The Week in Geek – March 24, 2007

Flaws in Blockbuster’s Revival
It looked for a bit like Blockbuster TotalAccess was finally working. Blockbuster lost $1.2 billion in ’05 (a year when NetFlix posted record profits up seven fold), and posted losses in first three quarters of ’06. But the nation’s #1 video rental chain surprised everyone with a Q4’06 profit that doubled street estimates. Not so fast – the last quarter Blockbuster profits plunged 28% due largely TotalAccess costs (ouch), while NetFlix (which recently delivered its billionth DVD) exceeded its targets. And this week, Blockbuster’s largest shareholder, Carl Icahn, ousted the firm’s CEO, the architect of TotalAccess. A table comparing top rentals at the firm suggests more value in NetFlix long tail, and bloggers have panned Blockbuster TotalAccess, but the real factor has to be profitability. Margins running stores side-by-side with an online operation are always going to be weaker than the pure-play. Unless Blockbuster can both make the dual channel consistently profitable and block NetFlix power to cut prices (some suggest BB may actually raise rates soon), the firm will continue to suffer. It’s still got to hurt to be NetFlix, though. With WalMart, Amazon/Tivo, Microsoft, and Apple offering video-over-Net, the 1,000 movie NetFlix streaming effort (not very long-tail compared to the 75,000 titles in their warehouses) looks like it’s gonna get thumped.

Where is Microsoft Search?
GatesCo dominates the desktop, but Redmond is getting creamed by Google in search. Over the last two years, Microosft’s search share dropped from 14% to 9.6%, while Google is up 10% to at 56%. For Microsoft that means about 300 million lost searches/month. And with more eyeballs on Google ads, Sergey & Larry’s shop nets 50% higher revenue per search than other websites. BusinessWeek solidly dissects Microsoft’s marketing missteps – the firm confused consumers by seperately branding related online resources as either “MSN” or “Windows Live”. Microsoft does have a potential targeting advantage over Google. Since users of Microsoft services give up gender, age, zip code, and other demographic information, the firm can serve ads that are more targeted. But the prospect of diverting serious money from Google is a long way out. Microsoft has made other search moves recently. It will pay Lenovo to preload Windows Live Toolbar on its machines, it’s experimenting offering training & service credits of $2-$10 per computer to large firms that direct employees to Windows Live Search, and it bought voice search service Tellme networks for over $1 billion, and MedStory, a consumer health-oriented search engine.

Borders Shelving Amazon Alliance
Visit Borders.com today & you see an Amazon.com co-branded site. But at Borders’ initiative the two firms are parting ways. The #2 offline book chain (behind Barnes & Noble) is bleeding. It lost $73.6 million last quarter & is shuttering half of its WaldenBooks stores. I don’t get the strategy of leaving Amazon to go it alone, though. Trying to carve out a profitable position online is going to be brutally difficult for Borders. Amazon now moves more books than Borders, so the firm has no scale advantage to undercut pricing. With stores nationwide, Borders will have to charge taxes in all 50 states (Amazon collects sales taxes only on books sold in Washington, North Dakota, Kentucky and Kansas). And Borders will be years behind Amazon’s ship-to-one logistics expertise. Anyone in my freshman class knows see how dangerous the ‘straddling’ strategy is. The only benefit is a dual-channel on/offline synergy for the buying program. I’m a member of Borders buying program, but hold an Amazon visa, too. Unless Borders figures out a way to dramatically underprice Amazon online, there’s no way a customer like me will migrate online buying to the new Borders.com. The Borders board needs a strategy session with our undergrads. Still, the move will cause Amazon a pinch of pain, scraping $80-160 million from revenues and perhaps 2% from profits.

Apple Opens the Door to Running Windows
Now that Macs run Windows with bootcamp or (even better) Parallels, Apple has flattened the switching cost barrier that held back many Windows users. But consolidation at multi-platform shops also makes Macs the logical machine-of-choice. Macs at Wilkes University used to make up 15% of lab computers. But now that Macs do Windows, Macs are on their way to taking all the slots. Even though Macs may be more expensive than bare-bones PCs, the cost savings in consolidating one platform outweigh the higher price. And a single platform simplifies administration. Last year, Apple accounted for 4.4% of all new PC shipments in the U.S. professional market, up from 3.6% in 2005 and 3.2% in 2004. Apple’s share of total new PC shipments in the U.S. jumped to 5.4% last year from 4.5% the prior year, Gartner says. Nearly all of the rest of the market is Windows. A rough look around campus has me guess that my students are about 3x more likely to be carrying a Mac this year than in previous years. Over the holiday quarter, Apple sold 1.6 million Macs, 28% more than in the same period a year earlier and nearly five times the growth in global PC shipments overall in the period. More than half of Mac buyers were new Mac converts.

Competition, Technology Enhance the DVR
Most folks agree that TiVo has the most innovative feature set of any DVR (see table in the article). But the firm’s subscriber base is up only 100,000 from last year. Why? A lesson right out of our Tech & Strategy course. Tech alone isn’t a sustainable competitive advantage in this case, even though the firm enjoys several patents that keep its interface super slick. TiVo’s competition is being bundled with cable providers – a vital distribution channel to addressing the market. So TiVo faces convincing users to pay a lump sum & a subscription fee, plus deal with the daunting task of hooking another box to their set top (think how many users still have the blinking VCR clock). All while its competition is installed by a service tech & is offered for the price of a week’s worth of lattes. Plus deep-pocketed rivals are innovating like mad. Time Warner rolled out 10 new DVR features last year. Verizon allows 3 TVs to be controlled off one DVR hub, other carriers plan multi-room offerings soon. And none of these firms see TiVo as their real competitor. If the TiVo challenge isn’t obvious, our Strategy & Technology reading may be worth a peek.

Beyond Virtual Reality
A BusinessWeek cover story offers several slick examples of motion capture technology that is spreading far beyond the Wii (see cool slideshow and video). Intel hopes you’ll soon be able to toss your remote control in favor of gesturing at your TV. Thanks to motion sensors in the devices, Verizon phone & Mac laptop users can jiggle their devices to play games like ‘move the marble through the maze’. Siemens is developing ‘drowsiness detection’ to alert sleepy drivers when recognizing the identifiable facial expression that occurs five seconds before falling asleep. The Las Vegas Airport will soon feature plasma screens with interactive ads where a car might follow alongside a traveler striding near the ad, and superimpose his/her face on the driver. Target, adidas, and Clorox are running ads on subway walls in NYC. The 20′ x 6′ Target ad has swirling snowflakes that users can spin in the air by waiving their hands (see YouTube video). The makeup department will soon be trumped by special effects, with computers able to digitally morph an actor’s face so they can play a role from childhood to old age. Ford created a digital version of a factory to analyze reach & posture. The firm claims that the resulting design reduces expected disability cases by 80%. When designing the new F-35 stealth fighter, Lockheed Martin used virtual reality technology to save $50 million in design changes & avoided 50% of the cost of a mockup.

Grudge Match in China
The US PC market is flat – growing just 2.6% last year. So PC makers are looking to China. Although only 7% of the population owns PCs, sales grew 21% last year & China is on track to be the world’s biggest PC market by 2013. Lenovo dominates China with a 36% share. HP & Dell are #3 and #4 with just over & just under 9%, and both have scaled up Chinese R&D offices. Dell’s direct model depends on consumers understanding PCs already, but this doesn’t work well with first-time Chinese buyers who are leery to purchase a box sight unseen, especially when the cost is so high relative to the avg. Chinese salary. To grease the wheels of adoption, Dell has introduced a new PC specifically designed for the Chinese market. The tiny & quiet EC280 uses a quarter of the power of a conventional laptop and has been simplified for the first-time buyer. Experimental Dell ‘customer experience centers’ in Nanjing & Chongquing allow customers to inspect a Dell before buying. It’s hard to imagine this’ll be enough when Lenovo sells at over 12,000 locations nationwide.

Head Start for Clean Tech Startups
BC TechCouncil recently ran breakfast talks on “greentech” on both coasts. The topic is blazing hot & Boston College has winning experts on our faculty. Faculty from the BC Physics Dept., led by Prof. Mike Naughton, won 2nd Place (but the Audience Favorite Award) at the Ignite Clean Energy competition. Now the idea is a firm, Solasta, focusing on developing ultra-high efficiency solar cells using nanoscale elements. BusinessWeek writes “it’s been difficult to make solar cells that are both thick enough to collect ample sunlight and thin enough to harvest electricity without significant losses. Solasta’s technology solves this problem and increases efficiency”. BTW: Alums, be sure to get on the event mailing list by sending an e-mail to [email protected]. This spring’s dinner is coming up & the guest will be spectacular!

LevelUp with N’Gai Croal
On Monday, March 25th, BC will welcome Newsweek Editor N’Gai Croal to Fulton 250 for a 7PM talk. N’Gai is one of the most prolific & influential writers in the digital media & video game space & we’re thrilled to have him speak as part of PJ McNealy’s New Media course. Croal also writes the influential blog ‘The Revolution Will Not Be Digitized‘.

Twitter: All Trivia, All the Time
The mobile phone service, Twitter, that allows users to text updates on their status to subscribers, is a bit too “Truman Show” for my liking. Hard-core users will send notes on their current activities: (e.g. ‘Going to the gym’, ‘Groceries for mother-in-law’). Presidential candidate John Edwards sends out updates on his schedule (“Washington D.C. today. About to make remarks at the Int’l Association of Firefighters”). But Ross Mayfield, CEO of SocialText (the firm that providers our wiki software) suggests in a BusinessWeek article that there may be a use for this kind of life posting. Send a note that you’re sick or at lunch & the world knows why you’re not returning calls or IMs. Our students spent time with Ross as part of undergrad TechTrek. He’s a forward-thinking guy & it’s worth paying attention to his thoughts on collaborative, team-driven, Web 2.0 experiences.

GeekDad
Yes I am one. Ian put his first website up (complete with video tutorial) before he started first grade. And one of my proudest moments was when the “M” words he listed for his kindergarten homework were “Milk”, “Mouse”, and (I kid you not) “Mozilla Firefox“. But there are legions of geeky papas out there. Wired’s new blog helps dads feed hungry young minds with wonderfully creative ideas.