Thursday, June 26, 2008

When Partnerships Drift....

Those dealing with partnerships know well that the strength of a relationship evolves over time. It could get closer and more hierarchy-like Or, it could get more distant and more market-like.
One of the best known examples of partnerships in recent years is the one between Microsoft and Intel (dubbed Wintel). Both companies rode the evolutionary trend in computing (Moore's Law) by introducing hardware-software combination in a coordinated fashion. As Intel designed its next generation chip, Microsoft released next version of its operating system. This trend had to stop sometime, somewhere. Well.. it looks like it has.
NY Times is reporting that an internal analysis within Intel has concluded that Intel may not upgrade all their 80,000 computers to Vista OS! Specifically,
the company made its decision after a lengthy analysis by its internal technology staff of the costs and potential benefits of moving to Windows Vista.
One of the tricky aspects of strategies in a network-era is that one partner does not carry out such analysis if the outcome is likely to significantly affect the performance and position of its tightly-linked allies. Intel's internal analysis to assess cost-benefit of Vista is not like analysis carried out by other big corporations or by so-called third party analysis from Gartner and Forrester.
Managing partnerships in a network-ear calls for understanding mutual-dependence and coordinating product launches. Unilateral decisions signal more arms-length relationship and this move--if it indeed is followed through--signals that Intel and Microsoft are drifting away from each other.

Wednesday, June 25, 2008

Symbolic versus Substantive Support Within Ecosystems

Over the last two days, two news items caught my attention: (1) Nokia buying out partners in the Symbian venture to make the software available free; and (2) Google is delaying the launch of Android-powered mobile phones. There is a connection between these two stories: it's about the fundamental differences between symbolic versus substantive commitment to ecosystems in network-based competition.
Nokia--which had 48% equity stake in Symbian--clearly wanted to make Symbian OS to be made available free to developers and operators so that they can be persuaded to be part of the Symbian Foundation ecosystem. It paid $400 (plus) million dollars to the other equity holders in Symbian and then is spinning it off into an open source foundation. Other equity holders may still support Symbian but nevertheless took their share of Symbian in cash from Nokia. It is not that the equity holders collectively pledged to change Symbian from a profit-motivated entity into a not-for-profit foundation. That was Nokia's call. They were symbolically supported by many of their erstwhile shareholders. Two quotations that I have reproduced from the Press Release is illustrative.

The complete, consistent platform that the Foundation plans to provide will allow manufacturers to focus on their unique differentiation at a device level” said Dick Komiyama, President of Sony Ericsson. “Sony Ericsson believes that the unified Symbian Foundation platform will greatly simplify the world for handset manufacturers, operators and developers, enabling greater innovation in services and applications to the benefit of consumers everywhere.

Mobile phones have turned into sophisticated multimedia computers and smart phones continue to grow in popularity," said Kris Rinne, Senior Vice President of Architecture and Planning at AT&T. "The Symbian Foundation will reduce fragmentation in the industry and holds the promise of incorporating leading technology and the most mature software into a unified platform for the entire industry. This will create an environment that will encourage and enable developers to build compelling applications that will positively affect our customers' lives and support AT&T in offering its differentiated services to consumers.

Such symbolic support is welcomed to signal commitment from the ecosystem for the new idea. But the real strength of the ecosystem lies in the substantive support provided by the ecosystem members: How many new models will Sony Ericsson design and launch with the Symbian OS? What will be the share of Symbian OS within Sony Ericsson's portfolio in 2009? 2012? Similarly, where will AT&T place Symbian-operated mobile phones relative to RIM (Blackberry), WindowsMobile (Microsoft), Apple iPhone (remember that AT&T was an exclusive, first-of-its-kind launch partner for Apple iPhone in 2007) and Palm?
Why is this distinction relevant? For that, let us turn to Google and Android. On November 5, 2007 Google announced the launch of Open Handset Alliance with 34 members. Two companies are common with the Symbian Foundation--Motorola and NTT DoCoMo.

It will be interesting and worthwhile to watch how these two companies balance their commitments to Symbian and Android.
Google's initiative with Android is a classic example of network-based competition. Wired Magazine ran a story recently about Google's Android. This paragraph from the article is illuminating.
So far, Android has been able to persuade only T-Mobile and Sprint Nextel to join the Open Handset Alliance. Neither is a surprise: T-Mobile partnered with Rubin on the Sidekick, and as one of the smaller carriers it's more willing to take risks. Sprint, suffering from massive consumer churn and almost junk-rated debt, seems game for anything that might help. But the two biggest players, Verizon Wireless and AT&T, have passed. "There wasn't anything viable we were willing to entertain," says Verizon Wireless spokesperson Jeffrey Nelson. This spring, the carrier even backed an Android competitor, an open source consortium called the LiMo Foundation.

Google needs to use revenue-sharing to convince network operators to join the Android ecosystem since 'free software' does not seem to have done the trick. Nokia is catching up to the free software rule-of-the game.
This ecosystem is evolving and many different players are jockeying to be the orchestrator of core mobile business models. In such ecosystems, we need to see more than symbolic quotes on press releases. We need to see who commits substantively. We need to see how Motorola and NTT DoCoMo navigate the competing requirements from the different ecosystems. We need to see how developers navigate the pulls from different OS such as Apple iPhone, Symbian, Microsoft Windows Mobile and Android. When will Verizon and AT&T support Android? How significant will be their support? Only when we see the actual moves, we will know who is leading and who is lagging. This network-based competition is just starting out; 2009 will be just the beginning but we will see who is gearing up for the long haul and who has fallen by the wayside.

Tuesday, June 24, 2008

Nokia Takes Control of Symbian

Mobile Software wars are heating up. I can count at least five major competitors now: RIM (Blackberry), Apple (iPhone), Palm, Microsoft (Windows Mobile) and Symbian (till now a consortium with Nokia as the largest shareholder).
Today, Nokia announced that it is investing $410 Million to take full control of Symbian and give the software away royalty-free. Microsoft charges around $10 per phone and Symbian supposedly charges around $5 per phone now. Google's android platform is still in development and Nokia is striving to aggressively compete on price.

The first two paragraphs of the press release are worth reading in its original form:
LONDON, UK; June 24, 2008 - Nokia, Sony Ericsson, Motorola and NTT DOCOMO announced today their intent to unite Symbian OS™, S60, UIQ and MOAP(S) to create one open mobile software platform. Together with AT&T, LG Electronics, Samsung Electronics, STMicroelectronics, Texas Instruments and Vodafone they plan to establish the Symbian Foundation to extend the appeal of this unified software platform. Membership of this non-profit Foundation will be open to all organizations. This initiative is supported by current shareholders and management of Symbian Limited, who have been actively involved in its development. Plans for the Foundation have already received wide support from other industry leaders.

To enable the Foundation, Nokia today announced plans to acquire the remaining shares of Symbian Limited that Nokia does not already own and then contribute the Symbian and S60 software to the Foundation. Sony Ericsson and Motorola today announced their intention to contribute technology from UIQ and DOCOMO has also indicated its willingness to contribute its MOAP(S) assets. From these contributions, the Foundation will provide a unified platform with common UI framework. A full platform will be available for all Foundation members under a royalty-free license, from the Foundation’s first day of operations.

From a network-era strategy perspective, this move is important as it signals the importance of orchestrating an ecosystem of hardware players, chip makers and operators who simultaneously both compete and cooperate. As of now, it has an impressive set of smartphones. My belief is that Symbian's current governance may have been somewhat complex and complicated with a mandate to make profit while it competes against Google and other open source movements. It is also a signal that Nokia is shifting the locale of competition away from software to design, features, interfaces etc. It also may allow Symbian to more aggressively court third-party applications and compete against Apple's iPhone platform that seems to have attracted many third-party developers.
But more important is the question: What does commitment to this foundation mean? What will Vodafone do to support Symbian while it also has to deal with Apple iPhone and support devices running Windows Mobile?
What will Microsoft do? What will hardware makers like Sony Ericsson and LG do? Worth watching as Google's android platform evolves in the coming months and years.

And the Rumor is: Microsoft and Yahoo are Back Talking!

I am not surprised because there is no reason to not think that Yahoo will still explore every option before the upcoming Annual Shareholders meeting. TechCrunch reports that the talks are back on but no clear details are forthcoming. So, what can we expect?

I do not see a full-fledged merger unless Microsoft can get Yahoo close to current price [without paying a premium anywhere close to what it offered in 2007 or even a few weeks back]. If Ballmer gets Yahoo at around $21, he will declare that it is a win for MSFT shareholders and reiterate that Yahoo fits in with Microsoft's long-term vision because it can help Microsoft achieve the requite scale quickly (and underplay any post-merger integration problems). I doubt that Microsoft will get such a bargain because that price is even lower than what Carl Icahn paid to accumulate his near 5% stake. He may not be willing to sell his stake for such a short-term loss unless he is prepared to accept MSFT shares under the belief that they are under-valued and may go back up at a faster rate!

If the discussions are about selling or combining on-line advertising business to create a separate entity with some sort of notional value, then Yang may be able to go in front of his shareholders and claim that he has salvaged a bad situation but without selling away the crown-jewels.
This story is far from over. Microsoft said: 'No Comment." For Yahoo, I believe that every option is on the table till Aug 1.

Thursday, June 19, 2008

Yahoo's Reorganization: Is it Like Shuffling the Deck Chairs on the Titanic?

Yahoo announced a major reorganization--essentially centralizing the various product division under Susan Decker. Reorganization sometimes may appear like 'rearranging the deck chairs on the Titanic.' While it may not be true in the case of many restructuring moves, in the case of Yahoo, it appears so.
WSJ headline for the story was: "Planned Yahoo Reorganization May Spark Executive Departures." I think it is a response to past departures and it could trigger future exodus. These managers may have wanted to stay on and cash in on the lucrative poison pill for the management cadre that was put in place when Microsoft was in the picture. Now that Microsoft is out, these executives may not get big payout, they have seen their stock price plummet (many of them may have their options 'under water'). The key resources that Yahoo has (or more precisely, had) is people--talented and experienced professional. As they start to leave (a good early warning signal in a knowledge-based economy), you can bet that they are unlikely to be successful in recruiting talent to replace those leaving--even under current economic conditions.

Yang & Co. have about six weeks before they face the shareholders at the Annual Meeting on August 1. I do not think the angry shareholders could be pacified by detailed presentations on reorganization!

Remember the age-old strategy axiom? "strategy before structure or structure follows strategy.' It's so true in the case of Yahoo.

Friday, June 13, 2008

Yang Needs More than Google to Pacify Shareholders on August 1

Yahoo announced late yesterday evening that it is entering into a non-exclusive relationship with Google. The title of the announcement itself is curiously strange:
Yahoo! to Strengthen Competitive Position in Online Advertising Through Non-Exclusive Agreement With Google
How does a company strengthen its competitive position by allying with its biggest, direct competitor? On the face of it, it fits with Yahoo's 'Open' strategy but this is not a long term solution. This is not enough to pacify the shareholders who feel let down by the missed opportunity to be acquired by Microsoft.

Both Google and Yahoo are cautious by saying that they will wait to see how the regulators react to this agreement:
Although Google and Yahoo! are not required to receive regulatory approval of the deal before implementing it, the companies have voluntarily agreed to delay implementation for up to three and a half months while the U.S. Department of Justice reviews the arrangement.
So, who benefits from the deal? I think Google does for two important reasons.
1. Yahoo gives one more prominent site(s) for Google's AdSense. It's better to be placed alongside Yahoo's advertisements than be totally excluded from those sites.
2. Google and Yahoo "agreed to enable interoperability between their respective instant messaging services, bringing easier and broader communication to users." Google's IM client has not been a blockbuster success and Yahoo has a significant number of users and this combination helps Google.
Yahoo claims that "this is an approximately $800 million annual revenue opportunity. In the first 12 months following implementation, Yahoo! expects the agreement to generate an estimated $250 million to $450 million in incremental operating cash flow." This is an estimate and we will see the results when we see the results!
Yahoo has been exploring many 'strategic options' since Microsoft's public offer earlier this year. What they have come up with so far is a potential increase of $450 million operating cash flow by working with its most direct, dominant competitor. How will the shareholders react on August 1?

Thursday, June 12, 2008

Microsoft's Final (?) Answer to Yahoo--No, Not Interested. Thanks!

So, it appears that Ballmer gave Yahoo a final answer and it is "NO, Not Interested. Thanks." The announcement was made by Yahoo (and not Microsoft):
The conclusion of discussions follows numerous meetings and conversations with Microsoft regarding a number of transaction alternatives, including a meeting between Yahoo! and Microsoft on June 8th in which Chairman Roy Bostock and other independent Board members from Yahoo! participated. At that meeting, Microsoft representatives stated unequivocally that Microsoft is not interested in pursuing an acquisition of all of Yahoo!, even at the price range it had previously suggested.
It appears that Microsoft realized that it was paying a premium for second-rate competencies that were further protected (diluted) by expensive poison pills. So, Microsoft wanted to cherry pick what it wanted most--Yahoo's search business but not all other unrelated weaker assets. That would have made Microsoft a winner in the deal. Yahoo rightly said No. So, the deal is off. The discussions are off. Yahoo loses in the short-term (shared dropped by 11%--so we know where the market sentiment is). Microsoft's shared were up about 4% (the market clearly happy that MSFT was not blindly and foolishly pursuing YHOO and overpaying for it!). --
So, what next for Yahoo. In the same press release, Yahoo said the following:
Yahoo! remains focused on maximizing value for stockholders by continuing to execute on its strategy of being the "starting point" for the most consumers on the Internet and a "must buy" for advertisers. The online advertising industry is projected to grow from $40 billion in 2007 to approximately $75 billion in 2010 and the company believes it has the right assets, strategic plan, Board of Directors and management team to capitalize on this growth opportunity.
As I parse this statement, what I see is (1) we (Yahoo) are in the right industry at the right time because the industry is poised for growth; and because we are in a growth industry, we will also grow--trust us! and (2) We (the current Board and management team) want to execute on the strategy for being the 'starting point' for consumers to search; and hence a 'must buy' for advertisers. Both these are not strategies but business directions and aspirations. Yahoo hopes and aspires that advertisers will consider Yahoo as a must buy and the consumers will continue to spend sufficient time on Yahoo properties.

Carl Icahn believes that the current management team has been soundly beaten by Google. And, Yahoo seems to be now wanting to enter into some business arrangement with Google (assuming that FTC will look the other way and that Microsoft will somehow keep quiet there).
As I blogged earlier, we know what Icahn wanted Yahoo to do. But, now Microsoft is not interested. My guess is that even he cannot persuade Ballmer to reconsider. They have been at it for a while and they have made their final decision. Now Yang & Co. have the clock ticking as we approach the upcoming annual shareholders meeting and proxy fight is looming. Carl Icahn's Yahoo shares are in the red as of today. We can bet that he is not a happy camper today.

If Icahn's slate of directors were to get elected, he needs a strategy different from 'Let's sell to Microsoft for a premium and go home.' His team will have to develop winning value propositions for consumers, advertisers and shareholders.

I say: Good Luck to Yahoo's current Board and Icahn's alternative Board.

Microsoft--while walking away from Yahoo--has kept its cash in the bank. But, it needs a compelling strategy for its future with its core business appearing to be weakened by lukewarm reception to Vista by enterprise customers.

Is Eric Schmidt having the final laugh (smirk, perhaps)?

Microsoft--Weakened Core?

Is Microsoft trying to enter into new areas with its core businesses (cash cows) strong or weak? There is a general consensus that Microsoft can milk its cash cows (Windows and Office) for at least a few years, while it positions itself in the post-Gates post-desktop network era. This core assumption seems to be somewhat shattered by a report about Microsoft Vista.
BusinessWeek reported that:
According to a Bernstein Web survey of 372 information technology professionals fielded in May, companies expect just 26% of their PCs to be running Vista by the beginning of 2011, down from an estimate of nearly 68% of computers by respondents to a similar survey a year ago....
Companies expect to install Vista on only about 10% of the PCs they already own, compared with estimates last year that they'd be able to do so on 27% of their machines.
The stock performance is showing a downward trend in 2008 just as Gates is leaving.

Most companies that tried to create radically different business models that bear no core connections to historical core competencies have failed. Microsoft seems to be in that position now. Sure, there are hopes and high expectations for the next version of Windows simply called Windows 7 for now (after a rather ambitious label, Vista!) with cool touch interfaces. But, the core constituencies for Microsoft are the enterprise customers and they seem to be--for the first time--not embracing Windows as enthusiastically as in the past. Is this an early warning signal of major shift underway for Microsoft's performance potential?
As Ballmer takes over from Gates, Microsoft needs a compelling and clear strategy. Here's my unsolicited advice on priorities.

1. Focus on Enterprises: All Sizes, All Sectors and All Continents. Vista is a major lesson and use that experience to reposition Windows for the enterprise and co-create the next generation OS with leading enterprises.
2. Forget Zune but focus on Xbox. use xbox as the platform to encourage the next-gen consumers. Use search and search-related advertising using xBox. It's futile to take on Google (even with Yahoo) as it will only siphon valuable resources away from other critical priorities.
3. Make Windows Mobile a Leader: Apple, RIM, and Google are formidable but Microsoft has established relationships and demonstrated interoperability before.
4. Experiment Selectively: Explore specialized, high-value extensions such as Microsoft Automotive (e.g., Sync) and HealthVault.
5. Research on Next-gen Applications (and user experience). Search and search-related advertising is today's battleground. What's tomorrow's opportunity in the global network-era where software will be at the core of value creation?

IBM wisely moved away from markets where it lost its historical prominence to seek a leadership position in an emerging market arena (services). What Microsoft should do is to stake a position in tomorrow's stream of value-creation than be caught up in yesterday's and today's battles. Easier said than done. But, that's what differentiates great leaders from mere mortals like me!

This video reinforces my recommendations as well!!

Microsoft Surface in Las Vegas

Here's a KillerApp from Microsoft that is tailor-made for Las Vegas. But seriously, looking beyond the obvious, what I see is Harrah's continued focus on using IT functionality to understand customer behavior at a micro-level. So, this is not technology for the sake of technology but a powerful example of using IT for capturing digital footprints of the customers and translating that into competitive advantage through superior service.
Worth tracking to see who else deploys Microsoft Surface.

Monday, June 9, 2008

We Know What Icahn Will do with Yahoo; But Do We Know What Jerry Yang Has in Mind for his Yahoo?

It's tough leading the company you start once it reaches a critical threshold as a public company. That's what Jerry Yang must be feeling in the weeks coming up to the Annual Meeting.
First, there is public disclosure that he and his Board rejected a Microsoft offer of $40-a-share in 2007--which represented about 60% premium over the closing price when Ballmer made the offer. Terry Semel rejected it.
Second, Yahoo rejected a $31-a-share in February. Apparently, Microsoft may have paid up to $34 late April but again, Yahoo leadership--this time, Jerry Yang--said No. The official Press Release at that time commented:
Jerry Yang, co-founder and chief executive officer, Yahoo! Inc. added, "I am incredibly proud of the way our team has come together over the last three months. This process has underscored our unique and valuable strategic position. With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners and users."
Third, Carl Icahn starts acquiring Yahoo shares and there is proxy battle underway. Yahoo responds angrily to the first letter from Icahn. Then, he send further letters--all focused on getting Yahoo and Microsoft to enter into discussions of merger. Yahoo again responds angrily to Carl Icahn--essentially indicating that he has no vision for Yahoo. The following is from their June 6 statement:
Leaving aside Mr. Icahn's inaccurate interpretation of our retention plan, we again note that he has no credible plan to operate Yahoo!. We believe that Mr. Icahn's suggestion that we cancel our retention plan would have a destabilizing impact on Yahoo! and would clearly not be in the best interests of our shareholders. Furthermore, his suggestion that we put out a price publicly to see if Microsoft will alter its stated position is ill-advised. As we have stated numerous times publicly and privately, we are open to any transaction including a sale to Microsoft if it is in the best interests of shareholders.

Carl Icahn's vision for Yahoo is clear: Yahoo has failed in its competitive quest against Google; Yahoo does not seem to have a credible vision to organically grow and innovate to be a leader and that it should sell itself to Microsoft. His vision is right from the point of view of shareholders who have seen their intrinsic value in Yahoo plummet. Semel rejected $40-a-share offer from Microsoft in Feb 2007 but Yahoo did not subsequently offer any new compelling vision or avenues for growth. Semel was ousted but the Board seems preoccupied with defending itself against takeovers rather than crafting a winning strategy on its own.

Indeed, my analysis of the initiatives pursued by them (a much publicized trial with Google and discussions with AOL, NewsCorp and others) leads me to conclude that they were looking at strategic linkages to have a credible basis to negotiate a higher price with Microsoft. Unless Yang & Co come up with a credible vision (supported by a workable execution plan), they have no basis to say that Carl Icahn has no 'credible plan to operate Yahoo.' Icahn may not have a plan to operate Yahoo--he never claimed that he has one. He is simply claiming that there is a better way to maximize shareholder value that what the current team is pursuing. He has even given a public figure for Microsoft to consider.

Instead of accusing Carl Icahn of not having a credible plan to operate Yahoo, Yang & Co. should lay out the vision and plans that the shareholders and employees can rally behind. If they do, they even Icahn may support the current management team.

It's time to go beyond letter and press releases; it's time for laying out compelling visions and detailing credible operating plans. Will Yang & Co. deliver that before the upcoming Annual Meeting? It's a do-or-die situation for sure--even for the ones that founded the company.

Friday, June 6, 2008

Did You Know 2.0: An Updated Version

This is an updated version that is easy for many to follow along with graphics from xplanevisualthinking.