Category Archives: Apple

Before Foxconn, Huawei Had Its Own Suicides

Long before the rash of deaths at the Foxconn Technology Group’s manufacturing facilities in China, another company fought to stem a wave of suicides at its Chinese operations.

That company was Huawei Technologies, and its problem with suicidal employees was covered in the media, though not as extensively as were the unfortunate events at Foxconn, part of the Hon Hai Precision Industry Co., Ltd.

What partly accounts for the difference in degree of coverage, I think, is Foxconn’s connection to Apple. As we all know, Foxconn manufactures Apple’s iPhones and iPads as well as computing devices for a number of other vendors, including Dell. Everything Apple touches is high profile, so it’s no wonder that the Western media gravitated to the Foxonn suicides once  Apple was discovered among Foxconn’s brand-name customers.

Another factor, though, might be the intense secrecy that surrounds Huawei. It’s a privately held company, shrouded in mystery, run by CEO Ren Zhengfei, who emerged from the People Liberation Army (PLA), is a member in good standing of the Communist Party of China, and is said to retain close ties to China’s defense and intelligence elite.

Still, the suicides at Huawei are a matter of public record. They began ramping in the year 2000 and continued well into the decade, seemingly coming to an end — or something like one — by 2008. At their peak, they were bad enough that Ren Zengfei wrote the following to another member of the Communist Party:

“At Huawei, employees are continuously committing suicide or self-mutilation. There is also a worrying increase in the number of employees who are suffering from depression and anxiety. What can we do to help our employees have a more positive and open attitude towards life? I have thought about it over and over again, but I have been unable to come up with a solution.”

This is not exactly the sort of pitch a human-resources executive wants to feature in employee-recruitment campaigns. Nonetheless, it demonstrates that Ren recognized the problem and was thinking hard about whether his company’s “wolf culture” and “mattress culture” were sustainable models on which to build a business that could scale and compete successfully against the world’s leading telecommunications-equipment and data-networking companies.

A few reports. which are disputed, suggest as many as 38 Huawei employees died from their own hand or from exhaustion during the past decade. Like Foxconn, Huawei experienced horrific on-site suicides, in which an employee typically would throw himself to his death from the balcony of a campus building.

Some commentators have noted that the suicide rate at Foxconn is not inordinately higher than China’s overall suicide rate. Some have even argued that the rate of self-destruction at Foxconn is lower than China’s rate, even going so far as to make the claim that working at Foxconn reduces the risk of suicide for Chinese employees.

Numbers can be sliced and diced, and they can be interpreted in a number of ways. As always, one should verify the accuracy of the source data and carefully check for an inherent statistical bias. I don’t have time to chase that thread now.

So, putting aside that debate, I want to consider another aspect of these stories: the incidence of at-work suicides at both Foxconn and Huawei. The instances of on-site suicide are well documented at both companies.

Perhaps I’m missing something — let me know whether I am — but I don’t believe there ever was a similar outbreak of suicides at technology firms in North America. Cisco, to the best of my knowledge, hasn’t seen its employees leaping to their deaths from the outdoor patios on Tasman Drive in San Jose. I don’t think we’ve seen anything of that sort at Juniper Networks or Brocade — or even Nortel Networks, where people have had considerable reason for despondence in recent years.

Workplace suicide is a dramatic act. It sends a powerful message. The victim makes a statement in not only how he chooses to kill himself but where he chooses to do it.

Ren Zhengfei was right to rack his brain in search of a solution to the morale problem at Huawei. However, as recent events at Foxconn and at other Chinese companies demonstrate, it isn’t a company-specific problem.

As China attempts to move up the technology value chain, from low-cost manufacturing to R&D-led innovation, it will have to find ways of motivating its employees with carrots instead of sticks.

Why Microsoft Might Finally Acquire RIM

In the past, I have argued that a Microsoft acquisition of Research in Motion (RIM) was unlikely and unwise. Still, stuff happens in the space-time continuum — circumstances change, new dynamics come into play — that cause one to revisit earlier assumptions and to reconsider possible outcomes.

Such is the case for my thoughts about a union between Microsoft and RIM. I no longer view it as an unlikely scenario. Considering what has been happening in the industry, and in light of the daunting challenges Microsoft and RIM face in the mobile marketplace, a marriage of convenience, if not one of amorous intent, could be in the cards.

Let’s first consider Microsoft’s circumstances. The company has failed utterly and repeatedly in its bid to establish a dominant mobile platform. Its smartphone licensees are defecting in droves, running into the welcoming arms of Google’s Android proselytizers.

Microsoft’s share of the smartphone operating-system market is plummeting like sales of The Knack’s follow-up albums. Microsoft’s latest silver bullet in this market is called Windows Phone 7, but a technical preview of that software, now undergoing lab testing at wireless operators, suggests Microsoft hasn’t cracked the code. A consensus is building that Windows Phone 7 is several years too late and several hundred-hundred million dollars short of where it needs to be.

At the same time, Microsoft might be coming to the grim realization that it isn’t the consumer-electronics behemoth it sees when it looks into the Redmond funhouse mirror. Microsoft’s perception of itself, as a company that actually understands and intuitively anticipates the desires of consumers, has been unmasked as abject delusion.

Fortunately, Microsoft might be gradually coming around to reality, recognizing that it must play to its strengths, not to its weaknesses. Its strengths are in enterprise markets, from SMBs upward. That  has been increasingly obvious to many people, except to certain denizens of Microsoft’s boardroom and to a few habitues of its executive suites.

Regrettably, though, Microsoft’s mobile offerings for the enterprise, even in terms of integration with its own server-based products, are sorely lacking in nearly every respect. Microsoft has failed at mobile, and it has disregarded one of its key constituencies in the process.

Meanwhile, we have RIM. Despite not having quite the corporate breadth of, let’s say, Nokia, RIM has the benefit of market focus and an established enterprise franchise that won’t vanish overnight. RIM could remain independent and stay the course. It could retain a solid core of its enterprise customer base — especially in certain vertical markets that require the centralized control, compliance, security, and back-end integration that BlackBerry products and technologies provide — but it will see some market-share erosion at the hands of Google’s Android and even Apple’s iPhone.  If RIM had more resources at its disposal, it might be able mitigate that erosion, if not stop it.

RIM might not want to entertain a union with Microsoft — scuttlebutt suggests it has resisted Microsoft’s entreaties before — but it might be more amenable to considering a compelling proposal now. Watching what’s happening to Nokia — a death of a thousand cuts amid a river of piranha, after losing its strategic bearings in a predatory jungle — cannot be edifying viewing for the chieftains at RIM. At one time, Nokia had acquisitive interest in RIM, and now Nokia is fighting, apparently without success, to remain relevant.

To be sure, RIM would not accept just any Microsoft offer. Maybe now, though, it  would not slam the door on the right offer. What might that be, though, and would Microsoft be willing to entertain it?

With more than $37 billion (and counting) in cash reserves, Microsoft has the means at tis disposal to pull off a RIM purchase involving a combination of cash and stock. RIM now has a market capitalization of $29.58 billion. Microsoft would have to pay a premium of at least 30 percent, probably more, to complete a deal. A $40-billion offer, with the right inducements, might suffice.

Clearly, that’s a lot of coin. We’re not talking about a simple, low-cost tuck-in acquisition with a modest risk profile. This would be a big deal, larger than any acquisition Microsoft has done. Until now, Microsoft’s biggest deal involved aQuantive, an online-marketing concern it bought for more than $6 billion in 2007. If Microsoft were to buy RIM, it would involve a transaction orders of magnitude greater than its purchase of aQuantive.

Indeed, the acquisition of RIM would be a scary proposition for the potentates in Redmond. It would be an off-the-scale move, a sharp deviation from Microsoft’s past practices and strategic playbook. But, as the saying goes, desperate times call for desperate measures. Microsoft, I believe, is very desperate. It could immediately realize revenue and profitability from RIM’s product portfolio and business model, which are more lucrative by far than anything Microsoft could offer in the mobile realm. Synergies with complementary Microsoft products and services also ought to be taken into account.

Critics might scoff, perhaps justifiably, citing two factors that argue against a deal (aside from the prohibitive price tag, which we’ve already discussed). First, they would point to technology-integration issues, arguing that Microsoft would struggle to convert RIM’s BlackBerry platform to Windows.

My response: Who says that needs to happen? RIM already integrates well with Microsoft applications and back-end systems. and Microsoft has been rewriting its mobile operating systems, practically from scratch, recently. It’s starting all over again with Windows Phone 7, which is receiving mixed reviews.

What risk would Microsoft incur by replacing Windows Phone 7, which doesn’t have an installed base, with RIM’s BlackBerry OS? I don’t see powerful arguments against the move. The cost of the transaction is a bigger impediment.
But, one might argue, what about Microsoft’s hardware licensees? What would Microsoft do about them?

Perhaps you’ve noticed, but Microsoft is losing their formerly loyal patronage. HP has bought Palm, and will begin using webOS in its mobile devices, while HTC, Motorola, and scores of others increasingly are adopting Google’s Android as their smartphone operating system. I don’t see many smartphone vendors anxiously awaiting the release of Windows Phone 7. They’ve moved on, and Microsoft knows it. What’s more, Google is giving away Android to licensees, making it all the more difficult for Microsoft to sell its smartphone operating system to handset manufacturers. Google changed the business dynamics of the OS-licensing game.

More than at any time I can recall, Microsoft is considering the merits of an integrated platform, one that involves a tight fusing of device hardware, operating-system software, uniform user experience (including a sleek, universal browser), a focused developer program, and a unified means of delivering and monetizing applications and content.

I am not saying Microsoft will buy RIM. The price alone is enough to dissuade it from doing so, and there are valid concerns about corporate integration and assimilation, about being able to get everybody moving in the same direction, about precluding needless and distracting internecine warfare and turf battles. There are good reasons, in fact, not to do such a deal, only a few of which I’ve touched on here.

But there’s desperation in Redmond. It’s palpable. Microsoft views mobile success as absolutely integral to its continued growth and prosperity. But Microsoft is no longer confident of its golden touch, especially in mobile computing, and it is more inclined to look beyond its doors for answers. RIM already has the sort of business Microsoft would like to own, with the potential for further synergies stemming from integration with Microsoft’s enterprise product portfolio and its cloud-computing strategy.

Consequently, I must revise my earlier opinion. I can no longer dismiss the possibility of Microsoft acquiring RIM.

RealD’s 3D Promise and Peril

I should have an opinion on RealD’s IPO today. Fortunately, I do have one, and I will share it with you now.

If 3D goes big, RealD will scale right along with it. The company is the leading purveyor of 3D projection systems for digital cinemas. By its own estimates, it owns more than half of that market, holding off competitors such as Dolby, Laboratories, Inc., IMAX Corporation, MasterImage 3D, and X6D Limited.

It’s interesting to see Dolby among RealD’s primary competitors. In many respects, RealD is emulating the approach Dolby used to dominate the stereoscopic sound market in cinemas worldwide. RealD has read Dolby’s playbook, and heretofore it’s done better applying it to 3D cinema than Dolby has done.

You can peruse RealD’s prospectus yourself, but here’s an excerpt to whet your appetite:

As of December 25, 2009, there were approximately 16,000 theater screens using digital cinema projectors out of approximately 149,000 total theater screens worldwide, of which 4,286 were RealD-enabled (increasing to 5,966 RealD-enabled screens as of June 1, 2010). In 2009, motion picture exhibitors installed approximately 7,500 digital cinema projectors, an approximately 86% growth rate from 2008, and in 2008, motion picture exhibitors installed approximately 2,300 digital cinema projectors, an approximately 36% growth rate from 2007. Digital Cinema Implementation Partners, or DCIP, recently completed its financing that is providing funding for the digital conversion of up to approximately 14,000 additional domestic theater screens operated by our licensees AMC, Cinemark and Regal. We believe the increasing number of theater screens to be financed by DCIP provides us with a significant opportunity to deploy additional RealD Cinema Systems and further our penetration of the domestic market.

The salient point is that the addressable market is large, the overall penetration rate for 3D projection systems is relatively low, and the market stage is nascent. Moreover, this is worldwide opportunity, not one restricted to the North American marketplace.

That’s a good thing, too, though RealD — like everyone else with valuable intellectual property — is concerned about the fate that might befall it in China. Among noted risk factors in the company’s prospectus, we find the following:

Our business is dependent upon our patents, trademarks, trade secrets, copyrights and other intellectual property rights. Effective intellectual property rights protection, however, may not be available under the laws of every country in which we and our licensees operate, such as China.

Even though that’s a legitimate concern, it isn’t RealD’s biggest worry. The real worries in my view are industry dynamics (namely, 3D’s spread from cinemas to consumer electronics such as televisions, PCs, cell phones, and game consoles), the quantity and qualify of 3D entertainment fare (also known as content), and the ability of the industry ecosystem and consumers to foot the 3D bill.

3D has proven marketable in cinemas, but now it is trying to expand its empire into consumer electronics. That’s an opportunity and a threat for RealD, which obviously wants to extend its hegemony beyond the three-dimensional silver screen.

RealD will have to rejig its business model and its technologies to capture consumer-electronics markets. It will have to enter into new relationships, build or buy new products and capabilities, and market and sells its wares differently. And that’s presuming that 3D makes a successful commercial leap into living rooms, mobile devices, and other display-bearing devices. Much remains to be done on that front.

Then we come to the content issue. You might have noticed that not all 3D films have the box-office wallop of Avatar. Movie exhibitors like the premium they charge consumers for watching 3D movies (though they are less enamored of the added cost of 3D projection systems), but the willingness of the masses to pay more per view is contingent on cinemas offering them experiences they deem worthy of the 3D surcharge.

I’ve scanned the lineup of 3D films slated to hit theaters over the several months. I am noticing — how shall I say? — the pungent whiff of ripe schlock arresting my olfactory senses, even though, incredibly, RealD has not entered the “Smell-O-Rama” business yet.

Sadly, a lot of cheesy horror movies are queued up for the 3D treatment. That’s not good. I’m of the aesthetic view that ostentatious protrusive effects, used to goose the shock value of severed heads and buzzing saws, aren’t the best utilization of 3D technology. I like the immersive depth 3D can bring to quality entertainment and live sports, but I’m not sold on the viability of cheap gimmicks, or of 3D as ornamental gossamer for bad content. Look, a crap movie is crap movie. A 3D turd is still a turd.

And a proliferation of 3D turds will not do the 3D industry any good. Does anybody in Hollywood remember the 1950s . . . or perhaps read history?

Anyway, presuming that 3D is used naturally, that it is applied to good movies rather than as a decorative wrapper for bad ones, RealD still will have to contend with the nasty array of macroecoomic uncertainties that beset all us all.

There’s considerable risk in RealD as an investment vehicle, and there’s also a commensurate measure of promise. Today, on their first day of trading, RealD shares were snapped up eagerly by investors who see more promise than peril. The stock was up sharply from the open, and the company was able to price its offering well above expectations.

That’s an important consideration, by the way. Earlier in this post, I mentioned that RealD intends to take its 3D technology to consumer electronics. As part of that foray, the company is also looking at developing autostereoscopic (3D without glasses) technologies to eventually supersede its stereoscopic (3D with glasses) technology.

All things considered, I don’t think the glasses are going to cut it for casual television viewing in living rooms; nor do I think anybody but the geekiest of geeks will want to be wearing 3D glasses for extended periods while using a mobile device or playing a game console. The company that does autostereoscopic 3D right stands to reap massive rewards. RealD wants to be that company, but it’s not alone — Sony, Samsung, Dolby, 3M, Nintendo, and many others are in the mix, and their advances are closely monitored by HP, Dell, Apple, IBM, Cisco, and other major players.

RealD needs a warchest to fight that battle. Today’s IPO delivers it, as the company makes clear:

We will continue to develop proprietary 3D technologies to enhance the 3D viewing experience and create additional revenue opportunities. Our patented technologies enable 3D viewing in theaters, the home and elsewhere, including technologies that can allow 3D content to be viewed without eyewear. We will also selectively pursue technology acquisitions to expand and enhance our intellectual property portfolio in areas that complement our existing and new market opportunities and to supplement our internal research and development efforts.

Today’s IPO will help RealD pursue its strategic plan. Numerous external factors, however, are beyond its direct control.

Microsoft Stumbles in Mobile Murk

This post is something of an experiment. I want to write about Microsoft’s commitment  to the tablet PC and see whether anyone cares.

I did not witness Microsoft CEO Steve Ballmer’s opening address at his company’s Worldwide Partner Conference. Most reports suggest that Ballmer was typically loud and proud, proclaiming an imminent Microsoft revival in cloud computing, mobile operating systems, and tablet computing.

For now, in this particular post, I will limit by commentary to Microsoft’s plans for tablet computing. The other topics will be addressed at another time.

According to Ballmer, about 20 device manufacturers will unveil various shapes and sizes of slate and tablet computers based on Microsoft’s Windows 7 operating system before the year ends. Among the vendors churning out Windows 7 slates and tablets will be Acer Inc, Dell Inc, Samsung Electronics Co Ltd, Toshiba Corp, Sony Corp., and numerous other hardware OEMs.

Ballmer didn’t mention HP, which procured its own operating system for smartphones, slates, and tablets when it acquired Palm and webOS. Nonetheless, Reuters reported that HP’s logo appeared on a slide listing PC makers working on Windows-based devices.

It’s hard to know how much to invest in that tidbit, however, because Phil McKinney, CTO of HP’s personal systems group, was simultaneously explaining at VentureBeat’s MobileBeat 2010 conference in San Francisco that his company bought Palm to “control the end-to-end experience” delivered by HP’s mobile devices.

It’s possible, of course, that HP will offer tablets based on Windows 7 as alternatives to its webOS products. HP might do so just to keep its relationship with Microsoft from fraying. Even so, HP will put its primary focus on the technology it acquired from Palm. To suggest otherwise is to question why HP bought Palm, and to question the sanity of HP’s executive leadership. Clearly HP did not buy Palm just so that it could license Windows for HP’s mobile devices.

Putting aside the touchy HP question, does Microsoft have what it takes to compete in a space that has been authoritatively defined by the success of Apple’s iPad? Theoretically anything can happen, but past performance and current circumstances suggest that Microsoft will not become king of this particular castle.

Let’s enumerate the reasons. First, there are questions about the technical suitability of Windows 7 for various slates and tablets. Windows hasn’t performed elegantly on netbooks — I, for one, immediately replaced the sluggish Windows Vista with Ubuntu on a low-end netbook in my possession —  and it’s an open question as to how well Windows 7 will perform on touch-based slates and tablets. A second consideration is whether Microsoft can deliver an experience that will be uniformly satisfactory across a broad range of devices from multiple vendors. Finally, it’s not 1999 anymore, and Microsoft’s isn’t the only operating-system software that device OEMs can evaluate for their new products. Google’s Android and Chrome are available, as are many variations of Linux. Microsoft isn’t the only game in town for tablet manufacturers.

Moreover, and perhaps more to the point, Microsoft seems to lack the customer intimacy and market focus that would give it a fighting chance in any competition against a strong rival with a notable head start.

Does Microsoft understand its tablet customers? Does it know who they are, what they want, and why they might choose a Windows device over one from Google or Apple? I’m not sure Microsoft has those answers. The company still seems to be pitching its products at an indeterminate intersection between the enterprise and the consumer. The trouble is, that crossroads is enveloped in darkness and fog, indistinct and poorly defined. Meanwhile, Microsoft wanders in the market’s wilderness, failing to travel on either road.

As I said earlier, though, anything is possible. Microsoft could get back on track, and it could reverse its declining fortunes in mobile devices, starting with slates and tablets and then —  yes, suspension of disbelief is required for this illogical leap — with smartphones, too. That said, Microsoft didn’t do enough today to prefigure such a bright future. From were I stand, the horizon looks murky and ominous.

Apple Isn’t in the Cisco Cius Picture

I don’t want to spend a lot of time on it, but I’ll offer a relatively brief assessment of Cisco’s Cius enterprise-tablet announcement yesterday.

Look, folks, the Cius is not competing with the iPad for the affections and disposable income of tablet-buying consumers. That’s not Cisco’s game, is not part of Cisco’s plans, and is just not happening. So, as difficult as it might be to do, forget about Apple and the iPad for now. Put it out of your minds. Apple gets more than its share of attention already, and I’m sure we’ll have many other reasons to pay homage to the iPad, the iPhone, and the other iWonders best0wed upon us by the wizards of Cupertino.

Now that we’ve determined what the Cius (as in “see us,” get it?) is not, what exactly is it? For starters, it’s clearly an extension of Cisco’s enterprise videoconferencing and video-collaboration portfolio. Cisco has been working from the high end to the low end, starting with luxury, room-based telepresence, buying its way into a wider range of corporate telepresence and videoconferencing through its Tandberg acquisition, and now developing its own low-end tablet, the Cius, to make enterprise video mobile and to deliver it to desktop docking stations.

So, one way of understanding the Cius is as a means for Cisco to  extend telepresence, videoconferencing, and video collaboration to areas of the enterprise it has yet to penetrate. It’s Cisco’s way of making sure video proliferates throughout its customer base, giving Cisco opportunities to derive sales not only from video-based products, but also from the enterprise-network upgrades that inevitably result from widespread utilization of high-bandwidth video on a corporate campus. For Cisco, there’s a revenue multiplier effect that is concomitant with the spread of enterprise video.

Not coincidentally, this move also precludes potential competitive encroachments by competing vendors of low-end videoconferencing and video-collaboration products. Cisco had a hole at the low end of its video product portfolio, and it has closed it with this announcement.

With the Cius, Cisco also integrates its enterprise-wide video-collaboration tributaries with its preexisting IP phone, unified communications (UC), and data-collaboration (as in WebEx) product streams. The docking station that comes with the Cius isn’t just an ornamental device holder; it is intended to act as the physical point of integration between personal video-collaboration and Cisco IP phones.  Competitors cut off at the pass here include Microsoft, HP, Avaya, and scores of others.

Finally — and Cisco’s reach might exceed its grasp on this one — the networking giant would like enterprises to view the Cius as an office-computer replacement. In defense of that argument, Cisco cites the Cius’ notebook-caliber Atom chip, its capacity to accommodate a monitor and keyboard, and its support for virtualization. I think Cisco has to put more meat on these skeletal bones, but I can see where they’d like to go and why. Again, Microsoft is a big target. It will be interesting to see how closely Cisco and Google, whose Android OS runs the Cius, can work together to disrupt their common foe.

All in all, the Cius was a logical move for Cisco, a practical and broad-based extension of its video-collaboration strategy. Apple, though, isn’t in this particular picture.

Maintaining Perspective on China’s Rising Labor Costs, Currency Moves

I don’t disagree with the basic facts presented in John Boudreau’s article at the San Jose Mercury News’ SiliconValley.com website, but I think the piece overstates the degree and significance of recent developments in China.

Boudreau correctly notes that labor costs are rising in the coastal region where most of China’s electronics and technology products are manufactured. At some point, those rising costs will result in decreased margins for product vendors or in higher prices for consumers and businesses that buy products from those vendors.

It’s also true that contract manufacturers operating in China’s main manufacturing hub will begin or have begun exploring alternative arrangements. Options include setting up factories further inland, in China’s less-developed interior, or shifting some types of manufacturing to automated facilities in Taiwan or to other low-wage countries, such as Thailand or Vietnam.

But those moves will not happen overnight. We should recognize that, even though the cost of Chinese labor is increasing, it’s still low. What’s more, China offers other advantages — such as a ready supply chain and access to plentiful raw materials (such as rare-earth metals essential to the manufacture of many kinds of technology hardware). Additionally, China still has that low-cost interior mentioned above, where there’s more than enough labor available to provide a helping hand.

Let’s also consider the appreciation of the Chinese yuan, also known as the renminbi. China’s authorities are allowing the currency to appreciate relative to the dollar, but the yuan won’t be allowed to skyrocket. China is not a so-called “invisible hand” market-based economy; its government retains firm control over the trading range of the country’s currency. Don’t expect a dramatic rise in the near-term valuation of the renminbi to the dollar. It’s not going to happen. Instead, advances and declines will be  controlled, incremental, and measured.

Finally, there’s the question of whether, and to what degree, increased Chinese wages might result in more consumer spending on imports from the U.S. and other countries. The assumption is that Chinese workers who assemble and  build Apple iPhones and iPads — not to mention HP and Dell PCs — now will be able to buy them, too.

To a degree that might happen, but bear in mind that China wants to move up the technology industry’s value chain. China won’t be happy functioning merely as foundry and consumer market for Western brands. China’s long-term objective is to architect and develop major technology companies of its own, Lenovo and Huawei being notable examples.

Those familiar with the term “indigenous innovation” know that Chinese companies will receive government support and encouragement as they increasingly compete against major Western companies across China’s technology landscape. We in the West need to exercise caution in assuming that China’s consumer market will function similarly to its counterparts in market-based economies. Not only does China’s government actively assist domestic companies — often through direct or indirect state control — but many Chinese consumers will actively and purposefully purchase goods and services from Chinese companies instead of those offered by Western companies.

What we’re seeing in these developments — the rising labor costs, the gradually unpegging of the yuan to the dollar, the country’s desire to ascend the technology value chain — are signs of a growing, maturing economic and industrial powerhouse. I don’t think they should be construed as symptoms of Chinese volatility or weakness.

Microsoft Hasn’t Earned Benefit of Doubt in Smartphones

At PC World, Tony Bradley strongly counsels his readers to wait and see Windows Phones 7 before they adopt Apple’s latest iteration of the iPhone or Android-based smartphones. He also says it might be prudent to include RIM and its BlackBerry in their assessments, too, but he dismisses that thought by brushing off the BlackBerry as “not really in the same league as the next-generation iPhone and Android devices, or what it seems Microsoft will bring to the table based on what we know so far.”

It is a curious statement that practically begs for a challenge. I will oblige.

First, let’s consider Bradley’s generous optimism toward Microsoft. How many kicks at the mobile can has Microsoft had? And how many times has its foot made solid contact with said can?

Even the most indulgent of observers would have to say Microsoft’s aim has been anything but true. What, then, persuades Bradley to believe Microsoft will do the deed this time? Is it because the company’s mobile group, like a faltering restaurant whose best chefs have decamped, is under new management?

I don’t know whether that’s enough to persuade me. Microsoft has had many chances to get it right with mobile operating systems and smartphones, and I’m at the point now where it must prove that it has the chops to play the game. Until then, I’m a resolute skeptic, and I wouldn’t defer an enterprise buying decision just because Microsoft might deliver a new smartphone operating system later this year. It’s been a long time since Microsoft had the intimidating force to suspend a market in that manner.

Let’s also consider Bradley’s summary dismissal of RIM. Earlier in this commentary, he cites smartphone market numbers, derived from comScore data, that suggest RIM tops the charts in market share. The company actually gained share in the last quarter on record, according to the comScore figures.

Like Microsoft, RIM will release a refreshed smartphone operating system later this year. Unlike Microsoft, RIM has enjoyed considerable market success with its smartphones. Like Microsoft, RIM has more affinity with enterprise users than with consumers. Unlike Microsoft, RIM has given its enterprise customers and service providers mobile-enterprise technologies and handsets that actually integrated smoothly with messaging and application infrastructure. That’s all the more impressive when one considers that, in most instances, RIM’s customers also were Microsoft customers. Even with that leverage, Microsoft failed to capitalize.

I don’t understand how anybody could extol Microsoft as a mobile-enterprise savant while dismissing RIM as a court jester. I fail to see the logic that says, of the two vendors, Microsoft is more likely than RIM to deliver an elegant, seamless mobile-enterprise solutions. How does one reach that conclusion based on what we’ve seen historically? Microsoft’s track record isn’t good, and we shouldn’t give it the benefit of the doubt just because it’s gearing up for another run.

Agreed, RIM’s Blackberry Operating System has fallen behind advances brought to market by Apple, Google, and even Palm, which is preparing for mastication by HP. Like Microsoft — and Nokia, for that matter — RIM will have to make up lost  technological ground on Apple and Google. But like Microsoft, RIM is making an effort to get back into the game, with its BlackBerry OS 6.0 slated for release later this year. Earlier indications suggest that it will close, if not eliminate, RIM’s innovation deficit. Nonetheless, it is not likely to change the fundamental perception of RIM as functional stalwart as opposed to trailblazing innovator.

So be it.  RIM probably doesn’t need to lead in flash and dash to maintain its enterprise clout. RIM understands the needs of enterprises — from application and systems integration all the way through to security and compliance — and it does not figure to be  easily displaced in large numbers of those accounts. Many enterprise users might try bringing their iPhones and Android-based handsets to the office, but that won’t always work, for reasons that vary depending on the specific industries and circumstances in which their employers operate.

Many years ago, when RIM began feathering its young nest among Microsoft’s installed base, I was among those who thought Microsoft might solve mobile email and repel RIM’s incursion with prejudice. Well, that never happened. Microsoft never did get its mobile house in order. Why do some of us think it will be any different this time?

Apple’s Innovation Falls Short in Product Naming

Apple has a well-earned reputation as an innovator, a company that regularly and repeatedly brings industry-leading designs, products, and technologies to market.

Apparently that innovation does not extend to the naming of its products and technologies. In that area, Apple increasingly displays a covetousness for what other technology companies already have brought to market. At its Worldwide Developers Conference (WWDC) yesterday, Apple had much to announce, including a renamed iPhone OS — now called iOS 4 — and a video-calling service called FaceTime.

As Network World notes, IOS and FaceTime are well-established trademarks in the technology world. Anybody familiar with Cisco Systems will know that IOS has long been an acronym and trademark of its Internetwork Operating System, a multitasking OS that runs on the networking behemoth’s routers and switches. Less known is that FaceTime was the trademarked name of a company that provides security and compliance software for IP-based collaboration and communications, including instant messaging, unified communications, and (more recently) social networking.

To avoid being sued for repurposing commercial names already on the market, Apple has licensed the IOS (or iOS) brand from Cisco (for an amount unknown), and its has acquired the FaceTime trademark from the company formerly known as FaceTime. FaceTime has put the best possible spin on the transaction, the value of which has not been disclosed:

As you’ve probably heard, Apple has announced that it will use “FaceTime” as the trademark for its new video calling application

Our agreement with Apple to transfer the FaceTime trademark to them comes as we are rebranding our company to better reflect our capabilities. We will be announcing a new name in the coming months.

This announcement echoes our long held belief that the Internet is changing the way people communicate. Increasingly the Internet is about communications, collaboration and communities – whether it’s social networking, instant messaging or now video calling, users are bringing these tools into the workplace.

FaceTime Communications helps businesses realize the benefits of the New Internet through enterprise solutions that provide unified security, management and compliance across the broadest set of applications and modalities.

Apple continues to be prolific in ideating and delivering its own designs and technology innovations, but product naming is a different story. In that domain, it is more than willing to pay handsomely for rights to the creative fruits of others.

Why ODM Evolution Puts HP and Dell at Risk

The mounting suicides at Foxconn have put that company squarely in the media spotlight, and not in a good way. Those deaths are human tragedies, and one can only hope that the factors that contributed to them will be identified and addressed so that similar incidents can be prevented.

As the vast size of Foxconn’s manufacturing plants and campuses attest, contract manufacturing has grown into an enormous business, one that continues to evolve far beyond its humble origins. In the past, contract manufacturers built or assembled finished products on a third-party basis for brand-name consumer-electronics companies. In recent years, however, their mandate has expanded.

At first, the business bifurcated between those delivering outsourced electronics manufacturing services (EMS) and those categorized as original design manufacturers (ODMs). As the names suggest, the former restricted itself to providing traditional contract manufacturing whereas the latter offered design and development as well as manufacturing services.

Until  recently, as Joseph Wei wrote last year, Foxconn, Flextronics, Jabil, Sanmina and Celestica were classified  as EMS vendors, while companies such as Compal, Quanta, Wistron, Pegatron (ASUSTek),  and Inventec were deemed ODM vendors. Increasingly, though, the distinction between the two classifications has blurred.

The aforementioned companies are extending and expanding their capabilities. Acer founder Stan Shih has noted that bare-bones EMS companies eventually will disappear or transition into what he called design manufacturing services (DMS). That’s a transformation Foxconn and others are undergoing, strengthening their R&D and design services to offer more value to consumer-brand clientele.  In adding design and development to their services portfolio, companies formerly in the EMS business mitigate distinctions between themselves and their ODM counterparts.

Although many of these firms originated in Taiwan, nearly all have Chinese operations, which are growing quickly. Like China itself, these companies are eager to ascend the value chain. Cut-price manufacturing of consumer electronics has been a good business for them, but the margins are wafer thin and the competition is fierce. (Then, of course, there are the dispiriting and sordid issues relating to sagging employee morale.) The more value a company can offer its consumer-brand clients, the more margin and profit it can make.

Now let’s turn this around, and look at it from the perspective of shareholders in the brand-name consumer-electronics companies availing themselves of the services of Foxconn, Wistron, and Quanta. For a Dell or an HP, the obvious appeal of doing business with a DMS vendor is that it reduces your development and engineering costs, especially as you outsource a greater proportion of design and development to a third party.

As that happens, however — at least in PCs, netbooks, tablets, and even smartphones — the value of the brand-name consumer-electronics firm increasingly inheres in the commercial appeal of the brand. But in little else. If HP or Dell ceases to design and develop many of its products, what is its value in the marketplace? Moreover, what is its competitive differentiation or barrier to competitive entry? Such companies, at least in these particular markets, are only as strong as their brands.

After all, a competitor can easily contract with ODMs or DMSs to have similar, if not identical, products brought to market. As the ODM assumes a greater share of value creation in its bid to attain better margins, it effectively gains more power in the broader ecosystem. Brand names will depend on it to provide designs and development as well as manufacturing. But that design and development is not exclusive; it can be provided to any company willing to do business with it.

This is one reason why Stan Shih said earlier this year that American PC vendors HP and Dell might eventually be rendered extinct within the next 20 years. (Conceivably, it could take less time than that.)

Said Shih:

“The trend for low-priced computers will last for the coming years. But U.S. computer makers just don’t know how to put such products on the market. U.S. computer brands may disappear over the next 20 years, just like what happened to U.S. television brands.”

There’s a real danger that, at least in the realm of PCs and related products, America’s top vendors have sacrificed long-term viability for a short-term reductions in operating expenditures. In transferring design and development overseas, increasingly to China, what defenses do they have against lower-priced offerings that essentially will be the same as their own products. Their only defense will be provided by their marketing departments, which will promote brand identity and equity. The care and feeding of those marketing departments, paradoxically, will result in higher corporate cost structures than those incurred by their Asian (increasingly Chinese) rivals.

It’s a daunting dilemma, one that Apple has been keen to avoid. While Apple uses contract manufacturers such as Foxconn, it has been careful not to outsource its storied design and development to companies overseas. Unlike its North American PC rivals, Apple sees design and development as integral to the value of its brand. For Apple, the brand isn’t just, well, the brand. Instead, the brand derives its power at least as much from design and development (R&D) as from advertising and marketing prowess, though Apple is undeniably skilled in those dark arts, too.

Apple knows that product differentiation, based on the technological innovation, still matters. HP and Dell might have to learn that lesson the hard way.

Apple Vaults Past Microsoft in Market Cap, but Markets Never Sleep

There was considerable discussion last night, continuing through this morning, about Apple supplanting Microsoft as the technology company with the largest market capitalization.

The discussion is warranted. When a changing of the guard occurs at the top of the heap — even if it’s a heap built on ever-shifting market valuation  — people will notice and try to invest great meaning in the event.

At a basic and literal level, of course, it means that the market ascribes greater value to Apple than to Microsoft. In terms of mindshare and brand, Apple has been outgunning Microsoft for some time, and the market now believes that, based on where the two companies stand today, Apple is a more valuable company that Microsoft.

What you need to remember about markets, however, is that they’re dynamic. Every day, they rise and fall, twist and turn. They never stop. They aren’t like the World Cup, for example, where a tournament is played, teams are gradually eliminated and one eventually claims the title, all its own until the next World Cup in four years.

On the market, nothing is ever fully settled. There’s no time to celebrate a milestone, because any milestone achieved is arbitrary and fleeting.

So, while I think it’s interesting that Apple has surpassed Microsoft in market capitalization — and while I agree that it says much about both realities and perceptions of both companies in the recent past and in the here and now — I also realize that the market is not finished taking its snapshots and making its sometimes capricious determinations.

Today is another day, and tomorrow will be another. Considering all the ferment and volatility we’ve witnessed in the technology sphere during the last couple months, one arguably could make the case that neither Apple nor Microsoft will necessarily accrue more relative strength during the next several years.

Obviously, Microsoft’s past-performance chart, as well as its current struggles, looks worse. It’s by no means certain that Microsoft can remake itself as its core franchises — Windows and Office — are threatened by a broad-based transition to cloud computing.

Similarly, though, the snapshot the market took yesterday might have captured Apple at its peak.  Apple is under attack for its App Store policies and practices, and its ascendant iPhone is likely to meet stiffer competition in the smartphone market from Google Android-based handsets, RIM’s BlackBerry (still a force in enterprise accounts, despite what you might have heard), HP’s Palm, Nokia (though that’s less certain), and even Microsoft, which is in the process of reanimating its moribund mobile business yet again.

Let’s not forget, too, about the Chinese handset players, who are likely to be major forces in their home markets and might not be content to play the comparatively passive role of software licensees.

Clearly news of Apple usurping Microsoft as market-capitalization king was deserving of notice and commentary. We need to remember, though, that it’s only a snapshot in time, and that markets — the public markets in which stocks are traded and those in which products and services are bought and sold — never sleep.

What’s Behind Microsoft’s Patent-Licensing Deal with HTC?

Jared Newman of PC World expounds on two possible scenarios behind Microsoft’s agreement to license unspecified patents to handset vendor HTC for use with that company’s Android-based smartphones.

Quoting directly from Newman’s article:

Here are two possible scenarios behind the HTC-Microsoft agreement:

The first is a conservative view. HTC’s phones may infringe on Microsoft patents. Rather than engage in two legal battles at once, HTC quickly agreed to license Microsoft’s patents before Redmond went after it. This spares HTC from another attack in court, while giving Microsoft a sort of insurance plan on HTC’s increasingly popular Android phones along with securing royalties.

The second possibility is more intriguing. Microsoft is throwing HTC a life preserver, letting the phone maker use Microsoft patents as a way to fend off Apple and its iPhone. I see it as an escape plan if HTC’s case against Apple goes south. If the possibility of a court-ordered injunction against HTC Android phones becomes real, HTC could simply say it’s using Microsoft’s patents instead, adjusting the design of its phones accordingly. This assumes that there’s overlap between Apple’s and Microsoft’s smartphone patents, and we don’t know because Microsoft didn’t get into details.

There is a third scenario, though, and it was mentioned in an IDG News Service item that quoted Francisco Jeronimo, an IDC research manager. To wit:

The fact that HTC, Samsung and Sony Ericsson also make Windows phones may make any discussions with Microsoft easier to resolve, according to Francisco Jeronimo, research manager at IDC. He said he wouldn’t be surprised if the vendors can get discounts related to how they are going to push devices based on Windows Phone 7.

Indeed, I think we have a winner.

While HTC can expect no mercy from Apple and its patent lawyers regarding alleged infringements occasioned by the former’s Google Android handsets, Microsoft is a different beast entirely. As I’ve said before, Google stands to make its mobile-platform gains at Microsoft’s expense, not at Apple’s. That’s because Google and Microsoft both count on patronage from handset vendors that license their mobile operating systems. Apple, as a vertically integrated player (providing operating system, handset, and online applications and content) doesn’t need handset vendors. It is its own handset vendor.

Consequently, Microsoft and Google are direct mobile competitors in a way that neither competes against Apple. In the battle between Microsoft and Google for the affections of handset vendors, it’s a zero-sum game. If a handset vendor, such as Motorola, defects from Microsoft to the Google camp, that’s lost business for Microsoft, and a lost service conduit to consumers.

What’s Microsoft to do? Some of the handset vendors — HTC, Samsung, Sony Ericsson — are hedging their bets, with feet in both camps. Microsoft wants to keep their business. To do so, it will be inclined to use every instrument and mechanism at its disposal, carrots and sticks. The threat of patent-infringement lawsuits might be a compelling stick to wield, just as sweet deals on patent licensing, with certain strings attached, might represent a tasty carrot.

It isn’t difficult to envision a Microsoft negotiating team making the following pitch to HTC: “You’re infringing on our patents with those Android-based handsets, and we intend to rectify the situation. Rather than pursue litigation that nobody wants, we’re willing to give you a great licensing deal . . . on the condition that you continue to develop and effectively market Microsoft-based handsets. What do you think?”

That’s the basic outline, anyway. The specifics of the deal might look a little different, but the essential idea is that Microsoft uses patents and litigation as bargaining chips to keep handset vendors in the Windows Phone 7 Series stable.

Has Google Picked the Wrong Fights?

An article at CNBC.com notes that Google shares are on the verge of falling to a key technical support level, presaging a further decline in value of as much as six percent. Traders say the wonky share chart stems from Google’s decision to battle against three adversaries: China, Microsoft, and Steve Jobs’ Apple.

Well, if that’s the presumed chain of causation, I’m not buying it.

On the search front, Google has managed to hold off Microsoft without much difficulty, and it seems to be well placed to poach some, if not most, of Microsoft licensees of mobile operating systems. It also is strongly positioned against Microsoft in mobile search and advertising, while trying to encroach on Microsoft’s Office franchise with its cloud-based Google Apps.

On the whole, I’d say Microsoft has felt more pressure from Google than vice versa. That dynamic probably won’t change, at least in the near term.

Apple and Google do compete in the mobile space, with Google’s Android smartphone platform pitted against Apple’s iPhone powerhouse. Google is the upstart, and Apple is the acknowledged power; but anything Google derives form mobile will represent a relatively new revenue stream, and if it is successful in courting handset licensees for its Android operating system, its gains will come at Microsoft’s expense, not Apple’s. People generally make too much of the presumed Apple-versus-Google cage match in the mobile space. The fact is, the market is big enough and varied enough to accommodate both players.

Finally, there’s the China issue. Said Jon Najarian, co-founder of OptionMonster.com and TradeMonster.com:

“The decision to leave the China market is akin to ‘New Coke.’ They owned the search market and then they blinked.”

No, no, no, Jon. Windows Vista was the New Coke of operating systems, but I fail to see the aptness of the analogy for what happened with Google in China. That was a far more complicated situation, which I have covered at length previously.

What’s important to remember about Google in China is that Google wasn’t the market leader in that country, and it had little likelihood of ever becoming the leader. Revenue from China was a small part of Google’s business, and — despite the size of China’s Internet market — Google was unlikely to ever see search market share over there on anything approaching the same scale as what it achieves in North America, Europe, and most other jurisdictions.

China plays by different rules, and Google concluded that the country’s glittering market prize would always remain just out of reach, with China’s government tilting the table just enough to ensure that Chinese vendors would win the game while benefiting, in various ways, from Google’s continued presence in the country.

Google could have stayed, it could have carved out a measure of business in China. But the company concluded that the candle wasn’t worth the game, that the dangers and risks of continuing in China under the status quo (or worse) outweighed the likely benefits.

As hard as it might be for some people to get their heads around the idea, Google’s decision to leave China was a business decision at least as much as it was an ethical choice. Depending on what happens to other American technology companies who stay in China, we might well look back and say Google made the right decision, all things considered.