February 28, 2008 | posted by Michael Baxter in New Media | comments (0) |

Investors in Google had a fright this week. A report from comScore found that paid-click revenue from Google has seen a sharp fall in growth. Was the miraculous Google growth story coming to an end? Many shareholders in the company thought it was, and shares fell by a third.

Yesterday, though, a ray of light shone down from Mountain View California.

Google maintains that it has been improving its technology in order to try and reduce the number of accidental clicks.

This would mean that revenue would fall in the short-term, but theoretically, as advertisers’ confidence increases, then rise.

Sanford Bernstein analyst Jeff Lindsay wrote in a note to clients, “We acknowledge that Google’s growth in paid search has to decelerate over time, but we do not believe that the current macro-economic conditions are undermining Google’s paid search business.”

We have argued before, that in the world of online retail, position on Google takes on a similar level of importance as position on the High Street for a traditional retailer.

The money then that an online retailer spends on Google, does not just come out of advertising budget, it should come out of the money that would otherwise have been set aside for rent.

This is why we think the Google story has got more chapters of growth yet.

February 25, 2008 | posted by Michael Baxter in New Media | comments (0) |

Talking of adapting, spare a thought for that old codger Steve Jobs. Poor old Steve. He maybe a one-man hurricane, a creative genius – but is he just too old and busy to get it?

An interesting blog, written by Peter Magnusson, has suggested that the new iPhone falls short, not because the product isn’t in any way a triumph of design, rather because the product isn’t designed for the latest big think – social networking.

Mr Magnusson says, “Apple can only do really interesting products if Steve Jobs understands the end user. And Jobs does not understand the 21st century computer usage paradigm. In this century, people don’t send memos to each other. And that’s what email is – electronic memos.

“Today, people chat; they blog; they share multimedia like pictures, video, and audio; they flame each other on forums; they link with each other in intricate webs; they swap effortlessly between different electronic personae and avatars; they listen to Internet radio; they vote on this that and the other; they argue on wiki discussion groups.

“At its heart, the iPhone is a projection of the original vision of bringing clunky desktop applications like email, contact databases, to-do lists, telephones, note taking, and web browsing to the palm of your hand. Because that is essentially Steve Job’s generation – transitioning from the mainframe office environment to the PC-based office. Jobs can’t quite get rid of the notion that a mobile device is nothing but a really small personal computer.”

Mr Magnusson went on to list the features the iPhone should have, including “location-aware signalling would be built it. The phone would sense if you were in your favourite coffee shop and flag that to friends.” He said the product should have supported dozens of social networking concepts from the get-go. iTunes would have been expanded to take your user name and passwords for major social networking services, and then it would just suck down all the meta data it needs for the corresponding functions to work on your device.”

In a way, though, the problem that Jobs faces is almost identical to the one challenging Bill Gates, described in the article above.

Maybe, you don’t want all your friends to know where you are, maybe all the latest social networking ideas won’t last.

It is not that Steve Jobs doesn’t understand the 21st century computer usage paradigm, rather it’s that he may not understand one possible paradigm that will dominate for the next few years.

Apple’s weakness is that it is reliant on the design expertise and creativity of a handful of very clever men and women.

The company’s challenge is to ensure its latest big products work with the latest fad – and ensuring it gets that right over and over again, is a huge challenge.

iPhone’s missing killer app: social networking

February 22, 2008 | posted by Michael Baxter in New Media | comments (0) |

Nothing lasts for ever, but for a new Internet idea, the long-term seems to be about two years. Facebook, the social net working site that has gone from nowhere to a valuation of around $1bn, is losing users.

According to research from Nielsen Online, there was a 5 per cent fall in the number of Facebook users in the UK in January, from 8.9 million in December to just 8.5 million.

Mind you, its annual growth rate is 712 per cent, so maybe it is a little too early to panic.

European Internet analyst at Nielsen Online, Alex Burmaster, said, “Just as one swallow doesn’t make a summer, so one month of falling audiences doesn’t spell the decline of Facebook or social networking.”

“However, real growth potential lies in the niche networks – those based on a particular lifestyle or interest, such as travel, music, wealth or business.”

Some are saying that Facebook has become too respectable, with corporations and now, even worse than that, Tory MPs putting profiles up on the site.

But actually, whether the fall in numbers represents the beginning of the end, or as Internet analyst Winston Churchill might have said, “Merely an end of the beginning for Facebook,“ there is a very important issue that is worth considering.

In economic theory, the big idea at the moment is adopting the theories of evolution. Natural selection, goes the argument, is the most effective way of finding new ideas that work. The future is uncertain, the factors that make one idea a success, another a failure, can, to an extent, be random.

When one business idea is a runaway success, another a failure, it does not necessarily mean that the management of the successful company were somehow blessed with uncanny foresight, any more than a winner of the lottery can see into the future. The laws of chance say that some ideas will work, others fail. (Is the phrase ‘laws of chance’ an oxymoron; not sure chance, by definition, has laws – Ed.)

And that is the problem for this new Internet era, especially for companies like Microsoft – even Google.

It seems inconceivable that Google can continue to out-innovate the rest, and for Microsoft, never a company which has been known for innovation, the challenge is even tougher.

Maybe the answer, then, is for these established players, with their capital base and captive audiences, to sit on a metaphorical branch somewhere above the business terrain, waiting, and try to swoop down and pick out the winners when they come through.

A risky strategy, of course, because bidding wars can be the result, and even when businesses are quite advanced, there is no guarantee their progress will continue.

Microsoft recently forked out $240 million for a mere 1.6 per cent stake in Facebook. Was this a shrewd move, or one that will leave the company looking foolish? – Right now, you can’t tell.

According to a study carried out by the economist L Hannah in 1999, of the 100 largest US firms in 1912, 29 had, by the time of the study, gone bankrupt, 48 had disappeared, and just 19 of them were still in the US top 100. But, for the current crop of companies, with their extraordinary growth – it seems their expected lifespan may well be a lot shorter even than that. Whether that is allowed for in the share price of these companies, that often see their valuations as a percentage of expected profits of well over 30, is far from certain.

Remember, when companies are valued, there is supposed to be some kind of assumption on future dividend flow. The investor would not only expect to eventually get all the investment repaid – but also get the equivalent of a good healthy rate of interest. Drill down, and look at the basics. It seems questionable whether some companies will actually survive long enough to repay their investors. Only those investors who jump ship, and sell out to someone else, will win. Maybe Internet investing is a negative-sum game.

February 12, 2008 | posted by Michael Baxter in New Media | comments (1) |

And from things that lurk in the dark places of the earth, to evil empires.

As you know, Google has this motto, “Don’t do evil” – and yet in this era of Google-dominated search engine advertising, an era in which the advertising bucks sit with the companies which know the most about us – Mountain View California seems to be taking on the air of Mordor.

The likes of Microsoft and Yahoo, on the other hand, are increasingly looking as if they are a forlorn force of lightness, if you like, a fellowship, desperately trying to break the ring of Google’s domination.

But when forces come together to take on a common enemy, the union is not always so sweet.

A year ago, Microsoft and Yahoo had flirted with the idea of a merger. In fact, back during the latter days of 2006 and early 2007, the bosses of the two companies put their heads together – but at the time Yahoo said, “Now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction.”

At least that’s what Microsoft claimed when it made its offer to Yahoo last week. In its letter to Yahoo detailing its offer, Microsoft referred to this previous rejection. Yet once again, yesterday, Yahoo rejected its suitor.

Yahoo said the Microsoft bid “substantially undervalues Yahoo! including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential as well as our substantial unconsolidated investments”. And it said it “carefully reviewed Microsoft’s unsolicited proposal . . . and has unanimously concluded that the proposal is not in the best interests of Yahoo! and our stockholders”.

If these two companies were to come together, there is little doubt who the yang would be to Microsoft’s yin. For Yahoo boss, not to mention co-founder, is Jerry Yang, and yesterday he told staff at the company he heads, “The global online advertising market is projected to grow from $45bn in 2007 to $75bn in 2010, and our more-focused strategies position us to capture an even larger share of this market…Our global brand is a tremendous base from which to build leadership as the starting point for Internet use: Yahoo is one of the most recognisable brands in the world. We have some 500 million users (one out of every two Internet users worldwide). In the US we are number one in personalised home pages, mail, music, news, sports, shopping and travel.”

And yet, robust though this defence was, the fact is, Microsoft’s $40bn offer valued Yahoo shares at $31 a share, that is 62 per cent up on the share price before Microsoft’s overtures were first made.

Yahoo’s performance has not been so good of late – during the last eight quarters, year-on-year profits fell no less than seven times. In the last quarter, profits at $206m were not only lower than in the same period the year before, they were lower than the year before that, too.

Shareholders in the company must find this a tad frustrating – and while Mr Yang is making lots of noises about big plans, the company seems stuck in the slow lane of growth – at least in comparison with other dotcom firms.

It seems that a merger with Microsoft will at least create a company with a good chance of taking on Google.

In this case, however, neither the eyes of Google, Yahoo or Microsoft can see that far.

Google’s rise to power has been extraordinary – but it can reverse – who knows what other companies are out there sitting on new ideas which will enable them to jump in. And let’s face it, as Google, MySpace and Facebook have all shown, this is an industry that, for companies with the right product, has very low barriers to entry.

Mount Doom exists in all companies. According to a study carried out by the economist L Hannah in 1999, of the 100 largest US firms in 1912, 29 had by then gone bankrupt, 48 had disappeared, and just 19 of them were still in the US top 100. And that was over a relatively short time frame.

History appears to tell us that most of the world’s firms fail eventually – but for companies operating in the field that Yahoo, Google and Microsoft call their own, failure is likely to be more-rapid.

February 6, 2008 | posted by Michael Baxter in New Media | comments (0) |

When the idea of ITV and Virgin Media merging was first mooted, the media slated it. One commentator likened the move to two drunks, trying to prop each other up.

But then again, BSkyB seemed much more alarmed by the idea, prompting it to buy a sufficiently large stake in ITV to block the merger.

Then Sir Richard climbed on to his high horse, and the authorities pondered, deliberated, and finally decided the Murdoch-dominated TV company has too much influence over ITV, and must sell some of its stake.

So now the way is clear for Virgin Media to leap back in, and buy the UK’s most popular TV station.

Yet all of a sudden, it all seems so different.

Virgin Media’s acting chief executive Neil Berkett said yesterday, “The bid for ITV was a moment in time, which was a view of the apparent value of the asset, a view of what Virgin Media could do with that asset and a view of potentially monetizing some of our tax position…. The market is completely different today to what it was then, and for us to reconsider anything in the acquisition of a production, an ITV look-alike, we would have to view it on its merits.”

But then also yesterday, BSkyB has just revealed a loss for the first half of its year, after writing-down the value of its stake in ITV.

Maybe it was all a cunning plan hatched by Virgin Media. They were able to talk tough, trick BSkyB into buying shares that were bound to lose value, score lots of brownie points over BSkyB with the authorities and customers, and then to boot, see their rival make a big financial loss out of the whole venture.

The truth, though, is that the whole sorry saga has been a disaster.

Now Virgin Media is admitting that it can’t compete with BSkyB for premium-priced television, and at the same time seems to be quietly dropping its idea for four-play media.

You may recall, four-play: broadband, TV, fixed and mobile telephony. The idea was simple enough. People would soon be watching their TV on mobile phones and via broadband, so by combining all offerings under one roof, the company would become a mighty player indeed. In fact, the whole idea behind NTL merging with Virgin’s mobile phone outfit was to be able to offer this four-play service.

But it seems the move has, instead, become a mighty failure.

Yesterday, Neil Berkett also said the company will put less focus on what it is now calling “quad play.” And yet, despite a horrendous line-up of disasters, Virgin Media still has one major thing going for it. With 3.3 million cable televisions, the company can storm ahead in the new burgeoning industry of Video on Demand (VOD).

And here, Mr Berkett was more bullish. “Usage of VOD content has more than doubled in the last 12 months, and users have really fallen in love with the product,” he said.

He added, “There is no economic advantage for us in premium television, where there is a very strong competitor. There is no profit pool in premium TV,” he said. “We believe we have a superior product in midrange television, so let’s focus on that. That is where the profit is going to come from.”

February 4, 2008 | posted by Michael Baxter in New Media | comments (0) |

Do you mind if we pucker up and blow our own trumpet for a second? Last May, we reported talk that Microsoft may be working on a bid for Yahoo. Microsoft, we said, seems to have no answer to Google, which was why a purchase of Yahoo could be just the company’s panacea.

Well, last Friday it was official. For that was the day when the world’s largest software company put its hands in its pockets, pulled out $44bn, and left it there on the table as an offer to buy the company with the world’s most popular web site.

It’s quite surprising, but Yahoo is still the most visited site on the Internet. The snag, though, is that Yahoo’s area of strength is not in the area where the money is. Instead, the bucks are with search. And you can see why. The strength of the Internet is that it allows advertisers to target their ads in a way that wouldn’t have been possible before. You sponsor a key word on Google, and you know that the people who click on your ad will already have typed a word into Google that you consider to be relevant to you.

This idea is not new to Yahoo. In fact it was offering customers the opportunity to sponsor searches even before Google, It’s just that in the battle to dominate search, Google has been walking all over Yahoo.

It’s shown up in the bottom line. Last week, Yahoo announced its latest quarterly results. Profits in its fourth quarter were not merely lower than its profits in the same quarter a year ago, but actually it even raked in more bucks in the fourth quarter two years ago too.

In fact Yahoo has now announced four successive falls in year-on-year quarterly profits.

Back in the fourth quarter of 2003, Yahoo’s profits were 2.7 times greater than Google’s. But within a year, Google had caught up. But, in the latest round of quarterly profits, Google’s profits came in at $1.2bn – no less than 5.8 times greater than Yahoo’s.

No wonder, then, that Yahoo is looking anxious. Its CEO, Jerry Yang, was appointed last year, but really, in making Yang the boss, the company was doing little more than an attempting to recapture past glories. For Yang also happened to be one of the company’s founders.

Then, there’s Microsoft. Sure, its latest profits came in at $4.71bn, dwarfing even Google’s profits, but then this does not quite tell the tale of the dominance it is used to. Three years ago, for example, Microsoft was making ten times more money than Google, Yahoo and Apple combined. Now, the ratio is more like two to one.

But what is really quite interesting about the whole saga, is the way many people seem to be portraying Microsoft and Yahoo as little more than two Davids coming together to take on the mighty Google.

Blog entries across the Internet are full of comments such as “down with Google”, while Google is seen by many as the home of the new evil empire.

Microsoft, for so long the whipping boy, for so long on the losing side of antitrust cases, and for so long seen as the evil empire, to be jeered at with every opportunity, is now the hero of the piece.

And even if Microsoft was to buy Yahoo, the new company’s share of the search engine market would still be around half of Google’s share. (And by the way, there would hardly be any pickings left over for anyone else – at least that would be the case in the US.)

But not everyone sees it in those terms. Not everyone sees Google, the company whose motto is “Don’t do evil”, as the bully.

Here is one argument put forward against the Microsoft–Yahoo coming together. One industry expert said the merger “raises troubling questions” and asked “could the acquisition of Yahoo allow Microsoft – despite its legacy of serious legal and regulatory offences – to extend unfair practices from browsers and operating systems to the Internet?”

So at last, Google has an ally. Well, alas not so. For the person who made those comments was David Drummond, Google’s senior vice-president for corporate development and chief legal officer.

It seems, though, this battle will come down to who the authorities are most worried about. Are they most worried about Microsoft’s strength, or do they see it as essential that Google is given tougher opposition?

The truth is, in the battle for Internet dominance, it is essential that there is no clear winner. And in choosing whether to allow the Microsoft–Yahoo merger, the authorities will really be looking at which company they consider to be the lesser of two evils.

February 1, 2008 | posted by Michael Baxter in New Media | comments (0) |

Profits soared at Google in the last quarter, but investors were nonplussed.         In the final quarter of last year, Google produced its best performance ever, posting $1.2bn worth of profits – that was an impressive 17 per cent up on the same quarter the year before, yet investors did a passing impersonation of a spoilt child, screaming in fury because Santa only brought him one games console for Christmas.    

And as the company’s profit reached heights that the most-bullish of analysts would only have dreamt about when the company was floated three years ago, a shadow appears over the Google horizon.  Is the mighty wonder of Mountain View California seeing an imminent end to its era of heady growth?

The problem, of course, is that analysts are used to seeing more-rapid growth from Google.      A year ago, for example, profits were 176 per cent up on the previous year.

 There are two clouds that hang over the company, at least they are clouds from Wall Street’s perspective – we have a sneaky suspicion management at Google don’t see it that way. 

The first cloud relates to the credit crunch and the all-round feeling of gloom.    They are asking, is even Google feeling the heat from the economic downturn?  If it is, then that’s a tad worrying, because it somehow makes Google seem normal, it makes its management seem mortal, and their veneer of invincibility suffers a nasty scratch.

The second cloud, though, is altogether more worrying, and it concerns fears that the company is approaching some kind of market saturation.  Maybe the scope to eke out many more dollars from online advertising is fast receding.   You can see the rationale behind this second fear.  After all, Google is now enjoying more revenue from advertising in the UK than ITV – surely there just isn’t much more scope for expansion.

The fears, though, seem overdone.   Cynics fall into the trap of seeing advertising as a cake. To begin with, Google’s slice was so tiny, the company could expand without impacting by very much on the overall cake.     But then, as the slice starts becoming the one that has the cherry on it, a really big stomach-filling slice, analysts start saying, well, the cake just isn’t big enough to facilitate much more growth from Google.  But this analysis is wrong. 

Thanks to the Internet, the advertising cake is changing, it is becoming more like a soufflé, before it was set in the oven.    

There is more than one reason for this. 

Firstly, for the online retailer, advertising takes on a level of importance that just does not apply to the traditional retailer.  They say that three key ‘Ps’ determine success in retail:  position, position, and position.  That’s why rent, position on the High Street and, for some retailers, ownership of prime retail space, are so important.  A retailer that can point to a balance sheet brimming over with property ownership, is seen as a business based on solid foundations.    

But in the Internet sphere, it’s position on Google that counts.  A Google ranking is more important than ownership of land.    

No doubt you know this Christmas was a record for Internet shopping, and most predictions say we have many more record Christmases to look forward to.     And thus, there is plenty of scope for the advertising soufflé to rise and rise again.   

Secondly, there is this new era of carefully targeting ads.   How much more successful would advertising be, if it was only pushed in front of people who are inherently interested in the products being sold.?  How much more effective would an ad for a restaurant be, if the advertiser could somehow know who would be in the region of its restaurant that evening.    

But as you know, this kind of advertising targeting is highly controversial, and it will take quite a while, two or three years, maybe longer, before it gains acceptance.    But when this new type of advertising finally takes off, the advertising soufflé will rise to unprecedented heights.   

Right now, Google is surely doing no more than pausing for breath.    Sure, its management is mortal, sure the company is not invulnerable, but there is no reason to assume the advertising growth phase is near an end.    

As Google co-founder Sergey Brin said about fears that the economic downturn was affecting the company, “We have not been able to detect any such effects from macroeconomic trends.”

January 23, 2008 | posted by Michael Baxter in New Media | comments (0) |

Last week we told how Apple’s shares suffered despite an impressive new range of products. The falling shares had nothing to do with the announcements, we said, the markets were just glum, and any news was interpreted as bad.

Well it has happened again.

Profits at Apple soared, breaking the previous record by 58 per cent. In total, profits came in at $1.58 billion, in their most recent quarter. A year ago, when the company set its previous record, profits were $1bn, on the dot.

Sales went though the roof. Mac sales came in at $2.3bn, compared with just $1.6bn a year ago, and a mere $1.2bn the year before that.

As for the iPod, sales were worth $2.2bn, again marking the best-ever quarter – although a year ago, sales were only slightly lower at $2.1bn.

“We’re thrilled to report our best quarter ever, with the highest revenue and earnings in Apple’s history,” said Steve Jobs, Apple’s famous boss.

Yet, shares in the company fell. Investors uttered something about how the company’s predictions for the next quarter were down on what had been expected.

The truth, though, is that Apple, alongside Google, stands as testimony to the power of US optimism. These two companies have startled, and put in performances that simply could not have been produced anywhere else in the world. They believed, they dared – and they won.

But right now, the mood on Wall Street is mean. If your child asks for a favour the moment your computer crashes, and you lose 4 hours’ worth of work, you are more likely to say No. Wall Street’s reaction to yesterday’s news was just like that.

January 16, 2008 | posted by Michael Baxter in New Media | comments (2) |

“This morning,” wrote Nassim Nicholas Talen in his book ‘Fooled by Randomness’, “I…asked the hotel concierge how long it takes to go to the airport. ‘40 minutes?’ I asked. ‘About 35,’ he answered. Then I asked the lady at reception if the journey was 20 minutes. ‘No, about 25,’ she answered. I timed the trip: 31 minutes.”

In this anecdote, Mr Taleb, who, by the way, also wrote ‘Black Swan’, a book which has been drawing praise from all quarters of late, was trying to illustrate a point. We are irrationally influenced by irrelevant data.

Now transpose that idea to yesterday’s markets and Apple computers. Apple CEO, Steve Jobs, is corporate America’s resident miracle worker. He is also a dab hand at wowing his audience with presentations. And yesterday was his annual moment. It was his keynote speech at Macworld. Last year he chose the occasion to unveil the iPhone, this time around analysts waited with baited breath.

And for Jobs, a man who holds his audience in thrall, yesterday must have been quite a shock; for while his 90-minute speech was still running, while his audience were oohing and aahing, shares in Apple fell 10 points.

Investors, it appeared, were not impressed.

Mr Jobs chose the occasion to reveal a new stand-alone TV which can download movies and songs from the Internet without reference to a computer. He also waxed lyrical on the imminent launch of a catalogue of 1,000 videos available for download on to PC, Macs or iPhones.

This announcement alone drew rave praise. Fortune magazine, for example, quoted Jupiter Research analyst Michael Gartenburg as saying, “This could do to Hollywood what the iPod and iTunes did for the music industry.”

The consummate salesman provided further lubricant to the atmosphere of anticipation when he said, “I’m still stunned our engineering team could pull this off,” and promptly revealed an interface mechanism for the Mac which ehoes the iPod’s famous touch-sensitive trackpad.

But, impressive though that line-up was, you havn’t even heard the best bit yet. For Mr Jobs also wowed the audience with thin Air. Only Jobs could do it, but thin Air was the star of yesterday’s spectacular. To be precise, it was a product called Air, and it’s the the world’s thinnest laptop computer – at its thinnest it is just 0.16 inches thick, and at its fattest, 0.76 inches.

So that’s a line up and a half: revolutionary new interface, a genuine attempt to reveal a product and catalogue of videos that could turn Hollywood upside-down in much the same way the company turned the music business upside-down, and a laptop computer you could almost slide under the door.

And shares got a panning. Scour the net, and you wil see a line-up of critics all trying to put their boot in, a proper job, as it were, on Jobs.

Why so much angst from investors and techies, when yesterday’s line-up was so impressive?

Well the answer is simple. It’s the mood. Citibank also chose yesterday to reveal another huge loss. Bad news on Wall Street is piling high, and no amount of thin Air, no matter how fresh, can alleviate it.