Monthly Archives: March 2016

Alphabet, Berkshire Hathaway, Google, Nest, Structure

Thoughts on Alphabet’s CEO struggles

We’ve had roughly two weeks now of fascinating insights into Nest specifically and Alphabet’s Other Bets in general, and I wanted to chime in on all this and revisit some of what I’ve written previously on the topic. For a quick primer on all that’s been going on, I suggest this brief reading list:

  • Google puts Boston Dynamics up for sale – Bloomberg article which suggests poor cultural fit, a lack of obvious routes to making money, and a general clampdown on financial responsibility at Alphabet companies
  • The Information’s lengthy article about Nest and Tony Fadell’s struggles there, which also mentioned the financial clampdown
  • Recode’s Mark Bergen writing about Alphabet’s broader CEO troubles
  • Another Mark Bergen piece about revenues at Nest and the two other moneymaking Other Bets (which happens to track pretty well with my estimates of these companies’s revenues here).

In three previous pieces, I wrote about Larry Page’s vision for Google as an emulator of the Berkshire Hathaway model, and then about the decision to turn Google into Alphabet, and subsequently Alphabet’s first set of financial results.

In the first of those pieces, I wrote these thoughts about why the Berkshire Hathaway model wasn’t appropriate for Google:

…the pieces of Google aren’t and can’t be independent in the way BH’s various businesses are, because many of them (including some of the largest, such as Android and YouTube) simply aren’t profitable in their own rights. Though the management of some of these bigger parts can be given a measure of autonomy, they can’t run anything like BH’s various subsidiaries can because they rely on the other parts of Google to stay afloat.

… if Page really is planning to build a conglomerate, that’s even worse news. For one thing, he’s absolutely the wrong guy to run it if he’s using Warren Buffett’s model as his ideal. Warren Buffett is, above all, a very shrewd investor, and Page’s major acquisitions have been anything but shrewd from a financial perspective.

Given what’s happened over the last few weeks, it’s becoming clear that even though Page really isn’t the right person to be running all this, Ruth Porat was brought in to offer exactly this kind of stricter oversight of the Other Bets. The challenge is that Google was never run this way, and so there’s a cultural clash there, which is only exacerbated in those parts where businesses were acquired and therefore brought their own distinct cultures. In some of the Other Bets, you now have a three-way culture clash, between the old Google culture, the new Porat-driven culture of financial discipline, and the mishmash of other cultures in acquisitions like Boston Dynamics, Nest, and Dropcam.

On balance, this tighter financial scrutiny is a good thing, and addresses some of those criticisms in my earlier pieces. In fact, in our 2016 predictions podcast, I made a somewhat out-there prediction that Alphabet would end up selling or spinning off at least one of its businesses in 2016 as a result of either poor fit or financial performance. Even I didn’t have that much confidence in that prediction, but it’s turned out to be accurate with the planned sale of Boston Dynamics. But none of that is to say that this is going to be painless for Alphabet or the individual Other Bets. It’s going to be a tough couple of years as this cultural clash works its way through.

Quick thoughts on Tony Fadell

Before I close, I wanted to just touch quickly on something I’ve hinted at on Twitter but haven’t really written about properly anywhere, and that’s Tony Fadell’s management style.

Much has been made of how Fadell’s style seems to emulate Steve Jobs’ style in many respects. The big difference, though, is that Steve Jobs always owned his brusque, rude style and never apologized for it (for better or worse). He recognized that his style wasn’t going to be popular, but believed it was still the right way to go even if people hated him for it. The difference with Fadell is that he seems to want to have his cake and eat it too – he wants to behave the way Jobs did but be loved as well. One of the strongest indicators of this is the way he seemed to recruit people to come to his defense following earlier critical articles (here and here) on his management style, and then retweeted their positive comments:Fadell tweetsThere’s nothing wrong with defending your management style if you believe it to be right, but there’s something disingenuous about embracing Steve Jobs’ abrasive style while also wanting to avoid the consequences. This was Steve Jobs’ approach to the same problem, as articulated by Jony Ive:

“I remember having a conversation with [Steve] and I was asking why it could have been perceived that in his critique of a piece of work he was a little harsh. We’d been working on this [project] and we’d put our heart and soul into this, and I was saying, ‘Couldn’t we … moderate the things we said?’

And he said, ‘Why?’ and I said, ‘ Because I care about the team.’ And he said this brutally, brilliantly insightful thing, which was, ’No Jony, you’re just really vain.’ He said, ‘You just want people to like you, and I’m surprised at you because I thought you really held the work up as the most important, not how you believed you were perceived by other people.’

I was terribly cross, because I knew he was right.”

Instagram, Twitter

Twitter and Instagram’s Communication Screwups

Note: both the Beyond Devices blog and Podcast are now available as a channel on Apple News, which is available if you’re using a device running iOS 9. Click on the button below to read this article there and follow the Beyond Devices channel.

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Today, hundreds of Instagram accounts were suddenly filled with panicked posts about a change to way the Instagram feed worked, which filled certain account holders with dread that their followers would no longer see their posts. In the previous few weeks, there were similar panics among Twitter users about two purported changes to that product: removal of the 140-character limit for tweets, and an algorithmic timeline similar to that being contemplated at Instagram. What’s striking about all three of these examples is that the companies arguably only have themselves to blame for the negative reaction, which could have been avoided if only they had communicated properly with users of their respective services.

In the case of Twitter’s supposed removal of the 140-character limit, reports started to surface over the first weekend in January that Twitter was considering a change, and it took a Twitter post (one that ironically embedded a sizable text document as an image) from Jack Dorsey to address the situation.  The problem was that Twitter had allowed a rumor about a possible change to get legs for several days before the company officially addressed it. Ironically, this month Dorsey finally announced that the company wouldn’t be raising the limit after all, but that just goes to show how powerful the user backlash was.

Twitter’s actual change – to an algorithmic timeline – also met with a significant user backlash, primarily from the sort of power users likely to pick up on news reports about the service and also the users most likely to care about such a change. In the end, Twitter better explained how the algorithmic timeline would work and – importantly – made clear that it could be turned off. When many users first experienced the new timeline a few days ago, they didn’t like it, but were able to turn it off. In the end, things weren’t nearly as bad as some users worried, but Twitter did itself a huge disservice by not explaining this better from the beginning.

And now we have Instagram’s equivalent moment – the company announced a few weeks ago that it would be introducing an algorithmic feed which would show the most “meaningful” posts first. However, it didn’t make clear exactly how this would work, and importantly didn’t specify whether users would be able to choose between this new feed and the current feed. As a result, and given Facebook’s history of making a similar change, many brands and creators on Instagram were understandably worried that their posts would suddenly become invisible to users. Then, at some point in the last 24 hours, a rumor (false, as it turns out) began to spread that the change would happen today. Hence, something like a game of what we Brits call Chinese Whispers and Americans call Telephone happened, and you had all those panicked posts on Instagram.

In all these cases, if the companies had just done three things, all the user backlash could have been avoided:

  • Communicate about the change before (or immediately after) rumors start
  • Make clear exactly what is planned, and when it will take effect
  • Specifically make clear that the changes will be optional rather than forced on users. (To be clear, we still don’t know if this will be the case on Instagram, but it absolutely should be).

Instead, you have overreaction by users, a huge backlash against something that may not even be happening (or may not be as bad as people fear), and a PR nightmare, all of which could have been avoided. I expect that to some extent any change to a major service that’s used by hundreds of millions of users will trigger some amount of panic, but in all three of these cases, the reaction has been much worse than it needed to be, and the companies only have themselves to blame. Nature and the Internet both abhor a vacuum, and when companies fail to communicate clearly, their users often fill in the gaps with worst-case scenarios, which serves no-one well.

 

AT&T, Net neutrality, Netflix, Verizon, Wireless

Why Netflix is Wrong to Throttle AT&T and Verizon Customers

Today, it emerged that Netflix has been throttling video streams for those customers which are using the AT&T and Verizon Wireless networks (but not T-Mobile and Sprint customers) to stream its content. From what we know so far, the carriers were unaware of this, and are understandably upset. Netflix’s justification for this partial throttling, according to a Wall Street Journal article, was that “historically those two companies [T-Mobile and Sprint] have had more consumer-friendly policies.” And the overly-simplistic value judgement implied by that quote gets at the heart of why this is wrong.

There are several issues here. Firstly, this treatment is discriminatory but not discriminating – what I mean by that is that the Netflix policy discriminates between networks but treats all users on each network the same, regardless of what data plan they’re actually on. For example, as of December 2015, 11% of AT&T’s smartphone customers are still on unlimited plans. Since December, AT&T has begun selling unlimited plans again to certain customers who take DirecTV and AT&T service. As such, over 1 in 10 AT&T customers have unlimited plans, and that number is growing, but Netflix’s policy takes no account of this. The same applies to Verizon customers. By definition, Netflix doesn’t know which plans users are on. Perhaps I’m one of those unlimited customers at Verizon, or I have a 30GB plan from AT&T, but I’m treated the same as if I’m on a 1GB plan regardless. At the same time, not all Sprint or T-Mobile customers are on unlimited plans either.

Netflix hasn’t been transparent here until it was called out, either with customers or with the carriers. That’s problematic for two reasons – users who aren’t aware have no control either, and Netflix should have given users a choice. The other problem is that users will have assumed degraded video was the fault of poor network performance, which negatively impacts perceptions of the carrier rather than Netflix itself when video is throttled.

Netflix’s justification in a hurriedly put out but opaque blog post is that customers don’t mind, but it has no way of knowing how users really feel, because they haven’t been aware. To be sure, some users are very concerned about data caps, and would choose overages. Simply giving users a choice would have solved the problem without the underhanded approach Netflix has taken. It’s uncharacteristic for a company that’s been so bullish about transparency and fair treatment (and been a huge proponent of net neutrality). Netflix’s current approach has many of the same shortcomings as the original implementation of T-Mobile’s BingeOn plan, which also throttled video without users’ permission. Deliberately degrading video performance without user knowledge or consent is wrong, no matter who does it.

That WSJ quote at the beginning sums up what’s really going on here – except that what Netflix really means is that some carriers have been less friendly to over-the-top video providers by metering bandwidth their customers use. This Netflix policy has very little to do with better serving customers and everything to do with better serving Netflix by getting people to watch more of its videos. If it really wanted to serve customers better, it would make this policy explicit, transparent, and opt-in.

Earnings, Payments, Q4 2015, Square

Solid Progress at Square

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Square (finally) reported its Q4 2015 results today, and they demonstrate solid progress on the key things that matter. For a very quick primer on the keys to Square’s long-term success, see the video embedded below. For more detailed earlier analysis, see this piece and this piece.


Here’s an update on some key areas where Square is making progress. As a reminder, the core transaction processing business has pretty much fixed margins – Square takes a roughly 3% cut of transaction value, and keeps around a third of that (or 1%) as gross profit:
Square fixed marginsSo, no matter how much Square grows this side of its business, its margins are capped according to standard payment industry rates. However, Square isn’t just sticking to this business, but instead seeks to build an ecosystem around it through software and data products, so far mostly Square Capital (loans to Square payments customers) and Caviar (restaurant services). That business is very highly profitable because it has few incremental costs, and has been growing rapidly:Square margins by segmentSquare software and data growthAnother positive indicator this quarter was the fact that Square’s renegotiated contract with Starbucks, which was previously a heavy loss maker, broke even in Q4. This deal, which was originally done to drive scale for Square, has always been a drag on the business, but now promises to be much less of one:Starbucks gross marginThat also now means that Square’s three smaller reporting segments are collectively profitable on a gross margin level too:Square three smaller segmentsTo be sure, Square is still loss making overall by every measure but gross margin, but projects to be Adjusted EBITDA positive in 2016 and to start generating margins sometime beyond that. This quarter’s results suggest it’s very much on track for that goal, although it’s still a long way off.