Microsoft spends more on R&D than Google

This is true not only in absolute dollar term but also true as a percentage of revenue. In fact, Microsoft spends more on R&D among all the IT and software companies – in both absolute dollar terms as well as percentage of revenue.

Have a look at the data below. I have picked it up from a post in Infoworld by Ted Samson.

Revenue in billion US$

R&D Budget in billion US$

R&D Budget  as % of Revenue

Microsoft

62.5

8.7

13.92%

Oracle

35.6

4.5

12.64%

Google

29.3

3.7

12.63%

IBM

99.9

6.0

6.01%

Apple

65.2

1.8

2.76%

HP

126.0

3.0

2.38%

It was a surprised to see Oracle so high up in the list but I guess it may be a legacy from Sun. However, what is more surprising is to see Apple and HP spending so less on R&D.

I poked around a little to cross check the validity of the data – it appears indicatively accurate. In fact Microsoft R&D spending may be little understated. (See Microsoft R&D Spending, Comparative R&D Spending and Oracle R&D Spending).

Here is another chart from Business Insider which is based on 2009 data.

So, it would be foolish to write-off Microsoft in mobile. They have a habit of bouncing back and taking the lead after late start. Let us wait and watch where Microsoft will it be in ten years?

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Which country will have maximum mobile subscribers by 2012 end?

If you have answered China than you are almost certainly wrong! It will be India. In fact, we may not have to wait till the end of 2012. India is likely to surpass China by middle of 2012.

May, 2011 statistics say China = 896 million subscribers against India = 840 million subscribers. (see Wikipedia). The gap is about 56 million. For the past few years, India has been adding significantly more number of subscribers every month. Current statistics indicate that India is adding 50% (5 to 7 million) more subscribers than China.

Chetan Sharma Consulting has produced a nice graph depicting this growth. It is the slide 19 in this presentation. [BTW: It is worth going through this presentation]

But this does not make sense!

[These stats are pulled out from Wikipedia]

  • Not only does China have more people compared to India (China = 1.34 billion, India = 1.21 billion), China has much larger adult population, people who are 15+ (China = 83.4%, India = 69.2%).
  • China has a much large urban population. In China 1 in 2 people live in an urban area were as in India the number is less than 1 in 3.
  • China has more than 3 time per capita GDP in nominal term (China = US$ 4382, India = US$ 1265) and about 2.5 time in PPP term (China = US$ 7519, India = US$ 3339)
  • In terms of infrastructure China is 10 to 15 years ahead on India.
  • Most mobile handsets are manufactured in China

So, what makes people in India wanting and affording a mobile compared to China?

Possible explanation

  1. Competitiveness: India mobile market is much more competitive. According to Chetan Sharma in a scale of 0 (= most competitive) to 1 (= total monopoly) – India = 0.1 and Chine = 0.55. (see this)
  2. Spider vs. Starfish syndrome: India is very decentralized were as China in centrally controlled (what is spider vs. starfish)
  3. Oral tradition of India: Historically Indians have been more focused on oral communication than written one (see this). In China, expressing you view is not encouraged.

What do you think?

Forrester says Future of Cloud is SaaS

Well … they have not actually said it but the data provided in their report on “Sizing the Cloud – Understanding and Quantifying the Future of Cloud Computing” implies so. The projection claims that going forward more than 80% of US cloud revenue will be from SaaS. This trend will continue for next 10 years.

[Forrester has an additional cloud classification of BPaSS which stands for Business-process-as-a-service. It involves provisioning of highly standardized end-to-end business process delivered via dynamic pay-per-use and self-service consumption models. You can think of it as BPO offered in the cloud.]

I tend to agree with them. Here is why …

What is the value proposition of Cloud?

  1. Save cost through better utilization
  2. Improve IT agility
  3. Help focus on core activities

Recent studies have questioned the cost saving potential of cloud. Costs saving possibilities exist when the load is unpredictable and volatile. However, most organizations and for most type of applications this is not true.

In theory, cloud gives you the freedom to start a new machine instance and deploy your application within minutes. In practice, how often will you need such speed? In how many different real world situations will it give you a competitive advantage?

That leaves us with the third option. You would definitely read about the analogy between IT and electricity generation. How electricity generation has move away from captive units to large centralized facilities. How cloud computing will do the same to IT infrastructure.

So, if the cost saving potential of cloud and the need for agile deployment is limited, then the main attraction of cloud computing is to get rid of the entire headache associated with managing the hardware, software and networking setup and focus on your core activity.

But software have become core IP of most organization

True.

But, such core software forms only a small part of any organizations application portfolio. Then again, most organizations will be reluctant to move such software to the cloud.

Vast majority of the application that is expected to move to cloud is of the kind which is not considered as the core activity of an enterprise.

To simplify IT infrastructure management – How does IaaS, PaaS and SaaS help?

Cloud does not help you in managing your client and networking infrastructure. You will more or less have the same overhead irrespective of your choice of IaaS, PaaS or SaaS.

IaaS partially relieves you of the burden of looking after the physical server infrastructure which includes physical security. However, you have to still manage the virtual instances of each server. Though some degree of automation is possible, you will still have to manage each instance of the virtual machine. The concept of Dev-Op is gaining momentum but that only shifts the burden and does nothing to reduce the workload. As some of the recent cloud service outage has demonstrated, you will still have to plan for DR (see this).

PaaS can have to variants. One is a pure PaaS environment like Google App Engine or Microsoft Azure where you can deploy you bespoke application. The other variant is the SaaS extension like Force.com which you can use to enhance or extend you SaaS. Though we cannot draw a clear line between the two (you can implement a bespoke application using Force.com) – I am talking here about those independent PaaS platforms. These platforms relieve you of the effort of managing the machine instance, operating system and most of the system software. However, the biggest challenge for PaaS is that your existing applications will not run on PaaS – so there is a high barrier for adoption.

SaaS may help you achieve cost saving or it may not. I may or may not also make you more agile but what it will definitely do is to relieve you of the necessity of spending effort to keep the applications running. Whether the SaaS provider will be able to match you security and reliability needs are a different question. The implication is that if you find a SaaS offering which meets you need you will no longer have to spend effort to keep the system running. DR also will be the headache of the provider.

Agile practices now have research support

Adam Smith was wrong. Well … he was not wrong in his conclusion but he was partially wrong in his basic assumption that human always pursue their self-interest.

Through the work of many scientists, we have begun to see evidence across several disciplines that people are in fact more cooperative and selfless—or behave far less selfishly—than we have assumed. In fact, recent research shows that in any society majority of us behave cooperatively rather than selfishly (though some people do behave selfishly).

The essence of agile is iterative development and self-organizing team (What makes Agile agile?). Latest research suggests that iterative approach with trial and error is the best way to navigate through our environment which has become exceedingly complex. Such research is inspired by biology and evolution.

Now you have research evidence that we are indeed tuned to work like that. Here are the references to 2 books and couple of article which highlight the latest development in this field.

However, what surprises me most is that there not a single reference to agile manifesto or agile development methodology in any of them. All of them invariably refer to Wikipedia and Open Source movement but I have not seen any similar publication referring to Agile.

The Unselfish Gene

Ted Cadsby, in an article in HBR, neatly summarizes the status of research in this field. He points out the following:

  • In experiment about cooperative behavior – in no society examined under controlled conditions have the majority of people consistently behaved selfishly. Most organizations would be better off helping us to engage and embrace our collaborative, generous sentiments than assuming that we are driven purely by self-interest.
  • Wikipedia and open source movement – people contribute because they want to cooperate. The interpretation that the voluntary contributions of participants are an attempt to improve their reputations and long-term employment prospects has been refuted by the decade of empirical research.
  • Cognitively and emotionally, we may be able to “feel” what others are feeling – Neuroscience also shows that a reward circuit is triggered in our brains when we cooperate with one another, and that provides a scientific basis for saying that at least some people want to cooperate, given a choice, because it feels good.

Agile proponents have always maintained that “Self-organization” through “Collaboration” and “Trust” is the key to successful software development. If you look at these 3 of the 12 principles behind agile manifesto, you will notice that it revolves around trust, face-to-face conversation, motivated individuals and self-organizing teams.

  1. Build projects around motivated individuals. Give them the environment and support they need, and trust them to get the job done.
  2. The most efficient and effective method of conveying information to and within a development team is face-to-face conversation.
  3. The best architectures, requirements, and designs emerge from self-organizing teams.

The article goes on to point out 7 building blocks of cooperative systems. The first building block is Communication – in agile manifesto the first item is just that “Individuals and interactions”.

There is another article by the same author which emphasizes that many of our current problems are too complex to be reduced to a single-cause explanation. Complexity arises from the interconnections between things — how parts within a system interact via intricate feedback mechanisms. The information signals we need to make sense of complex things are buried in a lot of noise, and we, unfortunately, are not adept at digging for cues.

Adapt: Why Success Always Starts With Failure

This book is by Tim Hartford, the author of “The Undercover Economist”. If you have not read the book the here is a nice summarization of the key ideas. There are references to numerous recent researches in this field. The main ideas brought forward in the book are:

  • Astounding complexity emerges in response to a simple process: try out a few variants on what you already have, weed out the failures, copy the success – and repeat forever. Trial and error is a tremendously powerful process for solving problems in a complex world.
  • Given that life is so unpredictable, what seemed initially like an inferior option may turn out to be exactly the solution we need. It’s sensible in many areas in life to leave room for exploring parallel possibilities.

In addition to these the author makes a case for making systems loosely coupled so that failures can be tolerated. This will ensure that the cost of one failure is not too much and it does not bring down everything with it.

The key to Agile is “iteration”. The third principle states “Deliver working software frequently, from a couple of weeks to a couple of months, with a preference to the shorter timescale.” The emphasis is on doing – learning – adapting.

The Origin of Wealth: Evolution, Complexity, and the Radical Remaking Of Economics

This book, written by Eric Beinhocker, is rich in survey of new ideas in economics, incorporating discoveries from science and psychology. This presentation highlights the key ideas in the book. The key premise in the book is that our economy is a complex, adaptive system which implies that:

  1. Equilibrium, and with it much of the economic thinking that has dominated the past century, is out.
  2. A new tool set with its own techniques and theories are available to explain economic phenomena.
  3. Wealth is a product of evolutionary processes.

This book also emphasizes on the need to iteration and self-organization.

Here is a diagram from the presentation showing how cycles have evolved.

Google Plus has ensured that Facebook cannot make money

Google+ may fail … it may not succeed in weaning away enough users from Facebook…

…But what G+ has ensured is that Facebook will not be able to make enough money to justify its current market value of US$ 100 billion.

Why so?

Let us do a quick back of the envelop calculation.

  1. For Facebook to justify it current valuation of US$ 100 billion, it needs to, at some point of time, make an annual profit of at least US$ 10 billion.
  2. That can be done only if they have annual revenue of around US$ 30 billion.
  3. This revenue number is about 15 time their current annual revenue.
  4. The user base and the level of usage cannot keep growing indefinitely and will saturate at some point of time. Let us assume that it saturates at double the current level.
  5. That still means the revenue per user has to increase 7 to 8 time the current level.
  6. Even assuming that enough organizations are ready to divert their ad budget to Facebook – where will the ads be shown?
  7. This can be done either by dramatically increasing the click through rate or by showing significantly increased level of advertisement.
  8. People don’t go to Facebook to search for things – they go to Facebook to check on friends. So, significant increase is click through rate is highly unlikely.

Would you stick around in Facebook, if they start showing significantly larger number of ads?

Especially when an interesting alternative in the form of Google Plus is around?

Do you remember what Microsoft did to Netscape?

Before 1996, Netscape used to rule the browser world. However, Microsoft changed the whole game by making IE good enough and giving it away FREE. That ensured Netscape could not make any money from their browser. You can read the rise and full story here.

Microsoft did not have to make any money from IE, so Netscape really did not have a chance.

Google – Facebook story is going to be similar

Google does not have to make any money from its social media initiative. It gave away Android free just to ensure that the mobile platform remains open.

Google probably needs to spend less than a billion dollar annually to keep the social networking initiative going. They can easily do that without any ads appearing. Look at how they handled YouTube.

If Facebook pushes too hard for revenue and profit margin they would land up handing the whole game over to Google.

However, Facebook can survive and continue to thrive if they can get rid of all those people who think that the Facebook IPO is going to be a goldmine.

Is Facebook Overvalued? It depends on how you answer one simple question

The Economist conducted a poll on January, 2011 asking the readers the same question – “Is Facebook overvalues at US$ 50 billion?” At that time it was valued around US$ 50 billion. Here is the result:

Since then lot has been said and written about Facebook valuation and the valuation has also gone up to US$ 100 billion. But, the argument persists. Both sides are strong in their belief.

Gartner, in a recent report titled “Current States and Future Directions of the IT Industry” states:

“…evidence continues to mount, highlighting there are few forces more powerful than the influence that friends or peers have on consumer buying decisions…”

On the other hand, Forrester, in a report titled “Will Facebook Ever Drive eCommerce?” states:

“…for most eBusiness companies in retail, Facebook is unlikely to correlate directly to near-term sales. A few pockets of success, however, have surfaced… while Facebook disciples believe that there will be something that will in the future transform shopping, the truth is that large brands just have not experienced any sizable gains in direct sales from Facebook…”

So where does it leave us?

What is your answer this simple question?

Ultimately it boils down to this one question. How you answer it will place you either in the “Yes” or “No” camp.

Can Facebook monetize the very detailed demographic profile and social-graph data that it will have for one billion users without alienating them?

Monetize = Generate ad revenue = Provide measurable increase in sales for the ad spend

Monetize = 10 billion US$ as annual profit to justify 100 US$ valuation

True, Facebook can make some money from the developers and by selling other things like music, movie etc. but that is already a crowded market. Major revenue has to come from selling ad.

It is not going to be easy.

People go to Google to look for things so targeted advertising can in many ways be helpful to the user. When people go to Facebook, they go to see what their friends are doing. So, ad can become an intrusion.

When Google went for IPO it had already figured out how to make money for 3 years prior to IPO. Facebook has not yet figured out how to be profitable. They are trying many ideas and hopefully some will succeed.

One billion user = Sure to have from current 600 million = Likely to saturate

Facebook is the most visited site in US (see this). It accounted for 8.93% of all US visits between January and November 2010 and now has more than 500 million active users. Half of Facebook’s users come to the site at least once a day. The user base has been growing at an incredible pace.

However, there are indications that for a country number of users tend to saturate at about 50% of the internet users. (see this interesting report)

Without alienating them = Showing too much ad = Move to the next happening platform

It happened to MySpace. In 2005 News Corporation acquired MySpace for US$ 550 million (see this). At that time MySpace attracted the fifth-most page views of any Web site. Last month, Specific Media takes the site off News Corporation’s hands for US$ 35 million (see this).

Having one billion users is no guarantee that there is no mass exodus. Who ever thought that Lehman Brothers can collapse in such a short period of time?

There is already some evidence that users are not that satisfied with Facebook. ASCI (American Customer Satisfaction Index) rates companies based on thousands of consumer satisfaction surveys. Maximum possible score you can get is 100 – higher the score, more satisfied are the customers. Here are the scores – not much difference between Facebook and MySpace.

Google = 80, Wikipedia = 77, Bing = 77, Yahoo! = 76, MSN = 75, AOL = 74, YouTube = 73, Ask.com = 73, Facebook = 64, MySpace = 63

Can we predict the future?

As you can guess by now that I think Facebook is not worth US$ 100 billion. To me it looks like a bubble created partly by Goldman Sachs. Check these:

However, it is always good to remember that you cannot predict a Black Swan. Just go through the following post, a 2003 vintage:

Ten reasons why you should not go for Google IPO

Cloud – Market forces working

Some time back I had complained that price of cloud service offering are not coming down fast enough compared to the drop in hardware price reduction. But then we see the following release from Amazon – AWS.

“…we’ve often told you that one of our goals is to drive down costs continuously and to pass those savings on to you…” (see this)

Indeed, from 1st July, they have eliminated the inbound data fee. It used to be US$ 0.10 per GB.

Also they have reduced the outbound data fee between 20% (for lower end of usage) to almost 40% (at the higher end of usage).

Here is the comparison of per GB outbound data fee, before and after 1st July (for US-Standard, US-West and Europe regions):

Slab for Data Transfer per month

Price per GB before 1st July

Price per GB from 1st July

First 1 GB

Free

Free

Up to 10 TB

US$ 0.15

US$ 0.12

Next 40 TB

US$ 0.11

US$ 0.09

Next 100 TB

US$ 0.09

US$ 0.07

Next 350 TB

US$ 0.08

US$ 0.05

Over 500 TB

US$ 0.08

Special price – not disclosed

However, was this change in price done, as claimed by Amazon, to pass the cost reduction benefit to customer? Probably not because few days before this announcement Microsoft had announced that inbound data transfer will be free from 1st July, 2011 (see this).

BI in the Cloud becomes attractive

This change may one up interesting possibilities for doing DW & BI application on the cloud. Earlier, the biggest roadblock for moving such application to cloud was the prohibitive cost of transferring data into the cloud. With the removal of that stumbling block the economics of BI in the cloud looks more attractive.