The Great Debate UK

from Breakingviews:

Microsoft ought to kick off search for Bing buyer

By Robert Cyran The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK -- Microsoft needs to concentrate on a different kind of search: finding a buyer for Bing, its online search business. The industry's distant number two is a distraction for the software giant -- and one that costs shareholders dearly. The division that houses Bing lost $2.6 billion in the latest fiscal year. Facebook, or even Apple, might make a better home for Bing. And a sale would be a boon for Microsoft's investors.

Microsoft has been pouring money into Bing -- this year's losses are greater than the previous year. The company thinks search makes Microsoft's offerings in everything from mobile phones to business software more compelling. Perhaps, but there's little evidence to date. And Bing and sites it powers like Yahoo still only control about 27 percent of the U.S. market. Google has more than twice as much.

Advertisers don't want a monopoly in the search business, which should assure Bing of some future revenue. And Google may be partially hamstrung in competition by antitrust probes worldwide. But the business has more value to a buyer that could bring it traffic.

How much? Microsoft's online services unit, of which Bing is far and away the biggest component, had $2.5 billion of sales in the year ended June 30. Google is valued at about six times sales over the last 12 months. At a 25 percent discount to Google, the unit would be worth about $11 billion if sold.

Moreover, there are potential buyers. Facebook already works with Bing. It might be interested in buying the site, keeping more traffic onsite, and perhaps using its voluminous data to better tweak search results -- that would be a potent weapon in its fight with Google, which recently rolled out social network Google+. Apple might even be interested, given its growing online ambitions.

In a deal, Microsoft could either get paper in a highly coveted company or cash, which Microsoft to its credit has been good about returning to shareholders. Equally, it could buy back stock, as the company trades at nine times estimated earnings -- almost a 20 percent discount to the S&P 500.

from MediaFile:

Apple and Twitter: A New Power Duo?

One big winner coming out of Apple’s developers’ conference on Monday is Twitter.

Apple announced that the Internet microblogging service will be integrated directly into future versions of the iPhone and iPad software.

That means iPhone users can quickly publish information on Twitter by tapping on a photo taken with the iPhone’s camera, or by tapping on a news article in the phone’s Web browser.

It’s the kind of front-and-center placement that any of Apple’s thousands of app-makers would kill for, and it will likely provide a nice boost to Twitter’s traffic of 140-character Tweets.

It may also represent the latest alliance in the ongoing battle of the technology titans.

The collaboration between Apple and Twitter could signal a new power duo, playing in smartphones and social networking – the two powerful forces that are re-shaping today’s computing, advertising and media markets.

How deep the Apple/Twitter partnership may be is still unclear. Twitter referred questions to Apple about whether the integration involved any financial terms, and Apple did not return a request for comment.

from Chrystia Freeland:

When the hacker ethos meets capitalism

The uprising in Egypt has provoked the familiar “realism-versus-idealism” foreign policy debate in many Western capitals, as diplomats and politicians struggle to balance their ideological sympathy for the protesters against fears of chaos and the threat of a future anti-Western and anti-Israel policy from Cairo if the people do win.

What we have paid less attention to is that the demonstrations have forced some of the world’s hottest technology companies to engage in a very similar debate. The conclusions these technorati end up drawing may be as significant as the verdicts of Western governments. This new intellectual battleground is a further sign that in the age of the Internet and the global economy, foreign policy doesn’t belong just to professionals or to states any more.

The quandary Egypt poses for technology companies – particularly the power troika of Google, Facebook and Twitter – goes far beyond the classic corporate social responsibility concerns that have become standard operating practice at big multinationals.

On one hand, the Egyptian revolt and the ways in which it has been facilitated by the Internet is the apotheosis of hacker culture and its worldview. That is the powerful conviction of the digerati: that they are on the side of freedom, small-d democracy and of doing good in the world. This self-image is easy to mock – that Google pledge to “do no evil” makes a pretty juicy target for satirists – but it is also deeply felt.

Egypt has helped confirm this view of technology companies being on the side of angels. For example, Wael Ghonim, the Google executive who helped organize the protests, was jailed and has emerged this week as an important face of a movement looking for leaders. Before that, there was the much publicized workaround that Google and Twitter technologists devised to help evade the Egyptian government’s communications crackdown. As Adrian Chen noted on the Gawker blog, “the amount of positive press generated [for Facebook] by Egypt’s uprising ... could only be greater if Mark Zuckerberg had parachuted in and started beating back riot police himself.”

On the other hand, the problem for technology companies in many parts of the world is that doing good – or even doing no evil – is very much in the eye of the beholder. The views, and the self-interest, of twentysomething programmers in Silicon Valley, or in Bangalore, India, are unlikely to coincide with those of eightysomething dictators. And that can spell trouble for companies intent on building a global business.

“Facebook is trying to expand into China, so it is hard for them to take the side of the protesters,” said Evgeny Morozov, author of The Net Delusion, which argues the Internet will not necessarily make the world a freer, better place.

from The Great Debate:

Google’s greatest skill – and challenge

By Jeff Jarvis Jarvis is the author of "What Would Google Do?" and teaches at the CUNY Graduate School of Journalism. His next book, "Public Parts", will be published later this year.

The miracle of Google was that it could accomplish anything—let alone become the fastest growing company in the history of the world and the greatest disruptive force in business and society today—while being run by a committee, a junta, a council of the gods.

In management, as in every other arena of business, technology, and media, Google broke every rule and made new ones.

It should not be a shock that Eric Schmidt has stepped aside as CEO and made room for Larry Page. Schmidt was the prince regent who ruled until the boy king could take the throne while training him to do so. We knew that this would happen. We just forgot that it would.

When I interviewed Schmidt a few weeks ago and asked about pressure over privacy, China, and lobbying, he said, “This is not the No. 1 crisis at Google.” What is? “Growth,” he said, “just growth.”

Scale is Google’s greatest skill and greatest challenge. It scaled search (vs. quaint Yahoo, which thought it could catalogue this web thing). It scaled advertising (vs. the media companies that today don’t know how to grow, only shrink). It is scaling mobile (by giving away Android). It has tried to scale innovation (with its 20 percent rule)—but that’s the toughest.

from Breakingviews:

Google’s innovation engine sputtering big time

By Rob Cox and Robert Cyran The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

NEW YORK -- With an optimistic spreadsheet and a lot of creativity there just might be a way to rationalize the $6 billion or so that Google is expected to shell out on Groupon. Yet making the numbers work on the search giant's purchase of the coupon website may not matter over the longer term. The bigger lesson to draw from what would be Google's biggest-ever deal is that the company's reign as the Internet's innovation king is ending.

Google's apparent willingness to spend so much shareholder treasure to acquire a two-year-old startup, in a business with almost no barriers to entry, is the most damning evidence yet. In its heyday, Google would have channeled some of its prodigious cash flow towards creating a Groupon of its own.

That era is receding. Few of these venture-capitalistic initiatives panned out. Google is still a one-trick leviathan: a search engine -- albeit an incredibly successful, even scarily dominant one. But it must now buy its way to innovation. Attempts to take on fast-growing, newer companies by itself have resulted in damp squibs. Two quick examples: Google Checkout never came close to dethroning online payment king PayPal; and Google's social networking tool, Buzz, accomplished the seemingly impossible feat of making Facebook look responsible at protecting users' privacy.

Not everything Google has done on its own has been wasteful. Gmail is a success, for example. But it was more akin to building a better digital mousetrap. Or take Google Apps, an attempt to bring Microsoft Office-like tools onto the Internet cloud. These have done fine, but their adoption hasn't obviously hurt Microsoft or hampered, say, Salesforce.com's growth.

These self-financed initiatives have modestly helped Google's core search business. On the other hand, Google has successfully added potentially huge, ancillary business through M&A. As part of the Google machine, YouTube, Android, DoubleClick and AdMob have extended the company's leadership into areas beyond traditional search.

The problem is the cost of this expansion. For example, Google bought YouTube for $1.7 billion in late 2006. It's just now close to profitability. Again, by any stretch of the spreadsheet, that's a poor financial return. If Google's dilemma is, "overpay or build something that doesn't catch on?" then purchasing Groupon for $6 billion may be the right answer. Shareholders should worry that Google may even have to ask this question.

from Chrystia Freeland:

America’s culture of no

Saying ‘yes’ is one of the dominant tropes of American life. America’s favorite politicians are the sunny optimists: think Ronald Reagan and "Morning in America." In fact, the culture is so insistent on looking on the bright side that, as Barbara Ehrenreich complained in a recent book, injunction can be heard on the cancer ward. You might even say -- and some historians have -- that Americans themselves have been pre-selected for their optimism: you or your ancestors had to have a powerful faith in the New World and the opportunities here to make the trek over in the first place.

That’s why when I interviewed Nikesh Arora, Google’s head of sales, operations and business development at a media conference last week, one of his comments had particular resonance with the live midtown Manhattan audience and in the blogosphere shortly afterwards. Google, Arora said, works hard to create “a culture of yes.”

Arora described the Google approach as an “inversion” of the attitude in more traditional companies, where “everybody in management is trying to look at where the flaw is when somebody is presenting. Everybody is trying to figure out what’s wrong with their plan.” At the Googleplex, by contrast, “we’re going to say what’s right with it, let’s find a way to say yes.”

According to Arora, creating a culture of yes is central to creating a culture of innovation. As he put it: “the more times you say yes, the more you create a culture of yes, the more likely you’re going to have people innovating and coming up with great ideas. The more you say no, people will absorb that, anticipate that and say, ‘What’s the point of me trying to innovate, management is going to say no anyway’.”

Google’s culture of yes extends to the pay-checks of its employees: a couple of weeks before I interviewed Arora, Google had given all of its 20,000 staff members a $1000 holiday bonus and decreed a company-wide 10 per cent pay raise.

Before the financial crisis, Google’s gung-ho commitment to innovation, and even its $1 bn company-wide retention bonus, would have been perfectly in tune with what I can’t resist calling the national zeitgeist. But what made Arora’s comments so striking this month was their sharp contrast with the mood of America, and even most of the developed world.

Google’s chiefs are striving to build a culture of yes, but most of America is living in a culture of no: banks aren’t lending, businesses aren’t hiring and consumers aren’t spending. That’s true of much of Europe, too: the latest act in the sovereign debt crisis has pushed the continent deeper into its new age of austerity.

from Breakingviews:

Could Google revolutionize James Bond franchise?

One of India's top film producers is interested in Metro-Goldwyn-Mayer, James Bond's Hollywood studio. That may sound novel, but a purchase of MGM by Sahara India Pariwar would probably provoke only relief in Tinseltown -- because it wouldn't upset the industry's status quo. That would require a more radical approach -- something Google's YouTube unit just might be capable of, if it dares.

There's no deal yet between Sahara India Pariwar and the struggling MGM. But India's biggest film production company, which also operates multiplex cinemas, understands the prevailing Hollywood business model. Films are released first in theaters and then eventually appear on DVD and Blu-ray, on pay television, and on the Internet. The basic idea is that customers pay extra to see movies sooner -- especially during the theatrical "window."

That model, though, could be ripe for a shake-up amid the rising popularity of Web-based video, led by YouTube, Hulu, Netflix and Apple's iTunes. YouTube aside, these emerging channels have collaborated with content producers and have little interest in roiling the industry. Hulu, for instance, is owned by a trio of television networks. Netflix and iTunes have struck deals with producers to distribute their content, after a delay, to paying customers.

YouTube is a little different -- and it's the big kahuna of the bunch. Four years after Google paid $1.6 billion for the business, people are watching 2 billion videos a day on the website. Yet the division is still a money-loser. That's because those videos mostly aren't the kind that people pay for or advertisers crave. Long term, it's hard to see how YouTube can turn its scale into cash without access to original programming.

Experiments in paid content and live streaming represent one type of response from YouTube. But it's another possibility that particularly alarms some in Hollywood. With $30 billion of cash, Google could easily make an offer that MGM's creditors couldn't refuse. Owning MGM would allow YouTube to vault ahead of its rivals by bypassing the theatrical window. Maybe the next Bond film could even be released on the Web -- where advertising revenue would supplant box office sales -- just in time for the 50th anniversary of the franchise in 2012.

All that may sound a stretch, but Google has already done plenty to disrupt media industry conventions. Hollywood may yet thank Bollywood for delaying another shock.

from Breakingviews:

Apple lends hand to Google against regulators

Apple has just lent a hand to Google in the search giant's increasingly tense relationship with regulators. The U.S. Federal Trade Commission worries Google's proposed purchase of AdMob may extend its dominance of internet search advertising into the burgeoning mobile Internet space. Apple's latest iPhone operating system will give the government less to worry about. The FTC's concern is understandable. Google could well use the profits for a near-monopoly in its original business to muscle into the promising mobile advertising market. That business is currently small -- total spending of around $400 million in 2009 was less than 2 percent of Google's revenues. But research outfit IDC estimates $1.9 billion of revenues by 2012.

Yet the tech trade creates a dilemma for the FTC and other antitrust regulators. As the long fight with Microsoft has demonstrated, once a monopoly is established, its huge economies of scale make conventional remedies ineffective. Officials need to strike before the competitive barriers are too high to tear down.

But when the barriers aren't high, it's hard for regulators to prove they will be. The FTC isn't getting much help from advertisers, who appear mostly unconcerned about the Google-AdMob deal.

Application developers for mobile phones might be a more promising avenue. They could be hurt if Google owned AdMob, which controls about a third of the market for placing ads in mobile applications and web pages. Since apps increasingly determine the choice of phones, and developers depend on app ad revenues, Google might be able to use AdMob to pressure developers to favor its own phone operating system over Apple's or Microsoft's.

But Apple just made the FTC's job harder. Its newest operating system for the iPhone makes it easy for developers to put advertising directly into applications. Apple is playing down the threat -- "just babes in the woods" in advertising, according to Steve Jobs -- but it already has the look of a powerful competitor. The iPhone share of the U.S. smartphone market is about a quarter, and the share of mobile data traffic is higher.

Apple may be offering a helping hand to Google against government intervention, but it has the look of a clenched fist.

from Breakingviews:

Skype looks like Silicon Valley’s best IPO hope

Skype looks like Silicon Valley's best hope for a blockbuster initial stock offering in 2010. With Facebook determined to stay private until next year, the former eBay orphan could steal the scene with a quick flip. Moreover, as a result of clarifying copyright issues and rewriting its code to attack the business market, the company may be worth twice its $2.75 billion price tag when eBay sold all but 30 percent of its stake last year.

The company already has 500 million users and made $48 million in the third quarter, its last before going private. That's good, but eBay wasn't a natural owner. Its core auction and payments businesses had little to do with managing a communications firm.

And eBay's poisoned relationship with founders, Niklas Zennstrom and Janus Friis, also hurt. Because they threatened to pull Skype's license to use the underlying source code, and shut the service, eBay was reluctant to extensively upgrade Skype's software. Skype's new owner, a private equity consortium led by Silver Lake, has patched things up, bringing on Zennstrom and Friis - and the source code - with a slice of equity.

The company can now improve voice and video quality on calls by revamping the software. Furthermore, many companies are reluctant to use Skype because it pierces firewalls that protect IT systems from outside intruders. Updated software should give Skype a chance to tap the larger and more profitable enterprise market.

Ebay sold the business for 3.5 times estimated 2010 sales. That's low for an Internet company whose brand is becoming entrenched, revenue is growing a third annually and operating margins are increasing. Eliminating the possibility the business would be shut down and retooling its software to open new markets make Skype more valuable.

Google, for example, trades at more than six times revenue. Put Skype on a similar multiple, and it would be worth more than twice the purchase price based on estimated 2011 revenue of $1 billion. This sort of return should be sufficient incentive for Skype's owners to start the countdown towards the Valley's next hot IPO.

A brave new Google-ized world

- Mia de Kuijper is CEO of de Kuijper Global Partners , author of Profit Power Economics and the Co-Dean of the Duisenberg School of Finance. The opinions expressed are her own.-

I have developed a practical approach to competitive success that defines strength not in terms of market share, but in terms of what I call “profit power.”

Profit power is your ability to hold on to your own profits and defend them against competition. Our information-loaded world is creating new sources of profit power.

You could argue that this is an age of “perfect information” – but crucially not one which has delivered perfect markets – because perfect markets would compete away profits and could not explain the popularity of one search engine over another.

Rather, this age of perfect information has given rise to new market dynamics that I call “hub-dynamics.” Being a “Hub” is one of the key modern-day sources of profit power.

So what is the source of Google’s profit power?

Google’s secret is that it’s the beneficiary of such hub dynamics – because it is such a “Hub”. Hubs can be people or products, assignments, clients, buyers or users that have self-reinforcing popularity. When hub dynamics are at work, products or ideas that are ahead stay ahead for a long time.