Mobile Opportunity - News And Views from Google MO

The other day when I was writing about the fate of mobile apps (link), I mentioned one of the laws of technology strategy. It made me realize that although we in the industry talk about those laws all the time, I’ve never seen them all written down in one place. There are probably more than three laws, but these are my favorites. Please post a comment if you want to add some more.

Here we go, twenty years of industry experience boiled down to three lines:

1. An elegant business model paired with mediocre technology beats an elegant technology paired with a mediocre business model.

To put it another way, if you create a marvelous tech product that has no way of making money, you get a long and passionate entry on Wikipedia. If you create a lousy tech product that prints money, you get to be Bill Gates.

Windows is the best case study here, but this one has been proven over and over again in the history of the tech industry. But companies keep tripping over it because they’re often run by engineers who have been trained to value technical elegance as an end in itself.

Don’t get me wrong, elegance is great. The most wonderful tech companies are those that combine elegant products and great business models. But you must pay the bills or you don’t get to keep playing. And wads of money can buy a lot of patches and kludges.

2. Design for a need, not a desire.

A serial entrepreneur once expressed this to me nicely: “I focus on aspirin issues.” In other words, if someone has a serious enough problem that they feel pain, they’ll be much more likely to pay money for an answer. (I wish I could remember who told me that — I’d like to credit him by name.)

Very often tech companies will fall in love with a concept that is compelling to people in the company, but not to non-technologists. They’ll convince themselves that people will want it because, well, they ought to want it.

A related problem: A company will come up with a product that’s nice, but doesn’t really address an aspirin problem. You know you have this problem when someone in the company says that need a marketing campaign to explain to people why they should want the product. The really good products need marketing for visibility, not persuasion.

I think this is the underlying problem behind most failed web applications. They do something interesting, as opposed to something compelling.

What makes this whole problem especially tough is that you can’t just ask customers what they need. They aren’t engineers, they don’t understand what you could build. All they’ll ask you for is improvements on the products they already have today. What you have to do is get inside the customers’ heads, understand how they live, and figure out what you could do to improve their lives. That’s what the best product managers do.

3. Software designed for one platform usually fails on another.

We teach this one to ourselves every time the industry goes through a platform transition, and then we promptly forget it again:

A computing platform isn’t just a technology, it’s a mindset, with a huge set of unstated assumptions about customers and business practices attached to it. When you port software from one platform to another, you take those assumptions along with you, and usually they don’t fit.

This is why the software leaders in one generation of computing usually fail in the next generation. Check it out — which software products led in the DOS world? Lotus, WordPerfect, Ashton-Tate. Did any of them thrive in the Windows/Mac world? Nope.

Then did the software leaders in Windows/Mac — Adobe, Microsoft, Symantec, Intuit — dominate in the Internet? Nope, the new startups without the mental baggage dominated.

Which leads to an interesting question: Do you think the leaders of mobile Internet will be the same companies that led the PC Internet? Or is the next Adobe/Lotus/Google a little startup out there, rethinking what it means to be connected in a mobile setting?

Think about it.

Summary: The business of making native apps for mobile devices is dying, crushed by a fragmented market and restrictive business practices. The problems are so bad that the mobile web, despite its many technical drawbacks, is now a better way to deliver new functionality to mobiles. I think this will drive a rapid rise in mobile web development, largely replacing the mobile app business. This has huge implications for mobile operators, handset companies, developers, and users.

The decline of the mobile software industry

Mobile computing is different from PC computing.

For the last decade, that has been the fundamental rule of the mobile data industry. It was the central insight of Palm Computing’s “Zen of Palm” philosophy. Psion came up with similar ideas, and you can hear echoes of them from every other successful mobile computing firm: Mobile computers are used differently from PCs, and therefore must be designed differently.

We all assumed this also meant mobile devices needed a whole mobile-specific software stack, including an operating system and APIs designed specifically for mobility, and native third-party applications created from the ground up for mobile usage.

That’s what we all believe, but I’m starting to think we got it wrong.

Back in 1999 when I joined Palm, it seemed we had the whole mobile ecosystem nailed. The market was literally exploding, with the installed base of devices doubling every year, and an incredible range of creative and useful software popping up all over. In a 22-month period, the number of registered Palm developers increased from 3,000 to over 130,000. The PalmSource conference was swamped, with people spilling out into the halls, and David Pogue took center stage at the close of the conference to tell us how brilliant we all were.

It felt like we were at the leading edge of a revolution, but in hindsight it was more like the high water mark of a flash flood. In the years that followed, the energy and momentum gradually drained out of the mobile applications market.

The problem wasn’t just limited to Palm; the level of developer activity and creativity that we saw in the glory days of Palm OS hasn’t reappeared on any mobile platform since. In fact, as the market shifted from handhelds to smartphones, the situation for mobile app developers has become substantially worse.

That came home to me very forcefully a few days ago, when I got a call from Elia Freedman. Elia is CEO of Infinity Softworks, which makes vertical market software for mobile devices (tasks like real estate valuation and financial services). He was one of the leaders of the Palm software market, with a ten year history in mobile applications.

I eventually moved on from Palm, and Elia branched out into other platforms such as Blackberry. But we’ve kept in touch, and so he called recently to tell me that he had given up on his mobile applications business.

Elia gave me a long explanation of why. I can’t reproduce it word for word (I couldn’t write that fast), but I’ve summarized it with his permission here:

Two problems have caused a decline the mobile apps business over the last few years. First, the business has become tougher technologically. Second, marketing and sales have also become harder.

From the technical perspective, there are a couple of big issues. One is the proliferation of operating systems. Back in the late 1990s there were two platforms we had to worry about, Pocket PC and Palm OS. Symbian was there too, but it was in Europe and few people here were paying attention. Now there are at least ten platforms. Microsoft alone has several — two versions of Windows Mobile, Tablet PC, and so on. [Elia didn’t mention it, but the fragmentation of Java makes this situation even worse.]

I call it three million platforms with a hundred users each (link).

The second technical issue is certification. The walls are being formed around devices in ways they never were before. Now I have to certify with both the OS and with each carrier, and it costs me thousands of dollars. So my costs are through the roof. On top of that, the adoption rate of mobile applications has gone down. So I have to pay more to sell less.

Then there’s marketing. Here too there are two issues. The first is vertical marketing. Few mobile devices align with verticals, which makes it hard for a vertical application developer like us to partner with any particular device. For example, Palm even at its height had no more than 20% of real estate agents. To cover our development costs on 20% of target customer base, I had to charge more than the customers could pay. So I was forced to make my application work on more platforms, which pushed me back into the million platforms problem.

The other marketing problem is the disappearance of horizontal distribution. You used to have some resellers and free software sites on the web that promoted mobile shareware and commercial products at low or no charge. You could also work through the hardware vendors to get to customers. We were masters of this; at one point we were bundled on 85% of mobile computing devices. We had retail distribution too.

None of those avenues are available any more. Retail has gone away. The online resellers have gone from taking 20% of our revenue to taking 50-70%. The other day I went looking for the freeware sites where we used to promote, and they have disappeared. Hardware bundling has ended because carriers took that over and made it impossible for us to get on the device. Palm used to have a bonus CD and a flyer that they put in the box, where we could get promoted. The carriers shut down both of those. They do not care about vertical apps. It feels like they don’t want any apps at all.

You can read more of Elia’s commentary on his weblog (link).

Add it all up, and Elia can’t make money in mobile applications any more. As he told me, “Mike, it’s time for you to write the obituary for mobile apps.” More on that later.

Although it’s a very sad situation, if Elia’s experience were an isolated story I’d probably just chalk it up to bad luck on the part of a single developer. But it mirrors what I’ve been hearing from a lot of mobile app developers on a lot of different operating systems for some time now. The combination of splintering platforms, shrinking distribution channels, and rising costs is making it harder and harder for a mobile application developer to succeed. Rather than getting better, the situation is getting worse.

I’ve always had faith that eventually we would solve these problems. We’d get the right OS vendor paired with a handset maker who understood the situation and an operator who was willing to give up some control, and a mobile platform would take off again. Maybe not Palm OS, but on somebody’s platform we’d get it all right.

I don’t believe that any more. I think it’s too late.

The mistake we made

We told ourselves that the fundamental rule of our business was: Mobile is different. But we lost sight of an even more fundamental law that applies to any computing platform:

A platform that is technically flawed but has a good business model will always beat a platform that is elegant but has a poor business model.

Windows is the best example of inelegant tech paired with the right business model, but it has happened over and over again in the history of the tech world.

In the mobile world, what have we done? We created a series of elegant technology platforms optimized just for mobile computing. We figured out how to extend battery life, start up the system instantly, conserve precious wireless bandwidth, synchronize to computers all over the planet, and optimize the display of data on a tiny screen.

But we never figured out how to help developers make money. In fact, we paired our elegant platforms with a developer business model so deeply broken that it would take many years, and enormous political battles throughout the industry, to fix it — if it can ever be fixed at all.

Meanwhile, there is now an alternative platform for mobile developers. It’s horribly flawed technically, not at all optimized for mobile usage, and in fact was designed for a completely different form of computing. It would be hard to create a computing architecture more inappropriate for use over a cellular data network. But it has a business model that sweeps away all of the barriers in the mobile market. Mobile developers are starting to switch to it, a trickle that is soon going to grow. And this time I think the flash flood will last.

If you haven’t figured it out yet, I’m talking about the Web. I think Web applications are going to destroy most native app development for mobiles. Not because the Web is a better technology for mobile, but because it has a better business model.

Think about it: If you’re creating a website, you don’t have to get permission from a carrier. You don’t have to get anything certified by anyone. You don’t have to beg for placement on the deck, and you don’t have to pay half your revenue to a reseller. In fact, the operator, handset vendor, and OS vendor probably won’t even be aware that you exist. It’ll just be you and the user, communicating directly.

Until recently, a couple of barriers prevented this from working. The first was the absence of flat-rate data plans. They have been around for a while in the US, but in Europe they are only now appearing. Before flat-rate, users were very fearful of exploring the mobile web because they risked ending up with a thousand-Euro mobile bill. That fear is now receding. The second barrier was the extremely bad quality of mobile browsers. Many of them still stink, but the high quality of Apple’s iPhone browser, coupled with Nokia’s licensing of WebKit, points to a future in which most mobile browsers will be reasonably feature-complete. The market will force this — mobile companies how have to ship a full browser in order to keep up with Apple, and operators have to give full access to it.

There are still huge problems with web apps on mobile, of course. Mobile web apps don’t work when you’re out of coverage, they’re slow due to network latency, and they do not make efficient use of the wireless network. But I believe it will be easier to resolve or live with these technical drawbacks in the next few years than it will be to fix the fundamental structural and business problems in the native mobile app market.

In other words, app development on the mobile web sucks less than the alternative.

Here’s a chart to help explain the situation. Imagine that we’re giving a numerical score to a platform, rating its attractiveness to developers. Attractiveness is defined as the technical elegance of the platform multiplied by how easy it is for developers to make money from it. The attractiveness score for native mobile app development looks like this over time:

This is why mobile app developers are in trouble. Even though the base of smartphones has been growing, and the platforms themselves have become more powerful, the market barriers have been growing even faster. So attractiveness has been dropping.

Now add in mobile web development:

Based on what I’m hearing from mobile developers, the lines just crossed. The business advantages of mobile web development outweigh its technical limitations. More importantly, if you look at where the lines are going, the advantage of mobile web is going to grow rapidly in the future.

I’m not saying all native mobile development is dead. In fact, we’re about to see the release of Apple’s native development tools for the iPhone, and as Chris Dunphy just pointed out to me, they are sure to result in a surge of native development for that platform. But I think even a rapidly-growing base of iPhones can’t compare to the weight of the whole mobile phone market getting onto a consistent base of browsers.

What it all means

If you’re a mobile developer, you should consider stopping native app development and shifting to a mobile-optimized website. That’s what Elia did, and he said it’s amazing how much easier it is to get things done. Even mobile game developers, who you’d think would be the last to abandon native development, are looking at web distribution (link; thanks to Mike Rowehl for pointing it out).

See if you can create a dumbed-down version of your application that will run over the mobile web. If the answer is yes, do it. If the answer is no, try to figure out what technology changes would let you move to the web, and watch for those changes to happen.

There are exceptions to any rule, and I think it makes sense to keep doing native development if your app can’t work effectively over the web, and it’s a vertical application so popular that you can get about $50 or more in revenue per copy. In that situation, you probably have enough resources to stay native for the time being. But even you should be monitoring the situation to see when you can switch to the web, because it will cut your expenses.

If you’re a mobile customer, make sure your next smartphone has a fully functional browser that can display standard web pages. And get the best deal you can on a flat-rate data plan; you’ll need it.

If you’re an operator or a handset vendor, get used to life as a dumb pipe. By trying to control your customers and make sure you extract most of the revenue from mobile data, all you’ve done is drive developers to the Web, which is even harder to control. You could have had a middle ground in which you and mobile developers worked together to share the profits, but instead you’ve handed the game to the Google crowd.

Congratulations.

Oh, about that obituary…

In loving memory of the mobile applications business. Adoring child of Java, Psion, Palm OS and Windows Mobile; doting parent of Symbian, Access Linux Platform, and S60; constant companion of Handango and Motricity. Scared the crap out of Microsoft in 2000. Passed away from strangulation at the hands of the mobile industry in 2008. Awaiting resurrection as a web service in 2009. In lieu of flowers, the family asks that you make a donation to the Yahoo takeover defense fund.

There is so much happening in the Web world that I went into this year’s annual O’Reilly Web 2.0 event hoping it would be like Aladdin’s Cave of Wonders–full of bright shiny new companies that did amazing things, each more enticing than the last.

Instead, the conference was more like a United Nations conference, full of important people talking about important issues, but not a lot of surprise or dazzlement. The name “summit” really does fit. That’s not the fault of the folks at O’Reilly; their conference has just grown in stature so much that it attracts CEOs from huge companies as speakers. By definition those people are very careful about what they say, and don’t make major announcement at an industry conference.

So while it was interesting to see people like the CEO of AT&T, we didn’t necessarily learn a lot. But there were a couple of highlights worth passing along…

The full article is on the Rubicon Consulting web site, here. There’s no registration required. From a mobile perspective, the highlight (or lowlight) is a quote from VC Ram Shriram on what a mobile software company has to do in order to get funded.

The announcement of Amazon FPS made my whole week, on a lot of different levels. I’m excited about the service itself, I’m excited about what it means for the development of web applications, and I’m excited about what it’ll eventually do for the mobile data world.

Okay, I’m just excited.

About FPS. Before I talk about what it means, I should give a quick overview of what it is. FPS is a web service, meaning it’s a set of online APIs that the creator of a website or web application can use to perform tasks. What FPS does for you is billing — you can use it to accept payments for something you sell online. Basically, you transmit the customer’s info to Amazon, and they take care of the credit check, credit card processing, billing, and so on. They send you the money, less a percentage cut that they take.

That’s not at all revolutionary. PayPal and Google Checkout offer the same thing already. Amazon’s cut is about the same as PayPal — about 2% to 3% of your revenue, depending on the amount of business you do, plus 30 cents per transaction. Google is a tad cheaper, plus you get AdSense credits for using it.

(For more information on FPS, there are good articles here and here).

What impressed me about FPS is its flexibility. Amazon says you can set different payment terms for every customer, set up subscriptions and multiple payment schedules, manage a store in which you pass payments from a customer to your suppliers, set up either pre- or post-payment systems, and most importantly you can manage micropayments down to a couple of pennies per transactions (link).

The competing systems either don’t offer this at all, or do it badly. I think FPS is a really important change to the competitive situation in payment services. And, because the payment services are all available to any website, that means it’s an important change to the whole web platform.

New forms of online business. So far, e-commerce online has been limited mostly to selling things that we could already get through regular stores — books, clothing, software, etc. One of the main culprits for this was payments. The current credit card system, with its strong discouragement of small transactions, makes it very hard to sell anything priced below a few dollars online. I think the most interesting use of online commerce will be the creation of markets for things that we can’t buy through stores today. Most of those things are intellectual property of various sorts, and the natural market for them is a buck or less a copy. So the payment system is a big barrier.

I won’t recap my whole argument for minipayments; I wrote about it recently, and you can read it here. Minipayments have already changed the world in music, where Apple’s proprietary minipayment system in iTunes has revived the market for music singles, something that was virtually dead in stores. Another example: iStockPhoto has created a market for low-cost stock photography. By creating an easy system of practical minipayments, Amazon FPS will help to enable the creation of lots of iTunes and iStockPhoto equivalents for other products and forms of intellectual property. Think short stories, art, games, and probably a lot of other things we haven’t even thought of yet.

I know FPS isn’t perfect — for example, small payments have to be aggregated and then billed in a single larger transaction. But it advances the state of the art dramatically, and more importantly it challenges Google and PayPal to improve their own minipayment handling. That competitive dynamic should eventually result in a truly great minipayment mechanism online, no matter who makes it.

Amazon vs. Google: A contrast in strategies. I think Amazon’s approach to web services makes Google look bad. Both companies are taking on PayPal, but Google’s approach so far has been pure blunt force — duplicate PayPal’s features, underprice them a bit, and tie it to another Google product (you get AdSense credits for using Google Checkout). Let’s see…you compete by duplicating someone else’s features, underpricing, and tying back to your dominant product. Does that remind you of a certain company in Redmond?

In contrast, Amazon has been trying to find holes in the infrastructure that nobody has filled yet. Its storage and compute services provided very important infrastructure that helped accelerate the growth of Web 2.0 companies. Although its payment system is not as unique, the emphasis on minipayments is, and I think it too will play an important part in the online ecosystem.

Bottom line: Google is often copying, Amazon innovating. I’d say that I’m disappointed in Google, but actually given their size they would crush everyone else if they were also innovative. So maybe we should be grateful.

What will Amazon do next? Their pattern is clear — they’re picking out things that they know how to do well (because of their retail operation) and turning them into services for other developers. A logical next step would be if they offered developers the infrastructure needed to set up an online store — order tracking, support request tracking, inventory, displaying merchandise, etc. That would work with their other services, and would put them in a position to start draining business from eBay.

I’d also love to see them offer some sort of unified product and content discovery system. One of the things missing from the online ecosystem is an easy way to find goods and services that are for sale online, and comparison shop between them. You can use search for it, but it’s not very well organized, and comparisons are difficult. eBay kind of does that, but you have to be registered as one of their sellers, and eBay does the billing. I’d love to see a looser directory than eBay that doesn’t take the payments directly, but just points you to things you can buy.

That’s what I thought Google Base would evolve into, but Google hasn’t made the move yet, so there’s still time for Amazon to seize that territory.

What it means for mobile. You can probably guess what I’m going to say here. The operators consistently charge up to about 50% of revenue for any songs, games, or other content sold through their networks. The mobile software stores like Motricity and Handango charge about the same. Amazon, Google, and PayPal each take about 2-3% of revenue, and that cost is likely to decline due to competition. As the wireless Internet takes hold, how many users will be willing to pay 50% extra just for the pleasure of having a game appear on their Sprint or Verizon bill rather than their Amazon bill?

If an operator bit the bullet now and priced competitively, they might be able to hold onto about 10% of revenue in exchange for the greater convenience of running content purchases through the mobile bill. But a 50% cut is like waving a red flag in front of a bull. There’s no way Amazon and friends will be able to resist the temptation to target the mobile web. The question is not if, it’s when.

The name of the game is infrastructure. In an open, decentralized computing environment like the Web, the best way for a software company to succeed is to create a control point — to offer a piece of critical infrastructure that others need, and build a franchise around it.

Google understood that concept with search + advertising, and did well with maps, but has been remarkably inept at creating other strong points. I think that’s because, to be blunt, engineering PhDs don’t necessarily make the best business strategists. Google, if you want to go to the next level, ya got to hire business people who are as smart as your technical people. And you have to give them some authority.

Microsoft seems to get it, but is still trying to retrofit its applications into services rather than really thinking through what’s needed in an online ecosystem. Apple seems to understand, but so far hasn’t been interested in opening up its services to others (it could easily have turned iTunes into a content discovery and billing service, long before either Google or Amazon hit the market). Some other big Internet companies, like Yahoo, don’t seem to really understand yet that this is the competitive battleground of their future.

Amazon is the one major web company that seems to both understand the situation, and be able to consistently come up with good new services. They already have two strong points (computing services and storage), and payments looks to be the third. If some of the other players don’t wake up soon, Amazon’s going to end up in an extremely powerful position online.

Because of the cool toys, of course. But for me, there’s also something else: Making a difference in peoples’ lives.

I’m sure that sounds corny, and not everyone feels the way I do, but for me there’s something very compelling about the ability of technology done right to improve the lives of lots of people, in ways you don’t expect and can’t plan for. I got my first taste of that years ago, when I was a Mac software developer in the early days of desktop publishing. I was mostly creating PostScript fonts, which is a thoroughly commoditized process today but was difficult back then, before third party font-creation products were available.

There was a lot of demand for fonts, so I would go to Mac trade shows and sell the fonts from a booth, $30 or so a pop. I didn’t get rich, but it was fun and I learned a lot. One of the things I learned was that you have to take the work really seriously, even on something as trivial as fonts. A man walked up to me at one of the shows. He didn’t look like one of the technophiles there, just a normal guy in his 30s, someone you might run into at the gas station. He spoke with a slight southern accent.

“I like your fonts,” he said, and smiled.

“Thanks!” I said. One of the coolest things about those shows was that you got to talk to customers.

“Especially that one.” He pointed to a font that imitated calligraphy, lots of curves and soft angles. “When my niece died, we used it to make the engraving for the tombstone.”

I thanked him and expressed my condolences, as politely and gently as I could. But I was in shock the whole time. I thought my fonts were for throwaways, things like flyers or newsletters that people glanced at and then tossed. It was fun to make them, and a good learning experience, but I wasn’t expecting anyone to use them for anything serious. Certainly not as serious as saying goodbye to a loved one who died young.

What it taught me was that making a new enabling technology is a trust. You don’t know what people might do with it in their lives, and so you should always take it very seriously and make sure it really works the way you promise it will. Because chances are, in a world this big, someone will depend on it an awful lot.

That lesson came back to me a few weeks ago, when I saw a photo essay in the New York Times showing real-life people with the avatars they use to represent themselves in computer games (link; you can read about the underlying book and exhibition here). There were the examples I expected — the chunky geek guy who shows himself as a red-haired ninja girl, etc. But most of the avatars looked a lot like the people who made them — thinner maybe, or with better hair or bigger, uh, appendages. But quite recognizable.

And then there was the photo of Jason Rowe, a young man in his 30s who has muscular dystrophy (link). He’s in a wheelchair, with a breathing mask on, and a report by NPR said he can move his hands just enough to control a character in Star Wars Galaxies, which he plays about 80 hours a week (link).

His avatar is a huge husky guy in armor, waving politely at the viewer — something that you imagine might be difficult for the real-life Mr. Rowe. In all of the other pictures, you get the impression that the real person is saying to you, “here I am in real life, the avatar is my mask.” But Rowe’s avatar seems to say, “this is the real me over here where I can move around, don’t judge me by my physical shell.”

I’ve never met Jason, and I may be reading way too much into his picture. But if he’s not thinking that, I know there are a lot of other people on the Internet who are. I doubt the folks who wrote Galaxies or Warcraft or Second Life were expecting to have this sort of impact on peoples’ lives, but that’s what happens when you work in tech.

And Jason, thanks for posing for that picture. You reminded me what this industry is really about.