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Archive for May 5th, 2008

Another Brilliant Scoble Linkbait: This Time on MSFT/YHOO/GOOG

Posted by Bob Warfield on May 5, 2008

I always enjoy Scoble’s linkbaiting.  It has to be one of the reasons he is a premier blogger about town. 

His latest purports to show that both Google (obvious) and Yahoo (What?!?!) are the winners and Microsoft is the loser.  His evidence?  A chart of stock prices since the deal was announced showing the performance of the three stocks.

Not so fast, though Scoble.  Of cources Google is up, but Microsoft and Yahoo are where they are on that chart for the same reason that Yahoo hasn’t crashed all the way back down to the $21 a share many investors say it’s worth absent Microsoft.  “And why is that?” you may ask.  Because a reasonably large contingent of investors are still betting that Microsoft will be back after shareholders soften up Yahoo management a bit.

I don’t think so.  As I pointed out in my original post, I think Ballmer and Co were hurt by how hard Yang and Yahooligans fought to avoid the embrace.  Ballmer extended what he saw as a generous offer and got back panicky scorched earth.  I mean come on, where’s the love in that?

I’m not the only one on that kick.  Henry Blodget says something strikingly similar:

Is Microsoft’s bid withdrawal just another bluff? It’s possible. Steve’s a card player, and he and his advisors probably foresaw the shareholder storm that is now walloping Yahoo–as well as the chance that this storm could be so intense that it could force Yahoo into a deal.

That said, we don’t think that’s why Ballmer walked. We think he walked because:

  1. His ceiling really was $34-ish, and it probably seemed that Yahoo just wasn’t going to get there.
  2. His enthusiasm for the deal had waned over the past two months–as many of his own shareholders, Yahoo management, and the press peed all over the combination.

In short, we think Steve walked because he just wasn’t that eager to do the deal anymore. And given Yahoo’s position since the bid was announced, we don’t blame him.

When the world figures out Microsoft isn’t coming back, or at least not at anything like that $33 offer, gravity will prevail and Scoble’s stock chart will look different.  Microsoft investors who think the deal was a mistake can heave a sigh of relief and raise that stock, and Yahoo will regress to where it had been, or worse.  Meanwhile, the one sure thing is that Google is likely to continue its rise.

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Henning Kagerman says Ballmer should’ve upped his bid to get Yahoo.  That’s pretty rich.  When was the last time SAP offered a 70% premium for a company they wanted to acquire?  What would Kagerman’s response have been, I wonder, if his generous 70% offer had been spurned?

Posted in saas | Leave a Comment »

Apotheker’s 10X Operating Cost Reduction for SaaS Isn’t Enough

Posted by Bob Warfield on May 5, 2008

As I reported earlier, SAP is saying the delays in their SaaS offering are due to problems with operating costs.  Despite charging a very high price of $149 per seat month, Larry Dignan reports they still can’t make money on the offering.  According to Apotheker, they still haven’t achieved the 10x cost reduction they had targeted.

Here’s an unpleasant newsflash: even 10x is not enough to be competitive in the SaaS world.  As I’ve reported here before, the average SaaS player delivers its service more like 16x more cheaply than On-premises software.  If SAP is struggling to get to 10x, it may be quite a while before they’re fully competitive with the SaaS pure plays.

Cost to deliver is a huge competitive advantage for any organization.  Just ask Dell or Wallmart.

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My colleagues at the Enteprrise Irregulars interviewed Henning Kagerman and came away with this:

There’s a very close link between the TCO of Business ByDesign and NetWeaver. The TCO is not so much hardware; There are too many processing steps in our hosting. We can continue to do manual steps when first upgrade Business ByDesign from 1.0 to 1.1, but it’s not predictable in way where every client got it at once and in the same way.

How many ways can I say that the cost reduction to be competitive in SaaS is a function of reducing the requirements for operations headcount and that it ain’t easy.  Real technology has to be purpose built for the SaaS world.  NetWeaver obviously was not.  Hopefully even the On-premises crowd will reap some benefits of these changes.


Posted in saas | 9 Comments »

Sun Sees Amazon Changes the Game Even for Hardware Vendors

Posted by Bob Warfield on May 5, 2008

The announcement that Sun has partnered with Amazon to make Open Solaris available on Amazon Web Services is fascinating.  It’s free, so Sun sees no revenue from it.  One wonders if Amazon has charged them for the inconvenience, so it may carry a cost.  In fact somebody somewhere paid a cost to at least cover the testing and development of whatever provisioning is required to get it started.  So why do it?

At the moment, Amazon is running away with the cloud computing show.  Last I heard there are over three hundred thousand developer accounts there.  It’s a thriving ecosystem, and if Amazon sold no more new customers, one has to suspect that just the growth centered around those existing customers would be significant.

Suddenly, this is a platform that matters for everyone that is trying to establish their own platform.  If you want your OS (Open Solaris) to have a chance, you’d better look into Amazon Web Services.  There is no Microsoft equivalent yet, so that’s a problem.  As I’ve said, Ballmer would’ve done better to buy Amazon than Yahoo, so perhaps now he’ll give that a try.  If you want your database or application server (hello Larry Ellison) to thrive, you’d better look into Amazon Web Services.  If you want your language (hello Python, Ruby is already there with Heroku) to be ubiquitious, you’d better look into Amazon Web Services.

In fact, as if to underscore this realization, the Amazon partnership is just one aspect of Sun’s official launch of Open Solaris.  But, it is a critical one.  It will be interesting to see how well it does, and whether there are aspects of the Cloud Computing world’s needs that give it any special advantages.  I’ve heard of a few things, but it hasn’t really sounded compellling so far (see Jason Perlow for more).  There’s an awful lot of momentum behind Linux already.

The availability of Amazon Machine Images does another thing.  These are freeze dried snapshots of a particular collection of software installed on a machine.  This makes them easy to propogate.  The best practice combination of various pieces of software can be combined, converted to an image, and made available for broad consumption.  This lowers operating costs and helps ensure that the “good” combinations are more prevalent in this ecosystem.

Sun’s announcement is a fasciniating indicator of just how important Amazon Web Services has become.  Look for more indicators as we go forward.

Posted in amazon, platforms, saas, strategy, Web 2.0 | 2 Comments »

What Now Yahoo? And What Now Microsoft? It’s Pretty Clear What Now Google…

Posted by Bob Warfield on May 5, 2008

By now you must have heard the news that Microsoft has walked away from the proposed marriage with Yahoo.  I got the first scoop on this from Michael Arrington.  Apparently Yahoo wanted $38 a share in the end and Microsoft would go no higher than $33.  That’s quite a gulf. 

Per Ballmer’s letter to Yang (which Microsoft themselves published), the Microsoft offer was a 62% premium to Yahoo’s stock initially, and rose to 70% later.  That’s a hefty premium: about twice the premium Oracle offered BEA, for example.

What’s next?

Yahoo’s response to the news focuses on the idea that, “The distraction of Microsoft’s unsolicited proposal is now behind us.”  Piffle.  The trouble is just beginning and that roar you hear is an oncoming freight train with the Yahoo bus stalled across the rails.

Scoble calls Yahoo, “a bleeding animal. Left lying, gasping for its breath, after a larger animal (Microsoft) struck and then walked away after it proved too difficult to eat.”  He goes on to list daunting challenges.  They’re mostly perception–perception that Yahoo is a wounded animal, perception inside and outside that Yahoo isn’t worth the $37 Yang asked for.  But perception counts at a time like this.  It’s very hard to rally the troops if they think the leadership did the wrong thing. 

The prevailing view is that lawsuits will fly, and it isn’t hard to see why.  Mathew Ingram flat out says, “Jerry Yang should be fired.”  He won’t be the first one to echo that sentiment, especially among shareholders.  Om Malik sees the offer withdrawal as Microsoft proving again that it is still the Prince Machiavelli of Technology.  The drama has proven that Yahoo has no real suitors to merge with and that its best option to remain independent is to give its online advertising to Google.  Surely that is a dreadful one-two combination for any company to face.

Fred Wilson, who thinks Yahoo did the right thingstarted a poll to vote on how low Yahoo’s stock would go Monday when the markets open again in the wake of this announcement.  His vote is for a close at $26, since he feels Microsoft has shown the real value of Yahoo.  I voted $20, because I don’t think Yahoo is worth what Microsoft bid to anyone but Microsoft, or perhaps Google, but the latter isn’t going to happen for anti-trust reasons.  As I write this, the poll is focused on the $20-24 range and there are more betting it’ll fall below $20 than that it will hit Fred’s $26 target.

Will the Google deal still go through?  Most pundits think Yahoo has to pursue it to placate shareholders by increasing profits.  Certainly Yahoo has talked up the efficacy of the trial to the point where it seems hard to back down.  If they do, one would expect their excuse will be the regulatory issues both they and Microsoft have alluded to that are involved with giving Google that much more of the business.  Meanwhile Yang, Filo, and the Board will face a barrage of shareholder lawsuits.  Hard to see how the shareholders lose either.  The premium that Microsoft offered sure seems like the sort of thing that fiduciary responsibility would have compelled them to take.  In retrospect, they will seem unforgivably greedy.

Microsoft is not without angst either.  There had been a story that Microsoft’s MVP’s were pushing to kill the deal.  That reflects a lack of faith in Ballmer, whose baby this deal was.  It can’t have been comfortable for him to back down, although it does let him play the, “I’m more reasonable than you thought, after all,” card.  Techcrunch goes so far as to suggest Ballmer might need to go.  As critical as I’ve been of Microsoft, and of this deal, that’s just ridiculous.  I’ll chalk it up to link bait, although if there’s not some progress made on the Vista debacle over time that may change.

I think something a little different went down here for Microsoft.  I suspect Ballmer and others at Microsoft were genuinely surprised that Yahoo would fight so hard to avoid being assimilated.  These guys love Microsoft, and basically grew up with it.  I know from a lot of friends that there is tremendous loyalty there–just as much as at places like Google.  So I suspect they were genuinely puzzled, and a little bit hurt that Yahoo would spurn them.  After all, Microsoft is a great home for Yahoo, which in their minds was stumbling badly, and they had given Yahoo an incredibly generous offer to go fight mutual enemy Google.  Couldn’t Yahoo see that Google was eating the industry up alive?

Many say that the Yahoo deal was set up to define Ballmer’s career.  Don’t forget–Ballmer’s had a career for years and years at Microsoft.  I doubt he sees this deal as career-defining as others may.  In fact, his walk away seems to me to be a great sign of a mature leader not willing to win at all cost.  It’s a great counter-example to the volatile reputation that he’s developed over the years.

Ballmer’s letter to employees leaves the door open to pursue other partnerships and investments to realize the competitive avantages that come with scale.  Don’t be surprised if there isn’t more news at some point.  My own personal suggestion was that Amazon would make a better acquisition than Yahoo for a variety of reasons.  After all, Microsoft wants to own the cloud, and Amazon is rapidly selling lots for builders there.  Also, Ballmer is all dressed up and left at the altar.  He’ll be looking for another big date.  Who will it be?  MySpace?  AOL?  Someone else with scale?  $44B goes a long way.  A stumble from Facebook and it could land in the spider’s web.

I’ll go firmly on the record as saying Microsoft, and Ballmer, did absolutely the right thing here, and Yahoo has badly erred.  I never liked the Yahoo deal to start because I don’t believe it offers real value.  The bloom has been off the Yahoo rose for some time, and the company is in decline.  The premium offered was generous, and it has been rejected.  Time to move on.

How do others benefit or suffer from this outcome?  You have to figure Steve Jobs and Eric Schmidt think it’s all good.  At worst Google can continue to take share from the weak and disorganized, and Apple need not fear a suddenly resurgent Microsoft.  At best, Google gets the deal to take Yahoo’s advertising and they win big.  I just don’t see how they can lose on this outcome.  Even if Microsoft comes back later to try again, Yahoo is badly mauled and unlikely to be anything but weaker by then.

Whatever else happens, if either Yahoo or Microsoft seriously stumble from here on out in their fight against Google, this event will go down in history as the day the two sealed their fates.

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Amazing.  Here it is Monday morning and Yahoo has no announcement of an ad deal with Google nor any others news save vague platitudes from Yang.  The stock is getting hammered.  It’s epic and sad.

Meanwhile, guys like Jim Cramer (sorry, you have to pay to hear it, so I won’t give a link) have started ranting and raving about the hubris of Yahoo’s move to spurn Microsoft.  It’s going to get a lot worse!

Posted in strategy | 1 Comment »

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