October 24, 2005

Google vs. Microsoft

Even as Microsoft won a victory recently against its new and increasingly agile young competitor Google in the case of Kai-Fu Lee, Google continues to nibble at the margins of Microsoft's more existential questions - the need for its software in the first place in an age when Web development architecture has taken the "Web 2.0" route offered by schemes like AJAX.

Kai-Fu LeeOn the Lee case, Microsoft has said it wants the case to be decided in the state of Washington, where a judge ruled last month that the hiring can proceed, with the stipulation Kai-Fu Lee cannot recruit from Microsoft. Google is attempting to keep the case in California where non-compete agreements are said to be viewed with less rigidity.

Microsoft initially filed suit in Seattle's King County Superior Court in July, claiming Kai-Fu Lee violated that agreement when the search giant hired him. Google then countersued Microsoft in California, in an attempt to have the noncompete clause declared invalid.

The battle for Kai-Fu Lee, a former vice president with the software giant, underlines a growing animosity between the two companies, with Microsoft CEO Steve Ballmer allegedly pitching such a fit after losing one executive in 2004 that he threatened to "kill Google" over the continued poaching of Redmond's top brass, even flinging furniture and dropping more F-bombs than I've heard tell in awhile.

Well, Microsoft won its latest round in the fight that has at last made explicit the smoldering rivalry between the two otherwise mostly indirect competitors.

Google Sun AllianceBut announcements between Google and Sun have indicated Google's interest in helping partners like Sun compete head to head with Microsoft in the office suite market with the recent release by Sun of OpenOffice.org 2.0 - a significant upgrade to the prior version which, if reviews are to be believed, is a virtual replacement (for free under the open source GPL) for MS-Office. According to Jonathan Schwartz, Sun's president:

“OpenOffice.org is on a path toward being the most popular office suite the world has ever seen; providing users with safety, choice, and an opportunity to participate in one of the broadest community efforts the Internet has ever seen. As a member of that community, I’d like to offer my heartiest congratulations.”

For sure, it gives Sun a new lease on life after a very tough few years after being the dot in the dot-com crash. McNealy was in full effect with his "network is the computer" mantra, so much exemplified by Google's strategy. If you can call it that: Eric Schmidt, who used to work for Sun and is now Google's CEO (after jumping ship a few years ago from the sinking Novell) even mentioned how he delights in the absence of a strategy... well, I guess. No matter how underwhelming the actual announcement, it creates powerful symbolism in the marketplace where Microsoft has left an opening.

Still, OpenOffice.org has Microsoft running scared from OpenDocument - a revolutionary file format that could at last end the Word/Excel/PowerPoint tyranny even more than PDF has done. Which is why, perhaps, Microsoft licensed PDF support for next year's release of the the updated MS-Office suite. But their enthusiasm for SaaS (Software as a Service) is palpable amid McNealy’s remarks about Windows being the last, sad representative of the old client/server computing world and is ”so last millennium.”

Microsoft's reaction to the announcement took the move in stride, but the evidence lies in nothing less than Google's patents that they've got Microsoft squarely sighted in, as it "builds a patent fence" around search and takes on Yahoo first, then leveraging cutting edge user interface design technologies present in Google Maps (which could challenge PowerPoint) and Gmail (the RTF technology already offering about 70 percent of the functionality behind Word). Deployed on the "Googleplex" platform Google has created as its supercomputer-like infrastructure, calling into question Microsoft's very necessity isn't far around the corner.

Of course, Microsoft has seen such threats before - when Netscape challenged the idea that an OS was even necessary and applications could be run in Sun's Java within the browser. We all know how that ended... despite continuing market share battles with Mozilla Foundation's open source alternative to Internet Explorer (which I use myself), in Firefox.

But Redmond won't go down for the count easily. They've just reorganized decisively to take on such threats. And, while Microsoft might not have invented the idea of "embrace and extend"; they do seem to have perfected it.

- Arik

Posted by Arik Johnson at 12:00 AM | Comments (0)

September 07, 2005

Sony vs. Toshiba in DVD Format Wars: Samsung Positions for Ultimate Victory with Dual-Format Device

DVD Format Wars between Sony and ToshibaEven as Sony renews its determination that its new DVD format Blu-Ray will not to relive the painful Betamax experience of losing to VHS, Samsung seems to be positioning itself as a quiet arbiter of standards cross-compliance for consumer electronics customers as Toshiba's HD-DVD wages a pitched battle with Sony for DVD dominance.

At the core of both formats are blue lasers, which have a shorter wavelength than red lasers used in current DVD equipment, allowing discs to store data at higher densities needed for high-definition movies and television. However, the coating used in the Blu-Ray format requires a retooling of DVD manufacturing equipment not necessary for HD-DVD, despite the advantages of higher storage capacity.

Now that HD-DVD has suffered the setback of pushing its U.S. launch back from late 2005 to early 2006, it'll have a MUCH tougher time competing with Blu-Ray, when Sony hits the street with the PS3 game console:

The next-generation DVD format known as HD-DVD won’t be launched in the United States until early next year, setting the stage for much tougher competition with the competing Blu-ray standard.

DVD Format Wars between Sony and ToshibaThe consumer electronics company (Toshiba), which is the major backer of the HD-DVD format said, however, that technology will be launched in Japan before the end of 2005 as planned.

The delay in the U.S. all but eliminates the only advantage that the HD-DVD camp enjoyed over the Blu-ray format: time to market. Initially the HD-DVD camp had planned to launch products in the U.S. before the 2005 holiday season. HD-DVD has been waging a three-year format war with the Sony-backed Blu-ray format. The Blu-ray products are planned to reach stores in the spring.

Although the delay will not greatly affect the volume of HD-DVD sales, it will hurt the group’s image, Ms. Levitas said. “In terms of any momentum [HD-DVD was] going to build this year, they are shooting themselves in the foot,” she said. “They are giving a chance to Blu-ray to catch up.”

Another reason for the delay could be Hollywood studios losing confidence. “Maybe the studios are getting cold feet that you can succeed in [acquiring] consumers to move to blue lasers without a standard,” Ms. Levitas said.

It appears so far that Sony's winning and seems to be tipping the scales it's direction - Slate.com had an analysis and rave reviews for Blu-Ray:

If history is any guide, changes in technology that make entertainment more convenient make a difference in the way it is experienced. The advent of mass television, for example, came very close to killing the movie business, cutting the average weekly moviegoing audience from 90 million in 1948 to 20 million in 1966. Once Americans had color TVs, some 70 million people a week stopped going to movie theaters, forcing Hollywood to revive the movie audience with massively expensive television advertising. Videos and DVDs—and the ability to churn out pirated copies of them—have wiped out most of the movie theaters in large parts of Asia and Eastern Europe. So, what effect does Sony expect that its new Blu-Ray DVD will have on what remains of the moviegoing audience? To find out, I proceeded from the ground-floor showroom to the 34th-floor executive suite and put the question to Sir Howard Stringer, the British-born—and first non-Japanese—chairman of Sony.

Sony's fabled success story began more than half a century ago, in 1946, in a bombed-out basement in Tokyo. Akio Morita and Masaru Ibuka started the company (originally named Tokyo Tsushin) with the intention of manufacturing necessities, such as rice cookers and space heaters, for the war-ravaged population of Japan, but they quickly found an export market in America for consumer electronics. They went on to introduce a string of remarkably inventive entertainment products—including the CD. Along the way, Sony also bought a number of American companies to get content for these products, including CBS Records (now Sony Music), the Columbia TriStar studio (now Sony Pictures Entertainment), and, most recently, MGM.

Even though Sony helped bring about the digital revolution, the company has failed to adapt to it. The standardization required to manufacture consumer digital products undercut the value of Sony's branded products. For example, the Chinese and other low-labor-cost manufacturers, using the same computer chips, could make the same DVD players and digital TV sets as Sony for a fraction of the cost. The result was a commoditized rat race that became unprofitable for Sony. When it became clear that Sony had to "revolutionize itself," as Sony's previous chairman Nobuyuki Idei termed it, the revolution involved transforming Sony from a company that had focused on engineering proprietary products, such as the Trinitron color television set, the Betamax VCR, and the Walkman, into one that could capitalize on—and protect from piracy—the streams of digital data that would include games, movies, music, and other intellectual property. When Sir Howard assumed the leadership of Sony this year, part of his mandate was to move the company, as he put it, "from an analog culture to a digital culture."

The Blu-Ray DVD is a critical piece of this strategy. As I learned in Tokyo, its multiple layers not only can store vast amounts of digital data, they can also be used to record data downloaded from the Internet. For example, after buying the Blu-Ray DVD for Spider-Man 3, a consumer could then add on a game, music video, or a prior sequel from Sony's Web site. When I asked Sir Howard if there was concern that the Blu-Ray DVD would result in a further eroding of the world moviegoing audience, he answered that it was "a chicken-and-egg problem." The "chicken" was theatrical movies; the "egg" the DVD (plus television and licensing rights). Sir Howard, who is also chairman of the American Film Institute, pointed out that it would be difficult to conceive of great movies, such as Lawrence of Arabia, being made without a movie theater audience to establish them; the dilemma is that it's the "egg" not the "chicken" upon which the studios increasingly depend for their money.

So, even while trying to avoid fatally injuring the chicken—movies—Sir Howard said that studios are under increasing pressure to "optimize" their profits from the proverbial golden egg, the home audience. Indeed, the Blu-Ray DVD make this balancing act more difficult: With its interactive features, it appeals to the very teenage audiences on whom the multiplexes now so heavily depend. It's also a vital part of Sony's latest version of its PlayStation, due to be released next year. The prior versions of PlayStation have sold more than 100 million units and have provided the Sony Corporation with up to 40 percent of its profits. PlayStation 3, while it may sound like a child's toy, is in fact an incredibly powerful computer, exceeding in its processing power IBM's famed Deep Blue. The Playstation 3 can play high-definition movies and super-realistic interactive games and surf the Internet, providing a gateway for further digital consumption. In addition, the Blu-Ray will allow Sony to reissue its movie titles in high definition. In fact, part of the stated justification for acquiring MGM was the profits to be realized from reissuing the 4,100 films in MGM's library in the Blu-Ray format.

At some point, Sony has to overcome a competing high-definition format, HD-DVD, sponsored by its traditional rival, Toshiba. HD-DVD, like the Blu-Ray, uses a blue laser optical reader and renders an equivalent high-definition picture. The principal difference is that Toshiba designed the HD-DVD so that discs can be stamped out by existing DVD manufacturing equipment (which unfortunately is also owned by video pirates). That design makes it less expensive to implement, but the HD-DVD lacks the recordable multilayers or massive storage space for interactive features of the Blu-Ray.

While Sir Howard preferred not to speculate on the outcome of this potential format war, I predict that the Blu-Ray will prevail for three reasons. First, Sony has a critical mass of movies that it can release on Blu-Ray. Aside from its own titles, Disney, 20th Century Fox, and Lions Gate have agreed to release their titles on Blu-Ray. Next, almost all of the leading computer manufacturers, including Dell, Hewlett-Packard, and Apple, are committed to using Blu-Ray. So, if a studio wants its high-definition DVDs to be playable on personal computers—or for that matter on PlayStation 3—it will have to issue them in the Blu-Ray format. Finally, the situations of Sony and Toshiba are not symmetrical. For Sony, the Blu-Ray is an integral part of its overall strategy. For Toshiba, the HD-DVD is just another product they manufacture. If the company reached an accommodating deal on licensing fees, it could also make money by manufacturing the Blu-Ray DVDs. One way or another, however, the moviegoing public will soon have one more diversion from movie theaters.

Meanwhile, Samsung says it goes both ways:

Samsung Electronics Co. will bring out a DVD machine next year capable of playing both Blu-ray and HD DVD if backers of the rival standards fail to agree on a unified format, a newspaper said.

Competition between the two camps has hampered the launch of the next generation of optical disks, which will have greater capacity and higher definition, as movie studios hesitate to commit to printing disks on either standard.

Samsung's head of consumer electronics, Choi Gee-sung, told the Financial Times Deutschland: "We would welcome a unified standard but if this doesn't come, which looks likely, we'll bring a unified solution to market."

"It won't be simple but you'll see our solution in the coming year. Consumers will be too confused otherwise," he added in the interview published on Tuesday.

Samsung is a backer of Blu-ray, which promises higher capacity than HD DVD and better interactivity and security.

But supporting all standards—as Samsung has done with cellphones and mobile video—could give it an advantage in the multibillion-dollar market for DVD players, PC drivers and optical disks.

In the end, it might all come down to porn - which is what happened with VHS.

My instincts tell me we won't still be wondering who'll win this thing when Sony's PS3 hits the market. Now that HD-DVD has been pushed back, execs from Sony are claiming the Blu-Ray will "overwhelm" HD-DVD, citing its bundling with the PS3 and the fact it holds more data as trump cards. However, Toshiba has countered the argument, saying HD-DVD is cheaper to produce, which will ultimately draw the porn industry to it, and where porn goes, industry follows. Score one for Toshiba.

Plus, Toshiba says, "We're also not convinced that consumers would need to store so much data on disks, especially now that internal hard drives are more popular," which just goes to show you business analysts aren't the only ones completely out of touch with what consumers want.

Regardless, it's about now when consumers either go with Samsung's dual-format solution (Samsung could be the biggest winner in all of this) or simply throw up their hands and wait a year or two to see how things really turn out and go with the victor. One way or another, the stalemate is bad for BOTH Sony's and Toshiba's competing camps.

Seen another way, with Blu-Ray so critical to Sony's overall strategy, and HD-DVD not for Toshiba, Samsung also had little choice but to support both.

Still, one of the big factors in all this will be who the content providers - meaning Hollywood - will go for. And that, my friends, will boil down to who has the best copy protection. Sony scored a big one there too, with assurances that Blu-Ray equipment will Internet-connected to report any hacks to Big Brother's central command and the device can then be disabled. As in all things, vested-interest politics shares much of the blame. This speaks to the long-time, silly "regional code" that prevents DVDs made on one continent from playing on another.

For anyone who's ever bought a DVD in Australia, South Africa or China and brought it home to the U.S., this is often a rude awakening, as it was for me. This regional code can be removed in the players - as I have done myself to enable them to play - but in a Blu-Ray world, mods like that will not only be taboo, they'll earn you a dead DVD player.

- Arik

Posted by Arik Johnson at 03:10 PM | Comments (0)

September 06, 2005

Intel's AMD Antitrust Rebuttal: We're Not Bad, You're Just Stupid

AMD Antitrust Lawsuit Against Intel

Intel fired back at AMD in rebutting its antitrust lawsuit, saying the company has only itself to blame for not being competitive as a microprocessor supplier, with an inability to ship products on time, which helped to earn the company a bad reputation as a supplier with a poor track record of manufacturing investments:

Advanced Micro Devices Inc.'s failure to compete effectively with Intel in the microprocessor market is a "direct result of AMD's own actions or inaction," and weren't caused by any illegal actions by Intel, the microprocessor market leader said in court documents filed Thursday.

The filing in U.S. District Court was Intel's first formal response to AMD's lawsuit filed in June that charged Intel with using bribery and coercion of computer makers and retailers to limit the use of AMD processors.

AMD Antitrust Lawsuit Against IntelAMD has used "out-of-context snippets ... to create the impression that Intel engaged in misconduct," Intel said its response. AMD's lawsuit also represents "a case study in legal dissonance. Although AMD has purportedly brought its complaint to promote competition, its true aim is the opposite. Under the cover of competitive law, AMD seeks to shield itself from competition."

Intel claims in its response that AMD is seeking to blame Intel for its own "many business failures ... that have determined its position in the marketplace." AMD's position in the marketplace "reflects its uneven track record, and its repeated failure to deliver on its promises."

Specifically, Intel points to AMD's "playing it safe ... with anemic investment in manufacturing capacity, leaving Intel to shoulder the burden of investment to enhance the usefulness of computers and enhance the market." In addition, Intel claims AMD has been "dogged" by a reputation of being unreliable as a supplier, has traditionally lagged in innovation, and has seen products delayed well beyond original launch dates.

When AMD has been able to deliver competitive products, such as with its Opteron server processors, it has seen share gains, Intel said.

AMD's allegations center primarily on the PC market, where chairman and CEO Hector Ruiz says the company has been unable to increase market share despite having highly competitive products in the past year. According to Mercury Research, AMD has seen its share of all x86 processors shipped, including those used in PCs and servers, rise from 15.1% in the second quarter of 2004 to 16.2% in the second quarter of 2005. When counting only x86 processors used in server applications, AMD has fared better, with its market share increasing 51% in the second quarter, from 7.4% to 11.2%

Intel argued that it hasn't violated any law or committed any wrongdoing. Intel said the AMD lawsuit is full of contradictions, including the claim that Intel's competitive actions could render it "nonviable." Ruiz has stated that the company "is in the strongest position we've ever been in."

Intel said it has demonstrated over a 30-year period that it can deliver faster, better, and cheaper products to consumers, in part because of its continued multibillion-dollar investment in new capacity and research and development even during downturns in the semiconductor market.

"In short," Intel wrote in its response, "AMD's colorful language and fanciful claims cannot obscure its goal of shielding the company from price competition."

Tom McCoy, executive of legal affairs and chief administrative officer for AMD, says Intel's response is "an attempt to divert attention from what this case is really about. Crossing swords of rhetoric is fun, but it's time to put the truth on the table in the courtroom. The industry problem is that [computer manufacturers and retailers] are under threats from retaliatory and potentially lethal price increases by Intel if they give too much business to AMD."

Evidence of Intel's illegal practices has already been substantiated by a prior ruling by the Fair Trade Commission of Japan that found Intel guilty of antitrust violations, and by ongoing investigations in Europe, McCoy says.

"There is an global regulatory focus on how Intel controls the IT industry, and it is plainly a serious industry problem that requires the light of truth," he says.

McCoy dismissed Intel charges that AMD's difficulty in competing was of its own making, pointing to a 25-year history of AMD consistently being a low-price leader in the x86 processor market, and the company's plans to open a 300-mm wafer fab in Dresden, Germany in October.

AMD was quick to respond to the charges. "It is true that with our early K6 processor, we had difficulty ramping one of our steppers. That hurt us for a couple of quarters," Thomas McCoy, AMD's executive vice president of legal affairs told internetnews.com. "But it's overwhelmingly true that we've been a worthy competitor for over twenty years, and now we have the technology lead. The problem is that Intel is using its monopoly power to force the world to accept Intel monopoly prices and is illegally insulated from having to compete on price and performance. We know that Intel is not the price leader, AMD is. Intel maintains a very constant monopoly margin it's proud of."

Intel did furnish a backhanded compliment, however, giving AMD credit for its success with the 64-bit Opteron processor for the server market, where it brought out a dual-core offering ahead of Intel. "When AMD is able to combine competitive products with reliable supply, the market responds," said Intel.

"Let's not debate it anymore," said AMD's McCoy. "We brought this case to put light on the truth. We'll put it in a courtroom and the world will see for itself."

"Crossing swords of rhetoric (REALLY) IS fun", "colorful language and fanciful claims" aside - what's not to love about this fight?!

- Arik

Posted by Arik Johnson at 03:09 PM | Comments (0)

August 24, 2005

Google Talk: the VoIP/IM Extension and how it will Impact Skype, AOL, MSN & Yahoo

Google TalkBack when I heard Google was raising $4 billion more dollars in a second offering I thought one of the targets might be erstwhile viral phenom Skype in order to get into the VoIP space in a big enough way to matter, but with the launch of Google's Talk beta this week, that original estimate appears mistaken. According to the Red Herring:

Granted, a comparison between a one-day-old product with few users and an industry leader with a cult-like following might seem a little odd. Skype, a Luxembourg-based Internet telephony company, has more than 40 million users and adds 155,000 new users every day.

However, when the challenger is Google, which has managed to establish a leadership role in the search sector, comparisons are inevitable.

“This isn’t the final product,” said Will Stofega, an analyst with IDC. “There are a lot of options for them as they develop this product further. The other way to think about this is that it’s not just a chat product, it’s a search engine doing a lot of fantastic things.”

The end product could turn out to be a threat to Skype and other companies in the nascent VoIP market, including Vonage, which reportedly has plans to raise $600 million in an initial public offering. Google, which has about $3 billion in cash, is planning to raise another $4 billion through a secondary offering, but has been vague about how it plans to spend the cash.

In July, Google fielded 36.5 percent of all online searches, more than Yahoo or MSN, according to comScore Media Metrix. Its popularity in search has crossed over to other products, such as Google Earth, its mapping service, and Gmail, its email offering.


Analysts believe Google’s brand image and financial resources could help it develop a powerful voice product, one that will easily attract users. But while Google may draw customers from other IM services, it isn’t clear whether it can eat into Skype’s market share.

“[Skype has] that same sort of techno-hipness that Google brings to the table,” said Mr. Stofega. “And Skype has this Grateful Dead-type loyal developer community.”

And those developers are working on independent applications—such as a video client—some of which are free while others are sold. They’re hoping their applications and features can potentially draw a larger audience than Skype.

Kazaa Vets

Skype was created by Niklas Zennström and Janus Friis, the founders of Kazaa, a peer-to-peer audio exchange program, two years ago. It has rapidly moved beyond the computer-to-computer space with services such as Skype Out, which allows users to call traditional phone numbers anywhere.

The Google application is, on the other hand, still very limited, pointed out Scott Kessler, an Internet analyst with Standard & Poor’s. And it’s only available to Gmail users at this point.

“It’s uncertain if you’re going to see broad adoption,” said Mr. Kessler. “Google Talk is exceedingly limited, from having to have a Gmail account, to having to have a computer, and having someone you’re in touch with on the same network.”

Then again, Google Talk is free, at least for now. And Mr. Kessler noted that if users asked for a capability to make calls to land-line phones, Google would probably try to provide it. In other words, down the road, Google Talk could eventually become a Skype-killer.

“They’ll compete with each other, and Google might have an advantage, because their business model is not based on this offering,” said In-Stat analyst Keith Nissen. “Skype is ultimately going to have to wonder, ‘Where are we going to get money from?’”

Where could Google really have a competitive impact? By acting as the bridge to IM interoperability!

However, hopes for a consolidation of the marketplace around the Holy Grail of an IM standard which could convey truly disruptive innovation appears elusive:

As the new kid in the instant-messaging market, Google Inc. wants to be friends with everyone, but it's unlikely the seasoned players will let rivals get close to their subscribers.

In launching Google Talk , the Mountain View, Calif., search engine called for interoperability with the major networks built by America Online Inc., Microsoft Corp.'s MSN and Yahoo Inc.

"It's the Holy Grail," Joe Wilcox, analyst for JupiterResearch, said of interoperability.

It's unlikely, however, that the granddaddy of IM, AOL, will open up its base of 41.6 million subscribers to competitors. In comparison, Yahoo, which has the second largest network, has less than half the subscribers of AIM at 19.1 million, according to web metrics firm ComScore Networks. MSN has 14.1 million subscribers.

"AOL isn't letting anybody into their network, if they don't have to," JupiterResearch analyst David Card said. "There's no incentive for AOL to cooperate with anyone."

That incentive, however, could come in time, if IM vendors decide to take the service beyond the ability to have immediate text conversations with friends, family and colleagues. The portals have already added PC-to-PC voice calls and have extended IM to cellular phones. They could go much further in developing a communications platform that tightly integrates email, voicemail and IM, making it all accessible through multiple devices.

The heart of such a communications hub would be the contacts directory, Card said. Besides grouping people by their relationship with the IM subscriber, such as a family member, friend or colleague, the directory also establishes whether they are reachable. That could one day be expanded to add how the person wants to be reached, by PC, cellular phone or some other device.

Microsoft, according to Card, is very much focused on IM as a broader communications platform.

While the evolution of IM could be a potential battleground for the major portals, telecommunication companies and wireless carriers, it's more likely that partnerships will occur, and communication networks will open up, much like email is today, Card said.

"It makes everything more valuable, if the network is bigger," he said.

In the meantime, AOL, Yahoo and MSN are connecting IM to more services, such as online music, in order to build loyalty and help keep subscribers. Locking in customers would also be a strategy behind the building of a unified communications platform.

Google Talk, however, is notable in that Google has not linked its IM client to anything but its web mail service GMail. Therefore, it's difficult to see where Google is heading.

"It's very Spartan," Wilcox said of the new product.

Some commentators even wonder if it was such a smart move, to continue the long march toward a world where any context is up for advertising with Google looking over your shoulder:

When does Google start parsing peoples' IM conversations in order to present context-sensitive advertisements?

They're already parsing people's Gmail and generating "appropriate" ads based upon the message's content. How can Google possibly resist doing the same for instant messaging?

I'm sorry, but all this Google-looking-over-your-shoulder stuff gives me the creeps. It asks me to trust Google in ways I don't trust, well, anybody. Not that other IM or free-mail services couldn't also be watching content, it's just that Google is provably doing so. And it's reading people's mail merely to present more targeted (and thus more annoying) advertisements. Yech!

Sure, those ads give me free service and I've even been known to click on an "Ads by Google" link occasionally. But, I already pay to make TV and radio ads go away, I buy AccuWeather forecasts minus the ads and also give money to a few other services that offer an ad-free option. I might be willing to pay Google, as well.

Should Google offer a paid, ad-free service?

In deciding that question, you first have to decide whether Google is worth paying for. There was a time when Google was so much better than the other searches that I'd have said "yes." But, before there was Google, I might have said the same thing about Alta Vista.

Today, Google is still the best search engine, but the others, MSN especially, are catching up. Google's biggest challenge, however, is the continued decay of its results.

Google isn't as open as it once was in talking about how it determines placement of its results. I just know that as Google has made moves into several other businesses, its core search business seems sick and hasn't gotten better. People I know are leaving Google for other search engines.

Particularly troublesome are all the sites that show up at the top of Google's rankings that really aren't sites at all, except that they lead you to other search results, auction sites, or whatever. Google ought to be able to get rid of this Internet flotsam but so far has failed to do so.

But, let's imagine Google could find a way to dump this pseudo-content, I still wonder if Google's results haven't become too expansive. I can't prove this at all scientifically but my gut is that Google presents way too much content in its results, having the effect of diluting the "right" content that most people are looking for.

Still the technological underpinnings of Jabber make for some interesting possibilities:

Google's system relies on the XMPP, or Jabber, protocol. That means those favoring operating systems other than Windows or alternative IM clients, including Adium, iChat, GAIM, Psi, and Trillian, can connect to the Google Talk network and send IMs.

Because XMPP is an open protocol, developers have an opportunity to add value to the network. "If a game developer or a productivity developer decides they need to have instant messaging in their application," Harik says, "they can just program to the XMPP spec and they'll be able to let people connect to our network using their Gmail IDs but inside the developer's application."

Harik says that Google is committed to open standards and interoperability with other networks. He says support for Session Initiation Protocol (SIP) is likely and notes that Google is already working with EarthLink, which has its own Internet voice service.

According to Harik, talks with AOL, Skype, and Yahoo are already underway. And now that the secret is out, Microsoft can expect a call. "We will shortly start conversations with Microsoft," he says.

Google's goal is a unified, abuse-free messaging network. That's something many IM users will welcome, given the fragmented IM market. According to Internet statistics company comScore Networks, Inc., the leading IM applications were AOL's two offerings -- the subscribers-only AOL Instant Message and AIM standalone application -- along with Yahoo Messenger, and MSN Messenger Service with 41.6 million , 19.1 million, and 14.1 million active users respectively in July.

While Google's grand unification theory may find favor with users tired of IM's historic Balkanization, the company's hope for a network free of misuse seems naive. In July, IM security vendor Akonix Systems Inc. warned that the number of attacks against major IM networks had increased nearly 400% from the first quarter of 2005 to the second. And that's a trend that's likely to accelerate as the networks become better connected, offering malware writers a larger, more tempting pool of potential victims.

Eager to address privacy concerns, Google wants users to know that it does not track the content of IM chats or voice conversations. It does, however, track certain log information to maintain statistics on usage and to improve service.

And Google Talk doesn't display ads.

Still, there's a change of attitude about Google afoot in Silicon Valley and comparisons with Microsoft recently have people wondering about that "Don't be evil" part of the corporate bylaws:

Google's success has already spurred Microsoft to develop its own Internet search engine (a project code-named Underdog), but Google has legions of engineers banging away on a range of projects of its own that, if successful, could dislodge Microsoft from the pre-eminent spot it has enjoyed since the early 1980's.

Of course, Silicon Valley has had past pretenders to the throne. Netscape, which went public 10 years ago this month, and its Web browser, Navigator, were supposed to fell Microsoft - but it is Netscape that is no longer in business. And while Google is riding high, those closely following the company caution that it is hardly invincible; an inflated stock price, a desire to compete in too many sectors simultaneously or simple hubris might cause it to stumble, they say. Even Microsoft, after all, has had legal troubles.

Still, similarities between Google and Microsoft are evident to local entrepreneurs including Steven I. Lurie, who worked at Microsoft between 1993 and 1999 but now lives in San Francisco, and Joe Kraus, a founder of the 1990's search firm Excite.

"There's that same 'think big' attitude about markets and opportunities," said Mr. Lurie, who has visited the Google campus in Mountain View many times to see friends who work there. "Maybe you can call it arrogance, but there's that same sense that they can do anything and get into any area and dominate."

To place Google in context, Mr. Kraus offered a brief history lesson. In the 1990's, he said, I.B.M. was widely perceived in Silicon Valley as a "gentle giant" that was easy to partner with while Microsoft was perceived as an "extraordinarily fearsome, competitive company wanting to be in as many businesses as possible and with the engineering talent capable of implementing effectively anything."

Now, in the view of Mr. Kraus, "Microsoft is becoming I.B.M. and Google is becoming Microsoft." Mr. Kraus is the chief executive and a founder of JotSpot, a Silicon Valley start-up hoping to sell blogging and other self-publishing tools to corporations.

Just as Microsoft has been seen over the years as an aggressive, deep-pocketed competitor for talent, Internet start-ups in Silicon Valley complain that virtually every time they try to recruit a well-regarded computer programmer, that person is already contemplating an offer from Google.

"Google is doing more damage to innovation in the Valley right now than Microsoft ever did," said Reid Hoffman, the founder of two Internet ventures, including LinkedIn, a business networking Web site popular among Silicon Valley's digerati. "It's largely that they're hiring up so many talented people, and the fact they're working on so many different things. It's harder for start-ups to do interesting stuff right now."

Google, Mr. Hoffman said, has caused "across the board a 25 to 50 percent salary inflation for engineers in Silicon Valley" - or at least those in a position to weigh competing offers. A sought-after computer programmer can now expect to make more than $150,000 a year.

David C. Drummond, vice president for corporate development at Google, acknowledged that the company was "very competitive" in its pursuit of talent, but added: "We're very sensitive to how everybody is perceiving us. We think the Silicon Valley ecosystem is critical for Google's success."

Google is also making it more difficult for some start-ups to raise funds. In the second half of the 1990's, entrepreneurs frequently complained that the specter of Microsoft hung over their every conversation with venture capitalists. Today, they say the same about Google.

"When I meet with venture capitalists, or if I'm engaged in a conversation about going into partnership with someone, inevitably the question is, 'Why couldn't Google do what you're doing?' " said Craig Donato, the founder and chief executive of Oodle, a site for searching online classified listings more quickly.

"The answer is, 'They could, and they're probably thinking about it, but they can't do everything and do it well,' " Mr. Donato said. "Or at least I'm hoping they can't."

In the end, the only analysis remaining is that Google Talk lays the groundwork for Google to move beyond the Internet and onto the telephone network - while the service can handle only PC-to-PC voice calls, for the moment, if it added the functions of an Internet telephony company such as Skype, it could easily and quickly let Internet callers reach beyond computers to the PSTN. Indeed, in January, the company said it was after a strategic negotiator with experience in "identification, selection, and negotiation of dark-fiber contracts both in metropolitan areas and over long distances as part of the development of a global backbone network."

That leads me to only one possible conclusion: the move confirms that Google's competitive ambitions are even more ravenous than Microsoft's at a similar point in its corporate business development.

- Arik

Posted by Arik Johnson at 07:48 AM | Comments (0)

August 23, 2005

AMD vs. Intel: the Abuse of Monopoly Power & a Dual-Core Chip Challenge

AMD Antitrust Lawsuit Against IntelThe grudge-match between AMD and Intel continues - although AMD is the clear aggressor in all of it. This week, in a follow up to AMD's antitrust lawsuit over Intel's "abuse of monopoly power" the guantlet was thrown down for a mano-a-mano in dual core server processors:

Advanced Micro Devices Inc. on Tuesday (August 23) issued a challenge to Intel Corp. to conduct a head-to-head competition of dual-core server microprocessors.

AMD's proposed dual-core duel would be a live, public performance evaluation between server platforms based on the dual-core Opteron 800 Series or 200 Series processors and the corresponding Intel product.

Should Intel accept AMD's challenge, the duel would take place at a public venue to be announced in the coming weeks, with testing conducted by a neutral, third-party testing lab.

"Since we launched Dual-Core AMD Opteron processors in April 2005, we've won every major industry-standard benchmark for x86 servers. AMD64 dual-core technology provides industry-leading performance, is easy to upgrade and is energy efficient," said Marty Seyer, corporate vice president and general manager of the Microprocessor Solutions Sector at AMD, in a statement.

"We are giving our competitor a fair and open opportunity to challenge our clear market leadership in a public setting,” he said. “The gauntlet has been thrown down, it is time to cut through the hype, and demonstrate who the industry's leader in x86 dual-core processing is today."

More interesting is that the existence of its monopoly isn't AMD's beef with Intel... it's the fact that they tried to maintain it:

AMD, he said, isn't suing Intel because Intel is a monopoly; it's suing Intel for abusing its monopoly powers to maintain its control of the market. I knew that a distinction of that kind existed, though I'm no lawyer. Still, I had never heard it put so succinctly.

The less thoughtful among those inclined toward AMD portray Intel as a beastly megacorporation drunk with wealth and success that deserves to be taken down a peg. AMD's going to storm the castle walls, do or die, so three cheers for the underdog!

It's a pity that view has gotten so much visibility because pundits are mistaking this antitrust case as an effort by AMD to rouse the rabble against the company that's gotten too big.

Those inclined toward Intel tend to portray AMD as a feeble grower of sour grapes, a company with some smart technology that was, in the end, unable to capture the minds and dollars of the PC market during a fair fight. In capitalism, as in nature, there must be winners and losers, diners and dinners. There's no crying in business, and we can't champion those who run to court to protest whenever the market decides against them.

AMD isn't suing Intel for being too big, too profitable, or too stingy to share its wealth. I'm relieved that we're enjoying a respite from the '90s-era knee-jerk disdain for tech companies judged too large or too successful. The arbiters of "too" are always unable to quantify their criteria, but they know it when they see it. And when they see it, these judges of corporate proportionality set about making things right by trashing the player that, according to the secret formula, has more than it deserves.

Microsoft will always be the epitome of the megacorporate pincushion. Every time a Windows or Internet Explorer security hole was found or a Microsoft exec said something stupid, it was flogged as yet another reason for right-thinking people to wish Microsoft failure or harm.

A company or individual who has attained a certain level of success risks having sloppiness and poor decisions reframed as malicious deeds. I'd have no empathy for AMD if it were using the courts to compensate it for ending up with too little pie.

I do have empathy for AMD precisely because AMD isn't suing Intel for being too big, too successful, or too wily a competitor. The question for the court and, if it's not settled before trial, a jury is whether Intel misused the monopoly powers it has acquired to make sure that it maintains its lead. Did Intel come by its wealth and power earnestly? Is Intel in the leadership position in x86 CPUs through dirty dealing? That's worthwhile fodder for discussion, but in AMD v. Intel, Intel's size and success aren't the issue. The question at issue is much easier to define and decide: Did Intel break the law trying to hang onto its control of the PC processor market?

So, what do you think? Is that a valid argument against unfair competition?

- Arik

Posted by Arik Johnson at 07:47 AM | Comments (0)

June 24, 2005

China on the Prowl: CNOOC Bid for Unocal Must First Overcome Chevron

Unocal Targeted by Chinese Oil Company, CNOOC, Challenging Former Bidder Chevron

China's $700+ billion current account surplus is calling out for application to something besides U.S. bonds, so the Chinese state-controlled offshore oil company is bidding to buy Unocal. The $18.5 billion unsolicited takeover proposal is $1.5 billion more than Chevron's proposed deal to buy the company, but analysts think Chevron's offer has other advantages (like not being Chinese) and will ultimately prevail... unless there's a bidding war:

    One of China's largest state-controlled oil companies made a $18.5 billion unsolicited bid Thursday for Unocal, signaling the first big takeover battle by a Chinese company for an American corporation.

    The bold bid, by the China National Offshore Oil Corporation (CNOOC), may be a watershed in Chinese corporate behavior, and it demonstrates the increasing influence on Asia of Wall Street's bare-knuckled takeover tactics.

    The offer is also the latest symbol of China's growing economic power and of the soaring ambitions of its corporate giants, particularly when it comes to the energy resources it needs desperately to continue feeding its rapid growth.

    CNOOC's bid, which comes two months after Unocal agreed to be sold to Chevron, the American energy giant, for $16.4 billion, is expected to incite a potentially costly bidding war over the California-based Unocal, a large independent oil company. CNOOC said its offer represents a premium of about $1.5 billion over the value of Unocal's deal with Chevron after a $500 million breakup fee.

    Moreover, the effort is likely to provoke a fierce debate in Washington about the nation's trade policies with China and the role of the two governments in the growing trend of deal making between companies in the countries.

    This week, a consortium of investors led by the Haier Group, one of China's biggest companies, moved to acquire the Maytag Corporation, the American appliance maker, for about $1.3 billion, surpassing a bid from a group of American investors.

    Last month, Lenovo, China's largest computer maker, completed its $1.75 billion deal for I.B.M.'s personal computer business, creating the world's third-largest computer maker after Dell and Hewlett-Packard.

    After years of attracting billions in foreign investment and virtually turning itself into the world's largest factory floor, China appears to be nurturing the growth of its own corporate giants into beacons of capitalism. China wants to be a player on the world stage, and it is eager to have its own energy resources, its own multinational corporations and its own dazzling corporate names.

    And some of China's biggest companies are now on the hunt, trying to snap up global treasures.

    "If there's an asset up for sale anywhere in the world, people are looking to China, particularly if there's a manufacturing element involved," said Colin Banfield, who runs the mergers and acquisitions practice at Credit Suisse First Boston in Asia. "And if these two deals go through this year, no one is going to doubt the credibility of the Chinese corporates when it comes to M & A."

    The deal making and bidding wars are all the more remarkable because they involve Chinese companies taking on American multinationals in a series of transactions certain to be a boon for Western lawyers and investment bankers, many of whom have been betting hundreds of millions of dollars on China's rise.

    Indeed, CNOOC is being advised by an army of bankers from Goldman Sachs, J. P. Morgan Chase and N M Rothschild & Sons of Britain.

    In a response, Unocal said in a statement that its board would evaluate the offer, but that its recommendation of the deal with Chevron "remains in effect."

    CNOOC's bid faces an uphill battle, with hurdles that probably rise above those usually confronting a corporate bidder. Already, lawmakers in Washington are questioning whether the Bush administration should intervene to block the bid for Unocal, which was founded in 1890 as the Union Oil Company of California.

    Two Republican representatives from California, Richard W. Pombo and Duncan Hunter, wrote a letter last week to President Bush, after speculation concerning the deal arose, urging that the transaction be scrutinized on the grounds of national security.

    They wrote: "As the world energy landscape shifts, we believe that it is critical to understand the implications for American interests and most especially, the threat posed by China's governmental pursuit of world energy resources. The United States increasingly needs to view meeting its energy requirements within the context of our foreign policy, national security and economic security agenda."

    Energy Secretary Samuel W. Bodman said at a meeting of the National Petroleum Council late Wednesday that the government's review of the deal would be "truly a complex matter," according to Reuters.

    In Beijing, Liu Jianchao, a spokesman for the Foreign Ministry, told reporters on Tuesday that "this is a corporate issue," according to Bloomberg News. "I can't comment on this individual case," Mr. Liu said, "but I can say we encourage the U.S. to allow normal trade relations to take place without political interference."

    TCL, a Chinese company that began by making cassette tapes in 1981, is suddenly the world's biggest television set maker, after its acquisition last July of the television business of Thomson of France, which owned the old RCA brand.

    Chinese companies still have a long way to go to become global giants that can compete head-to-head with Toyota, Siemens or General Electric. Most of the China deals are small in value - about $1 billion to $2 billion - when compared with big American or European deals.

    Whether CNOOC's bid will succeed on it merits is unclear. It is interested in Unocal, once known for its 76 brand, less for its exploration and production in North America than for its huge reserves in Asia. Twenty-seven percent of Unocal's proven oil reserves and 73 percent of its proven natural gas reserves are in Asia, according to Merrill Lynch.

    To succeed, CNOOC will have to persuade Unocal's shareholders to vote against their deal with Chevron. The new deal would then face a shareholder vote.

    Even though CNOOC's offer is worth $1.5 billion more than Chevron's, some shareholders could still decide that the regulatory review process and the time required to complete a deal with CNOOC would pose too great a risk, given the size of the offer.

    Chevron, which could raise its bid to counter CNOOC, is racing to complete its deal and submit it to a shareholder vote as early as August. The company made no specific comment on the Chinese offer.

    CNOOC's all-cash offer values Unocal at $67 a share. Chevron's cash and stock offer values Unocal at $61.26 a share, based on Chevron's closing price on Wednesday of $58.27 a share. Shares of Unocal jumped 2.2 percent, to $64.85, as investors anticipated CNOOC's higher bid.

    In CNOOC's letter to Unocal, it went to great lengths to say that its bid was friendly, despite being unsolicited. "This friendly, all-cash proposal is a superior offer for Unocal shareholders," wrote CNOOC's chairman and chief executive, Fu Chengyu.

    Trying to assuage concerns of some in Washington, CNOOC pledged to continue Unocal's practice of selling all of the oil and gas produced in the United States back to customers in the United States. The company also said it would retain substantially all of Unocal's employees in the United States.

David Andelman on Forbes.com has a pretty concise analysis of the situation that started yesterday and is sending a few shivers down the spines of those concerned by Chinese competition:

    Then there's your friendly Maytag repairman, who could soon find his paycheck signed by the folks from China's Qingdao Haier, which is joining Wall Street stalwarts Blackstone Group and Bain Capital to bid for the U.S. appliance-maker.

    So what's wrong with that? On the face of it--nothing. After all, the Russians are talking about selling a chunk of Yukos' reserves to China.

    Still, a host of issues complicates what should be an arrangement of the open borders, global investing that has so long been a hallmark of the growth of the American capitalist system. Yet, from the nature of the Chinese investments to the goal of the Chinese system, there are a number of priorities that the two nations may not share.

    First, the most basic--what do the Chinese want and what are they prepared to pay?

    What they seem to want is several things. First and foremost is natural resources--with oil at the top of the shopping list. UNOCAL controls more than 500 million barrels of oil in North America, has large natural gas reserves in Southeast Asia, and a minority stake in a big Azerbaijan oil field.

    David Hale, publisher of the Hale China Report wrote last month in the Wall Street Journal that China is investing $1 billon in a nickel mine in Papua New Guinea, joined with BHP in buying into the Australian iron-ore industry, while a quarter of all China's oil needs come from Africa. Why shouldn't UNOCAL be next?

    Another top priority is brand names. UNOCAL is a big U.S. brand. Maytag is even bigger--especially in the U.S. And IBM and Think-Pad are all but priceless names everywhere. Compare these with Haier, NCPC, FAW and Broad in appliances, pharmaceuticals, cars and air-conditioning respectively, and it's not hard to see why China's on the cusp of a shopping spree.

    As for what they're prepared to pay, the answer is easy. Apparently, whatever it takes. After all, in China's case, the bidders are barely private companies. Certainly, there are private companies in China--even publicly-traded shareholder-owned companies. But in the final analysis, this is not a free capitalist market, not even as free or capitalist as Russia, where the state can step in and confiscate on the flimsiest of motives. Still, until they do so, their money comes from profits, shareholders and the debt markets.

    Not so, in China where Chinese companies in any bid could go straight to the mother lode--the Chinese treasury--for more money to win any bid. Even if they are public, in many cases their financing comes at least in part from Chinese banks. And who owns those? In most cases, the state. How can even the wealthiest hedge fund or private equity fund investing state and local retirement dollars beat that? Let's see, the Salem, Ore. school district retirement funds versus the Beijing treasury? Who'd win that one?

    Then there're jobs. Why would Qingdao Haier, a big name in appliances in the Orient, want with Maytag? They would, of course, like the Maytag brand name which could suddenly attach itself to Haier products made in its very low-labor cost Chinese factories. At some point down the pike, then, what's to keep more production migrating offshore to China? Or for that matter, design and engineering functions as well? While there may be American money in the Haier-Blackstone-Bain bid, the guys who know the appliance biz are from China.

But there's a lot more afoot and at risk in the growing intertwining of two national economies. The ability of the U.S. government to sustain its deficit, and American consumers to sustain their appetite for Chinese-made goods, both hinge in part on China's willingness to help us finance it. As Andelman says, that's about "$230 billion in U.S. Treasury securities that the central bank has bought (as of April), according to U.S. government records--and that's nearly a third of its entire foreign exchange reserves. These purchases of treasuries has helped underwrite the U.S. trade deficit. Any hint that China was selling off any of those reserves could send shudders through every financial market in every time zone."

Can we deal with it?

Undeniably, there's still tremendous momentum and competitive spirit in U.S. business and industry. But there's also an addiction to consumption that could undo those strengths if we fail to control our appetites. Get ready - the real shock will come when China floats the yuan - and suddenly all that Wal-Mart underwear isn't so cheap anymore.

And, just to put things in perspective, China's US$700 billion in U.S. cash could not only buy UNOCAL - which, by the way, is a "strategic acquisition" that goes far beyond the short-sighted business opportunity Chevron might sacrifice... I think the Chinese government would pay ANYTHING to acquire UNOCAL... hell, they'd DOUBLE the offer if that's what it takes.

In fact, with $700B, they could buy the ENTIRE U.S. petroleum production industry sector (based on current market cap), at a little less than $600 billion! And still have enough left over to buy Boeing, Lockheed-Martin (combined at $81 billion), and the whole U.S. airline industry ($4 billion) long before they ran out of cash.

I believe that, despite any promises offered by Beijing to the contrary, commitments to route UNOCAL's massive oil reserves to the U.S. market are hollow. In fact, if China can acquire this asset, it may even overcome the downside risk of invading Taiwan... the threat of which has only been held at bay by a U.S. commitment to defend the island nation under any such circumstances.

On the flip side of that, UNOCAL could prove to be an ultimately very unwise move on the part of China in their quest for global manufacturing and industrial competitiveness... especially once the House and Senate Armed Services committees have had their way with them.

And now, they've tipped their hand... and it's up to us to refute what is sure to be an overwhelming show of support in the business and economic press to deny protectionist mercantilism on all such issues and let the "invisible hand of the market" do its work (b***s***).

And protectionism is the real red herring in this deal. Fact is, until Beijing allows a U.S. oil company to buy into a Chinese energy firm (which is forbidden as a point of Chinese national interest at the moment) the U.S. will NEVER face a level playing field.

It's up to our nation's leaders to realize this truth, and prevent this deal. To do that, a great deal of courage on the part of the Bush administration and Republicans in Congress will be required to resist business' vested interests and reject the arguments surrounding "the free flow of trade and capital".

There is a new line in the sand. A line that will determine whether China leverages their new wealth for good or ill... and the advantage in economic power that hangs in the balance.

- Arik

Posted by Arik Johnson at 02:53 PM | Comments (0)

May 05, 2005

Adobe + Macromedia = Domination of Content Creation Market: Can Competition Survive?

Adobe + Macromedia = Anti-Competitive Content Market?

Tired of paying $449 for the Professional Version of Adobe's cornerstone Acrobat application? Well, don't expect it to get any cheaper... or to pay less for Flash development tools either - Flash MX Professional will set you back about seven hundred bucks at current levels and that's not liable to move south anytime soon, with the new degree of power the combination gives both companies in their fight to dominate the multimedia and document management landscape.

The fundamental question is, will Adobe's $3.4 billion buyout of Macromedia mean competition survives? Or are they just bulking up to take on Microsoft once Longhorn hits the street?

Anti-trust regulators shouldn't start salivating quite yet... I found a GREAT functional equivalent from ARTS PDF called Nitro PDF for $99 with a 30-day trial that has the potential to be, as advertised, the first real alternative to Acrobat in PDF creation!

Whether Adobe can absorb the acquisition is another question:

    Computer document company Adobe Systems Inc. said on Monday it agreed to buy multimedia software firm Macromedia Inc. for about $3.4 billion in stock, a move designed to extend its lead in the market for creating and distributing digital documents.

    Adobe, best known for its Acrobat document-sharing software, said the deal would help it meet rising customer demand for audio and video options that are compatible with hand-held devices.

    Macromedia also gives Adobe access to the dominant animated graphics software on the Internet and which is also aggressively expanding into mobile phones.

    The deal is the latest move in the long-anticipated consolidation of the software sector. It was initially welcomed by industry-watchers.

    "Management is quite capable, but I think it is quite a big deal to be swallowing," said Robert Sellar, a technology fund manager at the UK's Aberdeen Asset Management, which owns Adobe shares. "$3.4 billion is a lot of money to be spending but (Adobe) are hugely cash generative."

Was this predictable? Of course... but there's a lot of opportunity to be unlocked here as well, including for some of their traditional competitors:

    Amish Mehta, CEO of Corel Corp., which competes with both Adobe and Macromedia with its CorelDRAW Graphics, described the deal as "no big surprise. Consolidation has been going on for years in the software industry, and this is a continuation of that."

    Mehta acknowledged that the deal might lead to decreased competition, but claimed that this might not be bad for existing Macromedia customers.

    "At the moment, Macromedia is a one core-technology company. This deal means it will be able to offer more to those customers," he added.

    The deal also offers several opportunities to Corel.

    According to Mehta, the effective disappearance of Macromedia—the company's brand will vanish after the takeover is completed—leaves Corel as the sole remaining alternative to Adobe in the graphics market.

    And for Mac users, the news might lead to some concerns.

    "Today if you're Apple, you can't be too excited about this, as it leaves a lot of key software concentrated in a single company. Hence, there's an opportunity for us to say, 'Hey, we're here, let's work together.'"

    To read more about what the merger means in the PDF space, click here.

    Mehta added that if Adobe decides to divest itself of some of its products in the wake of the deal, Corel might be interested in acquiring them.

    "At the right price, all kinds of products become interesting. We'd be interested in anything that complemented the products we already have," he said.

    Gavin Drake, marketing director at Quark UK, pointed to the hole that the deal would leave in the competitive landscape of the publishing and design market.

    "Lack of competition is not good for customers, and this definitely looks like it could be bad for competition," Drake said. "It'll be interesting to see what Macromedia customers think of the deal."

    And the deal may yet have wider ramifications for the software industry, beyond design and publishing.

    Joe Wilcox, senior analyst at Jupiter Research, claimed that the acquisition could lead to the emergence of a much tougher competitor for Microsoft in the business market.

    "Microsoft should be more worried about Adobe than Google," he said, adding that while the penetration of Windows and Office has reached saturation point, the server market has become much more important as an engine for growth.

    "Now along comes Adobe," Wilcox added. "Its pull is that documents are PDFs, which has certain advantages. For example, government departments sometimes insist that documents are submitted in PDF form. Macromedia fills in the Adobe product line, in areas where Microsoft isn't strong."

    These areas, Wilcox said, include server products such as Breeze, Central, ColdFusion and Flex, bolstering Adobe's push into the enterprise.

    The deal may be better for Adobe than for customers, analysts say. Click here to read more.

    This addition of Macromedia products could also lead to Adobe dominating the rich media market: "There's an opportunity around making content in business more accessible and exciting," Wilcox said.

    "But what if you then bring in more collaboration—something that's been an Adobe strength. What if Adobe could bridge the gap between static and animated documents?" Wilcox added.

    However, Wilcox cautioned that in order to exploit this opportunity, "Adobe needs to hit the ground running. As soon as it closes the deal, it needs to bring out products that start to exploit the merged company."

But some of my favorite commentary includes the translation from PR-speak to real-world intentions offered by the companies in explaining their rationale for the merger, Pam Deziel (responsible for Acrobat strategy execution) figures there's 70 million seats worth of Acrobat software waiting to be sold, and Jim Rapoza at eWeek.com thinks they should open-source the Macromedia castoffs.

Both companies have many competing products, Dreamweaver versus GoLive, FlashPaper versus PDF, Illustrator versus Freehand, ImageReady and Photoshop versus Fireworks... Gary Hein, an analyst with Burton Group Inc. of Midvale, Utah, said, "I think that Adobe plus Macromedia forms a new wild card in some desktop- and graphics-related formats and standards. Both have great installed bases among desktops, and together they'll have much more influence in what happens with interoperable, cross-platform document, graphics and animation formations. It's interesting, to say the least." He added, "Adobe has some interesting technologies but is not as prevalent in the enterprise. Macromedia brings more credibility and a great technology portfolio to Adobe."

But an article by Don Fluckhinger on PDFzone shows some of the upside development possibilities:

    At times over the years, the two companies have fought in heated rivalries. Who can forget the blood-and-guts Illustrator-versus-FreeHand battles for the designer's dollar in the 1990s? For the most part, however, they've co-existed peacefully.

    The last bump in the road came mid-2003, when Flashpaper, an element of Macromedia Contribute 2, looked as though it might give PDF a challenge: While it was simple, Flashpaper seemed sleek, elegant and much less clunky than PDF for uploading documents to the Web.

    A subset of Flash, the format never caught on in a huge way. Macromedia adopted an "if you can't beat 'em, join 'em" philosophy and provided a means to deploy PDF and Flashpaper together in subsequent versions of Contribute.

    Now that Macromedia and Adobe are under the same corporate roof, though, the fun begins for PDF. You'd think that the merger—which will take place this fall, if things go as planned—would be all about combining competing multimedia applications.

    But knowing that Acrobat has become lead dog in the Adobe revenue kennel, it was no surprise that in the press release announcing the merger Chizen didn't mention applications such as Director, DreamWeaver, Premiere or GoLive, but instead spoke of the "complementary functionality of PDF and Flash."

    Yeah, that's right. It's all about us. So how exactly does Adobe-Macromedia benefit PDF?

    - Is there such a thing as "more ubiquitous?" When you update your Flash Player, guess what? Maybe you should update Reader, too. And vice versa. Reminders should pop up every time either is downloaded; one company owning both pieces of software will help maintain current versions of both out there on nearly every computer hooked up to the Internet. This surely will help cut down on incompatibility headaches, such as when a user takes advantage of Acrobat 7 features in a PDF but a recipient using Reader 3 can't use them. The increased access to everyone's computer also offers the side benefit of making Bill Gates writhe in envy.

    - Web PDFs could get smaller. The theory of Flashpaper is great: Get paper documents to the Web in no time flat, and the files are microscopic. There are many uses for a quick-and-dirty technology for users who really need to get a sheet or two of static paper up on the Web. Anyone who's had to suffer through a 5MB PDF download just to read a stupid two-page interoffice missive understands the principle.

    - Mobile PDFs could become usable. Can the engineering brain trust of a combined Adobe and Macromedia finally make e-books, maps and manuals decipherable on something smaller than a laptop screen? They can be deployed today, sure, but they could be made much more useful. If this crew can't do it, it's just not possible.

    - Multimedia PDFs could get robust. And here's the big one: Macromedia dominates the video and audio stage. Adobe dominates the parallel universe of text and graphics. People who use Macromedia apps want to more easily integrate PDF documents into their presentations. PDF creatives want to simplify implementing video and audio in their files and turn them into must-see content. That's going to happen.

    It's a long process that will probably take a couple years before we see much difference. First the two companies have to please the stockholders and the feds by making the merger plan work on paper. Then, a couple new revs of the key applications need to make their way out into the market. After that, people have to figure out how to use all the new features they get in the box.

    But just imagine seamless integration of Flash and PDF. I, for one, can't wait to see the rich-media creations that eventually will come out of this merger. On my iPod or cell phone LCD.

So should Microsoft watch out? According to analysts and commentators, Redmond is the biggest potential loser in this deal:

    Paul Visco, a professor in the digital media arts program at Canisius College in Buffalo, N.Y., said he worries about competition, pricing and the future of graphic design.

    "It seems as though much of the recent innovation between the two software giants was brought on by healthy competition. They had an array of software packages that had the same purposes, e.g. GoLive and Dreamweaver, Illustrator and FreeHand, Photoshop and Fireworks. If there is no longer any need to compete, then they might not continue to develop new products. It will effectively create a monopoly in graphic design."

    Visco also voiced concerns about pricing. "Adobe can now say $1,000 for Photoshop, and companies and designers won't have any other choice. Look at Microsoft. Once you get really big like that, nothing matters."

    Metaliq's Riddell said the branding issue concerns him. "It may be a tougher sell to some of our clients if there's a new brand on an older product. Is it the same thing or better or just rebranded?"

    Wilcox talked about what else Adobe gets in this deal: new developers with different skills.

    "Every business uses the PDF platform. Most of us just receive them as opposed to building them, but it's a cornerstone of business now," Wilcox said. "What makes this even more important to Adobe is now this exposes them to a whole new brand of developer.

    "Microsoft has 48 percent of companies using their products from end to end. But Adobe now has a real opportunity to develop and serve the other 52 percent, the heterogeneous environments. And a whole new set of developers are going to get a chance to work with Flash."

    So, despite there being overlapping products, Wilcox said he is convinced that this is a fit that's going to benefit both companies and make Adobe a major player against Microsoft for the heart of the enterprise business. "This acquisition just makes them so much stronger."

I found at least a two other analyses that posit the same competitive dynamics of Adobe versus Microsoft in a Longhorn OS world:

    The deal marries Adobe’s ubiquitous PDF and Acrobat Reader software with Macromedia’s Flash products for creating media content. Adobe will also have a sizable portfolio of desktop software popular with creative professionals -- including Photoshop, Illustrator, and Macromedia’s Freehand and Dreamweaver.

    “I see this as both companies bulking up against Microsoft,” said Steven Brazier, an analyst at Canalys.

    The expanded Adobe could create a variety of rich media and Internet applications that use Flash, bumping into areas Microsoft has shown interest in, said Bola Rotibi, an analyst at Ovum. Although Flash is best known to Web surfers as a format for viewing animations, the technology is a powerful development platform, and Adobe said leveraging it will be a “key component” of its strategy for a combined company.

    “When you think of where Microsoft is headed with the future of its Media Player and Media Center PCs, this goes head-to-head,” Rotibi said.

    Adobe also gains Macromedia’s base of ColdFusion Web developers. RedMonk analyst James Governor predicted that dynamic forms that allow users to create, change, and share information online will be one of the first products of the marriage. Graphics automation is also in the cards. Both of these capabilities would fly in the face of Microsoft’s plans.

    “Adobe’s ambition in this acquisition looks like a bit of a Longhorn-killer to me,” Governor said.

    Microsoft has been working on dynamic-form technologies and a graphics system called Avalon as part of its upcoming Longhorn OS. By moving into these areas, Adobe may be trying to cut the software giant off at the pass, analysts said.

Clearly, it's a win/win for both Adobe and Macromedia; but if you're a customer of, developer for or competitor with the combined company's products, you've got a new dose of uncertainty to try and digest.

And that pretty much includes all the rest of us.

- Arik

Posted by Arik Johnson at 04:04 PM | Comments (0)

May 04, 2005

Broadband Muni Wireless Networks: The Next Public Utility?

High-Speed Muni Wireless Networks: The Next Public Utility?

The past few days has seen the latest attack on metropolitan telecom and cable operators manifest itself in Philadelphia, where authorities from municipalities around the world gathered to discuss and plot the future of broadband wireless networks as a public utility - just like water, sewer and garbage service. The last mile is no longer safe from public sector competition, especially with the likes of Intel pushing WiMax out to market over the next couple of years.

This is no small matter - a lot of comfortable, safe (i.e., free from competition) operators have billions invested in keeping prices high and service levels relatively lethargic. A new era of public sector competition is sure to get them to wake up to a new set of competitive realities. Here's a summary of what's going on:

    Philadelphia Mayor John Street and Dianah Neff, the city's chief information officer, will welcome technology professionals from some 33 cities, as well as counties, states and municipal coalitions, to their city next week as representatives from Dallas to Shanghai gather for the Digital Cities Convention there.

    Sponsored by the Wireless Internet Institute, the convention promises to provide three days of brainstorming, analysis and consensus-building among representatives of wireless and mesh networking providers and the city, state and international representatives interested in implementing their solutions.

    Stephen Rayment, chief technology officer of BelAir Networks, specialist in wireless mesh networks, who is chairing a solutions panel on the technology's impact on city social and economic development, expects the conference's focus to extend well beyond contentious plans to provide free and low-cost Internet access to city residents.

    Those plans have prompted heated political debates at the state level, where telecoms have sought legislation that would prohibit cities from offering municipal service.

    Rayment will focus on the question: "How do you make the business case make a lot more sense than just giving away free Internet access?"

    Rayment said he was encouraged that Philadelphia has expanded its plan beyond simply providing free access and is outsourcing the build-out and maintenance of its network to third parties.

    "Initially what they wanted to do was just provide Wi-Fi stuff," said Rayment. "But there are a lot of other applications that can run on public networks." Among them, he cited public safety, surveillance and inter-departmental communications.

    "You need to think about multiservices and network architectures that can scale to grow and accommodate that type of thing."

    The conference is proving to be a magnet for vendors with metro wireless and mesh networking solutions.

    Intel Corp. heads to the convention hot off a demonstration of its WiMax base station platform at the International Basestation Conference in London this week. The company, which began shipping WiMax chips this month, expects the chip to be installed in notebooks and available to the public by 2006.

    Intel has already begun developing markets in Europe. This week, Intel officials announced plans to open a technology center in Moscow this summer to promote the company's broadband wireless WiMax technology.

    Nomadix Inc., a supplier of public-access network solutions, and its partner Firetide, a wireless mesh networking specialist, will be exhibiting a public access gateway optimized for metro deployments.

    The solution, said Scott Zumbahlen, director of marketing at Nomadix, is designed to centralize and resolve security and billing, allowing municipalities to outsource those functions to the Nomadix network.

    "If someone has to take a trouble call, there's no cost model [for cities] that justifies that," said Zumbahlen. "We make sure the user gets onto the network quickly, and the operation is designed so that they do not have to call for support."

But what's a cable or telecom monopoly to do now, in this era of competitive dynamics? Naturally, as one might imagine, they're not at all fired up about it!

    A number of U.S. cities are becoming giant wireless "hot spots" where Internet users will be able to log on from the beach or a bus stop, a trend that is triggering a fierce backlash from telecom and cable giants.

    "We look at this as another utility just like water, sewer, parks and recreation, that our communities should have," said St. Cloud, Florida, Mayor Glen Sangiovanni, who hopes to provide free wireless service to the entire city by the fall.

    At a conference this week, officials from dozens of local governments compared notes, listened to pitches from vendors and discussed ways to counter the lobbying of telecommunications giants that have sought to block them at the state level.

    Free or discounted wireless service can spur economic development, improve police patrols and other city services and encourage Internet use in poorer neighborhoods, they said.

    Slightly more than 100 U.S. cities—as big as Philadelphia and as small as Nantucket, Massachusetts—are setting up wireless networks now. Conference organizer Daniel Aghion said close to 1,000 local governments worldwide have plans in the works.

    The trend has prompted an intense backlash from the large telecom and cable providers that sell most broadband access in the United States. At their request, 13 states have passed laws restricting cities setting up their own networks, and several others are considering such bans.

    "With so many other issues challenging municipalities today, why on earth should cities waste millions of taxpayer dollars to compete with carriers already offering high speed Internet service?" said Allison Remsen, spokeswoman for the U.S. Telecom Association, which represents incumbents like SBC Communications Inc. and Verizon Communications.

    City officials said they don't want to compete head on with commercial providers but aren't going to be held hostage to their profit concerns.

    Providers have shown no interest in setting up broadband wireless service or offering free or discounted rates, they said. Sometimes they refuse to provide any broadband service at all.

    "We begged them to deliver the service—we didn't want to be in this business," said Scottsburg, Indiana, Mayor Bill Graham, who said local businesses threatened to leave his town before it set up its own wireless network.

    The legal battles seem to have only increased interest among city officials, especially after squabbles over a Pennsylvania state law made national headlines last year.

    "It helped to bring to light what the telecommunications industry was attempting to do," said Philadelphia technology manager Dianah Neff.

    Others said the threat of a ban at the state level has spurred them to action.

    "We're acting pretty quickly for a municipality of our size, because we don't like to be pre-empted," said Lindy Fleming McGuire, a Chicago City Council staffer.

    Smaller wireless startups are rushing to provide the equipment and expertise needed to run city networks.

    "Munis don't want to own this at all, they just want the service," said Robert Ford, chief executive of NextPhase Wireless, a service provider.

    Rio Rancho, New Mexico, brought in wireless provider OttawaWireless because incumbents didn't reach many areas, assistant city administrator Peggy McCarthy said. Now that the network is up and running, the incumbents' service has grown more competitive, she said.

    "The lethargy and apathy with which we had been given DSL and cable have both changed," she said.

    Some cities, including Spokane, Washington, found they could easily set up wireless service when they upgrade their emergency communications networks with a little help from the Homeland Security Department. The federal department awarded $925 million last year for communications upgrades.

So, whether cities should be in this business or not, it's gotten the commercial interests to sharpen up their customer service and marketing skills in recent weeks - and will probably cause them to sharpen their pencil a bit as well. I think we'll look back on this as having been good for everybody involved.

For those of you interested in helping push things along, check out MuniWireless.com and the Wireless Internet Institute.

- Arik

Posted by Arik Johnson at 04:03 PM | Comments (0)

April 22, 2005

40th Anniversary of Moore’s Law Heralded by Introduction of Dual Core Chips by Competitors AMD and Intel

AMD versus Intel in Dual-Core Processor Launch

Even as AMD launched the Opteron dual-core, we’re reminded of the words by Gordon Moore, co-founder of Intel Corporation and father of Moore’s Law, “No exponential lasts forever. But forever can be postponed.”

It was April 1965 when Moore made history by publishing an article in that month's issue of Electronics Magazine titled 'Cramming More Components Onto Integrated Circuits' which later became known as Moore's Law.

An essay in the SIA’s 2005 Annual Report by G. Dan Hutcheson, CEO of VLSI Research, captures the significance:

    It has been 40 years since Gordon Moore first posited what would one day come to be known as Moore's Law. Today, we take many of the benefits of Moore's Law for granted. Yet if you look behind the curtains of the new breakthrough sciences, as well as many of the mundane, you will find semiconductors working. Much would not be possible without the relentless progress of the semiconductor industry doubling performance for the same price every two years or so, and that is what Moore's Law is all about.

    In 1964, Electronics magazine asked Moore, then at Fairchild Semiconductor, to write about what trends he thought would be important in the semiconductor industry over the next 10 years for its 35th anniversary issue. ICs (integrated circuits) were relatively new. Many designers didn't see a use for them and worse, some still argued over whether transistors would replace tubes. A few even saw integrated circuits as a threat: if the system could be integrated into an IC, who would need system designers? The article, titled "Cramming more components into integrated circuits," was published by Electronics in its April 19, 1965, issue.

    Moore's paper proved so long-lasting because it was more than just a prediction. The paper provided the basis for understanding how and why integrated circuits would transform the industry. Moore considered user benefits, technology trends, and the economics of manufacturing in his assessment. Thus he had described the basic business model for the semiconductor industry -- a business model that lasted through the end of the millennium.

    From a user perspective, his major points in favor of ICs were that they had proven to be reliable, they lowered system costs, and they often improved performance. He concluded, "Thus a foundation has been constructed for integrated electronics to pervade all of electronics." From a manufacturing perspective, Moore's major points in favor of ICs were that integration levels could be systematically increased based on continuous improvements in largely existing manufacturing technology. He saw improvements in lithography as the key driver. From an economics perspective, Moore recognized the business import of these manufacturing trends and wrote, "Reduced cost is one of the big attractions of integrated electronics, and the cost advantage continues to increase as the technology evolves toward the production of larger and larger circuit functions on a single semiconductor substrate. For simple circuits, the cost per component is nearly inversely proportional to the number of components, the result of the equivalent package containing more components." The essential economic statement of Moore's Law is that the evolution of technology brings more components and thus greater functionality for the same cost. Computing power improves essentially for free, driving productivity in the economy, and thus fueling demand for more semiconductors. This is why the growth in transistor production has been so explosive. Lower cost of production has led to an amazing ability to not only produce transistors on a massive scale, but to consume them as well.

    The economic value of Moore's Law is that it has been a powerful deflationary force in the world's macro-economy. Inflation is a measure of price changes without any qualitative change -- so if price per function is declining, it is deflationary. This effect has never been fully accounted for in government statistics. The decline in price per bit has been stunning.

    In 1954, five years before the IC was invented, the average selling price of a transistor was $5.52. Fifty years later, in 2004, this had dropped to 191 nanodollars (a billionth of a dollar). If the semiconductor were fully adjusted for inflation, its size in 2004 would have been 6 million-trillion dollars. That is many orders of magnitude greater than Gross World Product. So it is hard to understate the long-term economic impact of the semiconductor industry.

    So what makes Moore's Law work? There are three primary technical factors: reductions in feature size, increased yield, and increased packing density. The first two are largely driven by improvements in manufacturing and the latter largely by improvements in design methodology.

Meanwhile, Intel’s archrival, AMD rolled its first dual-core Opteron processors, even as Intel beat them to market earlier in the week:

    Intel beat AMD to the punch earlier in the week with the launch of its first dual-core processor, which was aimed at the high-end gamer and workstation market segments. In AMD's case, it has announced availability of the Dual-Core AMD Opteron 800 Series processor for four- and eight-way servers. In addition, it announced that the 200 Series for two-way servers will ship in May.

    According to AMD, the new processors deliver up to a 90 per cent performance improvement for application servers over single-core AMD Opteron processors. For the desktop PC user segment, AMD announced the Athlon 64 X2 Dual-Core processor brand that the company stated will enable true multi-tasking capabilities for richer computing experiences.

    "Just as AMD led the industry to pervasive 64-bit computing, AMD is now leading the industry to the performance and power benefits of multi-core processors," said Marty Seyer, corporate vice president and general manager, Microprocessor Business Unit, Computation Products Group, AMD, in a statement. "We have flawlessly executed manufacturing AMD64 processors, which is why today we are announcing the world's only broad dual-core client and server processor line-up, well ahead of our announced schedule. Because our non-disruptive dual-core architecture is designed to fit in today's existing infrastructure and provide leading-edge performance, enterprise customers can rapidly adopt AMD64 dual-core processors for servers and workstations today and for client platforms in June."

    Several of AMD's OEM partners have also announced AMD dual-core server products. Sun Microsystems, HP and IBM have all announced dual-core platforms that will take advantage of the AMD64 technology.

    According to AMD, dual-core processors are the next evolution of the company's AMD64 Direct Connect Architecture, and the processors were designed from the ground up to directly connect two cores on a single die, along with memory, I/O and dedicated caches. The company stated that the processors were also designed for easy and seamless migration. AMD's "non-disruptive upgrade path" allows users to upgrade single-core-based systems to dual-core-based systems because the dual-core processors were designed to work in the same power envelope and infrastructure as the single-core processors.

But Red Herring thinks it's advantage-AMD:

    Advanced Micro Devices began selling the dual-core version of its Opteron chip on Thursday, giving AMD a slim advantage over Intel in a race to provide better processors for servers.

    The single-core Opteron showed up in the marketplace two years ago, delivering a stunning blow to Intel. Opteron allowed business customers to use both the existing and more advanced software down the road. Intel’s server chips either didn’t have such capability or required expensive upgrades for companies that used servers with Intel processors.

    More recently, Intel and AMD have competed hard on their dual-core products, which represent a departure from the old way of designing processors.

    The dual-core chip has two processing units on the same piece of silicon. At a lower speed than a single-core processor, the dual-core chip can divvy-up the tasks and process more information at the same time while using less power.

    In the past, chip engineers increased processor performance by increasing clock speed. To do so, they had to cram smaller and more transistors into a single-core chip, and such an approach ran into overheating problems.

    Intel introduced a dual-core Pentium chip on Monday, but that processor isn’t designed for servers. So the dual-core version of Opteron gives AMD another advantage. Hewlett-Packard and IBM already plan to market servers and work stations featuring the new Opteron.

    “Our customers say they want a product that retains the same power envelope, same wattage… but also offers the same performance. And the way to do that is through dual-core,” said Gina Longoria, Opteron product manager.

    The news had been anticipated by Wall Street, and the stocks of both companies rose in recent trading as technology stocks rebounded from recent declines. Intel shares rose $0.42 to $23.08, while AMD shares climbed $0.20 to $14.85.

    Intel’s high-end Pentium chip will power desktop computers favored by gamers and graphic artists. Intel plans to begin selling a computer processor for the masses, Pentium D, later this quarter.

    AMD plans to start selling dual-core processors for desktop PCs in June and has given the PC processor a new brand name, Athlon 64 X2. Computers with Athlon 64 X2 will be good for handling multimedia tasks, such as photo editing.

    Meanwhile, AMD will continue to sell single-core Athlon 64, believing that some consumers may not care to spend more money for souped-up computers.

And, AMD’s CEO, Hector Ruiz, is in firm agreement in his recent interview with EETimes:

    Advanced Micro Devices this week rolled out its dual-core Opteron processor as part of its drive to usurp market share from Intel by developing a distinct product advantage. Hector Ruiz, AMD's CEO, discussed how Opteron will shape the Sunnyvale, Calif., chip maker's battle with Intel to win the hearts of minds of systems builders in an interview with CRN Editor In Chief Michael Vizard and Senior Editor Ed Moltzen.

    CRN: When do you think dual-core Opteron systems will make an impact in the market?

    RUIZ: I divide it into two parts. It will be rather dramatic in that it will force people to rethink their designs, but it will take some time to get things started. So the volume impact for us will probably be next year.

    CRN: Given that, how much of an advantage do you think AMD now has over Intel, which is expected to roll out its dual-core offerings next year?

    RUIZ: Intel is strong company and very capable. We just think this requires a lot more than a desire to do it. I don't know if you can retain their existing bus architecture and change it enough to get the level of performance and value that we have. If they change the architecture, that is not a trivial thing, so it will take them longer. And customers are already making an investment in the enterprise and are not just tip-toeing in the water.

    CRN: Do you think software vendors are on board when it comes to pricing their applications based on a dual-core rather than a single-processor approach?

    RUIZ: This is just starting, but the pressure is insurmountable in terms of going in this direction. Microsoft has taken the first step, and everybody will follow. Sun Solaris is the same way. We have major players signed up. At the dual-core level, I don't think this will be an issue. When we get to quad core, that could create a disruption.

    CRN: When will that happen?

    RUIZ: I'm perfectly confident that we will see engineering samples in 2007.

    CRN: Over the last year, Intel has taken more of a platform approach to the market, which seems to be much different than AMD's approach. How much of a difference is there in the two companies' go-to-market strategies?

    RUIZ: The good news is that you have a differentiated approach to the market, so channel partners now have a choice. How Intel and AMD are approaching the market is clearly different. We believe Intel's platform strategy is designed to continue their domination and control the market. But you can pick any three-year period [over] the last three years, and it shows that Intel generates all the profit and everybody else loses money. We believe that's crazy.

    Systems makers want people to buy their brand because it has good value in it, not because it has Intel inside it. I think this is giving us an opportunity to go to customers that are becoming more interested in getting state-of-the-art CPUs from AMD and state-of-the-art motherboards from Foxconn to create a best-in-class system with their name on it. Our strategy is to continue to offer customers the option of not being marginalized. Any system builder that thinks warming up to the Intel platform brand is anything other than giving their soul away is nuts. They're naive.

    CRN: Would you ever consider building your own chipsets?

    RUIZ: I have not closed the door on that. If we do that, it would not be to create a platform. It would be to create a reliable source of supply rather than trying to marginalize the customer brand.

    CRN: Most recently, AMD has experienced some profitability issues, especially as it relates to the flash memory business that the company is now preparing to spin off. When do you think AMD will return to profitability?

    RUIZ: I didn't give any guidance to that. Profitability is important, but our No. 1 goal was to get the businesses positioned so they could develop a life of their own. The fact that the flash memory market went to hell is a temporary disruption. I'm not worried about how we're going to be profitable there. I was worried about microprocessors because in 2000 we had a phenomenal year, and we didn't make money then. It took a lot of changes and modifications over the years to get the microprocessor business to be consistently profitable over the last few quarters. We are on solid footing.

    As the flash unit gets ready to spin off, it's pretty well-positioned. Last quarter, Intel had about $100 million more in flash sales than we did, but they lost $225 million on it. Our flash unit lost $39 million. We have better structure in the flash unit than any competitor. As the market recovers, we have a solidly positioned organization. I am pleased that we have been able to get the microprocessor business profitable and the flash business on solid footing.

    CRN: Do you think Intel exacerbated the situation in the flash memory market to cut off a source of revenue for AMD's microprocessor business?

    RUIZ: Funny how 999 people out of 1,000 actually think that.

    CRN: Are you worried that Intel will try to use pricing on its single-core offerings as a tool to keep AMD at bay?

    RUIZ: There are spots where they could choke us, but we think customers are warming up to the idea of having a viable, strong alternative. We're building the strength and momentum where pricing is not as effective as it once would have been.

    CRN: How vital of a role does the channel play in your strategy?

    RUIZ: The channel has always been a great partner for us when it comes to any product that we introduce. What is going to be different is that there are quite a few people in the channel playing a much bigger role in servers. Channel partners are starting to play a much bigger role in the enterprise. The help that we will get from the channel quickly will be pretty evident there. The people that we worked with that have been successful are people who really value creating a differentiated solution. We think single-core and dual-core Opterons strengthen that ability.

    CRN: Are you going to spend a lot more money helping those partners market that differentiation?

    RUIZ: We're going to have to change that, so this year we need to do something quite different. We obviously can't spend $2.1 billion on marketing. But we are going to work on that with partners. But what we spend will be an order of magnitude less than what our competitor spends.

The real question for consumers who only care about having the latest, fastest components in their box boils down to which is faster. On this front, at least according to reviewer Jason Cross at ExtremeTech.com – AMD wins handily:

    A couple of weeks ago, we gave you a sneak peak at the performance of the new dual-core Pentium 4 processors from Intel. The chips, which are now shipping, are the first dual-core CPUs to hit the market. What's more, Intel started their push into multiple cores with desktop chips, rather than CPUs for servers.

    AMD has been talking about dual-core chips for quite some time, and for awhile, was expected to be the first to the market with this technology. Accelerated plans from Intel changed all that, but the company is finally ready to ship dual-core chips. In contrast with Intel, AMD debuts their dual-core technology in their Opteron line, made for servers and workstations.

    AMD's thinking is pretty simple: Server and workstation applications are more likely to be multithreaded than desktop PC apps. A dual-core processor would benefit those applications almost from day one. Intel is playing a different game, believing that the heavy multitasking environment in today's PC desktops will get a benefit. Both are right, in a sense, and both are playing to their relative strengths.

    We recently got our hands on a dual-core Opteron test kit from AMD, and decided to pit it against the Pentium 4 840 Extreme Edition we previewed recently. These are not chips aimed at exactly the same markets, but the Opteron is so architecturally similar to an Athlon 64 in that it provides a reasonable facsimile of Athlon 64 desktop performance. There are differences, of course—Athlon 64 CPUs don't have as many hypertransport links for multi-CPU systems, typically ship at faster clock speeds, and don't use registered RAM—but the core architecture is nearly identical. Rather than test it as a pure server platform, we used a uniprocessor system and a desktop graphics card to see how a dual-core desktop Athlon 64 might perform.

    The dual-core battle is far from over, of course. Intel is shipping dual-core desktop CPUs now, but the quantities aren't real high. The real battle will come later this year, as AMD releases Athlon 64 CPUs for desktops that feature two cores, and Intel's dual-core shipments ramp up. For now, let's take a look at how the two competing technologies stack up.

    This is primarily a performance preview, but before we get into the numbers, we should take a quick look at the platform itself.

    The test hardware we received from AMD consisted of two Opteron 875 CPUs, which are expected to sell for about $2,649 in lots of 1,000. That's AMD's most expensive chip—a dual core Opteron made for systems with up to eight CPUs together. Opteron dual-core chips will also ship in the 200 series, made for workstations and servers with only two CPUs. The model 275, suitable for two-socket systems, is priced at $1,299. The model 175, targeted at single socket servers and workstations, goes for $999. All are socket 940 processors requiring registered, buffered DDR memory.

    The Opteron x75 ships at a clock speed of 2.2GHz. This is a significant reduction from the fastest single-core Opteron, model x52, which runs at 2.6GHz. Even with the transition to a 90nm manufacturing process, both Intel and AMD have to make significant reductions in clock speed to keep these dual-core chips from running too hot and eating up too much power. This allowed AMD to keep the thermal envelope at around 95W, which is better suited for server environments.

    There are significant architectural differences between AMD and Intel's dual-core chips. Looking at the following two block diagrams, you can see that the primary difference is how each core interfaces with the rest of the system. Each of the two CPU cores on the Model 840 shares a front side bus to the memory controller hub (MCH) of the 945/955X chipset. AMD's dual core architecture also uses a single memory controller, which is on-die. Memory arbitration in AMD's case is handled through a crossbar switch that also has independent access to the HyperTransport links. In other words, each of Intel's cores must go "off chip" to talk to each other, while AMD's cores have a more direct line of communication.

    AMD's dual-core products include the improvements made with the new "E4" stepping single-core Athlon 64 and Opteron CPUs. That is, they are made on a 90nm SOI (Silicon on Insulator) manufacturing process, have added support for SSE3, and a tweaked memory controller. It's a large chip, about 199mm2 and 233 million transistors, which makes it roughly equivalent in size to the Pentium 4 840 Extreme Edition. The thermal rating is 95 watts, considerably lower than the Pentium 4 840 EE's maximum thermal rating of 125 or 130 watts (we've heard both numbers out of Intel).

... later on, Cross gets to the point ...

    There's really no other way to say it—this is a huge win for AMD. We expected major improvement in multi-threaded applications and multi-tasking tests, but at only 2.2GHz we weren't sure it would actually perform better than Intel's dual-core Pentium Extreme Edition 840. There are a couple of tests—usually single-threaded tests—where the Opteron 875 doesn't keep pace, but in the vast majority of benchmarks, AMD comes out ahead.

My own verdict? I’d personally rather have Dell launching my processor (Pentium 4 Extreme Edition) on its workstations, servers and (eventually all of) its PCs, than IBM’s Opteron commitment for the LS20 blade… although Lenovo will be nobody to sneeze at, for Intel either…

The battle for the future of the microprocessor has only just begun.

- Arik

Posted by Arik Johnson at 12:06 PM | Comments (0)

March 27, 2005

Cracking the Code on Barry Diller’s Bizarre Ask Jeeves Acquisition: Why and Wherefore

AskJeeves & Barry Diller’s IAC
Think that resemblance is mere coincidence…? I think NOT! A week ago that oligopolist of the online Barry Diller announced he was buying also-ran search engine Ask Jeeves for almost two billion dollars, prompting many to declare a move to get just 5% of searches an utter waste of capital… but wait! There’s a competitive strategy in here somewhere… we just have to ask the right questions to find it.

Most importantly, what’s the real reason Barry Diller decided to buy out Ask Jeeves? Because his other sites need the traffic… and, if IAC can generate that traffic quickly enough, Diller should be cash-flow positive even before the search engine’s ad revenues kick in. Here’s a summary of the deal and speculation from InformationWeek.com:

    IAC/InterActiveCorp, which operates a variety of online and offline businesses, including CitySearch, Expedia, and Ticketmaster, today said it will acquire Ask Jeeves Inc., for $1.85 billon.

    Ask Jeeves is the fourth-largest Internet search engine and, by comScore Media Metrix's measure, the ninth-largest Web property.

    In a statement, Barry Diller, chairman and CEO of IAC, said, "Ask Jeeves was founded almost 10 years ago based on the idea that simple text search results alone are not sufficient or satisfying--but, rather, that consumers want answers to questions--and questions posed in natural language and answered with spot-on accuracy were especially desired and appealing. Of the many search engines launched during that time, Ask was one of the very few that established itself and we believe that in the future it has the potential to become one of the great brands on the Internet and beyond, and by beyond, we mean in wireless, in the search for anything on any device."

    "It does look like there's going to be another major player in this market," says Marianne Wolk, an analyst for Susquehanna Financial Group. "However, we caution that IAC and Ask Jeeves are coming from behind. Ask Jeeves has invested significantly less in geographical expansion, technology expansion, and capital expenditures to reindex the Web, than [have] larger peers such as Google, Microsoft, and Yahoo. And there's going to have to be significant investment made by the combined company to catch up."

    The other major search players aren't sitting still either. A Yahoo spokeswoman today confirmed that it plans to buy Ludicorp Research & Development Ltd., which owns Flickr, an online photo-sharing site favored by bloggers. Wolk predicts that America Online, Google, Microsoft, and Yahoo will continue to make significant investments and acquisitions in search-related areas, particularly blogging and social networking.

    "This really just emphasizes my point that the major players are aggressively spending to expand overseas, and enter new markets such as blog search, content search, image search, desktop search, and video search," says Wolk. "And Ask Jeeves is way behind in most of those investment areas."

    Ask Jeeves' purchase last month of Trustic Inc., the company that runs blog aggregator Bloglines, represents an effort to close that gap. But experts suggest the distance is considerable.

    "If you look at the market share of the search portals--Google, Yahoo, MSN, and AOL--Jeeves really has a sliver in comparison to those others," says Kevin Lee, executive chairman of search-engine marketing firm Did-It.com. "Can Jeeves be resuscitated with enough cash and savvy marketing? Perhaps it can. Clearly, Diller and his team have some thoughts with respect to Jeeves that they believe they can add value to Jeeves' current situation and maybe bring Jeeves back."

    Lee, like others in the search industry, shares Diller's view that "search for anything on any device" has potential going forward. But he's guarded in his assessment. "I think the whole convergence with wireless is going to continue to move slowly but surely," he says. "Device-agnostic search is going to be there in the future. I'm not sure that any one player has an advantage now given how early that game is. Any momentum any one player has can be eliminated with enough marketing dollars."

The key to understanding this competitive strategy is to understand that, despite all of the momentum behind Google and Yahoo and AOL and MSN, there will never be one big winner in the search engine marketplace. We’ve been fragmented for a decade and there’s little sign of that changing. Eric Chabrow’s blog entry captured this perfectly:

    Today, Google and Yahoo dominate the search market; they account for nearly 70% of all searches, according to comScore. Internet users conduct about one-quarter of Web searches on sites operated by MSN/Microsoft and AOL/Time Warner. Ask Jeeves accounts for only 5% of searches.

    But, as Diller points out, searches represent a very small slice of American media, even less so overseas. He compares the search market to other media, such as cable TV, where no one company dominates but scores of businesses are profitable. Despite its rapid growth, the Internet remains a relatively young industry. And search is even younger.

    Appearing on CNBC the other day, Diller addressed the search-engine sector: “It’s the very beginning of its growth. … This is going to be a world, just like the media world, where there will be many players, many people providing service.”

    Diller plans to grow Ask Jeeves by placing a search bar on Web pages of IAC’s other sites such as the online travel agency Expedia, Home Shopping Network, Ticketmaster, CitySearch, and Match.com. Diller said IAC sites attract 44 million unique visitors, and expects many of them to use the Ask Jeeves search bar instead of going to another site to conduct a search, such as Google.

    Too many people are infatuated with companies like Google. They’re judging this sub-sector by the number of searches. True, search and portal companies do reach out through acquisitions and partnerships to create synergies, but that doesn’t explain how the market got so out of whack. How else could Google have a market cap topping $49 billion on only $3.2 billion in sales last year when IAC generated nearly twice that amount in revenue but has a market cap of $15.4 billion, less than one-third of Google’s?

But in the end, this thing is all about creating a search destination that feeds the rest of the IAC network. According to Michael Stroud:

    It's about being a portal to every one of the products and services that Diller's IAC/InterActiveCorp provides—including LendingTree, Hotels.com, Ticketmaster, Home Shopping Network, Expedia, and Gifts.com—as well as many products and services that Diller's partners will provide. If he succeeds in driving traffic to those sites, he'll generate cash from Ask Jeeves, even before advertising revenue kicks in.

    You can easily see how. Plenty of website owners would be interested in putting an Ask Jeeves button on their websites if, say, Diller offered to pay them a fee every time a customer used Diller's search engine to buy one of his services or those of a partner. Isn't that exactly what Amazon.com does when someone lists their favorite book or DVD on their website and then directs visitors to Amazon.com to buy it?

    Similarly, you can see how a partner—whether a retailer or a mobile phone operator—might be willing to give Diller a little cut every time a customer buys an IAC product or a IAC partner's product after discovering it through the IAC portal. That's exactly how Ticketmaster works, after all: buy a ticket, pay a premium to IAC.

    Yes, the market can only probably only support a few big search engines, if you're talking about encyclopedic sites that connect you to everything from the Civil War to Martha Stewart. But it doesn't follow that niche search services catering to specific communities—in this case, buyers of products and services—can't flourish.

    Newspaper readers, after all, don't flock only to USA Today or the New York Times, while ignoring local papers. Consumers don't choose to watch only CBS, ABC, NBC, and Fox, rather than cable or local channels.

    Diller knows all about that reasoning. He was scoffed at almost 20 years ago, when he challenged the Big Three networks by cobbling Fox together from a hodge-podge of local stations. With Ask Jeeves, he's trying a new twist: creating a unifying engine that works across IAC's disparate products and services.

    Yahoo and Google do the reverse: they have a unifying engine, and they're seeking the products and services to monetize it. And there's no business on the web like show business, which seduces millions of online shoppers with CDs, DVDs, and other Hollywood products.

    It's no accident that Yahoo chairman Terry Semel, Warner Bros.' former chairman and co-CEO, chose to set up his new media division in Santa Monica. Entertainment news on Yahoo is just a mouse click away from Yahoo ads for online vendors of CDs and DVDs, or entertainment products for sale in Yahoo Stores.

    So there's no reason why other media companies or big retailers—even specialized ISPs and mobile carriers—can't set up their own search sites, tailored to their own communities. And don't be surprised if some of them say "Powered by Ask Jeeves."

Ah-HA! That’s the secret! The erosion of market share away from the search engine leaders and toward verticals! Why didn’t I think of that?! Diller actually couldn’t have succeed if he’d done things any differently. That’s why Diller is considered one shrewd, dude, though… right?

- Arik

Posted by Arik Johnson at 08:50 AM | Comments (0)

March 26, 2005

Lexar Wins $464 Million Trade Secret Suit Against Toshiba for its Backstabbing Partnership with SanDisk

Lexar Awarded $464 Million in Trade Secret Suit Against Toshiba Over SanDisk PartnershipMighty Toshiba succumbed to the legal assault of smaller Lexar, ultimately being ordered to pay almost half a billion dollars for a partnership backstabbing involving accusations Toshiba disclosed trade secrets to Lexar’s arch-rival SanDisk:

    Lexar Media’s stock doubled in value Thursday after a California jury awarded the company $380 million in a trade secret lawsuit against Toshiba. After the market closed, the jury added another $84 million in punitive damages for a total of $464 million.

    Lexar, one of the largest makers of memory cards and USB drives, contended that Toshiba stole its NAND flash memory inventions while partnering with the company, only to turn around and begin to work with Lexar Media’s arch rival, SanDisk.

    Eric S. Whitaker, vice president of corporate strategy and general counsel for Lexar, said the financial penalties were just punishment for Toshiba.

    "You've got to be able to trust your partners,” he said. “Toshiba was on our board, talking about more partnerships, and meanwhile they were planning to work with SanDisk. We thought Toshiba was going to be our partners for the long term."

    Toshiba had no comment while the case is pending, said company spokeswoman Keisuke Ohmori.

    Lexar’s stock closed up $3.15 at $6.32 per share before the jury decided on the punitive damage award. More than 127 million shares traded hands, more than 40 times the average daily volume of 3.1 million during the last 50 days.

    Punitive award hearing

    The jury granted the initial reward on Wednesday, then returned to hear arguments from both sides before deciding on the punitive award.

    “We accept the fact that you found Toshiba breached a fiduciary duty,” Toshiba attorney Alan “A.C.” Johnston told the panel. “If the issue is, ‘Did we get the message?’ I can assure you, you were heard, in the upper levels” of Toshiba’s management.

    But Lexar’s attorney, Matthew Power, decried Toshiba’s actions as “malicious,” and claimed Toshiba planned to “sustain Lexar” only long enough to take its inventions. Regarding the initial $380 million award, Mr. Power said: “That’s just money they should have paid Lexar to begin with.”

    Power asked for $1 billion in punitive damages “to punish Toshiba… and to (prevent) conduct like this by Toshiba or someone else.”

    After hearing both attorneys, the jury took less than two hours to decide on the punitive award. “Ten out of 12 of the jurors agreed with most of the outcome,” said one woman on the jury, who declined to be identified.

    Toshiba and SanDisk, based in Sunnyvale, California, have a joint venture to produce memory chips for making memory cards for storing photos and music files. But SanDisk was not a defendant in the suit.

    “We’ve never received any Lexar trade secrets,” said Lori Barker, SanDisk’s director of investor relations. “Certainly we weren’t involved in this action. Presumably if they had a case against us they would have filed it. We are a patent-intensive company, with $180 million from royalty revenues.”

    Mr. Whitaker said Lexar, based in Fremont, California, is also asking the court to bar Toshiba from selling, in the United States, memory chips and memory card products that were made using Lexar’s patents. That hearing is scheduled for April 13. Lexar also is pursuing a federal patent case pending against Toshiba.

    Lexar previously announced preliminary fourth-quarter net revenues are expected to be in a range of approximately $255 million to $260 million. That compares with $177.5 million in the same period last year. However, it has delayed reporting final results, citing volatility in the retail market for digital media products.

But don’t count Toshiba down for the count just yet:

    Toshiba Corp. vowed Friday (March 25) to fight a jury verdict in California earlier this week in favor of U.S. plaintiff Lexar Media Inc. The decision makes Toshiba liable for $465.4 million in fines related to alleged misappropriation of NAND flash memory trade secrets.

    Toshiba's response follows a jury verdict in a lawsuit brought by Lexar (Frement, Calif.) in California Superior Court in San Jose. The jury found Toshiba and its U.S. subsidiary, Toshiba America Electronics Components Inc. (TAEC), liable for the penalties in connection with the alleged misappropriation of NAND flash trade secrets.

    "Toshiba believes that the verdict rendered by the jury was in error, and we plan to pursue all available legal avenues to correct it," the company said in a statement. "Toshiba invented NAND flash memory technologies and has been a pioneer throughout its development."

    Toshiba's stock price dropped 2 percent Friday from the previous day's close.

    NAND flash is one of mainstays of Toshiba's chip business. It completed a 300-mm wafer fab last February at its Yokkaichi plant to boost NAND flash production. "Toshiba will continue pursuing technologies that enable it to scale down flash memories and enable it to go ahead of competitors on the market," said Toshiba President Tadashi Okamura said at the fab opening.

    To retain its position as a major NAND flash supplier, analysts here said Toshiba would wage an aggressive legal counter attack against Lexar.

Toshiba’s just got too much riding on this not to counter-attack and hit back harder… it’ll be interesting to see what twists and turns the assault promises to take, since Lexar essentially wants to put them out of business… the U.S. memory business anyhow. At least SanDisk doesn’t seem too worried… that makes one of us.

- Arik

Posted by Arik Johnson at 08:48 AM | Comments (0)

March 18, 2005

Charles Schwab vs. TD Waterhouse: The Grudge Match

Charles Schwab vs. TD WaterhouseIt's been found that the people most likely to complain about a particular advertisement are those who work for a competing company; now, Charles Schwab has filed a trade libel complaint in California state court charging that an ad campaign for TD Waterhouse has falsely labeled Schwab as a high-priced firm with inferior service. Charles Schwab said he tried to persuade the CEO of TD Bank Financial Group, which oversees TD Waterhouse, to abandon the ads before he filed the lawsuit, and that Schwab wants a court order to ban the ads, in addition to unspecified damages:

    Charles Schwab filed suit against rival TD Waterhouse this week for “a pattern of deceptive, misleading, and patently false advertising” in its ad campaign. The suit, filed on Monday in San Francisco County Superior Court, alleges that TD Waterhouse’s ad campaign creates the impression that Schwab charges the price of a full-service broker like Merrill Lynch and that Schwab doesn’t offer the same level of customer service as TD Waterhouse.

    Schwab alleges in its suit that this is false and misleading because, as the innovator of the discount brokerage market, Schwab is “known for excellent service….and has a stellar reputation for low-cost, high-quality financial services.”

    Schwab is also seeking damages based on injury to the company’s reputation and loss of potential retail clients. The suit claims that Schwab has suffered “substantial” and “irreparable” damage. “People get impressions about companies they want to use based on ads,” says Schwab spokesperson Greg Gable. “We want them to stop using Schwab’s name in comparative advertising.”

    TD’s ad campaign, which launched in November, 2003, features actor Sam Waterston, who plays a prosecutor on TV’s Law & Order, making statements such as: “Switch to TD Waterhouse, the alternative to higher-price brokers like Merrill and Schwab,” and “Why pay all that money to Merrill Lynch or Schwab.”

    Schwab claims that it tried to settle the issue out of court in early 2004, when both parties signed an agreement to change the language in the ads. TD Waterhouse agreed to switch its tagline from “TD Waterhouse, the alternative to higher priced brokers like Merrill Lynch and Schwab,” to “TD Waterhouse, the alternative to Schwab and higher priced brokers like Merrill Lynch.” The agreement also was intended to remove language such as “Why pay Merrill or Schwab just to bounce your ideas off them.”

    But according to Schwab, Waterhouse didn’t stick by the contract.

    TD Waterhouse counters that it did honor the agreement, but that some of the older ads continued to run unbeknownst to them. “We have fully adhered to our agreement with Schwab,” says Kevin Dinino, manager of media relations for TD Waterhouse. “As far as ads that ran in error, they were without our knowledge or consent. We believe Schwab’s complaint is without merit and will defend our reputation.” The ad campaign, meanwhile, is rolling right along and, according to Dinino, and has been a very successful in building the company’s brand with investors—even if they may not be switching from Schwab. “We’re clearly seeing refugees from full commission brokers,” says Dinino.

Just don't ask Chuck what he thinks of the ad-campaign…

- Arik

Posted by Arik Johnson at 12:17 AM | Comments (0)

March 17, 2005

Take Me Out to the Ballgame - Beltway Baseball Rivalry & Ripken’s Side-Switching

Cal RipkenThe Washington Nationals are going to war with the Baltimore Orioles in more ways than one - on the playing field and at the box office, while Orioles hero Cal Ripkin heads for the enemy camp, in this piece from BusinessWeek.com:

    On Apr. 4, the Washington Nationals will officially play ball for the first time -- and the boos from Baltimore promise to be almost as loud as the cheers in the Nation's Capital. The Nats and the Orioles, which will compete 37 miles apart, have already skirmished over the marketing of tickets, their attempts to acquire star slugger Sammy Sosa, and the question of how Birds owner Peter G. Angelos will be compensated -- a calculation that could affect the location and financing of future franchises.

    For Orioles fans there's even the frightening possibility of a Baltimore icon, legendary shortstop Cal Ripken, going over to the dark side. This summer, Major League Baseball will select an ownership group out of at least seven partnerships vying for the franchise. Ripken, who declined to be interviewed, has said he might be interested in joining a Nationals group if he also had a hand in running the team.

    The competition between baseball's new neighbors will grow more intense after a Nats owner -- expected to pay up to $400 million -- is selected. For now, the Nationals are owned by the 29 MLB team owners, including Angelos. That places the current, MLB-controlled management in a tough spot, trying to avoid even the mildest public disagreements with the Orioles. For example, in the contest to trade for Sosa, baseball sources say the Nats were directed to back off by MLB when Angelos got in the game. Says Nats President Tony Tavares: "Every time we play them, I hope we kick their butts. But do I wake up wondering how I can hurt the Baltimore Orioles' business and enhance mine? Honestly, no."

    Selig already seems to be bending over backward for the Orioles. In September the commish's lawyer, Bob Dupuy, began talks with Angelos. Since then, according to baseball sources, MLB has offered several plans to indemnify the Orioles. Terms include guaranteeing them annual revenues of $130 million, just above their estimated revenue at present. Angelos would also be assured of a price tag around $360 million if he were to sell the team. That's a tidy profit over the $173 million that an Angelos-led group paid for the Orioles in 1993. For now, the sticking point in the talks appears to be control over the Nationals' TV broadcast rights.

We'll see if the Nationals can out-draw the Orioles - but they likely can't stop Ripken from heading for the enemy camp.

- Arik

Posted by Arik Johnson at 12:16 AM | Comments (0)

March 09, 2005

Oracle vs. SAP: The Battle for Retek & Retail's Supply Chain Infrastructure

Oracle Challenges SAP for Important Retek AcquisitionLarry's playing spoiler again and defending his territory, going after SAP's latest acquisition target, Retek, an acquisition by SAP originally designed specifically to tweak Oracle's nose in its retail-industry stronghold:

    “Acquiring Retek brings a whole new level of industry focus and technical ability to SAP’s product lineup,” says Scott Langdoc, analyst for AMR Research Inc., adding that SAP appears willing to acquire additional retail industry software application vendors.

    SAP gains strong capabilities in web-based demand forecasting, demand-driven replenishment and retail planning, and will be able to offer multi-channel capability in order management, Langdoc says. Retek also brings clients like Gap Inc., A&P and Nordstrom Inc., who could benefit from SAP’s strength in enterprise software implementations, he adds.

    Minneapolis-based Retek provides an integrated suite of retail software applications and serves more than 200 companies in 20 countries. It posted $174.2 million in revenue last year. Under the terms of the acquisition agreement, Retek will merge with SAP’s U.S. unit, SAP America Inc., and the two companies will decide over the next several weeks whether to keep the Retek name and other brands, a spokeswoman says. The $496 million price is based on an all-cash offering of $8.50 per share of Retek, representing a 42% premium for Retek shareholders.

    Henning Kagermann, CEO of SAP, said the Retek acquisition enables SAP to offer a comprehensive set of applications extending from POS systems to supply chain management applications as it seeks to expand in the retail market. “The global retail industry represents a significant growth opportunity for SAP,” he said.

    SAP also faces challenges in capturing more of the retail software market with Retek, analysts say. Several existing SAP and Retek applications, including financial planning and supply chain management, directly compete with each other in the retail industry, and SAP will have to decide which of these it will support over the long term, says Paula Rosenblum, director of retail research at AberdeenGroup Inc.

    Until now, Oracle Corp. has been the source of the preferred back-end financial software integrated with the Retek suite, but retailers may now be expected to migrate from Oracle to SAP, a move many retailers are unlikely to accept willingly, Rosenblum says. “Retailers are as unlikely to want to take the time and resources to move from Oracle to SAP as they are to move from PeopleSoft to Oracle,” she says. “A different financial package will not help any retailer win the hearts and minds of consumers.”

    Rosenblum adds that SAP will also have to address the difficulties retailers have faced in upgrading Retek applications as well as in installing SAP applications. She adds that retailers’ demand for quick returns on investment from software implementations may favor, at least in the short term, niche players like merchandise optimization software vendor ProfitLogic and supply chain software providers Logility Inc. and New Generation Computing Inc.

In making the original acquisition announcement, SAP said the retail industry is entering a new phase of packaged software adoption, as retailers start considering IT a strategic weapon to drive competitive differentiation and business growth.

"SAP has been much more successful moving from one manufacturing industry to another manufacturing industry because there are many more common core set of attributes there," says Mike Dominy, a senior analyst with the Yankee Group. "This is a good acquisition for SAP, because it gives them a significant increase in market share and represents a renewed interest in being a major player in that industry."

AMR Research analysts Scott Langdoc, Robert Garf and Jim Shepherd predict, in an Alert Highlight "the combination of SAP and Retek will become a very difficult competitive challenge for existing enterprise retail software players. For nearly a year, it has been rumored that Oracle was interested in Retek as a way of heading off the growing competitive threat in retail from SAP. Oracle will need to push its relationship with Tomax as a way of offering industry applications beyond the core Oracle capabilities. JDA Software, in the midst of delivering its long-delayed .NET integrated retail systems, loses a longstanding competitor but will struggle even more mightily against the resources and abilities of the Retek-infused SAP."

And, Oracle's just sweetened the pot for Retek shareholders to reconsider the SAP offer:

    In a blocking move against application rival SAP, Oracle will make a bid Wednesday morning to acquire Retek Inc., a leading supplier of retail-management applications, for $9 a share.

    Oracle's move comes just one week after SAP said its North American subsidiary, SAP America Inc., had signed a definitive agreement to acquire Retek for $8.50 per share, or approximately $496 million.

    "We have the largest application business in North America, with about 23,000 customers, and [we] intend to defend the No. 1 position," Oracle CEO Larry Ellison said in a conference call Tuesday.

    An SAP spokesman declined to comment on Oracle's bid until SAP has had a chance to review the Oracle offer.

    On Monday and Tuesday, Oracle purchased 5.5 million shares of Retek common stock, representing about 10% of its total shares outstanding, according to Oracle. Oracle spokesmen said Tuesday that the company planned to follow up that move Wednesday with a tender offer to purchase all outstanding shares at $9 a share.

    Oracle delivered a letter to the Retek board of directors Tuesday that said Oracle could finance the purchase from its existing cash balances, and its offer "is not subject to any financing conditions."

    In the letter, Ellison claimed Oracle was matching the terms and conditions of the SAP offer "but at a higher price." During the conference call, he said Oracle began considering making a bid for Retek in September.

Can SAP afford to let Retek go? And the bigger question, can Oracle? While this won't be another PeopleSoft fight to the finish, I wouldn't be surprised if it's at least a bloody-enough battle for all three companies... regardless, the real winners in this horse race are likely to be Retek's shareholders.

- Arik

Posted by Arik Johnson at 04:36 PM | Comments (0)

February 22, 2005

California Wants to Do Your Taxes: An Idea Intuit and H&R Block Just Hate

California Ready Return

The LA Times discusses the proposal that has more than a few business interests a little worried - especially those in the tax preparation business:

    California's tax agency is moving forward with a revolutionary — some say disturbing — concept: having the government do your taxes for you.

    Instead of getting blank forms in the mail this month, a small group of taxpayers selected for a pilot program will receive a tax return that's already filled out. All they'll need to do is sign it, enclose a check if they owe anything, and send it back to the state.

    The Ready Return project puts the state in uncharted territory — and in the middle of the national debate over how to improve the way taxes are collected.

    Experts are watching with great interest to see whether California is able to implement a system that is in effect in dozens of other countries but nowhere in the United States. It could ultimately be offered to more than 3 million Californians with uncomplicated returns.

    "I think it is the most important tax move the state has ever made," said Joseph Bankman, a professor of tax law at Stanford University who is helping the state run the program. "It would make filing a tax return like paying a Visa bill."

    Ready Return has sparked an outcry among conservatives and business groups across the country. Opponents call it Big Brother at its worst. They say they want a simpler tax system but don't want the government doing their taxes for them. They worry that if the program takes off here, it could spread nationwide.

    Companies in the tax preparation business, such as TurboTax maker Intuit, H&R Block and FileYourTaxes.Com, say the state is overreaching. They have launched an aggressive lobbying campaign to stop the project. Letters denouncing the program as a cynical attempt to inflate people's tax bills are rolling in from as far away as Washington, D.C.

    And nearly half the members of the state Assembly have signed a letter to the Franchise Tax Board, California's version of the IRS, saying the initiative — which was launched without lawmakers' consent — is "a dangerous precedent, leading us down a very slippery slope."

    The legislators say they have concerns about privacy, taxpayer confusion and the potential for abuse.

    "The proposal could have long-term negative effects on California businesses and families, yet is being rushed through with little debate," national anti-tax advocate Grover Norquist said in a letter to Gov. Arnold Schwarzenegger. The activist said the initiative "takes away one of the key taxpayer rights — the right to make financial decisions to reduce one's tax burden."

    The program is a pet project of Controller Steve Westly, who heads the Franchise Tax Board. A former EBay executive, he has made it his mission to use technology to render the state tax system easier for Californians to navigate.

    With Ready Return, he is picking up on an idea that has long been promoted by tax experts at the federal level but never got off the ground at the Internal Revenue Service, which lacks the technology for it. Currently, the IRS will calculate taxes owed for people whose returns are uncomplicated, but only after they complete most of the tax form.

    "We are trying to reform the way we do business," Westly said. "California is the center for technology in the world. It is only natural we lead in this area."

    Congress passed a bill in 1998 calling for taxpayers without complicated deductions to be able to avoid filing returns by 2007. After that time, the government would automatically send those people refunds or tax bills. Supporters of the idea note that many countries, including Britain, Germany and Japan, already have such systems in place.

    But the initiative stalled in Washington. Experts say it is unlikely that the IRS will put the plan in place within two years — if ever. That leaves California far out in front.

    Ready Return is aimed at 50,000 residents with simple returns: single, one job, no dependents, and no tax credits or itemized deductions such as the interest on a home mortgage. Their tax calculation is based on what was withheld by their employer. The reasoning is: The state already has that information; why not fill in the blanks?

    Taxpayers who receive the filled-in return are free to toss it in the trash and go ahead doing their taxes the old way. But proponents doubt that many recipients, presented with such a simple procedure, will instead choose to grapple with complicated schedules and tables, and the need to add lines 23 through 34A and subtract line 35 from line 22.

    "This is a way to simplify taxes," said William Gale, a policy analyst at the Brookings Institution who has long advocated a return-free federal tax system for those with the simplest tax situations. "I would think people would welcome this."

    Several businesses, anti-tax activists and lawmakers do not.

    "People who are sent these bills may be put at an unfair advantage," Intuit spokeswoman Julie Miller said. "They may be intimidated and be unlikely to challenge what the government says they owe."

Frankly, it sounds like a good case for having software to check that out... which is already part of the value-prop for tax-prep applications. However, I suspect most of the firms in this business are a little more than worried that, if the government suddenly takes all the headache out of doing taxes, there'll be very little need to apply technology - or an accountant - to the matter on your own.

- Arik

Posted by Arik Johnson at 02:19 PM | Comments (0)

January 12, 2005

Search Competitors Gaining on Google

Google Search Competitors GainingWhile Google still reigns supreme, its competitors are on the rebound:

    Google’s competitors are showing signs of becoming, well, competitive. Yahoo, MSN, and Ask Jeeves search engines are satisfying more customers, according to a study released by market researcher Keynote Systems, and a growing minority say they plan to make one of those their first stop. This means the race could finally be on in a market where “Google” is synonymous with “search.”

    Google is proof that helping users tackle something as simple as finding information online can unlock much bigger opportunities. Yahoo unveiled its own search technology last February, and Microsoft joined the fray last month. Keynote’s study shows MSN pleased users by separating its paid sponsored results from its search results, bringing it in line with Google and Yahoo. That separation has led to fewer advertisement clicks, but more satisfied users that say they will return, said Bonny Brown, director of research and public services at Keynote, based in San Mateo, California.

    Some other advances could have influenced the results: Yahoo followed Google and MSN into desktop search earlier this week, and both Yahoo and Ask Jeeves launched local search services, as well as short cuts or smart searches to try to give users more relevant results. My Yahoo and MyJeeves have made searches more personal. MSN also launched MSN Search Beta in November, but it was not used in the Keynote study, which involved 2,000 people selected at random. Four-hundred spent 45 minutes to an hour performing a series of tasks on one site.

    Google clearly has a long head start. But the others have been making gains. According to the studies, fewer Google testers—84 percent compared with 86 percent during the first study in May—said they were likely to make Google their primary search. Sixty-one percent of those who used Yahoo said they were likely to make it their primary search, compared with 50 percent in May. MSN went from 30 percent to 38 percent in that category, and Ask Jeeves grew from 29 percent to 38 percent.

But, Google's rivals have a long way to go to catch back up. While actual search results were pretty close, the perceived quality of results leaned toward Google, so that even though they're working on a similar feature set, searchers prefer Google for the customer experience, and that's more about branding than technology. Daniel Read, product management VP at Ask Jeeves said, “We think the technology gap has more or less closed now amongst the four key players. Now the brand gap is what needs to close and you can see that is happening now.” After Google in the overall rankings were Yahoo in second, MSN in third, Ask Jeeves fourth and Lycos fifth. Local search appears to be an opportunity for Yahoo:

    For all three top Google competitors, the future is looking brighter. That's because they all made strides against Google in key indicators of future usage, Keynote found.

    When it comes to the likelihood of users to return to a search site, the likelihood for Yahoo increased 9 percentage points since May to 81 percent. The same measure increased 6 percentage points to 61 percent for MSN and rose 12 percentage points to 63 percent for Ask Jeeves, Keynote reported.

    A similar pattern was seen in consumers' likelihood to make the sites their primary search engines. Google still led, with 84 percent of consumers likely to make it their primary site. But Yahoo jumped 11 percentage points to 61 percent in that category, while MSN increased 8 percentage points to 38 percent. Ask Jeeves also reached 38 percent, a 9 percentage point jump from May.

    The shifting search numbers point to the tenuous nature of loyalty in the search market. Keynote estimates that half of consumers will turn to another search engine if their expectations are not met.

    In the hotly contested local search segment, Yahoo showed strength. All of the major engines, except Microsoft Corp.'s MSN division, have launched sites in the past year for finding business listings and other geographic-specific information.

    Yahoo gained enough traction in local search to tie with Google in that category of the study, according to Keynote. That gain came even as 22 percent of users complained that search engines in general are not returning relevant or well-ranked local information.

    A shift in the way it deals with paid listings seemed to have paid off for MSN. In July, it reduced the number of sponsored listings appearing atop Web search results and altered design elements to better distinguish paid listings.

As always, competition is a good thing - let's hope the trend continues and a balance of power in the search arena might be sustainable.

- Arik

Posted by Arik Johnson at 09:33 PM | Comments (0) | TrackBack

January 07, 2005

Taser vs. Stinger: Troubled Stun-Gun Maker Defends Against Competitor Amid Insider Selling Rumors

Taser versus Stinger Stun Guns
Days before Christmas, Taser International filed a lawsuit against fellow stun gun maker Stinger Systems, alleging that the company engaged in false advertising and unlawful patent marketing. Taser, whose 50,000-volt stun guns are used by more than 6,000 police departments and prisons worldwide, also disputed Stinger claims that its product is more effective than the Taser gun, saying that the Stinger product has not even reached prototype stage and called it a "fictitious" device in a press release. I have to say, the Stinger is certainly cooler-looking and, since they just had a demonstration of the product, calls into question, Taser’s competitive intelligence.

Then again, Taser has had a rough time of things recently. Amnesty International estimated in a November 30 report that Tasers contributed to the deaths of more than 70 people. Some medical experts say Taser shocks might trigger heart failure in cases where people are agitated, under the influence of drugs or have health problems. Taser says its guns are not lethal.

Taser said Stinger makes claims about being certified by the Bureau of Alcohol, Tobacco and Firearms, as well as claims that its device was the first ATF-certified weapon. Taser said the ATF does not certify less-lethal weapons, it regulates them, and also said it now owns a product that has been regulated by the ATF since the 1970's. Stinger's Robert Gruder, said his company believes Taser's claims serve to give Stinger more legitimacy in the marketplace. "We think these allegations are not only fictitious, but ridiculous," Gruder said. Taser also alleges that Stinger made false claims about being listed on a Nasdaq market, about its patent, its corporate history, as well as other aspects of its products' performance.

My favorite barb was, Gruder’s line "If he thinks we have a fictitious gun, I'd be happy to challenge him to a duel with our fictitious gun at 30 feet," referring to the superior range of his product versus the Taser product. "This just proves that Taser's management considers Stinger Systems a competitive threat. I would be happy to publicly demonstrate our weapon against the Taser at any time. We stand by our claims. Taser is just trying to impede competition." Here’s more from Stinger’s hometown media:

    Stun-gun producer Stinger Systems Inc. is countering legal claims by Taser International Inc., which has accused the Charlotte company of making misleading statements about Stinger products.

    "We intend to aggressively and vigorously defend our weapon and our company in the media, the trade press and in the courts from Taser's allegations, which are clearly aimed at silencing and stifling a competitive marketplace," says Robert Gruder, Stinger chief executive.

    Toward that end, video footage of the company's flagship product, the Stinger, was broadcast Tuesday night in a news report by WSOC-TV, the ABC affiliate in Charlotte.

    That report "unequivocally proves both the existence and operation of our weapon, contrary to allegations issued by Taser's management," Gruder says.

    Taser recently filed a lawsuit against Stinger in U.S. District Court, contending the local company is using false advertising and unlawful patent marking in violation of federal statutes.

    Among its allegations, Scottsdale, Ariz.-based Taser says Stinger is falsely claiming its products are certified by the Bureau of Alcohol, Tobacco and Firearms and its facilities are ISO 9001 certified.

    Both companies make stun guns and other nonlethal weapon systems for use by law-enforcement agencies and other customers.

    Stinger's ads use false information to claim its products are better - and less expensive - than Taser's, the complaint contends.

    In a press release, Gruder maintains Stinger's products are viable and says Taser's claims are off target.

    "We look forward to providing the law-enforcement community a choice in projectile stun technology and believe, in the end, the better product will win," he says. "I believe that product will be the Stinger."

And, Stinger has certainly been going full-frontal in their assault on the market leader. Their Taser Trade-In program and other differentia make a compelling competitor into a real threat to Taser’s long-term business prospects. Stinger's single cartridge weapon is almost half the price of Taser's X26 and yet it shoots farther and is supposedly more accurate – according to the trade-in program, any organization using either the M or X series from Taser, will get a discount on the Stinger single cartridge gun of $100 and two cartridge model $150 if they make the switch to Stinger.

That is, if Taser survives that long - a story out on Friday mentions the SEC will begin looking into insider trading at the company, as the stock tumbled toward the end of an otherwise bubble-like year in 2004. My theory is, the execs bailed out, when Stinger competition looked like it'd hurt the stock and sold shares on privileged information to try and lock in some of their gains before the company tanked.

Shocking... I'm stunned. (Sorry, I just couldn't resist.)

- Arik

Posted by Arik Johnson at 10:47 PM | Comments (0) | TrackBack

January 04, 2005

Newspapers Struggle to Compete with Craigslist

Competing with Craigslist
When EBay bought 25 percent of Craigslist in mid-2004, founded years earlier by social activist, Craig Newmark, it represented the creation of a more well-funded threat by a largely free, nimble competitor to traditional classified media in the newspaper business. Now, a new report says Craigslist is costing Bay Area newspapers between $50 million and $65 million in classified revenue a year:
    Online classifieds site Craigslist costs the Bay Area's traditional newspapers, and their online divisions, between $50 and $65 million annually in revenues from employment ads alone, according to a report by Bob Cauthorn, former digital media VP at SFGate.com, the site for the San Francisco Chronicle.

    Cauthorn put together the report, part of a package called "Competing with Craig," for research group Classified Intelligence. While Cauthorn didn't reveal the details of his methodology, he said he estimates the average recruitment ad in a metro daily would be worth $700. Craigslist charges $75.

    "Craig is pulling out of this market alone somewhere north of $7 million to $8 million dollars, and probably closer to $10," said Cauthorn. "That's for recruitment alone."

    In the report, Cauthorn says Bay Area newspaper executives can only blame themselves for losing their leadership position, "because they took no action and listened instead to the arguments inspired by fear, lack of vision, and short-sighted greed."

    According to the study, Craigslist had 12,200 active job listings on its San Francisco site the week of November 21, 2004. In contrast, the San Francisco Chronicle had 1,500; the Oakland Tribune had 734; the San Jose Mercury News had an estimated 1,700; and the Contra Costa Times had around 1,000.

    Cauthorn suggests that to compete with Craigslist, newspapers should begin offering free online classifieds, and promote the offer in their print publications. They should also offer easy, self-service tools to let users post ads online, and include anonymous Craigslist-style e-mail aliases.

    One advantage newspapers have, the study says, is businesses find it easier to work with them than with Craigslist. Cauthorn also points to Craigslist's customer support structure as an area of weakness.

    "It's not a fatal flaw, and Craigslist will certainly work it out," Cauthorn writes. "But this problem, and Craigslist's weakness in dealing with institutional customers, provide enough of a gap for other smart publishers to flood the gap while Craigslist sorts itself out."

    In another section of the package, 23-year-old Craigslist user Avi Zollman also offers suggestions for traditional newspapers' online divisions: provide RSS feeds of listings, post ads immediately, and let users have all the space they need, including for photos.

    "Obviously they have to reach a younger audience, whether it's going to be in the newspaper or in RSS feeds sent to wireless devices with new forms of classified ads," said Peter Zollman, founding principal of Classified Intelligence and father of Craigslist user Avi. "The short answer is that it's going to have to be all of those if they want to stay in the business."

So, the message to the newspapers is, adapt or die. Craig Newmark is bringing his list to your town and he's gonna steal your lunch money.

- Arik

Posted by Arik Johnson at 01:38 PM | Comments (0) | TrackBack

December 17, 2004

The Apprentice 2: Kelly Perdew Next in Line for Career Groveling at Feet of Billionaire Trump

The Apprentice 2: Kelly Perdew & Donald TrumpReal estate mogul Donald Trump hired another "apprentice" on Thursday, offering West Point graduate and software executive Kelly Perdew a six-figure salary job in the culmination of the fall season reality show "The Apprentice." Perdew chose to supervise the sprawling Trump Place development on Manhattan's West Side, saying he wanted to be near the mogul's base of operations.

Jennifer Massey, the Harvard Law School graduate and San Francisco attorney often incurred the wrath of her fellow "job applicants" during the NBC series' four-month run, was diplomatic after her loss, saying that "Kelly seems to be the best fit for the Trump organization." But she added that she thought she was the best candidate and deserved to win. Watching the series unfold on television, however, she said that it seemed to "be moving toward a Kelly coronation," and said many of her contributions had been edited out.

While he polled some of his top executives and past contestants on the show, most of whom favored Perdew, Trump said afterward that did not affect his decision, which he said he made only in the final moments. "I really go with my gut," he told reporters. "But I couldn't' have lost with either one. It was a very tough choice."

Frankly, I thought Massey survived more wrath than she deserved to - but, in this second Apprentice outing, the bloom is certainly off the rose a bit from the first season, which I thought was entertaining and original.

Apprentice 2 just seemed a little too forced to be as much fun as the first one.

- Arik

Posted by Arik Johnson at 01:04 PM | Comments (0) | TrackBack

September 21, 2004

Oracle vs. PeopleSoft: The Final Round

Oracle vs. Peoplesoft
I was waiting until tonight to weigh-in an updated opinion on the Oracle/PeopleSoft fight, after Craig Conway's rebuttal today of Oracle's win in the Justice Department case challenging the merger as anti-competitive.

Despite potential European regulatory challenges and the poison pill of a customer loyalty program ($2 billion in rebates worth a $5 a share premium over the current $21 asking price in a valuation on the company) that Oracle is challenging in a few days in Delaware, significant obstacles remain to Oracle's success. However, I believe that, not only will PeopleSoft fail in its defense, I think the time has come to acquiesce and make the most of of a rotten situation... oh, and, Conway has got to go, and soon.

The timing of the Justice Department ruling could not have been worse for PeopleSoft - nearing the end of its fiscal third quarter when a lot of deals get signed - getting any kind of traction in a market that thinks your company has no future will be tricky. Still there was a bright spot in August when PeopleSoft announced a $50 million contract, its largest ever, with Mexico's Tax Administration Service to modernize Mexico's tax system. The two-year contract - which PeopleSoft won after beating Oracle - aims to cut tax evasion and improve tax collection in Mexico.

But Oracle now cannot let this thing die - they need to win it... Oracle last week reported first-quarter earnings that, while exceeding estimates, were dragged down by disappointing applications sales, highlighting the strategic importance of its acquisition.

Their shared competitors are cetainly enjoying all of the uncertainty in the marketplace, and, if the sweetener added to the executive comp mix is any indication, it would appear PeopleSoft's management would agree with me that their chances of success are dim. However, Oracle said speculation that increases in executive pay at PeopleSoft would raise the purchase price of PeopleSoft were not at all true. "But this necessarily lowers the value of PeopleSoft and is just the latest in a long string of measures that takes value away from PeopleSoft shareholders," Oracle vice president Jim Finn said in a statement. Oracle Chairman Jeff Henley spoke to a Banc of America securities conference in San Francisco today regarding PeopleSoft's poison pill, which effectively makes a takeover impossible, saying PeopleSoft's shareholders need to speak up if they believe management isn't working on their behalf. "At some point the shareholders may stand up and say enough is enough."

The company said these changes address concerns employees had regarding their "long-term employment prospects" and only apply if there's a change in control of the company and a worker is terminated involuntarily. An Oracle executive testified during this summer's antitrust trial that the company plans on getting rid of at least 6,000 PeopleSoft staff, or almost 80 percent of the company, if it succeeds in its takeover. Still it seems pretty sweet: PeopleSoft said all employees will get a minimum of 12 weeks of base salary and payments for up to 12 weeks of health coverage, instead of a minimum of two weeks of base salary for each year of service up to a maximum of three months base salary. Executive officers besides the chief executive (who got his parachute a while back) will get between 1.5 times and 2.0 times their annual base salaries and target bonus payments for up to 24 months of health coverage. The executive officers were to get 0.75 and 1.0 times their annual base and target bonus. PeopleSoft has also provided for the accelerated vesting of all employee stock options if a takeover occurs.

It is in this climate that PeopleSoft started the week at Connect 2004 - its customer cheerleading event where spirits were high with record turnout, making it the biggest in the industry. "More than 15,000 attendees from the Americas, Japan, and Asia Pacific will convene at the conference being held September 20-24 at The Moscone Center in San Francisco. Just one year after the acquisition of former J.D. Edwards, PeopleSoft President and CEO Craig Conway, PeopleSoft Executive Vice President of Products and Technology Ram Gupta, and PeopleSoft Chief Technology Officer Rick Bergquist will deliver keynotes highlighting significant merger milestones, product roadmaps, and technology strategy. Other featured speakers include Intel CEO Craig Barrett and television host and author Bill O'Reilly."

Still there's that elephant in the room: "This conference is taking place under an enormously dark cloud," said Joshua Greenbaum, a Berkeley consultant who has closely followed PeopleSoft and Oracle for years. "It's got to be one of the more uncomfortable moments we have seen in a while." And, JD Edwards customers are probably the ones with the most to worry about. "It's kind of awkward," said Terrance Hauser, who helps oversee PeopleSoft applications as an information technology manager for the University of Michigan. "I think the question on everyone's mind is what is going to happen next for PeopleSoft, and I'm not sure we are going to get a lot of answers."

"Have you ever had a bad dream that just didn't seem to end?" Conway asked the crowd. "We have, and it's been going on for 15 months." Despite the judge's ruling, Conway said, that "does not mean PeopleSoft will be acquired by Oracle," a vow that drew loud applause.

Conway, himself a former Oracle executive, also announced an alliance with IBM. PeopleSoft will bundle its software with IBM's WebSphere, and the two companies said they'll spend more than $1 billion over five years on shared development and sales. The deal marks PeopleSoft's biggest-ever partnership... Huh? Doesn't it also seems just a little less than realistic. And, what's IBM think will happen in all of this?

Conway in his speech also noted the birthday of company founder and Chairman David Duffield, who was seated in the front row of the audience. Drawing a sharp contrast to Larry Ellison, Conway cited Duffield's reputation as an honest, humble leader. That legacy, Conway said, helped carry PeopleSoft through its ongoing battle with Oracle.

"We had a year that tested our resolve, stretched our resources and challenged our values," Conway said. "But we didn't blink, and we're not going to blink."

Showing their support, some employees stretched a large banner across the convention center's ceiling. It read "see you next year in Las Vegas," which is the site of PeopleSoft's 2005 users' conference. Customers, though, are cautious. "We're taking a wait-and-see approach," said Norm Wold of tech services company Oracular, an 18-month PeopleSoft customer. "We expect a long process of appeals and other events, but there is a definite amount of uncertainty."

And, a start date for PeopleSoft's billion dollar damages lawsuit against Oracle in a California state court has been pushed back to January 10 from November 1, after Oracle requested additional time to prepare, a move that might delay access to a potentially important defensive weapon for PeopleSoft’s fight. "Clearly, we want to get on with the case as soon as possible, but we're pleased that the judge moved it only to January and not any later," PeopleSoft PR chief Swasey said. PeopleSoft sued Oracle alleging unfair business practices as it pressed ahead with its bid. The case will be tried in front of a jury and PeopleSoft claims damages exceeding $1 billion and is requesting the takeover bid be halted.

Oracle said it needed more time because PeopleSoft didn't produce for the court a list of transactions central to the case until earlier this month and that wasn't enough time to conduct proper discovery. "The court recognized that this late disclosure was meaningful to the case and that it would deny Oracle its due process," said Oracle spokeswoman Deborah Lilienthal.

The question is, is there any real victory for Ellison's hopes of a tactical advantage over an otherwise threatening rival? Having scuttled the benefits of the JDE deal and hurting it with customers by injecting FUD (fear, uncertainty and doubt) into any software investments they might consider with PeopleSoft, Oracle’s bid had the unintended effect of strengthening otherwise less likely rivals, particularly a delighted SAP, especially in fast growing markets like China:

    Germany's software maker SAP AG said on Monday PeopleSoft and Oracle had disappeared as major rivals in the Chinese market due to their messy takeover battle and that SAP was growing at least twice as fast as the market.

    "Oracle has disintegrated. They have no people on the ground," SAP's head of greater China, Klaus Zimmer, said at the Reuters Asia Technology Summit in Shanghai. At the same time, Oracle's hostile bid "destroyed PeopleSoft's business in China".

    The Chinese market is rapidly emerging as the most important market in the Asia Pacific region for SAP, the world's biggest producer of enterprise planning software. SAP's Chinese business overtook India and Korea last year, is on a par with Australia and aiming to exceed its Japan business, Zimmer said.

    The growth is fuelled by local Chinese companies, many of them state-owned, which need business planning software to evolve from centrally planned behemoths to market-driven enterprises.

    "State-owned companies need to become cost-efficient modern enterprises," he said. After two years of roughly doubling sales in China, SAP expected in excess of 60 percent growth this year.

    "This year we will more than double the (expected) market growth of 32 percent," Zimmer said.

    In that fertile market, its two main international competitors were fading to the background, Zimmer said.

    "PeopleSoft were trying to come up last year. They gave us a hard time at banking, trying to penetrate through human resources (software). But the shadow of Oracle behind it scared the banks away. Banks are very conservative."

    PeopleSoft is trying to fight off a hostile takeover by Oracle. A U.S. judge ruled earlier this month that Oracle could pursue its takeover attempts.

    "Perhaps I should send Larry Ellison a thank-you note. PeopleSoft is now out of the picture. It's non-existent."

    SAP's market share in China, as measured in May 2003 by market research firm IDC, was 28.7 percent. Oracle then measured nearly 10 percent, but has experienced setbacks in the region since, Zimmer said.

    In head-to-head contract battles against Oracle, SAP was winning 95 percent of the time, he said.

    Zimmer said his counterpart at Oracle had left, the third time he had witnessed a switch at his rival during his eight year tenure in China.

    "When the head leaves, his allies in the company leave."

    Oracle's Asia Pacific technology officer, Kevin Walsh, said at the summit that China was one of the fastest growing areas for the company, but declined to give details.

    Zimmer said he was winning back business from Oracle, such as from electronics manufacturer TCL Corp.

    "The struggle was four years ago. Oracle started (with planning software in China) five years ago. In database (software) they have 80 to 90 percent of the market, so they had a very strong name. It was tough to fight against them."

    "The market wasn't educated by then. The story was that SAP's system were rigid and painful and Oracle said it didn't have to be. And they were very cheap. In one of the deals we won back recently, Oracle's price was substantially lower than ours."

    Local Chinese software makers posed no serious threat for SAP when bidding for big customers, he said. In fact, many of the major utilities, banks and industry companies owned by governments were ditching local software, despite efforts by the central government to use home-grown solutions.

    "At all the state-owned companies we displaced local players. I see less obedience to this (government) request."

As for what Conway should do next, I agree with the BusinessWeek recommendation:

    It's time for Conway to give up the fight. True, doing so will mark an ignominious defeat for a talented leader who helped turn PeopleSoft around in the late '90s. A takeover also will mean painful layoffs. But if Conway soldiers on, his company's prospects -- already made worse by the protracted fight -- will turn dire. Ellison, who badly needs PeopleSoft to shore up his sagging applications business, isn't going away. Says Addison L. "Tad" Piper, vice-chairman at investment firm Piper Jaffray: "Stretching this out hasn't helped anyone."

    When Ellison first made his bid in June, 2003, it made sense for Conway to test his resolve. Over the years, PeopleSoft had built an enviable relationship with its corporate customers. What's more, the company had a reputation for being more innovative than Oracle in applications. Conway argued, not without merit, that being taken over by Oracle, led by the famously abrasive Ellison, would undermine both of those strengths.

    But that was then. PeopleSoft's business, troubled for two years, is crumbling. For a while customers kept the faith, but in recent months growing concerns about the takeover fight have eroded their confidence. What's more, corporate spending has not revived as strongly as projected. The combination means companies that are buying software these days are consolidating around fewer suppliers -- and PeopleSoft isn't on the short list. While PeopleSoft has been forced to discount heavily to keep many customers, German giant SAP has emerged the big winner, with a 23% gain in U.S. software sales for the second quarter. PeopleSoft's second-quarter net income fell 69% from a year earlier, to $10.98 million, while sales of $647 million fell well short of analysts' expectations.

    Still, Ellison badly needs PeopleSoft. Thanks to Oracle's strong database unit, fiscal first-quarter earnings jumped 16%, to $509 million, on sales of $2.22 billion.

    But its application sales plunged 36%. Eager to get his hands on PeopleSoft's customers, Ellison has guaranteed to support its software for up to 10 years to ease their fears. That's better than PeopleSoft's existing maintenance contracts.

    Oracle's bid has plenty of upside for investors, too. The cash offer of $21 a share values PeopleSoft at $7.7 billion, plenty for a company with just $2.3 billion in yearly sales. The bid is also about 26 times PeopleSoft's earnings; big software deals usually don't go for more than 20 times earnings. PeopleSoft is now trading at about $19, but only because a takeover appears probable. It is unlikely to get near $21 on its own. Conway would do better negotiating the best price he can before its fortunes decline even further.

    Why won't Conway give up? He's eager to protect his legacy. PeopleSoft's employee-empowerment plans and dedication to customer needs are widely admired. Analysts figure over half of the company's 12,000 employees will lose their jobs. And he still argues that PeopleSoft will make better software alone.

    But consider one alternative scenario: Oracle launches a proxy fight and takes control of the board after another year of decline. Everyone at PeopleSoft would lose -- shareholders, execs, and employees. That's not a fitting legacy for a leader who, up to this point, has always done right by his company.

Others in attendance at the IBM press conference think Conway’s showing signs of stress:

    While Conway and other PeopleSoft execs have been directed not to say much about the Oracle takeover bid because of ongoing legal proceedings, sometimes saying less is more. In the case of Conway, his few words on the topic spoke volumes. He referred to Oracle’s unwanted overtures as a “bad dream that wouldn’t end” and made numerous subtle references to the situation being a distraction for the company. He said the past year had challenged PeopleSoft’s resolve. And he insisted that the company was not interested in being acquired, and that it was not seeking a “White Knight.”

    Then, during a subsequent press conference at which PeopleSoft and IBM execs provided details of a huge alliance between the companies, Conway called the agreement “perhaps the most ambitious announcement in the history of enterprise applications.” In quickly surveying the gathered journalists and analysts immediately after that remark, I spotted eyebrows raising and heads shaking at the unexpected and largely preposterous claim. Wall Street analyst Charlie Di Bona found it to be a head-scratcher, saying that PeopleSoft’s newfound focus on service-oriented architectures placed it well behind its competition.

    So what did I take from all of this? That Conway may be a CEO in denial, not only about his company’s future, but also about the impact the Oracle advances are having on its present. I'm not the first to suggest this--numerous analysts have suggested as much to me and other journalists. Unquestionably, the situation is taking its toll on Conway, who may ultimately find that shareholders can only stand firm for so long—eventually, if the deal clears all its regulatory and legal hurdles, Oracle’s offer may become too sweet to pass on.

So what’s the deal with IBM? Conway mulled the idea of trying to sell out to IBM last summer as a way to thwart Oracle's bid, according to evidence that emerged during a June trial on the antitrust challenge. According to internal company documents, IBM was also worried about Oracle's bid that it would lose millions of dollars in sales if Oracle gained more market power in a PeopleSoft takeover. But, the deal announced Tuesday doesn't necessarily mean IBM is taking sides in the takeover battle, said Steve Mills, who heads up the company's software group. "What you see is what you get," Mills said Tuesday. "We are not making any declarations about events outside our control."

But analyst Di Bona also predicted the IBM partnership won't sway PeopleSoft shareholders who are weighing the merits of Oracle's $21-per-share bid. "If PeopleSoft wanted to do shareholders a favor, they would take the $21," said Di Bona, who believe PeopleSoft's shares would be trading around $15.50, if not for the takeover offer. For the propeller-heads in the audience, the details are pretty interesting, even if they do confirm PeopleSoft's relative competitive weakness in middleware technology:

    Conway and IBM Senior Vice President Steve Mills refused to comment on whether the alliance was a stepping stone toward IBM possibly buying PeopleSoft. Some analysts have speculated that such a "white knight" offer for PeopleSoft could not be ruled out despite Oracle's takeover effort.

    Mills later told reporters the alliance would result in a boost in head count that could reach the "multi-100s" over time, though he did not elaborate.

    Conway said the IBM alliance was aimed at giving customers Web-enabled access to PeopleSoft's software applications - allowing them to make changes in their business processes more quickly - through the use of IBM "middleware" products, which allow different programs to work together.

    PeopleSoft will bundle IBM's WebSphere middleware products with its applications free of charge, and the two companies will invest $1 billion during the next five years to jointly develop industry-specific software that will capitalize on IBM's WebSphere products. The two also will jointly establish what they say is the first business-process-interoperability lab to test and certify application interoperability.

    The expanded relationship with IBM is key to a strategy Conway outlined in his keynote address: Over the next 12 months, PeopleSoft will deliver more adaptable applications to let customers use Web services to build service-oriented architectures. Both IBM and PeopleSoft are committed to helping customers better link applications to create smoother business processes, executives from the companies said at a press conference detailing the alliance. "There's not a company anywhere in the world that isn't talking about horizontal integration," said Steve Mills, senior VP of IBM Software Group.

    IBM is deploying teams to PeopleSoft's Pleasanton, Calif., headquarters and will make additional resources available as needed. "This is a very important strategic investment from IBM's perspective, and we're going to back that up," Mills said.

    But Charles Di Bona, an analyst with Sanford C. Bernstein & Sons, wasn't impressed with the announcement or PeopleSoft's message about Web services and service-oriented architectures. "I don't think it makes that big a difference," he says. "It's kind of embarrassing that they're just talking about this now. They're so far behind." The alliance is similar to relationships IBM has with many other vendors, and PeopleSoft had to establish a middleware partner if it's not going to market its own infrastructure products, Di Bona says. (PeopleSoft sells an application server, though it trails offerings from IBM, BEA Systems, and others by a large margin.) The primary impact will be on BEA, which was thought to be PeopleSoft's primary middleware partner, he says.

    Conway also highlighted PeopleSoft's accomplishments over the past year, most notably the rollout of the company's Total Ownership Experience, a program designed to lower the time and costs related to product rollouts and upgrades. The marriage of J.D. Edwards' manufacturing applications - inherited when PeopleSoft bought the smaller competitor in July 2003 - with PeopleSoft's product roster has created the world's most integrated manufacturing system, he said. In the past 12 months, 140 enhancements and 110 regulatory updates were added to PeopleSoft World, and 300 enhancements were added to PeopleSoft EnterpriseOne, including support for radio-frequency identification technology, Conway said. Some 250 additional enhancements are planned for EnterpriseOne by the end of the year.

Sure, IBM doesn't want to see its biggest database competitor - Oracle - strengthened in a growth business while IBM suffers the pain of losing an independent PeopleSoft as a sales channel. But, IBM's made a strategic decision to stay out of enterprise applications so it doesn't alienate other players with more revenue potential like SAP or Siebel by becoming a direct competitor with its former partners - which is exactly what will prevent IBM from ever actually buying PeopleSoft.

In short, if IBM wanted PeopleSoft it would've bought them by now; rather the company made a statement in the $1 billion partnership - that this is it, and nothing more. Still, convenient timing has given PeopleSoft a modest bounce at its user convention - perhaps getting a few of the customers who were holding off on signing deals to move ahead with back-burnered plans... however, a lot like political conventions I think, any bounce in the polls should settle back to earth in short order... and this might just be one of the last cards PeopleSoft has left up its sleeve.

The silver lining to this story - and something Oracle is sure to point out to the Justice Department and European regulators moving forward - is how competitive vendors are getting in the enterprise applications business. In addition to SAP's success, smaller ERP vendors - from Microsoft to Ross - are benefiting from all the FUD.

Another Oracle/PeopleSoft competitor, Lawson Software, is trying to make sure the company's customers don't forget about the Oracle threat. St. Paul, Minnesota-based Lawson has launched an advertising blitz in San Francisco this week, with a billboard and ads on dozens of taxis: "There's nothing hostile about letting Lawson take over."

- Arik

Posted by Arik Johnson at 06:56 PM | Comments (0) | TrackBack

September 17, 2004

Sony Beats Time Warner to Take Home MGM

MGM & SonyThe consortium led by Sony has reached a tentative agreement to buy Metro-Goldwyn-Mayer for about $4.8 billion in cash, snatching it from Time Warner’s clutches at the last moment. The past couple of years, MGM has been hunting for ways to get bigger having made an $11.5 billion all-cash bid for Vivendi Universal Entertainment last year, losing to NBC.

Time Warner had been seen as the front-runner to acquire MGM but Sony raised its offer, setting off a bidding war that Time Warner decided it didn’t want to participate in. "As we pledged to our shareholders, we approach every potential acquisition with strict financial discipline," said Time Warner chairman and CEO Dick Parsons. "Unfortunately, Time Warner could not reach agreement with MGM at a price that would have represented a prudent use of our growing financial capacity."

Sony is expected to shutter MGM's current production, with the likely exception of the "James Bond" franchises. Among MGM's upcoming films are a "Pink Panther" remake with Steve Martin, "Code 46" with Tim Robbins and "The Beauty Shop" with Queen Latifah. MGM has a considerable library of thousands of titles, including the "Rocky" franchise. Analysts have estimated MGM's library will generate $440 million in cash flow in 2004 by exploiting only 1,500, or about 36 percent, of its titles on the newer DVD format. Sony announced a future partnership with cable provider Comcast to establish a video-on-demand content channel with Sony Pictures content along with MGM content and Comcast is may become a minority equity investor in the acquisition. The deals, should they occur, would constitute a major consolidation of content production and distribution. Here's some detail:

    The deal, which ends an auction that was filled with behind-the-scenes machinations for months, included one last surprise twist: Comcast, the cable giant, joined Sony's consortium as a strategic partner and a possible investor.

    The Sony-led group, which includes the buyout firms Providence Equity Partners, Texas Pacific Group and DLJ Merchant Banking Partners, struck the deal with MGM on Monday, just 24 hours before the studio had scheduled a board meeting to approve a deal with Time Warner.

    If the transaction is completed, it would be the third time that Kirk Kerkorian, MGM's controlling shareholder, would have sold the company since he first acquired shares in it in 1969.

    The deal caps a come-from-behind story for Sony, which originally bid for MGM in April but was unable to complete the deal after becoming bogged down in negotiations with its backers, opening the field to a rival offer from Time Warner.

    With the last-minute addition of Comcast to the Sony-led consortium -- a pact that was negotiated over Labor Day weekend in Martha's Vineyard, where executives from Sony and the other investors converged on the summer house of Brian Roberts, Comcast's chairman -- the group decided to raise its bid to $12 per share from $11.23 and to sweeten its offer by offering a nonrefundable $150 million deposit. Time Warner had offered $11 per share and had guaranteed the deal's completion.

    The Sony-led group could justify the higher bid because part of its deal with Comcast calls for the creation of several new premium cable channels that will broadcast both Sony and MGM movies, adding revenue for the company.

    For Comcast, its participation came with some reluctance. Having lost its hostile bid for the Walt Disney Co. and been derided by investors for even making the offer, Roberts was wary about being part of another potentially unsuccessful bid for a content provider, executives close to the negotiations said. Indeed, he was so insistent about not being on the losing team that he signed onto the deal only as a programming and distribution partner. He indicated to the group that Comcast would become an investor only after the deal is completed. To keep Comcast's role in the deal secret, MGM and even bankers for the Sony-led group were kept in the dark until the very last moment.

    Time Warner pulled its offer off the table and decided against a higher bid when it learned early Monday that the Sony-led group appeared to be the winner.

    "Although MGM is a valuable asset, we have decided to withdraw our bid," Richard Parsons, Time Warner's chairman and chief executive, said in a statement. "Unfortunately, Time Warner could not reach agreement with MGM at a price that would have represented a prudent use of our growing financial capacity."

    While MGM may be famous for making films like "The Wizard of Oz," under the plan being developed by the Sony-led group, most of the movie studio operation would be shut down. Sony would license and distribute MGM's most valuable asset, its library of more than 4,000 films. Only the studio's best- known film series, like James Bond, would continue to be produced under the MGM brand through Sony.

    In recent years, Alex Yemenidjian, MGM's chief executive, turned the company around by focusing on its library while shrinking its studio business. As a result of those moves, the company produces an enormous amount of free cash flow compared with its rivals. The company forecasts $150 million to $200 million in free cash flow for 2004.

    The arrangement with the consortium was originally conceived and structured by Sony, which already owns the Columbia and TriStar studios, so that it could gain access to MGM's library without having to pay the entire bill and take on additional debt, a requirement of its Japanese parent. MGM's library of films will not only give Sony additional revenue from next- generation DVDs, but also give it added weight in the looming fight over technology standards for those DVDs.

    Despite nearly five months of back and forth inside the Sony-led group, the bid was kept alive by Jonathan Nelson, the co-founder of Providence Equity, and Robert Wiesenthal, Sony's executive vice president and chief financial officer, according to participants.

    Under the terms still being negotiated, Providence has committed to invest the most money with $450 million. Sony and Texas Pacific Group -- based in Fort Worth with a regional office in San Francisco -- will each invest about $300 million, as will Comcast if the deal is completed. DLJ Merchant Banking Partners, a unit of Credit Suisse First Boston, will invest about $250 million. J.P. Morgan Chase will finance the deal with a $4 billion loan. Quadrangle Partners has been invited to become an investor, the executives said, but has yet to make a commitment.

- Arik

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September 10, 2004

Neiman Marcus vs. Saks Fifth Avenue

neiman_marcus_saks_fifth_avenue.gifIs a complacent Neiman Marcus about to be schooled by a newly aggressive competitor in Saks Fifth Avenue, as each firm competes for dominion of the $62 billion luxury market?

    Over the past decade, the Neiman Marcus Group has cornered the market on luxury goods, turning the business of selling expensive handbags, alligator pumps and Chanel suits into a fine art.

    Now, its closest rival, Saks Fifth Avenue, which for years had been sidelined by poor management, is trying to make a comeback, setting the stage for a Gucciesque battle that could rock the fashion world.

    The contest is poised to take on a uniquely personal twist, pitting two former colleagues — Burton Tansky, the CEO of Neiman Marcus, and Fred Wilson, who holds the corresponding position at Saks — against each other for command of the $62 billion luxury market.

    The two men once worked side-by-side, as buyers in the early 1970s for Rike's, a Dayton, Ohio, department store that is part of the Federated Department Store chain.

    The similarities end there.

    Tansky, who at 66 is considered an elder statesman of the industry, has earned his fashion stripes many times over, first as president of Saks, then as CEO of the Neiman-owned Bergdorf Goodman store, and, now, as chief executive of the group, which includes the namesake department stores, an online business and the Kate Spade and Laura Mercier brands.

    Known affectionately in the industry as a big teddy bear, Tansky has also drawn criticism from colleagues, who chastise him for a seeming complacency and old school ways, including a tendency to scold employees for spending too lavishly on lunch.

    To his credit, Tansky has taken Neiman ever more upscale, making it the place to shop for the very wealthy, even as other department stores courted the middle market in the 1990s.

    He is unapologetic about Neiman's exclusiveness, often remarking, "I like rich people."

    Wilson, by contrast, eight years Tansky's junior, is more like a bulldog, compact and coiled with energy. Employees said he willingly throws out old ideas, and spends amply to make a statement, including a planned $150 million renovation of the Fifth Avenue flagship to be designed by Frank Gehry.

    After toiling in relative obscurity for 19 years at DFS, the specialty retailing division of LVMH Moet Hennessy Louis Vuitton, Wilson only recently grabbed the attention of the fashion world when he was named CEO of Donna Karan International, another LVMH division, in 2002. He assumed his duties as CEO of Saks in January.

    "There's a competitive rivalry that goes back to the days of Rike's," said one executive who knows both men. "Here they are 35 years later going head-to-head. It could be a war zone out there."

    Tansky was unavailable to comment.

    Wilson would say only that he is too focused on his company to worry about the competition.

    Like good ambassadors, both Tansky and Wilson are scheduled to make selected appearances in the tents of Bryant Park for Fashion Week, helping to promote the image of their respective stores and confer with buyers.

    Saks has been criticized in the past for lacking a specific viewpoint, a problem Wilson and his team have begun to address, sources said.

    In a strategy that more closely mimics Neiman's approach, buyers now have the leeway to stock up on key looks, these people said. In the past, Saks buyers often acted more like accountants, using their spreadsheets rather than their instincts to make decisions.

    Some apparel manufacturers said they are noticing a difference.

    "I've seen a much more aggressive approach to the Saks Fifth Avenue buys," said Michelle Stein, senior vice president of sales and marketing for Aeffe USA, which sells clothes under the Moschino and Narciso Rodriguez names, among others.

    Buoyed by a resurgence in luxury goods, Saks reported a 17.2 percent increase in sales at stores open at least a year in the most recent quarter. Neiman reported a 10.2 percent jump for the comparable period.

    Still, observers like retail analyst Maggie Gilliam said the contest remains too close to call.

    One major disadvantage facing Saks, observers said, is a sales staff that has become increasingly less service oriented over the years.

    By contrast, sales people at Neiman are famed for their ability to woo customers, often calling them at home when new designer shipments arrive in stores.

    Neiman executives, for their part, seem unfazed by the changes at Saks.

    "Neiman executives think Saks is crazy, making big orders that they'll never sell," said one Neiman insider. "But they're making a mistake in not taking Saks seriously."

- Arik

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September 09, 2004

Small ISPs vs. the FCC & Big Cable: In Broadband Era Cable Network Access is Fundamental to Survival

Powell FCCSmall ISPs just can’t buy a break like big cable companies can. The FCC came out in favor of protecting monopoly access to cable networks from what are sure to be deflationary competitive pressure from small ISPs that cannot otherwise provide non-DSL based broadband access to customers.

    Small businesses looking for more broadband choices are unlikely to get help from the Bush administration, which is taking a hands-off approach to cable regulation.

    Despite a federal appeals court ruling overturning their decision, federal regulators are continuing to push their edict that cable companies, unlike telephone companies, do not have to give rival ISPs access to their lines at regulated rates. Administration officials last week asked the U.S. Supreme Court to review the matter.

    The case pits the Federal Communications Commission against ISPs that say requiring cable operators to share their lines—much the way telecommunications companies are required to lease lines to competitors at set rates—would result in increased build-out of cable networks and more choices for consumers.

    SMBs (small and midsize businesses) and home offices typically have two choices for broadband: cable and DSL. But while DSL offers myriad choices among ISPs, with cable there is typically just one option—the cable provider.

    If the government supported access to the cable network by independent ISPs, cable companies would have an incentive to build their networks into downtown business districts, said Mike Jackman, executive director of the California ISP Association, in Sacramento.

    "If you plan on being in business in five years, you might want to have the option of having cable," Jackman said.

    FCC Chairman Michael Powell, meanwhile, lauded the administration for backing the FCC and asking for a Supreme Court review, arguing that if the appeals court's decision isn't reversed, regulatory burdens imposed on traditional telephone companies will have to be applied to cable companies as well.

    "This is about ensuring that high-speed Internet connections aren't treated like what they're not: telephones," Powell said. "A successful appeal of this case would ultimately mean lower prices and better service for American consumers."

    Independent ISPs disagree.

    "If [Powell] could name me an instance where you had more competitors and prices rose, I would be very interested," Jackman said. "There's no technological reason why customers who choose cable shouldn't have a selection among hundreds of ISPs."

    Although independent ISPs overall do not have regulated access to cable networks, they consider the issue imperative in the larger matter of broadband competition.

    "We're talking about a philosophical battle here," Jackman said. "Do we want true competition, or are we going to give the market to two or three companies?"

    ISPs are also concerned that the Supreme Court's review of the case could affect other areas of the broadband service industry. Anticipating that Congress will review the Telecommunications Act of 1996 and that it will face intense lobbying pressure from incumbent phone companies, ISP associations across the country have formed the National Internet Alliance, which plans to debut officially next week.

As a VoIP user running over cable, I’d argue cable companies are very much becoming telcos… plus, after having started a small ISP in the late 1990’s (since spun off, after serving its intended purpose of providing my own company with high-speed Internet access, back in the days before DSL/Cable), I can tell you that ISPs without broadband are sitting ducks.

Finally, having had my office in the only Wisconsin county (Barron, in the west central part of the state) with more than one cable company, I can tell you they tend to sharpen their pencil when the monopoly goes away. Our rates were approximately half that of surrounding counties.

- Arik

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August 18, 2004

Blockbuster Gunning for Netflix Movies-by-Mail Market

Netflix vs. BlockbusterBlockbuster jumped into Netflix's highly-profitable movie-by-mail sandbox last week, pushing its 25,000-title DVD rental library to Internet users and leaving fulfillment to the USPS. Blockbuster says it will begin offering an online movie-rental service beginning in 2005, and in addition to undercutting Netflix's subscription price, Blockbuster will offer two free in-store movie rental coupons per month, to try and juice their differentiation strategy.

Blockbuster’s entry represents at least an intensification on the initial Netflix counter-attack, which began in May and offered subscribers unlimited rentals with no late charges, but still required them to return movies to the stores from which they had been rented.

Can Blockbuster turn a buck in this new market? Netflix has diversity cornered in its eclectic rental library and in being first to market but with earnings of $2.8 million on $120 million in revenue for the second quarter, Blockbuster will need to compete on more than stocking big-name, new releases - it'll have to diversify its library, while moving to spark a price war.

    The Blockbuster Online service will provide subscribers with unlimited DVD movie rentals in the mail, with up to three out at a time and no return dates or late charges. A monthly fee of US$19.99 will be charged, which undercuts Netflix's $22 monthly price to new customers.

    The Blockbuster deal also includes two free in-store movie rental coupons per month. To promote the new service, Blockbuster has formed marketing alliances with MSN and AOL, which it claims will help it reach 75 percent of U.S. Internet users.

    The online-rental service is part of a series of initiatives being implemented by Blockbuster in a bid to transform itself from a neighborhood-based movie rental business into an "anywhere anytime" entertainment operation that eventually will enable customers to rent, buy or trade movies and games, new or used, in-store and online.

    In May, Blockbuster launched a store-based subscription service called "Movie Pass." The unlimited rental, no late-charge program requires customers to pick up and return the DVDs to the company's stores rather than get them by mail.

    The Blockbuster Online service is expected to be fully integrated and combined with the store-based subscription programs in 2005, the company said. "If a customer is in our store and wants to return a movie they rented online, we'll be able to accommodate them," says Shane Evangelist, Blockbuster vice president and general manager of Blockbuster Online. "If a member rents primarily in-store, but wants a hard-to-find title we don't typically carry in-store, he or she will be able to go online and get it. It's a matter of maximizing convenience and choice."

    With total revenues of just US$280 million industry-wide last year, the online subscription business represents only a small percentage of the $8.2 billion U.S. movie-rental market. "However, the online-rental business is growing, and Blockbuster believes it has the potential to appeal to several million U.S. households," the company says.

    "The research we have seen from Kagan World Media suggests that the online-rental market will have 6.5 million customers in the U.S. by 2008, up from 2.5 million today," Evangelist told NewsFactor. "The reason the market is so small right now is that online movie rental is a new kind of business, and the service providers need to educate potential customers."

    Netflix's success in the home-delivery DVD rental market has led other established retailers to offer a similar service. For example, Wal-Mart Stores has a low-cost unlimited offering, letting customers pay just $15.54 a month for up to two DVDs at a time or $18.76 a month for the three DVDs that Netflix and Blockbuster offer.

    "There are also some smaller players in the market," Evangelist told NewsFactor. "But there are high barriers to entry. To become a major player, companies need to make a significant investment. Online movie rental is very capital intensive, as there is the cost of product, buying the customers, and also setting up the service infrastructure."

    Blockbuster has set up 10 delivery centers across the U.S. so it can provide next-day delivery to its online customers, Evangelist said. "The way the service works is that you go to our Web site, select your three movies, and then we mail you the first one," he explained. "Once you have viewed the DVD, you mail it back to us in a pre-paid envelope, and we will then send you the next movie. Next year, once we have integrated the online service and the in-store subscription program, we will be able to use our stores to provide same-day delivery to online customers."

    Blockbuster is the world's largest video and DVD rental chain, with nearly 9,000 outlets. U.S. media giant Viacom is in the process of selling off its 81 percent stake in Blockbuster.

    "It is good for consumers that the DVD online-rental market is getting more competitive," Gale Daikoku, a retail analyst with GartnerG2, told NewsFactor. "It is about time that this happened. Netflix has been under pricing pressure since it put its prices up in June, and now Blockbuster has come in to undercut it.

    However, Daikoku warns that Blockbuster's plan to integrate its mail-order service with the in-store program may face difficulties. "The in-store business model and customer experience is really very different from the mail order," she told NewsFactor. "Subscribers will expect to be able to drop off at the stores DVDs that they rented online, or even pick up DVDs from the stores that they had selected on the Web site. But will the I.T. system integration work properly? Will there be confusion about Blockbuster's various subscription programs?"

It seems to me this move can't have been exactly unexpected on Netflix's part - I mean, with all the barriers to entry, who else but Wal-Mart and Blockbuster are really in it to win it? There's one other company that has the infrastructure to make it work and possibly even overcome the Blockbuster advantages: Amazon.com.

- Arik

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August 17, 2004

Viagra vs. Cialis & Levitra: Battling Ad Strategy Leaves Cialis Gaining on Viagra's Still-Solid Market Lead

Viagra Cialis Levitra
There was an interesting article by Michael Stephens on AlterNet's MediaCulture about the battle of ED drugs on TV between Viagra, Cialis and Levitra:
    Since the FDA's approval of Cialis and Levitra in 2003, television has become clogged with ads for ED (erectile dysfunction) drugs. In opposition to the "We are the Champions" Viagra ad that uses the Queen song to celebrate that triumphant feeling of getting free Viagra with every seventh prescription refill, the Cialis ad asks men the worrying question, "If a relaxing moment turns into the right moment, will you be ready?" Levitra's launch campaign included a partnership with the NFL and tried to entice men away from Viagra with a sex-as-sport pitch. This approach failed miserably, illustrating the difficulties of selling new ED drugs in the wake of Viagra's overwhelming market lead. Although Cialis and Levitra have been on the market for almost a year, Viagra still retains 75 percent of the $2 billion ED drug market, Cialis has managed to capture 14 percent and Levitra 11 percent.

    After it received FDA approval in March 1998, Viagra had five straight years of being the only clinically tested ED medication available and immediately cornered the world market. Having no other similar products from which to differentiate itself, apart from a few herbal remedies of the "Horny Goat Weed" variety, Viagra didn't need to create an image for itself. Viagra's original advertising consisted of endorsements from spokesmen like Bob Dole; older respected men who basically said, "It's here. It works." Enthusiastic reviews from Hugh Hefner and other aging playboy types didn't hurt, either. Soon, Viagra was being used by all sorts of people, many of whom didn't even suffer from ED. Several years later, Viagra is so sure of its universal recognition and consumer brand-loyalty that it can joke about the high price of Viagra, while surreptitiously gloating over its market supremacy in the "We are the Champions" ad.

    Viagra's reputation makes marketing Johnny-Come-Lately competitors like Cialis and Levitra an unusually tough challenge. As Robert Krell, president of pharmaceutical advertising company Krell Advertising says, "It's a monumental task for a new drug to take the lead away from the first drug to market". This is especially true in the case of Viagra. Since Viagra is already a potent and unfailing remedy for impotence in the popular imagination, alternative drugs are fighting an uphill battle against their own apparent redundancy. Why reinvent the wheel? A significant dimension of the marketing challenge that faces the makers of Cialis and Levitra is that they must re-establish the problem of impotence – a problem that many consumers see as already having been solved by Viagra – in order to offer their products as a cure. Impotence, however, is such an unpopular topic, that it is almost impossible for advertisers to refer to it without alienating the very consumer base they are trying to reach.

    Levitra has now dropped the sporty, macho tone of its first campaign and created a new ad featuring an attractive brunette who addresses the camera confidentially to tell us a "secret" about her man: He has erection problems. But not to worry, "For him Levitra works," she confides, "just look at that smile." This ad eschews innuendo for a direct discussion of sexual performance, a daring but risky approach, which also limits the ad to evening slots. Whether or not this change helps Levitra's market share remains to be seen; what is significant is that the new ad focuses on the positive concept of sexual performance rather than the negative concept of impotence. Instead of a guy who can't even get his football in the hole, we are presented with a desirable woman whose Levitra-enhanced man has evidently pleased her and himself. This ad suggests that Levitra is about making a good thing better, not helping desperate men to "stay in the game." It also introduces the element of female approval, for although the woman tells us to look at her man's smile, it is her smile that counts.

    Cialis differentiates itself from both Viagra and Levitra by offering a 36-hour window of efficacy. This beats Viagra's and Levitra's four-to-eight hour period, and allows Cialis to focus its advertising on timing rather than performance. The first series of Cialis ads showed a couple in bathtubs in a romantic, natural setting. and asked if the man was "ready" for this opportune moment. Like the ball-throwing Levitra ad, this Cialis ad uses fear as its basic motivator, but the fear has been shifted from the stark question of ability – can you do it? – to the less threatening question of preparedness; will you be ready when the time is right? This ad presupposes the existence of drugs like Viagra and Levitra, but implies the limitations of the time frame they offer: In a spontaneous moment of desire, do you want to have to pop a pill and wait an hour for it to take effect? In France, Cialis is already known popularly as "le weekender," a buzzword that suggests Cialis's potential to ultimately threaten Viagra's primacy in the market with its superior convenience.

My prediction based on this analysis is, there's a real competitive threat from Cialis to Viagra's market hegemony based on this differentiation and, ultimately, the ad strategy behind it.

- Arik

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August 16, 2004

MicroStrategy vs. Business Objects: Both Claim Victory

MicroStrategy vs. Business Objects
The U.S. District Court for the Eastern District of Virginia found Business Objects guilty of misappropriating MicroStrategy trade secrets and slapped a cease and desist order on the San Jose company in the wake of an October 2003 trial.

One of the documents mishandled by Business Objects provided a detailed description of how MicroStrategy planned to compete against Business Objects, the leader in the business intelligence space after acquiring Crystal Decisions last year for $820 million.

Business Objects thought of the trade secret ruling in a somewhat more positive light. In its own statement, the software maker said the court found that a former Business Objects employee had misappropriated two documents, not the hundreds of files MicroStrategy had alleged were mishandled.

Business Objects further said the court issued a "very narrow" injunction ordering Business Objects not to use or distribute the documents and that it shot down MicroStrategy's request for attorneys' fees.

The same court also found in favor of Business Objects, rejecting MicroStrategy's earlier claims of patent infringement of U.S. Patent No. 6,260,050. It had earlier thrown out MicroStrategy's claim of tortious interference.

Here’s a quick summary at Out-Law.com on what actual ruling Business Objects was found guilty of, plus reactions by each parties counsel:

    These were a “Competitive Recipe”, detailing MicroStrategy’s plan for dealing with its rival in the market, and a volume discount schedule, detailing thresholds at which MicroStrategy would give customers a discount.

    The court therefore granted an injunction against Business Objects, prohibiting the company from possessing, using or disclosing the two trade secrets identified by the court.

    The court refused to grant legal expenses to MicroStrategy and, in another ruling, dismissed a claim for patent infringement put forward by MicroStrategy.

    Business Objects welcomed the judgment, commenting that the court had found only two cases of misappropriation out of the hundreds of examples put forward, and at the end of the day had issued only a “very narrow” injunction.

    “This is an important victory for Business Objects, its employees, customers and shareholders," said Susan Wolfe, senior vice president and general counsel of Business Objects. "These decisions by the Court in Virginia confirm what we have maintained all along - that MicroStrategy's allegations and claims against Business Objects were essentially meritless."

    “We are pleased with the court's decision,” responded MicroStrategy Vice President, Law and General Counsel, Jonathan F Klein. "Business Objects misappropriated our trade secrets, and the court issued an injunction prohibiting their use".

    "Business Objects' suggestion that its misconduct involved only a single employee and two documents is contradicted by the court's extensive factual findings," he added.

    A further patent infringement case between the parties is still ongoing.

MicroStrategy was a bit dumbfounded by the positive light Business Objects was throwing on the ruling:

    MicroStrategy differed on its view of the decision, with company general counsel and VP for law Jonathan Klein saying he was "very pleased" that the ruling "validated our original purpose in bringing these claims."

    Klein said the court's 61-page ruling details how internal MicroStrategy documents - including e-mails, presentations, sales reports and competitive intelligence focused specifically on Business Objects - were circulated widely among Business Objects employees, including some of its top executives.

    "When I saw Business Objects' announcement this morning, I thought they could not possibly have read the same ruling I did," Klein said. Business Objects representatives were not immediately available for comment.

    In the second decision, the court issued a formal order on a ruling it made last year. The ruling granted summary judgment in favor of Business Objects, rejecting patent infringement claims made by MicroStrategy.

    Business Objects and MicroStrategy compete head-to-head in the business intelligence market, particularly in the area of reporting and analytics applications. Business Objects is the larger of the two companies, with sales of $560.8 million in the last calendar year, compared with $175.6 million for MicroStrategy.

Whatever your take on the outcome, the two are going to keep slugging it out over this last patent issue and we’ll see where all the dust settles. In the meantime, if you’re in the BI software business, it’s apparently time to review your non-compete/confidential-disclosure agreements… at least if you’re competing with these two.

- Arik

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August 12, 2004

Bush & Wal-Mart vs. Kerry & Costco

Bush:Wal-Mart as Kerry:Costco
There was an entertaining article by Daniel Gross on Slate.com the past few days about how Bush is to Wal-Mart, as Kerry is to Costco - i.e., the demographics are similar and the customers of each chain would tend to vote for their preferred candidate. Now, I don't know if I buy it, but it's an interesting crossover between competition in politics and competition in business so I thought it a worthwhile read:
    Like today's Democratic Party, Costco favors highly trafficked urban and edge-city locations—it has three stores in New York City. And it caters to a decidedly upscale crowd. As John Helyar reported in this excellent Fortune profile, the average salary of a Costco member is $95,333. The company's merchandise mix reflects the fact that its customers shop at discounters by choice, not by necessity. They're New Luxury suckers who like to save on staples, more Jean Chardonnay than Joe Six-Pack. As Helyar notes: "Costco is the U.S.'s biggest seller of fine wines ($600 million a year)." (Needless to say, "Moneybox" has been a member since 2000.)

    Costco also has the sort of labor policy that would bring a smile to Barbara Ehrenreich's face. Pay starts at $10 an hour. About one in six employees is represented by a union, and workers receive nice health benefits. Sinegal has a non-zero-sum view of employee relations. Give people good jobs at good wages, and they'll be more likely to work harder, less likely to leave, and less likely to steal. As Helyar reported, Costco's turnover "is a third of the retail industry average of 64%," and "shrinkage"—the amount of inventory lost to theft—"is about 13% of the industry norm."

    On the right: Wal-Mart Stores, Inc. Founded in Arkansas (a blue-turned-red state), it grew by spreading into the adjacent South and Great Plains. Like today's Republican Party, it focuses intensely on rural areas and generally avoids cities. (Republican conventioneers won't be able to shop at a Wal-Mart when they visit New York City.) As this Bloomberg story notes, "Sixty-seven percent of Wal-Mart's stores are in the 30 states that voted for Bush and Cheney in 2000."

    The company's labor policies are state-of-the-art, for the 1890s. It has been investigated for hiring contractors who allegedly hired illegal aliens to clean Wal-Mart stores and for locking them inside overnight. (One wonders if the Wal-Mart employees who in April were bused in to hear Vice President Dick Cheney sing the company's praises at Wal-Mart's headquarters were similarly confined.) In June, a federal judge certified a class-action lawsuit filed on behalf of female Wal-Mart employees who claimed discrimination. The average wage at Wal-Mart, which has no unions and bitterly opposes raising the minimum wage, is lower than Costco's lowest wage. Turnover at Wal-Mart, according to the Economist, is 44 percent, meaning it "has to hire an astonishing 600,000 people every year simply to stay at its current size."

Costco's customers seem to have more disposable income at least... maybe it's an unintended effect of Bush's tax cut?

    Consumers vote by shopping. And so far this year, they're voting more for Costco than Wal-Mart, yet another illustration of the Two Americas shopping theme. Costco's customers plainly have cash to spend. For the four weeks ended Aug. 1, Costco's same-store U.S. sales rose 9 percent; in the 48 weeks ended Aug. 1, they were up an impressive 10 percent. At Wal-Mart, the registers haven't been ringing quite so loudly. In its most recent four-week sales period, same-store sales rose a meager 2.4 percent. For August, Wal-Mart sees same-store growth of between 2 percent to 4 percent—about the same growth rate as the economy, if not slower.

I must confess, I've never been to a Costco before, but then I've led a sheltered life. Still, I've got some pretty rabidly anti-Bush family that are some of Wal-Mart's biggest cheerleaders... but then, we Midwesterners can be cheapskates sometimes too.

- Arik

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August 10, 2004

Yahoo! vs. Google: Happy Together? (Round Two in Search Engine Wars)

Yahoo! vs. Google
Yahoo! and Google finally buried the hatchet, even as Google approaches its IPO, after coming to terms on a patent dispute going back a couple of years to before Yahoo's buyout of Overture:
    As the day of its expected initial public offering approaches, search giant Google has settled two outstanding disputes with portal rival Yahoo! The settlement calls for Google to issue 2.7 million class A shares, which will be worth around $328 million if Google's stock prices at the mid-point of its expected range.

    "We are pleased to have resolved these issues and with the terms of the agreement," said Steve Langdon, a Google spokesperson. A Yahoo! representative expressed a similar sentiment.

    Google says it will have to take a one-time charge of between $260 million and $290 million in the third-quarter to account for the settlement. That will, the company says, result in its reporting a net loss for the quarter.

    The most substantial issue laid to rest was a patent dispute over the business model and technology behind Google's AdWords program - by far the largest contributor to Google's revenues.

    Overture Services, now owned by Yahoo!, filed suit against Google in April of 2002 alleging that Google infringed on U.S. Patent No. 6,269,361, "System and method for influencing a position on a search result list generated by a computer network search engine." Overture's patent protects bid-for-placement products as well as Overture's DirecTraffic Center account management system and tools. Google maintained the patent was "invalid and unenforceable."

    The settlement reached today calls for Overture to dismiss the suit against Google and grant the rival firm a fully paid perpetual license to the patent, as well as to several related patent applications Overture holds. Google divulged these terms in an updated S1 filing with the Securities and Exchange Commission today.

    The second dispute concerned the number of shares due under a branding and promotion agreement the two struck in June of 2000. In June 2003, Google says it issued around 1.2 million shares to Yahoo! under the terms of the warrant agreement, while Yahoo! contended it was entitled to more shares. Today's settlement sets aside this disagreement, as well.

    The issuance of shares brings Yahoo!'s stake in Google up to 8.2 million shares, worth about $996.3 million if Google's stock prices at the mid-point of its range. Previously, Yahoo! owned 5.5 million shares, worth an approximate $668.3 million.

    Google is reportedly preparing to make its initial public offering in the next two weeks. Widespread reports citing unnamed sources had pegged the IPO for this week, but glitches are said to have pushed things back. Google has registered to sell 25.7 million shares at a price between $108 and $135 per share. The company is taking bids in a Dutch auction at ipo.google.com.

The Associated Press last week reported that Google was delaying its IPO by a week because of logistical issues with its auction-based process. Meanwhile, Google earlier this month disclosed a legal snafu in the way it had issued more than 23 million shares to employees and consultants. And financial advisers and analysts have expressed concern that Google has overpriced its offering with its estimated selling price of between $108 and $135 a share.

"On the one hand, this clears up some questions for investors, but at the same time, the market has been bad, Internet stocks have been bad, and I think, so far, there's been lukewarm response in investing in Google," said Tom Taulli, co-founder of IPO-tracker Current Offerings.

The underlying question is whether this news, on top of all the other badness Google announced recently, will hurt an already aggressively priced offering. Yahoo! (an early investor in fledgling Google), can't really kick too hard, owning a stake in its most serious competitor - the settlement could net Yahoo as much as an additional $149 million at the high end of Google's expected IPO price range, and leave the company with a 4.1 percent stake in Google. After the IPO, Yahoo will also hold 4.95 million super-voting Google Class B shares, a 2.1 percent stake.

More interesting will be watching to see where the price goes in the day's following the IPO... there's a horde of investment bankers hoping it tanks so the whole Dutch-auction idea falls flat enough that they can get back to business as usual.

- Arik

Posted by Arik Johnson at 09:49 PM | Comments (0) | TrackBack

July 29, 2004

Apple vs. RealNetworks as iPod Wars Begin

Apple vs. RealNetworks

Apple went after RealNetworks new Harmony software as the company reverse-engineered a solution to allow its songs to play on the iPod, rather than forcing iPod users to also buy from Apple's proprietary iTunes music downloading service:

    Apple Computer on Thursday issued a statement attacking RealNetworks Inc., a provider of digital-media services, for offering software lets online music buyers at Real's music store play their songs on Apple's iPod music players.

    Many music-playing devices include proprietary copy-protection schemes that limit what music can be played on them, depending on what service that music was purchased from. Real said its software would allow songs downloaded from its music store to be played on Apple's iPods.

    Apple said it's "stunned that RealNetworks has adopted the tactics and ethics of a hacker to break into the iPod."

    RealNetworks' software, called Harmony, was introduced earlier this week. Real describes it as the world's first digital-rights-management translation system that music buyers can use to transfer music from one secure music device to another. Among the devices supported by Harmony are those made by Creative, iRiver, palmOne, RCA, Rio, and Samsung.

    Apple said it's investigating "the implications of their actions under the [Digital Millennium Copyright Act] and other laws. We strongly caution Real and their customers that when we update our iPod software from time to time it is highly likely that Real's Harmony technology will cease to work with current and future iPods."

    The Digital Millennium Copyright Act was passed into law in 1998 and makes it illegal to circumvent encryption and copy-protection technology to access copyright-protected property.

    Legal experts say that unless Apple can show that RealNetworks reverse engineered Apple's iPod software, it could be very difficult to make a case under the DMCA.

    "First question is, to develop Harmony, did RealNetworks have to break copy protection used by iTunes?" says Mark Rasch, former head of the U.S. Department of Justice's computer crimes unit and now senior VP of security services firm Solutionary Inc. "But even then there are exceptions under the DMCA for interoperability."

    Another question would be whether or not RealNetworks reverse engineered iTunes software to create Harmony. ITunes is the name of Apple's online music store. "We really need to know more about how Harmony was developed and how it works to understand the potential legal implications," Rasch says.

    In a statement E-mailed to InformationWeek, RealNetworks contends that Harmony follows "a well-established tradition of fully legal, independently developed paths to achieve compatibility. There is ample and clear precedent for this activity, for instance the first IBM-compatible PCs from Compaq.

    "Harmony technology does not remove or disable any digital-rights-management system. Apple has suggested that new laws such as the DMCA are relevant to this dispute. In fact, the DMCA is not designed to prevent the creation of new methods of locking content and explicitly allows the creation of interoperable software," the statement reads.

    RealNetworks says it's "fully committed" to its Harmony technology.

    "The problem with the DMCA is that it gives more protection than copyright law and it allows companies to skew the market with a form of protectionism," Rasch says. "It allows technological protectionism to be legally adopted, and it works to prevent people from coming to market with cheaper compatible products."

So, can Real break the Apple monopoly or can Apple successfully defend against Real's attempt to stay relevant?

- Arik

UPDATE: Tuesday 17 August 2004 - RealNetworks slashes prices on MP3s to 49 cents and $4.99 an album in money-losing bid to draw attention away from iTunes.

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July 23, 2004

Merck and Schering-Plough: FDA Approves Vytorin as Potential Cholesterol Blockbuster

Vytorin

Merck and Schering-Plough enjoyed a big win to celebrate over the weekend, as Vytorin won FDA approval to take on AstraZeneca’s Crestor, Pfizer’s Lipitor and a host of other statins, as they combine Merck’s Zocor, with a non-statin treatment in Schering-Plough’s Zetia.

    Vytorin combines Zetia, a cholesterol-lowering agent developed at Schering-Plough, with Zocor, the $5 billion cholesterol-lowering medicine marketed by Merck. By itself, Zetia is far less powerful than the cholesterol-lowering medicines known as statins, such as Zocor, Lipitor and Pravachol. But it works differently, and when Zocor and Zetia are used together, they lower bad cholesterol better than any treatment currently on the market.

    The U.S. Food and Drug Administration has a deadline of July 24--Saturday for its decision. Analysts expect a decision either today or Monday. In the last quarter, Zetia generated more revenue than Crestor, a new statin sold by AstraZeneca.

    "By combining them at a single tablet and offering them at a single price, you obviously create a benefit to the patient," says Richard Milani, head of cardiology at the Ochsner Clinic in New Orleans. The new pill will be cheaper--both because it will cost less than buying Zocor and Zetia separately and because patients will have only a single co-payment for the pill.

    Pricing is expected to emerge as a major issue for Vytorin. It must be priced competitively with Lipitor, which has half the cholesterol market and brings in $10 billion annually for drug giant Pfizer. It may, however, be priced more than Crestor.

    Barbara Ryan, an analyst at Deutsche Bank, says Vytorin could eventually grab 13% of the cholesterol market, reaching sales of $3.5 billion in 2008. Zetia sales that year will probably be at least $500 million, and the joint venture could contribute $1 billion in profits each to Merck and Schering. That could be a bigger benefit to beaten-down Schering-Plough than to Merck, which will lose patent protection on Zocor in 2006. Ryan rates Schering-Plough a "buy" based on the upside from the drug. Deutsche Bank does investment banking and owns 1% or more of both Merck and Schering-Plough.

    Pfizer can be expected to engage in a pitched marketing battle against any competition, perhaps arguing that lowering bad cholesterol with statins has extra, hard-to-measure benefits that doing so with Zetia does not. But the number of people who should be on cholesterol medicines constantly increases. New guidelines may have increased the number of Americans who should receive some kind of therapy to more than 50 million from 36 million. Currently, only about 11 million people do take such drugs. That exploding market can only bode well for Vytorin.

So, with cholesterol seemingly more important than ever, Merck might just have managed to extend the life of its soon-to-expire Zocor in time to blunt the impact of losing a $5 billion drug.

- Arik

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April 03, 2004

Google's Gmail Challenges Yahoo, Windows and Privacy Advocates

Google Gmail vs. Yahoo and Windows

Google's recent launch of Gmail creates some interesting new competitive pressures on its top two rivals, Yahoo! and Microsoft, but in some surprising ways.

For Yahoo!, the obvious frontal assault on their users from Google is nothing surprising. Yahoo saw this coming a few months ago and took steps to break away – pretty successfully, I might add. Still, the competitive dynamics in Yahoo vs. Google align across multiple services and markets in terms of serving their REAL customers – that is, the advertisers seeking to capture the best qualified eyeballs, that constitute both firms’ real product. I read an interesting update piece on the rivalry at eWEEK.com:

    It's curious why it took so long for Yahoo Inc. to discover that it was nurturing an adversary during all of the years that it hosted Google Inc.'s search engine.

    Long before Yahoo finally switched search engines in February, Google was adding features to its own site designed to challenge Yahoo's position as a popular home of Web searches, news, shopping and community groups.

    It's hard to believe that Yahoo would have remained committed to the Google search engine for four years if it had realized early on that Google would not be content to remain quietly in the background as Yahoo's search engine.

    Now, Yahoo—and for that matter America Online Inc., the Microsoft network and the rest of the online services industry—is dealing with an increasingly vigorous competitor that is going to battle tooth and nail for market share. Web surfers have nothing to lose in this battle as Yahoo, Google and the rest try to outdo each other by offering new online services to retain users' loyalty.

    Yahoo has gone to considerable pains to show that it won't miss Google search after making the switch to the Inktomi search engine, with its emphasis on product and technology Web searches. But when it comes to Web searches, Yahoo still lags far behind Google, which accounts for about 79 percent of U.S. search activity, according to Searchenginewatch.com. In comparison, Yahoo accounted for 27.7 percent even when Google was still its search engine.

    Yahoo also revamped its news search by implementing an index that combines content from 100 news partners and 7,000 Web sources, which it says will let users access a wider array of content. Its earlier news search gathered information from 4,500 Web sources as well as its direct news partners.

    While this seems impressive on the face of it, one has to wonder whether users are able to discern a difference in the quality of the content they retrieve when faced with a veritable avalanche of information, especially when most of the information is coming from the same set of sources.

    Local search has emerged as the new competitive battleground for Google and Yahoo. But it remains to be seen whether it will prove to be a major new channel for advertising revenue, even if it proves to be a boon to users.

    At first glance, local search doesn't seem like such a new or innovative idea. People have been able to do yellow-pages searches of local businesses and attractions for years.

    But new features such as Yahoo's SmartView let users pull up maps highlighting the locations of businesses and attractions such as hotels, restaurants, theaters, sports arenas and bank ATMs. The maps display icons that users can click on to get additional information such as directions, prices, Web addresses, schedules or restaurant menus.

From a little farther down:

    But the development of local search hardly comprises the majority of what Google is doing to challenge Yahoo on its home turf. Google's latest move is to announce a free e-mail service to compete directly with Yahoo, MSN, AOL and the rest.

    The Google "Gmail" service reportedly will allow users to archive and search every e-mail they've ever sent or received. Google plans to sweeten the offer with 1 GB of free storage, far more than what Yahoo and other free e-mail services offer. Yahoo, for example, offers 4 MB of e-mail storage for free. Users have to pay for additional storage capacity.

    With this powerful addition, Google's spare and uncluttered interface could prove an irresistible draw for Internet users, even those who have made Yahoo their default home page since the early '90s.

But, from Microsoft's perspective, Gmail represents a migration step toward computerless computing. By changing the model of where we store our files, Google does nothing less than diminish the need, not only for MSN's Hotmail and associated services, but for the very idea of owning a computer of one's own and the desktop OS to go with it. Over at SearchEngineWatch.com, Danny Sullivan considers the possibilities of the "Google Desktop":

    Will Google's new Gmail free email system be just the first of many things we begin moving to a new Google Desktop? If so, Microsoft might have a lot more to worry about than web search.

    Today, plenty of people download mail to desktop-based email programs. But Google might convince some of them to take up its email storage offer.

    After all, even if you do have a great way to search through your desktop-based email, you might like the idea that all your mail is backed up, stored offsite and easily searchable from anywhere, to boot.

    Now take things a step further. Imagine next year that Google provides anyone with 5 gigabytes, 10 gigabytes or more of storage space for personal files.

    Got a ton of Word documents, spreadsheets and other material? Push it across to us, Google would say. We'll store it, index it and make it easy to retrieve what you want. This type of material Google already indexes from across the web and has done for ages.

    As broadband expands, such an idea becomes more and more feasible. And with it, the idea that Microsoft might trump Google with "desktop" lock-in becomes perhaps less an issue.

    This recent AP article takes a fresh look at the search wars from the perspective of Microsoft being on the defensive, because of how prominent Google and Yahoo have become as almost parts of the operating system, a "layer" as John Battelle puts it, above Windows, Mac OS or Linux.

    Go even beyond this. Google's move might be a harbinger of redefining where our desktop lives, not just in terms of software-like applications that we interact with, but in terms of where we store that data.

Whether Gmail can overcome the concerns of privacy advocates remains to be seen. I personally believe viruses and spam have largely corrupted email communications and that differentiation, using methods such as targeted advertising to email readers, makes this interesting twist.

- Arik

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April 02, 2004

AT&T Expands VoIP Service, Promptly Sued by Competitor Vonage

AT&T CallVantage vs. Vonage

Just a few days ago, AT&T revealed plans to make its voice-over-IP Internet phone service more widely available - then promptly got punched in the mouth by competitor Vonage, with a lawsuit based on the name of the product. AT&T is certainly provoking a little, but I have to say, they’re finally learning to join ‘em, after years of failing to beat ‘em.

The service, known as "CallVantage," is available to residential customers in 11 northern and central New Jersey counties, as well as areas of Texas, including Austin, Dallas, Fort Worth, and Houston. AT&T hopes to offer the service in the nation's top 100 markets by year's end. As if waiting for the announcement, VoIP vendor Vonage filed a trademark lawsuit in U.S. District Court in New Jersey claiming CallVantage is confusingly similar to Vonage.

Here's an excerpt from eWEEK.com:

    Vonage Holdings Corp. has sued AT&T Corp. for trademark infringement, alleging that the name of AT&T's newly launched VOIP service is confusingly similar to its company and product name.

    In its lawsuit filed last week in U.S. District Court in New Jersey, Vonage alleges that AT&T is infringing on its name by launching a VOIP service named CallVantage. Vonage also is accusing AT&T of cyber squatting for having filed a series of domain names in February that it says are similar to those owned by Vonage. Those Web addresses include variations on "callvontage" in the .com, .net and .biz domains.

    The lawsuit points to the growing stakes in the VOIP market as more providers enter the space. AT&T rolled out its residential CallVantage service at this week's Spring 2004 VON Conference & Expo in Santa Clara, Calif. It announced availability for New Jersey on Monday and launched the service Tuesday for parts of Texas.

    Vonage of Edison, N.J., was founded in 2001 and first launched its Vonage Digital Voice service over broadband connections in March 2002. Brooke Schulz, Vonage vice president of corporate communications, said the company has spent three years building up brand awareness and had tried to resolve the name issue with AT&T before filing the lawsuit.

    "This is really about confusion in the marketplace," Schulz said in an interview with eWEEK.com at the VON show. "We welcome them to the marketplace, but we want them to use a different name."

    Officials at Bedminster, N.J.-based AT&T declined to comment on the specifics of the lawsuit but said they were confident of its outcome in their favor.

    "We simply think the suit is without merit, and we do believe that we will prevail," AT&T spokesman Gary Morgenstern said.

    The Vonage lawsuit is seeking an injunction to prevent AT&T from continuing to use the CallVantage name as well as a requirement for AT&T to transfer the disputed domain names to Vonage.

As a Vonage customer myself, I can say, it's pretty sweet - unless you're talking to someone while also sending a large upload... at which point call quality craters. This probably isn't fixable, and is only intermittently annoying. But, I personally hope AT&T has some success in defending itself in the VoIP market. Competition is good for consumers, as AT&T learned first-hand from competitors itself.

- Arik

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March 09, 2004

Samsung vs. Motorola: South Korean Handset Maker Gains on U.S. Rival

samsung_motorola.jpg

Worldwide cell phone handset market share figures are out for 2003 and Samsung has made some decided progress against competitors in both CDMA and GSM markets, particularly Motorola, although overtaking them for number two will still be a tough hurdle. Here’s an excerpt from a piece comparing the two from the Miami Herald:

    Wireless phones were key to Samsung's transformation from a financially ailing maker of memory chips and cheap microwave ovens into a respected brand. The company ignored the low end of the market, focusing instead on pricier handsets for customers who can afford the latest and coolest gadgets.

    Samsung shipped 11 percent of all wireless phones sold last year. The company's share of shipments still trails Motorola's 15 percent, but Samsung is neck and neck with Motorola in sales.

    Samsung chalked up $10.6 billion in handset revenues last year compared with Motorola's $11 billion. An average Samsung phone, at $190, is 30 percent more expensive than Motorola's $146 average selling price, according to research firm Yankee Group.

    And Samsung's profits are fatter. The company's 18 percent gross margins compare favorably with Nokia's 20-plus percent margins, while Motorola's hover in the single digits.

    "Samsung has just played its cards right," said Neil Strother, senior analyst for wireless handsets service at In-Stat MDR.

    The conglomerate's swift rise in a business that Motorola pioneered is a lesson in the challenges Motorola faces as new chief executive Edward Zander tries to energize the company.

    Motorola, with deep roots in radio and communications technology, is going up against Asian consumer electronics giants, including LG Electronics and Sanyo, that leverage their expertise in digital cameras, color displays and music players in the increasingly popular all-in-one phones.

    None has been more successful in muscling into Motorola's biggest business than Samsung, which made its mark by betting on an emerging technology seven years ago.

    CDMA, or code division multiple access, was new to North America in 1997 when Samsung introduced CDMA phones with Sprint PCS for the carrier's new all-digital national network.

    "Samsung is the classic example of how an Asian handset vendor can expand a toehold," said Yankee Group analyst John Jackson. "And they've done it by being a manufacturer."

    Bucking the trend toward specialization, Samsung thrives as a vertically integrated manufacturer. Its biggest factory complex is in Gumi, South Korea's largest inland industrial city.

    While Motorola is spinning off its semiconductor division, Samsung continues to buy chips, display screens and other parts from its affiliates. That can be an advantage when sales heat up and industry demand outstrips supplies.

    One reason Motorola was late last year in delivering phones to stores was a parts shortage. "Being late in this market costs you," Strother said.

    Samsung is blessed by another advantage: South Korea's rabid appetite for all things digital, especially mobile technology.

    The country's wireless networks are among the world's most advanced, providing a test kitchen for Samsung's concoctions. Korean consumers, on average, replace their phones every nine to 12 months--three times more often than the world average.

    Samsung satisfies their appetite by churning out models at a furious pace.

    It introduced 150 models worldwide last year compared with Motorola's 40.

    Motorola dramatically reduced the complexity of its product line three years ago to make its cell phone business profitable. By contrast, Samsung appears to thrive on complexity, designing different phones for each carrier to help them side-step cutthroat price competition.

    The SGH-e715 camera phone it produced recently for T-Mobile looks and behaves differently, for instance, than comparably priced phones for Sprint.

    "If the e-715 is a hit for T-Mobile, we would not like for Sprint to come in and rain on their parade" by offering a similar phone at a lower price, said Muzibul Khan, vice president of product management and engineering at Samsung's wireless terminals division in Richardson, Texas..

    The seeds for Samsung's success were planted in the United States in 1997, when Sprint was hunting phones for its new CDMA network.

    "Only a few companies had the capability," said Sprint's John Garcia, senior vice president of sales and distribution. "Motorola was skeptical, as was Nokia."

    Sony Electronics Co. partnered with Qualcomm Inc. to build Sprint's first CDMA phone, but the carrier needed more.

    "We needed more advanced handsets, and we needed a lot of them," Garcia said.

    Sprint decided to take a flier on Samsung, whose new CEO, Yun Jong Yong, was leading a radical restructuring. The carrier signed a three-year, $600 million contract--a deal that paid off handsomely for both companies.

    "What we thought we would sell in three years, we sold in two," Garcia said.

    "Samsung invested heavily to coordinate with our engineers to build customized services in their handsets that work uniquely on our network," Garcia added. "That's one of the things that makes them different."

    The Sprint deal provided a "market success," said Peter Skarzynski, senior vice president of Samsung Telecommunications America in Richardson. "Then we expanded a step at a time to other CDMA carriers."

    Samsung's phones turned heads.

    "They were no longer just another garden variety Asian electronics maker," Strother said. "Their overall quality went up."

    So did Samsung's reputation for innovation.

    "Among carriers, Samsung is perceived to be more a technology leader than Motorola when it comes to delivering coordinated consumer electronics," said Chris Ambrosio of market research firm Strategy Analytics.

    In South Korea, where more advanced networks deliver higher speeds than in the U.S., consumers are watching television on Samsung phones, sending video clips and playing 3D games. These features will arrive soon in Samsung phones for U.S. carriers, Skarzynski said.

    Motorola, meanwhile, isn't standing still.

    Just as Samsung exploited the growth of CDMA technology, Motorola has an early lead in UMTS (Universal Mobile Telecommunications Service). It's a third-generation standard that delivers faster speeds, opening up new ranges of mobile computing and entertainment possibilities.

    Motorola also is betting on its software, called MotoJUIX, to give it an edge against players such as Samsung, which licenses other companies' software.

    MotoJUIX is based on Java and Linux, an open standard. Motorola said it would give the company flexibility and speed to handle the explosion of applications coming with third generation networks.

    "There are a lot of transitions rippling through the industry that allow a technology innovator to win and take share," said Ray Roman, Motorola's vice president and general manager for North America.

    Analysts don't think Samsung will knock Motorola from its perch as the world's second-biggest phonemaker anytime soon.

    For one thing, Samsung already has maximized its lead in CDMA, said Chris Ambrosio of Strategy Analystics. For another, Samsung has yet to become a mass-market player, serving up quantities of cheaper phones as well as pricey ones.

But, Samsung has to watch our for its own countrymen – LG Electronics topped the Strategy Analytics ranking in CDMA phones, overtaking BOTH Samsung and Motorola, selling 21.3 million CDMA mobile phones last year, a 21.6 percent share, versus Samsung’s shipments of 20.4 million units during the same period, accounting for a 20.7 percent share.

Both LG and Samsung said the greater market share was largely attributed to more aggressive marketing and diversification strategy. Both companies used to focus primarily on the North American export market, but recently diversified its CDMA handset lines to other emerging markets like Brazil and China. LG's emergence as a top competitor is made more interesting as the company has long been the No. 2 player on the Korean CDMA market after Samsung, which essentially controls the high-end mobile phone market with its strong brand and market power.

Meanwhile, Motorola shipped 19 million CDMA handsets last year, securing an 18 percent share, Nokia ranked fourth, carving out a 12.5 percent share, or 12.3 million units, followed by Kyocera with 10.9 million units (11 percent) and Sanyo with 3.4 million units (3.5 percent).

But Korean handset manufacturers have yet to catch up with other competitors for GSM share. Nokia topped the ranking with 146 million units, or 42.2 percent market share for the global GSM handset market, followed by Siemens with 43.3 million units, or 12.5 percent, Motorola was No. 3 with 38.4 million units, Samsung ranked fourth with 33.8 million units, and LG shipped 6.1 million GSM phones last year.

Most ironic is that less than a decade ago, nobody saw Samsung, or LG for that matter, as a serious handset competitor to relative Motorola’s dominance.

- Arik

Posted by Arik Johnson at 04:48 PM | Comments (0) | TrackBack

March 07, 2004

Telcos vs. Cable

I found a good piece in this week’s BusinessWeek magazine “How Telcos Can Fight the Cable Invasion”, all about the expected counterattack from DSL delivering movies and other new services with only minor upgrades.

    One of detractors' most common observations is that telcos can't easily add video services. Their much-trumpeted fiber-to-the-home (FTH) initiative, the plan to deliver voice, video, and broadband services by extending fiber-optic cable to every home, could prove to be prohibitively expensive - to the tune of $1 billion for every million potential subscribers. It also could take more than a decade to implement, making that strategy a very slow boat to profitability.

    Telecoms don't need to exactly replicate cable's performance and services, however. Instead, with little additional investment in infrastructure, they can grab extra revenue - as much as $20 a month per customer - by providing innovative video services and content not available today, says Jonathan Hurd, a vice-president at tech consultancy Adventis in Boston. Such a move would represent a hefty addition to phone outfits' bottom lines, which typically reflect revenue per customer in the $30-to-$60 range.

    Telcos have already taken their first steps in that direction. Many recently began reselling satellite-TV service - programming that's on par with cable. The largest U.S. telecom operator, Verizon, is offering its users a $6-per-month discount on the service to help get the business off the ground, says Marilyn O'Connell, vice-president for broadband. (Verizon and others won't release subscriber numbers.)

But wouldn't that necessitate costly upgrades to their networks?

    Upgrading the telcos' existing copper networks to handle that bandwidth isn't a big deal. To provide DSL service today, telcos use DSLAM (digital subscriber line access multiplexer) devices, which accumulate bandwidth, then parcel it out to individual homes or neighborhoods via copper wires. Telcos can add special cards relatively easily to the DSLAM boxes for other flavors of DSL, such as VDSL (very high speed DSL), or to provide neighborhoods with more DSLAMs (at a cost of just $50 to $300 per user).

    This could greatly increase the bandwidth available to each subscriber home, says Matt Davis, an analyst at tech consultancy Yankee Group. A DSLAM located within 3,000 feet of a customer's home could pump data at rates of 7 megabits per second, far in excess of standard DSL, and more than enough to broadcast TV channels, Davis says.

    If they play their cards right, telcos could not only eat into cable revenues, they might also take on such outfits as DVD rental concerns like Blockbuster and Netflix. The average consumer bought 15 DVDs last year - and telcos could potentially grab part of that money by delivering the same content via their networks, says Ken Twist, an analyst with telecom consultancy RHK in San Francisco.

    To do that, telcos need to learn a lot more about branding and marketing - neither a strong point, historically. They also will need to strike deals with content providers, roll out new services, and tweak their networks. The phone companies, however, have a huge and loyal customer base, one that might prove both willing and eager to buy discounted bundles of various offerings.

    "I think that, at the end of the day, telcos will be able to respond to the [cable] threat," says Walt Megura, general manager of broadband networks business at gearmaker Nortel Networks, which has recently reentered the broadband-access market. Sure, the doomsayers could be right about some players - but maybe not all.

- Arik

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March 06, 2004

FDA Approval for Boston Scientific’s Taxus Stent Means War with J&J Cordis’s Cypher

taxus_cypher.jpg

Despite its second-to-market delayed start, some analysts are projecting Boston Scientific could realistically end 2004 with a 60 percent share of the $3.8 billion U.S. market, now that it's competing with Cypher. Taxus will roll out “immediately” according to the company and is sure to be the reasoning behind J&J’s Cordis defensive hatchet-burying business alliance with Guidant just a few days ago.

Drug-eluding stents are a big improvement over bare-metal stents, the little tubes designed to keep clogged arteries open, since the drug coating prevents the arteries from clogging again, reducing the need for repeat procedures. For those new to this area, if you’re curious how stents work read the following article from USAToday.com.

John Putnam, an analyst at Belmont Harbor Capital, an independent research firm, says many doctors believe the stent is easier to implant during surgery, compared with J&J's Cypher. "It was expected, but it's good news. I think it's the better stent of the two that are on the market," he said.

Boston Scientific said on February 23rd it hoped to win 70 percent of the U.S. market within 70 days after launching its device, following up its experience in Europe, where it has already grabbed 70 percent or more from J&J's Cypher. One day later, in a largely defensive competitive manuever, Guidant and J&J/Cordis said they formed a co-marketing pact over Cypher, which would provide J&J with Guidant's convenient delivery device and could protect or even increase sales.

CBS MarketWatch had a nice overview of the battle:

    The arrival of Boston Scientific's stent, called Taxus, marks the beginning of intense competition with archrival Johnson & Johnson for dominance of the estimated $3 billion U.S. market for drug-coated stents. The new devices are expected to significantly improve the outcomes of artery-clearing angioplasty procedures.

    The U.S. Food and Drug Administration late Thursday, as expected, granted approval to Boston Scientific's Taxus. The medical-device maker said it's fully prepared to introduce the stent in the United States and said it has "ample inventory in all sizes." The Taxus was approved early last year for use in Europe, where it's been competing with J&J's Cypher drug-coated stent.

    J&J last year became the first company to win U.S. approval for a drug-coated stent, and the health-care-products giant has had the market to itself, until now.

    Following the FDA's OK for the Taxus stent, Boston Scientific affirmed financial projections it made early last week at a meeting with analysts.

    Boston Scientific said at the analysts' meeting it sees 2004 Taxus sales of between $1.7 billion and $2.2 billion, climbing to $2.4 billion to $3.2 billion next year. The company estimated 2006 sales of the device at between $2.2 billion and $3.4 billion.

    Cardiologists have for years used stents, tiny mesh devices, to prop open clogged arteries. But the arteries frequently close up again after the angioplasty procedures. Medical-device makers have found they can greatly reduce the chance that arteries will close up again by coating the stents with anti-scarring drugs.

    "This approval is a breakthrough event for the treatment of cardiovascular disease in the United States," Boston Scientific Chief Executive Jim Tobin said in a statement.

    Some analysts have predicted that Boston Scientific's Taxus could ultimately emerge as the leader in the market for drug-coated stents. But the company faces fierce competition from J&J.

    Just last week, J&J and leading medical-device maker Guidant said they would team up to market J&J's drug-coated stent in the United States, a move aimed at intensifying competitive pressure on Boston Scientific.

Meanwhile, former competitors in the stent selling business Guidant and Johnson & Johnson's Cordis agreed to co-promote Cordis' Cypher Sirolimus-eluting coronary stent. Guidant said the agreement gives it immediate entry into the U.S. drug eluting stent market, but what it does for J&J is much more important in light of the Taxus’ approval for Boston Scientific. In addition, Guidant will assist Cordis in the development of a Cypher stent that uses Guidant's Multi-Link Vision stent delivery system.

Both companies agreed to license certain patents and to settle all outstanding patent disputes between the companies. Guidant reiterated its full-year 2004 earnings guidance as a result of this partnership. Likewise, Johnson & Johnson still expects full-year earnings in line with its prior view. Guidant grants Cordis the option to co-promote a fully bioabsorbable stent currently under development by Guidant. Cordis retains clinical, manufacturing and order fulfillment responsibilities for the Cypher stent in the U.S. The companies will both market and sell the Cypher stent, with each company bearing its own marketing and sales costs.

Guidant Chief Executive and President Ronald W. Dollens said, "We believe this strategic agreement will provide significant benefits to both organizations by building upon the strengths of both companies' sales, marketing and product development resources." Cordis President Rick Anderson echoed Dollens' comments, saying the transaction doubles its presence in the "hospital and cath lab."

Guidant's drug eluting stent program, which uses the drug everolimus, will not be affected by the agreement with Cordis. The company expects to launch its Champion Everolimus eluting stent system in Europe in the first quarter of 2005 and in the U.S. in the first quarter of 2006, pending regulatory approvals.

But, whether Taxus, as many think likely, might eventually break away to dominate here in the U.S. as it has in Europe is ultimately a question of how intensely J&J decides to compete to preserve its current stranglehold on the market.

- Arik

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February 17, 2004

Cingular Wins AT&T Wireless Competition: Vodafone Withdraws Amid Verizon Complexities

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Vodafone ran up the bidding in a stroke of competitive gamesmanship unlike any in recent memory. I think it was a strategic masterpiece that will leave a pair of global competitors – SBC and BellSouth – trying to recover for years to come. Cingular thought it had to convince Vodafone that to beat them, they would have to vastly overpay. I really don’t think Vodafone was ever serious about a bid for AT&T Wireless; it was a ruse to make Cingular overpay instead.

But maybe in doing so, according to a false report in the early edition of the New York Times claiming Vodafone had won the competition to acquire AT&T Wireless, perhaps Cingular paid a bit more than it should have. Still, it clearly wasn’t in Vodafone shareholders’ best interest to win, what with a necessary exit from its Verizon Wireless partnership leaving a tax liability of $4 billion, beside the fact that Cingular has the best operating synergies, particularly in terms of technologies – a fact which essentially escaped most analysts looking at the situation.

No doubt, when Cingular Wireless on Tuesday won an auction for smaller rival AT&T Wireless Services with a late-night $41 billion offer that edged out Britain's Vodafone Group, it created the new U.S. wireless leader. The deal, worth $15 per share, was the largest all-cash offer in history and marked a 37 percent increase over Cingular's initial offer made last month. AT&T Wireless was an attractive target as the third-largest U.S. mobile phone operator with the second-highest revenue per customer, with a 17 percent marketshare. NTT DoCoMo had invested $10 billion in AT&T Wireless - although that investment was trading lately with a value about half that.

Another big advantage for Vodafone entering the race, whether they bought them or not, was the peek they got under the hood of a major competitor.

"I don't think they overpaid. It's definitely a bet for their future," said one telecom banker, who was not involved in the deal. "It's a huge wireless hedge. It will be the basis for more bundling (of other services) with the parent companies."

The combined company leapfrogs current U.S. market leader Verizon Wireless, giving it 46 million customers, annual revenues of more than $32 billion and a presence in 97 of the top 100 U.S. markets. Cingular's parents, Baby Bells SBC and BellSouth, see the growing wireless market as a key to offsetting the decline of their core local telephone operations.

The deal also marked the start of long-awaited consolidation in the crowded U.S. wireless market where six national brands and a handful of regional players are battling for market share as subscriber growth slows. As the Consumers Union slammed the deal, saying the merger would lead to higher wireless-calling rates and poorer service. I disagree.

Although the merger would shrink the number of national carriers to five companies, I personally doubt the deal would ease the industry's intense competition and price wars since each new subscriber becomes more difficult to find with half the country already owning a wireless phone.

"We think that the price we paid is a fair price. Yes, AT&T Wireless has some issues ... but we think the company was sound before those problems and we view the problems as being temporary in nature," Cingular COO Ralph De La Vega said.

In the fourth quarter, AT&T Wireless said it lost customers and missed out on several hundred thousand potential new subscribers due to technical and customer-service problems. Analysts expect other carriers to prey on AT&T Wireless's recent operational woes and possible distractions during the merger, before its close at year-end.

Cingular CEO Stan Sigman will run the combined company, while AT&T Wireless Chairman John Zeglis, who took the company public in 2001 when it was spun off from former parent AT&T Corp., said he would leave once the deal closed.

SBC and BellSouth plan to finance the deal with a bridge loan, which is a temporary loan used until long-term financing is secured, but Cingular said it was not considering an IPO, despite a probable divestiture of some of the parent companies’ operating assets, in order to raise cash.

As we all know by now, Cingular won the auction after it sweetened its offer at the 11th hour to clinch a deal it feared was slipping away to Britain’s Vodafone, the world's largest wireless carrier. Vodafone was pleased the company did not compete more aggressively for a deal that would have hurt its earnings and shares of Vodafone rose five percent in London. "The markets think it's a good thing that Vodafone hasn't overpaid, although in the long term, of course, it does leave them with a strategic problem in the United States," said global equity strategist Patrik Schowitz at HSBC.

Vodafone said it remained committed to its minority stake in Verizon Wireless, the largest U.S. wireless carrier. Its partner, Verizon Communications, said, "We've worked together well in the past and we will continue to work well together."

Japan's NTT DoCoMo, decided on Friday against bidding for AT&T Wireless, said it would weigh its options in the wake of the Cingular deal, which will give it cash in exchange for its 16 percent stake in the company. SBC and BellSouth said the deal would hurt their earnings through 2006. But a merged Cingular expects to save billions of dollars by cutting overlapping staff and assets, and it expects to generate positive free cashflow in 2005. De Le Vega also said Cingular did not believe it should be required to exit any markets to appease any regulatory concerns about its new size. "We don't think there should be any divestitures, with the number of competitors we have, we don't see why that would be a requirement," De La Vega said.

I think Vodafone made Cingular flinch.

Fears that mobile phone giant Vodafone could be dragged into a costly and protracted bidding war for AT&T Wireless appeared to be on the horizon when Cingular, their $35 billion bid. As a result, AT&T Wireless asked for higher bids from both companies, after Cingular last week opened the bidding at $30 billion. To compound the pressure, sources close to the bidding said AT&T Wireless wanted a quick deal.

Why my belief in the ruse? Vodafone had no chance of making similar cost savings to Cingular and it surely would have overpaid. Its only U.S. presence is the 45 percent stake in Verizon Wireless, which it would have to sell if it bought AT&T Wireless. Plus, investors were not convinced that the purchase made sense for Vodafone, especially if it has to get rid of its highly profitable Verizon stake. The real question was, were investors resigned to the likelihood that Vodafone CEO Arun Sarin was determined to buy AT&T Wireless to gain complete control of a U.S. operation?

Plus, in contrast to Verizon, the AT&T Wireless business is losing customers and money and would almost certainly require substantial investment by whomever buys them to put it back on a competitive footing, synergies with Cingular or no. AT&T lost 4 percent of its customer base in January alone, and operating income dropped by 20 percent compared with the same time last year, as the company reported a loss in the fourth quarter of 2003.

In the end, I think Cingular – and its shareholders – probably paid more than they had to; and Vodafone had a larger strategically-adverse impact on two global competitors – SBC and BellSouth – that will put it on stronger footing elsewhere in the world telecom market.

- Arik

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February 11, 2004

Oracle vs. PeopleSoft: Department of Justice Signals Against Merger as PeopleSoft Rejects its Determined Rival’s Latest Bid in Hostile Takeover

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One of the chief reasons I’ve been hesitant to opine any thoughts on the Oracle vs. PeopleSoft hostile takeover for the past eight months was because of the competitive dynamics of the industry and the likelihood that regulators might oppose the matter entirely, essentially mooting the point of any significant competitive analysis beyond FUD-factoring Larry Ellison against Craig Conway. This despite what appeared to be a warming of relations between the two firms in the past week, as Oracle upped its bid and PeopleSoft playing hard-to-get by teasing that the offer was still just not dear enough.

Lo and behold, in an announcement posted to PeopleSoft’s Web site last night, PeopleSoft revealed it had been informed by the U.S. Department of Justice that the staff of the Antitrust Division has recommended that the Department file suit to block Oracle's proposed acquisition of PeopleSoft and that the staff recommendation has been submitted to the office of the Assistant Attorney General pending a final decision no later than March 2nd, 2004.

The recommendation represents a significant victory for PeopleSoft and CEO Craig Conway, a former Oracle executive, who has predicted antitrust regulators would block Oracle from consuming his company. Conway had argued the takeover would hurt competition in the $20 billion market for business applications software used to automate a wide range of administrative tasks for companies large and small while Oracle had argued the deal would create a stronger competitor to German market leader SAP and a surging Microsoft as it enters that market.



On Monday, PeopleSoft had rejected Oracle's latest tender offer, coming late last week as Oracle raised its bid from $19.50 to $26 a share indicating Oracle was determined to complete the deal. This set the stage for a showdown at PeopleSoft's shareholder meeting on March 25, having called Oracle's $9.4 billion cash offer "inadequate" and issuing a more detailed analysis of its rejection of the bid, in the strongest indication yet that it might negotiate if the price was right. PeopleSoft said the bid valued it at a lower earnings multiple than other enterprise software companies and was below the price target set by analysts, implying a multiple of only 27-28 times earnings based on PeopleSoft’s expected earnings. By comparison, SAP trades at 32 times expected 2004 earnings, while Siebel, which is recovering from a deep earnings slump, stands at 46 times prospective earnings.

The analysis of the Oracle bid and PeopleSoft's decision to reverse its earlier position and make price rather than regulatory considerations the main argument for its rejection suggested that last week's renewed strategy from Oracle may have shifted the dynamics of the takeover battle. Before yesterday’s DOJ recommendation, PeopleSoft's shareholders would have been able to decide at next month's meeting whether they wanted the company to give more serious consideration to Oracle's offer, despite Oracle's complaints that PeopleSoft's poison pill takeover defense prevents it from taking control in the short term and essentially means shareholders have no power to influence the outcome of the bid.

However, that point is moot if regulators don’t approve and Oracle can’t win on appeal – so, here’s a quick run-down of the antitrust dynamics at work.

Throughout the DOJ’s probe, Oracle has essentially argued that competition is robust, with hundreds of mid-size and small software companies all competing to offer applications to handle different business administration needs. The company has argued that if it bought PeopleSoft, the combined company still wouldn't possess a number one market share position in any major business software category.

PeopleSoft, on the other hand, argued that the software market was far more narrowly defined, saying that a market for software "suites" exists in the form of prepackaged software applications designed to work together and that PeopleSoft, SAP and Oracle were the three principle competitors in that market, which would be reduced by one key player after an Oracle acquisition.



PeopleSoft has argued that Oracle launched its bid in June last year simply to disrupt its pending acquisition of JD Edwards and the market for business application software. Oracle, who dominates the database software market, ranks third in the biz-apps market behind PeopleSoft following its JD Edwards buy-out and the leader SAP. Investors had always anticipated that the merger could run into anti-trust problems with U.S. or European regulators, which was why PeopleSoft's shares had traded below Oracle's most-recent offer.

For those without knowledge of the full background here, it gets pretty interesting. In a statement, Oracle spokesman Jim Finn said the initial proposal to merge the business applications units of the two companies had come from PeopleSoft's Conway, who thought he should run the combined business. But when Oracle countered by offering to buy PeopleSoft, "Conway said he wouldn't sell at any price," Finn said. "He then began a long and intensive lobbying effort...(that) resulted in complicating and prolonging the Justice Department review of this merger." Finn added, "While no decision has yet been made, Oracle believes this merger will eventually be approved," indicating a fight ahead on appeal should a ruling come down officially against the merger.

In addition to the regulatory review, the merger is also being challenged in court by PeopleSoft and by the Attorney General's office of Connecticut. Oracle, in response, has a lawsuit pending against PeopleSoft over the actions it has taken to try to block the takeover, including "golden parachute" severance payments estimated at more than $60 million for Conway alone. Oracle also complained that a customer assurance program PeopleSoft put in place puts the company at risk of having to pay out up to $1.55 billion in the event of an Oracle takeover.

There’s little chance Assistant Attorney General Pate will ignore eight months of work by the Antitrust Division or the 200-plus depositions from PeopleSoft’s software customers saying how Oracle’s takeover would make their business software more expensive. The most important key conclusions however are that the department has defined the software market narrowly and has determined where there could be higher software prices as a result of a combination, after an earlier definition of the market in question as one for core financial and human-resources systems sold to large and complex organizations - a market served by only SAP, Oracle and PeopleSoft.

That means the department's conclusions on any anticompetitive effects would NOT be focused specifically on Conway's software "suites" argument, which PeopleSoft had said there was a market for shortly after Oracle launched its bid, which is what led many to believe suites were also the focus of the DOH probe.

Putting limits on the market definition to just financial and HR for large, complex businesses means that all those other pesky facts applying to any broader markets get tossed out as the DOJ skips over any markets for selling software to mid-size or small businesses, the market for customer relationship management and supply chain management, or anything on the database front. This all appears a decided advantage for Oracle, as well as the lack of any argument that Oracle has pricing power in the database market that it will be able to leverage into business applications software, similar to the way Microsoft's Windows monopoly has been tied to competing in other software markets, such as Web browsers and office-suite applications.

However, software license sales alone don’t account for all those billions in revenue generated by SAP, Oracle and PeopleSoft, as sales of software services, support and maintenance to existing customers generate annuity income every month once the customer makes a software purchase.

The DOJ is also concerned with whether new competitors could enter the market in the event that Oracle increased prices, and supposedly, the staff report will conclude that the price of new software licenses could be driven higher in the narrowly defined market if there are only two competitors, instead of three, and that few new suppliers will fill the gap in a market defined as "core HR and financial software for large customers".

On top of that, should the DOJ look at maintenance and support for existing PeopleSoft customers, Oracle could be seen to have a near-monopoly there, post-merger. Many believe a merged Oracle-PeopleSoft could generate a tremendous influx of new customers which the combined company could enforce its monopoly on. And, if the DOJ accepts that analysis, it will be virtually impossible to argue that any new company could enter and compete in delivering support and maintenance services on Oracle and PeopleSoft software.

Still, understanding Larry Ellison, he’s probably not finished yet – he’s likely to recommend the company fight any official ruling from the DOJ that might materialize in March, although the likelihood that Oracle would prevail in that is also poor. Should Oracle appeal however, Conway and PeopleSoft will have a few months more fight ahead – but, in my view, this DOJ Antitrust Division recommendation essentially kills the deal.

- Arik

Posted by Arik Johnson at 01:10 PM | Comments (0) | TrackBack

February 09, 2004

The Battle for M&A Marketshare: Merrill Lynch vs. Goldman Sachs, Morgan Stanley, Citigroup and J.P. Morgan Chase

merrill_lynch_ma.gifAs the mergers and acquisitions market comes back around and Merrill Lynch struggles to recover from its scandal-prone past, it’s putting a big push on recovering marketshare against stronger competitors Goldman Sachs and Morgan Stanley as well as upstarts Citigroup and J.P. Morgan Chase. A Reuters excerpt from a couple of weeks ago describes their progress and ongoing challenges:

    Merrill's top brass credits their tireless discussions with corporate executives over the past three years, when few were interested in doing deals. They also point to a fledgling business model that links investment banking more closely with other products.

    Still, analysts and bankers - none of whom wanted to be quoted - say Merrill may have trouble hanging onto its remaining top talent. And rivals like Citigroup and J.P. Morgan Chase & Co., which can lure potential advisory clients with their lending prowess, are not likely to go away.

    Merrill Chief Executive Stan O'Neal is hammering home his quest for profits, even if it requires ditching certain products, especially those that will not lead clients to buy other higher-margin offerings. And even if it means the company must sacrifice some market share in a particular area.

    "Our first metric is profitability," said Greg Fleming, who shares the top post at Merrill's global markets and investment banking.

    Still, he said market share does matter. The company expects to be a top 3 player in higher-margin businesses like M&A and in the top 5 across all of its product lines.

    "You can't argue you're an expert in something if you're 11th or 12th in the league tables," Fleming said.

    Merrill, which reported a record profit on Wednesday, finished 2003 in third place on global announced merger deals, just a whisker behind No. 2 Morgan Stanley. Merrill worked on 16.7 percent of the global merger deals, up from 13.7 percent the year before, according to Dealogic, which ranked Goldman Sachs first.

    Merrill's share was still off significantly from 32.4 percent in 1999, when it ranked second behind Goldman, but the company, like other traditional investment banks, has ceded ground to the new breed of superbanks like Citigroup and J.P. Morgan.

    Amid O'Neal's deep cost cuts of the past few years and the various scandals that rocked Wall Street, Merrill lost some key talent, including Casey Safreno, the global head of health care banking, and virtually its entire media team.

    Fleming and Steve Baronoff, Merrill's global head of mergers, acknowledge they must fill certain holes. They already brought back Victor Nesi to lead media and telecom banking, and have landed AT&T Wireless as a client.

    "From an M&A point of view, most of our industry groups are well covered," Baronoff said, although Merrill is looking to hire bankers in countries like France and Germany.

    He said Merrill could selectively add coverage bankers, who help handle all aspects of a client's investment banking needs, in the media, consumer and industrial segments.

    Former Merrill bankers said, however, that few star bankers have left because opportunities were limited in the depressed merger market. But with more deals in the works, rivals might poach those who remain, since some are still bitter about the rampant layoffs.

    Some Wall Street observers were mildly surprised about Merrill's uptick in advisory work because reports in The New York Times and BusinessWeek have indicated that O'Neal sees less value in the mergers business than the retail side and asset management.

    Although strategic advisory work accounts for only about 3.3 percent of Merrill's revenues, O'Neal's reported views about investment banking are still perplexing - and disputed internally - since he came up through the banker ranks, while his predecessor, David Komansky, did not.

    "Stan, from my point of view on the M&A side, has been a breath of fresh air," Baronoff said. "Stan is very accessible to clients. He has CEO impact."

    While Merrill sounds confident about its merger advisory infrastructure, it will have a tougher time warding off external factors, particularly the encroachment of lending heavyweights like Citigroups.

    "The traditional banks want to argue that M&A is a brains business having nothing to do with brawn," said one former banker, "but the financial reality for the clients may be that they can't afford to look at it that way, even if it means they're going to compromise the advice they get."

    Although Merrill touts its knack for complicated cross-border deals and hostile takeovers, it is also banking on its own brand of one-stop shopping, including help arranging a wide variety of funding options.

    For example, it points to its work with British pub company Spirit Amber, which last year acquired Scottish & Newcastle Plc, the nation's largest brewer. Merrill was sole adviser and bookrunner for a secured debt facility, and it contributed equity to the deal.

    "Our vision isn't a single product," Fleming said. "Our vision is driven around developing a relationship with a client, where they will turn to us for any form of investment banking and advisory service they're looking for help on."

Still, Merrill Lynch will need to continue to execute to recover its previous standing in the M&A market, as new rivals Citigroup and J.P. Morgan Chase force market leaders Goldman Sachs and Morgan Stanley to fight even harder. Whether Merrill can avoid getting caught in the middle of that battle for market share will depend on their ability to execute according to their strengths and exploit competitors’ weaknesses.

- Arik

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February 07, 2004

Jeep vs. Hummer

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Hummer and Jeep are going at it - with Jeep running an rather risky ad designed to fight back against Hummer's popularity even as the two brands start a somewhat unlikely battle for marketshare - the Hummer based on the latest military vehicle technology, while Jeep's is based on its World War II predecessor. Here's an excerpt from the IHT, detailing the fight between DaimlerChrysler's Jeep and General Motors' Hummer:

    Jeep, a division of DaimlerChrysler, recently began running a commercial that showed a bunch of children tooting around in toy Jeeps while a fat child struggled to get his go-cart Hummer out of the mud.

    "If it's not trail-rated, it's not a Jeep 4x4," a little girl says to the fat child in a cutesy, I-told-you-so tone. The ad, by GlobalHue of Southfield, Michigan, part of Interpublic Group, is a takeoff on a recent Hummer commercial that depicted a naughty child building a soapbox Hummer and then going off road to win a race. The lavish Hummer spot, by Modernista of Boston, was directed by Scott Hicks, who also directed the movie "Shine," and set to the tune of "Happy Jack" by The Who.

    Why would Jeep take a swipe at Hummer?

    Ever since General Motors began selling a suburbanized, if still steroidal, version of the Hummer in 2002 called the H2, analysts have pondered the effect of a brand based on a new military vehicle on the brand based on an old military vehicle.

    DaimlerChrysler went on the offensive against the H2 by suing GM, asserting that the H2's grille too closely resembled a Jeep's grille.

    Jeep lost the case, but Hummer still seemed to be on the mind of GM's rivals at the North American International Auto Show this month. Both DaimlerChrysler and Ford showed rugged sport utility vehicle prototypes that seemed to buck the trend toward tamer, carlike sport utilities. Ford displayed a modern version of its defunct Bronco, while Jeep unveiled a new show car, a massive block of a vehicle called the Rescue, with tire diameters of 37 inches, or 94 centimeters, and a chassis width of 80 inches.

    Whether either vehicle will actually be produced is not clear, but many at the show said the Rescue's boxy design looked an awful lot like the H2.

    Dieter Zetsche, the chief executive of Chrysler Group, dismissed the idea in an interview at the show. "If anything, Hummer tried to penetrate in Jeep's area," Zetsche said. "This is an absolute, original Jeep, the design of the vehicle, everything. Yes, it has the size of a Hummer, that's true. But I don't know whether there are plans to have certain size brackets restricted to certain brands. That would be new to me."

    Hummer and Jeep are not easily compared when one looks at the numbers. Jeep, whose sales declined 4 percent last year, according to Autodata, is a far older brand that sold more than 440,000 vehicles last year. About 35,000 Hummers were sold in 2003.

    Hummer is also a luxury brand, with the H2 starting around $50,000 and the H1, which closely resembles the Humvee military transport, at around $100,000. That is why the parking lot at the Hummer Driving Academy in South Bend, Indiana, where rich suburbanites come to learn how to drive off-road vehicles, is filled with Jeep Wranglers - the camp's instructors cannot afford Hummers.

    Hummer is planning smaller, lower-priced models to fill out its lineup, which will present a broader challenge to Jeep down the road. But that could take years. Jeep plans to redesign its flagship SUV, the Grand Cherokee, this year, and it will offer a bigger version of the Wrangler.

    For now, the Hummer's principal threat, many analysts say, is capturing the mystique that Jeep once had.

    "Hummer has stolen Jeep's thunder in terms of image," said Peter DeLorenzo, a former Detroit advertising executive who now edits autoextremist.com, a Web site that critiques the industry.

    DeLorenzo, who does some consulting work for Chrysler, added: "Jeep is no longer considered the top of the mountain in terms of off-road vehicles. The H2's image has blown past Jeep overnight."

    DeLorenzo said the Hummer advertisement "might be considered one of the best car ads of its type of all time" and called the new Jeep ad "a very childish, amateurish spot that pretends to make fun of Hummer when all it does is make them look terrible."

    Speaking generally, Clive Chajet, founder of Chajet Consultancy, a corporate identity specialist, said: "I think it's always risky to be negative about a competitor. It is a form of flattery by the knocker to the knockee, because you don't talk about the competition, and you don't bring attention to them."

    Strong identities are increasingly important as the market is overrun with sport utilities. Jeep appears to be choosing to play the stud card, with its latest commercial being one in a series touting the brand's "trail-rated" off-road capabilities.

    The Hummer driver? In the Jeep commercial, the fat child, labeled an "imitator," is left pounding futilely on his roof with his black gloves.

So, as Hummer continues to appropriate Jeep's 4X4 image in the minds of auto-buyers, whether Jeep can effectively slam its un-named-but-heavily-hinted-at competitor in its ads might determine whether being "trail-rated" can come to mean anything in the American psyche.

- Arik

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February 01, 2004

Gibson vs. Fender: Battle of the Axes

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There was an interesting article on The Tennessean Web site about Gibson Guitar Corporation and its chief, Henry Juszkiewicz, who's ambitious goal is to "build the venerable brand, known for its high-end, handcrafted guitars, into a global, highly diversified manufacturer of musical instruments" with $3 billion in revenue.

While the article focused competitive perspective on the company Gibson hopes to benchmark itself with someday - that is, Yamaha, the world’s largest maker of musical instruments, as well as tennis rackets, snow-blowers, golf clubs, car interiors and motorcycles – Gibson’s $250 million in revenues pale in comparison with Yamaha’s $2.7 billion in musical instruments, and another $2.1 billion in other stuff.

The much more obvious direct competitor for Gibson is Fender, from whom Gibson is trying to differentiate itself with the "digital guitar", acclaimed by so many in the press, but with a more pragmatic reception from musicians. Likewise, diversification is part of where Gibson is headed – pianos and drums and bass guitars – alongside its traditional fare, which is also moving downscale with brands like the Chinese-made Epiphone in order to keep the Gibson brand the upscale $3k-plus axe musicians are used to.

Can Gibson grow 1,100% to scale up to meet Yamaha? I think they should focus on leapfrogging past Fender first.

- Arik

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January 19, 2004

Innovation Powerhouse IBM Breaks U.S. Patent Record & Tops the USPTO List for 11th Consecutive Year

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American technological competitiveness appears to be in good hands, despite six of the 10 top innovators being Asian rather than American. The 2003 preliminary patent results were reported a week ago by the United States Patent and Trademark Office. As you know, an agency of the U.S. Department of Commerce, the USPTO issues patents, administers the patent and trademark laws of the United States, and advises the administration on intellectual property policy.

IBM broke a record for the number of patents granted in a year with 3,415 in 2003 and the firm has led the U.S. Patent and Trademark Office annual list for the past 11 straight years, making it one tough act to follow.

IBM was far ahead of the number two firm, Canon, which had 1,893 last year. Companies that make IT products held all the top 10 spots; together, those firms acquired 18,121 patents. Besides IBM and Canon, the group includes Hitachi, Matsushita, Hewlett-Packard, Micron Technology, Intel, Philips, Samsung and Sony.

Making its debut on the top 10 list for 2003 was Intel, having jumped up from 15th place in 2002. The chip-maker landed in seventh place with 1,592 patents, compared with the No. 15 spot in 2002. Hewlett-Packard also made a notable rise, moving to the No. 5 position from No. 9 in 2002, recording 1,759 patents in 2003, 374 more than in the previous year.

Still, IBM is the "Innovation Powerhouse".

During the past eleven years, IBM innovations have generated more than 25,000 U.S. patents - nearly triple the total of any U.S. IT competitor during this time and surpassing the combined totals for Hewlett-Packard, Dell, Microsoft, Sun, Oracle, Intel, Apple, EMC, Accenture and EDS.

"IBM's commitment to research and development has driven more than a decade's worth of patent leadership and is a major factor in our emergence as the world's leading IT, services and consulting company," said Nick Donofrio, IBM senior vice president, technology and manufacturing. "That said, we consider patents a starting point on the path to true innovation. What differentiates IBM from other companies is our ability to rapidly apply these inventions to new products and offerings that solve the most pressing business challenges of our clients."

Meanwhile, some of the biggest innovators of years past that no longer appear in the Top 10 include American business titans like Xerox, Lucent, Motorola, Eastman Kodak and General Electric - all firms that have had their share of business problems recently. If you're as curious about prior years as I was, check out the list of Top 10 patent recipients since 1995 below - it's fascinating to see how standings can change so rapidly.

Notably, two Xerox Corporation scientists, Raj Patel and Robert Yu, were awarded their 100th U.S. patents last month. That rare accomplishment capped a year in which Xerox and its subsidiaries earned 628 U.S. utility patents on new materials, new technologies and new ways of processing documents, bringing its total U.S. patents earned to nearly 16,000 - a sum matched by only a handful of the nation's most creative companies.

- Arik

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January 15, 2004

Fighting OxyContin: the Miracle Drug Turned Deadly, Purdue Pharma Seeks Delay of Rivals

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OxyContin is an important pharmaceutical – to the terminal cancer patients and other chronic pain sufferers that use it, to its maker Purdue Pharma who generates more than a billion dollars in sales from it (despite a judge's ruling earlier this month that its patent was invalid), and to the junkies who can’t live without it. If you’re curious about that last angle, there’s a feature article you can read at CourtTV.com that samples the sort of turmoil and death OxyContin abuse has become.

But Purdue’s cash cow is also attractive to generic competitors – notably Endo Pharmaceuticals who is on the brink of introducing a generic alternative that will erode as much as 80 percent of Purdue’s market share in a matter of months – that is, if Purdue’s latest legal petition fails to prevent it, after Purdue was found to have misled the patent office to delay competitors in the past and lost its patent. Here’s a link to the story.

The active ingredient in OxyContin, Oxycodone, is a powerful opiate and has been present in many other pharmaceuticals for a long time, but what makes Purdue’s drug so dangerous and susceptible to abuse is the density of the ingredient in OxyContin's time-release delivery mechanism. It’s perfectly safe and effective when used as directed, but when crushed and snorted can deliver fatal doses of the drug with a euphoric kick - not to mention addictive qualities - to rival heroin. These days, an illicit OxyContin prescription goes for $4,000 on the street.

- Arik

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January 13, 2004

Nasdaq vs. NYSE: Dual Listings Gain Traction with New Nasdaq Lobbying Efforts, Even as NYSE Strengthens Marketshare

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Just as a new competitive push by the Nasdaq threatens to weaken an already hard-hit institution, in a year-end statement released on the NYSE Web site, the world's largest exchange said its market capitalization increased to $16.8 trillion during 2003 from $13.4 trillion at the end of 2002. The NYSE said it maintained a market share of 81 percent in listed stocks traded during NYSE trading hours it garnered "the dominant share" of the market for initial public offerings during the year with 65 new offerings, while adding 106 new companies to its listings.

The exchange managed to divert business from its largest rivals, including among its 90 new domestic listings were 17 companies that transferred from the No. 2 Nasdaq Stock Market, and six firms which left the No. 3 American Stock Exchange.

But, as the Big Board is embroiled in a controversy stemming from the $188 million compensation package of former NYSE Chairman and Chief Executive Officer Richard Grasso, who was forced from his post by widespread criticism over the size of his pay package, the Nasdaq started a new lobbying effort directed at dual-listing many of the exchanges biggest listing stocks.

Following the scandal, interim chairman John Reed appointed a whole new board, splitting the oversight mechanism from its market functions. And, the sweeping governance changes altered the manner by which board members are selected and the functions they oversee.

On December 18, this new board named John Thain chief executive officer and separated the roles of chairman and CEO, but has yet to select a new chairman to manage the NYSE's regulatory arm.

The NYSE has also come under fire for a weak governance practices and the trading practices of its six specialist firms, which match buyers and sellers on the exchange's trading floor. Nasdaq’s new lobbying efforts are directed at pointing out the obsolescence and inherent conflicts of interest present in the so-called "specialist system".

Meanwhile, as the Reuters excerpt below explains, the Nasdaq’s "kick-em-while-they’re-down" attempt at a new round of dual-listing lobbying is an attempt to put more competitive pressure on the NYSE:

    The Nasdaq Stock Market, seeking to capitalize on recent woes at the New York Stock Exchange, said on Monday six NYSE-listed blue-chip companies had agreed to have their shares also trade on Nasdaq.

    The six companies, from a variety of industries and with a combined market capitalization of about $156 billion, are Apache Corp. (NYSE:APA), Cadence Design Systems Inc. (NYSE:CDN), Charles Schwab Corp. (NYSE:SCH), Countrywide Financial Corp. (NYSE:CFC), Hewlett-Packard Co. (NYSE:HPQ) and Walgreen Co. (NYSE:WAG).

    The six companies - the first to list on both markets - will not be required to pay Nasdaq's listing fees for the first year.

    Nasdaq, whose list of traded companies is heavily weighted in technology, is trying to reinvigorate its business after suffering the implosion of the dot-com bubble in 2000 while facing a growing competitive threat from electronic-based trading platforms.

    "It's certainly a public relations coup for the Nasdaq," said Matthew Andresen, head of global trading at Sanford C. Bernstein & Co. LLC in New York.

    "This is an organization that has had an unending succession of negative news, and this is a piece of pretty good news," he said, though he added that the financial impact would be minimal for both the Nasdaq and the NYSE.

    A spokesman for the NYSE declined to comment except to point to a statement the exchange made last week. That statement said the Big Board's studies showed "companies that transfer to the NYSE from Nasdaq experience higher-quality markets" as well as lower costs and volatility.

    In fact, 680 companies have transferred from Nasdaq to the NYSE since 1990, according to the NYSE. During that time, only one company has defected from the Big Board to Nasdaq, it added.

    Nasdaq's move comes as the Big Board, which controls about 80 percent of the U.S. market in listed stocks, is undergoing upheaval related to the ouster of former Chairman Richard Grasso over his $188 million pay package.

    The NYSE is also now under regulatory scrutiny over its specialist-based open outcry system, which critics say is less efficient than Nasdaq's electronic trading system.

    The revelation about Grasso's compensation set in motion a chain of events that led to the most extensive governance changes in the exchange's history.

    Those developments have emboldened Nasdaq to become more aggressive in trying to lure business away from its largest rival as its listings have declined.

    "This is the first time that companies on a manual floor-based market have endorsed and recognized the merits of an electronic market with multiple participants," Nasdaq Chief Executive Robert Greifeld told Reuters.

    The decision by the companies to maintain dual listings, Greifeld said, "is stating that the performance they see as possible on the Nasdaq ... is a good outcome for their shareholders and investors."

    Silvia Davi, a Nasdaq spokeswoman, said the new listings should begin trading on the market within the next few weeks - under the same three-letter trading symbol on both markets.

    Nasdaq said any companies that wish to maintain dual listings must meet national market listing standards.

    For their part, the companies involved expressed the desire to see more liquid trading in their stocks.

    "In our belief, the more stock exchanges you are listed on, the greater the liquidity or the greater opportunity for volume of share trades," said Brian Humphries, a spokesman for Hewlett-Packard. "We believe there are many advantages to being on the Nasdaq, and it somewhat increases the choice or competition, which is always healthy in our view."

    One industry official saw the Nasdaq move as a development in the ongoing fragmentation of stock trading that has accompanied the rise of electronic platforms.

    "The world used to be divided into (the NYSE and Nasdaq) ... and now everyone's taking the gloves off," said Kevin O'Hara, chief administrative officer at Archipelago Holdings, an automated exchange.

Meanwhile, Pfizer, the world's largest drug company and a leader in U.S. corporate-governance reform, is evaluating Nasdaq's offer to have Pfizer trade its shares on the electronic exchange. At the end of 2003, Pfizer had the third-largest market capitalization of all New York Stock Exchange-listed companies - $345.26 billion, according to NYSE data.

"We met with Nasdaq officials in December at their request, and reviewed their dual listing proposal," Pfizer spokesman Paul Fitzhenry. "We made it clear in our meeting that we would not reach any conclusion in any particular time frame. We are evaluating the proposal."

If Pfizer makes the change, it could represent an intriguing new way the two markets compete for stock listings and orders – in the short run, Nasdaq wants primarily to change the rules of what used to be a decidedly zero-sum game, through persuading large NYSE-listed corporations not to abandon the NYSE entirely, but simply to dual-list their shares on Nasdaq. Reuters continues:

    In a statement, the NYSE said that while it isn't familiar with Nasdaq's plan, the dual-listing concept "does nothing to serve the interests of shareholders." The NYSE also said that "there's nothing new" about the effects of dual listings.

    Indeed, at first blush, not much would change if dual-listings were widely embraced among blue-chip NYSE stocks. After all, Nasdaq already has a system that trades NYSE stocks. But experts said Nasdaq's dual-listing threat may pack a powerful public-relations punch that could have negative consequences for the NYSE and the trading firms that do business there.

    One trading executive, Matthew Andresen of Sanford C. Bernstein, said Nasdaq's move to dual-list companies would represent "a PR coup" that could nevertheless "muddy the franchise" of the NYSE. Having Hewlett-Packard agree to dual-list its shares is "saying that Nasdaq is real," Andresen said.

    Though nothing has changed as far as what can trade where, such a stamp of approval could result in more trading volume in NYSE stocks going Nasdaq's way. The NYSE said it "continues to produce the best prices in our listed equities." But some observers said that dual listings could encourage market participants such as active traders to do more business on Nasdaq.

    "I think it might draw more liquidity. More competition on price is a good thing for market participants," said Keith Keenan, head of institutional trading at Wall Street Access, a New York brokerage firm.

    That could be a negative for the NYSE's floor-trading "specialists." These auctioneers oversee the trading in assigned stocks at the Big Board and therefore command an important part of the volume in those stocks. Hewlett-Packard's specialist, for example, is the specialist unit of Amsterdam-based Van der Moolen Holding NV.

    In its statement, the NYSE said it is proud "that the best companies choose to list on the NYSE, which has the most stringent listing requirements of any market. The vast majority of U.S. companies that are eligible to list on NYSE have in fact done so, and as new firms grow and meet our demanding requirements, most eventually decide to make the investment in an NYSE listing because of the benefits to their shareholders."

The threat of dual listings could pressure the NYSE in other ways as Jefferies analyst Charlotte Chamberlain said last week, that this is really a "psychological fire-bombing by the Nasdaq of the NYSE to get them to get serious about merging with the Nasdaq."

I agree that Nasdaq’s success in dual listings will ultimately lead toward a merger, of interests if not companies, into a closer, one-market system. In December, the Wall Street Journal reported that Nasdaq had approached the NYSE about a possible merger of the organizations, but the NYSE has declined comment on the rumor, while Nasdaq denied talks ever having been underway.

- Arik

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January 10, 2004

The BBC: an Alternative for the American Public's Media Attention-Span

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In the wake of what many Americans feel has been a pandering patriotism to the U.S. invasion/liberation of Iraq, the American media establishment seems to have a new competitor to deal with these days – the BBC.

After discovering BBC programming available overnight on public broadcasting and on demand through the Internet, many of our more urbane citizenry are finding the less patronizing and far more venerable British media icon a better truth-teller than our own broadcast news sources. But, who could blame them… there’s just something about that British accent that lends itself to severe credibility.

I found an interesting article in the December/January issue of the American Journalism Review that speaks to the subject of "the Beeb’s" newfound American admiration - read the whole piece, but here's an excerpt:

    The British Broadcasting Corp. can certainly relate to American media outlets in one stark way: The radio and television behemoth has been embroiled in a journalistic controversy that threatens to damage its credibility, change the way it does business and, most likely, result in the ouster of a few employees.

    For media buffs, the New York Times' springtime of discontent segued nicely into the BBC's summer of the same. A governmental inquiry led by Lord Hutton explored the events surrounding the suicide of David Kelly, a weapons expert who was an anonymous source for an explosive BBC report on the British government's claims about Iraq's weapons of mass destruction. The radio segment, by correspondent Andrew Gilligan, charged the government with "sexing up" a September 2002 dossier and further alleged 10 Downing Street knowingly inserted a false claim that Iraq could launch its WMD in 45 minutes.

    Soon Kelly was identified as the source of that report. Shortly thereafter, he told his wife he was going for a walk and never returned. His body was found the morning of July 18.

    While American news audiences didn't see much coverage of the inquiry, the British press was full of front-page stories, loads of commentary and, in the broadcast media, reenactments of the proceedings. Internal e-mails, reporters' notes and the diary of Alastair Campbell, Prime Minister Tony Blair's director of communications and strategy, were brought forth as so much dirty laundry, and neither the government nor the BBC came off looking particularly good. The Hutton inquiry even set up its own Web site, www.the-hutton-inquiry.org.uk, to give the public a look at the mounds of testimony.

    Says John Tusa, former managing director of the BBC World Service: It "made the summer riveting."

    Hutton's final report won't be released until late December or January, providing more time for speculation on how badly it will criticize the BBC's journalism and the government's political maneuverings.

    But beyond the shared experience of having its credibility on the line, the BBC is quite different from the American networks. There's the sheer size - 41 overseas bureaus, 3,700 news employees. There's the public confidence - yes, confidence. The British tend to trust the BBC more than the government, not less. They reserve the bulk of their cynicism for politicians instead of reporters. The BBC even has not one, but two cute little nicknames--Auntie, or more commonly, the Beeb.

    During the war in Iraq, reportorial differences became distinctly recognizable. The BBC was more likely to be accused of being an enemy of the state than a patriotic cheerleader. A number of American viewers and listeners, dissatisfied with what they saw on the U.S. networks, tuned in or logged on to the BBC Web site in search of a different journalistic tack. Viewership of the BBC World News bulletins, aired on public broadcasting stations in the U.S., rose 28 percent during the early weeks of the war.

But, it’s not just the cosmopolitan accents; many BBC fans cite the World Service as a more reliable – and more objective – source of opinion in what many feel has become a near completely entertainment-oriented broadcast news culture from homegrown sources.

Maybe American news media should consider their most sophisticated demographics a bit more deeply. We certainly don’t get the same global feel here in the States that Brits and others enjoy on BBC and I think an important demographic defection is underway when one’s most important news consumers find European opinions more compelling than the ones at home.

- Arik

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January 08, 2004

Yahoo! vs. Google: Round One in the New Search Engine Wars

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Yahoo! is ditching Google as its main search engine "perhaps as early as the first quarter", the WSJ reports. The paper's sources are an unnamed marketing outfit who says they have been briefed on the switch by Yahoo!

This will come as little surprise to anyone. The only question was when the contractual agreements between the two companies would end.

While Yahoo! is a shareholder in privately-held Google, it owns its own search engine technology, courtesy of the acquisitions of Inktomi and the consumer business of FAST. It also owns the world's biggest paid-for search listings business, Overture. All three were bought over the last year or so.

Google is becoming a serious rival to Yahoo!, as a portal in its own right, and as the purveyor of Adwords, Overture's most formidable competitor by far. :

But what’s the impact of the switch on the searching public - and more importantly for the companies, those wishing to be found? In an article I found on the Jupiter Web site Clickz:

    The impact: SEM [search engine marketing] just got much more expensive for anyone using Inktomi's (Yahoo's) CPC-based program. Companies using Search Submit could reap huge rewards without incremental costs... if Inktomi allows Search Submit customers entry into Yahoo! when the change is made. But don't bank on it.

    If you're a marketer whose not paying to submit your site to Inktomi and whose site isn't found in MSN or HotBot, over the next three months whatever traffic you enjoyed from Yahoo! (via Google) will disappear.

    For some, this is great news. It means new, increased traffic from Yahoo! for many who never ranked well in Google. For others, Yahoo! just got too expensive.

    Yahoo! and MSN combined drive roughly 45 percent of all search referral traffic, according to StatMarket. Google and those powered by Google drive another 45 percent.

    Inktomi will be as important as Google for many marketers, at least for a few months.

    We believe there's a strong likelihood MSN will launch its own search engine and drop Inktomi in the fourth quarter of this year. Rumors are circulating MSN may not offer a paid-inclusion program (though that may change), so organic MSN traffic may no longer cost per click come year's end.

There’s even been speculation Microsoft might buy Google, and with a likely IPO in the not-too-distant future, priced at estimates as high as a $15 billion market cap, Microsoft might be the only one who can afford it with the mountain of billions Gates & Co. are sitting on now.

- Arik

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January 07, 2004

TiVo Defends Against DVR Competitor EchoStar by Suing Over "Time Warp" IP

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It would appear TiVo is serious about protecting its rapidly eroding monopoly in the DVR market from cable and satellite companies using DVR as a differentiating feature for their services. They’ve decided to sue EchoStar, the satellite company that seems to be growing most quickly in the DVR category, even as TiVo’s DirecTV goes head-to-head with EchoStar’s Dish Network.

Both TiVo and Dish hit the one millionth subscriber mark recently, so TiVo’s growth has slowed by comparison with EchoStar’s in the category. Here’s a excerpted backgrounder and deeper dive from CNET on the subject:

    San Jose-based TiVo said EchoStar's technology violates its "multimedia time warping system" patent, which it received in May 2001 from the U.S. Patent and Trademark Office. Some set-top boxes used with EchoStar's satellite service come with DVR capabilities.

    Defending its patents are crucial to TiVo, which has been emphasizing its licensing business as a complement to its services operations. The company counts major consumer electronics makers such as Pioneer, Sony and Toshiba as licensees.

    "We've invested in building a comprehensive patent portfolio to protect our intellectual property, and as the DVR category grows, we will be aggressive in protecting those assets," TiVo CEO Mike Ramsay said in a statement. "The success of our licensing business clearly demonstrates the value the industry has placed on TiVo's technology. It's important that we protect our IP for TiVo and our licensees."

    TiVo is seeking monetary awards and an injunction against future sales of DVRs by EchoStar. EchoStar representatives declined to comment Monday and said they had not seen the suit. TiVo has a partnership agreement with EchoStar rival DirecTV, a deal that contributes significantly to TiVo's revenue.

    The patent in question, which TiVo filed for in 1998, is described by the company as an "invention allowing the user to store selected television broadcast programs while the user is simultaneously watching or reviewing another program." TiVo has been awarded 40 patents and has more than 100 applications pending, according to the company. The suit was filed in a federal district court in Texas.

    TiVo may also be experiencing competition in the DVR market from cable provider Comcast, which in early December said it planned to add TiVo-like features to its service by the end of 2004, using Motorola set-top boxes.

TiVo filed a patent infringement suit against EchoStar Communications Corporation in the federal district court of Texas, alleging that the satellite television service provider is violating TiVo's "Time Warp" patent, which was issued in May 2001.

Key TiVo inventions protected by the Time Warp patent include a method for recording one program while playing back another, watching a program as it is recording, and a storage format that supports advanced TrickPlay capabilities. TrickPlay allows live television broadcasts to be paused, fast-forwarded, rewound, replayed or shown in slow motion.

"We take great pride in the fact that TiVo has created and developed the technology that revolutionises the way people watch television," said Mike Ramsay, CEO of TiVo. "We've invested in building a comprehensive patent portfolio to protect our intellectual property and as the DVR category grows, we will be aggressive in protecting those assets."

"The success of our licensing business clearly demonstrates the value the industry has placed on TiVo's technology. It's important that we protect our IP for TiVo and our licensees," continued Ramsay.

In the late 1990s, TiVo innovated digital video recording, or DVR, technology, which pretty much out-does anything your old VCR can do. Although the TiVo brand, like Kleenex and Xerox, has become synonymous with the product category, other versions of the DVR have been developed by ReplayTV, EchoStar and some cable services. And, many analysts even think TiVo will be outflanked by its competitors.

Still, the DVR revolution that many thought would happen by now really hasn't. It is estimated that DVRs are in fewer than 3 million homes. And, with about 110 million TV homes in the United States, TiVo and its rivals obviously still have a long way to go.

The suit comes several months after EchoStar's Dish Network service introduced a new version of its digital video recorder that allows its subscribers to record one program while playing another.

The market is "growing rapidly and growth is accelerating," said TiVo chief executive Mike Ramsay. "We're very concerned that competitors like EchoStar might use our technology against us."

TiVo has been awarded 49 patents and has more than 100 patents pending, the company said. TiVo said it registered the patent in July 1998, and the government awarded it in 2001.

"If it's determined that people are infringing on our property, we will protect it," Ramsay said. "We really picked our timing to coincide with the growth of this market."

DVRs contain a computer hard drive enabling television viewers to record programs and watch them later or to pause, rewind and slow down live programs. They provide more viewing options and easier interaction than traditional videocassette tape recorders. Forrester Research of Cambridge, Mass., says nearly 3 million American homes have DVRs, a number the firm estimates will grow to more than 40 million in four years.

EchoStar is the largest provider, with more than 1 million subscribers using its DVRs. TiVo reached the 1 million subscriber mark in November, but many of those customers subscribe to EchoStar competitor DirecTV, which has a licensing agreement with TiVo. Cable companies have sold roughly 500,000 DVRs, according to Forrester.

"We're at a moment when this is about to really take off," said Forrester analyst Josh Bernoff. "It's the perfect time to sue. If they waited much longer, it would be too late."

Bernoff said TiVo may be hoping to extract a per-box fee of $1 or $2 from EchoStar. Whether it can depends on the court, which will determine if EchoStar borrowed heavily from TiVo's innovations or developed the technology on its own, he said.

Most analysts, however, are dubious about TiVo's chances of fighting off a rising tide of similar technologies being deployed by both satellite and cable operators. Skeptics also note that lawsuits rarely work as a revenue stream, as Gemstar-TV Guide discovered to its chagrin over the past few years of failed patent suits for its onscreen TV program guide.

TiVo is struggling to maintain its brand lead as it faces increasing competition from cable operators that are rolling out integrated DVRs built by set-top makers Scientific Atlanta and Motorola. TiVo's lucrative distribution deal with satellite leader DirecTV is also in jeopardy as new owner News Corp. is widely expected to start pushing its own DVR box while marginalizing or reducing the royalty rate it pays to TiVo. Currently, some 709,000 DirecTV subs have a TiVo box.

The future of TiVo may be uncertain, but the "TiVolution" has never been more accessible than it was this holiday season. TiVo once required an upfront investment of hundreds of dollars. But, as new competitors continue to emerge, most people can now try the new way of watching and recording television for far less.

In late December, ReplayTV lowered the price on its cheapest machine to $149 and stopped forcing consumers to buy three years of service upfront, cutting the initial cost by more than $300. Time Warner Cable this year began rolling-out of a service that has a TiVo-like DVR built into the cable box and costs less than $10 a month. Some of Cox Communications' customers already have cable DVR service, and Comcast plans to roll it out to all of its subscribers next year.

But even satisfied early adopters have learned not to expect the world. Changing channels can be slow and most machines can't record on one channel while you're watching another. When the hard drive fills up, the systems make up their own minds about what to delete, usually the oldest recordings.

Why has the TiVo concept taken so long to take hold? Like a lot of cool-yet-cutting-edge technology, it can be hard to understand how useful the service is until you actually try it or see it in action. There's also uncertainty over whether start-up services such as ReplayTV, owned by D&M Holdings, and TiVo will survive over the long haul - or whether cable and satellite versions will ultimately corner the market.

So, in months ahead it's sure to be interesting to see how this fight shakes out and whether TiVo can leverage its patent portfolio to discourage other competitors from eating their lunch.

- Arik

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January 06, 2004

Agri-Trust: Did Monsanto & Pioneer Hi-Bred Collude to Illegally Fix Genetically Modified Seed Prices?

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According to sources at Monsanto and Pioneer Hi-Bred, senior executives from both companies met repeatedly in the mid- to late-1990’s and agreed to charge higher prices for GM seeds. The companies responded to charges of illegal price fixing by acknowledging the meetings but saying they were engaged in negotiations about legitimate changes to an existing licensing agreement. Here’s an long excerpt from the New York Times that explains the situation more completely:

    Interviews with former and current executives of major seed companies, along with company documents, however, show that through much of the 1990's Monsanto tried to control the market for genetically altered corn and soybean seeds. Monsanto spent billions in the 1980's to invent specialized seeds and sold the rights to make them to big seed companies like Pioneer.

    More than a dozen legal experts contacted by The New York Times say that if the goal of the talks between the rivals was to limit competition on prices, they would have violated antitrust laws.

    The talks, which occurred from 1995 to 1999, involved licenses that let Pioneer sell altered seeds developed by Monsanto, which is based here. In those talks, according to interviews with dozens of executives and court and other documents, the companies discussed prices, swapped profit projections and even talked about cooperating to keep the prices of genetically modified seeds high.

    The talks involved top executives at both companies, including Robert B. Shapiro, then Monsanto's chief executive, and Charles S. Johnson, then Pioneer's chief executive, as well as Richard McConnell, now president of Pioneer, and Robert T. Fraley, now Monsanto's chief technology officer, according to company officials and documents. Together, Pioneer and Monsanto control about 60 percent of the nation's $5 billion market for corn and soybean seeds.

    Also in the late 1990's, Monsanto pressured at least two other big seed companies to coordinate their retail pricing strategies with Monsanto's, former chief executives at those companies said. The executives, who ran Novartis Seeds and Mycogen, said they rejected Monsanto's entreaties as anticompetitive and potentially illegal.

    Analysts estimate that more than $10 billion worth of genetically altered seeds have been sold in the United States since they were commercialized in 1996. Monsanto and Pioneer did not have to succeed in actually raising retail seed prices to have violated the Sherman Antitrust Act, legal and economic experts say; just agreeing to coordinate prices is against the law.

    Companies found to have violated federal antitrust law could be subject to criminal fines and civil class-action litigation. In the civil lawsuits, courts can award triple monetary damages.

    "If they're talking to Pioneer about raising the ultimate price to the farmers, that's illegal," said Austan Goolsbee, a professor of economics at the University of Chicago and a former Justice Department consultant on antitrust issues. "Monsanto shouldn't care about the final price. They should only care about the royalty payments they receive from Pioneer."

    Royalty payments were at the heart of the matter. Before it realized how successful altered seeds would be, Monsanto sold the technology to some companies, including Pioneer, for relatively modest sums. When the seeds proved to be a hit, Monsanto tried to renegotiate many of those deals to ensure that the seeds sold for higher prices, executives and records show.

    Monsanto said it brought up those early agreements only in the context of negotiating a licensing deal with Pioneer for new seeds that Monsanto was developing.

    "Monsanto did offer to expand and revise existing licenses with Pioneer," Lori J. Fisher, a Monsanto spokeswoman, said in an e-mail message. "In the context of a potentially new license for technology, it is absolutely within the law to discuss the price and the means of compensation to the licensing party."

    Pioneer, a division of DuPont, also denied that the discussions were used to fix prices. "We set our own prices," it said in a statement. "We do it independently, and without consultation with our competitors." It added that it believed that all of its talks with Monsanto about technology licensing were "legitimate and appropriate business negotiations" intended to benefit its customers. "Pioneer at no time engaged in illegal or inappropriate activity regarding the prices of our products," it said.

    Some leading antitrust experts, however, said the talks resembled an effort to suppress competition on retail prices for seeds, though they cautioned that they had not seen documents in the case.

    Before Monsanto struck the 1992 and 1993 licensing agreements with Pioneer, it had monopoly rights to its technology and could set any price it wanted. But once Pioneer bought the licenses, it became Monsanto's competitor and, legal experts say, the companies were no longer supposed to talk about how much to charge.

    "Once you've created the competition," said George Hay, a law professor at Cornell University, "you can't take other steps to snuff it out."

    The Justice Department is already looking into whether Monsanto engaged in anticompetitive action in the herbicide market, which it dominates with its Roundup weed killer.

    The department is aware of the seed pricing talks, according to government officials. But it is unclear if a formal inquiry has begun. A department spokeswoman declined comment.

    And a group of farmers filed a class-action lawsuit against Monsanto in 1999, accusing it of several misdeeds, including seeking to organize a cartel to control the market for biotech seeds. In September, a federal judge here dismissed some claims, but not the accusation of price fixing. The farmers' lawyers have appealed the judge's rulings.

    Monsanto began its work on seeds in the 1980's, when it applied the emerging science of genetic engineering to agriculture. One idea was to develop soybeans impervious to Roundup, which would let farmers attack weeds without killing crops. Another idea was to make a type of corn with its own insect repellent, to save the cost and trouble of killing pests.

    The company spent hundreds of millions of dollars on these and other projects, and when the first altered seeds were ready for market, it sold the rights to produce and market them. Pioneer was one of the first to sign up, paying $450,000 in 1992 for nonexclusive rights to altered soybean seeds. In 1993, Pioneer paid $38 million for nonexclusive rights to the biotech corn.

    Monsanto officials initially viewed the deals as a vote of confidence in biotechnology, former executives said. But soon after, some senior executives complained that the technology had been sold too cheaply.

    "I left in '93, and they tried to undo the deal," said Geert Van Brandt, a former Monsanto executive who helped negotiate the 1993 agreement. "They wanted more money; they wanted to have their cake and eat it, too."

    By 1995, Monsanto revamped its licensing program to what some executives called a value capture system to reap bigger profits. Under this system, companies that licensed the technology had to require farmers to sign a grower licensing agreement that forbade them to replant seeds saved from harvest. Monsanto also required the companies to charge a technology fee for every bag of biotech seed; licensees were to collect the fee and pay it back to Monsanto.

    Most big seed companies — including several that Monsanto has since acquired — agreed to use the system, which legal experts say is a legitimate exercise of Monsanto's licensing and patent rights.

    But one major company was absent from the program: Pioneer, which already had the right to sell Monsanto's altered soybeans and corn. Worried that Pioneer might undercut prices being charged by other licensees, Monsanto asked Pioneer to renegotiate the 1992 and 1993 deals, according to executives involved in the talks.

    "We bought Roundup soybeans for about $500,000," said Thomas N. Urban, the former chairman and chief executive of Pioneer. "They hated us. Every time we had a meeting, they'd say, `You need to pay us more.' We said, `Why?' "

    Monsanto executives wanted to make their pricing system an industry standard, according to former industry executives.

    "We had commercial concerns about somebody willfully trading away the value of the technology," said Arnold Donald, Monsanto's former president and a leading figure in the Pioneer negotiations. "If Pioneer and Asgrow went out and charged a normal seed price and didn't put any value on the technology, in that scenario, we have no value."

    Asgrow is the nation's biggest soybean seed producer; Monsanto bought it in 1997 for $240 million. Mr. Arnold said he believed that what Monsanto did was legal.

    Pioneer, however, was reluctant to go along, according to current and former Pioneer executives, because it saw no advantage in collecting a separate fee for its rival and because it worried about offending customers by adopting the grower agreement, effectively forcing them to buy new seed every year.

    But former executives who were briefed on the talks say that Pioneer considered acceding to Monsanto's proposal in exchange for more advanced seeds and for getting the underlying genetic engineering expertise, called enabling technologies, that Pioneer could use to develop new seeds by itself.

    Monsanto balked at sharing that technology, according to lawyers and executives. Instead, it offered other incentives, including $25 million, if Pioneer would adopt the grower agreement and technology fee in 1995, according to lawyers. At one point, Monsanto also offered to let Pioneer keep the technology fee just so long as it charged one.

    "We said, `Just go with our form and keep the money.' And they didn't want to go," said Mr. Donald, now the chief executive of Merisant, a Chicago company that makes artificial sweeteners.

    When talking failed, Monsanto tried a threat. Former Monsanto executives said they told Pioneer they would withhold new technology from Pioneer if it did not renegotiate.

    "We said, `You paid us; you have every right,' " Mr. Donald said. " `But now we have a value capture for the industry.' And we said, `If you want future technology from us, you need to honor it.' "

    Monsanto and Pioneer, which is based in Des Moines, declined to discuss specifics of their talks.

    In 1997 and 1998, Pioneer executives told Monsanto they would agree to simply charge an "elite" or premium price — in effect agreeing not to compete with Monsanto and its partners on price — in exchange for Monsanto's giving Pioneer access to new varieties of modified seeds and the technology to make others, according to people who have seen documents relating to this.

    Mr. Shapiro declined to comment when reached by telephone. Other current executives of Monsanto and Pioneer who participated in the talks were not made available for comment by the companies.

    In the mid- to late 1990's, Monsanto sought similar agreements from other rivals, according to former seed executives.

    For example, Monsanto asked the seed unit of Novartis, the Swiss maker of drugs and nutrition products, to charge premium prices for its altered soybeans even though Novartis, like Pioneer, had a license to market them independently, according to former executives.

    "They came to us; they did pose that question," said Ed Shonsey, the former chief executive of Novartis's crop science unit. "We felt it was inappropriate. We refused."

    In 1995, Monsanto asked Mycogen, which is based in San Diego, not to compete with Monsanto or its partners on the price of biotech seeds in exchange for access to some of Monsanto's patented technologies, according to former executives and others who were close to the talks.

    Carlton Eibl, former chief executive of Mycogen, said Monsanto also sought to combine its seed technology with Mycogen's to bring his company into Monsanto's pricing system.

    "They wanted us to license enough of their technology so they could control pricing under the G.L.A.," he said, referring to Monsanto's grower licensing agreement. "That was a fundamental thing about controlling price that we did not agree with. No matter how you look at it, it was anticompetitive." Mycogen later was acquired by Dow Chemical.

    Monsanto denied it sought an agreement on price with either Novartis or Mycogen; it said it was simply engaged in licensing negotiations.

Being from the Midwest and close to a lot of farmers (and many more FORMER farmers, including my father and his fathers before him), this might not be so infuriating if seed companies weren’t so harsh with their farmer-customers on the "grower agreement" policies cited above.

For example, it’s an illegal violation of a company’s intellectual property to attempt to preserve seed-corn for planting from year to year, a practice which had been routine for farmer’s in years past. Seed companies test fields for evidence of detectable genetic signatures to curb the practice.

- Arik

Posted by Arik Johnson at 12:43 PM | Comments (0) | TrackBack

January 02, 2004

MTV vs. Fuse: Music TV Competitors Spar Over Video Exclusivity

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Here’s a story I’ve been watching for a few months now, ever since Fuse launched last May as the first serious challenger to MTV. One reason I like Fuse is their creative advertising, but the real appeal is that they play actual videos at a time when MTV is increasingly filled with cheap reality-TV content.

As for their promo strategy, Fuse as a startup music-television competitor to Viacom's MTV needed to build viewership on a small budget, so it tried a "Save a music video campaign" highlighted with Sally Struthers parodying her well-known "Save the Children" campaign. Pasted to a Viacom-owned billboard opposite MTV's headquarters, the billboard got big free-media attention-span for its bold challenge to MTV.

Meanwhile, MTV has recognized the threat and has started fighting back. I noticed this article from Rolling Stone about the turf war going on between the competitors:

    When the upstart music channel Fuse officially launched last spring, MTV general manager David Cohn told Rolling Stone the new competitor didn't scare him. "That 'Where are the music videos on MTV?' thing?" Cohn said. "I'm not sure anybody's that fussed about it." But in late December, industry sources were complaining that MTV had started turning up the heat on its competition, enforcing exclusivity contracts that keep some artists' videos off Fuse.

    "We pay millions of dollars to the labels to support the production of videos," says MTV spokeswoman Jeannie Kedas. "We take a handful of exclusives a year, and it gives major exposure to the artist." MTV reaches 87 million households; Fuse reaches 34 million. Though Fuse is the smaller fish, one prominent manager points out that artists value the channel's commitment to playing videos: "It's more like MTV used to be. It's cooler and more irreverent."

    MTV exclusives are nothing new. But before Fuse, the twenty-two-year-old video network had no real competition. Label and management insiders say that, in recent months, MTV has become pushier about its demands. "They're using our bands to get in a war among themselves," says one label source. Bands such as P.O.D. and Puddle of Mudd got around the rules by filming live performances at Fuse's studios.

    MTV's Kedas says the network rarely asks for exclusive rights on a video. "We're not exercising those rights any more aggressively because of Fuse," she says. Kedas argues that since Fuse doesn't pay the labels the millions of dollars in licensing fees that MTV does, it's only fair that MTV should occasionally demand a blockbuster video for its exclusive use. In the past year, Kedas says, MTV has taken fewer than a dozen exclusives, including Radiohead's "There There," Beyonce's "Crazy in Love," Blink-182's "Feeling This," Limp Bizkit's "Eat You Alive" and Linkin Park's "Numb."

    Fuse president Marc Juris downplays the turf war with MTV, saying there are plenty of videos to go around: "It's not about owning content - it's about owning a voice which makes that content take on greater meaning to our audience. Competition is everywhere. But if I was to think it's only MTV I have to worry about, I'd be thinking pretty narrowly."

The New York Post had an interesting article on the subject too:

    MTV is taking notice of upstart rival music channel Fuse.

    Fuse, a 24-hour music video channel owned by Cablevision's Rainbow Media, has slowly been garnering buzz within the music industry this year for doing what critics say MTV has strayed from: airing a constant flow of music videos.

    "It's a refreshing change of pace that you have this new channel that will offer a healthy dose of competition to the world of music videos," said one music industry executive.

    But while Fuse is still an ant compared with its giant rival, MTV has lately been playing a behind-the-scenes game of hardball - using its clout to steer artists away from Fuse, according to music industry sources.

    For one thing, MTV has long had deals with music labels that allow the network to pay a fee to lock up exclusivity on videos to keep them off the airwaves on other networks. MTV, sources say, has lately been exercising its exclusivity rights more often.

    For example, MTV has locked up exclusivity on many popular videos recently - including ones by Linkin Park, Puddle of Mudd, P.O.D. and Beyoncé, sources say. While record labels collect a fee for this, music industry execs say that not being able to air the videos simultaneously on Fuse hurts the labels' ability to market their artists.

    A spokesperson for MTV said the network decides on exclusivity "based on audience tastes and wants, not based on what another network may or may not be doing."

    Marc Juris, president of Fuse, told The Post, "I'm from the Bronx, and this feels like a good old-fashioned turf war. We feel like 50 Cent - been shot nine times but we're still singing."

    But the battle extends beyond videos. Just last week, Linkin Park, a band signed to Warner Bros. Records, bowed out of a deal with Fuse that would have had the network sponsor its upcoming tour after MTV intervened, according to music industry sources.

    Sources close to the situation say that Linkin Park first offered the sponsorship to MTV, but the network declined. The band then began negotiating with Fuse, and a deal was close at hand before MTV stepped in and made it known that such a sponsorship with Fuse would hurt the band's relationship with MTV, according to sources.

    An MTV spokesperson denied this, saying, "We did not ask any band or artist to decline tour sponsorships."

    MTV has also reacted negatively toward artists who have appeared on Fuse shows to promote new albums before they appeared on MTV, sources say.

    For example, MTV was outraged last month when Blink-182 went on Fuse first, sources say.

    Fuse, formerly called "muchmusic usa", was relaunched under the new name in May.

    It is on the air in 34 million homes in the country, and has deals with DirecTV, EchoStar and most major cable operators except Comcast, the nation's largest. It is currently in negotiations with Comcast about a carriage agreement.

    MTV is owned by media giant Viacom, which also owns music channel VH1 and Black Entertainment Television, which also airs music videos.



And, finally, the Miami Herald had a somewhat deeper LA Times feed posted on the subject as well:

    MTV built itself into an entertainment powerhouse by keeping an ear tuned to pop-music trends. The channel probably doesn't like what it's hearing now: the footsteps of a competitor.

    Since its debut seven months ago, Fuse has been steadily picking up music video viewers. Viacom, which owns MTV, is playing hardball in response, industry sources say, exercising a provision in contracts with record labels that requires them to provide music videos for Viacom's exclusive use.

    Executives at the five major record conglomerates won't talk publicly about the move. Privately, they're griping about what they say is MTV's bid to strong-arm them in order to keep its near-monopoly status in the music TV business.

    The labels agreed to the exclusivity provisions in contracts signed years ago. But executives say those deals were signed back when MTV had little serious competition.

    MTV has claimed exclusive rights to some eagerly awaited clips, including Radiohead's "There There," Beyoncé Knowles' "Crazy in Love," Limp Bizkit's "Eat You Alive," Puddle of Mudd's "Away From Me," Blink-182's "Feeling This," and Linkin Park's "Numb."

    Under the labels' contracts, the Viacom network can air a video exclusively for as long as six months, sources say.

    MTV's position as the dominant force in music television has never before been seriously challenged. In 1994, major record companies launched plans to start their own 24-hour music channel but scrapped the idea in the face of a Justice Department antitrust inquiry.

    Right now, Fuse's reach is limited. It is available through cable and satellite systems in about 34 million households, while MTV2 is in 50 million and MTV is in more than 86 million.

    But Fuse has been winning points among music executives and media analysts.

    "Fuse has been very successful in establishing a relevant brand in a very short period of time," said Jack Myers, a media analyst and publisher of the Jack Myers Report. "MTV is in a position of being forced to pay attention."

    The upstart channel is emerging as an MTV rival at a time when the music industry is suffering from a three-year slide in CD sales.

    "Given the current crisis in the music industry, it's a shame that anyone would seek to prevent the work of today's artists from getting to as many people as possible," said Marc Juris, president of Fuse Networks, which is owned by Cablevision Systems Corp.

    Relations between MTV and the labels recently have been tense. Music executives say they are tired of footing bills that seem to benefit MTV as the companies' fortunes decline.

    For instance, a label pays to produce a music video and to cover a wide array of other expenses, including the costs of an artist's travel to MTV events, stage sets at the events and other fees whenever the artist appears on the channel. MTV pays the label's licensing fees, about $5 million a year for the bigger companies, but music executives say that doesn't come close to covering their expenses.

    For MTV, the arrangement has been rewarding: By keeping its programming costs low, it has generated some of the biggest profit margins in the media world - an estimated 56 percent this year on sales of $929 million, according to Kagan World Media.

    Lately, some labels have refused to pay the costs of some high-profile acts' appearances; labels also have been offsetting their costs by cutting product placement deals with companies such as General Motors Corp. and Verizon Communications Inc. without MTV's approval.

    Whether there will be changes in the channel's deals with the labels is unclear. Viacom's MTV division has a contract with every major record conglomerate that guarantees the channel exclusive permission to air for a certain period of time a percentage of the music videos a company produces each year. MTV can claim exclusive rights to as much as 20 percent of a label's videos in some instances, sources said. In return, they said, MTV offers the record company free advertising spots.

    MTV executives declined to discuss details of the channel's contracts. A spokeswoman said MTV decides when to claim exclusive rights to a video based on an assessment of audience taste, "not what any other network may or may not be doing." For popular acts, she said, "it only makes sense for us to want to brand with the artist."

    Cablevision started Fuse in May, revamping a lackluster channel called MuchMusic USA that Cablevision had owned since 2000.

    "Whether anybody wants to admit it or not, the Fuse is becoming a player," said one artist representative who spoke on condition of anonymity. MTV "is seeing a spark, and they want to keep them from playing."

    Parent Viacom is supposedly insisting on enforcing the little known provision, which requires major labels to give MTV exclusive access to music videos. While executives at the five major recording companies are being pretty tight-lipped about it, privately they're admitting that they did sign the contracts, back when MTV had no serious competition.

    The music industry has been beaten-up by the three-year slump in CD sales and Mark Juris, president of Fuse Networks, said: "Given the current crisis... it's a shame anyone would seek to prevent the work of today's artists from getting to as many people as possible."

Branding Fuse as something more than anti-MTV didn't mean just shooting arrows over the wall of the leading brand. It led the channel to create a TV identity to beat MTV’s already clichéd rebellion in favor of some really way-out imagery. New York's TeamHeavy, the channel's creative department, decided to skip over the traditional logo-oriented branding strategy. Fuse’s logo changes design from one promo spot to the next and takes on pretty interesting forms, with "the four letter word they don't want you to hear" appearing in a broad array of formats.

Contrasting MTV’s traditional logo, the "Shave the Children" spot graphic above combines electric razors shaving the Fuse name into the chest-hair of an ape-man drawn as a B&W textbook-style illustration. But without having watched Fuse, it's impossible to say whether or not it delivers on its music vid promises, so check it out.

- Arik

Posted by Arik Johnson at 12:38 PM | Comments (0) | TrackBack

December 30, 2003

FedEx Acquiring Kinko’s to Compete with UPS and Mail Boxes Etc Stores

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Just when you thought the holiday madness was over, FedEx announced today it’s paying $2.4 billion in cash to buy privately held business services provider Kinko's in a deal set to close in the first quarter of 2004. Of course, they’re a little late the party after the 2001 acquisition by top competitor UPS of Mail Boxes Etc. franchise operations, successfully rebranded as UPS Stores just this past April. But, it’s a step in the right direction, if FedEx hopes to keep a part of the retail interface to foot-traffic looking to ship from a local storefront. In the Motley Fool excerpt below, some of the logic (and competitive desperation) of the deal gets explained:

    Soon, FedEx will offer its shipping options in 1,200 Kinko's stores (it currently has outlets in 134 Kinko's stores through a pre-existing agreement). The acquisition will help FedEx grab shipping business from the small- and medium-sized business market as well as from consumers who have fulfilled their other document needs in the stores.

    Kinko's has been branching out from its humble beginnings as a copy center. It's no longer just about producing brochures, manuals, and business cards. Now, it offers its business customers some pretty fancy solutions in many of its locations, including Wi-Fi Internet hot spots and videoconferencing. For 2003, Kinko's expects to report $2 billion in revenues (though the acquisition won't add to FedEx's earnings until fiscal 2005).

    With the high price tag comes the expanded retail presence and high-profile name brand that seems sure to usher in some built-in customers for FedEx. Over the last several years, the delivery company has suffered from a sluggish shipping business as the economy took a nosedive, and from heated competition from rival UPS and even the U.S. Postal Service.

    Earlier this month, Fool LouAnn Lofton reported on FedEx's lackluster second quarter. A higher-than-expected number of employees jumped at the chance to take FedEx up on its early retirement package, resulting in a charge.

    While the Kinko's acquisition might be a good idea, it's not original. In 2001, UPS bought Mail Boxes Etc. for about $185 million, a franchise that currently has 4,000 locations. With the possibility that UPS is indeed winning the market-share battle, one might wonder what took FedEx so long to tap into this market. However, by capitalizing on Kinko's well-known brand and non-franchise stores, the deal could deliver some excitement to FedEx shareholders.

What took so long indeed?! And why wait until after Christmas? Time to absorb and assimilate, I imagine. I looked back at what UPS had to say about the MBE deal, following April’s successful rebranding:

    "The UPS Store is a significant step in UPS's strategy to strengthen its brand presence and expand access to our services for small businesses and individual consumers throughout the U.S.," said Rocky Romanella, vice president of UPS retail services. "The UPS Store extends competitive UPS pricing along with the outstanding customer service that has become synonymous with MBE franchisees over the past 20 years."

    "This is an unrivaled combination of convenience, reliability and price," added Mathis. "We feel The UPS Store will transform the retail shipping industry."

    "The franchising sector has never seen re-branding on this scale," said Don DeBolt, president of the International Franchise Association. "To see one of the world's largest companies working alongside a leading franchiser is historic on its own."

    There are no plans to change the trade name of MBE's international locations. Currently, MBE has more than 1,000 units outside the U.S.

    The UPS Store and Mail Boxes Etc. together comprise the world's largest franchise network of retail shipping, postal and business service centers, with more than 4,000 locations around the world. Mail Boxes Etc., Inc., a UPS company, franchises The UPS Store and MBE retail locations. In the United States, The UPS Store and MBE locations are independently owned and operated by licensed franchisees of Mail Boxes Etc., Inc. Outside the United States, locations are owned and operated by MBE master licensees or their franchisees.

So, what the UPS deal a better bet than FedEx’ Kinko’s move? It was certainly cheaper, even if they don’t have the asset base, due to the franchising model. This should be interesting to see who grows revenue more quickly… and retail outlets!

- Arik

Posted by Arik Johnson at 03:55 PM | Comments (0) | TrackBack

December 29, 2003

Toilet Paper Wars: Charmin vs. Quilted Northern vs. Cottonelle

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Going "head-to-head" (get it?) in the bathroom tissue business, we’ve got P&G versus Kimberly-Clark versus Georgia-Pacific in a new promotional war of international proportions, with P&G’s Charmin taking it up a notch. This isn’t Mr. Whipple’s TP business, as the New York Times excerpt that follows describes:

    In the $4.7 billion business that is bathroom tissue, there is not a whole lot that separates one toilet paper from another. Since toilet paper is a commodity we all must buy - and do so, often without much brand loyalty - companies go to unusual lengths to get their messages across.

    Procter & Gamble, to promote its Charmin brand, has begun showing up at state fairs to encourage people to use special "Charminized" rest rooms, which are not only clean but stocked with P.& G. products. Outside the restrooms, the Charmin bear dances and mugs to entertain the crowd.

    And there's Georgia-Pacific, which this month weaved its Quilted Northern bathroom tissue into the regular programming of "The View," the morning gab fest on ABC.

    Next up, on Jan. 5, Georgia-Pacific will introduce a $10 million campaign, created by DDB Worldwide in New York for Angel Soft tissue, including commercials introducing David and Larry, "bathroom angels" who perform such good deeds as restocking depleted toilet paper rolls. The company is the largest bathroom tissue marketer in the country, with a 38.9 percent volume share, according to Nielsen data provided by Georgia-Pacific.

    But Quilted Northern - the company's biggest brand, with about a 21.5 percent share of the total market - still trails the category leader, Charmin, by about three percentage points. Cottonelle from Kimberly-Clark has about a 12.7 percent share.

    The commonplace nature of toilet paper results in widespread discounting and promotional activity among manufacturers and retailers. That tends to erode brand image in a category where the last really notable advertising icon was Charmin's Mr. Whipple, who last appeared regularly in the 1980's.

    "It's one of those categories where retailers will football on price, so it's been very difficult for true product benefits - making a better toilet paper - to translate into higher prices," said Paul Crnkovich, partner at Cannondale Associates, of Evanston, Ill. "The ultimate definition of brand equity is how much more you'll spend for Product A than Product B."

    After P.& G. retired Mr. Whipple, the company spent years searching for an effective strategy that would differentiate Charmin. The company even brought Mr. Whipple out of retirement in 1999, but that did not last.

    Several years ago, P.& G.'s longtime agency, D'Arcy Masius Benton & Bowles, turned to an animated bear to restore some pride to the Charmin franchise. (P.& G. last year moved the Charmin account to Publicis Worldwide, part of the Publicis Groupe.) The Charmin bear originally appeared in broadcast spots but has more recently been seen at state fairs and festivals, alongside the Potty Palooza, a 32-foot truck with 12 fully outfitted rest rooms, featuring hardwood floors, sinks, floral scents - and Charmin tissue, of course. P.& G. provides the truck as an alternative to portable latrines. While people line up to use the Potty Palooza, the Charmin bear dances and entertains the crowd.

    In this case, the bear is extending the message of Charmin's broadcast commercials, in which he does the "Cha-cha-cha Charmin" dance.

    "It gets people interested in the bath tissue category," a P.& G. spokeswoman, Celeste Kuta, said. "It's usually a low-involvement category." The bear, she added, "does it in a way you couldn't do with real people."

    If Charmin's message remains playful, Quilted Northern opts for a somewhat more earnest approach, with the slogan, "It's Quilted Because We Care." A spot currently in rotation features a cartoon character named Wanda who doesn't care about quilting and, indeed, blows her nose into the quilt stitched together by the other characters, horrifying everyone. In the end, though, Wanda was just a nightmare conjured up by one of the quilters. DDB Worldwide, a New York agency that is part of the Omnicom Group, has the Quilted Northern account.

    Kimberly-Clark's Cottonelle brand also stakes out a claim to caring in its marketing, via the slogan, "Looking Out for the Family." The company uses a Labrador retriever puppy to convey that small dogs, like families, need to be treated gently, a company spokesman said. J. Walter Thompson in New York, part of the WPP Group, has the Cottonelle account.

What can I say? Since I’m the grocery buyer in our house, I tend to get whatever’s cheaper and I don’t clip coupons, but that puppy is a lot cuter than the bear in my opinion… or Mr. Whipple.

- Arik

Posted by Arik Johnson at 03:53 PM | Comments (0) | TrackBack

December 26, 2003

Barbie vs. Bratz: Dolls Battle for Marketshare ‘Neath the Christmas Tree

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At one of my family Christmas get-togethers this holiday season, I noticed the presence of a new, funkier kind of doll for girls – the "Bratz" dolls and all their accompanying accoutrements. Intrigued, I did a bit of research and found out they’re taking a king-sized bite out of a market ordinarily served by an older forebear, Barbie. Here’s an excerpt from an article that sums up the phenomena:

    For the first time in Ken Grow's 27 years as a toy retailer, Barbie lost ground to a rival fashion doll during the holiday season.

    "The best doll this year . . . has been the Bratz doll," said Grow, owner of Gregory's Toys, an independent store in Encino. "Barbie has lost a lot of steam."

    Mattel, the world's largest toy maker, is not accustomed to seeing its flagship fashion doll face such stiff competition. Its line of electronic learning toys also is faltering in what has become a tight market for toy producers.

    "Those are two key categories for us," said Robert Eckert, chairman and chief executive of Mattel. "We had been gaining market share for the last several years, and in fact we lost market share in the first part of this year."

    Sean McGowan, a toy industry analyst at Harris Nesbitt Gerard, estimated that Mattel's share of the fashion doll market has dropped from 75 percent to about 60 percent since 2000.

    The toymaker has other problems. Along with increasing competition, Mattel has been weathering the fallout of 2002's dismal holiday season that led to a surplus of inventory and tighter spending by retailers. And it has seen its profit margins weaken amid pricing pressure from Wal-Mart and other discounters.

    Eckert took over as CEO three years ago as Mattel struggled to overcome the ill-fated $3.5 billion acquisition of software maker Learning Co. As he focused on building the company's core brands like Barbie and Hot Wheels, Mattel stock bounced back and international sales increased.

    But domestic sales lagged during the first three quarters of this year. "We did spend the first part of this year working off those inventories," Eckert said. "On top of that, our own product line was not doing particularly well in the first part of this year."

    Through August, Bratz dolls topped the fashion doll market, according to the NPD Group, a marketing firm. The line produced by MGA Entertainment sports a sexy, urban look that embodies contemporary teen fashion.

    "Right now, there's nothing but the Bratz dolls," said consumer Jennifer Joyce of La Crescenta, whose 10-year-old daughter used to collect Barbies but has moved on to Bratz.

    Mattel has tried to keep Barbie edgy by marketing the My Scene Barbie, which sports a youthful, contemporary style, and the hip-hop-inspired Flava doll line.

    Grow, the Encino toy-shop owner, said his customers haven't shown much interest in the My Scene dolls, which hit stores last year, or the Flava dolls, which debuted during the summer. Chain stores such as Wal-Mart and Target have discounted the dolls, trying to move them off the shelves.

    In toys for boys, Mattel still leads the die-cast car market with its Hot Wheels and Matchbox brands. But some of its action figures haven't sold well, McGowan said.

    Jill Krutick, an analyst with Citigroup Smith Barney, believes Mattel is well-positioned heading into 2004 because of ongoing product innovations.

    The company is counting on a new race track called T-Wrecks that features a dinosaur that swallows and then spits out toy cars. To keep the interest of older kids who played with Barbies and Hot Wheels as children, Mattel has started marketing tie-in videos, clothing, cameras and electronic games.

    Mattel's main competitor, Hasbro, has gained momentum in recent years with popular brands such as Transformers and Beyblade, a line of shooting toys.

    In the past 12 months, Hasbro stock has gone from just under $12 to its current $21. Mattel's stock is hovering near $19 -- the same level it traded a year ago.

I found another couple of excerpts from BrandChannel.com, with a decidedly more positive opinion:

    Mattel’s popular icon has weathered many political, cultural and social storms since her introduction in 1959, but in the end she remains a plastic doll with a cheery smile and a perfect figure, a woman many little girls admire even when they realize that Barbie’s proportions don’t match reality. Billed as "a shapely teenage fashion model," Barbie made her first appearance at the American Toy Fair in New York City and soon became a hit. Her abrupt departure from traditional baby-faced dolls, however, drew criticism that has never stopped even though the nature of the complaints has changed.

    Mattel did its best to satisfy both the critics and fans of Barbie, reshaping her face early on to give her a softer look and even trying in recent years to make her body more closely match that of an average woman. The doll’s ubiquitous fashion accessories have also changed with the times, although Mattel made sure that there was nothing salacious about Barbie wearing a mini-skirt in the 60s or a tube top in the 80s, despite her popularity in a culture that has become increasingly open about sexuality.

    The company also began rolling out Barbie’s supporting cast in the early 60s, starting with Ken. (Mattel should abandon attempts to quell rumors that Ken is gay and Barbie is really in love with G.I. Joe; the speculation helps keep the brand in the public’s mind.) Barbie’s best friend Midge and her little sister Skipper followed soon after, and the subsequent 30-plus years have seen the addition of a black doll named Christie, an "artsy bohemian" named Chelsea, and others.

    Mattel’s response to feminists include Astronaut Barbie and Doctor Barbie, which debuted in 1986 and 1988, respectively. Day to Night Barbie (1985) reflected the yuppie lifestyle of the 80s, complete with an executive’s outfit for Barbie’s 9-to-5 office job and evening wear for a night on the town. She even came with a small calculator, perfect for crunching the numbers needed for financial reports.

    In 1992, the Barbie Liberation Organization became upset when a Talking Barbie included the phrase "Math class is tough." The group switched her mechanisms with G.I. Joe’s, creating homemade Barbies that yelled "Vengeance is mine!" While the incident was amusing, and it did successfully spread the group’s message, it did little to harm the brand. In fact, Mattel’s strategy in this area is to ignore the critics, as many of them will be unhappy with the doll no matter what the company does. If a mother is truly unhappy with the image Barbie projects, there’s little Mattel can do that it hasn’t done already.

    But while the critics have done little damage to the brand, competitors continue to search for ways to cut into Barbie’s market and mind-share. From cheap knock-offs sold in dollar stores to upstarts like MGA Entertainment’s Bratz, which tries to cash in on current American youth culture with a brash image, Barbie faces many threats within the market niche. In response, Mattel created the "My Scene" line, which features similar fashions without the "in your face" attitude.

    Brand consultancy Interbrand ranked Barbie 97th with a value of US$ 1.87 billion, down three percent from the year before, in its 2003 Best Global Brands report with BusinessWeek. While a loss of brand worth is never good, Mattel doesn’t need to panic. It has spent more than three decades building a brand that includes not only toys but also videogames, board games, comic books, cartoons, and other spin-offs that constantly keep Barbie in the public eye.

So, good luck Barbie – this battle with the Bratz is one fight where it looks as if you’ll need all the luck you can get.

- Arik

Posted by Arik Johnson at 03:51 PM | Comments (0) | TrackBack

December 19, 2003

RealNetworks Sues Microsoft for Unfair Competition

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RealNetworks said yesterday it’s suing longtime rival Microsoft, accusing the software titan of unfairly promoting its own software for playing audio and video on computers and over the Internet.

    In an antitrust complaint filed in federal court in San Jose, California, RealNetworks claimed that Microsoft "pursued a broad course of predatory conduct over a period of years by abusing its monopoly power, resulting in substantial lost revenue and business for RealNetworks." RealNetworks is seeking more than one billion dollars in damages and unspecified injunctive relief measures. "We believe that we have a very strong case against Microsoft," RealNetworks Chief Executive Rob Glaser told reporters on a conference call.

    Microsoft rejected RealNetworks claims, saying that there was "vibrant competition" in the digital media player marketplace and that it would respond forcefully to RealNetworks' allegations in court. "Real(Networks) claims to be the No. 1 provider of digital media solutions, with massive distribution of its software and more than 1 million player downloads a week," said Microsoft spokesman Jim Desler, "Thus, this is a case where a leading firm is seeking to use the antitrust laws to protect and increase its marketplace share and to limit the competition it must face."

    Seattle-based RealNetworks said that its lawsuit was complementary to an ongoing European Commission investigation into Microsoft's activity involving media-playing software and that it was cooperating with the EC. European Union regulators are wrapping up a five-year probe to determine whether Redmond, Washington-based Microsoft used its monopoly position to boost its share of the media player market. RealNetworks has testified in recent EC hearings.

    The two companies, based in the Seattle area, have met frequently in courtrooms over the last five years. Glaser, a former Microsoft executive, founded RealNetworks nearly a decade ago to sell software that allows users to listen to audio and video content on their personal computers.

    The two companies were once on good terms, with Microsoft making a $30 million investment in RealNetworks in 1997, but the relationship turned sour after Glaser testified against Microsoft in the U.S. government's antitrust case.

    In Thursday's filing, RealNetworks said Microsoft used its monopoly power, which was recognized by the U.S. courts, to force "every Windows user to take Microsoft's media player, whether they want it or not."

    RealNetworks, which has been branching out into online content subscription services, sells its media player as a downloadable software product or with a monthly subscription.

    RealNetworks said its its complaint that Microsoft went from having no presence in the streaming media business in 1997 to surpassing RealNetworks' digital media player market and usage in the United States in 2002.

    Bob Kimball, RealNetworks' vice president and general counsel, said his legal team chose to file its suit in San Jose, California, the heart of Silicon Valley where most of Microsoft's competitors are based, because many of the witnesses are nearby. RealNetworks said it had already spent more than $1.5 million on the litigation during the current quarter and expects to spend $12 million next year.

Meanwhile, Microsoft defended its business practices in the multimedia market:

    "There is vibrant competition in this marketplace and Real Networks' own reported growth shows that they have thrived on Windows and many other operating platforms," Microsoft said in a statement.

    Part of Real Networks' case is based on business conduct similar to what U.S. courts have declared illegal in other Microsoft antitrust cases, such as failure to disclose interface information and placing restrictions on PC manufacturers, said Bob Kimball, Real Networks vice president and general counsel, in the statement.

    Such antitrust litigation typically takes about three years with a trial, Real Networks said. Microsoft, for its part, said that computer makers can install and promote any media player on their PCs and that it does not restrict consumers from using any media player. The company called Real Networks' move "rear-view mirror litigation."

    "These issues are a rehash of the same issues that have already been the subject of extensive litigation and a tough but fair resolution of the government antitrust lawsuit," Microsoft said in the statement, in turn accusing Real Networks of using antitrust laws "to protect and increase its market share and limit the competition it must face."

    Attorneys who have been involved in other legal action against Microsoft said they could see Real Networks' lawsuit coming given its involvement in advising the Department of Justice and the various states in their antitrust cases against Microsoft. "It's not a surprise at all," said Richard Grossman, a partner at Townsend and Townsend and Crew LLP, in San Francisco, and co-lead counsel in a California class-action case that led to a $1.1 billion settlement with Microsoft. "Certainly Real Networks has been at the forefront of those concerned about Microsoft's anti-competitive conduct."

In browsing Real’s Web site today just to re-familiarize myself with a company that had, to be honest, dropped off my radar awhile ago, I found a solid explanation of their competitive advantage over Microsoft, which it seems to consider weaker in many areas than RealNetworks own products. That said, given such an unfair competitive advantage over Microsoft, it might leave some wondering what Real’s lawsuit is really arguing. Here's their top 10 list of advantages:

    HELIX VS. MICROSOFT: YOU DECIDE

    RealNetworks® pioneered streaming media on the Internet in 1995 and has been the leader in technology and business innovations ever since. Today, thousands of the world's leading enterprises, infrastructure service providers, and media companies manage media creation, delivery, security and playback with RealNetworks' end-to-end systems technology.

    Why do these companies continue to select solutions from RealNetworks rather than using bundled media software from Microsoft? Review the facts below and decide for yourself whether RealNetworks or Microsoft creates more revenue and cost savings opportunities for your organization.

    1. RealNetworks Helix Universal Servers deliver four times more Windows Media streams than Windows Media Servers

    In June of 2002, RealNetworks contracted an independent testing facility to benchmark our Helix Universal Server against the Windows Media Technology 4.1 Server. The results were dramatic — Helix Universal Server serves Windows Media better than Windows Media Server. In addition, if you take into account Microsoft's claims regarding performance improvements in their Windows Media 9 Series Beta, RealNetworks Helix Universal Server still delivers nearly double the performance and is shipping commercially today.

    2. Is "free" really free?

    Because Windows Media is packaged with the Windows operating system, people mistakenly assume that it's free. To use "free" Windows Media software you have to be a paid customer of the Windows operating system. If you want to use the latest Windows Media features, and you have not paid for the latest operating system release, you're out of luck. And to build a robust distributed network for delivering Windows Media, you'll have to pay for expensive third party software or appliances.

    3. Helix Universal Server supports all major media formats on an open system, Windows Media is a proprietary, OS-based system.

    The RealNetworks Helix Universal Server offers full support for over 55 formats and datatypes - now including streaming Windows Media to Windows Media Players and QuickTime to QuickTime players and MPEG-4 to MPEG-4-enabled players, including the RealOne Player. These products also now offer native support for MPEG4 and MP3 audio.

    4. Helix Universal Server runs on 11 operating systems — Windows Media runs on one.

    Customers appreciate being able to make their own decision on operating system based on existing resources, skills or their best judgment around security and other issues. The latest version of Windows Media is available with Windows 2000 and Microsoft's upcoming Series 9 release is expected to be available only on the .NET server. This means that with the Helix Universal Server, you will be able to deliver RealMedia and Windows Media from more Windows-based operating systems that you can with Windows Media.

    5. Helix Universal Servers slash the cost to deliver both RealNetworks and Windows Media by more than 40%.

    Only RealNetworks allows companies to deliver RealMedia, Windows Media, QuickTime and MPEG 4 from a single delivery infrastructure.

    6. Helix Universal Server makes delivery of Windows Media reliable

    From encoder to server, from server to server or from server to player, the RealNetworks system can be configured redundantly to provide a fail-over feed in the event of a network or equipment outage. Windows Media simply does not have this capability.

    7. Consumers overwhelmingly prefer RealVideo 9 to Windows Media Video

    By a 16 to 1 Margin, Consumers Favor RealVideo® over Windows Media Video for Better Video Image Quality, Smoother Motion and Overall Viewer Preference — Key Labs, May 2002.

    8. How will you reach all platforms and consumer electronic devices?

    The Helix DNA Client is at the core of RealNetworks embedded devices strategy. Designed for non-PC devices with constrained footprints and requirements, the Helix DNA Client can support any codec and format. Since its launch in October 2002 the Helix DNA Client has had tremendous success in the market and is being used by tens of thousands of developers as the core media engine for their device or application. The Helix DNA Client, along with the RealAudio and RealVideo codecs, is being ported and optimized for a wide range of devices including mobile handsets, PDAs, set top boxes, home gateways, audio/video servers, and others. In addition, RealNetworks has many relationships with Consumer Electronics manufacturers, chipset / processor / DSP providers, 3rd party software developers, RTOS providers, and others. All are using the Helix DNA Client as their primary multi-format media engine.

    9. Can you buy a complete solution for content distribution from Microsoft?

    The Helix Universal Server and Helix Universal Gateway offer an integrated content distribution system. Now, from a uniform architecture, digital media can be propagated either proactively or as needed in real time to any place on the network. With Microsoft, you would have to purchase an expensive third party solution for distributed content delivery.

    10. How many security breaches can you live with?

    RealNetworks has the best security track record in the industry not only because our system has been designed to leverage the intrinsic reliability and security inherent in the most robust operating systems, but because we also offer the most secure digital rights management system available. The RealNetworks Helix Digital Rights Management uniquely offers native, end-to-end and renewable security to unique, tamper resistant playback clients. Because of Microsoft's dependence on the Windows operating system, any OS bugs or breaches will adversely affect the entire infrastructure, including their media server.

Sounds a lot like Netscape a few years ago, doesn't it?

- Arik

Posted by Arik Johnson at 03:45 PM | Comments (0) | TrackBack

December 18, 2003

Windows vs. Lindows

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Microsoft is defending itself against another operating system threat in the form of Lindows.com, the San Diego-based company that now faces a penalty of 3 million Swedish Kronas (about $409,000) if it violates a temporary injunction Microsoft was awarded against the company in a Stockholm (Sweden) City Court on Wednesday.

Lindows must stop selling its Linux-based desktop OS products in Sweden, billed as an easy-to-use alternative to Windows, that allegedly violate Windows trademarks, including terms such as "Lindows", "Lindows.com" and "LindowsOS". The legal move to Europe, follows Microsoft’s filing suit in the U.S., an action which is set to go to trial in early 2004.

Meanwhile, Microsoft and Lindows have been going at it on other fronts as well. A Web site set up by Lindows allows California consumers to electronically (and much more easily) file for a share of the $1.1 billion class action settlement by the state against Microsoft, which Microsoft says violates the terms of the settlement. Here’s an excerpt from the article on the Lindows Web site that addresses the issue of settlement rebate vouchers:

    The clock is ticking for owners of Microsoft products who want to claim their share of the $1.1 billion class-action antitrust judgment against the company. In January, Microsoft agreed in San Francisco Superior Court to pay that amount to California customers to settle 27 lawsuits that accused the software maker of harming consumers with an illegal monopoly.

    Much of the $1.1 billion will go to businesses, many of which have bought so much software they will qualify for a rebate of more than $1 million, Crew said. A San Diego Microsoft competitor has come up with another way of processing refunds, but the Redmond, Wash., software maker is trying to block it.

    Lindows.com, which sells a version of the Linux operating system, is offering to process vouchers on behalf of customers who use them to buy $50 to $100 worth of software from its Web site at www.msfreepc.com. Although class members can't get their refunds until next summer, Lindows.com is allowing people to get their software free or at a discount right now through the program. It's even giving away a free low-end PC, which it normally is priced at $169, to the first 10,000 people who use the site to claim their vouchers.

    Microsoft calls the offer "deceptive" and warns that Lindows .com may not get reimbursed for claims it processes for class members in this unorthodox way. "Right now, the way that (Lindows.com's offer) works is not the way the claims procedure works," said Microsoft spokeswoman Stacey Drake. "We are concerned that the Lindows site misuses the California court-approved process as a marketing tool."

    The process for redeeming claims by mailing in a paper form was negotiated between Microsoft and the plaintiffs' attorneys at Townsend and Townsend. But Lindows.com chief executive Michael Roberts said the paper claims process is too inconvenient. "Microsoft made it a very complex process. They don't want people to take advantage of the settlement, because if they don't, Microsoft pays out less money," Roberts said.

    Microsoft will get to keep one-third of any unclaimed funds in the settlement, with the remaining two-thirds going to needy California public schools. Like class members, the schools will get vouchers they can use for a wide variety of tech hardware or software.

    But Microsoft's Drake said Lindows.com's online process makes it too easy to make a claim, making it more likely that people without legitimate claims will file. Crew, the plaintiffs' attorney, said he has no problem with the Lindows.com system. "We don't see any kind of deception or fraud," he said.

    Lindows.com has promised that customers will be allowed to keep the software they bought with the virtual vouchers, whether or not it gets reimbursed through the settlement. In the end, Crew said, the issue of whether Lindows. com gets paid will not be up to him or Microsoft, but the court-appointed administrator who will process all the voucher claims. "The claims administrator has to decide," he said. "That's their job."

In November, Microsoft had filed a court motion to force Lindows to take the site down:

    As part of the California settlement, consumers who purchased Microsoft products between Feb. 18, 1995, and Dec. 15, 2001, can apply to receive vouchers for refunds on future purchases of computer products and software after filling out a series of forms. The MSfreePC.com site prompts consumers to answer a series of questions to see if they qualify for a portion of the settlement. If they do, they then can access the Lindows desktop Linux operating system and other software that competes with the Microsoft platform.

    Microsoft, in its latest court motion, wants any claims from MSfreePC.com to be rejected because it says the antitrust settlement requires consumers to physically sign claims forms, while the site only requires a digital signature. Microsoft also says that consumers must essentially transfer their claims to Lindows.com in order to receive access to software in violation of the settlement agreement's rules.

    Lindows.com defended its MSfreePC.com site on Monday, saying that it meets the "letter and the spirit of the antitrust settlement."

    Lindows.com CEO Michael Robertson, in a statement, criticized Microsoft for using digital signatures itself while disputing their validity in the antitrust settlement and said that Microsoft's actions are an attempt to reduce the amount its pays out. Lindows.com plans to submit a rebuttal to Microsoft's motion within the next two weeks.

    Along with the rejection of claims from MSfreePC.com, Microsoft also wants the administrator of settlement claims to tell consumers that the Lindows.com site is not authorized and point them to the official settlement Web site, www.microsoftcalsettlement.com, and to mail the paper claim forms to any consumers whose claims are rejected in the Lindows.com dispute.

Since the Swedish court ruling last week, European resellers have been caught in the crossfire, with Lindows distributors throughout the continent being threatened with legal action until the Lindows name is changed:

    The injunction is the latest salvo in an increasingly nasty war in which Microsoft appears determined to quash the Lindows name permanently. "What we're asking Lindows to do is to change its name," says Microsoft spokesman Jim Desler. "It is Lindows.com that put these [European] resellers in a compromising position by their deliberate infringement on our trademark."

    Lindows.com Chief Executive Officer Michael Robertson isn't one bit happy. "It is another example of Microsoft attempting to eradicate all competition through any means," Robertson told a group of European resellers. "While they say they invite competition, behind the scenes they seem willing to take any actions - including blatant extortion - to squash competition."

    In November, resellers in the Netherlands got tangled up in their own Lindows skirmish. They cried foul after receiving telephone calls from Microsoft allegedly threatening them with possible legal action if they continued to sell the maverick, Linux-based operating system.

    On Nov. 25, Dutch reseller Hans de Vries, owner of DV Computer Systems, informed Robertson that Microsoft was about to drag his company into litigation against the Lindows name in the Netherlands. "What I understand from that phone call is that they want that I stop selling Lindows OS computers," de Vries wrote in an e-mail message. "I don't like this but when they are taking this to court and involve me then I must stop selling Lindows OS because I don't have the money for lawyers," de Vries continued.

    An angry Robertson branded the threats as "blatant extortion" and responded by jetting to Amsterdam, kicking off a weeklong trip designed to support international resellers of LindowsOS who have, according to a Lindows.com statement, "endured harassment from Microsoft."

    Microsoft's tactics are not keeping Robertson from moving ahead with a new product. "We're now launching LindowsOS 4.5 in Europe as a show of support for our resellers, who Microsoft is threatening with legal action if they continue to sell Lindows.com products," says Robertson.

    As for Microsoft's view of the operating system itself, Desler says there's no problem. "There are many Linux-based operating systems out there, and we don't have an issue with any of them. The only problem we have with Lindows is the name. This is a clear case of trademark infringement."

    In the United States, however, that question has yet to be decided. On Dec. 20, 2001, Microsoft filed a complaint in the U.S. District Court for the Western District of Washington against Lindows.com, alleging trademark infringement, trademark dilution, unfair competition and unfair business practices.

    At that time, Microsoft requested a preliminary injunction enjoining Lindows.com from using the Lindows trademark "in the promotion, advertising, marketing, or sale of a software product in competition with Windows." Two subsequent rulings denied Microsoft's request for an injunction, and raised questions about whether the term "windows" is a protectable trademark. A jury trial to determine the trademark's validity is slated to begin in March 2004.

    Robertson is no stranger to controversy: In 1997, he launched the digital music Web site MP3.com. Facing its own legal battles, the site was purchased by Vivendi Universal and, in November 2003, sold to CNET Networks Inc.

So, the real question revolves around whether Windows is a Microsoft trademark then. I don't know of many computer applications that would be so inextricably linked to Microsoft - other than maybe "office". But, if Microsoft loses this fight on those grounds, they've certainly done themselves more harm than good...

- Arik

Posted by Arik Johnson at 03:44 PM | Comments (0) | TrackBack

December 13, 2003

AT&T and Qwest Jump Aboard VoIP Bandwagon, Following Time Warner Cable Deal with Sprint & MCI

voip.gifAT&T and Qwest both joined the VoIP fray, along with Sprint and MCI's allegiance with Time Warner Cable, carving out the entry of big telecom into the emerging, fast-growth market that is rapidly commoditizing their existing local and long-distance businesses. The only question I have is, what took them all so long? I've had Vonage service for over nine months now as my primary landline after my cable company - Charter - couldn't say when they'd start rolling VoIP dialtone to my highspeed cable modem line. If you're a cable company thinking of entering this market, the calendar just got a lot tighter.

My thoughts are that this most recent round of initiatives is the Telecom Act coming home to roost in the free-for-all world of Internet communications. Regardless, it’s good to see some competition for Vonage in the space, as the plans promise to lower the cost of phone service more broadly and include new features (which I’m already used to, thanks very much), like the ability to check voice mail or program call-forwarding requests on the Web. But, until now, VoIP has been pretty much a niche service, as fewer than 200,000 Americans use Internet phone service as their primary line, according to TeleGeography.

But, that penetration is sure to soar in 2004. Besides the announcements made this week, the nation's biggest phone company, Verizon, plans to deliver a consumer Internet phone offering within the next six months. Here’s a press excerpt on recent events, that explains the technology pretty well too:

    "The giants getting into the business gives Voice Over IP credibility," said Guzman & Co. analyst Pat Comack, using the technology's official name. "People will give it a shot now. All of a sudden, this is not a toy anymore."

    But while the Internet phone bandwagon swells, the full-fledged revolution seems several years away. For now, only the roughly 20 percent of U.S. households that have broadband Internet access can use the technology.

    Perhaps most importantly, special steps have to be taken to make the Internet phone systems connect to 911 dispatch centers or work in blackouts like the old-fashioned phone network can.

    "I'm not going to pretend that we're ready to solve those problems," AT&T spokesman Gary Morgenstern acknowledged Thursday. "We're working on that."

    Other providers say they have addressed those issues. Internet phone pioneer Net2Phone, which is focusing on helping cable companies deliver the service, boasts that it also has overcome the technical hurdle of letting law enforcement officials set wiretaps, which phone companies are required to allow.

    Traditionally, a phone conversation is converted into electronic signals that follow an elaborate network of switches in a dedicated circuit. Long-distance calls cost more because regional carriers have to be paid for originating and terminating the calls.

    The new technology has a terribly nerdy name, Voice over Internet Protocol - or Voice over IP or just "VoIP" - but its premise is pretty simple.

    When a call is made, the sounds are converted into packets of data that take diverging paths around the Internet or private networks, just like e-mails or Web pages. The packets get reassembled as sound on the other end of the call. The sound quality sometimes strays from perfection - though it has come far in recent years and is expected to get even better.

    The process is cheaper because it cuts some or all long-distance access charges out of the equation - though that is a contentious issue under consideration by the Federal Communications Commission. It also helps big businesses save money because they can use their expensive data networks to make phone calls instead of only shuttle files around. And because voice is sent like any other kind of data, new videoconferencing services and Web-based phone messaging applications are possible. The address book in an e-mail program can dial a number with the click of a mouse.

    Combine all those elements, and VoIP represents a tidal wave.

    Providing service costs Vonage about 1 cent a minute; AT&T probably could do it for about seven-tenths of a cent because it has its own vast data network, says UBS Warburg analyst John Hodulik.

    With such low costs, charging for long-distance by the minute will probably give way to "all you can eat" plans. For example, Time Warner Cable lets its Internet customers in Raleigh and Portland make as many calls as they want for $39.95 a month.

    Also, cable TV companies increasingly will use VoIP to sell phone and broadband service in an attractively priced "bundle" that makes customers less likely to leave. In response, phone companies might have to accelerate plans to upgrade to fiber-optic lines that can carry a huge amount of bandwidth, including ultra-fast Internet and high-definition TV.

    In the meantime, the billions of dollars worth of copper phone wires spread across the country figure to gradually become obsolete. AT&T stopped investing in the old-style "circuit-switched" infrastructure several years ago, opting instead to build only data networks.

    "It's not a question of if," said Forrester Research analyst Charles Golvin. "It's a question of when."

The earlier announcement by Time Warner Cable that it is working with Sprint and MCI to offer phone service using VoIP is one of the surest signs yet that cable companies are going to war with the local phone industry. Here's another excerpt (paraphrased):

    While other cable companies sell phone service to their customers in selected markets, the deal announced last Monday is the first time VoIP will roll to nearly nationwide phone service by a cable company.

    "We've moved out of the talking stages and into the reality," said Jeff Kagan, an independent industry analyst based in Atlanta. "2004 is going to be the year cable and phone companies get into each other's business and start competing."

    At a switching station, the calls will be transferred to either the MCI or Sprint phone networks and into the traditional format that reaches most phone users. Improving quality gives cable companies an efficient way to break into the phone business. Meanwhile, telephone providers are increasingly going after the cable companies by cutting prices on digital subscriber line (DSL) high-speed Internet service and by bundling satellite TV service with local phone bills.

    Sprint and MCI said they were in talks to facilitate phone service for other cable providers but provided no other details. "It's a whole new business for Sprint and MCI to get into," Kagan said. "It helps to diversify the business. It's a whole new revenue stream for Sprint and MCI and it's a huge opportunity because Time Warner is just one of many cable companies they can work with. This is just what the long-distance industry needed." The companies provided no details about how much the deal was worth.

    Time Warner's cable and high-speed data customers in Portland and Raleigh pay $39.95 for unlimited local, in-state and domestic long distance calling. Customers that don't receive other Time Warner services pay $49.95 a month for phone service. Time Warner Cable spokesman Keith Cocozza said prices will remain similar when the program is expanded nationally. "What we've always wanted to do is offer our customers a wider range of services for the best value," Cocozza said. He said voice-over-IP "allows us to get into a market we haven't been in."

    Martin Dunsby, an analyst at consulting firm inCode Telecom Group, noted that the technology also provides consumers with other options because the calls are carried by lines that can handle other kinds of data as well. That makes picture messaging and video conferencing possible.

    "Really, it means more choice for consumers," Dunsby said. "Instead of having to go to the local phone company for phone service and cable company for cable you can go to a range of providers for a range of services."

It's a shrewd move that allows Time Warner Cable to leap a big hurdle, by using Sprint and MCI to provide interconnection facilities, long distance traffic, 911 service, relay systems and operator services. The service, which will be called Digital Phone, includes unlimited local, in-state and domestic long distance, and customers who add the service will be able to keep their existing phone numbers. Time Warner Cable has 10.9 million subscribers in 27 states. A spokesman for Sprint said the 17 markets that Sprint will service are about half of the total markets covered by the three-year agreement. MCI will cover the rest.

VoIP trials have varied a lot in how they packetize voice, and few carriers are ready to move directly to an IP-based client using the Session Initiation Protocol, or SIP, in phones or PCs. Instead, most services will use existing analog handsets, converting to packet at an aggregation gateway.

Even this partial offering carries immediate benefits, as in the case of AT&T, which can offer flat-rate service for both local and long-distance by transporting all voice traffic as packets. One financial analyst who covers AT&T said "the first impact will be to create more vicious competition between interexchange and local carriers, with prices dipping so low [that] some carrier operating expenses could suffer. The second impact will be to hammer the specialized long-distance providers who use a leased interexchange carrier. Without direct access to transport, they won't be able to meet the VoIP challenge."

Following a ruling by Minnesota's Public Service Commission regarding regulation of VoIP services from Vonage, Qwest will offer VoIP service in Minnesota, using either IP phones or analog phones with adapters, linked to DSL modems. The service, already available in some Minneapolis-St. Paul neighborhoods, will be expanded to most of Qwest's 14-state region in the first half of 2004. AT&T announced it would offer IP-based local and long-distance phone service to its customers with broadband access, enabling most services within 2004.

My analysis: the real killer app here is Unified Messaging, not Bundled Services. It should be interesting to see where commoditization takes prices next year - and the effect it'll have on the growth wireless telecoms have enjoyed of late - still, I think anybody who competes on price instead of features is probably doomed. I've found that a VoIP landline and a cell phone I can auto-forward it to if I don't pickup at home, makes for a real - and cheaper - telecom solution.

- Arik

Posted by Arik Johnson at 03:38 PM | Comments (0) | TrackBack

December 11, 2003

Juan Valdez vs. Starbucks: Colombian Coffee Growers Expanding Direct Channel to American Consumers

uribe.jpgColombia's President Alvaro Uribe is shown here serving coffee during the inauguration of a new Juan Valdez coffee shop in Bogotá, yesterday. The Colombian Coffee Federation, representing half a million coffee growers, inaugurated its flagship coffee shop with plans to open 10 others in the United States and elsewhere to compete with companies like Starbucks. The shops are a part of the federation's efforts to alleviate the suffering of coffee farmers devastated by the continuing collapse in global coffee prices, which has forced many growers to turn to cultivating of illicit crops, such as heroin or cocaine, to survive.

Here's an excerpt from the AP story:

    In a bold attempt at saving small-scale coffee growers who have been hit by a collapse in coffee prices on worldwide markets, the Colombian Coffee Federation is selling its coffee and other goods at its own shops bearing the name and image of Juan Valdez, its signature character. On Wednesday, the group inaugurated its flagship coffeeshop, and plans to expand into the United States and beyond.

    While prices for a latte or espresso top $2 at most of the world's trendy java retailers, coffee growers see only a few pennies of the profits, as much of it goes to middlemen or vendors. By eliminating some of the intermediaries, the federation hopes to ensure a larger part of the income for its members. The first Juan Valdez coffeeshops abroad are scheduled to open in New York and Panama by mid-2004, offering Colombian coffee in various forms, coffee beans, cakes and Juan Valdez accessories like T-shirts and bags. Ten are planned for the first phase.

    Colombian President Alvaro Uribe helped open the sleek, spacious flagship shop in Bogotá’s financial district Wednesday by serving the first cups of coffee from a silver tray. It is the ninth store to open in Colombia in the past year bearing the name of Juan Valdez, the smiling, mustachioed coffee farmer sporting a straw hat and brown poncho who has appeared worldwide in numerous Colombian coffee ads.

    Juan Valdez's shops in Colombia have quickly gained popularity since the first one opened at Bogotá’s international airport in December 2002, with $3.7 million dollars in coffee sales, the federation said. In trendy coffee bars in the United States, only one or two cents from the sale of each cup of coffee makes its way back to the farmers, the Colombian Coffee Federation said. The federation wants to ensure that Juan Valdez shops will generate returns of between four and five cents per cup to the farmers. Colombian coffee farmers each own a stake in the shops, whose profits are also being used to build schools, roads and hospitals in Colombia's coffee-growing region. "With this program, we are creating one of the most efficient mechanisms to transfer value from quality coffee straight to the growers," the coffee federation said in a statement.

    However, Juan Valdez will likely face stiff competition abroad from the likes of Starbucks and other major coffee competitors, and the global coffee crisis shows no sign of easing. But Juan Valdez could prove popular with customers aware of the plight of coffee growers. Starbucks spokeswoman Audrey Lincoff brushed off fears of competition. "We have said always that we believe there's room for many different coffee houses," she said.

coffee_logo.gifHowever, all other variables being equal, I think I would probably cross the street to get my mocha-frap from a J.V. shop, versus a Starbucks... the belief alone that I'm not exploiting coffee growers or forcing them into the cocaine or heroin business, is reason enough for me.

- Arik

P.S. - So, who is Juan Valdez, anyhow? Here's a history, plus biosketch on Carlos Sánchez, who protrays J.V.:

juanim.gifIn 1959, the National Federation of Coffee Growers of Colombia selected the advertising agency Doyle Dane Bernbach to launch a campaign for Colombian Coffee. The agency then created the fictitious character Juan Valdez, to symbolize and personify the more than 300,000 hardworking and dedicated Colombian "cafeteros" (coffee farmers) that depend on coffee for their livelihood. In 1969, Carlos Sánchez of Medellín, Colombia, was chosen to replace José F. Duval, a New York based actor, who had until then portrayed Juan Valdez. Mr. Sánchez has been Juan ever since and is now one of the longest living fictitious characters for any advertising product. A coffee farmer himself, Carlos Sánchez was born in Fredonia, a small town which lies in the largest coffee producing region of Colombia, Antioquia. He currently resides in Medellín, where, when not portraying Juan Valdez, he makes silkscreens in his Graphic design studio and continues to maintain a small coffee farm, where many weekends are spent with his family.

Posted by Arik Johnson at 03:36 PM | Comments (0) | TrackBack

December 09, 2003

Supermarkets, Antitrust & Union Busting: Can Anything Save Grocery Stores from Wal-Mart?

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Even as major supermarket chains in California have been trying to get health care insurance concessions from labor as they desperately try to compete with the likes of Wal-Mart, California's attorney general is investigating whether three supermarket chains involved in the labor dispute with 70,000 Southern California grocery clerks have broken antitrust laws by forming a financial pact.

The three supermarket operators - Safeway Inc., Kroger Co. and Albertsons Inc. - were issued subpoenas Monday by Attorney General Bill Lockyer's office, demanding they reveal the details of a mutual-aid pact, which the companies reportedly made to share revenue so they could reduce losses in the event of a labor strike. The chains have declined to give specifics on the arrangement, which has become a factor in the weeks since the United Food and Commercial Workers' union decided to pull picket lines from Kroger's 249 Ralphs' stores on October 31st. Ralphs has seen a surge in customers ever since.

Meanwhile, talks have broken down in the grocery strike this week:

    Labor negotiations between grocery companies and picketing Southern California grocery workers have broken off and no new talks are scheduled, officials said. About 70,000 grocery clerks went on strike or were locked out Oct. 11 at nearly 860 Ralphs, Albertsons, Vons and Pavilions stores from San Diego to San Luis Obispo. Negotiations with a federal mediator had resumed Dec. 2 between the companies and representatives of the United Food and Commercial Workers union. The talks broke off Sunday evening without a comprehensive offer put forth by the union, said Stacia Levenfeld, a spokeswoman for Albertsons.

    The dispute centers on a demand by the supermarket chains that workers shoulder a larger portion of their health care insurance costs. With the strike and lockout entering its ninth week, UFCW International President Doug Dority said he is calling major UFCW local unions from the United States and Canada to a "summit" in Southern California. Union officials said they will mobilize the 1.4 million members of the union to increase strike activity.

    The grocery companies in a joint statement said they "are no longer willing to absorb all costs related to maintaining health care benefits" and want to introduce a "modest level of cost sharing."

    The companies also are offering a reduced wage and benefit program for workers hired on or after Oct. 6, 2003 to help them "face the enormous challenge of the changing competitive landscape." The national supermarket companies that run the chains — Albertsons Inc., Kroger Co. and Safeway Inc. — say they face pressure from Wal-Mart, Costco and other so-called big box supermarket operators who can sell goods at lower prices because they don't pay as much for their employees' health benefits.

Fact is, labor and managment are in this together. The survival of supermarkets as a business is in question when faced with the stiffness of competitive pressure from Wal-Mart and the sooner labor figures this out, the better chance they'll have a job to return to.

- Arik

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December 08, 2003

Boeing vs. Airbus: Airbus Comes Out On Top

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The aerospace industry has suddenly gotten really interesting. The week after Boeing's CEO Phil Condit quit the company amid the latest round of ethical misdeeds, Airbus vice president for market forecasts, Adam Brown, told reporters at the Dubai Air Show that his company had 55 percent of the market against 45 percent for Boeing, taking orders for 263 aircraft since the beginning of the year - 47 more than Boeing, crowning Airbus "the world's leading supplier" of commercial jets. Airbus, based in the French city of Toulouse, says it has sold 4,854 aircraft to 186 companies since its inception in 1970.

But Chicago-based Boeing remains unshaken. "There is no question this year they will be delivering a few more aircraft than us, but we are not concerned about one downturn year," Boeing's marketing vice president, Randy Baseler, told The Associated Press:

    Promoting the A380, marketed as the world's largest passenger aircraft, Airbus said Monday its new carrier is the future of airline growth. The 555-seat plane, designed to fly nonstop for long hours, is scheduled for its first flight in 2005, with deliveries set to begin in early 2006. There have been 129 orders for the craft from 11 countries, including Dubai-based Emirates airline and Doha-based Qatar Airways. "Based on our experience we see nothing on the horizon which can cost-effectively supersede the aircraft we offer today," Brown said.

    In its separate news conference, Boeing expressed skepticism about Airbus' market forecasts, saying airlines usually handle growth in air travel by increasing frequencies and nonstop flights, not plane sizes. Boeing also says the A380's size would require airport adjustments and changes in the way airlines do business. Baseler said the future is for smaller jets. "On the global scale, we see market fragmentation — or 'point-to-point' operations_ continuing, which means airlines will rely more and more on smaller airplanes," he said. Baseler said this is why Boeing believes the future of its 250-seat 7E7 Dreamliner, which is planned for 2008, is promising. Brown said Boeing seems to be "in a parallel universe," adding that the A380 has had "the biggest market response to any jet" in numbers of orders.

Meanwhile, I found another biting commentary on Slate.com about the Boeing's recent slide, "Jet Lag: How Boeing Blew It"... here's an excerpt:

    ...as Boeing managers tried to fit McDonnell Douglas into the corporate mix, Airbus took off. One story has it that an Airbus executive boasted in 1997 that his company's sales would easily surpass Boeing's by 2003. Phil Condit, attending the same meeting, laughed. Now Airbus holds a huge lead over Boeing in orders; in 2002 and 2003, Airbus commanded nearly 60 percent of the global market—precisely the dominant share that Boeing enjoyed back when Condit was so amused.
    boeing_shakeup.gif

    Boeing's plummet matters in a big way, and not just for Boeing. The company has long been a major exporter: A single order of 747s (most of which sell for around $200 million) is capable of putting a sizable dent in the U.S. trade deficit, which likely will surpass $500 billion for 2003. Those fat orders now are essentially gone. Sales of 747s have screeched to a halt since Airbus announced plans to build the 550-passenger A380, due to fly in early 2005.

    The sight of a European or Asian airport packed with 747s and 777s says one thing about the United States. Those same airports crammed with Airbus A340s—and, before long, with mammoth A380 superjumbo jets—say another. Boeing's diminished clout in commercial aviation is also bad news for the U.S. airline industry, which may soon find itself with only one viable source of aircraft: Airbus. Goodbye to all the sweet deals the airlines extracted from Boeing or Airbus when the two were fiercely competing.

    To save itself, Boeing needs to accomplish two feats. One is to mend fences with the Pentagon and save the deal under which it will build 100 767 jets to serve as midair tankers (the only hope for the aircraft, which no commercial customer now wants). That may not be terribly hard; the Air Force really, truly wants those tankers, and even John McCain's blustering over the deal isn't likely to impede it.

    But the other more important challenge for Boeing is to get back to basics in commercial aviation, which after all is what built the company during the 1960s and 1970s. Whether Boeing is up to the task is far from clear. After fiddling in recent years with notions for a supersized 747 and a fast jet called the "sonic cruiser," Boeing has decided its savior will be a jet called the 7E7 "Dreamliner." This twin-engine, 220-seat jet is supposed to give airlines a comfortable, superefficient plane that dovetails nicely with the move away from hub-and-spoke airline flight patterns and toward the point-to-point flights preferred by customers.

    Ironically, says Paul Czysz, a professor emeritus of aeronautics at St. Louis University, that might have been found in the McDonnell Douglas archives. During the 1980s and 1990s, engineers there developed what is called the "blended wing"—a variation on the flying-wing model used in the B-2 bomber. Basically, a blended wing is simply a fat wing with the engines and tail fins attached to it—no long skinny tube with the wings stuck on the side. It's an ideal design for commercial aircraft—even more fuel efficient than the proposed 7E7, capable of carrying huge loads, easily switched between passengers and cargo and back. Should any U.S. aviation company actually build a commercial version, says Czysz (full disclosure: He's a former McDonnell Douglas guy), no other airliner could compete. Boeing toyed with something a little like the blended wing with its proposed sonic cruiser, but scrapped that in the wake of Sept. 11 and the collapse of commercial aviation.

    The 7E7, offered in its place, is certainly a safer bet. But if the Dreamliner isn't a winner—and there is no clear evidence that it will offer airlines something that Airbus can't—the odds are good that Boeing will be out of the commercial aircraft business in 10 years. To leapfrog Airbus, Boeing needed to roll the dice. Instead, its new culture of soaking the taxpayers for military goodies while playing it safe on the commercial-aircraft front may have cost Boeing its future and blown a hole in the U.S. economy that never will close.

Undoubtedly, without the competition between Boeing and Airbus over the past 30 years, the flying public as well as our militaries would be worse off, so I sincerely hope Boeing can start getting its act together... for the good of its shareholders, the U.S. economy and that of global aviation.

- Arik

UPDATE: On Wednesday 10 December, AP reported from Paris that Airbus said it has been gathering information on public aid to Boeing to check whether Washington has breached an agreement with Brussels, and is particularly concerned about pledges of U.S. government support for its U.S. rival's planned new fuel-efficient passenger jet, the 7E7 "Dreamliner."

    "We're following very closely what's happening with the 7E7 and forwarding the information we are gathering to the EU authorities," Airbus spokesman David Voskuhl said. He was speaking after French daily Le Figaro on Wednesday quoted Airbus CEO Noel Forgeard voicing concern over Boeing funding. "We want European Union countries to know what's going on," Forgeard was quoted as saying.

    Under the terms of a 1992 bilateral accord on civil aviation, the United States and the European Union pledged that government loans would not be allowed to exceed 33 percent of total investment by their respective aerospace companies. Since then, however, both sides have repeatedly accused each other of breaking the deal.

    Airbus is concerned about government loans and subsidies promised to the Japanese companies lined up for about one third of the manufacturing work for the 7E7. These include Japanese engineering firms Mitsubishi, Kawasaki and Fuji.

    Boeing spokesman Todd Blecher said he found it "ironic" that Airbus was raising concerns about potential support for the 7E7, given "the billions of dollars in subsidies Airbus has received for more than 30 years."

    "It's premature for anyone anywhere to speculate on the specific funding mechanism our partners might use for the 7E7," Blecher said.

ANOTHER UPDATE: On Tuesday 16 December, Boeing announced it would begin booking orders for the new 7E7 Dreamliner.

    "This is a capital-intensive business and this aircraft is a gamble, but it's a smart gamble," said John Murray, an analyst who covers Boeing for Delaware Investments, which owns Boeing shares. "If they didn't do it, Airbus would be standing alone in this business in 40 years."

    Without the 7E7, analysts say Boeing would be relegated to also-ran status in the two-horse race with Airbus, which has become the world's most prolific jetliner maker with a backlog of 1,467 jet orders compared with Boeing's 1,112.

    Airbus officials have called the 7E7's improvements over Boeing's current jets minor, saying price discounts on the competing A330-200 could eliminate any advantage the 7E7 might bring for airlines.

    "When Airbus says they are going to offer discounts, they are already admitting theirs is an inferior product," said Randy Baseler, vice president for marketing at Boeing's commercial jet unit.

    Airbus Chief Commercial Officer John Leahy said the A330-200 would beat the 7E7 and win at least half the 1,800 jet orders he expects for mid-sized jets over the next 20 years, expressing surprise that Boeing would spend so much money just to match the A330.

    "If the question is: If they bring out the 7E7 what are we going to do, the answer is nothing. We are very content to stay with our A330-200," Leahy told Reuters.

    The 7E7 would replace the slow-selling 757, which Boeing is discontinuing, and the 767 line, which has slowed to just one aircraft per month to sustain production until a controversial order for 100 U.S. Air Force fuel tankers is finalized.

    The company had considered about 20 locations for a 7E7 assembly plant, eliciting a wide range of offers to cut taxes and build new roads and facilities, including a $3.2 billion aerospace industry package from the state of Washington.

    The 7E7 will create just 800 to 1,200 Boeing jobs in Washington, but thousands more will go to local suppliers and state officials were determined to keep the jet business at home after Boeing moved its headquarters to Chicago in 2001.

    "It would be more devastating to our economy and our government coffers if Boeing did not build the 7E7 in our state," Washington Gov. Gary Locke told Reuters by telephone. "We would have seen the gradual relocation of Boeing commercial activities to another state, and the loss of 130,000 direct and indirect jobs."

Posted by Arik Johnson at 03:34 PM | Comments (0) | TrackBack

December 07, 2003

Sun's Java Desktop System (JDS) Going After Microsoft Windows & Office

sun_java.gifSun Microsystems seems to be coming on strong of late, especially targeting Microsoft Windows/Office dominance with its Java Desktop System, based on Linux, StarOffice, Mozilla and GNOME. With recent wins at Wal-Mart and with the government of China, it looks like the desktop might get interesting again. I'll spare the excerpts, but here are a few links:

Now, this sounds familiar... Java and Mozilla, at least - didn't Netscape try this back in '96? Whether this could be Sun's strategy for tomorrow is less certain, but we are sure to see price commoditization if things catch on, and they've got the CFO's ear now with a pricing model that beats the pants off Microsoft's. Let's hope they don't screw it up - we'll all be better off if competition can be restored to the desktop software universe.

- Arik

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December 06, 2003

Sneaker Wars: Nike & Adidas Toe-to-Toe

nike_adidas.jpgI found a great article in the Oregonian that captured the level of competitive rivalry going on between Adidas and Beaverton-based Nike:

    The hundreds of Adidas-Salomon sales reps meeting to celebrate the company's new Switzerland office grew silent as executive Michael Rupp began venting. For half an hour, Rupp, in charge of the sneaker company's central European business, assailed their complacency. If things don't change, Adidas might become an also-ran, Rupp says he told the gathering.

    Shoppers still buy more Adidas gear in Europe than any other brand, but Nike is narrowing the gap, even selling more sneakers. And it's gaining in Germany, Adidas' home country and the world's third largest economy.

    "We have to fight for our future," Rupp says he told his crew in June. It's time to launch into "forward-oriented attack mode." The sneaker wars are escalating across Europe.

    Beaverton-based Nike, the biggest company with headquarters in Oregon and the state's lone Fortune 500 firm, sees Europe as its next conquest, having defeated Adidas in the United States. Adidas, whose U.S. operations are based in Portland, has heeded the battle cry.

    The industry's two biggest titans face enormous pressure to capture Europe. Their shareholders continue to demand profit, sales and stock-price gains. But in recent years, Nike and Adidas have found diminishing returns in a mature U.S. market, the world's largest for athletic shoes and clothing. Nike did more business outside the United States for the first time in its last fiscal year. And after several years of stagnation, Adidas expects its U.S. sales to fall this year.

Here's another excerpt:

    Research shows that Nike needs to downplay its status as a big American brand to stem backlash that accelerated with this year's war in Iraq, unpopular in much of Europe. On the other hand, Adidas must attract a generation of consumers who, unlike their parents, weren't raised on a sneaker diet limited to German brands.

    Adidas' challenges Through much of the mid-20th century, Adidas owned Europe. Hometown rival Puma -- like Adidas, based in the northern Bavarian village of Herzogenaurach, Germany - was its biggest threat for decades.

    Nike changed everything.

    At first, Adidas shrugged off Nike's 1968 birth. But then it watched with increasing alarm as Nike grew into a powerhouse that sold about as many sneakers in the United States as Adidas, Reebok and New Balance combined.

    Marketing itself as an unconventional American alternative, Nike entered Europe about two decades ago. By 1998, it had elbowed out Adidas as the No. 1 sneaker seller. And since then, Nike has narrowed Adidas' edge in overall sales, which count clothing and equipment. Today, Adidas realizes it's dangerous to rely on tradition, habit and brand loyalty.

    Resentment from the U.S.-led war in Iraq and a wave of corporate scandals have begun to undermine American brands abroad, especially well-known ones such as Nike, according to a study released in July by RoperASW. As a result, the firm found, the percentage of Germans who regularly use or own a Nike product dropped to 29 percent this year from 49 percent in 2002. The percentage fell to 38 percent in France, down from 45 percent.

    Indeed, Nike's European sales have flagged over its last three fiscal quarters, compared with year-earlier periods, currency exchange-rate fluctuations aside.

    Nike officials, however, dispute the Roper findings and deny that anti-U.S. sentiment has cut sales. They point to a 21 percent rise in European orders for delivery by January -- again, without accounting for currency changes.

And, finally:

    To secure future growth, the company is revamping its methods. Rupp told his sales force in September to spend more "quality time" with Adidas' 1,000 largest retail clients. The move will cut face time with smaller customers by almost a third, but Rupp says they won't be ignored. By the end of the year, they will be able to place orders faster using automated machines. The changes will result in a few layoffs, Rupp says.

    Adidas also has stepped up its "Winning in Europe" campaign, a 2000 initiative to establish Adidas as the clear European leader by 2006. A headline on a recent 20-page campaign newsletter reads: "Watch out competition -- Adidas is back to take the lead in Europe." Stories highlight successes, such as Italy, and problem areas, such as the Nordic nations, where "there is a growing sense of urgency," according to the newsletter. "Sales have been declining since 1998, weakening our position and threatening our clear market leadership."

    One new tactic involves reducing the array of Adidas products by 30 percent by 2006. The company believes that fewer models will lead to lower product-management costs, higher profits and more time to refine forecasts. Already this year, Adidas has eliminated walking shoes and reduced its tennis shoe assortment from 19 to 14 models. "It's a full onslaught battle to grow the brand -- any way, shape or form," says Glenn Bennett, Adidas-Salomon's executive board member in charge of global operations.

It seems Adidas gets the competitive threat Nike represents on its home turf; too bad it's too late to save some of its markets abroad and the "full onslaught battle" had to be such a defensive one.

- Arik

p.s. - It seems the year-old unrest between Foot Locker and Nike has finally been put to bed, thanks to an 18-year-old basketball superstar, LeBron James, who secured his endorsement with $90 million bucks. That, and the retro-style trend that Nike will deliver on exclusively for its biggest buyer, in the form of "20 Pack"... your guess is as good as mine.

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December 03, 2003

Rival Tortilla Makers Sue Over Supermarket Shelf Slotting

tortilla.gifIn search of a story today, I found out about this Tortilla flap in Harris County (Texas) District Court with a bunch of small, independent tortilla entrepreneurs are going up against a dominant competitor from Mexico to try and keep them from putting them all out of business by giving kick-backs to supermarkets.

From the Houston Business Journal:

    The outcome of a current court battle between rival tortilla makers could affect the way product space is allotted on supermarket shelves. The trial began late last month over an antitrust lawsuit filed in Harris County District Court in July of 2001 by a group of 18 tortilla makers, including three in Houston.

    The suit claims Dallas-Based Gruma Corp., a subsidiary of Mexican conglomerate Gruma S.A. de C.V., conspired to monopolize the sale of tortillas in various markets by using its dominant size to extract concessions from retailers. The group of small, independent tortilla producers seeks $70 million in damages. The case is significant on several fronts, legal sources say. A final verdict either way would set a strong precedent for future antitrust litigation.

    Another primary focus, especially among attorneys, is the potential affect on "slotting fees," payments made by producers to retailers for the purpose of gaining preferential exposure for products ranging from toothpaste and tortillas to soft drinks and detergent. The financial stakes are also high. The $5 billion tortilla industry serves one of the fastest-growing food products in the country.

    Rick Davolina of Davolina and Eureste LLP, one of several firms representing the tortilla makers, says the entrepreneurs took legal action to protect their interests. "We think it's a very significant case because the clients are all small business people who have been in the tortilla business for a long time," says Davolina. "Most of them are family-owned and have managed to grow their business."

    Also representing the tortilla makers is Thomas Stanley of local firm Eastham Watson Dale & Forney LLP, who recently won a $14 million judgment against The Coca-Cola Co. on behalf of five independent soft-drink bottlers in a similar case over anti-competitive practices.

    According to the lawsuit, the defendants:

    1.) Controlled or tried to control the economic viability of competitors through financial payments to retailers.

    2.) Unfairly used the company's buying power to influence where products landed on store shelves and, by extension, illegally controlled the fate and competitiveness of other products.

    3.) As a result, the suit claims, Gruma and its associated companies "have eliminated or substantially reduced the availability and visibility of competing tortilla products ..."

    Such restrictions allegedly have shut the smaller rivals out of a lucrative market. Tortillas have become big business in recent years. Nearly a third of the U.S. bread market belongs to tortillas, according to claims by the Dallas-based Tortilla Industry Association. The organization's membership includes more than 175 tortilla manufacturers, industry suppliers, distributors and companies with interests in the tortilla industry from around the world.

    Antitrust attorney David Donaldson of Austin-based George & Donaldson LLP says the impact on future antitrust litigation will depend on how far the case is taken. If there is a high-dollar judgment favoring the independent tortilla makers that is then sent to the Texas Court of Appeals, it could set a precedent for how lawyers around the state argue on behalf of clients. "Our system recognizes that a company can get as big as it can get as long as it operates legitimately," says Donaldson.

- Arik

Posted by Arik Johnson at 03:29 PM | Comments (0) | TrackBack

December 02, 2003

Subway Chooses Coke over Pepsi

coke_subway.gifCoke will become the exclusive supplier of fountain drinks to Subway Restaurants, putting an end to the chain's partnership with the Pepsi unit of PepsiCo, The New York Times said on November 27th:

    The deal, effective in 2005, will put Coke fountain drinks in Subway's 20,000 restaurants around the world, according to the Times. Pepsi had been the primary provider of fountain drinks served in the chain since 1988, although Coca-Cola supplied about 15 percent of the restaurants with fountain drinks, bottles and cans, the paper said.

    Officials at Subway said they began evaluating the company's beverage business about a year ago and decided a single beverage distributor would best meet its needs, the report said. The officials said they chose Coke because they felt that it would help Subway with marketing, innovation and global distribution, according to the article.

- Arik

Posted by Arik Johnson at 03:28 PM | Comments (0) | TrackBack

November 30, 2003

Verizon Wireless Winning, Sprint PCS & AT&T Wireless Getting Hit by Number Portability

Just a quick story today turned up a week after WNP went into effect, from Asbury Park Press, Verizon Wireless appears to be gaining from the new law, while AT&T Wireless and Sprint PCS seem to be losing:

    To determine which U.S. wireless companies were winning the most customers this week, Wachovia Securities Inc. analyst Jennifer Fritzsche visited stores.

    RBC Capital Markets analyst Jonathan Atkin contacted retail-chain owners and managers. Legg Mason Wood Walker Inc.'s Craig Mallitz surveyed colleagues. Bob Egan of market researcher Mobile Competency extracted figures from mobile-phone carriers.

    They turned up similar results: Verizon Wireless, the biggest U.S. mobile-phone company, is winning customers in the wake of a rule that allows users to keep their phone numbers when switching providers. AT&T Wireless Services Inc. may be losing them.

    "Verizon Wireless stores had the most traffic," Fritzsche wrote in a research note on Tuesday, after visiting 15 stores in Chicago on Monday. "AT&T Wireless and Sprint PCS seemed to be the carriers where people wanted to switch from."

    Verizon Wireless and its competitors have declined to say how they've fared since the U.S. Federal Communication Commission number mandate took effect Monday, forcing analysts and investors to gather anecdotal evidence. Analysts had picked Bedminster-based Verizon Wireless as a likely winner before the rule began, saying its network is the most reliable.

    RBC's Atkin, who's been in touch with owners and managers of retail chains encompassing about 400 stores, said AT&T Wireless and Cingular Wireless LLC have received a "disproportionately large number" of requests to switch.

    Verizon Wireless -- a joint venture of Verizon Communications Inc. and Vodafone Group PLC -- and Nextel Communications Inc. have gained more subscribers than they've lost, he said.

    Egan made the same observations, based on store visits and tallies from five of the six largest U.S. carriers: Verizon Wireless, Cingular, Sprint, Nextel, and T-Mobile USA.

    Albert Lin, an analyst at American Technology Research Inc. in San Francisco, studied reports from telecommunications-software suppliers such as Amdocs Ltd. and Convergys Corp., which are monitoring activity in phone-number switches.

    Verizon Wireless is gaining the most customers, followed by Reston, Va.-based Nextel and Overland Park, Kansas-based Sprint PCS, he said. Cingular Wireless, AT&T Wireless and Deutsche Telekom AG's T-Mobile unit are losing clients, Lin said.

    "We believe that our message of the largest and most reliable network is resonating in the marketplace," Verizon Wireless spokesman Jeffrey Nelson said.

    Nextel spokesman Christopher Doherty said it's hard to distinguish whether customers coming in to buy Nextel service would have done so without number portability.

    "It's been busy, but it's also one of the busiest shopping times of the year for wireless," Doherty said.

    "We'll let the results speak for themselves," T-Mobile spokesman Richard Brudvik-Lindner said. "Opinions right now are all over the map, and we're not going to get into playing the horse race game on this."

Well, I can tell you this: not as many people switched as were expected to, and most of the carriers had a decent strategy in place from an advertising perspective. I think most people are waiting to see what the first-movers experience is before swapping service. Frankly, I think it's silly to give anybody a cell phone number - my home phone service - VoIP provider Vonage - will forward unanswered calls automatically.

- Arik

Posted by Arik Johnson at 03:24 PM | Comments (0) | TrackBack

November 25, 2003

Colgate vs. Crest: Round One in Fast-Growing Tooth-Whitener Market

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I've always thought that "too white" look on a person's teeth was a real clue the person was posing hard, but apparently not everyone agrees with my specious opinion of teeth that glow in the dark.

Call it the "War of the Whiteners" - Colgate is suing P&G, joining a trend among P&G's consumer product competitors lately for "false advertising over ads that mention Colgate's Crest dental products, adding to a growing number of lawsuits as P&G mounts more aggressive ads that specifically target its rivals." Here's an excerpt:

    Colgate-Palmolive Co. sued Procter & Gamble Co. Monday, alleging P&G is misleading consumers with new advertising comparing the companies' do-it-yourself tooth whitening products.

    The federal suit accuses P&G of lying in commercials that say its Crest Night Effects and Crest Whitestrips products are "clinically proven" more effective than Colgate's Simply White Night and Simply White products.

    New York-based Colgate also claims P&G used questionable measuring tactics to reach results showing its products make teeth several times whiter.

    The suit, filed in U.S. District Court in Manhattan, seeks unspecified damages and asks a judge to order P&G to pull the advertising - including TV ads, newspaper inserts and cardboard coffee-cup holders.

    Colgate claims the advertising risks "substantial and irreparable harm, including a loss of consumer confidence, loss of goodwill and lost sales, and could well destroy Colgate's tooth whitening business."

    A spokeswoman for Cincinnati-based P&G did not immediately return a call for comment.

    The two conglomerates are the nation's top two makers of tooth-whitening systems, which have gained popularity since hitting the U.S. market three years ago.

Here's another one:

    Colgate on Monday filed the lawsuit in U.S. District Court in New York claiming that P&G advertisements for its Crest Whitestrips and Night Effects tooth whitening products put Colgate's Simply White products "in a bad light," a Colgate spokeswoman said on Tuesday.

    The spokeswoman could provide no other details. A P&G spokesman said the claims made in its advertisements were accurate.

    "We take great care to make sure that our advertising is accurate and supportable and we will vigorously defend our advertising," Bryan McCleary, a spokesman for Cincinnati-based P&G said.

    While the lawsuits might in part be a strategy by competitors to defend their turf against new P&G products, they also could be the result of P&G being more aggressive in how it advertises, Joseph Altobello, analyst at CIBC World Markets, said.

    "I think this is part of an ongoing strategy on the part of P&G to not only push the envelope on the part of some of their advertisements, put to also point out the differences between their products and those of some of their competitors," Altobello said of the advertising.

    In May a federal jury awarded $2.96 million to Playtex Products Inc., maker of Tampax, after finding that P&G falsely advertised its new Pearl tampon.

    In September, Johnson & Johnson-Merck, makers of Pepcid AC heartburn medication won an injunction that made P&G drop the slogan "one pill, 24 hours, zero heartburn" from ads for its Prilosec OTC heartburn medication. Johnson & Johnson Merck, a joint venture between drugmakers Merck & Co. Inc. and Johnson & Johnson, had argued that Prilosec OTC can take up to four days to take full effect.

    The company also lost a lawsuit filed by Kimberly-Clark Corp. over an ad for Pampers diaper product that implied Kimberly-Clark's Huggies Pull-Ups could be removed by the toddlers wearing them. P&G also faces a lawsuit filed by Georgia-Pacific Corp. over ads that show P&G's Bounty paper towels absorbing more liquid than Georgia-Pacific's Brawny towels.

    Companies in general have also been more willing to go to court lately to fight advertising disputes instead of through the National Advertising Division of the Better Business Bureaus, the industry self-regulator, Linda Goldstein, head of the advertising practice at lawfirm Manatt, Phelps & Phillips, said.

    "I think in part that's a function of the market place and the competition becoming much more severe and much more aggressive," Goldstein said.

So, it seems the only way to compete with P&G in any market is to just sue 'em for false advertising... or maybe it's P&G that should reel-in its claims, unless it can prove their results... which so far, seems to trend toward doubtful.

- Arik

Posted by Arik Johnson at 03:20 PM | Comments (0) | TrackBack

November 24, 2003

Big Pharma Giving Thanks for Medicare Turkey: Seniors Get Stuffed, Canadians Refute FDA Drug Quality Complaints

kennedy.jpgThe Medicare drug benefit, which will really only "benefit" pharmaceutical companies in its current form, is the subject of debate on Capitol Hill today as it appears the government will be barred from negotiating drug prices with big pharma:

    With Congress poised for final action on a major Medicare bill this week, some of the fiercest debate is focused on a section of the bill that prohibits the government from negotiating lower drug prices for the 40 million people on Medicare. That provision epitomizes much of the bill, which relies on insurance companies and private health plans to manage the new drug benefit. They could negotiate with drug companies, but the government, with much greater purchasing power, would be forbidden to do so.

Likewise, last week in Canada, Diane Gorman, the assistant deputy minister in the federal health department, met in Ottawa with Mark McClellan, the commissioner of the U.S. Food and Drug Administration. "Canada's safety record is second to none internationally," she said, as the Canadian government said that there was no evidence that drug exports had violated Canadian laws or jeopardized the health of Americans, soundly defying a request by the Food and Drug Administration to clamp down on exports of cheap drugs to the United States.

Because the same prescription pharmaceuticals in the U.S. are 30 to 50 percent cheaper in Canada, naturally, there are a lot of Americans buying their drugs from the 140 or so Canadian pharmacies shipping to the U.S., despite threats against the practice by drug makers. So, at the same time that Big Pharma is threatening – apparently unsuccessfully – to restrict exports of drugs to Canadian distributors selling to mail-order pharmacies, U.S. Senator Ted Kennedy is attempting to get enough senators on board to filibuster against the attempt to scuttle Medicare’s ability to negotiate drug prices.

Here’s an excerpt:

    The cross-border trade has become a divisive political issue, pitting pharmaceutical manufacturers and many traditional pharmacists against consumer groups.

    In the United States, House and Senate negotiators earlier this week rejected proposals to let consumers import lower-cost prescription drugs from Canada and other countries as part of the bill creating a Medicare drug benefit. On the other hand, several state governors and local politicians are pushing for greater freedom to import cheap medications.

    The Canadian government has taken the view that its priority is to ensure safe drugs for Canadians. Last month, the health department asked medical and pharmaceutical groups to notify it of any drug shortages or other supply anomalies. "At this stage, we don't have evidence of Canadian law being broken," Ms. Gorman said at a joint news conference with Dr. McClellan.

    Several drug makers have begun rationing supplies to Canadian pharmacies in the hope of curtailing the cross-border trade. The Canadian subsidiaries of at least four companies have also announced price increases of 4 percent to 8 percent.

    Dr. McClellan praised Canada's drug approval process, but said that "it's not a system that's designed to handle the large flows of drugs to Americans."

    He said he was concerned at the potential for unapproved and mislabeled medications to be imported from Canada, and the difficulty of enforcing drug recalls north of the border in the United States. According to Dr. McClellan, Internet pharmacies have recently sprung up that claim to be based in Canada but do business from another country using a Canadian domain name. "Our focus is on safety for Americans," he said.

    Citing cooperation between the F.D.A. and more than 20 states in improving drug safety, Dr. McClellan expressed the hope that the Canadian health department would "provide more leadership" in dealing with other levels of government in Canada. Manitoba Province has encouraged Internet drugstores to attract investment and to create jobs.

    Earlier, Dr. McClellan and Ms. Gorman signed a memorandum of understanding intended to improve collaboration between American and Canadian drug regulators. While Dr. McClellan described the agreement as "a bridge to span the regulatory gaps that separate us," Ms. Gorman said the deal was aimed mainly at sharing information.

    Ms. Gorman said that while she "acknowledged and respected" the American government's concerns about the fast-growing importation of drugs from Canada, "our health care system is a defining characteristic of who we are as a nation."

    In a speech to the Drug Information Association here, Dr. McClellan expressed concern about the prevalence of every-country-for-itself drug policies. Keeping drug prices artificially low, Dr. McClellan said, lessened the incentive for innovation by drug manufacturers. He said rich nations should "fairly share the costs, not just the benefits, of new drugs."

- Arik

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November 18, 2003

The Innovator’s Solution – RIM’s Blackberry and the "Jobs" Consumers "Hire" Products and Services to Do

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To make innovative products that drive growth, companies must forget about demographics, product attributes and market size data, and focus on the specific jobs the customer needs to get done. That's what Clayton Christensen and Michael Raynor say in their new book. All about it in the excerpt from, "What Customers Really Want Is for You to Do Their Jobs."

Here's my own excerpt of the excerpt:

    Innovations That Will Sustain the Disruption Gaining a foothold is just the first battle in the war. The exciting growth happens when an innovation improves in ways that allow it to displace incumbent offerings. These are sustaining improvements, relative to the initial innovation: improvements that stretch to meet the needs of more and more profitable customers. Choosing the right improvements is critical to the disruptive march up-market. Here again, job-based segmentation logic can help.

    Let's examine one of the hottest markets of the past decade—handheld wireless electronic devices. The BlackBerry, a handheld wireless e-mail device made by the Canadian company Research in Motion (RIM), is an important competitor in this field. RIM found the BlackBerry's disruptive foothold at a new spot on the third axis in the disruption diagram, competing against nonconsumption by bringing the ability to receive and send e-mail to new contexts such as waiting lines, public transit and conference rooms. So what's next? How does RIM sustain the product improvement and growth trajectory for its BlackBerry? Surely, dozens of new ideas are pouring into RIM executives' offices every month for improvements that might be introduced in the next-generation BlackBerry. Which of these ideas should RIM invest in, and which should it ignore? These are crucial decisions, with hundreds of millions of dollars in profits at stake in a rapidly growing market.

    RIM's executives could believe that their market is structured by product categories characterized by some moniker such as "We compete in handheld wireless devices." If so, they will see the BlackBerry as competing against products such as the PalmPilot, Handspring's Treo, Sony's Clié, mobile telephone handsets made by Nokia, Motorola and Samsung, and Microsoft Pocket-PC-based devices such as Compaq's iPaq and Hewlett-Packard's Jornada. In order to get ahead of these competitors, RIM would need to develop better products faster than the competition. Sony's Clié, for example, has a digital camera. Nokia's phones offer not just live conversation and voice messages, but short text messaging as well. The PalmPilot's consummately convenient calendaring, rolodexing and note-keeping features have almost become industry standards. And does the fact that Compaq and Hewlett-Packard offer stripped-down versions of Word and Excel software mean that RIM will be left behind if it does not follow suit?

    Defining the market by the characteristics of the product causes managers to think that in order to beat the competition, Research in Motion would need to build some number of these features into its next-generation BlackBerry device. RIM's competitors, of course, would be thinking the same thing—all trying to cram their competitors' superior features into their products in a race to get ahead of the pack. Our worry is that defining market segments in a product-based way actually causes a headlong, arms race-like rush toward undifferentiated, one-size-fits-all products that perform poorly any specific jobs that customers might hire them to do.

    Alternatively, RIM's executives might segment their market in demographic terms—targeting the business traveler, for example—and then add to the BlackBerry those product improvements that would meet those customers' needs. This framing would lead RIM to consider a very different set of innovations. Stripped-down customer relationship management software might be considered essential, because it would allow salespeople to review account histories and order status quickly before contacting customers. Downloadable electronic books and magazines would obviate customers' having to carry bulky reading material in their briefcases. Wireless Internet access, with the attendant capabilities to alter travel reservations, trade stocks and find restaurants via global positioning satellites, could be very appealing. Expense-reporting software coupled with the ability to transmit reports to headquarters wirelessly might be a must.

    Every executive who has participated in decisions to define and fund innovation projects will empathize with the tortured difficulty of answering questions such as these. No wonder that many have come to regard innovation as a random crap shoot—or worse, a game of Russian roulette.

    But what if RIM structured the segments of this market according to the jobs that people are trying to get done? We've not conducted serious research on this, but just from watching people who pull out their BlackBerrys, it seems to us that most of them are hiring it to help them be productive in small snippets of time that otherwise would be wasted. You see BlackBerry owners reading e-mails while waiting in line at airports. When an executive puts an always-on BlackBerry on the table in a meeting, what is she trying to do? Just in case the meeting gets a little slow or boring, she wants to be able to glance through a few messages unobtrusively, just to be a bit more productive. When the pace of the meeting picks up, she can slide the BlackBerry aside and pay attention again.

    What is the BlackBerry competing against? What gets hired when people need to be productive in small snippets of time and they don't pick up a BlackBerry? They often pick up a wireless phone. Sometimes they pick up The Wall Street Journal. Sometimes they make notes to themselves. Sometimes they stare mindlessly at the CNN Airport Network, or sit with glazed eyes in a boring meeting. From the customer's point of view, these are the BlackBerry's most direct competitors.

    What improvements on the basic BlackBerry wireless e-mail platform does this framing of the market imply? Word, Excel and CRM software are probably out—it's just really hard to boot up, shift mental gears, be productive and gear down these activities within a five-minute snippet of time. Snap-on digital cameras likewise aren't likely to be hired to get this job done.

    However, wireless telephony is a no-brainer for RIM, because leaving and returning voice messages is another way to be productive in small snippets of time. Financial news headlines and stock quotes would help the BlackBerry compete more effectively against The Wall Street Journal. And mindless, single-player games or automatically downloaded David Letterman-like lists of 10 might help the BlackBerry gain share against boredom. Viewing the market in terms of the jobs that its customers are trying to get done would define for RIM an innovation agenda that is grounded in the way its customers live their lives. The good news for RIM shareholders is that this appears to be the trajectory that the BlackBerry is on.

    Doing this make-me-productive-in-small-snippets-of-time job perfectly is not trivial, of course. Adding voice telephony to the BlackBerry would increase power consumption. This, however, is the type of challenge classically associated with sustaining innovation. RIM's biggest issue is probably not a lack of engineering talent; it is deciding which problems it should deploy that talent against.

And, from later in the chapter:

    If RIM evolved the BlackBerry to help people be evermore productive in small snippets of time, if Palm evolved its Pilot to help people be ever better organized, and if J-Phone's handsets were optimized to help teenagers have fun, the products would become quite differentiated in consumers' minds—and each could grow to own a large market share of its respective job. And because these different jobs arise at different points in time and space in consumers' lives, we'd bet that for a very long time most consumers would opt to own each product individually rather than having a single, Swiss Army knife-like device—that is, until a one-size-fits-all device can do all these jobs without compromising functionality, simplicity and convenience.

    Unfortunately, it appears that many manufacturers in this space are now on a collision course. Each seems bent on packing every other competitor's functionality into a single, all-purpose device. Unchecked, this will lead to commoditized, undifferentiated products that don't do really well any of the jobs that they once got hired to do. This need not be so. The suicidal trajectory results from framing the market in terms of the attributes of products and the attributes of customers, rather than in terms of jobs to be done.

Still, maybe RIM wasn't quite as innovative as we thought, as a company called NTP based in Virginia recently won a $53 million judgement against RIM and a barring of selling their products in the U.S. Glad that news didn't spoil Christensen's book... but then, it'd probably already gone to press, eh?

- Arik

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November 01, 2003

Resurrected Napster Going Head-to-Head with iTunes & Apple

napster.jpgNapster is back at it again. This time, they’re going after iTunes in an attempt to try and win the online music wars.

I’m just waiting for Wal-Mart to come into this market with its low-price guarantee to squeeze any remaining profit out of the music business.

- Arik

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October 09, 2003

In a Defeat for Big Telecom, Minnesota Federal Judge Says Hands-Off VoIP

mnvoip.pngI noticed this story come out yesterday and was thankful my neighboring state has decided to lead by example - thus, perhaps, making it a little more certain the fate of my own VoIP service from Vonage. VoIP has been around for years, but usability and interoperability barriers with the traditional POTS system has made them a non-existent threat to big telephone companies until Vonage made a VoIP call seem a lot more like a regular phone call.

Naturally, the old hard-to-use VoIP services are still around - using essentially the same technology; they just aren't as much of a threat to the installed base of landline customers as Vonage has become - should we regulate IM providers like Yahoo, AOL and MSN, where VoIP is one option of their services?

"We're not suggesting that broadband telephony should never be regulated, but it can't be squeezed into existing regulation," Vonage Chief Financial Officer John Rego said in a recent interview. The link below provides some excellent competitive analysis of the situation - here're some excerpts:

    Internet phone providers have won the first round in a clash with state regulators, providing needed momentum for the upstart industry.

    In ruling from the bench late Tuesday, Minneapolis federal Judge Michael J. Davis permanently barred Minnesota from applying traditional telephone rules to Vonage, a pioneer in technology that lets consumers bypass the traditional phone network by making voice calls over a broadband connection. A written order that explains that the court's rationale is expected by Friday, according to the Minneapolis court clerk's office.

    Minnesota Public Utilities Commission (PUC) analyst Stuart Mitchell said Wednesday that for now, the state plans to comply with the court decision and could conclude its proceedings against Vonage as early as Thursday, when the agency is next scheduled to meet.

    "We've been told to stop, so we won't be enforcing our order," Mitchell said in an interview Wednesday. "I don't think the commission wants to violate a federal order."

    Tuesday's ruling for now frees Vonage to sell its Internet phone service in Minnesota without obtaining a telephone operator's license or paying fees to support 911 services. More importantly, the order is the first to address the authority of a state to oversee so-called voice over Internet Protocol (VoIP) providers and could thus impact efforts by other states to regulate the Net telephony providers.

    State regulators had threatened to stall VoIP's growth by forcing providers to follow the same rules as do traditional phone companies. As a result, the Minnesota suit was being closely watched by VoIP industry executives, consumers and traditional phone companies.

In the end, it's clear that, if we're going to regulate VoIP like we do POTS, we need to overhaul the regulatory system for telecom services as a whole; and that's not something you'll see big telecom pushing to have happen either.

- Arik

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September 30, 2003

Microsoft's Entry into the Anti-Virus Market Has Rivals Spooked

A short entry today about Microsoft's ability to "embrace and extend" Windows into the AV market - check out the article by BusinessWeek here - largely because one of its chief competitive weaknesses lies in Windows' battered reputation for being an easy target for viruses. Here's an excerpt:

    ...since Microsoft's (antivirus) products probably will be bundled into Windows, it will have a big advantage. Few believe that including antivirus software in Windows will violate antitrust laws. What potential rivals fear is that Microsoft will use its market power to thwart them. "The question is, will they play fairly or will they abuse their monopoly position?" asks Symantec CEO John W. Thompson. He and other rivals know they are facing a force more ominous than any virus. "When Microsoft enters an industry and includes the software in Windows, the sector disappears," says Steve Chang, CEO of antivirus software maker Trend Micro (TMIC ) Inc. It's a lesson the software industry knows all too well.
I guess I'd just as soon be able to get the updates right from the Windows Update site, like I do all the other patches I need for my PCs... right? Especially if I didn't have to pay anything extra for it. The AV crowd had better start thinking of better ways to differentiate themselves - a la Real Networks in the media player market - 'cause if Microsoft enters the business, their scorched earth policy won't leave many standing alongside them.

- Arik

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September 15, 2003

Apple Corps vs. Apple Computer: Fighting Over Music, Round Three

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The Beatles management company said on Friday it is seeking a court injunction against Apple Computer Inc., insisting the computer maker's iTunes online music store breaches the band's trademark. Apple Corps is owned by Sir Paul McCartney, Ringo Starr (seen above), John Lennon's widow Yoko Ono, and the estate of George Harrison.

In February 1968, The Beatles, Ltd. changed its name to Apple Corps, Ltd. with subsidiary holdings as follows: Apple Electronics, Apple Films Ltd., Apple Management, Apple Music Publishing, Apple Overseas, Apple Publicity, Apple Records, Apple Retail, Apple Tailoring Civil and Theatrical, Apple Television (planned), Apple Wholesale (planned). Here's a few excerpted items on the matter from Yahoo news:

    Apple Corps., the company formed by the Fab Four to manage its business interests and serve as the band's music label, issued a brief statement on Friday saying it had filed court papers in a London High Court in July seeking penalties and an injunction against the computer maker.

    "Specifically, (the) complaint is made over the use by Apple Computer of the word "Apple" and apple logos in conjunction with its new application for downloading pre-recorded music from the Internet," the London-based company said in a statement.

    The company did not elaborate on the penalties it is seeking, but said the computer maker violated a 1991 agreement specifying that it could use the Apple trademark for computer products only.

    "Unfortunately, Apple and Apple Corps. now have different interpretations of this agreement and will need to ask a court to resolve this dispute," Apple Computer said in a statement.

    Launched in April, Apple's iTunes has given hope to weary music executives looking for an alternative to free file-sharing services such as Kazaa and Morpheus, which have created a black market of sorts for free songs on the Internet.

    Music executives blame file-sharing and CD-burning for contributing to a three-year decline in global recorded music sales. The Recording Industry Association of America this week announced it has sued 261 song swappers, a tactic that has drawn criticism from consumer groups.

    Apple iTunes has been one of the few bright spots in the industry's attempt to woo back computer-savvy consumers.

    Earlier this week, the company said it had sold 10 million song downloads in its first four months. Apple's iTunes is available only in North America to Apple computer users, a small sliver of the total personal computer market. However, Apple has said it is on track to deliver a version of the online music store for use on the ubiquitous Windows PC platform by the end of this year.

    Apple has secured licenses from each of the five major music labels to sell music downloads, including EMI, home to The Beatles catalog. The Beatles, however, have not made their music available to iTunes or any other industry-backed service.

    The stakes could be high: Apple's iTunes Music Store has sold more than 10 million songs at 99 cents each since its April 28 launch, and is central to Apple's strategy to promote its computers as digital entertainment hubs.

    Despite Jobs' admiration of the Fab Four, still missing from the iTunes store are any songs from the Beatles. Apple Corps, which controls most of the Beatles' recordings, has traditionally been wary of releasing its music in new formats and has yet to authorize distribution on any Internet music site.

    The London lawsuit is the latest legal spat between the two cultural icons. In 1981, the Beatles, who had released most of their recordings on the Apple label, sued Apple Computer over the corporate name. The case ended after the tech company paid the Beatles' company an undisclosed amount of money and agreed to only use the name for computer products.

    A decade later, the Beatles sued again, alleging Apple Computer was violating the initial agreement by using its apple logo on music-synthesizing products. That case was settled out of court with Apple Computer again paying an undisclosed amount to the Beatles company and signing the agreement around which the latest lawsuit revolves.

    Terms of the 1991 settlement were kept confidential, with Apple Computer allotting $38 million at the time to settle the litigation. Some think the latest case may lead only to a walk down penny lane. Charles Wolf, analyst with Needham & Co., predicted Friday that the two companies will settle if a judge doesn't throw out the lawsuit.

    The Cupertino-based company is already paying hefty royalties to the five major record labels for the right to distribute their music online. It pays the labels an estimated 65 cents per song in addition to about 25 cents per song in other distribution and credit card processing fees. Wolf thinks the Beatles company would only manage to exact perhaps a half penny per song from Apple.

    "They'll never stop the iTunes Music Store," Wolf said. "The point of the suit is to collect money and they won't get any money if they cut off the store."

    Wolf thinks Apple Computer's lawyers must have considered the Beatles agreement prior to the online music store launch. "They named it the 'iTunes Music Store,' right?" Wolf said. "They must have thought about this because (the name) 'Apple Music Store' has more brand equity."

    The Beatles' holding company has always been diligent in protecting its property and trademark. In addition to the computer company, Apple Corps has sued others over domain names and unauthorized use of the Apple logo.

    Its latest case against Apple Computer will hinge on the details of the 1991 agreement, said San Francisco lawyer Eric Sinrod of Duane Morris LLP, who specializes in intellectual property and information technology.

    "The devil is in the contractual details and how restricted Apple Computer is in terms of using its trademark," Sinrod said. "Since the online music space is an area where many people are trying to grab territory now, this could be a situation of an aggressive fight."

    It's unlikely that either Apple company envisioned at the time of their deals today's digital revolution of music — how consumers can store thousands of songs on their computers or portable music players, including Apple Computer's iPod, and how they can buy songs with the click of a button, such as through the iTunes Music Store.

    The Beatles sued and won another lawsuit when Apple shipped computers that allowed music to be played through attachable speakers. That lawsuit charged breach of a trademark agreement since Apple had agreed to steer clear of the music business. Fox News estimates Apple has paid US$50 million in the lost suits so far.

    This latest round of legal proceedings surround Apple's popular MP3 player, the iPod and the iTunes Music Store, which just sold its 10 millionth song online.

    "When it first happened with the iPod, we said, "What could they be thinking?" said a Beatles legal insider, who agreed that posters announcing the iPod from "AppleMusic" were among the most egregious violations. "They knew we had the agreement, and that we'd won a lot of money from them already."

It would seem that Apple's destiny is intertwined with that of it's erstwhile brand competitor, whether anyone identifies Apple Corps with The Beatles or not.

- Arik

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August 29, 2003

Vodka Brawling: Grey Goose VS. Belvedere

greygoose.jpgTwo of the nation's leading luxury vodkas - Grey Goose and Belvedere - are in a barroom brawl over an advertising campaign. Here's an excerpt from the Minneapolis Star-Tribune:

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    "At issue are ads for the French vodka Grey Goose. In the ads, Grey Goose calls itself the world's best-tasting vodka, based on the results of a 1998 taste test by the Beverage Testing Institute. The ads tout Grey Goose's winning score of 96 and list the scores of 31 competing vodkas. Among the brands that scored worse than Grey Goose is Belvedere, the Polish vodka that pioneered the luxury category in 1996. Belvedere scored a 74 in the 1998 test, ranking it near the bottom of the pack. The institute is an independent company in Chicago that conducts and publishes reviews of beer, wine and spirits. Since that 1998 taste test, Belvedere has performed significantly better in two other taste tests by the same organization, posting scores of 90 and 91. Given those higher scores, Belvedere argues, it's not fair for Grey Goose to keep printing the results of its poor showing in 1998. Belvedere took its case to an industry arbitrator, the National Advertising Division (NAD) of the Council of the Better Business Bureaus. That group agreed that Grey Goose should stop running its ads. So did the National Advertising Review Board (NARB), another industry referee. But Grey Goose said it won't abide by the nonbinding decisions of those agencies."

Now, I'm not much of a vodka drinker - I prefer beer myself - but my bet is this ends up in court. The real question is whether Grey Goose should re-submit their product for comparison - which they have not since their 1998 win... and really have no interest in doing so and risk a loss of the earlier rating. Belvedere's been damaged by the ads certainly. But, if the 1996 Yankees won the World Series, should they not be able to cite that championship benchmark? Is it not true that Grey Goose won in 1998 and if they're citing that date in the ads, should Belvedere be able to make them cease and desist?

- Arik

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August 23, 2003

"Unfair and Off Balance": Fox News Loses Suit Against Satirist, Franken Laughs All the Way to the Bank

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Here’s an excerpt from the New York Times story from Saturday:

    “If anything, the lawsuit only benefited Mr. Franken. His book had been scheduled for release in September, but the publicity caused the publisher to print an extra 50,000 copies, for a total of 435,000, and to roll the book out on Thursday. After the ruling yesterday, it moved to the No. 1 spot on the best-seller list at Amazon.com. The network filed for the injunction on August 11. Fox News Network trademarked the phrase "Fair and Balanced" in 1998 to describe its news coverage, and network lawyers claimed that Mr. Franken's use of the phrase in his book would "blur and tarnish" it. Fox also objected to the use of a picture of Bill O'Reilly, one of its prominent news personalities, on the cover, claiming that it could be mistaken as an endorsement of the book. But these arguments were met by laughter in the crowded courtroom, as Fox tried to defend its signature slogan. Part of the network's burden was to prove that Mr. Franken's use of the phrase "fair and balanced" would lead to consumer confusion. One round of laughter was prompted when Judge Chin asked, "Do you think that the reasonable consumer, seeing the word `lies' over Mr. O'Reilly's face would believe Mr. O'Reilly is endorsing this book?" The giggling continued as Dori Ann Hanswirth, a lawyer for Fox, replied, "To me, it's quite ambiguous as to what the message is here." She continued, "It does not say `parody' or `satire.'" Ms. Hanswirth said Fox's "signature slogan" was also blurred, because people who were not associated with the network, which owns the Fox News Channel, also appear on the cover with Mr. O'Reilly. Judge Chin said, "The president and the vice president are also on the cover. Is someone going to consider that they are affiliated with Fox?" The courtroom broke into laughter again. Ms. Hanswirth replied, "It's more blurring, your honor." After more discussion about what was and what was not satire, and about the definition of "parody," Judge Chin decided that Mr. Franken's work was of "artistic value." "Parody is a form of artistic expression protected by the First Amendment," he said. "The keystone to parody is imitation. In using the mark, Mr. Franken is clearly mocking Fox." He said Mr. Franken's work was "fair criticism." Judge Chin said the case was an easy one, and chided Fox for bringing its complaint to court.

UPDATE: On Monday 25 August, Fox News dropped the suit.

- Arik

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August 22, 2003

As Gillette Fights Schick over Mach 3 and Quattro, Rayovac Liked Remington So Much They Bought the Company

… Prompting Me to Ask, What’s the Deal with Batteries and Shaving?

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coppertop.gifAs Gillette, the world's largest maker of shaving products (and owner of Duracell, by the way), went to court last week to counter a new competitive threat from its closest rival, Schick-Wilkinson Sword (owned by Energizer), another battery company (Rayovac) jumped into the shaving business as Rayovac bought out Remington for $322 million, plus debt. Here's an excerpt from the Gillette/Schick battle:

    “Gillette filed a suit against Schick over Quattro, the first four-blade razor, for an alleged patent infringement. The suit, filed in a federal court in Boston, alleges that the new razor uses technology that Gillette developed to allow the three blades on its Mach 3 system to extend progressively closer to the face and provide a smoother shave. Gillette claims it spent $750 million to develop Mach 3. "We welcome honest and innovative competition but we will vigorously defend our valuable intellectual property," said Peter Hoffman, the president of Gillette's grooming division. The lawsuit is seeking preliminary and permanent injunctions and triple damages. Gillette has a commanding 70% share of the world market for wet-shaving products, with Schick a distant second, at 18%. But the lawsuit was viewed by analysts as a reaction to the increasing threat posed by Schick. In a market where new product development over the past few years has often hinged on the addition of further blades, Schick has stolen a march on Gillette with Quattro. While Schick was preparing the launch of the four-blade razor, the people in the research and development department of Gillette were still adding a third blade to its Sensor brand due for launch next year. The drug company, Pfizer, acquired Schick in 2000 as part of its takeover of Warner Lambert and had always intended to sell the business on. Analysts say that, in the interim, Schick received little management attention or marketing push, leaving it in a state of destabilizing uncertainty for two years. It was bought by Energizer, the U.S. battery maker, earlier this year and has since shown signs of renewed verve. Two weeks ago it reported a 27% jump in quarterly blade and razor sales. Schick is planning to launch Quattro in the U.S. market next month for $8.99. The company has already begun to make a dent in Gillette's U.S. women's market sales with the Intuition brand. The razor has three blades surrounded by a bar of soap and is more convenient for women to use in the shower. The brand is held to be behind a 2.9% gain in Schick's U.S. market share to 17%. Gillette at the same time has fallen 4.3% to 63%, according to market data firm Information Resources. 'I think this shows the seriousness with which Gillette takes the Quattro as a threat to its core blades and razors business,' said Joseph Altobello, an analyst at CIBC World Markets."

Here’re a few background links:

- Arik

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August 21, 2003

Wireless Phone Companies Soon Free to Woo Landline Competitors

The FCC is taking up discussion of forcing wireline telcos to make phone number portability mandatory, as they’re now forcing wireless carriers to. The decision would go a long way toward making it possible for wireless phone companies to solicit business from landline customers, and accelerate the already precipitous decline in wired subscriber growth already so prevalent a trend within many demographics.

Face it… it’s just easier for most people to get a wireless phone they can always be near and ditch their stodgy old corded phone. Good story from Mercury News.

- Arik

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August 19, 2003

Verizon Wireless Walks Into Walkie-Talkie Market and Lawsuits by Rival Nextel for Trademark Infringement, Drops Charges of Nextel Corporate Espionage

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Verizon Wireless’ frontal assault on Nextel’s primary point of competitive differentiation – it’s Direct Connect feature – is hitting the streets; 95 percent of Nextel’s 11.7 million customers use the push-to-talk feature, and AT&T Wireless and Sprint are both expected to launch their own similar offerings later this year. Still, interoperability between networks is far from a done deal and that’s going to give Nextel some much needed breathing room to improve their service and pricing.

The amount of time it takes to connect the call will also be advantageous for Nextel, who began to prepare for the competitive threat from Verizon by going nationwide with Direct Connect in July.

Meanwhile, both Verizon and Nextel are being suitably litigious in their competitive strategy: in June Verizon filed a lawsuit against Nextel, saying the company had used “corporate espionage” to acquire prototypes of its new handsets and gained unauthorized access to its network; while Nextel sued Verizon over the use of the words “Push-to-Talk” as a trademark of Nextel’s service.

Still, Push-to-Talk is more Motorola’s technology than anyone’s and MOT appears to be ready to use it to propel it forward and out of its current funk with ambitious new plans to sell next-gen handsets.

- Arik

Here are a few more supplemental links on the issue:

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August 12, 2003

Fox News vs. Al Franken

alfranken.jpg

While I've always thought Al Franken was entertaining, I never thought he was a brilliant analyst... Can you name one observation this guy has really ever made? Certainly nothing worth being sued over - but that's just what Fox News is about to do.

My instincts tell me Franken's gonna end up laughing all the way to the bank from the loads of publicity this is bound to stir up for what would have otherwise been just another mediocre critique of right-wing journalism. Way to go, O'Reilly... real smart.

- Arik

Posted by Arik Johnson at 01:20 PM | Comments (0) | TrackBack

August 08, 2003

SCO Against the World, Microsoft Lends a Hand in Hopes of Squashing Linux

I've been watching the developing SCO vs. The World situation with interest lately - especially with LinuxWorld in full swing this past week and Microsoft's (rumored $50 million) license of SCO's UnixWare (purportedly to fund SCO's legal assault on the Linux community). But, I'm mostly left shaking my head as reading the latest on who's suing whom and why. If you haven't clued in to the story yet, here's a dozen background links on the subject - these should provide a good primer and I'll refer back here for future posts:

In the end, Linux and open source software more generally face a challenge that's more paper tiger than real threat. I think it's a shakedown and a scam by SCO to harvest some blackmail money from a cheap IP acquisition made a few years ago. SCO's puppetmasters (see links above from Forbes) have something of a history of this sort of thing.

What's more, if SCO would simply show the world the Linux kernal code they claim is theirs - something they've still refused to do except for a few in the analyst community, as mentioned in the links above - some say it would take all of two hours to get it rewritten... problem solved. But, then SCO doesn't get paid, right?

SCO's approach makes me think they took a page from the RIAA's playbook of public relations. Charging a few hundred bucks on average for every box running Linux worldwide would certainly raise some cash - but more importantly, from Microsoft's perspective, it would virtually eliminate the Linux price advantage over Windows.

However, I don't think, when the evidence of the infringing IP is finally revealed, that - as Red Hat is suing to have done ASAP - SCO will be able to prevent wholesale rewrites in avoidance of those recently announced licensing fees; and, only a fool would actually pay SCO anything at this point, without any guarantee of a refund when SCO's proven wrong.

- Arik

Posted by Arik Johnson at 01:18 PM | Comments (0) | TrackBack

August 05, 2003

BuyMusic Copycats iTunes Ads to Beat Weak Apple Product Strategy to Windows Users

There was a good Slate article today that looked at the ads you've been seeing lately from BuyMusic that look like flat-out copies of Apple's iTunes ads. They're trying to make hay while the sun shines - since iTunes is Mac-only (for the moment), BuyMusic is attempting an undercut and outmanuever strategy to beat Apple to Windows users with cheaper downloads and similar service (though, one cannot burn a mix-CD of songs as with iTunes, I'm told).

iTunes has been a big hit with fans and presents a real challenge to many artists - check out the good story at BusinessWeek on the subject.

Despite my personal dislike for knockoff marketing tactics, it might just work - and, shame on Apple for apparently trying to restrict the iTunes business as mere leverage to sell more Macs - a mistake that panned out with iPod. Apple dropped the ball when it didn't see iTunes as a business independent from the Mac platform, and by ignoring Windows users altogether, they effectively created tremendous opportunity for competitors. In that respect, BuyMusic deserves to win.

Still, the reason Apple's been so successful in the music business the past few months has nothing to do with price or marketing, and everything to do with Apple's new core competence. That is, Apple makes products people find cool enough that they can set trends and drive style among the coolest-of-the-cool hipsters that create pop culture. That unique position is what led the music industry to partner up with Apple on iTunes in the face of profligate MP3 piracy - if Apple can make it cool to honor copyrights, that culture shift bodes well for a music industry that's otherwise on its way to an early grave.

- Arik

Posted by Arik Johnson at 01:17 PM | Comments (0) | TrackBack