The Week in Geek – Feb. 6, 2007
Media Note: Ted Reinstein and the kind folks at the Chronicle TV program stopped by Fulton Hall last semester to film me “talking geek” with my students. It seems this will make the Wed. 2/6 show. Tune in to Channel 5 at 7:30 pm to catch it.
Microsoft and Yahoo – Happily Ever After?
In Q2 of ’07 a milestone was achieved: Google’s revenues exceeded Microsoft’s Windows PC sales. Granted, Microsoft earns 74% margins vs. less than 30% for Google, but the rapid growth of Google’s business is astonishing – and attractive. If Redmond wants to move its stock price, it needs new billion-dollar businesses, and it’s put up the cash to play. Microsoft first spent $10 billion building a web business, but has seen its search share steadily decline over the last two years. Last summer, Microsoft spent over $6 billion for aQuantive to get into (among other things) the kind of display ads that will counter Google’s $3.1 billion DoubleClick buy. Now in the boldest move in Microsoft’s history, Redmond is ready to fork nearly $45 billion for Yahoo. While Microsoft’s got a lot of coin – over $21 billion – even they can’t make the purchase without adding beaucoup debt (although the $1 billion a month Windows earns will make it up quickly). And remember, through all this Yahoo wasn’t standing still. During the last year it acquired ad firms RightMedia and BlueLithium, all while rolling out its new Panama ad platform.
So here’s a quick score card: In Google’s favor, the firm has a great brand (it’s a verb), scale (big server farms), and controls 60% of search & that’s where the coin is. Even if firms match Google’s infrastructure, rivals’ smaller numerator (market share) means lower margins. Plus Google has the largest number of text advertisers, and the biggest network of third-party sites in its ad network. There’s no indication at all that this biz is under threat. Now the minuses – lump together AdWords (search ads) and AdSense (Google ads on third-party sites like my own & the NY Times) and the firm is a one trick pony. Granted, it’s a trick that in Q2’07 was more profitable than all of Disney, but at this point text ads are pretty much all Google’s got. GMail is a distant third in e-mail, maps are slick but contribute next to nothing to net income, and outside of search, the firm controls precious few sites that run its ads (e.g. limited distribution channels for ads). Recall Google spent $900 million to run ads on MySpace, and spent nearly $1 billion to install Google tools on Dell PCs. Google’s recent stock swoon is at least partly because it claimed these kinds of investments weren’t as lucrative as hoped. And while no one’s leaving Google, the firm does have low switching costs. Nothing keeps users bolted to Google search, advertisers can take their pocketbooks elsewhere, and third-parties can move from AdSense to a rival (like MS adCenter) by modifying just a few lines of HTML code.
The benefits for Yahoo & Microsoft? Rationalizing costs. The separate data centers these firms rely on are so expensive that they’re being built next to cheap-power hydro plants in the remote Pacific Northwest. If these huge fixed costs can be combined, margins will go up. Also, Microsoft has lots of tricks. Windows & Office gush billions a year, so Redmond can afford a long and costly campaign. Cons: even with a combined 30% share, margins won’t match Google’s anytime soon. Yahoo’s share is sinking and there’s no evidence that’ll change. And while the fixed cost of server farms and some management functions might be rationalized, there’s a lot of redundancy, too. MSN and Yahoo have several competing sites (news, sports, finance). Will these get melded together quickly, holding share while shaving costs? Then there’s the challenge of bringing two very different corporate cultures together. Other than cash, Microsoft’s biggest potential weapon against Google is its distribution channels. If MS can embed search into MS product lines (Windows, Mobile, IE, MSN, and more) without raising anti-trust concerns, it could snare share. This is a big if. The Europeans, almost certainly, won’t stand for this kind of integration. Recall that Europe forced the unbundling of Windows Media Player from Windows, and played a role in making it easier to switch the default search in Internet Explorer. The deal might also be bad for startups & their backers. Where once there were three big, cash-rich net firms as acquirers, there may soon be two.
Google has boisterously opposed the deal. While some reports have it lobbying behind-the-scenes for alternatives, it’s not going to buy Yahoo & likely no one else will pony up the 60%+ premium that Microsoft is willing to pay.
A final note on the bad coverage of Google & sustainable advantge. To be sure, Google is a great firm. The pundits who claimed this was a commodity business back in pre-IPO ’04 got it wrong. Google now has scale, brand, and at least some degree of lock-in with advertisers & firms running Google ads on their website. Now many of these same pundits are claiming strong Google network effects in search, but they might want to listen in on the podcasts to the left of our site for some 101 on tech strategy. We can say Windows has strong network effects because more Windows users attract more developers who write Windows programs, which in turn attracts more Windows users (a two-sided effect). There’s also a single-sided benefit in that Windows users easily communicate with one another (sharing files, sharing PCs without learning different commands, etc.). What about Google? Well, more searchers attract more advertisers, which attract… hmm … Not much of a feedback there. It’s the rare person that’ll admit they go to Google ‘because of the ads’. There is some network effect for Google’s AdSense business: more advertisers attract more third-party sites wiling to run the firm’s ads, which attract more advertisers – but Google’s users are outside this loop.
Where are those Missing iPhones? Everywhere!
Jobs says Apple has sold 4 million iPhones. AT&T says it’s only activated about 2 million. So where are the rest? The NY Times says employees at big city Apple stores regularly see foreign buyers picking up multiple versions, and comments from Rio to Beijing claim unlocked iPhones are on the shelf worldwide in multiple, unauthorized sales outlets. I’ll be in Beijing, Tokyo, Seoul, and Hong Kong in May, so I’ll pop around electronics stores to see if I can verify reports. If ture, there’s good and bad here. The bad – Apple is said to make roughly $10 per month from each AT&T subscriber. Unlocked iPhones mean no additional revenue. The good news? This shows heavy worldwide demand for the device, even as an EDGE offering. The newly released 16GB iPhone is likely just the first upgrade we’ll see this year. An informal survey of my students shows many ready to buy one as soon as 3G becomes available. Some doubt whether Apple will hit 10 million units by year-end, as promised. If a 3G version hits, they’ll blow by that number.
Amazon Buys Audible
$300 million nets Jeff Bezos Audible, a firm with an 80,000 title lineup, magazine content like the NY Times, and the exclusive audio book firm on iTunes. The Times reports that all audiobook sales in ’06 were $923 million, with Internet downloads accounted for 14%. ’07 numbers are surely even higher. More good news – the Kindle has exceeded all forecasts – they can’t keep ’em in stock. Not bad for a gen-one product. And as further evidence that Amazon sees its future increasingly in bits, not atoms, it has sold off its Netflix-like UK and German DVD-by-mail business. Too bad the Street didn’t appreciate Amazon’s analyst-beating numbers. Full-year profit was up some 150%, to $476 million on sales of $14.84 billion. Analysts didn’t like narrowing profit margins, but this is the same group that has consistently misjudged the firm for years.
Oracle & Sun – Two Software Paths that Converge
Oracle is buying enterprise middleware maker BEA Systems for $8.5 billion, up from an initial bid of $6.7 billion. Also in an acquiring mood, Sun lightened its wallet by $1 billion for an Oracle competitor, open-source database firm MySQL, of Sweden. MySQL is the real deal, powering big chunks of Facebook, Google, Yahoo, and YouTube. Two interesting parts of the angle: 1) Oracle doesn’t control SQL, it’s an open standard, so MySQL is a much greater threat to Oracle than, say, Linux is to Windows. 2) Sun is a big Oracle partner, with lots of Oracle product running on Sun boxes. Silicon Valley is the world epicenter of coopetition.
Google, Facebook Competing for CS Grads
According to TechCrunch, Facebook is said to be offering $92,000 for computer science undergrads, and Google has increased some offers to $95,000. Google offers students with a Masters degree in CS as much as $130,000. Future’s so bright you gotta wear shades.
Online Golf Game Handicaps Productivity
Fortune points out that Internet gaming is what drove Activision into Vivendi’s arms a few weeks back, creating the largest videogame publishers in the world (World of Warcraft plus Guitar Hero, among others). Now the magazine predicts the next big thing – perhaps you’re using it already – is the free & addictive multi-player web-based game, World Golf Tour. The beta site is just a nine-hole prototype, but it goes live in about six months, first with a pixelized Ocean Course at Kiawah Island. Six more courses will be online by year-end, all rendered at $200,000 a pop from shots taken at multiple angles by helicopter or radio-controlled drones. That’s cheap compared to the cost to animate a typical high-end video game. The site hopes to make money through advertising, sponsorships, and premium offerings. You can meet your buddies online for a foursome, no matter where they are, as long as they’ve got a browser. In the Valley you’ll often hear geeks refer to the 9 million member, $1 billion a year, World of Warcraft as the ‘new golf’. Well, the new, new golf may be a form of the old golf.
Students Skip Tijuana for Google
The Heights profile’s BC’s TechTrek experience. Student demand now exceeds slots in both the grad & undergrad program. The undergrad program is 50% female – a rate higher than the IS concentration and the entire School of Management. More evidence of IS appeal at BC – Information Systems enrollments have nearly tripled over the last three years. ComputerWorld, are you getting this? Where’s our feature?
More Kudos for BC