Google=Apple?

From a market capitalization point of view, Apple and Google are roughly equal in value (around $159 billion). That is a creditable achievement for Apple for sure. I doubt few could have made this prediction a year or so back.

John Henderson and I derived a typology of business model innovations in the network era. For that typology, Apple is prototypical of Design-and-Dominate approach and Google as reflecting the Explore-and-Exploit approach.
---
It is interesting to see that these two companies pursuing two different approaches to crafting winning strategies in the network era have arrived at the same level of market capitalization today. I expect to see Apple do well in the coming months with further enhancements to its design-and-dominate strategy with Macs, iPhone and iPod. I also expect to see a rejuvenated Google dominate the online advertising and related areas (and finally develop monetized business models with YouTube and Android mobile phones).

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.

SonyEricsson:

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.

AT&T:

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.

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?

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)?