Disruptive Tendencies

Microsoft: SteveB or Not SteveB

That is the question.

As I saw Apple reporting record numbers yesterday, I was reminded that nearly thirteen years ago, Microsoft invested $150m in Apple to help keep it afloat because it needed to maintain the semblance that it had “competitors”? Be careful what you wish for!

In July 1997, prior to the Microsoft investment, AAPL was trading at $4.375 (split-adjusted). Overnight, it was up to $258.00, a 58X gain in twelve and a half years. Had Microsoft held onto its shares, they would be worth $8.8b in the open market today, or 26% of the cash on its Balance Sheet as at Q3/2010.

When Microsoft made its investment, its shares were trading at $17.50, and today? They closed up overnight to $31.50, up almost 1.8X over the same period as Apple’s 58X gain. Apple’s market cap today is $234b to Microsoft’s $275b. How times have changed!

It’s interesting to look at other things that were going on around the same time as Microsoft was investing in Apple.

1997 was also the year that Microsoft entered the mobile device market, with the release of Windows CE. This gave them a ten-year head start on the iPhone and a twelve-year head-start on Android! It predated RIM’s IPO. And today? Windows Mobile market share is Palm-esque, and Microsoft is betting on Windows Phone Series 7 to rejuvenate its mobile business. But if branding and momentum are any indication, it seems like a real longshot.

I’ve sat through many Microsoft Executive Briefings, dating back to 1997. Over this period, I have heard it said that Microsoft spends “$1m/hour on research”. I have seen presentations from Microsoft Research staff describing and demonstrating technologies like ClearType (also announced in 1997), a sub-pixel rendering technology designed to improve readability of rendered type on screen.  The obvious application (and one described in the early presentations) was eReaders. In 2007, ten years later, Amazon released the Kindle, ostensibly revolutionizing the delivery of content and forever changing the economics of publishing. Where’s Microsoft at this inflection point? Nowhere to be found.

What other market disruptions has Microsoft missed? (In no particular order)

Search is an obvious one. While Microsoft (and others), was focused on search technology, Google was figuring out that “Search” was all about advertising and catalysed a massive disruption in the media space, billions of dollars in revenue for Google, and hundreds of billions of dollars in shareholder value.

Maps and location services is another one. While Microsoft was focused on producing and selling CDs of MapPoint (a model it still clings to today which it “offers” at $245 on-line), Google was out producing high-resolution street-level images and has catalysed another disruption in location-based services. Today, mobile location is front and center on the Droid platform (and on Droid devices), on iPhones, and incorporated into applications across both ecosystems.

Set-Top Boxes and “owning the living room” Also in 1997, Microsoft acquired WebTV for $503m, predating the launch of Tivo. But while Microsoft apparently struggled with the thought of an appliance that wasn’t Windows-based PC (and encumbered by its emphasis on 3^rd-party OEMs to build on its platform), WebTV evolved to MSN TV (anyone remember this?!?) and has completely disappeared today.

SaaS is one to which Microsoft paid lip service throughout the late ‘90’s with its .NET push. But while it was evangelizing .NET (and SOAP, XML, web services), it was acquiring companies like Navision and Axapta (in 2002 for $1.4b) to expand its CRM and ERP offerings. But was it web-based like Saleforce.com which was founded in 1999 and which didn’t go public until mid-2004? Once again, Microsoft didn’t want to jeopardise Windows Server licenses, so it failed to embrace a market disruption despite having ample warning that it was coming.

Media Players created a seismic event and a brand new market that Microsoft completely missed. While it was focused on defending the tight integration of Windows Media Player in anti-trust lawsuits (in a vain attempt to preserve its “Windows” franchise), Apple came out with iTunes on Windows. More importantly, however, was that Apple also created the iPod, the Trojan Horse that enabled the iPhone.

Developers and App Stores: Microsoft has known since the early battles for OS supremacy (against MAC and OS2), that the selection of a platform is driven by application support. Even with a 30-year history of supporting software developers with incredibly rich tools to build 3^rd-party apps, Microsoft never provided a route to market for developers as Apple has done with the App Store. Apple also figured out how to monetise content and through the creation of a distribution system (iTunes Store), got people comfortable with micro-payments. What’s the difference between .99 for a song or an app? Ultimately, not a thing.

Obviously, there are other examples too. Microsoft completely underestimated the impact of open-source software, missing Linux, Apache, MySQL, etc. It evangelised tablets, but from a Windows bias. It would seem that Apple (and soon others) will trump Microsoft here as well.

It is fair to say, that Microsoft is losing on all fronts.

While it was focused on fighting the DOJ battle, it may ultimately have lost the war. Some, including “the late Nobel economist Milton Friedman believed that the antitrust case against Microsoft set a dangerous precedent that foreshadowed increasing government regulation of what was formerly an industry that was relatively free of government intrusion and that future technological progress in the industry will be impeded as a result.”

I have to agree. The government’s action against Microsoft was ill-advised, in that it is irrelevant that Microsoft may have had a monopoly on the desktop OS. The market isn’t stagnant. Some, like Apple with iTunes and Google with a toolbar, found ways to work within the constraints of a “Windows monopoly”, and still thrive. Others, like Salesforce.com just changed the rules.

Microsoft once had mojo but, for the past decade, has behaved like a neutered puppy. Where it was once aggressive and nimble, today it is passive and slow.

When Bill Gates relinquished the CEO reins to Steve Ballmer in January 2000, Microsoft’s stock was at around $56. With Steve B at the helm, the company has delivered a -44% return, despite being a cash flow machine and having a Balance Sheet that is (was) second to none.

 

If a patient’s ECG flatlined like Microsoft’s stock price, someone would call for the crash cart, get out the defibrillator and try to shock the patient back to normal rhythm. Where’s the crash cart in Redmond?

With a record of having missed so many opportunities to create new markets, where does the buck stop?

SteveB or not SteveB? That is the question.

That’s my .02!

Martin Suter

Skype - Joltid Licensing Dispute: Epic M&A Screw-up?

eBay must be ruing the day that it signed the M&A deal to buy Skype for $2.6b, in addition to an additional $530m as part of the earn-out provisions. Its original vision of incorporating Skype functionality into its auctions never happened. Despite that, Skype has proven itself to be quite interesting as a standalone entity, with some value potentially to be recouped via a spin-out IPO. However based on an eBay 10-Q form filed with the SEC on 7/30/2009, this is now at risk over a dispute over a license.

It seems that some of the core functionality within Skype is based on peer-to-peer software licensed from Joltid, a company also controlled by the founders of Skype, Niklas Zennstrom and Janus Friis. So if I get this right, Joltid entered into a non-arm’s length license with Skype (pre-acquisition), a company that Zennstrom and Friis also controlled. When eBay acquired Skype, it would have known that while it was “buying” Skype, it wasn’t buying Skype source code, it was licensing it from Joltid. Given the amount of money involved in the deal, and the fact that the principals were the same, insisting on a perpetual, fully paid up license, in some Field of Use (voice, IM and video applications) with rights to derivatives would seem to have been very do-able.

Instead, it appears that Zennstrom and Friis pocketed a boatload of eBay cash, and retained control of Skype’s destiny via a licensing agreement. Now with the M&A (and liquidity) at risk, eBay is now over a barrel. Negotiate and pay for that fully paid up license, re-write everything, or write it all off as the worst deal of the century. OK, maybe that’s overstating it, the Time Warner-AOL deal sucked pretty badly too.

I’ve been involved with transactions that have nearly fallen apart at the eleventh hour because of legacy tech transfer licenses. “What do you mean we’ll have to pay 4% royalties ad infinitum? We’re buying the company!” When it gets to this stage and a deal’s at risk, the original licensor has all of the leverage, and will often be “bought off”, at the expense of the shareholders, to make the issue go away so the deal can get done.

Having negotiated multiple technology transfer and M&A deals, I have learned that it is imperative to construct the tech transfer deal with M&A in mind. Exclusivity in a well-defined Field, rights to Derivative Works, Non-Assertion of IP rights, a built-in cap or royalty buy-out to convert to a license in perpetuity, are all essential. Of course, in a non-arm’s length licensing agreement, like that between Joltid and Skype, the license terms would have been very different, but in this case it is incumbent on the acquirer to recognise this and force the issue while they have the leverage.

In hindsight, many would agree, this acquisition missed the mark strategically, resulting in a $1.43b writedown. But it’s hard to fault big, bold plays with the potential to break new ground. I have a deep admiration for those involved in transactions like that. But a key takeaway is the tactical execution by eBay’s M&A team appears to have missed the inherent conflicts of interest and let slide the licensing agreement with Joltid. Now, with no leverage, it’s biting them hard. Caveat emptor!

That’s my .02!

Martin Suter

(martin.suter at iplicensing.net)

Mobilizing Web 2.0

(Originally posted at http://www.von.com/blogs/guest/2008/11/mobilizing-web-2-0.aspx )

The launch of the iPhone by Apple and AT&T in June 2007 was a seminal event in the evolution of the mobile Internet. For the first time, a handheld device delivered much of the usability and functionality that is available to laptop and PC users, in a form factor and interface that people wanted to use. The iPhone allows users to stream YouTube, purchase from the iStore, upload pictures to Facebook, and of course, make plain old phone calls.

Entire ecosystems are being enabled, as we speak, by companies like Apple, Google and RIM Blackberry releasing software development kits (SDKs), and creating a revenue-sharing business model that gives these developers a route to market (Apple App Store). Marquee VCs, like Kleiner Perkins, are committing hundreds of millions of dollars to fund startups focused narrowly on Mobile Web 2.0 application development.

The Mobile Internet is happening. Now.

But all is not idyllic. Many iPhone users report being frustrated by the limitations of current cellular networks. In many respects, it’s analogous to driving your Ferrari over a dirt road. Much of the functionality described above is only available over a Wi-Fi network, when available.

A short-term answer for the Mobile Internet is more ubiquitous Wi-Fi. We’re not advocating blanket, citywide coverage, but rather strategic deployments in areas where it makes sense to do so. This may be as simple as re-thinking the hotspot coverage area — perhaps placing a high-powered, highly sensitive access point on the outside of a location, rather than placing a low-power, enterprise AP inside. Conceivably, this simple step would provide coverage inside the establishment and its patio, just as the indoor AP, but it also could create a “virtual patio” covering about 10 times the area of the indoor AP alone. If you think about it, the location’s SSID could be used as an advertising beacon, pulling in more customers from the surrounding area, not simply serving those customers already inside the establishment.

Other locations where it might make sense to deploy Wi-Fi access include convention centers, hotels and resorts, sporting venues, commuter rail stations and lines, shopping malls, urban cores, multi-tenant dwelling units, etc.

The long-term bet carriers are making is LTE, 4G. In April 2008, the FCC raised $19.6 billion from 4G spectrum auctions and the major LTE equipment providers have agreed on an intellectual property model to accelerate adoption. 4G trials are expected to begin in 2010, with wide-scale rollouts beginning in the 2012 timeframe.

Whether Wi-Fi, WiMAX or LTE, or most likely some combination of all three, the challenge of deploying a network with the capacity capable of delivering applications and content to many of these devices simultaneously, at rates approaching 100mbps, is not trivial. Wireless networks are constrained by the laws of physics, notwithstanding the unfortunate hype that inflates expectations with every new generation of technologies. The infamous WiMAX promise of “70mbps over 70 kilometers” sounded good to the marketing department, but the reality is that this is an either/or proposition. Distance and power dictate data rate. Handheld devices are, by definition, low-powered, range-limited devices. For 4G to deliver on anything approaching its promise, much smaller cells (micro and picocells) will need to be used outdoors, with even smaller femtocells expected to provide an answer indoors, in the home and office.

That’s my .02!

Martin Suter is vice president of business development at BelAir Networks, a provider of broadband mesh solutions for Wi-Fi, WiMAX, 4.9 GHz Public Safety and 5.9 GHz ITS networks. Previously, Martin was the CEO at Cohda Wireless, where he raised the company’s profile and negotiated a licensing deal with a Fortune 100 vendor in its core franchise. Prior to Cohda, he was vice president of business development at MeshNetworks Inc., a classic tech transfer/disruptive technology success story that achieved a major liquidity event for its investors in Q4/2004 with its acquisition by Motorola. Martin also was responsible for building several high profile alliances with and for leading technology companies, including Fujitsu, Microsoft, Netscape, Sun Microsystems, and Teradata. Additionally, Martin has successfully negotiated technology transfer, distribution and/or licensing deals with companies like 3Com, BioChem Pharma, Dow Chemical, Exodus, Fujitsu, IBM, Microsoft, Motorola, Netscape and Sun.

 

What have you done with your cognitive surplus today?

Recently a colleague of mine and I had a fascinating discussion over drinks one night about a concept that Clay Shirky refers to as “cognitive surplus”. He then sent me a link to a speech Clay gave at the Web 2.0 Conference in April of this year, called “Gin, Television, and Social Surplus” (video).

I love reading something that really makes you think, and Shirky nails it. Effectively he describes the cyclical anaesthetization and awakening of Western society, and suggests that we’re in the middle of that cycle currently. I can’t speak to the historical accuracy of his description of the pre-Industrial Revolution gin carts helping everyone in London to dull their senses, but I can totally relate to his modern day example: the sitcom. He refers to Desperate Housewives as “a cognitive heat sink, dissipating thinking…” I love that line!

Obviously, Shirky is a fan of wikis, and uses Wikipedia as a unit of measure for productivity of the collective against which he compares non-productive activity, most notably the watching of television. He estimates that there’s 100 million hours of collective human thought in “all of Wikipedia, the whole project--every page, every edit, every talk page, every line of code, in every language that Wikipedia exists in.” He doesn’t share his calculations, but he seems like a smart guy, so I’ll take that number at its face.

He then cites statistics on the amount of time spent watching TV per year – 200 billion hours in the US alone, or as he equates it to “two thousand Wikipedia projects a year”. Therein lies his “cognitive surplus”. People sitting on their couches as passive recipients of brain candy, rather than being active producers…Doing nothing as opposed to doing something.

Where we diverge is probably in our views on profiting from this cognitive surplus. While he doesn’t come out and say it, my guess is that he believes that society as a whole will benefit from contributions made from this cognitive surplus and the collective sharing of knowledge. That’s a little too warm and fuzzy for me. I’d take a slightly different view. If we were to look at this through an economic lens, then tapping into this cognitive surplus could grow our GDP at Chinese-like rates!

There is not a shortage of time, there’s a shortage of intellectual activity.

That’s my .02 (with much inspiration from Mr. Shirky)!

Martin Suter

(martin.suter@iplicensing.net)

Facebook - UC for the Web 2.0 Crowd?

Some days I feel old. I can still remember getting excited about the move up to an IBM Selectric (with AutoCorrect!) from my first Brother manual typewriter. I remember standing in line at school in 1980 to run my punch cards through the reader and being handed inches of paper to parse through. I remember receiving my first fax, a handwritten letter from my father, and being blown away. None of these were seminal moments, except perhaps for me personally, but then as I began my career in technology, I’ve been fortunate to be on the bleeding edge of some major disruptions.

The first time I experienced the Web, with Netscape Navigator 1.0, was one of those moments. “How can you build a business model on ‘free’?” was a question that most of us in application software were asking ourselves when Navigator shipped, but then Google figured it out, in spades.

The first time I heard Scott McNealy describe how the network is the computer in 1995, and I spoke with James Gosling at the first JavaOne conference about the implications of Java were two of those moments.

The first time that I spoke with Peter Stanforth in 1990 about the implications for wireless mesh networking was yet another.

But this week, I had a doozy. In fact, I would dare label it an epiphany. But you’ll have to read on to find out what it is.

In 1996, Sun brought a guest speaker into its sales conference in Key West. Unfortunately, I can’t recall his name or title, but he was from a group within Nike that was focused on observing inner city kids, whom they considered to be the alpha trendsetters in fashion and function. The lesson I think we can all take away is that watching how kids use technology today can give us clues about what we (as mature, responsible adults) can expect to be doing in the future. Isn’t it amazing to watch people’s behaviors on planes? The first thing everyone does as soon as the plane lands is turn on their “cell phones” (multi-modal communicators would be more accurate), and begin texting. Irrespective of age, or the limitations imposed by SMS, “Generation Text” showed all of us that you can communicate effectively using a telephone keypad, abbreviations and your thumbs. Who would have thought that 30, 40 or 50-somethings would be typing away on their phones? In fact, I’m ROTFL just thinking about it.

I’m lucky to have two siblings in their early twenties to help me understand how to be relevant with my two teenage sons. I was introduced to Facebook in the early days by my kid brother and sister, and am amazed at what appears to be exponential growth. Notwithstanding the business model uncertainty, look at Facebook through the lens of a kid today. What is it?

Isn’t Facebook really the communications portal for kids today? I’m guessing most kids today have never used Outlook, and why would they?

Facebook contains their contacts, admittedly the “social” subset of what would be in my Outlook contact cards, but it is moving towards providing different views/access levels by categories. It offers “Presence”, rudimentary today, but that will change. Kids don’t use email anymore, they send Messages in Facebook. It’s similar to email but different, with real time notification (find me, follow me) and with the ability to respond via SMS. It has asynchronous chat via Wall postings and video communications (non-real time) through SuperWall. It allows me to stay on top of my communications via RSS feeds and SMS notifications.

Facebook is a social unified communications platform. Maybe this is what Microsoft saw when it recently made a half billion dollar investment in the company.

However, for all of its considerable strengths, Facebook’s biggest shortcoming today is real time, or synchronous communications, which is where my epiphany comes in.

Facebook should buy Skype.

Tomorrow.

I recently re-installed Skype (after taking a year break following the purchase of a new laptop), and am amazed at how it has stealthily and totally taken over my Web experience, including password protected applications like SharePoint. It’s not intrusive, it’s simply there. Everywhere. On every Web page with a phone number, Skype has found it, and turned that static number into an immediate click-to-call opportunity. Skype also has IM, Conference calling, Voice mail, Call forwarding. Now if you could tightly couple these features with the evolving capabilities of Facebook, what more would kids today need?

Email is dead.

Telephony is dead.

The transport layer is irrelevant.

Facebook + Skype is UC for Web 2.0.

Those of us who rely on UC today know that Facebook is not CEPB for the enterprise, but we can do much worse than to watch and learn from our kids.

That my .02! Be careful out there…

Martin Suter

martin.suter (at) iplicensing.net