Googles long-term strategy, and why they bought Boston Dynamics

Google just bought Boston Dynamics, the company behind robots such as Big Dog and Petman. Why would Google, a search company, buy a robotics company?

Because it’s part of their long-term strategy.

96% of Googles revenue comes from advertising. It’s a golden goose that sprinkles the company in money. Last year they made more than $10 billion from advertising. This is what drives their whole business – without advertising there would be no google. Depending on one income stream is a risky bet for a large company, and Google knows that the advertising revenue might dry up at some point. Not now, not next year, but sometime in the future. A nimble competitor might come along with a better product, googles search dominance might wane thus giving them access to less advertising space, or the advertising marketplace might change completely in some unforeseen way. In the long run it’s dangerous to be dependent on one income stream. On top of this Google’s marketshare in the advertising business is now so large that growth is becoming difficult.

Google is well aware of this. They know they need to look for other revenue streams to suppleant advertising. Since Google is a large company, and the advertising revenue stream is in the tens of billions of dolllars an alternative income model needs to come from a large market. Even if Google corners the market for dogfood completely it probably won’t make a dent in the financial statement of the company. They need a big market, and they need a big share of it. Otherwise it doesn’t matter.

Other large companies facing the same problem typically try to diversify into other markets where they might have a technological or market advantage. When IBM’s mainframe business was under threat in the 80′s they (successfully) diversified into consulting because they already had the sales organisation in place.

Moving into another market where you have an advantage is a classical strategy. There are 2 things that make google slightly different.

First, they are making the move before their main business model comes uder threat. This is both a rare and visionary thing to do, and it offers the distinct advantage that since advertising still rakes in money they have the resources to stay in the game, even though it might not be profitable this quarter or next.

Second, they don’t try to corner existing markets but look ahead to markets that might become billion dollar industries in years or decades. Robotics, self driving cars, Google Glass and Anti-ageing. The reason Google is able to look to new non-existing but potentially huge markets is that they aren’t in any immediate trouble. On the contrary, one of the hard things at Google HQ must be to decide what to spend money on. They spend it on securing a future where adwords is no longer their main revenue stream.

Very smart.

 

 

 

 

 

Google announced the launch of a new company called Calico on September 19, 2013, which will be led by Apple chairman Arthur Levinson. In the official public statement, Page explained that the “health and wellbeing” company will focus on “the challenge of ageing and associated diseases”.[77]

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Why newspapers are dying

20 years ago newspapers were thriving businesses. They set the political agenda, shaped public opinion and uncovered large scandals. They also made lots of money. Most publishing houses had large headquarters placed in the most expensive parts of town as monuments to their fortune.

From a business point they were in an enviable position. They were largely the gatekeepers between information and the public. If you wanted information you had to buy a newspaper. Gatekeepers typically make lots of money because they operate in a monopoly-like environment. If you want something you have to get it from the gatekeeper. Record labels used to be gatekeepers for music – if you wanted to listen to music you had to buy one of their CD’s. Hollywood studios used to be gatekeepers for movies – if you wanted to watch a movie they decided when it would be released in you country, when it would be on television and when you could rent it in blockbusters. They all made lots of money.

Newspapers used to be gatekeepers for news. In a world without Internet this gave them a distinct business advantage. They had access to millions of readers. In the newspaper industry it’s no secret that actually producing news is a loss leader for the business that can be generated through the access to a large loyal audience that trusts the brand of the newspaper. A newspaper with only news can’t generate enough income to be sustainable.

But that didn’t matter because seen from an business perspective news was the vehicle that allowed newspapers to bring their other business model to market.

If you wanted to sell a house you paid the newspaper to be included in the homes section. If you wanted to fill a position in your company you paid the newspaper for an ad in the jobs section. On top of this came the normal ads. They made lots of money. The sunday papers were the size of phonebooks, filled with expensive ads, job listings and pictures of real estate for sale. They also wielded some serious political power since they controlled the flow of information to the public.

Washington Post headquarters

Washington Post headquarters – now it’s for sale.

 

Then the Internet came along and ruined it all.

With the rise of the Internet the newspapers gatekeeper role diminished. Slowly web-based services crept in and ate the newspapers lunch. Monster, linkedin and a load of other sites slowly ate the revenue generated from the job boards.  Yahoo real estate, zillow and a large number of smaller sites stole the income from the real estate listings. Craigslist stole the classifieds. On and on it went. A million smaller specialised companies eating away at the newspapers economic foundation.

The sunday paper was slowly reduced from a cashcow the size of a phonebook to a trickle of pennies from a few loyal customers who still thought that a job posting in the New York Times was a pretty good deal. This started happening 15 years ago, without the newspapers taking notice. Or at least it appears that way since none of them put serious effort into developing competing services.

Only within the last few years have newspapers started to take the Internet threat seriously. Years after it has taken away their businessmodel. A lot of them seem to think that they just need to convince readers to pay for online news, and then everything will be fine – like in the old days. But it won’t. For several reasons:

  • News was never the sole revenue driver for newspapers. Ads, classifieds, job postings and real estate postings made up a substantial amount of the revenue. Those are mostly gone.
  • Ads are cheaper on the Internet than they were in print. It’s a simple question of supply and demand. 20 years ago there weren’t that many possibilities if you wanted to reach consumers. Newspapers were one of them. This drove prices up. On the Internet the supply is nearly endless and drives prices down. Note that this is true both for online ads and paper ads. (Online ads are a substitute for print ads, and since they’re cheaper a lot of the money previously spent on print ads are now diverted to online ads, thus driving down the demand)
  • News is abundant and free. You can always find your news for free on the Internet. This means that the incentive to pay for your news is dwindling. Very few online publications can generate substantial revenue from online content, mostly in the financial press.
  • Competitors have taken over the lucrative income models such as job postings with dedicated sites that do one thing and do it well.

So are newspapers doomed?

Not necessarily, but they have a rough road ahead. And they need to start moving now if they want to be in business 10 years from now.

There are only 2½ definitive truths in the future of newspaper economics:

1) It’s a structural change, and the old days won’t come back. Like so many other industries the Internet has disrupted the whole business model and stripped the industry of its gatekeeper role, and thus its income model. This won’t change.

2) Nobody has the obvious true answer.

2½) In 10 years there won’t be any printed newspapers. (This isn’t entirely certain, but very likely – technology is fast paced, remember that 7 years ago Apple hadn’t even introduced the Iphone)

So what should a newspaper do to survive? First, look at what unique advantages it has.

  • Brand value. Most newspapers have a brand that many online businesses would kill for. Who do you trust the most? New York Times or Instagram? Brand value is a key metric for driving sales.
  • An audience. A newspaper typically has a large audience that it connects to on a daily basis.
  • Journalists! The people whose job it is to create interesting and engaging stories that depict the world in which we live. A lot of them do it very well.

So newspapers definitely have some value, what they don’t have is a way of capitalising it. In a way  newspapers are like startups. In the words of Silicon Valley legend Steve Blank  a startup is an organization formed to search for a repeatable and scalable business model.” The main difference is that newspapers are way ahead of startups in that they already have brand, audience, money and a dedicated staff. All they need is the business model.

So how do startups find a repeatable and scalable business model? They try a lot of different things and see what sticks. It’s the exception rather than the rule that what a successful startup ends up making money on is what was envisioned in the original business plan. Paypal started as a digital wallet for PDA’s, Hotmail started as an online database business. Google didn’t have any idea how they would eventually make money when they started.

This is the strategy that many successful startups use:

  • Get an idea and create the simplest implementation that could possibly work. Get it out to customers as soon as possible. In startup speak this is called the minimum viable product. The point is not to have a perfect product but to find out whether it’s something people will pay for. If it shows promise you can always improve it.
  • Continuous deployment: Put your minimum viable product out there and test it. Tweak it, make it better, change it a bit and see what happens. Do this continuously until it works. successful startups often deploy new tweaks multiple times a week.
  • Actionable metrics: If you don’t have metrics you don’t know whether a deployment is a success or not. Metrics can be users, acquisitions. readers or money in the bank.
  • Pivot. If your minimum viable product doesn’t work, even after tweaking and testing, drop it and think of something else. Repeat and rinse until you have a business model that works.

Newspapers should copy this model. If 2 guys in a garage can make it work so can a news organisation that already has a brand, an audience, journalists and a solid infrastructure.

 

 

 

 

 

 

The projected economy of Silk Road

With the recent takedown of the illegal TOR-based merchant site Silk road some interesting numbers have been released in this (PDF link) criminal complaint . This gives a unique and interesting look at the economy behind the site.

Here are some raw numbers directly from the linked criminal complaint:

  • Silk road was initially launched around January 27, 2011.
  • Dread Pirate Roberts, the alleged owner and main administrator of the site, has on July 21, 2013 received 3.237 transfers of Bitcoins to his account, virtually all of which are labelled “commission”.
  • The commission rates vary between 8 and 14% depending on the size of the transaction (larger transactions have lower commission)
  • Dread Pirate Robert’s Bitcoin account page on Silk Road held equivalent to $3.4 million on july 23, 2013.
  • A small administrative staff has helped police the forums, and do other tasks. They have received a payment in Bitcoins  equivalent to $1.000 to $2.00 a week.
  • During the 60 day period from may 24, 2013 to july 23, 2013 1.217.218 messages were sent through Silk Roads privte messaging system.
  • From february 6, 2011 to july 23, 2013 1.229.465 transactions were completed on the site involving 146.946 unique buyer accounts and 3877 unique vendor accounts.
  • The total revenue generated from these sales was 9.519.664 bitcoins
  • The total commission collected by Silk Road from the sales amounted to 614.305 bitcoins. These figures are roughly equivalent to $1.2 billion in revenue and $79.8 million in commissions at current bitrcoin exchange rates.

So let’s look at the economics of being a large-scale criminal mastermind that runs a TOR-based drug trading commerce site.

The site has been in operation for around 2 years, and in that timeperiod the owner has managed to turn it into a business with a billion-dollar turnover. Pretty impressive.

To get an idea of the scale the maintenance and operations needed to keep the operation going we are given the following clues:

  • a little more than 1 million transactions were completed in the 2 years the site was operational. 
  • The site had around 150.000 buyer accounts and 4.000 vendor accounts.
  • around 2000 private messages were sent a day.
  • Dread Pirate Roberts has received a little more than 3000 bitcoin transactions in one day  on July 21, 2013.
  • On average around 1600 transactions have been completed every day since the start in 2011. Assuming a growth period this is consistent with the 3000 transactions received in one day as stated above.

Assuming that 2% of the visitors to the site make a transaction this gives 150.000 unique daily visitors based on the assumed 3000 daily transactions on july 21, 2013. Behind this is a database holding transaction history of the 1 million transactions, user account info for around 150.000 users, and other maintenance stuff. On top of this comes a forum, which was run on a separate server. This is not a mom-and-pop website, but well within the reach of one dedicated and talented programmer/sysadmin – presumably Dread Pirate Roberts.

The server and bandwidth cost of this operation should be negligible, and would probably come to a few thousand $ a month at most. On top of this comes pay for an administrative staff whose job it presumably is to weed out bad seeds, answer forum questions, settle disputes, etc. Assuming a staff of 10 people this comes to   around $80.000 a month.

So from these guesstimates we can get a broad overview of the economics of the operation.

Projected budget for 2013 – presuming the site was still operational:

Revenue: We know that revenue was $1.2 billion over 2 years, we know that an average transaction was $976 ($1.2 billion/1229465 transactions), and we know that in one day in july Dread Pirate Roberts received 3237 Bitcoin transactions. Assuming that this was a normal day (which doesn’t seem unreasonable with the given numbers, accounting for some growth during the time the site was operational) this comes to a daily turnover of $3.159.312, giving a projected yearly revenue of  $1.1 billion

Operating expenses (as explained above): $1 million

Vendor expenses (Revenue minus commission) It is stated that the commission varied between 8 and 14%. If we assume an average 0f 9% this equals vendor expenses of $1001 million

Profit for 2013 (assuming the site was still operational): $98 million

Not bad for a 2 year old site. Too bad it was terribly illegal.

Either there are no terrorists, or they are incredibly incompetent

Think for a moment about how easy it is to make a terror attack. You can make incredibly poisonous gas and release it in the subway for less than $1000, you can set off huge forest fires in California by driving around with a few cans of gasoline on a hot and windy day, or you can simply buy a semi automatic weapon and start shooting people on Times Square. These are all obvious and easy DIY terror attacks. If you have a sliver of intelligence you can fairly easily come up with attacks that are much more devastating and equally easy to deploy (I won’t mention any, I really don’t want to give anyone good ideas even though I highly doubt that potential terrorists are reading this blog)

There are examples of people without significant funding having successfully carried out attacks. The boston bombers and Anders Breivik come to mind. So we know terrorism can be done by individuals with limited funding and contacts.

We hear about the dire threat from large well funded terrorist organisations on a daily basis, so the obvious question is: If it’s so easy to do, why aren’t there more terror attacks?

I see three potential answers:

  1. There are no terrorists, or at least very few.
  2. The terrorists are incredibly incompetent.
  3. The NSA, CIA, FBI and other agencies are doing a stellar job of stopping terrorism.

Let’s assume the three letter agencies are incredibly effective and thwart potential terror attacks all the time. How would we know? They operate in a veil of secrecy so it’s hard to know for sure. However, sometimes they testify in congressional hearings so that our elected representatives have a chance to find out whether the billions they receive is well spent. In this C-span clip NSA director Keith Alexander is asked whether the NSA has thwarted any terror attacks. His answer is “dozens”, yet he is unable to mention even a single concrete example, or point to even a single arrest. It seems to me that if you testify before congress, which is the NSA’s source of funding, and you have a shining example of why you’re worth your money you would mention it. But there isn’t one.  In an interview director of national intelligence James R. Clapper is asked whether he can give examples of terror plots that have been prevented. He mentions two episodes, both from 2009. The first is an attempted bombing of the New York subway. The second is the apprehension of David Headley who was involved in the Mumbai bombing (they didn’t catch him before the bombings took place) and the planned attack on the Danish Newspaper Jyllandsposten. But David Headley’s case could easily have been unfolded without the NSA. His two(!) wifes both notified the US authorities about his terror involvement in 2005 and 2007 to no avail.

So we have two examples, where at least one is very dubious and the suspect could have been apprehended by other means. That’s not exactly a good track record. It seems to me that not that many terrorist attacks have been averted, if any.

That leaves me with the conclusion that either there aren’t any terrorists or else they’re incredibly incompetent.

How a true statesman would deal with a terror attack

Terrorism seems to be rampant in the western world – if you look at the media reports you might think that the chance of being the victim of a terror attack is a real and constantly present threat. But it isn’t. Terrorist attacks are incredibly rare events.  According the the Global terrorism database  there has been less than 3300 deaths from terror in the United States since 1970. 2764 of these were in the World Trade center on september 11. 2001. This is 43 deaths per year. Acording to NOAA 51 people die each year from lightning strikes. In other words, you are as likely to die from a terrorist attack as you are to die from a lightning strike. In fact you are more likely to die by falling in your bathtub, falling off a chair, being scolded by hot water from a tap, being stung by a hornet, being poisoned or falling off a building than you are dying in a terror attack. In other words – terror attacks are very rare, and are generally not a threat to normal people in Western countries.

Yet terror is perceived as an almost existential threat to our society. Why is that?

There are three reasons.

The first is psychological. We fear the unknown. This is why we are afraid of the dark and what might lurk in the deep water when we go swimming in the sea. We also fear situations where we don’t feel we are in control. This is why we feel safer in the drivers seat than in the passenger seat when we drive a little faster than we should, and it’s why some people are afraid of flying. Terrorism is unknown and we are not in control of where and when it might happen. That’s why it makes us afraid.

But that’s not enough to explain the massive fear of terrorism. Being stung by a hornet or being poisoned is as unknown and uncontrollable as terrorist attacks, yet we aren’t as afraid of being poisoned as we are of terrorist attacks. Which brings us to the second reason.

Mass media hypes and overexposes terror attacks. On the day of the recent Boston bombing, tragic as it was, there were more American fatalities from car accidents than terror attacks. But it’s spectacular and it’s a scary story that’s easy to write. People will read it. They see terror in every newspaper, every newscast and every radio show. They think it might happen to them. They think it happens much more often than it does because mass media inflates the story to crazy proportions. Then they will be afraid. And you can’t blame them, hardly a week goes by without some mention of terror in the news.

The third reason is that our leaders play by the terrorists rules. Terrorism is assymetric warfare. It’s using very limited means to engage an enemy that’s much bigger and which would instantly crush any terrorist organization in a head-to-head fight. It’s a flee biting an elephant. But presidents and prime ministers don’t treat it as the nuisance that it is. They treat it as  a credible threat to national security, and something the general populace should be afraid of. This, of course, is exactly what a terrorist wants. The flee that bites the elephant is portrayed as a credible threat that we should all be very afraid of. Presidents and prime ministers step up to the podium with prepared speeches telling the people that this is a grave danger, but that we will throw every resource at the problem and eventually overcome the threat of terror. By doing so terrorists are put on a piedestal where they can get their twisted message across to more people than they would ever reach otherwise.

In the immediate aftermath of a terror attack it soothes a nation when its leaders step up to address the atrocity, and it unites a nation around an external threat. It also scores some cheap political points – approval ratings shoot up when the president or prime minister can tell the people after an attack that every effort will be made to get the perpetrators, no matter what it takes. Now on the hook a president or prime minister will allocate huge resources towards fighting terror attacks, most of it unnecessary security theater designed to make people feel safe, but not really helping. On the contrary the media now run stories about airport security, possible targets and how much money is being spent on keeping us safe from terrorists. But people don’t feel safe. They feel afraid.

This is a shortsighted strategy for several reasons.

First, it makes the enemy look bigger and scarier than it really is. The president only steps up to the podium when something truly big has happened. When we go to war. When natural disaster strikes. It puts the terrorist on a much bigger piedestal than he deserves.

Second, a disproportionate   response makes normal people scared. When the president has left the podium the press takes over and before you know it everyone is talking about terrorism while looking over their shoulders. They are terrified. Which is the point of terror.

Third, it gives the terrorist and his organisation visibility, and can help recruit members. Al Qaeda grew significantly after the 9/11 attacks.

A true satesman should be able to see through this and deal with terror differently. Underplay it. Ridicule it. Not put terrorism on a piedestal, but paint terrorists as the low-life scums they are.

Norway did this in an exemplary way after the Breivik Shootings and bombing. The Norwegian prime minister got on the podium to soothe the people. But instead of fueling the fear and asking for retribution and revenge he told the Norwegian people that this was the work of a madman, and that it was an extremely rare event. People shouldn’t be worried, and shouldn’t be afraid. No never-ending war on terror. No security theater.  A week later Norway was back to normal. Breivik was treated like any other criminal and was unceremoniously put behind bars for life like any other twisted mass murderer.

A true statesman will not put fuel on the bonfire of fear. He will extuingish it by telling us that there is nothing to be afraid of. That these acts are done by moronic twisted people that don’t deserve the attention. He will tell the people that they have nothing to fear but fear itself.

 

 

The madness of the bailout in Cyprus

Last night the finance ministers of the eurozone decided on a bailout package for Cyprus. The small country with around 1 million inhabitants has an overstretched banking sector that is in dire straits. The primary reason for this is that the Cypriotic banks hold a lot of Greek sovereign debt – debt that took a serious haircut a few months ago when the EU decided that holders of Greek bonds would only receive 60% of their money. Cypriotic banks have been sympathetic (and maybe under pressure from the ECB) and have loaded up on Greek bonds. This is the primary reason for the trouble in Cyprus. The rest of the economy (GDP per capita, debt, etc.) is around average for a euro country.

But because the banks are stuffed to the gills with Greek bonds that are now only worth 60 cents on the dollar they need a bailout.

The big problem for the government is that the banking sector is extremely large in comparison to how small an economy Cyprus is. This is partly due to the fact that the island has always been a bit of a tax haven, with sympathetic banks and a corporate tax rate of 10%,  the lowest in the eurozone. This means that the government is unable to bail out the banks. They just don’t have that kind of money. This is why The IMF and the ECB has stepped in and bailed out the banks. Rumor has it that without the bailout Cyprus two largest banks would be bankrupt in a matter of days. A situation no economy can survive, especially not one with a disproportionally large banking sector.

The bailout, as usual, comes from  the other Euro countries through the ESM flanked by the IMF.

Cyprus is a small economy (around 0.2% of the Eurozone), and bailing out its banking sector is cheap compared to Spain, Italy and even Greece. But since the EU and thus the Euro is basically a political construct a bailout has to make political sense as well as economic sense. Unfortunately sometimes the two seem to be two mutually exclusive. As in this case.

The terms of the bailout are that all funds in Cypriotic banks will be subject ot a one-time tax of 9.9% (6,75% for accounts holding less than €100.000)  This tax is being withdrawn immediately from every Cypriotic bank account over the weekend.  Everyone with a bankaccount in Cyprus will find that when they when the banks open on tuesday (monday is funnily enough a bank holiday) there will be less money than there was on friday. This goes for everyone, from instutional investors, private savers, checking accounts and pensioners. If you had a lot of money saved up for your retirement stashed away in a Cypriotic bank, well bad luck for you because on tuesday only 90% of it will be there.

What happened after this was announced was entirely predictable. A bankrun. People are currently lining up outside ATM’s to get their money out before they’re taxed. The response from central hold has been to close down all electronic banking and not restock ATM’s so people can’t get their money out before tuesday when the tax has been withdrawn from the accounts.

Bankruns are what every economist, policymaker and banker fear the most. The whole banking system is based on trust, if even 10% of customers withdraw their cash from a bank it will be bankrupt in  matter of hours. No bank has the money in its vault to pay up if everyone wants their money at the same time. This is a vicious circle – when there is even the smallest doubt about a banks solvency some people will begin to pull their money. When people begin to pull their money everyone else will follow, knowing that the last one in line won’t get a dime. This is why most countries have a state-backed insurance in the case of bank bankruptcies. Even if the bank goes down the state will pay you the money you had in your account. It is paramount for an economy that people trust that their money is safe in the bank no matter what happens.

This whole thing is entirely unfair for the people living in Cyprus. The average citizen had nothing to do with the banking sector stocking up on Greek debt, but now they have to pay for it. The reason, apparently, being that the other Euro members , headed by Germany, think it would be fair that the southern nations learn to pay for their excesses instead of relying on bailouts from the Northern countries. An assessment that is, at best, inaccurate.

The result is that the Euro areas finance ministers have shown that freezing all bank accounts in a country and withdrawing 10% without warning is a tool they’re willing to use. They’re calling it a one-off and promise it won’t happen again, but it’s a large crack in the faith of the Europen banking system, and it sends a clear signal to all savers, companies and investors in the Eurozone: If you have funds in banks in a troubled euro country there’s a chance it will be taxed without warning. You could wake up one day and see that your €1 million has shrunk to €100.000 overnight. What does it matter that our money is federally insured against bankruptcy, if the state can just decide to take it away from one day to the next?

So what do investors, businesses, and savvy savers do? They pull their money from banks in the troubled euro countries. No need to take the risk, even if it’s small.

In other words: Because of the idiotic idea that the Cypriotic people should pay for the bailout of their banks by simply taking 10% of the funds in every single account in the country the market now knows that money isn’t safe in troubled eurozone banks.

Don’t be surprised to see a bankrun in Greece, Spain, Italy or Portugal next week.

 

 

Tesla’s ingenious strategy

Tesla motors has huge ambitions. Tesla founder Elon Musk has said he envisions Tesla as an independent automaker, aimed at eventually mass producing fully electric cars at a price affordable to the average consumer. This is a very difficult goal to achieve for several reasons. If you want to produce cheap cars you need a finely tuned, automated and hugely expensive factory because that’s the only viable way of producing a cheap car. You also can’t expect to get it right the first time. There will always be beginners mistakes, inefficiencies, regulations, things you hadn’t thought of and all sorts of other hurdles you need to jump through before your factory is ready for primetime. Mistakes in a full car production environment are notoriously expensive.

Maybe the biggest hurdle towards producing a cheap car is conservative customers. In an interesting focus group study that Phillips did to find out what color they should make a new electric kettle they invited groups of people to come in and discuss the merits of the different colored kettles on display. There were kettles in red, blue, yellow, green, and the traditional white. Most people liked the colored ones, and praised them for their looks and fresh approach. After the study they were told that as a thank you they could pick one of the kettles to take home. Almost all of them chose the white one. People are conservative creatures. Especially when it comes to big investments, such as a car. You need a history, brand awareness, and a fleet of cars already driving the roads to make average customers pick a Tesla.

These are huge obstacles, and is probably why there hasn’t been a new major auto maker in the United States for 90 years. The fact that Tesla is making electric cars doesn’t make it easier.

Tesla’s strategy for overcoming these obstacles is ingenious; Start at the top and work our way down.

If you drive a roadster you're cool. And rich.

Their first car was the ubercool, expensive Roadster that goes from 0 to 100 km/hr. in less than 4 seconds. Faster than most ferraris. It comes at a base price of $109.000 which, along with the looks and performance is sure to place it firmly in the “I wish I had one of those” category.

The roadster is the first step in the grand strategy. The point isn’t to sell a lot of roadsters, it’s creating a brand. People that can afford a roadster are a minority and it will always be a niche car- Less than 2.500 have been sold to date. But since they are early adopters and thought leaders  it elevates the Tesla brand from unknown to somewhere between BMW and Ferrari. Every car enthusiast worth his salt talks about the merits of the Tesla Roadster, and lots of average Joes know it exists, and that Tesla is the coolest thing that happened to cars in the last 50 years. The low production volume also gives the company a chance to learn how to run a car factory on a small scale while mistakes are still cheap to make. If 10% of the cars fail, that’s 250 cars.

If you drive a model S, you're still Cool and rich. But probably also a dad.

The next step is the model S. With a price tag of around $50.000 (depending on which battery pack you choose) it’s still an expensive car, but with a broader appeal. Due to the lacking gasoline engine and accompanying drive shaft, gearbox and other heavy machinery it’s a very roomy family car. It’s got two baggage compartments – one in the front and one in the back. If anyone doubts the target market the baggage compartment in the back can be converted to two child seats with the children facing backwards looking out the rear window. With a broader appeal, and the brand recognition of the roadster it’s expected to sell well for a car in this price range. On January 30, 2013, it was reported that production had reached 400 per week. That’s more than 20.000 cars a year. The ramp-up in production will also teach Tesla motors how to do mass production.

This is where we are now. Notice that this is a classical Silicon Valley strategy. Start by targeting early adopters with an expensive product, knowing that this demographic will be forgiving of small glitches as long as they get the newest and coolest tech. The heavy price tag pays for your research and development, and battle-hardens your technology. This is how cell phones, flat screen TV’s and laptops are sold. Use your initial experience to iterate on processes to make the product better and cheaper. Then lower the price and grab a larger market share.  Tesla is now an excellent brand, and has processes and production methods that are built from scratch and iteratively tested to deliver cost-effective cars.

Notice how, unlike many other electric cars, Tesla doesn’t primarily market their cars as electric vehicles. They know that outside a small circle of enthusiasts nobody cares whether it’s electric or not. What they care about is how it looks, how it handles, fuel economy, range and how nice it is to drive. Tesla cars look great, they’re so concerned with the finish they invented a special red paint that has extraordinary depth and shine. All their cars handle extremely well due to the low center of gravity (the heavy battery pack is located under the car), the fuel economy is good, and the range is almost as good as a gasoline fueled car. They also know that if they are to take on the giants of the car industry they need an edge. With their knowledge of electric vehicles, batteries, and electronics, and some experience in mass production of these they are well positioned for a future of electric cars. Arguably Tesla has more expertise in this area than any other car manufacturer.

The next step is to move one rung lower down the ladder with a cheaper car. This is the Bluestar with an expected price tag of $30.000 and a production schedule starting in 2015. This moves Tesla closer to the large and profitable consumer market, where cars are sold in volumes of hundres of thousands, if not millions. Eventually cheaper cars, specialised cars such as vans and trucks, and eventually self driving cars (Google is close by!) wil be produced in their Fremont production facility in California. The fact that the majority of the Tesla factory still sits empty waiting for the volume of the mass market is a sign of the ambition.

If the future of cars is electric, and a lot of things point that way, Tesla is uniquely positioned to lead the market. They have the brand, they have the technology, they have the production expertise, and they have the facilities.

If I was General Motors I would be afraid. Very afraid.

 

HTML prototyping

Paper prototyping is a great way of developing webbased software that meets the users needs. The basics are simple. You take a piece of paper, and you draw the elements you need on a piece of paper. One piece of paper for each webpage. Then you talk to a user, and ask him to evaluate your prototype. You show him one piece of paper at a time, and ask what he would do. When he “clicks a link”, or “presses a button” you show him the piece of paper that corresponds to his choice.

paper prototyping

Paper prototyping - here a user is shown three tabs.

Paper prototyping has some distinct advantages.

  • It’s easy. You can go from idea to paper prototype in less than an hour.
  • It’s easy to show users.
  • Users don’t get caught up in criticising your design, since there isn’t really any design to criticise. The conversation is only about usability.
  • It’s easy to change when you get feedback – just draw another piece of paper.

 

The proper way of paper prototyping is to iterate your way to something your users understand and feel comfortable with. Make a paper prototype, talk to users, get feedback, make a paper prototype, talk to users, you get the idea…

I’ve had some success taking this idea one step further. A few years ago I was contracted to redo the backend for a large webshop. The job was basically to get a lot of external systems (supplier systems, automated customer e-mails, postage tracking, inventory handling, etc.) to play nicely together and make it all available to the employees in a well designed web interface. I’ve always liked paper prototyping, but thought it had a few drawbacks, primarily that users get confused and can’t keep track if there are too many pieces of paper, and that you have to be there in person with the user for each iteration, which can end up taking a lot of time. So I did HTML prototyping instead, and it worked great. There are some simple rules I followed to get a good result:

HTML prototyping

HTML prptotyping - using simple HTML instead of paper.

  • No design. One of the great things about paper prototyping is that users don’t comment the design because there isn’t one. You need to carry this over to HTML prototyping.
  • Don’t use a lot of text. If you have lots of text users will focus on that instead of the interaction design.
  • No backend code. Use only HTML, once you start doing back-end code you’ve gone too far.

 

HTML prototyping worked amazingly well for me and for the client. I could have more than one person testing just by sending them the link. The manager in charge could follow along. I didn’t need to be there in person, except for the initial meeting where I brought the first iteration and explained the concept.

After a few iterations where we caught some bugs, stupidities and inconsistiencies the interface was exactly as the users of the new system wanted it to be. They had time to click around at their own pace without an obnoxious consultant hovering around waiting for them to make a choice or perform an action, they could spend some time thinking about their actions, and they could click back and forth and familiarise themselves with the new system. Under these circumstances where they weren’t stressed by external factors (me!) and could get a good feel for the whole system they provided some amazingly good feedback.

When everyone agreed that the interface performed as it should, it was handed over to a designer to make it fast, slick and good looking. After the design process, I spent some time writing up documentation for the development team that would actually impement all the functionality behind the scenes. It turned out that HTML prototyping helped both the designer and the programmers tremendously. The designer could quickly get an overview of the job by clicking around a bit, and he could implement his design by changing the HTML and inserting the appropriate images and CSS. The programmers received an almost finished frontend that wouldn’t change mid-development, and only needed to code up the underlying functionality.

How did the new interface perform? I spoke to the manager after 6 months and he told me that they had seen a 60% drop in the time employees spent handling orders in the backend system.

Not bad.

Where’s your apology Google?

Four days ago this post appeared on Kenyan company Mocality’s website accusing Google of not only scraping mocality’s database, which is basically the most valuable part of their business, but also calling up the numbers in the scraped database to upsell them a Google site. Even worse, the Google employees claimed that Mocality was under or working with Google. This is certainly unethical, and may very well be illegal – Mocality is getting ready to sue. Mocality uncovered that this seemed to be an international operation involving Google headquarters and call centers in India.

The plot was unveiled in a rather clever way by Mocality, and the technical breakdown of how they caught Google with their pants down lent the blogpost a lot of credibility.

After a few hours it was confirmed that Google was involved with this statement from Nelson Mattos of Google:  ”We were mortified to learn that a team of people working on a Google project improperly used Mocality’s data and misrepresented our relationship with Mocality to encourage customers to create new websites. We’ve already unreservedly apologised to Mocality. We’re still investigating exactly how this happened, and as soon as we have all the facts, we’ll be taking the appropriate action with the people involved.”

The story quickly spread and both the original blogpost and the reply from Mattos was top news on sites such as Hacker news, Reddit and Boing boing.  It even made it as far as The economist. This is a big deal. Especially because this behaviour stands in stark contrast to Googles ethos of Don’t be evil.

Yet now, four days later, that’s all we know. We don’t even know whether the above is an official statement from Google since Nelson Mattos presumably posted this from his personal Google+ account.

This tells me a few things:

  1. Google is not entirely in control of all of their operations. If this scandal was contained to Kenya maybe it could be written off as a few fraudulent employees or a local manager that went a bit too far to get his bonus, but since it appears that it extends to both India and Googles headquarters in Mountain view there’s someone at a fairly high level that doesn’t have full control of his domain.
  2. Google doesn’t handle PR well. Writing, blogposts about new features, April fools jokes and descriptions of how great the food at Google is  is the easy part. It’s when you have a scandal on your hands that your PR needs to shine. Where’s the damage control? Where’s the communication? We don’t even know if Mattos statement is official. It’s been four days!
  3. Google is becoming a big company, just like so many other big companies. They don’t know what is going on in all divisions, they’re spreading their portfolio thin (A Kenyan online directory for instance…), and they’re losing their original values because of it.
  4. Don’t be evil is not a mantra for Google anymore, it’s become a stale mission statement. Just like the stale mission statements all other big companies have.

 

When are we going to get an official excuse and explanation? Are we even going to get one?