Two significant news items last week in the social network fray. First, cable giant Comcast bought Plaxo the n°3 social network behind Facebook and MySpace for a reported $100m (euro 64m). Plaxo sports a 40m members base (and a 50 people staff – I kind of like the ratio…) Why is Comcast doing this? According to New York Times tech blog Bits, “Comcast was a natural partner since Plaxo was already providing the Philadelphia-based cable giant with software to help integrate its cable TV, phone and Internet services into a common platform”. The integration is a bet on the inclination of TV series’ fans to congregate. It will be interesting to watch. The second item is the launch of Google Friend Connect. The service is of the typical Google everything-on-it kind. It enables every site to add a social network layer — and, here is the catch, to tap into big social networks such as Facebook or MySpace. As the state of the art now demands, it is a plug-in anyone can easily paste on their site. (To understand how it works, go to the Google video) or to read this description. Predictably, social networks giants are not elated. Three days after the Friend Connect rollout, Facebook decided to ban the new Google service from linking into Facebook. In a detailed statement on its developers site, Facebook is invoking privacy, the butcher touting veggie food. This is just the beginning of the showdown between the two giants.
By Pierre Joo*
Virgin Mobile USA, one of the biggest US Mobile Virtual Network Operator (MVNO) confirmed preliminary talks with Korea’s largest wireless carrier SK Telecom “to explore possible strategic opportunities.” These are surely related to Helio, another troubled US MVNO that SK Telecom controls through a 69% stake (Earthlink being the other shareholder). One possible scenario according to mocoNews.net, which first broke the news, would be for SK Telecom to buy out VM, inject some fresh cash in the newly bought company, which would in turn buy Helio in an all-share transaction. SK Telecom’s move comes as no surprise. Sure, Korean high school kids switch cellphones every four months, and probably represent the earliest of early adopters of new mobile applications. Yet, the Korean giant can expect no exciting future from a saturated market of only 42 million subscribers, more than half of whom already are frenetic 3G, or 3.5G users. SK Telecom’s future growth obviously depends on overseas expansion. SK Telecom launched Helio in the US market in 2006, expecting that its superior technology (among many other innovations, it was the world’s first carrier to launch 3G, or broadcast TV on mobiles, significant investment capacity, and local partnership with well-established Earthlink, would give it enough competitive edge to attract all the tech savvy, high-ARPU driving users, starting with the Korean American community. Yet in a mature market such as the US, it was simply not enough to convince users to massively switch to Helio. With a mere 200,000 customer base, Helio has not been able to lure enough users, in spite of significant investments from its shareholders (last September, SK Telecom threw in another $270 million). SK Telecom lacked two key assets: a larger customer base to start with, and its own network. Last year, it approached Sprint Nextel, the very carrier which sells wholesale airtime to Helio, with a USD 5bln bid along with PE firm Providence Equity Partners, an offer Sprint turned down last November.
Virgin Mobile appears to be SK Telecom’s second pick, but can it be the right one? A Helio-VM merger could make sense: both run on the Sprint network and target different users. VM has focused on prepaid services aimed at young users different from the tech-savvy crowd Helio has been busy luring with high-end handsets and innovative services inspired from those offered in Korea. Yet, VM is badly hit by the US market downturn and experiences increasing pressure from investors: the company has lost more than 75% of its IPO value a year ago, and its earnings are heading south. Some would argue that taking advantage of VM’s shrinking market cap is a good opportunity, but can two troubled MVNOs make a right mobile operator? — Pierre Joo
*partner at Attali & Associés specialized in asian affairs
Out of the blue, Bloomberg LLC, the financial news service giant created by New City mator Michael Bloomberg, created a new position to fit the size of its new recruit: Norman Pearlstine. The man is a veteran editor: 22 years at the Wall Street Journal (including 9 at the top news executives) and 11 years as the editor-in-chief of Time Inc where he oversaw 154 publications and acquisitions of two portfolios worth $2bn. Another particularity of Pearlstine is its career in the private equity business. He joined the Carlyle Group in 2006 where he worked in the media and telecommunication division.
Why bringing up this résumé? Because it fuels further speculation that Michael Bloomberg could buy the New York Times, and combine its operation with Bloomberg (see Monday Note’s special report about the battle of newspapers in New York). As New York Times Dealbook put it, “Mr. Pearlstine’s hiring — and [Bloomberg Press release] talk of “growth opportunities” — might signal that Bloomberg LP is more apt to be a buyer than a seller these days”. Rupert is watching closely.
The examples stated above epitomize the increasing pressure of shareholders activists. The CBS/CNet deal has been, for a large part, prompted by an angry campaign led by the investment firm Jana Partners LLC. Jana criticized CNet strategy and called for a complete overhaul of the board. Actually, more and more media companies are facing shareholder actions. In past Monday Notes, we described the New York Times under attack by the Harbinger-Firebrand combined hedge funds. The Deal.com, a financial website, reviews the scope and the reasons behind such activism.
The flurry of deals in the Internet sector raises another question: are we facing another kind of Internet Bubble? In a lengthy article, the Wall Street Journal tells the story of financial bubbles in general, from internet to Chinese stocks or the US housing market. Here are some clues: – “Bubbles don’t spring from nowhere. They’re usually tied to a development with far-reaching effects: electricity and autos in the 1920s, the Internet in the 1990s, the growth of China and India. At the outset, a surge in the values of related businesses and goods is often justified. But then it detaches from reality.” And therefore, it is extremely difficult to go against the tide of optimistic investors. Until the tip of the curve. – Then, “When a lot of borrowed money is involved — as it often is in a bubble — once prices peak, the speed of their fall is intensified as investors sell urgently to pay down debt”. – Finally comes the “trading signal” : “At the height of the tech bubble, Internet stocks changed hands three times as frequently as other shares. “The two most important characteristics of a bubble are: People pay a crazy price and people trade like crazy”, says one of the researchers
Interestingly enough, this excellent WSJ story details the sources for its research. The Princeton trio the article refers to had been hired by current Federal Reserve Chairman Ben Bernanke, who was at the time head of Princeton economics department. The team was made of foreign born students (Chinese, Vietnamese and German) ranging from 32 to 39 year-old. This speaks well of some American Universities’ vitality and cross-pollination with the public sector.
This week’s complaint in the Valley: Carl Icahn is an ugly capitalist. He only bought 3.9% of Yahoo! to extract profit from his investment and, in the process, he’ll destroy the company. Really? Isn’t this is a little rich coming from people who make money from stock options? You will recall Microsoft walked away from their Yahoo! bid writing Jerry Yang a nasty “protesting too much” letter on their way out. Monday morning quarterbacking rose to a new pitch and shareholders who hoped to cash out launched lawsuits – SOP, Standard Operating Procedure. More surprising was Carl Icahn’s decision to accumulate Yahoo! shares and start a proxy fight. Here, proxy fight means putting a proposal before shareholders against the board of directors’ party line. In this case, Carl Icahn tells shareholders to elect his “slate” (list) of directors at the coming July 3rd meeting. His pitch: Management and directors at Yahoo! are idiots. Before Microsoft’s offer the stock traded below $20. Those incompetents could have sold to Microsoft for $33 or so. Let’s kick them out. Our newly elected board will re-open negotiations with Microsoft and we’ll make you money. There are problems with that line of thinking but they’re not what the whiners and ankle-biters think.
Yes, there are good reasons to fear Carl Icahn. He is relentless, he takes no prisoners, sweeps in, shakes the company down (greenmail) or up (restructuring). He extracts a profit from his investment and goes on to his next prey. A vulture capitalist, say his critics (I thought this was us VC): he’s taking advantage of troubled companies. But how did these corporations get in trouble? The causes are commonplace: resting on one’s laurels, complacent Boards of Directors, failure to adapt to new competition, to strategize or just plain incompetent top executives. All this causing shareholders to lose money. The latest Icahn raid got Ed Zander out of the CEO job at Motorola as, year after year, the company failed to keep its leadership position in an industry they invented: cell phones.
So, Icahn waltzes in and the worriers worry: He’s going to do irreparable damage to Yahoo! The thing is, it’s already done, that’s why the stock tanked before Terry Semel got fired, sorry, before he “stepped down”. In 1994, Yang and Filo founded Yahoo! and, for a brief moment, made it the shining star of the Web, the place to go as a user, the place to be as an engineer. But, quickly, Yang and Filo decided that the dirty task of managing was beneath their creative level. They hired Tim Koogle to make the trains run on time, it didn’t quite work, then Terry Semel from Hollywood because “it” was all about media, about content. Never mind technology. Yahoo! failed to grow its server farms, to sharpen its search, to make shopping competitive, to fire the ones who needed to be fired. Google came and we know what happened: they shed a cruel light on Yahoo’s directors and management. So, Carl Icahn is doing what he’s known to do: pounce on poorly run companies, clean up messes and make money for shareholders. Unpleasant but healthy. Predators keeping the ecosystem in shape.
But, will it work? I doubt it. First, Microsoft made up its mind. Too messy. What were we thinking? They won’t be back at the bargaining table. Second, it’s the technology and the techies, Carl. It’s not a bricks and mortar business where the accountants, the attorneys and the investment bankers can rely on a stable set of formulae to remodel the house. This, the Web, is the new New Frontier, we make laws as we move forward. People, the real assets, users as well as engineers move around at will, creating and destroying value much quicker than at an auto parts company or a shopping mall conglomerate. Ask Terry Semel and, actually, ask any outsider who came to the Valley to try and mend its ways. Conversely, ask any outsider, hello J6M, who tried to run Hollywood.
Carl Icahn could end up being right about the diagnosis: Yahoo! needs a new Board of Directors and a new management. And he could be the wrong doctor because the patient is unlike any other he’s treated so far. Unless he manages to force Yahoo! to re-open talks with Microsoft — which seems to be the case .– JLG
When an aging TV network acquires one of the oldest independent web media properties, what does it mean? Last week, CBS took a major step to increase its internet presence by acquiring CNet Networks for a $1.8bn (euro1.56 bn). Created in 1992, CNet Networks is of the oldest media property on the internet. It runs a bunch of websites, ranging to news, games and downloads. The Company’s leading brands include CNET, GameSpot, TV.com, MP3.com, Webshots, CHOW, ZDNet and TechRepublic. On the financial side, CNet Networks shows mixed results: a nice revenue base ($406m for 2007) but a low operating margin (4%) (full statement here). For 2008, management expected revenue to grow by 8% to 13%, compared to 10% growth in 2006. Unfortunately, Q1 results were not exactly in line with those prediction: the first three months of 2008 yielded only 3% growth and a loss of $18m for the period. Wall Street made its unhappiness known. Those results prompted CBS to make its move: it offered a premium of 45% over the stock price. This is a strategic move: the TV network expects to triple its size of its Internet operations. Audience wise, CBS is expected to be among the 10 most popular Internet companies in the US. (CNet sites add 32m unique visitors a month to CBS’s 25m UV).
The sale of one of the last independent content site remaining, also emphasizes the intense competition in the sector. Last week, in San Francisco, I happened to spend time with Dan Farber, editor-in-chief of CNet news. Farber has 25 years of experience in journalism. He runs a tight ship of specialized reporters and editors (about 30 for the news operations, 120 for all CNet content-related personnel). In a sense, they compete the old (and good) way : thorough journalism, expertise, persistence, breaking news, and scoops. When we talked about competition, Farber took the example of the gadgets sector — an important segment for the tech crowd. Rather that facing competition from news organization similar to his, Farber has to deal with sites such as Endgadget or Gizmodo. These are run by very small teams and yet get a significant audience. Asked about the notion of “trusted brand”, an important pillar of journalistic presence, he said: “This notion becomes more and more fluid and dynamic”. Basically, audiences are less faithful in this Internet age, and this makes the news gathering process much more challenging. Part of the response, in Farber’s views, is to deliver news on a wider variety of platforms, such as aggregators and social networks. (As we speak, he watches is laptop and sees that the story he ran that morning on his blog was taken by Techmeme, a clever small news machine, part human part tech. “Excellent! This is the guarantee pages views numbers”. OK, he added, you don’t make money on social networks, but they represent an indispensable tool with which to build your brand among a young audience. To him, the last thing to do for a news site is to be shy about dispersing its content in the broadest possible way. This includes allowing deep-linking from others, even for a paid-for website, and being good at Search Engine Optimization (SEO). Like everyone else, CNet is getting 40-45% of its traffic from search engines, mainly Google.
This CBS move is reassuring: true journalism — as long as it adapts to the medium, to its unstable audience and its peculiar competition — remains a valued asset. This also applies — in a much smaller but nevertheless interesting way — to the acquisition of ArsTechnica, an excellent tech news site, by Condé Nast, for a reported $25m. Again, Ars is cleverly crafted news product, mixing original reporting and conversational style. Should the United States not being in a recession, the price would have been much higher.
The answer is simple: we love destruction. We don’t like order — unless we briefly own a monopoly, take it public or sell it to Cisco and recycle the money.
There was much to love in that Microsoft’s projected acquisition of Yahoo! The people, the cultures were incompatible, there were duplicate products, mail as an example, different advertising platforms and disparate server “farms”. Lovely.
Thanks to Microsoft’s unsolicited offer, techies were going to stream out of Yahoo! We were going to get a fresh supply of much-needed engineers for our start-ups.
You see, we love Google but they’ve been a pain in the wallet lately. How do you compete with three free meals a day, Google’s own buses transporting them to work and back, 20% time for their pet projects, on-site laundry and dry-cleaning pick-up and delivery, free munchies, soda, organic coffee and green tea everywhere on campus? The monstrous heap of amenities – I was going to forget massages and restricted stock, not riskier options – makes getting talent for our nascent companies much harder. Harder as in expensive. Expensive as in threat to our return on investment.
So, for a moment, we thought of Steve Ballmer as our benefactor. The Yahoo! acquisition closes, the engineer cashes her or his stock options after the prescribed interval and leaves.
This is a triple win.
First, the engineer pays off student loans or part of a mortgage. This results in a mind more open to risk, to joining an unproven company.
Second, the time the individual must “mark” before cashing out of the combined company is used to our benefit. Writing code for a new music widget site, a PowerPoint presentation to raise money, just thinking what to do next or schmoozing with a team in formation. This is all good traditional Silicon Valley use of OPM, Other People’s Money.
Third and last, building up a head of steam. Frustration begets creativity. Large company (let alone victim of an acquisition) politics creates negative energy. We invert it, we channel it towards building a shining (as in gold) proof of what the old fogies should have done if only they had listened.
Some say we shouldn’t despair. Wait one quarter or two, Yahoo’s performance will tank, so will the stock. In six months, Microsoft might get the company for ten billions less. And we still get a fresh supply of adequately frustrated engineers.
In the meantime, we’re watching a migration of execs from Google to Facebook. A COO, Sheryl Sandberg, a CFO, Gideon Yu, a PR exec, Elliot Schrage, to name but the most prominent. We’re not really interested in such individuals as their most prominent skills are corporate politics and PowerPoint. An exodus of engineers would be another topic, they know things we can’t see but care for. These execs, on the other hand, jump from a company with an immensely profitable business to one with a huge (70 million) user base but no earnings. Facebook is now raising money ($100 million) through debt because no investor wants to pony up more funds at the latest $15 billion valuation. Unlike Google, Facebook is still a private company, we can’t see the stock deals the transfuges are getting as a reward for their skill, experience, reputation and risk taking. Who knows, they might soon work for Microsoft. The company invested $240 million in Facebook in October 2007, getting 1.6% of the company, but it apparently declined to do more – for the time being. I guess we’ll have to wait a little more to see if Steve Ballmer gets us freshly motivated engineers out of Facebook. –JLG
In the previous issue of the Note, we run a story titled “Why publishers should grab the iPhone business“ Today, I’m glad to report that the Associated Press did it. AP announced last week that it was lining up to 107 partners to make stories available for the iPhone. The service will deliver local news from participating member newspapers and national and international news from AP. The reports will be organized by ZIP code (and we hope could be geolocalized for the future GPS embedded phones). Companies that help connect advertisers with networks of Web sites will be among the sellers of ads for the service and will share revenues with the news providers, AP statement said. The next logical step would be to develop specifically designed readers that will allow pages storage and fast offline reading.
This is called having one’s head buried in the sand very, very deep. In preceding articles, we have seen the extent of the shift (and the upcoming shrinkage) the western press is about to experience. And, in parallel, how much newspapers from emerging countries are booming.
Guess what? In a survey made by Zogby International for the World Editors Forum, (details on the Editors Weblog) 56% of editors think that most of the news will be free in the future, whether it is print, online or mobile. But the most amazing is this: only 48% Western European editors — they are supposed to be in struggling mode — believe that news will tend to be free, versus 61% of news executives from emerging markets such as Latin American, Asia, Eastern Europe, Russia, where paid press still enjoys great successes. Let’s grab the shovels and head for the sand dunes.
Another interesting finding of this report: almost nine editors out of ten think that newsroom integration is inevitable. What strikes me is there could even be a discussion about this integration question: a) we all know the business is massively shifting towards digital; b) most of the resistance comes from the oldest dead-tree personnel; c) therefore what a better instrument to dilute this resistance-to-change culture than blending the most conservatives forces of a newsroom into younger, fresher minds? Having said that, integration must be done with extreme care, taking into account many elements such as the size, the age of the structure and the people, the cooperation of senior news executives (most of them, yes, will have to be replaced in the process). I’m not saying it is simple, I’m saying it is inevitable and that it must be anticipated, planned right away.
Last week in Beverly Hills, one man was grinning. Marcelo Benez, advertising director of La Folha de San Paulo is a happy man. His mission is to use every possible features allowed by modern printing machines, to offer his advertisers a variety of special formats. This goes beyond the limits of the publication itself : pop-up that surge from a page, complicated origami glued inside the paper, poster-like ads 16 times the size of a broadsheet page (“we don’t sell by the inch-column, but by the meter sometimes”, he laughs). That led to a stream of exclusive campaigns for the launch of products and services. A French daily for instance, does less that a dozen of “special operations” per year. By contrast, La Folha took up 287 of such events last year! Results are stunning : in 2007, the overall Brazilian economy grew by 5.4% ; for the ad market the growth was +9% and la Folha de San Paulo made a +19.3% progression in ad revenues.