Random Ranter that Rants

Random Thoughts on Facebook Post-IPO - Too Easy to Call?

2012-06-06T10:05:00.001-07:00

Over the last few weeks there has been enough debate over the issues surrounding the Facebook IPO that it could give the masses a migraine, but for some reason I am compelled to continue posting on comments sections. Here are my two best posts below; one on WSJ via commentary on Mark Cuban's blog and the other through SeekingAlpha - I hope this is as therapeutic to you in reading this as it is for me to get these thoughts dumped out of my brain!

Basically my summary thoughts on Facebook are thus... :)

The IPO dip on open was due to a massive oversupply of shares and the NASDAQ technical glitch only worsened confidence - what was considered oversubscribed turned very quickly to oversupplied
Facebook can't monetize mobile... yet
Facebook will most likely hit lumpy growth due to reliance on advertising revenues... don't think investors will have patience with this
Facebook's P/E (including other recent social IPOs) is WAY to speculative, they held private investors hostage to now face public investors that aren't buying that there are enough bullets in the gun... at this value
Facebook WILL NOT BE MYSPACE... it is not going any where, but it will ultimately sit at a comfy $50-100B Mkt Cap over the next 5-20 years (unless there is a massive shift in professional content to Facebook or Facebook somehow makes new software that revolutionizes an existing market and decides to CHARGE for use)
Facebook needs to focus on monetizing SERVICES and less on monetizing content through ads

Mobility Issues

http://blogmaverick.com/2012/05/23/facebook-ipo-post-mortem-killer-but-not-for-the-reasons-you-think/

I love that to Cuban $1M in facebook stock is equivalent to a Mickey Mantel card… Regardless – he is right about the video transition to mobile stall. It is drastically slowing compared to the previous growth rate due to data restrictions placed by Service Providers… the real question is whether your ISP is willing to shell out to Cisco the billions of dollars required to build the right infrastructure in a down economy to bolster your Mobile Data Usage (e.g. video usage) and compete to give you less-pricey unlimited data coverage OR that you dip into your own wallet and pay hostage-like unlimited data monthly prices to pay for and make a profit on those upgrades. Either way its a ‘Share of Wallet’ issue more than a ‘desire’ issue to use video and mobile devices. The even bigger issue is the competitive one – Service Providers ARE IN THE TV BUSINESS, so they are asking themselves “why would I give ad revenue to my COMPETITION in mobile and web apps (e.g. YouTube, Netflix, & Facebook) at cheap prices only to disrupt that big steady flow of income, while I pay for all the technology infrastructure” (search the issues between Comcast and Netflix). Also they are fighting to create comparable mobile apps while not losing their partnerships with the major content creators and distributors (e.g. Hulu, Xfinity, Uverse, licensing through Turner Web). Right now the tentacles of the Service Provider is the lynch pin.

Facebook Valuation Snafu and Future
http://seekingalpha.com/article/640801-why-you-should-not-like-facebook

To believe that Zuck, LinkedIn, and Zynga all can live up to their grossly speculative P/E ratios is impossible over the near term. History 101 - average P/E for top tier technology companies post-2000 and 2005 is 13 at best. Companies with P/E higher than 13 have drastically under-performed the market because the companies struggle to meet growth expectations over the long term as their products, operations, competition, and customers mature. Case in point, Cisco - was at one point valued at $557B (an obscene number at the time) at a P/E of 120. Fast forward to today, the street has figured out how to value Cisco and the euphoria has passed - $88.5B Market Cap. But here is the kicker - 12.2 P/E - Right smack dab in the sweet spot for a large cap tech leader. Not to mention that Facebook is more NBC than it is Google - Facebook is an entertainment distributor that monetizes through advertising - it doesn't sell software (cause it's free) and it doesn't do a good job of selling services (RIP facebook deals - cruddy places, and other bad apps). Facebook's only major competitive advantage is Connect - a bet for Facebook is a bet for universal ID - this is the secret sauce, Connect provides a simple and elegant way for mobile and web sites/apps to include a user's social graph. It is revolutionary because of the 900M user base. However, IT IS FREE - they can't monetize it. If Facebook were smart, they would sell Connect as a service for something like $12 /yr, $1 /mth - instant re-occuring revenue at a cheap cheap price and nearly all of it will fall to the bottom line. Facebook will not beat the Disney's of the world, but they can beat any open ID or Yellowpages - their biggest value going forward is as a connection point, not an ad platform.

Lastly some dramatized fun...

Your Full Attention

The Social Network — MOVIECLIPS.com

Until Next time - K

How Does Facebook = $100B Valuation??? Brand Value and a bit of Greed

2012-02-06T16:03:00.000-08:00

I think it's fair to say that despite rational logic, the facebook IPO will be a wild success. They will get their $100B valuation, and the VCs, PEs, Angels, IBanks, early facebook employees, and a muralist will make a mint. BUT, this company's stock price given the current application features, will eventually significantly stagnate. It won't be right now, it won't be 3 years from now, but mark my words this version of facebook will be in the $100B valuation range in 5 years give or take 5%. There is no bubble, its not a ponzi-scheme either, but what it is is an opportunistic event to get people paid while the "potential" and brand is hot. This is a classic case of strike while the iron is hot, plain and simple.

So what is the key driver in facebook's valuation? The valuation is being buoyed by the strength of the brand (probably supported in part by the "finger-in-the-air" guesswork of value-per-user), much more than the strength of the business model (typically supported by some variation of discounted cash flow). The key players are VCs and IBanks who have invested significant capital to keep facebook cash rich to compete with Google, acquire talent and technology, and market the company globally. Now they need their return plain and simple, and that return will come purely from brand appreciation, not profits. This IPO is the equivalent of the tax man, but for only for those 1%ers that want to improve the ROI for their facebook led investment funds or return some capital to limited partners to impress for their next fund raise. Not to mention creating much needed liquidity for employees. And why do they need liquidity for employees? Because facebook continues to have a cash problem despite their healthy piggybank. That's why they are raising $5B in the IPO. You can't wage a war on talent, without paying premiums (rumored that recent facebook employees only make $80,000 annual cash compensation on average, but fair employee stock of about 40,000 shares) ... and you can only acquire so many companies with stock before employees start asking for the full benefits of an IPO versus secondary markets. Also to support a $100B dollar valuation you have to continually defend your market and in turn your brand which can be a very expensive war to wage. And in this case, brand is the foundation.

But, we all should know that brand is a wicked intangible. The tech bust of the turn of the millennium was due to inflated valuations...based purely on brand and expected future profits. The failure was that wall street and every Tom, Dick, and Harry placed bets on whether these internet brands would develop and be adopted leading to massive speculation (stamps.com we are looking at you [1999 vs 2011]). The valuations saddled the companies with expectations that were impossible to meet over the long term, eventually to firing executive teams, key employees leaving for greener pastures, and brands falling apart all after initially cashing out investors. Proving that brand is a hard foundation to build a house. However, there are always big winners when things go right. Amazon is one of those winners, so was Google. But neither company was laden with $100B dollar pressure either.

However, facebook is a little different, and that is why this will be a hugely successful IPO. With facebook you know exactly what you are getting, an established brand with significant value weaving itself into the fabric of all media and commerce. But, the value today is supported solely by brand, and the future value is supported by hopes and dreams that facebook will eventually become one of the few winners in new media. This means the need to transfer a significant amount of wealth from traditional media (the Disneys, NBCs, and Activisions of the world) to facebook and its family of competitors because the ad and consumer media pie is only so big.

The fact is that social media is quickly converging all forms of digital interaction; and media is the head pin. So facebook's immediate future growth will be as a digital media company, not necessarily as a technology company. facebook monetizes amateur and crowd media better than most competitors and the faster they can help amateur's make better content and applications, the more money facebook will print.

As such, they should be evaluated less with the Microsofts, Googles, and Apples of the world and more associated with the Disneys; especially if you are going to value you them at a largely mature market cap of $100B. So, if you take Disney's current market cap of $72.7B on Revenue of $40.9B, EBITDA of $9.7B, and OCF of $7B - which results in a forward P/E ratio of 12x, 2x revenue, and about 8x EBITDA. This is for a massive BRAND, whose media properties touch 120 MILLION PAYING VISITORS a year just on theme parks alone, and penetrates probably way more than the 850MM users facebook claims. And they generate profits from PAYING CUSTOMERS in multiple businesses beyond just an ad model or facebook credits. Now you look at facebook, which is at $3.7B in revenues growing at about 70-100% annually (depending on ad growth and acquisitions) with expected OCF of $1.5B with a seemingly correlated CAGR to revenue. So an established time-honored mega-brand is worth $27B less than facebook who makes 1/10th the revenue and generates 1/7th the operating cash flow. So unless facebook plans to sell trillions of digital hotdogs or create facebook the amusement park, I just don't see the immediate value today. Talk about things that make you go hmmm.

In fact, if we assessed facebook from a revenue perspective, it would have to grow at a GIGANTIC 82% CAGR over the next 4 years to even equal the revenues of Disney TODAY... again with Disney valued $27B less... However, operating cash flow would only have to grow at a 63% CAGR over 4 years... but, still a Herculean effort for even the most innovative technology companies.

So what does this all mean in the end. It means that despite anyone's claims that this IPO and its valuation isn't about the money, it has everything to do with money. It is a very blatant play to book returns for employees and investors through a significantly forward looking valuation. It's obvious that facebook at 100x earnings and 25x revenues is a ridiculous bet, but it will be successful. It will be successful because 1) people LOVE brands and 2) dumb money chases smart. But never fear, as long as you plan to be in facebook for at least 4-5 years, your $100B investment should stand pat! And if facebook beats guidance and actually grows at that 82%, 63% or even greater than a 20% clip, the valuation will hold. But one slip up, and that brand foundation could crumble the entire castle. And if facebook crumbles, I'd hate to see the fallout for the other technology stocks. So I say long live facebook...because your investment come IPO will probably have to be just as long as their life.

K

Stop saying it... Facebook is NOT a Party! Social Media as a technology enabler for mass customization

2011-09-22T16:52:00.000-07:00

Fall is in the air! Schools are back in session, football has kicked into high gear, and the rants are ready to return. Since school is back in session, its time to address a common misconception that is more marketing buzz word than true life. As much as I enjoy social media platforms, applications, and tools... SOCIAL MEDIA IS NOT A PARTY. To view facebook, Google+, twitter, Ning, or any other social platform as a 'party' is 100% wrong. Social Media is a feature that helps enable and facilitate the connection of individuals and things to their social circles. No one is 'partying' on facebook. If they are blogging at a party, they are talking about partying...not partying (at least not yet - Internet of Things).

Let's do an experiment. The hypothesis is that social network is a party... let's test that.

Is this a party...

Can't argue too much with Animal House and John Belushi. Wonder if the comments on facebook ever get this rowdy? Also, It would be great if we flooded this song with advertisements for Shout laundry detergent. Oh goody I can connect with Shout on facebook, quick let me like this!

Okay, okay, simmer down now. Now what about this picture... you tell me, PARTY or party?

Hmm... hard to say. I mean their food isn't there yet, so what's wrong with a little digital conversation. After all, talking is overrated. Pssh, forget about friends... I can't not share with all of my 100 followers on twitter! They too must rejoice in my party hearty dinner!

Or this sad characterization using one of the original social tools... text messaging!

While hilarious... if this is a party, then I'm out!

While I may not have exactly followed the scientific method, the facts should be clear... social media is NOT a party. Just because it organizes your contacts, provides application connections to friends so that you can share, and allows you to post social commentary, it does not mean that it is a party.

Many people will argue that social media has forever changed the way that we interact. Yes it has... it has enabled us to take really cool web applications like micro blogs, photo sharing, video sharing, collaborative video, location sharing, live chat, gaming, and more and allowed us to connect it all to each other and then some.

But in the end social is ONLY a product feature, not an application itself. The social component is a feature that allows things (both human and non-human) to connect through an action. The first social action was doing stuff... I bet old Adam woke up in the Garden of Eden with a bunch of crazy ideas and interactions, but he had no way to communicate it or record it. Each interaction was stuck in the proximity of those interacting and the communication and documentation methods of the time. As we learned to talk, write, and communicate as a species, we used technology and innovation to expand our proximity. So what was the original facebook? It was the phone book! The original hot or not? Every Madman's little black notebook. People used documentation, categorization, and grouping to begin to make and maintain social connections. Enablers like the telephone, air travel, cell phones, and the internet set the table for ever expanding and near infinite proximity. With the challenges of proximity obliterated by the platform of the internet, the future is chock full of connective possibilities. Connectivity is the REAL word for social media. Before 'social media' was coined, people had been collaborating through chat rooms, gaming rooms, xbox live, and numerous other applications, tools, and portals. With internet 2.0 (I hate this term, but its applicable) came the ability to further enhance the online experience making web-based applications truly comparable to desktop versions and connectivity to one another through web services. This birthed an infinitude of possibilities as viable digital applications grew up from the tech bubble of the early 2000s. Polished applications such as email enabled a mass digital connection of people, collecting tools such as contact list management, simple document editing, and file attachments allowing people to begin to index and connect their lives digitally. Savvy tool and application builders used viral components to leverage the social circles created by email and other means to create user bases. The most savvy tools and applications early on allowed the ability to interact within the user base - meaning I could share and communicate with my social circle in the application. Then, as with all industries, tool and application conversion occurred.

facebook, Google, Twitter and many others began to realize that all these applications were more useful together than apart. So they bundled key tools that dealt with common social interactions and built one location so that they could all be in the same proximity. facebook and Google+ are no more clubs than they are the meeting house. So the Social Network has it wrong, while Zuckerberg may have intended to build the
"Final Club except we're the president," he really only built the building and the amenities that the club is housed in. And that is why everyone wants to be apart of it, they made it easy to reconnect with friends, post pictures, tag friends, and market your products.

The question is, do you really want a house party sponsored by Shout, Pampers, Nike, Coke, Boeing, NBC, and your local deli? The real question is how will we as a society react. Will we accept the continued growth of advertisements in our Social House as a cost of using the service, or does it increasingly become bothersome and turn us away? Similarly, our content is valuable, when are we going to realize it and ask for our fair share of the profit? Time will tell, innovation will flourish, but one thing will remain... Social Media will never be a Party, it will ever remain one of the vehicles to make the party happen.

-K

The Brave and The Bold: H-P, Acquisition Talks, and the Post-PC Era

2011-08-24T20:37:00.000-07:00

(image is copyright of DC Comics)

The dominant headlines over the past week in the world of tech and strategy have belonged to H-P, for good or bad. If Hewlett-Packard were a Harry Potter novel, its latest title might be something along the lines of "Hewlett Packard and the Myth of the Post-PC Era." Or you could consider that H-P is going the superhero route trying to reboot a whole new strategic reality, similar to DC Comics and their massive effort to revitalize their entrire portfolio of super-titles. Either way, H-P is making brave and bold decisions that would make Batman and the Flash blush. The problem is that to some market observers H-P is acting more like a DC politician two-facing products and speaking in rhetoric than a Tech Titan with clear goals, commitment, and direction. As such, markets have punished H-P and the jury is still out as to whether it is merited.

H-P has aggressively messaged its intent in three specific actions that took place right before their recent earnings call. First, the demise of the webOS devices currently in the market, R.I.P Touchpad and Palm Pre. Second, the shocker that H-P will seek to spinout their consumer PC and mobile business, most likely not retaining an ownership position. This enhanced the declaration as to the "end of the PC era" Golden age and ushers in the Post-PC Silver age of computing. Third, the acquisition of UK enterprise software company Autonomy for a hefty $10.2+ billion price tag. Big hairy audacious messages that sent shockwaves through the industry. A strategy that when reviewed should be less surprising and probably was the plan all along.

I would argue that H-P was probably on a strategic direction to exit lower margin and highly competitive consumer devices regardless of recent leadership changes. Also, it comes as no surprise that H-P CEO Leo Apotheker wants to strengthen H-P's software offerings to provide a more powerful end-to-end enterprise offering. To be honest, its a transition that Mark Hurd former H-P CEO started way before Apotheker's reign. Over the last 5 years, the majority of companies on H-P's acquisition list have been in software and enterprise solutions related companies. Not only should this not be a surprise, but it is part of the natural evolution of companies as they chase profits and seek to shift their "paradigm."

While a complete management buzzword, paradigm shifting borrowed from the classic definition of the changing of basic assumptions. As such, it has been a base strategic tactic that requires significant reallocation of resources to expected future areas of profitability within a company. The concept is that as markets and products evolve, so do the competitive strengths and weaknesses of companies. Companies use metric analysis to help determine and predict the shifts in profitability to better allocate resources and realign priorities to provide current and future returns. Ultimately, the direction of a company and the paradigms it chooses are largely determined by profit and expected profit growth. As such, it can be predicted that certain companies are reasonably expected to enter adjacent markets with similar technology or resource profiles that exhibit extranormal profits and high potential for profit growth. As adajcent markets take hold over a company's focus, old markets eventually commoditize and become less attractive. As a result, companies have to make the tough decision to participate in market disruption or divest/kill the business. H-P is no different, the bulk of its profits and margins are in the enterprise markets, and the products they build or acquire are mostly tied to filling end-to-end solution needs. Solutions that require integrated offerings in storage, compute, software, and networking... not PCs or mobile devices.

If companies are supposed to chase profits and are supposed to maximize profitability and shareholder value, then how did H-P end up with companies like Compaq and Palm in its portfolio? The answer is pretty simple... perceived value. Value can take many forms of which, in business, the most important is usually profitability or cash generation. But, the intangibles, items like talent (man-quistion or acq-hire), brand, distribution channels, marketshare consolidation, synergies, patents, and pride are all items that drive passion to purchase and contributes to seemingly irrational prices. At the time of the Compaq acquisition, H-P under Carly Fiorina thought that it could create a PC market mammoth that could create economies of scale from market consolidation and production synergies driving growth and profitability. 10 years later, hindsight is 20/20. The PC sales growth peaked, consolidation couldn't generate enough synergies, competition intensified, and commoditization killed gross margins. But that is the risk you take... its like getting excited for going to Vegas... you always think you are going to be up $500 by midnight...

Also, like all companies with multiple business units and large budgets, governance and decision making is difficult to control 100% of the time. There are independent budget allocations, product roadmaps, and commitments from hundreds and at times thousands of leaders who, based on there specific view of their business, give the approval to move forward on investments and acquisition recommendations. At the time, I am sure that webOS seemed like the silver bullet to fire at the tablet and mobile market. The trend was to either join the low margin Andriod fray a la Samsung and Motorola or try to differentiate through unique software/hardware offerings.

H-P placed their bet and while it was a decent differentiated product, it fell short of Apple. In essence, the promise and allure of profits in the "growing" tablet and smartphone market place crapped out. As such, H-P re-evaluated its strategy and decided to not compete. While an unpopular decision with technologists, they would have had a long hard battle to fight had they elected to continue. Did Apotheker and H-P leaders pledge their support for the defunct Touchpad and Pre lines? Absolutely... but what did you expect them to say to the public? At the time, they were trying to put on a brave face, rally the troops, and do battle... they didn't want to admit weakness until a loss was reasonably assured. Did Apotheker and the executive team ever really have faith in webOS? My retort is that it doesn't really matter. The product was a sunk cost by the point of release and they weren't going to damage the chances the product might have had to do well. I believe it was always an attitude of "let's deal the cards and see what turns up." It was the perverbial "double down" and if they won, then they would continue to invest, but they didn't win and they cut bait.

As such, the game continues on. The purchase of Autonomy is more about looking for a software capability to enhance other offerings and create high margin growth opportunities that have a strong potential pull through for other products and services. Its strong presence in the private-cloud solution space is very appealing and fits well with the early market trends. But, high potential companies don't come cheap. Autonomy is not stupid, they realize their position, they realize they can help complete or at least advance H-P's product offering really far. In turn, they want to get paid. If Autonomy turns out to be the lynch pin in a superior and potentially market leading cloud-software strategy, then why not pay whatever it takes. You are still H-P, you still have significant resources and loads of talented inventors. This could be the spark to jumpstart your innovation engine in a highly profitable growth market. You can fill in the gaps with smaller innovators, companies with solid technologies that fill those critical gaps... those $20-100 million companies that can bolster your engineering and innovation roster. So while H-P might be overpaying in an economic sense for Autonomy, perhaps the 'intangibles' if executed correctly will make up the difference.

A wise man once said to me, "it is better to execute a poor strategy well, than execute a great strategy poorly." Excute poorly and those Oracle rumors might be the least of its worries. Execute well and H-P could do more than turn the tables.
-K

UPDATE: H-P has just resumed manufacturing of the TouchPad due to a sudden surge of demand after liquidation price of $99 was set. WSJ.com reports that at $99 the TouchPad is a loss leader costing $307 per unit to make... awesome catch phrase "the TouchPad is dead. Long live the TouchPad!"

Google says $12.5B Hello to Moto... Mobile Faux Pas or Patent Envy

2011-08-16T16:45:00.000-07:00

While we were all snug in our beds with dreams of iPhones and Andriods in our heads, Larry Page and Google's corporate development team were busy crafting the next day's (and perhaps the week's) major headline story. In the ultimate +1 to Carl Ichan and Motorola Mobilility investors, Google announced its intent to acquire the group for a nice 63% premium at $40 per share. The acquisition is billed as strategic in nature, stemming from the intensity of current patent brouhahas with the major tech consortiums of Apple, Microsoft, Nokia and the like. While this seems to be clearly a case of "patent" envy, this may turn into a future mobile faux pas for the fashionable Googlistas.

The nuts and bolts of the deal can be broken down into a few basic categories using a standard mergers and acquisitions litmus test. Let us evaluate briefly the merger's A list opportunities. The deal earns mad props for kicking it straight old school by acquiring a business with actual profits and a means to generate them into the future. I'm sure many investors will applaud Google finally grabbing a company that has immediate big impact to top line revenue and serious potential for cash and profits. The move will further diversify Google's revenue mix and provides a launching pad for a Google controlled foray into hardware both for mobile and appliance.  But, this deal, so we are told, is all about patents. 17,000+ Patents that can stick their tiny little fingers in the dike to keep Andriod from a flood of litigation. As such, we see a new valuable category of consolidation occuring in the marketplace... consolidation of the patent trolls or paying ample sums of cash to cross their patent bridge. This deal immediately alleviates Google's well critized patent inventory and gives it plenty of ammunition to defend itself when the lawyers come servicing.

But, I'm not sure patents and revenue diversification are enough to justify a $12.5B cash purchase price. When you consider that Motorola had already fully jumped into bed with Android for its line of smart phones, Google basically already owned the majority of search, mobile ad, and mobile marketplace revenues coming from those devices. No incremental revenue above and beyond should be expected, bringing into question the rationale behind a 63% premium or roughly $6.6B. Does the $6B come from fit? Nope... Motorola is a hardware focused company that is arguably beyond its glory years of innovating products in the mobile space. The last few years, they were at best struggling to gain market parity in mobile and if it weren't for Driod, Google might be buying those precious patents at auction today. In addition, Google prides itself as an innovation factory in which creativity and healthy budgets abound. Which makes it a particular struggle to pair penny-pinching value engineering cultures with free-spending innovation thought leaders. The good news, Google has enough cash and free cash flow to keep funding the beast through integration and change.

But, the most peculiar part of the culture issue is Larry Page's plans to run the group as a separate business. It is a slippery slope to run Google and then have a red headed step child, Moogle, in the basement. Without competitive help from Mama Google, Moogle will still face the same competitive pressures across the handset and tablet space that it currently faces and could be a significant drag on financials. Google already has been critized for its spikes in OPEX and headcount, and as such, I wouldn't expect the "independent" Moogle to expect any free lunches or massages any time in the near future. Also, Google's hardware forays have been weak to date, with struggling joint efforts for Chromebook, Nexus, and Google TV. This doesn't bode well for the "separate" companies because the same design and collaboration hurdles will exist.

Surprisingly, Google has seemingly painted itself into a corner. If they don't operate Moogle as a separate entity, then they risk ruining the precious channel partnerships for the product they spent massive bucks to protect.  Choose to compete and innovate and they could generate significant profits to combat Apple's growing war chest, but most likely push their ecosystem partners straight into the arms of MSFT. Similarly, Google has justified the price with the potential of using the tech for Google TV and other lines. However, service providers should be wary of Google's past plays at being the disruptor, while now probably playing the saint. With wolves in sheeps clothing at every turn, expect the Comcast's of the world to be very sensitive to Google's every word. One wrong step and punishment could be severe.

So with significant risks apparent in both its vertical integration claims and its seemingly night and day cultures, how does Google win in the end? It doesn't need to do anything. It already won with its purchase of the patent book, which fixes its short term issues and seemingly eliminates significant risk to its future. Everything else doesn't matter, this was purely a "patent" play and as such Moogle better watch its back VERY carefully.  All the grand overtures and the lofty aspirations could, given the risks at hand, turn to rhetoric. Sadly, Moogle might discover that rather than being the red-headed step child, they very likely are the family pig waiting to be slaughtered for a nice tax write off.  If given the game theory chance to choose between continuing to lock up a massive ecosystem or drive handset sales, Google probably chooses the 38 ecosystem partners over its new pet. As so often happens with the Bachelor... in the end, Moto better pray they can bring more to the table than just a pretty patent book.

-K

Is Google the Walmart of Tech?

2011-08-12T16:45:00.000-07:00

To start, I am not a fanboy of any particular technology over another. I am a firm believer of no technology religion, using the best product or service that fits the job I want to do for the best price. With my personal disclaimer out of the way, the question remains... is Google the Walmart of the technology industry?

Recently, the news has blown up with companies becoming increasingly aggressive in protecting their market turf through patent litigation, communitiy messaging, and media coverage. As one company in technology succeeds with a breakout product, it is reasonably assured that 15 other companies will chase to build nearly identical products to flood the market. It is a continuous cycle, in which companies such as Microsoft have been supremely successful. But because the tech industry is a particularly entrepreneurial and idea driven community it raises the well known cry of "COPYCAT!"

So first, the business strategy. Standard competitive strategy teaches that when new innovations occur (i.e. market transitions, market disruptions, tipping points, etc.), revenues and profits are generated. If profits are extra-normal, then it is assured that competitors will be attracted to the same market because the market has room to accomodate them. As such, those competitors strive to furnish products that look, feel, and function as a near match to the initial innovation, i.e. a copycat. So entrepreneurs and idea people beware... if you have a great idea, nothing is stopping anyone from making a copy. Now you can protect yourself and errect barriers to entry, such as patents, lobbying, market consolidation or whatever your creative and expensive brain can concoct, however, it isn't a matter of if, but when will a competitor come knocking.

As noted in a previous rant, in many cases the markets can sustain a number of large competitors in oligopoly, while numerous solid lifestyle businesses service the niche related markets and fight for industry scraps. In most cases, companies find pricing parity and work in unsaid collusion to maintain prices and profitability. But, where it gets ugly is when companies break from the pack, make bold strategic moves, and price competitors out of the market. While initially great for consumers because it lowers prices, it can mean slow, painful death for competition.

By the above graphic you may think I hate Walmart... I envy Walmart. I think Walmart is an amazing company with awesome people. They solve all my needs in one place and I thank them for it, but this is Walmart's alleged strategy. To be the Low Price leader Always... no matter what. They have been notorious for allegedly entering communities and offering whole sale generic products at prices that are impossible to maintain for local businesses. In turn business is sufficiently wounded for surrounding entrepreneurs that they end up selling their business or going down with the ship. Once the market has consolidated, Walmart is free to offer whatever "low" prices they desire.

So is Google no different than Walmart? They have brilliant strategists that have taken competition to a whole different playing field. Google, like Walmart aims to be the 'Low Price leader Always' in everything but except probably search. Like Walmart, they know that if they can grab you to use one of their 'free' services like Gmail or Google+, then they can own your data, serve you ads, and drive you to spend more time using their search products. And when you generate as much cash as Google does from a virtually infinitely profitable business model, you can focus on creating a whole host of context products to pull through more growth and more profitability. If a competitor has a core product in one of your hot 'target' growth markets, Google gives them the option to sell and assimilate or go down with the ship. If the target doesn't sell or can't be bought (in terms of larger competitors like MSFT or Apple) it builds and deploys a 'copy' product, smashes the price to nil and burns the market to ashes in perfect competition. It completely and utterly disrupts the business. Customer's love it in the short term and it limits the possibility that the competitor ever can really reciprocate. Brilliant...

We are seeing it again today. Google+ recently added functionality for social gaming, probably one of the best and most powerful features facebook had to offer to its user community. facebook makes money hand over fist by charging a generally market standard 30% fee for digital purchases through its platform, basically matching market pricing parity with Apple for platform marketplaces that have large user bases. facebook can charge this premium fee because it has relatively the best game in town as far as social platforms, and relies on these type of fees to feed other inventions and innovations within its model. Games, unlike your recent status post about what food you just ate, provide tangible entertainment value and stickiness to facebook and is most likely considered a core functionality of their business. Seeing that games and digital purchasing was core to the social platform business... Google+ had to launch games.

Now Google could have played it nice, came in at price parity for the revenue split fee at 30% and stuck to the industry standard, but that isn't the Walm... ahem... Google way. Instead, Google launched a promotional digital goods fee of only 5% to entice developers to add Google+ to their radar. This 'beta' digital goods fee may or may not remain 5%, but it is hyper-competitive behavior and a Vegas sized signal to facebook that there is no intention to play nice. The point is that there is room for both Google+ and facebook in the marketplace, but hubris and ruthless strategy dictate that like the immortal Highlander... there can only be one!

Rightly so, the case for Walmart comparisons can be made for other tech companies as well, but Google has definitely been the most visible and aggresive as of late. While Google might not particularly like being branded the modern Walmart (or even worse to them, the modern Microsoft), their intentions are clear... burn the villages, storm the castle, and take no prisoners. Its all fair play, and it is brilliant strategy. So the next time Google comes calling with a nice little acquisition offer... remember that you have been duly warned. At the same time, can Google realistically maintain victorious by fighting a digital war on all fronts? Right now, it seems so.

-K

For those that don't want to link...

Fight or Flight? The future of Nintendo's 3DS

2011-08-11T18:00:00.000-07:00

An online debate with a friend sparked a thought that has been rattling around in multiple business spheres lately as companies begin or continue to emphasize resource and portfolio management due to the effects of the last recession and the fear of a double-dip. As markets dip and company profitability is questioned, investors clamor and cry for management to make tough decisions by reprioritizing their resources. This often results in the Bob's getting involved to validate the value of all the pieces of a business; which includes headcount, products, services, systems, and leadership. Sadly, the result is often workforce reduction, closure of once high potential products, and/or budget cuts. Investors and leadership understand that this is part of the natural order of a business as the market ebbs and flows and companies are forced to pivot in existing market opportunities and/or add adjacent products and services to their portfolio to achieve growth. Periods of growth are inevitably followed by periods of contraction, and then ideally the cycle continues with revitalized growth.

That is the concept depicted by the S-Curve. All companies fight the battle to minimize and avoid the contraction that comes as existing products and services commoditize due to increased competition and disruption. They typically do this through invention and innovation. Invention by the creation of new products and services. Innovation by the application of new ideas that generate incremental revenue and profits. And many companies use the build, buy, and/or partner model to achieve the next level of invention. The success of their build, buy, and/or partner model is dependent on how well the company listens, integrates, and adapts to the market's consumers, i.e. "innovates."

However, as companies fail to effectively build, buy, and/or partner to achieve invention and innovation breakthroughs, companies are faced with the tough situations mentioned above, so what is the best option? Really only three options exist... to milk the cash cow, double down on re-invention, or prepare to kill the business. These are the hard core decisions that keep leadership up at night because they affect thousands of workers and often billions of dollars. This is the decision that Cisco recently faced with the closure of Flip, the reorganization of its consumer businesses, and the recent workforce reduction. Did John Chambers really want to layoff workers? No. But, a stagnant stock price, increased pressure in routing and switching, and a struggling consumer products line forced his hand. Meritted or not, investors were betting against Cisco's ability to innovate.

Now to the headline... is Nintendo now facing a similar decision in one of its core businesses? Nintendo's wildly profitable mobile gaming handsets have historically been the leader in mobile gaming technology. For years Nintendo pioneered and innovated in the market providing hit after hit from the original Gameboy to the DS. However, the recent "invention" or line extension with the 3DS handheld has left consumers and investors wanting. The poor showing comes from the sad fact that 3D technology is still more "invention" than "innovation" with difficult and varied user experiences that don't inspire consumers to purchase or pay premiums. Also, the proliferation of smartphones and the innovative ability to provide a standard platform for both the creation and sale of gaming applications has completely threatened the fundamentals of the once stable gaming marketplace.

While dubbed a game of telephone in which a minor note from a large investor turned into wild speculation.still Nintendo faces the age old question that all companies face in periods of missed innovation and contraction. Nintendo must face the harsh reality that dedicated mobile gaming devices are now a niche business.

As listed above Nintendo has a few options available... they can fight like dogs and continue to sink money into a bottomless pit of invention to try and come up with a utility mobile device that can compete with the other multi-use smartphones. It would only take at least 2 years minimum in product development and testing, and require the development of better-than-par marketplace and software developer partnerships. But we see how well that strategy is working for Sony, Nokia, Microsoft, and RIM.

Or Nintendo can purchase or partner with a large social game developer like Zynga for a godzilla amount of money (no pun intended). They may also just start developing games for the new mobile platforms, taking advantage of the mass market opportunity. They have a fair amount of cash, so these are all possibilities. But, this only offers an opportunity to compete on the disruptor's playing field and does nothing to help the mobile hardware problem at hand.

Lastly, Nintendo can ride out into the sunset with its head held high. This is ultimately the route that Sega took, deciding to milk whatever they could from the Dreamcast and stay active in the markets they could remain innovative in, software and coin-op. Now, when was the last time we saw a REALLY innovative Sega game? A long time, but that begs a different topic... talent retention. So the only option left for Nintendo is to do the same. Nintendo has to face facts that the moment they let EA, Square Enix, and other game developers and publishers out of their grasps, the more innovative (not the most inventive) platform took the lead. Is there time for Nintendo to get back in the game? Yes. Do I think they will win? Sadly, no, but I can hope... my boyhood days of hours with my Gameboy is rooting for them.

The question I leave is no different than the above. The gaming market is experiencing a massive transition point as invention of cloud-gaming possibilities (OnLive) and convergence of multi-use hardware becomes commoditized. So that begs one only to ask... is the main-stay console next? Watch your back Wii...only time will tell.

Talking to the Bobs

Office Space
— MOVIECLIPS.com

Bob's Reference...for those that don't want to link to it.

Can't tech just get along! MSFT vs FB vs GOOG vs AAPL

2011-08-05T15:56:00.000-07:00

In business there is often the need to analyze and over-analyze competition in the market place. This need for comparison often creates the need to manufacture strategic battles between titanic foes like Microsoft and Apple or Coke and Pepsi. Today's new digital age is no different, so the social media, browser, operating system, digital deals wars are now upon us. A flood of social technologies have dominated market headlines and have become the darlings of both private and public investors. However, these hyper-growth companies have huge questions to answer as they navigate through the infancy of a new digital media age and take aim at incumbent technology leaders and each other. Unless you have been in a cave, you probably didn't miss the very public twitter, blog, and media battles between MSFT and Google legal councils over patent bullying. Or how could you forget facebook's Mean Girls move of trying to sully Google's reputation by using slimy PR tactics. And now Google fanboys and their constant complaining of Android this and Apple is that... Finally, does facebook really have to act like a crazed Ron Burgundy that is being threatened by the arrival of Veronica Corningstone because Google has finally put together a successful social product they didn't acquire.

Now in the immortal words of Rodney King, "Can't we all just get along!"

But while we all grab a bowl of popcorn and watch as the claws, brass knuckles, machetes, mace, and handguns continue to fly out maybe some common diplomacy should enter the discussions. Yes, these massive conglomerates are competing for billions if not trillions in future profit, but does the land of software and the internets have to be a battlefield? Software and purely web based products have a very unique property that no other good or service has in its arsenal. Software is a good that once produced has the potential for near infinite returns... meaning that it has a nearly infinite thresh hold against diminishing returns otherwise known as "increasing returns to scale." It is easy to store, has little maintenance cost when compared to physical goods, and allows for faster viral adoption because it is easily shared. By those means shouldn't there be room for Oligopoly instead of Google having to grab a monocle, top hat, and cane and make like Mr. Monopoly?

The point is that in the brave new digital world new markets and new market opportunities are created almost every second. Barriers to entry are falling and falling fast. So Google, Groupon, facebook, Microsoft, Apple, Zynga, etc... don't be surprised when a newbie product comes knocking at your front door threatening to take your market share because maybe, just maybe you are counting your market share the wrong way. With software, because it has the unique property of being a digital good, I can have 5 web browsers running on my machine or mobile device because it doesn't matter to me anymore. Why can't I be a lover of Opera, Firefox, Chrome, Safari, and yes, even Internet Explorer? It costs me nothing to download them, install them, and managing between browsers has become easier than ever. The same with social networks. I have an account on just about everything I get my hands on. LinkedIn meets my needs in one area, Google+ meets my needs in others, and I still post and check my facebook page.

Just like cable and satellite television, why can't we have thousands of unique options? And that should be the point. Companies like facebook and Google should strive to capture share of TIME not user share. If they stop spending on resources to fight and bicker in court and the press, they would have more time and money to spend on creating useful features to capture my TIME. That will be the battle of the future, so video game companies, cable providers, retailers, web companies and the like beware. Share of wallet is what will pay for the web of the future, but share of time is where the real battle will take place. The companies that ignore the hype and fight battles with innovation rather than lawyers will win the day. So don't put out the competitive fire, just refocus it on what matters, engaging and powerful user experiences.

-K

Will Googlehire.me? and Welcome

2011-08-04T12:11:00.000-07:00

By now or very soon the internet phenomenon that is now Matthew Epstein will cross your path in the digital or media sphere. For those that don't know, Senior Epstein has launched a marketing campaign to try and launch a product marketing career at Google. Armed with $3,000 in savings the budding Googler launched a website (googlepleasehire.me) matched with specific child pages that described his knowledge of Google products, how he utilizes them in his daily life, why Google is the company for him, and how he could potentially add value. He even produced his own viral video as a wonderful welcome to his glorfied resume and cover letter. Creative? Absolutely. Can the kid create a persona? For sure, part of his brand strategy was to make himself a larger than life character that sports a mustache as a manner of logo and brand more than a gimmick. As a self-proclaimed cross between Old Spice Guy and Chuck Norris, the persona is probably the most critical aspect of M.E.'s campaign to cross through to Google's vaunted Mountain View pearly gates.

So the question is will M.E. achieve his goal? Google has responded by asking him to go through the proper recruiting channels, but they definitely noticed. But the real question is, why in the world does he need Google anymore? With major tech blogs (TechCrunch and Hacker News) and news outlets reporting his campaign, he has launched into something bigger and its not clear if he realizes it yet. If and when his self-promoting stunt hits critical mass, hasn't he basically already succeeded at achieving the goal of why he is wanting to go to Google in the first place? M.E. clearly states that his whole inspiration is to sit at the feet of the Googler Rock-Stars and soak up their guidance and gospel. In crafting a serious, but fun campaign M.E. has proven that he has the ingenuity, creativity, and execution that most PMs, even at super companies like Google lack. So maybe M.E. should take a page out of Google's playbook and continue his innovative direction by using his entrepreneurial chutspa for himself? He may have a lot more fun crafting quirky marketing campaigns for local products and sarcastic startups.

Beyond Epstein, this has shown a general trend of social campaigns now beginning to bowl over out of the standard Facebook page or YouTube video. People are beginning to use the internet in fantastic new ways as our ability to share information settles into Moore's Law. Viral or social campaigns have become the new norm and seem to be doubling at a pace that makes the markets blush. From Betty White and her SNL crowd-demanded appearance to viral campaigns for A-list Celebrity dates for the Military Ball, new creative campaigns are popping up each day and will only continue to multiiply as the long-tail of consumer retail and web gain education and access to the social connections that are building accross the planet. Can you imagine a day when Epstein's campaign becomes the norm? It is a brave new world.

Welcome to this blog among a sea of other tech and entertainment blogs... Hopefully you gain a bit of perspective and share your own.
-K