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The Week in Geek – July 9, 2007 (plus seeking Korean Contacts)

Note: The Week in Geek will post less regularly during the summer months.

Seoul Calling: I’m planning to take BC MBAs to Seoul as part of our IME Asia experience in May 2008. It’ll be our first Korea trip. If you have contacts in S. Korea that would be willing to meet with our MBAs next May, please let me know. And if you’re a Korea-based alum, also drop me a note. Hopefully we’ll have a critical mass to match the successful alumni events we’ve had in Bangkok, Beijing, Hong Kong, Shanghai, Taipei, and Tokyo. Also on next year’s schedule: Beijing, Hong Kong, and Tokyo. We’re always grateful for your suggestions!

What Would Meg Do?
The best boss in the land, according to a recent Forbes cover story, is a woman. Meg Whitman took eBay public at a $700 million market cap, and built a firm now worth $46 billion. Over $60 billion in goods will be traded over eBay in ’07. ’06 revenue was $6 billion with $1.1 billion in profit (a smaller number due to the way eBay calculates revenues, but still impressive, with killer margins). Sure the firm stumbled in China and is in a brawl in Korea, but these results still place Meg’s shop among the most elite performers in eCommerce and retail. StumbleUpon, (recently snapped up for $75 million) is added to an impressive stable of non-auction businesses, with PayPal as the crown jewel. PayPal contributed $1.5 billion in revenue during the past 12 months and processed $11.4 billion in payments in just the last quarter. Skype, still considered ‘a work in progress’ at eBay, has nearly 200 million users worldwide, albeit contributing only $240 million (a measly $1.20/user) to revenue. And analysts are speculating that in the long run, eBay’s Craig’s List competitor Kijiji (recently launched in 220 US cities) could be as important as the firm’s other core businesses. In addition to being one of only ten self-made female billionaires on the planet, Whitman is considered one of the finest bosses in America – ethical, creative, focused. While the auction business slows, can Meg find new growth to maintain the firm’s healthy P/E of 34+ (more than double the average for public firms)? $3.5 billion in cash suggests eBay is still in shopping mode, with Expedia, Monster.com, and AutoByTel all mentioned as possible acquisition targets. More aggressive pundits see the possibility of an eBay-led merger with Yahoo or (less likely) Amazon. The article’s a great overview of the state of eBay and the challenges of high-growth Net superstars facing maturity, and a required read for next semester’s class.

Yahoo Turns to Yang
Speaking of Yahoo, Terry Semel is out as CEO, and co-founder Jerry Yang (who spoke at BC a few years back) has been named CEO (not interim, but the real driver). Since Yang took over, Yahoo has purchased sports media site Rivals.com, and has launched a new media tool, SmartAds. The latter creates customized ads in real-time based on a Web users’ age, gender, location, and online activities.

Commentary: So many people point to Google’s dominance over Yahoo and claim this is proof that there is no such thing as a first mover advantage. There’s a real strategy lesson in Yahoo’s widening gap beind ad-leader Google, but it’s not ‘be a late mover’ – the real story is “pay attention to the market, or get hosed!” Pseudo-strategists looked at Google’s business and saw a commodity, claiming there’s no way to build a sustainable business in search, with its low switching costs and technology that can be easily matched. So Yahoo ignored Google as a competitor. In fact, for over a year and a half, Yahoo hired Google to provide search and displayed the firm’s name in the results. They effectively created the monster that’s eating their business! This is particularly shocking and tragic, given that earlier research (shameless plug) showed that Yahoo regularly took less than two months to match moves by more traditional competitors. And what does “commodity” Google have today? Brand, scale, and an advertising base that continues to show up and pay more each year. Those are assets for competitive advantage. Even a “commodity” business can create them, and even Micrsooft’s deep pockets aren’t making a dent against Google. Yahoo could have killed Google early on. A savvy manager simply had to pay attention to the NetRatings stats showing Google’s rise, mimic the firm’s easy-to-use interface, and squish Sergey and Larry before their firm’s name became a verb. But no one at Yahoo did, and this should be taught as one of the most egregious examples of lack of strategic vision in modern business history. Variants of the same story are also played out (in the extreme) in Friendster’s loss to MySpace and Facebook, IDT vs. Skype, and so many others. But the lesson isn’t “move later”. Hoping a leader will stumble isn’t a strategy, its gambling. Instead, pay attention to the market, and expand the competitive radar to pick up on trends that are gaining traction and that can create assets that threaten your firm. And if you ever hear some blowhard mention there’s no such thing as a first mover advantage, tell them “it’s not the timing, it’s what you do with your lead” – and refer them to a podcast or a Carroll School freshman.

Yang’s appointment is being praised, and recent moves point to a firm with Valley mojo – something that Hollywood Semel (who lived in SoCal and commuted to Sunnyvale) lacked. Since Yang took over, Yahoo has purchased sports media site Rivals.com, and has launched a new media tool, SmartAds. The latter creates the customized ads in real-time based on a Web users’ age, gender, location, and online activities.

United States of Technology?
US innovation continues: despite Europe & Japan’s lead, Apple has redefined hand-held computing. Facebook, SecondLife, and Salesforce.com are emerging as ‘platforms’ or ‘eco-systems’ that define categories. Microsoft, eBay, Google, Amazon, EMC, and the PC industry – all revenue leaders in their categories – are all US-based. But take off the red-white-and blue glasses and you’ll notice that Tech is truly global. Skype (and now Joost) have development & management teams spread throughout Europe. Germany’s SAP leads in Enterprise software. Japan has led generations of video games. And the top spot in mobile phones is held by Finland’s Nokia, followed closely by Korea’s Samsung. Where will the next innovations come from?

Commentary: In class I often refer to 2009 as the year that ‘China Becomes Microsoft’. That’s the time in which China (currently #2 in Net use) will surpass the US to become the world’s largest population of Net users. And in the way developers flock to write Windows apps first because that’s where the market is, China will soon be a magnet for developers seeking an installed base. More disturbing – the US ranks just 15th in high speed broadband adoption. It’ll still be years before the spending power of the avg. Chinese net user matches their US counterpart, but there are real signs the shift is already underway. The Chinese mobile phone market, at an astonishing 460 million users and growing, is by far the world’s largest and will never be overtaken. At a talk at BC’s E. Coast TechCouncil in ’06, Motorola CEO Ed Zander said, when referring to the growth of China & the other BRIC nations, that as a market “the US almost doesn’t matter”. A bit of an overstatement in a month where Apple sold over half a billion dollars in iPhones during launch week, but markets segment, and the biggest segments aren’t yet in Apple’s $600/unit sights. Having the biggest domestic market isn’t necessary to achieve global dominance. Japan long controlled consumer electronics even though the US was a larger market. But, Fortune’s David Kirkpatrick offers evidence of a troubling attitude shift: a recent survey of graduates from the elite Indian Institutes of Technology reports that the new IIT alumni are now more interested in working in India or China than in coming to the United States. Bad news, since the US-based Indian community is so disproportionately and positively involved in founding tech giants.

How the iPhone will change computing
Fortune’s David Kirkpatrick notes how significant the iPhone is – a product that captured a demographic ranging from ‘my boss to my kids’. This isn’t marketing hype, the product defines a category and the public has responded. While official numbers aren’t in, even the low end of analyst estimates suggest the firm sold well over a quarter of a billion dollars worth of iPhones during launch week, moving more hardware dollar volume in a weekend than AT&T sold in any previous month. The unofficial tear-down on costs suggests that iPhone’s cost of goods are half the product’s retail price (before anyone declares price gouging, consider huge R&D and marketing costs on top of that). Reviews are glowing, with complaints largely focused on the slow speed of the AT&T network (early adopting Bostonians are thankful that BC Alum & City of Boston CIO Bill Oates is wrapping the city in a WiFi cloud).

This is such a significant device because the iPhone is a handheld computer that happens to be a phone. The iPhone is essentially a pocket Mac running a version of OS X, the same software that powers the Apple’s desktops and laptops. With millions of users an almost certainty, Apple is poised to create the winning standard for hand-held computing, sucking in developers and applications in the way that Windows drove the PC eco-system. The first iteration of iPhone is currently restrictive of non-Web applications, but that’ll change (there is an official iPhone developer website). An interesting hint at Apple’s new developer appeal was demonstrated when Electronic Arts Game Guru joined Jobs on stage at June’s World Wide Developers Conference. While this means Madden for the Mac will hit this Fall, it’s not a stretch to imagine more games on iPods, perhaps Apple TV, and certainly iPhone (which is loaded with sensors to be exploited). iPhone will get cheaper and faster, one day it’ll carry a hard drive, at which point such an iPhone becomes a video camera (recall Apple sold one of the first commercial digital cameras in the 80s), and flipping the lens to the front on a phone that runs on a faster network means Apple’s killer video conferencing app, iChat, goes mobile. We’ll likely look back at the iPhone launch as a key computing milestone, on par with the graphical browser and graphical computing, and a brilliant strategic move outlining one of the most impressive corporate turnarounds ever. Also of note: Apple’s music dominance continues, with the iTunes music store recently claiming the #3 spot among US music retailers, behind Wal-Mart and Target (a position that’s solid, despite Universal’s grumblings).

TED Talks – MS Photosynth
This is cool! Microsoft provides one of the slickest demonstrations ever of the power and potential of user-contributed content. Photosynth (Windows-only, for now) will stitch together separately taken photos from online sites like Flickr, creating a panorama that is potentially far more detailed than the images in Google Maps or MS Live Local. See a spot you like and you can drill down really, really deep, if the Photosynth bot uncovers matching pics. Simply stunning. You’ve got to watch this video from TED. BTW: TED is ‘the’ conference for tech & business elites, and video of noteworthy talks are thankfully now online. Also, Microsoft added a couple new members to the Windows Live family of services, one called Windows Live Photo Gallery for sharing pictures and videos, and another called Windows Live Folders, which gives users 500 megabytes of online storage for free.

Cybersource Gets Small
If you bought shares in Cybersoure a year ago you’ve scored a roughly 40% return. And by acquiring Marlborough, MA-based Authorize.net, Cybersource is bulking up and gaining a bigger footprint in the payment space. Combined, the companies generated 1.1 billion e-commerce transactions worth $65 billion in 2006. In payment volume, thems close to PayPal numbers (see above). CyberSource focuses on midsize and enterprise customers, serving roughly 20,000 clients including half the firms in the Dow Jones Industrial Average Index. Authorize.Net, focuses on small businesses, with more than 175,000 customers. Cybersource revenue was up over 40% last quarter, while Authorize was up over 20%. CYBS, ranked #5 in Business 2.0’s list of fast-growth companies, is led by Bill McKiernan, BC alum and head of BC TechCouncil West. As a side note, two TechTrek alums work for Jeffries, a firm consulting on the Authorize side of the transaction. Another side – InfoSpace, sold off Authorize.net (then known as Lightbridge) three years ago for just $82 million. That’s gotta hurt.

EMC Offers a Slice of VMware
One of the savviest tech acquisitions in recent memory was made by EMC when it bought VMWare for $635 million in 2004. Unsexy VMware, which provides software to make a single computer behave like several machines, is growing at a killer pace. An IPO for 10% of the firm should raise $1 billion, and value the firm at roughly $10 billion. EMC plans to hold the other 90%, and is using the IPO in part to show the world a diamond-in-the-rough to boost its own stagnant stock value. EMC remains a large, local employer of BC MBA talent. Jobseekers and EMC Eagles may be interested in BC FrontRow’s video of EMC Corporation President Joseph Tucci in frank dialogue about managing organizations and personal experiences that shaped his rise from the streets of Brooklyn to the heights of corporate power.

Wii will Rock Your World
We’re half a year from Wii’s Christmas launch and the console is still in short supply due to unprecedented demand. Wii is selling at rates 2x faster than XBox 360, 4x faster than PS3. And given that Nintendo makes $50 on each box (vs. a massive loss from Sony, reports varyingly put XBox 360 as a money-loser to break even), console sales will net the firm over $1.75 billion above software and licensing deals. Nintendo now generates more profits per employee than either Microsoft or Google. In class we constantly focus on ‘differences’ for competitive advantage, and the Wii seems to have found the sweet spot – expanding the market beyond young adult males. Not being high-tech is an advantage to game mfgs, with Wii games costing $5 million to develop, vs. $20 million+ for HD versions on 360 and PS3, so developers are flocking to Nintendo. One key issue – is a novel controller enough to build a sustainable competitive advantage on, or can this be matched (and commoditized) by others?

The Domains of the Day
In May 1999, a former student of mine took his class project and, in nine months, raised $7 million in capital, launching the business with three SuperBowl ads. Sadly, the business, Computer.com, didn’t last two quarters. But the seeds of acquiring high value domain properties led Mike Ford’s partner, Mike “Zappy” Zapolin, to build more online businesses from obvious domain names (this, after all, is the guy who made a boatload buying, then selling, beer.com and creditcards.com). BusinessWeek profiles Zappy and his Boston-based Internet Real Estate Group, focusing in on Chocolate.com, a firm now on track to clear $2 million in revenue and that now ranks ahead of Godiva and Hersey’s in Google searches. The firm owns 17 properties, benefiting from the fact that roughly one in six Net users never go to a search site, and instead take a shot at direct navigation.

How to Scale Mt. Google
So how does a firm like Chocolate.com (see above) climb Google rankings? SEO. Search Engine Optomization is one of the hottest topics in marketing, and the keys are outlined briefly in an easy-to-absorb Business 2.0 article. TechTrekkers enjoyed an SEO talk from the head of jeans super-site, Zafu.com earlier this year. Now you can get the scoop. It turns out links from .edu domains carry beucoup Google ranking points. Not true with Ask.com. Those weasels don’t even list Gallaugher.com on the first page of ‘Gallaugher’ results. No doubt it’s a broken engine that sees the many links from inside the bc.edu domain as some sort of fraud. And you paid $1.85 billion for that, Barry Diller? Who handles your Q-A?

The Google Blogger vs. Sicko
Corporate blogging sounds like a great idea, until an official post steps on the big ‘ol third rail of controversy. When a Google employee posted negative comments about Michael Moore’s new film, Sicko, ones that support the Health Care Industry and encourage increased use of Google’s advertising products, outrage erupted and an apology was quickly issued. An important lesson for all in an age where digital comments and photos linger forever. Advanced (or perhaps retroactive) apologies from yours truly if any of our posts cross a line. In unrelated Google news, the firm purchased GrandCentral. The startup promoted a website where a single phone number could follow a person for life, allowing others to reach you despite moves, employer shifts, etc. A nice switching cost if the idea gains traction.

Telecom: Back from the Dead
The telecom collapse earlier this decade was the worst US industrial implosion since the Great Depression. Investors saw $2 trillion in market value vanish in little more than two years, dwarfing losses from the dot-com collapse. Level 3 saw its stock drop from $130 a share to $1.98 in just 18 months, WorldCom was the nation’s largest bankruptcy ever, and a host of telcos took the dirt nap. But for evidence of the whipsaw swings and phoenix-like resilience of tech, consider that telecom industry profits this year will hit an all-time high, exceeding the last watermark, which occurred in 1998. More than half the US fibre capacity was unused in ’02, but while the amount of glass in the ground has doubled since then, only around 30% remains dark. Thank YouTube (and perhaps BitTorrent) for resurrecting telecom – many broadband firms very much like Eatel (click this link to check them out) claim video now sucks up 50% or more of Net bandwidth and is the primary growth driver. A standard-sized video consumes 1,000 times the bandwidth of a song. An HD video sucks up 7-10 times more than that. Net traffic is up 75% a year, on average, over the past three years. Broadband adoption in the US still lags much of the developed world, but more than half of US households will be broadband users by year-end. That means developers can assume most users have high-speed links. In ’06, Google spent $1.9 billion, or 18% of sales, on telco-related Capex to speed video and net searches.

China: A Clean Tech Gold Rush?
The Middle Kingdom is gaining raw GDP dollars faster than any nation in history, but all of this is coming at a price – it’s killing the planet. While the average American pollutes several times more than the average Chinese, a political system where local politicians have a stake in local businesses and are also ostensibly stewards of the environment mean no checks and balances. Fortunately Beijing is waking up to the choking reality, and as a result China is almost certainly set to be a center for green-tech innovation (if not, expect a Soylent Green future). While venture funding for clean-tech deals in the United States soared from $522 million to $884 million. Venture capitalists are increasing their clean-tech bets in China, from $7 million in 2004 to $222 million last year. Members of the BC TechCouncil were treated to green tech talks on both coasts this year. Eagles to the rescue!

The Rush to Test Drugs in China
Vital Therapies of San Diego had trouble finding enough US patients to test its artificial liver on, so it went to China. The Middle Kingdom has more Hep B patients (the disease destroys the liver) than the combined populations of Britain and France. Testing in China also makes sense because costs are low (clinical trials cost 15% of what they’d run in the West), and because Beijing insists treatments be tested locally before going to market. Astra/Zeneca and Novartis have announced $100 million in Chinese research investments, while Lilly has some 35 trials underway in China.

Can China Defuse its Stock Market?
We’ve seen freaky gyrations in the Chinese stock market over the past year and a half. As of early June the Shanghai index was up 50% for the year, after a 130% gain last year. But it’s important to realize that most professionals see Chinese markets as little more than a casino. Insider trading is rampant, there is little reporting transparency, and there are hoards of unsophisticated mo-mo investors. Locals plow money into China’s markets because there are few other viable investment options, other than equities. Businessweek reports that many investors are pensioners, the jobless, or individuals who have mortgaged homes and plowed money into stocks. In a market without options, futures, or short selling, people only make money in a bull market and lose big when a bear shows up. China has advanced its infrastructure with world-beating aplomb, but if it can’t get its bourse game in order before the bubble pops, world markets may suffer and managing domestic unrest could get ugly.

100 Best Places to Work in IT 2007
Geeks once again have their pick of jobs. If you’ve got tech talent, you might want to browse the list & find out who made Computerworld’s honor roll.

Questions for Reed Hastings
A Fortune Q&A with the founder & CEO of Netflix (a favorite case in my courses) offers some great sage advice. Among the gems: Hastings claims that one decision he would have changed would be to go public later than they did. Once NetFlix was public, quarterly reports showed Blockbuster, WalMart, and others got a chance to see just how profitable a business subscription DVD-by-mail could be. Hastings also discusses the firm’s video streaming efforts and answers questions about throttling and the NetFlix prize.

HP Reels In Hollywood
HP is after the long tail. It turns out that while a big box firm will offer 5,000 DVD titles, an online firm will sell 40,000, and NetFlix provides subscribers with over 70,000 titles, there are over 1 million TV shows and movie episodes that been made and most of that catalog is inaccessible. HP believes it’s come up with a system that can store film archives and burn DVDs on demand, printing packaging, and shooting off obscure titles that currently don’t pay to press DVDs. Business 2.0 offers the example of Different Strokes, the 80s sitcom that saw 26,000 YouTube views of a season opener, but that is currently considered not marketable enough to press onto DVDs. An HP-fed system could be offered to a host of retailers, with WalMart getting first crack. Tie that into the back-end and link it to the NetFlix ratings database and video entertainment will be redefined.

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