Fear and Loathing in Redmond

“Great occasions do not make heroes or cowards; they only unveil them to the eyes of men. Silently and imperceptibly, as we wake or sleep, we grow strong or weak; and at last some crisis shows us what we’ve become.”

Apple (AAPL) is an unusually difficult company to read. Most other companies telegraph their punches, but Apple does the opposite. It even misleads Apple watchers, so that when it releases a product it will be a surprise, in some way at least.

This strategy has served it well in recent years. Before any major Apple event, like for instance the World Wide Developer Conference (WWDC) that just took place, there is a rolling wave of pre-publicity that builds up like a tsunami approaching the shore line.

It’s became obvious to me at the start of the year that the Kindle was going to fail as a consumer device. The sales had not been bad - encouraging actually, with Amazon (AMZN) running out of stock over the holiday period. That should have been auspicious, but on New Year's Eve I ran into one of the entrepreneurs who founded Lexcycle, the company that introduced Stanza. I reported on our conversation in One Million Users: Is Stanza Killing The Kindle? and later reported on Amazon’s acquisition of Lexcycle. I’ve not changed my mind about the Kindle. Here are 10 reasons why.

1. Amazon is Amazon, not Apple (AAPL) or Nintendo (NTDOY.PK). I am impressed by Amazon. You might believe that Jeff Bezos was lucky to be first with the idea of the electronic book store, but I suspect that Amazon would now be dominant even if he’d been second or third with the idea. It’s hard to find fault with his implementation of it and the innovations he introduced. I am impressed that he scooped up the web music CD and video DVD business quickly. I salute the fact that he was ambitious and set up a clicks-and-mortar operation rather than just a web site. He was the first electronic retailer to establish an affiliate program - which pretty much drowned out the competition and his implementation of zShops was a great success. On a completely different business tack, I am deeply impressed with Amazon’s EC2 - its IT Infrastructure as a Service operation, and I expect it to continue to prosper. But none of that makes Amazon a credible device manufacturer. It isn’t one yet and it isn’t going to become one.
2. Jeff Bezos Suffers from iPod Envy. Don’t misunderstand me, the Kindle is excellently designed and I have no problem with reading books, even magazines and newspapers, on either of the current Kindles (the DX and the Kindle 2). I am particularly impressed with the attention paid to readability. I’m not alone either. It seems like most people who’ve touched the Kindle are impressed. Nevertheless I can’t help getting the feeling that Jeff Bezos suffers from iPod envy. That would be natural too in any entrepreneur, but it shouldn’t dilute the focus of the organization you run. Apple started with the iPod and built an end-to-end commercial ecosystem that linked the iPod to iTunes. Apple then doubled down and established something even more powerful with the iPhone and the App Store. Jeff Bezos would love to do something similar with the Kindle and, in my opinion, it’s blinding him to the fact that it won’t work. It would be really neat if the Kindle was the iPod of books, but it isn’t. It never will be.
3. The Kindle is Functionally Limited. The iPod allowed you to load and listen to the music you had already bought. You could also buy music from Apple, but actually few people bought much. For several years the average iTunes user was buying no more than the equivalent of a single CD a year through iTunes. The digital version of the music were, admittedly, a little cheaper than the CDs, but no-one bought an iPod to save money on buying music. If you wanted to save money on buying music, you stole it. Nobody is going to buy a Kindle to save money on buying books either. Yes, they are a little cheaper via the Kindle, but it’s not a meaningful incentive. The iPod developed into the iPhone and its functionality exploded. The Kindle has no such development path ahead of it. Its functionality is limited and if you increase its functionality it becomes what? A Netbook.
4. It’s the Channels, Stupid. To sell the Kindle, you need to get it into people’s hands. When was the last time you walked through Best Buy (BBY) and took a look at the Kindle. How about when you were strolling around Fry’s. Or maybe you saw a stack of them in Borders (BGP) or Barnes & Noble (BKS). No? How could that be? (It was a different story with the iPod.)
5. The Kindle is Pricey. Amazon just introduced the Kindle DX, at $489. You can get a Netbook cheaper than that. Unfortunately, Amazon hasn’t got the volumes to bring the prices down quickly, so the DX is going to stay at that kind of price for a while. The Kindle 2 is smaller and cheaper at $359, but I still think the price is too steep. Remember, you’re not getting a netbook here, you’re getting a book reader. It differentiates itself from other computing devices in two ways; it is better designed for reading (no question about that) and there is a whole series of things it cannot do, because it is not a laptop. Once you’ve bought the Kindle you have to start buying books to put on it.
6. The Kindle: A Device Too Far. The Kindle is yet another electronic device to carry around, which might get stolen, and which will inevitably run out of juice at an inconvenient moment. Amazon is betting that because some people are happy to carry a book with them they’ll be just as happy to carry a Kindle. Some may, but not many methinks. A book is cheap, but a Kindle is not, a book is self managing, but a Kindle is not. It’s a burden. It’s a device too far.
7. The Kindle has a Weak Commercial Ecosystem. Just go round an Apple store and take a look at all the add-on devices that you can buy for the iPod or iPhone - then think of the Apple Apps Store and the thousands of apps you can buy for the device. The commercial ecosystem is huge. Now go round a store that’s selling the Kindle - oops. Sorry, surf the web and you’ll find much less in terms of physical add-ons and nothing in terms of software - because the Kindle is a closed environment. Even if you think in terms of magazines, newspapers, etc. Amazon has not yet delivered a compelling set of magazine subscriptions to buy into - and, by the way, the Kindle is black and white only. Most magazines wont want to have the color sucked out of them.
8. The Kindle should be an Application not a Device. Kindle functionality is entirely doable in software, it was done in software, and when it was done in software (by Lexcycle) it acquired more users in the space of about 4 months than the Kindle had - and that was on the iPhone which doesn’t have an ideal reading screen. Portable video devices were sold for a while but were eclipsed by Microsoft (MSFT) and Apple providing the same functionality in software. And by the way, a soft Kindle would be able to do color - after all, it’s little more than a PDF reader and there are lots of such readers. Ultimately that’s what the Kindle is a hardware PDF reader that doesn’t do color.
9. Amazon Cannot Afford The Kindle. The Kindle is not friendly to the rest of the Amazon electronic book business model. The more that Amazon tries to differentiate its Kindle from software equivalents, the more it will have to embed functionality in the hardware - because software differentiation can easily be mimicked. However, the hardware is a constraint. Software competitors will naturally innovate to provide what the Kindle device cannot provide (color is just the obvious example.) This in turn will naturally generate competitive formats, which will in turn loosen Amazon’s grip on the electronic book business. The Kindle dislocates Amazon’s electronic book business.
10. The Kindle: A Bug Waiting To Be Squashed. Apple is rumored to be about to launch a tablet PC with 10 inch screen which will be priced somewhere between the iPhone and the Apple MacBook. It feels like a Kindle killer to me. But even if Apple doesn’t step in with such a device, the Netbook market will generate one. Ultimately, the Kindle is a goofy Netbook with limited functionality. It will be made obsolescent by millions of not so goofy Netbook or tablet devices.

Disclosure: No positions

Just as Apple (AAPL) was unable to keep a lid on the news of its iPhone before its official announcement, it hasn’t been able to completely quell the speculation surrounding its imminent media tablet. In its teleconference to discuss its most recent and very impressive quarterly results, Apple’s COO, Tim Cook, was derogatory about netbooks yet again. Apple is clearly positioning itself to produce “the device that the netbook wants to be, but clearly isn’t.”

I’ve just reviewed 10 Pointers To What Apple’s Netbook Will Be Like and right now I can’t disagree with anything suggested there. It seems pretty much on the mark. The new device will be a tablet, no keyboard laptop and the price point will fill the gap between the iPhone and the low end Apple laptop.

I said most of what needed to be said about Amazon’s (AMZN) Kindle with
One Million Users: Is Stanza Killing The Kindle? I’ll reiterate some of what I wrote then, in the light of recent events, but I’ll add to it. There are two points:

1) The Kindle is, by design and by definition, a niche device.

Companies avoid competition if they can and as much as they can. Publicly, they might praise the virtues of “the market”, but none of them wants to be in a fiercely competitive market. It makes for a tough life. Markets with few competitors are far easier to navigate and generally more rewarding. And it’s plain sailing, if you’re a monopoly.

Or is it?

The Bootleg Beatles

I think it was about 6 years ago that I went to "A Lark in the Park" in Hyde Park in London - a show that was an extension of the "Last Night of the Proms" via a huge screen, but also included a live performance in the park by none other than the Bootleg Beatles. The Bootleg Beatles, perhaps the best known of all tribute groups, provide a passable impersonation of the Beatles and their music. One of them looks like John, one looks like Paul, one looks like George and, let's face it, nobody looks like Ringo. Their live performance sounds very close to the original Beatles sound and they are genuinely entertaining. They don't come even close to the real thing, but that surprises nobody.

Before we break into 2009 and consider what the future may offer, it is worthwhile looking back to review the year that passed. So I’ll do that right now, in real time.

2008 was a signature year of change - and not just in politics and economics. The changes in technology and the technology market were many and various, and some were profound. Here are the ones that I suspect were the most important.

The announcement of Google (GOOG) Chrome preceded Google’s 10th birthday by a few days. Google Chrome, for those who don’t yet know, is Google’s new browser and it qualifies as an excellent birthday present to itself, even if it was delivered a few days early. Google’s entry into the browser market might not seem particularly important, given that Google often appears to put its toes in the water without actually going for a swim. Nevertheless, it is.

The importance of the browser has been all but forgotten since Microsoft (MSFT) crushed the life out of Netscape Navigator. Admittedly, the Netscape browser was reborn as FireFox, like a phoenix from the flames, and has taken a significant slice of the market. Apple has also grabbed a sliver of the market with Safari, with a little bit of help from the iPhone (AAPL). But neither of these efforts have disturbed the status quo much.

The valuation the stock market put on VMware (VMW) never made a great deal of sense. I wrote about this in November (The EMC Paradox) when the irrational exuberance of the market had driven VMware shares to over $120 and it’s value was approaching that of EMC (EMC), which owned and still owns 86% of the company. Since then EMC’s share price movements have reflected those of VMware, demonstrating the market belief that VMware constituted the dominant portion of the value of EMC. In terms of stock value, it surely did, but  in terms of business value I’m not sure that’s the case.

VMware is now, in my opinion, approaching a realistic valuation. The stock price tanked when Microsoft (MSFT) announced that it would be releasing a hypervisor of its own, Hyper-V, bundling it in with server versions of Windows. Anyone who believed that VMware wasn’t going to face hypervisor competition from Microsoft  was living in la-la land. Virtualization revolutionizes the OS market. (If you’re not sure what OS visualization is click here.) Microsoft was never going to stay out of this market.

Last week, Business Week published an article on Apple’s (AAPL) potential in the business market - making the point that business staff are frequently requesting Macs rather than PCs. This has moved beyond the marketing departments and graphical design shops, where Macs were always part of the scenery. Business workers are particularly covetous of Mac laptops, because they are both a computing device and a status symbol - especially the new razor thin MacBook Airs.

Playing Hard to Get

HP (HPQ) was intent on building a healthy consultancy division long before Mark Hurd took the helm. Even while it was having problems digesting Compaq, it was glancing with envy at IBM (IBM) Global Services, which has powered a good deal of IBM’s business in the past decade. HP spent years establishing its current capability and has performed creditably, given that it started from nowhere. Nevertheless, in “Big Consultancy League” it only occupies 5th place .

I had a briefing with Brocade (BRCD) soon after I wrote the article; The Server Vendors vs. Cisco: Is This A New Technology War?. Brocade was a little aggrieved that I chose to use Cisco’s Nexus 7000 switch to illustrate the idea that the network hardware vendors were now in a stronger strategic position than the traditional server vendors, in respect of corporate computing. With the Nexus 7000, Cisco (CSCO) was providing technology that runs an OS and manages the whole network, virtualizing the connections between servers. It is thus in the ideal position to manage service levels.

In such an environment servers can be viewed as “application execution resources” to be used as necessary - rather like micro-controllers in a PC. This is especially the case when you introduce dynamic virtualization into the environment, where new instances of virtual machines are created “on the fly”. (If you’re not sure what virtualization is click here.) When that happens, dynamic management of the bandwidth between servers is necessary.

To depict Apple’s (AAPL) extraordinary growth over the past 6 years as a "revival" is to understate the truth. Apple is not just revived, but energetic, ambitious and kicking ass. At no time in its history did Apple achieve the success or momentum that it now has. But how long is this likely to continue?

The Origins of Success

The answer is “yes” and “no”, as we shall see. And this question begs another, perhaps more important, question: How will VMware (VMW) develop its business model going forward? We’ll make a guess at this too.

Why VMware is like Netscape

In January Cisco Systems (CSCO) announced Nexus 7000, a major “rethink” of the corporate network switch. To be honest, it’s better not to think of the Nexus 7000 as a switch; a switch can be something you turn a light on with. Instead, think of it as a cage full of network blades that just happens to be the corporate network in a box. And by the way, it’s a bewilderingly fast network too. If you have a wide enough pipe into “the cloud”, it could download and distribute the whole Wikipedia in a hundredth of a second, or 100,000 movies in just over 6 minutes or the whole of the searchable Internet in 7.5 minutes.