The Transparency Revolution and Why Business Is About to Change

Bono Speaking at The Forbes Philanthropy Event Last Week in NYC

I recently attended the Forbes Philanthropy Summit in New York where Bill Gates, Warren Buffet, Bono and others talked about the state of various global social inequalities.  In one interesting session, Bono gave his take on what he calls the “Transparency Revolution” and how information transparency is the key to fighting the corruption sustaining these social inequalities in Third World Countries.  The idea is that if corrupt political manipulations were known to the public, those behind them would be deterred from such practices fearing they could face the consequences of their actions.

Just as information transparency is working to expose and deter corruption in the Political World, it is also beginning to expose customer exploitation in the Business World.  But few seem to grasp the magnitude of what it is about to mean.

For those of you in the Information Technology Industry, there is a famous saying that goes something like this — “No one ever gets fired for buying Cisco”

I first heard the phrase when I was in college and assumed it to reflect wide-spread customer endorsement of the great value proposition of Cisco’s solutions.  That was my understanding anyway from an “Outsider” point of view.  Later on, in my professional career (designing Information Technology), I began to see things entirely differently — this time as an “Insider.”  I soon realized it was not Cisco customers promoting this saying, but rather it was an instrument designed by a collusion of the company’s own “Insiders” working together to strengthen their profit hold on their customers.

So, who are these “Insiders”?  They are a collection of different groups brought together by a singular aligned common interest — to make the customer pay as much as possible.  From huge sales, marketing, and business development organizations to multi-tiered distribution channels, to complex user experiences and certifications, professional system integrators, and post sales re-occurring support and licensing parties.  Whether they know it or not,  customers have been largely paying for a set of “relationships” that have nothing to do with technology value of the product they are paying money for.  They are essentially getting ripped off.

The Old Model vs. The Future Model

Traditional company business models aren’t built to empower customers and pass on value to them.  They are built to extract profitability from them.  And information asymmetry gives them the perfect cover.  But, with an increasingly connected world paving the way for more and more information transparency to the customer, all of this is about to change.   No longer are “Insiders” able to control the flow of information.  If a product is great, soon customers will tell other customers on the Web and rave reviews spread like wild fire.  Similarly, if a product is bad or customers realize they are being ripped-off, relationships will provide little recourse to contain that information from being widely disseminated.

What does this mean moving forward?  As an Engineer first who enjoys building great products, and a Businessman second who has no patience for politics and inefficiencies, I feel very fortunate to be at the early stages of my career in this point of time.  Moving forward, I can say with certainty that the most successful tech companies of the future will be the ones who deliver the best products and technology value first and foremost which empower customers.  This is very different than the traditional business model which leverages relationships to control information asymmetries and extract profit from customers.

Three companies that I believe are positioned well in an increasingly information transparent world are:  Tesla (Electric Vehicles), Xiaomi (小米科技; Smartphones), and Ubiquiti Networks (Enterprise/Carrier Technology).  What is important to note is that although these companies deliver technology value very efficiently, all take concentrated R&D approaches to produce leading edge performance products which in turn generate evangelism for their brands.

 

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Tesla: Technology Bait and Switch 101

Recently, a new Tesla Model S has been parking next to me in my apartment garage.  And each time I see it, I feel a growing impulse to buy one.  There are many articles about Tesla’s business model and whether they have future staying power.  I thought it might be interesting to give my insight on Tesla and the successful launch of the model S from a product designer perspective.

When people think of Tesla, they think of a company betting big on the idea of a future auto Industry dominated by electric cars.  The company’s public relations and marketing campaigns are built around the “saving the planet” ideals of their electric drivetrain architecture.  And it has worked beautifully — huge awareness has been created for the company virtually overnight.

However, behind Tesla’s whimsical vision of electric cars is a multitude of impracticalities including the car’s high price tag, cost of maintenance (battery life depreciation), and charging inconveniences which basically renders its use to a secondary commuting vehicle.  Now ordinarily, this would be enough to scare away potential buyers.  But not in this case.  Why?  Because people ultimately don’t buy Tesla cars because they are electric.  In fact, when was the last time you have seen a “save the planet” activist drop 6 figures on a car?

The reason people buy the Model S is because it is an awesome product with key innovations both in industrial design and user experience that hypnotize prospective buyers into looking past impracticalities of the electric drivetrain.  In effect, Tesla has “hooked” in prospective customers using a monster PR and marketing campaign leveraging the uniqueness and earth friendly attributes of the electric car vision, but have successfully converted them to owners with their great product design despite it being an electric car.

When people choose cars, it’s a very similar decision process to how they choose the clothes they wear.  They select designs which reflect qualities or an identity they would like to project to others.  Tesla’s designers did a great job of grafting certain qualities into their industrial design which strongly match those qualities their financial and demographic target market want to project.  Essentially they have taken a traditionally conservative/functional sedan category and have reinvented it with an understated, wickedly cool factor.

The best product designs can illicit emotional responses from their users.  Often times, users can’t even describe why they are so fond of a particular product experience and this is precisely a reflection of great design.   It’s analogous to a brilliantly crafted scene from a classic movie which grasps the viewer, but only after reviewing the scene over and over again, can one recognize and appreciate all the great details that had to come together to make it special.  Tesla’s industrial design incorporates several small innovations that collectively create a hypnotic effect to the outside viewer.  The design is equal parts elegant, fierce, and progressive; something difficult to do without appearing over the top.  It’s completely cool without trying to be; and that is what makes it so attractive to its target market.

Here are a few of my favorite details of the industrial design

A. The lights:  There is something very elegant about clean and bright pure white light.  Tesla uses this lighting strategy throughout the car.

B. The remote:  Tesla has designed the coolest remote entry key out there.  A detail not nearly paid enough attention to by the auto Industry; it’s something the driver always has to carry around.

C. Integrated larger rims:  Lots of car owners upgrade stock wheel rims to much larger rims to give their cars a more aggressive look.  Although it looks great, it projects an “over the top” message.  Inherent in the model S design is a symmetric balance that incorporates larger wheel rims.  The result is a powerful but under-stated look.

D. Seamless retractable door handles:  This is another small detail, but it has a huge psychological impact to the user.  It encourages me to the conclusion “if they put all this thought into this traditionally overlooked small detail, then every detail of the car must have had equal attention to detail.”

E. Great design symmetry:  By curving the side windows and tapering the interior cabin width, Tesla has created a look that is equal parts sedan and super car.  From the side angle, it looks like a balanced sedan, but from the backside, it appears powerful with a low center of gravity more characteristic of a super-car.  Again, they have managed to do this while maintaining an under-stated image.

Model S Industrial Design

The user experience of the model S is just as impressive.

Even though the original iPhone proved that a pure software-based interactive experience was a superior user experience, Industries outside of mobile computing have been slow to follow.  Mechanical buttons and controls are completely primitive by today’s standards and so frustrating and cumbersome to use.  Yet, the auto Industry has been slow to catch on.

Tesla gets it.

Model S 17" UX Screen

At the heart of the model S user experience is the giant touch screen.  They could have settled for a 7″ or 10″ screen, but they went to a full 17″ screen from the start with a completely software-based interactive experience.  It’s so obvious and superior in every way to a traditional car user experience.  More efficient, intuitive, can easily be upgraded anytime, and just feels way cooler.  Tesla is the first car company I have seen who understands that the future of great cars is not just about how they drive or specifications, but about how they interact with the driver.  In a sense, the model S was designed to be a computing device itself.

Closing Thoughts and What I would do if I were Elon Musk

In addition to Tesla’s superior industrial design and user experience mastery, they have also exposed another huge inefficiency in the Industry: how cars are sold.  In my opinion, the way cars are sold today is completely insane.  Dealerships located in the middle of nowhere with huge amounts of diverse inventory?  Clueless sales people who just waste customers’ time?  And why does buying a car have to take a full day of sitting at a dealership completing a purchase?  And are test drives really that important?  Most people already know whether they will buy a car or not by the time they do their research and just sit in it — especially these days with all the information transparency the Internet provides.

One of Tesla’s Retail Stores

Tesla’s retail store strategy is as obvious to me as their design direction.  It’s far less costly than traditional dealerships to operate and it is far superior for marketing the car.  The retail stores can effectively demonstrate the qualities and user experience the car offers as well as be strategically positioned at diverse locations with high consumer traffic.  Best of all, they are not co-located with any other competitors like traditional dealerships are.

Although Tesla’s mission to grow an Industry of pure electric vehicles has proven to have great leverage in building powerful PR/marketing initiatives and public market valuations, I am not so sure it has great leverage in building a company that will disrupt the auto Industry and take the lion’s share of the profits.

Now, if I were Elon Musk, I would fully exploit the momentum of the bait and switch success. Specifically:

1. Keep the current messaging of Tesa intact, emphasizing the benefits of electric vehicles, but shut-off R&D spending on pure electrical drivetrain vehicles and abandon the charging infrastructure network build-out

2. Take the incredible core strengths of the company (Industrial design, user experience, retail stores) and quickly re-focus them on a robustly manufacturable <$50K hybrid car that can be sold to the masses

3. Look for overseas production facilities and focus very quickly on expanding capacity and operational efficiency to close the operational competitive advantage gap the rest of the auto Industry has today.

The challenge Tesla faces is they have exposed now-obvious design and sales inefficiencies to the rest of their competitors in the Auto Industry.  At the same time, they do not have the production capacity and operational efficiencies to be cost relevant against these same competitors.  So, if they really want to disrupt the entire Industry, they will have to address their operational disadvantages before the Auto Industry takes notice and starts to incorporate the company’s own design and user experience innovations.

 

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Memphis Grizzlies Press Conference

This week I was in Memphis to talk with the local media.  Although I am not the most experienced public speaker, it was a lot of fun and I am very thankful to the city and people of Memphis for their warm welcome.

Memphis Grizzlies – Ownership Introduction from Robert J Pera on Vimeo.

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The Challenge of Educational Reform in The United States

Ubiquiti Networks has engineering offices in San Jose, Los Angeles, Irvine, Chicago, Kaunas (Lithuania), Moscow, and Taipei.  Even though we only have upwards of 100 employees, it is quite the geographic mix.  Ironically, we never intended to build these remote offices and we never had aspirations to save costs on engineering salaries. We just somehow managed to recruit outstanding people (irrespective of location), and over time, teams and offices naturally grew around them.

I often enjoy traveling to the different offices and helping make sure each one has what it needs to be successful in product development.  Over the past several years, I have flown 1,000’s of hours in the air and I have trained myself to the point where I will naturally fall asleep as soon as I get on plane.  It does not matter where in the world or what time, typically I will be asleep on the plane before it takes off through when it lands.

Today, on the flight back home, I happened to wake up early and was able to check out a movie called “Waiting for Superman” which details the state of the country’s educational system.  I was so intrigued by the film that I went on to do some further research.  I thought I would share what I found:

For those of you who are fans of the book “Freakenomics,” you might recall that in 2001, Steven Levitt (University of Chicago) and John Donohue (Yale University), published a paper titled “The Impact of Legalized Abortion on Crime.”  Backed by compelling statistics, they claimed that the Roe vs. Wade decision of 1973, in which the U.S. Supreme Court legalized abortion, directly resulted in the sharp decrease in crime rates seen in the 1990’s.

Their argument is that this legalized abortion had a compelling side effect  — it essentially reduced the number of unwanted children typically growing up in severely underprivileged circumstances that would eventually go on to lead criminal adult lives.

Now, if their argument were true, it would appear that by extension, the key to a brighter future depends on finding a way to solve the problem of underprivileged circumstances altogether, right?

The documentary “Waiting for Superman” is a study of how we are failing to deliver a quality education to much of today’s youth. It argues that the poor performance of the U.S. public school system is directly related to the poor quality of its teachers.  And changing the situation is incredibly difficult because of the highly inefficient government educational bureaucracies combined with the change-resistant national teacher’s union who stand in the way of improving teacher quality and performance.

One of the most interesting scenes of the film shows the ill-effects of a system that accumulates bad teachers combined with a union which makes it nearly impossible to fire any of them once they enter the system.   New York’s “rubber room” is a building where teachers who are on job related probation are required stay while they await their disciplinary hearing – a wait that takes on average 3 years! Here, they spend their days collecting full pay and benefits basically doing nothing at a cost of $100mm/year to the state of New York.

Rubber Room, New York

Another memorable scene studies the statistics of a Pennsylvania jail in a failing school district where 68% of the inmates were highschool dropouts.   The inmates stay inside the jail at a cost to the state of $33,000/year per inmate.  Meanwhile, the cost of the average private school tuition in the country is just $8,300 year.  For ¼ the amount, the inmates could have been sent to private school as youths, highly unlikely to have ended up in jail in first place, and possibly paying taxes and contributing to the work force as well.

Charter Schools

“Charter Schools” have recently been promoted as a solution to the failing performance of the current educational system.  Charter Schools are public schools funded by public money, but completely redesigned and free of the agents resistent to change in the current system  They are backed by philanthropists and business leaders such as Bill Gates, Reid Hoffman, and Pitt Hyde; and aim to bridge the inequality between the privileged top private schools and the failing public schools throughout the country.  Charter schools believe in smaller class sizes, longer school days, and tighter screening of teacher quality.  Although there are statistics showing that some charter schools have been very successful, other studies show that their overall test scores have not yet shown significant improvement compared with the existing public school system.

FINLAND

After reading conflicting accounts about the success of Charter Schools, I proceeded to research who had the best educational system in the world.   It turned out to be the Scandinavian country of Finland (home of Nokia).  Finland has consistently ranked at the top of the world in educational test results across virtually every standard.  Here are a few of the philosophies from Finland’s educational system that I am most impressed with:

Disciplined Pursuit of Perfecting the Teaching Profession: Teachers are very highly respected in the country and becoming a teacher in Finland’s school system is even more difficult than becoming a doctor or lawyer.  All teachers are required to obtain a masters degree and gaining entrance into these programs is highly competitive with only 10% of the applicants being accepted.

Even though the new teachers are highly qualified, they still go the extra mile.  Groups of these “student teachers” will regularly visit schools and sit in on classes for years before actually teaching lessons.  After sitting in on the lessons, the student teachers will congregate with senior teachers in feedback discussions about how lessons can be further improved.

Encouraging Student “Discovery”:  While an average teacher spends 1100 hours per year in a classroom in which they dominate 85% of the spoken words, in Finland teachers spend just 600 hours in the classroom and it is the students who speak 60% of the time.  There is very little homework (a few hours per week), very little testing, and no “tracking” or separating students based on their learning ability.  In fact, teachers often stay with a core group of students for several years and focus on how each child learns.  Different teaching styles are adopted as needed to fit individual students.  Finnish teachers say they don’t want students to learn lessons; but rather “discover” lessons.

Designed for the Modern World:  Finland’s students are introduced to hands-on learning involving computers and electronics at an early age.  In addition, lessons in entrepreneurship and innovation are embedded across the school system.   But, what is most interesting to me is that high school diverges into two separate tracks:  there is a general track which leads to higher studies as well as a vocational track that focuses on hands-on engineering skills, immediately preparing students for the work place.  Interestingly, 40% of the students voluntarily choose the vocational, hands-on track

There is a great documentary done by Harvard’s Tony Wagner that can be viewed here that covers a lot of the above: http://www.youtube.com/watch?v=Up0JdxYl5h0

My Closing Thoughts:

Finland’s system reminds me of a great “company culture” which empowers the value creators (in this case the teachers) to collaborate, innovate, and focus on a quality product (the students).   As Steve Jobs might say – it is an environment, which promotes “A” players working together with other “A” players, and everyone sharing a disciplined focus on constantly advancing the quality of the product.

The U.S. system in contrast has many attributes of a bloated, inefficient company that has been over-run by “C” players who are blinded by self-preservation and politics with little care for product quality (the students).

So how do you fix it?  I think the Charter school idea is a good start.  One of the strategies I have used in growing Ubiquiti is identifying great products and finding the people behind them.  So, why not just recruit Finland’s leading educational system brain trust and employ them to develop a charter school system here in the U.S.?

 

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Manufacturing in China and IP Protection

Over the past decade, electronics manufacturing has largely shifted into China because of cost-savings.  However, these cost-savings can often be misleading as manufacturing in China also comes with the risk of IP theft that can potentially lead to financial damages far in excess of the capital saved in manufacturing there.

As a hi-volume hardware manufacturing shipping millions of devices per year, Ubiquiti Networks partners with contract manufactures based in China.  For entrepreneurs looking at manufacturing in China, I want to give some advice in hopes of preparing others for the potential dangers they may face.

Before I start, I want to point out something that is often not communicated enough to the Western World regarding business ethics and the general integrity of the justice system in China.  Looking at the country of China as whole and making generalities about the business culture is somewhat unfair.  It is well known that China has the largest population of any country in the world, but it is not as well known that it is very much still a country with a great range of internal variance (probably more so than any country in the World) when it comes to the evolution of business ethics and intellectual property protection amongst its 23 provinces.  (to be exact, 23 provinces, 4 directly administered cities, 2 special-administered regions (HK/Macau), and 5 self-administered regions by ethnic minorities such as Tibet and Inner Mongolia)

In fact, a friend of mine in China summarized the variance best when he broke down 3 regions

China Map

 

-In Shanghai the attitude can best be expressed by the phrase: 上面说行才行 – meaning don’t do it unless the authorities say it’s ok to do it

 

-In Beijing, it’s 上面没说不行就行 – if the authorities didn’t say don’t do it, it is ok to do it

 

-And in Shenzhen, 上面说不行也行 – do it even if the authorities say you can’t do it

 

Unfortunately for Western technology companies, a large part of manufacturing today takes place in the Shenzhen region.

With that, here are my 3 pieces of advice

  1. Take what your contract manufacturing partner tells you with a grain of salt: When you first engage with a manufacturing partner in China, they will likely tell you “We will sign an NDA” or  “we have a very strict information policy” or “we have very tight security”, etc. in an effort to make you feel comfortable that your IP can be protected in their hands.  Reality often deviates from words. The motivation for factory personnel to leak IP or take their manufacturing and project experience to lucrative counterfeiter operations is very high.  This is especially true if they are based in the Shenzhen region.  It is therefore very important to do reality checks with your partners to make sure they have effective internal IP protection processes and are in fact doing their best to protect your IP.  If they are not, it is time to change partners.
  2. Apply for IP registration in China in advance:  Registering trademarks and patents in China is a long process that can take years.  You must start this process immediately and ideally well in advance of any plans to manufacture there.  Enforcing this IP in certain parts of the country can be very difficult, but there is a more important reason for filing.  There will be others in China that will attempt to fraudulently file your IP once you show up on their radar and will look for ways to use it to profit at your expense.
  3. Use manufacturing IP to protect your product IP:  This is the most valuable piece of information I can give.  If you can protect your product IP at the source (manufacturing level), the potential agents of IP theft can be effectively neutralized.  At Ubiquiti, we developed a powerful system of product counterfeit protection that is virtually unbreakable.  It consists of (a) a security IC with a “a unique water mark signature”, (b) a software application running on a test station that loads the binary firmware image on to the hardware, and (c) a cloud based server which authorizes only stations with approved IP and MAC addresses, authenticates loading instances based on cryptography involving several dynamic values as well as the security IC signature; and logs all activity.  The system also uses passwords that must be changed on a frequent basis at the manufacturing line.  Using an anti-counterfeit mechanism such as the one described is your best protection against the future threat of rogue counterfeit manufacturing facilities.

Ubiquiti’s Anti-Counterfeit System Overview

 

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Disrupting Markets: The Walmart Story

Last weekend I had the pleasure of having dinner with Pitt Hyde, the Founder of AutoZone (NYSE:AZO) and just an overall impressive, humble, and great person.  Perhaps my favorite story of his was when he recounted his time serving on Sam Walton’s Walmart Board of Directors in the early days of his company.  According to Pitt, Sam would pick him up from the airport in a run-down car and take him back to the Walmart offices where they would prop up a fold out table and chairs to have their board meeting.

Apparently when Sam Walton was first starting his business, he had a unique vision where he could serve the underserved communities – areas in which larger store chains did not want to enter as they found it impossible to make profitable business cases for doing so.  Not only did Walton succeed in his strategy, he was able to make his business immensely profitable.

Walton’s First Walmart Store

“Once committed to discounting, Walton began a crusade that lasted the rest of his life: to drive costs out of the merchandising system wherever they lay—in stores, in the manufacturers’ profit margins and with the middleman—all in the service of driving prices down, down, down,”

–John Huey, 1998 Fortune Magazine(also co-authored Walton’s autobiography)

Walton started from humbling beginnings and was seen as an underdog with an unorthodox strategy, but through the years, Walton was not only able to apply his strategy effectively to underserved markets, but eventually would grow to dominate the whole country en route to becoming the largest revenue company in the entire World.

Today when people ask me to compare Ubiquiti Networks strategy, business model, and story to another company, I like to believe it’s most similar to Sam Walton and his early days in starting Walmart.  We have found a way to deliver powerful and sophisticated plug and play hi-tech connectivity solutions to underserved areas of the world while making a profitable business out of it.  Unlike other companies in our space competing for existing market share, Ubiquiti has created new markets and opportunities that didn’t exist before in places such as Africa, South America, Middle East, India, and China.  Although we are in the very early stages of the company and predominately represented in underserved areas of the world, I also aspire to drive Ubiquiti’s transformation from David to Goliath one day just as Walton did.

 

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What is the Future of TV?

I want to preface this post by saying I have very little knowledge about the business side of television.  The below analysis is the result of some surface investigation combined with my own experience in building new technology platforms, attacking distribution inefficiencies, and disrupting markets.

This weekend, I decided to finally take a look at the HBO series Game of Thrones.  After watching a few episodes on iTunes, I took to the Internet to do some deeper research on the characters and the creative process in making the series.  But, I unexpectedly found something else that was very interesting…

Game of Thrones stands to become the most pirated TV program of 2012.  In fact, piracy for Season 2 has reached beyond 25 million downloads already.  Now the interesting piece – a significant amount of these pirated downloads are originating from viewers that would gladly pay to view the show, but cannot.

How could this be?  Well, HBO owns the show and the only way to view the current season is to be an HBO subscriber through Cable or Satellite. HBO does offer the “HBO Go” streaming Internet service, but this is only available to existing HBO cable/satellite subscribers.  Why would HBO allow this piracy to become so rampant when they could distribute Game of Thrones through iTunes/Netflix and monetize it more efficiently?

To find the answer, let’s take a step back and look at the distribution of content.  HBO funded the creation of Game of Thrones and owns it rights.  HBO is a network that has deep relationships with the cable and satellite companies, which it uses for distribution.  Together, this network/distributor partnership has created a viewership base that it can control and monetize.

Unlike the pre-iTunes music Industry, the traditional television industry and the network/distributor partnership has still managed to maintain profitability even with the advent of pervasive broadband Internet because viewers still spend a lot of time watching cable and satellite TV.  However, the Game of Thrones piracy situation has exposed the traditional model as being incredibly inefficient by today’s standards.

I believe this traditional model will change.  The television Industry will inevitably undergo a massive change where traditional distribution mediums like cable and satellite will become increasingly primitive; and eventually completely replaced by Internet distribution.  In this future, there will be no television channels or traditional remote controls.  Everything will converge to the ideal user experience – the ability to choose the content you want to buy and view it from any web-connected device.

However, this change is not necessarily in the long-term financial best interest of the network/provider partnership.  And that is the reason why I believe Game of Thrones is not available for Internet distribution today.  The traditional players are in a difficult position as they know that the more viewership is shifted to Internet platforms, the more the financial viability of their traditional model becomes exposed.  Naturally, they are defensive about enabling a new model that will compromise their main leverage position (their viewership base).

In the end, the traditional model will fade away, but how fast this happens will depend on who can enter the market with a disruptive Internet distribution platform – one that quickly can own the viewership base.  Once this happens, I believe traditional networks will be reduced to older content licensing companies and content creators will have a newfound control over their financial destiny.

Although Netflix, iTunes, and Hulu have made significant progress, I believe for the television Industry to be changed overnight, a more dominant platform must be established that has a mission of aggressively buying the viewership base.  With that in mind, let’s see what Apple has in store for their upcoming iTV platform.

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Beijing

CCTV Building, Beijing

This week I was in Beijing working on a PR campaign to build awareness of the Ubiquiti Networks brand in China.  Beijing’s development pace has been astounding and the quality standards of their airport, shopping districts, hotels, and business centers now rival those of Dubai or even Tokyo.  The city is very alive and I can feel the people carry a collective motivation, pride, and sense of urgency to continue in its advancement.  The other thing I noticed is the proliferation of Apple devices has skyrocketed overnight.  There were countless people using MacBooks, ipads, and iPhones, where as during my first visit to Beijing a couple years ago, I would only see them on rare occasions.

Also, in some areas of the city, there is also a lot of international diversity; much more than I expected.  I would not be surprised if in 30 years the demographic diversity in Beijing starts to approach those of major cities in the United States and Europe.

One of the more interesting buildings I noticed in downtown Beijing was the China Central Television (CCTV) Headquarters.  Below is a photo of the building I took on the way to the Airport.   The building is a unique design that has a radical pretzel-like shape.  Apparently, it was a very sophisticated development process as a requirement of the design is seismic resistance to a Richter scale 8 earthquake.  The total project cost was said to be upwards of $1billion USD!  Although Dubai’s Burj Khalifa is the most impressive building I have seen to date, the CCTV building might take second place.

 

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Walk the Walk

Unfortunately in the world we live in, there are the few that truly create value and then there are the many that prey off the value creation of these few.  One of my favorite movie scenes — from the classic “Hustle and Flow,” about a struggling Memphian (Djay) who enlists the help of a music producer (Keyes) to reinvent himself as a rapper, captures this idea pretty well.

People often ask how my company (Ubiquiti Networks) is able to achieve leading public market profitability and growth metrics while only employing upwards of 100 employees.  The answer is simple:  when you have a team of individuals who “walk the walk,” you can run circles around competitors with massive teams of employees who are resolved to “talk the talk.”

Although Ubiquiti’s operating expenses are far less than other technology companies, it is not because we are shy about spending.  In fact, on an individual basis, our compensation levels are often significantly higher than standard market ranges.  It is our ability to know where to spend which results in our unusually high return on R&D investment and unusually low operating expense metrics.

To illustrate this, below is a diagram showing distributions of engineers as a function of their value contribution.  For the engineer types I classify as “talkers,” I believe they often contribute negative value contribution to a company.   The “walkers” on the other hand, will always have at least some positive value contribution.  And, if they are “superstar” types, they can deliver phenomenal value contribution and return on investment.  At Ubiquiti, we focus on hiring these specific types while being as disciplined as possible in scaling our R&D teams.  I also believe it’s just important to avoid the wrong hire, as it is to get a great hire.

 

If you can find, recruit, and build small teams with a high concentration of these types of hands-on engineering “superstars”, the results can be awesome – including the potential to disrupt markets and challenge much larger competitors.

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BootStrapping Strategies Part 5: The Power of Information Transparency

One of my favorite movie scenes is from the comedy Office Space about the miserable culture of Initech, a software development company.

When the company brings in two so-called “efficiency experts” to restructure its operations, the experts start by interviewing each employee to determine who essentially needs to be replaced.  One of their interviews focuses on Tom Smykowski, the long employed manager, who they expose as adding no value or even negative value to the company’s operations.

One of our earliest employees at Ubiquiti (and our head of hardware design) came up with a term I often use to describe these no value added positions.  He calls them “impedances.” And interestingly, they are everywhere.

At Ubiquiti, when we are in the planning phases of a new hardware design, we typically start with a selection process of integrated circuits vendors.  Usually we are self-sufficient enough to understand how to integrate vendor components into our designs; we just require basic application notes, pricing, and delivery information.  Unfortunately, when we inquire with a vendor for this information, our inquiry often sets-off a frustrating circus of middlemen — from marketing, sales people, and executives to 3rd party distributors and representatives — wanting to meet and understand what we are trying to do.  We have little interest in these meetings; we only want delivery of the parts and pricing to proceed and get our product to market.  Sometimes these “Impedances” become so irritating, we will look for alternative vendors just to avoid them.

When it comes to our own sales, we take a polar opposite approach.  Instead of compartmentalizing sales with process, middle-men, and “information control”, we believe in complete transparency.  At Ubiquiti, we do not have sales people, marketing teams, or a bureaucratic process for disseminating market information.  We use what I like to call “applied social networking” where  we have over the years fostered a community of end-users that we freely allow to interact directly to each other and with our engineering teams.  This community uses various open forums on the Internet as well as our own official forum at forum.ubnt.com

I believe there are several benefits to this transparency:

  1. Operations become more efficient:  Without the overhead of sales and marketing, operating expenses are significantly lowered.
  2. Engineers become empowered when given direct customer access:  When engineers feel like they “own” their projects, they feel a deeper sense of responsibility to deliver a great user experience to the customers.
  3. Brand Loyalty can increase:  Contrary to traditional thought, if the company makes mistakes out in the open, it is not necessarily fatal. The mistakes just need to be addressed quickly and if you can show a history of resolving them and improving, then a transparent market approach will eventually build end-user trust and loyalty in the brand.
  4. Leverage expands:  As the “open” community grows, it can become self-supporting and self-growing.  In our case, Ubiquiti customers provide support to other Ubiquiti customers.  New product launches are virally marketed throughout the community and beyond.  And, new ideas and feedback are provided back to our R&D teams to help further evolve our platforms.

The key to succeeding with a “transparent” market strategy is to recognize that the customer is irreplaceable.  If the customer can be convinced that you exist to serve them and loyalty can be established, then a transparent market approach will become predatory to competitors with traditional sales strategies and operating models.

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