June 16, 2011 · 11:11 am

Is Facebook’s Project Spartan/Microsoft’s Kinect SDK a sign that the application market wars have begun?

Mobile devices are the future. Whether it be iPads, smart phones, netbooks, or whatever device we will use to access “the cloud” in five years, and we probably won’t care as much about desktops or even laptops as we do now. That’s old news, but it’s yet to be seen what that news means for the traditional big hitters in the tech world, and how those big hitters will keep up with a rather dramatic market shift. Apple was the first to the market by a year or two, really, and they paved the way for the app market structure: an iphone on 3G showed the world how easily we could do without our desktops, and pointed software towards the grave. Soon the days of software developed by teams of engineers over multi-year development cycles, “mastered” and sent to a manufacturer to mass produce to send to physical stores around the world would be gone… Our mobile devices, of which it seems we can’t get enough right now, run on applications – they aren’t “finished”, but constantly and quickly updated. An excellent piece by Ben Horrowitz on the Economist website pointed out that advances in programming languages greatly reduce the number of hours it takes to create a strong piece of software, and along with a whole host of other reasons (faster wireless, cheaper phones/tablets, end of closed development platforms), applications are how 90% of consumers will get 90% of their content in the future.

This year will go down in history as the year where the big tech companies realized that the future was in application markets, and where every single one of them entered the fray. News came yesterday of “Project Spartan” (lame codename), a Facebook HTML5-based application market, designed to run on any web-capable device (aka the iphone). This joins Amazon’s app market, already running on a bunch of devices, and obviously Google’s Android market and the original “app market” by Apple. As we learned in the original computer boom, only one (or two) of these operating syst… I mean app markets… can survive. Every technological platform reduces to 1-2 main competitors eventually; just look at computers [mac/pc], operating systems [windows/OS], smartphones [iphone/android… sorry blackberry!], video game consoles [xbox/playstation]… It’ll happen in app markets too. Does Facebook’s inherent social advantage mean it can take on Apple and Google with their giant headstarts and hardware presence? Can Amazon do anything to parlay their advantage in moving physical goods and their relationships with distributors into something app users care about? Can Barnes and Noble turn a pretty solid device (the nook) into something that won’t be a historical relic in 2 years? Is Microsoft gonna uncharacteristically sit this round out, or is the Kinect their app market?

begun the app market wars has.

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Filed under Games, Misc, Social Games

June 14, 2011 · 12:39 am

Groupon and Pandora getting killed in the media as their IPOs approach, Will Zynga reach $1,000 a share?

LinkedIn’s IPO earlier in the Summer seems to have sparked a major IPO push for a lot of the big web companies that have found success as of late. Groupon filed their initial docs last week, Pandora’s shares hit the market on Wednesday, and Zynga is by all accounts filing their initial documents sometime very soon.

While LinkedIn’s IPO was largely a success (so far), it still raises eyebrows: the initial IPO price of $45 represented a Price-to-Earnings ratio of about 250, and the current trade price has a P/E of 500, much higher than the average for the market, and certainly not the hallmark range of a strong company. With that said, Groupon and Pandora are likely to have even worse states, but unlike LinkedIn, the companies are getting lambasted in the media before their IPOs. Rocky Agrawal has been doing his best to ruin Groupon’s IPO through a series of guest posts on Techcrunch, which are sticking on the top page as featured posts with rather uncouth titles like “Why Groupon is Poised for Collapse“, “Groupon was ‘the single worst decision I ever made’“, and “Why I want Google Offers and the entire daily deals business to die“. You can probably guess the gist of those articles from the titles, and they are good reads despite being titled as if they were trollish posts on a business forum frequented only by 16 year olds.

In slightly more journalistic corners of the world, Fortune ran an article today on Pandora’s business model as a loser in the long run, detailing how they have yet to find a way to generate a profit from any aspect of their service, yet they are raising the price of their IPO anyway.

So really, it’s not looking good for the tech IPOs right now. Groupon’s core business looks completely copy-able, a bad sign, Pandora is going to start getting quashed by iCloud and other cloud music providers, and neither is making money. And this follows LinkedIn’s astronomical valuations, which seem hardly justifiable if you actually think about LinkedIn’s business model. Yet people ate up the LinkedIn IPO, and even with all this bad press, nothing seems likely to stop Groupon and Pandora from becoming overvalued by months end as well.

Zynga, though, has solid financials. They actually MAKE money, but that little detail could backfire in the face of investors’ rabid hunger for tech stocks: If they deputed at a P/E of 250 like LinkedIn and opened with as many shares as LinkedIn (roughly 100M), assuming a net income figure of $400 million (who really knows with a private company, but I’ve seen that number frequently), then Zynga would be the highest priced stock in the history of the stock market at around $1,000 per share. Remember, that’s at the P/E multiple that LinkedIn opened at, BEFORE their stock DOUBLED in price.  That would put our irrational exuberance in a company at a new, embarrassing high, and even staunch anti-bubble supporters would have to admit that something was wrong. Something tells me we will find out before the end of summer.

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June 10, 2011 · 12:24 am

Microsoft v i4i decision: No surprise, Microsoft loses

Pretty unsurprising news today, as the Supreme Court handed down their decision in the patent case of Microsoft v i4i. I’ve written about the case before, back when the oral arguments were heard, and noted that Microsoft was extremely unlikely to win.

Well, Microsoft actually did worse than I could have imagined, somehow losing Judge Breyer’s vote and falling to i4i in an 8-0 decision (one justice recused himself for owning a significant share of Microsoft, and even HE said he would have voted for i4i). It was really an uphill battle for Microsoft from the get-go: they were trying to lower the bar for the standard applied when a patent is challenged, from a clear and convincing standard to anything lower, but decades of court precedent and complicit silence on the part of Congress made it unlikely that the Court would step in and reverse standing law without good reason. Sotomayor wrote a snarky opinion, basically dismissing Microsoft as having no case, and the clear and convincing evidence standard will live another day (and likely for a very, very long time).

Unfortunate, because the patent system could really use some more editing and the Court had shown a willingness to adopt change by brute force in some recent cases. But alas, the patent system remains broken, to the surprise of nobody.

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June 9, 2011 · 12:20 am

The Wii U – More like a Dreamcast than a Wii.

So you’ve just finished the life cycle of one of the best-selling consoles ever. Took a big gamble on a funky controller setup, lowballed the competition in terms of processing power in a quest to reach a broader audience, and the gamble paid off! Crazy, who would have thought. What’s the next move? This is the position Nintendo found themselves in before this week, when we got a first glimpse at their answer. The Wii U was announced this week at E3 – and it’s a total departure from the Wii gameplan. The new gameplan? ZOMG EVERYBODY LOVES TABLETS LETS DO THAT.

The Wii was a shock to the console game both from a gameplay and a market perspective: it was completely outmatched in terms of hardware by the PS3 and Xbox 360, but it appealed to a much wider audience with funky wii-mote controls and quirky party games, at a lower price point. The hardware was so cheap, Nintendo was actually making money on the console itself at the end of the lifecycle, a rare event in an industry where the console is usually the loss leader (my roommate and I often joked that if the Wii broke, we’d just get another one in a box of cereal or a cracker jack box). The Wii outsold both the Microsoft and Sony competition, and inspired them to copy the Wii with the Playstation Move and the Kinect.

Maybe that’s why Nintendo had to pivot away from motion controls: the Kinect now looks like it will own that space, so why fight Microsoft on even footing? But the Wii U offering is still crazy weird, and doesn’t deserve to carry the Wii name (hopefully Wii U is just a prototype name anyway: it sounds like either a bad social game, or a person very confused about who they are speaking about…. “i just bought my we you today…. huh?”)

The Wii U looks like it returns Nintendo to the hardware battle, though without knowing what the next-gen offerings from Sony and Microsoft look like, it’s a little hard to say. But the real “draw” to the Wii U is the controller, which is basically a Motorola Xoom tablet with pieces of a Wii-mote grafted to the sides to make it more like a standard controller. It’s not the WORST idea, and I’m sure games will find some interesting things to do with it. But it feels like Nintendo just wanted a piece of the iPad/tablet craze, and less like the controller will change video gaming forever. Plus, having the controller be interactive isn’t even new, the Dreamcast did it years ago (quite successfully, too). It seems more and more to me like the Wii U is really a Dreamcast 2 in disguise: it’s got the same color scheme, the controller is rather rectangular with an interactive screen in the middle, and it’s bound to be weaker than the truly next-gen systems that will follow it by a few months. So it’s a weird play by Nintendo. Might still be good, and I was a Wii skeptic who was forced to convert after great games like Mario Galaxy and Smash Bros. And I loved my Dreamcast back in the day too. But it just seems strange to follow the Dreamcast playbook when that playbook basically knocked Sega out of the console market entirely.

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June 7, 2011 · 2:19 pm

What will the tech sector look like in a year after every major player goes IPO?

For the last year everybody has been talking about “when will Zynga/Facebook/Groupon/etc have an IPO?”. Now, with recent IPO filings from Groupon, a successful IPO from LinkedIn, and musings of an IPO for Zynga, the news has to shift into a new speculative phase. So, how will the landscape of startups and tech companies, and the distribution of talent among them, change over the next year as all of these companies file for and complete their IPOs? (Warning: Everything below is speculative garbage. Actually, that warning probably belongs at the top of every one of my posts, and probably at the top of every blog…)

For one, I imagine a lot of the companies will lose large swaths of their core members to other endeavors. Think about it: If you are a 2-3 year employee of LinkedIn/Groupon/Zynga, you really hit the lottery when it came to stock options, but until the IPO your ability to cash out and actually make the money is severely limited. Maybe you could trade some on the secondary market, but the company strongly discourages that (for good reason), so the IPO may be the first time you can sell shares for astronomical prices. Plus, new startups will pay a premium for somebody who was at one of those successful companies from the beginning (Zynga project managers, for example, are highly sought after by social game startups, and I imagine somebody with institutional knowledge of Groupon or LinkedIn would benefit from a similar advantage). Google and Apple regularly see employees rise up through the ranks and then depart for smaller ventures, so its pretty likely that the new group of tech companies will see employees leave after their IPOs as well.

The real thing we don’t know is how IPOs by this group will impact the rest of the market in terms of venture capital, startup formation, and general investment in tech. It’s far too soon to tell how the larger market appreciated LinkedIn post-IPO, and although the IPO itself raised LinkedIn’s valuation quite a bit, the company now has to produce growth and profits for investors if that valuation is going to hold. Zynga seems a shoe-in to grow (unlike Groupon, they are wildly profitable despite their rampant growth), and with a likely IPO valuation in the $8-10 billion range, that would give Zynga enough cash to unify the social game front and buy up any sizable competitor. That sort of money behind Zynga will likely skyrocket valuations of other game companies – companies become more valuable in Zynga’s network, as the social/viral aspect of their games generates exponentially greater returns when the games benefit from display time on the screens of Zynga’s existing user base.

This post isn’t going anywhere, really, so if you are still hoping for a conclusion I apologize. My predictions are basically that Zynga will take over the world with an overvalued IPO. Because Zynga doesn’t actually need any more money, the IPO is driven by a desire to let founding members and middle management cash out (see Groupon). So shortly after the IPO, Zynga will lose tons of talent to now also overvalued smaller companies, who Zynga will be forced to buy up in the pressure to spend that IPO cash and grow. Maybe we shouldn’t call IPOs successful just because they raise a company’s valuation. There, let’s call that the conclusion.

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June 2, 2011 · 3:11 pm

Supreme Court continues trend of cutting back on patent rights

The Supreme Court has recently been rather proactive in cutting back on areas of patent law that many academics felt were too generous to patent holders. Recently the Court ruled that more ideas should be deemed “obvious” (and thus unpatentable) at various stages of the patenting process in KSR, and that courts should discontinue the practice of rewarding all successful patent infringement plaintiffs with injunctions in Ebay.

This week saw the Court take another shot at the patent establishment, albeit a smaller one than in KSR and Ebay. In Global-Tech Appliances vs. SEB SA (or, as I and probably most of the patent world will refer to it, SEB), the Court ruled that there is a high bar for a company to be deemed a third party infringer under the inducement theory presented in the patent act. Specifically, the inducer has to know about or be “willfully blind” to the existence of the infringed patent. This overruled the lower court’s test, which required a showing of mere “indifference”, and while only the legalese-apt would recognize the difference between “indifference” and “willful blindness”, the burden advocated by the Supreme Court will generate much less litigation. The weaker test would have opened up a lot of technology companies to liability under the inducement theory, specifically where users violated patents that the the tech company wasn’t aware of. I imagine most pundits on the topic will hail this as a smart move in line with the other cuts to patent rights the Court has been making.

Patents are getting out of control, especially in software – seeing the Supreme Court make cuts to patent rights isn’t surprising in light of all the negative press patents have been getting, though obviously it would be nice if either the PTO or Congress took some more substantive action.

{Late Edit: I tend to like Techdirt, but in the pressure to put up posts, Mike M. on occasion will overlook what’s actually going on and just throw in his boilerplate views on an issue. He seems to have done this with his analysis of this Supreme Court case. The 3rd comment to the post sets him straight, so read that if you want to reconcile our two differing conclusions.}

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Filed under Patent

May 31, 2011 · 11:21 pm

Social Game IPOs heating up, Zynga releases a new game tomorrow

News from the last couple days suggest that Zynga is planning to file for an IPO, following LinkedIn’s successful IPO move earlier in the month, and news from Popcap that they plan to IPO as early as November. So the big headlines all over the internet are that the IPO market is heating up, that social game IPOs are heating up, and that there is or is not another tech bubble (depending on who you ask). Kabam also raised $85 million last week, so a lot of money and hype is heading into the social game market right now.

In other/related news, Zynga is releasing their first game in many months tomorrow, and it DOESN’T end in ‘ville! Empires & Allies will launch tomorrow according to every technology site on the planet, and it’s a pretty big departure from the “mindlessly clicking on things and coming back tomorrow to click again” genre that Zynga has cornered so far. Apparently the game is something of a Risk/Settlers of Catan hybrid, though I’d be surprised to see the deeper strategy elements of either of those games appear in E&A.

Social games are clearly on the rise, and Zynga’s eventual IPO is probably going to surpass LinkedIn’s valuation by a mile and rile further claims of a bubble, but really the social games market isn’t close to finished growing. Here’s why:

The iphone has really only had one blockbuster game (Angry Birds), and it wasn’t even social – Social/mobile is the new hotness in the consumer web world, but it hasn’t hit it’s stride yet. There hasn’t been a big game yet that successfully connected a gaming experience with a social experience for a mobile device. Somebody will eventually figure out how to connect those dynamics and make a compelling user experience, but so far nobody has. And even besides that, Angry Birds showed that there is a large market for a game based on a single-player campaign with none of those social elements, and there are bound to be more hits the size of Angry Birds as developers become more sophisticated.

Nobody has made a good Facebook game yet – That’s right, as somebody who actually likes PLAYING games, I can confidently say that compared to the other things in the world that we consider games (board games, console games, classic games like chess), development for the Facebook platform has been rather pathetic. Compulsion loops are great for making money, and there’s no questioning that plenty of companies have made a living by satisfying people’s demand for mindless entertainment. But in terms of experiences that we could use in an argument about games as art, nothing from the major social game developers has really come close. Does every developer need to be trying for art when they make a social game? Of course not. But at least a few will, and whoever succeeds will probably have a sizable hit on their hands and gain a cult following for it.

Tablets (iPads) will probably be the next big development platform, and demand for tablets is not yet satisfied – Tablets, with their huge screen and more powerful hardware, present developers with the chance to make completely different sorts of games than we currently see on iphone and Facebook, but few have focused on the platform yet. As tablets continue to populate our planet at an increasing rate, more developers will gravitate towards it as a medium and eventually an Angry Birds-sized hit designed specifically for the iPad will launch a developer into the stratosphere. But as of now the biggest iPad game is Angry Birds, which wasn’t even designed with the tablet in mind.

So despite some of the negative bubble buzz, I don’t think these companies are overvalued or a sign of the impending apocalypse/bubble. People point to Zynga’s valuation as a sign of the bubble, but Zynga is making crazy money, and if you believe any of the three notes above, they’ll probably be able to make even more in the coming years. That’s a far cry from the bubble companies of yore, which went public before seeing any revenue or even developing a business plan.

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Filed under Funding, Games, Social Games

May 22, 2011 · 7:35 pm

How social games are like massages, and why anybody might care

The massage therapy market seems to be doing just fine in the recession, at least if you believe a google search on the topic. I’ve previously posted about how well the social games market has done growing up during the recession, and in some ways I think social games are a lot like massages. Think about it:

You can’t satisfy demand for them in just one purchase: There’s a reason you don’t see advertisements for 10 hour massages, and you can’t beat a social game in one sitting like you could a console game. The good is structured in a way that demand is fulfilled by experiencing the good in small intervals, with the goal of addicting you so that you come back later. Compare to something like chocolate: If I was offered 10 pieces of chocolate for $5, or 20 pieces for $5, I’d be economically irrational not to take the latter offer. But with massages, I’d take a 2 hour massage for $20, but probably wouldn’t want a 10 hour massage even for the same price. Similarly, I might want to play Mafia Wars for 20 minutes, but probably wouldn’t want to for an hour straight even if the value proposition of a normal good would suggest that to be irrational. (Turns out I won’t play Mafia Wars even with my developer friend begging me to play it, because the game isn’t much fun, but you get my point.)

Both goods defy the typical definition of a luxury good, apparently: Luxury goods are typically understood as goods with a high elasticity of demand; the more money people have, the more they want to buy, and vice versa. Apparently social games and massages aren’t really luxury goods, even though most of us would think of them as superfluous to our existence (rightly so, I’d say). My cursory google research has me believing that the massage/spa industry is doing quite well even during the country’s economic turmoil, and there were no such things as social games 2 years ago.

Maybe both goods are… replacement goods?: If they aren’t luxury goods, though, this raises an interesting question for social games: will the market continue to grow as the economy recovers? Social games might actually be a replacement good – I can’t afford a console game, so I spent 20 bucks on Farmville Frontierville Cityville. Hear that sound? That’s the sound of this post getting to it’s point – Maybe we should be realistic about the potential market for social games as the general economy recovers. Obviously it will grow, as it’s a young industry, and there’s only been one killer app on iphone/ipad (Angry Birds, which isn’t really even social). And the markets are somewhat different: Farmville was built on middle age women. But if social games are a replacement good rather than a luxury good, we might consider the possibility that at least some gamers will go back to console games, and at least some middle age women will go back to whatever middle age women used to entertain themselves with.

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Filed under Games, Misc, Social Games

May 19, 2011 · 12:46 am

Macrosolve does a bad Lodsys impression, patent system needs to change

Lodsys has gotten a lot of attention for their patent threats against app developers lately, and yesterday came news of Macrosolve doing something similar. Florian Mueller wrote some great stuff about it here, as he usually does.

Basically, Macrosolve is a publicly traded app maker who has done terribly at their core business, losing hundreds of thousands of dollars in the last few years. But they were recently awarded a patent for a “system and method for data management” relating to mobile computers, and now they are going crazy suing small developers.

Unlike Lodsys, Macrosolve isn’t beginning by asking for licenses, and the developers they are targeting run the gamut of mobile operating systems. This is probably a bad idea for multiple reasons: For one, some of the defendants are just going to fight the suit, costing Macrosolve a lot more money than Lodsys, who won’t have to defend their patent. Also, by suing developers on a range of platforms, Macrosolve is more likely to entice Apple, Google, and Blackberry to split the legal costs and fight the patent head on. Apple doesn’t have that option with Lodsys, because Lodsys hasn’t actually sued anybody, and they’ve only asked for licenses from Apple developers.

Still isn’t good for the mobile app ecosystem though, and all of this is demonstrating that the patent system really needs to adjust in some fashion to fix software patents, or risk stifling development in “mobile computers”, a rather broad category that covers every new consumer technology likely to come out in the next ten years. It just doesn’t make sense to reward a company likely Macrosolve, a total loser when it came to making real apps, with the right to IP ownership over such a simple concept. Even if the concept wasn’t simple when Macrosolve “invented” it, clearly others reinvented it quite quickly – nobody was copying Macrosolve, whose most successful app was related to barbeque recipes… and it wasn’t even successful. The patent system allows this logic to prevail when a court looks at whether a patent was “obvious”, but that’s pretty late in the game in terms of litigation, and everybody has spent a pile of money by then. Software patents are a pretty broken system, and hopefully the system will adjust sooner rather than later, before the small app developers are forced out of the market.

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Filed under Law, Patent

May 16, 2011 · 10:50 am

Should Apple be deemed a third party infringer of Lodsys patents?

Update: The premise of this post was later revealed to be erroneous – Apple probably has a license for the patent in question from Intellectual Ventures, before the patent went to Lodsys…

 

Last Friday, Lodsys, a patent trolling firm, sued a bunch of small iOS developers for infringing a patent they bought a few years back that they claim covers in-app system features. Lodsys is upset that they are being called a patent troll for suing a bunch of iOS developers for patents reaching back as far as 1992, so they made a blog defending their actions via a Q & A format which treats their readers like children. They also call out individual websites in some of their questions, showing how professional they are.

In short, their defenses are an outrageous joke. Lodsys throws around a bunch of boilerplate defenses to the concepts of patents generally, but don’t address any of the actual criticisms that have been tossed at them. Lodsys, in almost every argument, compares patent law and Lodsys’s actions to classical property issues. Here’s one example, used to “explain” why Lodsys is going after the small developers rather than Apple:

As a comparative example, it is the owner of the hotel who is responsible for the overall service (value proposition) that guests pay for, not the owner of the land that the hotel may be leasing.

The difference between a hotel and an intellectual concept is painfully obvious, but apparently not to Lodsys. Developers have no idea that they are infringing an idea that somebody had back in 1992, because intellectual property isn’t a physical thing. Obvious ideas aren’t something that people assume they can’t use. Hotel owners, on the other hand, know that they are leasing land… they placed their hotel on the land.

Another ridiculous statement comes here:

Historically, the tech industry did not clear patent rights in advance because the amount of time and effort to do so made no economic sense given the relative low cost to create software and the speed at which products were being released… so a norm has arisen where it’s build and ship now, and worry about clearing the patent rights later

If this is accurate, it doesn’t seem like the patents are doing anything to spur innovation in the field at all. If developers are ignoring patents because the cost of finding them are too high (aka all the patent holder did was file a patent, one of tens of thousands issued every year), then why reward the patent holder for disclosing his invention to nobody?

If you want to read a strong critique of Lodsys’s actual arguments regarding patent law, head here. Solid discussion there about how this sort of agressive patent trolling stands to ruin the app market by significantly raising the barrier to entry, but I won’t repeat the entire post here.

What’s more interesting to me is (and it relates to the hotel point), why isn’t Lodsys suing Apple as a third party infringer?

Third party infringement in patent is a very strange, infrequently utilized doctrine, but the key phrases from the Patent Act are “knowledge” and “inducement”. Lodsys claims that Apple has licensed their patents: seems like strong evidence of ‘knowledge’ to me – clearly Apple “knew” of the patent in the strictest sense of the word if they were paying to use it. “Inducement” is typically the wiggle room for defendants, who can often claim they didn’t know that what they were encouraging would be deemed infringement. But how could Apple possibly claim that they didn’t know encouraging use of their in-app system would induce infringement, when they themselves paid to license the patent? Unless the in-app system infrastructure came with a strong warning that using the system opened developers up to lawsuits unless they licensed, Apple seems like they are in trouble.

Maybe the real purpose of these suits is to extort licenses from the small guys as further evidence against Apple of third party infringement, giving Lodsys a stronger bargaining position if Apple winds up paying Lodsys for the patent outright. All this for a patent covering a technology that, in all likelihood, Apple independently reinvented themselves. I’m all in favor of patents on technologies that the inventor actually uses, or that the inventor at least DISCLOSES in some meaningful way to the public. But that is clearly not what’s been happening here.

Since Lodsys seems to be reading blogs that reference them, here is my suggestion: If you take an EXTREMELY unpopular position, don’t spur further debate on the subject by responding with blog posts. If the system is broken in your favor, abuse it quietly, if you must abuse it.

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Filed under Law, Patent