Feb 27, 2008

Visiting Tokyo

I'm in Tokyo for the next few days - attending meetings and trying to earn more about the Online landscape over here - first hand. This is my first trip to Tokyo - and my second to the orient. I arrived last night and I'm already learning some of the interesting nuances of Japanese Culture. Hope to blog about some of my key learning's and takeaways - in the days ahead.

Feb 21, 2008

Yahoo: AKA - You always have other options!!

Earlier in the week I blogged about the Microsoft -Yahoo saga and expressed mild concern that both orgs could loose key talent in the wake of a drawn out proxy fight. Clearly, Microsoft is serious about seeing this deal through, this initiative should, at the very least, serve as a forcing function to bring yahoo to the negotiating table. It makes no sense for MSFT to raise the offer when key Yahoo stakeholders seem deadset against the deal. So, the Proxy Contest - will go ahead.

That said, Yahoo is thinking well ahead. The company has announced its directors had decided to offer all full-time employees enhanced severance benefits in case they were terminated without cause in the two years after completion of any merger. Yahoo said that the enhanced benefits, which include accelerated vesting for stock options, were intended, in part, to prevent an exodus of employees.

The new severance plan is intended “to help retain the employees" - They also include accelerated vesting for all stock options, restricted stock units and other equity-based awards, and reimbursement for outplacement services up to a maximum of $15,000. All this from a company which was laying off 1,000 staffers last week.

All of this reminds me of a comment I read in a recent blog post by Mark Cuban. He referenced a conversation he once had with Jerry Yang during which Jerry mentioned that Yahoo stood for: You Always Have Other Options.

In an ideal world, we always have options. If we plan ahead, maintain a level of independent, introspective thinking and stay driven - we tend to have more options. In this case though - Yahoo Investors have few options, none of which seems better than the deal at hand.


Feb 18, 2008

Yahoo - Still Not Feeling MSFT, Now Talking To AOL

I read this morning that Yahoo & AOL are actually in talks about a possible partnership which (they hope) could help fend off Microsoft's friendly advances. This news comes on the heels of last week's discussion with News Corp.

Clearly, Yahoo is showing that it will consider any alternative to partnering with Microsoft. This is no longer about trying to drive the price up by $3 - $5 dollars. I can't see how a deal with AOL would be significantly more advantageous than one with News Corp. These guys are seriously looking for a "White Knight".

AOL has some similar products to Yahoo - and a merger would probably provide a whole new bunch of integration headaches which are sure to distract Yahoo's Mgt, at a time when they desperately need to provide stronger returns for Investors. According to the Silicon Valley Insider, If the companies combine, therefore, Time Warner could have about a 20% ownership in the New Yahoo. One hurdle to an AOL-Yahoo deal in the past, however, has reportedly been that Time Warner doesn't want Yahoo stock, which means that the deal would have to be done at least partially for cash. A private equity firm could provide some of that cash, but then the question would be: At what value will Yahoo issue the new stock--the post-Microsoft bid $29, or the pre-Microsoft bid $19?

Truth is, Yahoo is not going to find a Suitor better positioned to offer a strong incentive to it's shareholders, to sell out. It's also worth mentioning that -with Yahoo clearly struggling to build its Search Business, Google stands to gain even more in the short to mid-term and could lock up the Search Syndication / Distribution sector - for years to come.

Last week Friday (02/16), the World Street Journal reported that Alibaba, the Chinese Internet Company, part-owned by Yahoo Inc, has hired advisers to help negotiate for expanded management independence in the event of its U.S Partner, being acquired by MSFT.

Alibaba hasn't publicly commented on the Microsoft bid. On Friday, Jack Ma, told his employees that Alibaba management "will always maintain its independence and management control" over the company, regardless of who its shareholders are. Alibaba's reaction is not surprising, given the Chinese Governments involvement in Internet Companies.

I can't figure out why Yahoo is so dead set against this deal. It's doubtful that Microsoft will kill off any of Yahoo's priced assets, as this will certainly diminish the power of the Yahoo Brand, which is undoubtedly reflected in the $42B offer.

Yahoo's initial response indicated that "The board believes that Microsoft's proposal substantially undervalues Yahoo!, including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects."

Fine, but it's safe to say that MSFT will probably come back with a higher bid - especially since $31/share bid has dropped. Both companies must know that by dragging this out, they risk losing talented Leaders & Mid-level Managers, in both Corporations. If Yahoo forces Microsoft's hand, and the Software giant decides to go hostile, that would be the worst possible scenario for Microsoft. Ultimately, Yahoo shareholders would prevail over Jerry Yang, he'll resign and a lot of his loyalists will follow suit. Many who are on the fence, will most certainly be poached by the likes of AOL, Google, IAC, eBay, Large Worldwide agencies and a host of start-ups

That would make the integration of Microsoft's OSG and Yahoo's Global Org, much more complicated and very expensive. What may have been a 1 year integration plan, could quickly become a 24 - 36 month affair. That would certainly have a significant impact in the $1B in gains and expected growth in Search Revenue & Query Share, which this partnership is expected to present.
For now, this saga makes for some very interesting commentary. However, I can only imagine how Yahoo employees are feeling right now.....

Feb 15, 2008

Google Losing Online Advertising Share?

A recent report from IDC indicates that Google’s Internet Ad Share is slipping while Online Ad Spend Rises 28%: USA Internet ad spending in 4Q07 grew nearly 28% over the same quarter in 2006 to $7.3 billion. For the full year 2007, online ad revenue grew 27% year over year to $25.5 billion. IDC research also found that Google's net USA market share declined for the first time in two years due to slower growth in domestic fourth quarter 2008 sales. Google's net USA Internet advertising market share was down 0.5 percentage points to 23.7% in 4Q07 compared to 3Q07. Google's estimated net USA Internet advertising sales (excluding the traffic acquisition costs they pay out to the partners in their networks) grew by a little more than 40% in 4Q07, but its year-on-year growth rate in the quarter before had been 50%.

Since Microsoft made the $40B+ offer for Yahoo - the Online advertising industry has been in the spotlight. A potential merger between Microsoft's Online Services Group and Yahoo would create a global Media organization which would control over 15% of the US Online advertising market. Expect that figure to grow, as the new organization starts to promote an unprecedented mix of online assets to an advertising sector, eager to bring more of their marketing budgets online.
Google would still be the "King of Search" - however, display advertising would take on a whole new level of importance. Microhoo! would be competitive in Search - both in terms of algorithmic search and monetization through distribution deals. As for Google, unless it can find a new differentiated revenue stream - it's best days could well be, right now..........

Yahoo Searches For Options

I read today that Yahoo appears set on delaying the inevitable.... Not sure whether Jerry Yang et al, really don't want to sell out, or if they're angling for $36/share. Either way, this deal is not a slam dunk - at least not yet. Apparently, the Yahoo board is split - between two key Factions. You've got the hardnosed investors, who evidently think $40B is a no brainer, and Yahoo loyalists, led by Jerry Yang - who are much less reluctant to sell out to Microsoft.

Hey Jerry, it's always hard to say goodbye, but you may want to consider your shareholders, who stock with you when times were rough and now deserve a decent payout. You could partner with Myspace or Google, but neither one of these companies can offer Yahoo a $40B payout. The Myspace deal smacks of desperation and you're giving all the leverage to Rupert Murdoch.
Google can monetize your search engine results - but then you'll become reliant on a 3rd party for over 50% of your revenue. You've been down that road before and it's not fun.
Now, you need a plan which willl persuade Yahoo shareholders to willingly take an instant 40%+ hit to their holdings on the hope that the Company will be able to deliver even more value over the next couple of years.
Good luck..........

Feb 13, 2008

Yahoo & Google - Can Lightning Strike Twice ?

Much has been written about the reasons for Google’s remarkable growth and the Global Power of its Brand. It’s worth reiterating that the first Google site was launched in ’97, at a time when literally no one was paying any close attention to Search. The key reason for the company’s success is that it’s able to provide core value to the 3 key Audience Segments which power the entire online services industry. Online Searchers, Search Advertisers and Search Distribution Partners.

The Google founders set out with one key goal in mind – to create a Search Engine which would deliver more relevant and hence, more useful results than any other Engine available at the time. The extrinsic value of the Page Rank Algorithm helped fuel the word of mouth buzz about the Google and its popularity grew amongst Internet Users, the most important Audience Segment. By the Year 2000, Google was synonymous with Search – and was becoming the World’s best known Pure Search Engine. That same year, Google started selling advertisements associated with Search Keywords. The popularity of the adwords platform helped create a second audience segment – Search Advertisers. The value created by the adwords platform was a clear win-win for Google & its Ad-buying customers and Internet Users were not deterred. The click threshold which Google applied to its keyword bidding model also helped improve ad relevance.

Around that time, Overture made a key decision to stop driving traffic to its own site, and instead syndicate its monetization platform to other search engines and general interest sites. By the end of 2001, Overture had distribution deals with most major sites, portals and Search Engines –with the exception of Google. By this time, Google was widely seen as the only Pure Search Engine and this further enhanced its popularity in the minds of Internet Users.

In 2002, Google started to aggressively build its own distribution network. It signed deals with Key Overture partners – including Earthlink, Ask Jeeves and most significantly, AOL. These distribution partners became the 3rd and final key Audience Segment. Overture was left with two major partners – Yahoo and MSN. Today, Google is far and away the Global Leader in Search Syndication – after re-signing with AOL, Ask and thousands of smaller general interest websites. Google’s Financial Reports and accompanying commentary provides some indication of the benefit of a strong distribution model on Google’s query volume and revenue.

I provide this historical context – in order to make the point that Google’s popularity and brand Strength didn’t happen overnight and it can be traced directly to its laser focus on providing a valuable offering to its core audience segments (Searchers, Advertisers/Customers and Distribution Partners). The core value proposition remains the relevance of its core web search results and the overall performance of its engine.

Yahoo was launched in ’95 – primarily as a web directory and later diversified into a Web Portal. Yahoo originally sourced Search Technology from Inktomi from ’98 – 2000. In June ‘2000, Yahoo and Google signed an agreement which retained Google as the default world-wide-web search engine for Yahoo sites. Google’s popularity grew in leaps and bounds as it benefitted from brand association with Yahoo and AOL – two of the leading General Interest Portals – at that time. Gradually, Google started adding features people normally went to Internet portals like Yahoo, AOL and MSN - to find. Including, Maps, News Aggregation Services, white pages-style phone and address look-ups, maps and Web site translation services. At the time, Yahoo was monetizing Google Search Results through Overture.

In Dec ’02, Yahoo purchased Inktomi, then in July ’03 it acquired Overture Services, Inc. and its subsidiaries AltaVista and AlltheWeb. On February 18, 2004, Yahoo dropped Google-powered results and returned to using its own technology to provide search results. At the time, the Overture deal seemed to make sense – even at $1.6B, because Yahoo was very much dependent on Overture for its paid listings and the control of both key elements (Search Engine & Monetization Platform) was supposed to help secure Yahoo’s future as a search destination. What has happened since then is instructive – Yahoo lost its marquee client – MSN.com and its Search Business has been in freefall ever since. The Company did invest in improving its YSM monetization platform, but it has not been able to maintain query share or
deliver sustainable Search Revenue. Although the Yahoo brand is a strong one, it’s not Synonymous with Search. Although it still provides a good Search Engine to Searchers – the organization has struggled to compete with the relevance of Google’s Search Engine and the efficiency of its ad platform. As a result, it’s Search Distribution Network has suffered, query volume & share is down Worldwide.

Ironically, recent reports indicate that Yahoo may actually be thinking about coming full Circle and once again partnering with Google – pure speculation at this point though, but it's not surprising that Jerry & David would consider this option. A sale to Microsoft would mean the end of a dream for both of them - although I strongly suspect the Yahoo brand would live on regadless. Google clearly fears that a combined Microsoft/Yahoo entity could slow the Google Juggernaut. At the very least, the online behemouth could provide a viable alternative to online advertisers, many of whom don't want to do business with Google. One things for sure, Google is not in a position to bail out Yahoo, regulators would be waiting with baited breath to kill that deal. They can't simply offer to host Yahoo's search or monetize Yahoo's search engine, as they did before. It's too late for that - $44B too late......

Microsoft -> Yahoo -> News Corp -> Microsoft ??

So, what's on Jerry's mind. First he get's a call from Steve - informing him of the Microsoft Bid. Then he get's a call from Eric - offering to help him out of the $44B bind. Not surprisingly Eric backs down in the face of the very obvious regulatory issues which would surely consume him and his Management Team. A relative calm ensues -which lasts all of a few minutes, before Rupert, steps up and professes his interest, again.

Jerry et al and Rupert have talked before but could never agree on the correct valuation for Myspace. Probably due to the fact that Social Networking Sites don't make a whole lot of money - relative to the sheer number of eyeballs they attract. Apparently, no one has figured out how to effectively monetize the Social Engagement piece -which faciliates user generated content and ultimately makes sites like Myspace and Facebook, so popular. The deal would allow Yahoo to remain independent while giving News Corp. substantial control over a huge array of Internet properties and advertising opportunities. Clearly a big win for News Corp - with very little upside for Yahoo! - so why go through with it?

The fact that this discussion is even taking place, gives an indication of the Yahoo founders feeling about selling out to Microsoft. Jerry wouldn't even consider this deal now, unless he was feeling the heat from shareholders -who have been pretty patient thus far. Let's face it - $44B is a lot of cash. So, ultimately, a sale to Microsoft still appears to the most likely scenario for Yahoo. And, apparently the MSFT Team knows it. There's no sign of anxiety in Redmond, even as Yahoo actively seeks alternatives. The company has said it is willing to "pursue all necessary steps" to consummate the deal, which could mean going directly to shareholders. Let's hope it doesn't come to that. A protracted battle, would be bad for morale at both Companies - and the only clear winner would be Google.......

Feb 5, 2008

Policeman Catches A Baby Thrown From Burning Building Lives

I saw this story earlier on and I felt compelled to post a comment. In LUDWIGSHAFEN, Germany - two parents faced an unbearable dilemma. They were trapped in a burning building with their 9-month-old baby girl and were forced to make a split second decision. If they threw her out of the window, would she be caught four stories below? The split-second decision paid off: Onur fell safely into the arms of a policeman below. The parents also survived, although the mother was still in a hospital Tuesday, two days after the blaze that killed nine people, including five children. I lifted this picture from the MSNBC Piece earlier on today – you can make out the parents looking out the window and the baby falling through the air. This truly was an unfortunate incident and hopefully the ongoing investigation will provide more clarity on what exactly happened here.

I’d like to focus on the Policeman who stepped up and caught little Onur. Picture with me, if you will – the circumstances under which this whole thing went down. Screaming Victims, panicked onlookers with thick smoke billowing around them. With the staircase destroyed by flames, adults also jumped for their lives while others formed human ladders to help save people trapped inside, police and rescue workers said. Children from lower floors were handed to rescue workers atop an ambulance. Some who jumped missed rescue nets laid out by police. In the face of all this chaos, a Policeman was called upon to catch a 4-month old child. He probably had no time to think about anything, one can only imagine what was going through his head, as she flew down towards him.

Hopefully, most of us will never have to face a challenge quite like this one. There was absolutely no margin of error here, the officer could easily have been killed whilst trying to save the baby. According to reports from the Police spokesperson, he was injured after he fell to the ground and struck his head. Thankfully, he was treated at a hospital and released. Don’t know anything about this man, but he’s a World Changer in my book, because he stepped up when it counted and saved Onur’s life........

Google - Still Going Down ??

According to Google has now given back over $150+ per share and about $50 billion of market cap. Personally, I think the $700 mark was as good as it's going to get for Google. The mere fact that Yahoo is in play, changes the dynamic in the online landscape. Investors are worried because Google's revenue growth (paid clicks) decelerated sharply in Q4. The largest online advertising market in the world may be facing a Recession and it appears that Online advertising spend will slow, across board - in the weeks and months ahead.
Then, there's all that money - to be spent on "new opportunities", as the company searches for an alternative, sustainable revenue streams, such as the Android. At it's peak, Google hit over $700 and was trading at over 50x projected '08 earnings. I think it's likely to settle around the mid 400's and depending on the outlook for the MSFT - Yahoo deal, it could dip below $300 by Q4 '08.

Google vs. Yahoo - Q4 Results

Back In September, Google produced some pretty amazing results. Revenue came in at $4.2b, representing a 57% increase over third quarter 2006 revenues of $2.69 billion and a 9% increase over second quarter 2007 revenues of $3.87 billion. TAC totaled $1.22 billion, or 29% of advertising revenues. On Jan 31st, the company released it's 4th quarter earnings and things were not so good. Google reported that its fourth-quarter revenue came in at $4.83 billion, up 51% from a year ago. Excluding advertising sales that Google shares with partners (also known as traffic acquisition costs or TAC), the company reported revenue of $3.39 billion, below the $3.45 billion analysts had expected, according to Thomson Financial.

Google posted net income of $1.44 billion, or $3.79 a share, up 17% percent from a year ago. Profits, after backing out certain gains and charges, came in at $4.43 per share, narrowly missing Wall Street's expectations of $4.44 a share. Eric Schmidt, CEO of Google, had his game face on - stating that the Company was very pleased with it's results. "It reflects strong momentum in our core business, growing receptivity to our new business initiatives and improved discipline in managing our operating expenses." Schmidt told analysts he was optimistic about 2008 in a call after the company's earnings were released, saying he had not seen any "negative impact" from "rumors" of an upcoming recession. But Google CFO George Reyes admitted to analysts that ad inventory on some of the hottest real estate on the Web - social networks - is "not monetizing as well as expected." It's worth noting that Google's International Sales now represent 48% of total revenues, up from 44% in the fourth quarter of 2006. The company has also has continued to aggressively hire new workers, adding 889 employees in the fourth quarter, half of which were engineers. Brining total employee count to 16,805 people in more than 20 countries.

Things are even worse at Yahoo, which reported 23% drop in fourth-quarter profit and will lay off over 1,000 of its 14,300 employees in mid-February. 2008 Net Revenue Guidance is $5.35 to $5.95 billion, versus consensus of $5.9 billion. Interestingly, Yahoo President - Sue Decker, indicated that there was weaker online-ad spending during the quarter among some categories of advertisers affected by broader economic issues. Spending by advertisers in the financial, travel and retail areas declined or grew more slowly in the fourth quarter compared with a year earlier. Her tone contrasts with that Eric Schmidt from Google - who seemed to brush off any comments about a possible slow down in online adverstising spend, in 2008.

And then there's Microsoft. The company easily exceeded revenue and EPS whispers and raised its guidance despite the threat of economic weakness. Office and Xbox revenue stronger than expected, other divisions in line. Revenues were up 30% to $16.4 Billion. Operating Income was up 87% to $6.5 Billion & Earnings Per Share (EPS) were up 92% to $0.50 per share. It's worth noting that - even in this very volatile financial climate, Microsoft was able to generate strong results in all of it's key Business Units - including $863M from the much magligned Online Services Group. Highlights from a previous blog post - here. Microsoft shareholders have got to be happy with the strength across our 5 Key Business Divisions.
  • Windows Client (Vista/XP): $4.3 Billion, up 68%
  • MBD (Office/SharePoint): $4.8B, up 37%
  • Server & Tools (SQL Server/Visual Studio): $3.3 Billion, up 15%
  • Entertainment (Xbox & Zune): $3.1 Billion
  • Online Services (MSN/Live): $863M, up 38%

Market Leaders are expected to return strong results quarter after quarter - and you're only as good as your latest report. I dove my hat to MSFT - for delivering very stellar results across 5 very distinct Business Areas.......