AI – rescuing the spectrum crunch (Part 1)

Chamath Palihapitiya, the straight talking boss of Social Capital recently sat down with Vanity Fair for an interview where he illustrated what his firm looked for when investing. “We try to find businesses that are technologically ambitious, that are difficult, that will require tremendous intellectual horsepower, but can basically solve these huge human needs in ways that advance humanity forward”.

Around the same time, and totally unrelated to Chamath and Vanity Fair, DARPA, the much vaunted US agency credited among other things for setting up the precursor to the Internet as we know it threw up a gauntlet at the International Wireless Communications Expo in Las Vegas. What was it: it was a grand challenge – ‘The Spectrum Collaboration Challenge‘. As the webpage summarized it – “is a competition to develop radios with advanced machine-learning capabilities that can collectively develop strategies that optimize use of the wireless spectrum in ways not possible with today’s intrinsically inefficient static allocation approaches”.

What would this be ‘Grand’? Simply because DARPA had accurately pointed out one of the greatest challenges facing mobile telephony – the lack of available “good” spectrum. In doing so, it also indirectly recognized the indispensable role that communications plays in today’s society. And the fact that continuing down the same path as before may simply not be tenable 10 – 20, 30 years from now when demands for spectrum and capacity simply outstrip what we have right now.

Such Grand Challenges are not to be treated lightly – they set the course for ambitious endeavors, tackling hard problems with potentially global ramifications. If you wonder how fast autonomous cars have evolved, it is in no small measures to programs such as these which fund and accelerate development in these areas.

Now you may ask why? Why is this relevant to me and why is this such a big deal? The answer emerges from a few basic principles, some of which are governed by the immutable laws of physics.

• Limited “good” Spectrum – the basis on which all mobile communications exists is a finite quantity. While the “spectrum” itself is infinite – the “good spectrum” (i.e. between 600 MHz – 3.5 GHz) or that which all mobile telephones use is limited, and well – presently occupied. You can transmit above that (5 GHz and above and yes, folks are considering and doing just that for 5G), but then you need a lot of base stations close to each other (which increases cost and complexity), and if you transmit a lot below that (i.e. 300 MHz and below) – the antenna’s typically are quite big and unwieldy (remember the CB radio antennas?)

Courtesy: wi360.blogspot.com

 

• Increasing demand – if there is one thing all folks whether regulators, operators or internet players agree upon it is this; that we humans seem to have an insatiable demand for data. Give us better and cheaper devices, cool services such as Netflix at a competitive price point and we will swallow it all up! If you think human’s were bad there is also a projected growth of up to 50 Bn connected devices in the next 10 years – all of them communicating with each other, humans and control points. These devices may not require a lot of bandwidth, but they sure can chew up a lot of capacity.

CISCO VNI

• and as a consequence – increasing price to license due to scarcity. While the 700 MHz spectrum auction in 2008 enriched the US Government coffers by USD 19.0 Bn (YES – BILLION), the AWS-3 spectrum (in the less desirable 1.7/2.1 GHz band) auction netted them a mind-boggling USD 45.0 Bn.

One key element which keeps driving up the cost of spectrum is that the business model of all operators is based around a setup which has remained pretty much the same since the dawn of the mobile era. It followed a fairly, well linear approach

• Secure a spectrum license for a particular period of time (sometimes linked to a particular technology) along with a license to provide specific services
• Build a network to work in this spectrum band
• Offer voice, data and other services (either self built) or via 3rd parties to customers

While this system worked in the earlier days of voice telephony it has now started fraying around the edges.

•  Regulators are interested that consumers have access to services at a reasonable price and that a competitive market environment ensures the same. However with a looming spectrum scarcity, prices for spectrum are surging – prices which are indirectly or directly passed on to the customer
• If regulators hand spectrum out evenly, while it may level the playing field for the operator it does nothing to address a customer need – that the capacity offered by any one operator may not be sufficient… leaving everyone wanting for more, rather than a few being satisfied
• Finally, the spectrum in many places around the world remains inefficiently used. There are many regions where rich firms hoard spectrum as a defensive strategy to depress competition. In other environments there are cases when an operator who has spectrum has a lot of unused capacity, while another operator operates beyond peak – with poor customer experience. No wonder, previous generations of networks were designed to sustain near peak loads – increasing the CAPEX/ OPEX required to build up and run these networks.

In the next part of this article we will dive deeper into these issues, trying to understand how an AI enabled dynamic spectrum environment may work and in the last note point out what it could mean to the operator community and internet players at large…..

The dynamic pricing game – where all is not 99c

Phil Libin the effervescent CEO at Evernote made headlines two days ago when he admitted that Evernote’s pricing strategy had been a bit arbitrary and a new pricing scheme for their premium offering would be launched come 2015. Although little was said about what the approach would be – I do hope it points to adopting a flexible pricing approach, and serve as a forerunner for pricing strategies to legions of firms down the road.

To put some context, many software providers (especially app companies) have adopted a one price fits all approach; i.e. if the price for the app is $5 per month in USA, the price is $5 per month in India. The argument has typically been one of these

1. Companies such as Apple do not practice price differentiation around the world, and yet they sell – so we should also be able to do the same
2. Adopting a one price fits all approach streamlines our go-to-markets and avoids gaming by users
3. It is unfair to users who would end up paying a premium for a product which can be sourced for a cheaper price elsewhere

From a first hand experience I believe that such attitudes have proven to be the one of the biggest stumbling blocks for firms to achieve global success. A good way to explain why is to pry apart these assertions.

• The Brand proposition argument – Although every firm would love (and some certainly do in a misguided manner) to believe that their firm has a premium niche such as Apple – harsh reality points in a different direction. There are only two brands who top $100 bn – and Apple is one of them; and no – unless you are Google, you are not the other! Even though your brand may be well known in your home of Silicon Valley, its awareness most likely diminishes with the same exponential loss as a mobile signal – its value in Moldova for example – may be close to zero. This simple truth is that there are only a handful of globally renowned brands (e.g. Apple, Samsung, BMW, Mercedes, Louis Vuitton etc) which can carry a large and constant premium around the world.
• The “avoid gaming” argument – this does have some merit, but needs to be considered in the grand scheme of things. Yes – this is indeed possible, but is typically limited to a small cross section of users who have foreign credit cards/ bank accounts etc. The vast majority are domestic users who are limited to their local accounts and app stores. The challenge here is to charge the same fee irrespective of the relative earning power in a country. While an Evernote could justify a $5 per month premium in USA (a place where the average mobile ARPU is close to $40), it is very hard to justify it in South East Asia (mobile ARPU close to $2) or even Eastern Europe (mobile ARPU close to $8). It then would simply limit the addressable market to a small fraction of its overall potential – and dangerously leave it open to other competitors to enter.

ARPU	$12.66	$2.46	$11.37	$9.20	$48.15	$23.88	$8.77
Region	MENA	APAC	Oceania	LatAm	USA	W.EU	E.EU

• The unfairness argument – also doesn’t hold true. The “Big Mac Index” stands testament to the fact that price discrimination is an important element of market positioning.

Even if you argue that you cannot buy a burger in one country to sell in another, the same holds for online software – take the example of Microsoft with its Office 365 software product, same product – different country – different price.

• That brings me back to the final point – $5 per month may sound like a good deal if you are a hard core user, but if you compare it with Microsoft Office 365 – which also retails at $5 per month, it is awfully hard to justify why one would pay the same for what is essentially a very good note taking tool.

Against this background, I do welcome the frank admission that this strategy is in need of an update, and also happy to hear that the premium path isn’t via silly advertisements. Phil brought up a good challenge with his 100 year start-up and delighted to know that he still is happy to pivot like one.  I do for sure hope that the other “one trick pony” start-ups learn from this and follow suit.

Al la carte versus All you can eat – the rise of the virtual cable operator

Recent announcements by the FCC proposing to change the interpretation of the term “Multi-channel Video Programming Distributor (MVPD)” to a technology neutral one has thrown open a lifeline to providers such as Aereo who had been teetering on the brink of bankruptcy. Although it is a wide open debate if this last minute reprieve will serve Aereo in the long run, it serves as a good inflection point to examine the cable business as a whole.

“Cord cutting” seems to be the “in-thing” these days with more people moving away from cable and satellite towards adopting an on-demand approach – whether via Apple TV, Roku or now – via Amazon’s devices. This comes from a growing culture of “NOW“; rather than wait for a episode at a predefined hour, the preference is to watch a favorite series at a time, place – and now device of ones choosing. Figures estimate up to 6.5% of users have gone this route, with a large number of new users not signing up to cable TV in the first place. The only players who seem to have weathered this till date are premium services such as HBO who have ventured into original content creation, and providers offering content such as ESPN – the hallmark of live sports. Those who want to cut the cord have to end up dealing with numerous content providers – each offering their own services, billing solutions etc. To put together all the services that users like, ends up being a tedious and right now – and expensive proposition.

This opens the door for what can only be known as the Virtual Cable Operator – one which would get the blessings of the FCC proposal. Such an aggregator (could be Aereo) could bundle and offer such channels without investment into the underlying network infrastructure – offering a cost advantage as much as 20% as compared to current offerings. This trend is a familiar one in the Telco business – and cable companies better be ready for this. Right now they may be safe as long as ESPN doesn’t move that route – but with HBO, CBS etc all announcing their own services, I believe it is only a matter of time. While the primary impacts to cable has extensively been covered – there are a few other consequences, and opportunities that I would like to address.

The smaller channels (those who charge <30c to the cable operators) will experience a dramatically reduced audience. Currently there was a chance that someone would stop by while channel flipping – with an al la carte service – this pretty much disappears, and along with it advertising revenue. An easy analogy would be that of an app in an app store – app discovery (in this case channel discovery) becomes highly relevant. Another result is that each channel would be jockeying for space on the “screen” – whether a TV, tablet or phone. I can very well imagine a scenario of a clean slate design like Google on a TV, where based upon your personal interest you would be “recommended” programs to watch – question is who would control this experience…

Who could this be –  a TV vendor (a.k.a a Samsung – packaging channiels with the TV), an OEM (Rovio, Amazon etc.), a Telco or cable provider (if you can’t beat them – join ’em), or someone like Aereo? The field is wide open and the jury has yet to make a decision. One thing however is clear – the first with a winning proposition – including channels, pricing and excellent UI would be a very interesting company to invest in…..

Why Germany Dominates the U.S. in Innovation …. or does it?

“Germany dominates the US in Innovation” blared the headline from the HBR blog posted by Dan Breznitz who put across several points to illustrate where and how Germany was better than the US in these respects. As a person who has lived and experienced both sides of the pond I beg to differ. The article does incorporate several facts such as the strong manufacturing base and a good work ethos but in mixing innovation with inequality and other issues I think the author has missed the point, and I would like to elaborate why.

On government sponsored research – the author does extol the large benefits of government based applied research at institutes such as Fraunhofer. True, they are indeed great and have provided many an invention – perhaps the most widely known is the MP3 license. However, there are multiple efforts by the US government in the same direction; key difference being that they prefer to fund private firms to carry out the research on their behalf. Let us take the example of the Small Business Innovation Research and compare (all figures taken from their respective websites)

• Number of institutes/ firms funded
  • Fraunhofer: 66 institutes and research facilities around Germany
  • SBIR grants: Supporting 15000 small firms all around USA
• Number of people (engineers/ scientists) employed
  • Fraunhofer: 22,000 staff
  • SBIR grants: 400,000 scientists and researchers
• Funding
  • Fraunhofer: annual budget around 1.9 Billion Euro
  • SBIR: annual $2.5 Billion

As can be seen, one major program in the US is able to employ 20 times more people and support a whole lot more of private enterprise than focusing on a few big institutes. It is this private capital driven mentality that allowed NASA to downsize and opened the doors to many upstarts who are developing new technologies at a fraction of the cost of what it cost the government under NASA (see SpaceX). From my own experience, small and agile firms are able to innovate at an astonishing rate. Although government funded research is nice, they are typically trapped by layers of bureaucracy and inefficiency which limits their productivity.

The second argument around German leadership in manufacturing; if the American’s learnt one thing early was to franchise, scale and mass produce – all at the lowest cost. This was the key determining factor which led to a flight of capital to developing markets such as China and India which became the manufacturing hubs. In recent times as technology innovations such as automation and 3D printing are becoming more wide spread – we can see manufacturing come back (again to provide a cost advantage). What Germany is definitely good at is in manufacturing, but if you talk to the vaunted mittelstands’ there is a distinct fear that as China and India catch up, this technology edge is fast evaporating as the technology is copied (or sadly robbed due to poor control), localized and enhanced to suit the local market. The US took the other route to economic prosperity – focusing on services rather than manufacturing – which has directly led to the huge explosion in this industry, and the innovation around it (I am considering IT more as a service rather than a traditional manufacturing industry).

Yes – this does bring about inequality, because you end up with a high tier service class (who make the cool software etc), and a lower tier class who “serves” (the fast food server etc) and the absence of a strong “manufacturing” middle class as in Germany. But this is not tied to who is the better innovator, but the impact of the choice to focus on a particular aspect of the food chain i.e. services rather than manufacturing. Putting both in the same pot simply befuddles the discussion.

It is also true that Audi, BMW etc do sell well – but within high-tech you can also see that their connected car platforms are in partnership with the likes of Google and Apple (all US companies).  And if you want to talk about cars – the US is one of the few places where you can see the emergence of players such as Tesla to challenge the erstwhile giants.

What Germany trumps the US in is in its social benefits – working hard to ensure higher and more egalitarian employment and a fairer distribution of wealth.  This is part of a cultural ethos and mindset rather than an outcome of innovation – and definitely a model to be copied. However, pairing this as an outcome of innovation is far fetched.

In the end, I believe both countries have their own strengths and weaknesses and could do well to learn from each other; In innovation – if anything, Germany could take a piece out of the US system.

Partnering at large corporations – secrets to succeed!

In the era of consolidation following the economic crises, many firms turned towards a ‘protect the core’ approach. One often adopted approach was the slashing of R&D budgets and consequently a diminishing pipeline of new products. These now lean companies are facing a new problem – what do you do when your core itself is shrinking! This is being fueled by rapid technology changes which allows substitutes to enter the market, many with a compelling service offering, and many times free of cost!

Given an option to either make (i.e. reinstate the development that you just fired), buy (who knows if this is a hype or will work?) – many large firms are turning to the third, the partner option. At the highest level this would seem simple – there are no integration headaches, no large in-house development costs; but many are realizing this is not as easy as it seems. This is best illustrated by a simple analogy, ‘have you ever seen an elephant dance with a mouse?‘. Nonetheless, rather than give up on what is and should be a clear cornerstone of new products offerings to keep customers happy, large companies can make some concrete steps in this direction.

• Make sure that the partnering and venturing team has the full backing of the management. This simply boils down to the fact that partner products should always be evaluated on par with similar internally developed offerings – no step-motherly treatment here.
• Ensure that the team understands the partner mindset. At best this would also mean that a few members if not all have past experience in such an environment. It is quite difficult to understand the challenges, needs and wants of small firms if you haven’t quite done it yourself.
• Do not subject your partner to the internal functions, realpolitik and bureaucracy in your organization. Instead work hard to make your own internal processes lean, efficient and less cumbersome. Best way to look at it – treat the partner as you would a customer; keep him happy! It is amazing how beneficial this could be to other divisions in your organization as well.
• Invest in being able to effectively manage multiple partnerships. Managing the first 3 – 10 are easy, managing 50 is another story altogether. This does not imply additional layers of complexity – but recognize the need to be abreast of and manage partner needs. The Microsoft way – i.e. categorize partners based upon a few select KPI’s (e.g. revenue, strategic interest etc) and then accordingly assign resources to them is quite effective in this respect. Have to give them credit here – they do know how to manage (without strangling) their partners to a good extent.
• And with all partners – do not be afraid of failure; monitor the progress, recognize if and when it is failing – and move on. Do not throw good money after bad.
• Finally – be patient. The above points may sound simple but do need some time to fall in place and for you see tangible results. Give yourself the time, and make management aware of the same. Last thing you need is the fruits of your labor falling apart halfway through because unrealistic short-term expectations have been set!

Berlin – from humble beginnings to the innovation hub of Europe?

If the number of startup’s can be used as a proxy, then one could contend that Berlin is the place to be. Walk down Linienstraβe or any of the ‘start-up’ pockets and you will find the streets and cafes bustling with young entrepreneurs, computer programmers and the likes. There is this air of youthful exuberance and unbridled optimism that each small start-up is on to something big. Same goes with their youthful sponsors – many of whom have successfully launched and sold their first startup for millions of Euros and are eager to make this newly found wealth work for them by investing into new and hopefully promising enterprises.

However, if I look towards the type of start-ups then one does see a discernible pattern, one which I would like to ponder on a bit. Most of these firms, I daresay a significant majority are geared towards e-commerce, and among these a good number are those that imitate successful firms abroad. Nothing intrinsically wrong in this as well – if you read entrepreneurial literature it is full of statistics indicating that being able to copy (with modifications) a proven model overcomes many of the barriers to succeed. So you have everything from a Taxi app, to an e-Tailor and the likes.

That brings me to the multi-million dollar question – what about the high tech startup, has Germany lost its mojo here? Now for those who are in the unawares, Germany has one of the best and most respected small to mid size industry, the venerable ‘mittelstand’ which continues to be a major contributor to its economic success, not to forget also a significant employment avenue. Most of these are privately owned, operate in niche high-tech segments and are undisputed masters in this space. No wonder they are referred to as the hidden champions. These do not seek mass market, but high margins within a niche that they have carved. Rather than being followers – they seek out new avenues to dominate. In addition, Germany has a large number of well funded research institutes – the Max Planck institute, Heinrich Hertz institute among others, who continue to do pioneering work, pushing the boundaries on the lines of the peers in the US and abroad.

What is sadly lacking is a concerted attempt to be able to develop a strong competence into this type of startup, one that would take the mittelstand model and develop global powerhouses. Why should Berlin only be considered as the lesser brother of its Silicon Valley cousin, treated contemptuously for the fact that many of its successes have their origins in businesses abroad? Couldn’t it leverage the knowledge that is being developed at its universities, the high-tech skills learned at its mittelstand to foster and grow new business – which one day could be the next Siemens? If you talk with those who try – you commonly get the sorry headshake – it is easier to raise money for the next app then for a high tech product offering.

This would also be beneficial to these small businesses themselves which are now at the cross-roads of globalization. Some have adapted, but others struggle to adapt their technologies to a changing world. From this would emerge the second generation of the mittelstand, one that is not averse to the VC (many today operate solely with banks, wary – perhaps rightfully so at Venture Capital), can gainfully utilize the business savvy in Berlin to move abroad, with a product and service with a clear differentiation – and lead to a strategic advantage. On the other hand, it does require a different kind of VC – one that isn’t in the ‘get rich quick’ business, but recognizes the inherent long term value and is ready to invest.

Is this possible, can Berlin emerge from the shadows to stand on its own. For both, I think the answer is yes – it needs will, it does need vision – and it definitely does need all parties to recognize and respect the capability of the other. Then, Berlin (and well – Germany itself), could truly become the Innovation 2.0 capital of Europe.

Nokia & Microsoft – a failing strategy?

The past few weeks must have been a veritable headache for Stephen Elop and his crew at Nokia, one which would be shared with his former employers at Microsoft. After a lot of ballyhoo, and just one week before the iPhone 5 launch the much vaunted Window 8 phones were finally launched at the Nokia World event. This one was deemed important enough that the Microsoft head honcho, Steve Ballmer attended in person.

The result was a disappointment and the stock market made this amply clear by the end of day. What definitely did not help was Nokia resorting to cheap trickery to ‘enhance’ the feature set or the fact that they would generously dole out around $150 million to carriers to subsidize the device. No small wonder many analysts sent in a buy recommendation, with some trying to figure out the value of Nokia’s patent portfolio determining the lowest price at which they could snatch a bargain. But I do not want to dwell only on the negatives, but instead try to peer through a looking glass to try and gather what could or should they do to change this downward spiral.

Let us look at the bigger and far brighter picture. Although smart-phones adoption is increasing fast at the same time they form a tiny fraction of the total number of phones which stands at around 6 billion! For example in South Africa where I am currently based, only 14% of the total subscriber base own smart-phones. From a market opportunity, well there is certainly a huge untapped market to be explored rather than having to fight for market-share in a saturated environment. Agreed this market is primarily in the developing world – but one market which Nokia has keenly understood for over a decade. Nokia has honed its skills in being able to deliver feature phones at low prices and is a well loved brand in this community. Microsoft too is well known in these circles. Rather than aim for a head-on confrontation with Samsung and Apple in developed markets wouldn’t it be interesting to aim for a Windows 8 touch-screen device in the APAC and Africa regions? Nokia could conceivably energize its much vaunted logistics and R&D to create such a device in a global partnership with Microsoft. This would not be a retreat from a battle, but prepare and establish a strong presence in the smart-devices category in a market which is rapidly growing both in earning power as well as numbers. This would need to extend towards devices more than just smart-phones. The Windows 8 platform could offer just this leverage. You could then conceivable have a similar unified experience (a.k.a. Apple) across all your devices, which could make the whole deal a more compelling value proposition.

Of course, this is not a sure shot win. For starters Nokia needs to be doubly aggressive in this case facing the emerging threat of the Chinese with Android powered devices. I believe the whole hoopla with the developed markets is a sorry distraction in this respect. Microsoft may even need to revisit its Windows sales strategy and business models if it wants to be serious in the mobile business. None of these are easy decisions, some of which sit on top of large egos at the management at both companies. Perhaps it is time for them to learn from their teams in the developing world, realize and seek this opportunity and move swiftly to capture it before it is too late.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours