Sunday, April 03, 2011

Innovation, Imitation, and Intellectual Property

Either the era of "cloud storage" is upon us, or it isn't. As you have likely heard, Amazon has announced cloud storage, directly inviting its customer base to upload their music collections and stream them to their mobile devices. For years, Apple has been rumored to be "about to release" a cloud storage product for your iTunes library, video rentals and purchases, etc., but apparently due to strong resistance from the entertainment industry those plans appear to be on indefinite hold. Google has danced around the edges of cloud storage, and you can already store incredible amounts of data on Google's servers for free (or purchase even more for a reasonable price), but having settled its YouTube lawsuits, struggled to settle its dispute with book publishers, and perhaps having concerns about various advertising and licensing contracts, has not offered the type of service announced by Amazon. I have no doubt that Amazon is aware of the risk it is taking in announcing this product under a philosophy of "It's better to ask for forgiveness than it is to get permission," but has concluded that (as with YouTube) it's better to be first to market even if it potentially means paying tens or hundreds of millions of dollars to settle lawsuits. Amazon's move could actually help Apple, Google, or any other company that wants to offer a similar product (Facebook?) by testing the legal waters for them and potentially creating a precedent for any necessary licensing deals.

Although for many years, large companies often seem to ignore each other's intellectual property rights until one or another sues, followed by either a huge settlement and licensing deal or a mutual settlement that allows the companies to use each other's technology without actually testing the viability of the underlying patents. Ever since the release of the iPhone, that seems to be the story of cellular phone software. Apple's also having to deal with the fact that although it remains difficult to innovate, imitation is easier and faster than ever. Android devices now have greater market share than iOS products, with Palm and Microsoft struggling to maintain their share.

An interesting blog post suggests that the creation, promotion, funding and distribution of quality, open source software is a big part of Google's strategy to protect its market. I expect that is Google's plan, but there's a serious side-effect to that approach: Google doesn't directly profit from the Android OS, and its store for Android Apps (awkward phrasing, but...) is nowhere near as profitable as Apple's App Store. Although companies making Android phones will customize the software and will offer a variety of phones at a variety of price points, the competition is increasingly seen as "Android vs. Apple" - the brand of the Android phone is marginalized and the value of an Android phone is commoditized.

Apple has been incredibly innovative at various points in its history, including in recent years, but under Steve Jobs it has excelled at producing premium products. In the recent iterations of the iPhone and in its production of the iPad, Apple has also leveraged its volume to produce highly profitable products at price points that, for its competitors, appear to be difficult to match. Yes, some will point to one Android device or another and argue that it's cheaper, has a higher resolution screen, has more memory, is more expandable, and may even be faster than the iPhone, but put one next to the other and you can immediately see why - plastic vs. aluminum case, bulkly vs. compact, etc. Such products highlight another reality: Apple is fully prepared to produce mobile products that will satisfy 90+% of consumers "out of the box" and to leave to others the production of products that can be easily expanded. Yes, Apple is also better at marketing, but that's a small part of the story.

The genius of Steve Jobs is sometimes overstated. Apple has managed to produce premium products within markets that are largely commoditized (cell phones) or to reinvent markets that others viewed as commoditized (portable music players). I don't want to understate Jobs' ability to spot trends in technology and culture, but (as with any computer product) there are aspects to Apple products that anticipate that people will use the product in a specific way and, should you want to do something else... tough. Some of that results from licensing deals. The easiest way to send text messages on an iPhone is through your contract with your cell phone carrier. (Just like GPS features are often expensive add-ons for smart phones.) You don't mess with the profit centers of companies you rely upon for the promotion and distribution of your products. iPods don't play well with computers other than the one you use to sync their libraries, and if you somehow crash the computer with your music library you'll need a third party product to recover your files from the iPod. OSX left Microsoft playing catch-up, but (IMHO) Windows has long offered a better finder. And we shouldn't overlook that Jobs' prognostications have involved attempts to bring technology to market too early, as well as some design innovations that did not attract consumers or introduced problems or complications. As with any strong, innovative company (seriously), Apple has released a lot of products that failed - and continues to introduce products and services that will fail. Google fails a lot as well. If a company bats 1,000, it's not taking chances.

As Apple profits from the tablet market, Microsoft correctly implies that tablets aren't different from any other computer hardware, and will eventually be commoditized. Or at least, that's how I interpret Craig Mundie's comments. But in their estimate of tablets as a potential flash-in-the-pan, Microsoft appears to be overlooking how tablets are much less an entity to themselves as much as they are part of a spectrum from tiny electronic devices to desktop computers, and that there are many contexts in which a tablet could prove valuable. The Hyundai Equus uses an iPad instead of a paper manual. There are increasing numbers of electronic and mechanical devices that can interface with iPads and iPhones (or similar devices) instead of standard remote control. And if you've seen a toddler with an iPad or iPhone you have a sense of how intuitive the interface is - and I expect that a generation that comes of age using touch screens and virtual keyboards is going to have a different perspective on traditional computers and keyboards than us "old folks". The commoditized touchpad screen is, I think, the interface of the future. (Microsoft suggests that the Kinect is the interface of the future - I guess it's more literally a game changer, but I expect that type of body tracking to remain specialized as opposed to ubiquitous.)

Let's assume, though, an era in which computer hardware is commoditized across-the-board. If you look at companies like Facebook (which has nothing to leverage that is not, or cannot be, replicated by others other than its large user base) and Apple, they are intent on creating a future in which they profit from any commercialization of their platforms. Google and Amazon perceive that future, as well, so they both offer apps for sale and Amazon is reportedly automatically placing copies of your digital media purchases into your cloud storage. I think that Apple has an advantage over Android, as with tight control over both the hardware and OS it will be much better able to assure content producers that it has effective DRM (digital rights management) and can quickly patch security holes that allow unauthorized copying or sharing. Google has no similar control over Android, and no control at all over the hardware that runs it. Amazon and Facebook can control things only at their end. Facebook doesn't have to deal with these issues (yet) because you have to connect to a social gaming network in order to participate in the online games that produce so much of its revenue. It's not clear what Amazon's plan is, to protect its cloud service from being abused - I saw somebody quip that you could have one Amazon cloud drive with 1,000,000 authorized users. So far, despite the slow and painful negotiating process that often seems to involve Steve Jobs giving a "Here's the deal, and it's not negotiable" offer to content providers, the long-term advantage seems to be Apple's. (Microsoft? It's only in the picture if you're talking about Xbox Live and, while I don't want to discount that service, it's self-limiting.)

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