Paying For Free Software

Something I didn't touch upon in my post yesterday about Microsoft and Yahoo (actually the adaptation of a story I had translated for Newsweek Japan, which periodically asks me to write about the high tech industry) is the cost effectiveness of the investment. Instead of something over $44 billion for Yahoo, I thought that Microsoft could have a different strategy. Put aside $500 million, which is practically a drop in the bucket for them (even cheaper than EU fines for unfair competition). The company would host a contest, looking for the hundred best and most interesting ideas for future web businesses.

The winners would get $5 million, some as a monetary price, and the remaining as seed money. That way, Microsoft would, for relative chump change, become a super-charged venture capitalist working on a scale that, for most, would be completely inconceivable. Out of 100 ideas, if they have smart people doing the picking, I'd guess that it would be safe to figure that five might wildly succeed, to create markets that might be worth $10 billion each. That is, I think that the law of large numbers, with some intelligence stacking the deck, is bound to turn up at least that number of winners. Over the period of a few years, that $500 million investment turns into $50 billion of businesses in which Microsoft has majority ownership. Now that would be a way to stop following others and take a commanding lead.

So I was a bit surprised this morning to get my daily mailing from Slashdot and learn that Google, while not doing exactly that, is in a similar space, at least. In the Google Summer of Code, the company pulls together 1,500 college students, 2,000 mentors, and gives each student (each winner had to fill out an application and compete for the spot) $4,500 to fund an open software project, and offers each mentor $500 for participation. The students have to license their code to the mentors.

Will Microsoft take my advice? Are you kidding? They won't even read it or hear of it. However, if they don't learn that innovation has to be about business practices, and not software, they'll be going nowhere new fast.

Microhoo: Why a Microsoft Acquisition of Yahoo Won't Change a Thing

Money can buy almost anything you want, and for Microsoft, that would be Yahoo – for something over its original bid of $44 billion. Many experts agree that the software giant will likely have its way. But getting what you want can be different from getting what you need, which may not be available at any price.

During a February 1 conference call, Microsoft CEO Steve Ballmer said that acquisition talks had occurred “off and on for the last 18 months.” Microsoft wants Yahoo badly enough to offer an amount greater than its combined net income from 2005, 2006, and 2007 because it is stuck.

Once PCs ruled supreme; now the Internet is king, Microsoft is “struggling,” says N. Venkat Venkatraman, a professor of management at Boston University. Traditional Windows and Office products – 80 percent of company revenues – are mature businesses that won’t fuel accustomed growth. For example, the newest version of Windows, Vista, has had relatively poor sales because of technical problems and a chilly user reception. According to statistics from NetApplications.com, it has a market share of only 12 percent market, versus the nearly 75 percent for XP, the older version. To avoid future financial stagnation, needs a way to grow.

Online advertising seems like the answer to a prayer. According to Kevin Johnson, Microsoft president of platforms and services, it is currently worth $40 billion a year, and may double in size over the next three years.

But Microsoft has had a problem called Google. “I can’t think of a company that has controlled the direction of an industry [to the same degree],” says William Mahnic, professor of banking & finance at Case Western Reserve University. According to Jeffrey Rayport, a partner in consulting firm Monitor Group, Google makes twice the online ad revenue as Microsoft and Yahoo put together, with half the user traffic. Furthermore, the Internet whiz is giving away software functions – such as spreadsheets, word processors, and email programs – that that directly competes with Microsoft’s cash cows.

Microsoft’s has had a roughly 6 percent share of online advertising for a few years, which is “essentially been flat,” according to Karsten Weide, program director of digital media and entertainment for market analyst IDC. But add the 11 percent share of Yahoo, and “it would give them a much better fighting chance” against Google’s 24 percent.

Johnson said that the combination would offer a number of strengths. By eliminating duplicated R&D, freed-up staff could “improve our ability to drive innovation in emerging areas such as video, mobile, and online commerce.” Yahoo and Microsoft have both proven that trying to charge users for services is literally a losing game. That’s how Google has moved ahead: by providing a lot of free content and delivering ads that tie in with someone’s interest.

So, if online advertising is the name of the financial game, why focus on R&D? Because advertising online must still draw audience the way it must in print or television. On the Internet, that means novel and clever applications and services. R&D is supposed to deliver that innovation, as well as finding ways to use data about users to effectively pair ads with people.

Plus, Microsoft management is betting that by combining forces with Yahoo, the combined online advertising revenues would be better, while cutting redundant costs would actually mean more profit to keep shareholders happy. It all sounds smart on the surface, and Weide says, “We think a merger between Microsoft and Yahoo would make a lot of sense.”

But there’s a problem. Neither Microsoft nor Yahoo has been setting records in making money from online audiences. Between 2005 and 2006, Yahoo grew revenue by about 22 percent. Microsoft grew by over 11 percent. Google grew by close to 73 percent. It’s gross profit for 2006 was bigger than its gross revenue from 2005, and it’s significantly larger than Yahoo. Expecting the simple combination of the two companies to better address Google’s market dominance and momentum is unrealistic.

To fend off Google, Microsoft doesn’t need more of the same old thing, whether its own packaged software past or Yahoo’s online business. It needs entrepreneurial spark and invention. But innovation is the result of people, and getting the employees at Yahoo and Microsoft to work effectively in this way will be incredibly difficult.

First there are practicalities. “They’ve not done an acquisition of this size before,” notes Georgia Institute of Technology finance professor Narayanan Jayaraman. The mistakes that could come from an acquisition badly done could cost Microsoft the efficiencies and focus it is counting on.

The two groups may also get along badly. “[Yahoo employees are] always making jokes about Microsoft and the evil empire,” says Mike Grishaver, now CEO of Thingfo but until last fall a director of product management at Yahoo. Rayport agrees: “You’re talking about two cultures that are not just far apart, but that have active animosity.” Should key Yahoo employees become annoyed, they can find many other opportunities in Silicon Valley.

Furthermore, neither Microsoft nor Yahoo has shown the particular type of innovation that is necessary. “[In 2005] I laid out 13 things that Microsoft should buy or start building,” says Robert Scoble, a former Microsoft developer who used to write a popular blog about the company when still an employee there. But management turned down all the ideas because they weren’t big enough at the time to warrant Microsoft’s interest. Those small potatoes included MySpace, photo sharing site Flickr (later purchased by Yahoo), and Internet phone service Skype.

As for Yahoo, its glory days of Internet innovation may also be over. “The problem that Yahoo’s facing, and the reason they’ve been going downhill, is management bloat and lack of vision from the top,” Grishaver says. “When I started at Yahoo, the teams were small and days were about getting things done. Then they started to hire management layer over management layer over management layer who just go to meetings all day.”

In other words, Microsoft’s planned purchase of Yahoo could be nothing more than an expensive “me too” strategy of trying to follow Google, without an infusion of business innovation to start leading. And in the world of the Internet, another term for following is being an also-ran. The tens of billions of dollars could come to nothing more than an expensive way for Microsoft to stay exactly where it is now.

Do Businesses Court Chicken Little?

I noticed on NPR's Morning Edition a story about a mandate in San Francisco to have companies provide paid sick days to employees. One thing that struck me is that one employer after another mentioned how people took far less sick time than they had imagined, and how the cost was far less than what they feared it might be. Some admitted that they had overreacted.

This sounded like the type of behavior the business community accuses environmentalists, shareholder activists, and others of demonstrating. The truth is that hysteria, bolstered by a willingness to stretch facts to support an argument, is all too human a trait. When people give in to it, they actually only support their cause, at best, by inflaming their existing supporters. But through continued exposure to the technique, the people and entities only create fatigue. At worst, they lose the true believers and antagonize their opponents.

Perhaps businesspeople would be better off by not assuming that every civic requirement was going to bury them in rubble, and instead work to admit any real need and then negotiate to find a way to implement changes. For example, when faced with a public that wants to mandate paid sick time - and, I think, with some justifiable desire - then why not work on a trial period. Six months should show beginnings of trends and allow the community and industry to assess the impact of a program and then make decisions based on fact, not fear.

Loss in Confidence in Television Advertising

I hadn't run across this survey, but the Association of National Advertisers, in conjunction with Forrester, did a fourth biennial survey of corporate managers on television advertising, according to Advertising Age. The results aren't looking so good for the TV industry. In short, companies are looking to spend more online and less on television because in general - 62 percent of respondents - thought that television advertising had become less effective in the last two years. More than half reported that when half of all households use digital video recording, they'll cut spending on TV ads by an average 12 percent:

Eighty-seven percent of advertisers believe branded entertainment is the key to TV advertising in the coming year, and 65% of them are eager to try ads in online TV shows. And emerging technologies continue to lure marketers looking to experiment. Forty-three percent would like to try interactive TV ads; 55% are interested in ads embedded in VOD; and 32% would like to try ads attached to the set-top-box menu.

But what's bad news for television is good news for online. Maybe that's where the medium will eventually go.

Banks Doing Worse Than Saying

Whatever the banks say publicly about the credit crunch, it appears to be a lot worse. An article in the Financial Times of two days ago mentions how banks have been quietly borrowing a huge amount over the last few weeks - $50 billion - from the Fed under a new mechanism that the U.S. central bank introduced two months ago:

The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

US officials say the trend shows that financial authorities have become far more adept at channelling liquidity into the banking system to alleviate financial stress, after failing to calm money markets last year.

However, the move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support.

It's not just in the US that there are signs of problems. The government of the U.K. decided to preemptively nationalize mortgage lender and bank Northern Rock. And now Credit Suisse has "revealed $2.85bn of losses on structured credit positions caused in part by “pricing errors” by some of the Swiss investment bank’s traders." That will mean re-examining 2007's stated financial results. And so central banks print more money - it has to coem from somewhere - while banks face just how badly they have been managed, as that's all you can describe the need to run for funds and the inability to see a multi-billion dollar loss in advance.

Earnings Are a Corporate Crap Shoot

Results from some new research from strategic consulting firm The Hackett Group just hit my inbox, and my, are the results scary. The consultancy does financial and management studies of a good number of corporations, and they've found that two-thirds of companies are off in their next quarter earnings forecasts by 6 to 30 percent. When it comes to gross sales, more than half of the companies couldn't get even within 5 percent of their next quarter's numbers.

Notice that this is all about next quarter, not next year. And 14 percent of companies describe themselves as being in high risk/high volatility areas - three years ago, the number was only 2 percent. In other words, the number of companies finding the world changing too quickly has been rapidly rising. (My guess would be that conditions changed just enough to let them realize how dangerous their markets were, and not necessarily a drastic change in the markets themselves.) As the release said:

"It’s shocking to see this level of poor performance in such a key area," said Fritz Roemer, who leads Hackett’s Enterprise Performance Management Executive Advisory Program. "We’ve seen companies take severe hits in the past few years after missing forecasts. Analysts suddenly question the competence of senior leadership. Stock prices become unstable and valuations drop dramatically. In some cases, CFOs have had to resign. Yet companies still refuse to make the necessary efforts to get this area under control."

Apparently, two-thirds of companies do year-end forecasts only, not rolling forecasts, which would match changing conditions more closely. Some forecasts should even be done on a monthly basis. In addition, only a fifth of the companies had forecast accuracy targets, which is like saying you're going target shooting, only you'll not look at the score after to see how well you're doing.

Not only is this bad for investors, but it shows that for many corporations, the basics of understanding their business and how things are going is dangerously out of their control. Sure, an unexpected event can come along. But what do you do if you have these events constantly? Then there is something wrong in the business model, management, the board, or some combination of the three.

Politics, Business, and Doing Brand

Al Ries had an interesting article in Advertising Age on branding lessons from the presidential race. (Sorry, but you'll need a subscription.) Politics has picked up branding from business and now offers some clear lessons on it. For example, Clinton staked out "experience," Obama went with "change," and then Clinton realized that the latter's pick was more in keeping with public sentiment, and so tried to shift and have it both ways:

It's too late. Obama has pre-empted the change idea. A typical example is the cover of the Jan. 14 issue of Newsweek with a picture of Barack Obama and the words "Our time for change has come."

Now, Clinton looks like a follower instead of a leader.

Ries then asks the question, if you wanted to establish a brand, what idea would you want that hadn't already been grabbed by someone else? He actually writes about choosing a word, but I think idea might be more applicable. The obvious problem that businesses face is that no one remembers their slogans. You don't get too many new hits as you once had with "It's the Real Thing" (Coke), "King of Beers" (Budweiser), or "When it absolutely, positively has to be there overnight" (FedEx).

Little doubt that if you're older than, say, 35, you've heard these and the sayings have stuck in your heads. Ries suggests that companies make three mistakes:

1. developing a slogan independent of the brand and broader marketing strategies


2. trying to get an "exciting" slogan without remembering that it only has meaning in context


3. thinking in years instead of the decades of repetition success can take

I think there's something to be said for all these, but I think they miss a more fundamental point. You can't have brand for something that you're not. Eventually people find out what your product or service is like, and if you're blowing smoke, your marketing will be worthless at best, and at worst will drive business away.

FedEx had that great slogan, and backed it up with intense efforts to make sure that over 99 percent of the time, the package acutally did get there on time. Bush has had such a large market share that in economic reach, if not in taste, it really still is the king of beers. Coca Cola was the real thing because it established itself and for decades, any competitor, including Pepsi, was busy trying to be as big as Coke.

The single biggest mistake that I see companies make is thinking that a slogan can overcome ineptitude, disinterest, sloth, and greed. If you want a brand that will stick, don't talk the brand, do it. When you do the brand, you have orders of magnitude more repetitions of the branding messages, because they occur virtually every time someone does business with you. You then engage emotional and muscle memory, not just intellectual. This is a brand that will hold on to customers, and promise something valuable for prospects.

Everyone Talks About Climate Change, No One Does Anything

As the old joke goes, everyone talks about the weather, but no one does anything about it. The same appears to be true about corporations. A new study from consultancy Accenture "surveyed more than 500 business leaders from China, Germany, India, Japan, the United Kingdom and the United States" about climate change. Of those, 45 percent thought that change was "current a major business issue" for their companies. That number jumped to 59 percent when given up to five years for climate change to have an impact on their businesses. However, climate change isn't quite so high on strategic priorities:

Only 5 percent of survey respondents named climate change as their top strategic priority. In no region of the world did that number rise above 8 percent. Just 11 percent of businesses stated that climate change figures as their second or third strategic priority.

Some of the additional findings are interesting. Although two-thirds of the respondents felt a responsibility to manage the impact of climate change, only 42 percent felt "well positioned" to do so. Maybe that has to do with the lack of nuanced understanding of the topic, or it could be the result of concern over shareholder displeasure. And then there are all the other things that executives have to do:

Competing strategic priorities mean that climate change may receive less attention than other business imperatives. Climate change ranked as only the eighth strategic priority for businesses, named by only 16 percent of respondents—lagging behind sales growth (47 percent), cost reduction (46 percent), developing new products and services (45 percent), the war for talent (39 percent), growth in emerging markets (29 percent), innovation (28 percent) and technology (18 percent).

And then there is the triple threat of paying for new technology, trying to get employees and management to act differently, and managing the response to new regulations. In short, companies are highly sympathetic to the problems, but for various reasons cannot or will not make the issue a strategic priority. That suggests calls to let the private sector deal with climate change are effectively the same as suggesting that we all stick our heads in the sand.

More (or Less) on Super Bowl Ads

I had mentioned the Super Bowl ads the other day and thought I was done - and I was. But someone else at MediaPost had a good point. Why didn't most advertisers make better use of email - and other parts of their marketing mix - to tie in the money they were spending in the ad? The one exception that the article points out (and it did have an email bias) was Budweiser.

Budweiser actually was quite clever in tying its online commercials into both an email campaign, a Web site, and a mobile marketing campaign. Weeks before the Super Bowl, you could see an “unaired” Super Bowl ad as well as enter a sweepstakes where you voted for your favorite Bud ad through your phone.

With the amount that companies spend on these 30 second extravaganzas, you'd think they'd want a better return on their investment. Or maybe their agencies tell them that they'll be the next Apple, with the famous 1984 ad, and that no other activity will be necessary. No need to measure results when you're building "brand."

London Bridge Is Falling Down...

For all the bad financial news coming out of the U.S., Europe is having its own share. A rogue trader costs Société Général $7 billion in France - and the person's superiors might have known what was going on, as management did throughout all the stupid choices of financial institutions here. The euro has dropped, London's FTSE index has dropped, and British bank Northern Rock, which was supposed to get a bailout from private equity group Olivant has just heard that its white night rode right past (because of inflexible conditions given by the government, so Olivant is claiming).

To hope that a financial mess in the U.S. could be contained, with other countries propping prospects for investors, is naive. When the economy becomes global, it by definition becomes interrelated. You can't see one part tumble and expect that everyone else will be left standing. You certainly can't expect that a financial system that decided to go for the high risk "easy" profits can avoid eventually paying for that free lunch.

Super Bowl Ads and the Failure of Business

Forget about the game. Forget about the upset and the ugly screw-ups on both sides. Look, instead, to the ugly screw-ups between plays: the ads. Companies spend millions for the time and then for the creative. The spots practically shriek, "We're gonna be on the Super Bowl! Let's show 'em how important we are!" Wtih animation, things blowing up, special effects, and casts that seemed to rival a Biblical epic movie, this was the opposite of tight budget.

But to what end? Other than knowing Budweiser had commercials - because they always have commercials (and I'll admit some fondness for the one about the horse training to join the team) - who do you remember? Hyundai trying to reposition itself as a luxury auto manufacturer but under the same brand? (You want how much for one of those?) Some automobile site, again with a couple of clever ads, but not memorable? CareerBuilders.com, whose ads seemed dull, which is probably not the best association for a business? It was about the commercials, which is fine, I guess, but do any of these companies do research into the history of ads?

Alka Seltzer ran an astonishingly clever series of ads in the 60s: funny, witty, pithy. There was the guy talking about the speecy, spicy meatballs, and the woman whose gastronomic adventures send her new husband seeking digestive relief, and "I can't believe I ate the whole thing. You ate it Ralph." And the company dropped them all. Why? Because while people loved the commercials, they didn't remember the product. Because the commercials became an end in themselves, serving a desire for entertainment, but not directly touching the issue of indigestion in an emotional way that would make people want to try the product for relief.

Does anyone test the results of the Super Bowl ads? I don't mean recollection, but actual sales. Do the companies make multiple times what the ads cost them in total? If not, they are wasting their money. I can't help but wonder if the really smart companies are the ones that avoid the Super Bowl and invest their marketing dollars into things more prosaic ... and profitable.