The Great Debate UK

Why we are not witnessing a tech boom

By Kathleen Brooks. The opinions expressed are her own.

The words ‘tech bubble’ have been bandied about since the Apple share price really started to climb at the end of 2011. Earlier this month, its market capitalisation hit $600 billion dollars, only the second company to see its market cap get that high. So it appears like everyone wants a bite out of the proverbial apple.

There is a dangerous precedent for markets’ believing that tech stocks can only go in one direction. The dotcom bubble back in 2000 caused havoc in the equity markets and also contributed to the Federal Reserve keeping interest rates incredibly low, one of the contributing factors to the housing crisis in 2007.

Added to this, the only other company to have registered a $600 billion market cap was Microsoft at the height of the tech boom. Today Microsoft is worth about a third of that value. So does Apple need to watch out?

We have seen the Apple share price fall quite sharply in recent days, it is down 7 percent since last week. However, it has followed the overall market lower and thus the decline may not be people getting nervous about holding Apple stock, but rather some profit-taking and a normal correction. While we certainly don’t expect Apple to continue to appreciate at the pace it has of late, good profit growth, surging sales and plenty of opportunity to expand its retail operation across the developed and developing world could help prop up the share price even at these levels.

It’s not just Apple’s incredible marketing and product quality that makes us doubt the doomsayers. In my view, the overall market does not look like it is in bubble territory. Although Apple is bigger than some small European countries (it is more than double the size of Portugal’s annual GDP), it is not the only tech stock on the block. Research In Motion (RIM), who makes the Blackberry, has seen its share price fall 77 percent over the past year. Nokia has seen its share price dwindle from $9 per share in April 2011 to below $4 today. So not every company has seen its share price surge nearly 90 percent, like Apple has. Hence the Nasdaq remains more than 30 percent below the peak reached in 2000 before the dotcom house of cards collapsed.

The key difference between then and now is that the market has a better nose for quality, revenue source and longevity. Hence why Apple – with its 50 percent control of the tablet market and dominance in the phone sector – has managed to outperform RIM and Nokia. The tech bubble was characterised by the huge valuations of companies people had barely heard of and who, ultimately, did not have viable business models. LinkedIn, whose IPO last year saw its share price double on its first day trading, has seen its share price trajectory get more volatile since then rather than surge to frothy levels. Also, LinkedIn has a viable business model. Subscribers can pay to get a premium service, which is invaluable for head-hunters, human resource managers and others. LinkedIn is a good example of the free/ subscriber hybrid model that some newspaper companies should have followed years ago.

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 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 Reuters Investigates:

Sleepy in Seattle — the future of Microsoft

The world's biggest software maker once inspired fear in tech land. Today it's mostly yawns. Is Microsoft no longer a growth company? Should Google be nervous, too? And are Steve Ballmer's days at the helm numbered?

Seattle correspondent Bill Rigby's special report has some answers.

from The Great Debate:

Microsoft learns to love leverage

If you thought the era of better living through financial engineering died with Lehman Brothers, have a look at Microsoft.

The ubiquitous computer software company has decided to borrow as much as $6 billion at the same time as it is increasing its dividend by 23 percent, despite sitting on a $36.8 billion cash hoard and generating more every day.

It reminds me of the old Saturday Night Live skit about the "Bank of Change," which existed only to turn dollars into quarters and pennies into dimes. "How do we do it?" their pitchman said, "Volume."

Microsoft's shares fell more than 2.5 percent on the news, but mostly because investors had hoped for a bigger return of cash, presumably financed by a bigger bond issue.

It looks as if Microsoft will pay out about $5.6 billion annually in dividends, quite close to the size of the bond issue and perhaps a quarter of the free cash the company is likely to generate in fiscal 2011.

So why would Microsoft want to borrow money when it already has so much and is shoveling more in every day? Partly no doubt because financial conditions engineered by the Federal Reserve have made borrowing so cheap for the world's few remaining AAA credits. According to initial indications Microsoft will pay anywhere between 30 and 87.5 basis points over Treasuries for borrowings of between three and 30 years.

Could it be that Microsoft thinks it can make money by funding and reinvesting? A hedge fund and a software company -- there's a business model for you.

Thinking outside the budget-shaped box

- Dave Coplin is national technology editor at Microsoft UK. The opinions expressed are his own.-

The emergency budget was announced recently as a means to tackle the country’s deficit and Britain’s current economic situation.

But embracing a new approach to the way we run public- and private-sector organisations will be needed in order to stay competitive in the current market and help to redefine the fundamentals of business in this new environment.

Although Chancellor George Osborne’s budget has been deemed by a few as a “credible plan” for the future of public finances, and is an important step on the long journey back to economic health, we must remember that the economy is still fragile.

The budget announcement is likely to define the coming Parliament, and the government will either stand tall or fall on its ability to deliver Osborne’s proposals to bring the deficit down.

But it is UK businesses that the announcement will have the most tangible effects upon. Astute business leaders know that dramatic social, economic and political changes all ultimately affect our global competitiveness.

Is a hybrid model an answer for British businesses?

-Dave Coplin is national technology officer at Microsoft. Any opinions expressed are his own.-

The British economy may technically be out of recession, but it is still not creating the jobs and growth needed to turn back the clock to the upbeat days of the past. And with a looming fiscal crisis, it’s not hard to see why some commentators are predicting the terminal decline of the British economy. I don’t think the situation for Britain is dire — yet. But if businesses want to regenerate economic engines in the future they do need to change.

Astute business leaders know that dramatic social, economic and political changes — in addition to changing workforce demographics, globalisation and rapid developments in social and business technologies — are now fusing together. Ultimately, they will affect every aspect of UK private enterprise – and competitiveness.

Having spoken to prominent industry figures and the Institute of Directors, I am more convinced than ever that the solution to this change is a move to a “hybrid” business model. That means UK businesses need to change their thinking, structures and operations and adopt a more flexible approach or lose out to more nimble competitors in the future.

A looser hybrid model has many benefits, although it isn’t without challenges. In the hybrid business, fixed office space is rejected in favour of giving staff access to shared space in bureaus. Such structural changes have huge benefits, including increased profitability (reduced rental overheads), greater responsiveness to shifting demand and more intense collaboration between workers – not to mention improved agility as businesses quickly spot and exploit market opportunities.

It’s not all sweetness and light though: less fixed office space can put off employees and create a sense of insecurity. But it’s become clear over the last few years that the notion of the office is changing and employees want a flexible approach to work. There is a noticeable move towards sharing in cities such as London, Manchester and Birmingham where office space — as well as coffee, light and power — are shared.

A hybrid approach to business is far more employee orientated. In my view, it recognises the blurring demarcation between work and home life. That involves recognition from businesses that as part of expecting staff to be on call 24/7, they must also be able to access modern communication tools — such as social networks and online shopping tools — in the office at all times.

Microsoft bets on Windows 7 heaven

-Matthew Bath is technology editor at Which? The opinions expressed are his own.-

Microsoft’s Windows operating system has been frustrating and delighting computer users in almost equal measure since it was first debuted by the software giant first in 1985. Fast forward through nearly a quarter of a century of powering the majority of the world’s personal computers, and Windows is about to hit another milestone.

Windows 7 launches on October 22, worldwide, and it’s safe to say that, as a firm, Microsoft will be collectively crossing fingers and toes that shoppers flock to the new version.

The successor to its Windows Vista operating system, Windows 7 promises to be faster, more reliable and make computing simpler than ever – so much so that like a proud parent, Microsoft hosting worldwide coming-of-age parties to help launch Windows 7 onto PC desktops worldwide.

Yet the key question is whether consumers, already stung by what many found a problematic Windows Vista, are as willing to take a punt on this latest version.

Certainly, it’s chalking up record sales – and Windows 7 has overtaken Harry Potter and the Deathly Hallows to become the biggest grossing pre-order on Amazon.co.uk of all time, and the online store says demand for the new operating system remains strong.

from The Great Debate:

Forget Microsoft, Yahoo’s value is overseas

-- Eric Auchard is a Reuters columnist. The opinions expressed are his own --

The fate of Yahoo Inc has become intertwined in the public's imagination with the success or failure of its dealings with Microsoft Corp in recent years.

That's despite the fact that as much as 70 percent of the value investors put on Yahoo's depressed shares are tied up in its international assets or cash holdings -- factors that have nothing to do with Microsoft.

Yahoo's operations trade for just $5 to $6 per share out of its current $15 share price, once you exclude its Asian investments and the value of its cash. Its hidden assets in Japan and Chinese affiliates -- Yahoo Japan Corp and China's Alibaba Group -- alone are worth around $6 to $7 per share.

The trouble is that Yahoo needs to find a way to cash out of its increasingly rocky relationship with Alibaba Group, in which it holds a 39 percent stake after it pulled back from operating its own business in China in 2005.

Yahoo's best chance here may come next year if Alibaba succeeds with a second IPO of its Taobao.com consumer ecommerce site, building on the success of the 2007 IPO of Alibaba.com, now valued at more than US$13 billion on the Hong Kong exchange.

Truth be told, Yahoo's huge success in building the biggest U.S. Internet media destination never translated very well overseas, despite the early foray into Asia that left it with lucrative assets in Japan and China. These passive investments came to substitute for a global operating strategy.

from Commentaries:

Apple-Google learn Corporate Governance 1.0

LONDON, Aug 3 (Reuters) - The resignation of Google CEO Eric Schmidt from Apple's board should come as no surprise to anyone with an inkling of what corporate governance means.

But then Silicon Valley's idea of corporate boards has long consisted of cozy, interlocking directorships which would be considered collusion in most other industries.

Google's CEO is not leaving Apple's board voluntarily. He is only stepping down in response to the increased government scrutiny of obvious potential conflicts of interest between the two companies.

Yet regulators shouldn't be content with Schmidt's departure. The truth is that Apple and Google have been heading into the same markets for years. A veritable chain of overlapping business ties remain in place even if the most obvious formal link is now broken.

The chairman of Apple's board, former Genentech CEO Art Levinson, remains on Google's board. Another Google board member, Ann Mather, is the former chief financial officer of Steve Jobs' former animation company, Pixar Studios.

Paul Otellini, the CEO of Intel Corp, Apple's main chip supplier, also sits on Google's board. Al Gore remains on Apple's board, but in his new turn as venture capitalist he has many business ties to Google and its founders. Gore is a partner of Google board member John Doerr at legendary Silicon Valley VC firm Kleiner Perkins.

For months, the U.S. Federal Trade Commission has been examining Schmidt's participation on the boards of the tech world's two most dynamic companies. Last week, the Federal Communications Commission said it was looking into Apple's decision to reject a Google phone application to run on the iPhone.