Thursday, July 31, 2008

Yahoo's Much-Delayed 'Meeting' on August 1: Much Ado About Nothing or Articulating a Compelling Strategic Vision?

The much delayed meeting at Yahoo is tomorrow. Nothing newsworthy may come out tomorrow because most thorny issues have either been already settled or need to be settled after August 1.

Question 1. What role for Yang? Icahn has patched up and he along with two members are on Yahoo's Board now. Now, he is not an activist outsider. He needs to steer, lead and guide Yahoo to be a force in the online space. That will take time and patience. The unanswered question then is--Will Yang be forced out by the Board not simply because of Icahn but because the company may need new blood and new energy?

Question 2. How will the Google relationship evolve? As of now, that relationship is still in play. No negative information from the Government; So, I expect that to continue as both assess the business value (and risk) of the experiment while they wait for the Government verdict (or inaction).

Question 3. Does Microsoft have any serious part in Yahoo's strategy going forward? All indications are that the story is over. But, it is safe to say that a big chapter (and many be a big section) is over but the story may not be over. It is simply because any serious challenge to Google should involve Yahoo (which is still capitalized at around $28B). If the stock price falls much below today's price of about $20, all options and all price levels are in play.

Tomorrow's meeting marks the beginning of Yahoo's next phase of evolution. While we may not see new news or theatrics (Carl Icahn will not even be present and T. Boone Pickens has sold his yahoo stake at a loss), we should watch for what Yang & Co. lay out as strategic directions and milestones. The market desperately is looking for some clarity now that the merger talks have ended. Will the expanded Board deliver on that expectation?

Thursday, July 24, 2008

Microsoft--Facebook Connection Gets Closer and Deeper (?)

I have always felt that Microsoft was seeking the wrong partner in wooing Yahoo. After all, Yahoo had failed to capitalize on the potential and was losing ground fast to Google. The new kid on the block is Facebook--which is winning handsomely against MySpace. And, Microsoft essentially provided a public valuation for the privately-held Facebook when it invested $240 Million in October 2007. Essentially that investment valued Facebook then at $15 Billion. At that time, Kevin Johnson--who has since left Microsoft--made the following comments:
“Making this investment and expanding this partnership will position Microsoft and Facebook to better take advantage of advertising opportunities around the world, and is a great win for not only for our two companies, but also our collective users and advertisers,” said Kevin Johnson, president of the Platforms & Services Division at Microsoft. “We have partnered well over the past year and look forward to doing some exciting things together in the future. The opportunity to further collaborate as advertising partners is a big reason we have decided to take an equity stake, and is a strong statement of our confidence in the long-term economics of this partnership.”

On the day after Kevin Johnson's departure, Microsoft announced that it is deepening the relationship with Facebook. Satya Nadella made the following comment as part of Steve Ballmer's segment at the 2008 Financial Analyst Meeting today.
One last thing I wanted to also talk about is an extension of our Facebook relationship where we are extending it to Search and Page Search. We will be providing an API to Facebook where they will create a rich search experience, including a Web search for the Facebook users. And that's something that they will launch in the fall, working with us, and it'll carry both our Web results as well as our Page Search advertising. So we're excited about even using that as an opportunity to further extend the Live Search reach.
To me, this is an important relationship that Microsoft should nurture and grow. It is potentially as important as the relationship that Microsoft had with Intel during the heydays of the Wintel architecture dominating the PC sector. Microsoft-Facebook could evolve to be a powerful social network advertising platform that could potentially attract Yahoo, AOL and others to be part of the ecosystem that might one day be a dominant credible competitor to Google. I think Microsoft can do without the distractions of Yahoo for now. This cooperation is worth watching and tracking.

Wednesday, July 23, 2008

Kevin Leaves and Ballmer Refocues

Kevin Johnson is leaving Microsoft to run Juniper. This is big news... A game-shifting news, I think. Fortune recently profiled him as the Man Who Would Run Yahoo. His departure signals a shift in strategy and tactics at Microsoft.

This also means that Carl Icahn will have a relatively uninterested lukewarm Ballmer when it comes to any discussions post August 1. It also means that Kevin Johnson calculated the odds of a credible alternative that Microsoft and Yahoo will combine in any meaningful way to achieve the requisite scale to be rather slim. he is moving to the infrastructure part of the network business--far away from the content and online advertising--possibly because of the complex non-compete clauses in his employment contract.
What does this mean? I think finally, Microsoft will focus on its core and not on its periphery. The memo from Ballmer (reproduced below) seems to indicate that rather clearly.
From: Steve Ballmer
Sent: Wednesday, July 23, 2008 4:30 PM
To: Microsoft–All Employees
Subject: FY09 Strategic Update

With FY08 complete, I want to discuss my priorities for the year ahead and share my thoughts about the key strategic topics that are on everybody’s mind, including Windows, competition with Apple and Google, our software plus services strategy, and Yahoo.

I also have news about an organizational change and a transition in our Senior Leadership Team.

First, I want to thank you for your hard work and the dedication you showed during the past 12 months. FY08 was a milestone year. Our revenue jumped $9.3 billion to more than $60 billion. Operating profit grew 21 percent to $22.5 billion.

These outstanding numbers are the direct result of your commitment to the priorities I outlined last July. A lot has happened since then, but our fundamental strengths, challenges, and strategic goals remain largely the same. Therefore, my priorities are consistent with last year. In FY09 we must continue to:

1. Invest in the right opportunities;

2. Expand our presence with Windows, Office, and developers;

3. Drive end user excitement for our products;

4. Embrace software plus services; and

5. Focus on employee excellence.

By focusing on these five areas, we can continue to grow revenue, increase profit, and expand our market share. These priorities are also critical as we work to address key issues surrounding our business in the coming year:

· Windows: The success of Windows is our number one job. With SP1 and the work we’ve done with PC manufacturers and our software ecosystem, we’ve addressed device and application compatibility issues in Windows Vista. Now it’s time to tell our story. In the weeks ahead, we’ll launch a campaign to address any lingering doubts our customers may have about Windows Vista. And later this year, you’ll see a more comprehensive effort to redefine the meaning and value of Windows for our customers.

We also have to drive developers to create rich applications for Windows. With Internet Explorer and Silverlight, we have great tools for creating applications that run everywhere. But we also need to make sure developers have the .NET skills to write unique Windows applications using Windows Presentation Foundation. To keep today’s Windows applications alive, vibrant, and exciting, we need both—applications that run everywhere and rich client applications.

· Apple: In the competition between PCs and Macs, we outsell Apple 30-to-1. But there is no doubt that Apple is thriving. Why? Because they are good at providing an experience that is narrow but complete, while our commitment to choice often comes with some compromises to the end-to-end experience. Today, we’re changing the way we work with hardware vendors to ensure that we can provide complete experiences with absolutely no compromises. We’ll do the same with phones–providing choice as we work to create great end-to-end experiences.

· Business and enterprise: Our enterprise and server business has never been stronger–today we are on the verge of becoming the number one enterprise software company. We need to continue to push on all fronts–mail with Exchange, business intelligence with PerformancePoint, virtualization with Hyper-V, and databases with SQL Server. We have to drive our enterprise search capabilities, our unified communications solutions, and our collaboration technologies. And we must continue to compete against Linux in key workloads such as Web servers and high performance computing.

· Software plus services: Some people think software plus services is all about search. But it’s really about changing the way software is written and deployed. The future is about having a platform in the cloud and delivering applications across PCs, phones, TVs, and other devices, at work and in the home. It’s also about driving change in business models through advertising, subscriptions, and online transactions. Software plus services is a huge opportunity for us to deliver new value on the desktop and the server to all of our customers. This year at PDC, you’ll hear more about our cloud platform initiatives and the next versions of our Live and Online technologies.

· Google: We continue to compete with Google on two fronts–in the enterprise, where we lead; and in search, where we trail. In search, our technology has come a long way in a very short time and it’s an area where we’ll continue to invest to be a market leader. Why? Because search is the key to unlocking the enormous market opportunities in advertising, and it is an area that is ripe for innovation. In the coming years, we’ll make progress against Google in search first by upping the ante in R&D through organic innovation and strategic acquisitions. Second, we will out-innovate Google in key areas–we’re already seeing this in our maps and news search. Third, we are going to reinvent the search category through user experience and business model innovation. We’ll introduce new approaches that move beyond a white page with 10 blue links to provide customers with a customized view of their world. This is a long-term battle for our company–and it’s one we’ll continue to fight with persistence and tenacity.

· Yahoo: Related to Google and our search strategy are the discussions we had with Yahoo. I want to emphasize the point I’ve been making all along–Yahoo was a tactic, not a strategy. We want to accelerate our share of search queries and create a bigger pool of advertisers, and Yahoo would have helped us get there faster. But we will get there with or without Yahoo. We have the right people, we’ve made incredible progress in our technology, and we’ll continue to make smart investments that will enable us to build an industry-leading business.

As I mentioned earlier, I have important organizational news. Today we are announcing that the Platforms and Services Division will be split into two businesses: Windows/Windows Live and Online Services. We are also announcing that Kevin Johnson will leave the company. He will work to ensure a smooth transition.

Since 1992, Kevin has been a key contributor to many of this company’s most important achievements. As president of the Platforms and Services Division, Kevin has built an incredibly talented organization and laid the foundation for the future success of Windows and our Online Services Business. Over the last 16 years, through everything from his work as head of the company’s worldwide sales, marketing, and services efforts, to his leadership in transforming our field operations and repositioning the company to focus on opportunities in emerging markets, Kevin has played a vital role in this company’s success. There is no doubt that his passion and dedication will be missed.

Effective immediately, Steven Sinofsky, Jon DeVaan, and Bill Veghte will report directly to me to lead Windows/Windows Live. In the Online Services Business, we will create a new senior leadership position and conduct a search that will span internal and external candidates. In the meantime, Satya Nadella will continue to lead Microsoft’s search, ad platform, and MSN engineering efforts, and Brian McAndrews will continue to lead the Advertiser and Publisher Solutions Group. Both Windows/Windows Live and the Online Services Business are led by a strong group of executives on the technical and business side who have the talent and experience to address the challenges we face and drive the next generation of growth and success.

Looking ahead, I see an incredibly bright future for our company. As I said at the June 27th Town Hall for Bill, we are the best in the world at doing software and nobody should be confused about this. It doesn’t mean that we can’t improve, but nobody is better than we are. Nobody works harder than we do. Nobody is more tenacious than we are. We’re investing more broadly and more seriously than anybody else. Our opportunities to change the world have never been greater.

I look forward to working with all of you as we focus on our five priorities in FY09.


His memo is worth reading in detail. The five points are right dead-on for Microsoft to be taken seriously as a global technology leader and more importantly, if Microsoft is to be a true innovator in the network-era. Job#1 is Windows and if Microsoft loses that game, they will be marginalized for sure. What is also interesting in dissecting the memo is that he places Google as #5 (last on his list). Gaining a credible traction against Apple in the mobile phone arena is higher. And Enterprise is #3, ahead of Google. I have always maintained in my previous blog post that Microsoft should focus on Windows and use that dominance to win in the mobile space with Windows Mobile and then go deeper within enterprises. (may be rekindle a deal with SAP perhaps?).
I was baffled by Ballmer lending support to Icahn in his proxy fight few weeks back. Now that issue is settled with Kevin's departure. This memo is one of the clearest and compelling strategic logic that I have seen from Microsoft in totality in a longtime. It recognizes their strengths (software) and the need to refine and adapt their business practices including how they work with their partners to improve and enhance the end-user experience (#3 and #4). I also agree with the point that Yahoo is a tactic and not a strategy. I look forward to seeing this strategic vision expanded and refined over the next few months.
Score: Advantage Ballmer.!

Monday, July 14, 2008

Icahn and Ballmer's Week-end Moves

In high stake coreporate games, the action does not stop for the week-end. The news over the week-end is that Microsoft and Icahn made a 'take-it or leave-it offer' set to expire within 24 hours. The idea was that Microsoft and Icahn will guarantee Yahoo about $2.3 Billion dollars in revenue, Microsoft will buy the advertising engine and Icahn will own the rest of Yahoo. The following from Yahoo's Press Release is worth highlighting.

Roy Bostock, Chairman of Yahoo! said, "This odd and opportunistic alliance of Microsoft and Carl Icahn has anything but the interests of Yahoo!'s stockholders in mind. Clearly, Microsoft, having failed to advance in search, is aligning with the short-term objectives of Mr. Icahn to coerce Yahoo! into selling its core strategic search assets on terms that are highly advantageous to Microsoft, but disadvantageous to Yahoo! stockholders. Yahoo's Board of Directors will not allow that to happen. Yahoo!'s Board remains open to any transaction that delivers full value to our stockholders - we just do not believe such a transaction should be dictated by Microsoft and a single short-term investor."

Mr. Bostock continued, "After negotiating among themselves without the involvement of Yahoo!, Carl Icahn and Microsoft presented us with a 'take it or leave it' proposal under which we would be required to restructure the Company, hand over to Microsoft Yahoo!'s valuable search business and to Carl Icahn the rest of the Company, giving us less than 24 hours to respond. It is ludicrous to think that our Board could accept such a proposal. While this type of erratic and unpredictable behavior is consistent with what we have come to expect from Microsoft, we will not be bludgeoned into a transaction that is not in the best interests of our stockholders."

Mr. Bostock also noted that Microsoft's position that it would not deal with, or otherwise engage with, Yahoo!'s management to reach agreement on this proposal or to implement it, is completely absurd and irresponsible given the complexity of the deal - one that requires the removal of half of Yahoo!'s business from Yahoo! and then the integration of it into Microsoft.
The parameters of the 24-hour offer are totally puzzling to me. Why would the current Board that is being effectively ousted by this offer accept this offer under such tight time frame over a week-end? There are NO upsides for them to accept such a poorly crafted offer. It is not that Ballmer wants to keep Yang & Co. Carl Icahn had previously urged Yahoo not to break up the advertising engine and sell it, knowing that such a break-up will destroy Yahoo's value even further. And, Ballmer does not want to directly negotiate with Yahoo's current board but is joining with Icahn in pressuring the Board. Why give a 24-hour take-it or leave-it offer with no room for negotiations after wanting to negotiate to make this work before?

It's just one more stunt in the proxy battles.

Apple iPhone 3G: iPocalypse or Not So Bad Given the Hype?

Sure, there were problems. They were to be expected with so much hype and so many wanting to upgrade at the same time. The headlines in the blogosphere was 'iPocalypse Now.' Clearly, those that wanted their hands on the new phone on Friday were frustrated and irritated. I do not know if the fault lies with AT&T or Apple or both but in any co-created and co-delivered new product launch, it does not matter. Both are responsible for the fiasco. Nothing is gained by each party blaming the other.
But, on balance I say that it is a minor fiasco for a simultaneous global product launch. I do not have one yet but will get one later this week when the hype is settled down. But, if you are tracking Apple's strategy, the early indicators are upbeat and promising--Apple sold 1 million units over the week-end. Steve Jobs said that:
iPhone 3G had a stunning opening weekend... It took 74 days to sell the first 1 million original iPhones, so the new iPhone 3G is clearly off to a great start around the world.

What other indicators to track?
1. Percentage of current iPhone owners converting to 3G within the first month (strength of customer loyalty)
2. Number of applications (free versus fee) downloaded from the appstore within the first month (breadth of complementary network effects)
3. Number of new customers switching from other carriers to Apple 3G locally in the USA and globally (depth of positive churn).
4. Number of Enterprises that officially embrace Apple iPhone beyond the early endorsers such as Disney (degree of inroads into new markets).
We can add many more to the above list. To me these four indicators provide good insights into how far Apple may go in dominating the mobile phone sector. It has clearly captured the imagination of many but the real question is--will it be as widely successful and as pervasive globally as its iPod? I think Apple is off to a good start.

Thursday, July 10, 2008

Yahoo's BOSS

No. Yahoo does not have a new Boss yet. It may still happen after July 1. Yahoo announced a new initiative today. BOSS stands for "Build Your Own Search Service." NY Times reported that:
on Thursday Yahoo is opening its search technology and powerful data centers to other companies, allowing them to build new or customized search engines without having to make the huge investments needed to develop a search service from scratch. Yahoo, in turn, will sell ads on those new search engines; if some grab even small slivers of the search market, Yahoo will share in their success.
Yahoo is embracing principles of innovation in networks. It is striving to capitalize on network effects involving its customers embracing this platform to create more customized search than possible with Google.
Erik Schonfeld has a good blogpost on this. He observes that:
All of this forms just the first half of Yahoo’s intentions with BOSS. In a few months, Yahoo will also release APIs for what it’s calling “BOSS Custom”. This version of BOSS will allow developers to actually push data to Yahoo’s servers for indexing, and then perform highly customizable search queries against them.
So in a way, BOSS starts by opening up web search to 3rd parties, but it will go far beyond that by providing cloud-based search for all imaginable types of data. Yahoo has already enlisted a handful of partners for BOSS Custom, including us here at TechCrunch. We’re working on a search implementation that will enable readers to conduct searches across the entire network and retrieve results that have been weighted using a custom relevance model. Readers will also be able to drill down by author, comments, date, and other criteria.
BOSS is the second concrete product to come out of Yahoo’s Open Strategy. The first was SearchMonkey back in April.

This is a brilliant strategy for the #2 player. It is in line with network-strategy thinking. However, for Yang & Co., the timing is all wrong. On the one hand, they want to partner with Google (after the fiasco with Microsoft) and then they want to create an alternative model. Different modes of experimentation (that are mutually conflicting) may be OK when the company is doing well. But, when the company is under attack as Yahoo has been, such initiatives may come across as incoherent. I am waiting to see how Yang & Decker will convince their shareholders to retain their slate of directors against Icahn. What they need is a simple-yet-powerful strategic vision and credible numbers that people can rally behind. The first six months have been nightmarish for them. Will the next six months be significantly better? All will depend on August 1. This is a good piece of the larger and compelling vision that Yang & Co. need to unveil...
Clearly, this strategy has risks. As NY Times reported:
Yahoo executives acknowledged that the new strategy, if successful, could cannibalize Yahoo’s own search business. But they said that if a search start-up became popular, it would probably take more users away from Google than from Yahoo, as Google has a far larger share of the market.
“We did a lot of analysis,” said Bill Michels, senior director for Yahoo’s open search platform. “We are comfortable with the risks associated with it.”

In the coming days, we will continue to see more announcements detailing Yahoo's strategy. Otherwise, Yang & Co. have their days numbered and Ballmer & Icahn may be trying to work out a deal.

Monday, July 7, 2008

Yahoo's Future: Carl Icahn Reveals His Hand (and Ballmer's Support)

Just after the three-day long week-end, Carl Icahn revealed his hand and his purpose is crystal clear--to get the shareholders to support his slate of directors. He does not want to lose his proxy fight and he does not want his billion dollar investment to tank. So, he revealed that he has the support of Steve Ballmer as long as his slate of directors are elected. In his letter to shareholders he boldly states that:
Steve made it abundantly clear that, due to his experiences with Yahoo! during the past several months, he cannot negotiate any transaction with the current board.
So, Carl Icahn's message is clear: It's time for Yahoo shareholders to reject the current Board.
He goes on even more persuasively to make a case to get his slate elected.
Steve made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo!, such as either a transaction to purchase the "Search" function with large financial guarantees or, in the alternative, purchasing the whole company. He stated that Microsoft would be willing to enter into discussion immediately if the new board that has been nominated were elected. While there can be no assurance of a future transaction, as many of you know, I have negotiated successfully a large number of transactions over the past years. If and when elected, I strongly believe that in very short order the new board would, subject to its fiduciary duties, be presenting to shareholders either a purchase offer for the whole company or a very attractive offer to purchase "Search" with large guarantees. I hope to continue to be speaking to Steve over the next few weeks; however, since I do not as yet represent the Yahoo! board, both Steve and I do not wish to get into details over price, or even which of these transactions makes the most sense.

Carl Icahn's intent is blatantly obvious: get rid of the current Board, engage Microsoft and engineer a transaction that maximizes shareholder value. I have always maintained that a deal with Microsoft (with some decent premium over the current share price) is good from the point of view of Yahoo shareholders (except Yang, Filo, Decker and other senior managers). I have also maintained that Microsoft should not spend in the vicinity of $40 + billion for Yahoo. However, Steve Ballmer's explicit support for Carl Icahn is a clear signal that he wants Yahoo (minus the current leadership team that he accuses of mismanaging Yahoo!).
David Kirkpatrick writing in Fortune is convinced that Yahoo will finally end up with Microsoft. He is basing it on the fact that Microsoft needs to create a credible alternative marketplace for search-linked-advertising to compete against Google. My interpretation is that Microsoft needs Yahoo's scale (share of the search market--currently a distant #2 to Google but above its own Steve Ballmer does not want anything to do with the leadership team and he gets Carl Icahn to do the tough job of ousting the current board. If Icahn gets a price higher than whate he paid for Yahoo, he wins. If Ballmer gets Yahoo on his terms that serves as a catalyst for Microsoft to seriously take on Google, he wins. So, how will the proxy battle turn out? I do not think that we have to wait till August 1. I expect to see hints, leaks and more memos and letters in the coming months.
Microsoft has made its position clear in its statement released today.
We respect the right of Yahoo!'s shareholders to determine the destiny of their company, and we do not intend to engage in ongoing commentary on these issues in advance of Yahoo!'s shareholder meeting......While of course there can be no assurance of a future transaction, we will be prepared to enter into discussions immediately after Yahoo!'s shareholder meeting if a new board is elected.

Yahoo's statement reiterates that the current management is still committed to negotiating with Ballmer.
If Microsoft and Mr. Ballmer really want to purchase Yahoo!, we again invite them to make a proposal immediately. And if Mr. Icahn has an actual plan for Yahoo! beyond hoping that Microsoft might actually consummate a deal which they have repeatedly walked away from, we would be very interested in hearing it.
Score (following from yesterday's epic Wimbledon 2008 Finals): Advantage Ballmer and Icahn against Yang and Decker.

Meanwhile, Google waits for the winner to emerge.

Wednesday, July 2, 2008

Business Model Innovations in the Network Era

Recently John Henderson and I published a paper on business model innovations in a network era. I have posted this paper here.
We are working on expanding and refining the ideas and would very much welcome comments and suggestion on this work.

Countdown to August 1 (Yahoo's D-Day): What's Microsoft Seeking Now?

We are on the homestretch towards Aug 1 shareholder meeting at Yahoo. Yahoo is fighting Carl Icahn and that seems to be intensifying on a daily basis. Now, WSJ has written a detailed article on the moves, counter-moves and gamesmanship in the Microsoft-Yahoo takeover saga. As I blogged earlier, Microsoft's interest in Yahoo is far from over. Why?
Microsoft's obsession with Google is strong and deep. WSJ reports that:
Yahoo executives were unimpressed with Mr. Ballmer's vision. If anything, they regarded the Yahoo pursuit as a crude solution to quell his obsession with Google. They would later refer to Mr. Ballmer's plan as "filling his Internet hole." Indeed, Mr. Ballmer spent much of the meeting discussing the threat Google posed to the two companies.
So, the end game is not about walking away from Yahoo but also figuring out how Google may gain or lose with (or without) Yahoo.
The interesting part of the WSJ article beyond illuminating some of the inner workings of the deal is about what Microsoft is pursuing now. Not happy to be a passive participant, Microsoft is pursuing to put together an ecosystem involving Time Warner, News Corp and others. It appears that Microsoft is not responding to overtures from others but is taking the role of the orchestrator of such an ecosystem. Why? Again, to ensure that if it cannot beat Google by acquiring Yahoo, it can at least create a credible alternative by pooling together online advertising strengths (and weaknesses) of second-tier competitors.
Yahoo has about four weeks to show its shareholders that its current management team is capable to lead the company and has a credible and compelling vision. What Yang & Co. need is cold, hard facts (financial and operating numbers) that support the clear vision. What Microsoft is trying to do is to make sure that it scores a minor victory. Will that minor victory come at the expense of Yahoo's market value? Or will it be a central part of Yang and Decker's compelling vision? I doubt that July will be dull and boring--at least from Yahoo and Microsoft vantage points.