Friday, January 30, 2009

Sex sells commodity IT

Sunday is the Super Bowl, and so, among other things, it’s time for another tasteless Go Daddy ad.

Since 2005, Go Daddy has been running Super Bowl ads involving scantily clad women, and this year is no exception. Since the first ad, Go Daddy has relied on claims of “censorship” to draw attention to its ads, but this year the argument didn’t work: two ads were cleared by NBC: “baseball” and “shower.” Instead,the publicity stunt is faux-suspense over which ad will air in the $3 million slot. (If it wanted, it could have paid another $3 million for one of the two unclaimed 60-second spots).

Of course, that assumes that viewers even know what’s being advertised. Of the two, the product plug in “baseball” is more effective, with spokesperson Danica Patrick delivering the pitch near the climax of her conflict with two bimbos. The spot also harkens back to the original 2005 ad theme of stodgy congresisonal hearing, and Parsons has been bragging about his “uncut” version. The (broadcast) ad is the one I would choose.

The “shower” ad shows less but promises more. It’s a lowbrow ad, akin to Carl’s Jr. or the most crass beer ad. Worse yet, the plug is mumbled at the beginning, before the viewer knows what is going on. If Go Daddy happens to choose this one (unlikely), it must have decided that titillation will generate more traffic to the website.

As with previous years, Go Daddy has been doing a good job
of generating click-throughs, using the TV ad (and free publicity) to draw viewers to see the “uncensored” spots

"Viewers have come to expect our edgy Internet-Only versions on Super Bowl Sunday and this year's online video really pushes the envelope," said Go Daddy CEO and Founder Bob Parsons.
Once they see the online adds, viewers also see a postroll ad with a $3 off coupon for a domain purchase. Having a product that can be purchased over the Internet puts Go Daddy in an ideal position to translate Super Bowl exposure into action and sales.

As in other businesses, sex sells. Parsons is consciously using sex to sell commodity IT services — domain name registration — where one provider is as good as the other.

I’ve been a Go Daddy customer since the summer of 2005, not because of the sex, but because they were one of the cheapest providers out there and a friend had good luck with them. The same low prices that enable cybersquatters has allowed me to carry 15-30 domains during this time, such as,, and Go Daddy has been edging up its prices, so it’s probably time to find another provider for these commodity services.

I’m not so clear why Patrick, the former Indy 500 rookie of the year, is lending her body to a campaign that goes beyond Maria Sharapova, let alone a Chris Evert. I guess Patrick has decided she needs the exposure in her career (and the endorsement money) while she can still get it. As any starlet would probably advise her, in today’s society you need to exploit your looks and celebrity while you can. However, the normal pattern is to work your way up to classier roles: think Nicole Kidman and Chanel No. 5.

For Go Daddy, the continuing use of the same ad theme for five years suggests a lack of creativity on Parsons’ part — being “edgy” has become safe. From using the same approach, the (privately-held) Go Daddy should be feeling diminishing returns by now. Among those who procure domain name services, it has a firm position as the mindshare and marketshare leader. Unlike an Apple or Yahoo, its website creation tools are for techies and not consumers, so there isn’t much upside there.

Perhaps, as with other celebrity CEOs (Mark Cuban or Lee Iacocoa come to mind) Parsons has grown addicted to the limelight and is using publicity stunts to stay there. Perhaps he really he believes the meaning of the Go Daddy brand is controversy, sensational, “edgy” and Bob Parsons. (How is resolving a name to an IP address “edgy”? Never mind.)

Or perhaps like other men pushing 60, the ex-Marine enjoys being surrounded by buxom bimbos. I’ve never met the man, so I can’t say.

Another $50 off that TV

In writing about Circuit City’s liquidation, nine days ago I wrote:

I suspect a 20% discount timed for SuperBowl Sunday (Feb. 1) would clear out most of the inventory.
Sure enough, this morning at Circuit City, TVs were 20% off, as were audio equipment, videogames and most of the other high-value items in the store. That’s 10% better than last weekend, and 5% better than Monday. Those who want plasma TVs get 25% off.

Although MP3 players are 20%, iPod® brand MP3 players remain 10%, as are all notebook and desktop computers. (Monitors and printers are 20%), while CDs/DVDs are cut to 25%.

Unlike the Mervyn’s GOOB, or Good Guys 3 years ago, I haven’t spent a penny yet at Circuit City. But it’s still interesting to watch what sells and what doesn’t, particularly on a liquidation of big ticket items supported by a TV advertising campaign.

I am more likely to spend money at the GOOB for Expo, the mid-market home improvement store owned by Home Depot. The planned liquidation is much smaller (34 stores vs. 500+ for Circuit City) and got almost no press.

Thursday, January 29, 2009

First, do no harm

Apparently politicians are not required to take the Hippocratic Oath. The politicians who protected Fannie and Freddie have thus far cost the taxpayers $300b just in direct aid to the two government-sponsored enterprises, but it hasn’t cost them their jobs.

With that stellar record of government intervention behind us, on the strength of the popular president’s persistent pressing, the $800+ billion “stimulus” bill overwhelmingly passed the House Wednesday; the only dissent came from the small GOP minority and 11 (mostly “Blue Dog”) Democrats. Since no one knows what the plan will do, the plan is certain to fail the “do no harm” test even if it leverages the current financial panic to reward key allies.

Interestingly, one of the harshest criticisms of the plan came this week from an Obama campaign contributor, former Harvard wunderkind turned Columbia economist Jeffrey Sachs. Writing in the Financial Times from a perspective of fiscal discipline that was once dominant in macroeconomics, Sachs argues that the benefits of the “stimulus” are likely overestimated and the predictable harm has been completely ignored:

The US debate over the fiscal stimulus is remarkable in its neglect of the medium term – that is, the budgetary challenges over a period of five to 10 years. Neither the White House nor Congress has offered the public a scenario of how the proposed mega-deficits will affect the budget and government programmes beyond the next 12 to 24 months. …

We are told that we have to rush without thinking lest the entire economy collapse. This is belied by recent events. The spring 2008 stimulus package of $100bn (€76bn, £71bn) in tax rebates was rushed into effect in a similar way and we now know it had little stimulus effect. The rebates were largely saved or used to pay down credit card debt, rather than spent. The $700bn troubled asset relief programme bail-out was also rushed into effect and its results have been notoriously poor.

The Tarp has not revived the banks or their lending, but it has supported a massive transfer of taxpayer wealth to the management and owners of well-connected financial institutions. …

The most obvious problem with the stimulus package is that it has been turned into a fiscal piñata – with a mad scramble for candy on the floor. We seem all too eager to rectify a generation of a nation saving too little by saving even less – this time through expanding government borrowing. …

The White House and Congress have stated an amount – $825bn to be spent mostly over two years – on top of a deficit that is already projected to reach $1,186bn in fiscal year 2009 without the stimulus package. Many of the details of allocating the $825bn are being left to Congress with the aim of reaching a bipartisan consensus. The result is shaping up to be an astounding mish-mash of tax cuts, public investments, transfer payments and special treats for insiders.
Meanwhile, one of the most successful no-bailout financial executives explains the inevitable failure of Congress’s desire to replace free markets with central planning:
When you start relying on government to do business' job, you've got real issues. So--real conflict there, which is too many people relying on government or, basically, the man behind the curtain. There is no man behind the curtain. There's no politician that can come in and run the banks better than the guys who are bankers. There may be different bankers who can run these banks, but come on, a politician?
The executive, Cantor Fitzgerald CEO Howard Lutnick, has more credibility than any of the dozens of bailout seeking bankers. Not just because he had a good financial year, but because he’s led a miraculous revival of the company that lost 69% of its employees in the 9/11 World Trade Center attack, and has been paying to support those families ever since while achieving the turnaround.

Instead, much of the public is being spent under false pretenses:
You know, with so much public money going into the banks, there really could be a call of, "Well, hey, these guys shouldn't be getting paid" and "Hey, they should be making loans for social reasons," and this goes on and on. So, I think there's a real issue of mixing social policy with fiscal policy. And you're seeing that now in the stimulus package. If you dissect it, you're going to see a lot of social policy in there. They're calling it a stimulus package. Social policy can be good, but it's just not a stimulus package.

Netflix: built to last?

In an article this week, Forbes claims to offer a list of 100 companies that will survive the next century. The choices are odd and idiosyncratic: Coca-Cola, Disney, Honda, HP, Intel, P&G, Toyota make sense, but Nestle Oil but not Nestle foods? United Technologies but not General Electric?

They list Dell and not Apple, IBM or Microsoft — presumably because Apple won’t survive without Steve Jobs (even though Dell also did badly without Michael Dell). They list Ericsson — even though 30 years ago it was virtually identical to Northern Telecom, now bankrupt.

Of dot-com era technology companies, Amazon makes the cut, but not Cisco, eBay or Google.

Responding to a great quarterly earnings report, Chris O’Brien this morning raves that Netflix belongs among the latter, if not the former.

After almost a decade in operation, Netflix deserves to be recognized as one of the most successful dot-coms ever.

Many of us may have underestimated not just how innovative this company is, but also how well managed it is. It's pulled off a feat that's too rare among Internet companies by pairing a great, disruptive service with a powerful business model. And it's continued to vanquish each rival even as analysts have fretted that it would stumble with every new challenge.

Even more amazing is that the company appears to be gathering momentum after a decade, a neat trick that fellow first-generation Web icons like eBay and Yahoo could only dream of emulating.
O’Brien praises it for its business model (by which he really means revenue model), its operational efficiencies, and by a dogged focus on one market: the US. (It’s not even in the 51st state, even though it once had plans to go to Canada and the UK.)

In following up O’Brien’s column, it was interesting to note what analysts were saying five years ago:
With 2.2 million subscribers, Netflix showed that the model works. Customers go online to select the DVDs. Providers mail them in envelopes that are re-used for returns. Most plans allow customers to have three DVDs at a time, sending a new video out each time one is returned — with no late fees.

But now, "It's very unlikely that they're going to dominate the market," says Michael Pachter of Wedbush Morgan Securities.

The reason? "There are very few barriers to entry, and companies with deep pockets can get in and make some money," says Marquis Investment Research's Brian Bolan.

As a result, many analysts consider Netflix a takeover play. With a market value of $537 million, and no single shareholder controlling enough votes to block a sale, some say Netflix could be had for under $1 billion.

"If the stock price stays at $10 very long, then Amazon has to buy Netflix," says McAlpine Associates' Dennis McAlpine. "Nothing else makes sense. And if you're (Yahoo CEO) Terry Semel, you're drooling. He'd have all the (online retail) capability that Amazon has. Even (InterActiveCorp CEO) Barry Diller might want it."
Five years ago, Yahoo had a market cap of roughly $30b, but now Yahoo’s stock is half what it used to be and Netflix is up 250% from what proved to be a historic low.

None of this proves that Netflix is Built to Last. But, as O’Brien argues, its progress over the past 5 years suggests that it’s on a better trajectory for the next decade than many of its contemporaries.

Update Friday 8am: Michael Pachter wrote to say that he removed his “sell” rating in September 2007, and upgraded to “buy” in October 2007 when the stock was around $22. He also notes that since switching to “buy”, Netflix is up 60% while the NASDAQ is down 45%.

Tuesday, January 27, 2009

Secret Storm

Today Verizon reported quarterly earnings, but wouldn’t say how many units it’s sold of the BlackBerry Storm. Despite high hopes, the supposed iPhone-killer has been plagued by scathing reviews, mainly due to buggy software.

In an article this morning entitled “BlackBerry Storm Is Off To Bit of a Bumpy Start,” WSJ reported rumors that Verizon sold 500,000 Storms the first month — leading up to Christmas — and the RIM CEO’s claim that RIM is making 250,000/week. No one else has confirmed these numbers, and it is not clear how many of these phones are being sold outside the US.

These numbers are a bit contradictory – we don’t know how much is the initial sales spurt vs. how much is sustainable. A sustained level of 1 million units/month for the Storm would be great figure, something that Verizon should be bragging about. By comparison, AT&T sold 2.5 million iPhone 3G units in its first three months.

Even if its latest phone has disappointed – either in terms of technology or market performance — RIM has some breathing room, since it is the smartphone market share leader in the US on the strength of unmatched enterprise integration and a broad range of phones across the Big Four carriers.

Monday, January 26, 2009

Slightly cheaper SuperBowl TVs

Circuit City has 9 weeks left until it’s gone.

Sunday, the discounts were

  • 10% audio, TVs
  • 20% CDs, DVDs
  • 30% accessories
but this evening at another branch, TVs (only) were now 15%.

The timing seems designed to move TVs in advance of next Sunday’s SuperBowl. However, I haven’t seen the 5% bump mentioned in the TV ads. And while the discount is up by 50%, the product is only 6% cheaper.n

Will RIM end up like Apple, or like Broadcom?

Over the last few years, many high-tech firms got in trouble for the timing of the exercise price on their stock options. These kerfuffles always get settled, but the question is at what cost: do the execs pay big fines, and are they forced to resign as corporate officers.

Three firms in the mobile phone industry have or are facing this problem.

At Apple, last summer Steve Jobs dodged any sanctions and got to keep his job as CEO (at least for another 6 months) . Instead, Apple made its former general counsel take the fall.
On the other hand, Broadcom first paid $12 million to settle charges against the corporation, and then its two founders got charged, Co-founder and once CEO Henry Samueli (who AFAIK is the only entrepreneur to endow two engineering schools) is still fighting to avoid prison time after a judge rejected a plea bargain that avoided jail time.

Now, Canadian and US securities regulators are threatening officers of Research in Motion — including co-CEOs Jim Balsillie and Mike Lazaridis — over backdated options terms that later forced a $250m earning charge. Although Balsillie surrendered his position as chairman, both CEOs are believed to be fighting to keep their right to remain a corporate officer, in the face of a rumored $100 million fine. Given the pace of leaks, it sounds like a resolution is coming in the next few weeks.

What I find remarkable is that despite the publicity that the SEC gets for such cases, life goes on — both while they are pending and after they are settled. Employees still work for the companies, consumers still buy the products, investors still buy the stocks. This is in great contrast to Enron or Arthur Andersen, whose white collar transgressions killed the company.

In fact, there is even a bit of a backlash against the charges. Broadcom’s hometown paper referred to Samueli as a “philanthropist” (a 100+ year old term that refers to giving the money away now rather than how it was made in the past).

In RIM’s home town last week, business leaders were sympathetic to RIM and its executives in their fight with regulators:

At the luncheon, the Ontario Securities Commission was as much the target of criticism for seeking fines that many felt were out of proportion to the offence.

Others questioned the timing of such a large penalty, when Canada is facing huge challenges - a financial meltdown and the recent bankruptcy protection filing of technology icon Nortel Networks Inc.

"We need strong regulation but it's an odd time to suddenly get righteous," said Randall Howard, a veteran software entrepreneur who runs a technology investment company.

"We need to find ways to create champions," he said. In going after RIM, often cited as Nortel's successor as the key Canadian technology champion, "It's an odd choice."

"I'm absolutely opposed to what the OSC has proposed here. I think it is grandstanding of the highest magnitude and opportunistic given the Hockin report has just come out and all of a sudden the OSC wants to be seen as a regulatory tiger that has teeth. It's no coincidence whatsoever," said [Al Foerster, a lecturer of accounting at Wilfrid Laurier University.]

"All they've done is found individuals with the greatest pockets," he added. "If I were Balsillie or Lazaridis, I would fight this all the way given the OSC's track record with respect to litigation."
As the WSJ notes, the temptation to backdate is an artifact of 1993 Congressional sanctions against high salaries:
And one of the problems with options is that they give executives every incentive to capitalize all company profits back into the stock price--thus contributing to their own pay--rather than paying out dividends to shareholders. As SEC Chairman Chris Cox has noted, the 1993 law deserves "pride of place in the museum of unintended consequences."

Sunday, January 25, 2009

Praising our tax protester in chief

The American people have figured out that Treasury-secretary designate Tim Geithner is the next Kimba Wood or Zoe Baird, but (so far) the president is standing by his man.

Apparently this economist is so smart that he is “the most qualified candidate for the job” but he’s not smart enough to do what we expect every plumber, carpenter or other self-employed American to do: pay Medicare and Social Security taxes. When caught, he paid the 2003-2004 taxes but wasn’t going to pay his 2001 and 2002 until he was nominated for Treasure Secretary.

The Wall Street Journal — like other media elites — argued that this “isn’t a disqualifying offense,” even as it criticized his evasion during the Senate hearings. However, the Saturday the paper published eight caustic letters (obviously from a supply of hundreds or thousands) taking them to task:

Geithner's Nomination for Treasury Invites Ridicule

I believe your Jan. 22 editorial "Geithner's Tax Code" is wrong to conclude that Tim Geithner's failure to pay payroll taxes for several years "isn't a disqualifying offense." As one who has prepared his own taxes for years, using TurboTax, and who has worked as a contract consultant and had to pay both employer's and employee's share of payroll taxes, I am familiar with the matter at hand. While agreeing that we have an "insane tax code," it is also true that the tax requirement at issue is not horribly complex.

Therefore, it is my view that Mr. Geithner's behavior admits only two possibilities. Either he intentionally committed several years' worth of tax fraud, for which he should face prosecution, or the man is dumber than a box of rocks. In neither case should the job of Treasury Secretary await him. Anyone thinking this was an "innocent" or "honest" mistake is actually saying Mr. Geithner falls into the second of these possibilities, and the person making that assertion probably belongs there, too.

Bob Augusta
Simsbury, Conn.

Aa a tax professional, I have seen many instances of unsophisticated taxpayers making essentially the same error as Tim Geithner. The difference is that what for Mr. Geithner is an "innocent mistake," for Joe the Plumber is an "intentional disregard of the rules and regulations" for which penalties are assessed.

Robert E. Stigger
Oak Park, Ill.

I think Mr. Geithner's plan to boost the economy is perfect. Forget TARP and forget choosing which politically favored banks and industries to save. Simply tell each taxpayer to forget to pay some taxes. This will have a direct impact on spending and will boost consumer confidence

Paul Dembry
Los Gatos, Calif.

My friends employed at the Internal Revenue Service state that if they committed the same or similar violations for even shorter periods of time as Mr. Geithner, on federal, state or local tax laws, they would be terminated, let alone get hired for a new job. And why would anyone now ever have to pay penalties under the "Geithner standard"? Maybe those things should have been considered before the Journal uncharacteristically endorsed another double standard in Washington, D.C.

Jeffrey Felman
Beachwood, Ohio

President Obama should now consider how much Mr. Geithner's confirmation would undermine the strict ethical tone that President Obama's Jan. 21 orders on ethics rules are attempting to create.

Carol Penskar
Orinda, Calif.

Mr. Geithner seems to be a member of the Leona Helmsley culture: "Taxes are only for the little people." What a farce.

Ron Kunzelman
Sun Lakes, Ariz.
L’Affair Geithner is another example of how the American republic (not being a direct democracy) insulates “public servants” from accountability to public opinion. President Obama’s three predecessor must be envying how the political and media elites have closed ranks behind his choice, a show of unquestioning support they did not enjoy.

While Geithner has been attacked by a few right-wing nuts here and abroad, he has also won support from at least some potential right wing critics. The blog Radioactive Liberty praises Geithner as a new symbol of American freedom:
Although many have criticized his minor oversight, I believe that Geithner is just the kind of person that we need in charge of our money. President Obama has made a shrewd choice in selecting this American Patriot to this important government office.

The Treasury Secretary in waiting understands that his money is HIS money and not the government’s money. This is one of the core principles of conservatism. In fact, our country was founded upon a stubborn refusal to pay taxes.
Since everyone expects Geithner to be confirmed, his appointment will give tax protesters a new spokesman in the highest levels of government. Perhaps we’ll see Wesley Snipes doing public service announcements or even a special agent for the Treasury Department.

Saturday, January 24, 2009

A historic week for the Valley and the world

As everyone knows, this is a historic week, not just for Silicon Valley but the world. Twenty-five years ago today, Steve Jobs unveiled the Macintosh at the auditorium of De Anza College, the Cupertino junior college a mile down the road from Apple headquarters. Steve pulled his 20 lb. Macintosh from a bag, and then let the Macintalk speech synthesizer (later starring in Wall-E) do part of the introduction.

MacintoshWhile the original Mac 128 was overpriced by $500 (thanks to John Sculley) and underpowered, it was arguably the most influential personal computer of the past century: it did more to change the direction of the industry than any before or since. One might argue that role belongs to the Lisa, but I believe that since no one bought the $10K computers, without the Mac the industry would have ignored for years the mouse, menus, icons and windows that later brought us Windows. The Mac also brought home the idea that software design matters — consistency of experience across built-in and third-party products is what makes a consumer platform usable.

Looking back to 1984, the Ridley Scott “1984” SuperBowl ad announcing the Macintosh is available from dozens of sites (even including MSN). In response to that ad, I went to my local BusinessLand store and put down my deposit for my first Mac, which came a month or two later. I’ve spent the last 25 years as a Mac owner, 17 of those years at the head of a (proudly) Mac-only software company.

I originally wanted to write about the original intro, the computer, the past 25 years — or at least the coverage — but I realized that was an impossible task. CNET, MacWorld and ComputerWorld have special sections on the 25th anniversary, while eWeek has a slide show and CNN has user-submitted stories. The Merc only has only one main story, but does have PDFs of the original news clips from January 1984. Larry Magid’s 1984 review for the LA Times shows that he really got it, even if he didn’t appreciate how slowwww those floppy drives were.

Perhaps the most personally relevant article was MacWorld’s question of “The best Mac ever,” in which 3 of the 5 experts picked the SE/30:

The Macintosh SE/30 was the pinnacle of the original Mac hardware design. It looked much like its predecessors, but it was far faster—the first all-in-one Mac where the software could really sing.

Sporting every bit as much horsepower as the phenomenally expensive Macintosh IIx, the SE/30 was like a V12 engine shoehorned into a Honda Civic. Though future models with the original upright shape were released, they were all tagged with the derisive moniker Classic. The SE/30 bore no such shame. It was and is the undisputed king of the original, iconic Macs and, therefore, of all Macs for all time.
The SE/30 has fond memories for me, because it was the workhorse for both Palomar Software founder/programmers for several years. Palomar couldn’t afford extra computers, so after Palomar got its first office in 1988, Neil and I would each carry our SE/30 back and forth from home so that we could work in the evening. Later on, when we could afford an extra computer, we would schlep an external hard disk back and forth. The first time I did real software development on a laptop was on Christmas Day 1991, when I used my PowerBook 140 to write the first alpha promised to Eastman Kodak.

A number of articles (such as this one at the Merc) comment about the Mac’s declining influence. One aspect of that goes without saying: many of the Mac’s ideas (themselves copied from the Lisa and Xerox Parc) were copied by Windows and a scad of other computing devices. It was bad for Apple Computer but good for the industry that visual copyrights did not impede these ideas from become ubiquitous in the computing industry.

At a higher level, HCI experts have been saying for years that the Mac is obsolete because we need to get beyond menus and icons. It sounded like a good theoretical argument, but that’s re-fighting last century’s war. The fact is, the heyday of the PC industry was a narrow window at the last quarter of the 20th century, just as the peak of the mainframe/minicomputer industry’s economic and technical importance came between 1964 and 1985 or 1990.

By the Mac’s 35th or 40th anniversary, mobile computing devices will be the dominant form of computing — devices that allow creating and editing any content that we now use a PC for, and also play music, video and communicate with the rest of the world. I don’t know if they’ll run PC operating systems or smartphone operating systems or something else, and whether they’ll be made by Nokia, HP, Sony or someone else. We’ll have our Knowledge Navigator about 10 years late, but with higher resolution and no menu bar.

I think it’s a safe bet that — even if Steve Jobs is gone — Apple will create a few more breakthroughs on the convergence of computers, entertainment and communications devices, if for no other reason than their current strong market (and design) position in each of these segments.

Friday, January 23, 2009

Aggregating UGC

On the WSJ, Carl Bialik writes a very interesting column (and blog) called The Numbers Guy, both of which talk about the use and misuse of numbers to convey information (or psuedo-information).

This morning’s column (inside the paywall) talks about the controversy within the movie critic profession over the use of “star” ratings, and he elaborates on it (outside the paywall) in his blog. In addition to the impact on user generated content (more later), the column caught my attention as the former Arts Dept. editor for The Tech, the MIT student paper.

Both address the issue of reducing everything to one number. At The Tech, we used turkeys instead of stars, reverse coded from 0-5 (no turkeys is best). Other systems use 1-4 or 1-5 stars. So if a movie wins 3/5 stars, is it an average movie across the board, or is it a movie that’s great on some aspects (e.g. performances) and terrible on others (script)?

So this problem is one of “good” being a multi-dimensional measure. and other consumer rating sites seem to be able to compile these multiple dimensions on their UGC and allow buyers to see ratings on the dimensions that matter to them., Consumer Reports and others also have the issue of norming for price. Does 4 stars mean the same for a $50 motel and a $500 hotel? (Or for a $15,000 or $50,000 car). For the AAA diamond system, it’s an absolute scale, but seems to want the rating normed based on value.

As Bialik notes in his column (and an earlier column) the problem at the next level of analysis: aggregating the ratings of multiple reviewers, as is done by Rotten Tomatoes and Metacritic. Does a 3/5 mean everyone gave it a 3, a bell-curve distribution around 3, or a bimodal distribution of all 1 or all 5?

This is nicely (& easily) handled by Amazon, which gives both a mean and a histogram. This works particularly well for polarizing authors like Al Franken or Ann Coulter. However, it doesn’t fix the sampling bias issue — the people who self-select to write a review are not representative of the reading public overall (an issue Bailik notes in his paid article).

One issue that Bialik doesn’t address is weighting the average. For movies, critics who see dozens or hundreds of movies a year usually reward things that “push the envelope,” which normally means some sort of aberrant production values (Blair Witch), script (Curious Case of Benjamin Button) or characters (Boys Don’t Cry). Others are excited by the craft — the production values, acting performance, directing — of the sort that win Oscar® awards.

However, I am plunking down $10 2-4 times a year to be entertained. I want something that I enjoy watching, not something that pushes the envelope. A good example was “You’ve Got Mail,” which is a very nicely done romantic comedy — the ideal date movie — but only got a 62% critic rating. Sure, the plot was predictable, and the ending was pre-ordained, but the character quirks and plot twists were believable and at times funny: not as timeless as Tracey-Hepburn, but as close as a modern-day rendition as Hollywood offers nowadays.

So even if we have an accurate, low variance attribute rating — everyone agrees this is a predictable plot — it doesn’t solve the problem that buyers differ on how important that is. The problem was solved 30+ year ago by Fishbein & Ajzen, who described a subjective utility model with different attribute importance ratings (i.e. weights).

To discern what’s important to each buyer, this seems like a job for a neural network or other self-training system. Again, the Amazon recommendation engine handles this: if I like Al Franken, it shows me Bill Maher and Stephen Colbert; if I like Ann Coulter, it shows me Rush Limbaugh and Bill O’Reilly.

Interestingly, Amazon has very different incentives than the movie sites in aggregating ratings. Rotten Tomatoes or Metacritic want me to linger on the site looking at ads. Amazon wants me to buy something that I like, so I’ll buy more. Whether it’s different incentives or a different scale of revenues, Amazon seems to be much more serious about giving recommendations that are accurate for my tastes.

Perhaps what we need is an open source score aggregation system, one that handles

  • multiple dimensions or rating
  • conveys the distribution of ratings, not just the average
  • fits my own opinions to those of reviewers whose opinions most closely match mine, to give me feedback consistent with my tastes, interests and values.
Slightly off-topic: oddly for a numbers guy, Bailik uses the word “commodify” when he means “commoditize”. Google ranks the latter as 4x as popular. Wikipedia (not the most reliable source) attributes commodify to Marxist political theory, while accurately noting that commoditize is the term used in business.

Remembering the planet Pluto

On Monday’s Tonight show, Jay Leno interviewed the man he said was the smartest guest he’d ever had. (Given he normally interviews starlets, TV actors and politicians, that wouldn’t be hard.)

But in this case, the guest was Neil DeGrasse Tyson who holds a PhD in astrophysics from Columbia. Maybe not a rocket scientist in the literal sense, but in the figurative sense.

Tyson has served on presidential commissions — including the NASA Advisory Council, writes popular and scientific articles, and is director of the Hayden Planetarium in NYC. He was also named the “Sexiest Astrophysicist” by People magazine in 2000.

As is often the case, Dr. Tyson was there to flog his latest book, in this case The Pluto Files: The Rise and Fall of America’s Favorite Planet. In recalling his own role in fueling the controversy (and Pluto’s demotion to planetoid) he mentioned that there was a Facebook group entitled “When I was your age, Pluto was a planet”:

This is a group dedicated to the kids who were taught that Pluto was the 9th planet from the sun!!!!

Pluto, we salute you. (February 18, 1930 - August 24, 2006)
I checked it out the next morning, and I’m proud to say I’m now member 1,546,518 — the first group I’ve joined since joining Facebook over the weekend. The group doesn’t seem to do anything other than collect members, but I imagine it’s not the only group like that on Facebook.

Thursday, January 22, 2009

Mac-loving Obamites

From the Washington Post:

One member of the White House new-media team came to work on Tuesday, right after the swearing-in ceremony, only to discover that it was impossible to know which programs could be updated, or even which computers could be used for which purposes. The team members, accustomed to working on Macintoshes, found computers outfitted with six-year-old versions of Microsoft software. Laptops were scarce, assigned to only a few people in the West Wing. The team was left struggling to put closed captions on online videos.
I suppose this preference for MacBooks should be no surprise, given that Al Gore is a director of Apple Inc.

At the same time, the Post saw the same gaps in the new website that I saw trying to quote the President’s speech:
By late evening, the vaunted new White House Web site did not offer any updated posts about President Obama's busy first day on the job, which included an inaugural prayer service, an open house with the public, and meetings with his economic and national security teams.

Nor did the site reflect the transparency Obama promised to deliver. "The President has not yet issued any executive orders," it stated hours after Obama issued executive orders to tighten ethics rules, enhance Freedom of Information Act rules and freeze the salaries of White House officials who earn more than $100,000.

The site was updated for the first time last night, when information on the executive orders was added. But there were still no pool reports or blog entries.
To tell you the truth, it’s not surprising that it would be hard to switch everything over a few minutes after assuming office. (Sure it can be done but there’s a lot of things that can and apparently did go wrong.)

A less ambitious goal would have been more realistic. As with other things, the new Administration has raised expectations of superhuman perfection, which probably won’t last more than a few months.

Hat tip: Matt Asay, “The Open Road”

Google starving newspaper revenues

Penn law school professor C. Edwin Baker summarizes the problems of newspapers. Much of it is a familiar story: declining revenues that bring layoffs, reduced quality and further declines; a problem of free riders who use the content without paying for it.

He argues that Google is killing newspapers in a zero-sum fight for ad dollars:

Possibly most serious, advertising is a more or less fixed pot. Huge portions of advertising revenue now supports the suppliers of the “search” for all sorts of already-produced information (including product and personal information) rather than journalistic entities which produce news – which is the story of huge capitalization of Google. Internet advertising that basically did not exist thirteen years ago clocked in at $21.2 billion in 2007 – with 41% going to advertising related to “searches” – and the amount is rising rapidly. That compares with annual newspaper advertising of roughly $40 billion, an amount in decline due primarily to this increasing diversion to online advertising. Though advertising always goes down even in minor recessions, even more so in anything like what the country is currently experiencing, the movement to online advertising is of historic significance for the news industry. Essentially the advertising that has long paid for journalism is in irreversible decline.
Unfortunately, Baker has no answer to these systemic problems: his claimed answer, nationalization of the press, is a nonstarter for reasons too numerous to mention in this post.

A better, more decentralized answer may be the efforts of the Public Press Project in San Francisco, whose response to plummeting ad revenues is to build a newspaper without advertising. Their argument (grossly simplified) is that if member supports works for local PBS TV stations, why not a local newspaper?

The US news industry was created by decentralized initiative, and I believe the solutions will have to begin here too (even if reform of the AP may be a prereq to their salvation).

Of course, I may be a little biased, since I know founder Michael Stoll, a journalist and adjunct professor here at SJSU. In fact, I arranged for two management students from our Sbona Honors Program to work with Public Press this semester to help them develop their business model.

The problems of newspapers are the same as they have been for the past decade: if they don’t have a revenue model, they won’t exist. Finding some way to get to paid content is the crux of the problem.

Wednesday, January 21, 2009

Short Circuit sales

Because Circuit City announced Friday that it’s going out of business, last night I decided to stop by a store and see what’s going on.

Sales were at 10-30% off — 10% for most major items, 20% for recorded content, and 30% for accessories. (I think that says more for the margins on the items than their relative demand).

Two guys walking around to each other were complaining about the prices. As one said, “the special prices aren’t all that special.” I would agree that 10% off of list price is beaten by the average weekend special. Indeed, that was the complaint of shoppers interviewed Monday by the LA Times.

However, I spoke to a sales rep in the TV section (10% off) and got a quite different story. He admitted that “We had better prices 2-3 days ago,” when the store still had specials that were advertised before the GOOB was announced.

Still, he said the store was getting 2 truckloads of merchandise to replace all the TVs sold since the GOOB began. The store was nearly out of 32" LCD TVs — their main HDTVs in the $500-$1000 range — and it sounded like they’ll all be gone within a week or so.

I told the sales rep that I thought all the TVs would be gone at 30%, and he winced — since (he said) the top margin on any TV was only 24%. After hearing about the 32" TVs, I moved my prediction forward: I suspect a 20% discount timed for SuperBowl Sunday (Feb. 1) would clear out most of the inventory.

However, if the Mervyn’s sale (also run by a professional liquidator) is any indication, I expect the 10% rate will continue until for at least 3 weekends (Jan. 18, Jan. 25, Feb. 1) before they drop prices again, and they will end February at 30% off.

The employee noted that they will get paid until March 31, and if they sell out early, they don’t have to show up for work. (Smart way for the owner/liquidator to align incentives). So the big discounts will come in March, when most of the high-volume items have been sold.

I probably won’t be back: by the time the discounts get interesting, it will be picked over. I bought most of the home electronics that I needed either upon moving to the Bay Area in 2002 or at the Good Guys liquidation three years ago.

The WSJ notes that this is boom time for liquidators, with lots to sell. However, there is more inventory than the traditional liquidation channels (such as Marshalls and can support: both due to increased supply and falling demand.

With the recession likely to continue past 2009 into 2010, more retail bankruptcies are coming. So, like mortgage brokers during the housing bubble, liquidators will enjoy boom times for a few years before until the economy improves for the rest of us.

Update: Time magazine has an article about the four liquidators clearing out $1.7 billion in inventory.

Tuesday, January 20, 2009

Newspapers won't be saved by Google

Google announced today that it is phasing out PrintAds, with all operations discontinued by March 31. Its CEO’s promise last June to help save newspapers apparently was only valid for one year or the next bad quarterly earnings report, whichever came first.

The move has been interpreted as a cost-cutting move, but in many ways the upside was more important for the newspapers than it ever was for Google. In fact, with PrintAds gone, Google will continue to help destroy the once-omnipotent local media monopolies, by commoditizing them. Now, the newspapers have one less hope for survival and the bad news will keep on coming. (PaidContent notes that the competing Yahoo Newspaper Consortium will continue).

Tuesday also included ominous news from America’s premier newspaper property, the New York Times Company. The parent of the NY Times announced it sold $250 million in convertible debt to the world’s largest man, a politically-connected monopolist, who Time dubbed “an investigative reporter’s dream”: 

Did the New York Times Company have any choice over who put money into the firm? Probably very little. The newspaper industry is viewed as a poor investment. Several newspaper chains are already in the process of liquidation, particularly Journal Register and Gatehouse. The third largest newspaper company, McClatchy (MNI) is in deep trouble. A number of the nation's largest dailies, including the Rocky Mountain News, are for sale and some will be closed if they do not find buyers.
NYTco shareholders were apparently not thrilled at the prospective dilution (or perhaps the terms of the debt), pushing the “A” shares down 7.8% or $72m. (The family-owned class B shares aren’t publicly traded.)

PaidContent notes that the alternatives — dumping distressed properties at depressed prices — were even worse. Of course, pouring money to keep the existing businesses alive assumes that current valuations are near the bottom of a notoriously cyclical industry, rather than a mere waypoint in an irreversible slide towards oblivion. Right now, the trendline clearly supports the latter interpretation.

By coincidence, on Seeking Alpha today Jeff Jarvis offered an imaginative (and relatively complete) list of alternative revenue models for newspapers.

Newspapers have known for years that they will have to make the transition from paper to an online-only business. The imperative is to use their existing revenue streams and (most importantly) supply of unique content to establish a new sustainable revenue model before the printed paper goes away. Otherwise, they will just be one voice in a more crowded, democratic and commoditized 21st century media market — and one with a demoralized workforce trapped by memories of 20th (or 19th) century industry paradigms.

To hope and to dream

After weeks of wall-to-wall Obama-mania — particularly here in the Bay Area — I vowed not to add to clutter. But we turned on the inaugural address for my daughter, because it was something she was too young to understand four years ago and will only have one more to watch before she leaves home.

As with any presidential Big Speech, President Obama’s speech had soaring rhetoric and something to appeal to everyone. As with most such speeches, the encouragement to supporters and digs at rivals were mainly through passing lines, as with the inane phrase “we are ready to lead once more.”†

Overall, I thought it was an inspirational speech, well delivered — no surprise there. It nicely captured American exceptionalism and unlike some, did not endorse the view that the US is an empire in decline. It was not the speech that Al Gore would have given eight years ago, acknowledging the reality that the world has changed:

We will not apologize for our way of life, nor will we waver in its defense, and for those who seek to advance their aims by inducing terror and slaughtering innocents, we say to you now that our spirit is stronger and cannot be broken; you cannot outlast us, and we will defeat you.
To me, the meat of the speech was an optimistic paragraph in the middle. I agreed with the first part:
We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished.
However, the remainder of the passage seems at best a hope, and more likely an unrealizable dream:
But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed. Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America.
I can believe that the president would like to see that, but how much of his personal prestige and power is he willing to stake to make it happen?

He has 535 opponents in Congress, led by members of his own party, and there are other discouraging signs. Congress has been putting off unpleasant decisions for decades, including saving Social Security, fixing public schools and the twin fiscal and trade deficits. Most of all, Federal spending got worse under Bush 43, exacerbated by the 110th Congress — which vowed to end earmarks and pork-barrel spending and instead increased them.

The new Administration has promised to fix earmarks. However, the proposed fiscal stimulus package is built around the idea of government spending on pet projects in all 435 Congressional districts, and so the only question is whether the “pork” will be $2 billion or $20 billion or $200 billion.

Specifics and actions will be required to make a reality out of this dream of renewal. So far, the markets are not impressed, with the Dow down 2.5% and the S&P 500 down 3.5%.

† The US has been a world leader since 91 years, since April 6, 1917, and the leader of the free world since June 1948 if not 1941. People can (and will) argue as to whether it has been leading in the right direction, on the right issues, or with the right tactics (other remarks by the president argued this latter point). However, it would be intellectually dishonest to argue that the US has not shown leadership during the past 8, 16 or 28 years.

Monday, January 19, 2009

Is that all?

I was underwhelmed by the (long rumored) Dec. 26 announcement about iPhone sales at Walmart.† After inspecting the iPhone sales activities at two different Walmarts in San José, two weeks apart, I am now under-underwhelmed.

At both stores, there were signs over the theft detectors at the door — two weeks ago they were more prominent, but today they shared billing with the promo for Open Season 2 (new on DVD!)

While the iPhones were nowhere in site, if you ask one of the “greeters” at the door, they’ll direct you to the opposite side of the store, where electronics are. The Walmart sales experience was every bit as downmarket as I feared.

Both stores sold phones (with contracts) from 3 of the big 4 carriers. The first one had all but Sprint and eight (8!) prepaid carriers, either MVNOs like Virgin or the prepaid arms of the big four. Today’s display had all but Verizon, and six prepaid carriers. Among the T-Mobile phones on display today were the G1 and the a Sidekick, each with the keyboard half of the phone locked down and the screen half stolen by some miscreant.

At both Walmarts, there was a dedicated iPhone display, maybe 3' wide and 18" high; today’s faced away from the entry, while the earlier one faced towards the entry. The display had a stand for a phone, but two weeks ago the phone was missing. Today there was a live iPhone, with real applications, but without any 3G signal (perhaps because it was deep into the large store).

Both stores also had point-of-sale promotions for competing phones. Today it was for the Blackberry Pearl Flip sold by T-Mobile. Two weeks ago, it was for a Verizon phone that claimed to be the “hottest” touchscreen phone (not even a Storm, but something generic Korean phone).

I didn’t see anyone looking at the iPhone display at either store. However, today I did hear this exchange between two electronics clerks:

Associate #1: “I sold two iPhones the other day.”
Associate #2: “I sold one.”
To make crude guesstimate, if every Walmart electronics department in the country sold one phone a day, 52 weeks a year, that would be about 910,000 phones a year, or about 10% of Apple’s projected global sales for 2009. So no matter how lame the display, if it increases sales by 10%, it was certainly worth it.

Of course, this is only guesstimate. In the two years since it was announced, iPhone demand has highly cyclical, with most phones sold in the quarter after its release. There is also the question of cannibalization — how many of these iPhones would have been sold through another channel? So my guess is that a net gain of 910,000 is most likely on the high side.

† Apparently the company is named “Wal-Mart Stores, Inc.” but the retail stores are named “Walmart.”

Sunday, January 18, 2009

A good weekend for product placement

The three of us spent two long days at the internationally famous Santa Clara Swim Center, killing time while waiting for my daughter to swim seven races. As with swim parents everywhere, we came home beat, wanting to vegetate, which for our generation means watching some mindless television.

Tonight it was Extreme Makeover: Home Edition, where host Ty Pennington gets the neighbors amp’d up for when a lucky family returns home to see their new mansion, in this case for a family of five in central Pennsylvania.

As always EMHE has a heavy dose of product placement for Sears, which is a major sponsor and has been very successful from its efforts. Product placement has been a major theme for the show for the past four years, and the website even has an “as featured on” section that includes 16 specific products from tonight’s episode. (Fittingly, the website also has ads for the local builder who donates the labor for each home).

Tonight’s show ended with the parents and three boys piling into a Ford Fusion Hybrid, considerably more obvious in its placement than most episodes. While this makes everyone aware of the new hybrid, this is more akin to winning the car on Wheel of Fortune, not the president mentioning your product in the midst of an international crisis.)

Book 'em Danno!After that, we watched a 1968 episode of Hawaii Five-O, in which every airport shot included a United logo and the closing credits mentioned obligatory “promotion considerations …” While United dominated flights to Hawaii in the 1950s and the 1960s, it did little to forestall the competition it continuously faced on the routes.

Last night, 2/3 of our family — the Food Network addicts — turned to an episode of “My Life in Food” involving weight loss. As part of the episode, they mentioned the help by Taco Bell with its “Fresco Menu.” I am a regular customer of Taco Bell of at least 35 years’ standing, and knew about the initiative — trying to improve its reputation with health Nazis by reducing the calories on all its products by replacing cheese with tomatoes.

For me, lunch is a commodity, in which I satisfice on quality and optimize on price and convenience. Last night’s reminder got me today to try their “new” products, the ones I already knew about. For the same $1.19, I got roughly the same volume of taco but reducing calories by 60 and fat by 4g.

Theoretically, product placement is a better business model for TV shows (or movies), because they are harder to zap than commercials, while if the content is entirely ad-supported, no the producers don’t care how often it’s copied or stolen.

However, as with the testimonial ad, product placement requires a credible spokesman to be effective. And while it’s playing an increasing role in supporting Hollywood productions, placement becomes less effective the more it is used. While product placement may end up shoring short advertorials (like BMW’s “The Hire”), it’s hard to see how they will ever be more than a supplemental funding source for top tier entertainment.

Saturday, January 17, 2009

Sam Walton is rolling in his grave

When I’m up late, I’ll turn anything on the idiot box rather than have silence. Early Thursday morning, it was Charlie Rose, who was interviewing H. Lee Scott, Jr., outgoing CEO of Wal-Mart. (During the show, the running gag was that Rose kept reminding Scott that there’s an opening for Commerce Secretary).

There were a few points where I agreed with Scott. For example, he and Rose were noting that the best shouldn’t be the enemy of the good, or, as Scott put it, “in business, you have to be generally correct: you don’t have to be perfect.”

The only problem with that quote was the context, which was instituting new government policies. Since we already expect government to captive of special interests, pork barrels, and politicians’ self-protection, [link] lowering our expectations further — from imperfect to mediocrity. I would have felt better if at least he’d identified first principles for economic policy, notably “first do no harm”.

However, I parted ways with Scott (not surprisingly) over one of the few areas he’s praised by left-wing activists: his push for greater government involvement in healthcare. About 26 minutes into the interview, Rose asked him about his views on healthcare.

Scott argued that government should mandate (or provide) healthcare for everyone, rather than impose a mandate only on large companies. Because “91-92%” of Wal-Mart “associates” have healthcare already, the he argued that the problem is small business and the self-employed. He predicted that in the next few years that “Those of us who have health insurance are going to be at a competitive disadvantage,” i.e. a race to the bottom.

If that point wasn’t persuasive enough, he then argued that a government failure to regulate small businesses would hurt the American economy because “large exporters” like Boeing would be at a disadvantage. Last time I checked, Boeing doesn’t compete with startups, but rather against a MNC with 50,000+ employees headquartered in the country that brought us socialism.

As a private citizen, Scott may legitimately believe that more healthcare mandates are better. However, as the CEO of the world’s largest company, Scott is not conveying his personal opinion but that of the company he represents.

Scott is holding in trust the seat made possible by the entrepreneurial imagination and tireless efforts of the late Sam Walton. The idea that his successor would advocate more government regulation to hurt competitors must have him turning in his grave.

Don’t get me wrong. Scott is no different than any other manager who’s work his/her way to the top of a big corporation. The selection processes reward politicians (kissing up, making peace), bureaucracy (consummate CYA) or worse yet, the overlap of the two in selective presentation of the truth to influence perceptions.

I realize that a good manager can preserve the value created by entrepreneurs, but the element of personal risk (or value added) is rarely there. Good CEOs are readily available in the labor market (even if great ones aren’t), with the main problem being that boards need to separate competent ones from those who are merely successful politicians. I gather that Scott has been an above-average manager (in an incomparably complex operation) and is now doing a “victory lap” prior to his retirement.

By comparison, entrepreneurs the ones who create value by doing something that hasn't been done before. They might offer something that people didn’t know they needed, like Steve Jobs, Juan Trippe or Fred Smith. Or they might find a way to deliver it more affordably than customers (or competitors) ever thought possible, like Michael Dell, Herb Kelleher or Sam Walton.

Entrepreneurs often continue as entrepreneurial leaders of their big companies, unless they’re shoved aside on the theory that the company needs a “real manager”. Clearly some founders develop the skills to grow their companies into the Fortune 500. In other cases, the founder grew into the job; it worked out for decades for Microsoft and Wal-Mart shareholders (among others).

Of course, successful entrepreneurs — nothing if not confident — often overstay their time. The visionaries have big ideas for time that has past. In ICT sector, we see this over and over again — tech entrepreneurs navigating a turbulent era of high uncertainty and high growth find they must cope with commoditized competition where pinching pennies is the norm. Exhibit A would be DEC founder Ken Olsen, the ultimate entrepreneur who failed to cope with the decline of the minicomputer market.

Friday, January 16, 2009

Bye bye Circuit City

Circuit City announced today that it failed to find a way to save the electronics chain. Having closed 155 stores in the past two months, the remaining 567 stores and 34,000 employees will be history in about 10 weeks’ time.

Circuit City had its fans and detractors; I was somewhere in between. Although I usually shop for electronics on price, I found it a reasonable tradeoff between variety and ease of use: Radio Shack is too small and Best Buy is too big. I liked Good Guys better — they had more personality — but they had even less scale and ran their liquidation during Xmas 2005.

Fool Rick Munarriz marks its decision two years ago to fire its highest productivity (and highest paid) sales reps as the beginning of the end. Don Tennant of Computerworld makes a related argument that it under-invested in knowledgeable sales staff.

Of course, there is no one single cause of its demise. But my guess that its once healthy margins were squeezed the same way as with Tower Records:

  1. As with other bricks and mortar stores, online selling commoditized distribution: the variety that Circuit City once offered was easily surpassed by online sellers.
  2. Online retailing facilitates price competition
  3. Wal-Mart has increased its product selection (and number of stores), providing a lower-cost alternative for those who don’t want to wait for the UPS driver to deliver.
This is clearly a big win for BestBuy and Wal-Mart, who will have a clear field going forward — although also a warning to further improve their website sales.

For Radio Shack, this seems both like an opportunity and a temptation. There will be markets that need more choice and competition in mid-range electronics products, which could provide growth. At the same time, Radio Shack has survived by largely avoiding large inventories of high-price, short-lifespan products, a model that fits its relatively slow inventory turnover.

One CEO who subtracted value

Adding a new spin to a story about how Microsoft hopes to do a search deal with new Yahoo CEO Carol Bartz, a front page story on the Wall Street Journal this morning highlights all the ways that CEO Steve Ballmer missed the boat to challenge (or even pre-empt) his current rival for Total World Domination.

According to the story, Microsoft had two other chances to have its own equivalent of Google AdWords prior to last year’s failed attempt to buy Yahoo. The first was called Keywords, which a prototype service developed inhouse in 2000, and a few customers who signed up. The article has mini-profiles of Scott Banister, Ali Partovi and Bill Bliss, who once pushed the internal effort before giving up.

(The story of Microsoft killing Keywords reminds me of Apple killing “Star Trek,” a demonstration project that ported Mac OS to Intel chips 14 years before Apple finally made the switch. In my dissertation, I considered it emblematic of the poor executive leadership at Apple from 1985-1997.)

The second opportunity was a 2003 opportunity to buy Overture Services, a pioneer in targeting ads to search. The company was instead bought by Yahoo, and five years later was a major reason why Microsoft wanted to buy Yahoo.

Ballmer is supposed to the the more accommodating of the duo that ran Microsoft for near all of the past three decades. One might argue that he was the less visionary, but the article (and common sense) suggest that founder Bill Gates agreed with Ballmer on these decisions.

I think this illustrates two key points about CEOs knowing their own limitations.

First, it’s essential that top execs both encourage and support bottom-up innovation and initiative. This harnesses (and motivates) the talents of the entire company to support its growth, and recognizes that the boss can’t have all the possible answers. When they come up with a good (and feasible) idea, however, the executives have to give it a try — or you won’t get any more.

Second, success is dangerous because it both breeds complacency and locks executives into their winning paradigm. Gates and Ballmer were part of the PC generation, and (unlike their young engineers) couldn’t see that eventually software revenues would decline and be replaced by ads sales on the Internet. So if the CEO can’t adjust to understanding these new paradigms, (s)he needs to step aside for someone who can.

The Microsoft search miscues also have a subtheme about being willing to cannibalize your own revenues before someone else does, but that’s an old story — Microsoft’s major challenge since the triumph of Windows 95.

Thursday, January 15, 2009

Justifiably angry BofA shareholders

Fortune reports this afternoon how NationsBank† Bank of America shareholders (like me) are understandably angry about the (apparently) lousy due diligence done in the September acquisition of Merrill Lynch.

The M&A consultants got $20m for a weekend’s worth of work, but the more serious problem is the contribution of the Merrill boat anchor to the $95b drop in BofA market cap since then (or the $70b lost since the election).

Unfortunately, the accountability here is pretty much nil. The BofA board can say this is a one-time deal, based on incomplete information during turbulent times — which is all true. The purchase was a big risk, and it turned out badly.

Less convincing is when they were sold a bill of goods on Merrill: making the tough decisions is supposedly why they get so much money. They made the decision to buy — not the consultant or the shareholders. Even if there were recourse against the consultant, it would be for some fraction of the fees, not the incidental and consequential damages.

Absent Merrill, BofA would probably be the largest healthy bank in America, the unchallenged position it enjoyed in the 1960s and 1970s. Now many suspect that it’s the next Citibank.

Bank of America was a San Francisco-based bank founded in 1904 (as the Bank of Italy) by A.P. Giannini. Once the world’s largest commercial bank, it disappeared when its brand and assets were acquired by Charlotte-based NationsBank in 1998.

Netbooks in the news

In his monologue last night, late night comedian Jay Leno decided to mention the new Sony P-series notebooks introduced last week at CES. (They are the same size as a netbook but at twice the price.)

Leno’s analysis:

Sony announced they’re coming out with a new computer that weighs just 1.4 pounds — weighs less than a pound and a half.

They say this will be the lightest computer ever on which Windows Vista will not work.
(It’s at 7:30 into the video if you want to see it.)

R challenge to proprietary stat software

The NY Times published a glowing story Tuesday (with a follow up blog posting Wednesday) on the success of R, an open source project that has grown to fill most statistical software needs.

R was launched in 1996 as a knockoff of the Bell Labs statistical programming language, S. As with Apache or Perl, much of the value comes from add-on packages, and it has grown a remarkable library of donated packages stored at CRAN, which is modeled on Perl’s CPAN.

I first came across R when running the MacStats website in the late 1990s, and recommended it to fellow academics (interested in stat software and notoriously cheap) back in August 2000.

From an economic or organizational standpoint, R is just a new act of the original open source story: user-innovators solving their own problems. Or, as Eric Raymond observed a decade ago, good software (especially open source software) comes from “scratching a developer's personal itch.” That scratching gave us Project GNU, with programming language compilers, a text editor, and gradually bits and pieces of an operating system.

Once upon a time, statisticians had to write their own Fortran programs to solve their analyses. Even today, most have better math and computer skills than the average college graduate.

So R — as with compilers — had a large pool of potential users who could write their own code. (Unlike, say, those who write children’s edutainment software). Also, university professors have autonomy over use of their time — organizational slack — but often not a lot of discretionary cash. So spending a few days to write a library — rather than buying a $100 or $500 off-the-shelf package — made certain economic sense.

When I was first evaluating R in 2000, the problem was the lack of a GUI. Statistics teachers often could program but undergraduate psych (or business) students could not, nor would they be keen on navigating a line-oriented program.

To make a GUI solution available, R had a Windows version, and started on Mac OS X with an X11 (Unix workstation GUI) implementation. Now it has a native UI version for OS X, in addition to Windows, Linux (4 flavors) and Solaris. It has scientific, social science, probability and domain-specific statistical packages contributed by users. Where once social scientists fought to find any implementation of partial least squares — since Herman Wold, the implementor of the original PLS package, died in 1992 — there are now at least 4 PLS packages available (free) for R.

When I was recommending R back in 2000, it was rough but obviously ambitious in its goals. It’s gratifying to see how it’s evolved to success (and fame), even if it doesn’t teach us anything new about strategies for growing autonomous open source communities.

Wednesday, January 14, 2009

Steve Jobs' medical leave

AP and others are reporting Steve Jobs’ decision to take a medical leave of absence for the next 5½ months. InformationWeek (from Silicon Alley Insider) reprints the email Jobs sent to coworkers. The key excerpts:

During the past week I have learned that my health-related issues are more complex than I originally thought.

In order to take myself out of the limelight and focus on my health, and to allow everyone at Apple to focus on delivering extraordinary products, I have decided to take a medical leave of absence until the end of June.

I have asked Tim Cook to be responsible for Apple's day to day operations, and I know he and the rest of the executive management team will do a great job. As CEO, I plan to remain involved in major strategic decisions while I am out.
As before, our prayers go with Jobs and his family.

Bye bye Nortel

Once North America’s 2nd largest telecom equipment maker, Ontario-based Nortel Networks Corp. filed for bankruptcy this morning. The expectation is that the company will be sold off in pieces to the highest bidder.

Apparently the proximate cause was a (US) $107m interest payment due tomorrow. Another factor was today’s expiration of a 30-day waiver granted by Export Development Canada on a (US) $750m line of credit — a waiver necessary to use the line of credit after Moody’s downgraded Nortel debt to junk bond status. In its bankruptcy filing, Nortel reported that it owes $187m on that line of credit.

While all B2B firms are facing cutbacks on capital goods orders, Nortel had a particularly bad 2008. Its shares fell more than 95% in 2008 and it was facing delisting on the NYSE. Its September plan to sell off the two units with the highest potential growth — Metro Ethernet and its 4G (LTE) operations — were said to have rattled buyers worried about the longterm viability of the associated product lines.

My guess is that buyers of multimillion dollar infrastructure were spooked because they can read the papers: Nortel has lost nearly $7 billion in the three years that Mike Zafirovski has been CEO. Nortel’s 2006 decision to sell its W-CDMA base station operations to Alcatel was also not a sign of strength for a company that claims to be serious about LTE, the 4G successor to W-CDMA.

In happier times, I would expect that Motorola would be interested in Nortel’s operations, but this is also looming as a bad week for Motorola as well.. Zafirovski is former COO and President at Motorola, and so would know many of the key players there. Motorola’s 4G wireless base station operations are too small for it to make the top ranks of LTE vendors. Motorola and Nortel had a brief (CDMA) infrastructure joint venture in the early 1990s, and back in 2002 there was speculation about some form of combination.

One thing is clear: the death of the 113-year-old former Western Electric subsidiary will be a major blow to Canadian national pride. The company has consistently been the country’s largest R&D spender — still 6x as big as Research in Motion — although increasingly that R&D has been sent offshore to China and other foreign subsidiaries.

Tuesday, January 13, 2009

Best Yahoo news in years

Yahoo’s long search for a new CEO is over, and for once, I think they got it right. Yahoo today hired Carol Bartz, the chairman of the board (and former CEO) of Autodesk.

Bartz has real management skills and experience — unlike the Yahoo (or Google) founders. She knows something about a Silicon Valley company and managing technology development, unlike Terry Semel. In addition to competence and abilities, according to those who know her, she’s someone of unquestioned personal integrity.

There are two common criticisms of her. One is that it’s not clear how much she deserves for Autodesk’ success. It’s true, that it often hard (if not impossible) to separate the CEO from the hand that he/she has been dealt: achieving scucess as CEO of GM is undenaibly harder than being CEO of Toyota or Honda.

For every Steve Jobs or Lou Gerstner — CEOs who clearly turned a losing hand into a winning hand — there are plenty who were in the right place at the right time, and thus it’s hard to establish whether they added value or just avoided subtracting value. A good example might be Eric Schmidt, at least when he was CEO during the go-go Google years of 2001-2007. (We’ll see how he handles the next few years).

The second rap is that running a CAD software company doesn’t prepare Bartz for running Yahoo. Take this Wall Street Journal quote by stock analyst Martin Peers, whose only praise is that she’d sell the company in a heartbeat:

At first glance, Yahoo's choice of Carol Bartz isn't exactly inspiring.

The former Autodesk CEO is a capable Silicon Valley executive with solid management experience who should restore some order to Yahoo. That is crucial as the Internet company copes with what's shaping up to the worst recession in decades.

But there is a world of difference between the computer-aided design industry inhabited by Autodesk – Ms. Bartz's professional home for 14 years or so – and the ad-supported Web media business occupied by Yahoo.
This is a laughable criticism. Yahoo tried a media executive, that certainly didn’t work.

What was Schmidt’s qualification to be Google CEO? He was #2 man at an enterprise computer systems company, and then #1 man at a dying PC networking software company. That makes him more qualified than the CEO of a successful Bay Area software company? (We won’t talk about Lou Gerstner, a credit card salesman).

In addition to Autodesk, Bartz is also also a director of Cisco and Intel — a front row seat on the web. Yes, she hasn’t done been an Internet CEO before, but who has? Do you want to hire the head of Microsoft’s, which has been unable to take Microsoft’s billions of dollars and customers and catch Yahoo, let alone Google? Short of a Schmidt or Steve Jobs, is there another tech executive who’s got a stellar record of running a recent tech company (and is available)?

It’s tough to be CEO of a large established tech company: you have to find a way to balance control and process against decentralized initiative and innovation. Too much of the former, and you’re an HP or pre-Gerstner IBM; too much of the latter, and you’re Apple of the Jobs I and then Sculley eras (“What’s the difference between Apple and a Boy Scout troop? The scouts have adult supervision.”)

The truth is, she gets tech, she gets the tech culture, she understands how to manage an innovative software-based company — something Yahoo once was and hopes to be again. Her discussion of “fail-fast-forward” shows that she knows how to both encourage and manage innovation and risk-taking in a large established tech company.

She’s got the job, so what does she do next? I’ll assume she’s not just prettying things up to sell the company in 2009, but create value long term.

She’s not asking for my advice, but if she did, here is what would I recommend:
  • In the long term, the success of Yahoo (like Google’s) is tied to leveraging economies of scope — continuing related diversification to build the Internet equivalent of a systems company, where the whole is greater than the sum of the parts. That will take 2-5 years to really show results.
  • In the short term, Yahoo needs to size up the point products; that’s what’s suffered most (particularly in terms of business buyer confidence) from the recent turmoil. Of the various offerings, see which ones were/still are winners and what resources they need to succeed over the next 18 months. Until Yahoo has a new strategy, it needs to protect and strengthen winners Yahoo mail, Messenger and Flickr to keep marketshare and mindshare among its customers.
  • Reach out — to employees, to customers, to the ecosystem of complementors, perhaps even to individual website authors who embed a Yahoo widget. Meet in person, post a video, send an email. The message should be “Yahoo has done great things and will do so again, but we need your ideas, suggestions, assistance — and patience.” Hire key aides in the office of the CEO to be a conduit and advocate for each of the major class of external stakeholders.
  • Do a better job of monetizing search: if not the deal with Google or being acquired by Microsoft, how else can it raise its yield to approach Google’s?
  • Find new areas to innovate (or buy successful startups). Yahoo lacks the revenues to go head to head with Google in search, but that doesn’t mean it can’t gain advantage over Google in mobile (where it once led), social networking, or other opportunities that are ripening right now.
I don’t know if she’ll succeed. Perhaps she has a personality quirk none of us know about. Perhaps her middle managers hide the truth until too late. Perhaps the company can’t be saved. But if anyone can make it work, I believe Carol Bartz can.