Abstract Networking Thoughts: ONS, Sad State of DC Networking, Random Market Thoughts

I will be spending the upcoming week at the Open Networking Summit (ONS) in CA.  With all the SDN buzz over the past year, this week’s ONS appears to be a good test of the hype.  Will the energy be sustained by the event or diminished?  Will the event be a repeat of 2011 or will fresh, new ideas and progress with SDN be showcased?   Personally, I do not look forward to industry conferences, but I am looking forward to this conference.   I will try to blog some thoughts during the conference or each night.

Sad State of Data Center Networking: An interesting post this past week over on the Packet Pushers website concerning the sad state of data center networking.    The second paragraph entitled the Inconsistent Network makes a lot of sense to me.  I have been in the networking business since 1988, when my boss at the time explained how spanning tree works.  What I have found to be true in networking across the enterprise-service provider continuum is that selling in the transition zone from legacy to emerging solutions is where the most value can be created.  Selling legacy technology is a simple theta calculation.  Selling the future in which the proposition is all or nothing, or forklift upgrade or a limited solution set is not a big winner.  How vendors address the transition zone is the difference between winners and losers.  I will be looking for indicators of how SDN vendors intend to sell into the transition zone at ONS.

Random Market Thoughts: Market rips on Thursday fueled by the global growth recovery China GDP vibe and the market declines on Friday fueled by the global growth recovery stalled China GDP disappointment vibe.  This is why all the “trader talk” is stupid talk.  If you are actively trading equities in this mess, good luck.  I trimmed my exposure heading into earnings, but still long a few equities such as FNSR, as I think inventories are lean, bad news priced in and any uptick in CAPEX should benefit FNSR.  I starting shorting oil and gas this week and feel good holding this through the summer.  GOOG reported this past week.  I think my call on GOOG over the past year was correct, but another class of stock is confusing.  When stocks becoming confusing, my reaction is to not be involved.

 

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private. **

October 2011 Earnings 1.0

Here is the start of my October 2011 earnings thread.  I am already a bit late having been positive on GOOG from the past, I did tweet it last week.  A few reactions so far:

GOOG: Sticking with my GOOG call from April, not much to update.

INTC: I have been positive on INTC based on my web 3.0 thesis.  It will be interesting to see if results were strong enough to break INTC out of the ten year down channel on a weekly basis.  Need a close above $22, but a close above $23.16 on a weekly basis would be a strong signal as that is the 38.2% Fibb going back to 2002.  I pitched this stock and thesis to a PM in NYC in September and he laughed at me.  Who is laughing now?

AAPL: I still like the product cycles and would be a buyer as it settles.  It is all about product cycles.

JNPR: JNPR was defiantly on the mind when I was thinking about my web 3.0 thesis and Moore’s Law exhaustion.  I read about fifteen reports on JNPR this morning, which is probably ten too many.  I would start by saying I think the company is in the midst of (i) product, (ii) market and (iii) leadership transitions.  These three forces need to harmonize for the company to go on a run and I do not see that happening for some time.

INFN: The company is making a bet on 100G and that they have the ability to scale their business to be a supplier in size to tier 1 service providers.  One cannot criticize the company for not taking on difficult endeavors.

APKT: Waiting on the official results after the pre neg which I posted about here.

YHOO: I think this stock is un-investible.  Negative product cycles and poor leadership; are there any other questions?

PWAV: I posted some thoughts on that last night.

MACRO: The market is really difficult to deal with on a daily and weekly basis.  It reminds me so much of 2008, even though I see people on CNBC who say it is not 2008.  I have posted on this in the past, but I will add when the market swings on reports from news outlets like Reuters, CNBC, WSJ and government officials and central bankers, we might as well appoint a Committee of Public Safety and start the Reign of Terror.

I will endeavor to post additional updates to this tread over the next few days.

Stocks of interest in the next few days:

10.19: RVBD, WDC

10.20: NOK, ERIC, T, STX, MSFT

10.21: GE, VZ

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. ** 

Content Delivery Networks (CDNs) 08.21.11

I had an email question two weeks ago regarding CDNs and where they are going or not going and who will be the winner or loser.  I answered the question privately, but it gave me cause to think about content deep networking, CDNs and what is going on in the network because of the evolution to longer form data, or big data depending on what term you prefer.  There is no question that Web 1.0 (~1995-2000) built on small HTML files is much different than Web 2.0 (~2002-2008) and Web 3.0 (~2009-?) with streaming HD content, state aware apps and access points at the edge that have higher connection speeds and capacities; all that being said, I am still a bit of an OTT skeptic.  Here is a chart I produced over a year ago using data from AKAM and CDN pricing trends.  The chart is not updated, but I think it shows the conundrum of having to serve longer form data in a market of declining ASPs.  I noted on the chart the start of iTunes, which is the poster child for the old content consumption model in which the user had to own the rights locally for the content.  The new content model which iTunes is using too, the rights are licensed by the content provider (AAPL, NFLX, AMZN, etc) and the end-user rents usage rights, usually as a monthly fee.

When I wrote that I was an OTT skeptic, I meant that I find it hard to quantify the OTT problem and I find that service providers (SPs) find it hard to quantify the problem.  I think there is no shortage of emotion, but I am not sure everyone is talking about the same problem or maybe they are just using the perception of a problem to force a discussion about another subject matter, which is what I really believe.

To start, let us step back and ask what video/OTT problem are service providers and the infrastructure companies are trying to solve?  Is it a bandwidth problem (i.e. real capacity constraints), a revenue problem (i.e. SPs want a share of NFLX revenues) or a CAPEX problem (i.e. SPs do not want to spend)?  I talk to a lot of people on many sides of the debate; I talk to equipment companies and I read the industry and investment reports.  I am skeptic when smart people tell me that it is a well known and understood problem that video is clogging the network.  Is it?  Can someone show me some stats?  When I read puff pieces like this, I struggle to grasp the meaning.

If OTT video is growing 40-50% over the next four years it is somewhat meaningless to me because network technologies and network capacities are not static.  The whole OTT space is a bit of conundrum.  There is a lot of noise around it and that is good for selling, marketing and thought leadership, but it seems vastly under invested if there is such a problem on the scale it is made out to be.  I think the data center (compute) scaling (more VMs on a Romley MB and the virtualization of the I/O) into the network is a much, much bigger market.

What are CDNs really good at?  Distributed CDNs like AKAM are really good at distributed content hosting like big file upgrades and regional specific content distribution like day and date.  iTunes is hosted by AKAM and they do a good job of ensuring you cannot download content specific to the UK in the US.  AKAM also offers really good site acceleration services for web properties that have low to medium traffic demands, but might have a spike in traffic due to an unforeseen event.

Centralized CDNs like LLNW and LVLT do really well at serving up specific content events and they are much better at hosting content that requires that state be updated, think Gmail which likes to update state on a regular basis.  Before thinking about CDNs, think about NFLX or Youtube.com (YT).

A year ago most service providers (SPs) who thought they had an OTT video problem viewed YT as the biggest problem, but as a problem it was small.  NFLX has overtaken YT traffic.  From a SP perspective, there are several ways to handle the problem of OTT video or user requested real time traffic.  (i) SPs can ignore it, (ii) SPs can meter bandwidth and charge consumers more for exceeding traffic levels, (iii) SPs can block it or (iv) SPs can deploy variations on content deep networking strategies.

Content deep strategies use products from companies like BTI Systems and JNPR (Ankeena acquisition) to mention a couple.  These companies deploy a caching CDN product in the network around the 10-50k user stub point.  The device replicates popular content that it sees requested from sites like NFLX (it is a learning algorithm) and thus the 10-50k user group does not have to traverse the entire network topology for popular content from streaming sites.

Similar to a cable node-splitting strategy, hosting popular content deeper in the network works well and seems to slow bandwidth consumption growth rates to very manageable levels.  CDNs win because they do not have to provision as much capacity and the SPs win because they have less money going to the CDN and less capacity issues in the network.

The user experience is better too.  When you see ATT and LVLT wanting to build a CDN service (GOOG too) it is really about content deep and putting content local to the user.  This is something I wrote about in my blog back in April.  Recently, there were reports of LVLT and LLNW combining CDNs and this makes sense to me as scale will matter in the business.

In terms of BTI, I listened to a webinar they produced about a month ago that was hosted on Dan Rayburn’s site.  BTI is claiming 10 content deep networking customers and in trials with a tier 1.  Specifically (if I heard the presentation correctly), they said that at the Tier 1 SP trial, OTT video traffic was growing at 3% per month.  311 days after insertion, video traffic is growing at 0% a month and that was during the rise of NFLX.  When BTI started their content deep solution it was all about YT, but this has changed in the last 9 months due to NFLX.

What I really think this entire debate is all about is money.  I put a chart in the April post that you can view here.  It is all about the chain of commerce.  Why did we pay $15 dollars for album in the 1980s and $9.99 for CDs in 1990s?  The answer is the chain of commerce could support that pricing model.  Today, the chain of commerce is shrinking and consumption habits have changed.  SPs do not want to be relegated to a “bits r us” business model.  They want a piece of the revenue stream from the content creator, to the content owner, to the content distributor, to the CDN, to the SPs and finally to the consumer.  I think the real issue is not the network, but the network is being used as a facility to broker a bigger discussion about the division of revenues.  I could be wrong too and the whole internet could collapse by 1996.

/wrk

* It is all about the network stupid, because it is all about compute. *

** Comments are always welcome in the comments section or in private.  Just hover over the Gravatar image and click for email. **

Wondering why my 80 year old dad wants a smartphone and what this means for the mobile device industry

Over the weekend my 80 year old father sent me an email asking for advice regarding upgrading his Samsung feature phone to a smartphone.  Apparently my sister had suggested a Droid and my brother an iPhone and my dad was thinking Blackberry.  I replied to his email asking him why he wanted to upgrade, how he intended to use the device and what is in the new device budget.  My dad is not an early adopter of the latest technology trends, but his is not illiterate either.  Below is a picture of him from the Korea War when America was still using exchange name calling codes in a two letter five digit format.

He replied that he did not know what social networking is, but he would like to talk on the phone, read email and text.  He has never sent a text message.  That forced me to think about what kind of device to recommend.  His current feature phone was designed to be a phone.  When the engineers at Samsung designed the clamshell phone my dad is carrying their first design objective was to build phone for talking.  The phone has a text message function, but with a standard telephone keypad it is really not a texting device if you are over 18.  As a phone for talking, the Samsung device is great.  The battery lasts for days, rarely drops a call and it is small and easy to carry.

When the engineers at Apple designed the iPhone, their first thought was to design a mobile computing platform that leverages the Apple OS.  They then thought to put a voice application on it and call it a phone.  That is much different design path than the Samsung engineers who designed a phone and thought to add some text functions.

I have been carrying a Blackberry device since 2000.  It was not always a phone, but it has always handled email.  That was the magic of the Blackberry.  The engineers at Blackberry said let’s design a mobile email device that uses the cellular network.  Then they made it a phone and after that they decided to make it web device.  It was the step beyond email and phone where Blackberry stumbled.  Today, there is no magic to email on a mobile device.

Nokia made a colossal set of mistakes, but the biggest like Blackberry was losing the innovation war to Apple and buying Symbian.  Symbian was a great operating system for the feature phone era – but it failed in the smartphone era.

Motorola or MMI as they are now called simply stopped innovating.  They fell behind the other device leaders after failing to replace the magic of the Razr and had to recruit a new CEO a few years ago out of QCOM named Sanjay Jha.  I have met Sanjay many times and I give him credit as he realized the market for mobile devices was going to be a product development marathon.  Product cycles will matter.  Miss a product cycle and it becomes hard to catch up.  That is what is happening to RIMM in the present year.  When Sanjay took over he knew he needed an OS that would be a winner and he chose Android.  The whole mobile device market really comes down to three operating systems: Android, Windows Mobile and iOS.

HTC embodies the concept of product development as a marathon.  They are a product development machine with phones on Windows Mobile or Android.  Samsung and Sony-Ericsson are another two developers of smartphones who have seen the light and are now using Android or Windows Mobile.

The business model in the handheld mobile device space is to pick an OS: Android or Windows as iOS is not available for license and webOS (developed by Palm now owned by HPQ) is really a cool OS, but very small amount of market share.  Next you need to develop a nice user interface (UI) to go on top of your OS.  Hire some excellent hardware, packaging engineers, use the latest chips from QCOM, STM, IFX, BRCM, then build a device, find market distribution and off you go.  This is a somewhat long answer by me to the Edlar Murtazin blog post today speculating that MSFT will by NOK’s device business.  If I was NOK and MSFT wanted to buy it, I could not sign the paperwork fast enough.  If I was MSFT, why would I want a mobile device business?  I have a mobile operating system business.  Which is more valuable?  I think the later and we can debate if MSFT is executing well, has leverage, blah, blah, blah.

When I first saw the iPad I was a bit skeptical.  I had accurately guessed the price at $499, but I was not certain it was a game changer.  Then I used the iPad.  I now have three in my family and it is an amazing device.  I am still carrying an almost two year old Blackberry 8900 as a phone, because it works well as phone and I really see no need to get a new phone now that I have an iPad.  I am also a T-Mobile customer and have been one since 2002.  I am waiting to see if the merger with ATT goes through, what my options are post closing before making any new device or service provider choice.

Back to my advice to my dad who is a Verizon customer.  I told him to look at the iPhone as well as the Droid Incredible and the Thunderbolt by HTC.  As the weekend wore on I realized I might have given him the wrong advice.  Why does he need a smartphone?  The few times he makes a call, he has the perfect phone today.  If he loses the small Samsung phone no one would care.  It was free.  Get another one.  What my dad really needs is an iPad with 3G.  That is the game changer.  When I came to this conclusion my next thought was what does this mean for the stocks in the mobile space?

Here are a six ten year charts to look at.  I think these charts tell you where the mobile device market is going.  Ten year weekly charts are nice because they diffuse the daily noise effect from rogue bloggers.  The other option is read the thousands of pages of research published annually on the mobile device market.  I just think it comes down to who is making cool devices, who can keep making cool devices and who are the companies that are making parts for the makers of cool devices.  Product cycles matter.  They always matter.  Buy stocks in positive product cycles and short stocks in negative product cycles.  Anymore thought beyond that last sentence is too much thought.  People need to let their over analysis go, it is not that hard to figure out and you do not have to calculate RIMM’s earnings if they sell a few more devices in Chile because the 12-18 demographic likes the BBM.  It is not that hard.  Product cycles always tell the truth:

NOK: Here is the poster child chart for missing a product cycle.  I marked the introduction of the iPhone, but it should also be noted that between 2006 and 2008, NOK spent a lot of time in legal battles with QCOM.  I wonder how much this distracted the management team when AAPL was readying the iPhone.  I think the stock will bounce around the bottom for awhile.  I simply do not understand the people who want to bullish on a company in this much turmoil as if a windows phone in Q3, or Q4 or Q1 is going add $20 to the stock.

RIMM: The recent close below the bottom trend line is not good.  Will this chart go the way of NOK?  Missing product cycles really sucks.

AAPL: This is called a positive product cycle company.

MOT: There is no chart for MOT as it is two companies now and the current data set for MMI and MSI is limited.

QCOM: Over the past 3.5 years, I have met with this company many times.  These were very trying times for the company and the stress showed on the management team.  The chart really does reflect that distraction of the various lawsuits both to investors and management.  Those distractions are now behind the company and the recent breakout is very bullish.

MSFT: Last week’s close was not good for MSFT.  I would be watching it here.  I see many reasons why the company is in a negative product cycle, but I am more inclined to say this is being priced into the stock and it sets up for a buy in the 2H 2011.  Time will tell.

GOOG: No ten year chart here, but a nice series of higher highs and higher lows.  As with MSFT, last week’s close not positive, but I like how the company is setup.

/wrk

** It is all about the network stupid, because it is all about compute. **

GOOG: The Day After

I was speaking to the CEO of networking company last night and he surprised me with the comment that he used to read my blog and thought highly of my blog.  I have not blogged in four years.  Now I am back blogging because I have some time to commit to blogging.  I have written blog post that disagree with the notion that blogging should be live in the moment, extemporaneous thought stream.  I attempted to be thoughtful and compose original pieces.  I am not sure how long I will sustain this blog, it could be a matter of days or months, but I though this was a good opportunity to read something I posted in 2006 and see if it still made sense in 2011.  Below this post is my unedited 2006 post on Google.

Today is an apropos day to write about Google as they reported earnings last.  A number of disappointing metrics have clipped the stock today.  There is nothing wrong with Google.  It is a fantastic company – they just make so much money it is hard for their other businesses to live up to the success of the core business.  I had one VC comment to me lately that he thought Google funds all sorts of wild, fantastic projects and people because they make so much money it would look obscene if they just spent what was needed to run the core businesses.

Here are my thoughts on Google post the report.  If you want to see a company that is going to kill RIMM, it is Google.  I would take the long GOOG, short RIMM trade all day.  In many ways, Google is one of the critical computing engines of the internet.  If you want to be long GOOG, what should you expect the stock to do?

If we look at a weekly chart that removes the distraction of daily swings and assume that 2007 run to the peak and the 2008 run to the bottom did not occur, then the stock is actually showing a toping pattern.  See the five black lines of higher highs; they are starting to lose their step function.   Barring a major market sell off, I think the stock is going to become range bound in the $505-625 range.  The good news is I think the recent management change is a reflection the stock for what we know about the company is in a fully valued position.  I would be buyer and holder long term because I think the management team (1) knows this and (2) long term I like their position in a compute centric internet world.

– GC

Friday, September 29, 2006

Thinking About Google, Do they Fit into a Peer Group?

How would you classify or label Google as a company? Are they an ASP, Search Engine, Services Portal, New Millennium Service Provider, Infrastructure Provider, Software Company or something else? Google does receive a large amount of press and even has nice 60 Minute fluff pieces done on the company wherein we learn that the smartest people on the planet are lovingly clustered in one location ensuring that we can have immediate access to information regarding the nearest pizza shop and Starbucks location.

Google defines their company mission as: “Google’s mission is to organize the world’s information and make it universally accessible and useful.” [Source: http://www.google.com/corporate/]. This mission statement is accurate when you accept the premise that the Google business model is really a function of their user base and their ability to connect users with advertisers. By this definition, growing the subscriber base means having presence in demographic markets with large populations, consumer level wealth and connections to the web whether it is wired or wireless. I like Google’s mission statement, but I always think that a better mission statement for a public company would be: “We are here to enhance and grow shareholder value through an ethical application of our business model.

Critical to the success of Google’s business model is having relevant content and recognizable brand. I wrote about the content portion last week [see http://wrkoss.blogspot.com/2006/09/do-you-want-to-own-content-aggregate.html], thus we only need to cover the brand portion. Google as a brand is a core element of their success. If Google was not a brand at the consumer level, they would not be a preferred destination on the web and would not be generating vast amounts of advertising revenues. Having relevant content and recognizable brand are key components to their success.

 What does Google do well?

Google does three things well. (1) The have an excellent search engine built initially around the concept of ordering an information database by using the concept of source citing and links to data. Think back to the concept of creating a graduate thesis and citing sources. As information evolves, papers the theories evolve from base of existing knowledge. Credible academic papers cite sources and previously published material. Google’s initial search engine started with the concept of ordering information based on relevancy measured by links or references to the content from other sites. (2) Google figured out how to monetize the information in their library. By separating sponsor information from ordered or non-sponsored information Google actually created a space to brand and value. (3) Google does services very well and the core service is what Mary Meeker termed an “on demand customer acquisition tool.” I heard Mary describe Google in this way at the Warburg-Pincus Information Technology Conference in May 2006. Mary went on to state that Google provides “…advertisers and vendors with a toolset, dashboard to manage and measure customer acquisition through sponsored search.” As evidence of this point, Meeker used the Q4 Google numbers (now somewhat dated) that revealed Google generated $1.9B in gross revenues and paid out $629M to partners.

 What Google does not do?

Google is not an infrastructure company. They have a number of data centers built around the concept that would find a familiar home with the American and Russian Armies of the Second World War. Instead of buying the best server and storage technology available, Google builds massive server farms using the concept that cheap and numerous is better then a few high-end storage systems. A typical Google server farm ranges from 3000 to 5000 servers (enough to keep it running and support the traffic load) with ethernet switches and routers as necessary. Google believes the value of their network is in the software that ties servers together – not in the hardware itself. They then take this server model and replicate it as required. Each server farm is built on the assumption that a number of servers (~25) can be out of service at any one time without affecting service. To keep cost down, Google buys off the shelf servers from the any of the computer suppliers (e.g. Dell, HPQ, IBM, etc) who are offering the best price. The real cost of a Google datacenter is not in the hardware, but in power. Power is a significant portion of their cost as power is required to operate 5000 servers as well as cool the heat output of 5000 servers. Google thinks a lot about power consumption as seen in their recent paper submitted to the Intel Developers Forum (IDF) [see http://www.nytimes.com/2006/09/26/technology/26google.html].

A few years ago, Google did not have a distributed datacenter architecture and the exogenous shocks of 9/11 and Katrina affected their thinking in terms of network architecture. The increased number of Google data centers as well as need to deploy smaller localized data centers for regional or localized content, has created the need to ensure that there was enough bandwidth and resiliency in their network connections to load level and provide cache updating across a distributed data center network. This is a scaling challenge caused by ever increasing amounts of content and the need to organize, locate as well as educate other Google servers where to find information.

What is important to Google?

Setting aside the three things Google does well, the next most important consideration for Google is the health of the network and the deployment of ever increasing amounts of bandwidth in the global internet. The first five to ten years of the internet have often been called the Web 1.0 or the dialup years. The internet in the mid-1990s looked more like and SNA next from the early 1990s then the basis for a new economy. Post the technology/telecom crash the new internet excitement has centered on Web 2.0 and the deployment of a broadband version of the internet. For the past several years, the service providers have been in the business of upgrading the internet from dialup to broadband. This created a new of challenges which can be covered off in another discussion, but evolution from dialup to broadband is an important health measurement of the overall technology/telecom ecosystem for Google. If Google is maintain a healthy business model, then driving more users (i.e. consumers) to their servers and connecting these users with content and advertisers is the core function of the company.

As content consumes increasing amounts of bandwidth, the speeds, capacities and methods of internet access are an important consideration for Google to monitor. Google has seen massive growth in Google Talk and Google Earth, which are two applications that consume a large amount of bandwidth. This is the reason they are trying to provide the performance and the significantly superior sound quality of Google Talk (i.e. bandwidth) over mobile phones and land lines. [see the recent article on LightReading.com http://www.lightreading.com/document.asp?doc_id=104756&WT.svl=news1_1]

Another area of importance to Google is key alliances with content delivery systems such as AOL. In the war between Google and Microsoft, we can see two companies that are increasingly in conflict with each other and each is coming from a different domain expertise. Microsoft’s domain expertise is the operating system and the applications that run on their operating system. Google expertise is the cataloging the content on the web and users with advertisers through relevant content. If you make the assumption the future OS is network based – not system based as in past ~25 years, then a real paradigm shift is occurring. In this war Google and Microsoft both view service providers of all types (i.e. wireline, mobile, ILEC, CLEC, PTT, RBOC, Cable) as companies that are increasingly overlapping in the their competitive offerings and they are an important connection to ensure is that a relationship exists with these providers to ensure access to the end users. Cleary the moves by Microsoft with its relationship with at&t (formerly SBC) and the handset providers is a concern to Google. Google wants to see the world of devices that are used to access content move away from device centric operating systems, while Microsoft wants to seed more end-user devices (e.g. computers, mobile phones, set top boxes) with a Microsoft OS. It is important to remember that this is not the first time Microsoft has engaged in strategic initiatives in the broader technology ecosystem. The following text is from my book (yes, I know, cheap promotion, but it is easier to cut and paste then type for hour), Six Years that Shook the World, pages 100-103 [see http://www.amazon.com/gp/product/1419634690/ref=pd_rvi_gw_1/104-1068541-9747117?ie=UTF8]:

In the time period from 1993 to 1994, Microsoft was consumed with readying one of the most significant product launches in the company’s history as well as developing an online service to rival AOL, Compuserve, and Prodigy. The impending new product launch would be a significant driver of Microsoft revenue and would secure Microsoft’s position as the dominant supplier of operating systems for the PC market. This product was called Windows 95 and in August of 1994 when the product was launched, it was difficult to avoid the global marketing campaign developed by Microsoft around the Rolling Stones’ song, Start Me Up. It was just a few short months before the launch of Windows 95, that Microsoft made a commitment to the web. In April of 1994, Bill Gates wrote an important memo to the key leaders of the company entitled, “Sea Change.” In this memo, he outlined the importance of the web and set Microsoft on a rapid development plan to integrate a browser into the Windows 95 product, which was scheduled to launch in a few short months [see Speeding the Net, Joshua Quittner and Michelle Slatalla, 1998]. Before the April memo from Bill Gates, the web was not a top priority for Microsoft and its best resources were not aligned to capitalize on the emergence of the web. Although Microsoft did start work on its browser in late 1993, it was not a top development priority within the company. Following the launch of Windows 95, the MSN Network, and Internet Explorer 1.0, Microsoft began some initial investments in the internet revolution, but the company was still focused on the anticipated revolution in the consumer market of television. As part of their investment in the internet, Microsoft became an investor in UUNET in 1995, but the main investment focus of the company was in area of interactive television. Microsoft envisioned a world in which the personal computer and television would become fused. This belief guided Microsoft to be an early investor in next generation cable television as well as to be a creator of broadcast content. Three significant cable and broadcast media investments set the foundation for what would later become more than $10 billion in follow-on investments in the network infrastructure of cable television to carry high-speed internet data and enhanced video services.

The first major investment that Microsoft made in the cable industry was investing in TCI. The same TCI was the first customer of @Home. Microsoft’s next investment was in a company called WebTV that was developing a form of interactive television. The idea behind WebTV was to provide internet capabilities to a cable television set top box for the consumer who wanted internet access, but did not own a computer. Microsoft eventually acquired WebTV, on April 6, 1997, for $425 million. In the press release announcing the acquisition, Bill Gates said, “This partnership with WebTV underscores our strategy of delivering to consumers the benefits of the Internet together with emerging forms of digital broadcasting.” Before the acquisition of WebTV, Microsoft made a major move into the broadcast media, well before anyone ever envisioned AOL buying Time-Warner. In 1995, Microsoft launched Windows 95 and started a broadcast network with NBC that would become known as MSNBC.

 1995 was just the beginning for Microsoft and the cable industry. The next four years would see Microsoft invest nearly $10 billion in the cable industry worldwide. The first big deal announced after 1995, was a $1 billion investment in Comcast in June of 1997. Bill Gates said of the deal, “Our vision for connecting the world of PCs and TVs has long included advanced broadband capabilities to deliver video, data and interactivity to the home. Comcast’s integrated approach to cable distribution, programming and telecommunications complements that vision of linking PCs and TVs. Today’s announcement will enhance the integration of broadband pipes and content to expand the services offered to consumers.” Brian Roberts, then president of Comcast said of the investment, “I am pleased to have Microsoft’s participation as we shape and advance the integration of the PC and the TV. Microsoft’s investment is a strong endorsement of Comcast’s vision to use its cable networks as a broadband vehicle to homes, schools and businesses. Comcast’s customers will be the beneficiaries of the innovations that America’s most advanced computer and cable companies can offer. In addition to a significant cash infusion, this investment gives us access to Microsoft’s expertise, which will help us facilitate the deployment of high-bandwidth applications and lead to more sophisticated services.” Microsoft was making a major play for the interactive television and internet market accessed via cable networks. At the May 1998 NCTA show, Bill Gates said of the internet and cable industry, “By early ’99 we should be rolling out hundreds of thousands, even millions of set-top boxes that combine PC technology with these Internet connections. Now, the information that people will deal with will be in many different places. You’ll have a pocket-sized device that you can take with you. You’ll have your pager or telephone. You’ll have your intelligent set-top box. And you’ll continue to have PCs that you keep in your den, or that you have as portable devices, or that you use at work. Now, through all these devices you’ll want to get at the same information. And the value of having that information online will continue to increase. It’s really stunning, if you go out on the Internet, to see all of the things you can find out there. You can see what’s going on in Congress. In fact, whenever you go and browse a news site, if you’ve provided your zip code, it automatically appends onto any news stories about the Congress, specific information about how your representative voted. There’s even a link that’s included now, where if you disagree with what they did, or if you want to provide feedback, you simply click, and you can provide electronic mail to your representative. And so we’re going to get interactive democracy, letting people participate in new ways. Electronic commerce across the Internet is also exploding. Companies like Amazon.com are achieving very high valuations, as people see the incredible growth there. Whether it’s finding books, finding records, booking travel, all of these things, the interfaces continue to improve. And I think that a substantial part of all of those activities will be done over the Internet. And therefore, give the cable industry a chance to participate, participate in the transaction fees, and participate in owning the companies that are going to make this happen” [see, Bill Gates, http://www.microsoft.com/billgates/speeches/ncta’98.asp%5D.

 The one billion dollars invested in Comcast was just the beginning. Microsoft next invested $212.5M in Time-Warner’s Road Runner cable modem service. Time-Warner was one of the few cable service providers that did not use the @Home service, but rather built its own cable modem service. A look at the June 15, 1998 press release finds two typical ITO Revolution quotes from the two Cable Company CEOs involved in the deal. Gerald M. Levin, CEO of Time-Warner said “Today’s investments by Microsoft and Compaq validate the cable architecture as a premier Internet distribution medium, which will benefit consumers nationwide. This combination of world-class companies will enable us to develop a powerful, branded package of content that will become the high-speed online service of choice for our customers. Microsoft’s and Compaq’s expertise complements perfectly the strengths of Time Warner and MediaOne.” Chuck Lillis, who was chairman and CEO of MediaOne said, “With this combination of industry leaders, the venture will be well-positioned to rapidly deploy a wide range of high-value content and services to our customers. As network-based services become ever more integral to our lives, providing a network that will allow us to ensure the performance, connectivity and interoperability to any network in the world will be critical. This venture provides the ideal platform to build both the online service of choice and the network.”

 As Microsoft pushed into 1999, their investment in the cable infrastructure as a broadband delivery mechanism increased. Interactive active television, the internet, and the legacy service of telephony became targets for Microsoft money. In January of 1999, Microsoft made a $500 million dollar investment in NTL, the largest cable provider in the United Kingdom. Barclay Knapp, then CEO of NTL said, “Microsoft believes in our vision of bringing advanced digital Internet, telephone and television services to consumers and businesses throughout the UK via all platforms. NTL’s pioneering marketing, network and back-office resources, coupled with Microsoft’s world leadership in personal computing and digital television, will make for a great combination.”

 Following the NTL investment, Microsoft made two international cable investments and one of the largest single investments in the company’s history. The two international cable investments were in the cable arm of Portugal Telecom (PT) and Rogers Communications in Canada. The investments were $38.6 million in PT and $400 million in Rogers, which is the largest cable operator in Canada. On July 12, 1999, Microsoft and AT&T announced a $5 billion dollar investment by Microsoft in the cable business of AT&T, known as AT&T Broadband. In the press release, Bill Gates was quoted as saying, “Our agreement today represents an important step in Microsoft’s vision of making the Web lifestyle a reality. Working with AT&T, a leader in the delivery of cable and telephony technologies, we will expand access to an even richer Internet and television experience for millions of people.” In turn, AT&T used the proceeds from this transaction on capital expenditures to improve their cable network. This infusion of capital to build their own network occurred four months after the merger of @Home and Excite.”

Beyond the health of the internet and relationships with content providers, Google looks at broader markets to drive more users to their site. With this in mind, finding successful strategies to commercialize their revenue mechanism in Asia-Pac and Europe is important. Google wants to promote broadband deployments, whether wireline or wireless in large demographic markets for in Asia-Pac. Anytime large demographic populations with increasing disposable wealth have broadband access to the Internet, Google thinks they can make their new age advertising model work.

 Where does Google fit?

With Google shares priced at $403 (09.28.06 closing price) they receive a lot of press coverage regarding their share price and valuation. A good example of this coverage can be seen in this entry from the 24/7 Wall St. Blog [see http://247wallst.blogspot.com/2006/09/is-google-200-stock-that-trades-at-400.html]. Google is valued much more highly then Amazon.com, eBay.com and Yahoo.com. Does this mean these companies are not in Google’s peer group or Google is simply a much better company then these peers? I think the answer can be found in two parts. Part 1 is that Google has clearly produced a better mechanism (i.e. engine) to capture advertising revenue. The metric the stock market is seeking is to know the ceiling capacity of Google’s advertising revenue engine? By knowing the peak revenue generating capacity, it will frame the valuation of Google. The second answer is that Google wants to be something else, without disrupting the current business model. They try not to move to far from their core competency, but realize they need to develop a more sophisticated business. I am using the term sophisticated to mean evolving their revenue sources beyond advertising. This then goes back to looking at their strategic relationships with service providers of all types and the development of applications in a network centric computing model and how this paradigm shift (if it occurs) can be monetized to add to their advertising revenue stream or hedge against a decline in advertising revenues. Google is valued today because the stock market does not know the extent to which they can grow their advertising revenues and there is a component in their valuation that accounts for Google being perceived as an important brand and innovator in the next twenty-five year technology paradigm that started when the technology crash bottomed out in 2003.