GLG News by Kenneth Eisner

Implications: Sure, Google gets the best out of the deal with a weakened Yahoo and a non-strengthened Microsoft, but I'm not sure if this deal would have been good for Microsoft anyway.  They showed a lack of brutish eagerness that has hurt Yahoo, near fatally, and that hurt could help Microsoft climb up the search ladder at Yahoo's expense.

Analysis:

The Yahoo – Microsoft debacle showed some phenomenally poor negotiating skills by Yang and the Yahoo team.  On the other hand, I completely disagree with Legg Mason Miller’s comment that Microsoft emerged as the biggest loser in this deal, by not extending an of

The Yahoo Story

It was obvious from the start that Yahoo did not want Microsoft’s hand, as I mentioned in Yahoo’s Stalling on 3/17, though, at that point, I truly believed that Microsoft would gain hold of the Silicon Valley falling giant.  Yahoo did not fit culturally with Microsoft, and, to me, it fully appeared as if Yang and others felt that they would have failed with a sale.   They approached News Corp, AOL, and even Google to change the ballgame.  This psychological impediment to the deal was much larger than the valuation impediment, as the valuation impediment was actually quite small. 

Now, Yahoo is without a suitor, or, if Microsoft or others come back with another offer, that offer will be less than the last one on the table.  Yahoo is in a very bad positioned.  They were weak before the deal, with a soft stock price and a decreasing search market share, and now they are weaker.  They’ve been distracted.  They’ve been demoralized.  They’ve already seen significant defections, and they are going to see more.  They may have ceded a piece of their search to Google, through the ad deal, for short-term gain over long-term brand loss.

Was Microsoft Better for Dropping Out, and Did They Increase their Relative Power in Search by Weakening #2?

The answer to the second part of this question is yes.  Microsoft did not improve their search prospects by gaining Yahoo, but I think they did help quicken Yahoo’s deterioration.  Of course, this will help Google, probably more than it will help Microsoft or AOL, but it will also help Microsoft.

I’m not sure now, and I wasn’t sure then, that Microsoft would be helped by a Yahoo deal.  It is no sure bet that a combined company would increase search market share by a joined company.  My guess is that 1 + 1 in this argument would equal significantly less than 2.  Whether the other properties, as Yahoo’s portal or banner deals and Yahoo’s social and Web 2.0 properties (as Yahoo! Answers and Flickr), would improve with Microsoft’s support is also an open question.  

Surely, the cultural fit was awful, and one could argue that both the AOL – Time Warner deal and the Sprint – Nextel deal were in part buried by this cultural misfit.  Additionally, Microsoft might have trouble truly leveraging these properties in addition to suffering a brand backlash.  I understand why Microsoft would attempt this deal, as they are losing the Internet battle, but I would have put the risk of less value for the money at greater than 50%.

Microsoft’s BATNA

We often ignore BATNAs in deal making, and it appears as if Microsoft hit theirs.  They determined that $33 per share was the maximum that they would go before walking away, and then they walked away.  Good for them.  The small increment in increase could have made the deal sour for them, per their valuation.  As I mentioned above, it certainly wasn’t a sweetheart merger anyway.

Microsoft’s Increasingly Powerful Hand in Negotiations

Plus, they now have a more powerful hand should they go back.  Dropping out made Yahoo weaker.  It made the Yahoo board mad at Yahoo.  It even made Yang say that they would have been willing to talk and were surprised by Microsoft backing out.  This alone makes it a good idea to drop out, should they decide to come back in.  They’d be able to get Yahoo for a lower price.  Not that I think they’ll do this, at least in the short-term.

Implications: Buyers beware is an understatement with Sprint Nextel.  They have so many gashes in their underbelly that I have difficulty seeing how they could be a worthwhile acquisition, unless the price drops much further.  T-Mobile is not in a powerful position in the market, and combining the two seems more foolhardy than a power move.

Analysis:

No one ever said that vultures were wise.  A spokesman for Deutsche Telekom says:  "We would be bad businessmen if we didn't take a look at Sprint, given the recent decline in the company's share price and market value.  I am sure we are not the only ones making these calculations now."

And perhaps, Deutshe Telekom, you would be “bad businessmen” if you added CDMA and iDEN to GSM?  Or perhaps you would be “bad businessmen” if you combined the two bottom-of-the-barrel wireless carriers in an attempt to fight Verizon and AT&T? 

GSM + CDMA + iDEN = yicccch

Sprint purchased Nextel several years back with the belief that they could utilize the strength of both networks to deliver a stronger network – integrating and upgrading networks, unifying billing systems, combining credit qualifications etc.  Well, this promised integration never happened.  The iDEN network slipped in quality as attention focused on integration as opposed to maintenance, load balancing, and so on.  The advantage that Nextel had with the Direct Connect offering and the minimal impact it had on its network slowly slipped away.  Today, the two networks are disparate and so is the brand.

What makes Deutsche Telekom think that a third network in the mix wouldn’t be a complete nightmare?  Would it be possible to scuttle both networks and attempt to bring everyone into the GSM world?  Could they possibly provide customers with a worthwhile customer experience?  And how about combining billing and credit scoring?  What would they do with the legacy networks?  Enough to make your head spin? 

Two Wrongs (T-Mobile and Sprint Nextel) Don’t Make a Right

I admit to having a sour view of Sprint Nextel.  They have the bottom-of-the-barrel customer category, as their low end phones with poor credit profile customers put the company in a very bad position.  Their customer base has been declining due to the these elements, and more, and there is no reason to expect a healthy turnaround.  The only positive part of Sprint is their data network, and it has also been underserved, now only a partnership called Xohm that will likely spin-off.  The talent at Sprint is weak, so, sure, it might make sense to aim for efficiencies via layoffs, but I view Sprint as a declining giant just attempting to suck the last dollar of a weakened wireless base.

As to T-Mobile, they also have a weak offering, generally attracting customers in spots of the country where their coverage is strong or, more likely, attracting customers to attractively-priced plans.  With a few exceptions, they cannot compete with AT&T on handset assortment, nor can they compete with Verizon.  And their data offerings also pale to the big two.

Growing market share, if the market share is weak, is a dangerous play.  It is vital to get under the covers and understand the true brand.  I fear that few “vultures” can really understand the true Sprint and thereby maximize a merger.

Implications: Yahoo's move into Yahoo Glue is a smart concession in the basic textual search world and a desire to innovate the search experience.  Good for them.  But this is a complicated delivery in a world dominated by simple user experiences, and that is what Yahoo must concentrate on in order to succeed.

Analysis: The move by Yahoo to incorporate visual search and fully integrated search is a good one, but it presupposes much on the user experience.  As for the advertising model, in search, you need to first build a great user experience and then brand.  I believe that Yahoo India's search director is pandering when he suggests all of the interactive ad models available; if the user experience in this new delivery doesn't succeed, then all the advertising opportunities in India won't amount to a hill of Ceylon Tea.

Yahoo needs to move away from traditional search to new platforms if they really wish to turn the tide on their decreasing market share and eat into Google and then Microsoft's share.  This type of multi-product and visually integrated search is a move in that direction and, along with the recent Google search partnership, a move toward a long overdue concession that they have lost traditional search.  That is a good move.  And video and visuals are succeeding brilliantly over the Web right now.

On the other side of the coin, this combination of many products and visuals seems very confusing to me and will be hard to deliver in a worthwhile user experience.  Google succeeded because they had a great search algorithm and search content ... and because they had a phenomenal and simple user experience.  One search box in the center of the page.  The Yahoo Glue product will need a huge amount of trial and improvement to work. 

I'm not sure if it will.  But it is a good direction.

On the advertising side, Yahoo's comments cater to the analyst world who want to know how they will monitize success and traffic.  This is the least of their worries.  We all know that search will be monitized, though we are not sure exactly how that will happen in a more visual display.  Users will tell us over time.

Yahoo needs to focus on the user experience and not the ad model.

Implications: Employees posting full profiles at work certainly poses dangers to employees, should they be arrogantly drawn and rudely sketched. But this and other elements of the Social Web allow for benefits to both employee and employer.  More importantly, this two-way conversation is inevitable, so it is better to embrace and understand as opposed to ignore.

Analysis: The Web is quickly becoming a two-way, open communication vehicle -- or Web 2.0, the onset of the social web.  Facebook is both a function of and a contribution to the spread of this open conversation.

Brands and companies are embracing this new Web (or not embracing it) at various speeds.  Some companies are rejecting this open communication, fiercely holding onto the old ad paradigm whereby a brand or company designs and delivers a message of its own making and hopes, prays, and tests its resonance.

Other brands and companies are both understanding that the move toward the two-way open conversation is inevitable -- and it provides great opportunities to the companies that take advantage of it.  These companies are embracing user feedback and reviews, which has been proven to increase sales for e-retailers.  These companies are using wikis and employee forums to develop internal handbooks and policies.  These firms are allowing for negative feedback to be published and then addressing this feedback proactively and positively instead of squashing it.  These companies have senior managers and CEOs who write open blogs.

Consumers and employees are posting on Facebook, LinkedIn, and MySpace.  Sometimes, especially early on when no one realized that the wrong people could be reading the posts, users posted things that they shouldn't have.  Now, it is a gradual climb to smarter postings, ones that provide input as opposed to Toga-clad pictures and illicit behavior.

So, the move to companies that embrace Facebook profiles and users who post useful info is also inevitable.  This is the open Web.  The importance is to then extend this open-ness into useful elements for companies, such as R&D by run-of-the-mill employees, social networks to lower the cost for research, using the crowd for self-customer service, and so on.

This is the Web.  Either accept it, strategize, and grow ... or ignore it and fall behind.

Implications: In the short-term, Sprint has salvaged their WiMax opportunity, but a quick look back shows you how much they have really lost.  On the other hand, sly Google had another ace up its sleeve, and their wireless strategy is becoming clearer by the day.

Analysis:

On Sprint’s Pitiful Journey

Sprint boxed themselves in a corner with WiMax, and Dan Hesse and team are lucky to walk out alive.  Ever hear of that trite concept “good strategy, bad execution,” which attempts to excuse the elders for faults of the followers?  In Sprint’s case, after a disastrous merger with Nextel and horrible brand and product execution since the merger, their only real hope has been the strength of their data network, a network most consider the leading network for 4G services.

Yet, Sprint can’t seem to do anything right these days.  They overestimated the network power and readiness.  They overestimated the power of their brand and the ability to overcome setbacks.  They underestimated the impact credit decisions would have on churn.  And then … they overestimated their ability to pay for their last hope, the ambiguous beacon of WiMax.

So, they journeyed to the doors of Clearwire’s McCaw, who journeyed to the doors of Comcast’s Roberts and forced a call through to Google’s Schmidt.  And they begged for money, for no one thought they’d have leverage.  And now they only own a fraction of the new venture – the largest fraction, but a fraction nonetheless.  Something that they needed to control more vigorously than that fraction in order to justify the existence of a strong Sprint.

Now, this weakened Sprint plus the laugholympics media gang will spin off Xohm, or whatever the name winds up being, and Sprint will be left with a very weak and decaying wireless company, attempting to sell off Nextel to British Telecom or any other suitor available.  Then, Sprint will fade away.  WiMax has a much greater chance for success in being spun off.

Comcast and Time Warner Shoot in the Dark

Meanwhile, Comcast and Time Warner look at WiMax as a way to compete with Verizon and AT&T for broadband access.  They can’t think that customers will purchase VoIP through them, do they?  They probably do, as they’ve been projecting this revenue for awhile and haven’t been able to grasp the trend lines quick enough to tell them that that isn’t going to happen.  So, they will also shoot to surpass the wireless providers in Internet access, but prices will fall and the technology, customer predilection, and marketing strategy is unproven.  They are taking a big risk at best.

Google Shows Again Why It Is … Google

Google, on the other hand, is showing a cohesive strategy in the space.  First, they forces Verizon into an FCC auction bid where they have to provide open access and open handsets … to, well, Google.  Then, they released Android to provide an operating system loaded, likely, with all that is Google.  Handsets to be distributed soon.  They partnered with Apple to put some of the best features on the iPhone.  And, now, they are embarking on a deal that would increase the presence of the Android OS and Google search embedded across handsets that utilize this platform. 

WiMax may fail, but it may succeed … and, if it does, Google will have saved $4.1 billion vis-à-vis the spectrum auction.  Meanwhile, Google will have great testing access to this technology, marketing partners who will again shout out the Google name across the airwaves, and the Google search algorithm across the mobile universe.  And they have cash to burn.

A clear and coherent strategy in wireless.  Interesting. 

Implications: Wireless researchers keep getting the voice to data point wrong, and they shouldn't still be making this mistake.  Consumers aren't using data because they have been given poor devices with poor interfaces, not because they wouldn't use the Internet or other data if the device was better.  I provide five reasons why voice is no longer king, and data awaits the ARPU throne.

Analysis: Reason 1: Though hardly excellent, voice quality has improved across wireless carriers, especially with the migration to 3G.  

In a J.D. Power report published in March of last year, the following quote sums up the current situation: "Wireless providers have clearly made great strides in improving call quality," says Kirk Parsons, senior director of wireless services at the market research firm. "One key advantage to this [3G] technology upgrade is that carriers can greatly increase the capacity of handling voice and data transmissions with existing network equipment. As more wireless subscribers use cell phones that are 3G-enabled, the rate of call quality problems decreases significantly."

This has greatly reduced the competitive differentiator, over time, that certain carriers have over the other in terms of call quality.  Don’t get me wrong, though I’m an AT&T user in large part due to their better phone selection (currently an iPhone), I’ve had to switch from AT&T to Verizon and then to Sprint in order to pick up service on vacation in South Carolina.  It’s just that the difference is less apparent than it was several years back, when Verizon blew the other carriers away.  While I was heading a multi-carrier distributor, we saw a dramatic change in voice coverage when Cingular merged with AT&T, and the difference has continued to evaporate.

Reason 2: As sad as this may be, consumers have become used to be dropped calls or no service areas in the U.S. due to our lack of a continuous network (unlike in Europe, where uniform technology stretches across the network), and churn has dropped as a measure.   

Over the past decade, as wireless has become ubiquitous, this failure has hardened U.S. consumers to an imperfect network.  Churn has dropped significantly.  Four years ago, carriers were all frantically attempting to drop their churn below 3%, a feat only achieved by Verizon and Nextel (prior to Sprint).  For the past couple years, AT&T and Verizon have dropped their churn rates significantly below 2%, in part due to longer contracts (2 years instead of 1) and the early termination fees (ETFs), improved networks, and customers who have adjusted their tastes to accommodate imperfect networks.

Reason 3: Carriers are moving toward price wars over all-you-can-eat voice plans, with attached data, signifying that they can’t continue sucking huge dollars for voice from consumers.    

Sprint made the first move in this direction, and now AT&T is following suit.  Voice price has been falling swiftly, and it will continue to fall.  The carriers have felt that they could wait and attempt to suck the last voice dollar from consumers, but now they know they have to differentiate on data and phones in order to extract large ARPU from consumers.

Reason 4: Consumers need to see and use features like the Internet before they recognize their use and utility. 

One mistake that analysts make that bugs the *&^$ out of me is they ask consumers whether they want Internet, GPS, etc on their phone, and consumers say, “Nah, it isn’t a big deal.”  That is what the analyst in this report erroneously concluded.  This has been the guiding beacon that has halted innovation for carriers and manufacturers (especially Motorola) for years.  So we’ve spent years with weak phones with awful interfaces (WAP and Microsoft Mobile have been epically flawed, with innovation paces that only a turtle could love) and slow data connections.  Read my lips: provide consumers the right device, and they will use the data.

Reason 5: The iPhone, the explosion of Safari Internet use, Blackberry, the proliferation of smartphones, and growth of the pro-sumer are proofs that data is the heir to the thrown. 

Within a half-year after the iPhone’s introduction, the Apple Safari browser overtook Microsoft Mobile as the top mobile browser in the U.S. with a mere fraction of the installs.  Today, globally, Safari is nearing half the traffic of Nokia’s browser, after soaring past Microsoft … and yet the iPhone only has about 2% market share of all smartphones.  And this is all prior to the Apple iPhone going 3G!  The iPhone is proof that, if you give consumers a better device with a better user experience, they will utilize the Internet.  Sure, iPhone users are on the cusp of the curve, but the data is undeniable.

Give consumers poor devices with poor interfaces, and, yes, then voice is still king.  Wireless analysts should be smarter than making that kind of association.

Implications: The delay in Sprint's Xohm initiative is absolutely telling, telling that there are many problems with WiMax.  The truth is that the U.S. needs faster broadband speeds to compete with Japan and Europe, but I'm not sure if Sprint has the answer.  This article discusses some of the major problems, and then prays for a quick spin-off in order to get it out of Sprint's untrustworthy hands.

Analysis:

The implications of Sprint not announcing WiMax at CTIA are as large as they are obvious.  Sprint is behind an eight-ball on WiMax.  I think that it will eventually become “live,” but there are huge chunks in the Sprint Xohm initiative.

For one, Sprint needs the help of major financing and large partners.  So, instead of this being a Sprint initiative, it is a Sprint – Clearwire initiative, with the assistance of a half-dozen of their favorite friends.  Sprint has admitted it can’t go into this alone, and that is a big admission to control, the brand, and the Sprint bottom-line.  The end game, hopefully the near end game, is a spin-off, but it will be interesting to see how much value Sprint is able to capture. 

Next, this initiative is late, very late.  It was supposed to be in initial markets awhile back (a half year+), and it still doesn’t have a launch date.  As of last Friday, Sprint just let loose all of the non-full-time consultants who were working on this project and are now looking for things to occupy the full-time workers before funding arrives. For this product, central to the Sprint bottom-line, this move represents an undesirable drag on the bottom line and a potential shot to morale.  Has anyone walked down the street to visit AOL and see what morale can do to a company?

And will the network be as good as promised?  The rumor mill is abuzz about all of the upgrades that are needed prior to launch.  Judging from telco and wireless history, this is scary news.  I love my Apple iPhone; but AT&T’s Edge network, not so much.  Sprint Nextel has had many failings with the IDen network, and this would make me extremely worried. 

Will customers come?  Sprint has had a string of miserable campaigns to attempt to fool the public, and themselves, that the combination with Nextel would bring great boons to the subscriber public.  It did not.  Fool me once …  Will consumers be satisfied with faster laptop speeds, or will they require phones and other networked appliances to access this great new network.  The wireless companies had it all wrong about consumers not ready to use these networks – they were ready, but they needed a device that delivered.  They needed the iPhone and other smartphones that changed the user interface.

Hey, I’m a huge fan of faster networks.  The U.S. is falling way behind Japan and Europe in broadband speeds, and I encourage Intel and the others to jump on board.

It is just this nagging feeling that I have about Sprint.  This feeling in the back of my throat that warns about a dying giant.  The same feeling that AOL conjured up.

For the good of Xohm, pray for a quick spin off.

Implications: Comscore's absurd data caused a seismic roar in the media world, but it turned out that the data was awry, as it is unfortunately with all analytic firms.  Google's growth is relentless, as is the growth of all online.  This article looks at a few of the ways other companies can compete with Google in advertising, amid the run-up by the juggernaut.

Analysis:

As I’ve mentioned before, the market for search, as we know it, is over, and Google has won.  Additionally, Microsoft and Yahoo! have both been weakened in this arena, do both their own inadequacy (Yahoo!’s painful delay in launching their advertising platform Panama to compete with Adsense and Microsoft’s painful delay in moving to a variable cost pay per click platform) and due to Google’s great no-cost branding campaign.

 

The first truism of Google’s news is that the onset of the catastrophic online advertising has been greatly exaggerated.  Comscore reported the doomsday news, and they are on the firing line.  They should be, as neither them, Neilsen / Net Ratings, Alexa, or Compete produces worthy statistics.  This is a huge problem.  Google, on the other hand, continues to be the machine that they have been to date, with no real signs of slowing on the ad market.  Even with a consumer slowdown in purchasing, which will have a greater impact on store traffic than on e-commerce but an effect nonetheless (Forrester projects a reduction in online retail growth from 21% in 2007 to 17% in 2008), Google and search are still king.

 

I would expect online ad growth to be very impressive over the next few years, even with ad recessions, as companies smartly move their ad budgets into the online space.  Currently, the ad distribution as compared to eyeball distribution is extremely poorly laid out, and this distribution continues to skew as the younger generation ages.  Simply put, online advertising is greatly underutilized by advertisers.

 

So that leaves open the question of whether anyone can compete against Google in this space.  Here are five of the various potential options:

 

<!--[if !supportLists]-->1)      <!--[endif]-->International – Google has an even wider lead in Europe, especially in the UK, but they are not impenetrable.  For one, there are pockets where Google’s penetration is low, especially in China, and those pockets can spread.  There are also obvious differences in these market, especially in wireless and in social shopping, and those advantages can be exploited (that is, before Google buys the exploiter J).

<!--[if !supportLists]-->2)      <!--[endif]-->Brand advertising online comes back in vogue – numerous studies show that brand advertising is as, if not more, effective online as it is offline, yet vertical and portal ad networks are not getting their fair share.  This is due in part to the failure to adequately measure the impact of these campaigns, the limited nature of the inventory (banner advertisements), centralized control of the branding budget away from the online group, etc.

<!--[if !supportLists]-->3)      <!--[endif]-->Increase of social marketing, in terms of ads through social networks (Beacon, MySpace Ads, etc) and blogs, or conversely ad networks that specialize in social media.

<!--[if !supportLists]-->4)      <!--[endif]-->Wireless marketing – now Google may at some point control this world, but they currently are just beginning to dip their foot in.  No one has figured out wireless as an ad medium.

<!--[if !supportLists]-->5)      <!--[endif]-->New search – there are numerous companies trying to be game changes in terms of search, from people-driven Wikia to visual search to multi-touch search navigation.  Whether anyone of these takes hold is an open question, but search as we know it will likely change dramatically over time.

Implications: The U.S. has been drifting farther and farther behind Asia and Europe in broadband speed, and failure to innovate has been the punishment.  AT&T may have spent too much on their CapEx to make further investments, but that doesn't mean that consumers aren't ready and longing for the broadband advancements.  Build the high-speed bridge, and they (consumers, businesses, applications) will come.

Analysis:

If you want to predict consumer demand and usage, never ever ask a pipe provider their viewpoint.  The wireless carriers, Internet providers, and MSOs have consistently underestimated consumer usage, and they are doing the same thing today.  AT&T is just dead wrong.  Currently, Japan, South Korea, and Europe are literally destroying the United States in broadband speeds (Japan is 8 to 30 times the speed of the U.S. at a cheaper price), and full-screen IPTV, high-definition teleconferencing, and telecommuting have grown by leaps and bounds due to these speeds.  The United States is in danger of falling behind these countries in many facets if we do not increase our bandwidth, as users need this speed to access the useful and exciting applications of the future.  The U.S. is in danger if AT&T’s mentality is pushed to the forefront as opposed to Verizon.

 

Here are a couple examples, among many, of huge mis-hits by the pipe providers…

 

Example One – AOL and the dial-up Internet

AOL basically owned the Internet a decade ago, with the large majority of home Internet users accessing the Internet through their dial-up service.  They assumed they could hold out for a long period, and slowly charge additional fees for their “superior” broadband product.  They were wrong.  Consumers flocked in droves to the quicker pipe and away from dial-up access, hastening AOL’s rapid descent from fame.  Consumers hungered for the improved experience and quickly fulfilled their latent demand.

 

Example Two – Wireless Carriers and the iPhone

Having spent several years inside Sprint Nextel and heading up sales and marketing for a multi-carrier wireless company, I was constantly told by the knowledgeable carriers that consumers wouldn’t access the Internet on the small screen, that they didn’t require fast data speeds at the moment.  Eventually, perhaps, but it would take awhile.  Then, along comes the Apple iPhone, and, again, people are flocking in droves to the product and to the Internet.  Within seven months after introduction and with only 2% of the smartphone market, the iPhone’s Safari browser overtook all other Internet browsers in the U.S. market and is quickly gaining on Nokia’s Symbian platform globally.  Even with the weak, pre-3G AT&T Edge network (along with speedy WiFi), consumers are hungering for the interactive data.  And, once the 3G version comes out, I guarantee that Internet usage will take another huge jump and important applications will be written for this product.  No, it wasn’t just the speed in this case – it was the combination of user interface, beauty of product, applications, and WiFi – but speed is integral to accelerating growth.  And the wireless carriers and other handset manufacturers, especially Motorola, had this one dead wrong.

Implications: Yahoo is doing whatever they can to avoid a Microsoft takeover, but it is becoming obvious that they will have no choice but to fall prey to the Seattle giant, in large part because their other suitors - News Corp, Google, and AOL - could never exude the leverage that Microsoft could.  In truth, the merger is likely good for the marketplace, as Google is becoming far too dominant of a player in search and other Internet categories.  The only questions left to ask may be whether the takeover will be hostile or not and whether the deal will pass federal scrutiny.

Analysis:

Yahoo has done a poor job managing its assets, and now faces one of the ultimate consequences, a hostile takeover.  Shareholders for Yahoo cannot be satisfied with the company's performance: the stock is at the same level as it was in 2004. 

 

Though the company touted the Panama platform, industry insiders knew that the platform was far too late to market.  Google had introduced its AdSense platform several years earlier and rocketed to its search lead.  And, instead of switching focus to new endeavors, they’ve muddled their way through a myriad of Web 2.0 and mobile ventures.  They’ve had a recent flight of talent away from the company, and there is no reason to believe that this flight will abate.  The sad thing about it is that they have very talented team members and truly worthwhile projects, as Yahoo Answers, One Search for mobile, and Flickr.  So, they’ve now eroded shareholder value and confidence to the point of no return.

 

Though Yahoo is doing its best to fight this battle, and I truly believe they are loathe to accept the “evil empire” of Microsoft as their suitor, it seems impossible for them to evade takeover.  Now, all they can do is raise the value of their company.

 

To this end, they are actively seeking suitors.  They’ve talked to Google about being an outsourced search partner.  Of course, Google considers it in their best interest to keep Yahoo out of Microsoft’s hands.  They’ve talked to News Corp about a potential sale, but News Corp doesn’t appear able to make the purchase.  That’s good for all of the Net, as the history of content companies purchasing large Internet entities is not a good one.  And they’ve talked to AOL, who was part of the poorly matched and executed merger with another content company: Time Warner.

 

Microsoft is the only real option for Yahoo.  The deal makes sense, as it allows the merged company to present a viable alternative to Google, which neither company on their own can do.  I’m not sure if it will deliver its desired goal, as there is no reason to believe that a merged company can innovate better than the parts (and the Yahoo brain drain will accelerate post-merger), but at least they will be able to gain cost savings, larger reach, and dollars to expand.

 

For now, Yahoo’s only true option to me is to continue to try to raise its offering price, lest the initial offer from Microsoft become a hostile one.

Implications: The RIM versus Apple battle is the current smartphone battlefield (unless Nokia can enter the fray), with Microsoft and Palm bowing out due to an inability to innovate and deliver products that capitalize on the shifting pro-sumer or business / consumer market.  Now that Apple is making a move into an enterprise-level product, pro-sumers will now have an opportunity to carry only one product that can be used for both in-office and out-of-office activities, something that the Information Week article did not delve into -- the shift in consumer usage.  While conceding a RIM lead over the foreseeable future, this analysis will examine some of Apple's advantages as the playing field shifts.

Analysis:

I will state up-front that the RIM versus Apple battle is an exciting one, one that will be great for business.  It is true, as the article states, that six months is a long-time to wait for the enterprise class release, and this will allow RIM to defend their ground.  However, it is not as if RIM could just turn a switch and counter Apple’s attack.  After all, they’ve known this was coming since the original release.

 

RIM has a huge lead in email, which is vital to business users, and they should likely keep that lead.  I, for one, enjoy the iPhone’s email capabilities, but I readily admit that RIM is better.

 

In the face of that lead, one that RIM will retain for the foreseeable future, and the years of battles that these companies will face, I offer a few reasons why Apple is well positioned for the fight.

 

1)   Consumers don’t want to carry more than one device.  Consumers do this today, but why would anyone want a personal mobile phone and a business phone?  The Blackberry is an excellent business phone for today, as business encircles email and Blackberry is certainly the best emailer and a worthwhile though not innovative personal organizer; however, it is not a good consumer phone for today, as consumer use encircles much more.  RIM, to its credit, has finally begun to innovate its line with the Curve and the Pearl, but they were painfully late to the innovation game and face a forceful opponent in Apple.  As consumer applications, such as blog reading, Internet usage, photos, and new applications, cross over into the business segment, the iPhone is positioned well to attack the smartphone space.

2)   There are only two real competitors in this space: RIM and Apple.  Motorola and Palm are near irrelevant.  Palm’s Treo, after several years of excellent development, peaked and then failed to introduce a new, useful product.  Motorola is deeply troubled, with its failure to move on from the RAZR model-type and the horrid Q smartphone.  They’ve been losing market share by the heap, and the Windows Mobile browser has been obliterated by iPhone’s Safari browser.  This is a stark advantage for Apple, as they gear their resources to attack RIM.

3)     Do not underestimate Apple users.  The Information Week article discusses how workers are asking for company IT personnel to reimburse and/or support their iPhone purchase.  I did this as well, prior to starting my own company (which will eventually support the iPhone).  The reason that the IT department gave in rejecting my query was that Apple did not have enterprise class support, including security.  Within six months, that excuse will be gone.  This bottom-up request from employees is quite powerful, and most IT personnel that I’ve talked to enjoy the phone as well, even if they were not willing to support it until the enterprise upgrade.

4)      Internet is the killer mobile usage.  We’ve been discussing the move from voice to data for a long time.  Until now, the only real uses for mobile phones were email and text.  That was “so first decade, 21^st century.”  In the coming decade, if not over the next couple years, larger-scale Internet usage, including the usage of Google Gears and other online to offline “widgets” will become the most important use for mobile.  Video will grow in utility. 

5)      User interface is the key.  RIM has a great user experience for email, but they have a poor user experience for everything else.  Though In-Stat’s Hughes had difficulty seeing this, applications are better on an iPhone because of the user interface.  Apple’s multi-touch interface allows users to interact in a very different way with their phone.  Applications on an iPhone will also have more utility because users will be more likely to interact with these devices, and therefore businesses will have more motivation to accelerate development or encourage usage of business-useful, on-device applications.

Implications: Microsoft is in the middle of a tremendous browser battle.  Their share has been eroding, and the web masses are getting restless.  Internet Explorer 8 is an attempt to fight back Firefox and Safari, but it also appears to be a change in approach for Microsoft.

Analysis:

The article discusses Microsoft's huge lead in the browser market, with almost a 75% market share as compared to Firefox's 17% and Apple Safari's 6%.  However, the posturing of these comments feels too easy on Microsoft.

Microsoft is definitely in a browser war, one that they have been faltering in.  They controlled 85% of the market as recently as 1/06.  Meanwhile, Firefox, at 9.5% in 1/06, and Safari, at 3% in 1/06, have both nearly doubled their lead since then.  On the mobile front, Microsoft Mobile has been crushed by Apple’s Safari, through iPhone usage.  To lose that high of a percentage in 2 years must be scary for Microsoft, as Google distributes Firefox, helping the browser gain critical mass at near 20% share, and as Safari threatens with the introduction of new Apple products.  That 10 point loss must equate to a significant loss in today’s and future dollars.

In this frame, everything Microsoft does is to stop the erosion of their market share (they lost 0.47% in January 2008 followed by 0.59% in February 2008), as opposed to their previous position as market aggressor.  The move to universalize standards in web design across theirs and other platforms is a clear sign that Microsoft wants to play nice, wants more acceptance by the market, instead of the powerful, dictate-the-terms stance that many feel they have taken.  The olive branch to Yahoo is brilliant Ray Ozzie’s way of playing nice, even as the rest of the company prepares to play more hostile.

Implications: Google Gears delivers interactive applications that run offline to a place where these applications will certainly excel, on a mobile device.  However, the users most likely to use it, iPhone users, aren’t on the list and neither are Nokia users.  Are they just seeding for the Android launch?

Analysis:

Google Gears delivers interactive applications that run offline to a place where they will certainly excel, on a mobile device.  The relatively slow connection to data networks, especially in the absence of a WiFi connection, makes the utility of offline, or off-Internet, applications increasingly important on mobile phones.

 

However, the big users of Google Gears, as a widget, will unlikely be users of phones with Microsoft Mobile software.  The Microsoft Mobile browser has already been passed by the Safari browser, even thought the Apple iPhone with Safari has a much lower installed base.  Use of the Internet is much less, in large part due to the user experience of Microsoft Mobile, which means that this consumer group is also going to be less likely to use the online to offline applications, or widgets, that Google Gears stimulates.  Additionally, a significant number of those likely consumers have already fled to the iPhone or are using Blackberry Rim products.

 

The big win, off the get go, would be to integrate Google Gears into the Apple iPhone, and perhaps Google will announce support for the Safari browser, especially with the launch of the iPhone SDK.  Google Gears may have a somewhat similar problem on PCs, as I would expect Firefox or Safari users to be larger widget users, but the Microsoft installed base on PCs is dominant, with a decreasing but still huge 75% market share.  Of course, the end around is the integration into the mobile Google Android platform, but that market is completely untested, with no phones available to date.

 

Google Gears is certainly good news for the mobile industry, as they can serve a unique and important role in mobile, perhaps more important than in the desktop world.

Implications: With the decreasing value of voice through both mobile and landline phones, Verizon, AT&T, Sprint, and T-Mobile are all entering into a price war that places a decreasing value on voice.  They are also adding data onto their plans, and services such as Sprint TV, in the hopes of getting consumers attracted to their products.  The implications, though sometimes subtle, include a transition away from carriers, at the center of the wireless world.

Analysis: The introduction of the new unlimited calling and heavy data usage plans will be very difficult to break away from, for the wireless carriers.  With the decreasing value of voice through both mobile and landline phones, Verizon, AT&T, Sprint, and T-Mobile are all entering into a price war that places a decreasing value on voice.  They are also adding data onto their plans, and services such as Sprint TV, in the hopes of getting consumers attracted to their products.

In this way, these companies are making some signals:

1) Voice is a commodity.  Whether true or not, Sprint CEO Dan Hess said, "Nationally accepted measures of voice quality now show very little, if any, difference among the top wireless providers."  Now, I know that I oftend get aggravated at my AT&T mobile device for its voice stability relative to Verizon, but I think the general point is that consumers are willing to accept their voice quality and begin to move on to other services. 

2) Data is now the focus.  By developing pricing that includes data integrally to the plan, the carriers are hinting that data is ready for prime time.  This is a big shift, as carriers had been walking slowly toward these plans, offering small add-on plans and testing the water.  By pushing people en masse toward data, they are signaling that data is now ready for use.  The risk is that the experience, besides that evident in the iPhone, will not meet expectations.  Hence, Sprint adding services like SprintTV to the package appears to be a good move, though I have not tried SprintTV since the early days of its use.

3) The carriers are moving toward being a 'dumb pipe.'  I know the carriers and many other pundits debate this statement, and certainly Verizon has some advantages on both call quality and services through the pipe (Sprint has yet to show their supposed data prowess).  However, the mere existence of such a wide-spread, defector-led price war shows that customers don't see the differentiation in their services as much as they see the differentiation in devices and services through those pipes.  For instance, the use of the Safari browser is far outpacing the competition, on the basis of installed base, due to its user experience and tie to the iPhone. 

4) Increasing emphasis is shifting toward the handset manufacturers and service players that deliver data through the pipe.  The incoming explosion of more players to deliver services that consumers will like should be encouraged by the carrier.  However, this move weakens the carriers' negotiating position and stature relative to these third parties.  As consumers care more about data, other entities will be better positioned to deliver to their needs.  And we've already seen Apple with the iPhone increase its relative negotiating power.

Implications: Yahoo is in a good and a bad position.  The good position is that they have multiple suitors already -- Microsoft, News Corp, and Google (in a way) -- and might get more, driving up the offer price.  The bad news is that they've already seen AOL go down the road of a failed merger with Time Warner, and, if not careful, they could be the next.

Analysis: Does anyone worry about Yahoo going down the same path as AOL? 

 

This is the first thing that came to my mind as I read a blog on one of my favorite sites, TechCrunch.  The author described the closed door talks between News Corp and Yahoo designed to increase the offer from Microsoft’s initial bid of $44.6 billion to $50 billion.  (Of course, rumors are already rampant that Microsoft is readying a $50 billion bid with less strings attached than News Corp’s bid.)  

 

News Corp taking a big chunk of Yahoo sounds like a disaster to me.  It rings of the AOL – Time Warner merger that has widely been considered one of the worst mergers in history.  Though wide ranging, at heart News Corp is a media company, with similar components as Time Warner.  They own or have a major stake in major television and cable properties, especially FOX, BSkyB, and DirecTV, similar to Time Warner’s cable holdings.  They have a huge array of print publications, especially The Wall Street Journal, New York Post, The Times (of London), and so on.  Time Warner has a huge Time magazine portfolio.  And now they are going after Internet properties, such as IGN, Rotten Tomatoes, and MySpace.  MySpace has been on a downward trend since the acquisition.

 

Why does Time Warner and News Corp forebode poorly on Internet company success?  For one, there is a culture clash.  There are hundreds of stories about Time Warner management not understanding or getting along with AOL management, forcing physical and virtual walls.  When senior managers crossed the chasm, they were doubted and failed to deliver.  Secondly, often the non-Internet side just doesn’t get it.  AOL at that time and Yahoo at this time are desperately in need of new strategies to guide the company forward. 

 

At that time, both companies were falling (even if AOL didn’t know it, as evidenced by their lack of understanding of the impact of broadband and the dissolution of dial-up), and they need management that can both leverage existing resources in a new way and put into place a fundamentally new and forward-looking strategy for the company.  I’ve been to conferences where Yahoo executives alongside Microsoft executives and AOL executives talked about their ability to combat Google in the paid search arena.  They all said that they are still in the game and have strategies to pick up scene.  I wanted to throw a bucket of cold water in Yahoo’s face, saying “wake up, search as you know it is lost, Google will continue to gain market share because they are Google, so adopt new strategies.”  Yahoo has some very compelling properties, including Yahoo Answers, Flickr, and One Search on Yahoo Mobile, but it seems as if they are dabbling in these properties and coming late to the game on search with the hugely delayed release of Panama.

So will Microsoft be a better suitor?  Yes, they definitely would.  Not perfect.  For instance, I’m unsure whether simply gaining market share will help them in the paid search world.  Rather, this could help them at least cut overhead in that arena.  And the lack of distinctiveness of other properties also may lead to duplication.  But I do think they will be able to achieve scale benefits in advertising across their properties and the use of companies like aQuantive to provide benefits across the platform.  It also might allow the merged companies to focus on true growth areas, such as mobile and social networking.

 

Will these two entities get along better than News Corp and Yahoo?  Absolutely.  Not to say that there won’t be an immediate brain drain from Yahoo in such a merger, and this is partially desired by the merger.  Yahoo employees may very well be upset by such a takeover, especially by an entity hated as much as Microsoft.  However, Microsoft “gets” this business and could develop a sensible strategy going forward.  Not to say that it will be the right strategy as evidenced by both companies missteps when addressing Google, but at least it will be a sensible strategy. 

 

Google is also, especially in terms of being an outsourced search partner to Yahoo as a third option for Yahoo.  Google is also being discussed as a partner in the News corp deal.  I’m not so sure that Google won’t benefit from this deal, as their focus might narrow and a merger might harm one of the players.  They are fighting the Microsoft merger, but that doesn’t mean that they won’t benefit from it.  All that is sure is that Yahoo is struggling, truly needs suitors, and will likely receive a very good price for a sale.

 

I could discuss into more detail on all elements, but I’ll leave it at this for this article.  These talks were a long time in coming, and hopefully they will create value instead of evaporating it.  

Implications: AT&T doesn't make a cent off of an unlocked Apple iPhone, but Apple makes a hefty profit.  Plus, they get distribution to untapped markets and can still claim that they tried to prevent it.  Apple is on a roll and will continue through the next iPhone release (provided it is not a bad release).

Analysis:

Who is the clear loser in the unlocked iPhone “scandal:” AT&T.  Of course, this is obvious.  AT&T doesn’t make a cent off an unlocked Apple iPhone.  They don’t get a subscriber.  They don’t receive any ARPU.  From the moment the full court press to unlock the iPhone came about, AT&T condemned these activities and warned of retribution.  AT&T’s CEO appeared to make some veiled threats to Apple to put down this threat.

 

And Jobs responded.  He bricked the iPhones, using iTunes software to render them ineffective.  But Jobs is smart.  Apple is smart.  They understand the software game as readily as they understand the hardware game.  They know how good hackers are, and they understand the grey market.  Strategies had to be crafted for the iPod to defend against similar threats.

 

So, is Apple a loser in this battle?  I don’t think so. 

 

For one, they still make a very substantial market off of the sale of the iPhone hardware.  Margin is steep, and profits will recur as the iPhones go obsolete (all iPhone users fear a sapped battery) or a new iPhone with better features or more storage is released (Apple users are wont to chase upgrades, as has been evident in the iPod).

 

Secondly, unlocked phones likely spread the market for iPhones to consumers who couldn’t already purchase the product.  Perhaps they didn’t want to leave their existing carrier, or perhaps they lived overseas and couldn’t purchase the iPhone as of yet.

 

Third, it does create a market for these phones overseas.  If it took a year or longer to release the product abroad, then the iPhone hype could die down, but the prospect of having some of these phones in the marketplace prior to entry begins to seed the marketplace.

 

A higher priced iPhone is another option, but this may or may not be precluded by their relationship with AT&T or other carriers in other countries.  It would be in AT&T’s best interest to negotiate out unlocked phones from the contract, if they were able to have that leverage point (not sure if they were able to do that, considering all the negotiating room they gave up).  And, as Apple has a long-term partner for the iPhone, they may prefer the passive as opposed to active snubbing of the carrier by putting out higher-priced unlocked products.

 

So is Jobs upset?  I doubt that he would be.  I doubt that he didn’t predict this happening and would doubt that he would be upset by the spread of these phones to consumers who couldn’t get it otherwise.  Each of these markets have such large potential.

 

As to whether they can get to 10 million iPhones sold by the end of the year, I would expect a hearty surge.  The recession is a scary looming fact, driving down retail numbers, but many Apple acolytes are awaiting the summer upgrade.  And product satisfaction of the iPhone is the highest in the market, above RIM Blackberry in the #2 place and leaps-and-bounds over Nokia, Samsung, and bottom-dwellers Motorola and Palm Treo.

Implications: Google's domain tasting policy makes sense, but, predictably, it addresses a very small concern.  Click fraud and a complete lack of transparency are more vital, though this lack of transparency also vaulted Google over Yahoo, AOL, and Microsoft.  In the vein of openness (OpenSocial, Android, etc), Google will inevitably have to cast more light on its opaque business processes.

Analysis:

Domain tasting is really a drop in the bucket, as Google considers policing its space.  What the domain tasting suit really sheds light on is the inherent misuses of the system by unsavory businesses, and the difficulty that Google has in cracking down on these abusers.

 

When I headed up the e-commerce operations for a wireless company, I saw how bad the situation could get.  Online wireless is a hugely competitive business, with little differentiation among the various online carriers and distributors and huge price competition.  This mix brings out some of the worst from competitors, and we saw some very unhealthy behavior.

Click fraud was prevalent, apparently from competitors who clicked on our ads in order to drive costs up.  We received multiple checks from Google in response and a number of discussions with them.  (Yahoo and Microsoft’s MSN were lower down on our attack list because our bills to Google were so much larger and the offenses more obvious. AOL’s group IPs also play into this, but that would be for a more in-depth conversation.)  The people at Google treated us quite amicably and brought us to the table for discussions. 

 

Site fraud was also rampant, as one competitor used multiple domain names to point to their main site in order to increase search engine optimization and dominate the paid search listings.  Domain tasting can also play into this arena.  A positive policy move came out of the talks that we had with Google a couple years back, as they restricted multiple sites that pointed to the same domain, shutting down a few competitors.

 

Google is rather opaque when it comes to dealing with advertisers.  They don’t divulge what is behind the black box that separates the advertiser from the means at which their advertising is distributed.  Google claims that this wall prevents advertisers from gaming the system, and they are right, to an extent.  But Google is also worried about exposing themselves, to competitors as Yahoo and Microsoft and to advertisers such as Procter and Gamble or Sears. 

 

As we move to a more open world, and Google is becoming more open with OpenSocial for social networks and Android’s open platform for mobile, they will also have to become more open in their base AdSense business and fend off more of these anti-competitive behaviors. 

Implications: Garmin's Nuviphone entrant shows that the incumbent manufacturers and carriers are continuing to lose their stature, in the wake of the Apple's iPhone.  However, Garmin has neither the brand power nor the expertise to pull off an iPhone.  We won't be able to predict success until we have much more information, as I detail in this article.

Analysis:

Garmin's Nuviphone is an interesting entrant by an interesting player.  Will Garmin be an iPhone killer?  No, to suggest that is either: a) to stir up controversy and write a compelling headline or b) to have a complete lack of understanding on consumer behavior and brand power. 

In many ways, Garmin’s Nuviphone reflects the major changes occurring in the wireless market that I have previously described: a disintegration of control by the incumbent handset manufacturers and the wireless carriers, followed by a shift to power by innovative brands and software companies.  This is due to the appalling lack of innovation on behalf of the manufacturers and the carriers.
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But it isn’t an iPhone.  Apple wields phenomenal brand power.  Garmin has a nice brand, but it is exponentially dwarfed by Apple brand power.  This allows Apple to negotiate an unheard of deal with AT&T, including distribution through their own stores, activation through iTunes, no AT&T branding on the handset, and so on.  It also allows Apple to build hype through a brilliant media campaign, fill the blog boards and newspapers with commentary, and have huge lines at their doorstep upon release. 

 

Can Garmin do this?  Are you kidding me?

 

Can Garmin create a user-interface that will make iPhone users salivate, as the iPhone did to other products?  Everyone drools over the iPhone because of the multi-touch, because of the icons, because of the gravity-induced image rendering, because of the gorgeous hardware.  Garmin has produced car-top apparatuses, hardly acclaimed for their beauty and even upsetting some for their user-interface on dashboard.  I know; I’ve heard people curse it a number of times before.  Garmin produces a good product, but it doesn’t have an Apple interface.

 

This does not mean at all that the Nuviphone won’t succeed.  It may.  I don’t know.  I haven’t seen and played with the product, and it doesn’t carry any a priori brand as Apple to make the product succeed simply because it is cool.  (Yes, the Apple is much more than just being cool.)  I don’t know what the price is, and that is important.  If they price it as a GPS device, it will get killed.

 

GPS or geolocation definitely has its place in the mobile world, a big place that I’m excited about.  I use the Google locator feature on my iPhone all of the time and wish it was GPS enabled.  To see Garmin bringing it to the wireless world is great to hear.  Nokia is trying to do that with Navteq as well.  And GPS will eventually be a killer mobile application, as it will greatly accelerate mobile commerce and other location based services.

 

Another thing to note is that consumer usage takes some time, when consumers are given the proper product.  The iPhone was so good that it became an exception, and, with RIM Blackberry, is literally driving the smartphone market.  It already overtook browser usage, with Safari beating out the much higher installed base of Microsoft Mobile.  Yet, Internet browser usage in mobile phones is still miniscule.  Mobile GPS usage also won’t happen overnight.

 

I’m looking forward to this phone, but we will need to touch, feel, and use the features before predict it as a success or failure in the market.   One thing is for sure: it isn’t an iPhone killer.

Implications: Manufacturers, carriers, and analysts completely underestimated the willingness of consumers to access the Internet over mobile devices and are still nay-saying the iPhone.  They're wrong, and the numbers prove it. 

Analysis: The carriers and handset manufacturers have long told you that consumers aren't ready to access the Internet over their mobile device, maybe they never would be.  Analysts have echoed their remarks, adding that U.S.-based customers aren't as advanced on mobile, never will make up the gap that leads to greater SMS activity as European consumers or greater gaming activity as Asia customers.  Even now, Microsoft and even AT&T itself are saying that the iPhone is hardly an innovation, hardly a game changer. 

I spoke to an AT&T middle-manager a few weeks ago who put the iPhone down, transparently cognizant that they were dictated the deal on the phone and precariously close to becoming a "dumb pipe."  I talked to a mobile application developer for a location-based services company who put down the iPhone experience, calling it over-rated, understandably upset that they have not yet been able to develop on their currently closed platform (should open up in a few months with their new SDK).  I've spoken to Motorola acolytes (the few of them that are still around), who claim the new RAZR editions feature a worthwhile interface.

They're all wrong.  Consumers have long been ready to access dynamic mobile services, and all of these actors failed to give them what they wanted.  Pent up demand has led to an outbreak in Apple iPhone users and an outbreak in data activity.  iPhone Safari traffic is amazingly high, given the relat