Wednesday, December 05, 2007

IT Opportunities due to the weaker Dollar

The dollar, currently valued at about two-thirds of a Euro, has been continuing on this trend for the last two years. With future interest rate cuts all but inevitable, and the likelihood of interest rate increases or holding steady in Europe in the near future, this trend is likely to continue.

From the Economist:
The ECB is managing an economy that has relied much less heavily on rising house prices to fuel consumption. As Jean-Claude Trichet, the ECB’s president, made clear, the main worry is about higher inflation, which is currently at 3.0%, well above the target of a bit below 2%, rather than lower growth.

The cheap dollar brings about a number of arbitrage opportunities, since goods and services produced in the US, but consumed in Europe are likely to be significantly cheaper. Retailers and the tourism industry in the US have already seen this trend, and opportunities for technology goods and services cannot be far behind.

S-as-S and Web 2.0 markets

Web-based services developed and hosted in the US may have significant cost advantages over European counterparts. Building in multiple language and multiple currency support early should be a key priority for most S-as-S companies because of easier monetization opportunities.

IT equipment

While large semiconductor plants like the one built by AMD in Dresden employ 2,000, labor costs account only for a fraction of operating expenses. However, other costs - including transportation and other costs may make large projects like this unviable if their primary market is outside Europe. More companies are likely to build manufacturing plants in the US because it may now make economic sense to do so.

Outsourced IT Services

IT and BPO outsourcing firms are likely to face pressure in face of rising salary costs in emerging economies and lower revenues due to a weaker dollar. For companies considering or using outsourced IT services, increased prices or lower quality of services are inevitable.

For application development, processes like LEAN and Scrum help projects move forward faster, but aren't geared towards geographically distributed teams. ALM tools (ECF, Microsoft Team System, Serena) and application frameworks (.Net 3.5, Django) drastically improve software developer productivity. In many cases, it may therefore make more economic sense to develop software locally rather than using offshore teams.

Voice recognition and self-service technologies have also developed significantly and are widely used by many large firms, and while not as personal, may be an adequate replacement for Tier 1 offshore call-centers. Canadian firms may also find it easier to outsource IT work to the US.


European and Asian customers in emerging markets, who are used to paying significantly higher prices for technology products and services, may find services from US firms (particularly S-as-S) cheaper and more customer-friendly. It may also be difficult for internet firms to geographically segment customers.

While the falling dollar may mean some increased costs for some, many opportunities like the ones mentioned exist for firms seeking to exploit such opportunities. While arbitrage opportunities exist in exports from the US to Canada, Europe and Asia, the Pound is also likely to depreciate against world currencies due to lowering of interest rates fueled by the deflating housing bubble there.

Monday, December 03, 2007

How technical is your web-site visitor?

Every month, the Seattle startup community waits eagerly for the list - a list that will be debated, commented upon, written about, sometimes criticized, but always initiates bouts of navel-gazing and moments of satisfaction. The Seattle2.0 list is maintained by Marcelo Calbucci, a Seattle entrepreneur who founded and runs Sampa.

The composite index is driven by a startup's performance in getting web traffic, as measured on Alexa and Compete, and besides providing some insight into the eyeball movers and shakers of the month, also provides increased publicity to media-shy Seattle startups.

Given that this information was neatly tabulated, I tried getting additional information from this data. Using that fact that there is a serious skew towards internet developers in Alexa data, and that Compete doesn't suffer from this skew ( but can be gamed, nevertheless), I created a normalized TechScore, which shows how technical the website's audience is likely to be.

What it means:

A higher TechScore means that your audience is skewed towards Tech folks/ Internet developers - and you can use this information to your advantage when continuing to add features to your web site.

How can you use it:

If you are getting a tech-savvy audience, you can spend less resources on making detailed online help available. You could also make the experience richer because these folks are more likely to have a broadband connection and a good computer.


A higher TechScore could also mean that

  • the site is new and Alexa seems to have recognized and started gathering information about the site earlier than Compete (Compete doesn't yet have statistics for November - and there may be a lag ).
  • Traffic has significantly increased the last month, and the comparison of Alexa and Compete rank may be an apples to oranges comparison.

A lower TechScore could also mean that the webmaster may have the Compete toolbar installed.

Company Alexa Rank Compete Rank Normalized TechScore Seattle20 Rank
ReelTime 114,988 501,512 100 86
LiveMocha 30,485 108,734 100 42
goChongo 144,268 514,694 100 89
Bill Monk 284,797 938,222 100 121
SEOmoz 1,517 4,640 100 5
Shelfari 5,677 17,122 100 14
Athleon 265,331 778,663 100 113
Ohloh 21,251 48,834 98 29
Movaya 192,854 385,139 94 84
WidgetBucks 6,374 12,054 93 12
Should Do This (Robot Co-Op) 100,512 189,516 92 64
MixPo 359,254 652,277 91 111
Biznik 72,642 135,887 91 55
FEEDJIT 42,998 74,441 90 37
Pelago 504,607 861,790 89 129
Openomy 469,358 801,366 89 123
PixPulse 352,108 571,190 86 105
Jookster 448,666 725,930 86 120
Jambool 254,712 410,964 86 91
Versionate 337,575 538,422 86 100
PeepCode 137,726 221,847 85 72
ProgrammableWeb 18,843 28,835 84 25
Jackson Fish Market 367,097 551,137 83 104
Others Online 231,758 349,930 83 85
MyTypes 68,519 105,336 81 50
Zoji 112,162 165,733 80 62
ZooDango 262,597 367,232 78 87
Popshops 57,116 83,027 77 43
Picnik 12,709 15,832 73 17
RescueTime 97,974 128,066 73 57
Down2night 407,352 509,365 73 103
SWiK 8,283 10,028 72 11
BlueDot (now 8,204 9,905 71 10
Sampa 34,313 40,894 71 31
PhotoSleeve 375,652 448,999 70 98
Wishpot 167,714 198,298 68 74
ImageKind 19,199 21,628 68 23
Earth Class Mail 76,843 93,074 67 48 48,732 53,545 66 35
Wishlisting 303,093 337,903 66 88
EyeJot 164,391 180,489 64 70
GridNetworks 373,608 385,218 62 96
They're Beautiful 558,987 571,246 62 115
FeedWhip 674,975 681,169 61 128
Zeenami 837,113 806,441 59 133
Wetpaint 5,024 4,738 58 7
LiquidPlanner 696,134 653,778 58 127
Just Cause 785,719 727,072 57 132
FlowPlay 390,850 359,877 56 94
Redfin 21,239 18,911 55 21
Treemo 161,858 150,222 55 67
Instacalc 463,538 410,291 54 99
43 People 126,645 114,779 53 59
Synapse 956,376 807,295 53 136
NewsCloud 95,757 84,630 51 52
SimplifyThis 546,495 448,697 51 108
Estately 237,846 198,499 51 79
Konnects 127,867 109,256 51 58
TeachStreet 540,162 439,047 51 106
SecondSpace 414,418 337,705 51 95
Ripl 496,833 392,706 49 101
Pluggd 106,919 88,667 49 54
Trailfire 44,411 33,068 48 32
PrestoGifto 585,499 418,623 45 109
ActiveRain 6,875 4,730 45 8
Cdigix 1,382,173 954,746 44 145
Fyreball 973,832 671,700 44 134
Cocktail builder 849,637 567,360 43 130
Inrix 797,785 525,962 43 125
The Phrogram Company 866,758 567,880 42 131
Jamglue 23,940 15,153 42 20
Medio Systems 801,835 507,153 41 124
Etelos 199,017 130,763 41 68
SnapTune 1,394,772 869,159 41 144
Linebuzz 617,437 371,102 39 107
LexBlog 221,860 136,194 39 71
Bus Monster 800,963 461,252 38 122
ClayValet 1,257,235 714,508 38 137
Findory 75,079 47,704 37 40
Walk Score 114,654 68,784 37 53
Dashwire 362,909 202,813 37 82
TrenchMice 752,182 412,007 37 118
nPost 188,490 108,278 37 66
Scriptovia 758,423 410,248 36 119
Robot Co-op (43 Things) 369,859 200,835 36 83
Avvo 179,401 98,885 36 63
FinancialJoe 1,309,443 678,478 36 139
TalentSpring 1,123,447 580,647 35 135
SmartSheet 241,129 125,899 35 75
Broadband Sports 102,255 56,837 34 45
CoolToors 1,463,438 715,522 34 143
43 Places (Robot Co-op) 49,571 23,571 34 30
BuddyTV 4,967 2,348 34 6
Jott Network 50,317 30,314 33 33
OwnYourPhone 904,975 421,525 33 126
SongSlide 1,366,510 621,085 32 138
All Consuming (Robot Co-Op) 115,479 58,572 32 51
AlphabetLane 1,776,698 802,983 32 149
Blist 267,729 125,268 32 77
Bioscreencast 1,748,576 778,695 32 148
iMedExchange 1,638,401 723,085 32 146
PhoneMyPhone (KeenScreen) 1,697,185 740,435 32 147
HomeMovie 700,579 306,962 31 110
You Just Get Me 2,035,156 866,593 31 155
Appature 1,941,322 815,324 31 153
Urban Spoon 38,412 15,722 30 26
Noonhat 577,713 238,184 30 97
43 Things (Robot Co-op) 4,078 1,605 30 4
Ontela 1,912,409 752,757 30 151
Overcast Media 1,551,030 603,451 29 142
SportsUltra 646,289 253,041 29 102
Lists Of Bests (Robot Co-Op) 86,063 39,299 29 41
MerchantOS 99,415 43,816 29 44
ActiveWords 544,050 206,096 28 93
EmptySpaceAds (KeenScreen) 2,170,926 785,513 28 156
Minecode 2,211,166 780,735 28 157
PhoneSherpa 267,979 99,831 28 76
AdReady 160,820 62,132 27 56
Crush or Flush (IceBreaker) 267,271 96,843 27 73
Catch the Best 1,540,278 520,683 27 140
Weedshare 1,960,327 644,243 27 150
Melodeo 877,890 283,761 26 117
SNAPforSeniors 852,401 275,083 26 114
ResortScape (SecondSpace) 503,493 161,001 26 90
PilotOutlook 2,336,438 713,139 26 158
Conenza 2,044,021 623,906 26 152
Frigy 2,858,639 862,735 25 161
Style du Jour 3,327,129 988,497 25 164
TripHub 220,994 71,935 25 65
Knouen 2,758,509 810,972 25 160 896,904 252,044 24 116
iLike 2,962 785 24 2
Zillow 3,031 802 24 3
Formotus 1,656,751 428,850 24 141 30,055 7,643 24 18
Trendi 3,423,175 876,825 24 163
Metafos 2,206,776 553,981 23 154
YourSports 584,137 150,698 23 92
RealSelf 134,130 34,632 22 47
Audiosocket 3,586,655 690,772 21 162
Bag Borrow or Steal 39,930 7,087 20 24
TrustedWord 2,802,424 484,868 20 159
SnapVine 34,667 5,614 20 22
Jobster 20,734 3,242 20 15
Postacrime 874,387 137,993 19 112
Judy's Book 33,087 4,799 19 19
Thrift Books 350,679 56,812 19 78
PayScale 14,872 2,068 19 9
3Guppies 55,396 14,430 19 28
Mercent 301,264 43,583 18 69
Cozi 240,692 34,419 18 61
Menuism 89,419 16,491 18 36
Farecast 18,622 1,742 17 13
Healia 236,452 27,707 17 60
Peppers and Pollywogs 410,725 43,085 17 80
Yapta 102,434 15,730 17 38
BigOven 51,888 10,817 17 27
Mpire 24,577 1,569 16 16
LandWatch (SecondSpace) 143,717 15,954 16 46
Atomic Moguls 108,900 11,056 16 39
Intelius 3,585 106 15 1
Trumba 84,653 9,152 15 34
GotVoice 171,807 1,479 13 49

How is TechScore calculated?

I do a simple regression of Compete Rank (independent variable) against Alexa Rank (dependent variable) to get a slope (1.94 this month, intercept = - 13,174), and calculate a projected Alexa rank = Slope * Compete Rank + Intercept. I calculate a ratio of Calculated Alexa Rank to actual Alexa Rank and normalize it on a curve to give it a score of 1- 100.

I did not add the intercept to sites with Alexa ranks less than 50,000 - so sites with Alexa ranks of less than 50,000 may have a slightly higher tech-score. However, this doesn't affect the scores on the vast majority of websites.

Friday, November 30, 2007

TCO for software implementation projects

Understanding factors contributing to high TCO's for software projects and helping customers eliminate these adverse factors will enable ISVs and their channel partners to create and capture additional value.

Lengthy RFP Process: Complex RFP processes that drag along for months are expensive and erode value of projects and increase TCO.

Causes of delay: complex licensing structures, lack of clear list of capabilities,  perceived execution risk, cost of implementation

Implementation Costs: Professional services, which are complementary to software, in the same way as mortgages and houses, or hot dogs and mustard, account for a significant portion of the cost of the project. Remote customization and implementation templates provide the promise of reducing implementation costs. Reducing the cost of complements with automated migration solutions and help ISV's capture more of the value created, albeit at the expense of the party providing a less automated migration service. Automated migration solutions also eliminate switching costs that an incumbent may have built to retain some competitive advantage.

Causes: Migration/Rollout costs, complex dependencies between software - impact is usually broad; training and learning curves for corp IT developers and end users.  

Costs of "Lights On" Operation: Periodic maintenance expenses, if not automated require systems administrators and increase chances of failure in systems when they are least expected. Periodic maintenance also has to be scheduled to fit into enterprise change management windows. 

Thursday, November 29, 2007

Allen and competitive advantages

Sports Illustrated and Seattle-PI columnist John Cook, both talk about Microsoft founder Paul Allen's investment and passion for sports teams - (Seattle Seahawks and Portland Trailblazers) he owns. For those questioning the wisdom of his investments, that rationale behind many of his investment decisions become clearer if you understand complementary products and competitive advantages that his asset management company, Vulcan, has over other more traditional venture investment firms.

Sports Teams As Complements - Real Estate is the Product

The Blazers are the only major league team in Portland, and the Seahawks were kept in Seattle after Paul Allen bought the franchise in '97. Sports teams, things to do - like museums, shopping and convention centers are all factors in attracting visitors and inhabitants to a city, and this increases the value of real estate. Also, investments in EMP, the Seattle Center are all really investments in Vulcan's South Lake Union project.

Vulcan Competitive Advantages - Timeframe.

Asparagus typically takes 3 years to harvest, so only farmers who can sustain a negative cash flow for 3 years can make the investment. However, it provides a higher return over 3 years than crops with shorter harvest cycles. Many fruit trees take longer, but again yield higher values over a long period than asparagus.

Vulcan, unlike private equity or venture capital firms that have an investment lifecycle, does not have a restricted timeframe. They can therefore invest a part of their assets in "fruit trees" when even the best venture firms cannot.

So investments that look less than stellar in a 5-10 year timeframe may make sense when looking at a 25 year timeframe.

Philosophy - Create Value before Capturing it

The lack of short term pressures like fund-raising and track records also means that venture fund managers  is likely to be more supportive of entrepreneurs and portfolio companies, and not succumb to monetization pressures too early. 

Of course this philosophy may not work for all startups, since it is not ideal to have no monetization pressures, nor is it great for entrepreneurs looking for an early liquidity event if the investor likes to add more value before a liquidity event, but it is good to know that there is an investment firm that offers capital under different terms than most funds.

Diversification - and an eclectic portfolio

Wall Street had a laugh at the eccentric "accidental zillionaire," noting that had he simply held on to his Microsoft stock -- that is, had he adopted no investment strategy whatsoever -- his net worth would have exceeded $80 billion. - Sports Illustrated

Hindsight is 20/20, and diversification is a smart investment management strategy. There are more cases of people who lost through putting all their nest eggs in one basket, than of people who have gained through lack of strategy.

Vulcan's portfolio seems well-diversified - both in sectors and time to maturity, and its technology startup portfolio is eclectic - consisting of Semantic Web startups (, Radar Networks), energy efficiency/alternate energy companies (Ember, Imerium) and disruptive models ( 

The only thing I couldn't find is international investments, which are probably made through public securities or other instruments. Given that growth rates in emerging markets are much higher than the domestic market, it is an opportunity worth considering since it fits well into the gaps in Vulcan's current investment strategy.

Monday, November 26, 2007

Non-Profit websites

About 6 months ago, I was looking for alternatives to a poorly designed and rather unmaintainable shtml web site for a non-profit I am deeply involved with. Seattle Youth Garden Works has an annual operating budget of about $450,000, and after a restructuring, I volunteered to maintain the web site.

The CMS.

I decided on Drupal after evaluating a few Open Source and proprietary content management systems. Joomla was a close second, and I chose Drupal because

  1. Already established in the non-profit world.
  2. Had plugins that I needed.
  3. Other research regarding future support etc.(IBM, forums)
  4. The ability to add blogs, forums etc if necessary.

If you are looking for alternatives, Joomla, Magnolia or DotnetNuke are all good CMS choices depending on your comfort or choice of application stack.

The host.

Dreamhost, a widely popular hosting service is large enough to have professional support available 24x7, and has a user community that helps you solve most problems before going to technical support.

They provide free hosting for non-profits - which is an absolutely sweet deal, and they are carbon-neutral - which many of our donors like.

They also support PHP/MySQL and provide root access for their non-profit account - a very useful feature. My only gripe is that MySql queries on Dreamhost are rather slow.

The Modules

I recommend using Drupal 5.0 because most commonly used modules exist for this version. I used a number of modules including Event, Volunteer Timeslots and FCKEditor to enable employees to make changes to the website directly without having to request a webmaster. Contact me if you are looking for a list of modules to install along with a Drupal installation for your non-profit.

The Result

Check out the website to see what it looks like.

The Next Steps

It would be a useful feature to have donors commit to and donate online. Although CiviCRM integrates well with Drupal, changing donor management software is disruptive and may adversely affect fundraising activity. Enabling social networking feature for volunteer management would also be a cool feature, and would ensure a more engaged group of volunteers.

Wednesday, November 14, 2007

A Hypothetical Sun Microsystems – Unisys merger

It has long been observed that though Sun Microsystems comes up with superior technology, it has been unsuccessful in monetization. Solaris is now open-source, as is Java. Of course, this has been hugely beneficial to customers and other vendors building providing valuable solutions using these technologies.

Sun's struggles in the recent past and jugglery with stock symbols (they changed from SUNW to JAVA), and a recent 4-1 reverse split have largely been "busy work" for the financial mavens, when a merger or acquisition would make more sense. There are obvious weaknesses (see chart bottom), that could easily be removed by acquiring or merging with the right partner.

Sun's bet on giving away software (that can be installed on any hardware), but charging a premium for their servers doesn't make a lot of sense – SPARC based servers are typically 3 times more expensive than comparable white-box servers to purchase, and the total cost of ownership is still higher. In order to extract a premium for their servers, Sun focused on TCO by including data center build-out costs – in their Black-box offering. The Black-box offering, may certainly make sense for many computing-intensive firms, but this strategy can largely be replicated using commodity hardware by other vendors like HP.

Meanwhile, another vendor, Unisys, has evolved from primarily manufacturing proprietary hardware to becoming an expert in consulting, systems integration and data-center build outs. Unisys' professional services and consulting expertise are complementary to Sun's superior, but open-source technology offering, and it may make sense for some kind of Unisys – Sun partnership. M&A with other hardware vendors is nothing new for Unisys Corp, which was formed when Burroughs and Sperry merged in 1986.

A SWOT analysis of both companies is given below.

Unisys' strong consulting and system integration relationships and its expertise in high-performance computing is a great complementor to Sun's high-performance computing infrastructure and software. In addition, Sun's xVM family of products - which includes a bare-metal virtualization platform based on Xen and corresponding tools to manage a grid of computing resources - CPU, memory and storage, will benefit strongly in adoption due to Unisys' established data-center build-out and management expertise.

Although Unisys resells Sun products, a deeper relationship, where Unisys services are bundled together with Sun data center solutions, may be advantageous to Sun.

As the virtualization bandwagon starts rolling by - with Oracle and other players announcing their own bare-metal VMs, this may be a good time for these companies to consolidate, and provide a much higher value service to their customers.

"Office is the Browser" - Microsoft

Hosted office applications are getting better, and are providing more and more functionality that is generally available on Office Desktop applications. Suites like GAPE and Zoho are providing functionality that is pretty close to what most people expect and use.

As Google, Zoho and a number of other SaaS firms bet on the providing rich functionality over the browser, Microsoft is attempting a contrarian strategy.

According to Microsoft, Office applications like Word, Excel and Outlook can be front ends for more complex back-end applications like SAP etc. This integration benefits

  • the back-end application vendors through additional seat license sales, and consulting revenue through integration,
  • increases Microsoft Office sales,
  • and makes it more difficult for enterprises to switch to another Office application easily later.

Most firms have been using Excel to query and analyze databases and create usable reports, and Office Business Applications formalizes this process. However, the success of this strategy depends how competitive SaaS offerings can be to Microsoft Excel, which has been the undisputed leader in its class.

I see 2 key challenges to Microsoft Excel's dominance in the market.

  • Google's ability to outprice Microsoft in its "free hotdogs, just buy mustard" offering.
  • Office 2007 - which has been a significant change - and has not been adopted widely among the the most common users yet, and upgrades are likely to take some time to verify that integrations with previous Office versions work with the newer version as well.

Office 2007 has a significantly different look and feel, and there is a learning curve associated with using Excel 2007, after you have become used to the previous version. Also, Enterprise IT organizations have been waiting for any significant problems to show up and be fixed in Service Packs before adopting the new version. Given this uncertainty around Office 2007, both Google and Zoho have a unique window of opportunity to push and get SME's to adopt their solution instead of Excel.

Tuesday, November 13, 2007

Inefficiencies in the services sector

Inefficiencies in the service sector are not easily visible until you have to find a plumber on a holiday weekend or are looking for a story teller who can hold the attention of a dozen easily board five-year-olds.

These inefficiencies are challenging for both the service provider and the customer, and are caused by a number of reasons.

Frequency of use: Most people do not use these services on a daily basis or for that matter more than once a year. As a result, prospective customers do not understand what to expect. Not understanding what deliverable can be expected leads them to question whether the service worth the value being charged.

Information Asymmetry: The customer is not able to know the quality of a service provider’s work until after a contract has been signed. Therefore, customers rely on word-of-mouth referrals (which are inherently inefficient), or on reputation management sites (like Angies’ List – which is subscription based).

Friction points in the sales process: The sales funnel has numerous friction points – and a lot of time is spent by a service provider answering similar questions for each prospect. Advance payments for some services is made through checks in snail mail (which is another obvious friction point), or if a service provider doesn’t take deposits, causes a loss of service revenues through last minute cancelations or no-shows. Unlike airlines or restaurants that can use yield management algorithms to manage no-shows, independent service providers are left with lost revenues if this occurs.

High fixed cost/low marginal cost business: Service providers, like airlines, have high fixed costs, tied to cost of living, which they incur regardless of whether they are serving a customer or not. They, therefore split these high fixed costs across the orders they get over a period.

For instance, if a plumber had fixed costs of $10,000 a month, and charged $100/ hour of labor, and of the 160 hours he works each month, spent 30% of his time answering customer calls, he would make $11,200 or a profit of $1,200. However, if he were to answer all his questions on a website, and enable customers to book his services online, and was able to reduce the time spent answering phone calls to 10%, his profits would increase to $4,400. Even after assuming that he paid $500 per month on the system, he would still have 200% additional profit. His customers would get other benefits like the ability to book and schedule appointments online, and the plumber could pro-actively market things like “winterize your bathroom” specials to customers when he is less likely to be busy.

The problem is much worse if you look at services where customer tastes change rapidly and high demand elasticity exists – like entertainers and venues. Demand elasticity is also much higher than you would see in essential services like plumbing. Also, utilization of services usually centers around weekends – utilization of venues is as low as 15% and is lower in case of entertainers. Increasing utilization by offering discounted prices but which are higher than marginal costs, can ensure significant additional revenues for entertainers and venues.

A number of web-based applications, the growth of social marketing and service providers getting comfortable with this new customer acquisition method will go a long way in correcting this inefficiency.

Integrating front office and back office tools: IT systems for most venues have evolved to encompass most sale and post-sales functionality – like bookings, deposits, printing receipts, accounting etc. However, these systems primarily assume that the customer is booking through telephone or in person. Booking or inquiries through web-based systems are rarely tracked within the system, and generally assume the form of an email notification containing lead information, which has to be manually re-keyed into another system. Integrating search engine marketing tools and lead generation forms with back end processes like instant booking will improve sales for franchises and entertainers significantly.

Online reputation management: Word of mouth referrals, while effective, are rather inefficient methods for generating leads, especially where customer tastes change regularly. Online reputation management is of paramount importance for a service provider who is looking to increase his revenues and decrease expenses.

Comfort with web bookings:
Most people under 40 are comfortable using the internet to make purchases, choose restaurants or other services. They also the “instant gratification” of buying or booking being confirmed when they place an order. Service providers should take advantage of this trend and ensure a sufficient web presence to meet the demands of their target customer.

Thursday, November 01, 2007

Google and Microsoft

Google seems to have perfected the art of attacking its competitors cash cows. Attacking cash cows is a good strategy for two reasons – it makes the company being attacked move to a defensive role. Once in a defensive role, you are reacting to the competitor's threats, rather than focus on adding value to the customer and others in the value chain. Second, a loss of revenues means that there is less investment available for other projects that help the company retain competitive advantage.

Google has done this often and rather successfully. First, it took on Paypal. Google Checkout's price promotions in the 2006 holiday season and throughout 2007, have led to significant adoption in the marketplace, and has forced Paypal to spend additional product development dollars or lose market share.

It has also done this with Microsoft – with GAPE (Google Applications Professional Edition), which bundles the equivalent of Office and Exchange in a SaaS solution at a price of $50/user/year. Exchange and Office costs of ownership are significantly higher.

The unchallenged competitive advantage Google has as a market maker for ads makes it possible for Google to finance these strategic initiatives.

SWOT Analysis for Microsoft



Closest to customer

Hard to convey incremental value to customer

Solid Development platform


Established ecosystem of partners

Partners capturing too much value

Lots more experience in managing value chain



Better Development Tools

Google - Office

Publisher Ad incentives

Open source - Servers

international markets

Virtualization – Can they make server OS' irrelevant?


Enterprise software

SWOT Analysis for Google




Dependent on network operators and PC OS's

Unchallenged Ad market making

Single source for revenues

Established ecosystem of publishers and advertisers

Major SEM tools integrated

Traffic cop for the internet



Mobile SEM

Can execution be sustained?

Making other advertising markets efficient

Can someone incentivize publishers to move elsewhere?

For Microsoft to retain competitive advantage and the ability to price products without significant competitive pressure, it must act to somehow dilute Google's source of revenues. As most of you already know, Google a significant portion of ad inventory where Google Ads are served is on non-Google sites. If Microsoft were able to convert these publishers to use their own version of an ad network, codenamed Gatineau, or at the very least undermine the use of the Google Adsense program (through legitimate means, of course). Microsoft can do this in 2 ways – buying a stake in publishers –like Facebook – which it has already done, offers a potential for a significant amount of ad inventory that is out of Google's hands. The second, possibly more difficult option, is to provide ads cheaper to advertisers, and pay more to publishers – and take less of a margin or no margin at all in brokering the transaction. While this doesn't help Microsoft's bottom-line directly, it helps by impede Google's ability to invest in high projects that will continue to offer it competitive advantage.

Tuesday, October 30, 2007

Virtualization – The Next Generation

There are a number of case studies that show that server virtualization and consolidation provides significantly higher utilization of assets. Cost savings occur not only due to direct equipment costs, but also due to savings in software licensing costs, rack space and data center usage and power. Over 75% of large enterprises now use at least some method of server virtualization in their data-centers.

On the client too, desktop virtualization eliminates the need for testing a home-grown application for compatibility and qualification with a number of desktop operating systems, and makes desktop OS migration significantly easier due to fewer dependencies on additional application development and testing efforts.

However, the ever-increasing drive towards more efficient computing organizations will undoubtedly take enterprise IT computing to the next steps in virtualization – where computing, storage and networks are all able to anticipate and re-configure themselves according to demand for specific computing resources.

Dynamic provisioning – where a virtual server is configured as needed, will enable IT managers in capacity planning using averages and medians instead of peaks in usage – which typically occur less than 10 hours in a year. For instance, additional e-commerce virtual servers would be instantiated dynamically on Black Friday, which usually sees the highest sales in a calendar year, and additional customer service virtual servers would be provisioned automatically to handle returns after new year for an e-commerce business.

Demand Orchestration - Additionally, business process configuration and management software will also be intelligent enough to orchestrate demand to balance the need to maintain business SLA's and optimal efficiency. For instance, a line of business file export could be configured to run any time between 12am and 4am, and will be scheduled intelligently between those times by a scheduler using historic data. Intelligent scheduling of computing demand will enable higher utilization due to more uniform usage.

Exciting times are ahead for IT efficiency in general, with virtualization evolving to squeeze more out of infrastructural investments.

Monday, October 29, 2007

Social Networking and Customer Acquisition costs

I was infected with a virus this week. After a few futile attempts to fight ghosts being thrown at me and offers of beer, I succumbed and installed SuperPoke! and to get even, sent a few vampires after those people. Nicholas Carr talks eloquently about vampires and social networks and observes that we welcome these social networks to be part of our lives.

Many blogs and news articles have commented on how Facebook would be able to use profile information to target ads more effectively than ever. While this may certainly be true, I think that peer pressure and peer recommendations are going to drive the next generation of marketing efforts far more effectively than super-targeted campaigns using profile information. This approach is currently far cheaper than other means of customer acquisition, and stickiness is likely to be greater because it is enforced softly by the your peer group.

First, for most of the population the need for affiliation is far more than the need for power or achievement. Analysis of qualitative information around us (I can't seem to find quantitative data with nAff, nPow or nAch scores for US subjects using McClelland's Thematic Apperception Test and inexperienced in conducting such a test. If anyone has some information, please post in comments below or email me) like houses in a sub-division, dress codes, cars in a neighborhood etc. look alike not only because of formal rules, but also because of informal social pressure.

Additionally, cost of web-traffic is growing. For adwords, or paid search, the most used keywords are fairly expensive, and less used search keywords need a marketing specialist to manage a campaign. Affiliate marketing rates for traffic are anywhere from 4%-15% of revenues. With shrinking margins, this cost is often prohibitive for product companies.

Firms have already realized this, and product companies are increasingly moving to own communities (Johnson and Johnson's purchase of Mayasmom and Reliance's launch of are some examples). BuyCostumes has benefited by this trend by writing a Facebook application and saving significantly on costs of customer acquisition.

All this leads me to think that the next logical step for Facebook is offer a valuable service to product companies–set up Owner Clubs for products and charge product companies for this service.

Wednesday, October 17, 2007

Are Companies Spending too much on IT?

Most IT managers and executives are likely to be creating their 2008 IT budget this time of the year. As companies prepare for an economic slowdown and are looking to reduce operating expenses, IT executives may be hard-pressed to explain any increases in IT spend.

I looked at IT areas where companies are currently spending money, and where there may be room to reduce IT operating expenses without creating investing in large CAPEX projects.
According to META in 2004, the financial services industry is well above overall averages, with projected IT spending of six percent of revenue in 2005, compared to an average of just over four percent and projected spend of 13 percent of operational expenses, compared to an average of five percent.

Gartner surveys say insurance companies in the US spent 2 to 4 percent of their annual revenues on IT expenses in 2006.
Surprisingly, insurance companies were quoted as saying that 65% of their IT expenses were "to keep the lights on." The large amount spent in running the engine leaves few resources for strategic projects that can actually help increase company revenues. Here are a few areas where executives can reduce their IT spending.

Do you really need those servers?

Additional resources come with huge hidden costs. For example, software licensing, data-center space, maintenance contracts and additional system or network administrators needed to manage the product, may end up making a bigger dent on your IT budget than you intended.

See if you can move applications to servers to improve utilization, or use virtualization to squeeze more out of your hardware. Also, using virtualization may mean that you can get rid of some OS licenses altogether. For instance Weblogic runs directly on the hypervisor, and other applications that run on Java VM's may be able to do so as well.

Better Application Maintenance processes

Ensure that you have a documented application development process. Use EPF or Visual Studio Team system to have an integrated approach to application lifecycle management. Enforcing a process ensures smaller learning curves, and consistency in estimates and process when interacting with other departments. Ultimately, this saves time and reduces confusion and risks. In addition, since the process is documented and enforced by the system, you can continually improve process and ensure that every one in the application development team follows it.

Use PPM to determine what Projects to execute
Unfortunately, most executives have more positive NPV projects than the budget will allow (and raising additional capital for projects, while theoretically sound, may not be likely in practice due to transaction costs). If you already have a good system for evaluating business cases, tracking projects, quantifying risks - use your PPM system to monitor and reassess your priorities as the time goes by. Sometimes, it makes sense to nix a project that continues to be on time and on budget if it is no longer as important. If you don't have such a system to track projects, this may be a good time to start. Serena's Mariner or Microsoft Project Portfolio Server are best implemented by professional services or if you have the $$, by consulting companies who have done this many times before.

"Lights-on" Operations
Are you relying on people for operations that can be automated? For instance, diagnosing most issues like batch processes not running or password resets do not require a technical support person. Look at issue logs over the last 6-12 months and identify the issues that were most frequent and required signficant time to fix. Look for opportunities to automate diagnosing and fixing these simple but time-consuming problems using simple scripts or use products like iConclude (now part of HP).

Tuesday, October 16, 2007

The Malaise at Microsoft

In a business school case (Rohm & Haas), we learned about how channels of distribution were critical to a new product's success. I have added a brief description of the case below.
Joan Macey, Rohm and Haas' market manager for Metalworking Fluid Biocides, found that sales of a new biocide, Kathon MWX, was utterly disappointing. This was all the more puzzling since sales of her other product--Kathon 886 MW, a liquid biocide used only in large-capacity tanks--was well on target and held a steady 30% market share. In May 1984, about five months after the new product was launched, Joan Macey was reviewing her entire marketing strategy with a view to bringing Kathon MWX sales closer to target. Of particular concern to her were the distribution and communication strategies used for the new product.
Designed for Channel, not the end-user. The better product apparently cannibalized strong service revenue retailers were getting, and retailers really didn't have any incentive to sell the new product. Obviously, Microsoft has learned this lesson too well. That is the problem. It is obviously not enough that a product exist to help players in the value chain capture value, it has to create substantial value to the customer too.

Products don't solve a problem: Most products (including Vista) primarily seem to be designed to push more products and services to customers who really don't see a problem being solved.

Products create problems. In fact, most people I know have gone back to XP because all their software and peripherals (Camcorder, Palm software etc.) work with XP but not with Vista. These are people who prefer function to form.

Advice to product managers: talk to end users for product requirements, not just to channel partners.

How much is it again? Licensing is confusing. Now, that is an understatement. Because a lot of Microsoft products are sold through channel, Microsoft has to list really ridiculous list prices for their software. Other software vendors like Oracle also do so, but Oracle primarily deals with large enterprises, whereas Microsoft has a lot of small business customers. If I don't understand pricing, as an IT manager, I will go to a vendor who has a more transparent pricing model.
The licensing tool is an attempt to help with your pricing confusion and perhaps anchor a ridiculously high price as a reference point for you to begin bargaining.

Segmentation Gone Wild
Microsoft Dynamics, after several confusing name changes, has 7 products and each product has an average of 3 editions. Not only is this challenging for the customer to navigate through, it is challenging for the sales staff who has to be up to date on the features of each of those products. Is it really cost-effective to extract every ounce (or more) of value from your customers? Or is it poor post-merger integration?

Peanut Butter with your OS?
Yahoo executive Brad Garlinghouse wrote the Peanut Butter manifesto for Yahoo, but it applies to Microsoft as well. The software maker recently launched Real Live Moms, a Live Spaces site that exhorts moms to be "the most spirited mom in the block" (sic) and other spaces to promote its "community." It may be time for a talk about the problem of spreading resources too thin and shoddy execution on products.

Outlook: I'm moving to GAPE!
As SAAS offerings like Google Applications Premier Edition are beginning to provide rich functionality, avoid issues like local storage, and provide a clear pricing structure ($50/user annually), I expect more small businesses to move to such products. Also, improvements to Google Gears may take care of times when your network go offline for brief periods.

Monday, April 02, 2007

Understanding web-consumer psychology through Google Data

Google now collects vast amounts of consumer behavior data. Most obvious among the data being collected is search keywords.

By offering Google Analytics for free, Google is able to collect data from other sites that users visit, and is able to establish a pattern of visits for a particular visitor. For instance, Google will be able to determine what

Saturday, September 16, 2006

Not IT - Are railroad companies the next private equity target?

Private equity firms, with a significant amount of capital to invest, highly incentivized managers (in case of buyouts like Sungard), the ability to avoid the cost of being a publicly listed, and the opportunity to extract operational efficiencies - are all reasons for the increased number of buyouts by private equity firms.

Typically, private equity firms are attracted to industries with consistent cashflows, low volatility (beta less than 1) , low debt (Debt less than 50% of capital) and high dividends. The railroad industry ( BNI, NSC, UNP) fits right into this set of specifications, and their enterprise values (market value of debt + market value of equity) are in the $24bn - $30bn range, an size that a consortium of PE firms can easily digest.

In addition, cash flows in this industry are strong, coupled with gross margins close to 40%. Railroads have a greater efficiency than road transport - and higher fuel costs are likely to make railroads cheaper than shipping by road. Levered beta for this industry (with 40% D/K ratio) is 0.9.

Stock values in the transportation sector have in general weighed down by high fuel prices, and railroads may be a good buying opportunity for PE firms.

Burlington Northern Santa Fe Corp. CANADIAN NATL RAILWAY CSX Corp. Norfolk Southern Corp. Union Pacific Corp.
Industry Railroads Railroads Railroads Railroads Railroads
Current Share Price 69.82 41.02 31.61 43.05 83.80
Market Value $25,272 mil $21,851 mil $14,020 mil $18,711 mil $22,571 mil
Revenues $14,031 mil $6,507 mil $9,096 mil $9,107 mil $14,715 mil
Net Earnings $1,724 mil $1,684 mil $1,036 mil $1,343 mil $1,366 mil
5-yr. Sales Growth 8.24% 13.84% 1.41% 7.49% 2.89%
5-yr. Earnings Growth 15.23% 35.48% 25.08% 31.49% -0.53%
Net Profit Margin 12.30% 25.90% 11.40% 14.70% 9.30%
Short Interest 1.3 1.6 1.4 0.8 1.2
Est. EPS Growth Rate 15.3% 14.3% 16.1% 14.4% 15.6%
Forward P/E 14.1 14.2 14.4 12.9 15.0
PEG 0.92 1.00 0.89 0.89 0.96
Price/Sales 1.8 3.4 1.6 2.0 1.5
Price/Cash Flow 10.2 10.2 8.3 10.4 9.7
Price/Book 2.5 2.6 1.6 1.9 1.6
ROE 17.5% 22.2% 12.7% 14.2% 9.8%
ROA 5.7% 9.0% 4.3% 5.2% 3.8%
Dividend $1.00 $0.59 $0.40 $0.72 $1.20
Dividend Yield 1.43% 1.44% 1.27% 1.67% 1.43%
Payout Ratio 16.8% 16.6% 11.6% 18.1% 23.7%
Total Return (12-mos.) 18.2% 17.1% 37.7% 7.7% 18.5%
Total Return (3-yr.) 149.4% 143.4% 121.6% 140.4% 50.2%
Beta 0.8 1.1 1.0 0.9 0.8
% Off 52-wk. High -20.65% -19.84% -15.32% -25.40% -14.04%
% Above 52-wk. Low 26.07% 21.54% 48.06% 16.29% 25.28%
On Balance Volume Index 61 59 67 46 82