What made Apple the most valuable company on earth?  Their relentless focus on creating extraordinary customer experience unveils opportunities others miss.   They attack them using proprietary hardware and software embedded into elegant consumer products that ultimately disrupt long standing business models.

Because Steve Jobs told his biographer, Walter Isaacson that he’d finally “cracked TV” many think television is Apple’s next target.

Rupturing TV won’t be easy.  The current stake holders have money, motivation and know Apple’s MO.  You can just hear them whistling that Police classic:

Every breath you take
Every move you make
Every bond you break
Every step you take
I’ll be watching you

The Apple Rap Sheet

Competitors would describe Apple as a crafty conman who preys on unsuspecting industries with sexy hardware and then robs them blind.  Their rap sheet starts with shattering the recording industry’s album model.   Instead of paying for twelve songs to get one hit, iTunes let you just buy the hit.  In a decade, recorded music sales plummeted 55% from $14.6B to $6.3B.

Next they stole handset control and add-on applications revenue from mobile carriers with the iPhone and the App Store ecosystem.

There should be a warning label on all Apple products:  “Using this product may result in destruction of the current business model in your industry.”

Apple would argue all they want is to make today’s outdated TV experience better and user centered.  In their view, insanely great products deliver life-changing benefits:  a small cost for creating a better world.

Tell that to the broadcasters and cable company executives who see musicians riding tour buses 200 days a year to make up for lost recording earnings.  Trade in our Gulfstreams for tour buses?  Not on my watch.

Stunning Design is Not Enough

Apple will bring Bang and Olufsen styling to the flat panel then amp it up with SIRI search and voice control.  They’ll add FaceTime for video calls and unleash the IOS developer community to create gizmos we’ve never thought of and a few we’ll wonder how we lived without.

Though premium priced, AppleTV won’t be outrageously expensive.  Their smart iPad pricing demonstrates they know how to make profits and be competitive.  It’s a given the marketing will be minimalistic and leverage their “think different” brand.

But the above only makes AppleTV the best “media center” available.  The current TV add-ons such as the AppleTV “hockey puck”, Boxee and Slingbox deliver cool features but hardly a dramatic, new experience.  Besides, they’re relatively cheap accessories compared to a flat panel.

To really change TV, Apple or someone else, has to cross the tipping point that switches control from broadcasters and distributers to users:  See what you want, when you want and where you want.

The Sunset of Television:  When, How & Who But Not If

Zillions of cable, satellite and web channels already shattered the networks’ distribution monopoly.  TIVO clones let us time-shift when we watch as well as skip the 21 minutes of ads each hour.  On-demand, streaming and web connectivity is built into every new DVD player.

Content creation has simultaneously exploded.  Internet content such as Ted Talks and Kahn Academy compete head-to-head with Discovery Channel and PBS.  America’s Funniest Videos and YouTube’s most popular uploads are basically identical.  Sites like Xtranormal let anyone create animated content.

To further blur the playing field, content delivery specialists Hulu and Comcast are now producing original content.  Even the screen monopoly enjoyed by the family room TV set is dissolving.  It was nicked by the PC, gouged by cell phones and now slayed with tablets.

Chaos reigns. It’s easier to describe what’s happened than define where TV will land, how long the transition will take and who will win.

Apple’s Shrek Challenge

Apple held less than 5% of the PC market when it redefined music and later mobile.  Back then, pirates had the music industry on life support and mobile was fixated on Blackberry’s 24/7 email addiction with minimal Internet access.  Apple swelled to Shrek-like proportions with it’s success.

TV is in turmoil but growing.   Viewing increased 22 minutes more per month in 2011.  Healthy growth means that today’s players have money and see opportunity.  That doesn’t mean the incumbents can muster the technology, transform their business models and keep control.  It does mean they have plenty of incentive.

The size and dynamics of the TV market do not favor Apple.  The flat panel market is about a tenth of the size of mobile phones.  People didn’t trash their plasma panel for LED’s for the latest technology as can occur in mobile plus a family only needs one premium screen.  Last, while it’s a problem that can be solved, flat panels are large which would challenge Apple store inventory space requirements, transport, etc.

This piece assumes that Apple will try to crack TV with a flat panel.  Rather than speculate further on Apple’s entry, here are three  criteria that any competitor revolutionizing TV has to address.  By definition such a short the list is incomplete.  I invite your comments and ideas.

Three Criteria for a User Centered World

1. Supports quality content creation

At Pixar, Steve Jobs saw firsthand the difference between Hollywood’s creative talent and Silicon Valley’s technical wizards.  This distinction is critical and one technologists dismiss too quickly.

In tech, a proven path to success is incremental improvement.  Be early to market and iterate one’s way to success using frequent revisions and end user testing.  By doing so, technology gives us a richer pallet for creating, aggregating and distributing content.

But the skills for enlarging the pallet are different than those that use the pallet to craft an original movie or series.  Imagination, not engineering, drives captivating characters, unique settings and compelling story lines.  You can’t increment a TV series using half-finished shows.  The best in tech and art creation put in 10,000 hours of practice but art has a higher voodoo factor – the unknowns are greater than in tech.  Pilot audience ratings are far less predictive of Hollywood success than clickstream analysis at Google.    At Pixar, Jobs saw this first hand (see The One Man Steve Jobs Didn’t Try to Control).

It’s unlikely that Apple would directly delve into content creation though their relationship with Disney is unique and could open the door for interesting experimentation that might change the current model.

Who pays and produces content will evolve.  Hulu and Comcast’s toe dip into content creation, Ted Talks, etc. already point that way.  Perhaps we’ll even see crowd sourced funding or direct artist to viewer plays as some comedians are trying.

Advertising will continue to carry a majority of the load be it through subscriptions, one-time fees and perhaps basic services may be incorporated into devices just as General Motors incorporates OnStar collision service into cars.

Bottom line:  A TV without compelling content is virtually unplugged.

2. Enables anytime, anywhere viewing across “screens” regardless of size and location

HBO Go gives us a glimpse into the anytime, anywhere, any screen future.  HBO subscribers can stream programming to their phone, tablets and game consoles.  It has its quirks and hiccups but they’ll be sorted out soon enough.

All content will be delivered this way with payment schemes that offer aggregation by content types, producers, interests, etc.  This is pretty close to what Apple has already done with music and to a lesser degree, released movies and recent TV episodes.

Content ownership versus rental may also change.  To enable cross-device viewing, we’ll need more choices that fall between personal ownership and short term rental.  Plans mimicking today’s mobile phone family plans may emerge that allow parents to share and steer parentally controlled content across family devices.

Bottom line:  Apple’s ecosystem experience is a big plus but AppleTV won’t go big until it address offers a solution for all screens.

3. Expands the Experience

This is a tougher issue than it might sound.  The promise of interactive television has been stalled on the edge of take-off for twenty years.  The new 3D flat panels are not flying off store shelves.

That said, the IOS app developer universe will craft something really cool such as what I’ll call TweetTV.  With TweetTV , you watch and tweet your real-time reactions to a show that are synchronized in the cloud to appear when your friends reach the same point in that show, no matter when/where/how they watch the same show. You could host an asynchronous SuperBowl party complete with social betting on every play.

Assume there are thousands ideas like this, many better and some that could really stick once we leave today’s one-to-many broadcast model.

Another experience expansion target is the programming guide. Have you ever pulled into a hotel late at night and tried to navigate an on screen channel guide?  The experience screams that the distance between today’s onscreen program guides and internet search technology is at least a galaxy far, far away.  Surely Apple’s SIRI (and Google as well) can begin to head towards a better alternative.

This is where Apple has a competitive advantage.  Designing a complete user experience is in their DNA.    Software, hardware and service distinctions common at other firms are de minimis at Apple.  The potential of AppleTV combined with iCloud screams for apps that provide experiences across end points that start from users.

Bottom line:  This has always been the potential ace up Apple’s sleeve.

The Missing Link:  Can Tim Cook Lead Industry Disruption?

Steve Jobs brought a unique combination of passion and chutzpah that may truly be a once-in-a-generation phenomenon.  Tim Cook’s demonstrated brilliance at internal business execution was a perfect complement to Jobs’ iconoclastic passion.   The question is can Cook reach beyond Apple’s boundaries and lead business model innovation across a leery set of industry stakeholders.

Disruption is far easier to dissect and chronicle once after the fact.  We’ll have to wait and see.  Maybe Apple can crack TV but it’s still early in the second inning with no one on base.

This piece  offers a proven approach that will dramatically cut the deficit without cutting spending or raising taxes.  Interested?

Run the government as a business but not any old business. Certainly we wouldn’t want to run it like the airlines.  Who’s going to advocate that Wall Street take over the remaining parts of government they don’t already control.  No I say follow in the footsteps of Google.

Why Google?  Because it’s a business that fits the American dream of use now, pay never!

How can they do that?  Advertising.  Google (and Facebook, Twitter, etc.) is free because advertisers are endlessly willing to pay to get their products and services before our eyes.  The more popular the search term, the more money Google charges.

So let the Feds do what Google and Facebook already do and open the advertising spigot!  Put on your Don Draper suit and let’s slather advertising on government forms, buildings and yes, personnel.  Why should city buses be the only beneficiaries?  Total advertising spending is $500B a year with growth of between 4-5%.  It’s time the Feds got their fair share.

Google-ize America!

Let’s start with customs forms.  What better way to welcome one of the 60 million visitors into our economy than by putting detachable coupons for hotel, food and entertainment discounts on immigration forms?  Wouldn’t Marriott, McDonalds and Broadway want to reach them before anyone else does?  Is there a more American “Howdy”!

For those of us traveling, how about spicing up those TSA cards that we’ve all discovered after our luggage was inspected.  Your space has already been invaded so why not leave something more pleasant behind.  Put a “scratch and sniff” section on the notice suggesting perhaps a bit of Tide laundry detergent or Secret deodorant would tame that dirty laundry smell?

Then there’s paper currency.  With about $850B of paper money in circulation, couldn’t we make better use of the greenback for potential advertising space?  Isn’t it redundant to print “One” on the back of every dollar bill?    99₵ stores would kill for this space.  Take the Lincoln Memorial off the $5 and sell it to BankAmerica.  Based on low advertising cost of $.50 per thousand (CPM), currency advertising alone would raise just shy of half a billion.

Just as Google does with popular search terms, raise the rates for coveted high denomination bills.  Can you imagine Tiffany’s letting France’s Louis Vuitton grab the $100 dollar bill?  Newt Gingrich won’t have to hide next time he walks in to buy Callista a new bauble.

Advertising on your mobile phone is heralded as the next frontier so let’s have the Feds think out of the box. And I mean the Post Box.  With the largest civilian fleet of vehicles in the world covering 1.2B miles a year, this is the largest mobile display advertising play on the planet.  Start by selling just one panel on each truck.  Double down with two.

Google-ize America! will not discriminate or get sucked into today’s political controversy of class warfare.  Instead, think of poverty as a rapidly growing market.  Even with the new electronic “credit card” system for food stamps, there’s no reason not to let Tropicana and Minute Maid turn the sour taste of hardship into deficit reducing lemonade.  When food stamp buyers swipe their new electronic cards, let’s offer “did you forget” ads on checkout displays.

Another growth opportunity is prisons.  Is there any reason that orange jump suits have to be so boring?  Let’s go NASCAR and sell every inch of space to rehab programs, legal aid clinics, trade schools and of course, Smith and Wesson.

And why should PING just get access to Masters winner Bubba Watson’s golf visor?  Sell Obama’s for real money!  Heck, do the podium and backdrop as well!  Why can’t Hillary’s appearance be augmented with tasteful product placement fees from Coach handbags, Marc Jacobs and Donna Karan?

The list is unlimited.  Johnson & Johnson promos on birth certificates.  Tax forms sponsored by H&R Block.  eBay ads for discounted auction listings is a natural on bankruptcy filing forms.  Transform all those programmable interstate highway signs that lay fallow when there are no accidents or Amber Alerts into a revenue source for limited time offers.

We’ve got an untapped source of revenue bigger than the Keystone pipeline can handle.  Ads, Baby, Ads!

For those who think Google-ize America! is crass commercialism, they can opt out…for a fee.  Advertising free tax forms, passports, etc. will generate even more revenue.

Now I don’t want to turn our country over to advertising any more than it already is so no advertising would be allowed within 1,000 feet of any registered lobbyist or television station. Let’s keep them fair and balanced.

Digitization has dramatically changed our world.  From Apple’s retina display which packs 326 pixels in a square inch to encoded keys that let us into offices, breaking the world into finer and finer granules of 1’s and 0’s has changed our lives.

But for these devices to work they need a power source, logic software and most importantly a sensor.  Sensors provide the signal that defines the current state or change from it.  As computers shrink in size, the leading edge of innovation is shifting from the sensor itself to a rapidly expanding partnership between sensors and the software that figures out how to share and makes sense of our experiences.  This piece wades into this surging tide of digitizing experiences exploring the opportunities unleashed and where threats may linger.

This first piece is a toe dip with more to follow.  I invite you to contribute your thoughts as I begin with more questions than answers.

Visibility 2.0

One could think of the growing plethora of cameras in every city as an invasion of privacy.  They also provide a dramatic increase in visibility, at low cost and with a memory that aids in catching crooks ripping off folks at ATM’s, diagnosing traffic accident causes, etc.  Love ‘em or hate ‘em, the fact is we’re only adding more.

Cameras are fixed in place sensors.  There are also sensors in the streets and traffic signals triggering light changes.  Utilities and transportation systems rely on an array of sensors to signal location, alert security to the presence of toxins as well as the TSA flotilla of metal detectors, x-rays and yes, facial recognition.

Now add in the new wave: mobile sensors.  Every cell phone now has GPS so even if you’re not in a camera’s range, the likelihood someone can find you is high.  Do something worthy of attracting attention and don’t be surprised if someone hasn’t used their camera phone to record it.

Last week a JetBlue pilot became disruptive on a flight from New York to Las Vegas.  Passengers took him down and within a couple of hours after landing, the video was all over the Web.

Privacy fears compete with sensor technology advances.  Persistent visibility enables researchers to identify behavior patterns (and yes, profiles) that precede trouble to forewarn us.  Without sensors, we wouldn’t have advances such as non-invasive medicine.  Would you rather suffer the incision of exploratory surgery or have a fast and painless MRI or CT Scan?

Sensors are continually shrinking in size and power requirements.  The latest now sense from a greater distance.  Microsoft’s Kinect console detects body motion that enables game play without a keypad or joystick controller.   Build similar technology into an LCD project and you’ll be changing slides with a sweep of your hand from the front of the room.

When sensors combine networking with embedded intelligence they change some of our most familiar sensors such as thermostats.  The new NEST thermostat illustrates not only where sensors are heading but the challenges facing them.

A Thermostat that Thinks It’s More than That

One look at the NEST thermostat signals its Apple design roots (see photo at top of page).  The device itself is drop dead gorgeous compared to the plastic beige plastic circles and squares with which we’re all familiar.  Founded by the  Apple executive who used to be in charge of Apple’s iPod and iPhone teams, the NEST thermostat incorporates sensors that detect your presence.  When no one is home, it automatically turns down the temperature.

The NEST thermostat is also networked.  If you have more than one thermostat in your home, they talk to each other over WIFI.  Should you go on holiday and forget to adjust for that, you can do so through a mobile app or web-based application.  This is ideal for a frequent traveler or if you own a second home.

With embedded artificial intelligence software, NEST learns your living patterns and if enabled, adjusts heating and cooling based on your experience.  And that’s my point, the leading edge of sensors is moving from simple motion detectors that open super market doors to sophisticated systems that track, network and analyze our life experience over limitless time.

Smart But Smart Enough?

My household lifestyle has nearly melted the artificial intelligence inside our NEST thermostat since our patterns are more like fractals with seemingly random changes.  Just when NEST has us figured out, we break the pattern.

Part of the problem is that while our thermostat is centrally located, it is not in an area that we pass by frequently so it thinks we’re not here when we are.  Another issue is that despite having a wide viewing range, different rooms have different sun and wind exposure such that any single sensor, no matter how smart, is handicapped to heat or cool at an average.  An alternative would be innocuously shaped “sensor pebbles” that we could distribute throughout the house.  This would increase the sensing range and increase the data input.

Undoubtedly, the folks at NEST are way ahead of me as they comb through the data they have gathered from each thermostat sold.

Think of this for a moment.  Most of us grew up and have used thermostats that never reached beyond the home or office.  NEST has information on our settings, usage, when we change temperature (or don’t), etc.  Now correlate that with weather, public utility usage patterns, etc. and who knows what surprises are in store?  A big gating issue is making sense of the experience data captured.

Big Data Analytics

Software analytics will leverage networking to achieve the next level.  That’s what all the fuss about “Big Data” analytics is about.  When we begin to combine data from multiple sources, patterns emerge that are not visible from single sources.

Imagine combining point of sale data with facial recognition, affinity networks such as airline mileage or supermarket clubs, weather, demographic and GPS.  Retailers such as Target have already figured out which of their customers are in the last trimester of their pregnancy by analyzing their purchasing behavior and shortly will be able to tell (let’s assume with your permission) where you are in their stores.

That’s what makes the work of MIT’s Sandy Pentland so intriguing.

A Badge that Blabs About You

In The New Science of Building Great Teams (Harvard Business Review, April 2012), Pentland describes a study using electronic badges that collected behavior on individuals’ voice tone, body language, whom they talked to, how frequently and more.  In their seventh version, the badges capture 100 data points a minute yet is no more intrusive than most corporate IDs.  In sum, the badges quickly become invisible and don’t appear to alter people’s behavior.

Pentland’s study weaves technology and sociology into fascinating insights.  His data demonstrates that patterns of communication are not only critical to success but as significant as factors such as individual intelligence, personality, skill and the substance of discussions combined. He’s identified productive team data signatures that are so consistent he can predict success without ever meeting the team.  It’s a worthy read that further illustrates the potential that digitizing experience offers.

Sensoring or Censoring?

Every new technology brings with it opportunities and concerns.  Let’s assume that electronic badges or NEST technologies shrink in size and power requirements, while increasing in computational strength and networking.  Let’s further assume that sensing from a distance and connecting wirelessly continues to improve as demonstrated by Microsoft’s Kinect gaming interface and Nike’s FIT athletic sensor, respectively.   And of course, Big Data analytics continue to drive forward.

What emerges is a digitization of experience that goes far beyond what IBM refers to as the Internet of Things.  IBM’s terminology suggests a networked world of fixed sensors such as traffic signals that adapt for weather or water main breaks based on networked sensors.  No doubt there are benefits to found in operating cost savings, preventive maintenance and emergency response.

But the implications of digitized experience leaves the Internet of Things in the dust.  Just as electronic digitization enabled us to control and manipulate visual elements to “Photoshop” pictures and create dazzling special effects in the movies, digitizing experience opens the door to better understanding and improving human experience.

For example, what might happen if Pentland’s  post experiment analysis was transformed into a real time display of communication efficiency in meetings or web conferences?  Think of it as bio-feedback for group discussions and team leaders.  It offers the potential to reduce the time-to-detect and time-to-correct a lousy meeting.

Now record this data over the life of the team or duration of the project/problem.  Then add big data analytics and consider the potential for leaders to track and analyze communication effectiveness over time.  Since tough problems and good teams take time to solve and groom respectively, we could identify who are the best team leaders, players and settings relative to specific situations.

Recognize that all of what’s described above we do today through observation and what designers refer to as ethnography.  The difference is these are usually one-off studies and the data analysis depends on the researcher.  With digitized experience, the same intelligence that has made Google search so valuable can be applied to knowledge work.

If we take to heart that our global economy is based on knowledge, then how effectively we process knowledge in teams, across cultural and technical boundaries unleashes dramatic potential.

Balancing Opportunity with Caution

Without question, the technology raises some fears as well as opportunities.  Without being dismissive, let’s stipulate that fear of misuse is part of every technological shift.  Some concerns deserve our full attention while others just reflect the anxiety of change.

Building on my above speculation, it’s not crazy to suggest that combing NEST with Pentland’s badge technology to build a real-time bullshit detector.  That sure sounds like big brother if your employer does it to you but how would you feel about using the same tool in a critical acquisition discussion?  Imagine what knowing when the people across are bluffing could do?

If only one party had access to the information it could be wielded for serious advantage.  Alternatively if both parties had the technology, it could take bullshit off the table.   Now apply it to the upcoming electoral season – just use your own imagination of what doors that might open!

Of course the above is speculative.  What is not is how fast the new world of digitized experience is approaching.

I begin most mornings reading national newspapers online.  What looked like just another story about crowdsourcing on the Internet turned out to be one of the most creative and humanly compelling change strategies I’ve ever seen.

Ironically, I’ve been working on a piece on the importance of individual heroics in our flat and networked world.  Jason Russell’s film KONY 2012 takes that message and breathes far more life into the importance of the subject than where my words were heading.

Russell’s quest is to raise the crimes of African war lord Joseph Kony on innocent children into our daily conversation.  It’s not a liberal sob story.  It’s a brilliant saga that’s 27 minutes long and totally riveting.  How often do you get to see Oklahoma Republican Jim Inhofe and George Clooney on the same side of the table?

Stop reading and click the above link now.  I’m serious.  Pencils down — No reading until you watch KONY 2012.  What follows makes marginal sense until you do.

Anatomy of Heroics

Russell’s film captures the essence why heroic acts inspire and hold us accountable to our highest self.

1. He demands our attention for higher purpose and moral values
2. Based on a personal commitment, he has fought uphill for over nine years
3. Actions, past and projected, bristle with initiative and creativity
4. Russell’s prowess is obvious – as a film maker, story teller and change strategist

Kony 2012 is a heroic story that invites viewers to step up.  That’s why heroics are so important.  It is so easy to slip into the middle of life’s river and drift with familiar routines.  Heroic actions remind us that not only can we do better; we have an obligation to try.

Russell and his colleagues actions show us how it’s not super-heroes, but the aggregation of small and large heroics that morphs the impossible into reality.

Anatomy of Russell’s Change Strategy

The  glean from the individual links that form Russell’s overall change strategy are strikingly thoughtful and relevant for any heroic leader:

1. Increasing awareness builds pressure for change: When Kony’s horrific and invisible killing becomes omnipresent, people find it much easier to act
2. Use technology to tap human compassion and societal intelligence across political, social and geographic boundaries: social networking community leads to lobbying and a radio-based early warning system to thwart Kony’s plundering of villages
3. Use universal human aspirations to make not acting unacceptable: Russell’s wishes for his son’s future is the story’s backdrop
4. Harness the time and passion of younger generations to capture the hearts and dollars of current power brokers: Do you have more discretionary time than a high school or college student?
5. Say what experience would never allow through the mouths of innocents: “It’s better to die than stay on earth” says Jacob, a young African who escaped Kony’s grasp
6. Demonstrate credibility through small successes:  Russell shows how Invisible Children has turned awareness of Kony’s crimes into progress to arrest him
7. Make sharing your passion easy: Invisible Children’s kit for supporters includes two bracelets: one for you and one to give a friend.

The apex of Russell’s strategy is a call to action entitled “Cover the Night”.  The idea is during the night of April 20, 2012 to paper the world with “Kony 2012” posters, bumper stickers, web objects, etc. such that when people wake up on Saturday morning, they can’t help but ask, “What is Kony 2012”?  It’s a brilliant twist on the campaign signage that dominates our political season.

Closing

As of this morning, the Invisible Children’s Facebook page had 2.5 million likes.  That’s impressive yet with Facebook’s total membership over 650 million, it represents less than 1%.   I tried to purchase the Action Kit from Invisible Children’s website and was disappointed (and pleased) that it was sold out.  Bracelets are on their way.

I got up this morning intending to finish my piece on the imports of heroics.  Jason Russell did a much better job.

A firm’s business strategy reflects its leaders.  Under Steve Jobs, Apple differentiated itself through elegantly simple design.  This piece explores Apple’s business strategy in the first full year of Tim Cook’s leadership.

Already, we can see Tim Cook is changing Apple.  In contrast to Jobs’ rare appearance before the press and analysts, Cook took the opportunity to discuss Apple’s business strategy at the recent Goldman Sachs’ Technology Conference.  When questioned about the future of the iPhone, Apple’s largest revenue stream, Cook underscored that smartphones only represent 9% of the global handset market and even within smartphones, 3 out of 4 customers bought something other than Apple.

Apple manufacturing partners and practices have also come into the spotlight following the unprecedented disclosure of their supply chain partner audit combined with the hiring of a third party employment practices review agency.  Most recently, Apple invited ABC Nightline into their primary supplier Foxconn.  In increasing increments, Cook is making Apple more accessible.

In the past, his operational expertise has been a perfect counter to Jobs’ legendary product instincts and will serve Apple this year.  What we won’t learn in 2012 is whether Cook can plant the seeds for a new platform in the years beyond.  It’s a no-brainer to assume Apple Labs is cooking away.  There just won’t be much evidence in 2012.

What we can expect is that Apple will continue to get paid for the integrated value they deliver.  Apple products initially cost more than most competitors.  They win by tightly integrating hardware and software for a superior user experience.  Many would argue Apple’s integration provides a lower aggregate cost as well.

Apple 2012

2012 will be dominated by the following four themes, all targeted at cementing users and developers into Apple’s lush, walled garden of peerless user experience:

1. Scaling all operations (manufacturing, retail, Internet) to meet global demand
2. Rapid expansion in China and developing economies
3. New product form factor:  Apple TV
4. Apple’s iCash Mountain Problem

1. Scaling:  Flawlessly Synchronizing Billions of Transactions

With revenue greater than $46B in the fourth calendar quarter of 2011, any conversation about Apple strategy has to begin with the challenges of scale.  The iPhone and iPad have plenty of runway left for growth as does Apple retail, but as numbers grow, so do the consequences of the smallest hiccup.

Meeting demand for hundreds of millions of annual units requires flawless execution across the supply chain, distribution and with their manufacturing partners.   We’ve become so accustomed to high tech products that it’s easy to forget what a shortage of a single component can do.  When floods struck Thailand last fall, it disrupted disk drive supplies for nearly six months.

Last year, Apple sold 156 million IOS-based devices (iPhone, iPad and iTouch) which is more than the 122 million Macs sold since its 1984 introduction.  In Tim Cook’s own words, “the trajectory is off the charts.”

Geometric growth plays to Cook’s strengths.  In fact, if there’s a hallmark to Apple’s business strategy in 2012, it begins with leveraging his unique competencies.

2. China…and other developing countries

Any conversation about scaling quickly turns to Apple’s China opportunity.  Focusing just on iPhone, Apple currently sells it exclusively through China Unicom (196 million subscribers).  This is slightly less than the combined subscriber base of Verizon Wireless and AT&T.  But in a country of billions, it doesn’t compare to China Mobile’s 616 million subscribers. It’s no surprise that Cook visited China Mobile this past June.

As important as Apple’s innovation machine has been for the developed world, 2012 success in China and emerging economies will be fed by incremental product improvements.  They may be combined with creative cost and/or pricing strategies that subsidize purchasing much like Verizon and AT&T has for U.S. iPhone customers.  With rapidly growing middle classes, one might consider market access more important in the developing world than ground-breaking innovation.

And the above doesn’t account for iPad or iTouch.  Apple’s Asia Pacific sales (minus Japan) grew approximately 200% last year and account for 20% of Apple’s total revenue.  Add in an expanded global retail presence and there’s not much that stands in the way of superior revenue growth in 2012.

3. Next Platform Form Factor:  Apple TV

The speculation regarding an Apple “next generation television” has evolved significantly.  According to Cook, the current Apple TV hockey puck has been a “hobby” product.  Shortly before his death, Steve Jobs told biographer Walter Isaacson that he had finally figured out TV.  True or false, there are several reasons why flat screen TV’s make sense for Apple:

1. Market size & headroom for premium pricing: The global market for flat screen displays is over 77 million units and grew 15% last year.  Apple needs large markets like this to move the needle even if they only appeal to the high end of the market.
2. Platform expansion via form factor: Just as the iPad is essentially a larger iPhone, an Apple flat screen will enlarge the form factor again.  It will leverage technologies such as Siri for a new control interface.  Facetime will evolve into home video conferencing, likely enhanced by motion sensing technology that automatically follows action. As connection speeds improve, iCloud based recording (currently limited by upload speeds) and playback (available today) will be incorporated.
3. Apple ecosystem lock-in: Just as Frito-Lay thinks about the “share of stomach” it captures with drinks and snack foods, Apple seeks “share of screens” be it on Mac, iPod, iPhone or iPad.  Just as salty snacks drive you to drink more soda, Apple TV will leverage device interoperability via iCloud.  Apple TV widens the moat that keeps competitors away while fertilizing the soil in land of Apple.
4. Innovation Bluebird: Borrowing from Donald Rumsfield, the biggest unknowable that we know today is that Apple’s legions of independent apps developers will provide something surprising.  The causal gaming phenomena of Angry Birds didn’t exist before mobile apps. TV will offer a new and much larger landscape in which to play.
5. Hardware opportunity: As important as iTunes, mobile advertising and iCloud may be in Apple’s future, they currently constitute a thin sliver of overall revenue and profits.  For now, the route to growth remains hardware.

But Apple TV will face challenges.  First are the flat screen incumbents.  LG, Samsung and Visio have not been sleeping and will quickly counter Apple’s moves at lower price points.  They will most likely scale Google’s Android interface; perhaps a long shot might be Microsoft.  Assuming Apple pushes Facetime as a family video conferencing play, you can bet that competitors will counter with a similar feature based on Google Voice or Microsoft’s Skype and Kinect technology.

The second and more troublesome foe will be current content producers and distributors.  After watching Apple iTunes disrupt music distribution, pricing and margins, movie and TV studios as well as cable, satellite and phone companies will be very wary.  If you need evidence of their strength, just look at Neflix’s recent struggles (see Netflix at a Crossroad).

Can Apple drive the same disruption through television that they did in mobile phones?  Without question, Apple will make good money but we won’t know if it’s only a good business or a more serious disruption in 2012.

4. Apple’s iCash Mountain Problem

Do you recall the mountain of cash Donald Duck’s rich uncle Scrooge McDuck possessed?   Tim Cook has a $100B mountain and it’s rapidly growing.  Far beyond what’s needed for a rainy day, Cook cannot continue to ignore it.

Declaring a special dividend to return some to stockholders is simple but hardly strategic.  Technology acquisitions like the 2008 acquisition of P.A. Semi which brought the iPad’s ARM processor in-house will continue, but they don’t dent the bank.

The current maelstrom of patent lawsuits in the mobile space suggests that Apple will ultimately use some to settle issues much as Google did with its acquisition of Motorola Mobility.

Similarly some will go to addressing market expansion issues such as the current licensing spat between Apple and China’s Proview regarding use of the iPad trade name in China.  Or Apple could follow Amazon’s Kindle strategy and subsidize hardware pricing to lower entry price.

The problem is none of these strategies drain more cash than is coming in. The obvious next question is what if Apple pursued a large acquisition?  This raises three significant challenges, at a minimum:

1. Regulatory:  As the most valuable company on earth, regulators in all geographies would scrutinize any deal for monopoly concerns.  It’s hard to think of a large technology acquisition that wouldn’t cause concern.
2. Cultural fit: Strong cultures exclude rather than include.  Add in Apple’s penchant for secrecy and try to name an asset of scale that would naturally fit in the Apple world.  I can’t.
3. Assimilation capability: Companies such as Cisco that have a track record of acquiring and assimilating large entities; Apple has never done so.  Starting with a big bite would be challenging.

Having said this, Apple could acquire an infrastructure capability outside of traditional tech that enriched the breadth of Apple’s ecosystem.  For example, what if Apple acquired a financial services player?   Blend Apple’s mobility hardware/software, advertising and iTunes to offer an electronic wallet with Apple’s legendary ease of use?

Apple could buy a “no-name” bank and quietly use their existing financial infrastructure to leverage its 200 million iTunes customers and software expertise into an Apple iWallet.  In the midrange, they could look at Intuit ($17B market capitalization) though that might raise regulatory flags.  Alternatively, they could go big, buy Mastercard ($50B market capitalization).

Stepping outside the technology arena would reduce regulatory monopoly concerns while leveraging Apple’s technology, branding and retail expertise.  Going big doesn’t directly address the cultural fit and assimilation issues but neither does it require much in the near term.  Mastercard is a well-run, growing firm.

Please take above for what it is: an example to illustrate a strategic choice versus a fully vetted alternative.

Summary

Apple’s business strategy 2012 has three elements:

1. Leveraging momentum with scale
2. Expanding the walled garden geography and IOS foundation
3. Investing in new directions:  new product platform innovation and cash

If we were playing poker, the first two elements are cards that are face up.  The third is not.  And that’s the bet we’re waiting to see.

Steve Jobs was not a quiet presence.  In Walter Isaacson’s biography, colleagues described how one could go from exalted hero to useless zero overnight.  Love him or hate him, Jobs inserted himself relentlessly – with one notable exception.

Pixar’s John Lasseter stands out as the one person who Jobs consistently granted far more space. To learn from Jobs’ genius, it’s worth asking why?

The baseline explanation is that Jobs stood back because he didn’t know movie making as he understood computing.   Fair, but Jobs was not shy in his time as CEO of Pixar.

Pixar’s Not Perfect According to Jobs

When he purchased the company from legendary director George Lucas, it was primarily a digital rendering company with unique hardware and software.  Jobs bought it because he was into computer graphics.

There was a sideline business brewing inside Pixar: a small animation group headed by Lasseter.  Lucas warned Jobs in their one and only discussion, “You know, these guys are hell-bent on animation.”

For a while, Jobs let the co-founders, Ed Catmull and Alvy Ray Smith, run Pixar without much interference.  That didn’t last long.  Job’s personality and penchant for control weighed in.  For example, he insisted using his favorite designer, Hartmut Esslinger, to shape the hardware despite protests about his fees.  He later pushed Pixar to sell to the mass market including opening sales offices in major cities.

Before long, Smith and Jobs were going at it.  Isaacson describes two classic confrontations:

When Smith was feeling attacked or confrontational, he tended to lapse into his southwestern accent. Jobs started parodying it in his sarcastic style. “It was a bully tactic, and I exploded with everything I had,” Smith recalled. “Before I knew it, we were in each other’s faces—about three inches apart—screaming at each other.”

Jobs was very possessive about control of the whiteboard during a meeting, so the burly Smith pushed past him and started writing on it. “You can’t do that!” Jobs shouted. “What?” responded Smith, “I can’t write on your whiteboard? Bullshit.” At that point Jobs stormed out.”

The pARTnership

As the paragraph heading implies, the Jobs-Lasseter partnership starts with art.

The first thing that differentiates Lasseter from Catmull and Smith is he’s an artist.  Isaacson describes Lasseter as having a drive for perfection that rivals Jobs.

Jobs was energized by artistic creativity, particularly when it was connected to technology.  In a recent panel discussion at the San Jose Churchill Club, many of those who worked with Jobs also described him as an artist.

Lasseter’s world view as a movie maker paralleled Jobs’ approach to creating products.  When asked how he decides whether a movie idea is worth pursuing, Lasseter told the New York Times that he looks for heart first and then setting.  “The heart has to be there from the beginning.  You can’t punch up the heart”.

Until Jobs, computers were built by engineers and based on highly efficient yet heartless algorithms.  Consider the day that Bill Atkinson, a brilliant engineer on the original MacIntosh, raced in excited that he had figured out how to draw rectangles.  Keep in mind that this was when character only, green screens dominated computing.

Everyone was excited, except Jobs. Jobs liked the circles and ovals but wanted the rectangles to have rounded corners.   Atkinson pushed back explaining that he was trying to keep the code lean.  Jobs jumped up and pointed out that rectangles with rounded corners were everywhere.   Jobs finally won him over as he pointed out that even no parking signs were “rounded recs” as they came to be called.

Jobs’ artistry lured him deep into every new product program.  Jobs drove Apple’s design philosophy far beyond the familiar minimalist exteriors.  Jobs cared as much about areas that customers never see such as circuit board layouts or extrusion molds.  Jobs wanted to go beyond finding a product’s heart; he wanted to grab its soul.

Lasseter wants to understand a story’s setting before making a movie because you can’t pick a story up and move it to a different world with different characters.  Nemo lives in the sea, Cars on the road and Up! in the sky.  The setting has to be someplace in which Lasseter would love to spend time.

For Jobs, the setting was both critical and consistent:  the individual.  From the iconic Superbowl ad that declared “why 1984 won’t be like 1984” to the “Think Different” campaign adorned with famous faces such as Martin Luther King, Jobs put himself in the individual user’s shoes.  That’s why Apple products are normally brought into the corporate world by folks who own them and not the IT Department.

Storytelling

Lasseter tells stories for a living.  Unbounded by reality boundaries of traditional cameras yet infused with all the capabilities of modern computer technology, Lasseter’s Up! lifts an old man’s home to the heavens with a bunch of party balloons.  In Jobsian terms, animation is the ultimate “reality distortion field”.

Storytelling is what fueled Jobs’ persuasive reality distortion field.  He made arcing over the next impossible time or technology barrier seem essential as much as possible.   That’s how he plucked Bill Atkinson out of academia at the University of Washington and into Apple.

Jobs tried calling but Atkinson turned him down.  He then sent him a pre-paid round-trip ticket and suggested what did he have to lose by visiting?  Once together, Jobs wove a tale that described no matter how smart Atkinson was, it took two years for Silicon Valley innovations to reach Seattle.  By definition, Atkinson would always be behind the latest technology.  Alternatively, he could come to Apple and conceive it.  Atkinson went on to invent the pull-down menu, MacPaint and more.

Emotional Vulnerability

The third shared factor is emotional vulnerability.  As domineering as he could be, Steve Jobs was consistently vulnerable.  He allowed his passion to take him to places from which manners and social norms normally protect the rest of us.  Jobs could rant and cry simultaneously.

The “I’m a PC, and I’m a Mac” ads embody this same vulnerability.  The PC is constantly put in positions where coldness and lack of style are its vulnerability that the simple but warm Mac overcomes – but we always feel a little sad for the PC at the end.

Lasseter and Jobs are both criers.  Lasseter cries when telling Pixar employees that they will be acquired by Disney.  From the early days when Mike Markula was dressing him down for his boorish managerial behavior to fighting for privacy regarding his cancer, Jobs cried often.

Minimalists

The final factor that gave Lasseter space was his appreciation of minimalism.  Jobs was not driven by wealth creation and possessions.  In his younger days, his large Woodside estate was mostly unfurnished.  In later years, buying a washer took two weeks that included framing alternative models against his family’s values of time, ecology and cleanliness.

Lasseter was asked what is his favorite animation feature?  As he gives his answer below, imagine that it’s Steve Jobs describing the latest Apple product.

“Dumbo.” Hands down. “Dumbo” is my favorite film for many reasons. It’s very tight storytelling. It’s amazing to have a main character not speak at all through the whole movie. It is the most cartoony of all the Walt Disney features, and I love the style of it. The music, the characters, it’s just fantastic. It’s just over 60 minutes long. It’s a very well told story. And it’s so emotional too, especially for parents. It’s really amazing.

It’s uncanny.  I can see Jobs in his signature mock turtleneck and jeans walking back and forth as he introduces Dumbo to a crowd of Apple faithful.

Closing

We can learn as much about what someone has to offer us by what they don’t do as well as what they do.  Jobs didn’t mess with Lasseter.

Have you ever written a piece that was for internal consumption and mistakenly posted it publicly? Ouch!

That’s essentially what Google’s Steve Yegge did last week on Google+ when he inadvertently published “Stevey’s Google Platforms Rant” to the world.  As you’d imagine, it went viral pretty quickly.  And it elicited the expected public apology from Yegge (Posted at 3am…I can’t help but wonder how many re-writes he wrestled through.)

Go read it.  Far better than any business magazine piece, Yegge’s rant is a riveting, cinema vérité peek into two of America’s most successful technology companies: Amazon and Google.  Having worked in both, Yegge challenges how Google can build product platforms in an open innovation culture (Google) versus high control environments (Amazon, Apple).

Before delving into to Yegge’s content, one of the most captivating aspects of his rant is the contrast in tone and timbre to the mind-numbing Powerpoint presentations we all endure.  His voice is smart, compassionate and as Stephen Colbert might say, the rant reeks of one man’s “truthiness”.

Yegge’s rant reflects one of Silicon Valley’s best leadership practices.  By definition, innovators bristle when facing the status quo.  Part of the secret sauce behind Silicon Valley’s perpetual innovation machine is that Valley leaders would rather cope with the disruptive fallout from rants like Yegge’s than lose the astute passion behind them.

To Google’s credit, the post remains public.  Read it and ask how your company might respond to a similar posting be it private or public?

Unlike Earth Girls, Platforms Don’t Come Easy

Let’s return to Yegge’s main point:  Is it possible to build and evolve product platforms in Google’s high autonomy engineering culture.

As a devoted Amazon customer and admirer of their laser focus on customer experience, I can’t help but flinch reading about the dark side of their culture. Jeff Bezos comes across as a brilliant but tenacious micro-manager:

Bezos is super smart; don’t get me wrong. He just makes ordinary control freaks look like stoned hippies.

But like Steve Jobs, it’s Bezos’ tenacious clarity that stomps out the resistance that impedes most platform implementations.  I suspect it’s helped by the fact that Amazon’s business roots are retail rather than technology.  Metaphorically, Bezos cares more about the hole than the shovel used to dig it. Googlers like their shovels.

As noted The Attractive Platform Strategy of Facebook, Amazon and Apple, creating an attractive platform is a top-down undertaking.  A platform strategy imposes boundaries that everyone has to operate within.  Bottom’s up freedom leads to divergence.  Yegge tells us that Bezos required all groups to use common service interfaces as well as design them to be externalizable or be fired.  No ambiguity there.

This discipline is essential because there are always good reasons for exceptions.  Once they creep in, compatibility and support issues escalate rapidly.  Unique test requirements, suppliers and support procedures blossom such that in a very short time, the company is inflicted with a platform’s development complexity and cost while receiving none of the benefits.

In cultures that value autonomy such as universities or Google, operating norms invite and protect the open expression of ideas.  The promised efficiency of a platform can’t compete in the present with the cost of the constraints that come with it.   If there’s an issue I have with Yegge’s call to action for Google it’s that by affirming the importance of Amazon and Apple’s dominant, detail oriented leaders he underestimates the change required from Google leaders.

Wait a minute…What about Google’s Android?  Android has grown faster than Apple’s IOS and is the dominant global mobile platform.  Android was purchased by Google in 2005.  It wasn’t created there.  Google leadership smartly gave Android’s leader, Andy Rubin, more autonomy to evolve Android than other acquisitions.

That makes the real question what can Google take from Android’s success and use elsewhere?

Who Owns the Ultimate Product?

Yegge points out that a key difference between a perfect product and a platform strategy is who gets to determine the end product.  Amazon leaves that to retailers while Apple and Facebook defer to app developers.  In Yegge’s words:

But when we (Google) take the stance that we know how to design the perfect product for everyone, and believe you me, I hear that a lot, then we’re being fools. You can attribute it to arrogance, or naivete, or whatever — it doesn’t matter in the end, because it’s foolishness. There IS no perfect product for everyone.

As Apple learned with the iPhone, winning at platforms adds new responsibilities (see Apple’s New Platform Citizenship).  Developers, not users, make or break a platform.   Developer tools and marketing support are essential to create and evolve a platform.

To be fair, Apple stumbled onto these lessons.  When the iPhone was introduced, it was not an open platform.  There were no apps, developer kit or even App Store. Historically, Apple fears losing control over the user experience to outsiders.  Give Jobs et. al. credit for changing direction.  Yegge is challenging Google to make a similar change.

Yegge uses Google’s new social network product, Google+, as an example.  Yegge’s view is that Google+ is an attractive social interaction application but far from a platform.  He smartly points out that Facebook’s platform strategy is the real source of their competitive advantage.  The basic Facebook application is just the dock you walk down to get onshore.

Two Lessons

The top team at Google must have been taken aback by the public release of Yegge’s comments.  Who doesn’t cringe at having their laundry exposed in public?

Lesson 1:  Silicon Valley leaders have learned that most organization secrets are really just matters told to one person at a time.  Going public wasn’t planned for but I bet has raised the quality of platform strategy discussion inside Google.

Lesson 2:  Yegge’s contrast of Amazon’s tight-fisted tenacity versus Google’s technologically superior but open sophistication underscores the leadership discipline required to harvest the benefits of a platform strategy.

To Steve Yegge…I know it wasn’t intended but thanks for the smart peek inside.

Mark my words, Amazon has just introduced the world’s second successful tablet.

Here’s why:

1. Point of View (POV): Amazon designed the product based on what they do best rather than mimicking Apple.  Yes it uses Android and will run Android apps but it’s not an Android trying to be an Apple.
2. Price, price and price: Starting with the $79 Kindle, Amazon has made a Kindle purchase a no-brainer.  At $199, the Kindle Fire is substantially less than the iPad and the original Kindle.  No one has managed to seriously undercut Apple pricing until now.
3. Content availability: Tablets are primarily content consumption devices rather than content creation.  To win, you have to be able to feed it.  Amazon’s content (film, videos and books) provides content that matches, and may exceed, iTunes.
4. Customers, customers, customers: There are millions of Amazon customers out there.  There are also millions of Kindle users who haven’t stepped up to a tablet because to them it seemed like a significantly more expensive Kindle.  The Kindle Fire gives current Kindle users a color Kindle with more for just a few additional bucks.
5. Technology innovation: If Amazon’s new Silk browser matches the claims, it’s a very innovative architecture that should deliver a faster web experience.  They’ve taken the traditional browser and split the work between Amazon’s extensive cloud infrastructure and the tablet’s browser.  A creative and compelling use of their cloud infrastructure.
6. Unlimited content storage: Apple’s iPad pricing and margins are built around device storage.  Adding memory to an iPad raises the price. Using their cloud architecture, Kindle offers a single device and price point with unlimited storage.
7. Applications: I mention this last because it underscores #1 above – Amazon is not participating in the app race.  They’ll run Amazon approved Android apps which gives them access to a growing universe but they’ve kept their focus on what they do best – content, price and a powerful user experience.

Granted, all of the above is based on first pass information from Amazon and first day reviewers.  Looks like it might be a tad heavy and battery life isn’t up to the iPad, yet.

And it doesn’t intend to diminish the continued success I expect the iPad will enjoy.  Apple loves what I call the “BMW” segment of the market; never the Toyota.

BUT, there is no way Apple will continue to own the entire tablet market – that’s the nature of competition.  Until now, we’ve had hardware companies offering iPad clones without unique content, pricing or capabilities.

With a clear customer POV,  Amazon’s Kindle Fire is your first tablet competitor.

After a flat day last Wednesday, on Thursday, the stock market plunged 420 points on the Dow (-3.7%).  During the same time, Eastman Kodak stock increased 44%.

Did Kodak crush its earnings numbers?  No, second quarter earnings were a negative $3.96 per share as revenue fell 4.5%.  Perhaps they invented something as spectacular as George Eastman’s 1888 invention of photographic film?

What happened is that the Wall Street Journal reported that Kodak hired an investment banker to shop their patent portfolio.  The 1,100 patents are estimated to be worth potentially $3 billion dollars compared to Kodak’s market cap of $820 million.

The patent system has strayed far from our Founding Fathers’ original intent:  to spur innovation for society’s benefit by granting a temporary monopoly privilege to compensate for the risk therein.  Instead, patents are increasingly used as spears and shields by large corporations to protect or extend their current interests.

What Happened?

Patents (inventors) and copyrights (authors) were enabled in the constitution:

The Congress shall have the power… To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries   (Article 1, Section 8, Clause

By lengthening the term and broadening the coverage, privilege has morphed into what is commonly referred to as intellectual property rights, or “IP”.  Note that the Constitution makes no mention of intellectual property.

Privilege Becomes Property

A privilege is significantly different from property. Your driver’s license conveys the privilege to drive but drivers don’t own the roads.

A privilege is a shared right and responsibility.  Your driving privilege can be revoked if you don’t drive safely.  In contrast, private property is secured by an individual or entity to the exclusion of others. By expanding the time limits and breadth of patents, their monopoly value increases.

For example, patent’s now cover business processes, software algorithms and DNA (contested but not overturned by courts).  Amazon’s one-click ordering process is patented.  Is this an invention that “promotes science” such that as a society we want to prohibit other merchants from providing the same service to their customers?

The implication of patenting business processes is significant.  At some point, it’s theoretically possible to patent every operating, financial and administrative business process such that one could lose the opportunity to improve the customer billing process without licensing the process from a competitor.

Extremist thinking?  A so-called patent troll, Phoenix Licensing, is currently seeking millions from banks for allegedly infringing on the patent it holds to print marketing material on billing statements.

The Rise of Intellectual Property

As Lewis Hyde points out in Common as Air: Revolution, Art & Ownership, you would be seriously mistaken if you think that intellectual property has been a long standing pillar of American business.  Until the late nineteenth century, the United States behaved much as many accuse China today.

American Francis Cabot Lowell visited British power looms with the specific intent of memorizing the design to install in a factory in Waltham, Massachusetts despite British laws that even prohibited mill engineers to emigrate. Until the late nineteenth century, the United States didn’t have much intellectual property to offer and therefore didn’t enforce copyright or patents vigorously.

The blossoming of United States industrial power coincided with the emergence of corporations. Patent ownership shifted from individuals to industrial corporations that now had aggregated sufficient knowledge to license and trade.  About the same time, courts began to imbue corporations with the rights of individuals.  This dramatically changed the patent life cycle and how abuse was punished.

Theoretically, corporations are immortal and their intellectual property assets can be reassigned indefinitely.   For example, bankrupt Nortel recently sold its patent portfolio for $4.5 billion to repay creditors.

Corporations also have the strength to pursue lengthy lawsuits, particularly against individual inventors. Ford did just that for two decades against Robert Kearns, the inventor of the intermittent windshield wiper.  And you can only fine a corporation – who’s going to send a CEO or CTO to jail for patent infringement?

Here’s the bottom line:  The rise of intellectual property is a recent feature of our economy driven by the rise of corporations and technology.  The original intent and privilege granted “to promote the progress of science and useful arts,” society has suffered.

Here’s a quick example of some of the consequences:

1. Academic researchers refrain from promosing genetic research projects to avoid impinging on someone else’s gene patent.   (Remember, no one invented DNA)
2. The cost for start-up entrepreneurs to research increasingly broad existing patent coverage is become much more expensive and impedes raising capital.
3. Can any patent office legitimately identify the invention path in a highly collaborative society while simultaneously allowing broader claims?  Even then, can they do it in a timely fashion?  (The current time frame from filing to issuance is 3 years and growing).

Patents Literally Suck Dollars Out of Innovation

According to many, Google paid $12.5 billion for Motorola to get its 17,000 issued and 7,500 pending patents.  Since most patent disputes end in cross-licensing agreements, Google needed ammunition as nearly every competitor in the mobile space is engaged in a patent fight with someone else.

Google’s hand was forced two months ago when Nortel put its patent portfolio up for sale.  After making a “stalking horse” bid of 900 million, Google lost to a $4.5 billion bid from Rockstar Bidco.  Who is Rockstar Bidco?  A coalition comprised of Apple, Microsoft, Research in Motion, EMC, Ericsson and Sony.

Just adding the cost of the Google acquisition, the winning Rockstar Bidco bid and Kodak’s patent portfolio valuation together and you get $20 billion.  To put this in perspective, that’s nearly $2 billion more than NASA’s total budget.  How many new development programs might $20 billion fund inside these same companies?

Does the “America Invents Act” Fix the Problem?

Having passed the House and the Senate, the America Invents Act is in conference and President Obama has indicated he will sign it.  This is the first patent reform bill since 2000.  The new bill’s major change is to award patents based on “first to file” rather than the current “first to invent”.  This aligns the U.S. with most other developed countries.  Those who work closely with young start-up companies are opposed because they see the change as greatly favoring existing companies.

Without going into the arguments for and against the bill, let me suggest the bill in no way returns patents and copyrights from property to privilege.  And that’s where the greatest threat to innovation resides.

Innovation is about creating the future whereas managing property extracts maximum value from the past.  We certainly should provide innovators with the privilege of extracting value for their creations but when the breadth, time and ownership extends so that it is treated as property, corporations naturally focus on extracting economic rents.   Since these returns are more easily defined and secured, money that could fund the next cycle of innovation is diverted.

Losing Our Footing on the Shoulders of Giants

Sir Issac Newton spoke of his own inventions as having benefitted from standing “on the shoulders of Giants” that came before him.  Innovation is increasingly collaborative such that it’s very difficult to identify where an original idea resides.  As privilege expands into property, the shoulders of yesterday’s giants become unavailable.

We have heard many public figures argue that the route out of our economic hole is paved with innovation.  Looking through the lens of today’s patent and copyright practices, the actions of Google, Kodak and others make sense.  It’s easier and safer to harvest more wealth from yesterday’s thinking than break new ground.

As my Working Wider readers have heard me say before:  Is this the future we want for our grandchildren?

Today’s patent practices may teach them how to beat their friends at Monopoly but I’d rather they create a new, new future that none of us can possibly envision.  And let them have a temporary monopoly privilege for having done so.

And perhaps one of them might even be as daring as Jonas Salk, inventor of the polio vaccine who when asked who held the patent to the vaccine responded, “There is no patent.  Could you patent the sun?”