Lunch Talk: Conducting Effective Negotiations (Stanford GSB)

Negotiation is an inevitable aspect of starting a business. Joel Peterson talks about how to conduct a successful negotiation.

lunchtalk, business

Smartphone apps: mobile and insecure.

MIT Technology review writes:

A 2012 study of 13,500 Android apps by researchers in Germany found that only 0.8 percent used encrypted connections exclusively, and that 43 percent use no encryption at all. Last week mobile app security company MetaIntell reported that 92 percent of the 500 most popular Android applications communicated some data insecurely.

To move into the enterprise on scale, mobile devices and apps have to become secure. The same goes for mobile payments and NFC-based apps. Enhanced security requirements will demand more computing power, which many companies would not able to afford. As a result, secure cloud-based services will have an opportunity for long-term growth. Although before that, NSA surveylance issues have to be resolved, so that customers feel comfortable with having their vital data hosted externally.

tags: mobile, security, packaged, payload, control, business, enterprise

Dilemma of the Day: Making Money vs Influencing Debate

Joseph Stiglitz, a Nobel Laureate in Economics, says:

The reason that we [academics] write these things [books] is not to make money but to influence ideas [that] influence the shaping of the intellectual debate.

Source: Joseph Stiglitz. The Sixth Annual Frey Lecture in Intellectual Property.February 16, 2007 at Duke Law School. (12m.45s).

In contrast, major Silicon Valley innovators, both companies and VCs, break this dilemma by making money AND influencing the world. The Stiglitz' view highlights the difference between invention (i.e. production of concepts) and innovation (implementing concepts on a large scale). In innovation, the goal is to shape the debate for the sake of changing the world and making lots money in the process.


tags: dilemma, quote, business, invention, innovation

Amazon patents - Content Management

Amazon continues its push into content management technology. Their  US 8,639,817 patent issued on January 27, 2014) is the latest in a series that covers delivery of digital media.

The patent applies (among other things) to delivering ads based on the original content. In their terminology, a first set of users consumes the "real" content, while a second set gets [relevant] ads. For example, Claim 2 reads:

In claim 3, they continue using the anticipatory approach we found earlier in their other patents, which cover delivery of physical goods.

With physical goods, Amazon describes a scenario where the system
1) routes packages to a general geographical location in anticipation of demand;
2) re-routes packages to a specific address, based on a customer order.

With virtual goods, Amazon patents a scenario where the system
1) delivers content to a content delivery network in anticipation of content demand;
2) delivers content to a specific user device, based on user requests or targeting logic.

In system terms, Amazon creates a smart Distribution network, which sits in between the content providers and users. We model the arrangement in Scalable Innovation, Chapter 25. Anticipating Control Problems. Because Amazon collects a lot of information about both content (Packaged Payload), users (Tool), and providers (Source), it has the ability to determine and anticipate consumption patterns. The patents are a strong indication that business value migrates from the Tool -- Source axis, to the Distribution -- Control axis.

Similarly, Facebook, Google, Twitter, NSA, and others sit between users and content providers (e.g. other users). Remarkably, Amazon doesn't cover social networking scenarios in their patents. Vice versa, Facebook doesn't talk about content management in their patents.

tags: patent, system, aboutness, distribution, control, business, value, amazon, facebook

Lab Notebook: a computer security disaster waiting to happen.

Legacy computing systems are notoriously difficult to retrofit for new threats. Recently, Target got hacked, with in a possible loss of 110 million user records (including mine). Now, the banks have discovered that their good old ATMs need to be upgraded to new software to be ready for new hacking dangers. According to Bloomberg Newsweek,

When ATMs were introduced more than 40 years ago, they were considered advanced technology. Today, not so much.
Inside every ATM casing is a computer, and like all such devices, each one runs on an OS. Microsoft’s 12-year-old Windows XP dominates the ATM market, powering more than 95 percent of the world’s machines and a similar percentage in the U.S., according to Robert Johnston, a marketing director at NCR (NCR), the largest ATM supplier in the U.S.

For banks, investing into a massive upgrade of an old computer system would be a waste of money because customers are switching to mobile payments. We can deposit checks, pay bills, and invest with a smartphone. The only thing we can't get from the smartphone is beer physical cash. A lot of startups and established companies, including Square and PayPal, are going after this market. The success of BitCoin is also a strong indicator that physical banking is dying.

If the banks don't invest in a rigorous new security system, old ATM networks will become a juicy target for hackers. Like any other parasites, hackers love weak targets: newborns and elderly, a legacy ATM system being the latter. A computer security disaster with a major ATM network will speed up the adoption of digital currencies immensely. A great financial play would be to buy a lot of bitcoins, then hack an ATM system just to scare people into using the new technology.

tags: innovation, deontic, payload, system, money, business

Vitamins is a $28B+ placebo industry

Based on multiple medical studies, Annals of Internal Medicine declares the multivitamin industry a fraud:

...we believe that the case is closed— supplementing the diet of well-nourished adults with (most) mineral or vitamin supplements has no clear benefit and might even be harmful. These vitamins should not be used for chronic disease prevention. Enough is enough.

Despite sobering evidence of no benefit or possible harm, use of multivitamin supplements increased among U.S. adults from 30% between 1988 to 1994 to 39% between 2003 to 2006, while overall use of dietary supplements increased from 42% to 53% (9). Longitudinal and secular trends show a steady increase in multivitamin supplement use and a decline in use of some individual supplements, such as β-carotene and vitamin E. The decline in use of β-carotene and vitamin E supplements followed reports of adverse outcomes in lung cancer and all-cause mortality, respectively. In contrast, sales of multivitamins and other supplements have not been affected by major studies with null results, and the U.S. supplement industry continues to grow, reaching $28 billion in annual sales in 2010. Similar trends have been observed in the United Kingdom and in other European countries.

The key notion here is "well-nourished." Since people don't know whether they are well-nourished or not, taking vitamins solves an important problem: it simplifies our efforts to find and stick to the right diet. That is, instead of a complex task to select the right food, we can simply take a vitamin pill to make sure we (our children, parents, and pets) get "the right" nourishment.

When food supplies were scares and of low quality supplementing it with vitamins and minerals was a great innovation. As the food industry caught up with the trend, the need for the supplements disappeared, but the perception of the need did not.

Moreover, the trend spread to pets! When we got our dog, the breeder recommended a whole range of dietary supplements from vitamins to "grass" tablets. Needless to say, that dogs don't need any of that stuff because they, unlike humans and monkeys, produce most vitamins internally. Despite being useless, pet food supplements are extremely popular and profitable. And they serve the same purpose as supplements for humans - generate a placebo effect.

I wonder, when a similar "enough is enough" article is going to be published about organic foods.

tags: control, industry, trend, science, biology, business

Creativity Quote of the Day: Invention vs Engineering

In 1905, Dr. Hammond V. Hayes took over AT&T's engineering department. Here's a quote from his 1906 letter where he describes his approach to innovation:

Every effort in the Department is being executed toward perfecting the engineering methods; no one is employed who as an inventor is capable of originating new apparatus of novel design. In consequence of this it will be necessary in many cases to depend on the acquisition of inventions of outside men.

Today, many leading technology companies follow this recipe for success by acquiring promising startups, rather than developing their own original ideas.


Source: Leonard S. Reich. Industrial Research and the Pursuit of Corporate Security: The Early Years of Bell Labs. The Business History Review, Vol. 54, No. 4, Business History and the History of Technology (Winter, 1980), pp. 504-529
http://www.jstor.org/stable/3114217

tags: creativity, invention, innovation, book, business

Death by partnership with Google

In 2006, Facebook (FB) decided to partner with Microsoft (MS), rather than Google, to serve ads to its US-based users. One year later, FB and MS extended this partnership worldwide. This choice may have helped FB to become dominant in the social media market. Despite multiple attempts by Google to friend its way into Facebook's business, e.g. through social search services, Zuckerberg treated them as rivals, not partners. And for a good reason.

Two other major companies that chose to partner with Google — Yahoo and Apple — ended up loosing their market share when their partner turned into a dominant competitor. In 2000, Yahoo hired Google to provide search results for its web portal. After a couple of years, most search requests ended up on Google's site, not Yahoo's. According to comScore, Google now has 2/3 of the search market in the US.

Source: comScore, August 14 Press Release.

In 2006, Steve Jobs partnered with Google to provide email, map, and youtube video services to launch the iPhone. Several years later he found himself staring in disbelief at the growing market share of Google's Android smartphones, which now account for a staggering 81% of the total.

Source: CNet, Oct 31, 2013. Android Snags Record 81 Percent of Smartphone Market.

With Yahoo's help, Google got themselves a ticket into the web-world, including maps and email; taking ideas from Apple propelled the company into dominance in the world of mobile media services. In both cases, Google outsmarted their business partners. Just like that was the case with Microsoft partnerships in the 1980-90s, Google's highly intelligent technologists took advantage of their close proximity to huge new markets discovered by others.

Since its early days, Google has been eager to acquire ideas and startups. The original adoption of the search-relevant ad model has brought them the bulk of today's revenues. Acquisitions of startups that developed interent-based maps, docs, videos (Youtube), social navigation (Wase) etc., provide for the bulk of the company's most popular services. Due to its dominance in search, Google is in a great position to detect early user trends and buy growth before most people recognize it. Having learned from their own industry experience, Googlers would rather acquire a potential "disruptor," than give it an opportunity to become a powerful competitor. Nobody can pull off a google-style partnership on Google itself!

It's all fair (Steve Jobs famously disagreed calling Google Android "a highway robbery") and we should probably "like" the company for being a relentless innovator. What bothers me is Google's increasing emphasis on lobbying its case in Washington. This year, Google was ranked #8 lobbyist in the US, a position that no Silicon Valley company has ever tried to attain before. The Steve Jobs' generation of innovators grew out of California counterculture. They considered it to be wrong to rely on the government to advance your business case. Obviously, the times have changed. As Bloomberg reports,

Google passed two Washington power tests when it escaped an FCC probe in 2012 of improper data collection with a $25,000 fine, and the FTC dropped an antitrust probe in January. Now lobbyists for the company are working on protecting its reputation amid revelations about U.S. spying.

When the next Google antitrust probe comes up for consideration who is going to resist the high-power lobbyists? As the ancient question goes, "Who is watching the watchman?"

P.S. The lack of checks on Google should work well for their stock price.

tags: technology, innovation, business, google, facebook, system, growth, startup

Invention of the Day: Relevant Advertisement.

Today, Google makes billions of dollars a year, by serving ads relevant to user searches. Bill Gross, of IdeaLab, is generally credited with inventing the business model. We use this example in class (Principles of Invention. BUS 74) and Scalable Innovation to illustrate a couple of points:

1. The difference between Invention and Innovation (for more detail see Scalable Innovation, Prologue. Soft Barrier 2: Invention vs Innovation. page xxxi).
2. Breaking, rather than accepting a broadly accepted trade-off, often leads to a major innovation breakthrough. That is, in 2000 when Yahoo dominated the web and used Google search engine to serve user requests, it made money by serving annoying banner ads. In short, Yahoo was locked in a trade-off between making more money and making user experience unbearable (very similar to today's Facebook situation). Google took Bill Gross' original idea and broke the trade-off, by making ads useful (see Scalable Innovation, 2013. Prologue, Internet Advertisement. page xxxvii). As the result, the constraint on revenue and user experience disappeared, making Google the dominant force on the Internet.

New developments in the world of patent litigation show that the concept of relevant ads was invented not by Bill Gross, but by Richard Skillen and Fred Livermore, of Nortel. US Patent 6,098,065 describes a search system that "correlates the received search argument to a particular advertisement." Derived US patents claim multiple aspects of their original idea.

In 2011, Apple, Microsoft, and others bought thousands of patents from bankrupted Nortel for $4.5B. Now, they are suing Google, Samsung, and the rest of the Android universe for patent infringement. The Skillen and Livermore patents are an element of the lawsuit. Of course, the suit will not stop Google from dominating search on the web and mobile. Rather, it is likely to result in a monetary settlement or damages awarded by the courts. The best part of it is that we now know the original inventors of a new powerful business mode. And they are Canadians!

Why Toronto, Canada is not Silicon Valley is another story.

tags: invention, patent, internet, business, model

Trade-off of the Day: Revenue vs User Experience

Yahoo reported 2012 Q4 results that show a company stuck in a 15-year old trade-off between selling more annoying banner ads and improving user experience:

Display ad revenue excluding commissions to other websites in Q4 fell 5%, even though the amount advertisers were willing to pay for ads rose 7%, the company said in an earnings statement.

...the fall in Q4 was also at least partly an effect of Mayer's mission to improve the user experience on some Yahoo properties, including its home page, wrote Cowen and Co. analyst John Blackledge, who rates Yahoo as neutral. Fewer ad impressions in Q4 were "partially a result of an attempt to rein in site clutter and improve user experience," he said.

Yahoo's business model is bound by the Revenue vs Quality trade-off. In contrast, Google provides relevant text ads that improve user experience AND generate more revenue. The difference in business models creates a huge performance gap.

 

tags: tradeoff, business, internet, model, constraint, 

Failure rates in startups with funding above $1M

According to the Wall Street Journal (Sept 20, 2012):

...findings are based on data from more than 2,000 companies that received venture funding, generally at least $1 million, from 2004 through 2010.

About three-quarters of venture-backed firms in the U.S. don't return investors' capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School.

There are also different definitions of failure. If failure means liquidating all assets, with investors losing all their money, an estimated 30% to 40% of high potential U.S. start-ups fail, he says. If failure is defined as failing to see the projected return on investment—say, a specific revenue growth rate or date to break even on cash flow—then more than 95% of start-ups fail, based on Mr. Ghosh's research.

In part, startup incubators allow companies fail fast without getting a lot of VC money.

tags: business, technology, market, entrepreneurship, startup

Trade-off of the day: Liquidity vs Growth

In "Corporate Finance" textbook I found this fundamental financial trade-off,

The more liquid a firm’s assets, the less likely the firm is to experience problems meeting short-term obligations. Thus, the probability that a firm will avoid financial distress can be linked to the firm’s liquidity. Unfortunately, liquid assets frequently have lower rates of return than fixed assets; for example, cash generates no investment income. To the extent a firm invests in liquid assets, it sacrifices an opportunity to invest in more profitable investment vehicles (p. 32. McGraw Hill, 2002).

The textbook treats the trade-off as a given, but from business practice we know that successful investors, such as Warren Buffet, break the trade-off by using insurance "float" and/or borrowing against fixed assets. Access to low- or negative cost credit seems to be the most creative way to deal with the problem.

tags: trade-off, constraint, finance, business, problem, solution

Online tracking: social networking vs analytics

Hi-tech websites seem to use a lot more social networking tracking than business sites (figs below). For example, wired, VBeat, Cnet and other tech-oriented content services are more geared toward generating "buzz", while biz sites use good old spying techniques to sell ads.

 

Tracking on wired.com

(all four major social networks present)

 Tracking on bloomberg.com

(no social tracking but extensive analytic  data collected)

tags: technology, media, control, detection, social, networking, business, model

Social Networking: a Bubblecovery?

An interesting perspective on social media's economic impact:

...the social media bubble has played a very important role in the U.S.' post-2009 "bubblecovery" or bubble-driven economic recovery. The social media bubble has helped to create nearly 500,000 U.S. jobs in recent years (a very high percentage of newly-created jobs) and has helped to launch a housing and commercial real estate recovery in hard-hit San Francisco and parts of New York City. The social media bubble has contributed to an explosion in post-2009 entrepreneurial activity, with the number of startup incubators tripling from 2009 to 2011. The social media bubble is also important, because it has been one of the few glimmers of economic hope that many Americans have had in recent years, especially for young aspiring-professionals who see few other appealing career options (1, 2, 3).

The recent election cycle may have contributed to the expansion because politicians of all parties embraced social media as a vehicle for delivering their messages. It's a relatively easy task to influence one's vote (i.e. to "buy" a political preference) through online tracking and ad targeting because the vote is free for the person to give. A harder task would be to convince one to buy a product or service online when s/he has to part with real money. Even Zynga with its freemium business model is having trouble.

tags: distribution, cycle, social, networking, business, advertisement

Starbucks and McDonald's compete to deliver Diabetes 2

Recent medical research confirms my corollary that Starbucks is McDonald's for the affluent.

Researcher Marie-Soleil Beaudoin has discovered not only that a healthy person's blood sugar levels spike after eating a high-fat meal, but that the spike doubles after having both a fatty meal and caffeinated coffee – jumping to levels similar to those of people at risk for diabetes.

Since many Starbucks sell fatty sweets and lunches, adding coffee to the mix creates a recipe for sure-fire Diabetes 2: sugar (salt) + fat + caffeine. Similarly, when McDonald's sells coffee in addition to its traditional junk food they reproduce Starbucks' commercial success and the Diabetes 2 recipe.

tags: 10x, health, control, packaged payload, business, model

"The Yoga Pants War": Design Patents in Apparel

According to the Wall Street Journal (9/11/2012),

Lululemon, in a complaint filed in federal court in Delaware last month, claims that Calvin Klein is selling pants that "have infringed and are still infringing" on three patents, including one for a distinctive waistband featuring overlapping panels of fabric. The company was awarded one of the patents last year, and the two others in June.

Lululemon is trying to chart a new path by filing and litigating patents secured on the basis of its designs.
Such patents, called design patents, have "for too long been grossly underappreciated" by the fashion industry, said Perry Saidman, a design-law expert and lawyer in Silver Spring, Md.
Fashion designers have only sporadically gone to court over such patents. But slowly, design patents are coming into vogue across a widening number of industries. Apple Inc. made them a key part of its case in its recent legal victory over rival Samsung Electronics in which a jury found that Samsung had copied Apple's designs.

 Design patents is a great weapon against copycats. Unlike utility patents, they are easy to get and their scope usually well defined. Moreover, design patents are simple; they don't require highly technical expert testimonies to demonstrate infringement to a lay jury.

Lunch Talk: (@GoogleTalks) The Lean Startup

Google hosts Eric Ries author of, "The Lean Startup"

The Lean Startup movement is taking hold in companies both new and established to help entrepreneurs and managers do one important thing: make better, faster business decisions. Vastly better, faster business decisions. Bringing principles from lean manufacturing and agile development to the process of innovation, the Lean Startup helps companies succeed in a business landscape riddled with risk. This book shows you how.

tags: lunchtalk, startup, business, strategy, control

Quote of the Day: The Luck of Silicon Valley.

Gordon Moore:

I never fail to credit the element of luck.

My personal success stems in part from the fact that Fairchild’s timing and direction were extremely fortuitous. Semiconductor science and technology were evolving rapidly. Fairchild invented the planar technology that provided the basis for the integrated circuit. Intel made a lucky choice of a new version of the MOS technology using a silicon layer for the gate of the transistors.

The luck of this valley stems from the fact that it began with a fairly clean slate in a wide-open technology space.

Moore's insight about luck gives us an important attribute of a possible successful innovation: wide-open technology space. We should also realize that when Moore talks about technology he means the business of technology, not just the technical side of a specific implementation.
Similarly, when Steve Jobs introduced PC and, later, iPod he targeted a wide open business-technology spaces.

This aspect of luck can be captured by using my 4Q diagram approach (one of the topics of today's class at Stanford).

tags: 4q diagram, strategy, quote, innovation, business, model

(ES) Creating business with 10X change.

Gordon Moore, of the Moore's Law fame, writes about his experience of creating a breakthrough technologies at Intel,

...at the time the first microprocessors were shipped, the total annual market for computers in the world was something like 10,000 units. The microprocessor would have been a commercial disaster if all we did was to replace those 10,000 units with cheaper processors.

I remember going to a conference and speaking before a group that was more involved in applications than devices and explaining to them that we had to ask big questions, like, ‘ How are we going to develop markets that can use 100,000 of these a month?’ (While one hundred thousand a month doesn’t seem like many now when compared to the tens of millions shipped currently, it sure did then.) Ted’s insight and the Fairchild experience with ICs helped us understand that this product had countless uses, but we also understood our efforts alone would build volume markets.

 To summarize, the goal was to create a market that could absorb 10 times more units shipped in a ten times shorter period of time. It's likely that Andy Grove's notion of a 10X change comes from the same early days at Intel.

Source: SIEPR Discussion Paper No. 00-45. Gordon Moore, Kevin Davis. Learning the Silicon Valley Way. Stanford University, 2001.

tags: 10X, 4q diagram, business, breakthrough

Saving Yahoo, act 6.

NYT adds another detail to the story of Yahoo's demise:

[Marissa Mayer] said Yahoo was “one of the best brands on the Internet.”She recalled that when she first started at Google, the company would conduct user surveys and “people didn’t understand the difference between Yahoo and the Internet.”

At the turn of the century, Yahoo owned the web, had unrestricted access to Google's search technology, and was one of the largest e-mail providers in the world. And they managed to blow the lead.

As she hashes out Yahoo’s strategy, Ms. Mayer said she was intent on leveraging the Internet company’s strong franchises including e-mail, finance and sports. She also hopes to do more with its video broadband and its mobile businesses.

Let's do a reality check. Youtube dominates Internet video; GMail dominates e-mail (e-mail is dead anyway); Google and Apple share leadership in mobile; Apple gates access to Yahoo finance on the mobile. Facebook and Google are buying technology at the pace of a couple of startups a month. It will be a miracle if Ms Mayer pulls an upset using Yahoo's sports properties.

tag: s-curve, innovation, business, internet, web