Microsoft's long courtship with the Valley

I got home Sunday and got caught up with the Merc. The first story that grabbed my eye was Dean Takahashi’s sidebar Saturday on the MS-Yahoo merger:

Microsoft may finally become a Silicon Valley company.

It has always been the beast from Redmond. An outsider. The inspiration for many a Silicon Valley start-up in the negative sense - everybody here wants to get rid of the company or go around it.

Microsoft's bid for Yahoo fits into a strategy that has been a long time in the making. It for years has been trying to be a player in Silicon Valley.

Once upon a time, Microsoft was at war with the valley. Companies like Netscape were key players in the antitrust case against it. To patch things up, Microsoft executives Bill Gates and Steve Ballmer made regular diplomatic missions to the valley, where the company has a 32-acre campus in Mountain View. "Let us be your friend," was their message.

Takahashi notes that the campus dates to Microsoft’s [1997] acquisition of WebTV.

Microsoft has been making nice with SV for years, dating back to at least 2000. Of course, the 1990s were mainly about Silicon Valley firms ganging up on Microsoft — or at least perpetual enemies like Scott McNealy’s Sun Microsystems. (Microsoft has since buried many of these hatchets). And beyond the few enemies many ISVs who needed to work with Microsoft to support the world’s most popular software platform — even though it had a habit of competing with its ISVs if the segmnent was large enough.

One thing that people forget is that Microsoft came to the Valley 20 years ago, with the July 1987 acquisition of Forethought. The Sunnyvale company invented something called “desktop presentations” with a new software package for the Mac. I remember visiting the Forethought (then “Microsoft Graphics Business Unit”) engineers in 1988, so that we could make our HP PaintJet printer driver compatible with their software.

People have forgotten Forethought, but most of my readers are now using version 11 or 12 of the software it created. I expect to upgrade to Version 12 next month, as part of our 23-campus university site license.

Big game, big ads

I missed most of the SuperBowl, although I did catch most of the 4th quarter and New York’s down-to-the-wire victory over the previously undefeated Patriots. (To the degree that I cared, I was rooting for someone to dethrone the Pats, particularly since they eliminated my Chargers two weeks ago).

However, the reason I normally watch the SuperBowl is the ads: certainly I remember the ads long after the game. For example, the 2000 EDS “herding cats” ad marked the end of the dot-com era but still ranks among the top 10 of all time. B-school profs have been using them to teach marketing for years. This year, the ads have the side benefit that they help us forget the torrent of insipid political ads that have been running on TV for the past month, particularly for the Indian gambling initiatives.

However, technology has changed the one-time nature of the ads. For the last few years I’ve caught the ads and read the articles on the WSJ paid site. But this year with Fox (and last year with CBS) the broadcast network has run them again online. (Presumably the business model is offering extra exposure to the advertisers). The NFL — one of the most vigilant about protecting its IP — is also running the ads on its site.

Of course in this era of Web 2.0, YouTube and even MySpace are getting into the act with their own replays. MySpace has it nicely organized by quarter. Of course, I learned about the MySpace page from the Fox broadcast (presumably since they’re a Fox subsidiary).

Normally, the memorable ads are either gimmicky or genuine. I disliked the Cars.com and E-Trade ads, while many others left me indifferent. (Of course, I’m an annoyed E-Trade ex-customer so I may be biased). The Verizon ad for the LG Voyager managed to make a hot product cold. GoDaddy.com (the once-cheap domain registrar) has milked its sex-sells approach of the past four years (starting with the 2005 “wardrobe malfunction”) to become a lame parody of itself.

On the plus side, the Taco Bell was mildly amusing, with a combination of mild warmth and edginess (rathe than the usual over-the-top campiness of the beer ads). The American Idol house ad was a clever tie-in linking the game, the NFL brand and the network’s biggest hit.

My favorite ad features NFL players Ephraim Salaam and Chester Pitts, talking about Pitt’s improbable path to college and pro football. The spot is heart-warming, an improbable happy ending — and is (mostly) true. It also involves SDSU, the alma mater of my mother-in-law (and my father’s first two years of college). What more could you want?

The ad was selected from 240 submitted by NFL players. It does exaggerate a musical instrument over a handheld calculator, but it’s still touching.

Oddly enough, due to the NFL legal beagles (or is it viewer indifference?) this heart-warming story is not posted to any site other than the NFL’s. The other odd thing is that the Fox ads are posted via MSN but playback is in Flash, not Windows Media.

High-growth business models

At an academic reception this week, I met Josh Long, a former entrepreneur now part-time business plan instructor. Like all sorts of people, Josh has a blog.

One posting caught my eye, one he posted last week on “Entrepreneurial Business Models.” To quote:

Since I started teaching a class to Entrepreneurship students at Fresno State on Business Plan Writing I’ve found that there are only 3 business models from a strategic perspective worth pursuing. There are 2 other business models that aren’t worth pursuing at all, but is where most business owners fall into because it is so easy to. The business models are Category Creators, Niche Perfectors and Category Killers. I learned about these categories in the book ‘Blueprint To A Billion’ by David Thomson that goes over businesses that have gone public since 1983 (386) that have achieved $1 Billion in annual sales. He found that all of these ‘Blueprint Companies’ fit into one of these three business models.

I think our instincts are the same: Category Creators are sexy but attract too many failed efforts, while Niche Perfectors offer opportunities almost everywhere to exploit.

Unlike many entrepreneurship instructors, I think there are many sound reasons for starting a business that doesn’t become the next billion-dollar enterprise. (A 90% chance at a $5 million/year company makes more sense than a 0.1% chance at a $1 billion/year company). Still, the “Me Too” companies that Thomson disparages often offer the worst of all possible worlds: no upside, and not a sure survivor either.

Microsoft, Yahoo and Total World Domination

I was heading out the door this (Friday) morning when I saw the announcement of Microsoft’s $44.6 billion offer for Yahoo. I wasn’t able to blog it, although in between (during) meetings I was able to surf some of the news.

The two obvious points were first, this has been rumored since May 2007 so it’s no surprise. Second, the only reason is because neither has been able to compete with Google on its own, and Microsoft is not yet willing to cede Total World Domination to the GOOG. The Microsoft quote (reported by MarketWatch) was none too subtle.

'Today this market is increasingly dominated by one player. Together, Microsoft and Yahoo! can offer a competitive choice.'

BTW, the MarketWatch package (13 stories by Friday afternoon PST) was the best I saw. The WSJ was nearly as good, but a little too dry while MarketWatch was more sharp (but then they have John Dvorak). Plus MarketWatch is free, and you know how I like free.

I think the deal is likely to happen, but the market isn’t quite convinced. The stock closed at $19.18 Thursday and $28.38 Friday, an 8.5% discount to the $31 offering price. The math suggests there is only a 78% chance the deal will happen, but it could also be that people don’t like the half-stock side of the deal (being bearish on MSFT stock).

Or perhaps the shareholders who bore persistent losses just gave up and dumped their shares on the good news. The stock closed at $33.63 on Oct. 26 (and briefly broke $34 the next trading day), so Microsoft’s premium this week is a big discount from three months ago. Certainly I agree with the consensus view (e.g. in the NYT) that no one will pay more.

Rushing out the door this morning, I made a brief note on four points to investigate:

1. David Filo and Jerry Yang get $4 billion (9%) to start their next company or become philathropists. (Filo and Yang used to own 8% each but I guess they either sold or got diluted). Obviously they wouldn’t stay, but they (especially interim CEO Yang) get the monkey off their back to turn the company around — trying to win with what seems to be an unwinnable hand.
2. The culture should be a snap. In fact, the suggestion of a parallel to AOL Time Warner is asinine. I study tech culture for a living, and these are two strong engineering cultures. There isn’t even the east coast/west coast thing because (besides the obvious Seattle-Sunnyvale geography) Microsoft has very astutely created a mothership campus (a few miles from Yahoo) for consolidating all their SV acquisitions — starting with buying Forethought (creator of PowerPoint) back in July 1987. Yes they could botch it, yes they need a Yahoo division president who spans both camps, but it’s as close a culture fit as Yahoo is going to get. (The rumored News Corp. - Yahoo merger would have been another AOL Time Warner — and look how well Terry Semel worked out).
3. MSFT needs to keep the Yahoo brand and identity. It has better share and (I’d bet) far better associations in most of the world than Microsoft’s. Yes it means forcing the MSFT online division to submerge their egos and join Yahoo, but anything less would destroy the value of the acquisition. Plus some people just hate Microsoft, which brings me to …
4. Antitrust shouldn’t be an issue — except for Europe. Yes Microsoft can’t bundle Yahoo search on the desktop and expect the US DOJ to approve, but other than tying to the Windows monopoly it will sail through the US as it provides real competition to Google’s majority share. Europe is another story. The FT and Reuters referred to “bad blood” between Microsoft and EU competition authorities. Like the WSJ, I think the real problem is that Microsoft is public enemy #1 for Eurocrats who use the excuse of competition policy to hobble successful US firms.

Longtime industry pundit John Dvorak thinks the deal won’t happen, due to the culture clash and EU antitrust issues. Dvorak is really knowledgeable, but he’s the definition of an iconoclast — and has been a curmudgeon for 15 years. I’ll chalk it up to contrariness rather than some unique insight.

Amazon, Audible and Apple

Amazon is buying Audible, maker of audio books, for $300 million. Chump change for an e-commerce transaction, but of course I’d love to have founders shares on such a deal.

I happened to see the story by Brad Stone in the dead tree edition of the NYT, and he raised some interesting points.

Stone noted that Audible was a dot-com (1999 IPO) that went dot-bomb with everyone else. Reading between the lines, the investments by Random House, Bertelsmann and Amazon in 2000 kept the company alive until its market ripened at it was swooped up by Amazon.

IMHO, like so many other companies spawned by the technology push optimism of the 1990s, this was a company years before its time (like eBooks). Its business model didn’t make sense until people had iPods (instead of laptops) to listen to their Alive to be bought by Amazon.

The other point that Stone (and I’m sure others) makes is that Audible has succeeded through distribution by the iTunes store to all those iPods. No word as to how Apple will feel about the deal, but I’m guessing Amazon is hoping Apple will say “bye” and it can try to switch all those Audible customers over to the Amazon MP3 store. The other possible outcome of a Audible-Apple divorce is that Apple makes some other company the next Audible.