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The Week in Geek – Nov. 18, 2006

Sony Stumbles, Microsoft Pounces in Video Game Console Wars
Sony’s PS2 was king among last-gen game consoles, but the PS3 has an uphill fight ahead of it. It’s a year late, it launched with only 100,000 in Japan & 450,000 in the US, it’s wicked expensive, and has incompatibility problems. This creates a huge opportunity for Microsoft. While Playstation 3’s Cell chip is considered best-in-breed, some predict it’ll be a year before game companies leverage the chip’s capabilities. And Xbox Live is considered 18 months ahead of Sony’s online efforts. Last week Microsoft announced it will allow movie & TV downloads via XBox Live. While Zune 1.0 looks like a loser, XBox 360 is rocking. And Nintendo is staking claim to the low-end market with its fancy wireless remote/nunchuk controller. Wii controllers can be swung like a tennis racket, twirled like a steering wheel, or pointed at the screen like a gun. Ask someone who’s used one & you’ll see a huge, happy grin. Launching a new console has been costly, in part because manufacturers have traditionally sold new hardware below cost (the real money is made in software & licensing). iSuppi estimates Sony will lose more than $300 per unit on the lower end PS3 and about $240 on the top-end console. But both Microsoft & Nintendo seem to have cracked the code. The XBox 360 sells for $75 above component costs, and Nintendo says the Wii will make a profit on hardware, too!

Trolling the Web for Free Labor
Work for a software firm? Read this WSJ piece to appreciate how your world is changing. While finding someone to work for free, for nothing more than the love of “ego-boo” (the boost of geek peer recognition) is tough, Zimbra shows how it can be done. The firm started when three guys decided over Palo Alto coffees to roll a better e-mail program. The firm solicited online contributors that eventually included a guy in Denver who coded while watching “Lost” episodes, a nuclear engineer in a French chalet, and a Rochester college student with so much tech gear in his room that he had to run the a/c during the winter. What’d they get? T-shirts & other SWAG – that’s it! (note to geek project managers: never underestimate the value of the t-shirt as a motivational tool). Zimbra launched in February & now has 4 million users worldwide. The WSJ carried a video cast of a Microsoft manager discussing how the firm must respond to Zimbra’s advance. Gates concedes “They’ve done a good job”, although it’s not on feature par with Exchange. But that may be the point. Disrupters don’t need to be better than rivals, just good enough for existing customers. mySQL users see the product as ‘good enough’ to replace Oracle, SugarCRM users see it as ‘good enough’ to replace Siebel, and Linux, Firefox, and Apache users see those products as superior in most cases to their commercial alternatives. Apple based its OS X kernel on a free Unix subsystem (Free BSD), Sun’s gone open-source (the OS, Java, even chip designs). And although not open source, has legitimately proven software-as-a-service is a model for a big public company. The software game is changing with fundamentally different economic models working to create low-cost disrupters. Finding uber-geeks who code for the love of code will be even easier as legions of otherwise marginalized are empowered by the $100 laptop & their equivalent.

Attack of the Bots
The Net is under assault by criminals. Almost every major crime problem on the Net – spam, click fraud, fishing – can be traced to the increasing use of ‘bots. These software robots, or pieces of remote-controlled code, infiltrate PCs and servers worldwide and allow gangs of evil-doers to enlist infected PCs in their schemes. 90% of spam comes from ‘bots. Google paid a $90 million fine from bot-based click fraud. A 19 year old was busted for using bots to shut down competitors to his athletic jersey business. The bot problem is big, real, and getting worse. Anti-spam firm Blue Security tried to leverage ‘white-hat’ good-guy bots to combat spammers. The response from pocket-protector Sopranos was so vicious that the firm’s blog was shut down and no ISP agreed to host the firm’s site.

Thin Slice – Big Market
A decade ago getting one tenth of one percent of the online market meant you had 96,000 people. That’s the circulation of the Bridgewater, NJ local paper. Get 1/10th of 1% today and your customer base exceeds the Washington Post. Note to Michael Porter, the Net redefines notions the ‘niche’ strategy. Now niche is big and in the online space, winner-take-most dynamics push out all but the dominant player. Sites are cheap to build & run, and a large, loyal fan base provides content. Gaia for anime fans is bigger than the online communities for Rolling Stone Magazine or Oprah., the quirky site for less-than-commercial length flash goofs has 4 million visitors a month. A flash in the pan? Maybe. But sites are nabbing serious revenue on a shoestring.

So Many Clicks, So Few Sales
Google earns the bulk of its revenue via pay-per-click advertising. Microsoft & Yahoo have growing PPC businesses, as well. These ad networks pay website operators to run ads on their pages (much like the Google-served ads on the right of the Week in Geek’s site). Since site operators are paid each time an ad is clicked, there’s a big incentive for cheaters to create bogus ad clicks & enrich their coffers. ‘Enriching click fraud” could crater pay-per-click advertising on third-party websites (about 40% of Google revenue), but bot threat aside, there are methods to intercept the majority of fraudsters. Ad networks can track IP addresses for suspicious patterns or uncharacteristic interest from overseas users. Spikes in click-through rates also suggest when something is amiss. And now third-party firms like ClickFacts and Click Forensics can be hired to perform additional monitoring. Pay-per-action is another mechanism that can eliminate fraud, but that’ll tank revenues since users do a lot of browsing online before they buy, and even then they may buy off-line. While click fraud is a big deal, the numbers likely average 10% or less. Predictions of an ad-crash are likely overblown. Advertisers are still sinking record amounts into Google & other PPC mechanisms. Almost all major advertisers are increasing their ad buys and no one would return to PPC if Google didn’t yield measurable ROI. Advertisers should consider PPC fraud akin to shoplifting. They should monitor results to minimize cheating and realize while ROI is likely to be high, the click-to-customer rate will never be 100%.

More Elbow Room on the Net
The world will exhaust its supply of IP address in 4-5 years unless we make a rapid migration to IPv6. To boost standards adoption, the US government is providing heavy incentives. Federal purchasing officials plan to require civilian and defense agencies to upgrade their key network equipment to IPv6 within 20 months. By next spring, the GSA will award two of the largest government contracts ever, totaling $125 billion, to overhaul the government’s phone systems and IT infrastructure. Can you hear the Cisco cash register go ka-ching? BusinessWeek reports IPv6 will help the military bring a battalion online in hours vs. the weeks it takes today. Military equipment firms envision soldier gear that transmits data to central command – check the vitals of an infantryman, the scope of a pilot, or locate a pilfered weapons cache. For consumers, most every appliance you’ll by in 10 years will be IP-aware, and capable of upgrading itself, thwarting hackers, and calling in for repairs. The data will make products more reliable (think how much more reliable elevators have gotten in a decade), and be a boon for add-on-services.

The Holy Grail of Web-to-TV Video
Quartics, a firm you’ve likely never heard of, has begun providing chips to stream video from PC to TV faster, cheaper, and at about 1/7th the power consumed by today’s options. Vendors using Quartics technology will begin dropping set top boxes by Christmas at price points under $200. Fortune predicts the boxes will be less than $100 in a year or two, at which point it will be built into TVs, projectors, and other gear. Devices with Quartics chips will be recognized automatically & will accept WiFi streams. The firm has licensed every available video standard. Stream iTunes, YouTube, Flash, Real, Windows Media, and other kinds of video & it will all work. Chips are programmable so products can be upgraded in the field to comply with new offerings. With Microsoft sneaking content & movies to the TV via XBox (and this it no longer requires Windows Media Center upgrade), Apple set to launch iTV early next year, and Amazon and others clearly itching for a PC to TV link, Net video is poised for breakout.

Private Equity Firms Gobble Up Public Companies
Andy Kessler, hedge fund legend, author, and staple of TechTrek, comments for NPR’s Morning Edition on the recent spat of private equity deals. The discussion follows a recent BusinessWeek cover story on the topic. Of particular note, the KB Toys deal where private equity guys bought the firm for $250 million, pumped $20 million into the firm, then took out over $120 million under crushing debt that brought about bankruptcy. BW argues that while the surge to take public firms private’ makes sense for some firms (e.g. those that need a breather from quarterly reporting while they invest in new tech or new models), much of the headline grabbing recent effort is motivated by Gordon Gekko-esque greed. Careful guys, Skilling needs a roommate.

Goodbye, Bangalore
Visiting India’s hotbed of tech? You’ll be traveling to Bangalooru, not Bangalore. Following the examples of Bombay, Madras and Calcutta, (which, for the less-global, are now Mumbai, Chennai, and Kolkata) Bangalore has rebranded itself, taking a local name meaning “city of cooked beans”. Hey Mayor Menino, how about a sister-city relationship? Boston & Bangalore are not only tech capitals, it seems now they’re both “Bean Town”!

Hong Kong Beats Shanghai as China’s Financial Center
“Shanghai wasn’t ready”, claims Knowledge@Wharton. Hong Kong’s mature capital markets, rule-of-law, and critical mass of English speakers have put to rest early predictions that Hong Kong would die as Shanghai became the favored destination for China-bound cash. But while HK becomes the funnel for funding, it also suffers pollution backdraft, a problem that largely didn’t exist 5 years ago. Being downwind of 200,000 Pearl River Delta factories has led to recruiting problems as “families don’t want to put their kids through a childhood of toxic air”. Still, HK is magnificent and increasingly kid-friendly, as BC MBAs will see next May when we visit Hong Kong Disneyland, built on landfill jutting out into the South China Sea.

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