Urlocker On Disruption

M&A Deal from Hell: Alcatel + Lucent Bombs Again

  More bad news from telecom maker Alcatel-Lucent this morning: The third earnings warning so far this year.

The Wall Street Journal says the company is facing increasing competitive pressure from Ericsson and from emerging Chinese companies Huwawei and ZTE.

Clearly the merger of Alcatel and Lucent has proved a bust, which is what we warned back when reports of a pending merger emerged in early 2006 in one of our first investment-oriented postings.

"If you merge two non-disrupting companies, each saddled with commoditized products in non-growth markets, do you get a better company as a result?"

Why most mergers fail:

• They don't create new services or products
• They don't create new customers
• They focus management on financial engineering or deal-making rather than customers

How to boost your chances of merger success (pdf) using a disruptive approach.

**Other views**
Denial is a CEO's worst enemy:  Alcatel-Lucent CEO Pat Russo, interviewed by WSJ: "We're seeing a bit of softness... that may or may not have something to do with what's  going on in the U.S. economy: homestarts, home buildings... It has nothing to do with the merger."

This article in Industrial Distribution magazine says there are five rules of successful M&A based on management guru Peter Drucker's writings.

NY Times: Alcatel-Lucent tumbles on outlook

Cellphone Video Works, But Does it Get the Job Done?

Today's Wall Street Journal has a story about how new services offer video on cellphones such as MyWaves, CellFish Media and 3Guppies.

These services are typically ad-supported and allow consumers to watch short clips such as music videos on their cellphones. Some allow you to upload your own videos onto your cellphone or to store videos from YouTube and other sources as well.

I have also experimented in the past week with a few other technologies to load video on my BlackBerry, including from Mobiola as well as BlackBerry video converters from Seabyrd Technologies and MediaCell.

And yes indeed, I loaded and watched a handful of videos on my BlackBerry, including a conference speech on disruption, a few music videos and (allegedly a techie's holy grail) full-length TV shows.  In some cases there were some problems with file-format errors or screen-resolution, but generally video on cellphones works.

But does it do a job?

Or put another way, does adding video to cellphones create any real business value or is it just a technology exercise in search of a customer need? Is this just another random splatter-campaign to create new (smaller) advertising venues to replace larger failing advertising venues such as broadcast TV?

Glancing at the websites for the various suppliers of these services and technologies, it doesn't appear that anyone has figured out a market for whom this works. For video on cellphones to be valuable, it must solve a customer problem that is:

• An important problem
• A frequent problem
• A problem that customers are trying to solve today but can't

In tech-land when new technologies struggle without a valid market, observers sometimes bemoan the absence of a 'killer-app." They are highlighting the same issue. Remember the video phone of 1964... or in 1992...or in 2002 or again from Vonage in 2005?

Nobody wanted it.

To find real economic need for cellular video --where people will actually value and pay for the service -- requires a re-think. 

I don't have answers on this, but I do have some questions that can help. Rather than chasing the mass market, video suppliers should ask questions along these lines to identify where the initial needs for this technology are strongest:

• Are there places where people can't afford full sized TVs but a lower-cost cellphone video service makes sense?
• Are there occasions when a video on a cellphone is 'good enough' because it is not convenient  or appropriate to fire up a DVD or TV, but a cellphone is ok?
• Is it possible to use a cellphone to give people access to important programming that they can't get through any other source?

**Other Sources**
This blog from Japan refers to "consumer confusion" about mobile video...Always a dark warning sign.

Monte Silver at Podcast Alley refers to the billions spent on mobile TV to no success, and concludes that podcasts --not commercial video-- will be telephone companies' salvation.

Apple's iPhone Likely a Hit, But Not Disruptive

Apple's new iPhone has high appeal to a segment of the market and looks like it will be successful.

Early reports show several indicators of pent-up demand and cult-like followings even before the product is released in June.
Why?

• Apple is the master of design in creating simple, powerful devices with high appeal
• Apple markets better than any tech consumer company
• Apple has no entrenched base of cell-phone customers or channels to worry about offending, marginalizing or competing against

But is the iPhone a disruptive force in the industry? By disruptive I mean, will it displace current suppliers like Nokia, Motorola or even a niche-player like RIM's BlackBerry? Will it win in the market by changing the basis of competition?  Will iPhone change the game for cell-phone users? 

Or is adding a phone to an iPod an incremental function for a disruptive product? By that, I mean is it just a brand extension that enhances the value and helps take a product mainstream, similar to the addition of an mp3 player and a phone on recent BlackBerry models?

Using the Disruption ScoreCard (located on The Disruption Group's  tools page) here are some of the assumptions I used for the iPhone:

• New customers: C
• Product inferior to mainstream: C (ie iPhone is not perceived as inferior)
• Product superior to early adoptor needs: A
• New business model: A+ (I assume that iTunes makes this a new cell phone business model)
• Investment required large: C (Apple has invested two years R&D and mega-bucks)

I don't know if the Disruption ScoreCard is the best framework for analyzing the iPhone or other high-end products because it has a clear bias towards new markets and low-cost entries.  (Afterthought: Maybe there is room to consider the iPhone as inferior relative to conventional phones in that it lacks a keyboard, which would be a sore point with mobile email-junkies, as some readers have pointed out.)

However, a key issue comes through: The iPhone has a different user interface; It is sleek; It is cool; It is well integrated; But it does not appear to do something new for a new set of customers. And doing something new, (especially something new that mainstream suppliers consider unimportant or wrong) is a key ingredient of many successful market disruptors. 

My personal experience (or bias) sees little value in Swiss Army knife kind of multifunction products that do many things adequately but do not specialize in doing one thing extremely well. That razor-like focus, at the expense of ignoring other functions, is what helped make the iPod and the BlackBerry very successful, high-margin products with long-lasting competitive advantage.

The net result of the Disruption ScoreCard was a "B-" rating for iPhone: Some work ahead to get disruptive.  Download the iPhone Disruption ScoreCard and test your own assumptions in the spreadsheet.

This lack of full-on disruption doesn't suggest that iPhone won't make inroads in the market. And it clearly adds some value to people who are considering buying an iPod or a cellphone. But it suggests a limited lifespan and a product that is less likely to be a disruptive breakthrough than say, the Apple Mac or the iPod.

My take is that the iPhone caters to a segment that wants status and high-design and is willing to trade up for it, to use the language of Michael Silverstein of Boston Consulting Group.  While the $500-price point seems impossible to current cell-phone suppliers, ultra high-end pricing of other so-called commoditized products (coffee, beer, laundry machines) shows that historic price-demand assumptions can be dead wrong.

**Forecast Confession**

Six years ago, I mistakenly thought the iPod would flop: Too expensive; Incompatible with PCs; Me-too product.  My mistake was in undervaluing two important iPod attributes 1)The mega-size of the iPod allowed it to solve a new problem for customers (How do I carry ALL my music with me?) and 2) I underestimated the capabilities of iTunes in that it made it easy and convenient for people to legitimately download music.  Those two attributes far outweighed the shortcomings of the early iPods.

**Other Thoughts**
Apple's iPhone has 50% gross margins and a great business model says Alex at EightySevenFour.

RoughlyDrafted says Apple will disrupt the entire wireless industry just as it did the music industry.

More juice from Apple: Apple TV rated an 'A' on our Disruption ScoreCard posted last September when the first details of the product, then known as iTV, were released. Why? It's a low-cost device that fits with how consumers already behave.

Bruce Tognazzini, a 14-year Apple veteran, has a detailed analysis of the iPhone's user interface: Not exactly new and revolutionary, but advanced enough to put the rest of the cell phone industry to shame.

Bloomberg news columnist Matthew Lynn says iPhone will be a flop: Apple is late, Apple is not a team-player with telcos, and the product is a defensive attempt to protect iPod, he says. "Consumers are interested in new things, not reheated versions of old things."

Eager to get an iPhone right away and without dropping $500? Try printing off this fold-and-clip paper version.  And this one with full-color fish screensaver (pdf).

The Wall Street Journal reported on the online debate of whether iPhone will be a hit, including reference to a list of seven iPhone shortcomings compiled on her blog by Motorola Chief Technology Officer Padmasree Warrior.

Arik Hasseldahl at Sci-Tech Today says he learned his lesson from overstating the shortcomings of the iPod back in 2001, when it suffered a long list of complaints (incompatitble with PCs, poor battery life, expensive, etc.) "We now know that the first iPod was just that: the first. Apple learned from what worked and what didn't and made adjustments." 

Stock view: Needham's Charlie Wolfe says buy Apple based on a forecast 7% cellphone market share by 2016. But Eric Savitz at Barron's shows the risk side as well from Bernstein.

 

Updated: How to Solve Information Overload

The New York Times has an interesting article today about a strange phenomena related to information overload and phone tag. People are using new anonymous telephone number services like Jangl  and PrivatePhone.com to retain privacy on their cell phones.

It’s a funny story that explores dating trends in New York, but it also demonstrates that people are using these services because they are trying to solve a growing problem of filtering out unwanted callers.  Clearly to these people, this is:

• A frequent problem
• An important problem
• A problem they can't solve adequately today with current tools, including these new services

Those are the classic identifiers of a potentially great disruptive business opportunity.

The problem these consumers are addressing is related to information overload and phone-tag.  Simply put: 'How do I receive the calls I want and filter out the calls I don't want in an easy way?'

I think this is similar to an important business problem that is growing.  Notice how some business people hand out their cell number to top clients or VIPs.

Or how voice-mail (and in some cases e-mail) have become ineffective ways to communicate because of too many low-priority messages and spam. The problem remains for business people: How do I filter out unwanted communications while retaining the important calls, emails and IMs? 

Is there a solution to this problem?

I think Iotum comes the closest to solving this important problem with their relevance engine, which hooks into customers' contact lists and calendars (such as MS Outlook) to determine the priority and handling of calls. 

Is this a big market opportunity? Typically in disruptive innovations, it is hard to be accurate. And often the opportunities look small or uncertain in the early days.

While we can't prove the size of the market, the FCC tells us that 44% of residential phone customers in California have unlisted numbers: a clear signal that people are trying to solve the problem themselves, but inadequately (no prioritization and filters out too much). And we can all attest to the rise in unwanted calls and emails.

**Update: Spam expands**

The New York Times reports on how spam has doubled recently and explores the seemingly losing battle against spam.

Freedom to Tinker reports that spam is invading other formats including blog comments, with up to 800 fake comments sent daily to that blog.

Nicholas Carr says he's given up on the battle, but he admits spam is an interesting example of the new economics of abundance.

Amit Agarwal at Digital Inspiration says a simple filter rule in Gmail will win back your freedom from spam.

**Other Sources **
Iotum was named one of the 'fierce 15' innovative telecom companies. Iotum's CEO, Alec Saunders also has a blog on telecom issues.

VoIP expert Jeff Pulver says this problem is well-handled by VoIP technology and that more 'disposable phone number' services should come out in 2007. At the bottom of the comments section there are some details on how VoIP technology could reduce spam calls as well.

Paul Kedrosky has staggering stats on the rise of spam emails from Russian scam artists.

 

Business 2.0 Disruption Roundtable

Business 2.0 Magazine is hosting a roundtable panel discussion on disruption in San Francisco later this week as a follow up to the recent cover story. Look for video highlights from CNN Online later in the week.

The roundtable session includes most of the disruptive innovators featured in the magazine as well as some VCs and others interested in sharing ideas on disruption. I will be there hoping to offer thoughts on how to avoid the classic pitfalls for disruptors and other ideas to maximize disruptive business strategies.

A couple of telecom-related companies at the panel session should be especially relevant to some work I am involved in:

• Clearwire: WiMax based telephony and data
• JahJah: Simplified VoIP on multiple devices including mobile
• Applied Location Corp.'s Skymeter system for toll roads and auto insurance.

** Other Information **

Business 2.0's list of resources for Disruptors. Archive of The Disruption Group in the news.

Tools for managing disruption at The Disruption Group's site.

Cable VoIP Call Quality: Where to Not Innovate

Keynote Systems has a new study out on the quality of telephone calls on Voice over IP systems.  The results show that cable network based VoIP systems rated better phone quality than traditional telephone company offerings.
Here's a summary from Engadget:

"VoIP hard / soft phones, digital cable VoIP phones, and traditional landline phones were all tested and compared, only to discover that cable company-provided VoIP phones that utilized PacketCable -- an IP multimedia transmission system optimized for coax -- scored a whopping 4.24 MOS (mean opinion score), trouncing the 4.0 found in traditional phone networks."

Should telephone companies worry about the rise of VoIP and cable voice services? Absolutely. But voice quality is not the issue.  The quality of voice service surpassed customer needs a long time ago and has become commoditized.  Cable and VoIP companies know that voice-quality is a minimal requirement to get in the door, but it won't make a sale. The VoIP company that leads with voice quality is admitting to a me-too service.

Observing consumer behavior, we can see customers have adapted to substantially inferior voice quality over cellular networks. And the traditional five-nines reliability of the Public Switched Telephone Network has become a moot point for many telecom users, including some businesses, who readily use their cell phone as a backup.

This is not to say that customers won't complain about voice quality or network downtime. But they do not appear to be willing to pay for higher quality by these measures. Consumers also appear to be ready to accept lower quality in exchange for new capabilities, as is the case for traditional cellular, Nextel push-to-talk functionality and BlackBerry phones.

The key issue for telcos and would-be disruptors of telecom is to consider these two questions:

• Where is the telecom experience for customers good enough? <-- stop innovating here because this is commoditized
• Where is the telecom experience for customers not good enough? <-- work on this because this prevents commoditization

Consider whether these innovations from telcos would warrant a premium from customers:

• Telecom service more customized to the customer's industry or business;
• More flexible service to scale up or down based on seasonality
• Better integration between wireless and wireline service
• Single point of contact for service
• Sinlgle point of contact for billing
• Better integration with standard PC and office tools, such as Microsoft Outlook

Another question for carriers:
If not voice quality, what are the attributes that customers value and pay for on VoIP systems or on other successful telecom innovations? (The cop-out answer is lower prices.)

**Other views**
Cbeyond is an IP-based carrier focussed exclusively on the small business market in several major U.S. cities. Financial performance has been strong with high-growth, profitability and 18% ROE in a traditionally neglected, poor-service segment of the telecom market.

VoIPCentral says VoIP carriers are adding 100,000 subscribers per month.

Scoble's E-Mail Crisis: Who Can Solve Information Overload?

You may be familiar with some of these symptoms of information overload:

• Your voice-mail message waiting indicator has been glowing red for 47 days;
• Your E-mail inbox is so full you can't get through your messages;
• When someone asks 'Did you get my e-mail?' it feels the same as when your spouse says 'Did you forget our anniversary?'
• You give your cell-phone number to a select few as a way to prioritize calls;
• You have a secret e-mail address you give to a select few to prioritize e-mails;
• The whole message thing feels out of control;
• Once in a while you declare info-bankruptcy and delete all stored messages to start fresh;

I am sure that Robert Scoble is not alone when he confesses he is close to declaring e-mail backruptcy:

I’m missing lots of appointments and screwing people. Not good at all. I’m gonna take a couple of days off and get a handle on it.

Anyone have any productivity tips? Especially for dealing with 1,537 e-mails? (I have them all triaged in separate folders). The pain of it is I have other stuff I need to get done.

I don't think these are user-created problems as much as they are systemic problems due to the nature of work, the global economy, increased demands on employees, and the limitations of communications tools.

So here is an open challenge: Can an e-mail system, handheld device, BlackBerry, telephone, handset, telecom network or software system solve these problems of information overload?

For many people this is:

• An important problem
• A frequent problem
• A problem they can't fully solve with today's tools

Those are the key ingredients for a potentially lucrative market-disruptive product or service. But to be effective the solution must be:

• Dead-easy to use (No big training burden)
• Works the way people work (Doesn't require a change in behavior)
• Integrates with current systems, such as MS Outlook, standard voice-mail, etc.

The service that comes closest to my understanding of the problem is the Relevance Engine from Iotum, a software startup founded by Alec Saunders, previously with Microsoft.

Another candidate with emphasis on collaboration networks is Tello, a startup backed by Craig McCaw, Intel Capital, John Sculley, Jeff Pulver and others, but this seems like a more complex approach.

**Other Views **
43 Folders is an efficiency blog that has some tips for dealing with e-mail.

NY Times columnist David Pogue piqued my interest with a post about BlackBerry users spending more time with family back in the summer.

Iotum's blog looks at the issues behind relevance.

E-mail dashboard offers some productivity tips for dealing with e-mail overload.

Telecom: Not Dead Yet

Mark Goldberg points out that a year ago The Economist ran a cover story on the death of telecom, in his words prematurely: "We have seen various signals that indicate a reincarnation," highlighting renewed capital spending by several carriers.

"It's more accurate to talk about 'energizing' the phone business, not killing it. Indeed, it isn't just the internet that is catalysing change, we see wireless technologies, computer processing, entertainment and societal behaviours also driving a renewal of investment and employment growth."

My sense is that telcos are beginning to react to the threats that are upon them, but the largest challenges arise from two simple questions which have nothing to do with technology or re-investment:

1. What should the telephone companies become?
2. What are the services and processes that should be abandoned as part of yesterday's business which is no longer valued by customers?

** Other views **
The Economist's full report

Former telecom exec Bob Ferchat has a Drucker-inspired essay on the subject from 2002 and still relevant: "Telecom is clearly not dead but the disarray is widespread... and learning to live with its radical makeover. It just looks and acts differently...The winners have not been declared, but clearly some of the traditional players are just as devastated and puzzled as we are individually."

The Technology Liberation Front lauded the Economist, but said the story was misleading in some ways.

Jupiter Research said the Ecomonist's view was a crock, and has some detailed reports for sale to back up its view.

Never too shy about announcing an industry's death, The Economist ran a similar cover story on newspapers last month.

Deconstructing a Business Failure

Anti-marketer Paul Paetz analyzes the statistics and marketing behind Boeing's failed WiFi service. He is brutal in his assessment but he has logic and more facts on his side than any other analysis of the project, from start in 2000 to its end last month:

"Extensive" market research by Boeing came up with a definitive statement that "38% of frequent travelers are willing to pay at least $25 per flight for full, high-speed access to the Internet and their corporate network". Clearly, Boeing believed that it they built it, the users would come, and had boxed themselves into a cost structure that embedded this assumption...

But, the really head-scratching fact is that Connexion's business model required between 30 and 40 percent of all passengers on all flights to pay for this service every time they got on a plane, and nearly 10x as many planes carrying the service as had been outfitted.

The anti-marketer highlights Boeing's mistakes:

• Wrong price;
• Other activities competing for user's time;
• Poor power;
• Desire for privacy;
• Lack of space onboard;
• Poor promotion by airlines;
• Poor takeup by US airlines;
• Lack of direct communication with users;

To be clear, Paetz doen't think this analysis has anything to do with disruption... just clear-thinking in business and marketing.

In the end, it's about being sensitive to customer needs and perceptions, and offering a product and packaging that removes barriers to adoption, rather than erecting them. And please, power access in every seat should have been done 15 years ago.

However, some innovators forget these basics when they are convinced they are onto a "disruptive" idea. I think several lessons are to be learned from any such failure, especially when it seemed like a sure-thing.

Boeing Pulls Plug on Broadband in the Sky

Guess what? People don't really want to use broadband Internet on airplanes.

As a result, Boeing cancelled its Connexion service today (don't expect that link to last!) and took a $320M charge following six years of R&D etc., with CEO CEO Jim McNerney saying, "Regrettably, the market for this service has not materialized as had been expected."

The WSJ said the 560-employee unit had annual revenue less than $25M despite $1B in investment.

Details on Connexion:

• WiFi service for laptops with throughput of 150-200 kbps;
• Launched on Lufthansa in May, 2004, expanded to 10 other airlines;
• Single hour for $10;
• $27 flat rate for an entire flight.

Om Malik says beware the gap between early adopters or tech reviewers and  mainstream users, asking: "Is it a case of don’t trust the early adopters?"

It's possible that there is another angle here to draw some lessons from Boeing's mistakes.
My view: Don't trust what people say; trust what they do.

Market research said there was a big market for this service, with In-Stat saying 44% of those surveyed said that they would be interested in Wi-Fi on airplanes.

But user actions suggest otherwise.  As an example, apart from a brief spurt during the dotcom bubble, onboard airline telephone systems are often idle, which lead Verizon to cancel its Airfone service.

If you watch people on airplanes, you might gather that these activities are highly valued and popular, but might not rate in surveys:

• Snooze;
• Booze;
• Eat;
• Watch movie;
• Listen to iPod;
• Daydream;
• Read.

Note the mushrooming of portable DVD player and DVD movie rental kiosks at airports.

Looking at the Connexion service through the lense of our Disruption Scorecard, the service would score two poor grades which were warning signs:

• Instead of planning to learn, management bet the farm on what it thought was a sure strategy;
• The service tried to change customer behavior instead of helping customers do what they are already doing;

** Other Views/Late Additions **

Robert Scoble says battery power was the problem. But he also observes that even tech-enthusiast Microsoft managers didn't use the service on long US-Copenhagen flights: "I was suprised to learn that they enjoyed the 10 hours 'off the grid' where their employees and managers couldn’t talk with them."

The Disruption Group's site includes a CEO Guide to the Benefits of Disruption (pdf) and other tools for managing disruption.

Clayton Christensen's firm Innosight takes a look back at a different aspect of Boeing's efforts to innovate, the "Dreamliner" project, "a risky bet for the high end of the market...Boeing still has to fight against Airbus for every deal, which means providing deep discounts to carriers."

Ed Brill says he liked the Connexion service and blames low takeup by US airlines for the failure. "After a week in a city where every coffee shop, motel, diner, and Chinese take-out has WiFi, it's mind-boggling to me that Boeing found this business unworkable (though admittedly, in almost all those places, it's free...)"

Engadget says business travellers will be upset and many such comments are posted there, including complaints on price and the lack of power to seats.

Airline consultants IAG say Boeing over-engineered the system and lacked commitment, backpedalling early on when the service didn't show explosive growth:  "The system was created and built by engineers lost in technology...Boeing handed the world a solution only the Pentagon could afford – but the Pentagon was not buying."