Microsoft mesh — Caught Between The Desktop And The Cloud, Part II: The Markitecture Solution

Last week’s column asked how you’d like to be Microsoft’s CEO, caught between the aging desktop and the emerging cloud. How do you grab a significant (Microsoft likes “dominant”) share of Cloud Computing. without cannibalizing your desktop business? Imagine shutting off the Divine Earnings Stream, the immense profits from desktop applications, Microsot Office, mostly before the Cloud applications profits kick in. Immense? In one quarter, Microsoft Office makes as much money as Google does in one year.

This week, we have the answer: Live Mesh.

We The People, are going to get the best of both worlds, the Desktop and the Cloud, without any disruption whatsoever. It is so beautiful, so obvious that I wonder: How come I didn’t think of it before? Actually, I did. I once was a corpocrat, we told stories like this all the time. Chief, no problem, here is how we get the best of both worlds. Same thing in politics, a French president campaigned on Change With Continuity. In the US, we have More Spending With Less Taxes.

The Theory Of Everything: Live Mesh synchronizes everything on all your devices — through the Cloud. An offer we can’t refuse. See, you keep using your PC, meaning Office the way you always did. But we, Microsoft, know you’ve been seduced by these sirens: smartphones, laptops, Macintosh and, soon, MID, Mobile Internet Devices (small pocketable computers not running Windows and using Cloud applications through non-Microsoft browsers). No need to feel guilty, my son, come back to our embrace — and don’t forget your wallet. Live Mesh connects all these devices and applications in a synchronized mesh. Here, synchronized means your data are kept identical, up-to-date, everywhere. Let’s say you have a PC at the office, a laptop and a smartphone. The PowerPoint presentation you write at the office will automagically propagate to your other devices. So, when you’re on the Eurostar going to London, you edit the same presentation on your laptop and the changes appear everywhere on your universe of devices and applications. And, while you’re at it, make sure to create different Meshes: one for your work and one for your family. This way, the pictures from your smartphones will propagate to your wife’s iMac, just like that. [Sorry, I've just been advised by Microsoft there is an update for Silverlight to be downloaded: Click Here. And, sorry again, "We Were Unable To Service That Request".... Just happened as I'm writing this on Google Docs.] The problem with this story? Too perfect. Who can disagree with keeping everything synchronized, consistent? In Valley argot: When it’s all pros and no cons, it’s a con! We’re being framed, the proposition is couched in an artfully arranged perspective leaving annoying details in the dark and no room for disagreement. Still in Valley-speak, we also call such discourse markitecture, architectural discussions for marketing purposes only. No need to worry about the Mere Matter Of Implementation. Which is where the ugly details lurk.

Examples: Do I want to replicate everything everywhere? Do all my company documents belong into my smartphone, or even my personal laptop? Does my home iTunes music and video library belong to my PC at the office? Away from industry conference slideware, pedestrian reality intrudes: the dream of seamless (another much abused word) synchronization becomes a complicated reality of segregation and permissions. Where can this file go and not go, who owns it, who can see it, modify it. Nothing new here, these are old, known computer systems problems without simplistic solutions. Things get even more complicated when what you really want isn’t synched copies of presentations but calendars, address books and more delicate data structures, think real-time business data for a mobile organization, running on incompatible systems. Ask the folks at RIM/Blackberry, it’s close to black magic — and a reason why Microsoft should buy a winner like RIM instead of a Yahoo!

And there is another “mere matter”, the matter of making money, the business model. At an industry conference this week, one of the Mesh evangelist, Amit Mital, was asked by a French journalist, Dominique Nora: What about the business model? In substance, the answer is it’s still very early to talk about money. Here, “it” refers to the availability of Live Mesh. In other words, we’re being conceptual here, folks, this is not a product announcement. Just an attempt to cloud the Cloud. Don’t worry about this Google stuff, keep using our desktop applications, we’ll protect and extend your investment as you use more and more connected devices.
Pure, undliluted markitecture, a clever attempt by Microsoft to finesse the Cloud vs. Desktop dilemma.

Next week, if nothing more pressing presents itself, we’ll examine some of the half-truths in Goggle’s theory of Cloud Computing. And, perhaps, my boss Mr. Filloux will let me take you through an exercise in kremlinology: commenting Ray Ozzie’s BS paragraph by paragraph. For fun, I used to do this for an industry analyst in Paris and it got me my second biggest career break. Who knows what this could lead to now. –JLG

The battle for New York’s papers

An update: Murdoch decides not to bid for Newday. The AP story.

Five newspapers in New York. Ranging from the most respectable to the lowest tabloid. One is the object of a bidding war, another is under siege by Wall Street. Who will control NYC’s newspapers a year from now? Here is an overview of the main players and scenarios for their possible next move.

#1 : Rupert Murdoch, owner of the New York Post and the Wall Street Journal.
Rupert completed the acquisition of the WSJ from the hands-off Bancroft family for $5.2bn in December 2007. He’s happy with his new toy. He set an office in the Journal’s headquarters overlooking Ground zero, he revamped parts of the paper (an upgrade is due this Monday April 27), and he will replace the managing editor Marcus Brauschli who resigned last week. Things are moving fast and hard, the usual Murdoch way. At 77, the Australian-born mogul seems rejuvenated by this acquisition. In his crosshairs: the New York Times. To Arthur Sulzberger, Times owner, he said in a note “…let the battle begin!”. And he means it. He will modify the Wall Street Journal to go after the Times’ audience, adding more politics, sports, and even culture.

But he won’t rest with this media trophy. On April 22, he made a $580m offer to buy Newsday. The New York (Long Island) paper is a nice business: a bit less than 400,000 copies; $500m in revenue for 2007 and a nice $80m EBITDA, many papers would be happy with such numbers. Newsday is to be unloaded by Sam Zell, the new owner of Tribune Company (The Los Angeles Times, Baltimore Sun, Chicago Tribune). Zell is saddled with a crushing debt load ($1bn due this year) that a collapsing advertising revenue can non longer support.

Why Murdoch would want Newsday ? Because he also owns the New York Post (667,000 copies), that has been bleeding money for long ($50m a year!). Murdoch wants to combine back office operations and thus save a lot of money. Plus he wants to increase pressure on the New York Times by controlling a broader spectrum of news — from highly respected financial stories to trashy tabloid gossip — and their related operations (syenergies on printing, adverstising, classifieds).
And, combining audiences, Newsday (870,000 copies) plus the New York Post (400,000) — even if there is duplication — would make life harder for the Times.

#2 : Michael Bloomberg, currently mayor of New York and main shareholder of Bloomberg LP, the financial information service he created in 1981. On April 19, Newsweek broke the story that Bloomberg could bid for the New York Times. The paper is facing a deterioration of its fundamentals, with an advertising base shrinking faster than expected and web revenues that are growing but are still far from compensating losses at the carbon-based version.

Why would Bloomberg want the New York Times? First, because he can. His stake in Bloomberg Limited Partnership is worth $11.5bn according to Forbes magazine In comparison, the market value of the New York Times Co. is estimated at less than $3bn. Michael Bloomberg is currently 65 and his second term as a mayor will end in 2009. There are obstacles. First, Bloomberg has to be embraced by the Sulzberger family: it controls the NYTimes Co’s capital through a dual shareholding structure. Also, there is no doubt that an open and friendly proposal from Michael Bloomberg for buying the Times (or a big chunk of it), would increase Wall Street pressure on the family. Such pressure is already intense (see below, the Harbinger paragraph). In other words, Sulzberger would have to be pragmatic and negotiate. Second argument: the business potential. Combining the pantheon of journalism (soon to be a mausoleum) and a Bloomberg’s fantastic business news delivery system is a no-brainer as far as shareholder’s value is concerned. Bonus result: Murdoch would have a much more difficult time eating Sulzberger’s (or, rather, Bloomberg’s) lunch.

#3 : The Harbinger-Firebrand private equity fund. To sum-up, the tandem now owns 20% of the New York Times. Their proxy contest succeeded, they get two seats at the Gray Lady’s board. Philip Falcone and his pal Scott Galloway are not exactly newspapermen, but they are nevertheless willing to push the Times to innovate. Their foray epitomizes the tremendous firepower of the big investment funds. In that instance, this power is about to reshape a icon of the media industry.

What to expect with the Harbinger gang ? Not that much because of the dual ownership model of the Times. But the management of the NY Times now must make moves in several directions: ownership, content, business model, staffing, spin-offs…

#4 : Warren Buffet. Investor, the wise man from Omaha (the Nebraska, glowing headquarters of its investment vessel Berkshire Hathaway) second to Bill Gates with a net worth of $52bn, according to Forbes. Warren Buffett is also a board member of the Washington Post Company. He knows quite a lot the newspaper business. He could be credible white knight for the New York Times.

#5 Mort Zuckerman. Owner of The Daily News (700,000 copies), Murdoch’s New York Post archrival. Friday night, Zuckerman announced he was to match Rupert’s offer ($580m)
for Newsday. Same idea as above, he whishes to combine operations and save money for both papers.

Why this battle is worth to watch, even from Europe?

1. It will we be interesting to see the results of Murdoch’s strategy to expand the territory of the Wall Street Journal towards a broader audience (French new owners of business dailies, do you read this?)

2. There is a new kind of players in town. Big hedge funds, like the Harbinger-Firebrands. Many escaped the credit crisis. We’ll see the results of the pressure they are applying to a company such as The New York Times.

3. Aside of the papers circulation, there is the online audience issue. The NYT Times, WSJ.com and even Newsday are big players in a field still pregnant with possibilities.

4. New York is New York. Among others things, it is the capital of advertising. Trends start there. So, watch.

> Related stories on MondayNote.com, here
> A profile or Rupert Murdoch. Newsweek published an excellent account on the way he’s functioning. In this piece, they revealed Michael Bloomberg’s itch to buy the New York Times
> The Bloomberg Monday Machine, the best story ever written about Bloomberg LP, how it works, its journalistic firepower, etc. In Fortune.
> The Harbinger Fund, the incredible history of an investor, Philip Falcone, whose fund is worth 760 times its was seven years ago. Read “The Midas of Misery”, cover story of Business Week.

Caught Between The Desktop And The Cloud

How would you like to be the head of Microsoft? Yesterday, you were the emperor of the desktop. Riding Moore’s Law, microprocessors doubling their power every 18 months, microcomputers became personal and made IBM’s mainframes passé. Microsoft Office, Windows on the desktop, Windows servers running Exchange became the industry standards. The resulting dominant position (some say monopoly) gave Microsoft unheard of pricing power and generated billions for shareholders, founders and employees. But, today, we have Cloud Computing. It is often characterized as all applications run on servers in the Cloud, the PC’s browser is merely the interface. Is this a pendulum swing back to the old mainframe and dumb terminals days? No. Is it the passing of Marc Andreesen’s 1996 prophecy: The browser is the operating system? We’re getting closer.

First step: delivering former desktop applications from a server. This is what Salesforce.com pioneered with the leading CRM application. Initially a struggle, Salesforce.com is now a brilliant success with many imitators. The genre is known as Software as a Service, Saas.

Second step: Google’s server farms. Combining technical brilliance, foresight and agile opportunism, Google now runs the largest sever farm on the planet, more than one million servers on three continents. Building on this infrastructure, on its engineers and on its brand, Google enters the Saas business buying applications such as Writely. We now have Google Docs. Essentially, this is Microsoft Office delivered from the cloud. Who cares which PC and which OS you run, all you need if Firefox (Linux, Mac or Windows) and a Net connection. I’m writing this column on Google Docs in Palo Alto, for my boss Mr. Filloux editing it in Paris.

Third step: working off-line. It’s nice to store data and run applications in the Cloud but what do you do when you’re on a plane? Google (and others) have thought about it and we see an off-line version of applications coming to us. Edit on-line, go off-line, write some more and re-sync with the server when you reconnect. The idea isn’t exactly new, a good sign. Consider Outlook/Entourage and Exchange in Cache Mode: you “own” a local version of the server data on your machine. You answer mail, edit your calendar locally. Then, you send/receive mail, re-sync you calendar when you reconnect.

Fourth step: offering the server farm to application developers. Again, not the newest of ideas: Amazon has been offering very good server services, AWS, Amazon Web Services. Small start-ups delight in using AWS to host their applications. Now, building again on its infrastructure, engineers and brand, Google tells entrepreneurs: Come and build your cloud on our cloud. You see the idea: getting it both ways, autonomy when off-line, full power, world reach when connected. I’m leaving many other examples and companies aside to go back to Microsoft. Today, Microsoft gets more than $300 (at retail) for a copy of Microsoft Office. That copy costs a few dollars to make. That’s pricing power. But what I called The Divine Earnings Stream is doomed to run dry.

Microsoft cannot and doesn’t ignore the threat but what can it do? In theory, they should do what Google does, deliver Office in Saas mode, cached locally and run form a server farm. In practice, they’re caught in three concentric prisons. First: servers. Windows Server works reasonably well for enterprise applications. But using it for a million servers farm is out of the question. Second: the Office code base. Big and heavy. Can it be adapted to an on-line/off-line Saas delivery model? Third: Wall Street. Free is a four-letter for Microsoft shareholders. How do you earnings trouble when converting from $300 per copy to a free or freemium Saas Office? This is what Microsoft is timidly testing with Albany. Not a Saas version yet, but Office by rental subscription. In the meantime, Salesforce.com and Google join forces, Google Apps now available with the leading CRM application. As for the question at the beginning: Bill Gates answered it by passing the baton to Steve Ballmer. –JLG

Wall Street — When the billion-dollar is the unit on paycheck

Couldn’t help to make the connection. The very same week hunger-riots hit the headlines after a surge in food prices, the magazine Institutional Investor released its ranking of the top hedge-funds earners for 2007. The laureate is John Paulson, unknown to many (not anymore) who made $3.7bn (almost half a Kerviel!) last year by betting against complex mortgages securities that subsequently collapsed. Other winners include George Soros (net gain: $2.9bn), and James Simons ($2.8bn), a former military code breaker who is now taking care of his retirement. The fourth one is Philip Falcone ($1.7bn) whose fund, Harbinger Capital Partners is putting pressure against the New York Times. One interesting piece of data : six years ago, it took $20m to be in this top 25 earners ranking. Now it requires at least $360m, 18 times more. Oh, by the way, in this week’s issue, The Economist reminds us that the World Food Program needs — urgently — $700m to avoid an additional 100m people to fall in absolute poverty. That’s the decimal figure of Mr. Paulson’s gain. Not his fault of course. As the French aircraft maker Marcel Dassault put it when asked about his wealth, “I can’t take more than four meals a day”.

Privacy –You liked data-mining? You’ll love reality-mining

Data-mining is the use of mass-data to extract behavior patterns such as food purchases or clothes consumption. That will sound rather innocent compared to this: a scientist at the MIT is willing to learn about individual behavior by analyzing, — in real time of course — data collected by our cellular phone. As explained in the last issue of the MIT Technology Review, Sandy Pentland is working on ways to improve social networking (he’s trying it with his students and colleagues) by finding where and with whom people spend their time. It can even predict such behavior, using statistical models. Worse, reality mining will even be able to detect the most intimate feeling like depression (through voice analyzer) or Parkinson tendencies (by analyzing data from accelerometers embedded in your phone). Such technology can also be used for a vast spectrum of applications. One example is improving computer models for the spread of contagious diseases. Another reason to be convinced that the mobile phone will be much bigger than the personal computer. This one is unpleasant.

google — It’s all about the physical internet, stupid

In a nutshell, Google is fine, thanks. Last quarterly earning showed a revenue of $5.2bn for the first three months of 2008, a 42% increase compared to a year ago. And the operating income is cruising at $1.55bn, or 30% of the revenue. Going deeper into the financial statements give some clues about Google’s strategy for the coming years. In one word : dominance will be secured through a control of the physical internet, i.e. servers and networks. Expenditures for the period amounted to $842m, a jump of 41% versus Q1 2007. Altogether, Google has invested $5.14bn in datacenters since 2006. A level that no operator can match. Not Microsoft, not IBM, not HP. That gigantic infrastructure will allow Google, not only to serve any advertising to any customer, but also to develop and host new applications, most of them having yet to be invented.

Classified — A reminder of a transfer : the Craigslist figures

Call it a transfer. As we have seen above, the classified market for US newspapers is down 20% to 30% from a year ago. In the meantime, Craigslist, the mostly free #1 classified website in the US is quietly heading for the $100m mark in revenue. According to a report by the research firm Classified Intelligence, Craigslist is expected to generate more than $80m in revenues this year. It is mostly profit since the San Francisco-based classified company has a staff of only 24.

Here a summary of Craigslist’s growth in revenue terms :

2003……… $7m
2004……… $9m
2005……… $15m (approx)
2006……… $30m
2007……… $55m
2008……… $81m (estimates)

Some of these figures are estimates since Craigslist is a privately held company and isn’t required to disclose financial results. Other numbers for Craigslist:

Unique Visitors/mo…..28m (source : Quantcast)
Page views/month……..9bn
New classified/mo…….30m
New jobs listing/mo…..2m

Craigslist’s business model still has much upside. On the 450 markets it serves worldwide, the company charges in only 11 of them, all in the US. Jobs listings cost from $25 to 75 and apartments ads placed by broker in New York City are charged $10. Just figure out the impact of any adjustments in the cursor.

Substituting pennies for dollars

For each dollar it gains in online advertising revenue, the New York Times looses six dollars in print ads. See the first quarter financial results released last week by the company Q1 2008 yielded a loss of $335,000 for the period compared with a net income of $23m for Q1 2007. Advertising revenue is down 9.2% for the group even though circulation revenue is up 1.9%.

A closer look is even more alarming. It shows a sharper decline in advertising on all regional markets (-26% for its New England operations and -19% for its other regional papers). This is actually a trend : a decline of 30% in advertising revenue versus 2007 is not uncommon in certain regional US markets affected by the complete collapse of both jobs and real estate classified ads. For the New York Times, the drop was 35% for jobs ads, 30% for real estate and 20% for cars. Needless to say, the entire US newspaper industry is bracing for the release of the first quarter results in the coming days.

The fundamentals of the sector are deteriorating much faster than anticipated. The advertising side is impacted by two factors: number one is the current recession that affects first the real-estate market, then job related ads, and now all sectors of the economy. The second factor is the structural migration of a large portion of ads towards Internet pure players — not only classified but display ads as well, since advertisers are now seeking a cheaper and measurable space on the internet. Both trends are irreversible. Revenue lost to the Internet won’t come back, even if the economy rebounds: every player will soon be addicted to a cheaper and more efficient internet. And circulation won’t help either. It is and will remain flat since newspapers are not keen to invest in major audience-boosting initiatives. In the meantime, newspapers are increasing their online audience (+12.3% for Q1 over a year ago according to the Newspaper Association of America).

What’s next then ? First, a major depreciation of assets. In an interesting piece published by Portfolio, Howell Raines, former executive editor of the New York Times, wonders if newspapers aren’t “The worst investment in America“, quoting the story of Brian Tierney who bought the Philadelphia Enquirer two years ago. Since then, Mr. Tierney has seen the value of his investment melting like the polar cap. The same applies to Sam Zell, the Chicago real-estate mogul who bought the Tribune Company last December for $8.2bn. As The New York Times reported recently Tribune Co. is dealing with a debt (now amounting to $12.8bn) that it is likely to default on, in the wake of a double-digit decline in advertising. The long-term part of this debt is now trading at 50 cents a dollar. And Mr. Zell is disappointed with the level of internet revenue (he actually coined the term “pennies for dollars”). As Howell Raines puts it in Portfolio, “[Publishers] have to find more revenue at a time when little, if any, elasticity is left in the old business model, even though newspaper profit margins still average a deceptively healthy-looking 17 percent. But those margins have been maintained by one-off fixes like radical slashes in payroll, trimming news holes and circulation, and a self-defeating stinginess in regard to innovation”.

Emerging economies –The design of the fourth billion cellphones

It took about 20 years for the first billion mobile phones to sell worldwide. The second billion sold on four years, and the third billion sold in two. 80% of the world populiation lives within range of a cellular network, which is double the level in 2000. Among other cellphone manufacturers, Nokia wants to own a big chunk of the next billion of handsets. The New York Times Magazine sent a reporter to follow anthropologist employed by Nokia who is scouting the world to see how people use their cell phone. He founds out that the ownership of a communication device such as a cellphone is becoming almost as essential as the access to running water or a sewage system. And in many instances, through amazing grassroots innovations, cellphones can help to reduce poverty. Read this great story in the NY Times Magazine.

The turnaround of the Financial Times

Call it the success stories of the British press. Last week we looked at the stimulating story of the Economist that is harvesting global praises both from its business performances and its journalistic insight. It is last edition, Business Week did the same for the Financial Times. Here are quick facts:
- in 2007, the pink austere business daily turned profit of $60m for a revenue of $600m. This come after a $60m loss in 2003 and $17m in 2004.
- interestingly enough, overall staff remains in the same numbers thanks to increase in digital team that has compensated cuts in the print. Its current headcount is about 600, less that half of the NY Times for instance.
- as for The Economist global view proven to be a strong concept. The FT has four edition plus a Chinese language website ; circulation is 150,000 in the US (vs. 1.7m for the Wall Street Journal) ; 140,000 in UK, and 160,000 for the rest of the world.
- advertising endorses this global reach : not only it increases by 10% last year, but also three quarter of the ads appears in more than one edition.

In the coming year, the FT will face a dual competition. The WSJ is willing to beef-up its international presence (if someone has a global view, Rupert Murdoch does) and the New York Times could try to become a global brand by taking over the International Herald Tribune’s operation and putting its own name on the international paper.