Chairman Bill not quite so rich

Several news outlets (258 according to News.Google.com) are reporting speculation that Bill Gates is no longer the richest man in the world. All the stories claiming Carlos Slim Helú now holds that honor quote one particular financial journalist in Mexico, Eduardo Garcia. As the AP (via the IHT) reported:

Slim controls Mexico’s largest fixed-line telephone company, Teléfonos de México, or Telmex, and owns other businesses in sectors from construction and music to restaurants and cigarettes. Garcia says Slim's current wealth represents nearly 8 percent of Mexico's total Gross Domestic Product.

In April, Forbes magazine reported that Slim had overtaken U.S. investor Warren Buffett to become the world's second-richest person, with holdings of US$53 billion (€39.6 billion).

But according to Garcia, Slim took over the No. 1 spot as early as late March, with a fortune surpassing Gates' by about US$1 billion (€740 million).

Garcia attributed Slim's latest rise to a 26.5 percent second-quarter bump in share prices for América Móvil SA, the largest wireless service provider in Latin America, which Slim controls. Garcia's estimate of Gates’ latest worth is based on a 5.7 percent rise in Microsoft shares during the same period.

Even Forbes — official scorekeeper for the world’s billionaires who ranked CSH #3 last fall — seems to give the report credence.

Now any personal wealth over $50 billion seems like a lot of money to me (but then I’ll never make it to $5 million, so what do I know?) Other than the symbolic value of being #1, Gates is still pretty rich.

I think the report also reminds us of the value of telephone quasi-monopolies — Telmex has a 90% share, while his faster-growing mobile business (América Móvil) has a 73% domestic market share and also is a contender in other Latin American markets. SBC AT&T only covers half the USA, but 10% of it would be worth $25 billion.

Slim has made some smart bets — buying Apple near the bottom in 1997 and getting a 6x return in a year. But then he was stupid (or, more likely, egotistical enough) to think he could turn around CompUSA. However, Warren Buffet bet on USAir and Bill Gates keeps losing billions on the Xbox, so nobody’s perfect.

Photo: Forbes magazine, October 2006.

Technorati Tags: Bill Gates

Way to make money off of “freemium”

In my e-mailbox Tuesday night was an e-mail from GrandCentral Communications founders Craig Walker and Vincent Paquet, announcing they had sold their 1½ year-old startup to Google. As Doug told me Friday (during our iPhone outing), the acquisition has been long-rumored.

GrandCentral got the cool name from its VC, Halsey Minor, who had it left over from an earlier venture. You may not know Minor but you probably know his most famous startup, CNet, which once brought him a paper net worth approaching $1 billion. Minor put an estimated $4m into the startup, while the cofounders had money from their turnaround and sale of Dialpad to Yahoo. Although Minor, Walker, Paquet & Co. did not specify their haul from this week’s deal, some speculate they grossed $50 million.

I know Vince casually as our kids go to the same elementary school and we’re working together (indirectly) as Lego Robotics coaches. This is one of the cool sort of social overlaps that I thought would happen when I moved to Silicon Valley, but (frankly) is more the norm for those living in the Peninsula (esp. Palo Alto) than us peons living in (relatively) affordable housing in the South Bay (i.e. South San José).

As with a lot of Web 2.0 companies, I grok the value creation part of GrandCentral’s business model but not the value capture. Still in beta, GrandCentral gives me an incoming phone number (free) that forwards to my other phone numbers (free) and the ability to ring different numbers for calls for different callers (free), as well as voicemail (free) that sends me e-mail when I have a new message (free). This will come in handy, as I want to forward some calls to my cell phone but not others, as well as be able to find out about voicemail when I’m away from the office.

Did I mention the service is free? The value to me as a customer is pretty easy to get. So where’s the value capture? A couple of weeks ago, Vince said that once the free service was done, they had plans to dangle lots of cool features available only in the premium service. He called this the “freemium” business model, a term I’d never heard before. Google’ing around, I was surprised that “freemium” already has a Wikipedia entry (but not surprised to see the quality of the entry). My old friend Tom Evslin apparently used it more than a year ago, at which point it had already caromed around the blogosphere.

To me, Skype is the quintessential freemium service. I’ve used the software (free) to make PC-to-PC calls (free) and even WiFi handset-to-PC calls (free). And last December, when my flight from Eindhoven to London got fogged out, I spent €5.00 to be able to SkypeOut to fix my travel arrangements (and I think I’ve recharged it once). So for several years of free calls I’ve paid for a little bit of local PSTN termination at rates generally cheaper than any non-VoIP alternative.

We’ll never know about how GrandCentral’s freemium business model would have worked. Instead, the GrandCentral revenues, cost and acquisition price will non-material figures (i.e. trade secrets) lost in the wads of cash being gathered and handed out through Google’s ever-expanding tenacles.

GrandCentral (like blogspot) makes Google’s properties more sticky — exactly as with Yahoo and Microsoft’s acquisitions (e.g. eBay buying Skype). It seems that the aggregation value (economies of scope) to Google are more compelling for its mobile phone portal than its PC-based portal. Others speculate that Google will use the GrandCentral infrastructure to more directly challenge Skype.

But I worry about how GrandCentral contains even more private information about social networks that Google can mine: if I say “x family calls always get forwarded to my cell” but “y friends get voicemail if I’m not at my desk,” that is not just linkages between individuals but also very useful tie strength. What will Google do with this information? The GrandCentral and Google privacy policy today seem rather benign — they only want to target ads. I can deal with the prospect of getting more Hawai‘i ads if my wife (or friends) click on Hawai‘i ads. Some of the other prospects I find more unsettling.

Technorati Tags: business models, Google, freemium, Skype, VoIP

Limits to diversification

When we teach related (or unrelated) diversification, we emphasize the case where the competencies from the existing business don’t transfer to the new industry (or perhaps the rare case where participating in two industries has disadvantages).

However, there are cases where diversification runs aground by being too successful — at least in the IT industry with its increasing returns to scale. I recall in the 1990s, Microsoft spent a lot of money trying to sell settop boxes based on Windows CE, while the cable TV oligopoly was quite clear that they were not going to make IBM’s mistake and transfer their distribution channels and market power over to Microsoft.

At lunch today, I read in yesterday’s Wall Street Journal that Universal Music is threatening to not renew its annual contract with the iTunes store. In fact, today’s Information Week reports that Universal will not renew its contract at all, but instead offer its content at will, free to change the terms or pull out at any time.

Universal is taking a big risk: the NY Times article suggests that the iTunes store accounts for about 10% of the revenues of Universal Music (70% x 15%), or about €500 million of its €5 billion annual music sales.

Of course, there are a lot of disagreements between the record labels and Apple, the largest being that they want to charge consumers more per song and Steve Jobs thinks that’s a bad idea (except for its iTunes Plus premium service). But the WSJ (and other) articles make the explicit link to the label oligopoly being averse to surrendering any more of their supplier power than they already have:

Music companies generally consider the mobile market the next frontier for their business, and are loath to let Apple dominate it that market the way it has digital downloads.

In the short term, having Universal withdraw from iTunes would be bad for consumers (lack of one stop shopping), but it could be good in the long run if it increases competition. It wouldn’t matter much to me, since I have 10 purchased iTunes songs and 3,600 songs that I personally converted from CDs.

Still, having followed the music industry’s information age strategies for the past five years, I suspect that Universal is doing the wrong things for the wrong reasons. The record labels seem to be better at asserting their naked market power to protect an old order that will soon be gone, rather than aggressively creating a new future more to its liking. At least EMI is trying new strategies — there are risks to their strategies, but there is more risk in doing nothing.

Since Universal is owned by Paris-based Vivendi, perhaps its executives are spending too much time trying to emulate Louis XIV. Not a rewarding path to follow, unless you are eager to enjoy pie in the sky when you die or the attention of 72 willing virgins.

Technorati Tags: Apple, diversification, iTunes, music industry, Universal Music

Another reason to hate EDGE

Monday there were widespread reports that AT&T’s EDGE network crashed. AT&T claims it’s not because of the iPhone (and the estimated 500,000 new data users that suddenly showed up on the network in a 24 hour period). Perhaps it’s because of the “Fine Edge” network improvement.

AT&T snared the iPhone in hopes of improving its reputation and winning high-margin customers. So far it doesn’t appear to be holding up its end of the bargain. One estimate said only 1/3 of prospective iPhone users were already on AT&T, which means the other 2/3 must be really p-o’d.

iPhone users also had trouble activating their phones, but since AT&T and Apple aren’t being candid about their customer support nightmare, getting an accurate overall picture has been difficult. One report I heard (e.g. this WSJ story) is that AT&T had particular problems (could just be routine LNP delays) moving people from other service providers — again aggravating exactly the sort of new customers AT&T most wanted.

I would sure love to see a survey of iPhone user satisfaction with their device, Apple’s service and AT&T’s service. Also with a breakdown of their former carrier and phone maker.

Overall, this suggests that Apple is paying a price for its immaturity in the mobile phone industry. Running a mobile phone network is a complex operation where some firms are better than others. As Apple has found out, network services can’t be bought and sold the same way as plastic cases or power supplies.

Technorati Tags: AT&T, iPhone, mobile phones

Weakening political support for IP?

In this morning’s Wall Street Journal, the former dean (1990-2004) of the Boston U. law school, Ronald Cass, wrote a scathing attack on the efforts of 35 Congressional Democrats to weaken Bush Administration efforts to get Thailand to respect the intellectual property rights of U.S. companies.

The opinion piece (Democrats and U.S. Intellectual Property) is available by subscription only and not on the free OpinionJournal site. But the gist is that some of the IPs being infringed by the Thai military government are U.S. drug company patents, the Bush administration wanted to do something about that, but some U.S. politicians think that’s such infringement is a good thing.

The charge is being led by Rep. Henry Waxman (D-Hollywood), who has represented entertainment industry interests in Washington since 1974. His involvement here is a little surprising. On the one hand, Waxman is a lawyer and career politician who has never been a friend of free markets or (other than Hollywood) business interests. He is also the co-author of the main U.S. law encouraging generic drug competition, the 1984 Hatch-Waxman Act.

On the other hand, the largest losses due to IP “piracy” in Southeast Asia over the past 20 years have been for prerecorded music and video, followed by computer software (a major California export). Cass noted that “The International Intellectual Property Alliance reports that 80% or more of the software sold in Thailand is pirated, as are more than 60% of the motion picture works and 50% of the records and music.”

Like the U.K. and several other developed countries, the United States has long been a net importer of manufactured goods. IP has been one of the few areas where the U.S. has a positive current account balance, and thus U.S. policy for about 20 years has been that lax IP enforcement is a non-tariff trade barrier (NTB). Some outside the U.S. have plausibly argued that the current global IP system largely exists to reward American interests.

I studied this in depth over 10 years ago in researching my first academic paper, “Software rights and Japan’s shift to an information society.” While IP creation tends to avoid smokestacks and manual labor, the problem is that it’s easier to steal IP than it is to steal a car (let alone a factory or piece of real property). The 1994 TRIPS accords under the multilateral WTO system — as well as the unilateral US Special 301 retaliation clauses — were set up to address this problem.

Among his harsh criticisms, Cass raises some important points. Who should make U.S. trade policy? The executive branch? A majority of both houses of Congress? Or 8% of the lower house (not having gone to the trouble of introduced specific legislation to be decided through the democratic process).

For American companies, this fight has broader implications. Sure, the question of Thailand’s compulsory licensing of AIDS drug patents is controversial, with some Americans siding against U.S. drug companies. And — as with any lax IP enforcement — there is always the fear of gray market reverse imports hurting your home market. But my main question is whether this is symptomatic of a larger policy shift.

President Bill Clinton was probably the most aggressive U.S. president in two decades pushing retaliation against NTBs (with weapons such as Super 301) in the name of protecting (in both senses of the word) U.S. industries. He was heavily backed by fellow Democrats, particularly in the House. Three years ago, then-Minority Leader Nancy Pelosi pushed hard for Super 301 retaliation against Chinese firms.

So this leaves a puzzle. Is the current politicking against U.S. IP interests happening because

• it’s just greedy Big Pharma, being demonized with Bill Oil and Big Tobacco?
• a fringe group wants free health care at any cost?
• you can’t get elected dogcatcher as a Democrat without attacking George Bush?
• the majority of Congress no longer wishes to fight foreign governments to protect enforcement of U.S. IP abroad?

A little certainty would be good here. It’s often my view that (shy of Hugo Chavez-style confiscation) businesses usually have more trouble with uncertainty of regulation than the regulation itself. If IP investments aren’t going to be rewarded, drug companies can fire their R&D departments and go into generics, or just try to cure diseases that impact rich Americans rather than poor Third World residents. My faith in free markets is strong enough to believe that the resulting underinvestment in necessary innovations would eventually lead to a policy change.

Technorati Tags: business models, intellectual property