private capital, would have left the company independent, but with a load of debt that might have been crippling. Hardware companies must have a big reserve of cash to fund inventory and tide them over if they launch an unsuccessful product. I don't pretend to understand all the terms of the Elevation deal (they're wickedly complex), but from my perspective it looks like the financials aren't crippling. I am a little worried about Palm's cash levels, though; a lot of their current cash is going into the stockholder payout.

A couple of other thoughts on the impact of the deal:

Bye-bye 3Com. Palm gets three very well respected people for its board, and removes Eric Benhamou, the last vestige of the 3Com legacy. Somewhere I have a photo of the Palm and PalmSource combined management teams from just before the two companies were separated. The photo includes everyone in the company from Mr. Benhamou down to senior directors. That was about 30+ people. Every single one of them is now gone. So if you didn't like Palm's management back then, you should take another look at the company because it's now 100% different.

Irresponsible speculation about politics. After a change like this, the standard sport in Silicon Valley is to speculate about what it means for the job status of the people involved. In that vein, the thing to ask is, "Who's running Palm in the long run?" The weirdest part of the whole Elevation deal is the arrival of Jon Rubinstein as both Chairman of the Board of Palm and head of product development. As Chairman, Jon is technically the boss of Palm CEO Ed Colligan. As head of product development, Jon technically reports to Ed. So Jon is kind of his own second-level manager.

That feels...unstable.

Palm seems to now have a surplus of product leaders. Jon is in charge of product development, Jeff Hawkins is the designated product visionary, and marketing SVP Brodie Keast is supposed to control the product road map, according to the press release Palm issued when he was hired. It's hard to picture a car with three steering wheels. Who will really be in charge? In the conference call Palm said that Jon would be the execution guy and Jeff the visionary. "The combination of those two guys is one of the most dynamic... combinations on the planet." Maybe. Any organization structure can work if the people involved get along well, and I presume they would not have made this arrangement unless they were all comfortable they could work together. So good for them and best wishes.

But if you want to be a cynic, you'd speculate that Jon probably didn't leave Apple just to be the head of engineering execution at a much smaller company. You wonder if the current situation is just a stage in a longer-term changing of the guards at Palm. I don't have any evidence that's the case, and I am not trying to start any rumors. But when you see a nonstandard reporting structure like this, it usually triggers speculation that another shoe is going to drop later.

Only time will tell.

What's the effect on products? That's the most important question, and it's impossible to answer at this time. Hardware product development usually takes 18-24 months, so the earliest Jon could change the Palm road map would be very late 2008. But that's the middle of the Christmas selling season, and you can't announce products then. So realistically, the Rubinstein product era doesn't start until spring 2009.

In the meantime, there's a lot he can do to make the development of the currently-planned products be more efficient and predictable. Palm has said publicly on numerous occasions that its on-time product delivery needs to improve, and presumably Jon can help with that.

But personally, I think Palm's bigger problem has been its lack of innovative new product designs. Unless Palm has a bunch of surprise products already in development, it will take quite a while to turn around the product road map.

_____________________

Thanks to Twofones for including last week's post on the Palm Foleo in the latest Carnival of the Mobilists (link).

This afternoon I heard from a reporter that Google and Microsoft are now rumored to be interested in buying Palm. I have no idea who starts these rumors, or whether there's any truth to them, but they're not nearly creative enough. Here's my list of other companies that have absolutely no interest in buying Palm, but ought to be in the rumor mill anyway. Feel free to re-use these if you want to manipulate the stock market. No need to credit me; I don't want to be visited by the Feds.


7. Airbus

Compelling business rationale. I hear Airbus has a lot of trouble with the wiring in the A380, and there's a bunch of wires and stuff inside a Treo, so this seems like a good match. (Hey, it makes as much sense as Google buying Palm.)


6. eBay

Compelling business rationale. Most Treos end up on eBay eventually, after their owners upgrade to a new model, so this is an opportunity to "significantly integrate the value chain," as we say in the business. Each Treo could come with an eBay account, enabling the user to offer it for sale whenever they're ready.

As an added benefit, a Skype client could be bundled with every Treo sold. (By the way, this is apparently the only way to get Skype to port its full native client to Palm OS.)


5. Ben & Jerry's

Compelling business rationale. What if Jeff Hawkins designed ice cream flavors?




4. Cisco

Compelling business rationale. Apparently not required for a Cisco acquisition.


3. DaimlerChrysler

Compelling business rationale. I propose a straight-up equity swap: Palm for Chrysler. Daimler would give away a company that's talented at design, but whose products have fallen behind the innovation curve, and that has problems with execution. In exchange, it would get...exactly the same thing. But as a bonus, Daimler could build a Treo and sync cradle into every car it sells. This fits with the whole convergence thing that's supposedly driving all industrial development in the western world, so this merger is a natural.


2. HP

Compelling business rationale. No, wait, this one actually makes sense. Never mind.


1. JetBlue

Compelling business rationale. Give a Tungsten to every employee, pre-loaded with a datebook alarm that says, "Time for the airplane to leave now." The acquisition would pay for itself within three months.

Yes, I know Sprint's serious about WiMax -- it's spending more than $2.5 billion to build out a mobile WiMax network across the US. That's old news. The surprise to me is the business model Sprint says it'll deploy on that network. That hasn't gotten much coverage at all, but I think it's critically important. If you believe what Sprint says, its WiMax network will be totally open: any device, any application, without any contract required.

When I first heard Sprint describe that business model, in a panel discussion late last year, I felt like I ought to pinch myself. Did he just say that? I thought. Did a VP at a US carrier really say that?

He said it. What I'm not sure of is whether Sprint has the will and persistence to see it through. If they do, I think the Sprint WiMax network might be very special indeed.


Background on WiMax and Sprint

WiMax is a marketing name for 802.16, a wireless broadband communication specification. Some people call it WiFi on steroids, and although there are some significant technical differences, that's a reasonable way to think about it. WiMax promises to provide about 10 megabits per second of upload and download, at a distance of 10 kilometers from a base station (although Sprint has said that the real-world throughput will probably be more like two to four megabits per second download and half a megabit per second upload).

There are a lot of different frequencies on which WiMax can be deployed. Sprint owns rights in much of the US to the 2.5 megahertz band, which is considered to be very good for deploying WiMax because it has relatively little interference and because the signals carry well at that frequency. From what I've read online, it's possible that some unlicensed spectrum will also be used for WiMax (so you won't have to pay anyone to use it, like a WiFi base station), but if that happens it's likely to have more interference and shorter range. Unfortunately, WiMax is likely to be deployed on different frequencies in other parts of the world. I presume we'll end up with multi-frequency radios (just as we have for GSM today), but that sounds messy.

In summer of 2006, Sprint announced plans to build out a nationwide WiMax network in urban areas across the US. Motorola and Samsung were listed as key equipment suppliers, and Intel as a chip supplier.

Some other companies also own WiMax related spectrum, most notably Craig McCaw's new company, Clearwire. He has already raised about $1 billion from investors including Intel, and is planning an IPO for another $400m.

(Intel is a consistent theme here, and some of the people I've spoken with fear that Intel will end up dominating WiMax the way it did PC microprocessors.)

If you want more details on WiMax, Wikipedia has a good article. There are some other interesting tidbits here.


The panel

The setting was a Churchill Club evening forum on WiMax. On the panel were senior execs from four companies: Qualcomm, PacketHop, Motorola, and Sprint.

Qualcomm is widely seen as an opponent of WiMax, because it doesn't control a lot of the patents around it (unlike just about any cellular technology you can think of). The Motorola speaker even cited the absence of Qualcomm patents as a key advantage of WiMax, which tells you everything you need to know about the relationship between Qualcomm and the handset companies.

Sure enough, the Qualcomm speaker, marketing VP Ronny Haraldsvik, spent most of the evening expressing gentle skepticism about WiMax. "Take the hype, add some reality and a couple of years to it," he said. He predicted that fixed-location WiMax will be successful, but said mobile WiMax will be surpassed by other mobile broadband technologies.

PacketHop provides mesh network wireless broadband that can be deployed quickly for government and business. Basically, it's a way to get wireless broadband at the site of an emergency or special project, in an area that's not covered by 3G. I'm not sure why PacketHop was in this particular panel, since Sprint's plans are focused more on consumers than business.

The Motorola speaker was Raghu Rau, SVP of strategy and business development for the company's networks business (presumably he'll be providing network equipment to Sprint). And the Sprint speaker was Bin Shen, Sprint's VP of broadband.

The panel featured all the usual rhetoric you'd expect from competitors and suppliers, but in between the posturing, Shen said some very interesting things about Sprint's plans for the network. The excerpts below are paraphrases of what he said, with my comments in italics.

The vision: personal broadband. Mobile broadband will be much more interesting, powerful, and important than landline (DSL or cable) in the long term. Landline is for a family, but mobile broadband will be personalized to the individual. This creates the possibility for all sorts of personalized advertising and services. In the future, mobile broadband reaches beyond homes and handsets; it shows up everywhere in all sorts of consumer electronics devices.

It's a very starry-eyed vision. You can find some more examples of the sort of story Sprint is telling here. Personally, I'm not very enthusiastic about the idea of building broadband into every consumer electronics device imaginable – it reminds me too much of the Bluetooth-equipped refrigerators that people were predicting in 1999. But I do think that new types of mobile devices paired with mobile broadband will be important.

Mobile data demand is anemic today because it's forced through handsets. The handset is primarily for voice, Shen said. Among the US operators, Sprint has the largest share of ARPU coming from data (over $10 a month) , but it's a small percentage of total revenue, with limited growth. There's always a limitation on how much people will use and pay for data on a handset. On the other hand, the laptop is a data device. So are the iPod and the Playstation Portable. People expect to use data on those devices. How do we connect them to the Internet wirelessly?

I thought that was a stunning statement from a company that has invested heavily in 3G networks and smartphones. He basically said that smartphones are a cul-de-sac; that the future of mobile data will come from devices designed from the ground up to use data.

Right on. I don't think smartphones are a dead end, but we need a lot more diversity in mobile devices.

Openness is essential. Broadband requires a much more diverse ecosystem. You can't predict what will be the popular data device. You need an open model with a lot of people participating. There must be a different structure and business model to encourage that. A key issue is partnership and ecosystems. Get the right set of players.

The US carriers exercise lots of control over handsets and application developers. On the one hand that's very good; it provides a consistent experience for users. But it's probably not good for innovation. The next generation will be open, with a very robust SDK and API, open for the Internet community to come in.

Another striking admission for an operator: We strangle innovation. This is where I started wanting to pinch myself.

No contract required. WiFi doesn't have broad coverage. But 200 million units of WiFi have been shipped in the US. That's one element of why we chose WiMax -- it can share a lot of common components with WiFi. We want a WiFi+WiMax chip, at very low cost, so device manufacturers can replace their WiFi-only chip with a dual chip. This enables a very interesting consumer model. Consumers don't have to decide which network to sign up for; they have a choice to use WiFi or use WiMax whenever they want. If they want to use WiMax, they can pay for it on the fly, without a contract.

Okay, so let's add this up: an open, broadly-deployed, high-speed wireless network that welcomes any device, open APIs that allow any application, and no contract required. This is everything that the computer and Internet industries have been asking of the operators, and Sprint is apparently saying yes to all of it. The audience at the Churchill Club should have given this plan a standing ovation, but the information came out in dribs and drabs during a 90-minute panel, and it was very hard to assemble all the pieces.

If Sprint really wants to build an alliance around this thing, it needs to do a much better job of outreach to Silicon Valley.

The killer app is open access to the Internet. There are a lot of interesting apps you can do for mobile broadband – location services, video, etc. But the fundamental one is intelligent mobile Internet access. That's what people want. We did a survey -- the number one need is Internet everywhere.

Ouch. Whenever you do a survey on this sort of subject, people ask for the things they already know. So if you ask them what sort of data they want in a mobile setting, of course they'll say the Internet because that's what they know from their PCs. What they'll actually use is a different matter. But if Sprint really makes its network as open as it claims, that will sort itself out because the best mobile apps will naturally rise to the surface.

Hurry up and wait. The most frustrating thing Shen said was that Sprint will start deployment of the new network in late 2007 in Chicago and Washington, DC, with nationwide buildout in 2008. Aside from being frustrated at the length of the wait, I thought their choice of cities was poor -- if they really want software developers and consumer electronics devices, they ought to roll out the network first where the software and hardware developers are. Chicago's a great place, but it's not exactly a hotbed of Web 2.0 development.


What it all means

Can Sprint stay the course? Sprint's subscriber base has been growing more slowly than the other US operators, and it has gone through a lot of management turmoil. (As one friend who deals with Sprint told me recently, "they have fired pretty much everyone they could blame for the situation.") When this sort of change is happening, it's very difficult to maintain focus on a long-term goal. To make its WiMax plan take off, Sprint will need to get a lot of details right. In particular, evangelism of hardware and software developers is a black art, and not many companies know how to do it well. If Sprint can't keep consistent management on the WiMax project, and give them the resources and time needed to build up an ecosystem, its new network could become yet another costly mobile data failure.

This has strong implications for Sprint's management (stay focused, evangelize creative hardware and software companies now). It also means that companies planning to work with WiMax should monitor Sprint's progress carefully. More management changes, and shifts in strategy, would be major warning signs.

What about battery life? Small implementation details can easily doom a mobile product, and one I worry about for WiMax is battery life. Transmitting lots of data over long distances takes a lot of power. WiFi, for example, consumes far too much power to leave it connected all the time in a handset. I have to assume that Sprint and Motorola are working this issue, and you can find a lot of claims about low power consumption from the WiMax component makers. But I've been burned on this issue in the past, and I won't believe the problem is solved until we see working devices whose battery life we can test directly.

Let's hear it for desperate operators. I've had this conversation with several friends who work in the mobile space. We all agree that the best operator is a desperate operator. When operators are financially secure, they see no need to change their proprietary ways. But when they get scared, they become open to all sorts of interesting, formerly heretical ideas. The situation is similar to what the music industry faced at the turn of the century. They were so scared of music piracy that they willingly helped Apple to set up a music store with radically different pricing than had ever been used in the music industry before. If it hadn't been for the fear of piracy, do you think iTunes would have ever happened? I don't.

What you need is an operator that has enough financial resources to make interesting investments, but not so much that it feels secure. Sprint is the ideal example. The Three network is another, and look what they've been doing with flat-rate pricing. T-Mobile in the US is another example, although I worry that it's just going to focus on playing 3G catch-up now that it has bought a lot of new spectrum in the US.

If you're looking to do business with an operator, I think it's worthwhile to bypass the top companies and look at the bottom end of the top tier, and the top end of the second tier. They're likely to be much more open than the leaders to new ideas and radical business changes.

What matters is the business model. Qualcomm claims that other mobile broadband technologies will be more effective than WiMax, and for all I know that might be true. But if Sprint really executes on the things that Shen described, it may not matter. The thing that's broken in mobile data isn't the technology, it's the business model, and Sprint is promising to fix that. As Microsoft has proved numerous times, the right business model paired with mediocre technology often wins decisively.

Come to think of it, what Sprint really ought to do is apply the same open model that it's planning for WiMax to its EVDO data network. That would be truly spectacular.

It's worth an intense look. I've been critical of Sprint in the past when they've done things that I thought were unwise, so now I think I owe them some credit. I believe they're on the right track with WiMax. There are a lot of uncertainties about execution, but I think companies working on new mobile devices should look intensely at WiMax. It generally takes about 18 months to develop a new hardware product, so right now is the time to get started.