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Why Silicon Valley Should Be Worried
Updated at the bottom: We have short memories in Silicon Valley, which is both a blessing and a curse. We forget the bad times as quickly as we forget the good times.
At the turn of the century, everything went to hell with the dot-com bust. Then the pendulum started to swing the other way; the pessimism that once reigned supreme was being replaced by wild-eyed optimism. Now Silicon Valley is in for a long-overdue reality check, one that should worry one and all. Why? Because the news coming out of advertising-focused companies is not good.
Yesterday ValueClick, a display advertising network, said it now expects its second-quarter revenues to range from $162 million to $164 million, lower than the previously forecasted $170 million. The company also cut its full-year 2008 sales guidance by about 10 percent, to between $655 million and $675 million. It blamed weakness in its display and comparison advertising business, and flatness even in its lead-generation business.
Time Warner’s Platform-A advertising division isn’t doing so well either, according to some of my sources. The company is instituting wide-scale belt-tightening measures, including freezing travel budgets. Pali Capital in a blog post today forecast, “AOL’s display advertising revenues down about 8% in Q2 (Q1 ‘08 was down about 10% organically), with the back-half down mid-single digits.”
Microsoft, in its fourth-quarter 2008 earnings call today, also admitted that online advertising was tough. “The one proviso to that is in the online advertising space…it was weak in the fourth quarter. There is a direct impact and we’re not immune in the online space, ” Microsoft CFO Chris Liddel said in a conference call with analysts. “The online advertising area is part of the business that we think is most challenging…the online advertising area is very difficult at the moment.”
And if that wasn’t enough, Google just announced spectacular growth in its second-quarter revenues — about 39 percent over the same period lat year — but fell short of Wall Street’s profit expectations. Between The Lines blog notes that Google CEO Eric Schmidt, in his company’s conference call with investors, said they would survive the downturn because there will be a flight to quality, and that they will provide a better return on investment. Maybe! Larry Dignan hit the nail on the head when he wrote:
“Color me skeptical. Anyone that lived through the dot-com bust has heard these lines before and no company is immune if there’s a recession.”
Like him, the skeptical me went straight to the traffic acquisition costs (TAC), which is where I think the real story lies. If you look at the image below you’ll see that Google’s traffic acquisition costs have declined rapidly while its revenues have ballooned. TAC in general and AdSense specifically are like a black box – no one quite knows how much Google gives out. Sometimes it feels like Google can use this “black box” to come up with pretty much any numbers it wants to.
We’ll get a better sense of the overall health of the market when Yahoo reports its latest numbers, but the way I see it, things are sort of troubling. We wrote about this nagging problem back in May. I think that as we go forward things are only going to get worse — and even Silicon Valley can’t ignore what’s been going on in the overall economy.
The housing crisis is being replaced by a much scarier problem: the personal credit crunch. In a recent report, American Express noted that it has started to see a sharp increase in late card payments. Now folks, this is American Express, whose customers skew towards the affluent, especially compared to those of its competitors. The company has boosted loss provisions for its U.S. card business, profits have declined, and defaults are up.
Will these problems escalate? Probably. Consumers struggling with the housing crisis and rising fuel costs — and thus higher basic living expenses — will be forced to cut back on other spending, which will lead to slower sales and in turn, less money for advertising.
We know the housing and financial sector-related ads have already declined drastically, now we’re going to start to see other sectors cut back on advertising, too — and that is going to have a negative impact on everyone from large social networks to ad networks to Yahoo and Google to small startups, including weblogs like ours. I guess Provigil sales are going to take a nosedive in the Valley as we stay up all night worrying about everything.
Update: And there’s more bad news today. The Wall Street Journal reports that General Motors is going to sharply cut back on advertising. GM is one of the big spenders in U.S. — last year the company spent about 32 percent of its $2.3 billion dollar ad budget on newspapers and 11 percent on television networks — but it looks like those expenditures are going to get hacked. It’s not clear from the report how this move will impact Internet advertising.
Photo courtesy of ZDNet
The Real Reason Powerset Sold (Out)
When visiting Israel in the middle of summer, it’s generally not a good idea to go for a walk in the afternoon, even if it is along the sea. The heat and humidity sap your energy, making you feel as if you spent nearly three hours in the gym. But that wasn’t enough to stop me from writing a post about Microsoft buying Powerset for what is rumored to be around $100 million.
I’ve been unable to stop wondering why founder Barney Pell decided to take the money and run — after all, he used to turn blue in the face telling people how superior Powerset’s approach to search was. If it was so superior, Mike Masnick of Techdirt put it best when he wrote that “[T]he exit certainly falls well short of the hype around Powerset. If Powerset was actually seeing any traction at all it never would have agreed to sell at that price.”
To some extent, Mike is right, but I would add another reason: infrastructure, specifically how expensive it is to build. At our Hadoop meet-up earlier this year, Chad Walters, director of engineering at Powerset, noted that their search “requires 100 times more processing than simple keyword searching and indexing (about one second per sentence is required for processing).”
Powerset used some pretty nifty technologies to build out their system, but in order to really scale, they would have needed more money — a lot of it.
And Powerset would have had to scale; there’s no other way to compete with search’s 800-pound gorilla, Google. That’s why Microsoft is building a gigantic data center in the Chicago area focused almost entirely on search. (Which it can now use to help roll out Powerset’s search technology to a larger audience.)
This is an abject lesson for every startup looking to get into the business of search: No matter how good your algorithms are, you still have to deal with the cost of queries, which need to be low enough to be offset by some kind of advertising in order to make a profit. (The conspiracy theorist in me says that if your results are really good you won’t be able to generate enough inventory to serve up ads that bring in the dollars, but maybe I’m just too cynical.)
One of our readers believes that it is possible to build a search engine that surpasses Google’s. Nevertheless, as I’ve noted in the past, “[P]rocess-optimized infrastructure ensures that Google???s cost of executing a query keep going down” — and that allows the company to wring more dollars from the system.
Given all that, Powerset has done a good job of wringing a hundred million from Microsoft. Not that there’s anything wrong with that.
Bonus Link: Don Dodge of Microsoft explains the logic behind the deal.
Inside Microsoft’s Internet Infrastructure & Its Plans For The Future
A few minutes after she delivered a speech at our Structure 08 conference in San Francisco, I caught up with Microsoft’s corporate VP of global foundation services, Debra Chrapaty, for a video chat. I think a more appropriate title for her would be Mr. Softie’s Internet Infrastructure Czar. I found her very knowledgeable, engaging and open with her opinions. “We have some new innovations up our sleeve that are going to knock the socks of anything anyone is doing, including our friends down south,” she told me. She didn’t name Google, of course, but we all know who she was talking about.
Her candor was one of the reasons I wanted decided to share the video with you guys. The common theme of the conversation: Microsoft is spending liberally to build out its Internet infrastructure, including upgrading its backbone network and scaling out its data center infrastructure by adding new technologies.
When I asked her exactly how much Microsoft was spending on it, she dodged the question, saying just that it was a big number. This much we do know: Two years ago, the company was spending close to $2 billion on its infrastructure; it has since undertaken the development of six data centers, with parts of two networks already online.
| Adding 10,000 servers a month |
| New data centers being planned/under construction are equivalent of over 15 US football fields of data center space. |
| Plans to cut of 30% to 40% in data-center power costs company-wide over the next two years. |
| Current network backbone runs at about 100 gigabits per second, but soon Microsoft plans to bump it to 500 Gigabits. I think this could be big for Level 3, long time partner of Microsoft. |
| Building out its own CDN (Edge) network - 99 nodes on a 100 gigabit per second backbone. |
| For Microsoft, total data grows ten times every three years. The data in near future will soon approach 100s of petabytes. This includes data from all of their online services. |
| Source: Microsoft, GigaOM |
| When complete, it will consume 48 megawatts of energy. Microsoft can tap up to 72 MW of energy coming from hydro power. Microsoft is paying about 1.8 cents per kilowatt, but will rise to between 2.6-to-2.9 cents per kilowatt as more capacity goes online. Two data centers in this location. | |
| It will be 447,000 square feet on 44 acres. Microsoft is building two data centers here | |
| first Windows Live data center outside the U.S. | |
| The first floor of this facility is going to be entirely made of containers and would house Microsoft search. | |
| Source: Microsoft |
Watch the video to get the full low-down, but if you’re in a hurry, here are some highlights, including her quotes from our conversation.
- “We are building data centers but I don’t want to say not just data centers. We are already on to our second generation data centers. More utilization, better density and more power efficient.” For Chrapaty, power efficiency is not just talk, it’s her mission — she is the driving force behind Microsoft’s server utilization.
- “Infrastructure is a differentiator. I use FedEx as an example. They are world’s most predominant distribution company. It wasn’t that they had a great brand or they had all these plans. No, what they did was find these strategic landing fields where they could get in and out quickly to key distribution points across the globe. It defined their company. I think the same is true in the infrastructure now. Data centers are already becoming a scarce resource.” Google realized this a long time ago; Microsoft is now demonstrating how it can put money to work and build an advantage over others.
- Like Google, Microsoft is taking the design of servers into its own hands. “We are doing some unique things in the mother board designs, server designs, and because we are Microsoft, operating systems.”
- She’s a big champion of container data centers, which essentially act like the trailers on long-haul trucks, optimized and packed with all sorts of gear — servers, switches, storage systems — that’s wheeled in and plugged into the power grid and the network. Sounds like Rackable Systems and Verari are major suppliers of these containers to Microsoft; the company is making extensive use of them in their Chicago facility.
- Her comments indicate that Microsoft has plans to offer managed services to large corporations.
- She lets us know first that they are building a IOWA data center, which is huge for Iowa. Google has one in Iowa too.
The True Fiction of Microsoft Live Search
Yesterday, I read a post on Google’s blog about their focus on improving search quality. Today, I read a press release from Microsoft in which it said its Live Search product will be used to give “cash back” to those who use it to find and buy things. Innovation vs. buying your way into the market…in my book, that kinda speaks for itself.
Microsoft’s “Live Search cashback” site…promises to pay back a portion of the purchase price — ranging from about 2 percent to more than 30 percent — to people who use it to find designated products and buy them online from participating retailers…including the online sites of large retailers such as Barnes & Noble, Sears, Home Depot, J&R Electronics, Office Depot and others. [via]
Instead of jumping to conclusions, I decided to make a list of my thoughts on this, many of which the folks at Microsoft are not going to like.
- We shouldn’t be surprised that Microsoft is using the lure of the cash. When it comes to beating Google in the search game, cash is the one asset it already has.
- Microsoft Chairman Bill Gates is still running the company, despite not being the CEO. He talked about paying people to search almost three years ago.
- eBay is using Microsoft to generate traffic. That leaves lead-generation players on a slippery slope.
- TechCrunch notes that this program is based somewhat on Jellyfish, a company that Microsoft bought back in 2007. In other words, this isn’t a new idea, just new spin.
- Will this work? That remains to be seen. Remember a company called iWON? Well, despite all the cash and prizes it handed out, it failed miserably. Will Microsoft’s size and online presence give it a leg up? Maybe.
- It really doesn’t address the issue of Microsoft continuous loss of market share in search.
- Microsoft will need to find a way to overcome resistance to register for the service.
- Microsoft Live Search Cashback has 200 merchants, compared with the average comparison shopping engines, which each have about 10,000 merchants.
- Microsoft is pretty serious about what amounts to little more than a gimmick. They recently bought Cashback.com, showing how committed Microsoft is to this effort.
- What Microsoft is indicating: It will shift to a cost-per-acquisition model, instead of the more generic cost-per-click model, which I think is actually a good thing.
- What they really need to do is to upsell merchants to other types of online advertising they offer — search, contextual, content and display. Now that could prove to be a very big opportunity
Final thought: Microsoft’s traditional strategy of “We will charge less and crush the competition” really doesn’t cut it anymore. How long do you think merchant partners are going to stick around and waste their resources if they can’t make money? This is not some PC-maker-schmuck they have in a headlock. Take a look at all the other new technologies where Microsoft hasn’t been able to dominate — this is a sad reflection on that trend.
Microsoft, Yahoo Back On — or Not
It is a sad commentary on the state of affairs in Silicon Valley when Carl Icahn, a known corporate raider from the go-go 80s, is used as a lightening rod to bring two of technology’s major players, Yahoo and Microsoft, to the table to strike some sort of a deal. And there seems to be some sort of a transaction in the works. And that’s not necessarily a good idea.
Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties. There of course can be no assurance that any transaction will result from these discussions.
As you might remember, Microsoft made a $31 a share bid for Yahoo, got spurned, and then raised the bid to $34 a share, only to see it rejected it again. At that point Microsoft walked. Many Yahoo shareholders weren’t cracking smiles when that happened, prompting Icahn to step in with his idea of a board. Ichan’s move to put a new board in isn’t all that bad: Yahoo needs to clean house, as I had said a long time before holier-than-thou Carl showed up.
The New York Times reports that there were talks that “center on a partnership or joint venture for search-related advertising” as the two companies find a way to beat Google. Kara Swisher says that Microsoft “wants most of all to grab Yahoo’s search ad business to become a credible No. 2 in the important sector.”
This is Microsoft, once proud company that would have gone to any length to win, and it is going to settle for second spot. What does it really say about Microsoft? Never mind, it is a rhetorical question.
The combination of Yahoo and Microsoft in the search business is not going to be a winning combination. Essentially Microsoft is in the market to buy eyeballs – ones that have been declining in numbers. Both Yahoo and Microsoft continue to lose market share to Google in the search market.
Just take a look at the April 2008 data for US searches from Hitwise. According to comScore data Google now outranks both Yahoo and Microsoft. So building a search-advertising business makes no sense. (Read Kevin Johnson, Microsoft’s President of Platforms & Services Division memo about Microsoft’s online effort.)
For Yahoo it might not be a bad idea, since the company doesn’t solely rely on search/search-based advertising to make money. Instead, a substantial chunk of its revenues come from (what I like to call) produced pages, email and other content related efforts. If Microsoft wants to pay up for that, that I guess is palatable defeat for Yang & Co.
I Don’t Want Source Code; I Want App Tone
For a long time, source code was viewed as a software company’s crown jewels, protected by dongles and complex encryption schemes to prevent copying and theft. In the software-as-a-service world, however, source code becomes irrelevant. If someone offered us the schematics to a telephone, we wouldn’t care. We don’t want to know how to make a phone. We want a dial tone. When it comes to IT, we want app tone.
A recent April Fool’s joke claimed the Vista source code was leaked. But really, would we care? Gartner says Windows is collapsing under the weight of 20 years’ worth of legacy code. Forrester says that only 6.3 percent of enterprise users it surveyed at the end of 2007 had switched to Vista. It’s not just Microsoft. IT administrators will tell you that the cost of running any application far exceeds its license fees.
Even the open-source movement is feeling the change: Recent modifications to the third revision of the GNU Public License recognize that it’s the service, not the source code, that has value — and that any user of the service has the rights to its source code. IP-protection firm Palamida’s GPLv3 blog says that “in a SaaS arrangement…the opportunity to receive such source code must be prominently offered to all users who interact with the program remotely over a computer network.” (italics ours)
But I increasingly don’t care. If 37 Signals gave me the Basecamp source code for free, I’d still use their service. If Freshbooks burned me a copy of their app, I’d still subscribe to them. Even if Salesforce.com handed me their software, I’d use their hosted portal.
In the license world, it’s all about the ability to make copies of the software. By contrast, in the world of app tone, it’s about the ability to run instances of the code. It’s about operating an application reliably, and the ecosystem the SaaS provider can build around it through APIs, partners and extensions such as the Salesforce for Google Apps integration.
Microsoft clearly wants Yahoo for its traffic. The future of consumer applications is free, and having traffic to monetize those applications in other ways is essential if Microsoft is to make the jump from software to service.
But the ability to deliver “app tone” is an equally compelling reason for Microsoft to go after Yahoo. Instead of selling software burdened with 20 years of backwards compatibility, they need to start running applications. Yahoo is not only staffed with people experienced at this, but it has a large-scale computing cluster to run it on, and an installed base that already thinks of it as a service. It’s something that Redmond desperately needs, and something Yahoo’s willing to ally with its biggest competitor to defend.
Yahoo, Google, AOL Strike a Pose for Microsoft
Update: The Wall Street Journal reports that Yahoo and Google are going to work together on an experiment that might lead to big things. In other words, a two-week test that is limited to Yahoo’s U.S. traffic will carry Google ads. These ads will be limited to “no more than 3% of Yahoo’s Web search queries.” If all goes well, then a broader search outsourcing arrangement could be struck by the two companies.
Loose translation: With its bid for Yahoo, Microsoft made a checkmate move. Yahoo is out of suitors. Its shareholders don’t give it a prayer of a chance, and further more, the company is still as listless as it was six months ago. So what does it do? It goes and sleeps with the enemy!
Just a reminder of Yahoo’s cluelessness: In 2000, it outsourced its search queries to Google. It renewed the deal in 2002, and has become a minor player in the search business. Anyway, about this new-found friendship, I wonder if the U.S. government is going to let this one through. I mean, this is one instance in which antitrust concerns could actually hold some merit.
Microsoft is pretty clear about its position. As Brad Smith, Microsoft’s General Counsel, told the WSJ:
“Any definitive agreement between Yahoo! and Google would consolidate over 90% of the search advertising market in Google’s hands. This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo!”
Either way, in this deal, heads or tails, Google comes away a winner. If Yahoo goes to Microsoft, the ensuing chaos is going to benefit Google. If Yahoo gives away its search ad business, Google is a winner.
Update: The Wall Street Journal is reporting that Yahoo and Time Warner are planning on putting together a deal where Yahoo will get AOL which is being valued at $10 billion. In exchange Time Warner will get 20% of the combined company (Yahoo) and will make a cash investment. Google will be the search-ad-partner. Yahoo would spend the money it gets from Time Warner $10 billion buying back its own stock and beating down Microsoft. With Legg Mason, 7% owner of Yahoo opposing the Microsoft offer, the new plan could work. To make this plan come apart at seams unravel, Microsoft has to up the offer by a few dollars per share. I say this again, Yahoo has some serious problems. Buying AOL, already troubled in its own right, is only going to compound problems.
Mix’08 Review: How Microsoft Is Fighting a War on Three Fronts
Microsoft is fighting a war — one in which it’s being attacked on three sides. Cut through the flurry of announcements out of its Mix conference this week and what emerges is the Redmond giant’s three-pronged defense strategy: consumer, enterprise and developer. Only by understanding the battles Microsoft is fighting does it become clear where the company is headed. So we’ve broken it out for you here.
The consumer attack
The front: Desktops, handsets and consoles. Flanked by Apple’s cooler desktops and devices, Google’s insight into users, and the Nintendo/Sony console world, Microsoft is struggling. Windows Mobile isn’t a consumer handset like the iPhone. Live hasn’t really taken off. Vista flopped, with the company embroiled in claims that it overstated the number of machines on which it would run. And the Xbox, despite its success, has an alarmingly high recall rate. Perhaps most frighteningly, it’s becoming clear that when it comes to consumers, advertising is paying for it all (what Chris Anderson calls the “freeconomy”). But Microsoft isn’t plugged into that ad stream.
The defense: One OS to rule them all. Users have dozens of devices, and Ray Ozzie wants them all to work seamlessly together. Expect Danger, Zune, Xbox and Vista to share and synchronize automatically. Carriers and labels will love it. Consumers will settle for it. And once they’ve got a central identity, they’ll be able to carry their desktop applications (with varying degrees of functionality) from their desk, to their car, to their hip, to their sofa.
But how to pay for it? What Microsoft needs is an ad network like Yahoo, and media formats like Silverlight that lure advertisers. Ballmer’s clearly not resistant to the concept of advertising: In an on-stage Mix interview with Guy Kawasaki, he performed a mini-monkeyboy dance, only to demand of the person who had requested the jig: “If your buddy behind you just gave you a buck, I want 50 cents.” He knows where his consumer revenue’s coming from down the road.
The enterprise attack
The front: On-demand apps and a mobile workforce. Salesforce.com has gone from a turnkey contact manager to a full-fledged ecosystem for developing CRM applications. Amazon lets hundreds of upstarts build project planning, accounting, word processing, messaging and more — apps that traditionally filled Microsoft’s coffers. Standards like OpenID give interoperability without buying a suite. As companies realize the inevitability of on-demand computing, Microsoft has to completely change its business model. And on the mobile front, Windows Mobile can’t hold a candle to the BlackBerry.
The defense: Connected productivity and an easy move into the cloud. Expect the firm to retrench on mobility. Exchange still holds the bulk of business users’ internal relationships. More and more, it’s focusing on workflows and business process. Moving those processes between the enterprise server, the mobile device and the web — seamlessly — would be a big win that companies will love. With Danger, Windows Mobile can stop being a tweener and go after Research In Motion. And Microsoft’s asp.net architecture is still the easiest way for its legions of developers to build online applications.
When companies are ready to port their data centers into the cloud, Microsoft will make the transition as painless and transparent as possible using Windows Live Storage, SQL Server Data Center Services, and other services with codenames like CloudDB, Horizon, and Live Core that execs are still tight-lipped about.
The developer attack
The front: Open source, web apps and video. The thing Bill’s always done right is focus on developers. He put in functions. He opened up APIs. He showered them with development resources. And it worked. But today, we have Sourceforge for snippets of code. Eclipse gives ActiveVisual Studio a run for its money. We built Web 2.0 with Flash, AJAX, Ruby, Python — the language of the web isn’t .net, and it hurts. When it comes to video, Microsoft’s Silverlight seduces content providers with tracking and ad support, but we’ve already built those things out of Flash ourselves. And Microsoft’s notoriously long release cycle for Longhorn impacted its ability to react to market changes.
The defense: New Lego. Remember old Lego, which only had a few pieces? You had to carefully build the front of a spaceship from thin rectangles and dozens of identical bricks. But new Lego is different. There’s a single piece for the front of the spaceship. And while old-school Lego types cry foul, now pretty much anyone can build a spaceship.
That’s Microsoft. New features in Internet Explorer 8, working in concert with the company’s web servers, will make it easy to drag-and-drop sex appeal into the application without needing much talent. And enterprise developers will embrace it, as they always do, because it’s easy. Things like Feedsync and Sliverlight will make it that way. Even the Popfly site makes anyone who can drag a mouse a coder, performance be damned. By breaking the software into services, there will be less delay between releases, which should fix the Longhorn drought.
How will the battle go?
Mix08 was an upbeat event. But read between the lines, and it’s clear that the company is bracing for a fight from several sides at once. Don’t write off Microsoft: We were here once before, when Netscape was going to put the company out of business. But Gates issued an edict, the company turned on a dime, and a few years later IE was the dominant web browser.
But you never want to fight a war on multiple fronts, and that’s what Microsoft faces in battles for consumers, enterprises and developers. If it survives, the Microsoft of tomorrow will be a very different company.
Google Sites Now Live To Collaborate
Google acquired JotSpot eons ago, so long ago that one almost forgets about the wiki company and its founder, Joe Krause. Apparently Google didn’t let it go to waste. It is now the underpinning of Google Sites, a web-based collaboration software service that is going to be part of the Google Apps and will be available later on Thursday.
It is a simple and easy way to build a web site where you can share information with your team, including files, calendars and presentations. You can put content from other Google products, including YouTube, Google Calendar and Picasa. Google hopes that small business, wide-spread teams, classrooms and even political organizations would use this new offering in tandem with its current Google App offerings.
Google is not the first one to make a collaboration available — 37Signals’ Basecamp, Microsoft ’s Office Live WorkSpace, Zoho and GoPlan come to mind — but it has come up a pretty compelling offering that is going to challenge competitors.
“Creating a team web site has always been too complicated, requiring dedicated hardware and software as well as programming skills,” said Dave Girouard, vice president and general manager of enterprise, Google.
I was pleasantly surprised by new offerings’ ease of use. Sure, some power users are going to be disappointed but I suspect a majority will find its simplicity appealing. Moreover, it is tightly integrated with Google Apps, which would make its adoption easier, just like Google Docs and Google Talk.
I bet like me, no one wants to deal with another wiki. Funny how Google is taking a page out of Microsoft’s playbook, and offering an “integrated suite.”
WebWorkerDaily, which follows collaboration software quite closely had outlined similar approach.
Take GMail, GCal, plus Google Docs & Spreadsheets and you could manage a project reasonably well…If you wanted dashboard or notification-type features, you’d probably have to custom-build them yourself, though, and that’s a serious undertaking.
Looks like Google fixed that problem. My initial enthusiasm aside, I am still withholding final judgement on this product for now. Like most Google apps, the limitations become obvious after one has had a week or two and real-work situations to put the service through, a case in point being the marginal IMAP experience on GMail.
Related Post: An in-depth review of Google Sites over on WebWorkerDaily
Dear Yahoo, I Pwn You. XO Microsoft.
Just when you’d think Google’s financial discombobulation would give Yahoo some rest comes this heartfelt bullet from Microsoft. On the PR newswire this morning runs this incredibly respectful yet dispiritingly asexual love letter from Steve Ballmer to Jerry Yang. And, oh how Mr. Ballmer loves to dish, to wit:
In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that ‘now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction.’ According to that letter, the principal reason for this view was the Yahoo! Board’s confidence in the ‘potential upside’ if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment. A year has gone by, and the competitive situation has not improved.
Man, you have to hand it to sweaty old “Give It Up to Me!!!” Ballmer.
He corralled Yahoo’s proscribed empire into his greasy fist while preserving that silly artifice of the exclamation point in Yahoo!’s name. Nicely done, Steve. More than that, he finally called Yahoo on the Oz-like illusion it’s been fostering for a couple of years: “You had a year. You lost. All your base belong to us.”
I can’t shake this feeling Ray Ozzie has a hand in all this, but oh well. Yahoo shares finished Thursday at $19.18, but Ballmer & Co.’s bid of $31 a share for the web portal turned…umm, Microsoft property has driven the stock up 50 percent to $28.68 Friday morning.
Microsoft, which has $37.8 billion in cash and short-term investments, was to put out $44.6 billion in cash and stock to buy an Internet pioneer that until a year or so ago was so revered by investors and affiliates that everyone would have laughed aloud at the idea of the ticker MSFT swallowing YHOO.
Now it’s February 2008, and is anyone laughing?…Ben Stein…Beuller…anyone??
Having spent my share of last-calls at bars, I can only applaud Microsoft’s ambition in its 3 a.m. bid at corporate copulation — while snickering privately at the 62 percent premium over what everyone else thought Yahoo was worth until this deal was proffered.
Let’s sit down a minute and think about what a Microsoft-owned Yahoo will mean.
Yahoo has been admirably laissez-faire with Flickr and del.icio.us. Will they be preserved or folded into to services we’ve all eschewed? How will Yahoo mail accounts be reconciled with Hotmail accounts? Will those of us who use Yahoo Finance and all its features adapt to MSN Finance? What is MSN Finance?
A 62 percent premium, hmmm –- we Yahoo users have a new choice: Learn to love life under Ballmer, or migrate to Google.
Looking Back: A Very Google 2007
Looking back at 2007, we will remember it as a year Google finally grew up and showed its true colors. Sure there was Facebook and all the hoopla around its platform and privacy, but the big story of year was still Google. The Mountain View, Calif.-based company that still gets a majority of its revenues from advertising made moves that would help expand its reach into new markets.
Wireless, Voice and Applications were three areas of major push - and if that meant taking on the telcos, the FCC, Microsoft, Wikipedia and even Facebook, so be it. And along the way it is estimated to add $1.7 billion to its $10 billion or so sales in 2006. No wonder it commands a market capitalization of $217 billion. Here are some of the major developments of a very Google-y 2007.
- January 2007: Crosses $10 billion in sales.
- February 2007: Google Office, ready for business. Microsoft beware.
- March 2007: Announces its 700 MHz spectrum plans, taken on Verizon, AT&T.
- March 2007: Viacom sues Google for $1 Billion.
- April 2007: Buys Doubleclick for $3.1 billion.
- May 2007: Launches Streetside View for Maps.
- June 2007: Buys Grandcentral.
- June 2007: Buys Feedburner
- July 2007: Buys Postini.
- August 2007: CFO Greg Reyes retires.
- August 2007: YouTube launches embedded inline advertising.
- September 2007: GoogleNet is going global
- October 2007: Buys Jaiku
- October 2007: Launches OpenSocial, takes on Facebook
- November 2007: Launches Android, Mobile Platform, taken on Microsoft, Nokia, Others
- November 2007: Announces plans to produce GigaWatt of clean energy.
- December 2007: Launches Knol, takes on Wikipedia
Mozilla Weaves Services
I had reported on Mozilla jumping into “online services” earlier this month. Today, they quietly announced a new project called Weave, that allows you to take control of your metadata and store it on Mozilla servers, once you set up an account.
The idea behind Weave is that all your personal information — bookmarks, passwords and account names, for example — are synced to your Mozilla account via Firefox. If you lose your computer, you can download Firefox, log into your account and you can restore all that information. You can do some of this today if you use Google Browser Sync and Dot Mac services. You can start by creating an account with Mozilla Services. You will need Firefox 3.0 or higher to get this working.
Mozilla has set-up a code of ethics, which make me view this project more positively. For instance, all client side data is encrypted. I like the fact that Mozilla is a neutral entity and is less likely to commercially abuse the information at their disposal. If you take a longer term view, Mozilla can become the data broker for all future web services, especially for those who don’t want to throw in their lot with commercial vendors such as Google, Microsoft and Facebook.
Who Needs Facebook? MSFT Thriving on Its Own
This will be good news or bad news depending on how you feel about Microsoft, but the software company seems to be roaring back. And it has nothing to do with its overpriced, over-hyped 1.6 percent stake in Facebook.
Instead, it has more to do with the earnings report it delivered Thursday afternoon for its fiscal first quarter that ended Sept. 30. Beating the Street by six cents a share (its biggest earnings surprise in a few years), while showing $1.2 billion more in revenue than analysts had expected and a significant improvement in its operating margins (to 43 percent from 41 percent a year ago).
Not only was that good, it was way better than Wall Street seems to have been expecting. The stock was up at $35.50, as of this writing, in after-hours trading — surging 11 percent in less than an hour after Microsoft (MSFT) reported earnings. Here’s why I think that performance is so impressive.
First, it launches the stock back to a level it hasn’t seen since July of 2001 — more than six years ago. Microsoft reached as high as $31.84 on July 19 of this year. But the last time the stock closed officially above $35 was back when the tech bubble was still deflating. If Microsoft closes above $35 Friday, it will mark a six-year odyssey back to that level.
But that doesn’t mean Microsoft will necessarily be overpriced again. Its net profit for the last 12 months total $14.9 billion, or three times its net income six years ago. In other words, Microsoft’s stock may soon be back at its 2001 level, but its profits have tripled in the meantime. Its after-market market value of $333 billion is only 22 times that profit.
Second, Microsoft had a $300 billion market cap at the end of Thursday, before its earnings report, about 150 percent of Google’s (GOOG) and roughly double that of Apple’s (AAPL) on the same day. That’s a lot of market cap, and to get it to rise 11 percent means pumping in $33 billion dollars.
As the chart from Google Finance shows, Microsoft’s stock rose to $35.81 from $32.04 in 45 minutes. In that frenetic three-quarters of an hour, when tens of millions of shares were traded, the value of the stock was rising an average of $12 million a second.
So this is a bigger vote of confidence for Microsoft from Wall Street than the headline figures may indicate. Everyone was expecting a pretty strong quarter from Halo 3 and Xbox 360 sales, but the actual numbers were even stronger. Improbably, 85 million copies of Vista have been sold.
(One weak spot remains online advertising, which thanks in part to investments in aQuantive and other properties, posted a loss of $264 million.)
This quarter may mark a turning point when investors stopped looking at Microsoft as an aging, arthritic giant that could at best hope for maintaining slow and steady profits with the occasional if beefy dividend thrown in. After all, EPS grew 29 percent, to 45 cents a share.
That profit growth rate may be a league below Apple and Google. And Microsoft is still far from being an innovation powerhouse like either of those companies. But it marks a significant improvement from the Microsoft of a few years back, when it would have sounded odd to say what we know today: Microsoft is alive and well, and still in the race.
For Investors (so far) Apple Better Than Google
Remember when Apple’s (AAPL) stock topped the $100 mark, powered by another stellar earnings report? It was only six months ago. Judging from the rapturous reaction in the aftermarket today to Apple’s most recent earnings report, the stock is close to racing past the $200 mark.
Apple closed active trading Monday at $174.36. Following release of its fiscal fourth-quarter results, it shot up as high as $187.76. After market trading can be volatile, but it can often, if not always, be a good gauge of how the stock will fare in official trading the next day. It’s a pretty safe bet Apple shareholders will have a pretty good day Tuesday.
Apple has turned into one of those superstar stocks that seem incapable of disappointing investors. Just add money and watch your returns grow. The last big superstar stock in the tech firmament was Google (GOOG). But Apple seems to be in a higher class of supernova than even Google.
Ever since Google’s first day of trading back in the summer of 2004, Apple’s stock has outperformed Google so that, as of the close of trade Monday, an investor who bought Apple in the stock market on Aug. 19, 2004 would have made twice as much as an investor who invested the same money in Google shares.
A lot of people have been talking about how Google’s shares have started to rally again after trading in range of $400 a share and $500 a share for months. In the last two months, Google’s stock has risen 27% to an all-time high of $658.49. In that same period Apple has risen 33%. Remember, that’s after Google’s post-earnings rise and before Apple’s.
So when will Apple see a slowdown the way Google’s did earlier this year? It depends. There really isn’t a lot in Apple’s business operations to suggest a dramatic slowdown in its business. As the earnings call showed, iPods and iPhones are spurring Mac sales, which are likely to spur more upgrades, whether to Leopard or to future generations of iPods and iPhones, and so on.
I think any danger to Apple’s stock is more likely to come from investors themselves. Once a stock is labeled a sure bet to rise, the speculators come running. The top graph above shows Apple’s P/E ratio creeping higher in recent months. Speculation could drive Apple’s price much higher in the near term but add downward volatility longer term. A stock split would only add to speculative volatility.
On the other hand, there is the value of historical perspective can provide. Apple has had Microsoft on the run in key areas. So has Google. But if you compare both those stocks to Microsoft since the 1980s, you get the sense that both of them have a long way to run.
Now that’s a lot of catching up to do.
Did Microsoft go lose its head over aQuantive?
I’ve been trying to find a way to illustrate just how screwy Microsoft’s $6 billion bid for aQuantive is, and here it is: For $6 billion in cash, Microsoft could have hired, in a single day, 60,000 engineers and salespeople (plus managers to make sure they earn their pay) - paying each one of them a $100,000 salary.
Of course, if Microsoft did that in one day everyone would think its executives had gone mad. After all, it already employs a modest 71,000 people around the world. Instead, it’s paying out $2.85 million for each of the 2,106 employees who work for aQuantive. Which, no matter how hard as people labor to rationalize this deal, is at the very least slightly more mad than that, if not good old-fashioned American bat-shit insanity.
Just as Microsoft was obsessed 10 years ago with an iron grip on the computer desktop - a vision that proved almost fatally shortsighted - it’s now obsessed with having a Bigfoot-sized imprint in the online-advertising industry.
Sure, being shut out by Google and to a lesser extent Yahoo has to be painful today, but the fact is Microsoft is seeding several markets that may well be just as important if not more important in a few years on: video games, online business transactions, health-care software and consumer-oriented robotics.
Still, Microsoft blunders on into online ads like a middle-aged ex-quarterback bent on reliving those glory days of high school. In the world of M&A, as in a post-midnight dive bar, desperation is a cheap cologne. If anyone smells it on you, they hold it against you. After Friday’s news, Microsoft is fairly doused in eau de désespoir.
Yet as always happens whenever something occurs that makes no sense whatsoever, there is no shortage of explanations: Microsoft lost Yahoo, so this is its last best option in online advertising. No wait, this allows Microsoft to get back into the courting dance with Yahoo. Or just maybe, Microsoft knows a bargain when it sees it.
The thing is, aQuantive is a respectable enough, if already overpriced, company. But its value has been erratic. Before the whole media-merger mania caught fire, aQuantive went from $11 two years ago to $29 in early 2005, down to $19 that same summer, and back up to $29 a few months on.
So aQuantive as an investment is kind of like John Travolta’s career: It really all depends on when you catch him. Are you getting the epoch-defining Saturday Night Fever or its unpalatable sequel Staying Alive? Pulp Fiction or Michael?
Just Microsoft’s luck, Travolta is about to headline the new Hairspray in drag. Microsoft wants a bride who resembles Doubleclick, snatched away by Google earlier this spring, but aQuantive has been dabbling all along in, shall we say, alternative revenue streams: “behavioral targeting businesses” and “creative development and branding,” and whatever those euphemisms, taken from aQuantive’s last 10-K, might suggest.
Microsoft has often been compared with Google unfavorably in recent years. One thing both companies shared in common was their restraint in spending hard-won capital. But with Google’s $3 billion buy of Doubleclick and now Microsoft’s buy of aQuantive that’s twice as large, I fear we are in uncharted territory of M&A-Land.
Well, territory that hasn’t been charted since the hyper-aQuisitive days of the dot-com years. But who would rationally choose to return to those silly times?
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Wall Street stumped, surprised by Internet Cos
ANALYSIS (Q1 2007 Earnings Season): Internet companies are playing a game of stump the analysts. And they’re winning.
For the second straight quarter, the research desks on Wall Street have significantly and pretty consistently fallen short in their earnings estimates.
This is no small matter for analysts. Their job is to query the company, talk to its customers and crunch its numbers to distill it all into a single number: an EPS forecast that, if short by a penny or two is no big deal. But a forecast off by 23 cents, as happened with Apple this quarter - well, that can cost clients money. And clients hate to lose money.
Take a look at the graph below. With the exception of Yahoo - whose earnings were among the few tech giants to disappoint Wall Street this quarter - all of their net profits came in at least 9% ahead of the consensus of analyst estimates.
The biggest surprise of all - in every sense of the word - belonged to Amazon, whose 26 cents a share profit was 11 cents, or 69%, above the 15 cents the Street had been forecasting. Most analysts had given up hope that Amazon’s profit margins would ever rebound, with some arguing the company was no different from an old-fashioned bookseller.
Boy were they wrong. Amazon’s net profit more than doubled while its ever-scrutinized operating margin expanded thanks to some spending discipline. Piper Jaffray downgraded Amazon’s stock a day before its blowout earnings. Amazon’s stock rallied 40% in the next two days.
Even Microsoft, which many had assumed was aging into a steady machine of predictable profits, took the Street by surprise Thursday. All of the 34 analyst forecasts were calling for EPS in a narrow range from 45 cents to 47 cents. Microsoft’s number came in three cents ahead the highest of all those forecasts.
Nor is this parade of surprises a one-quarter aberration. In January, when the same companies were reporting earnings for the fourth-quarter of 2006, it was Yahoo who had the biggest surprise. Apple followed closely behind. All of the others had surprises that were at least 9% above the consensus.
What’s going on? Most of these companies were easier to predict a year ago, when the surprises were much more modest. Did they suddenly become harder to read?
Part of the disconnect is due to analysts, who were probably inclined to paint the tech sector with a broad brush, one that foresaw a market slowdown. A slumping housing market was expected to spill over into the economy at large. Overall profit growth this year was expected to be half the 14% rate of 2006.
Within that mindset, most analyst expected some tech giants to come up short: One or two might surprise to the upside, but surely not all of them. But companies like Amazon, Microsoft and eBay, under pressure for years to rein in spending while ensuring past spending would translate into present growth, were starting to deliver.
All of this is good for contrarians and for spectators like us in the press. Aside from Yahoo, these companies have in aggregate several tens of billions of new dollars in their stocks that weren’t there a couple of weeks ago.
But it makes life tough for analysts. Having resuscitated their reputations after the excessive antics of Blodget, Grubman et al, they are now facing a new crisis: Relevancy. If they don’t get a better handle on earnings of the biggest tech names, it won’t be hard to forecast the impact on their own income.
Don’t Blame Panama: The Real Threat Facing Yahoo
Taking a look at Yahoo’s first quarter number, one word comes to mind: heedless.
Not “heedless”, as in Yahoo executives who led the Street on until it believed that, thanks to its vaunted Panama search technology, revenue and profits would surge in the first quarter of 2007. Or even “heedless”, as in investors who had gotten a little ahead of themselves by betting that Panama would deliver sooner than promised.
No, Yahoo CEO Terry Semel was clear on that point a quarter ago: “The first time we see any benefit will be at the end of the second quarter,” he told the New York Times. “Every quarter thereafter we will start to get better.”
Despite that cold dose of reality, Yahoo bulls bid up the stock 19% since that cautionary interview. It could charitably be written off to long-term optimism. But today, people are slamming Yahoo for getting it wrong.
“Yahoo recently overhauled its online advertising system, giving some investors hope for a positive earnings surprise. So far, that hope hasn’t materialized,” the Wall Street Journal wrote Tuesday. Who knew?
Any selling Wednesday on Yahoo’s first quarter results may miss the point. Yahoo could be facing tough times in 2007, but not because Panama didn’t lift profits in the first quarter, but rather because of something that happened last week: Google is finally getting serious about banner ads.
The real threat for Yahoo is that it could well remain on the wrong side of the profit pendulum. Here’s what I mean by that.
Yahoo was a big player in search before Google came along. But it didn’t capitalize enough on that position. Instead, it focused on branded ads (a nice way of saying banner ads - something that regular Web users have learned to either ignore or block, but not enough for Yahoo or, now Google, to care.).
Want to know the dirty little secret of Yahoo’s stock? It’s this: In the two years before Google went public, its stock rallied 376% to $28.61 from $6.01. As of Tuesday, before Yahoo’s first quarter 2007 report, it had risen another 12% to $32.09.
That’s partly because, before Google IPO, investors had nowhere else to put their money than Yahoo. Then came Google, who knew better than Yahoo how to make ad money off search results: that is, no banner, only text ads that maybe, just maybe may be relevant to you.
In other words, the pendulum swung. Search/text ads grew like crazy even if banner ads grew at a more-than respectable pace. Yahoo realized it had to match Google in its intuitive search algorithms, so it began to hatch Panama. It wasn’t an easy proposition. There were critical delays.
Still, Yahoo remained clear about Panama’s timing, warning investors if it would release later than expected - which is more than Google did for the un-beta release of Google News or that Microsoft did for … well, pretty much anything Microsoft ever did. No one ever called Panama vaporware.
And they shouldn’t today. Because the real risk for Yahoo is that Panama is finally catching up to Google right as Google is catching up to Yahoo in its core market of branded - er, banner - advertising.
This could go either way: If you’re a true believer in Google’s instincts, banner ads (along with video ads) will catch up with its text and search ads. But if Yahoo has been right all along, Google is essentially leveling the playing field to Yahoo’s advantage.
The antitrust concerns about the DoubleClick buyout are off mark, but I do wonder if they may help tip the balance from Google toward Yahoo.
Take Semel Tuesday on Yahoo as a alternative to Google: “We have heard concerns from various advertisers, ad agencies and others,” he told Reuters. “My guess is there’ll be some who are fine and there’ll be many who, perhaps, aren’t fine. That’s up to them.”
So it is. Everyone else, place your bets now.
Who will be the real heedless: Investors in Yahoo, which loses ads to Google because of its superior ad-personalization algorithms? Or investors in Google, because Yahoo’s Panama eats into its search pie, while the DoubleClick deal prompts advertisers to defect to the prime alternative, Yahoo?
Thank you, Internet gods. Just maybe, it is once again a two-horse race.
Kevin Kelleher is a writer living in Berkeley, Calif. He has a regular stock column at TheStreet.com and is a contributor to Wired, Business 2.0 and Popular Science. He has previously worked at Bloomberg News, Wired News and The Industry Standard magazine.