Posts tagged ‘search’
Microsoft Enters Garbage Recycling Business
Microsoft Inc. (MSFT) is going green in more ways than one. Not only is Microsoft shelling out a lot of green ($8.5 billion) to acquire internet communication company Skype, but Microsoft is also going green by recycling Skype – an asset previously tossed away as garbage by eBay Inc. (EBAY). While I’m certain Microsoft executives did their due diligence and a large cadre of savvy bankers provided their stamp of approval on the deal, recycling a previously disposed item successfully poses some unique challenges.
The Problems
What could possibly go wrong in a sexy, strategic deal that plans to leverage Skype’s power of internet communication across Microsoft’s various businesses including mobile, business software, gaming, and advertising platforms?
- Sticker Shock: The Microsoft-Skype deal is still in its early phases, but the multi-billion price tag has already elicited heartburn from some investors (heart attacks among others). In Microsoft’s defense, what’s a mere $8.5 billion among friends, especially if your wallet is stuffed with over $60 billion in cash like Microsoft? With the 3-month Treasury bill currently yielding 0.02%, the massive wads of cash that Microsoft (and other tech giants) is sitting on appear to be burning a hole in buyers’ pockets. In a kooky internet world where IPO valuations of $70 billion for Facebook, $25 billion for Groupon, and $3 billion for LinkedIn are freely tossed around, an $8.5 billion Skype offer may seem like par for the course (or even a bargain). Sadly, however, I am having difficulty reconciling how Microsoft will take 663 million money-losing customers at Skype and balance the laws of economics by adding further volumes of money-losing customers. Apple Inc. (AAPL) spends about $2 billion per year in research & development, and is expected to produce more than $100 billion in revenues in fiscal 2011, while the $8.5 billion that Microsoft spent on Skype produced less than $1 billion in revenues last year. I presume Microsoft has some aggressive assumptions built into their Skype forecasts to rationalize the price paid for Skype.
- Failure Déjà Vu: Does the desire to integrate wiz-bang technology into existing product platforms sound familiar? It should – eBay Inc. (EBAY) already attempted and failed at integrating Skype before it threw in the white towel at the end of 2009 and sold a majority $1.9 billion stake of Skype shares back to a group of investors, including the Skype founders. Back in 2005, when eBay paid a then bargain of $3.1 billion for Skype (including earnouts), former CEO Meg Whitman evangelized the “Power of 3” (Skype + eBay’s Marketplace + PayPal) – I suppose new CEO John Donahoe must now promote the “Power of 2.” In Skype merger sequel of 2011, Microsoft’s CEO Steve Ballmer is espousing the benefits of Skype across Microsoft properties such as Outlook, Windows Live Messenger, Xbox, Kinect, and its newly created Nokia Corp. (NOK) relationship. Gaudy priced mergers in the internet/social media space have a way of eventually ending up in the deal graveyard. Consider AOL Inc.’s (AOL) 2008 deal with social network Bebo for $850 million – two years later AOL sold it for $10 million. News Corp’s (NWS) high profile purchase of MySpace for $580 million is reportedly looking for a new home at a fraction of the original price ($50 million). Hewlett-Packard Co.’s (HPQ) ostentatious $2.4 billion value (~125 x’s forward earnings) paid for 3Par Inc. during a bidding war with Dell Inc. (DELL) in 2010 is another recent example of a risky high-priced deal.
- Telco Carrier Skepticism: Although Microsoft has ambitions of taking over the world with Skype, the telecom service carrier companies that facilitate Skype traffic may feel differently. As the telcos spend billions to expand the global internet superhighway, if Skype is clogging traffic on their networks then the carriers will likely require additional compensation – no freeloaders allowed.
- Rocky Past Marriages: When it comes to acquisitions, Microsoft historically hasn’t fooled around as much as some other large Fortune 100 companies, nonetheless some important past relationships have gone sour. Take for instance Microsoft’s previous largest $6 billion cash acquisition of aQuantive Inc. in 2007. As Microsoft continues to chase Google Inc. (GOOG) at their heels, Microsoft has little to show for the aQuantive deal, except for a lot of employee turnover. The sizable but smaller $1.1 billion acquisition of Great Plains in 2001 has its critics too. Like Skype, the Great Plains business software deal made strategic sense, but six years after the units were fully integrated founder and owner Doug Burgum packed his bags and left Microsoft.
Consequences
What happens next for Microsoft? I know it’s difficult to imagine that Microsoft’s colossal underperformance since the beginning of 2010 could worsen – Microsoft has underperformed the market by a whopping -38% over that period – but by massively overpaying for Skype’s losses, Microsoft is not making their own job any easier. Although Microsoft has missed many key technology trends over the last few years (e.g., search, mobile, tablets, social media, etc.) and its stock has been in the dumps, the PC behemoth is looking to salvage a previously failed merger into a successful one. Time will tell if Microsoft can recycle a trashed, money losing operation into hefty green profits. If not, investors will be out for blood wondering why $8.5 billion was thrown away like garbage.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, AAPL, and GOOG, but at the time of publishing SCM had no direct position in MSFT, Skype, EBAY, AOL, HPQ, DELL, NOK, Facebook, MySpace, LinkedIn, Groupon, Bebo, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Microsoft’s Hand Caught in Google Cookie Jar
Source: Photobucket
The globalized world we live in has become ever-more connected (see Globalization Train), and the recent events in Egypt where mass protests were organized, in large part by Facebook and Twitter, only goes to show the importance technology plays in our daily lives. As a result of our tight global links and the advancement of technology, product cycles have only become shorter and more competitive, raising the stakes for business success. The expanded field of cut-throat competitors in a digital age has also increased the value of intellectual property (IP). Increasingly, lawyers and judges are being forced to decipher the obscure realm of bits and bytes and vigorously defend unique IP from competitors.
If You Can’t Beat Them, Copy Them
Case in point is the current war of code-words between Google Inc. (GOOG) and Microsoft Corp. (MSFT). Google claims they have caught Microsoft’s hand in the corporate espionage cookie jar by watching Microsoft effectively steal Google’s algorithmic search code for the software giant’s Bing search service. How can Google make such harsh and direct accusations? Google claims to have set up “synthetic” searches, which were designed as digital booby traps. Based on Google’s story, Microsoft appears to have taken the bait…hook, line, and sinker.
You be the judge. Here was the synthetic search result for “indoswiftjobinproduction” when entered in Google:
Source: Search Engine Land
This is the response when the same search term “indoswiftjobinproduction” was keyed in on Microsoft’s Bing search service:
Source: Search Engine Land
Coincidence? Perhaps. Likely? No.
Well, maybe lightning just struck with the “indoswiftjobinproduction” search term gibberish – why not try another?
This is what Google’s search results created when “mbzrxpgjys” was entered:
Source: Search Engine Land
When the same “mbzrxpgjys” term was inputted into Microsoft’s Bing, here was the result:
Source: Search Engine Land
Hmmm, I seem to be detecting a pattern here.
Is Microsoft’s apparent copycat behavior illegal? The evidence for the moment doesn’t appear to be clear, thanks mostly to the fine-print legalese of confusing check boxes that nobody reads when downloading or using any internet service. Evidently, many Microsoft Internet Explorer (IE) users have unknowingly provided Google search information typed in through Microsoft’s IE browser, and the Redmond behemoth has been using this information to sharpen their search algorithms.
So if this behavior is not illegal, then should this activity be considered cheating? Here’s what Amit Singhal, a Google executive who oversees the company’s search engine ranking algorithm has to say about the issue:
“It’s cheating to me because we work incredibly hard and have done so for years but they just get there based on our hard work…I don’t know how else to call it but plain and simple cheating. Another analogy is that it’s like running a marathon and carrying someone else on your back, who jumps off just before the finish line.”
I’m sure this will not be the last we hear on the subject of technology and corporate cheating. As a matter of fact, in the field of intellectual property crimes, French-Japanese car giant Renault-Nissan recently brought the case of industrial espionage, corruption, theft, stolen goods, and conspiracy against three senior Renault executives. The allegations of selling crucial electric car information to the Chinese raised concerns to a feverish pitch in the tabloids because so much can be gained or lost by those involved in this estimated $2 trillion electric car market.
The committing of crimes is nothing new, but the types of new crimes are changing. In a globalized world increasingly dominated by technology, perpetrators better think twice about committing these invisible crimes. Cheating may taste sweet, until you get caught with your hand in the cookie jar.
Read More about the Google–Microsoft Tiff
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and GOOG, but at the time of publishing SCM had no direct position in MSFT, Facebook, Twitter, Renault, Nissan, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Google vs. China: Running Away from 660 Million Eyeballs?
Wait, let me get this straight. Google, the $185 billion behemoth that wants to take over the world is seriously considering turning its back on a rapidly growing cluster of 660 million eyeballs (330 million Chinese internet users according to BusinessWeek)? After hitting their head on an obscenely high market share in the U.S. (67% search share based on Nielsen data) and looking for new geographies to expand, I’m supposed to believe Google will walk away from the third largest economy on this planet (see China: Trade of the Century)? The explanation given for Google’s capitulation is discontent related to unknown hackers and censorship concerns. If that’s not enough, this alleged saint-like posturing comes after Google sold its censorship soul for years, before seeing the free speech light. Although the company’s mission is to “do no evil,” Google had no qualms aggressively poaching Microsoft (MSFT) miracle maker, Kai-Fu Lee, to kick-start their Chinese presence. If free speech is truly at the root of the Google’s unease, then why wait four whole years and a hack-attack before laying down an ultimatum on the Chinese government?
I Smell a Rat
In a blog post written by Google’s Chief Legal Officer, David Drummond, the company explains how their iron curtain digital defense was bent but not broken:
“We have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists. Based on our investigation to date we believe their attack did not achieve that objective. Only two Gmail accounts appear to have been accessed, and that activity was limited to account information (such as the date the account was created) and subject line, rather than the content of emails themselves.”
I’m no exterminator, but I smell a rat. All this feels a lot more like politics and business tactics then it does an altruistic display of free-speech martyrdom. The Chinese government and Google executives know what is at risk, as they both play a high stakes game of “chicken.”
Google goes onto say:
“As part of our investigation we have discovered that at least twenty other large companies from a wide range of businesses–including the Internet, finance, technology, media and chemical sectors–have been similarly targeted.”
I’m confused. These unknown hackers attacked 20 different companies and only unsuccessfully cracked two Gmail accounts. The evidence sounds pretty harmless on the surface, if this language is representative of reality. Maybe I’m wrong, and a foiled cyber-attack is reason enough to cease operations in a country inhabiting a potential 1.3 billion customers.
Sure China represents a relatively small portion of Google’s revenues (estimated at less than $1 billion and a single digit percentage of revenues), but Google would be insane to walk away from this massive long-term growth market, even if Baidu (BIDU) is currently eating their lunch. Although Google has a smaller #2 position in China, it still has a respectable 35.6% search market share (according to BusinessWeek).
Not Just About Search – Cell Phones Too
Even if they claimed they were throwing in the white towel on their Chinese search business, I don’t think they really want to flush their newly minted cell phone prospects down the toilet. Even if 275 million or so cell phone users in the U.S. is fertile ground for Google to target their new Android-based phones, I’m guessing they have penciled out the gigantic mobile potential of the rapidly expanding 700 million+ Chinese mobile phone user market.
While I can’t take the scenario of Google ceasing China operations off the table, I consider the chance of Google shutting its doors in China significantly less than 50%. While the bold Google statement of feasibility review regarding their Chinese business existence has gained a lot of attention, I think calmer heads will eventually prevail and Google will resume their targeting of 660 million Chinese eyeballs. Who knows, the high stake game of “chicken” may even benefit their bottom-line as they win the hearts and minds of more future free-speech users.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own GOOG shares and China based exchange traded funds at the time of this article’s publishing, but did not have a direct position in MSFT and BIDU shares. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
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