Microsoft watch: not a good time to be Steve Ballmer

By | Facebook, Google, IBM, Microsoft, Yahoo! | 7 Comments

Microsoft reported Q3 results yesterday and they weren’t pretty – the first ever drop in overall revenues compared with the year ago quarter and online revenues down 14% were the main lowlights, although good news was thin on the ground.  I will leave the detailed commentary to others more qualified, but it looks to me like this beast is in terminal decline and won’t escape without some very radical change, which probably means new leadership.

First take a look at what their share price has done over the last five years:

This isn’t the picture of a company that is moving forwards.  It isn’t much different to other old school tech giants like IBM and Oracle, or even the NASDAQ over the same period, but it is a story of a company that is moving sideways.

To their credit Gates and Ballmer have long recognised that they need to re-orient the Microsoft around the web, and have tried to use the huge cash thrown off by their core software franchises to do that.  However, there isn’t a single web sector that they dominate, at least one that I can think of, and it looks to me like Windows and Office are at the start of what could turn out to be a pretty steep decline.

As successive generations of Windows underwhelm open source alternatives make steady progress, particularly in the high growth netbook area (the Microsoft offering for netbooks is still XP!), and at the same time Open Office and Google Docs are effective low end competitors for Word and Excel – so no good news on the horizon here.

And as I said at the beginning their online business is performing terribly as well.  They are nowhere in search, their social media story doesn’t go much beyond an over-priced investment in Facebook and the chat that I hear suggests that aQuantive the display ad business they acquired last year for $6bn isn’t prospering under their ownership.  At 14%, the decline in Microsoft’s online business over the last twelve months is worse than Yahoo!’s 13%.

It is hard to see what they might do to engineer a turnaround – so cue some more over-priced M&A and investments.

With AOL, Yahoo! and MSN all looking weak we are left with Google as the only strong player in this market, which doesn’t strike me as healthy for the world economy, but is likely to mean there are more opportunities for new companies.

The recession is kinder to some than others

By | Business models, Google, IBM, Yahoo! | 7 Comments

We are in the midst of earnings season right now and different companies are faring very differently:

  • Google revenues were up 18% – as I wrote last week
  • Yahoo! yesterday reported revenues down just 1%
  • Sun Microsystems also reported yesterday with revenues down 10.9% on the year ago period
  • IBM reported last week with gross revenues down 6% on the year ago period (apparently only 1% if you take out currency fluctuations).  But that overall performance masked double digit declines in their hardware business and good performance in services and software.

The overall position is, I think, that it is better to be in the web than in software, and better to be in software than in hardware.  This is because the lowest layers of the stack are commoditised already, software is starting to get there and web based services have yet to really begin that painful process.

My guess is that they will though – and then the attention will move somewhere else – e.g. shared data services.

I have focused on revenues in people’s results as a proxy for overall market size, which I think is the best single indicator.  Profitability is important too though, is more influenced by company specific factors.

Cheap laptops will drive growth of web and cloud

By | Business models, IBM, Microsoft | 20 Comments

The NY Times has a great article today about the impact of $200 laptops on the IT industry.

The first, and most obvious point is that they are bad news for desktop software companies like Microsoft.  These laptops achieve their pricepoint by running open source software and cutting down on local processing power.  And MSFT is already feeling the heat – they recently had their first big work force reduction and sales of Windows fell for the first time in history in Q42008.

High end chip companies are also feeling the pain, with Intel’s revenue down 23% last quarter, the steepest decline since 1985.

We are witnessing the commoditisation of much of traditional IT.

But as I’ve said before, this is a cycle.  In the words of the NYT:

This has happened before. The dot-com bust earlier in the decade dragged down high-fliers like Sun Microsystems and America Online but set the stage for a new generation of Web powerhouses like Google and other innovative Internet software companies like, founded on disrupting the status quo.

The recession of the early 1990s sent I.B.M., then the dominant force in technology, into a five-year tailspin. But it also propelled Microsoft and Compaq, later acquired by Hewlett-Packard, and Dell to the forefront of computing.

As I’ve been writing about a bit recently, one area that I think has potential is shared data services.  As the cost of computing comes down, so more people will use it, but they will be using hosted apps leading to the creation of lots of data that is ripe for sharing and a source of huge potential value creation.

Some parts of tech holding up well

By | Google, IBM, Microsoft, Mobile | No Comments

Amongst all the doom and gloom I’ve felt like slitting my wrists at points over the last couple of weeks so it was good to hear the positive sentiment coming from Google, IBM and Nokia yesterday.

Google’s earnings fell short of expectations, but that was due to increased expenses and reduced investment income and is therefore not a reflection of the market conditions. Further, they were cautiously optimistic about the prospects for the next couple of quarters. So despite the earnings miss I take this as positive for Google and therefore as a good sign for our markets overall. The markets saw things differently and pushed Google 11% lower in after hours trading, but I’m with Yi-Wyn Yen of Techland who says investors are “freaking out for nothing”. Revenues are still 39% higher than Q2 2007 and 3% up on last quarter. The Google press release is here.

The stories at IBM and Nokia were more unequivocally positive with earnings per share up 13% and revenues up 4% year-on-year at the former and the latter came in ahead of estimates and increased its guidance for the remainder of the year. See Nokia’s sales buck fear of slowdown and IBM shrugs off global concerns.

However, the news isn’t all good with the word from Redmond less positive – Microsoft posts sharp profit rise, cautious guidance.

This doesn’t change overall macroeconomic picture – which IMHO is still very gloomy, but it does indicate that maybe the tech sector will be one of the better places to be over the next couple of years. This is in stark contrast to the 2001-02 recession where the bubble had been in tech and therefore tech was the worst hit.

Macro-economic gloom and startups

By | Entrepreneurs, IBM, Venture Capital | 9 Comments

My last post of 2007 was entitled No predictions for 2008.  I wrote that in part because I’m reading Taleb again and you can’t turn a page of his book without being reminded of how people are wrong more often than they are right when it comes to the business of forecasting the future, and I’m now glad I took that line because if you had pressed me at the time I would have been a lot more optimistic about the year ahead than I am now a mere three weeks later.

As an aside which I may come back to later, as I read Black Swan I increasingly think that managing day to day is an almost totally different activity to managing over the long term.  Maybe so different that that doing both adequately at the same time is going to be prohibitively challenging.  The problem is that day to day management requires decision making based on short term predictions which you need to make with confidence (this sale will close next week, we can get a successful partnership with Google etc. etc.) yet if Taleb is right, and I think he is, long term planning requires you to embrace an almost overwhelming amount of uncertainty.  Taleb would argue that at the moment we effectively ignore this challenge by pretending the long term is more predictable than it really is – to our detriment when it all goes wrong.

Back to the main point of this post which is what the current macroeconomic gloom means for startups.  This topic is on my mind because of two conversations I had yesterday on this topic, one with an entrepreneur and the other a VC (Damon Oldcorn of Zebtab, and Paul Fisher of Advent), and in both cases we ended up concluding that if economic picture continues to deteriorate it will make a difference to budgets and financing strategies.

Hopefully we are all working in high growth markets and so even if the overall economy slips into recession we will still be operating in growth areas – albeit growing more slowly.  Which means that all things being equal our companies will still grow, just more slowly than before.  Slower growth means less cash in the door which for loss making companies either means bringing the next fundraising forward or reducing expenses.

That is the general case – obviously different areas of industry will be hit to a greater or lesser extent and we all need to look closely at our individual market.  Remember how internet advertising was disproportionately hit last time round, for example.

The other thing to consider is that if recession really does bite then the fundraising environment will get a bit tighter.

Putting all this together, it looks to me like the downside risks will become more acute for many businesses, whilst at the same time the upside is moving further out.  This is not an armageddon scenario, but it is definitely less rosy than it was 6-12 months ago.

Maybe all this is a bit obvious, but it is easy to forget the big picture when you are working 25 hours a day down in the detail of a startup.

Reading about Intel’s results didn’t do much to improve my mood either, although it is good to read today that IBM is more positive.

To finish on an optimistic note, the best companies come through periods like this stronger than ever and ready to capitalise on the fact that most established businesses under invest in innovation through the low points of the economic cycle.

Advertising will change more in the next five years than it did in the last fifty

By | Advertising, Business models, IBM | 11 Comments

In the words of IBM:

The next five years will hold more change for the advertising industry than the previous 50 did. Increasingly empowered consumers, more self-reliant advertisers and ever-evolving technologies are re-defining how advertising is sold, created, consumed and tracked.”

From The end of advertising as we know it, IBM 2007.

Spot on. There are huge budgets at stake in a rapidly evolving market place and that means good opportunities for startups.

For IBM there are four drivers:

  • Attention is increasingly controlled by consumers as media consumption moves away from the TV and due to ad skipping/blocking technologies
  • The rise of UGC is enabling engagement marketing
  • New channels and technologies are enabling measurement of advertising effectiveness for the first time
  • The rise of exchanges is changing the way advertising is bought and sold

….. which will demand two key changes (and this is IBM plus a bit of me)

  • Demand from advertisers for transparency on how their budgets are spent and what the results are. Over time this could go as far as cross channel comparability and allocation of budget to different channels and formats based on performance. This might even get automated.
  • Greater creativity in advertising – traditional and online. This will take many forms, a lot of which I suspect haven’t even been thought of yet – but are necessary to overcome online ad-blindness and ad-skipping technologies in video. Part of the answer could well be innovative models that make explicit the exchange of advertising attention for content, and potentially even for cash. (Check this out for a fun example.)

If you read the IBM presentation (which I warn you is a bit of a slog…) then you will see they have a lot of survey data to back these ideas up.
Credit goes to Tomoaki Sowada for the pointer to the IBM presentation.

Some more magic to come out of Facebook?

By | Facebook, IBM, Social networks | 12 Comments

Lots of people are reporting that Facebook is turning over $150m and making $30m in profits. These are small numbers when compared with the rumoured $10bn valuation that Microsoft is considering for a $500m investment. As the Guardian points out that equates to $238 for each of their 42m profiles – which compares with revenue and profit per profile of $3.6 and 71 cents.

This kind of discrepancy between revenue and valuation suggests to me that they must have a plan that will drive some kind of step change in financial performance.

According to Wired that plan is to start targeting ads more effectively using the profile data in the site. That would be good to see, but it would have to be incredibly powerful to bridge this valuation gap. More powerful than any ad targeting I have seen before, and by quite some margin.

I think they might have something else up their sleeve.

The $10bn valuation probably started life as little more than a convenient round number made up by someone at Microsoft for what is for them a relatively small investment at $500m. But I would be surprised if there isn’t some kind of justification somewhere and I doubt that it is based simply on better targeted ads.

There has to be something more Facebook can do with all the passion and data which resides in their user base and profiles.

On a related note the Wired article also quotes Scott Rafer as saying he doesn’t expect Lookery to make any money out of Facebook after all! (I wrote last week that Lookery had the better prospects than the other two vendors I looked at who were building services to monetise Facebook apps.) Instead Rafer is using Facebook to experiment before turning to smaller social networks to help them target their ads better. You can see how Facebook is a good place to experiment given that the API gives you instant access to profile data without the need to go through a lengthy biz dev process, but at the same time they are not a great customer as they are large enough to want to build their own ad targeting system.

UPDATE – Scott Rafer has clarified that Lookery does plan to make money out of their Facebook ad network – they have started with a zero revenue share but plan to start taking a cut in due course.

Sun Virtual Workspace

By | 3D, IBM, Second Life, Virtual Worlds | 2 Comments

Check out this video of Sun’s Virtual Workspace. They have built a Second Life style collaboration environment focused on commerce. Very cool.

More detailed info is available on Sun’s site here. They call the initiative MPK20 (obviously not because they want me to remember it).

Being like Second Life, it is avatar based. The idea is you walk your avatar around your virtual office collaboratinig with your colleagues. It looks like voice conversation and document sharing are supported.

All pretty handy given that on any given day 50% of Sun’s workforce is remote.

I’ve been saying for a long time now that Second Life and Habbo Hotel show the power and popularity of 3D environments, that both of those are niche worlds (albeit large niches), and that there must be space for something in between that is easier to use and more focused on a real life application. It looks like the folks at Sun are thinking the same way.

Similarly, I am hearing from IBM that they believe 3D virtual worlds can (will?) be a $1bn revenue line for them in the next few years. That is why they are so active in Second Life.

It feels to me like there is a big market here waiting to be created. Virtual offices might be a great driver.

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Second Life watch – outline of future apps visible through the SL fog

By | IBM, Second Life, Virtual Worlds | 4 Comments

I wrote quite a lot about Second Life around the turn of the year, but seem to have written less recently (all the archives are here).  I think that is because my interest has moved from understanding whether SL has legs and is going somewhere (it is) to trying to figure out what that means (beyond the success of Linden Labs).

What I really want to understand is what useful things can be done in SL.  I don’t mean to denigrate in any way all the stuff that goes on there already, but I’m looking for things that people could build businesses around, and for that the first thing to look for is activity that is happening elsewhere that could be ported to SL.

Enter the Digital Business Section of the FT this morning.  In it there is an article by Peter Whitehead on just this subject.  As a guest of PA Consulting he visited four companies in SL who explained why they are there, and in their explanations I saw for the first time a number of real world tasks that might be better performed in SL (as well as more cheaply).

Those tasks were:

  • Recruitment – ABN Amro and PA Consulting highlighted this as one of the reasons they maintain a presence in SL.  As well as the benefit of looking “with it” their SL presence allows potential employees to interact with them conveniently and anonymously.
  • Customer feedback – BMW, ABN Amro, Vodafone and PA Consulting all said that SL is a great place to solicit customer feedback.  There is a general feeling that people find it easier to be honest in their comments when they are speaking through avatars.
  • Product and service design – SL is a great venue for experimenting with new product and service design.  PA Consulting has built a model of a branch bank that they use to experiment with the user experience.  IBM also uses SL in this way.
  • Collaboration – mostly internal, meeting in SL will never be the
    same as a first world meeting, but it is better than a conference
    call.  IBM have been banging this drum for a while, and ABN Amro also
    cited this as a benefit.

These are all good steps forward, but I don’t want to overstate their signnificance.  All these companies regard their activities in SL as experimental and they are also there to push their brands, and benefit from the additional PR they get from being leading edge.

What I would love to find is a company that sells products in first life and delivers them in Second Life.  Now that would be cool.  I’m not talking about Rivers Run Red or Electric Sheep who sell virtual goods to avatars, great companies though they are, but about something that is delivered in SL but has value in real life.

For the first time I am seeing some glimpses of how that might look.

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Second Life – grubby underbelly

By | IBM, Second Life, Virtual Worlds | 7 Comments

Second Life log

I have been thinking for some time of writing a post in response to some of the chatter about the problems at Second Life. 

You can read here and here about the extent to which Second Life is really an economy – it’s not, the extent to which it is all sex and gambling – it is, and for the academically minded the future of the LindenDollar as a currency – not dissimilar to the US$ actually, with significant deflation on the cards.

Then on the other hand you have companies like IBM saying SL is the future of the internet.

For me the interesting question here is not so much whether SL will get so big that Linden Labs will rival Google as a successful VC investment, but whether what we see happening in SL and places like Habbo Hotel is the start of a massive change in the way we interact online.

I think that is the case, I blow hot and cold about how quickly it will all happen, but I’m convinced that something big is starting here.

For me the fact that a lot of people go to SL for (virtual) sex doesn’t disturb me too much – as we all know the porn industry is a perennial early adopter.  And to me the Linden dollar is an enabler rather than an end in itself.  The amounts of money people play with in SL in real world terms is tiny – I think the importance of the Linden dollar and the ability to convert to real dollars is that without it people wouldn’t enjoy their SL games.

I might take a very different view if I was a shareholder, of course, but as an industry observer (and hopefully one day investor….) the thing that excites me are the levels of activity and the passion of the people who play there.

I’m guessing that is what IBM see too.  I would like to see more business applications evolving – virtual meetings as an alternative to teleconferences + limited training isn’t that exciting, but my strong belief is that these things will come.