Nokia - Late For The Kill...

Towards the end of Batman Begins, Morgan Freeman's character asks Rutger Hauer's character if he had "read the memo". Its a pun on the flip in positions between the two characters at Wayne Enterprises. Morgan, who was once retired to obscure research projects at Wayne, becomes the CEO, while Rutger, who was once the CEO, is fired. Unbeknown to Rutger himself until he is told to read the memo. When I woke up this morning, the net was abuzz with a similar statement. "Haven't you read the memo?". But this time it was not fiction but fact. But similar to the movie, Nokia seems to have flipped from CEO to being fired, in the smartphone market that is.

Stephen Elop, Nokia's CEO, has written an honest review of his company's prospects in the mobile market, and especially the smart phone market, where Nokia has been in a free fall since last couple of years. My intention in writing this analysis, is not to recapture what Elop has already said, but to put things in perspective and check the ways out of the current mess for this once stalwart company. when I last wrote on Nokia (not for this blog), it was 2004 and the World was a different place. The company was on top of the mobile business, followed distantly by Motorola and Samsung. There was no iPhone then, neither was Android and BlackBerry was about a paging device.

Nokia is not a stranger to innovation. Some facts:

- The first smartphone from the company, Nokia 9000 Communicator, came out in 1996.
- The N-Gage mobile telephone and handheld game system was released in 2003.
- Nokia released its first touch screen phone in 2004, long before the iPhone.

But from 2004 until now, nothing much happened at Nokia, in terms of great products and innovation. Were the Finns spending more time in sauna and less looking around the mobile market?

Couple of things. In many ways, the products I listed above were ahead of their times. The Internet was just taking off in 1996 and telecom carriers were living off Graham Bell era networks at that time. N-Gage, a phone, was so niche, it created a new product category in phones, but bizarrely was competing with gaming devices like PlayStation, Nintendo DS and Microsoft Xbox. Touch screens were very expensive to manufacture in 2004, due to being premium products and lack of economies of scale. Not being able to see the type of success it thought it deserved, Nokia shelved the N-Gage, stuck to the archaic Symbian for Communicator and could not create an ecosystems of applications for the touch screen devices. Being content with growing candybar mobile sales in Asia and Europe, Nokia ignored the high-end North American market. Not a single product of Nokia took off in the US. All the while, the company looked happy selling cheap phones by the boatloads in markets in India and China. Higher volumes, but lower margins, which slowly got wafer-thin due to increasing competition from cheap Chinese imitators.

Meanwhile, Apple redefined the architecture of phones, Blackberry became The Phone for business users and Google redefined the mobile platform with Android. The beauty of iPhone is not just being cool but also its ability to create a whole new universe of consumer applications on a phone. BlackBerry's had an explosive growth due to email application, which made a must for business users. Android as an O/S is not only fast, but also smart. Symbian, could do none of these. Why?

Let's just look at O/S market share numbers now:

2005
Symbian: 67%
Microsoft: 14%
RIM: 7%
Linux: 6%
Palm: 5%

2010
Symbian: 37.6%
Android: 22.7%
RIM: 16%
Apple iOS: 15.7%
Microsoft: 4.2%

Over a period of five years, Nokia lost a staggering 30% of its O/S market, with Microsoft losing about 10%. This 40% went to the new players, Apple and Google, both doing an incredible job of hacking at the high end and low ends of the smartphone market respectively.

What now? It seems that according to Elop's memo, things are going to change. Nokia might finally start making phones that will have a different O/S than Symbian. Reports indicate that it could be Windows Mobile 7. If this reports are true, this must be great news for Apple and Google. Why? Because two wrongs don't make a right. Already on a slippery slope, Nokia could do better than hand-shaking with another loser in Windows Mobile (WM). It's a much better choice to go with Android. Because the higher-end market is already in the firm grip of Apple, who makes its own hardware and O/S. Apple does not lease its O/S to other companies. The lower-end of the market is being eaten alive by Android, which is just an O/S as Google does not make phones anymore. HTC, LG, Motorola and Samsung benefited tremendously by launching neat products with Android inside. Nokia, although joining this bandwagon, can put an immediate tourniquet on the blood bath in the lower-end products by embracing Android. In the North American market, what good will come out of going with WM 7, which has 4% penetration? Nokia can also open its phones to both WM 7 and Android devices and compete with the rest of the pack. Either way, still looks like a slippery slope.

Elop's memo has come a little late in the day. Almost five years late. The questions he raised should have been raised when Apple took the smartphone market by storm few years back and Google was exploding with Android since almost two years. Both companies are redefining the way people communicate and connect while the company whose motto is "Connecting People" seems disconnected. No matter which way Nokia choses to go, it looks like too little, too late. Late for the kill and absent for the slaughter.Unless Elop does something miraculous that is.

Grougle - Goopon

When a search giant that makes $23 billion a year goes after a group discounting website that makes $500 million a year it raises many questions. But the most important question is how much is it willing to pay? Google, which is reportedly scouting for Groupon, is heard to have put a price tag of about $6 billion for a discounting website, that has absolutely no barriers to entry. But that issue can be discounted by the fact that Groupon has already built terrific traction in its business. Based out of Chicago, the company basically provides bargaining power to its users, and then using that power negotiates and gets discounts from retailers to these users. In the process, its takes a cut. Its a localized business that scales to national or even international level. With around 17 million users in North America alone, Groupon is an undisputed leader in its field although many others such as LivingSocial are catching up. Its easy to see how Groupon fits into Google's ambitions.

A) One of the hottest areas on the Net is location-based social networking done thru mobile devices. FaceBook (500 million users) has this feature, FourSquare (4 million users) is a pioneer and there are many others working in this space. Google has Latitude, which allows users to allow friends to view their location. So location meets retail deals, a white hot deal for mobile users. Google, starved for attention in the social media networking space, will gain immediate access to the installed users of Groupon and then combine them with Latitude to come up with synergies in this space. It will also be a check on FaceBook's check-in and FourSquare's growth.

B) Google gets about 99% of its revenue from ads. Groupon makes money by getting a cut from the retailers to whom it drives customers. Groupon has a large salesforce that constantly negotiates with local businesses for deals. Groupon will give Google leads into local advertising and insights into local spending habits. This ties in well with Google's prime revenue stream, AdWords and AdSense. Targeted search is always good to improve ads in Google. Already small businesses in Europe are complaining that Google is undercutting them by not properly displaying them in search results, so such local learning will help Google better serve its ads.

C) Google Maps, is another product that ties well with Groupon's efforts. Google Latitude is actually based on Maps and this goes back to point A above. You see the synergies?

All this goes back to the main question. How badly does Google want Groupon? As badly as spending the reported $6 billion? This would make it the most expensive acquisition ever for Google, more than the combined price it paid for YouTube and DoubleClick.

Let's see how traditional valuations are done.

1. Discounted Cash Flow: Expected future earnings discounted to present value.
2. Relative value: Finding the market price of similar assets/goods/companies.
3. Option price: Black/Scholes/Merton, lets not even go there.
4. TTM: A multiple of Trailing Twelve Month (TTM) revenues is used for Internet companies (e-commerce 3XTTM and other Internet companies could be more than 3X).

Groupon reportedly makes about $500 million. Maybe $6 billion comes across as a desperation price when trying to use DCF. Using TTM, Groupon could be valued at $1.5 billion (500 * 3).  I dont know how you can use 2 and 3 from above to value it. Maybe there is some other style of valuation used by the brainiacs at Google. Groupon has countless imitators, and apparently its repeat use is less meaning low customer loyalty. Although it can boost Google' social media ambitions to some extent, whose to say that someone else like LivingSocial cant scale to current Groupon's size? When it comes to deals, customers usually lose their loyalties. Besides, how does a strong salesforce oriented company integrate with a strong engineering company? I guess, in the end, if A,B,C > 1, then surely $6 or so billions seems ok, considering Groupon's traction and Google's localization ambitions. With Marissa Mayer overseeing the local business now, Google seems pretty darn serious about this space. Groupon deal seems more defensive on Google's part than playing offense. So, essentially its not how badly Google wants Groupon, but how badly its does not want a FaceBook or a Microsoft get Groupon. To this end, $6 billion seems like the right price.

The Duplicity of Dairy Management

The Facts: Dairy Management Inc. is a Government department created by the then President Bill Clinton in 1995 which builds on the Dairy Production Stabilization Act, which was drafted around 1983. This almost-privately run department, with a CEO like leader has a single-minded focus. It is to make Americans eat more cheese and drink more milk. As a consequence of its persistent efforts, a typical American in 2010 eats more than 30 pounds of cheese compared to a third of this amount a few decades back.

People born in the 70s were brain washed into believing that drinking milk is essential to good heath. That cheese is high-protein and hence very essential for humans is an ingrained thought to most of us. Various incarnations of butter, cheese, yogurt and milk stare innocuously at us begging us to consume them, across stores. Problem is, nobody tells you that this is a marketing push by the same department whose sister concerns are lambasting the American public to reduce their cheese consumption and raising concerns about growing obesity due to increased cheese consumption.

On the one hand, the department promotes cheese through Pizza and fast food chains and on the other, as recent NY Times research indicates it also promotes reducing cheese consumption for health benefits. Apparently they are feeding the population with subsidized cheap high calories while blasting them to show more restraint and not fall victim to obesity. I am sorry I don't get this at all. A department that has such self-interest in making the most out of its $140 million budget surely is not in a position to talk about obesity. Its easy to see the conflict of interest in this.

The problem is also more inherent to how capitalism has evolved in the last hundred years. While losses, in terms of health-care costs and obesity concerns, have become public, the profits, from rising dairy production, are private. Much like the banks, who keep their profits but rub their losses on public through threats (real or perceived is up to the reader to decide) of systemic collapses, these institutions have the mandate to increase dairy consumption but also "fight" public health concerns.

Except for the astute observer, such things largely go unnoticed by the general public. Praise needs to be bestowed upon NY Times for bringing such issues out. This is exactly what journalism was born to do. In open democracies, transparency only comes from media when our representatives unleash these duplicitous schemes on the public. In the end, its up to us to decide whether eating that double-cheese crusted pizza will increase our health-care bills or not. If we don't show that restraint, I guess we cant criticize the Government for not reforming the health care issues. But what about those marketing campaigns I saw as a kid which made me say cheese? Marketing should be left to the businessmen themselves and not pushed by the Government. If a Govt. Department markets dairy products aggressively, and makes deals with chains like Dominoes, to push more cheese, they have no ground to tell the same public not to eat that cheese.

Why Meg Whitman Lost...

Meg Whitman turned eBay into what it is today, the biggest auction site on the planet. I like eBay, I bought loads of stuff there and except a glitch or two, the marketplace mechanism she put in place pretty much works fine. Meg, who oversaw eBay for a long time, has a reputation for being a tough taskmaster and a very very demanding boss. But very few people who were at her level can claim to be the opposite.

Meg, who apparently never cast a vote until she decided to run for Governor of California, lost quite badly yesterday. Badly not only in terms of votes (she polled around 41% to Jerry Brown's 54%, which is a much bigger spread than the surveys had predicted) but also in terms of return on investment. She spent about $160 million in the 2010 election for a job that would pay about $200,000 a year. Surely she was not doing it for the money cause she made more than enough for herself and her family at eBay. Obviously she was running for Governor either because she really wanted to do something for the public or its just her innate leadership drive. Whatever it is, its a pretty bad loss.

Now, had the Governorship of California been auctioned on eBay, she would have been the highest bidder what with a $160 million bid. Nobody would have come close. Of this money, almost $140 million is her own, that's about 10% of what she made at eBay. Ouch, that's a lot for losing an election. Depending on what your interests are, this type of money can do a lot of things. For Meg, she could have generated loads of jobs by simply investing in California. She could have stayed away from the bloodsport she got bludgeoned in. But that's what drive does I guess.

So, here are a few things I think went against her in spite of the scale of monies involved in this election. Please note that this is the largest personal wealth any person has ever spent on any single election in the history of United States.

1. Out of touch: People on the street had no idea who she really is. I mean, tech industry folks like myself or my friends surely know everything there is to know about her in the public domain, but the minimum wage workers? Nope. They think that she is some wealthy corporate person, who lives in a million dollar mansion in the hills and goes around in chauffeur-driven cars. That's never an image that would help those seeking public office. Sadly, Meg could do nothing about it. She is what she is. She is a legal multi-millionaire, a fact she could not take pride in public because people would always say, "hey, you are rich, what do you know about unemployment?".  Due to this, a lot of women could not identify with her. This is reflected by the fact that more women voted for Brown than they did for Meg.

2. No participation in democracy: The fact that Meg never voted, deftly exploited by Brown, only hurt her already out of touch image. It made it look like Meg woke up one fine day and realized that she has a few hundred million to throw around and see if she could become a Governor. She has nothing to do anyway, except maybe give a few talks here and there. Lesson: People who want to run for public office in the future, please start voting from now.

3. Foul campaign: The amount of muckraking done by Meg's campaign is just too much. Yes, Brown did some too (that whole "whore" episode was so bad taste) but maybe Meg could have run a cleaner campaign and could have said what she has in mind for California instead of foul-mouthing how bad Brown is for the state? This makes it a lesser of the two evils situation and given the above two problems of being out of touch and never having voted, totally worked against Meg.

4. Money cant buy me love: Again and again, the major point that Brown hit Meg, where it hurt the most is the fact that she was pumping so much money into her campaign. Even people who don't usually vote know how much Meg spent. This has so badly ricoched on her, she never fully recovered from it. A strange victim of her own success.

5. Maid issue: Finally, the last nail in the coffin that sealed her defeat is the whole drama about her using an illegal immigrant as a maid for years. Less said, the more about this issue. This never went down well with the Hispanic community in California and for the right reasons. Lesson: Maybe Meg would have been better off, had she brought this out herself in the beginning of her campaign? Politics is a bloodsport and such skeletons in the closet will be adroitly manipulated by the opponents.

In the Republican wave of 2010, when the house was lost and major Senate gains being made, it must be really disappointing for Meg to loose. Maybe Mark McCormack can update his best-seller on "what they dont teach you at HBS" and include a chapter on "winning the public mandate" since clearly HBS did not teach Meg that. And if he does update, I will bid for the book on eBay.

Idiot Box = A Smart Box...

I wish I watched more TV. Then, I would have realized that there are many ways to optimize the idiot box. For starters, there is search. To jump from one channel to another, even on a set-top box, is a pain. The distance between two interesting channels is always too much. Second, there is no way for me, as a user, to find out where an interesting program is being beamed unless I check some papers or websites, which I will never do. Takes us back to what we do on the web daily, search. Now, had there been a way to directly search on the TV, the idiot box would become a smart box. Just provide a good search bar somewhere on the screen, damn it. But then, TV's don't have operating systems. So, why not create an O/S for TVs?

That's what Google TV is doing. No, Google will not make the hardware but will partner with TV makers like Sony to pre-install the O/S to make TV's smart. And Google will make small boxes (like set-top boxes) that can be hooked to existing TV's so programs can be made searchable. The Google TV then, will have a built-in browser (Chrome, or some mutant version of it) that will help the user easily navigate through the clutter of content, search through the programs to what the user wants to see, help enable them to record and play these programs later. We cant do this now, although we can record on DVRs and that is why Google TV looks so bloody promising. Where Apple failed, Google goes. While Apple TV was a great idea badly implemented, GTV looks like it will redefine the media business slowly but steadily.

Of course there is YouTube, owned by Google. Legions of people daily use this web video service to upload, and watch videos. Google TV will take advantage of this demographic, which is huge. YouTube is already making money, reportedly about $500 million in 2010. If GTV kicks off, this number will reach the sky because GTV will sync perfectly with YouTube, making watching videos even more easier. We dont have to start laptops and desktops to watch videos anymore. Then there are apps. Super cool apps are being built for Android every single day, and these apps will sit pretty in GTV and enhance and enrich the user's television viewing experience. Bottom line, television is finally going to marry Internet and its all coming together by 2011. Video is the fastest growing media on the Internet (check this: 178 million people watched 33.2 billion videos in just one month recently) and Google is neatly positioned to take advantage of that. In the end, watching television and searching for what we want to see is going to be redefined and very soon.

I wish I watched more TV, I probably would have thought about this whole search-bar-in-a-television business long back. I have my excuse, hope you have yours ;)

Thoughts on FaceBook's Revenue Model...

Another friend of mine posted more incisive questions to my ramblings on Google's precarious Social Network situation. He asked:

"Search Ads make so much money because the focus on "intent". FB/display ads work on 'brand awareness" and "generating intent". Yes, they are important, but monetizing them is hard. If you try too hard(like in Myspace) you end up pissing your users who leave your site.

What happens when this demographic grows up, or when everyone's FB circle becomes sooo huge that it becomes less useful, or if something better comes along? i.e how sustainable is FB?

Let me start off my trying to explain how Google makes money. Google's revenue model is very straightforward. It makes money through:

1. Advertising
2. Search results
3. Sponsored links
4. AdWords/AdSense

I agree that search ads work beautifully because of 'intent'. This means that more people search, more pennies fall into Google's coffers. On FB, people don't 'search'. Yes they do search for friends and groups etc but they don't search the web, they search within FB. So FB cannot monetize 'intent' as neatly as Google can. Regardless, advertising on FB has been growing like a virus in a petri dish. Lets dig deeper and check FB's revenue model in more detail. Those ads that you see on the right side (to the user) of your FB account brought in about $250 million to $300 million Users dont have to do anything on this (well they can click the Like tab and spread the message). These ads can also be custom targeted. For instance, if I am a fan of Beatles on FB, one of these ads could be Beatles' album or a guitar instruction DVD. I think that this revenue model is here to stay. Next, engagement ads, which need user-interaction and sometimes user endorsements brought in another $100 million or so to FB in 2009. These ads need the users to interact with the ad, they could be games that need to be clicked or puzzles or even quizzes (Haven't we all FB boys taken one of those silly "What animal are you" type quizzes at some point or other?). Next, Gifts and virtual goods brought in another $50 or million or so. These could be those ubiquitous and constant birthday reminders and gift suggestions that FB throws at us (quite surreptitiously). Finally, Microsoft which has an agreement in place with FB and sells around $50 million or so worth of banner ads on FB. Please remember that all these ar 2009 numbers.

So if you look really close, you have see that one through three from Google's revenue model above are applicable to FB in one way or another. FB is also smart enough (until now) to not piss us users off like MySpace (what a horrible site that has become) did. Sponsored links will appear as FB as the number of fan clubs and corporate profile pages grow. I think these corporate sites will bring in more revenues in the future. If for instance, Toyota wants to spread a product safety message or market a new technology, FB community would be a great place for such propaganda. A closed private network within the vast Internet. Revenues will keep flowing from that side. What is left is the mega-selling AdWords/AdSense type programs. Here intent plays a huge role, no doubt but I think its probably a matter of time before FB comes up with its own version of FaceWords and FaceSense programs.

Only a certain section of FB users are active on the site. Even if you take that as 40%, it translates to 200 million active users. The site is only a few years old and from what it was it has dramatically changed. As the users grow up, FB will morph itself into something more suitable to that particular demographic depending on the private network within. Basic services such as email, photos/videos uploading will only increase as the Net usage and speed increase. The users will start uploading more and more data to FB and keep throwing it around opening paths to better image searching (on which Google is working hard, even taking cues from rival Bing). So as the demographic matures so will that section of FB along with it, reinventing itself. The bigger the circle of influence gets, the better it is for FB from the perspective of advertisements. True, there could be a lot of chaff in an individual circle but that is users problem not FB's. Whom you add and what you share on your profile is entirely up to you. Such privacy issues will always remain (Whether its email or FB). The onus is on the user to be diligent about what she puts on the network. The safe bet being the assumption that someone somewhere has a copy of that image/document/whatever you put on the Internet. FB is not an exception to this.

Finally, I believe that FB has gained so much traction that something else coming up is really tough. There are so many social networking sites, its daunting to even keep a track (for an exhaustive list and the number of users on each network, check http://en.wikipedia.org/wiki/List_of_social_networking_websites). But FB is easily the most generic and famous among all these. Mail apps like Hotmail has about 350 million users (Yahoo around 170 million or so and Gmail 140 million or so) but FB has 500 million and growing. How will it sustain this growth or where the next 500 million will come from is tough to answer. It could acquire other budding social networks in Europe, increase presence in Asia/Latin America where it is weaker. It might also move into a different direction in terms of services/apps offered. I guess the possibilities are endless when you have 500 million registered accounts on a single network.

Why Google Needs A Social Network

A good friend of mine posted a very interesting question to my ramblings on Google's hubris. His question is:

"why does it even matter that google hasn't succeeded in social networking in spite of trying? should an aircraft manufacturer also make cars and succeed at it? should a tv network also make tvs or dvrs? some great companies have found it difficult to break into other related ideas. coke used to own a wine business that went nowhere. is there really a danger that google will become irrelevant if it doesn't do social networking?"

I think it matters a lot that Google makes its presence felt in the social networking space. Lets look at an analogy. Think of Microsoft getting into web browsers in mid-90s. Why did it matter to a O/S company to make browsers? It did because at that time Bill slowly realized that the future of IT industry is shifting from desktops to the Internet. Microsoft had to succeed in not only beating Netscape but also in bettering it (although I prefer Firefox to both). It cunningly reverse-engineered Navigator and bundled it in Office. Had Microsoft not gotten into browsers, it would have lost a great opportunity to make its presence felt in the Internet industry. Wonder how the tech world would have been now. Now that cloud computing is here to stay, it only makes MSFT's moves valid.

Google currently is the top dog when it comes to search. And it makes all its money thanks to its efficient search algorithms (thru Adwords and Adsense programs). But the way I see it, the net is growing into an animal the type of which we haven't seen before. For this animal, search will become a menial task. Don't get me wrong, people will still search and search hard for the net is so easy to get lost. We need a janitor who takes us where we want to go. But that's the role of the janitor, it stops there. Social networks offer the higher end services (if not now, in the future) and will make people stay more in their sites and engage users through various apps. Naturally, advertising dollars will shift to places where people hang more. How people navigate will matter less and where people will navigate to will matter more. Hence, its crazily important that a pure web company like Google has a strong presence in social networks, or it will risk becoming a more menial search service provider (not that its inherently bad or anything). This is exactly why Google is scrambling hard with its botched attempts like Orkut, Wave, Buzz and now something else.

If Coke fails in making wine it hardly matters because wine-making is not Coke's forte. But if Coke fails in expanding into other beverages (like filtered water, flavored water, juices, coke variants like coke zero, healthy beverages etc), it will not grow. Now being stagnant is the enemy of Wall St. Already Coke's market is stagnant. It has two basic choices, expand into new markets (China, India, Latin America) and/or move into new product lines. That's why Coke purchased Vitamin water. For Google, geographical expansion is not as important as paradigm expansion. The net's paradigm is shifting through social networks. Google China can take a hit from Baidu but FB has already gained traction across geographies. It does not matter if Apple is not into creating social networks for a business because Apple is not a net company, its a product company. But Google is a pure-play net company who's raison d'etre is the net. So if the net is moving into social networks, it only makes sense for this net company to have a strong presence in the same.

Had Sun gotten into consumer market (since it had some of the best technology/IP/brainpower) and focused on areas that Dell, HP focused on, it would still have existed today. Sun made halfhearted attempts, failed and paid a big price. If Google misses the social networking boat, I believe, that something similar will happen. For Google, the growth will come from controlling as much of the net as possible and its impossible to do this without a strong presence in social media. With FB and Twitter expanding the way there are, its hard to miss their power in Web 2.0.

I could be totally wrong in all this analysis but I sincerely believe in it. My belief only strengthens when I read/hear more about Google's perseverance in making a mark in social media. For a net company, it has to succeed in this space, or it can remain being an usher.