News Roundup

Microsoft will stop selling its XP operating system today. This applies to both boxed software sales, as well as pre-installed software through PC manufacturers. Why do this? Well, the popularity of XP has been somewhat fueled by consumer distaste for Microsoft's new Vista OS.

In the short term Microsoft will certainly stop cannibalizing Vista sales with XP sales. (Most companies would love to have its own products as its main, if not sole, competitor.) However, this signals a loss for Microsoft in the fight over the hearts and minds of the computer user. After XP is off the table, expect many long-time PC users to make the switch to Apple. Once Apple's market share is in the double digits, that might be the point of no return for Microsoft. Although still relevant, the company will find itself in a truly competitive environment in which it will have to better cater to consumer preferences.

---

Nokia's Symbian acquisition might be good for Google. I can definitely see why Google makes Ballmer's blood curdle. No matter what the news is, it all seems to be good news for Google. Microsoft to buy Yahoo? Good for Google. Yahoo rejects Microsoft's offer? Good for Google.

Despite the seeming absurdity of this win-win situation, it certainly has some merit, as does the win-win situation in Google's play for the mobile advertising market. If Android-enabled smartphones dominate the mobile market, Google wins. If Nokia's Symbian-run smartphones continue its current momentum, Google still wins.

What Google is really looking for is smartphone penetration. Smartphone users are heavy mobile internet users. The faster the adoption of mobile web applications, the faster Google will be able to create a new revenue stream that investors have coveted for years. Regardless of whose operating system consumers are using, users will likely flock to Google's mobile sites. It's difficult to argue with Google's current 61% mobile search market share (according to Nielsen). There's currently no reason to believe this dominance will abate in years to come, so long as people are given a relatively uninhibited choice of web search applications.

PowerSoft

I don't mean to say "I told you so," but Microsoft's reported interest in purchasing natural language search engine Powerset for $100 million seems to go along with my recommended strategy for Microsoft. (See It's Search, Stupid.) Even though I'm the Yacrosoft blogger, I see how big of a headache the integration of overlapping services would be at Microsoft and Yahoo!. Add to that the ridiculous amount of money Microsoft was willing to pay for Yahoo!, and you must wonder whether Microsoft couldn't find a more productive way to spend its tens of billions of dollars.

As I had said in my very first blog post ever, Powerset will offer Microsoft the one thing in search that will give it a fighting chance against Google: DIFFERENTIATION. Nobody wants to use an also-ran search engine. Google was the first search engine to solve the great search spam problem that popped up in the late 90's. It's going to take something pretty compelling to overcome Google's overwhelming internet-savior-become-more-powerful-than-God status. Having a natural language search engine will be a step in the right direction--and at a nearly 500-fold discount.

Yacrosoft Update: False Alarm

According to a CNBC correspondent with a source close to Microsoft negotiations, there is no revival of Microsoft-Yahoo! talks. Apparently nothing has changed since yesterday and there is no possibility of a complete acquisition of Yahoo!

A purchase of Yahoo!'s search business is much more likely if you ask me. It's the one business that Microsoft really needs, and is the one that perhaps Yahoo! should concede. Of course, Yahoo! is #2 in search, but they're also #1 in display advertising and a close #2 in overall web traffic. Display advertising is a much better market for Yahoo!'s web traffic. Shopping out search to Microsoft would be a good idea given Microsoft's willingness to pay top dollar for it.

Yacrosoft Lives!

According to Tech Crunch, Microsoft and Yahoo! have started talking again.

This doesn't surprise me in the slightest. Yahoo! looks too appetizing to Microsoft now, especially since it's against the ropes.

Apparently, they're going to offer something lower than the $33 per share they previously offered, but there's no indication that they'll undercut their initial $31-per-share offer.

Found with the Sphere widget...

I just installed the Sphere widget for related content (related content link at the end of this post) and found this article on Yahoo! in which Vinton Cerf, the internet pioneer who is now a VP at Google, discusses how high oil prices could be a boon for the online ad market. I'm not going to discuss this idea in great length right now, although I will give credit to the argument. As I've posted before, tech companies that drive efficiency could fare well in current economic conditions.

What I would like to highlight, though, is the interesting blog search service provided by Sphere. I stumbled upon it as I was reading a related article on the BusinessWeek site.

Sphere allows you to embed a widget into your blog to offer your visitors blog posts and articles related to each of your blog posts. I installed it today with some skepticism, but the results were much better than I expected. I was pleasantly surprised when I realized that Sphere could find content that is not only relevant, but also timely. This makes me very excited. (Very sad, I know.) Pointing blog visitors to very timely related content is a big improvement on typical blog search engines.

One of the great difficulties in creating any kind of search engine is indexing. Having a comprehensive collection of webpages can be very challenging, given the overwhelming size of the internet. Even further, a timely indexing of all of these pages can be even more trying. Consider Google's job of not only storing a relatively complete version of the internet, but also re-crawling those billions of pages quickly enough to identify the newest, freshest content.

Although I'm not sure how Sphere indexes, I suspect they use the widget embedded in their 86,000 and some partner sites to offer their related content. As Sphere picks up steam, I suspect that a wider range of blogs will find relevant content for their visitors via the service. (It's probably very easy to find tech-related content for my blog, but a stamp collecting blog might be out of luck for now.)

Anyway, I'm excited about the Sphere service. Let me know what you think.

Google on top again

April traffic statistics showed Google sites eclipsing Yahoo! sites in unique visitors for the first time ever. It appears that Google has maintained its small lead for the #1 spot in the US audience for another month, according the following ComScore statistics for May:

---

comScore Media Metrix Ranks Top 50 U.S. Web Properties for May 2008

______________________________________________________________________

Yahoo! still holds the lead in pageviews. This is very valuable to Yahoo!, but why doesn't it worry Google? Because Google makes money by sending visitors to other websites through sponsored links. The short nature of web visits is Google's strength, not it's weakness. Google's brand power relies on its ability to direct people to their desired content sources quicker than any other search engine on the web.

Whether Google actually does this or not, it's perception that counts in this game.

Yahoo Deal (Bargain)?

Yahoo just dropped over 10% today after it announced a stop to talks with Microsoft. This drop might be exaggerated, ignoring much of Yahoo!'s stand alone value and ability to broker other favorable deals that can add both short- and long-term value for shareholders. Please keep in mind the following:

• After today's drop, Yahoo!'s trailing P/E is close to 30, which is much lower than it's been in quite some time.
• Yahoo! quickly announced a flexible, non-exclusive search deal with Google that could add $250-$450 million in free cash flow within the first year.
• Microsoft is still open to a deal with Yahoo!, just not an all-out acquisition. The Google-Yahoo! deal is the last thing that Microsoft wanted to come out of the whole Yacrosoft hoopla. Don't expect Microsoft to just sit back idly.
  

To this last point, Microsoft may have had no intention to buy Yahoo! (as Gates and Ballmer have both alluded to), but to rather ruin Yahoo! and fight aggressively for its current market position. Yahoo!'s search outsourcing deal with Google would certainly ruin Yahoo!'s long-term legitimacy in search, but as a clear windfall for Google and not Microsoft. Regardless of what Microsoft's Yacrosoft intentions were, they can not stand by and let Yahoo! shop its search out to Google.

So, Yahoo!'s position as the #2 in search should not be undervalued. They're stuck between two battling titans who are more than happy to give the company a favorable deal. If Microsoft is ready to recognize $33 in value for each Yahoo! share, $23 should be seen as a fleeting discount. Any deal that Microsoft and Yahoo! might do will likely reflect this value, even if the deal isn't a full acquisition. Similarly, if Google does go ahead with the Yahoo! deal, the bottom-line gains will add instantaneous value to the company and let it pursue the defense of its own bread and butter, display advertising.

For an example of the value that bottom-line gains might add to Yahoo!, if you add $250 million to Yahoo!'s 12-month trailing earnings, Yahoo!'s current P/E ratio would be 25.5. If you add $450 million, which is the high-end of the deal estimates, you'd get a P/E of about 22. If you expect Yahoo!'s earnings from other sources to simply remain stagnant, you still have a Yahoo! stock that's pretty cheap on valuation, something we haven't been able to say for years!

So, the main takeaways here are the following:

• The deal with Yahoo! signals Google's strength. Buy on this strength.
  
• The end of dialog between Yahoo! and Microsoft has unduly suppressed Yahoo! shares. Buy on a possible short-term correction

However, please mind the following caveat: If a Google-Yahoo! deal doesn't hold up to regulator scrutiny, expect Yahoo! to go sideways or continue its downward trend.

Quality is King

In the crazy world of content on the internet, quality ends up winning out in the long run, despite what people may think.

Sure, there are plenty of tech-savvy people out there who want to direct traffic to their less-than-great web properties to make a quick buck from a prominently displayed text ad unit. Many of us have been to these ad-laden landing pages. Cyber squatters still make a lot of money by snatching up domains by the thousands in the hopes that people will happen upon these domains, which are either laced with common words or misspellings of real websites. I suspect that many of these people are successful in their efforts. This is blatant opportunism is definitely a negative aspect of the internet, but it musn't spoil our overall image of the internet. It's not a shortcoming of the medium itself, but the result of an internet user base that is still in the process of learning how to surf the web. When internet users have a firmer command over where they go on the web, and have a greater knowledge of the best places to find content, products, and services on across the web, opportunism will end up losing its footing. In the long run, this will be a huge windfall for internet users and high-quality web entrepreneurs alike.

Another perception that is perhaps well-founded, but not necessarily sustainable, is that low-quality and/or spammed-up sites often find their way into important search engine results. This is result of many unsavory SEO techniques, as well as a Google bias toward older, yet less useful, websites (since older sites tend to have more backlinks since they've been around for so long). I see both of these causes having much less influence over search engine results over time. Eventually, newer and better waves of websites have an easier time populating search results because current trends on the internet make linking much more prominent, as well as more indicative of quality. For example, the blogosphere (I don't like that word either) is very quick to pick up new websites and link to them on a massive scale that wasn't previously possible. Also, there are newer sites like Digg.com, StumbleUpon, and Del.icio.us that give the web much more collaborative/democratic feel and functionality.

Aside from the technological advances that have pushed quality to the forefront, the 'quality is king' statement is more of a practical credo for entrepreneurs than it is a conjecture that one must prove over and over again. In business, no matter what the industry, emphasis should be placed on making something useful. If you're a web entrepreneur, work only with concepts that are interesting, and create content that is useful to people. Techie tricks will always be useful tools for the webmaster, but quality must always come first. Quality is King.

Tech-led Turnaround?

Well, I don't know whether or not to call it a turnaround, but I do think there will be an influx of money going into technology soon. While the energy and materials sectors are the only ones that are seeing any signs of life this year to date, investors are looking for the stocks that could be bargains in this year's second half.

I think technology is where you will see the first gains outside of energy and materials. However, this won't necessarily signal a turnaround. Technology will perform well relative to the rest of the market because companies are looking for productivity-enhancing products and services. Technology companies can offer this.

Since this is a blog about internet trends, let's explore what Google has to offer in this capacity, as well as others that are important to current economic conditions:

First of all, as many have already pointed out, Google's AdWords advertising system offers a more accountable form of advertising toward which advertisers tend to flock during economic downturns when marketing budgets tighten up.

Also, within the paid search market a larger player like Google will tend to do well, as advertisers will be more likely to take focus off of secondary players before considering scaling back on Google ads.

These conjectures are not entirely untested. The U.S. economy grew at measly rate of 0.9% year over year in Q1 2008. Nonetheless, Google greatly exceeded Wall Street's projections, both the latest revised ones and the original ones that were higher. Google posted good growth domestically, as well as stellar growth internationally.

On that note, the international exposure of Google (as well as many large multinational tech companies) is also a way the company will shine in current economic conditions. Google's brand power is just as potent internationally as it is in the U.S. In Q1 Google's international sales surpassed its domestic sales for the first time in the company's history.

Many point to the favorable conversion rate that Google receives from these international sales, but let's not underestimate the growth story in other countries. As e-commerce markets develop in other countries, Google's sales growth will likely reap the benefits. For example, China's e-commerce market is in a state of infancy. When growth starts to accelerate and the market starts to mature, Google will have a huge new source of revenue, assuming they continue to gain market share in China.

For another example, Latin America is Google's highest-growth region. Having lived in several Latin countries, I understand the brand recognition in these countries. People hardly use any of Google's peripheral web services, but almost everyone uses Google for search. Similarly, Google will reap the benefits of economic growth in Latin America as the internet starts to mature with the expansion of the Mexican, Brazilian et al. middle classes.

OK, now back to the original point. Technology will likely perform well relative to the rest of the market during this downturn. Also, as we come out of the downturn, the best-performing tech companies that have eaten up market share stand to benefit the most. Within technology, there are some companies with healthy balance sheets that have been taken down in the first half of 2008 with the larger market. Much of this is unwarranted. For example, Google lost 3.5% today on a record hike in crude oil prices. Companies like Google, which are not as directly exposed to oil prices, should not experience the same dips as the larger market due to spikes in oil prices. Even further, if Google and other tech companies truly drive productivity, they stand to benefit in certain ways from a struggling economy due to higher energy prices.

So, this doesn't point to a tech-led turnaround, but rather good tech performance during the downturn. Even though technology will likely perform well coming out the of the downturn, too, it will be the recovery of other sectors that actually drives new economic expansion.

"Me too," says Microsoft

Microsoft today announced a search distribution deal with Hewlett-Packard, the largest such search deal Microsoft has had to date. This agreement, which is very similar to Google's deal with Dell, involves pre-installing HP computers with the Live Search toolbar, as well as making Live the default search engine in Internet Explorer.

The conventional wisdom behind such search deals is that many computer users are unable or unwilling to change the default factory settings on their computers, including default search engines.

This deal will have a considerable impact on Microsoft's web traffic, but this impact can certainly be overstated. For one, has tried to make Live Search more prominent in its new Vista OS, but has only been losing search market share since its release. Also, many PC users will bypass the embedded Live Search functions and go straight to Google's homepage to get their trusted search results. Whereas Google's search deal with Dell is likely to make people search with Google's toolbar much more often, Live Search's toolbar could make people search less frequently since the Live Search brand awareness is currently non-existent compared to Google's #1 global brand.

Nonetheless, this deal is a step in the right direction for Microsoft. I don't believe the terms of the deal have been made public, but I'm sure even a rich deal will be worth it for Microsoft because it has good reason to fear Google's dominance on the internet, which could carry over to--or eliminate the need for--the desktop.

Google Finance 2.0

2.0 is not what they call it, but I am starting to see some major improvements and innovations with the service that is slowly but surely becoming worthy of the Google name.

First of all, today the Official Google Blog announced the incorporation of real-time quotes for NASDAQ stocks on its finance site. Rather than having to log into a brokerage account to get such quotes, any investor can access this real-time information via Google.

Also, Google has an incredible stock screener, which is a fairly new feature to the Google site. This screener allows investors to screen stocks for a number of different customizable metrics. Do you want a stock with a price-to-book ratio that's less than one and a dividend yield that's greater than 5%? Well, the stock screener can give it (them) to you.

However, Google Finance still has a long way to go. The news feed on the right hand side of the stock pages leaves out some very relevant articles that appear on Yahoo! Finance.

Another bothersome aspect to Google Finance is the prominence of the Discussion board, which is often loaded with senseless commentary.

All in all, the service is becoming a worthy rival to Yahoo! Finance, but still falls short of the incumbent #1 in finance.