Windows Phone 7 Series – Finally, Microsoft gets it!

There’s a Turkish proverb that says – “No matter how far you have gone down the wrong road – turn back!”

That’s Microsoft for you in the mobile device business. For several years, I have voiced my frustrations to my friends in Redmond (disclaimer – I spend quite a bit of time with Microsoft on marketing capability development) about how Windows Mobile was trying to be “Windows on a mobile device” and failing miserably at it. For a simple reason. A mobile device is NOT a smaller computer that you carry around. It is a very different user experience and so it logically demands a very different user interface. I vowed that, as long as Microsoft kept the “Start” button and the menu bars that went with it on WinMo, I would never use a Windows Mobile device. You can keep putting lipstick on a pig, but it will remain a pig. The concept of seamless integration with your desktop and enterprise (Outlook, Office, etc.) was a great idea and a good differentiator for Microsoft, but that does not mean that you need to make your mobile device look like, act like and feel like your desktop! Windows Mobile was annoying, klutzy and slow. But most importantly for me, it was just the wrong user interface because it was trying to carry the legacy of Windows on to a mobile device. This legacy was like a ball and chain attached to a ballet dancer’s foot.

And we have seen this before. I teach a classic case on the Apple Powerbook dating back to 1994. In that case, Apple was just coming off the failure of the Portable project. The Apple Portable was designed to be a “no compromise” smaller desktop – it had an 8-hour battery life, active matrix display, powerful processor and a big hard drive. The only problem – it weighed 17 lbs! Apple had fallen into the trap of extrapolating ther “mental model” it developed about the ideal user experience from the Macintosh to the Portable. The problem -laptops are NOT smaller desktops. They are used in a variety of different scenarios and the user experience you create has to be quite different from a desktop. Microsoft (in my opinion) was also carrying around the mental model of “make Windows mobile” as opposed to “make a delightful mobile device experience”. Success can be a lousy teacher and legacy can stifle your creativity and shackle you.

So I am pleasantly surprised to see that Microsoft has finally broken free from its chains and has started from scratch to build Windows Phone 7 Series (to my friends at Microsoft – please also break free from the lousy brand naming legacy and call this thing something less verbose!!). Finally, it is a user experience that is built ground up with the user in mind as opposed to the Windows legacy in mind. The Tiles, the gorgeous graphics, the seamless music and video integration and the social networking features all make this a truly worthy competitor to the granddaddy of user experience – the iPhone. And what I like most is that Windows Phone 7 does not try to copy Apple. It goes in a different direction and it goes beyond in many ways. And like Apple, Microsoft is finally taking more responsibility for the end-to-end user experience, by being a lot more presriptive to the ODMs and OEMs about the “reference specs” that will guarantee a minimum quality of user experience. For too long, Microsoft has taken a cop-out by saying that “we don’t control the end-to-end experience like Apple does”. But in fact, it DOES have the power to dictate the user experience to its partners. I’m glad to see this happen, at least from the early indications.

There’s still many unknowns here. Will it all work as promised? Will the apps be anywhere close to the Apple iPhone ecosystem? What will the devices look like and how many OEMs/ODMs will sign on? How will carriers respond? Is it too late for Microsoft in this game?

But I do give a lot of credit to the folks behind this new version for admitting that they were on the wrong road, and that sunk costs are just that – sunk. This is a fresh start for Microsoft. The mobile device game just got more interesting and more competitive. The only certain winner – you and I. I can’t wait to get my hands on one of these. Anybody in the Mobile business listening?

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A few weeks ago, I gave a keynote speech to the global marketing team at Cisco Systems. In my talk, I made a provocative observation. I noted that Cisco has acquired several B2C (business-to-consumer) companies including Linksys and Pure Digital (makers of the elegant Flip camcorder). Further, Cisco has other interesting products like Internet phones that are relevant for consumers. Finally, John Chambers has identified the home market as the “next big frontier” for Cisco. But my contention was that Cisco still doesn’t “get” the consumer market. If they did, they would offer a simple universal home connectivity and storage solution that would store my media, route my video and voice traffic, run my telephones and videoconferencing in the home. And it would be available from Best Buy and installed “out of the box”. That’s not likely to happen soon. It will probably take a genetic mutation for Cisco to truly embrace the consumer market. For that matter, Apple is never going to become a big player in business markets either. They have “consumer DNA”, not “B2B DNA”.
As Geoffrey Moore has observed, there are two types of technology companies – companies that make “complex systems” and companies that make “high volume” products. IBM, Cisco, SAP and Oracle are in the first category while Apple, Sony, Intuit and Nokia are in the latter category. And never the twain shall meet. Efforts to transform B2B companies into B2C companies are almost never successful. Yes, there are some exceptions – HP and Microsoft possibly come to mind. But in general, you are either fish or fowl.
There is another dimension to the same problem. There are “product” companies and “services” companies. Product companies sell things while services companies offer services and solutions. For instance, IBM is a (primarily) services company while Motorola is a product company. Product companies that try to “cross the line” face serious challenges. Consider the Google NexusOne phone. Google is quickly finding out that selling a product is quite different from offering an online service. When people pay $529, they expect personal service. Knowledgebases don’t cut it. And when Intel got into the services business with Intel Online Services, it was a disaster as Intel wasn’t very good at the 7×24x365 mindset that services demand.
So why can’t leopards change their spots? It turns out that B2B markets don’t only differ from B2C markets in terms of products. They differ in the entire business system that is needed to design, develop, market, sell and support the products. The development process is different. The figures of merit in product development are different. The price points and margins are very different. The importance of target costing and price-volume analysis is different. The sales & distribution channels are different. The partner ecosystems are different. The branding approach is different. The differences are systemic – they are embedded in every aspect of how companies think, how they are organized, how they operate and who they hire. And even if the “consumer division” is held at arm’s length (as Cisco has done with Linksys and Microsoft has done with Xbox and Zune), there is a “dominant logic” in every company, and everyone knows who the real Brahmins are.
Why should leopards change their spots? They need to. A secular trend I observe is the consumerization of technology. The consumer market is becoming more important than ever before as technology products reach beyond the rarified atmosphere of enterprises and seep into the mass consciousness. Consider mobile devices. Time was that cellular phones and wireless email devices were predominantly used by businesses and professionals. Now, even the staid RIM is coming up with sexy consumer models like the Pearl and the Storm. And of course, Apple has completely changed the game with the iPhone. Other markets will follow the same logic – unified communications, networking, cloud services, to name a few. So the writing on the wall is clear. If you are a B2B company, you have to figure out how to “scale down” your offerings, first to the mid-market and Small Business segment and eventually to the consumer market.
But how? I think companies will be well-advised to study the few success stories – HP seems to pull it off well. So does Microsoft, to some extent. And Adobe. How they did it and what they do differently is the subject of another post someday. Meanwhile, B2B marketers, consider yourselves warned!

Now that we have the iPad (notwithstanding its flaws), will eBook readers die?  What is the future of Blu-Ray players as TVs converge with the Internet?  Will the Flip die now that we have video cameras built into iPod Nanos? Will handheld GPS devices seem quaint when every smartphone has built-in GPS functionality?  Is there a future for a dedicated TiVo devices? A common theme in all these questions is – do dedicated devices eventually die because devices converge?  Do devices converge as technology advances?  Looking back at history, we see examples of convergence as well as examples of dedicated devices persisting.  The PC is the ultimate convergent device, and many a dedicated device (word processors, fax machines, NCs – Network Computers, etc.) have been sucked inexorably into the pull of the “do it all” PC device.  Even at the software level, Microsoft Office is a convergent suite that sucked up dedicated functionality from WordPerfect, Dbase and Lotus into one package. Yet, dedicated gaming consoles have been able to resist the forces of convergence. And the TV-VCR combo didn’t catch on either. What gives?

My take is that, like all questions in marketing and strategy, the right answer is – it depends!  I believe that convergence (and the consequent death of dedicated devices) is a function of several contingent factors.  So, rather than taking one side or another of this debate, I would like to reflect on som principles that will help predict whether we will see convergence win out in a specific context. So here are some assertions:

1. The more mature the underlying technologies, the more convergence is favored. 

2. The wider the disparity among the converging functionalities, the less likelihood that convergence wins. 

3. The greater the value of “converged scenarios”, the more the  likelihood that convergence wins.

4. The more the cost of a dedicated device, the more the likelihood that convergence wins

5. The stronger the externalities of dedicated devices, the lesser the likelihood that convergence wins

Let’s look at these principles in turn, with some examples.

When technologies are immature, it is difficult enough to do one thing well. It is virtually impossible to do multiple things well. Consider the Apple Newton. Handwriting recognition, display, battery and processor technologies were all relatively immature in the ealry 90s, when the Newton was created. In fact, a whole slew of PDAs (Motorola Envoy, AT&T EO, Bell-South Simon and so on) failed because the devices simply could not do everything acceptably well. But now, the data-voice convergence is virtually seamless (smartphones).  And data-voice-media is also quite easy to do (iPhone/Nexus One).  As a corollary, if you are trying to combine apples, oranges and broccoli, it is difficult to create a convergent device that does very different things well. If the form factor for the different dedicated devices are very different (does a camera look like a phone or does a phone look like a PC keyboard?), it is more difficult to create an acceptable convergent device.  If ”jack of all trades” functionality is acceptable, then convergence wins. But if you need very specific functionality for a dedicated device, as gaming consoles offer, then dedicated devices persist.  Hence, I believe that Digital SLR cameras will sustain as a dedicated device, but the Flip is more vulnerable. 

Sometimes, convergence creates new scenarios – you can do things with convergent devices that you simply could not do (elegantly) with multiple dedicated devices. I still am amazed how I can Google a business and click to call the number on my smartphone.  And how I can take a picture and upload it instantly onto my Facebook account using my smartphone. These are “convergent scenarios”  - new possibilities that convergence opens up.  But bundling a VCR with a TV does nothing new – one plus one is two, not eleven in this case. So the more the possibility of valuable convergent scenarios, the more likely that convergence wins. So, watch out, Tivo!

If dedicated  devices are expensive, then the value of a convergent device (or product) that offers a better deal overall will be greater. That’s how Microsoft Office destroyed the competition in office applications.  It was not only expensive to buy all these dedicated applications, you had to learn each application separately and you could not integrate them easily.

Finally, one of the reasons gaming consoles will persist despite advances in PC and TV technology is that people have a lot invested in the software, and this software is not portable across platforms. The same thing is true for the Amazon Kindle – you can’t move the books over (or at least Amazon won’t make it easy to!).

So these are some principles that might help you figure which way the cookie will crumble.

Not even 24 hours since the announcement of the much-hyped iPad and much real and virtual ink has already been spilt. Here is my two cents. I think the iPad is aimed squarely at the center – of nowhere. I’m trying to understand the scenarios where the iPad does something that other devices we own (including Apple’s own iPod Touch and iPhone) don’t do well enough to justify the price of the iPad.  Further, I struggle to come up with scenarios where the iPad will be a complete substitute for either a laptop or a netbook or a smartphone.  And I’m forced to make a heretical statement – I’m sorry, Mr. Jobs, I think you messed up on this one. The iPad, in the final analysis is either a) an oversized and overpriced iPod Touch; or b) a Netbook/laptop substitute wannabe that is marvelous at content consumption but is nowhere as good at content creation.  Maybe Apple will conjure up a market of people who don’t own iPhones or iPods or iMacs or Netbooks or laptops, and are willing to pay a hefty price for an admittedly gorgeous browsing experience.  I’m not sure there are too many people like this left. When Apple did the iPod and the iPhone, they created truly breathrough performance, design and usability that reinvented the categories these devices participated in. But with the iPad, Apple is trying to create a new category, a much more difficult task.  There is a hole in the market between smartphones and netbooks, and it is a hole for a reason.

And then there is the TCO (Total Cost of Ownership). If I take the median hardware device (32GB) and add in the 3G coverage (without which the mobile value proposition of the iPad is seriously compromised), I am out $729. If I add the umlimited data plan from AT&T (the 250MB/month plan isn’t enough if I want to watch movies), that’s $30/month additional.  Over a 24 month period, that’s a TCO of almost $1,500. I’m sorry, Mr. Jobs, did you realize that 10% of Americans don’t have jobs? Apple is trying to make money on ALL three elements of the business – the hardware, the connectivity and the content. Amazon swallows the connectivity fees, and the iPod Touch doesn’t require a data plan.

What’s the outlook for the iPad? There will be long lines on the day it becomes available, because a million or so die-hard Apple fanatics will buy anything Apple puts out, even if it is a brick.  Seduction and lust is a powerful emotion and it will drive sales for a while. Once the early adopters have forked over their money, the rest of us will start to ask difficult and incovenient questions about the value relative to the price.  And Apple will be forced to make some drastic adjustments to the pricing and the connectivity fees. The iPad won’t be a failure, but Mr. Jobs, this is no iPhone.

Then again, as Richard Bach notes in the last page of Illusions - “everything in this book may be wrong”. And so may everything I have said. After all, Jobs is the brilliant billionare, and I’m just a modestly-paid academic!

I have been seduced by Apple. Twice. Once by the iPhone and once by the Macbook Pro.  First it was the sexy iPhone, with all its fancy media handling capabilities and the oh-so-sexy interface.  And of course, all the apps.  I chucked my BlackBerry and got in line at the Apple store to buy myself an iPhone.  A few days into my love affair, I discovered that beauty is often skin deep.  Typing on glass is not something I want to get used to at my age. And the email capabilities of the iPhone simply don’t stack up to my trusty BlackBerry.  And the screen tends to get pretty greasy.  Plus, at least when I bought the iPhone, the battery life for 3G was really poor. Now, I know that there are millions of iPhone lovers who will hate me for my opinions, but for me, the iPhone was a brief torrid affair that lasted two weeks. I returned my iPhone to AT&T and bought myself a BlackBerry Bold. And all was peaceful.

Until a few months ago. I finally caved into the charms of the Mac, spurred on by my brother and cousins who swore that “there was no going back” once you got a Mac. So I bought myself the sexiest Mac I could find, with a giant 24 inch HD Cinema display.  And I gave up on my trusty Lenovo laptop, which has the sex appeal of a water buffalo. My excitement faded in a few days when I started using the lousy Entourage email program and the Word for Mac. They simply don’t work as well as the Windows versions.  And other annoyances poked through. The printer connectivity of Snow Leopard with Windows printers leaves a lot to be desired. And who thought of the sharply milled surfaces on the edge of the Macbook? They cut into my wrists when I type. And the Mac doesn’t talk to Live Mesh from Microsoft, one of my favorite cloud services, the way Windows does. Granted that much of my annoyance with the Mac links back to the Microsoft programs on the Mac, but that’s what I’m going to use for the forseeable future. I loved the touchpad and some other things, but when I put Windows 7 on my Lenovo, I find that many of the annoyances of Vista have been fixed and it works quite nicely now.  So my Mac is sitting around, forlorn and unused, while I revert to my trusty ole Lenovo.

So that’s Apple for me. The sexy siren that seduces only to disappoint.  And I find myself returning back to my steady girlfriends – Windows and BlackBerry. 

Now I’m waiting with bated breath for the upcoming Apple tablet. Now that sounds REALLY sexy. Surely my trusty Amazon Kindle pales in comparison…

These are tough times for entrepreneurs. We are going through one of the worst financial markets crises in history. The meltdown in financial markets has plunged economies around the world into a recession. Entrepreneurs are finding that investors have all but disappeared and revenues are declining as customers cut back spending. Given these woes in the capital markets and the economy, it seems that this is a very bad time to be starting a new company or to grow a startup business.

Yet, history suggests that difficult economic conditions may actually be the best of times for entrepreneurship. Like a lotus that thrives in a dirty swamp, some of the most innovative companies have emerged during deep recessions. And just as the lotus relies on the swamp for its nutrition, startup companies can actually benefit from difficult economic conditions. The Great Depression of 1929 was the most severe and prolonged economic crisis the world has ever seen. And yet, it was during these times that great companies like Motorola and Texas Instruments were founded. Ironically, it was during the Depression that Fortune magazine was launched, when there wasn’t much business to talk about! The next biggest recession the United States experienced was in 1982, as the economy shrank by 2.2% and unemployment spiked at 10.8%. However, it was during this time that we saw the birth of the IBM PC, the founding of Sun Microsystems, and the creation of Cisco Systems. These events gave birth to the PC industry, the computer workstation industry and the networking industry. Twenty years later, as the U.S. was again mired in recession in 2001, Apple launched its first retail store and introduced its revolutionary iPod digital music player. As Steve Jobs noted, Apple does not pay attention to the state of the economy. Instead, it believes that as long as it keeps putting great products in front of customers, they will continue to open their wallets.

Why are difficult economic times a good time for startups and innovation? There are several reasons. First of all, when funding is easy to come by, as it was during the dot com boom, there is a lot of noise and confusion in the marketplace. Many dubious business concepts get funded, and it is difficult to separate the wheat from the chaff. Startups are locked into a mad race to “get big fast”, even though they cannot absorb the pace of growth that is demanded by impatient investors. In my experience, far more startup companies die of indigestion than of starvation! When you get too much money too fast, you end up spending it in foolish ways. And you don’t have as much pressure to make the business profitable, because you can always raise more money. Just as homeowners in the United States got into trouble when banks lent them more money than they should have and on more lenient terms than they should have, venture investors tend to pressure startup companies to accept more capital than they need, which can end up getting them into trouble in the long run.

Another reason that recessions are good for startups is that customers become more demanding about value for money. So startup companies are forced to ask themselves hard questions about what value they offer to their customers and why customers should do business with them. When a market is growing rapidly, it doesn’t take much to sell your products and services. After all, a rising tide lifts all fortunes. But, as the legendary investor Warren Buffet observed, it is when the tide goes out that you find out who has been swimming naked! This customer-enforced discipline is good for startup companies, because it makes them focus more sharply on creating relevant offerings and compelling value propositions.

Finally, a recession in an industry often signals that the current technologies and current business models are running out of steam, and that it is time for disruptive new technologies and innovative business models to take hold. For instance, the Desktop Computing paradigm grew out of the declining fortunes of the Mainframe computing paradigm. Similarly, we are witnessing a slowdown in the Enterprise Software market, but at the same time, we are witnessing the emergence of Software as a Service (SaaS) paradigm and the Open Source Software paradigm, which have the potential to usher in a new era of software, applications and devices. Take the mobile device industry, for example. While the fortunes of conventional mobile handset manufacturers like Motorola and Sony Ericsson are declining, we are seeing the creation of open-source mobile devices based on Google’s operating system, Location-based services on mobile devices, mobile gaming, mobile advertising and mobile commerce. Customer needs do not disappear in a recession. There is always room to innovate, and there is more room to innovate when the existing paradigm is looking tired.

So the spirit of entrepreneurship remains alive and well even when things look gloomy. And entrepreneurship in India is no exception. Despite all the bad news we read about in the newspapers and the breathtaking decline of the Indian stock market, the Indian entrepreneurship scene is more vibrant than ever before. A case in point – the Tata NEN Hottest Startups contest that is currently ongoing has received over 500 entries in the Tata NEN Hottest Startups competition. The range of industries and markets these startups represent is amazingly diverse, ranging from traditional domains like IT, Internet, Media, Outsourcing and Retail to newer domains like Health Care, clean tech, biotech and agribusiness. And the fundamentals of the Indian economy remain solid. The Indian Internet audience grew to 28 million users by April 2008, a 27% increase from the previous year. The mobile subscriber industry in India continues to be on a tear, reaching 315 million subscribers by September 2008, with 10 million new subscribers being added every month. And despite the economic slowdown, the organized retail market continues to hold immense opportunity as it still stands at only 4% of the total retail market. The silver lining to the devaluation of the Indian Rupee is that revenues for startup companies focused on the U.S. and Europe are almost 25% higher in rupee terms than they were 6 months ago. Clearly, there is no shortage of opportunities in the market. And there is no shortage of talented and passionate entrepreneurs who are pursuing these opportunities.

However, entrepreneurs do need to recalibrate their strategies for difficult economic times, as investment capital becomes scarce and the marketplace slows down. They need to think differently about their markets, their offerings, their approach to funding, and their operations. Here are some tips for surviving and thriving in difficult economic times:

Grow organically: Think about how you can grow your startup company with minimal or no external capital. This might sound difficult, but on deeper reflection, investment capital is usually required for two reasons – to fund product development and to get big fast in a competitive race. I advise entrepreneurs to begin with project-based services that can provide quick revenues and lessen the cash burn, and then gradually invest in product development as they generate resources organically. The mantra – “servicize to learn, and then productize to earn”. Further, in difficult economic times, getting big fast may not be essential, because the race will be won not by those who run the fastest, but by those who last the longest. So you can afford to slow down and pace yourself to run a marathon, instead of burning out quickly in a frantic sprint fueled by venture capital!

Sharpen your Value Proposition: As customers become more demanding, you cannot afford to be wishy-washy about why they should be buying your products or doing business with your company. You need to communicate your value proposition clearly, crisply and concisely. What benefits do you offer? When, where and who should be using your products – what situations or scenarios have you optimized your offerings for? How are your offerings better than competing alternatives, including the alternative of not buying anything at all? How can you make it easier for customers to do business with you? How can you reduce their perceived risk of using your products or doing business with a small company? These are questions you should pay close attention to.

Diversify your markets: For a startup company, it is a good idea not to have all your eggs in one basket. If you focus exclusively on the U.S. market or the Indian market, you are more vulnerable to sharp downturns in that market or in currency fluctuations. For instance, the U.S. market might have looked very lucrative a few years ago for Indian IT companies, but an over-dependence on the U.S. is now hurting the leading Indian IT firms. As an entrepreneur, think about how you can make your products and services relevant to the Indian market as well as to developed markets. While it may take some effort to tailor your offerings and your marketing to different markets, you will be better protected from the wild swings in currencies and economic trends.

Variablize your Assets: Fixed assets are the bane of startup companies. You need loads of capital to acquire fixed assets, and they greatly limit your flexibility once you have acquired them. So, whether it is real estate, computers, software, and office equipment or even staffing, think ten times before you put a single Rupee into the ground. Instead of buying servers and setting up data centers, use virtual “cloud computing” services like Amazon.com’s Elastic Compute Cloud offering. Rent your office space, your office furniture and your office staff. Use part-timers where you can to reduce your burn rate. I have seen startup companies even time-share their executive management – hiring a part-time CFO or CMO until they have the resources and the need for highly-paid executive talent. Variablizing your assets makes you leaner and more agile, putting you in a better position to ride out the storm.

In conclusion, the spirit of entrepreneurship lives on in times good and bad. In fact, entrepreneurship may actually thrive in difficult economic times, because entrepreneurs need to be more disciplined, more focused, and less distracted by competition. If entrepreneurs can adapt their strategies to position themselves for the downturn, the same economic headwinds that are slowing them down can become the wind at their back, propelling them to the Promised Land.

As I survey the landscape of digital media, I find an interesting paradox. Digital technologies have revolutionized the convenience and cost of listening to music, watching videos, and keeping in touch with people. Digital music, digital video, digital mobile devices and digital social networks have become part of the fabric of our lives. We live in a world that is immersed in iPods, iPhones, BlackBerries, Facebook , Twitter and text messages. But for every step we have taken forward in convenience, we have taken a step back in quality and fidelity of our experiences.

Consider music. We began listening to music on amplifiers that used vacuum tubes and media that were recorded on vinyl. It was a hassle, it was expensive. But the quality of sound was superb. Even today, the purists swear by LPs and valves in their search for the perfect listening experience. Then we “progressed” to CDs that compressed the music, with a loss of quality. And then there was the iPod. It offered superb convenience and a massive 10,000 songs capacity, but only if you compressed the music into a poor facsimile of its original quality.

The same story applies to video. On the one hand, we have higher and higher quality of video recording and playback devices available. And yet, much of the video we consume today is the highly compressed videos on web sites and the grainy and poorly-shot stuff that passes for video on YouTube.

Our mobile phones are the same. We can take them anywhere and we can talk to anyone around the world. But give me a corded phone on a landline any day over the lousy sound quality and dropped calls that we take for granted with a mobile phone.

And so it goes for friendships. In the old days (“BF” – Before FaceBook – pre-2004), we had a few friends who we talked with, met face to face, had coffee with and hung out with. These were “high-fidelity” friendships – inconvenient and time-consuming, but rich and deep. And now, friends are like philately – we collect them as if they are stamps! My kids boast that they have hundreds of friends on FaceBook, and that they are in touch with many of them all the time, often many at a time. But I have to wonder about the depth and the quality of these connections. Do 100 text messages a day equal an hour of face-to-face conversation with a friend?

Don’t get me wrong. I’m far from a luddite. I welcome the advances of digital technology and the convenience it brings to our lives. But a part of me is saddened by the loss of fidelity that the march of technology has caused in our lives.

Now excuse me as I squint and try to read the Wall Street Journal on my tiny BlackBerry screen!

Last weekend, my wife made a convincing case for an interesting kitchen appliance – the Keurig Platinum Single Cup Brewing System.  The device is really innovative – it brews a single cup of coffee, tea, hot cocoa or even iced coffee in less than a minute, using “K-Cups” that you load into the machine and discard after each use.  It is easy to use, easy to clean, and looks really cool.  And you can choose from a lengthy list of branded providers of beverages. 

I was skeptical, arguing that we didn’t need yet another space-age kitchen appliance and that the TCO (Total Cost of Ownership) was very high.  But she won me over with her arguments that convenience trumps TCO and a hot cup of on-demand Joe was well worth the financial sacrifice and shelf space.  As I sip my cup of Newman’s Own Extra Bold coffee that I made on the Keurig, I must say that she was right, as usual. This machine is the greatest thing since sliced bread!  The coffee comes out piping hot, it tastes great, and the kids love the fact that they can make hot cocoa in less than a minute whenever they want. 

But what impressed me more than the device is the innovative business model that Keurig and its competitors (Tassimo and Lavazza, among others) have created.  I call it “Apple iPod/iTunes meets coffee”.  Let’s look at the similarities:

·         Like Apple, Keurig began with the premise that, while coffee makers have been around for a long time, the customer experience of making a hot, consistent and convenient cup of coffee in the home leaves a lot to be desired.  Coffee makers are difficult to clean, a hassle to operate, the coffee sits there and becomes cold and bitter, and it is difficult to figure out exactly how much coffee to put into the filter.

·         Like Apple, Keurig created a superb end-to-end customer experience consisting of an elegant hardware device, single-use “K-Cups” and a comprehensive ecosystem of “content” from 13 branded beverage manufacturers.  Further, like Apple’s proprietary AAC format, the Keurig K-Cups are not compatible with other systems.

·         Like Apple, Keurig sells the hardware for a similar price point as the iPod ($199), and content at a similar price ($0.60 per K-cup).

·         Like Apple, Keurig creates an “open yet closed” customer experience by allowing independent content providers to offer their own branded beverages, while maintaining tight control over the buying and brewing experience.

·         Like Apple, Keurig has been able to convince all beverage providers to sell the beverages at the same price.  Just as i-Tunes sells all songs at $0.99, all K-cups sell for $13.95 for a pack of 24.

·         Like Apple, Keurig has created a number of accessories, including reusable filters, milk frothers, travel cups, etc. that it sells at healthy margins.

·         Like Apple, Keurig has created a strong lock-in effect because of the investment that customers have made in its hardware and accessories.

All this allows Keurig to make a killing, first on the coffee maker and then on the K-cups.  For my household, here is the stimated CLTV (Customer Lifetime Value), assuming a 36-month horizon:

·         Coffee Maker: $199

·         Accessories: $50 (we have already spent about $30)

·         K-Cups: $6,000 ($0.60/cup x 10 cups/day x 365 days x 3 years)

That’s a CLTV about $6,150, assuming a 10% discount rate. And you thought Starbucks was an expensive habit!!

Here are the lessons to be learned from Keurig and its competitors:

·         Even a commodity category like coffee can be reinvented by focusing on creating innovative solutions and an innovative customer experience.

·         Business model innovation has far greater payoffs than product innovation

·         There’s a lot you can learn about business model innovation if you look beyond your industry

Now, I wonder why P&G and Kitchen Aid haven’t thought about creating a “personal laundry system” or a “personal dishwashing system”. This could include appliances that would accept proprietary “pods” of Tide or Cascade that would be inserted for each load, and would take the guesswork out of doing laundry or dishes.  If HP can make money from ink, Gilette from razor blades and Apple from MP3 players, what’s stopping other consumer packaged goods companies from using a similar “razor-razor blade” business model? 

Customer segmentation is probably the most important concept in marketing. But it is also one the most difficult to do well. In this post, I reflect on four key issues that marketers must address in their segmentation work:

1. Scope of segmentation – What is the appropriate scope at which segmentation studies should be conducted? Specifically, how do we reconcile the level of depth required by engineering with the breadth required by cross-business alignment?
2. Inbound versus Outbound Use of Segmentation – How do we reconcile segmentation variables that are useful for inbound product development decisions versus segmentation variables that are useful for outbound product marketing decisions?
3. Refresh Cycle and Stability of segmentation – How we ensure that segmentation remains relevant between the time the product is initially conceptualized, through development and into go-to-market? How often should we “refresh” segmentation studies to ensure that they are tracking changes in the market structure or demand?
4. Segmentation for Multiple audiences – how we approach segmentation and targeting for products that cater to multiple audiences?

1: Segmentation Scope:

The broader the scope of segmentation research, the less actionable the results are for specific business groups and products. On the other hand, the more focused the segmentation research, the less the “interoperability” and reusability of the research for other business/product contexts. If the scope is defined too broadly, you can end up with a very generic segmentation approach. At the other extreme, segmentation of a very narrowly defined audience will lead to very precise segments, but it would be of no relevance for other products/markets.

Specific questions that you need to think about related to scope:

• What are the different levels of scope at which segmentation is currently done?
• How “interoperable” are the segments/segmentation variables in segmentation studies done for different products/business groups?
• How feasible is it to “standardize” segmentation across business groups/products?
•  What is the “sweet spot” in scope between too broad and too narrow?
•  What can we learn from other companies or other industries in terms of best practices?

2: Inbound vs. Outbound Segmentation

When segmentation is done at the inbound stage to guide engineering decisions, it will emphasize variables such as:

• End-user behaviors
• End-user needs
• Usage scenarios
• Technological environment
• Desired features
• Depth and breadth of product use
• Skill level

On the other hand, when segmentation is done at the outbound stage to guide marketing decisions, it will emphasize variables such as:

• Audience
• Attitudes
• Demographics/Corpographics
• Psychographics
•  Life stage
• Media habits
• Price sensitivity
• Channel preference
• Goals and outcomes

A new day dawns today in America as Barack Obama becomes the first African American president of the United States. This is a time for us to look ahead. But it is also a time for me to look back and to marvel at how far this man and this country have come in four short years. I distinctly remember the phone call in the spring of 2004 from my friend David Jacobson, who is very active in Democratic political circles and has been deeply involved in Obama’s Senate and Presidential campaigns. David told me that he was supporting “this promising young guy who was running for the Senate seat in Illinois”. The candidate’s name was Barack Obama, and David urged me to support him and raise money for his campaign. I was skeptical – what chances did this young, skinny, African American with a funny name have? And he was running third in his Democratic Senate primary at the time. But I was intrigued.

I first met Barack Obama at a small lunch organized by an Indian friend Balvinder Singh, a political organizer in the Asian Indian community. I was impressed. He was intense. He was charismatic. He listened. He spoke softly, but with passion and conviction. I immediately wrote a check for his primary, and we organized a fundraiser for him in our Evanston home. He connected instantly with the small crowd at our home, and we all were left with the feeling that this guy was going to go places. If only we knew how far! I joke with my friends that that fundraiser was the best pre-IPO investment I ever made – it was like making an angel investment in Google! Now that Barack Obama is on the national stage and will soon be in the White House, I watch and admire him at a distance. And I am proud to have played an infinitesimally small part in his incredible journey.