This post originally appeared on TechCrunch.

On Thanksgiving, Pinterest’s co-founder Ben Silbermann sent an email to his entire user base saying thanks. It was fitting, as Pinterest was born two years ago on Thanksgiving day 2009.  Ben had been working on a website with a few friends, and his girlfriend came up with the name while they were watching TV. Pinterest officially launched to the world 4 months later.

Some startups go crazy with hype and users right after launch. And some don’t. I don’t know the founders, but I thought I’d take apart Pinterest’s story to discuss growth and virality in consumer web startups. Pinterest was not an overnight success. On the contrary, its growth was surprisingly modest after Turkey Day 2009.

Take a look at Pinterest’s one-year traffic on Compete from Oct 2010 to Oct 2011, which is the picture in this post, and shows Pinterest rising from 40,000 to 3.2 million monthly unique visitors. I took both ends of this chart and estimated monthly compounded growth over Pinterest’s lifetime, then interpolated the curve using constant growth and put the results in this Google Spreadsheet.

Backing out of Compete’s numbers, we see Pinterest grew about 50% month over month from a base of zero since its inception (on average, smoothing the curve). Today growth is catching fire, as evidenced by the near doubling of traffic last month, and Pinterest’s page views growing 20X since June, according to comScore.

Note these numbers are approximations and also do not count the significant traffic the service sees from mobile (Pinterest’s app currently takes the #6 social spot in the iTunes store). Also my guess is that a lot of its unique visitors arrive out of network (from Facebook / Twitter), and many of these uniques leave Pinterest without registering (more on this below) so it’s tough to know their exact user numbers.

But let’s play pretend and use the data we have to do some projections on where Pinterest could be a year from today.  Its recent VCs certainly did this, and decided to give the startup a $200M+ valuation.  Ron Conway said recently that Pinterest is growing like Facebook did in 2006. Facebook actually grew from 14 million uniques to 26 million uniques from May 2006 to May 2007, then a year and half later they had rocketed to 140 million uniques, and were growing at about 20 million uniques per month. So monthly growth early on for Facebook was around 10-15%.

Can Pinterest really sustain its wild 45% monthly growth? No, unless it’s destined to be the fastest growing startup in history. However, we can be pretty sure Pinterest has hit a tipping point… their page view numbers are simply insane. If they were to grow 20% month/month over the next year, Pinterest would be at 30 million uniques a year from today. And with 25% month/month growth, they’d be at 50 million.  These are pure guesses, but Ron’s statements and last month’s growth make this look possible, so let’s examine virality and Pinterest’s underlying fundamentals.

Virality – Does My Startup Really Need It?

Viral sharing is typically emphasized in products or services where the cost to acquire a customer needs to be low, and you can’t afford to spend money on paid channels, like Mint.com did, or like a Living Social / Groupon.  Having a free method, ideally a user-driven method, is critical to consumer web startups.

But there’s a lot of confusion around virality. The reality is that you can build a sustainable business without “going viral” and this point is not understood well among techies or investors. The connotation “going viral” typically means having a viral growth coefficient of greater than 1. For every user that comes on your platform, he or she refers 1 additional user. This ensures a service will “hockey stick”.

But what if every user only refers, say 0.2 new users? Contrary to popular belief, this can also lead to a sustainable business. However, the lack of pure virality implies that you absolutely must retain existing users to grow. This is why daily active users and monthly active users are such important metrics, and are tracked maniacally by CEOs and investors. Churn is your ultimate enemy. Sure, it will take longer to grow if each user brings in fewer new people, but as long as most users don’t leave, you’re all good.

Viral cycle times also factor in – the shorter the “referrer” period, the faster the virality takes hold – for example, if a user invites 1 new user every month, that’s better than if she invites 1 per year. Social games like Zynga historically have extremely short viral cycles; however they must, because churn is extremely high (user lifetime is often measured in hours or days, because users get bored with games quickly and move on).

Obviously, the more viral a service, the more sustainable it is, but it’s really in the details. And overnight success is not a guarantee for sustainability. Many startups are pushing way too prematurely on press before they’ve demonstrated real sustainability. I see this all the time and Eric Ries covered this in his discussion on the danger of vanity metrics.

The truth is that startups often draft off of artificial success that originates simply from hype within the tech echo-chamber. Some sites go from 0 to 100K+ visitors in weeks and people high five one other, then look around and say “what’s next,  how do we keep these users happy?”

Pinterest’s Virality and Sharing Examined

Pinterest’s story is much different – they didn’t have the same early “hype spikes” as many other startups do, standing at only 40K uniques 8 months after launch! It took Pinterest quite a while for a network-effect to take hold. Clearly every startup should hope for early virality. But if it doesn’t exist initially, you must work to perfect a soft onboarding of virality that’s based on high engagement, and create a product that people love and will come back to, while layering viral techniques on top of that.

Today, Pinterest is clearly insanely addictive among its user base, and they are sharing.  But one reason I see Pinterest as a valuable case study is precisely because they didn’t experience the early adopter “hype” spike 18 months ago. Like many tech startups, I am sure some content was seeded within the tech community by the founders. But their “normal” user was a housewife in the Midwest, not a techie reading TechCrunch or Hacker News. And I’m sure Pinterest made a bunch of product tweaks early on to iterate around sharing and engagement, as virality took hold.

Let’s compare Pinterest to Instagram for a minute, since both base off of photo content as their primary unit. Instagram has actually done nearly all its user acquisition virally out of network (sharing to Facebook and Twitter) and via word of mouth, with limited sharing in the network. This is remarkable when you think about it.  By that I mean that there’s no real sharing inside the network other than liked photos surfacing due to popularity, and manual discovery via hashtags. There is no “regram” if you will. You also can’t follow people or like a photo from Instagram without an iPhone (even if it’s tweeted or posted to the web!) unless you’re a power user on an API mashup (see Inkstagram). All this reveals just how impressive Instagram’s growth has been, as they went from about 1 million to 10 million users over the past year.

Being realistic, Pinterest could have much higher growth than Instagram based on the fact that it’s unconstrained as a platform – it works from web, mobile web, in-app, and has easier baked-in virality around sharing. “Pinning” has this built in because many initial pins start as “repins” of other people’s content. In this way, existing content will often be the seed for a new user’s stream. The pin unit is genius.

Users can also visit the Pinterest site and participate (i.e. browse endlessly) before signing up. This allows full consumptive access before registering and is a secret weapon if done right. Fred Wilson discussed this recently in his post about the logged out user, giving an example of his mom checking his tweet stream without logging into Twitter – she gets value out of the service while ironically bringing down Twitter’s monthly active user metric. Similar value can be granted to consumptive users who visit the site but don’t initially register.

Then when a user is ready to pin content, they create an account and go wild – Pinterest leverages web content from Tumblr like no site that has ever existed, thus riding on top of its network-effect while not requiring user generated content like many services. They’ve also perfected in-network virality (pin, repin, like) in addition to out of network sharing (Facebook, Twitter) to grow virally. For these reasons Pinterest could conceivably grow as fast as any consumer service we have seen in recent memory. It’s fun to speculate on all this when you factor in Ron Conway’s statements comparing growth to Facebook’s early heydays.

And perhaps most notably, though it will surely take a while, Pinterest is already threatening to monetize, as those Midwest housewives are literally using it for shopping discovery, which Pinterest can profit off of by taking attribution for purchases that originate off its platform. I know several friends who’ve purchased stuff spontaneously via random discovery on the site. I expect Pinterest to be thriving a year from now (my guess is 30 million users next Thanksgiving) and also spawn hundreds of copycat startups in other verticals (“Pinterest for that”). Sadly, many of these will arrive on TechCrunch and spike in hype, then fail to nail any true virality before they are slowly forgotten… After all, this is the cycle of consumer startups.

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In November of 2010, just 9 months ago, I  wrote a post on TechCrunch about application layer disruption in telecom and messaging, called Why the Carriers Are Losing Their Voice. At the end of the post I wrote: 

There is simply no doubt that the future of voice and messaging is with companies innovating at the application layer, and my guess is there is going to be a ton of investment activity and M&A in this space as new realtime communication tools are developed over the next few years.

Less than a year later, a lot of the observations I made have become realities. Traditional carriers like AT&T continue to languish, doing weird things like cutting messaging plans to boost ARPU, and Skype is the fastest growing telecom network in the world. 

Of course during that time, innovation at the application layer has accelerated what feels like ten-fold. Competitors in voice and messaging have launched at a blistering pace, Facebook made an M&A play in groups / messaging, Google+ launched, and Skype was sold for $8.5B. 

I also made the decision to join GroupMe (I absolutely knew there was something special here), and have helped drive our business development and brand / user acquisition strategies. And now we’re part of Skype.

Wow... that’s a hell of a lot of disruption and M&A in 9 months.

All of this is exactly the type of innovation that I'd envisioned back last year, but it’s important to remember we’re still in the beginning throes of a revolution here. The traditional concept of “telecom” is being disrupted at the application layer in ways that we have not yet seen. The things we’re building at GroupMe blow my mind when I look at the traditional telecom stack, and Skype is going to enable us to move even faster.

There is simply no doubt that the peer to peer economy and group-based social communication are massively disruptive forces within the tech and social ecosystem. But one thing that people aren’t yet talking about -- even smart people like Om, who miss the larger opportunity -- is how these amazing communication and social layers in mobile are going to drive new use-cases for commerce.

The peer to peer economy is driving unprecedented intelligence to the edge of the network, and messaging is just the first wedge in helping individuals and groups make decisions and take actions instantaneously. When I talked about Groupon closing the redemption loop a few months ago, I was adamant that a mobile commerce layer and a social / communication layer are being built out that will have unprecedented impacts on how we interact and consume things with friends in our physical environments.

At our core, humans are social, and friends drive a lot of our decision-making and actions. Where traditional telecom allowed fairly static connections between people, the mobile internet is driving a new peer to peer economy where people not only instantaneously connect with each other, but take actions to consume, share and enrich their real-world lives.

This is just part of our opportunity at GroupMe, and now Skype. And I’m incredibly excited about the possibilities that lay in front of us. #)

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Admittedly, Groupon is a work in progress. They continue to spend insane amounts of money to acquire customers and merchants to try to extend their dual-sided network effect with consumers and merchants. Many people see this as unsustainable, some adamant it’s all just a Ponzi scheme. 

But these naysayers who are fixated on the current “daily deal” economics as long-term unsustainable are completely missing the point. The real innovation Groupon brought to the table wasn't in advertising deals per se, it was their ability to profit off of closing the attribution loop in online-to-offline commerce. And this is a huge land grab that others had completely missed. 

Google never had success (monetarily) with online to offline search, because you can’t go to a search box and carry that discovery process to your offline environment. Yes, you can absolutely use a search query to find a place to go, but when you get there no one knows that you found it on Google…

The same can be said for services like Yelp. Yelp might drive people to restaurants, but it doesn’t benefit Yelp if merchants don’t attribute the new customer to Yelp. And how would they know? It’s not like you walk in the door and tell the restaurant owner you just located them on your iPhone via Yelp’s app. Foursquare hasn’t solved this either, despite having 250K merchants signed up and literally inventing the act of announcing your presence to the world.  Both are great companies solving problems, but only Groupon has closed this attribution loop. 

Groupon essentially short-circuited what others haven’t been able to do by inserting itself between the customer and the transaction. They gave merchants an advertising channel (yes Groupon is just an ad unit), and in return they immediately take a cut, regardless of when the voucher is redeemed. Groupon not only closes the redemption loop, but also banks the cash way ahead of redemption. Pretty sweet deal. 

And Google understood how valuable this was a long time ago.  It’s well documented that AdWords’ genius is its ability to harvest intent that was generated elsewhere. About 10 years ago, search became the last place where consumers interacted during many online transactions, and has since trumped all forms of intent generation via display advertising, review sites, and other forms of marketing. Those mediums generate your intent to buy that camera, but Google profits off of it. 

This is precisely why Google wanted Groupon – they were able to solve a REALLY difficult problem in a simple way, creating an offline link between customer and merchant and profiting off of it. Hopefully for them a link that is valuable over the long term… 

And that’s the exact issue in question that people are puking over. Those reading the S1 believe this merchant to customer link is very weak, because Groupon left out key metrics for effective customer acquisition cost and merchant churn. 

That would be a sensible conclusion IF today’s email-based daily deal world were to remain static…  if that were the case all this would be extremely worrisome. But things are changing. We’re entering the next phase for daily deals, something Groupon has been public about: real time bidding on remnant inventory at places around you. 

In order for real time to work you need inventory. Lots of it.  That’s why this is an onboarding and growth exercise to get people on the platform. It truly is a land grab. That’s Groupon’s bet and it’s why every major player is copying Groupon. 

Fact is that right now a mobile commerce layer and a social / communication layer are being built out on mobile that will have unprecedented impacts on how we interact and consume things in our physical environment. 

Trust me – getting email deals to your inbox will appear old and tired within several years. But that’s all local merchants can do today. They can’t bid for individual customers against “searches” because you don’t have an environment with enough context or sophistication on the merchant side to support an Adwords-like product for local commerce and there is no publishing platform to push this to consumers. 

All this is changing. FAST. 

First with massive creation of context: location/proximity, stored preferences, conversational sentiment, social indicators such as groups, and a bunch of stuff that’s temporally and geographically relevant to you and your group in the real world. I'm talking massive amounts of data.  

And second with sophistication on the merchant side. Tablets are being put In place at the point of sale at an increasing rate, and a healthy percentage of merchants have now created accounts on daily deal sites. Google Wallet is coming online and almost subsidizing merchants with new point of sale technology. Surely Facebook is thinking about doing something to link credits with their new deals, and has arguably done a better job at self-serve deals than Groupon Stores. 

I remember having a conversation with Vin Vacanti at Yipit awhile back, and we both talked about a future time when a restaurant’s staff will say to you “let me consult the tablet” to make decisions in the restaurant.  Metaphorically-speaking. 

Kind of like how you consult your iPhone when you need to do something in your physical world. The employee “consults the tablet” and pushes a lever to bring in some customers – it’s a little slow in the restaurant for a Thursday night. Meanwhile you are “searching” for somewhere to go to dinner that night with 4 of your friends. This is the future of self-serve at the merchant level. 

An hour later your group shows up, dines, and receives the check. They bring the bill to your table in one of those standard-looking black folios—except it has an embedded NFC tag. You pay through a credit card linked to your mobile phone. Unbeknownst to the waiter, you purchased that deal in real time 1 hour before you went to dinner and get 20% off, right after assembling your group, planning, deciding, and purchasing on the go. 

So the real end-goal for daily deal sites is in assembling a marketplace and exchange that has enough inventory and users to support these types of new online to offline behaviors at massive scale. And if Groupon doesn’t figure it out, someone else will. There is way more money to be made in offline commerce than there is in online commerce. Everyone knows that by now.

The reality is we’re in inning 2 or 3 of deals and local commerce. We’re moving away from these static one-time deals toward a marketplace for your attention in the physical world. And someone is going to make a lot of money off of it. 

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We all know that the delineation between public and private was eroded by Facebook a long time ago. Over. Done. But now Facebook’s sheer scale is pushing it in a new direction, one that encroaches on your authenticity.

Facebook is no longer a social network. They stopped being one long before the movie. Facebook is really a huge broadcast platform. Everything that happens between its walls is one degree away from being public, one massive auditorium filled with everyone you’ve ever met, most of whom you haven’t seen or spoken to in years.

Last week a bunch of massive sites across the web, including TechCrunch, adopted Facebook commenting. The integration of the formatting and fonts is so strong that when you're reading comments you actually feel like you are on Facebook, not a tech focused vertical site.

This latest push by Facebook to tie people to one identity across the interwebs is very troublesome.

The problem with tying internet-wide identity to a broadcast network like Facebook is that people don’t want one normalized identity, either in real life, or virtually.

People yearn to be individuals. They want to be authentic. They have numerous different groups of real-life friends. They stylize conversations. They are emotional and have an innate need to connect on different levels with different people. This is because humans are born with an instinctual desire to understand the broader context of their surroundings and build rapport, a social awareness often called emotional intelligence.

In the beginning, Facebook catered to this instinct we all have. But FB in its current form, a big graph of people who may or may not know anything about one another, does not.

And forcing people to comment – and more broadly speaking to log-on – with one identity puts a massive stranglehold on our very nature. I'm not too worried about FB Comments in isolation, but the writing is on the wall: all of this off-site encroachment of the Facebook graph portends where FB is really going in pushing one identity. And a uniform identity defies us. 

Face it, authenticity goes way down when people know their 700 friends, grandma, and 5 ex-girlfriends are tuning in each time they post something on the web.

Don’t believe me? Go to TechCrunch and count the comments on last week’s posts. Better yet, go read the comments. They suck. They’re sterile and neutered.  

The nature of commenting on the web needs to feel organic and fluid, just like it does in real life.  And even anonymous if necessary, though that’s not at the core of my argument.

My main contention is that the off-network spread of Facebook’s identity graph is parasitic for the web. Now – just to join the best technology community on the internet (TechCrunch) – we need to live inside Facebook walls.

Unfortunately, it doesn’t surprise me why this is happening. The carrot here for content sites is clear: even with a lower volume of comments, the potential viral effects and CTRs are something parent sites like AOL are surely extrapolating, based on their recent manifesto to boost reach, drive traffic, and maximize page views (though I'd argue they would perform much better on mainstream sites like HuffPo or TMZ than a niche vertical like TC, which your friends are less likely to be aware of). 

There's a pretty straightforward reason why FB is valued at an astonishing $75B, and it's all about them forming a reciprocal feedback loop between Facebook.com and other sites so that you can be targeted. 

But for such a massively social company, Facebook’s insistence that you have one identity across the web is both short-sighted and asinine, and people I talk to are starting to realize this.

Fact is, one social network will not rule the web... People are simply way too social to allow that.

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It’s with incredible excitement that I announce I’m joining GroupMe as their first full time Business Development hire. I met Jared and Steve shortly after the TechCrunch Disrupt Hackathon in April 2010, where they took agile development to a new level, releasing a beautiful product over the course of a weekend. Since then I've fallen in love with the service, we've become good friends, and it’s been tremendous to watch such smart guys attract the best people and build momentum. 

It was GroupMe's elegance and simplicity which attracted me the first time I played with it... But it's their vision and opportunity at the intersection of groups, messaging, mobile, and social which really excite me. I've never been more excited about the opportunity to help grow a business, which is definitely what I love to do best, and I'm thrilled to be able to do this at GroupMe in 2011!

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TechCrunch Link

Lately it seems like there is endless news around messaging, VoIP and video calling. Apple recently announced they’d added FaceTime support for the Mac, and had shipped 19 million FaceTime-enabled iOS devices since June. Google Voice also made headlines last week for an outage, but I think the bigger news associated with that downtime is how fast they’ve been growing. And there’s been a flurry of startup activity around messaging and communication as well, such as the super innovative GroupMe releasing an Android App.

The resounding theme from all these seemingly disparate announcements is that messaging, voice, video, and chatting applications are on fire. Sure, we all use social media, but it sure hasn’t dampened people’s affinity for texting or making a call.

More revealing, all of this innovation seems to be happening at the application layer, far from the AT&Ts of the world, who are missing another wave of innovation which is happening on top of their networks. It’s very evident that Google and Apple are making overtures to become your de facto voice and messaging provider, and the carriers are sitting with their pants down, struggling to plan how they stay relevant.

Why the Carriers Will Become Irrelevant in Voice and Messaging

It’s easy to bash carriers. I recently wrote about the technical reasons why AT&T’s network is so awful which got their higher ups to contact me and whine about what I’d written. Truth is, there are long-standing reasons behind AT&T’s failures—network decisions take many years to unfold, especially since the telco monopolies are, by their very nature, slow to respond to change and innovation.

But forget the past, let’s look at why the carriers are poised to become more and more irrelevant beyond being pipe providers in the future. And let’s do so specifically around voice and messaging, the bread and butter services that they evolved to provide.

Imagine the future of communication on your smartphone: you’re on a video call with your significant other across the world on different networks, you tap your screen, and instantly their phone screen mimics yours as you flip through photos of your trip while continuing your call. Or imagine sending out an MMS to a group, and when each of your friends open it they immediately tap into a live HD audio/video stream which you’re broadcasting to everyone. No delays, no dialing, and no going in and out of different apps—it just works.

All of these amazing use-cases, and more, will be enabled by 4G wireless standards. This is because 4G is 100% IP-based, which is what the internet was founded upon. Today, voice is routed separately from data on mobile networks due to legacy “circuit-switched” architecture. With LTE, the first phase of 4G, voice and video sessions will be packetized and sent over the network from your smartphone just like any other application layer data, which will open a range of new capabilities.

LTE Now; Voice in 2013 – Are You Kidding Me?

But there’s a roadblock to realizing this vision of ubiquity. Right now the carriers can’t agree on what’s happening with respect to voice. In classic fashion, they are stuck in endless consortium meetings arguing about standards instead of moving forward, picking one, testing, and deploying.

Some carriers are behind a voice technology called IPMS (IP Multimedia Subsystem), which is 100% IP-based, and others are clinging to VoLGA (voice over LTE via generic access), which splits mobile voice and messaging apart from the IP-based LTE network in a technique called “circuit-switched fallback”.

Guess when they plan to resolve all this? 2013! Per this AT&T slide from a few weeks ago. And it’s easy to envision any resolution extending years past this date, which is crazy considering what’s at stake for the carriers as they struggle so stay relevant in voice communication.

FaceTime best foreshadowed their dwindling relevance, since video calls over WiFi bypass the carrier network entirely. And though FaceTime doesn’t yet work on 3G you can see the writing on the wall. Meanwhile Google Voice still requires you to dial out using your carrier’s network, but Google’s acquisition of Gizmo5 last year foretells this will go away in favor of full VoIP too. Then of course there’s Skype, which now works over 3G, bypassing the voice network of your carrier too.

The Bureaucracy Behind Why The Carriers are Missing Out

Carriers are in the process of transitioning from a telco model, which is closed, to the internet model, which is open. In the old days it was deemed acceptable for them to stew over standards for multiyear periods, but innovation on the internet doesn’t work this way.

Recently at CTIA, Verizon declined to discuss the VoLTE situation because they simply don’t have anything cohesive to communicate. This is embarrassing, considering their LTE network is supposed to be ready by the end of the year. What this means is that voice will be routed over their old network for years to come—fabulous.

This is absurd, and is symbolic of how consortiums and standards bodies work in telecom—anyone who has ever sold to or interacted with a carrier understands the glacial pace at which they move. What the carriers really need to do is get out of bed and resolve how voice will be packetized, then move forward and deploy it. It’s simply embarrassing that they can’t do this, but it’s not surprising, since they still receive so much revenue from voice plans.

The Internet Wins Again – Go Back to Sleep Carriers

The future in mobile communication is being written at the application layer—both by innovative giants like Apple and Google, and smaller startups such as GroupMe and Twilio—not at the infrastructure layer by the AT&Ts and Verizons of the world. The carriers had a chance to provide a better voice and messaging experience with 4G, and to charge a toll for that experience, but they are missing that window.

Apple and Google are closing it fast. Back in June, when iPhone 4 was released, people wondered why Apple made FaceTime an open standard. Here is one important reason why: A closed standard may have caused an overly fragmented market for video-calling, which would definitely benefit the carriers. This is  likely, at least in part, why Steve Jobs decided to open up FaceTime, as any open standard's success in video/telephony limits the power of the carriers.

The funny thing is, they seem to be screwing it all up without Steve’s help. There is simply no doubt that the future of voice and messaging is with companies innovating at the application layer, and my guess is there is going to be a ton of investment activity and M&A in this space as new realtime communication tools are developed over the next few years.

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TechCrunk Link

During the “Back to the Mac” event two weeks ago, Steve Jobs made a particularly witty remark as he unveiled the MacBook Air, one that made the audience chuckle in laughter:

“We asked ourselves, what would happen if a MacBook and an iPad hooked up? Well, this is the result, we think it’s the future of notebooks.”

There is always a strategic intent with the things that Apple says at product launches, especially when they come from Steve Jobs. This is because Apple cares deeply about the perception of its products. By intimating that the Air is the future, and that it blends the best of the MacBook Pro and iPad, Apple is signaling a lot. There is no doubt that this first phase in “hooking up” between the MacBook and iPad foretells a deeply converged future on many levels.

iOS and OS X Aren’t Hooking Up 

Often when people visualize the convergence of the iPad and MacBook lines, they wonder whether a unified operating system will take over, which somehow blends the best of both the touch and “mouse” metaphors.

This is unrealistic and silly. Though iOS is OS X’s little cousin—both use different APIs and layers, but reside on top of UNIX—merging them makes little sense from an end-user perspective. iOS and OS X serve different use-cases, applications, and markets, and the touch metaphor on a MacBook simply wouldn’t serve a user well in the majority of cases. And running multiple browser tabs and multitasking between 8 open applications requires a much more immersive experience than iOS may ever provide.

But despite the fundamental difference in how we interact with a MacBook and iPad, Jobs made sure to deeply blend how we view the two products at the marketing level, by touting attributes like the Air’s ability to turn on instantly, and last 30 days without a charge.

Why the Hardware is Rapidly Intersecting

One reason why Steve Jobs wants us to think about the MacBook Air as an extension of the iPad, is because there is a hardware convergence happening under the hood. The MacBook Air benchmarks were the most telling sign that this is occurring. Apple was able to double the system performance of the MacBook Air, despite using the same 3 year-old CPU technology from Intel—Intel Core 2 Duo processors running at pokey speeds.

Though profound this isn’t surprising—the Air uses flash instead of spinning disks, and SSD technology dramatically cuts data transfer bottlenecks for applications that are I/O (Input/Output) constrained. And guess what? Most simple computing tasks are memory and IO-constrained. This fact helps the flash-based Air operate on par with Apple’s high end MacBook Pro line, except under taxing CPU-intensive scenarios such as video rendering.

So let’s get this straight: Apple is using several year old technology, and the Air’s system performance screams. This is nothing short of incredible proof that after a certain threshold, CPU advancements are only adding incremental benefit to 90% of what the user cares about today.

Instead, performance is more dependent on graphics processing than ever. This is why Apple designed the Lion OS to heavily focus on OpenCL, which leverages parallel constructs within the GPU to extend its utility to non-graphics tasks. And a big reason why Apple didn’t go with Intel’s newer CPU line is they lack support for OpenCL, and Apple is probably designing new applications like iLife 11 to take advantage of OpenCL’s power.

The fact that Apple’s sexiest new Notebook didn’t go with Intel’s latest technology is damning for Intel and is the best signal yet of how innovation in PCs is getting blown away by what’s happening in the mobile ecosystem. Right now, benchmarks show that the fastest ARM-based smartphone CPUs are only about 25% as fast as the Core 2 Duo that Apple is using in the MacBook Air. But this delta will compress fast.

In about 2-3 years we will be seeing integrated chipsets make their way up the food chain, and potentially fit in notebook-class form factors. Multicore ARM solutions, based on ARM-15, will make this a reality in about 2 cycles of Moore’s Law.

Skeptics will say “no way — never, not with the need for Flash”. I agree that Flash is probably here to stay on desktops. But all the pressure on Adobe to make Flash better is, ever so slowly, improving how rendering and compositing are done in hardware. And even in the midst of their darkest public battle last Spring, Apple and Adobe were cooperating in getting Flash acceleration to work on desktop Macs. In the future, it’s conceivable that Flash could be the only remaining bottleneck that prevents Apple from using an embedded SoC in a MacBook Air. But hardware acceleration for Flash is approaching which can solve this dilemma.

All of this rapid advancement in what’s under the hood has huge ramifications for the future of the MacBook Air and iPad. Anyone want a MacBook Air that is several pounds, Runs OS X, lasts for 30 hours, has a detachable keyboard, and then converts to an iPad running iOS once the screen is removed?

I am not saying that Apple is going to make this device, nor that it’s even in their best interest to pursue one-size-fits-all form factors. But there is no denying that the hardware is converging, and the “Back to the Mac” theme of Apple’s latest event deeply intimated this.

The Mac Store’s Incredible Network Effect

The remaining puzzle piece in the intersection of the MacBook and iPad is all about the applications—both end-user discovery & distribution and developer support. The iOS storefront was the genius behind the iPhone becoming a low friction distribution warehouse for content.

In much the same way, the Mac Store is Apple’s umbrella strategy to encourage developers of long-tail content to have an easy landing pad on the Mac, developers who are already building apps on top of iOS.

Interestingly, the Mac Store allows Apple to do the reverse of what Microsoft is doing with Windows Phone 7: whereas Microsoft can leverage .NET familiarity to encourage the desktop dev community to write apps for WM7, Apple will use its iOS franchise to kick-start a vibrant ecosystem of Mac developers.

But there’s also something more magical that this network-effect provides for Apple: by specifying that developers use Apple’s tools, namely Xcode and LLVM, Apple gains a layer of control in how this hardware convergence plays out.

How so? Apple can have developers simply flip a recompile switch and upload universal versions of apps to the Mac App Store, which work on both ARM and x86. In this way, Apple is setting up a distribution mechanism to host and install code which will allow them to transition hardware seamlessly.

This is the ultimate in streamlined distribution, since a developer can focus on one unified environment based around Cocoa Touch and Objective-C, along with a set of UI / UX constraints. Apple then abstracts all this from the user, independent of the hardware.

Apple Hates Control and Loves Optionality

If it’s not completely clear yet, Apple is setting the stage to be processor and component agnostic. This not only allows them the above-mentioned architecture-neutrality, but also affords them incredible pricing power, and ensures they can tap into consistent component supply, which will be a critical challenge as they lock up an even bigger slice of the supply chain.

Apple can build an A4-variant themselves, or they can partner up with one of many vendors. If Intel starts innovating again, that’s an easy choice for Apple. If nVidia, with its graphics pedigree, emerges as a winner in combining GPUs with ARM-based CPUs, Apple can partner more deeply or buy the company. Or Apple might decide to stick with x86, but use GPU/CPU technology from AMD.

It’s all about optionality. And Apple is building that into its long-term strategy, by combining its rapidly expanding footprint in mobile hardware / software with its iOS developer mind-share to rev its Mac franchise into much higher gear.

Wow Hooking Up Feels Amazing – When’s Our Next Date?

I believe it’s pretty clear: Apple wants to use OS X, running on an incredibly battery efficient MacBook Air-like form factor, as a bottoms-up strategy to attract loyal iOS fans over to the Mac franchise. After all, there are around 150M users of iOS worldwide. Apple knows that iOS is a secret weapon to bring both consumers and corporate users to higher end Mac products. And the marketing around the Back to the Mac event is just a precursor for Apple’s underlying strategy in mixing these two worlds.

Behind-the-scenes, Steve Jobs is setting up all the pieces for Apple to converge these product lines. But it’s all about optionality for Apple. When and how they choose to get there is up to them. And my guess is Steve Jobs is going to do so in a way that continues to make the Apple experience a superior one for you, its loyal customer.

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TechCrunch Link

Last week we saw the carriers’ growth numbers for Q3 2010, and AT&T completely blew away Verizon with new subscribers. Despite mass availability of Android phones, Verizon only added 1 million subscribers in Q3, its lowest total in years. AT&T added 2.6 million.

It’s now completely clear why Verizon has finally capitulated and cozied up with Apple—even with tons of Android models, Verizon simply can’t compete with AT&T in terms of new subscriber growth.

Right now the question du jour among iPhone aficionados is how many net subscribers will leave AT&T and switch to Verizon once the iPhone becomes a reality in January 2011. That number is going to be a lot larger than people think for a series of compounding reasons.

First off, let’s establish that iPhone service on AT&T has not improved. Dropped calls are one issue. But so are dead connections, intermittent signal, and my personal favorite—the inability to use the phone for voice or data even when you have “full signal”.

There is a reason why these issues are endemic to iPhones on AT&T, but don’t affect either Android smartphones on Verizon, or iPhones on other GSM carriers worldwide. And it always intrigues me that it’s hardly ever mentioned by either analysts, the media, or by Apple and AT&T themselves.

I suppose the former community doesn’t understand the issue, and the latter doesn’t want you to know the truth. Earlier this summer I uncovered the real reasons why AT&T’s network is so terrible, just prior to iPhone 4 and iOS4 being released.

Contrary to what’s normally discussed in the press, the issues are not capacity related. It’s not about the number of cell towers or wireless bandwidth. Instead, they relate to “signaling”, control and status information which is communicated back and forth across wireless networks. Smartphones use signaling for network polling and status updates, for functions like SMS, billing, and for DHCP requests.

When I wrote that piece, Steve Jobs had just gone on record at D8 saying that AT&T was working hard and the issues would get better by the end of the summer.

Well guess what? They haven’t.

The issues have not been alleviated because they require a completely rethought approach to network topology at the signaling layer, and after three years it’s clear AT&T has no clue how to do this, especially amidst a continual onslaught of iPhone subscriber growth.

Attempts to overhaul its signaling network present a chicken-and-egg problem. AT&T must also build out its LTE network, which is the real solution to creating robust signaling.

This dilemma is compounded by the fact that 3G isn’t going away—I recently learned Apple plans to bypass LTE in 2011, instead opting to wait for “4G” to mature. This means that AT&T subscribers will be relying on AT&T’s woefully strained 3G network for another 18 months or more.

Unless they switch to Verizon.

The premise that Verizon’s network will support the iPhone fine is now anecdotally supported by the fact that Verizon smartphone subscribers use more data than iPhone subscribers, and because Android phones actually use the same power saving disconnect methods that the iPhone popularized.

Up until this point AT&T could physiologically assuage the concerns of iPhone users since they had exclusivity. But soon people will be able to compare Apples to Apples, if you will. An iPhone user on Verizon will not experience the same issues as an iPhone user on AT&T. If you don’t believe me, this will become clear for everyone when the Verizon CDMA iPhone becomes available.

The really interesting part is that it appears Apple is going to supply a dual mode GSM/CDMA iPhone in mid-2011 which supports all carriers worldwide.  Imagine the scenario of a new customer walking into the Apple store—why on earth would they go with AT&T when their neighbor talks about how well the iPhone works on Verizon?

This confluence of reasons—the general delay of 4G, coupled with Apple’s plans to support a dual mode GSM/CDMA iPhone—will hurt AT&T. It’s beginning to look like there are going to be a lot more AT&T defections to Verizon than the majority of people think. And once again, Steve Jobs will smile like the Cheshire cat while Apple stands above the fray, as the primary beneficiary.

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TechCrunch link

Back in August I broke the news that Apple was lining up a component purchase of several million chipsets from Qualcomm for a CDMA-powered Verizon iPhone due in January. Last week, over two months later, the Wall Street Journal confirmed this story.

Now that folks are finally celebrating the iPhone’s imminent arrival to Verizon, speculation has shifted to whether the January model will take advantage of Verizon’s “4G” network. 4G (not to be confused with iPhone 4) refers to the fourth generation of cellular standards, and both Verizon and AT&T have publicly released launch plans for 4G networks based on LTE in 2011.

This impending shift from 3G to 4G presents a major inflection point in the reign of the iPhone franchise. Does Apple move to 4G right away, or do they wait for the network to mature? Recall that Apple waited to support 3G for one entire cycle, opting to release the original iPhone on AT&T’s mature 2.5G EDGE network, despite wide availability of 3G by early 2007.

That situation mirrors what is happening now with LTE in 2011, and as these questions become front and center, I have some very interesting news to share about Apple’s plans.

First things first — the iPhone CDMA model due in January won’t support LTE.  But here’s where it gets really interesting: sources tell me that the iPhone refresh in mid-2011 won’t support LTE either. Instead, Apple will produce a dual mode iPhone containing 3G flavors of GSM and CDMA, which operates on all carriers worldwide. If this holds true, Apple won’t support the LTE standard until some time in 2012.

A lot of you aren’t going to be very happy with this news, since 4G-enabled Android phones already exist on Sprint’s WiMAX network, and dual-mode LTE-enabled Android phones will start to emerge for use on Verizon’s new network in the first half of next year.

But as we cut through the hype on LTE, I believe Apple’s decision to wait may be the right one. While the carriers are promising LTE as an upgrade path that will drive new applications and higher speeds, the reality is that 4G deployments will take much longer than the carriers are letting on.

Apple doesn’t want to mess with the first generation of LTE chipsets, since they will be bulky and power hungry. Instead, Apple will make a unified model that works across 3G networks on all carriers, and innovate with incredible new features like NFC which mirror what they accomplished with FaceTime on iPhone 4.

Apple simply doesn’t want to be the guinea pig on new LTE networks that aren’t ready for primetime, and Steve Jobs knows not to trust the hype that’s spewed by the carriers on 4G. The truth is that 3G networks have many more years of life, and the transition to LTE will be much slower than the carriers want you to believe (LTE doesn’t even have its voice standard fleshed out yet).

This is why AT&T is upgrading modem cards in its basestations to support the newest flavor of 3G called HSPA+, and it’s why Verizon is rumored to be working hard on Voice over Revision A, which will allow simultaneous data and voice. These upgrades greatly extend the life of 3G networks, and hedge against the transition to LTE. And Apple is pushing the carriers to extend 3G.

So if you’re waiting for an iPhone that works on 4G carrier networks, it’s probably going to be a while. I’m sure we’ll be hearing a lot more about this story as the months unfold, especially as next summer’s iPhone approaches the “engineering verification test” stage. But based on my knowledge of both the supply chain and networking infrastructure, I feel pretty confident this is the way it’s going to play out.

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For years, offline merchants have been acquiring data about you in attempts to personalize your experience through loyalty and rewards cards, credit card data, and surveys. But the problem is these interactions occur after it’s too late: at the point of sale. You’ve already checked out and are leaving the store, or have ordered dinner. For a merchant to convince you to add an extra item to your shopping cart, or buy an appetizer with your meal, the interaction must happen sooner.

Online check-ins, as a trend and use-case, have created a remarkably compelling opportunity for offline merchants to interact with consumers who are in the store before the sale happens. When you announce you’re at a store or restaurant by checking into Foursquare or Facebook Places, for example, your experience can be shaped and molded in compelling ways.

This is precisely why check-ins are incredibly powerful—they give the offline merchants an opportunity to shape your behavior before you buy or consume. Unfortunately, check-ins alone provide little value to merchants in the absence of contextual data about you. And checking into a place definitely does not equate to liking it. Imagine how many restaurants you visit, then consciously decide to never return to. Without a feedback loop this context will be used erroneously for future offers and recommendations.

The real power in converged online/offline interactions will come from a hybrid of realtime contextual offers, deals, and advertisements which can change a consumer’s behavior long before any transaction occurs. Recommendations and offers that take into account nearly everything about you as an individual.

This is a why Steve Jobs strategically entered mobile advertising with iAd. Contrary to what Carol Bartz thinks, Apple is thinking way beyond serving brand advertisements within mobile apps. The real potential is about blending offline and online data about you as a person, data that can be transferred across services and devices. iAd is absolutely a secret weapon for Apple to ultimately leverage its micro-payments franchise to influence you at the point of sale. But they could work not just while you’re mobile, but at home as well. Imagine watching rich immersive ads on your Apple TV, which are tailored based on your offline behavior while your iPhone simultaneously knows what channel you’re watching and gives you a click-to-act offer or saves a deal which you can unlock later.

And though Google bought Admob for a simpler reason (to own mobile/online display), it’s clear that their success with Android and momentum with Google TV is driving them toward similar ambitions.

There’s simply no doubt that the offline and online worlds are melding in a way where “ads” will incorporate your presence and behavior across the entire web. Obviously the use of apps and web services on your mobile phone will be the source of a lot of this data. But because apps don’t use cookies like traditional websites do, proprietary layers of data are becoming silo’d inside these individual services and applications.

This is one fundamental reason why you see so many mash-ups and “data threesomes” happening between services these days – there is incredible power in blending silo’d data across web services. For example, say Foursquare reaches beyond check-ins with a recommendation service, while also providing curated offers by tapping into the API of a group buying service. Then imagine this combined data mash-up accessing the API of a mobile payments service like Square to provide not only a discount, but also an integrated loyalty or reward at the point of sale. You get a recommended list of restaurants, check-in with your friends, trigger a context-aware offer, then immediately get a discount and reward when you pay.

This is the future. And ultimately, this creates massive opportunities for companies to enter the fray with great ideas and leverage APIs from other services. Many will end up as commodity layers, but it’s likely that those which play the greatest role in shaping purchasing intent will benefit tremendously from this massive online/offline convergence and acceleration of mobile commerce.

And these trends likely form the underlying strategy for why Facebook is building a mobile phone. They want to become a participant, not just a layer or service, in how this offline/online commerce plays out. This week’s announcement that Target will sell Facebook credit gift cards is another telling sign of Facebook’s ambitions.

That’s why it’s funny when people see Facebook’s push into phones as a basic play to make phones more social. Dan Lyons wrote a silly Newsweek article this week about Facebook not innovating. I believe innovation is alive and well right now, and is likely accelerating. And Facebook’s push into mobile is much more profound than making phones more social – Facebook believes owning elements of the mobile stack will help it leverage its vast social graph to influence offline/online commerce.

And though companies like Facebook and Apple are salivating at the opportunities in this offline/online convergence, so are many startups. TechCrunch Disrupt will undoubtedly mark the arrival of some amazing new startups which are poised to take advantage of these trends as well.  We’re on a new frontier of mobile commerce and life after check-ins looks pretty good from where I’m standing.

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TechCrunch Link

Intel’s recent acquisition binge has been enormous—they’ve spent almost $10 billion in the past month on TI’s cable modem division, security software maker McAfee, and Infineon’s Wireless Solutions (WLS) business.

At last week’s Intel Developer Forum, CEO Paul Otellini talked about this massive acquisition spree like it’s predestined to succeed. But if we look back in time, Intel’s pitiful M&A track record suggests this couldn’t be further from the truth.

Between 1999-2003, Intel spent over $11 billion buying about 40 companies, and the vast majority of these acquisitions failed. In fact, of the 15 largest acquisitions in its history, Intel has shut down or sold off the acquired products in every single case (aside from Wind River which is too recent to include).

This is an awe-inspiringly bad track record, and likely puts Intel as the worst acquirer in tech history. There isn’t even a Wikipedia acquisition page for Intel like there is for Google, Microsoft, Cisco, and Apple. If I were a conspiracy theorist, I’d say Intel’s corporate PR department had Wikipedia remove the page.

Only kidding. But the truth is, Intel doesn’t want the media and public to remember how bad they are at M&A. They want everyone to believe it will be different this time.

The Reasons Behind Intel’s Past M&A Failings

Intel has become dominant off of one single product category: PC processors. They love how easy it is to make money in PCs, and even do things like sell 100% margin scratch-off cards to consumers to “unlock” features (it’s amazing what you can sell when you have a monopoly).

Intel isn’t good at innovating outside of PCs / servers primarily because a “not invented here” (NIH) culture prevails within the company, causing internal teams to reject products which originated elsewhere, or which serve non-core markets.

Intel’s missteps outside PC processors are vast. First was the failed diversification in the 1999 – 2002 communications boom. Then Intel made a massive splash at CES in 2004 with a technology called LCOS for digital TVs, only to kill it later that year. And of course Intel tried once and failed in mobile, selling off its XScale division to Marvell in 2007.

It’s fine to fail fast like companies sometimes do with products (e.g. Google Wave), but with Intel we’re talking about a different type of failure: overpaying for bad acquisitions and a complete inability to wean itself off of PCs.

Unfortunately, M&A is Not a Strategy

In addition to its cultural resistance to outside innovation, Intel has also tended to rely on ad hoc M&A as its growth strategy. This is bad. M&A should be used to augment a corporate strategy, not as a strategy to grow in and of itself.  In this way Intel faces the classic innovator’s dilemma as they attempt to reach beyond PCs and grow through acquisition.

McAfee and Infineon are huge risky roll-up bets—Intel has very little presence in security and mobile today, and McAfee is the largest deal in corporate history. Synergies will not be realized unless the technology, operations, and people are rolled successfully into existing Intel product lines.

And large roll-up acquisitions in technology can’t typically rely on cost synergies—they must produce additional revenue synergies. In this context it’s very revealing that Intel has publicly hedged, talking openly about how both Infineon and McAfee can be operated autonomously.

But operating these companies autonomously isn’t what Intel promised to shareholders when it comes to growth and diversification beyond PCs into new markets.

And there are already ominous signs for Intel: Rumor is that Apple has already ditched Infineon for Qualcomm in iPhone 5. This is pretty ironic following Intel CEO Paul Otellini’s public gloating about Steve Jobs being “very happy” with Intel’s acquisition of Infineon. And very bad for Intel since Apple was Infineon WLS’s largest customer.

So though only time will tell if it will be different this time for Intel, it certainly isn’t starting well. And it’s tough to see how these huge sprawling acquisitions into new markets will work given Intel’s record of poor execution.

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TechCrunch Link

As I was writing this, news of the HP / Dell bidding war for 3PAR broke on the front page of Yahoo. This made me laugh, as it typified just how crazy this story has become—few things outside of a bidding war will make a storage acquisition sexy enough to make mainstream news.

At $30, HP’s current offer is the sixth bid, a 200 percent premium over 3PAR’s previous $10 share price. Not only is this insane, but it’s also nearly unprecedented in M&A history. And since 3PAR is trading above $32 the market thinks Dell will bid even higher.

First Off, Is 3PAR Really THAT Unique?  

Yes and no.

3PAR is a classic disruption play, its value proposition based on the premise that unused storage is wasteful—often times just 10% to 25% of allocated disk space is actually used.

3PAR’s “thin provisioning” technology enables disk space to be allocated only when applications need capacity, greatly reducing IT management costs. Think of it as storage on a just-enough and just-in-time basis.

In the cloud era, pre-allocation of storage is especially wasteful, because on-demand storage and computing services delivered via the internet have wide variability and less deterministic usage patterns. This makes 3PAR a great fit for data centers, and it’s partly why the technology is suddenly perceived as very valuable.

Not surprisingly large storage vendors have been slow to adopt technologies like 3PAR’s for a simple reason: making storage more efficient ultimately means selling less gear and is essentially akin to committing commercial suicide.

EMC CEO Joe Tucci actually once went on record admitting as much saying “If I only have hardware and I just keep helping to make you more and more efficient at less and less cost, eventually I’m going to hit a wall and it’s going to be tough for me to make money.”

HP’s Vanishing R&D Budget and The Mark Hurd Effect

This classic “Innovator’s dilemma” definitely applies to HP. But something else has hamstrung its ability to innovate in high-end storage, a market HP has been a leader in for many years.

And it’s correlated to former CEO Mark Hurd’s recent firing. Word on the street is Hurd wasn’t let go for his affair or even for his embellishment of trivial expense reports. Instead the board kicked him out because his employee approval rating was absolutely atrocious.

And the reason employees hated him is because he traded short-run profits for long-term innovation by laying off entire design teams and killing HP’s R&D budget—take a look at this chart and compare HP to Cisco and IBM, both storage leaders.

In this way, I believe acquiring 3PAR is actually the beginning of a secular trend for HP in using M&A to “make good” on the company’s lack of organic innovation.

Yes that’s right, believe it or not, the real reason why HP’s board is obsessed with 3PAR is closely correlated to Hurd’s departure—divisions like HP’s storage group simply haven’t kept pace with peers. I used to sell to HP’s storage groups (as well as Dell and 3PAR) and have plenty of friends who tell me that projects have been canned and innovation has languished.

Dell is Desperate for Similar Reasons

Innovation within Dell is even more of an oxymoron. If you thought HP’s R&D allotment was low, compare it to Dell’s. Dell is not an engineering driven company. They are a system integrator desperate for growth outside of the personal computing market.

And storage consolidation threatens Dell for another reason. Storage has traditionally been like a cross selling catalog, with vendors filling in their product portfolios by OEM’ing equipment from others—Dell actually resells EMC’s high-end storage gear today. But these cross-sell deals are becoming more tenuous to defend as vendors build out more complete portfolios.

This is because cloud computing requires complex virtualized resource allocation, management and provisioning. Vendors are increasingly moving up the stack in providing services beyond hardware, which is all but a commodity.

Owning 3PAR would give Dell a chance to stay in the game and complement the low end storage solutions it acquired from EqualLogic in 2007. And the Dell board is prepared to break the bank since there is a scarcity of other good high end storage virtualization plays (Pillar Data and Compellent are two of the largest, but don’t have 3PAR’s traction).

Why HP Will Probably End Up with 3PAR

So there you have it. With its DNA as a system integrator, Dell doesn’t have a hope in hell of organically growing complex ASICs and software like 3PAR has, and is desperate to move up the food chain and stop reselling EMC’s portfolio. And the HP board is tacitly admitting it needs to rectify the fact that Mark Hurd sort of killed the “HP. Invent” culture. 3PAR would give HP several hundred R&D focused engineers and a talented ASIC team.

The interesting thing about this bidding war is that it conveys a larger lesson about why M&A often fails.

It’s easy to listen to investment bankers and overpay on acquisitions. But it’s much harder to actually handle post-merger integration. Dell is the perfect example. They have essentially no precedent for running an ASIC team, and would take a company like 3PAR that spent 25% of its revenue on R&D and eventually starve it.

3PAR is a better fit for HP, and in the end it’s likely that they will prevail. It sure seems that way anyway. HP’s board is set out to make up for lost time and right its innovation ship regardless of cost to shareholders. But the synergy premium for 3PAR will be enormous, and history suggests that deals with such a massive allocation of acquisition goodwill generally fail to pay for themselves.

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TechCrunch Link

Over the weekend it was reported that Apple hired Benjamin Vigier, an expert in near field communication (NFC), a short range wireless protocol most synonymous with contactless payments. This key Apple hire is perhaps the strongest public signal yet of Apple’s intent to use NFC to build on its micropayments franchise and disrupt traditional point of sale using a mobile commerce model.

There is no doubt that Apple wants to enable native support for mobile payments and authentication—its myriad of patents and installed base of 100M active iTunes accounts with credit cards on file make this a no-brainer.

But I’ve learned of an even more revealing sign that Apple will integrate the technology—sources tell me that Apple has built NFC-enabled iPhone prototypes using hardware from NXP Semiconductor, and is testing mobile payments today (NXP is the market leader in NFC and Goldman Sachs just ran its IPO).

The existence of prototypes would almost surely suggest that Apple will include NFC in iPhone 5, or whatever Apple decides to call its next iPhone. Nokia is also slated to include it on all 2011 smartphones, and NXP recently announced an Android-based reference platform and open-source SDK to facilitate payments.

Short range wireless also has compelling use-cases beyond commerce, and it’s clear Apple is thinking of integrating NFC into its Apple TV and MacBook lines to transfer data between devices at high speeds. Imagine freshly-snapped photos from an iPhone 5 transferred instantaneously to a new iTV device by placing the devices close together for a few seconds.

In fact, Apple’s patents say a lot about its “hardware network-effects” strategy and how NFC could accelerate sales for Apple—iPhone 5 users would be more likely to buy an iTV and vice versa. In this way, this strategy mirrors what FaceTime has done as a selling point for iPhone 4.

FaceTime can only be “unlocked” when both callers have an iPhone 4, and therefore becomes a feature which spurs people to upgrade. This perfectly exemplifies how Apple could leverage creative proximity-based applications to promote synergies between product families and accelerate new hardware adoption.

Proximity-based integration with iAd is another potential gold mine for Apple. Think of the power of serving ads, coupons and loyalty awards based on presence. Shopkick recently announced plans for localized promotions and engagement (likely using proprietary point to point Wi-Fi). NFC would enable a standardized contactless method for merchants to promote consumer engagement, and it’s clear Apple wants in on this market.

And though my sources say Apple is currently testing NFC chipsets from NXP, it’s highly possible that Apple chooses technology from Broadcom, who currently supplies Wi-Fi and GPS on iPhone 4 and who recently acquired an NFC company to make multi-function chipsets combining all of these technologies.

It’s pretty clear Apple is aligning all the pieces to include NFC in iPhone 5. But non-core components aren’t locked up this far in advance of a product release, and iPhone 5 has a ways to go until device verification test (DVT) and pre-production, the stage at which the Verizon-based iPhone appears to be, as indicated by Apple’s orders for millions of CDMA chipsets.

Nonetheless, it appears increasingly likely that iPhone 5 will usher in a whole new world of mobile commerce and short range wireless applications, which makes perfect sense based on Apple’s highly converging hardware, software and platform strategy.

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TechCrunch Link

We’ve been hearing Verizon iPhone rumors for years now.

It’s to the point that no one really believes the rumors anymore, since analysts and pundits have cried wolf so many times.  But this time looks to be different due to some key dynamics in the semiconductor value chain, and I am going to go on record to say Verizon will be selling an iPhone this coming January. Here’s why:

Smartphones like the iPhone are built from a collection of components, which are sourced individually from suppliers—e.g. the iPhone 4’s cellular baseband (the core chipset used in mobile phones to handle voice and data communications) comes from Infineon and its GPS chipset from Broadcom.

Component purchases and manufacturing starts don’t typically reveal strong links to individual handset OEMs. But in some cases components have a DNA which is traceable through the supply chain. For example, iPad rumors became much more concrete when we knew Apple was procuring large LCD screens.

For typical refreshes of GSM-based iPhones (the model that works on AT&T’s network), suppliers and component product families remain fairly consistent between models.  But a Verizon compatible iPhone would be CDMA-based, which would make its DNA distinct from other iPhones and traceable through the supply chain.

The dominant supplier of CDMA chipsets is Qualcomm, the largest fabless chip company in the world. Apple has never procured baseband chipsets from Qualcomm before.

If Qualcomm were to plan for orders from Apple, there would be a ripple effect through the supply chain. It works like this: Apple’s iPhone forecast links to Qualcomm’s CDMA chipset forecast, which then trickles down to their foundry partner TSMC, who uses the forecast to plan wafer starts.

A CDMA-based iPhone would likely sell 2-3 million units in the first few weeks (modeled after iPhone 4’s oversubscribed launch). The lead-time associated with upside in the semiconductor world is huge, sometimes as long as 26 weeks (supply is tight right now so this rule is in effect and Apple had major supply problems with the iPhone 4 and iPad).

Sources with knowledge of this entire situation have assured me that Apple has submitted orders for millions of units of Qualcomm CDMA chipsets for a Verizon iPhone run due in December. This production run would likely be for a January launch, and I’d bet the phone is nearly 100% consistent with the current iPhone 4 (with a fixed internal insulator on the antenna).

I can’t say with 100% accuracy that an iPhone will hit Verizon store shelves in January, but all of the signals point that way, and it would give Verizon’s CEO some interesting things to talk about in his CES keynote (though he may have to refrain as CES comes before Apple’s typical January keynote). I may be proven wrong, but based on my history dealing with components and selling to Apple, a Verizon-compatible iPhone looks to be a done deal.

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TechCrunch Link

Updating your location in the background on mobile apps is gaining momentum as a use-case, most recently with an app allowing you to Check-In On Foursquare Without Taking Your Phone Out Of Your Pocket.

Problem is—though this sounds really amazing—such uses of background location services are bound by hardware / software limitations and aren’t quite ready for primetime. The Future Checkin app (which is obviously an innovative example of using Foursquare’s API) reveals why: this app specifies a 300 meter check-in radius, which is equivalent to about four city blocks.

Imagine being in Union Square in New York and the app deciding to “check in”—to where exactly? You could be close to 10-20 places you’ve already checked into in the past. Not only could you have tons of previous check-ins within a small radius, but you may just be walking (or in a taxi) with no plans to stop anywhere. The Future Checkin app intelligently uses “favorites” to mitigate this, which are locations that you or it tags automatically when you frequent them enough, as well as recent-check-ins.

For me, this reduced “nearby” locations to around eight when I opened the app in Union Square. In less-populated areas which people frequent occasionally, this could help, but in cites like New York the technology feels like it’s not yet ready for primetime.

The main issue preventing these types of great ideas (granular geofencing, passive check-ins, pushed coupons) from becoming reality is the fact that GPS radios consume incredible amounts of power. For this reason Apple precluded use of GPS on iOS 4 location backgrounding. Instead, cell towers are used to approximate a subscriber’s location.

Cell tower triangulation has long been considered a joke. Though it’s been really useful for safety features such as 911 call-locating and for applications like geo-tagging photos within a city radius, the inaccuracy and infrequency of updates really mitigate the promise of broader applicability.

Also, 300 meters is overly-optimistic. Accuracy of background location on iOS 4 depends on how quickly you’re moving, the relative frequency of cell tower updates, and hardware (iPhone 4 makes better use of triangulation than iPhone 3GS). In non-optimal conditions, one kilometer accuracy is about all a person could expect (a 12 city block radius!).

The truth is that as much as Apple wanted to provide granular LBS with iOS 4, there’s a disconnect between the maturity of the technology and the goals of the people who dream up product ideas. This passage from Apple’s iOS reference library shows where Apple hopes developers will go:

“You might use region monitoring to alert the user to approaching landmarks or to provide other relevant information. For example, upon approaching a dry cleaners, an application could notify the user to pick up any clothes that had been dropped off and are now ready”

But it’s kind of comical when you see Apple product people pushing ideas that almost certainly won’t produce an “Apple experience”. Unless they think that you’ll want to be alerted to pick up your dry cleaning when you are 12 blocks away, this isn’t going to fly.

This problem isn’t limited to Apple however. Android has issues as well because successful background location depends on GPS. And today it’s simply not feasible to leave the radio connected or your phone will die within several hours. Issues such as poor indoor reception and time to first fix (TTFF) complicate this further.

So what’s the solution? Eventually the GPS radios inside phones will become more sensitive to location and will consume less power. Broadcom recently won the iPhone 4 GPS design (from Infineon), and it is producing highly integrated chips and multi-function radios that will do wonders to enable low power background updates.

Modes like assisted GPS will allow the GPS chip to turn on and get a fix within seconds (instead of the standard 40 seconds for a cold start) even without any satellite information.  They do this with aid from the cellular network (time and frequency data). In between updates, the chips will go into a “sleep” state, consuming up to 1000 times less power, but can still wake within seconds, since after the initial fix the receiver can predict where the satellites will be a certain time later.

But these advancements are still a minimum of one year out, so don’t get excited too soon—it’s unlikely that even next year’s iPhone will solve all of the hardware and software issues around checking-in with your phone in your pocket.

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TechCrunch Link

Apple’s earnings and revenue growth in mobile have been awe-inspiring to witness. From zero presence three years ago, Apple is now the most profitable cell phone maker in the world.

Apple’s success in this compressed period has helped it become an enormous buyer of components. In fact iSuppli projects that next year Apple will become the second-largest semiconductor buyer worldwide and may edge out HP in 2012 to become the world’s largest.

Though this scale presents Apple with enormous bargaining power, it also begs the question: Should Apple own its own wireless chip development?

This week’s rumors that Intel is about to acquire Infineon’s wireless chip business to make a run at the smartphone market bring this question front and center. Infineon is Apple’s sole supplier for cellular basebands, the core chipsets used in mobile phones to handle voice and data communications.

Based on Apple’s deep relationship with Infineon, and its famed secrecy around M&A, it is a pretty safe bet that Steve Jobs is analyzing the implications of a deal.

Vertical Integration is Back In Vogue:

We are re-entering a period where companies are integrating vertically instead of horizontally. This is happening at an incredible pace at companies like Cisco and Oracle. Even Microsoft recently hinted at creating its own chips, by obtaining an architectural license for ARM processors.

There are even precedents in the mobile phone market—both Nokia and Ericsson successfully managed cellular chip teams up until 2007 before spinning them off in a quest to move up the services stack.

The fact is that despite Apple’s success with the A4, it trails nearly all other large hardware companies in chip development, including Cisco, Sony, and IBM.

Synergies Between Infineon and Apple are Significant:

In addition to having supplied every cellular baseband chip that Apple has ever bought, Infineon is one of only four companies with an ARM architectural license (Qualcomm, Marvell, and now Microsoft are the other three). This allows Infineon to extend ARM’s basic capabilities, and is clearly synergistic with the charter of PA Semi and Intrinsity, which were acquired by Apple for their respective ARM expertise.

But below the surface, the rationale for Apple owning wireless technology runs even deeper.

Because Apple primarily sells just one hardware version per year, it’s infinitely easier for it to match devices with features. Nokia got rid of its chip business because it was impossible to produce different variants of chips for hundreds of handsets.

In this way, it’s Apple’s minimalistic approach to hardware that makes it the perfect candidate for vertical integration at the wireless level, as R&D can be narrowly focused. For example, if Apple’s not going to release a 4G handset in 2011, they don’t need to worry about cramming in pre-release versions of LTE / 3GPP. Or if they are strategically planning around short range wireless micro-payments, they can begin to integrate NFC technology now.

This edge could conceivably help Apple out-innovate larger competitors like Qualcomm who must produce more generic chips which cater to the needs of the broader market.

Lastly, since Infineon is only the fourth largest 3G baseband provider, there are fewer OEM customer relationships to phase out following the acquisition (LG and Nokia are its next biggest customers and wouldn’t be happy buying from Apple, so would turn elsewhere for subsequent designs). But precisely because Infineon is a smaller player, this issue of buying into the supply-chain is entirely manageable.

Apple could also learn better practices in RF design from Infineon, clearly a weak spot per the recent antenna issues.

Financially, It Makes Sense:

Apple can do no wrong right now with Wall Street. That’s why 2010 is an ideal time for “risky M&A” in the wireless space. With its stock at an all-time high and with over $40 billion in cash, Apple can afford to strategically spend capital on expanding into wireless chip development.

Infineon’s wireless group did $1.2 billion in sales last year, and comparable transactions suggest a premium of about 1.5x sales, or a $2 billion dollar price-tag.

Let’s compare this to the ridiculous rumor in April that Apple was going to buy ARM, the maker of semiconductor IP that goes into all of the world’s cell phones. At that time I outlined why buying ARM for more than $5 billion made zero sense.  Clearly acquiring Infineon for around $2 billion absolutely does make sense.

And here’s the real crux: If Infineon is acquired by Intel or Samsung, Apple won’t ever be able to obtain wireless technology at this price again. Every other chip vendor supplying cellular basebands is enormous and diversified across industries (Qualcomm, ST-Ericsson, MediaTek, Broadcom).

Not Owning Wireless Is Dangerous For Apple:

Aside from the synergies and advantages to owning wireless chip development, you can bet Steve Jobs is thinking about the risks of not doing so.

In the future, handset OEMs will buy “package solutions”, consisting of application processors (e.g. Apple’s A4, which give mobile phones computing power for handling software and applications), integrated connectivity chipsets (GPS, Wi-Fi, FM, Bluetooth, NFC), and multifunction radios—all from one vendor. Qualcomm is nearly there today, and Intel wants to combine Infineon with its Atom processors to get there.

This poses a threat to Apple, since Qualcomm and Intel will start to integrate portions of digital interface logic into their application processors in proprietary ways in an effort to promote bundled solutions. This will marginalize Apple’s ability to marry merchant wireless chipsets with subsequent variations of its A4 application processor.

And it’s why vertically integrating “half-way” is a dangerous journey for Apple as mobile innovation accelerates and integration levels skyrocket. The truth is Apple is a different company today than before it entered the mobile world.  Picking up Infineon would give Apple all the necessary pieces listed above to completely control its future as a mobile device company.

And if Apple misses out, it will likely never get another chance to acquire the wireless technology necessary to do so because the entire mobile component value-chain is consolidating and the remaining players are giants.

Which is exactly why Intel is rumored to be salivating so much at the prospect of snapping up Infineon for itself.  Intel has big ambitions in mobile and understands why it can’t let this one get away.  The only real question is whether Apple wants to get into a bidding war with Intel.

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TechCrunch Link

Leading up to Apple’s press conference tomorrow, there’s been endless speculation about the iPhone 4 antenna issue. Amidst all the wrangling, both sides have been pretty bipolar about the solution—suggesting either a complete recall, or a hand-waiving session, free bumpers, and a general denial of the hardware issue.

The best solution lies in between both of those extremes: a full admission of the hardware issue, together with a voluntary recall and an immediate manufacturing fix. Here’s why:

The antenna issue is not only very real, but it’s also open-ended. To date, only 3M iPhone 4 units have shipped. PC World estimates that 40M units will ship by 2011.

This staggering forecast quantifies the true issue for Apple—it will never really go away. With each iPhone 4 sold, the installed base grows. And since the issue appears to be fairly fickle, presenting itself differently depending on location and signal, the potential for problems grows geometrically as shipments increase. And continued negative mainstream press could actually expand Apple’s woes exponentially.

There is a simple solution:

ODMs (original design manufacturers) in Taiwan are incredibly deft at making quick changes to their manufacturing runs. In my visits to Foxconn and Taiwanese ODMs, I was always completely blown away by how they made changes in the middle of product cycles. Most people aren’t aware that components inside consumer electronics equipment change as often as every 3-6 months. And these are component and software level changes, which are much more difficult than simple changes to the industrial design.

A person only needs to think of HTC (part ODM, part OEM) to witness this. If HTC is capable of producing entirely new models of phones every 1-2 months on average, then it’s very clear that Foxconn and Apple should be able to implement a mid-run manufacturing tweak to modify the design of the antenna.

What would this tweak constitute? It’s fairly straightforward: An insulating coating should be applied to the stainless steel antenna. Surely Apple design God Jonathan Ive has an arsenal of materials at his disposal which could coat the steel, yet retain the look, feel, transparency, and hardness of the stainless steel band.

Together Foxconn and Apple should be able to complete this in a month or less. Foxconn can stage the runs of new iPhone 4’s, and switch the manufacturing line over as soon as new antennas are ready. Since there is no shortage of stainless steel (unlike Retina displays for instance), this solution would only be gated by how quickly Apple and Foxconn can move.

Considering the antenna issue is quickly becoming the worst gaffe in Apple’s history, mobilizing the required resources should be Apple’s No. 1 priority.  In fact, if Steve Jobs announces tomorrow that such a fix is already under way, it will go a long way towards silencing the uproar.

This is imperative for Apple, since the installed base is rapidly growing, and since Apple’s lack of attention to quality assurance threatens to become a permanent blemish. Both the lack of testing and Job’s email response were extremely sloppy. The antenna issue stands in complete contradiction to Jony Ive’s recent interview in which he boasts about Apple’s command of materials—it doesn’t take an RF engineer to know that stainless steel is conductive.

It’s much better to fix the antenna now. Apple can then do a “voluntary recall” after a certain date once manufacturing has hit its stride. For example, the voluntary recall is announced now, and starting September 1st, customers can exchange their iPhone 4 at a genius bar for up to three months.

Such a voluntary recall would only produce a modest financial hit since it would be spread between two quarters (the September and December quarters), muting any hit to earnings. And since many newly-educated customers will be using bumpers or after-market cases by that time, plenty of people won’t even bother with the recall.

Fix the antenna Apple. Or the issue will damage your brand and become much worse. By the way, I talked to iFixit, the self-repair site, and they think Apple is using some sort of coating.

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This post originally appeared on TechCrunch.

The success of iPhone 4 has been astonishing to witness, despite the antenna issues, proving once again that Apple has an unparalleled ability to differentiate around design and integration, not simply "features".

Perhaps the best example of this ever is FaceTime, Apple’s take on video-calling. FaceTime makes video-calling on the Android-based Sprint HTC EVO look silly, because the EVO awkwardly requires users to sign up and download a third-party app, then launch it every time they want to talk. Normal people simply won’t do this.

Apple eliminated this friction by innovating at the confluence of hardware and software – hit one button mid-call and the feature just works. It really is amazing (yes, I am channeling Steve Jobs).  

But FaceTime is just a teaser of Apple's deep integration capabilities. Below the surface of hardware / software, Apple is on the cusp of differentiating on a much deeper level, a result of its strategy to vertically integrate at the component level. The advantages of integrating so deeply are subtle but incredibly powerful.

‘Feature Bloat’ in Components Benefits Apple:

I recently discussed why innovation in mobile is happening at an unprecedented pace. One primary driver is incredible component innovation.

But this rapid innovation – which is good overall – causes a negative byproduct: ‘feature bloat’.  The HTC EVO, which crams in 4G wireless, epitomizes this best (sorry, but mobile 4G is NOT ready for primetime, and I firmly believe Apple won’t even include it on next year’s iPhone 5).

The temptation for companies to differentiate via features is a virtuous cycle: component vendors (Broadcom, TI, Qualcomm) compete aggressively based on integration levels. Handset OEMs like HTC push vendors to release features prematurely, and they make component decisions based on availability of bleeding edge (but often buggy) technology.

This leads to a 'kitchen sink' mentality, which conflicts with customer development frameworks, ironically driving a maximum feature set. Pressure from handset OEMs is a driver, but component vendors also tend to use competitive analysis to shape their marketing requirements. Steve Blank made some excellent insight into why this leads to feature bloat. The poor reviews of the HTC EVO are proof that – though alluring – additional features don’t always speak to consumers. Especially when they kill your battery overnight.

Apple thinks much differently about adding features. While the HTC’s of the world "differentiate" blindly based on available technology, Apple innovates only when it can create a superior, well-integrated user experience.

Right now this virtuous cycle of feature bloat is accelerating in system-on-chip (SoC) development for the reasons I outlined above. And Apple is poised to sidestep it by vertically integrating and producing chips which mirror its minimalist product strategy.

Supply-Chain Transparency is an Enormous Unspoken Benefit for Apple:

Perhaps even more powerful is an unspoken advantage afforded to Apple's SoC designers: vertical integration gives them explicit knowledge of what’s happening across the entire component ecosystem and value-chain.

How? Every component vendor in the world visits Cupertino to share its 'secret' roadmap – despite the fact that Apple now competes in SoC development. The dangling carrot of an Apple design win simply outweighs any aversion to sharing. This transparency from other chip makers is extremely powerful, since handset OEMs plan several generations out (e.g. Apple is undoubtedly in concept stages with 'iPhone 6' and the 'A6').

Apple can learn Broadcom's chip plans and mull over whether to bring portions of the digital logic related to GPS and WiFi on to the A6. New technologies like NFC for payments – bring in-house or purchase discrete? There are dozens of permutations, each with design challenges, benefits, and risks.

By extracting data from suppliers, Apple's chip team has a feedback loop into product planning. All of this collective wisdom adds up, helping Apple decide what to roll-up, buy, license, and outsource. Imagine seeing your competition’s entire feature roadmap, and then planning your own SoC strategy. It’s like seeing your neighbor’s wife naked, and deciding afterward whether you’re interested, even though you’re already married.

Cisco has used a similar vertical integration strategy to its benefit in the enterprise for many years (Broadcom and Marvell pitch Ethernet fabrics despite the fact that Cisco builds its own switch chips). But in mobile, Apple is the only company who owns all three elements of the value-chain – hardware, software and components (outside of Samsung). Nokia divested its component division to STMicro, and Ericsson and Motorola spun off theirs as well. 

As multicore ARM-based chips accelerate, and as software / hardware integration becomes more of a differentiator, Apple engineering teams will out-innovate competitors at the intersection of these three levels (again, antenna issues aside). It’s much more difficult for Google, Motorola et.al to cross pollinate information from their own independent silos.

In tomorrow’s smartphone wars, this transparency into the entire mobile value-chain will give Apple an incredibly powerful advantage. This strategic implication wasn’t lost on Steve Jobs when he made the decision to vertically integrate and compete with the giants in the semiconductor world.

Fact is, Apple is a company run by brilliant strategists and user experience designers, not engineers. They know that deep component, hardware, and software integration gives Apple an enduring advantage as mobile platforms evolve. Which is why Apple will undoubtedly produce more products and features that become huge hits like iPhone 4 and FaceTime.

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It’s rumored once again Apple's next bold move is in the living room. We've heard this for years, but now the scoop is Apple will redesign Apple TV around iOS (think iPhone without a screen). This makes sense, since iOS and the A4 have all the processing and HD graphics power needed for HDTV. But absent a completely new cloud strategy, such a device would be dead on arrival. Here’s why:

Apple TV is priced at $229, supporting 160GB of local storage—a price which has proven way too high for mass market living room adoption. Speculation is that the device would need to be around $99 (Roku's price), and certainly not higher than $149.

Apple’s gross margins typically hover around 50%. A $99 Apple TV would need to have a bill of materials (BOM) of $50 in order to meet margin requirements. At $149, the BOM would need to be $75. So the question becomes – is it even feasible for an iOS-powered device to meet these cost targets?

iSupply estimates that the iPhone 4 costs $188. Most chips on the front and back sides of the iPhone 4’s circuit board can be removed including the GSM circuitry, GPS, gyroscope, touch screen controller and camera sensor. Apple TV doesn’t need these, but even removing all of them (as well as the battery and screen) only lowers the base cost to $99—still way too high, since to maintain 50% margin, Apple would need to charge about $200.

By embracing a cloud strategy and streaming music and video, the flash memory can be removed, since local storage wouldn’t be needed. Removing the flash lowers the BOM to $72 (and 16GB of Flash isn't nearly enough for video storage anyway) . At $72 cost, Apple could comfortably sell Apple TV for $149 and make about 50% margin, or bring the price as low as $119 for 40% margin. Certainly component costs will keep going down, so it's easy to envision a $50 BOM and $99 Apple TV.

This is a simplistic analysis, but it really is this simple from an economic standpoint. A cloud-centric streaming model is imperative for mass adoption of any device Apple produces for the living room. It’s also unlikely Apple would adopt the razor blade model and sell Apple TV below margin requirements, attempting to make up money on content subscription revenues. Apple has never been known to do this with hardware. 

So it’s almost certain that an iOS / A4-based Apple TV is on the horizon, but it will only be ready once Apple completely revamps iTunes for the cloud. Buying streaming music provider LaLa was surely aimed at accelerating advancement in the living room. Once Apple can secure subscription deals with content providers, build out their data center and CDN strategy, and move beyond a local storage model, they should have all the pieces to price Apple TV aggressively and take the living room by storm.

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This post originally appeared on TechCrunch.

On the heels of the latest Android phone, the Sprint HTC EVO, and as we approach iPhone 4, it seems like mobile devices and platforms are innovating at about five times the pace of personal computers. 

Rapid advancement in mobile is often attributed to the natural disruption by which emerging industries innovate quickly, while established markets like PCs follow a slower, more sustained trajectory.

But there are deeper fundamentals driving the breathtaking pace of smartphone advancement. Component vendors supplying to smartphone OEMs have evolved a much different DNA than those supplying to PC makers. Smartphones are an evolution of embedded systems, not PCs, and embedded markets have long favored vendors who don't simply provide the most highly integrated chipsets, but who can also partner with OEMs to drive system-level integration and software at a rapid pace.

Hardware / Chipset Integration Differences in Smartphones vs PCs:

Intel's monopoly in PC processors and peripheral chipsets has caused PC innovation to stagnate. "Chipsets" sit alongside a CPU and integrate auxiliary functions such as wireless and peripherals. By “bundling” chipsets with processors, Intel neutralizes competition on PC motherboards. Exceptions such as graphics exist, but Intel essentially "decides" 90% of what will (and won’t) be included on next generation PCs.

A great example of this is around lack of GPS in laptops. The fact that I have to type in my starting address on Google Maps on my $1,500 MacBook Air serves as a constant reminder that PC innovation has plateaued (even Mac hardware is controlled by Intel). It's no surprise people reach for their iPhone when in front of a computer – the mobile experience is often better.

GPS is just one example of the ever-widening gap between PCs and smartphones. Sure, PC makers could add a separate GPS chip to the motherboard, but why hasn’t Intel pursued location as a core piece of IP in its chipsets to drive a better mobile experience?

It’s simple – they don’t need to. Intel loves high margins, and their market monopoly allows them to pursue margin at the expense of innovation.

In contrast, smartphone vendors have traditionally competed in a fragmented supply chain, integrating at a breakneck pace just to survive.  Today's 3G wireless chipsets integrate GPS, Bluetooth, and 802.11n on a single chip. And the competition between great companies like Qualcomm and Marvell not only spurs further integration, but also drives vendors to differentiate in system integration and software.

System Level Integration and Support Differences in Smartphones vs PCs:

System integration is the term for how hardware and software combine to create a finished platform. In PCs, Intel dictates the pace of hardware releases – OEMs essentially wait for CPU updates, then differentiate through inventory control, channel / distribution and branding. Intel wins no matter which PC makers excel – they literally don’t care if it’s Asus, Dell or HP.

In the smartphone world, it’s the opposite. Dozens of component vendors fight each other to the death to win designs at smartphone OEMs. This competitive dynamic forms an entirely different basis for how component vendors approach system integration and support.

Consider Infineon, which supplies the 3G wireless chipset in the iPhone. In order to stay in Apple’s graces, Infineon must do everything necessary to help the hardware and software play well together, including staffing permanent engineers in Cupertino or sending a team overnight from Germany. Do you think Intel does this for Dell?

This level of commitment helps smartphone OEMs to iterate platforms much more quickly than they could do so alone. If Infineon slacks off at Apple, other vendors are pushing to get inside the next iPhone. This competitive dynamic simply doesn’t exist in PCs, which is actually a fascinating side-story to why Intel and Microsoft have traditionally failed in most embedded (non-PC) markets.

Software Platform Differences in Smartphones vs PCs:

We all know Apple deserves credit for starting the first wave in smartphone OS innovation and for restructuring the wireless industry. And though we harp on Android for fragmentation issues, Google's commitment to moving the OS forward is noble considering Microsoft has only released 3 Windows refreshes in the past 10 years, and is yet to release a smartphone OS, 30 months after buying Danger.

The competitive interplay between Apple and Google will continue to help smartphone software outpace PCs. But iOS and Android also benefit wildly from the structure of the smartphone industry. Apple and Google are pushed not just by each other, but by the symbiotic advancement in chipsets and the system integration work of component vendors that I detailed above. The entire smartphone innovation value-chain just works.

It's this overall combination of component advancement, system integration, and software which will continue to drive unprecedented innovation in mobile. Meanwhile, the WinTel monopoly is taking PCs along a slow linear path, where features and user experience drag way behind available technology.

As we approach the next evolution in computing as ushered in by the iPad, Microsoft and Intel are under extraordinary pressure to recover in mobile. But not only do they lack the technology to succeed, they also fall victim to the inbred structure they've created in the PC industry. It’s very likely that within 5 years, tablets, smartphones, and other “mobile devices” will have permanently left PC innovation behind. And I'd argue this is a good thing for both the progression of exciting new technologies, and for consumers.

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