Systep

Google Glass Is Not Segway!

2013-04-27T00:01:00.000-04:00

TechCrunch EU Editor, Mike Butcher, compared Google Glass to Segway, noting that it was "hyped as a game changer but ultimately used by warehouse workers and mall cops." While Butcher makes some valid points regarding the inherent challenges of adopting and using Glass, the notion of Glass, or its successors, designed by Google or otherwise, not becoming a massive game changer - and becoming a Segway - is absolutely ludicrous.

For the sake of entertainment, let's start with a thought experiment. If a basic Segway model cost $1000, would you buy one? For $500? Segway's only major shortcoming is that it is too expensive for the average consumer. Adoption of Segway has increased steadily since it first launched, and the company seems adamant on reducing its MSRPs on all units. In 2003, the company sold 6,000 units, 23,500 units in 2006, and 50,000 units in 2009. Clearly, Segway wasn't an explosive C-Shaped adoption curve, but most of us didn't expect it to be. It takes time to educate a market, especially at such a high price point, and having rather poor distribution channels surely didn't help. Personally, I’m not a big Segway fan, and I don’t see myself owning one anytime soon. That being said, at $1000 - surely at $500 - I would buy one instantly.

Glass, as a concept, will be a C-Curve. The hype is justified. Would be consumers got in line to shell out $1000 for the privilege of owning a stripped-down beta version of something Google has yet to really think through. None of the lucky few to get their hands on the Explorer Edition expected a fully-baked product. In fact, most expected Glass to be even less functional than it is, yet this stopped none of them from spending a significant sum of money. Consumers are already in a frenzy, and the rumors of a 2014 launch has caused many to be very disappointed. If the MSRP was $5000, we would be having a different conversation, but in the sub-$1000 range - and I expect this price to come down - we will see fairly widespread adoption, possibly led by professional industries, as Butcher noted, or by a wave of retail consumerists. Either way, this is going to be a hit! The convergence of technologies that allows a product like Glass to exist is too powerful to be ignored, and it will mark the beginning of a new era of personal computing. I have no doubts in this regard. Many developers are already tinkering with the Glass Mirror API, and there’s nothing to suggest that Glass will launch without a complementary suite of third party apps from your favorite vendors. The only thing that I openly question is whether Google Glass - the specific product, not the concept - will be the one that delivers us into this new era. I expect Google to be a pioneering player in this market for some time to come, but I am somewhat skeptical that it will be the only major entrant to the market.

I find Butcher’s specific gripe with voice as a primary input puzzling. First, I am sure that we will see other control mechanisms, such as virtual touch, or other motion detected gestures, so if that’s such a deal-breaker, have no fear. Second, voice, if recognized properly, can be very powerful. Granted, voice, or Glass in general, for that matter, is not appropriate in all use scenarios, but neither is talking on the phone, and that hasn't stopped anyone from buying one. Butcher correctly points out that certain physical attributes of the device are not ideal. However, if you try to imagine another five or so iterations and multiple competitors, you will probably come up with a rather inspiring consumer product. The iPhone was first introduced in 2007, and less than six years later, smartphones now outsell feature phones. Expect this trend to be adopted at an even faster rate.

I have a lot of respect for Butcher, and I understand where he is coming from. Many over-hyped products fail to meet expectations, and are either useless or too expensive to be adopted by the masses. This isn't the case. It’s simply too cheap of a product to manufacture, and consumers are too excited to let this one go. I don’t recall anyone this excited about Segway.

Microsoft introduces two-step verification

2013-04-17T19:58:00.000-04:00

As you all know, I have been very critical of Windows 8 security features, and was very happy to hear that two-step verification was to arrive soon. I'm happy that 'soon,' was sooner than I expected. Microsoft today announces two-step verification for Windows 8, in what I hope is the first of many such announcements.

"Over the next couple days we will roll out a major upgrade to Microsoft account, including optional two-step verification to help keep your account more secure.

Microsoft has increasingly focused on delivering connected devices and services that are currently used by more than 700 million people around the world. A Microsoft account is the key that unlocks your experience across these products—from your Windows PC to your Windows Phone, from Xbox to Outlook.com, from SkyDrive and Skype to Office and much more.

Given this critical role for Microsoft account, we remain vigilant in working hard to protect your account, which is why we’re adding an option so you can enable two-step verification to further protect yourself. You should see this option show up in your account in the next few days. You can enable this capability at https://account.live.com/proofs/Manage."

$0.02 Roundup

2013-04-13T17:38:00.004-04:00

Blackberry Showing Some Muscles | Google Introduces Inactive Account Manager | Microsoft Working on New Security Features | LinkedIn Acquires Pulse for $90 Million in Cash and Stock

BlackBerry is on the PR war path

It’s no secret that vocal investors, myself included, have very different and opposing opinions with regard to BlackBerry’s (NASDAQ:BBRY) future. It has also become clear that the investment community is not going to give BlackBerry an easy time, and is less patient with the recovery process than BlackBerry executives would like. With emotions running high, it would be better to wait for official numbers to get a sense of how the turnaround is going. However, both BlackBerry and the investment community are doing no such thing. BlackBerry announced this week that it has filed a complaint with the SEC against research and investment firm Detwiler Fenton, which reported that BlackBerry Z10 devices were being “returned in unusually high numbers.” Detwiler Fenton refused to make either its report to investors or its methodology available to BlackBerry, even after the BlackBerry said that the firm’s findings were “absolutely false.” While I support action against analysts who make unfounded claims for personal gain, BlackBerry is hardly an innocent bystander here. BlackBerry recently announced that it received a record order for one million 10-series units, yet conveniently left out the identity of the buyer. While BlackBerry has no obligation to disclose such information, purposely creating the image of successful 10-series sales with such a report may be equally misleading. Trying to create the image of successful sales, BlackBerry neglected to report that the buyer is not one of the large networks, but rather an intermediary seller, Brightstar, which is taking some of the sales and execution risk from the cellular providers - hardly a sign of confidence. While that report has yet to be officially confirmed, BlackBerry isn’t filing any SEC complaints, so I think we can take the report at face value. If that is, in fact, the case, BlackBerry is playing the disingenuous PR game as well. I understand that for BlackBerry to succeed in the retail mobile space it needs to create the image of being a winner, but unless it is willing to back up said image with hard numbers, I don’t think the investment community is going to be impressed.

Google post-mortem

Om Malik’s post on Data Darwinism sparked an interesting discussion amongst entrepreneurs and investors, and reminded us all of the ongoing challenges we face in a data-driven era. One such cultural challenge is retention and access to private information stored on external services, such as gmail, Dropbox, or Facebook. Facebook has a memorialization process, but that’s hardly the same as assigning ownership or other such rights to the digital property (in the broadest sense). This week Google rolled out its new Inactive Account Manager which allows users to control - to a certain degree - what happens to their online data after their passing. I think this is the beginning of a trend that will continue to expand, and I expect similar services (or add-on platforms) to offer similar control to users. As these solutions evolve, I imagine that we will see specific regulation developing around this topic, and more transparency from digital service providers.

Microsoft playing catch-up

Back in 2011, I voiced my concerns over Microsoft’s lack of a secure login platform that is capable of supporting a Windows 8 consumer drive in mobile and tablets. I specifically took issue with single-step verification, and the inexcusable ease with which one can gain access to another's account. It took some time for Microsoft to address these issues. However, LiveSide reported back in March that Microsoft is working on a whole slew of new security features, and this week it is reporting that one of these features will be two-step verification. While this hardly changes my thoughts on Microsoft’s security layers, it is no doubt a step in the right direction, and I look forward to seeing what other features will be rolled out by Redmond in the near future. Given what’s at stake for Microsoft - its relevance as a consumer platform - an image of a secure and trustworthy platform is imperative.

Pulse

As many of you know, I am a big fan of Pulse, and have been really impressed with the quality of the development team and its ability to deliver a top-notch solution. This week, LinkedIn (NYSE:LNKD) announced that it has acquired Pulse for $90MM in a predominantly stock deal. While I’m really happy for the Pulse team, and imagine that their new home will provide a creative and supportive development environment, I’m not entirely sure how this fits in with LinkedIn’s vision for the future of its professional network. I don’t know how many LinkedIn users actually use its (relatively) new news aggregator feature, but I imagine it isn't a very big number. Integrating the Pulse feeds into my LinkedIn landing page doesn't seem to really make a difference, and wouldn't make me change my usage patterns. Moreover, if LinkedIn ever killed off Pulse as an independent app, I would probably cease to use it altogether. It’s still unclear how this is going to play out, so I guess we’ll just have to wait to see what type of integration the companies have in store.

Disrupting Investment Banking and Private Wealth Management

2013-03-26T18:54:00.003-04:00

With a plethora of new companies and business models already threatening the core services provided by retail banking, we are now witnessing early signs of disruption of the services offered by investment banks and private wealth management firms.

Much has been written about the disruption of retail banking. While we surely will see savings and loan banks around for many years to come, companies and initiatives like PayPal (eBay), Square, V.me (Visa), Dwolla, Payoneer, Google Wallet, Apple Passbook, and many mobile operators in developing countries are already displacing many of the typical functions provided by retail banks. Peer-to-peer lending companies such as CommonBond, Lending Club, and Prosper are also quickly displacing many of the remaining services that we would expect from a typical thrift, and one might become rather bearish on the sector. Granted, these forces are massive, but one must also remember that most of these initiatives (possibly with the exception of mobile payment platforms) are currently focused on retail consumers and small enterprises, as opposed to medium and large enterprises, and it will be some time before any of these or future challengers will displace retail banking as we know it.

At the same time, we are also seeing massive threats to the incumbent Investment banking conglomerates. In private equities, companies such as SecondMarket and SharesPost, which recently signed a joint venture with NASDAQ OMX, are disintermediating investment bankers and brokers in secondary transactions, and may very well give institutional investors additional ways to enter the private market. I don’t think Sand Hill needs to be worried anytime soon, but they are taking notice, and are actively looking for ways to handle this shift in power. Institutional investors with crossover funds are becoming especially active in this space, and are fueling a growing secondary direct market. Market makers such as Knight Capital Group and others are also dabbling in this market, and I believe the day is fast approaching when private companies voluntarily adopt disclosure policies to allow for more active private trading, as executives are looking for ways to control both the process and the flow of information. Outside of the tech sector (in the widest sense) there are very few companies for which such platforms have been relevant, but we may see wider adoption after the early adopters, the tech sector, pave a successful path. There is also no reason to believe that typical investment banking and sales and trading for medium and large enterprises can’t be disrupted. I could easily get on board for a call to end roadshow-mania, as technology can provide far better means to perform most of the due diligence anyway. That being said, it isn’t going to happen soon, and it is also unclear how much of this is a U.S.-centric phenomenon.

Private wealth management is also being disrupted. We have already seen a massive shift to ETFs and other basket-oriented funds and financial instruments, and there is little or no proof that active management in public equities can yield a greater after-fee return than its benchmark index; on the contrary, studies show exactly the opposite. Popular culture has used such studies to discredit active management as a whole. However, as investment professionals know all too well, public equities are only part of the story. Once your portfolio starts diversifying into medium and low-cap securities, distressed debt, or any more exotic investment avenue, such as hedge funds and private equity funds (again, in the widest sense), active management becomes crucial, as the top quartile managers significantly outperform their peer group. As Erik Hirsch from Hamilton Lane recently said to Wharton MBA students, “investing in venture capital during the last ten years was worse than going to Vegas.” For institutional investors who, for diversification reasons, will be investing in most asset classes and are not typically engaged in actively managing their funds, selecting active managers is their only real task, and they often outsource it.

Source: AdvisorOne, 2012

Many wealth management firms are beginning to take on more of an advisory role, whereby they now pitch asset allocation, manager selection, and monitoring to their high net-worth clients, rather than management of the funds directly. I believe we will see this trend continue, as similar services are offered by numerous firms to their institutional clients. In this paradigm, success is measured by successfully choosing the proper allocation among and within the asset classes, and selecting the most successful managers within such asset classes. My bankers at Bank of America-Merrill Lynch and Barclays will excuse my saying this, but I’m pretty sure that big data platforms are far more equipped than they are to answer that question, and if not now, surely they will be in the very near future. TechCrunch reported this week that Wealthfront has secured $20 million in venture funding, in a round led by Mike Volpi of Index Ventures, Chamath Palihapitiya of The Social+Capital Partnership, and Reid Hoffman of Greylock Partners – not lightweights, to say the least! While Wealthfront is really a retail investor platform at this time, I can see it, or other ventures, moving into the institutional investor space as well, just as soon as they can prove their model on early-adopter, retail investors.

Retail and investment banks, as well as private wealth managers, to the extent that they are different, are going to have to find a way to play nice with these models. While they may not be ready to admit it yet, it is clear that there are massive forces that are slowly disintermediating them, and are threatening their core competencies and services. Some of these models can, and will be, adopted and integrated by the street, and will allow them to overcome competition. However, other models will completely catch them by surprise, and will have achieved too high adoption rates to ignore. PayPal and Square, despite issues of quality control and regulation, have clearly proved that they are in that group of companies that cannot be ignored, and the list will surely grow. It is an interesting time for the financial sector, and I hope that it can learn to evolve with the adoption of these challenging models, as it has no alternative.

This article was previously published on Seeking Alpha

Sonar Lands New Investment from Microsoft's Bing Fund

2013-02-28T15:44:00.000-05:00

I first wrote about the Sonar app when it was released back in March of last year, and, if you recall, I was very impressed with the concept. At the time, Sonar was far from ready for massive consumer adoption, and was trying to figure out how to integrate more and more relevant streams into its platform. Since writing that post, things began to slow down, and it looked like they were about to disappear. However, this morning Sonar is announcing an investment by the Bing Fund:

Big news aboard the sub! We’re excited to tell you about a new relationship we’re kicking off with some fantastic new crewmembers: the folks at Bing Fund! Today we’re announcing that the Microsoft-backed angel fund is making a strategic investment in Sonar.

For the occasion, we’ve created what we believe to be the world’s first ever “Vine-nouncement.” Enjoy! http://vine.co/v/bXZa5BQj7e2

Sonar & Microsoft have done some fantastic events together in the past, including PSFK’s Need to Know at last year’s SXSW, and Social Media Week, Xconomy Mobile Madness and the For Humankind gallery all in New York, so we’re particularly excited to be hooking up with the team at Bing Fund. We’ve found we share quite a lot in common; they too recognize the value of understanding location and social—the intersection of time and place—in providing customers with great experiences. They’ll be great friends to have along on our adventures in helping customers connect with the most relevant people, places and things nearby.

Onward!

Sonar has some experience working with Bing this last year, and I can’t help but get a bit excited for the team. The ability to integrate with the Bing API, including access to maps, local content, and social layers, will clearly be something to leverage, and I am sure that there are many further integration opportunities. I’m looking forward to see what the team can do.

Also, credit to Sarah Perez (@sarahintampa) from TC for being the first to call for an end of Vine-nouncements.

Is BlackBerry Finally Back in the Game?

2013-02-14T08:56:00.000-05:00

With the upcoming release of the Z10, many are betting on BlackBerry (NASDAQ:BBRY) - formerly Research in Motion (NASDAQ:RIMM) - to regain its once dominant position in the mobile market. With positive reviews of the new Z10 series, the old Diocletian of CEOs replaced, a pile of $2.7 billion in cash and no debt - as of the end of 2012 - and analysts such as Jefferies & Co.'s Peter Misek and Wells Fargo's Maynard Um reiterating a Buy rating on the stock with a $19-$20 price target, what could go wrong? Everything!

It's been over a year since I predicted BlackBerry's demise (and believe me, I get no joy out of this), and things have been playing out in a rather expected manner. If you recall, it was Daniel Ernst from Hudson Square Research, on MSNBC, explaining why he is keeping his $40 target for RIM in mid-2012, which was the genesis for that post. The genesis today is the recent upgrades to, and reaffirmation of Buy ratings for BBRY.

BlackBerry Chief Executive Thorsten Heins

It's easy to look for silver linings that may spark a great turnaround story. Reviews of the new Z10 series are overwhelmingly positive, and the die-hard fans who have been awaiting a new BlackBerry for years are all on board. "The architecture we have built is true mobile computing architecture. It's not a downgraded PC operating system. It is a whole new innovation built from scratch. It's built for mobile." said recently Chief Executive Thorsten Heins, and I believe that the overall vision of building the next-generation of mobile computing platforms is solid. Unfortunately, to get to that vision, the company first needs to be around that long, and more importantly, it needs to successfully convince a fragmented market to adopt its platform.

Calling this an insurmountable, up-hill battle would be sugar-coating the situation. For the new platform to be adopted, BlackBerry must increase its market share and actually sell enough units to turn around the money-bleeding trend. While reviews are positive, sales figures are less exciting. The reality is that the market has dramatically changed since the first BlackBerry was introduced, and it is now an incredibly fragmented space, with large incumbents, such as Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), and Microsoft (NASDAQ:MSFT), and with many new entrants on the platform front. Such incumbents completely understand Heins' shift to building a new platform - obviously, since they have been successfully doing so for the last five years. In fact, a Forrester Research survey from last year claims that 54% of 1,600 IT decision makers at North American and European companies were implementing a BYOD program, and this number is surely higher today. Heins' vision, despite being solid, is archaic for these giants who have been building technology and relationships to capitalize on this massive shift. BlackBerry has been losing corporate clients - its core revenue segment - faster than you can say Research in Motion, and if you're betting on personal consumers to fill this gap, guess again, as that trend has been declining as well. Last year I pointed to continued growth in foreign markets as one of the only positive trends for BlackBerry. However, for the first time in the company's history, BlackBerry recently reported a decline in subscribers - 79 million, down from 80 million last quarter - and a quick look at the segment breakdown of recent earnings would reveal that the company's hardware segment is the biggest laggard. Major U.S. carriers won't stock the Z10 until mid-March, and I doubt anyone is banking on Solavei to move the needle. Slow roll-out can't be a positive catalyst.

With 4.6% share of the market, BlackBerry will never recapture its place as a market leader or innovator, and that $2.7 billion cash-pile will get ever smaller as more resources are dedicated to experimentation. Heins recently told Reuters that "we need to decide where do we play? It could be a software play, a licensing play, an end-to-end horizontal play, we'll figure that out." Figuring it out is usually rather expensive. Few opportunities are really viable, and the company's current BlackBerry Z10 strategy is not one of them, I'm afraid. BlackBerry's network is far more robust than most of the large carriers, and is far more secure as well. A strategic acquirer looking to enter this space, such as Lenovo, Microsoft, or HTC, would find little value in the handset business unit, and would most probably be looking to acquire the company's enterprise software business and its robust IP portfolio, and take control of that cash pile before it disappears. Such strategic buyers might pay $15-$20 for BlackBerry shares on a good day. However, no such day is looming on the horizon. At best, BlackBerry shares is slightly overvalued, and, if my analysis is correct, I believe we will be seeing the $6-$10 range sooner rather than later. At that range BlackBerry would again become attractive to strategic buyers, as well as to financial sponsors - surely they have been covering BlackBerry for a while now. Analysts at Macquarie correctly pointed out that "Given the ongoing price negotiations between RIM and carriers on services fees, it would be nearly impossible for a financial or strategic buyer to currently value RIM's services annuity." As I mentioned, out of the 78 million users, it is estimated that less than 20 million are part of the enterprise software unit, and those users could easily be transitioned to other platforms, such as those offered by Microsoft, Google, or MobileIron. With that being the case, I believe we can expect low multiples in any M&A discussions that might be taking place, and I would also venture to say that not too many of those are taking place right now.

There is hardly anything that would allow BlackBerry to stay in the game. Had Good Technology not already been acquired, I would have been looking there. However, with Good out of the game, I would be looking seriously at the likes of MobileIron, AirWatch, and others to refuel R&D. Selling off the handset unit - if anyone would be inclined to buy - should be the first step. The next should be a massive M&A and integration-based expansion strategy that would focus on delivering enterprises with an open platform that meets their need for performance and security, and at the same time meets consumers-employers evolving demands for new devices and integration capabilities. These challenges are real, and if BlackBerry is able to position itself as a service-providing leader in this space, it would have a real value proposition to pitch to CTOs who are begging for some guidance. Unfortunately, I don't believe the company can pull off such a strategy, and shareholders will be even less inclined to play along. Blackberry may enjoy this bump in share price and PR for a little while longer, but those optimistic days will soon come to a melancholic end.

A similar version of this article was previously published on SeekingAlpha

The Smart(er) Car is Closer than it Appears

2013-02-04T22:47:00.000-05:00

Heads-up displays (HUDs) have been available in cars since the late eighties. Early versions just showed the MPH on the windshield so you didn’t have to look down to see if you needed to worry about that cop you just passed. Newer ones show much more, including turn-by-turn navigation data. Modern HUDs make this data reflect on the windshield from a projection source tucked into the top of your dashboard. Graphics-rich HUDs use light sources such as LEDs and cathode rays that project the data onto a portion of the windshield containing phosphor cells. This creates detailed imagery beyond just alphanumeric characters and a handful of symbols.

BMW, Lexus, Honda, Cadillac, Buick, and Ford all offer HUD systems in their 2013 models. BMW’s HUD technology leads the pack with adjustable full color displays that appear to hover over the tip of the hood. In Europe, BMW is experimenting with HUDs that display road sign information captured by onboard cameras. The company is also experimenting with augmented reality (AR) technology in their HUD displays to help define roadway boundaries during bad weather. AR HUDs also have the potential to highlight hazards, other cars, and illustrate emergency maneuvers. GM has been a leading HUD innovator for decades. It was one of the first to offer night vision HUDs back in 2000. Its latest push is to use the entire windshield as the HUD, along with a myriad of cameras and sensors gathering road, car, and environmental data. At least one of these cameras will track the driver. The driver camera is used to adjust where the HUD places information on the windshield, and what info is displayed. No doubt, insurance companies can get behind the idea of in-car cameras focused on drivers. Maybe the camera can be tied to your Facebook or Google+ accounts. That’s not as far-fetched as it sounds.

Pioneer is expected to release a US version of their Cyber Navi laser-projected HUD system later this year (the system is already available in Japan). Its large HUD screen is installed near the driver’s visor area. Its visuals deliver a sci-fi-ish, Minority Report kind of experience focused on navigation and traffic. The system includes a touchscreen LCD that uses AR to show drivers a virtual view of the road ahead. Cyber Navi’s big, colorful, information-rich experience may overload US drivers, but probably fits right in on the streets of Tokyo. HUDs can keep drivers engaged. They are capable of presenting the information we crave along with important car, road, and navigation data in a way that resonates with a tech-savvy culture. Since HUDs are both input and output devices, it is possible that they can help maintain your social media presence while you drive, though we may not yet be ready for status updates such as “Tim just ran a red light on 3rd street,” or, “Janet just ran over a cat.” But, hey, perhaps you can ping the cutie in the green Prius one lane over. Or maybe not... Yeah, just like anything else tracking our personal existence, safeguards will need to be employed to save us from ourselves. The implications for traffic law enforcement boggle the mind.

Car HUD technology remains one-step behind automobile smartphone integration, but it is quickly gaining ground, and a marriage between the technologies seems inevitable, even necessary. Thanks to Microsoft’s Windows Embedded Automotive (WEA) operating system, Ford has already delivered over five million SYNC cars - cars with agnostic smartphone integration. Not only does this integration access data on your phone (currently no more than music, your address book, and the phone itself), it also provides an ideal link between the car and the cloud - where the future has already replaced its tent poles with concrete pillars. Ford SYNC is open source, but since it relies on a Windows Embedded OS, that open-source architecture is not as deep as some would like. Apps and sites like Yelp, and WAZE, are no-brainers for a platform like Ford SYNC. But how should this information get to (and in the case of WAZE - from) the driver? The answer, of course, is via a HUD.

Cars have become an immersive computing experience within the transportation and travel ecosystem. There is huge commercial potential here, which is a requirement to get capitalists investing in these technologies. The HUD is the missing link between smart cars, smart drivers, the road, and the cloud. Personal computers and smartphones would not exist without sophisticated graphics integration. Automobiles need the same if they are to evolve, and the convergence is underway.

Meanwhile, Google may already be shaping HUD technology and the driver’s connected-experience through their AR-heavy Project Glass, birthplace of Google Glasses (the Explorer Edition is currently being reviewed by the FCC). Google Glasses have the potential to make HUDs personal and portable. Technically speaking, Google Glasses are not HUDs, they are HMDs (head-mounted displays). But the functionality is quite similar, and each opens the same door to hands-free real-time information on the move. And there is no reason why an HMD device can’t serve as a HUD behind the wheel. In addition, Apple announced last June that Siri could land in cars by summer of 2013 (and Honda’s latest announcement seems to confirm this), and It’s going to be a very exciting time in the marriage between personal transportation and technology. Competition, commerce, and innovation have become accelerants in the smart car world. It’s happening fast, and HUDs and possibly HMDs are at the root of it because they are a requirement to safely deliver the information today’s driver requires and has grown accustomed to accessing.

Dozens of smartphone HUD and AR apps, such as iOnRoad and others, are already available. They currently rely on reflectivity from the phone’s screen to the windshield or displaying information on your phone or tablet. Windows Automotive 7 OS introduced Microsoft’s Silverlight application framework support, simplifying HUD graphics development, and offering a means for these apps to properly display their information in a true HUD environment, provided carmakers increase HUD projection system availability. With cars becoming more autonomous, and please don’t get me into the Google vs. all car manufacturers debate, HUD technology, and integration with current devices, will become even more important. With less of your time focused on driving-related actions, your eyes will be free to focus on various other inputs and outputs that could increase your productivity and quality of life. Driverless cars are a lot closer than you might think, and whoever will gain a credible foothold in the current HUD/integration market will be better situated to capitalize on the more lucrative future environment.

Car HUDs are a win-win for everyone involved. They are an emerging platform, not just a high-end feature for a midlife-crisis-mobile. There is a stockpile of automobile-related technologies that have yet to enter production due to costs and carmaker reluctance. The HUD helps break down both barriers. After all, GUIs are far cheaper to produce in quantity than physical UIs constrained by dashboard space. In addition, the heavy lifting of tech development utilizing HUDs can occur outside the automobile factory similar to how apps and phone accessories are developed outside of Apple and Google. The displays and input devices that make up a HUD system can already be leveraged by almost anyone providing technologies related to driving and the automobile, including the carmaker. HUDs don’t just make cars smarter, they make drivers smarter, and in real time.

Shipoopi; The Antithesis of Israeli Startups

2013-01-09T18:29:00.002-05:00

Shipoopi, “the girl who’s hard to get” from Meredith Willson's The Music Man, is a woman who waits until the third date to kiss. Israeli startups seem to be the exact antithesis, giving in too quickly by exiting early, thereby rarely becoming a true multinational company. Paradoxically, a large part of the success story of Israeli startups is directly linked to their early acquisitions by the so called ‘Centers of Excellence’ of large multinational tech giants, including, IBM, Intel, Microsoft, Cisco, HP, and recently, Apple.

The Start-up Nation

Much has been written about the origins of Israeli success in high-tech industries, and I urge you to read Singer and Senor’s Start-up Nation: The Story of Israel's Economic Miracle. In fact, some 40% of Intel’s current revenue can be traced to their R&D and manufacturing centers in Israel. However, the authors’ story ends at a point where Israeli venture capital (VC) is championed, and VC knowledge is exported to other countries. While there is much truth in such a glorified ending, I fear it does not tell the entire story. It is well documented that Israeli start-ups tend to exit significantly faster than their U.S. peers (credit to @bredesen for bringing this article to my attention), and while there are many reasons for this trend, it is mostly due to lack of late-stage VC funding and lack of institutional participation in TASE tech listings. Late-stage VC in Israel is virtually non-existent, and the few funds that officially invest in later stage ventures have made very few investments in recent years. Last week I spoke with Dr. Benny Zeevi (Managing General Partner DFJ Tamir Fishman Ventures) and Yoav Chelouche (Managing Partner Aviv Venture Capital), both recently appointed Co-Chairmen of the Israel Advanced Technology Industries (IATI), about the lack of late-stage funding for Israeli ventures. Both indicated that this is a major impediment to the emergence of Israeli multinational corporations, and that they are working on creating a program to seed late-stage Israeli VCs, similar to the Yozma program in the 90’s which essentially created the Israeli VC market, as raising funds from foreign institutionals (which represent the vast majority of VC LP money in Israel) has been very difficult. U.S. VCs view Israel in a larger context, EU or MENA perhaps, and rarely have dedicated late-stage funds that operate in Israel. The lack of companies worthy of late-stage funding due to early exits is also an obvious deterrent. Yigal Erlich, initiator of the 90’s Yozma program has also voiced similar opinions. Increased institutional participation in TASE listings has been identified as key to building the infrastructure to maintain the growth of Israeli ventures. Israeli institutionals have little technology, Media and telecom expertise, and have so far shown no inclination to develop such expertise. Moreover, Israeli institutionals rarely participate directly in the Israeli VC market. While Mr. Chelouche indicated that IATI is also working in this area, I believe there is little that we can expect in the near future.

One multinational’s gain is another entrepreneur’s loss

It is hard to criticize Israeli entrepreneurs in light of the situation of the Israeli VC market. With little hope for late-stage funding or listing on the TASE, Israeli ventures seek strategic partners for M&A activity, or an aggressive banker for an early IPO in the U.S. If in the late 90’s the aggressive bankers were on every VC’s speed-dial, post 2001, it is the strategic buyers that they are coveting (this is also true to a certain extent in the U.S.). The appetite for early ventures on U.S. exchanges has been fairly low during the past decade, and Israeli start-ups that listed early are having a difficult time managing both growth and investor expectations (Mellanox comes to mind). Alas, the only exit is an M&A event, and the sooner the better. One could also point here to Israeli VCs pushing for early exits (under pressure to perform by their LPs) or the greed of Israeli entrepreneurs. However, these are merely symptoms. I recently spoke with Dr. Orna Berry, Corporate Vice President and General Manager for EMC’s Israel Center of Excellence, someone for whom I personally have a lot of respect, on the state of Israeli VC. Dr. Berry confirmed that having the opportunity to identify and work with Israeli start-ups at an earlier stage has been beneficial on all fronts - purchase multiples have been typically lower, and integration is generally faster. Win win? Hardly! Israeli entrepreneurs are leaving a lot on the table, and are looking for many ways to break out of this cycle. One of the most obvious methods of coping has been transferring to the U.S. (or other target markets) at a very early stage. If you fly from Israel to San Francisco or back (via New York usually), you will find the lounges packed with Israeli entrepreneurs and venture capitalists - it is usually just a matter of time before they forgo the flight all together and relocate.

Is the Start-up Nation Over?

Teva (NYSE:TEVA) is still the only true multinational company in Israel, and I don’t expect it to have any company in the near future. Developing a late-stage VC market and educating Israeli institutionals will take many years, and unless foreign VCs have a sudden change of heart with regard to the Israeli market, M&A exits to large multinationals (often with local Centers of Excellence) will continue to dominate the Israeli high-tech scene. This is probably one of the reasons we see so many B2B ventures starting in Israel, and this also explains why consumer oriented ventures tend to migrate to the Valley rather early in their life-cycle. That being said, Israeli tech exits totaled $5.5 Billion this year, the highest since 2006, and there are more Israeli ventures with more than $100 million in revenue than ever before. The Israeli Start-up Nation is far from being over, rather it is slowly evolving into a more mature market with stronger foundations and infrastructure to support its growing innovation. While Teva will surely be alone in this domain in the next few years, I believe it will have some peers in the not-so-so-distant future.

#Gaza and Big Data Wars

2012-12-03T21:21:00.001-05:00

Now that the fog of war has settled, let it be said, declared on twitter (with hashtags and all), augmented by social media, and attracting more eyeballs than the U.S. invasion of Iraq, Israel and Hamas waged the first Internet age mini-war. While this conflict is an incredibly sad human story, it gives me hope that the future will be much better, and that conflicts will be shorter in nature. Is this the face of future cyber-warfare?

Disclaimer:

This is not meant to be a political piece, nor am I objective in any way. If you really want to get an objective point of view, I encourage you to visit Israel and Palestine, and see firsthand how people live in the region. I assure you that you will really enjoy such visit regardless of your political stance. That being said, certain aspects of this latest round of violence between Israel and Hamas have proved to be most interesting from a technological point of view.

The IDF has embarked on Operation Pillar of Defense.
— IDF (@IDFSpokesperson) November 14, 2012

Social media played a crucial role in this conflict. While Jack Dorsey clearly didn't imagine that Twitter would be used to declare a war, the IDF not only used it to declare war, but to get its message out to both local and international viewers. The IDF's use of Facebook, YouTube, and other social outlets on a massive scale was also apparent during this conflict. However, user generated content far surpassed that of the 'IDF Spokesperson' both in quality and extremism. We have seen this type of leveraging of social media in previous world conflicts (Egypt is a recent example), yet a focused effort, coordinated by a modern state, is surely a first. I can't help but wonder if such use of social media is positive or negative. Surely there are advantages to educating the world about a certain conflict, and making it aware of the human toll that soldiers and civilians endure during conflict. Many have argued that the massive coverage of the Vietnam War was a catalyst to ending it sooner. However, over-depiction of such horrors dehumanize the suffering and pain associated with combat to the point of lacking of clear red lines between right and wrong. I specifically recall the IDF's use of #callofduty and #pillarofdefense in the same tweet. Avital Leibovich, a Lieutenant Colonel in IDF responsible for Social Media, explained the military’s use of Twitter and other social media channels during a BuzzFeed interview with John Herrman, stating that this was acceptable “As long as you respect the rules of engagement of that specific platform.” Others have labeled it "Crowdsourcing Propaganda." As Brian Fung notes in The Atlantic, “It’s an interesting turn of phrase taking a traditionally military concept and applying it – so appropriately, as social media curators are always seeking ‘engagement’ – to digital communications platforms.” The cynical use by Hamas of pictures of civilian death is no more favorable. Both sides of this conflict made conscious use of the social tools at their disposal, and, in Israel's case, waged an all-out social-media war to win public opinion. I have yet to see an estimate on how much money Israel devoted to this endeavor. However, I believe it is a substantial amount.

Anonymous practically declared a war of its own

Gone are the days of elaborate tracking and monitoring troop movements by satellite pictures, advanced eavesdropping, and long-range reconnaissance. Well, not really, but the emergence of geo-location enabled smartphones 'tagged' to every soldier on either side of the conflict is clearly cause to rethink intelligence gathering. Endless messages to Israeli soldiers during this conflict from the IDF implored them to refrain from use of popular chat tools such as Whatsapp, Twitter, and Facebook chat to communicate, as their location was being intercepted in real-time over visible communication channels. This allowed Hamas militants to re-calibrate their missile launching efforts, as well as to gain advance warning regarding troop movements. Counter-intelligence methods employing such outlets may have also been used. While one could easily think of ways to limit his or her online footprint, as long as internet-enabled devices exist, soldiers will be using them carelessly. I'm not sure what is the the best way to handle this problem, but I'm sure we will see more strict restrictions on use by civilians of such devices in future military settings.

The non-public technological aspects are just as interesting. Cell-phones were hacked at an alarming rate on both sides, and for many reasons. Clearly cell-tower-based positioning is what comes to mind, and extraction and publication of personal information attained from personal accounts was also prevalent. Hacking of high-profile online domains, as well as personal online accounts of high-ranking officials were both fair game and prevalent. Anonymous and affiliated entities got involved when rumors of an internet outage surfaced, and banks were targeted as well. I predict that such attacks on infrastructure will become prevalent in future confrontations, and this may have an unprecedented, crippling effect. Israel's Yuval Steinitz notes that during the conflict Israel "deflected 44 million cyber attacks on government websites. All the attacks were thwarted except for one, which targeted a specific website that was down for six or seven minutes."

Credit: Palantir

What is less known is that Israel essentially controls and monitors all communication methods in Gaza. Israel's communication monitoring unit is the largest in the Israeli Army, and is rumored to cover essentially all methods of communication. “There has been no other case in the history of modern warfare where one side controls all the communication infrastructure of the other, as is the case here ... All of Gaza’s telephone networks and internet servers go through Israel; every phone conversation and email is routed through Israeli territory and from there sent on through underwater fiber-optic cables to the rest of the world.” wrote Anshel Pfeffer in Haaretz. Maybe by means of necessity, Hamas is developing better short range communication methods. This is just one stream of information, and combined with stationary cameras, drone surveillance, online media, hacked communication lines, and many more, we will start to see service providers emerge that will help make sense of all this data. Palantir is already working on some of these challenges in the U.S., and we may see companies like Opera Solutions or MuSigma enter this space as well. I am sure governmental R&D programs are also in the works.

Big data is completely changing the face of modern warfare. Better intelligence leads to increased accuracy and reduced collateral damage. It will allow for shorter security lines, less invasion of privacy, more dignity, and actual increase in safety (vs. the perceived safety we have today). It will allow for better planning, analysis, and dissemination of data streams to all interested parties. #Gaza was a test site, a lab if you will, and the world watched this experiment closely. There's a good ending to this story, and I look to history for guidance. We have become less violent than in the past (I know that is a hard claim to make, but just look at the statistics, the 90's were better than the 40's), and as a whole we disdain from violence more aggressively than we did just 20 years ago. Media, and the Internet in particular, make the conflict real and bring it closer to home, into our living room, and into our palm. Constantly! That's something that's hard to swallow, and I believe it will have a positive effect. I can't bear to think otherwise.

Tvinci raises another $4.5 million for OTT delivery platform

2012-10-27T20:24:00.001-04:00

After hailing Apple TV (in the broader sense) as the next champion of OTT, I believe a regression is in order. While Apple TV, or similar services, will surely disrupt Multichannel Video Programming Distributors’ (MVPD) ability to generate returns from content (whether or not they will substitute such returns by raising prices on data is a topic for a different discussion), this process won’t happen overnight, and we will see a rather painful transition process.

For the next three to five years, the MVPD’s will continue to run the show as they can apply extreme leverage on content producers to bar them from distributing the vast majority of their content in any avenue that may directly compete with them. The economics are simple. MVPDs have been paying content producers immense sums for distribution rights, and, in turn, content producers have become increasingly dependent on MVPDs. With this dynamic in play, it is no wonder that content producers have avoided giving over-the-top (OTT) networks access to their crown jewels. While this dynamic may begin to change more rapidly if antitrust regulators take aim at the MVPDs, I don't see this battle won anytime soon, and, moreover, it looks like OTT operators may be classified as MVPD as well – putting all such operators in the same boat.

The buds of disruption are not coming from small players, but rather from the biggest games in town, as it's extremely capital intensive to compete head-on. Hulu, now that Providence Equity Partners has exited, is a network play, Apple (AAPL) is reportedly spending copious amounts of money on iTV R&D and content gathering, and Netflix (NFLX) has public funding to try and fuel growth. While they are all struggling despite these focused efforts, it’s becoming apparent that smaller incumbents have little hope in dethroning any of the larger players. There are indeed some examples of OTT network plays as well, such as Boxee, Roku, and others. However, these attempts, appealing as they may be, have yet to yield significant results.

This reality leaves little room for smaller players to create a new delivery network (aside from a few fringe online-only networks), and has pushed them to focus on the delivery technology. This space is now extremely crowded (and frustrated). With everything riding on an M&A exit, developers have focused on working with (or around) cable companies' specific business and technology models, and, on the surface, it appears that the cable companies have succeeded in maintaining their dominance. I am not completely ruling out an IPO event for a delivery and/or monitoring technology venture, but you would have to agree that this is highly unlikely.

Tvinci, which reportedly secured an additional $4.5MM in funding from fairly unknown angel investors Kaedan Capital, Zohar Gilon, and now, Trellas Enterprises (bringing the total invested amount to $6MM), is another such delivery platform play that caters to the cable companies and content producers. While Tvinci's OTT 2.0 platform offers a solid technological appeal, it is far from disruptive, and will have to compete with both large and small competitors. Motorola's Home division is currently working on a white-labeled platform and UI with multi-screen support, Apple is positioned to tackle both the MVPD and OTT markets with their delivery platform, NDS, now part of Cisco (CSCO), and has an incredibly strong OTT platform that can be used by MVPDs, and Disney and Comcast seem perfectly happy pushing old(r) content through Hulu, which soon will support multi-screen as well. This is not an easy challenge, to say the least, and I haven't even mentioned Google, (GOOG) which is currently dabbling with Fiber and Google TV, but has yet to make the decision to really take on this space. Honestly, if Google could reach a deal with the networks (currently impossible for reasons I described earlier), wouldn't YouTube be a perfect platform? It's already optimized for large traffic and advertising, and I have yet to find a real reason it wouldn't work (you could also customize the UI to work with MVPDs if you're thinking along those lines). The reality is that if Google decides to spend a few hundred million on infrastructure, they could become a real threat.

Even if Tvinci is successful, which will be determined equally by its technological advantage and its ability to forge a meaningful relationship with one or more major networks (that already have endless such "partnerships" in place), don't expect a big exit! MVPDs have been burned by recent acquisitions, and have yet to see meaningful returns. They have realized that they can continue to dominate the market for the next few years, and have more time than they initially thought to plan their next phase of existence as data providers (a post for another day). With more time to experiment and study the market, and with earnings weighing heavily on managerial decisions, expect MVPDs to focus more on in-house R&D, and pay lower multiples on acquisitions. That’s not to say that we won’t see any consolidation in this space, far from it. I simply believe it will be a slow and relatively inexpensive roll-up.

Tvinci has a really great vision, and has been growing rapidly since inception. It has recently signed partnership deals with most of the large operators in the U.S. and a few of the larger players in Europe and Asia. Indeed, this is a rather impressive run given the fact that they have raised minimal equity. Tvinci is definitely one of the more interesting Israeli startups to emerge recently, and is definitely one to watch. I wish them the best of luck! They are going to need it...

Who killed Laura Palmer and why Apple TV is about to completely change the way we consume content

2012-08-19T21:56:00.001-04:00

*For the 2000+ viewers who keep landing here: Leland Palmer murdered his daughter, Laura Palmer, possibly under the influence of evil BOB.

I love to hate on Apple (NASDAQ:AAPL). I own an iPad, two iPhones, and an unknown number of various generation iPods, and yet somehow it seems that I always have some kind of beef with Apple. Apple never really invents anything – although one could argue that no one ever truly invents anything – it simply envisions what the world will look like five years from now better than any of its peers. It (or should I say He?) has successfully created completely new categories of products from technology that are rarely new. It is about to do it again. Apple TV is about to change completely not only the channel by which we consume content, but the actual content we consume.

Cable TV is ripe for disruption, and previous infrastructure limitations that inhibited a truly competitive and innovative market have been slowly removed. Hulu (owned by NBCUniversal, News Corporation, The Walt Disney Company, and Providence Equity Partners), Netflix (NASDAQ:NFLX), Amazon Prime (NASDAQ:AMZN), and literally thousands of competitors already have a foothold in this space. They have successfully demonstrated that there are is an incredibly large number of content consumers who prefer to consume the same content (currently TV shows and movies) they used to consume through a TV set and cable box, through various other channels and on any number of other devices. However, they have yet to prove that such a model can be financially feasible.

In come Apple and Alt.tv.twin-peaks. While Twin Peaks may seem like an obscure reference, that famous Usenet group was the beginning of what we are about witness in the next two or three years. Former MIT professor Henry Jenkins is famous for his work on media convergence, and some of his work is absolutely illuminating. In “Do You Enjoy Making The Rest of Us Feel Stupid?: alt.tv.twinpeaks, the Trickster Author and Viewer Mastery” Jenkins documents the highly evolved fandom that formed around Lynch’s combination of mystery and soap opera. Twin Peaks was one of my favorite shows as a teen. Alt.tv.twin-peaks wasn’t just a place to catch up on missed episodes, or ask questions about the plot. It was so much more than that. Fans would flock and engage in the most incredibly elaborate conversations about every minute detail in every episode of the short lived serial (30 episodes), and that same fan base actually convinced ABC to bring back the show for another season after it was canceled. We all wanted to solve the mystery of who killed Laura Palmer, and imagined Lynch embedding endless details in the script that we were to find and decrypt. Even today I can’t stand not being able to solve a mystery. While I doubt that Lynch ever even imagined some of the intricacies that we debated over in the Usenet group, this little experiment demonstrated how an engaged audience might be tapped collectively to solve a mystery, and how users might consume related content on more than one medium.

There have been many attempts to harness users’ eyeballs on, what we now commonly call, a second screen – a second device, such as an iPad, used to consume content that is relevant to what you’re watching on your TV set or computer, your first screen. The quest to capture and monetize the social TV experience, coupled with additional tailored content has been an uphill battle, and I won’t even bother mentioning the current contesters to the throne, as they are all about to evolve or disappear. Just a couple of years from now, you, the content consumer will be an integral part of the story. You will watch shows similar to Twin Peaks, perhaps is 3D, with one, two, or who knows how many second devices showing additional, relevant content. Perhaps you will see maps of the area shown on your TV along with additional information relevant to the plot that wasn't shown, as well as an active discussion on additional layers of information that will be embedded in the plot. Your input will shape your own unique consumer experience, and it will eventually be part of the actual story. The convergence is to the story, and the various media will each serve as an integral part of that experience. This will be the end of the 40-minute format, as the story could essentially be timeless – consumed over many devices and at different times. Advertising will shift to highly targeted and engaged audiences, and there will surely be a premium for such an advantage.

Source: U.S. Patent and Trademark Office

The reason this vision of a multi-platform content world hasn’t become a reality so far has been, surprisingly, technological. Despite wanting to have been the first to envision this new world we are about to enter, Apple recently received a patent that it filed six years ago for this exact idea, and Google (NASDAQ:GOOG) has been dabbling with this concept for years. The real problem with creating cross-platform content is that up until now there hasn't been a way for content creators to interact on multiple devices in a coherent and seamless manner. There was no single architecture or API that would allow a creator to, for example, air a two-hour commercial-free series, while at the same stream you content on multiple devices that is relevant to your geographical location, shopping habits, or even friends. You would currently need to aggregate many different feeds and try to coordinate their distribution across many different platforms. This all ends with Apple TV. Apple has given content creators a platform to deliver seamlessly content across multiple devices, time-frames and geographies, and as a result we will never consume content in the same way again. Your story will be tailored to your own unique ego or alter-ego, and will both influence, and be influenced by fellow consumers’ unique experiences.

The catch? It’s Apple. Once you are part of the Apple iKool-Aid eco-system (dreaded iTunes and all), you are stuck in an inhibited, uncreative, and inefficient setting that is absolutely appalling. Luckily, it won’t be the only game in town. If Google can finally find a way to keep track of what businesses it actually owns and operates and get them to work together synergistically, I can see Google (surely coupled with Google Fiber) becoming a major player in this space as well. Either way, this doesn't look good for the Cable middle-ware providers, but if they didn’t see this coming they deserve what is about to happen to them. All I can say is that this is an exciting time to be a content creator, and I can hardly wait to start consuming this new content. Maybe I’ll even agree to be exposed to marketing content… if they can find a creative way to deliver it to me.

Special thanks to Leland Palmer.

GRID – Excel has finally been disrupted!

2012-08-11T09:34:00.002-04:00

It’s not often that I come across a product about which I am really excited. Granted, years in the business have rendered me somewhat of a skeptic, and I feel that many new and hyped products fail to deliver on their promises. This week I came across Josh Leong’s new Y Combinator-backed (YC S12) spark of ingenuity in the form of GRID, an Excel-like mobile app (I am really not doing this product justice), and a small grin immediately crossed my face. Excel has finally been disrupted.

Well, maybe not quite yet, as I don’t foresee anything in the near, or even distant, future dethroning the undisputed king of spreadsheets. I work in PE/VC, for instance, and the thought of using anything other than Excel to prepare financial models is even more laughable than replacing our Bloomberg terminals. Then, why am I still excited? Simple. Until GRID came along I had a really tough time envisioning anything like it. I had written in the past about how tablets have yet to become powerful and work-oriented enough to replace a laptop (not to mention a desktop), and my main grievance was that tablets and other touch-oriented devices were simply not Excel friendly. I use Excel here as an example, as it is close to my heart, but you can probably recall a plethora of applications that you currently believe to be non-tabletable (I’m coining this… deal with it) – think AutoCAD, 3D Studio Max, or any other keyboard- and mouse-intensive application. What Leong has done is really quite remarkable, and it gives me hope that more and more of these desktop-oriented interfaces will be replaced with more intuitive and touch- and voice-driven user interfaces. Leong is no stranger to Excel, and was responsible for Redmond’s latest UI design for Office (2013). Actually, it’s rather amazing that Microsoft hasn't been able to keep him on board and I’m sure they will eventually regret it (if they don't already).

“I would have used a different example of its use.” -A.B. Mendez repeating a commenter

GRID sports a pretty simple and intuitive interface that supports both touch and voice commands. It is still in development (expected to be released soon to an iDevice near you). I therefore expect functionality to be incremental (as was and is the case with Google Docs) and am not expecting a full-blown Excel replacement anytime soon, but I believe that GRID or something similar could really become a major competitor with Excel in many areas. Many Excel users are not statistical or financial power-users, but rather the average Joe and Mary, using Excel for fairly simple and mundane tasks, such as grocery lists, bills, and the like. Such users probably find Excel to be far too complicated for their real needs, and would be happy to replace it with a multi-platform alternative that would be far simpler and more convenient to use. GRID is actually so simple that I can easily see users, who in the past would shy away from Excel, adopt GRID with a smile (Microsoft is attempting something similar with its new radial menus, but the jury is still out on that one as the underlying software is essentially the same). I’m impressed, and can’t wait to see this project develop. I hope it lives up to my hype!

Temporary Quiet Period

2012-06-25T20:23:00.000-04:00

It’s been a while since my last post, but unfortunately, it couldn’t have been avoided. I have recently joined Greencrest Capital Management as an Associate, and conflicts of interest with my new position bar me from being able to write about most of the topics that I would normally write about. Greencrest, or PE Source, the private equity arm of Knight Capital Group (NYSE:KCG), is a leading research and advisory firm that provides insight-based access to exceptional private companies and rapidly growing, revolutionary industries. Greencrest analysts frequently appear in the world’s top financial media outlets, and I am proud to have joined the team. That being said, I will do my best to identify topics and companies that we have no coverage on or position in, and will return to my writing routine as soon as possible.

Expect some cool things to happen in Q3 and Q4. While Facebook’s botched IPO wasn’t a good start for the IPO season (while I have a lot to say about this topic, I will reserve my thoughts for a later date), and it has been rather quiet since, the pipeline is strong, and some really cool companies will be hitting the equity capital markets in the near future. As we speak Morgan Stanley is leading ServiceNow’s roadshow, where they will be looking to raise $150-$200 million at a $1.5-$2 billion valuation. M&A activity has also been picking up. Buddy Media’s $689 million acquisition by Salesforce, and Yammer being acquired by Microsoft for around $1.2 billion are just the start of the season, and with more IPO withdrawals than ever before, we can expect M&A activity to continue picking up throughout the second half of the year. I particularly like the Adtech space. Whereas many ventures have been catching banker and investor eyes, this space has been somewhat underhyped (if such a thing exists in this market). Companies like Clearspring (AddThis) and Adconion (selecting bankers for an upcoming IPO as we speak) haven’t been receiving the kind of attention that Klout, Pinterest, and others have received. However they have been (and still are) far more profitable than many well-known (and hyped) ventures. I find it rather hard to pinpoint (no pun intended) the exact reason Pinterest, or even a Pinterest clone, with high costs of revenue and negative EBITDA are so much more popular than, say Media Ocean, which has around $3 billion in revenue, and is reportedly netting a rather high margin. However, that too will change in the near future.

So expect a very interesting second half of 2012, and expect more from me (hopefully here, rather than elsewhere) on the less known and covered ventures, as well as on public equities in this space.

Know thine enemy

2012-05-04T13:59:00.001-04:00

If you are like most users, you probably think that your computer, tablet, phone, or [insert latest gadget here] is safe from cyber-attacks. Not only is this notion absolutely ludicrous, but your device is probably already infected with some type of malware. You simply don’t know it yet. Identifying and addressing such threats has been the focus of a great deal of effort by many in the cyber security community. However, locating the source of such threats has received far less attention (read virtually none). CrowdStrike is attempting to address this exact issue.

As the use of various technological devices that are connected to the internet proliferates, so does the risk of such devices being compromised by various sources. There is nothing new about security threats to your devices, and Viruses (so coined by Fred Cohen in 1982), for example, have been around since the existence of the internet (or ARPANET if you insist). A whole industry has since evolved around protecting your devices from external, malicious software (malware) threats. While there are huge players in this space that have spent literally billions of R&D dollars in identifying and addressing new and emerging threats, we are far less safe than we imagine.

The truth is that we have become so complacent and docile when it comes to malware threats that it is absolutely astonishing. In reality, we are actually less safe now than we have ever been. Just to put this statement into some context, over five and a half million attacks were blocked in 2011 (up from 3 billion in 2010), with over half of these attacks being targeted at large enterprises, including the public sector. Think of those attacks that went on undetected. As you might imagine, the top three target industries are the government and public sector, the financial sector, and the IT sector, and while the vast majority of these attacks were aimed at U.S. entities, this is by no means a local phenomenon. I would also note that with the proliferation of cloud based data centers, our data (and I use this term loosely to encompass literally everything you would want to protect, such as Social Security numbers, credit card numbers, intellectual property, corporate financial information, trading position, etc. – the list is endless) is now stored in a more centralized manner, making attacks on such centers more lucrative (a successful attack would yield more information). Attacks are also not limited to PCs or servers, and we have witnessed an explosion of attacks aimed at mobile devices as well. We really are not safe.

While there are endless solutions out there for personal, SMB, and enterprise users, including anti-virus tools, anti-spyware tools, firewalls, and many more (there are actually many companies that provide ongoing detection and threat removal services for literally all types of entities), they all focus on identifying and addressing the actual threat (i.e. the malicious code), rather than the perpetrator. In the public sector (say the military or the FBI) this is not the case, as identifying the source is considered far more important, and being able to trace the criminal or spy is paramount. However, in the private sector little to no focus has been aimed at the actual source of the attacks (except for general statistics purposes). You might be asking yourself why this even matters, as most corporate entities would simply want to prevent such a security breach in the first place, or alternatively, remove it once discovered. The answer is simple. Detecting the source of a threat goes a long way in helping to detect, prevent, and ultimately remove future threats.

The truth is, as CrowdStrike’s President & CEO, George Kurtz (Former Chief Technology Officer & Executive Vice President of McAfee), puts it well “there is no silver bullet that will stop a determined adversary, so while the security industry attempts to build bigger fences, the enemy is bringing higher ladders to the fight.” Not only will a “determined adversary” be successful, the odds are he already has been. You simply don’t know it yet. Kurtz goes on to say that “the seemingly daily barrage of disclosures about companies that have had their crown jewels stolen in recent years reinforced a key principle for us – these companies don’t have a malware problem, they have an adversary problem.” I couldn’t agree more. Unlike the competition, CrowdStrike provides a real comprehensive solution, addressing both the actual threats, as well as the actual predators, and then monitors such predators in order to prevent future attacks, or alternatively, discover and address them faster. The company will focus on the technological aspects of malware – developing tools for monitoring, detecting, and addressing threats – as well as on providing business services for its clients. To show they mean business, the services division will be led by Shawn Henry, former Executive Assistant Director of the Criminal, Cyber, Response, and Service Branch of the FBI.

I believe these guys have really put together a stellar team, and have a really good approach on how we should be looking at future threats. Fighting yesterday’s battles, as security experts have done so far, is pointless, and the future is in fighting future threats. While the company is still officially in stealth mode, I expect to hear a lot more about it really soon.

Can Salesforce deliver another straight quarter of accelerated growth?

2012-04-14T18:53:00.000-04:00

With scores of large, enterprise customers, including Dell (DELL), HP (HPQ), VMware (VMW), Kimberly-Clark (KMB), and others, replacing their outdated Siebel platforms with Salesforce (CRM) platforms, and with thousands of SMBs adopting its various platforms to help manage their businesses, it seems that Salesforce is on target for another quarter (its 10th) of consecutive acceleration in transaction growth.

I first considered investing in Salesforce back in 2008, when a good friend of mine was highly praising this new disruptive company that he was paying to manage his CRM needs. At the time, Salesforce was trading around $30 per share, after coming down from its then high of around $70 earlier that year. With the current recession just beginning, and with many uncertainties on how industry leaders SAP (SAP) and Oracle (ORCL) would respond to this new threat, I admit, I was bearish.

Although shares of Salesforce since have only trended up, I was looking to see steady growth, and this was not the case. Throughout 2009, and for most of 2010, Salesforce demonstrated negative Quarter-on-Quarter (Q/Q) growth, and it wasn’t until that trend shifted in the end of 2010 that I began to look more seriously into Salesforce again. Since that last quarter of 2010, Salesforce has done nothing but grow at an incredible pace, delivering quarter after quarter of exceptional growth, and has seen positive Q/Q growth in every quarter since. With over 92,000 customers, and almost $2.5 billion in revenue, Salesforce is looking really good.

I believe that Salesforce is one of those companies that we will look back on years from now with awe, and I have no doubt that it will continue to disrupt Oracle, SAS, and other large competitors, which have been forced to spend huge sums in acquisition costs just to keep up. SAP recently shelled out an astonishing $3.4 billion (representing an incredible 52% premium) on purchasing human resources software maker SuccessFactors, and recently agreed to acquire mobile asset management and field service solutions provider Syclo for an undisclosed sum. Oracle has also been on a cloud-shopping spree, paying $1.5 billion for CRM provider RightNow, and $1.9 billion for talent management provider Taleo. If you were looking for validation of a thesis that cloud enterprise solutions will be dominant, look no further, as Oracle, SAP, and other giants have essentially validated Salesforce’s model, and are now trying to play catch-up. However, Salesforce is proving to be a fast moving target.

Salesforce has recently introduced its Social Marketing Cloud which leverages the Radian6 acquisition it made last year, as well as its powerful Chatter platform. Its human capital management platform SuccessForce, based on the recent acquisition of Rypple is additional confirmation that Salesforce means business. The SiteForce developer platform (re-branded as Site.com) based on Salesforce’s Heroku (Ruby) and Apex platforms is quickly gaining momentum, and it looks like 2012 will be a pivotal year for the company. Salesforce has demonstrated an appetite for acquisitions, and has proven that it can compete in this space.

Sure, Salesforce’s questionable GAAP performance (when compared to non-GAAP results) is not as impressive as I would like to see, and the continuous dilution of shareholders raises questions surrounding long term goals. EBITDA multiples, both current and forward looking, are through the roof (somewhere in the 150 range), and one could easily turn bearish. Adoption of Apex has not been on par with predictions, and Salesforce’s intention to allow integration of Oracle and SAP platforms could seem like a bit of a step backwards. Competition from Microsoft Azure platform and Google is also expected to be fierce.

Even so, my thesis remains unchanged, and SAP and Oracle’s aggressive entry into this space confirms that non-cloud platforms will soon be a thing of the past. Salesforce has proven itself to be a worthy competitor, and has demonstrated beyond any doubt that it is just as hungry and aggressive in this space as its larger rivals. Salesforce has much room to grow, and despite the high multiples, is a great opportunity for the long run.

Box is finally a serious threat to Dropbox, but is it overreaching?

2012-04-03T19:35:00.000-04:00

Box recently announced that it is rolling out Box OneCloud, a broad cloud-solution for the enterprise that will set Box one step further apart from Dropbox, and one step closer to being a one-stop-shop cloud solution for the enterprise. However, despite all the hype, this move pits Box against some really big players in this space, such as Oracle (ORCL), Microsoft (MSFT), and IBM (IBM).

I was first acquainted with Dropbox when it first débuted, and have been a loyal user ever since. The sheer simplicity and functionality that Dropbox provided was unparalleled, and the company developed a massive following. Dropbox assumed correctly that smart phones and tablets would become an increasingly more important part of our lives, and that we will require better platforms for storing and accessing our information. Dropbox has successfully stayed ahead of the curve in an immensely competitive market, and has been able to maintain a strong market share. With more than 45 million users worldwide (up 310% from last year) and $240 million in revenue, Dropbox seems to justify its recent $250 million Round B financing by Index Ventures, Benchmark Capital, Goldman Sachs and others, giving Dropbox an estimated $4 billion valuation. With Morgan Stanley predicting a 50% per year increase in cloud expenditure through 2014, you can see why Investors are happy. However, in light of Box’s recent announcement, I believe Dropbox is in store for a real battle.

Box’s new OneCloud service will offer enterprise clients access to over 30 powerful applications on remote servers provided by Apple (AAPL) that will essentially make document sharing and editing a lot more intuitive and safe. The new suite allows users easily to interact with powerful and popular applications, such as QuickOffice, Nuance Paperport Notes, Adobe Echosign, and others, from literally any device. “We want Box to be center of all business work flow and the go-to mobile business operating system” co-founder and CEO Aaron Levie recently commented to TechCrunch. More importantly, Box has released a developer platform (the Box App to App Integration Framework) that will allow for future customization and functionality. For instance, Box does not currently support certain file operations that we would expect an enterprise platform to support, such as the ability to open in one application a file created in another. However, this capability can now be offered by application developers, and I expect many of them to start providing seamless integration with Box OneCloud.

To my dismay, however, Dropbox has, so far, stayed away from the enterprise market. I can tell you firsthand that a certain large U.S. university would have been very happy to pay Dropbox to provide a viable enterprise solution, but today is considering a Box solution instead. One could argue that it is wise of Dropbox to avoid battling it out with such giants as Oracle, the largest provider of database solutions, which has been making strategic acquisitions to boost its cloud capabilities. Oracle’s recent aggressive purchase of online human resources platform Taleo Corp. for $1.9 billion is just one such example, and I doubt the giants will go down without a fight. I personally believe that such purchase was aimed to position Oracle better to compete with the likes of SAP (SAP) and SalesForce (CRM), but the effect on Dropbox and Box is nonetheless the same. One could further argue that this space is already crowded by many small players, such as Accellion, Egnyte, and YouSENDit, and that it is expected to get even more crowded when Google (GOOG) and Microsoft decide to get serious about competing in this space. Microsoft has already demonstrated that Azure could be an incredibly strong platform, and a Google Drive combined with the Apps platform will be a significant player as well. Add Apple’s iCloud to the mix, and I can understand Dropbox’s hesitation. However, if Dropbox fails to provide a viable enterprise solution, it will be at risk of losing the home market as well, as enterprise solutions tend to trickle down into the home market, rather than vice versa.

There’s really no nice way to put this. Either Dropbox was too timid to be first to enter the space, or worse, it failed to recognize the opportunity. I doubt the latter is likely, and, if I am correct, we will see Dropbox offering similar functionality soon. I only hope for its sake that it isn’t too late by then. Box now claims to have over 10 million users in 120,000 businesses, including 82% of Fortune 500 companies, and is picking up speed. With over $160 million in venture funding from some major strategic partners, such as SAP Ventures and SalesForce, as well as from some of the most respectable venture firms in the game, such as Andreessen Horowitz, Draper Fisher Jurvetson, and others – giving Box an estimated $600 million valuation – it seems serious about becoming a dominant force in the market. I hope Dropbox is up for a fight.

Why acquiring Square at a $1 billion valuation might have been the best (and cheapest) move for PayPal (eBay)

2012-03-21T00:51:00.000-04:00

As most of you have heard, PayPal will be launching a new service (and dongle) to compete directly with Square in the offline payment space, and believes it can swallow some of Square’s market share. While I understand that a $1 billion valuation for Square may have seemed a bit much for PayPal (NASDAQ:EBAY) execs to swallow, I believe such acquisition would have been highly beneficial, and would ultimately have been cheaper than competing directly.

Acquired in 2002 for $1.5 billion, PayPal has had an immensely successful run, and is one of eBay’s most profitable units. The company has recently released its vision for the future, to provide customers with “Integrated in-store, online and mobile shopping solutions that create a fully optimized end-to-end shopping experience”, and intends to do so by competing in the offline payment space as well by taking on companies such as Square, which has to date processed over $4 billion worth of goods. PayPal has good reason to believe that it will succeed. With incredible brand recognition, over 106 million active accounts (13% increase year over year), excellent relationships with millions of merchants spread across various geographies, a wide suite of product capabilities, and an excellent risk management and claims system, PayPal believes it can leverage its current strengths and dominate the offline payment space as well. Compared to Square, PayPal is a behemoth. Backed by eBay’s strong analytics team, and with total payment volume (TPV) of $33.4 billion in the fourth quarter of 2011 and mobile payment volume of over $4.0 billion last year (a 500% increase from 2010), PayPal enjoys a significantly lower cost of capital than does Square. To top it all off, PayPal has announced that it will be charging five basis points less than Square’s transaction fee of 2.75%, and is signaling that it intends to be aggressive about competing in the space.

However, Square is no small player, and unless merchants are willing to switch to PayPal immediately (something I would love to see a study on), it will continue to enjoy a dominant position in the market. Square is also willing to compete aggressively, and hired Alyssa Cutright, who until recently served as Vice President of Products for North America at PayPal. PayPal is not the first to compete with Square. Launched by accounting software firm Intuit Inc. (NASDAQ:INTU) in May 2009 and currently about half the size of Square, GoPayment is a software service that comes with a free card reading device, and has been steadily increasing market share. Other companies such as Eventbrite have also announced that they will be launching a service that would compete with Square in certain markets.

While we can expect fierce competition in this space in the future, I believe Square at a $1 billion valuation has never been cheaper. I am confident that PayPal will be successful in the offline payment space as well. However, I also believe that Square will be able to compete successfully with PayPal in the markets in which it is currently dominant. PayPal’s move will undoubtedly make it difficult for Square to be a serious player in markets in which PayPal has a dominant online platform presence, but this should not have such a pronounced effect on Square’s position in the U.S. market, and will not completely lock them out of foreign markets either. Assuming you accept this premise, Square will continue to grow in certain markets, and will continue to be a competitor of PayPal (assuming PayPal is successful in their endeavors as well). Given this scenario, it may very well have been cheaper to acquire Square, its market share, and its know-how at $1 billion, than to bear the costs of competing with it. Acquiring Square would allow PayPal to keep the 5 basis point fee reduction, which will prove to be significant over time, save on sales and marketing expenses associated with fierce competition (assuming PayPal is serious about dominating this space), and leverage Square’s momentum of success across world markets.

Just as Square seems to have underestimated PayPal’s willingness to compete in the offline payment space, I believe PayPal has underestimated Square’s ability to remain competitive despite more aggressive competition. If Square continues to grow as it has (I expect we will see at least some slowing in growth), PayPal may end up acquiring it down the road at a higher valuation, or worse, Square could be acquired by an even larger player in the financial world, resulting in an even worse position for PayPal. PayPal will surely be successful, but I believe it could have done even better had it acquired Square.

Weekly Viewer Statistics

2012-03-20T19:21:00.001-04:00

What can I tell you, its been an incredible few months, and I just wanted to thank you all for following (here, on Nasdaq Community and on SeekingAlpha) and for your continuing support. I'm utterly humbled - Thank you!

Netscape?

Adobe’s first quarter profits are down 21% from last year, but here’s why it doesn’t matter

2012-03-19T23:59:00.001-04:00

Adobe (NASDAQ:ADBE) reported first quarter net income of $185.2 million (37 cents a share), and non-GAAP net income of $1.045 billion (57 cents a share), just hitting analysts’ estimates of 57 cents a share. “We delivered solid earnings in Q1, achieved revenue within our targeted range, and began to build excitement for our upcoming creative product release,” said Mark Garrett, executive vice president and chief financial officer, Adobe. Although still recommended as a ‘buy’ by most analysts (51.9%), many still are reluctant about Adobe’s new Software as a Service (SaaS) subscription model, and are waiting to see if it is as profitable as Adobe predicted. Analyst ratings with regard to Adobe’s ten nearest competitors are more optimistic (73.9% average ‘buy’ ratings), but I believe Adobe will continue to grow in the coming 18 months, as it begins to capitalize on some of the emerging new areas in which it has heavily invested. I also believe this trend is likely to continue in the future.

Diversified across many platforms, products and services, Adobe became a bureaucratic nightmare over the last few years, and despite reasonable growth, seemed to be lacking a grasp on market currents and had endless unrecognized synergies. The HTML5 fiasco is a great example of Adobe’s slow thinking. When Apple first released the iPhone, many were initially surprised that it lacked compatibility with the most dominant method, then, as well as now, to deliver rich media content to end users, i.e. Flash. However, Apple had no intention of supporting Flash, and instead invested heavily, through their relationship with the Web Hypertext Application Technology Working Group (WHATWG), in HTML5, which would bridge the void. It was clear that Apple would not budge on this matter, and while the entire developer community was embracing HTML5 with an extra, borrowed hand, Adobe was waging their own little war with Apple, and tried to hold on for dear life to Flash as a dominant platform. Adobe failed, of course, at shunning HTML5, and recently began developing tools for HTML5 developers, although years late.

Adobe has seen an incredible decade of growth as a result of constant innovation and embracing of new technologies, but it had become impossible to replicate past success without a major rethinking of future strategy. During the past year, Adobe has reorganized its profit units into two main categories: Digital Media and Digital Marketing. The Digital Media unit is responsible for tools and solutions for content creators, web application developers, and digital media professionals that enable them to create, promote, and monetize their content. In contrast, the Digital Marketing unit is responsible for solutions and services for digital marketers, advertisers, publishers, merchandisers, and web analysts, to allow multi-channel campaign execution, and delivery of personalized web experiences and media monetization. This type of focus is what Adobe really needed, and it is great to witness that it has a clear vision of how it will create value in the near future. Digital media creation and monetization are huge revenue sources, and although Adobe historically had a significant competitive advantage on the content creation side, it is only recently that it made a real push into the monetization and analytics space in which they are now a powerful player.

Things have changed at Adobe, and it has successfully positioned itself to compete with new consumer demands. The new SaaS subscription model is not a new product, but rather a hint of things to come, and I believe that this is the reason Adobe has put so much emphasis on it in past presentations. The new SaaS model has been priced in a manner that would actually increase Adobe’s overall sales (assuming the adoption rates predicted are, in fact, met), and looking forward I believe this is a more viable platform, as it will allow better integration with current Digital Marketing platforms and will most likely increase overall value to both the consumer and the company. Sales are, in fact, lower this quarter, but this is to be expected in anticipation of a new Creative Suite version, which will be released soon, and with subscription revenue up 38%, I wouldn’t put too much emphasis on this fact. I am, however, concerned with the fact that, despite revenue from Digital Marketing increasing from 19% to 22%, cost of revenue has gone up from $254.9 million to $301.6 million, and has more than offset this growth. These costs are directly associated with the fact that Adobe has made many acquisitions is this space (including Efficient Frontier, Auditude, Typekit, Nitobi Software, IRIDAS, EchoSign and Demdex), and is working hard to integrate them into the Adobe product umbrella. “We are raising our fiscal year revenue and non-GAAP earnings growth targets due to the addition of Efficient Frontier,” said CEO Garrett. I am optimistic, and while I would monitor these numbers closely, I expect them to decrease over the next 18 months, and expect significant growth from this sector.

Adobe still looks good.

New Sonar App released this week

2012-03-13T19:03:00.001-04:00

I've been playing around with the new version 1.5 of Sonar, and while I have been using Sonar for a while now, and have been generally impressed, I was expecting a bit more from the new version. I have no idea whether this is ultimately a feature or a legitimate stand-alone, but in the meantime I’m enjoying the functionality, and Sonar is generating a lot of buzz at SXSW.

For the uninitiated, Sonar is a simple little app debuted at TechCrunch Disrupt last year that allows you to "uncover the hidden connections you miss everyday, in real time, in the palm of your hand." In other words, Sonar browses through your various social outlets (Foursquare, Facebook, etc.) to discover who else is in your vicinity (be it friends, acquaintances, people you follow or subscribe to, etc.), and displays relevant real-time information about whomever Sonar discovered. While there are similar players in this space, Sonar is unique in that it doesn’t require your "discovered friends" to have Sonar installed; rather Sonar relies on already published information, be it private or public. I have found Sonar to be very useful in trying to get more information about the people with whom I’m already talking, and help discover people with whom I probably should have been talking.

Sonar was launched about a year ago, but we really haven’t heard much about them since until a few days ago when version 1.5 was released for the iPhone, as well as a new Android version. As you can see from the iTunes Store screenshot, Sonar now pulls data from sources other than Foursquare (such as Facebook, Linkedin, and Twitter), and is able to display more information about the people around you in a faster manner. While these are all nice improvements (essential really), I still feel that this could have been, and still can be much more. Say, for instance, you’re a Wharton MBA student attending an endless networking event to recruit for a top position with some major firm and are using Sonar as a means to try and figure out if any of the foes in the room are actually friends (or friends of friends). While the existing (and revamped) app gives some basic info, I would have really wanted to get so much more. If I’m in a networking mode, I would love to get a one-page summary on who I’m about to approach – something that could capture the essence of who he/she is, and through what chain of acquaintances we are connected – not just the bare essentials to get the conversation started, but something to make it meaningful.

This is how I use Sonar, but other users’ experiences may differ, and may be looking to Sonar for other uses as well. While it’s been years since I’ve been "in the game," I can also envision myself in a game mode, in which Sonar would act as a way to connect me with better potential partners, based on shared interests, groups, likes, etc., and would provide me with more than just basic information. Any way you look at it, Sonar is a great idea, but it doesn't go far enough, as I, like most people I assume, want different things from Sonar at different times. Sonar should be able to accommodate these different needs. It is very possible that the folks upstairs are working on something similar, or alternatively have implemented some of the above in the new algorithm, but at the end of the day, I would have liked to see more functionality. I am still really excited about Sonar, and hope to hear more from them in the future.

UPDATE (3/15/2012) - The new Sonar app has no way of turning off location services, and basically records your every location. I don't know about you, but for me this is a deal-breaker, and I have removed the app. I have also heard reports of significantly reduced battery life, as is to be expected from constant use of location services (although I have not witnessed this issue firsthand). I encourage Sonar developers to address this issue immediately, and not alienate their current following.

Have the Greeks Undermined the European Union? Eurodebt: to infinity and beyond…

2012-03-08T15:35:00.000-05:00

Greece has had a rough week (as well as month, year, and decade), but it looks like things are finally beginning to look good for the Hellenic Republic. Assuming this week's private bond swap goes through, and Greece is able to successfully return to fiscal normality, we can expect some stability in the near future, but I must ask at what cost to the European Union's fiscal structure(s)?

Source: Wikipedia

From Schism to Economic Unity

Following three major wars in a 70-year span, Europe was in financial and political ruins. Desperate to regain world respect and contain future German aggression, Frenchman Robert Schuman set out an ambitious goal to unite Europe. Together with the initiative’s architect Jean Monnet, Schuman announced on May 9th, 1950 plans to place “the whole Franco-German coal and steel production under a common High Authority, within the framework of an organization open to the participation of other countries in Europe.”[1] Accepting the new German Republic as an economic partner, and maintaining French national security through the external control of the most important economic resources of the day, the European Coal and Steel Community (ECSC) was established in 1951 (together with the European Defense Community and the European Political Community). In 1957 the Treaties of Rome established the European Economic Community (EEC), and the union was born.

In 1979, amid wildly fluctuating exchange rates (culminating in the collapse of the Bretton Woods fixed-exchange rate system), rapid inflation, pricing discrepancies, and exceptionally slow, post-war, economic growth[2], the European Monetary System (EMS) was established to address these threatening economic changes. In the early 1980’s there was again a feeling that deeper economic integration could benefit the member states, and talk of a single market became frequent by François Mitterrand and his finance minister Jacques Delors[3]. Europe signed the Single European Act (SEA), a major revision to the Rome Treaty, and it quickly became a pillar to the European Community’s (EC) metamorphosis by preparing the grounds for the European Monetary Union (EMU). The collapse of Communism, the end of the Cold War, and the reunification of Germany were all major catalyzers in the birth of the European Union. The challenge of overcoming old fears of a united and strong Germany, absorbing the (relatively) weak East Germany into the new EC, and maintaining Germany’s commitment to the EC were all major challenges that the EMU was established to deal with. Europe witnessed extreme currency fluctuations and attacks, and member states began fixing their local currencies to the Deutsche Mark. It became a prominent argument that a single currency would solve these problems. In reality, within the constraints of the EMS, a single currency was a necessity.

Source: Deutsche Bundesbank

In a rather quick response to the profound political and economic changes that Europe was experiencing, member states negotiated the Maastricht Treaty – the treaty that established the European Union. The Maastricht treaty formed the European Central Bank (ECB), and modeled it after the German Central Bank (Deutsche Bundesbank), which emphasized price stability, and had a narrow mandate to combat inflation. The ECB would be prohibited from purchasing a member state’s bonds, as well as from bailing them out of financial insolvency. The architects of the 1991 Maastricht Treaty also recognized that among other things, European people, goods, services, and capital must be mobile to allow for a single market to be a reality, and the treaty provides for such free movement. However, cultural and language barriers still persist. The treaty’s initial guidelines mandating that the budget deficit be below three percent of GDP and the national debt be below 60 percent of GDP served well as guidance, but in practice were rarely maintained. Such standards were adjusted initially to allow for “improving states,” but later were overlooked as Germany and France strayed significantly from their own hard-pressed goals. The treaty also mandated an inflation rate of no more than 1.5% above the three best performing member states and some other similar provisions, yet they, too were loosely enforced.

Difficulties in Implementation

While strict guidelines are common in EU treaties, enforcement of such guidelines is somewhat less common. Nonetheless, the German-modeled ECB has been relatively consistent in interpreting its narrow mandate, and has been reluctant to act as a lender of last resort to European member states. Spreads on European member state’s bonds regressed during the 1990’s to match a low, single-market yield expectation, essentially representing a similar credit risk among all member states. As member states had control over their currency, and could print as much as needed to cover any debt obligations, low and consistent spreads were justified. However with a single Euro currency, member states are no longer able to cover their obligations by inflating their local currency, and bond yields have recently skyrocketed for states in economic peril, such as Portugal, Italy, Ireland, Greece, and Spain (PIIGS). Unlike the perceived exchange-rate risk of the 1970’s and 1980’s, current spreads represent the ‘real’ credit risk (sovereign risk premium) of member states, as they are no longer have fiscal autonomy. Whereas markets would once correct such discrepancies, a single currency does not allow for such prospect, and certain countries surely feel the pressure of the aforementioned limitations.

Can the Eurozone Survive Without Greece?

Greece could surely survive without the Euro. The New Drachma would be highly devaluated, and the Greek economy would be in peril for some time to come. However, they are already in peril, and an independent currency would allow them to attract new speculative investors that would spur growth in the local economy as well as increase competitiveness. Long term recovery under such a scenario and would be dependent on Greece’s willingness to enhance its own competitiveness, with market forces doing the rest. This does sound optimistic, but clearly there are disadvantages to cutting off the lifeline of cash that Greece currently enjoys, and it is unclear that this would be beneficial overall. Unlike Greece’s options, the Union cannot suffer the loss of Greece, as such a loss would completely undermine the currency. If Greece were to leave the Eurozone, similar attacks would be launched on other PIIGS currencies, and soon all would have no choice but to leave as well. This would be the end of the Eurozone, and it’s not the PIIGS banks that would be left alone with the bill, so to speak. Exposure to PIIGS banks is immense among member states, and anything but a recapitalization of distressed banks, or providing a window for lending directly by the ECB would end with grave economic repercussions.

I would like to point out that I have set aside for the sake of this post the far-reaching political implications to the EU in case of such chain of events. It is clear that such implications would also have a secondary financial effect that cannot be ignored. However, I will leave that topic for future discussion. German Chancellor Angela Merkel and French President Nicolas Sarkozy have been trying to negotiate an impossible solution. Germany has been reluctant to assume financial responsibility for member states’ failure to adhere to fiscal responsibility, and rightfully demand that such countries show willingness to increase competitiveness and manage a conservative budget. However, ignoring history and the historical pattern of lack of adherence to, and enforcement of, the provisions set forth in the Maastricht Treaty does grave injustice to Greece and other PIIGS countries. The ECB could technically interpret its mandate in a broader manner, such that purchase of government bonds is essentially needed to prevent future price instability for the entire Eurozone, however this is a politically charged debate. Nonetheless, the EU rescue package is clearly at odds with the historical framework, which, we have seen, has proved to be more dynamic than one would have thought.

The €750 billion recent EU rescue package, in the form of facility loans and guarantees, is clearly a deviation from the conservative stance we have seen from the EU in the past, and it is clear that any other action would have led to extreme economic conditions throughout the Eurozone. It also clear that recent measures will not suffice (to say the least) to prevent economic conditions from deteriorating, and future action will surely be needed soon. It is worth noting that the ECB’s strategy of purchasing member states’ bonds on the open market (as such action is not prohibited) has also been rather ineffective, and has been costly as well. It is undoubtedly far from what the architects of the EU and ECB intended, but clearly necessary under the circumstances to preserve the future of the union.

Source: Wikipedia

“In our seeking for economic and political progress, we all go up - or else we all go down” –Franklin D. Roosevelt

Barring a miraculous set of circumstances, the EU is faced with few options. Even a drastic reduction of Greek debt, surely coupled with extreme austerity measures that may have dire social and political implications, would have little overall effect, as it would take Greece a decade just to achieve a 120% debt-to-GDP ratio. A Greek default or departure from the Eurozone would spell dire consequences for other member states, not to mention global exposure to European sovereign and private debt, and it seems unlikely that given the consequences discussed herein that such events would take place. The EU is therefore left with only one viable option, which is to provide extensive capital to distressed member states and allow them slowly to regain competitiveness with the aid of a depressed economy. This would allow Greece and other PIIGS countries to focus on internal development and for wages and other competitive measures to increase. This scenario seems most likely, and despite the social-political implications, seems the lesser of many evils. I believe recent events in Greece are proof that this is in fact the direction that the ECB, the EU, and ultimately Greece are heading in, and this appears to be the right direction.

[1] Pascal Fontaine, Europe, a Fresh Start: The Schuman Declaration, 1950–90 (Luxemburg: Office for Official Publications of the European Communities, 1990), p. 44.

[2] Desmond Dinan, Ever Closer Union: An Introduction to European Integration, 3^rd Edition 2005 (Boulder: Lynne Rienner Publishers and London, Palgrave Macmillan, 2005), p. 77-78.

[3] Peter Ludlow, The Making of the European Monetary System: A Case Study in the Politics of the European Community (London: Butterworths Scientific, 1982).

Analysts are not properly acknowledging that AMD is now fabless

2012-03-06T23:33:00.000-05:00

Advanced Micro Devices (NYSE:AMD) announced this Monday that it is selling its remaining 8.8% stake in Globalfoundries to Advanced Technology Investment Co. (based in Abu Dhabi). AMD share prices reacted immediately with a 4%-5% decline (there was some recovery later in the day). The consensus rightfully assumes that the direct impact of this decision will be an immediate reduction in AMD’s future income from Globalfoundries, however it seems the consensus is not properly acknowledging the fact that AMD is now officially a fabless semi-conductor manufacturer.

AMD spun-off Globalfoundries in 2008 amidst a major restructuring effort, and this move is essentially the completion of that decision. Nothing has really changed, and it is surprising that shares reacted so violently. Assuming this move was imminent, and it truly was, then surely this should have been accounted for in any past valuations. AMD’s core operations remain unchanged, and recently appointed CEO Rory Reed has been excellent at bringing AMD back on course, and preparing the grounds to allow AMD to compete aggressively with its major competitors.

AMD’s fabrication business was centered on Desktop and Server processors, and while this strategy was mandated by the licensing agreement with Intel, it made little strategic sense for AMD. Spinning off Globalfoundries was imperative to allow AMD to focus on its core business, and was instrumental in allowing AMD to invest heavily in mobile driven platforms. While ARM and RISC based processors are abundant today in mobile and tablet devices, it is becoming clear that such platform will not be able to satisfy either the CPU or GPU needs of future devices. Consumers are demanding more from consumer products, and manufacturers of such products will increasingly demand more from chip manufacturers. In that world, AMD has only one rival – Intel (NASDAQ:INTC). While AMD has not historically been, nor do I expect them to be in the near future, a major threat to Intel, it has nonetheless been able to successfully position itself as a worthy no. 2 to Intel in both the Desktop and Server markets, and will successfully do so in the future.

Being fabless allows AMD to bet less on certain platforms than its rival Intel, and I believe this will give AMD a competitive edge in adopting new platforms faster. AMD has already shown that it can successfully implement some of the know-how it acquired from purchasing ATI by coupling a competitive CPU/GPU combo for mobile devices, and I believe we can expect significant innovation in this space in the future. AMD’s success depends on the success of the underlying trends CEO Reed is betting on – Mobile, Tablets, and Cloud data centers. I truly believe all three trends will be strong, but if any of the three succeeds, AMD will do very well.

Cisco is still king of the hill

2012-02-11T11:12:00.003-05:00

Cisco reported Q1 FY’12 earnings this week, and this is a great opportunity to evaluate how Cisco’s restructuring is doing. The short answer – not bad, the longer answer – not bad, assuming some stuff.

Source: Cisco

Representative of its last few quarters, Cisco’s (NASDAQ:CSCO) Q4 FY’11 earnings were a testament to how massive shifts in industry trends are affecting Cisco’s business. Essentially, Cisco now has four main profit drivers: its core business – routing, switching, and associated services (which includes comprehensive security and mobility solutions), new products (which includes solutions for wireless, collaboration, video, data center virtualization and cloud, and architectures for business transformation), services, and ‘other’ (consisting primarily of optical networking products, emerging technologies, such as physical security and video surveillance, and digital media systems). Revenue from routers and switches is in decline across most consumer and commercial markets, and enterprise markets are not doing much better, however this is Cisco’s core business, and the focus of its recent restructuring. You would think that a big push to cloud would spur a growth (which it did for that exact reason), yet it is more than offset by the decline in in-house data rooms and in general, in-house IT anything. While profits have been declining for the last year, this week’s Q1 FY’12 earnings show some signs of improvement. After dropping the failed line of Flip cameras, cutting 10% of its work force, and lowering estimates, Cisco has met its $1 billion target expense reduction early, and appears to be competitive again. “We believe our vision and strategy are working,” said Cisco's chief executive, John Chambers this week.

Source: Cisco

Cloud is good
Cloud is becoming a huge IT trend, and more and more companies are outsourcing their storage, computing power and virtualization to cloud platforms. While this trend is growing at an incredible pace, and is expected to drive mass purchases by emerging, large cloud providers, such as Amazon and soon-to-enter Google, those same providers have far superior bargaining power, and can extract lower margins from Cisco, which is already operating in a very competitive environment. Moreover, a push to Cloud means large customers are moving an increasing amount of IT processes out of their in-house budget, something that is having a negative effect on Cisco’s revenue from these categories. Home products are doing no better, and Cisco’s attempt to gain major dominance in said market through the expensive acquisition of Linksys has proven unsuccessful, something Cisco has recognized, and therefore is investing less money in consumer products. Despite a rise in market share, margins have been going down for a while now, and we are witnessing a commoditization process in rapid evolution. While this can be somewhat offset by increasing gross margins through work force reduction and improved processes, there has been question whether such improvement is sustainable. Pundits note that even if Cisco is able to maintain a consistent market share in its core businesses, it seems that real future growth from these categories will be modest, despite wider adoption of the Nexus line of switches. That being said, Cisco currently enjoys a 76% share of the 10-Gbit Ethernet market, and sales of 10-Gbit Ethernet switches are expected to reach $13 billion by 2016 and will constitute nearly half of a total $28 billion Ethernet switch market by then. By 2016, sales of 40-Gbit Ethernet and 100-Gbit Ethernet products (the really fast and expensive ones) are expected to amount to $3 billion. Some room for hope. Like other vendors, Cisco has been adding higher-capacity switches to meet network demands for cloud computing, collaboration, and mobility products, and this trend is expected to continue at a rapid pace. Just imagine how much more information goes through mobile devices today compared to just a few years ago. It’s rather incredible.

Source: Infonetics Research

Collaboration
Just as we saw in Cisco’s Q4 FY’11 report, this week’s report for Q1 FY’12 further emphasizes the fact that most of Cisco’s growth in revenue does not stem from its core businesses, but rather from new products, such as enterprise video-conferencing solutions (collaboration – up 10%), and top boxes for cable companies (up 23%). We have been witnessing a real convergence of consumer demands and corresponding technologies related to video and collaboration – both heavily augmented by increase demand for mobility technologies – and Cisco has been very effective at capturing a significant part of that market through both in-house R&D and successfully integrated acquisitions, such as its purchase of Norwegian teleconferencing company Tandberg in April 2010.

Unified Computing for Dummies

The enterprise data center space has undergone massive changes in the last few years. Many major, well-financed, and aggressive competitors, such as Alcatel-Lucent, Brocade, Dell, Huawei Technologies, IBM, HP, and Juniper Networks have been very aggressive in maintaining or expanding their market shares, and gross margins have been declining (despite Cisco’s latest successful, aggressive attempt to gain a slight increase in market share through price cuts). We are witnessing mass commoditization in the space, triggered by a convergence of computing, storage, networking, and software technologies. Cisco has been attempting to capitalize on this new trend through its (rather) new and scalable Nexus product line, and its Unified Computing System (UCS) platform – both designed to integrate said technologies into enterprise data centers. Cisco reports that “to date, over 10,000 customers worldwide, including 3,000 in Europe, have deployed UCS systems.”

Cisco is betting big on Unified Computing to deliver new revenue growth in lieu of other shrinking sources. While this sounds like a rather trivial issue, it really isn’t, and neither are the implications to Cisco’s core business. Cisco has properly recognized that enterprise customers want packaged, secure, and copyrighted solutions for their operations. Similar demands will surely come from other customers as well, and I believe that Cisco has properly envisioned the post-pc, uber-mobile world, and is positioning itself to take advantage of this expected growth. If you had any doubt that Cisco is serious about this whole UCS thing, take a look at the new Cius tablet (Cius Mobile Collaboration Device) – the first real tablet for enterprise users (yeah, I remember the playbook), and a real masterpiece for collaboration (check out Tom’s IT Pro’s excellent piece on the Cius).

Epilogue

I can’t help but feel that Cisco just “gets it.” It is unclear whether it is able to capitalize on this shift in consumer and enterprise behavior, but I don’t see any other serious players even acknowledging that the game has changed. Indeed, Cisco is leading the way, and with almost $50 billion in cash to spend on acquisitions (something some investors may be worried about – did anyone say special dividend?), I believe Chambers is on the right track.

*Disclaimer: I hold shares of Cisco

Microsoft's new revenue model

2011-12-31T01:27:00.000-05:00

What does Microsoft’s new, Apple and Google inspired revenue model mean, and will Microsoft developers play ball?

I’ll be blunt… for a while now, I’ve been wondering where Microsoft (NASDAQ:MSFT) is heading. Before Windows 7, and for a really long time, I found myself defending the Windows and Office product lines from countless attacks. Vista was a flop – nothing new here – but overall Microsoft was still delivering the best business platform around, and I don’t believe this has really changed since. So, where did everything go wrong? Or did it?

False sense of security

Small improvements in the Office suite, and the later, and more major improvement with the introduction of the Ribbon interface, all kept the Office suite at its rightful place on the top of the business suite totem pole. Revenue from Office products was $5.8 billion in 2007, and is now over $22 billion, representing a close to 400% increase in revenue over four years (and recall that the last few years were somewhat extraordinary years). Windows 7 was a huge success. A good operating system in its own right (maybe this is what Vista was originally intended to be), but coupled with billions of corporate dollars sitting on the purchasing sideline during the financial crisis – now finally being put to use – Windows 7 has proved to be a huge success, and has sold more than 450 million copies to date. Remarkable! Yet, I somehow I don’t feel vindicated.

The reality is that we simply interact differently with our environment (or at least we are changing). Whereas lawyers, bankers and accountants are perfectly happy sending thousands of versions of the same documents back and forth with each other via email (or snail mail) – labeling them with some seemingly random code that only they can decipher, such as Orion_SPA_V23_A2_LDS (project code name; Share Purchase Agreement; version 23; option A2; created by L.D. Salmanson) – and often running a separate spreadsheet just to keep track of versions, the rest of the world is looking for better solutions, and is questioning that status quo.

Source: Microsoft

Iterations

I’ll demonstrate with a story. I’ve been recently helping a friend with his MBA applications. Now, for those of you that are not aware of this process, it will involve anywhere from three to five essays on really vague topics for each school, and each such essay will go through endless versions before it is finally submitted (ironically, still “unfinished” if you ask most applicants). Typically this is not a private process, and an applicant will get feedback from many of his or her friends and colleagues whose opinion the applicant trusts, and so a string of endless document instances is born. I could give you my two minute speech on why this is one of the most resource-inefficient processes imaginable (I have a fetish for efficiency), but let’s just focus on the actual difficulty in maintaining control of the documents and their revisions. Simply put, it’s a mess. Now consider the alternative – one document that could be commented on by, and shared with anyone. Efficient!

Now, this isn’t to say that this can’t be done within the Office suite, Office 365 or with the Web Apps and Live environments, but the fact of the matter is that Google Docs does this far better, and users are convinced of this. Few home and small business users really need the vast majority of features that Windows, Excel or PowerPoint now provide (never mind products such as Access), and are really paying a rather high premium for the features they do in fact use. Google Docs is free, and although the Google office suite is light years behind Microsoft Office, this gap is closing at rates that should be alarming to Microsoft executives. Revenue from Office products represents 30%-40% of Microsoft’s income. My friend and I are using (among other tools) Google Docs, and the thought of him having to do this process via endless email attachments of versions, although some are still unavoidable (admittedly, primarily due to my own addiction to Microsoft Office products), is troubling. Things have changed.

Source: Microsoft *Office is part of the Microsoft Business Division

Again, we are simply interacting differently with our environment. Whereas it was once OK for Outlook to sync in the background on our PC (yes, we once marveled at this), the notion of not having connectivity on your mobile device (for a working person at least), is unfathomable. Whereas just six to seven years ago I used to perform almost 100% of all of my online activities on my PC, that number is probably close to 20% today. In other words, Windows and Office are becoming a smaller part of my life. Granted, I’m currently on sabbatical from the corporate world, in which, in my profession at least, Excel, PowerPoint, and Word are irreplaceable, but I believe this trend is upward spiraling. Google Docs has become significantly more powerful in the last few years, and is rapidly catching up with Microsoft Office. Soon alternatives to Solver, Oracle Crystal Ball, and many other professional tools will be available for Google products as well, and this gap will narrow.

However, do you remember when I described my online PC-Mobile ratio earlier? I purposely neglected to point out another interesting ratio – namely, how my non-online usage is split between my PC and mobile devices – which has changed surprisingly little during the same period. For programmers, graphic designers, gamers, professionals, and so many others (I fit into a number of those catagories), mobile platforms are simply unsuitable. In those markets, Microsoft has been, and I believe will continue to be, very dominant in the near future, as mobile devices are simply unsuitable for certain tasks. A keyboard and a mouse help make a tablet for instance a little more work oriented, but current mobile OSs are not suited to deal with most work-related tasks.

The sun is shining

Again (did I say this enough), we are interacting differently with our environment. Do you remember Microsoft Briefcase – a great notion to try and sync between our PC and laptop(s) that never took off? Now think of Dropbox… I think you’re catching the drift… The idea of having anywhere from two to infinite versions of the same document (remember our Google Docs analysis) running around is laughable, but one instance on Dropbox’s server (Cloud if you insist), visible as if it was a local document on any of your devices (PC, laptop, tablet, phone, etc.), now that’s starting to make sense. What about operating systems. I am currently using anywhere from two to four different operating systems at the same time (and had I been programming or something, I would probably be using a few more). Does this make sense? Google doesn’t think so. As many others (I imagine) who first glanced at the Chrome internet browser when it was released to the developer community back in 2008, I immediately understood that this was more than an Internet browser… it was a Terminal. Now I know that Terminal isn’t the correct buzzword I should be using today. I could muster up a couple of sentences using such words and phrases as cloud, hybrid-cloud, single-user-experience, unified-platform, application integration, platform-as-a-service, and many other nonsense charged phrases, but I’ll spare you. Just imagine that you have one OS, say Chrome, which is simply a way of delivering content (stuff you and/or others created or edited) and applications (things to help you and/or others create and edit stuff). Your files would exist once on the cloud (probably multiple instances on many servers for speed, reliability, and security purposes – but from a user’s perspective, once), and would be accessible on any device. Like a Sun Terminal, Your OS too, say Chrome, would exist only once on the cloud, but will have an instance open on each of your devices. It would look the same from every device, and you would simply use the best suited device for each of your tasks. It could be seamless. In this model, content and applications are purchased through in-house outlets (App Stores if you will), and revenue is abundant. Sounds good!

Source: Microsoft

New revenue model

This is Microsoft’s worst nightmare, and Windows 8 is here to address just that. Up until now, Microsoft has been somewhat on the sidelines with regard to this whole paradigm shift in user experience. While Apple has been working hard to integrate our tablet, phone and laptop experience on a single Cloud platform with iOS and iCloud, and while Google has been involved in similar efforts with Android, Microsoft has been absent. This is expected, at least by some, to change with Windows 8, a product primarily geared for mobile devices - namely phones and tablets, and that would hopefully give users a single user experience (last buzzword, I swear) across all platforms. Imagine the opportunity Microsoft has, to integrate (or pick another infinitive if you like) servers, desktops, laptops, tablets, phones, TVs (yes, Xbox is still very viable and dominant platform, especially coupled with Live), and anything else you can imagine (potentially your fridge, coffee maker, and even car) under a single OS experience. Powerful!

To top it all off, Microsoft will reportedly be rolling out Windows 8 in February with a new feature, a store. A Windows Store, the likes of Google’s Android Market and Apple’s AppStore. Interesting! Tom’s Hardware’s Wolfgang Gruener recently questioned Microsoft’s ability to rally developers behind the new Windows 8 platform, citing the fact that a better revenue split (similar to Apple, Microsoft will reportedly be offering developers a 30%-70% split, but instead of Apple and Google’s constant model, once the developer hits $25,000 in sales, the developer’s share goes up to 80% indefinitely) is not enough to attract a strong developer community. I disagree! Microsoft has always been able to attract developers with a versatile platform that gives them endless freedom to be creative. Windows 8 could be no different, and so long as users adopt the platform, the developers will be there in scores. Indeed, building a store is not enough, but if Microsoft approaches this aggressively, as I believe it will, we will see a strong Windows Store, a store that is expected to deliver all content to the Windows Metro interface – Windows 8’s interface for mobile devices. Gruener rightfully points out that this doesn’t mean anything for desktop users, as the metro interface will, I believe, not be used on the Windows 8 desktop interface. As I mentioned earlier, we really don’t want touch for many of our daily tasks on our PC, and this isn’t expected to change in the near future. However, and in contrast with Gruener, I don’t believe that Microsoft Store’s fate is coupled with that of touch. The store will simply expand over time to include PC apps (software, as we used to call them), as well as Xbox content and similar other expansions.

The bottom line

If Microsoft delivers a strong user interface, the kind that reminds us how Windows became such a dominant part of our PC life in the first place, Windows 8, its attempt to unify computing platform, and the overall capitalization on this new platform via the Windows Store, will all be successful. If Windows 8 fails, it may prove to be a crippling failure, as Google, Apple, and others have been waiting for an opportunity to do just this for quite some time now.

“Eyeballs”

2011-11-23T22:24:00.001-05:00

A quick look at some of the recent IPO filings such as Groupon (NASDAQ:GRPN) and Yelp might make some of you feel like we’re rocking like it's 1999 again. With the term “eyeballs” being replaced, merely technically, with “unique visitors,” recent IPO registration statements indicate sparse accounting information and valuation based on unique visitors to a site, with no reference to a conversion ratio or similar indicator to give investors a sense of how accurate the valuation in fact is. The flip side of that argument is that comparing new high-growth companies with established lower growth companies would yield a deflated valuation that would be no more accurate. Unique visitors, argue some, is a good method to assess future growth.

So, how useful is a valuation based on “unique visitors”?
For those of you too young to remember (or as I, who were simply not interested in registration statements and corporate valuations at the glorious age of 18), it was rather common during the late 90's tech boom to valuate companies based on "eyeballs," or what has now been rebranded as “unique visitors” to a website. Companies such as Yahoo or Excite (pardon my search oriented references, but they came to mind quickly), which showed little or no net income, would boast higher valuations based on the number of unique visitors, together with a forecast of their expansion. The assumption was that with economies of scale working in their favor, a concept widely misunderstood and used in that era, along with the number of unique visitors sharply increasing, net income would soon follow, and plentifully. Now don’t get me wrong, some of those companies, such as Amazon and eBay, were very successful in converting unique visitors into actual purchases (albeit over a slow process of gaining momentum), but many others disappeared. However, such is true for many IPOs.

The works

The price of IPO shares will be largely dependent on the valuation ascribed by the lead advisory and underwriters, and the actual price has historically been somewhat lower than said valuation, so as to provide banks with compensation for the underwriting risk. If the valuation is inflated, meaning that investors believe it to be, say, too high, said investors will push the prices down, and the underwriters will lose on the transaction. Underwriters, therefore, have an incentive to keep valuations lower than we would otherwise expect on underwritten IPOs, but not too low. If we assume this logic, we would have to question any claim stating that Groupon or Yelp, for instance, are overvalued. Many have claimed to the contrary, stating that underwriters undervalued Groupon, so as to benefit from the underwriting profits.

Let’s think this through: if Yelp, for instance, is, in fact, undervalued, this would mean that Yelp, or Groupon, for that matter, are essentially worth… more? What numbers from their financial statement or elsewhere justify that lunacy? The answer is clearly unique visitors. I’m sorry, but for all the credit I give sites such as Groupon, Yelp, or even LinkedIn, their valuations couldn’t have been higher (or else they would have been). If anything, the valuations are inflated, and they are inflated because our earlier premise was probably wrong. We cannot assume that IPO share prices will be competitive, as the opposing pressure from investors is not strong enough to push down the price. Or, put differently, investors are willing to pay the offer prices, even if at higher valuations based on questionable future potential.

What, then, is happening, and does LinkedIn's drop in share price after the lock-up period ended shed light on anything?

As I write this, LinkedIn share prices have dropped significantly, and Groupon’s share price has dropped to IPO levels, indicating that the general investing public is questioning Groupon’s growth potential, and that speculators are probably shorting Groupon. I would also argue that most parties affiliated with LinkedIn’s IPO must feel that its current share price is high enough to sell significant parts of their holdings. Granted, some of that liquidation is just underwriters cleaning their balance sheets and insiders looking to cash out on some of their earlier investments, but the sharp decline observed this week (of Nov. 21st) suggests that LinkedIn’s value may be overstated.

Wait! So, how much are all these companies really worth?

Well, simply stated, exactly what they were offered and later traded for. I don’t mean that facetiously. To argue that anything is worth more or less than what a large group of intelligent people decided it was worth (by allocating value and funds), would essentially be to argue that they all have been misled. Not likely. So long as, for instance, Groupon’s lead bankers, Morgan Stanley, Goldman Sachs and Credit Suisse, provided investors with all the information required to make an informed decision (and I am sure that is, in fact, the case), it's caveat emptor.

Maybe I’ll rephrase that. As someone who has filed IPO registration statements (granted, I was responsible for the legal side of things, but you’ll have to trust me when I tell you that it isn’t much different for other aspects), I can tell you firsthand that investors are never told everything they need to know. On the contrary, they, the investors, are told the minimum the company is able to disclose without risking a major lawsuit. Some will disclose more than others, but, in general, (and I’m not saying anything new to anyone who has been, even remotely, involved in similar processes), most will disclose as little as required (and in a very selective manner) to make the IPO a success. This is true for all industries. This isn’t a rigid process as some may imagine. Rather, investors are an active part of this live process, and, if they, individually or as a group, question aspects of the registration statement (be it valuation, risk factors, or what have you), there is a good chance that such documents will be altered to meet investors' demands, as otherwise, they will not take part in the IPO, and underwriters will either fail, or be required to risk more as part of their underwriting commitment. It may be worth noting that the aforementioned banks received, collectively, about 6% of the IPO proceeds in fees for Groupon’s IPO, suggesting a rather typical fee (and in turn, suggesting that perhaps, such banks did not perceive Groupon’s IPO as a major risk).

Source: Yelp

Is everyone drinking the same Kool-Aid?

Well, yes. Markets always drink the same Kool-Aid (disregarding market inefficiencies – in the broadest sense). But, let’s try for a second to put ourselves in the shoes of a potential Yelp investor. You were handed a nice prospectus (a nice book with fancy graphics) that attributes a certain value to Yelp. I don't have the exact valuation, as it wasn’t disclosed yet, but I could give you a rough estimation of around $1.5B-$2B. Let’s also assume that you’ve seen in that prospectus the prevalent use of the term “unique visitors” (48 times in Yelp’s case), to the point where there is no doubt that it is the basis of the valuation. Let’s also assume (as I personally do), that Yelp’s business model is legitimate, not to say that it is necessarily profitable in the long run, but merely that it is a legitimate viable model that you believe is an interesting investment option. Now, further assume that you question this metric as a good estimate of future growth, and wish to come up with a better one to reflect the terminal (future) value of Yelp. What would be a good metric?

EBIT and EBITDA multiples are terrible, and would seriously skew our thinking of a high-growth company, as Yelp is in early growth stages, and earnings are, therefore, negative. Sales? O.K., somewhat helpful, but probably not the best indicator of growth (since as you will see, it is correlated with another metric). We’re really left only with visitors. Yelp’s success is dependent on, and correlated to, the traffic generated by its website. No traffic, no income. So, plainly speaking, unique visitors is a helpful metric, as it indicates the popularity of the product (and its related growth curve), as well as indicates how many visitors are worth a certain measure of revenue or profit. This would give us (the investors) a good metric to assess the growth curve, and subsequently, the terminal value of Yelp. However, more traffic doesn't necessarily equal more profit, and this is where the metric may fall slightly short.

What if we considered a new metric, “conversion ratio," which would indicate the percent of unique visitors that were actually converted to profit, as opposed to those visitors just taking a look around and generating little if any revenue to Yelp? Would such a metric be any better? While it may be beneficial to see a ratio such as this, or a variation thereof, such as enterprise value as a multiple of converted visitors, I doubt it will change our perspective of Yelp, or, for that matter, of Groupon, LinkedIn or others. “Unique visitors” is being used as a metric since we don’t really have a better one. Trying to valuate high-growth companies using methods devised and formulated for more mature companies is destined to yield some discrepancies. For that exact reason, venture capitalists valuate companies in a far more simplified manner, and basically set a relatively high hurdle rate that is used for discounting future (predicted) cash flows, and that takes into consideration that inherent risk associated with new high-growth companies. Our methods for valuating high-growth industries are decent at best, and when it comes to online companies, they are a bit inferior. However, these methods are the best we currently have.

Epilogue

With future IPOs like Zynga and Kayak potentially in the near future, as it appears that the equity markets may be open again for tech IPOs (despite Groupon’s weak performance ex-post), we will get a good taste for how investors perceive valuations based on unique visitors. If my assessment is correct, we will probably see banks and investors in future IPOs again embracing this metric, as there is simply no better alternative.