Walter Adamson

The Ten Ways Solar Energy will Destroy the Electricity Network Operators and The Poor

Just 19 words recently attributed to Grant King CEO Origin Energy portend the implosion of electricity network operators. Lost in a large glowing article on the benefits of solar energy those 19 words were simply washed away in the deluge of daily information flow. Learn below why those words were simply one step in ten steps towards the commercial demise of the power grid operators. 

It's not the electricity network failing but the commercial failure of the power grid business

Firstly, let's set the scene. I did not say that the grid is headed for failure. It could fail, as the ultimate outcome, but that's not my point here. Firstly the private companies responsible for the electricity transmission and distribution grid structure will face commercial collapse. Then, to prevent subsequent failure of the grid government intervention will be required. We're focused here on the steps leading to the commercial failure of the network operators.

The rise of independent power production by individuals and companies as epitomised by the rapid uptake of domestic solar energy installations has set in train an unstoppable national disaster for the power transmission and distribution network operators, and the nation. As more people go off-gird the networks companies as private entities are doomed. Already Australians pay 130% more for electricity than Canadians, according to new research - a power premium to rise to 250% once the carbon tax and locked-in price increases take effect.

Solar energy spells disaster for power network operators and the disadvantaged

Australia only produces about 1.2% of it's annual power demand from solar, the trend to solar is accelerating due to compelling triumvirate of government incentives, falling equipment prices, and rapidly rising power bills, as noted recently by the Clean Energy Council:

More than two million Australians are now getting cheaper power and saving some half a billion dollars a year on their electricity bills, because of their switch to solar energy. The number of Australian homes with solar power systems has passed the one million mark, according to figures from the Clean Energy Regulator that confirm the milestone was reached in March. Clean Energy Council Chief Executive David Green said this meant that approximately 2.5 million Australians now lived in one million homes with a set of solar panels on the roof.

Ironically, the greed of the power companies, through their rorting of the pricing regulatory system, has probably been the most powerful and emotional incentive for people to want to install solar panels. There is $55 billion worth of network upgrade spending already locked in, and it was recently estimated that on a national level, network costs would contribute about 40% to increases in electricity prices from 2011/12 to 2013/14. Even the Australian Consumer and Competition Commission has caught on to the sport of the power companies:

Sims [Rod Sims Chairman of the Australian Competition and Consumer Commission] is only the latest in a succession of independent authorities to identify the huge cost of a flawed regulatory model for electricity pricing that allows power companies to use investment to game the system to gouge consumers. Ross Garnaut was the first prominent figure to call for a fundamental overhaul of electricity regulation when he updated his climate change reports in 2011 and identified market, government ownership of power companies and regulatory flaws as a key reason behind rising power bills.

Electricity companies unethical behaviour accelerated the market failure

The companies outwitted the various governments in their privatisation negotiations, fair enough that's what happens 90% of the time. And, they had what they thought was a monopoly, like the privatised airports, tollways and water service providers, so they could gouge to their hearts content right?

Yes, right, they did. When pricing submissions came around they employed special purpose consultants who were expert in every nuance, trick, and rort in the regulations. Big bonuses were paid all around when the rorts came off and the price rises gave a lot more bang for the buck of projected capital investments. They gamed the system with intent.

Yes, the outcomes here would have happened anyway. But they would have been slower, and with far less emotion and rancour had the electricity companies acted ethically, which they did not.

Solar energy spells crisis for power grid, doom for the network operators

What is this impending commercial crisis, and why? It's consequence of these 9 steps, leading to #10 which is the actual market failure of the network operators:

1. The grid needs to be maintained at (a nominated) peak capacity;
2. People buying less energy means that the grid cannot be maintained without huge price increases
3. The people who can least afford it e.g. not on solar, will be hit extremely hard
4. People who can afford it will go completely off-grid HOWEVER they will want to retain a connection as emergency backup
5. The effect of #4 will accelerate the affect of #3 on those that cannot go solar or off-grid
6. Network operators will lobby government to dramatically raise the cost of just "being connected" in order to try to cover maintenance costs, and governments will have no choice but to agree
7. Solar panel owners will then install more and more on-premise energy storage capacity, which is also falling in price very rapidly
8. Micro-communities e.g. large blocks of apartments, will realise that they can share capacity and then wire themselves up with enough backup to go off the network entirely
9. The scope of these self-networked self-wired communities grows which results in greater backup capacity and more and more people completely off-grid, in part driven by the "outrageous" connection cost imposed by the network operators
10. Inevitably, the network operators fail financially - one by one- and the Government has to ultimately re-claim the networks and run them as a public service, at substantial cost.

Why Governments will have to Reclaim the Electricity Grid as a Public Service

You are probably thinking that this is all fanciful, or even fairyland right? If it were so then many energy "leaders" would be talking about it right? Well if you do some searching you will find some conversations, but you're right in that you'd have to search and with some diligence.

So maybe I'm to be treated in the same way as a climate change skeptic - what do you think? Perhaps I can simply cast into the dark corner of "anti-solar" and all will be fine?

But, wait ! What DID Grant KIng actually say? On page 8 of The Age on the 5th of April 19 words were attributed to him. He issued words of caution in a large positive article on solar energy:

The spread of solar, though, has its critics, such as Grant King, chief executive of the largest retailer, Origin Energy. He said PV owners retain grid access but as they buy less power from it, costs will rise for everybody else.

Now it's extreme to be against solar per se, although Grant King is speaking from a position of self-interest. But never-the-less the BIG point he makes is what we are saying here. And those 19 words, and that warning, went no further. So this is a topic not yet on the public energy or political agenda.

But this issue is not going away, it cannot go away, it cannot be ignored any longer. It will mean massive restructuring of the electricity network operators, and it will mean that governments will either have to own the networks again, or pay huge social subsidies to the operators.

The looming solar tax as a social payment

Where will those subsidies come from?

They will have to come, in the main, from those that operate solar for their own benefit - either identified by definition or demographic or income. The only other option is to raise general taxes which in one way or another will further penalise those than can least afford their electricity.

What will probably come about is a Power Benefits Scheme analogous to medical, where it becomes part of a social safety net.

Does any of this mean that we should stop deploying local solar systems? Not at all, and there is really no way to stop it anyway except by punitive legislation, which would be extremely controversial.

Questions on solar and the power network operators

• What do you think - do you see alternatives to this scenario?
• Which of my steps is fatally flawed, leading the demise of my prediction?
• How does Germany solve this issue when at times 40% of their grid's power is supplied from solar?
• How do you think governments should react, or even better how should they plan for this?

Walter Adamson

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PS "Electricity generators manipulating the market"

This in the Australian Financial Review p10 April 10, 2013 - which is why it is uncontroversial to say that the electicity companies are behaving unethically. They are entitled by the laws of the land to exploit the rules to the full. That does not make it ethical behaviour, which it is not. Here are the key phrases from the article:

• "manipulating the national electricity market"
• "commercial gain"
• "bidding designed to game the system".

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The Analog-to-Digital wave of disruption - Google Driverless Car

There are many massive disruptive waves crashing on the shore of business today, perhaps more than at any time in history and certainly moving with more momentum. Think not just cloud computing, social media, big data, predictive analysis, collaborative commerce, mobile platforms, and biological waves but think of where they intersect and overlap - that's massive.

Up until now general computing and global networks e.g. the Internet, have concentrated on digitising all things analogue. Feedback from the real world obviously has existed in parallel in everything from space rockets to oil refineries, and very sophisticated at that.

But the Wave of Analog-to-Digital (A2D) Disruption brings a level of accessibility to a new level for the masses, and at rapidly diminishing cost points, and feeds that information back into the global digital networks.

For example the Google Driverless Car brings analogue back into the Google digital world and along the way has huge social, political and economic consequences. Suddenly roads hold more traffic, far more, because the density, speed and braking distances are optimised. Less fuel is used, the need for most city parking space is eliminated, and potentially fewer cars are needed.

Analog to Digital consequences

The outcomes of that need to be pondered, and by more industries that you think. Investments by superannuation or mutual funds in companies with parking lot real estate assets will fall in value, same for their investments in toll roads owners and operators, taxi fleet owners would suffer as driverless cars were co-opted through collaborative commerce, etc.

Shopping Centres could offer perks and incentives to have cars bring customers, and among a million other scenarios the fact that everything is connected and located means that real time interactions across all facets of daily life could be optimised and bargained for negotiated in near real time.

More digital disruption

If we consider other big disruptive consequences, think of the motor vehicle insurance companies - a massive global business. All of a sudden everything is based on real vehicle data (noticed that I did not say driver data).

That means that companies which are most nimble and agile digitally and with the best algoritms and "big data" can now pick off all the low risk customers and offer them very substantial savings on their premiums. This leaves all the high risk vehicles with the incumbents, notoriously not nimble nor digitally agile.

So these are big industry disruptions, from digitalisation and in particular from the accelerating connection of analog back into the digital empires. And this is only one of the huge disruptive waves coming over the horizon. 

Do you have your head above the waves and can see them coming and have considered their impact in your industry?

Walter Adamson

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Lessons for Enterprise from Facebook and its 1 billion users

I was surprised today to see relatively little in the tweetstream in Australia about Facebook's achievement in reaching 1 billion users. I had to search to find comments as they weren't streaming through, and then I also discovered that about half the comments were sceptical or negative, which surprised me.

It's a massive achievement, with big implications for business and enterprise IT. Here are 5 - off the top of my head. They are not very well researched - forgive me - but at least I'm putting out thought-starters about the implications of Facebook's achievement.

1. The power of the smartest combination of technology, technologists, business strategy and execution

It demonstrates how dramatically the smart choice of technology and business models can decimate the competition. We know the story but it's worth repeating that Myspace was bought for $580m in 2005 and reached a peak of about 100m unique visits a month in 2008 and at those times Facebook was deemed to be an also-ran. Facebook's architectural platform strategy together with its computer science and computer engineering prowess a la Google and its incredible ability to execute rocketed it past the competition while at the same time running on a relative shoestring.

And furthermore Facebook has made much of its secret sauce public, through contributing to open source projects and the establishment of its own Open Compute project. That's partly because of its mission, and mostly because it knows that the knowledge alone isn't precious, it's the ability to execute.

Which brings me to my next point, how Facebook has revolutionised the economics of computing.

2. Computing Economics

Facebook's total cost of revenue is about $1b. A large chunk of that goes to running IT infrastructure including "data center operational expenses include facility and server depreciation, equipment rent expenses, energy and bandwidth costs, support and maintenance costs and staff salaries, benefits and share-based compensation".

In Australia the big banks, big telcos, and some other large organisations spend in excess of $1b per annum each on IT to serve a minute fraction of the user base of Facebook.

Can we even calculate how small that fraction is? Let me see, let's say 25m/1,000m = 2.5% right? Now even if you throw in all the reasons that "we're different" and double that 2.5% to 5% then we're seeing 20 times less value for money in Enterprise computing than Facebook can achieve day-in and day-out.

We’ve always been small in terms of number of employees. We have this stat that we throw out all the time here: There is on the order of 1,000 engineers and now on the order of a billion users, so each engineer is responsible for a million users, says Zuckerberg.

In fact, Facebook has reinvented the economics of data centres and computing. Which brings me to my next point - reliability.

3. Facebook's reliability across 1b users is astounding

Australia's major banks all have very public problems in keeping their basic ATM & EFTPOS networks running "Angry customers slam Commonwealth Bank meltdown". In response some have committed huge sums - $300m, $400m - to remediating their systems. The end result for the customer is no difference in anything except that the service will stay up as promised. On the other hand Facebook manages to stay up to high levels of availability and runs all this across public infrastructure - not dedicated expensive networks.

Once again, I am sure that there are all sorts of nuances, all sorts of reasons why "we're different" we're more complicated" etc etc but for all intents and purposes Facebook stays up globally for 1 billion customers while very expensive dedicated enterprise systems in a single country serving a minute fraction of users don't stay up.

If these enterprises knew what the Facebook engineers know than they'd be equipped to deliver a lot better value for money. And furthermore Facebook never intentionally goes off the air for system upgrades, which brings me to my next point.

4. Very clever zero-downtime system upgrades

Facebook has developed a remarkable 100% uptime service while at the same time constantly experimenting, innovating, bug-fixing, updating and upgrading their software. This hasn't fallen out of the sky in to their lap. They've invented most of it, building on the experience of some others like Google. Facebook's proven processes of gradual releases and dark launches should be the envy of large-scale enterprise IT. Their A/B testing processes are phenomenal and they now have the amazing ability to A/B test on just 1% of their active user base and gain feedback from 10 million users!

Read the real account of rolling out Facebook's new Timeline feature

In contrast, to my knowledge all the banks in Australia are still taking their systems off the air at least every week for system upgrades. And remember, these outages are just repairs, not the continuous raft of new features and substantive user service upgrades managed by Facebook with zero downtime.

5. The value of a platform

The essential reason that Facebook crushed MySpace was that Facebook build a platform while MySpace tried to build a closed community system. Facebook's approach is conceptually the same as building a mobile ecosystem of content and apps, as invented and launched by NTT DoCoMo in 1999 and as copied by Apple 7 years later. This is the essence of why cloud computing is so important. Cloud is only trivially about the dial-up of infrastructure and just outsourcing iron. Rather, it's fundamentally about the ability of platforms to interact and mash-up through defined application and data protocols e.g. APIs and the Open Graph.

It's an old story, but a poorly learnt one. In 1999 DoCoMo when set out to make its i-Mode service the most successful internet and app store-enabled mobile system in the world (in which it easily succeeded) it deliberately aimed to make the content providers and app developers as successful as possible. That's why it gave them 90% of the revenue, and why many listed on the Tokyo Stock Exchange and made thousands of millionaire entrepreneurs. Facebook as a platform has spun-off similar success stories.

With a "flick of a switch" Facebook could become the biggest of many things - the biggest virtual currency provider, the biggest bank, the biggest postcard generator, the biggest flowershop, the biggest video streaming company, the biggest news company, the biggest green electricity retailer etc etc.

That's the power of building platforms and not applications. Is it relevant to enterprises? Well I think if Facebook decided to become the world's biggest bank, or just enter a few prime markets as a banker, then we'd have an answer wouldn't we? And then it would be too late.

Summary

Well done Facebook. What a lesson for enterprise IT there is in the taming of complexity, the agility, the reliability, and the power of the platform. It's a combination of technological mastery and business strategy and execution ability and agility which the world of business has not seen before.

And I didn't even touch on Facebook's data mining and personalization and their ability to do data analytics at a huge scale to connect everyone and to build the map of who and what 1 billion people know. WITH FACEBOOK YOU AIN'T SEEN NOTHING YET!!

Related: Facebook's 'Next Billion': A Q&A With Mark Zuckerberg

Counterview? For a "counter view" of why all this isn't going to shake up large Enterprise IT quickly it's worth reading this The Enterprise: I’m Not Sexy And I Know It

Would the real cloud innovation please stand up!

The topic of "Innovation" has been trending ever since Steve Jobs announced he was quitting.

It makes a plethora of interesting reading about how companies innovate and how Apple is said to innovate, whether Jobs was critical to their innovation,and in fact the greatest CEO ever! There is even raging debate over the word itself including "creative disruptive" innovation! (It makes sense!). We have warnings against gamification of innovation, against democratization,  and in favour of democratization, and about the long nose of innovation. We read of encouraging positive deviance and emergent employees. And we even have debates about whether Henry Ford said or did not say "If I had asked people what they wanted, they would have said faster horses".

And then there's the cloud! Is it innovative or not?

Cloud innovation, real or not?

I'm a fan of Simon Wardley and Randy Bias on this (and throw in some Berard Golden). Cloud computing per se is not really disruptive innovation. That's not to say that it is not innovative. And it is certainly not to say that it is the same old thing we've had for years just rebadged by marketers.

Is Cloud Computing Old Hat?

That "old hat" line, used by the best salesmen in the old enterprise software and new private cloud vendor organisations, is simply a ploy. It's a sales ploy to keep the buyer in their comfort zone while they sell them some more "stuff" to keep them away from the real cloud.

Need to get your head into the value not the features

As far as the IT infrastructure goes it's fair to say that it is evolving, or sustaining, innovation and not disruptive innovation. Even though for the major cloud operators and providers e.g. Facebook or Amazon, it has required a lot of innovative pursuits, the result from the consumers' viewpoint is not disruptive innovation.

For instance, let's consider virtualization, because it is often discussed as the core "innovation" of cloud computing. I've picked it for 2 reasons. The first reason is that often becomes the sink hole for discussions on cloud, as the be-all and end-all, and the second reason is that it illustrates the point about evolving innovation.

Discussions about cloud often centre on virtualization. But cloud and virtualization are independent, especially as far as the potential of disruptive innovation is concerned, and I'll come to that later. Google, Facebook, Amazon don't use virtualisation. Why not? It's probably more complex but the reasoning at its simplest is that they can't afford to use it. It would increase their capital and operating costs and cut their margins by doing so - think of a 20% hit to each.

Why then, do so many big IT shops use virtualization. Good question!

Here's the uncommon answers  - firstly they have to clean up their mess, and secondly they haven't got the talent not to.

I'll explain:

• Cleaning up the mess. When you've built an infrastructure mess which is getting worse, it can become economically attractive to impose layers of inefficiency since those inefficiencies are less costly than continuing to build more mess. 
• Haven't got the talent. The big cloud providers are magnets for the top talent, and it takes talent to get all this right. The Amazon and the Googles and the Facebooks and the Microsofts have the most challenging cloud workloads on the planet - even the big banks don't rate at this scale. It takes talent to move your core systems into a real cloud environment and especially a super-efficient non-virtualized one a la Facebook.

Virtualization does offer a path forward for those "normal" big IT shops who have a mess to clean up. It's an effective way to get some mess under control and hopefully to get a tighter and more efficient architecture out of the transition going forward out of virtualization. But it is not fundamental to "cloud computing".

Conclusion, if you could do it, you often would be better to not virtualize anything in building your core services into a real cloud environment. At best virtualization is a feature, not a benefit.

The second reason I mentioned virtualization was to illustrate its evolutionary heritage. It's certainly not new.

Most often people reference the late 70's and IBM. But it was in commercial use in the early-70s by Burroughs, and by ICL of the UK. ICL's George 3 operating system allowed for multiple copies of its predecessor, the George 2 OS, to be hosted within it as a migration strategy. All the old programs could be run "as is" under George 2, while the system as a whole ran under George 3. This feature offered many advantages in systems administration, but was ineffecient. I know, because I was a George 2 and a George 3 systems programmer, and I wrote my Masters thesis on Machine Portability in the mid 70s.

So the point is that the myriad of developments needed to deliver cloud as a service are part of a chain of evolutionary innovation. This is of no interest to the business consumers of cloud, as these are simply features of cloud not benefits to the business user.

The key for business is that the delivery chain of cloud has now reached a point where it can enable disruptive innovation for the business.

It's about the business bozo!

That is, the features of cloud have been cleverly developed over a long time - they do represent something new in their combination. But the potential of cloud is in the benefit to business to create new business models, new services, new sources of wealth, and new agility.

Those can be disruptive, at the business and industry level. That's why business should be extremely interested in cloud and very uninterested in how it is delivered.

Does it interest you how telco carriers have evolved and developed the technology to deliver us better internet access? For 99.99999% of us the answer is no. But we are interested in how we can make money from having that asset, and particularly if we can layer on a disruptive business model.

Cloud is a vehicle for disruptive innovation by those higher up the value chain - not on the provider side but in the higher order application on the customer business model side.

In fact it's the biggest disruptive opportunity for business for the last 20 years. That's where the opportunity for real cloud innovation lies. And that's also the reason that those businesses which stick their heads in the sand about cloud may well be placing their business at risk of being attacked by more nimble and cost-effective competitors.

If you are driving your business forward and see innovation as an ingrained strength then you must come to grips, as soon as possible, with how cloud computing can help deliver shareholder value.

Why do so many firms find themselves debating cloud innovation rather than business innovation from cloud?

See my question on Quora.

Please comment below.

Walter @adamson
http://xeesm.com/walter

Apple's success Dr Deming's legacy - continuous improvement

Innovation guru Clayton Christensen writes that "Jobs made Apple great by ignoring profit", and beyond the headline he actually makes the point that a tunnel vision on profits has been the downfall of many previous industry leaders. He thinks that acceptance, and even pursuit of "disruption", is the core of Apple's sustainability as a highly successful business. But I think there's more to it, especially in the case of Apple.

I agree with (almost) everything Christensen says. And the aspect of Apple he describes is evident in their public comments about the cannibalisation of Mac sales by the iPad.

It's Apple's view of the bigger picture which drives them forward, knowing that Mac sales in some segments will be cannibalized, but in other segments new markets for Mac will open up because of the iPhone and iPad.

I never cease to be appalled at the number of senior executives I meet who say something like "our strategy is very simple - it's to make a profit". Christensen's post is a good reference for them to understand why this may not be in their firm's best interest (that's not to say that the individual's interest and the firm's long-term interest are necessarily aligned!).

Of course there are always certain times when a focus on cash-flow and profitability is paramount. But that's a tactic, or perhaps a short-term strategy, and not a sustaining goal.

The iPod wasn't a device with no existing market

I disagree with one single part of Christensens' analysis, and that points to the big part which I think his post is missing - the role of continuous business improvement. 

The one part I don't agree with is his comment that the iPod was a device for which "a market did not even exist yet".

That's factually wrong. The iPod used a whole lot of technology from others who were already in the market with these devices. Just as with the app store, commercially launched by DoCoMo in Japan in 1999, and "iTunes" launched by KDDI in Japan in 2000 in response to DoCoMo's app store, Apple took the best of a lot of existing ideas and improved them.

The improvements were often small - but they add up.

And sometimes they are innovative enough to be patentable. In fact Apple's patents tell the story - if they invented everything that people commonly attributed to them then Apple would own the patents - and they don't. There is so much fluff and gushing in the blog-sphere and paid media about Apple's inventiveness around the iPhone, for example, which just isn't true. 

Continuous improvement is a key to Apple's success

What they do brilliantly is what Christensen describes, plus their approach to ingrained continuous improvement, as with the iPod and the iPhone (and some might say the iPad - a reinvented "tablet").

Most companies neglect this "ingrained continuous improvement". It's seen as too boring, or too trivial, or tainted by "quality control" or "being too Japanese" or any other reason that suits their desire to do something more spectacular. They go for "creativity" and "innovation departments".

That's why you see many of the most lifeless entities with big investments in Innovation VPs and Departments and creativity training etc - think banks, governments, metro transportation companies. These types of entities have zero continuous improvement and a big bet on "creativity" but are usually sustained, in fact, by some kind of monopolistic or oligopolistic structural position.

In these organisations, the main innovation is "the event". Here's what Cyril Bouquet concludes after a 5 year study of corporate innovation:

Paradoxically, innovation events can even prove damaging if the company does not have a system for acknowledging, assessing, and developing the bright ideas that emerge from them.

Continuous improvement does not exist in a vacuum

If a firm is truly after game-changing innovation, then a different set of rules and pre-conditions apply. But the reality is that 99% of firms can't execute even "incremental innovation" well and that's where the focus, for them, needs to be. There's no doubt that part of Apple, including Steve Jobs, applied game-changing innovation (see below) yet at the same time the bulk of the organisation is focused on continuous improvement.

But wait! There is a twist. That "bulk of the organisation" is not just a hapless bunch of micro-improvers. Well, they could be, but there is a difference in a highly successful organisation - they have a purpose. Not only a purpose but a clarity of purpose, and a consistency of actions.

Where there is strategic clarity and a compelling purpose in an organisation and the entire organization is aligned on achieving something of great social value beyond the tactical, people become incredibly committed to being successful and tend to ignore boundaries and "not invented here" limitations in order to achieve the purpose.

That is part of Apple's secret source in making continuous improvement deliver so much value, and why some say Why Apple Doesn't Need Steve Jobs. Without that secret source continuous improvements are diluted. It's that simple.

It's also true that the secret sauce does need some healthy additives from the leadership team.  Not all that bubbles up from below is going to make business sense at the time, nor can it all be funded. The skill is in how the leadership team can provide a "focus",  how they guide risk assessment to avoid irrelevant innovation, and how they decide what needs to be discontinued (since companies can't do it all). The HOW of those is critical to sustaining the motivation and momentum.

iPhone more about continuous improvement and little about invention

I think ingrained continuous improvement is mostly overlooked, yet it is far a more powerful and sustaining organisational force than "invention". And Apple is a leader in applying it.

For example the iPhone was mostly a result of continuous improvement. It bought together things which others had done, commercially, and reshaped them nicely into a smooth ecosystem. It was "smoother" than those from which it learnt. It didn't even have any exceptional new goals, compared to the DoCoMo app store or the KDDI music service - but it executed better and in the right market.

For example DoCoMo's i-mode (1999) was totally focused on the end-to-end experience and the user interface and they even tuned their network to ensure the handsets performed to delight the users. And they gave content providers 90% of the revenue because they wanted the content providers and their ecosystem to be as economically successful as possible.

The really remarkable innovations with the iPhone, for example, were that (1) it broke out from under the dead hand of the telcos - that was a revolution (a game-changing business model innovation), and (2) the extent of the media deals (or perhaps that was a continuous innovation from the iPod). The hard yards and the strength of the final whole offer were a product of a relentless focus and ingrained culture of continuous improvement. This spans the whole organisation, not just the Innovation Department.

I believe that much of Apple's success can be attributed to this attitude towards continuous improvement across the entire firm, plus the leadership's lack of fear of cannibalization as Christensen says (combined with their other assets and ability to execute).

Continuous improvement as an ingrained culture is old fashioned and unfashionable but Dr. Deming had it right - as Apple proves.

How important is continuous improvement to Apple's success, compared to say "invention"?

Why do so many firms find continuous improvement so hard to ingrain?

Please comment below.

Walter @adamson
http://xeesm.com/walter

PS If you are interested in Cloud, and Clayton Christensen, read What Clayton Christensen Can Teach Us by Cloud expert @bernardgolden

Dangerous delusions - iPad is not just a PC

It's a dangerous path to think that the iPad is just a PC, as numerous sources quoted Steve Balmer as saying at the 2010 D8 Conference. I'm not sure that he actually said exactly that, but that was the most common byline after his session. Holding on to that interpretation is surely delusional and not in Microsoft's best interests?

I think that Balmer actually said something like everything you can do on an iPad you can do on a PC, and it's just about form factor. And in fact just a couple of days ago one of the senior PR gurus at Microsoft echoed those exact words, so I guess that IS the party line:

They [tablets] are each highly optimized to do a great job on a subset of things any PC can also do. Poor Frank Shaw got well and truly hammered in the blogsphere for his post.

Whereas Steve Jobs had described the PC as being "like trucks", Blamer countered by saying shared devices e.g. a PC  in the home are not going away, if only for cost reasons. (You know, Balmer should have said that there are some important things we do on a PC that are just a pain on an iPad - try blogging for example. But in any case his mental model is a liability.)

The mental model matters

So what's the problem in holding on to the mental model that the iPad is just a svelte PC?

For one, the iPad is making massive gains in market share, and creating new markets, and powering Apple to be an extremely serious competitor to Microsoft in some of it's core lines of business. Large corporations are buying large blocks of iPads and Apple cannot keep up with demand. The corporatization of IT is a big deal, and Apple is at the forefront of that wave.

And for another - the market doesn't believe you. Which means you will lose market share, even faster.

• Perth woman offers iPad for romance
• Sign a contract on your new Simonds home, you'll receive a FREE Apple iPad
• Or why not buy a home in the beautiful AMEN Estate in Lekki, Lagos and get TWO free iPads?
• Get a new iPad 2 Free, with EVERY HomeSec Caveat loan

Etc etc etc

Hey, would any of these work if we replaced "iPad" with "PC"?

NO.

That's why the iPad is not just a PC.

What IS the iPad?

It's something different, and Microsoft's challenge is to find out what it is an how different. If they don't start with that attitude then they are likely to never bridge the gap.

By the way I don't actually know what it is. It is all of these things but what else:

• a brand
• a fashion statement
• a geek statement
• a business statement
• a personal statement
• a business tool
• an entertainment tool and portal
• a great way to interact with your children
• a satisfying experience
• fun
• work
• simple
• quick
• sharp
• a personal assistant
• part of Apple
• not part of Microsoft.

What the "whole product" is, which is driving incredible wealth to Apple's bottom line, I don't quite know. Most obviously the iPad whole product is a LOT MORE than the device - which is what I think most of the other tablet makers don't quite get.

What the other tablets are IS just a piece of junk, a boat anchor - HP proved that! Of course Android will make some headway, and that headway depends on everything other than the tablet itself - the table is just a ticket to the game. But what is the game?

The "ecosystem" is a word, and a powerful one, which explains Apple's success. But it is not all. 

If Microsoft have a mental model which is focused on the device a la the PC world, and the concept that they are just remodelling the form factor, then that is surely doomed to failure. Even if they don't quite understand it, as I don't, then they should approach the iPad "whole product" with a mindset that this is something different.

Let''s face it, if you've been dissing your competitor for years, and then failed at everything you've done where they've been beyond successful, then something isn't quite right with how you view what they are doing. (Examples: Zune - total failure; Retail Stores - total failure; Tablets - total failure; Mobile Phones - significant relative failure)

This is a different world and we need to understand it.

To do otherwise is to dance on the head of a pin, while the spoils fall to Apple in bucketloads.

Adjust the mindset - let go

There's no rocket science here. I'm just saying that it takes a "simple" Peter Drucker-ish adjustment to the mindset, and then progress can be made by Microsoft. And good luck to them, sometimes Apple gets on my nerves with their crappy attitudes to customers.

But hey, I'm still "queueing up" for my iPhone 5 !!

So let's see the mental model that the iPad is not just a PC, and see what Microsoft can turn out with it's incredible resources. That would be exciting. Another form-factored PC as a tablet won't be.

What do you think the iPad "whole product" is - the secret sauce?

How should Microsoft think of the iPad in order to challenge it?

I'd like to hear your opinion, please comment below.

Walter @adamson
http://xeesm.com/walter

By the way I thought that the Simonds Home iPad promotion was very clever.  It may actually save them money! When new home buyers sign up, and receive their iPad they can

• "follow your new home being built on MySimonds;
• receive building updates;
• receive information alerts;
• receive one to one service from start to finish; and
• then your new home will be constantly at your fingertips."

Very neat ! And those interactions reduce the workload and costs on Simonds and the iPads pay for themselves many times over, and the customers are thrilled. Clever

Nothing social is impossible but everything is harder than it looks

"Engagement is actually a pretty complex process when you look under the hood", said Axel Schultze in a recent post at Social Media Academy.

It's a theme which has rung out from many of the more experienced social business consultants during this year. It's the realization that (a) the old advice of "just getting out there and doing something" isn't going to get you to a "social business", and (b) that engaging your own organisation needs a solid plan and actions.

Have your customers take the lead

Axel actually went further, his post called Engaging customers is actually a bad idea - that's provocative. He suggests turning the engagement procedure on it's head and facilitating your customers to first engage with you. Which means - you need to find multiple ways, and customer-preferred ways, for them to engage with you.

In order to do that you first need to know in which social places and spaces your customers and prospects and their influencers are hanging about having conversations. And that's not so simply if you have multiple brands, products, services, and you also want to check out your competitors.

Which means that before you start heading anywhere, you need to known where you are today, and where your customers, prospects and competitors are.

Planning - knowing where you are and where you want to be

Remember the "old" idea of building a solid plan to get from A to B? From the AS IS, to the TO BE, and taking into account risk and resources - I found a 10 year old pic from a PPT of mine which shows the process - on right.

That model still holds. Planning starts with an assessment of where you are in this process and where your customers etc are. As they say at iGo2Group:

A strategy is a plan of how an organisation will move from its current social assessment to its agreed business goals as it relates to the use of social media and networks to get there. Goals are key to great social strategies and they may be for sales (revenue, margin, share) or marketing (leads, programs, pipeline) or market research (monitoring, competitive, sentiment) or service (customer satisfaction, reduce service costs) or innovation (new product development, product testing, launches). But they must be tangible business goals.

So the plan is how to move from the current, to the goals. In fact iGO2 say "the most overused word in social media today is 'engage' " - better to provide benefits to customers and provide paths for them to engage and in a way which takes you towards your goals.

That then raises the question of tactics, and social media strategy and tactics are often confused.

Tactics and strategy often confused in social media discussions

Thinking of tactics as the following kinds of things, this is a complex part of the social reconstruction of an organisations processes e.g. the social penetration deep into company structures to create an engaged work force, and the creation of internal and external social communities, and education and training of employee and partner communities to leverage Social Business, for example.

That's all tough stuff in any moderate sized organisation. It requires solid thought and serious commitment and resource allocation. It's a world apart from having a few people doing what might be "great job" in some isolated unit of the business e.g. the "Twitter support team". And this is why, now, it's not really recommended to follow an "enthusiast" path to social business as that approach can't really do more than educate other early adopters. It falls short of taking the organisation with it.

In a nutshell, being "engagement ready" is a major undertaking which in itself requires serious analysis and planning, aligned with a social media strategy and the plans to channel in engagement from customers.

The social media team

Steve Farnsworth(@Steveology) wrote about this a while back, like Axel in a post with a provocative headline - Why Are You Wasting Time and Money with Radian6, Scout Labs, SM2, or Other Social Media Monitoring Tool? Steve says, after purchasing such tools the tool becomes functionally the Software as a Service (SaaS) version of Shelfware. Shelfware-as-a-service.

The main reason?

The bulk of responsibility rests squarely on the users’ lack of vision, and understanding of smart practices around implementation and adaptation, says Steve based on his conversations.

He notes that many times the tools disappear into a corner in Marketing, with a young enthusiast driving it, and that "this is a heartbeat away from saying that your nephew designed your company logo". Exactly.

Steve advocates the type of social media team that is advocated by all the experienced social business practitioners now:

... include a representative from every key department on the team to help implement your social media monitoring program, build a strong mix of skills and points of view, constantly evaluate efforts and results, and set clear goals, you have a fighting chance at making social media monitoring a powerful asset to your organization.

His readers agree - overwhelmingly - I suggest that you read the comments to his post.

What is it, again, that we're trying to do with social media?

Finally, a fundamental confusion needs to be put on the table in order to not have mismatched expectations. It's often the case that one side of a discussion about social media strategy is thinking "customer insights" and "ideas" and "sales", and the other is thinking "brand protection" and PR. They require quite different setups and socialisation, and that's why the initial planning steps and goal setting are so important. If you are satisfied with brand monitoring that's one thing, if you want to concentrate on sales leads that's another, and on innovation another.

For example, as far as innovation goes you'll need to listen out for the most wackiest conversations about your product and services - where people are doing odd things or unhappy in a "promising" way. If you're interested mainly in brand monitoring and PR you'll be listening mainly for "negative sentiment", and for sales you'll want to hear some "immediacy" in the conversation.

Then, your structures and teams and resources and executive actions will need to be tailored and aligned with each of those different objectives - whichever one you choose, or several if the organisation has the bandwidth.

So you get the idea, that to end up in the right place you need to start in the right place and know where you're heading and how to get there. That's where social media is today, and it's good to see the maturing market for proper social business consulting services.

Do you still see a rush to action prior to "thinking" in social media strategy?

What is the biggest corporate challenge today in the "how to"?

Please comment below.

Walter @adamson
http://xeesm.com/walter

2 Business Transformation Markers from Apple WWDC 2011

There's news galore about Apple's Worldwide Developer Conference announcements, but amongst the mountain of new feature analysis and reporting I see two transformational items which haven't got much press. The first is related to the "home media center" transformation, and the second to the cloud computing transformation.

Home media center

Windows has a home media centre. It's on a PC, duh! Some reports of Apples new iCloud gushingly headlined this type of summary "Apple pins its hopes on the iCloud as users drift away from computers". That's a poor headline, although that actual article in the Guardian is very good. 

Users aren't drifting away from "computers". We're being more and more surrounded by them, almost embedded with them!

BUT! The universe IS drifting away from the PC as the centre of anything, and especially the home media centre.

That IS a transformation - not technically but business-wise, personally, socially and emotionally. The blurring of personal and business life, and entertainment, is all part of what makes this a real transformation. People interacting with their music, TV, work, and social channels "simultaneously" is not going to revolve around a PC. And guess who is placed best for where it will happen, Apple. Not because they have the devices, but because they have the devices and the ecosystem and the assets.

Which brings me to my next point

Cloud Computing - the transformation accelerates

Apple is reputed to have spent $1 billion on their new data centre in North Carolina to support iCloud.

There is still lots of noise and emotion about cloud computing, and our trusty sales folk are making hay while the sun shines with traditional Fear Uncertainty and Doubt to keep customers from making the big  choice.

But which companies, in the world, can afford to spend what the big cloud providers are spending on their data centres? Microsoft is said to be spending $500 million per centre. Plus they attract the very best people, because they can and because it is leading edge. The world's smartest computing scientists and IT practitioners and operational experts are working for Amazon, Apple, Ebay, Facebook etc. Not for the banks, and the traditional IT vendors. Those "old" sources are good, but not transformational, perhaps with the exception of Microsoft in a perverse way. Microsoft's cloud solutions are very good and they are coping with the cannabilization issue after many years of internal conflict.

All this means is that the transition to the cloud, for 98% of businesses, is just a matter of time. That time period will be largely a matter of emotion, pushed by a build-up of cost and competitive pressures on the laggards.

If you can't afford to spend $500m to $1 billion on your data centre, then you need to ask serious questions about why you are investing any money in "computing" and not planning the path forward to cloud and the necessary communications support. You may need to invest in new access devices, and communications, but you don't need what you had.

The IT world is in transition - business transformation follows

Just these two trends, accelerated by a "consumer" company are enough to show that the whole IT world is heading for massive transition, and the business transformation opportunities are big.

PS I was going to title this post "iOS 5 is irrelevant" but that's a bigger topic I'll leave for another day.

What do you think was the biggest transformation from WWDC?

How do you think the cloud transformation will play out with most businesses?

Walter @adamson

Business model innovation yields Apple 100X growth

News is pouring out of the WorldWide Developers Conference but here are is simple snapshot of the numbers for Apple. Impressive all round:

• Over 25 million iPads have been sold since the original 2010 launch
• More than 15 billion songs have been sold via iTunes Music Store - making Apple the biggest retailer of music worldwide
• 14 billion apps have been downloaded from App Store (which includes 90,000 just for the iPad)
• iBookstore has seen 130 million e-book downloads
• Apple has paid out over $2.5 billion to developers
• There are more than 225 million accounts with credit cards and one-touch purchase power.

Not to mention that at market close on June 3 Apple exceeded the market cap of Microsoft (market value of $201.59 billion) and Intel ( $115.21 billion) combined.  The closing value of Apple was $317.60 billion.  Some pundits predict that Apple will rise to "its natural level" of over $500, and then be worth more than Dell, HP, Microsoft and Intel combined!

There may be Apple detractors and Apple zealots, but the facts of comparing Apple to Microsoft and Intel in June 1998, and now, are astounding.

• See this WolframAlpha search result: Intel, Apple, Microsoft market cap at June 1998.

Am I completely bamboozled or is that a 100X yes ONE HUNDRED TIMES increase in market cap for Apple!? Whereas Microsoft and Intel are roughly the same (not taking into account inflation which means they have declined in purchasing power terms).

That's not to mention the sad story of Nokia, 10 times bigger than Apple in 1998 and now 10 times smaller in market cap, and in free-fall.

To quote g4dualie: "Apple changed the rules of the game to level the playing field. Under Microsoft’s dynasty, might made right (market share) and with Apple’s resurgence came a new meme; intelligence is fashionable. Work smarter for a better return on investment".

Apple is a powerhouse at the moment, and leading the charge in business model innovation.

Do you think Apple will continue to define the playing field for it's competitors?

How do you think that Apple will continue to maintain it's distance from the others?

Where will the competition come from, current players or a new entrant?

Walter @adamson

How social business exposes relationship marketing as an Emperor with No Clothes

Since the early 80s Marketing has taken a turn towards "relationship" marketing and such things as "lifetime customer value". However this "value" is still transactional-based.

The kink in the road toward relationship marketing was a reaction away from immediate transactional value towards creating and measuring long-term net gain based upon superior customer satisfaction and benefits.

The trek to "relationship marketing" has been a long 30 year journey, and it still rates a conference spot. See for example Session Three of the upcoming "annual Miller Heiman Sales Performance Summit for sales leaders" where the National Australia Bank is presenting: "Transformation Time; Paul Freeman, Head of Capability Business Banking of National Australia Bank, will present on their journey to become a World Class relationship bank".

The concept of the relationship model has been highly successful, as we all take this for granted as Business 101 these days. Or perhaps it was always obvious but was glorified and codified by Marketing theorists seeking the next swag of publications and seminars?

Marketing professionals resisting social business

In any case, although the business community broadly accepts this relationship model as a given, ironically there is still a strong resistance about social media's role in this among the marketing professionals and more-so the Marketing Professional groups with which I am familiar.

There is some kind of turf resistance while they try to figure out how to "professionally" own this space. For example up until now the Australian Marketing Institute Annual Conference has had zero content on the topic, and although there was some this year it was at the level of "Facebook campaign success stories" - the epitome of transactional relationships.

Relationship marketing is about transactions over a longer time frame

Now here's the thing. This "relationship marketing" and Customer Lifetime Value (CLV) still focuses on transactional value - it's just a form of discounted cash flow of the lifetime events of a customer as they relate to probable transaction capture from those events. The marketing "edge" is as simple as this - to be at the right place at the right time for those typical lifecycle events - drip feeding at the right reading of the tea leaves. The "relationship" part is a view of a different time frame - long-term versus short term, not of different forms of customer valuation.

Relationship marketing is still just about focusing on the customers with the highest lifecycle sales possibilites.

New forms of customer valuation are required

But, what we know today is that new forms of customer valuation are required, and many organisations are reconsidering how they determine customer value. They are recognising that instead of focusing on revenue or profit associated with an individual's or household's transactions, that they need to start to think about the value of influence and collaboration.

Understanding a person's social reach combined with their propensity to share thoughts becomes a method to extrapolate value, and in turn to help update segmentation rules and adapt relationship strategies.

The relationship wanted is the relationship of the social medium

But here's the catch - these very same customers want and expect a different kind of relationship with the companies whose products and service they buy. And it's not easy to predict what those expectations are - for some it may mean a deeper relationship extending to business innovation and for others just a more efficient buying experience with little or no product enquiry or interaction.

Fragmented social business isn't going to work

To know which suits which customer segments it is imperative to track and understand holistically across the organisation the influence, referrals and collaboration of the customers in their social spaces. That's no easy task because very few organisations today deploy this holistic social business management.

This need for a holistic approach to social business implementation and customer relationships is a recurring theme in the drive to increasing customer value today. For example in social media customers need to be treated in the right way, they need to be interacted with and engaged in the right way, and different arms of the organisation need to be fully aware of the nature of the interactions, if not the detail.

For example if the new knowledge gleaned from successful social engagement leads to more efficient segmentation then the appropriate parts of the organisation for that specific segmentation need to take a coordinating role, otherwise value could be destroyed.

It's a complex business. And it requires serious top-down support, and serious cross-organisation implementation and measurement. It's not about a support team of 4 people in an organisation of 4,000 people servicing the squeaky wheel tweeps.

Takes proper business planning not more staff monitoring

It's a truism that the growth of social media has put the customer in a stronger position. Anyone can have a voice and everyone expects “human” near-real-time responses. Organizations operating without improved customer value metrics are hiring staff to monitor and respond to virtually everything – which is difficult to scale – not only because of the sheer volumes of activity, but the risk of having inconsistent responses or staff that are untrained in the art of risk mitigation.

What they really need is not a rush to operational solutions, but proper business planning and strategy. It will most likely require the services of a solid management consulting group, skilled in complex organisations, industry sectors, project management and organisational change. It's not a "call center up" initiative. And to be frank it's not something that can picked up at a marketing conference or from Facebook campaign award nights.

Bearing in mind that most complex enterprises already have ways and means of successfully coordinating cross-functional activies,then this provides a lever for the transformation to a social business and more extensive measurement and action around enhanced customer value.

Real change requires top-down support. The business case for investment should be about the extent to which new customer valuation insights can help the organization to compete more successfully. That means integrating customer engagement across the organization, not developing a silo directed at social media.

What is the new valuation metric?

However if we are talking about Customer Loyalty Value rather then Customer Lifetime Value then perhaps we are starting to embrace some of the new valuation metrics made evident through social business using social media. Unfortunately "loyalty" programs have all but degenerated into very broad direct marketing programs so we might be best to dispense with that term. In which case we need a new term, and of course new measures for customer lifetime value.

For example traditional CLV models use variations of "propensity to purchase" in their mathematical calculations, and it typically is related to recency of last purchase. Internet marketeers know that the very time a customer has just purchased a product from the web is the best possible time to offer them something else - the upsell. In the offline world it is similar - the upsell of extended warranties on home appliances at the point of sale of the latter.

However do we now need to measure not the recency of last purchase but also the recency of last significant interaction. This could be via contact with an influencer, a high value collaborator, a review on a website, a comment on Facebook? This is where we need a new addition of Berger & Nasr's classic "LIfetime Customer Value" - one of the most cited books on the topic. In fact if you refer to their book you'll see how directly transactional their mathematical models are.

Adding in social metrics is a whole new kettle of fish. What that really means is that adding in social metrics would for the first time turn the traditional CLV "relationship marketing" equation from one based on transactions to one which incorporate measures of relationship! 

How do you re-envisage customer value?

What non-transactional measures are the most important for a social business?

What would the new Customer Lifetime Value equation look like?

What is the greatest organisational roadblock to implementation new CLV measures?

Walter @adamson