Ballmer Batting Eyelashes at Yahoo!

Microsoft CEO Steve Ballmer kept hopes of Yacrosoft alive today with this announcement at a conference on the East Coast:

"We offered $33 bucks (for Yahoo) and it's $11 today," Ballmer said. "It's clear Yahoo! didn't want to sell. They probably still think it's worth more than $33 a share. I still think it makes sense for their shareholders and ours."

Then, later in the day a Microsoft spokesman said this:

"Our position hasn't changed. Microsoft has no interest in acquiring Yahoo!; there are no discussions between the companies."

It appears that for the moment the Yacrosoft buzz is coming from Steve Ballmer, but has yet to materialize in any substantive negotiations. Still, this could signal the beginning of negotiations for Yahoo!'s depressed stock. The following questions remain:

• Will Yahoo! even sell to Microsoft?
• Will Yahoo! continue to set unrealistic expectations for its share price?
• Will a merger between Microsoft and Yahoo! foster greater competition in the paid search market?
• Will Microsoft be incorporate Yahoo!'s service with its own web offering without causing major damage to both brands in the process?

I raise this last question because it's unclear to what extent Yahoo! and Microsoft--when put together--create synergies. First of all, many of their offerings overlap, which creates the problem of brand confusion and/or user cannibalization. Also, one of Yahoo!'s greatest intangible assets is its newly found image as the high-profile underdog in the web space. By becoming a part of Microsoft, Yahoo! will not only continue to languish behind Google in the onlin ad space, but it will at the same time be associated with Microsoft, a company for which very few internet users will have sympathy in its current struggle. In fact, the response from the tech company will go in the opposite direction. There will be a considerable flight from Yahoo!'s services under a Microsoft regime.

I have nothing against Microsoft. I think they do a fair job at creating software solutions for the masses--which is by no means an easy task. However, one must realize that the company's image does not fit with Yahoo!'s, and that if Microsoft's image is not harmed by a Yahoo! acquisiton, Yahoo!'s certainly will be.

Perhaps that's the point. As others had point out this spring when a deal looked very likely, maybe Microsoft was toying around with Yahoo! in the hopes of destroying it and taking over a good chunk of its position in search. While I don't think this is the case, the end result might be the same. (However, it's no foregone conclusion that a world without Yahoo! would make Microsoft a lot more powerful in the search market.) While Microsoft is still entertaining the idea of a deal, perhaps Yahoo! will take its eye off the ball and fail to formulate a real long-term strategy to maintain relevant in the online space. With the distraction of Microsoft, as well as huge hits to the ad market, it will be interesting to see how Yahoo! comes out of the current economic funk. On this front I don't have any good predictions, but short of a generous purchase by Microsoft, nothing will come easily.

Web Entrepreneurs Beware

My friend Kavi Turnbull, co-founder of DriveAlternatives.com, just alerted me to an article on TechCrunch that highlights an e-mail from one of the Valley's most prolific angel investors, Ron Conway, to his portfolio companies.

The e-mail was ridden with advice for entrepreneurs facing a grim market outlook. Among this advice was the strong suggestion to decrease your burn rate to make your cash last an extra 3-6 months. Unfortunately, for many entrepreneurs this can only come about by firing staff.

Also, if you're in a funding stage, raise money--and as much money as possible--as soon as possible. Time is running out before private equity money is all dried up, especially the ever-important venture capital. Also, expect an unfavorable valuation. To get your necessary capital, you will probably have to give up more equity than your normally would. Times are tough, but your business still needs to survive.

Look for corporate partners for funding, and perhaps an all-out sale. According to Dan Howell of Mesirow Financial, who spoke to our class this week, the private equity market is soft and the leveraged buyout market is much weaker. (The overall market could still be good for his firm, as there could be many deals to be had for the next few years for equity buyers.) However, there are large tech companies out there with the ability to make cash purchases. Last time I checked, Apple had about $20 billion in the bank and Google had about $15 billion. Other heavy hitters with cash include HP, Microsoft, and EMC. In this market cash is king. Stock prices are depressed to such an extent that stock-based purchases aren't a viable option.

Notwithstanding this sound advice, the fact of the matter is that times are tough and many promising start-ups will find their hopes dashed by a weak equity market and a frozen-solid debt market. However, those companies that are lucky enough to have a full war chest can economize in the short- to mid-term and save some time before running out of cash or--better yet--before the economy turns around.

Smartphones: Making the World More Googley

It seems like everyone has something to say about smartphones these days--and everyone seems to have their favorite horse. Some think RIM's Blackberry, the incumbent stalwart, will continue its success. Some think Nokia's Symbian OS will gain ground. Then again, who would count out Apple? The iPhone has seen great adoption in the consumer market, essentially expanding the overall smartphone market.

But this is just the beginning.

Similar to Apple's effect of expanding the smartphone horizons, Google will soon come to the scene with its first Android-based phone, available through T-Mobile. The wireless provider has recently tripled production of the G1 based on huge demand for pre-ordered phones.

Rather than being a Blackberry killer, or any existential threat to any other players in the field, Android could be a boon for the smartphone market. With both Apple and Google in the space now, the two most powerful brands in the world will get their weight behind a new revolution in wireless computing. People who have never bought a smartphone (guilty as charged) will now become interested in upgrading, if they haven't already.

Although I've only seen a demo of the G1, the slide-out qwerty keyboard and what I assume to be great compatibility with various Google apps are enough to get people excited about using the internet on a phone.

So, who stands to benefit? Well, perhaps all of the companies aforementioned, if the total pie suddenly becomes a lot larger. However, Google is the one company that seems to win out no matter which handset maker, or no matter which mobile OS, ends up winning the lion's share of the market.

Why is this, you may ask?

First and foremost, Google wants people to use mobile search. According to Nielsen Mobile, Google already dominates the mobile search market with 61% of the searches, a stranglehold only slightly eclipsed by the company's dominance on the desktop. Since the number of searches executed by smartphone users is staggering compared to those of more conventional cell phones (yes, people like me still use those) Google would do well to make sure that as many people as possible have smartphones in their hands.

But doesn't the mobile search trend cannibalize Google's desktop-based revenue stream? Well, maybe, but who cares. Google will be happy to expand its search horizons to mobile search. Geo-targeting, something that Google has tried to do on the desktop with limited success, has its holy grail in smartphones. If Google can offer up relevant advice based on where you are anywhere in the US, you will likely make many of your commercial decisions through its search service.

I could make up plenty of compelling scenarios to sell extreme relevance and potential profitability of mobile search, but I'll leave that to your imagination. Very quickly you'll realize that it requires very little creativity.

So, Google's entrance into the smartphone market will add even more excitement to one of the best growth frontiers in tech. In my opinion, there will be plenty of opportunity for RIM, Nokia, Apple, and others as well, but Google stands to gain the most from smartphone penetration. Certainly, Google would love for Android to become the standard, but it's really not necessary for the search giant to gain from smartphone use. If Symbian wins out, or if Windows Mobile gains more ground, Google still wins.

Now, if only the greater world economy would cooperate we might see some actual gains in share prices...anyone's shares...please!

Sleeping Giant

Today we're talking about India. Of course, India isn't sleeping. Its economy is growing at an incredible clip, but its search market has yet to impress. India sill lags behind the world at large in search activity. It contains over 15% of the world's population, but executes just 2% of the world's searches. (Source: Market Watch) What I find striking about these numbers is the great potential for internet growth in the country, as well as the great opportunity for companies like Google (with 81% of India's search market share) that are well positioned to reap the benefits.

Top Search Properties in India
June 2008
Total India -- Age 15+, Home/Work Locations
Source: comScore qSearch

                                                  Searches      Share of
                                                    (MM)        Searches
Total Internet                                     1,242          100.0
Google Sites                                       1,011           81.4
Yahoo! Sites                                         117            9.4
Ask Network                                           24            1.9
Microsoft Sites                                       22            1.7
Rediff.com India Ltd                                  18            1.5
FACEBOOK.COM                                          10            0.8
People Group                                           9            0.8
CNET Networks                                          5            0.4
Wikipedia Sites                                        5            0.4
AOL LLC                                                3            0.2

First of all, I'm assuming that continued internet penetration in India is all but inevitable. Like any social network or communication device, the internet becomes more valuable and useful as more people use it. Facebook, which captures nearly all of the 18-25 demographic in the US, is several times more valuable to its owners and useful to its users than a comparable networking site that happens to have far fewer users. Similarly, a fax machine is just a box of plastic and metal until enough people make sending faxes a real possibility. To use a cliché (but a good one) the tipping point for internet usage in India could come relatively soon, and for reasons beyond the aforementioned network effects. (Would anyone doubt that the economic growth will lead to more computers and internet infrastructure?)

When the internet growth accelerates, one could also expect the search market to accelerate. (I challenge anyone to decouple the internet market from the search market.) As I have said before in this blog, Google has several markets like India, in which it has incredible brand awareness and market share, but has yet to experience stellar revenue numbers. When these markets do decide to take off, it's only natural that Google will stand to benefit.

It's for this reason alone that Google's organic revenue growth (which has dwindled ever-so-slightly) is not in trouble. If any one of Google's investments in India, China, Brazil, or Russia starts kicking in, you'll see the robust organic revenue growth you had always before expected from the search giant. This growth might not come in smooth fashion, but Google has the brand positioning in enough countries to fuel growth in the long term as these markets mature from their current states of infancy.

I don't mean to overestimate Google's growth opportunities. The law of large numbers will catch up with Google. To sustain 30% growth in the long term is quite nearly impossible. However, Google is still growing at an impressive rate when the ad market is showing glaring signs of softness. Google trades at a trailing P/E of just over 32, so the market seems to be somewhat cautious on the company, which is something we haven't been able to say in a long time. Coming out of the economic downturn, Google will have the force of increased market share behind it and will see its revenue growth accelerate once again. Whether this will happen in the next few months or the next few years, I do expect to see this earnings jump and a huge jump in the stock price.

...But I could be wrong ;)

Should we be scared of Knol?

I know it sounds pretty benign when compared to Google's ability to save search data and peer into your home's windows from its "street view," but I see the new Knol as perhaps the #1 reason why we (as both web entrepreneurs and casual internet users) should fear Google.

For nearly Google's entire history it has shied away from being actual content creators or owners. Google has lived up to its mission to organize the world's information because it has had no conflict of interest when it came to ranking content for search results. Sure, it would give its own services good search results when it was warranted, but Google never had a content site of which it was the owner. Google could push its Blog Search to the homepage and suddenly become #1 in blog search, but search was still a way to channel traffic away from Google sites, and not to keep the traffic in the Google network.

It has been very important for Google to maintain this neutrality, lest it squander its good--yet vulnerable--image as an impartial director of web traffic.

Now Google is creating a user-generated content site, Knol, which will slowly chip away at the company's image as an impartial tech company. Instead, many people will start viewing Google--perhaps more fittingly--as a media company. Sure, Google still isn't creating the content; they're just creating the platform. But Google will become the effective owners of that content. Sure, users will be able to earn revenue from ads placed by their "knols," but they will be hosted on a Google site from which the company will reap a share of the revenue. (The actual revenue split remains a secret.)

This new potential revenue stream might be good for individuals who have a lot of information to convey, but what about the smaller players who already have their own content sites? Aside from the WebMD's and the About.com's, there are hoards of small-time content publishers who could suffer steep decreases in traffic if they have to compete with another web authority on their topic. Wikipedia already tattoes the first page of Google search results for just about everything subject known to man. Imagine what will happen if there's yet another content behemoth pushing other content to the bottom of the search engine barrel. (This statement doesn't seem melodramatic when you consider how seldom people click on anything but the first few search results.)

You may be asking: why assume Knol will get favorable search results? I don't think Google will intentionally push its own content to the top of the search results, but that will be end result anyway. It just so happens that Google's search algorithms favor content from larger websites that have a lot of backlinks. As a Google site, Knol will have the benefits of the PageRank that google.com passes onto it. (Has anyone seen a site with a PageRank of 10 other than google.com?) Google will have no choice but to place its knols at the tops of the pages.

Sure, this might be a great opportunity for people to create knols and suddenly become the web authority on a topic that is fairly competitive. I am all for leveling the playing field and letting new content rise to the top if it's top quality, but I have a problem with having to play Google's game just to take advantage of this opportunity. Plus, just because content is on a Google site, that doesn't mean that it's any better than the content of a person or organization of lesser financial resources. If someone wants to be an authority on Type II Diabetes, she should be able to do it on her own domain, and not have to appease the Google Gods with a well-written "knol."

To summarize, the main director of web traffic should not be the creator/owner of the web content. I guess we'll have to see how everything unfolds in months and years to come, but Knol could pose a huge conflict of interest for Google as an impartial trustee of web traffic.

Is Cuil really that cool?

The short answer:

I don't know.

The longer answer:

Something I always wondered about Jimmy Wales' Wikia project was how the search engine was going to establish an index of billions of web pages. Even assuming the legitimacy of user-driven search, which is itself a stretch, the technology and capital required to overpower Google in search would likely evade the overmatched Wikia.

Cuil, on the other hand, promises the ability to index the internet's hundreds of billions of web pages better than Google. Not only do they intend to index better than Google--and even claim they already have an index three times as large as the search giant--but they intend to do it with far less financial resources.

Apparently, my major argument against Wikia doesn't seem to apply to Cuil. What does make me skeptical of the new search engine is the actual product that was lauched today. If Cuil is crawling roughly 125 billion web pages, why are there some fairly substantial pages absent from search results? One decent example that demonstrates my point (and possibly my partiality) is the absense of City Dictionary from the search results. Google has already crawled and indexed the website a number of times since it went live in April. (Google currently lists nearly 10,000 pages for City Dictionary's domain in its search results.) Google has also followed several links from other websites to City Dictionary, each time placing greater importance on the new website. As a result, City Dictionary has the #2 spot in Google for 'City Dictionary' and the #1 spot for "City Dictionary" with the quotation marks.

Q: Where does City Dictionary appear in Cuil's search results?

A: Nowhere.

Even when I put in 'City Dictionary local flavor,' which makes an obvious reference to the tagline 'The Dictionary with Local Flavor' that appears in the 'title' tag for the homepage, the results suddenly go from somewhat relevant to completely off the radar. (Top search results include pages from lawyer.com, as well as others looking to sell "cheep airline ticket.") Bottom line, I can't find any of City Dictionary's thousands of pages in Cuil.

Why is this important? I don't have any delusions of grandeur for a site that is only a few months old (it's still not so bad if I do say so), but City Dicitonary's complete exclusion points to a very daunting problem for Cuil. If the new search engine already claims to have a larger index, that index still does not seem to have very timely content. City Dictionary has been in three different newspapers in the past few weeks. Google finds timely content because it is constantly crawling the most popular news sources. Since a great part of search is based on time-sensitive issues, I can't help but to question the quality of a search engine that can't follow links from newspaper websites in a timely fashion.

So, does Cuil really have an indexing advantage over Google? Well, not necessarily. Google no longer publishes the size of its index, so Cuil's claims to be three times larger than Google are suspect at best. Plus, very little is known of Cuil's indexing techniques; so, the young engine's ability to (re-)crawl billions of web pages on par with the incumbent search giant is questionable.

It's not just content; it's intent. Search is still an intent-based medium. Reducing the influence of links to search engine results o take away the ultimate popularity metric on the internet. Are web pages that have backlinks from several blogs and trusted news sources of higher quality than web pages without such links? Generally speaking, yes. Of course Google will continue to sort search results by content relevancy, but the democratic system of linking is still paramount until Cuil can come up with something more compelling (which may exist but has not yet been articulated). Cuil must have an answer for the very powerful Page Rank system. Otherwise its 125 billion collection of web pages is for naught. (By 'naught' I mean being sold to Microsoft for about $500 million.)

Will Cuil end up creating great search results from its gargantuan index? We'll have to see what happens in the years to come, but for now it's not that cool.

New Facebook Profile?

I just received an odd e-mail from the Facebook Ad Team, outlining some of the changes that will be made to Facebook profiles and ad units. I will not comment on those changes until I can see some of the results firsthand from my own ad campaigns. Similarly, I cannot comment on even an initial reaction to the aesthetics of such changes until I can even see a demo of these changes. Tech Crunch just reported on the FriedFeedization of Facebook. In this post the blog claims you can see a demo of your new Facebook profile at new.facebook.com, but this subdomain simply redirects me to the regular Facebook homepage.

This frustrates me for three reasons:

1) Tech Crunch put up a link whose target was not what I expected it do be. I expect more from the popular tech blog.
2) Facebook often launches new services in an uneven fashion, offering them to certain people and not to others. This leads to confusion when asking friends "did you see that new thing on Facebook."
3) Most importantly, I'm upset that I can't see the changes when I'd like to write a blog post about the new ad setup.

I'll be heading to the Canadian wilderness for the rest of the week, but will hopefully have something substantial to report next week on the new Facebook changes. (All I know now is that ads will be served up on the righthand side and will come in twos, instead of a single ad unit.)

UPDATE: I can now see the new Facebook design from that same link, new.facebook.com. I will still comment on it at a later date because I still don't have any real results to share from an advertiser's perspective. This will come next week.