The Week in Geek – April 6, 2007

Is Google Too Powerful?
Google handles 56% of all Net searches, it scored over $3 billion in profits last year on over $10.6 billion in revenue. And its market cap is bigger than Time Warner, Viacom, CBS, ad agency Publicis Groupe, and the New York Times, combined! Remember, this is a firm that wasn’t even publicly traded until August, ’04. The profits are real, but to keep the market cap, Google needs to push growth beyond text ads. YouTube, Office Suites, free wireless, and ad sales in magazines, on the radio, and over TV are all underway. BusinessWeek speculates that set top box initiatives can’t be far behind. Imagine a future scenario where Google manages a firm’s advertising. Clients like P&G could turn over a significant portion of their ad budget to Google, allowing the firm to allocate spending across channels, with payouts based largely on performance metrics. Google’s formidable $11 billion cash horde puts it in Microsoft territory, where it can experiment & fail several times until it reaches success (conventional wisdom on Microsoft has always been that Redmond’s first two tries will be learning attempts, but ‘version 3 will kill you’). Switching costs are low, but Google is either a first innovator or fast follower, so mass migration to a rival is unlikely. The biggest threat? If Microsoft can leverage its vast assets for distributing a Google alternative. Balmer has stated that Microsoft will step up efforts to embed their own search products into Vista over the next few months. Early results show promise, but not yet at Google’s expense.

DRM-Free iTunes Music
EMI is the first of the major music publishers to heed Steve Jobs’ call for music free music of Digital Rights Management (DRM) locks. Starting in May, the third largest of the big four labels will offer its entire digital catalog on iTunes with a $1.29/song DRM-free option (note: while most of EMI’s big names are in the digital library, there’s still no deal for EMI tunes from the Beatles). Songs will be encoded at a higher quality (256kbps vs. 128kbps standard) and offered in the open AAC format, so these songs can be shared with a host of non-Apple music players including the Zune & PSP. Album prices will remain the same, even for DRM-free, higher-quality tunes. Already bought locked music? You’ll be able to upgrade to DRM-free for just $.30 a track, a remarkable concession from an industry that has profited handsomely from past format changes. On a related topic, iTunes now has a ‘Complete my Album’ feature, where users can ‘upgrade’ to a whole album at a reduced price that subtracts out the cost of iTunes tracks already purchased. Jobs predicts 50% of major label digital tracks will be DRM-free by the end of the year. And in BC Apple news – the East Coast Chapter of the BC TechCouncil is fortunate to welcome BC Alum and Apple SVP of Marketing, Phil Schiller, as the speaker at the spring dinner.

The Album, a Commodity in Disfavor
Last year, digital singles outsold plastic CDs for the first time. So far this year, sales of digital songs have risen 54%, and buyers of digital music are purchasing singles over albums by a margin of 19 to 1. An unusually weak release schedule, and shrinking floor space in retailers has resulted in a 16% drop in album sales this year. Is the album out and are digital singles the new 45s?

Why Globalization is Good
Priority Reading: Over the next 8 years, 1 billion Asians are set to make the ‘the great leap forward’ into the middle class. A Forbes cover story & forthcoming book (The Elephant and the Dragon by Robyn Meredith) argues that Globalization is not just good for the rich – it is especially good for the world’s poor. The aggressive participation of India & China in the world economy lifted 200 million people out of grinding poverty. As Vietnam’s economy grew 6% annually, the ranks of the 45 million poverty-stricken Vietnamese dropped 7% a year. Ugandan poverty fell 6% a year as GDP grew 3% annually. In India, where 77% of the population lives on less than $2/day and a third of the population is illiterate, the only likely route forward is globalization. Foreign investment in India was up to $7.5 billion last year – a huge increase, but this is an amount that China attracts every just 6 weeks. Per person income in China has vaulted from $16 per year in 1978 to $2,000 today. Reforms have created 22 million Chinese businesses that now employ 135 million workers – people who would likely have otherwise remained peasants like the generations before them. Pressure to keep factories safe, clean, and honest is vital, but seemingly scandalously low S. Asian wages of $4/day can be a vast improvement over the pennies a day workers earned a generation ago.

Commentary: Shouting down sweatshops is the easy part. Figuring out how to plot a just path to globalization is tough. New theory suggests a poverty culprit is not enough free trade, rather than too much (for background, read Travels of a T-Shirt, by Georgetown Economist Pietra Rivoli). As we strive to become ‘men and women for others’, what is the right path for managers and for citizenry? Do we endorse advancing economies while overlooking harsh governmental abuses today, assuming democracy is likely to follow? Are we brave enough to earnestly confront the troubling question of cutting US agricultural subsidies in order to assist world farmers? Conservatives & liberals can be found on either side of these questions and these labels do little to push critical reflection and a thoughtful agenda. The hard part is wading into the gray area where a perfect path cannot be found, and trying to choose the best option among flawed alternatives. And what will the fast-forward, new industrial future of the developing world mean for the environment? These are big, ponderous issues that will wallop the current generation. Make it a priority to understand the topic. Read broadly, deeply, and with an open mind.

NeNetFlix vs. Naysayers
A week after Blockbuster’s CEO is out, NetFlix CEO Reed Hastings was invited to join Microsoft’s Board of Directors. Some updated stats on the firm’s success: The NetFlix subscriber count grew 51% last year to 6.3 million (more than 3x the number using Blockbuster TotalAccess). Revenues also grew 46% to nearly $1 billion. Netflix now sends out 1.5 million DVDs a day. The current DVD streaming service offers only 1,000 titles, but Hastings expects 5,000 titles by year end. That’s more than the 3,000 you’ll find in a typical Blockbuster, but still 70,000 less than the number of DVD titles the firm offers via mail.

Hastings offers a great quote on the difficulty of figuring out when to move first “The challenge for a management team is to figure out which are real threats and which aren’t. During the Internet bubble, Blockbuster was very disciplined. Their primary competitor, Hollywood Video, bought a video sales company for $100 million – Reel.com – and then plunged another $200 million of losses into it and ultimately cratered Hollywood’s balance sheet on a business selling VHS online. It’s conventional to say, “only the paranoid survive” but that’s not true. The paranoid die because the paranoid take all threats as serious and get very distracted.” Also of interest, NetFlix says next-gen DVDs represent only about 1% of its offerings. The perception of a format war is causing customers to delay buying players until a winner is clear.

TJX Hack – The Biggest Ever
Regulatory filings detail that Massachusetts-based TJX, a retailer whose 2,500 stores include Marshall’s and TJ Maxx, has been the victim of the largest digital credit card pilfering in history. Regulatory filings say 47.5 milion cards were stolen from TJX systems. The intrusion was so deep, that hackers even stole the TJX deciphering tool, allowing access to encrypted files. The firm has paid over $5 million on investigation and security fixes, and crushing lawsuits are expected. While the feds are nabbing crooks using the stolen cards, these were bought from the unidentified original hackers. Feds call it “the perfect crime’ and doubt the hackers will ever be caught. Yet another stunning indication that the CEO suite needs to take tech seriously and treat customer data as a sacred asset, or be prepared to suffer devastating consequences.

The Biggest Website You’ve Never Heard Of
Photobucket has 38 million users and more unique monthly visitors than Facebook (although Facebook users linger far longer). Photobucket allows digital pictures & video to be linked to Facebook, MySpace, and other sites. The whole package creates killer switching costs. Fortune writes: “Once somebody has stored their photo somewhere they will guard it zealously. Their online social life, so built around images, depends on it”. It pushes out some 2.5 billion images a day. It’ll break even later this year and is almost certainly being courted by acquirers. What’s interesting is that in an age of Flickr (Yahoo), Picassa (Google), and WebShots (CNet), among others, an unaffiliated startup can create a value proposition that beats the big boys.

Kessler Interviews Facebook Founder
Two years after its founding, Facebook has 16 million users & a has reportedly rejected a billion dollar offer from Yahoo. TechTrek’s favorite business author, Andy Kessler, nails the difference between MySpace & Facebook – the latter’s advantage is exclusivity. Facebook allows users to “leverage the power of connections via the Internet, while at the same time maintain tight personal control.” 1/3 of Facebook users post their cell phone #s, a stat MySpace will likely never boast. There is a fun Zuckerberg anecdote. While at Harvard, the Facebook founder was about to tank an exam in the course “Rome of Augustus” (he spent the semester writing code). The exam required identification & commentary for some 500 pieces of art, Zuckerberg hacked together a site & allowed others to post notes. The site was filled in a day. Pretty wiki-like. He aced the class & claims grades on the exam were never higher.

Cold Cash from a Hot Site
Last year MySpace delivered 31.5 billion page views a month. As BusienssWeek puts it, that’s as if “everyone on the planet visitd the site once a week“. But the firm’s ad rates are terrible. MySpace charges just $1.50 CPM (cost per 1,000 ‘impressions’ or views) vs. an average of $40 on video sites. While ad revenue will be just over a quarter billion this year, a quarter billion in real profits are expected in ’08, when Google starts serving ads (part of a $1 billion pact struck last year). MySpace is also introducing an eBay-like service, allowing users to hawk tickets & merchandise from personal pages. And it takes 70% of the $2.99 monthly fee that Cingular charges for its Mobile MySpace service.

Yahoo Offers Unlimited E-mail Storage
The free e-mail market is a great case study in competitive advantage, timing, and the value of switching costs. Yahoo & Hotmail launched first and have garnered 250 million and 228 million users, respectively. GMail launched in 2004 and it’s (initial) 1GB of storage trumped the 4-10MB available from rivals. But tech innovations can be easy to match, and Yahoo had a 1GB offering by ’05. Today Yahoo offers unlimited e-mail & GMail’s rivals remain 4-5 times larger.

Google Maps out Mashups
Google recently introduced a nifty new service, My Maps (activated via the My Maps tab at maps.google.com), that allows even non-programmers to create map mashups. Users can drag around pushpins, put in their own data, even embed photos & video. Very slick! PC World already has a brief tutorial online, complete with links to some fun examples. When someone figures out how to create a group-editable map, let me know. I’d love to create a map where current & former students can enter their home towns. A special shout out is due to BC Eagle Tae Kim, who is on the Google Geo Product’s team. Great work!

How Businesses Are Using Web 2.0
McKinsey’s survey results on corporate use of Web 2.0 suggest most are pleased, and firms wish they’d have acted faster in deploying efforts.

The Ultrafast Future of Wireless
Researchers at the University of Utah have discovered how to created a new metal film that can help antennas control terahertz radiation. If the product can be commercialized, it could pave the way for tether-free connections that are over a thousand times faster than WiFi.