IBM helping to bring the “smart grid” to a power utility near you
When one thinks about the electrical grid, thoughts of antiquated, rusting machinery certainly comes to mind. The big blackout of 2003 in the Northeastern U.S. points to an electrical system which is in bad need of an overhaul - and why would it need to change? With electrical systems in North America increasingly privatized and with literally no alternative suppliers of energy, why would power systems invest the billions needed to modernize their systems - would consumers pay significantly more for power if it was more secure? Upgrading to a modern power system has been in discussion for a number of years now.. the 9/11 terrorist attack did start to create awareness that North America would be vulnerable in the case of an attack on a major power system, as the interlinked nature of power systems could cause a system-wide failure in the case of major outage.
Yet, today there haven’t been a lot of tangible signs that the grid is much better than before, but the “Smart Grid” is a direction that the industry will likely gravitate to over time. Two basic concepts of the Smart Grid are the abilities to 1) inject power into the grid from alternative energy sources, even by the end consumer themself through sources like solar, and 2) enable the end consumers of energy to be aware of how much power is costing at a given time, and to allow these end devices to time-shift consumption to get the best rates possible. Ultimately, the Smart Grid should allow the peaks in the demand curve to smoothed out, resulting in a much more stable power grid and which can enable power utilities to plan their equipment purchases for much lower peak levels of demand. Through advanced metering, consumer end devices become more “intelligent”, reporting back and forth to the “mothership” with real-time consumption patterns, and ultimately helping consumers and the utility to deliver power in the best way possible. For example, consumers could tell their dishwasher to start up when the power reaches a particular $/kwhour in the middle of the night.
Already, we can see signs that large tech companies are making some waves in the Smart Grid area. I wrote an article back in September about Google and GE partnering up in power research, and IBM has now announced that it is partnering with utilities American Electric Power (AEP) and Consumers Energy in the U.S. (representing around 11.5 million consumers) to run some trials in 2009 to do advanced metering. IBM also announced recently that it is also working with French utility EDF as well, and for IBM, this is a positive step as it understands how to get the ball rolling in these types of large-scale projects - reminiscent of IBM’s abilities in healthcare as countries look to modernize their IT Health infrastructure to support more electronic data interchange. For the whole smart grid initiative, getting buy-in from the actual utilities is an important step, which does pave the way for smart grid devices to eventually roll out en masse, perhaps over the coming 5 years. At the end of the day, this could be huge opportunity for IBM as the smart grid market could be huge. Lux Research pegs the smart grid opportunity at $65 billion through 2013, while Al Gore believes that an ever larger investment would be necessary to get the job done: “$400 billion over 10 years pales in comparison with the annual loss to American business of $120 billion due to the cascading failures that are endemic to our current balkanized and antiquated electricity lines.” In any case, with large players like IBM and GE working with power utilities to get the technology out there, infrastructure could represent an important mega-trend over the coming years in looking at ways that tech firms can find new areas of spending growth.
For IBM, this is a continuation of a trend where the company has now made big bets into new technology silos, as described in this February article from BusinessWeek. For example, IBM has been selected by the Saudis to develop new techniques for desalination and solar energy, and IBM has been looking to make more investments in developing areas with the hope of being a big player when the technologies mature. As noted by IBM’s head of research John Kelly, “Great ideas are springing up everywhere, and we need to shift from focusing on large brick-and-mortar operations to having a much more collaborative outreach program.” - which highlights IBM’s increasing willingness to partner up in order to accomplish these feats without substantively increasing the R&D budget. And as seen with Cisco (which has been pushing hard to create new markets like remote teleconferences through its jaw-dropping Telepresence systems), Tech firms with vision and market-leading technology are diversifying to emerge as leaders once the macro economy passes… in time.
Samsung’s comments on the mobile phone market echo Nokia’s pessimism
mments from Samsung this morning reflect a widespread pessimism towards mobile phone growth this year and next. In the after-market in Korea, Samsung warned that 2008 mobile phone growth might fall short of its initial forecast of 9%, suggesting that Q4/08 sales may be much worse than expected. Nokia had prevously forecast for 2008 a rise from 1.14B to 1.24B units sold (8.8%), so this latest update from Samsung could indicate that there might be some downside from Nokia’s 2008 expectation.
Looking ahead to 2009, Nokia also believed that negative growth was possible, and Samsung echoed this same sentiment. According to Reuters, a Samsung spokesperson said that the market could “post a single digit or even negative growth”. Why the change in unit growth despite the growing importance of developing markets? While cell phone companies are feeling the pinch as consumers tighten their belts, more importantly, overseas mobile carriers are reducing their phone subsidies, meaning that end consumers will need to pay more their mobile devices. In turn, this is putting pressure on the device companies to either reduce the prices on their phones or to pack more functionality into their phones.
The global trend towards smartphones is only increasing the pressure in my view. The introduction earlier this month of the Euro199 Nokia E63 smartphone (~$250 before subsidies) is an unprecedented price point for a smartphone. The introduction of the 3G iPhone at the high end of the market has definitely had an effect in this regard, and will limit the ability of competitors to charge premium prices at the high-end, which puts increasing pressure on price points in the mid and low-end.
If 2008 was the year of the 3G iPhone, 2009 might now be seen as the year AFTER the 3G iPhone. After displacing the Razr as the best selling phone in the U.S. in Q3/08 (according to NPD group), the all-in-one smartphone appears to be finally hitting its stride, consolidating all of the features one needs in a phone plus a portable computer.
Why the “sudden” interest in smartphones? Given the current state of the macro economy, a bigger theme going on is of consolidation, which comes in two forms:
1) Consolidating lines = the move to mobile phones from landlines. This credit crunch appears to be accelerating the move away from legacy land lines towards mobile phones. While voice quality is not as good on mobile phones, mobile voice minutes have never been cheaper and for most people, it’s good enough. More users on mobile phones sets the stage for trend #2.
2) Consolidating functionality. With smartphones now capable of accessing web pages in a very competent fashion, I believe we’re seeing consumers starting to embrace the functionality of the laptop plus the phone in one device. One ComStore study even points to the reason why the iPhone is gaining in popularity despite the state of the economy - for lower-income families, the iPhone consolidates a broadband connection, a phone, a music device, and a low-end computer all in one device. Doing the math, a broadband connection might cost around $40, a basic phone plan costs $40, and a wireless phone might cost in the $50/month range. A few years back, these costs might run in the $130 range, so moving to around $70/month with the added data mobility might seem like a good deal to consumers. With Internet-connectivity almost a basic need to many.
On a global basis, Apple’s ability to maintain its subsidies remains an important asset (Singtel reported earlier in the month that it had seen short-term profitability significantly impacted by Apple subsidies + marketing costs), but for these carriers, getting data consumption is going to be an important theme as they look to offset weakening voice-related revenues. And for these carriers, I don’t think they’ve seen a device like the iPhone before, a device which has been able to shift consumers from being non-consumers of data to relatively heavy users of wireless data. Changing these consumptions will be critical for the industry, particularly as carriers look to get consumers to adopt next-generation (high-capacity) 3G and 4G mobile networks.
In summary, Samsung’s warning on the mobile phone market is consistent with Nokia’s thoughts for 2009, and suggest an increasing divide between the haves and have-nots, and for premium makers of smartphones, there could be a silver lining in a cloudy 2009 mobile phone market.
Semiconductor industry to contract in 2009 says the SIA
A report yesterday from a Semi industry group outlines its thoughts on 2009. The topline numbers are bleak, with 2008 sales expected to now grow by 2.2% over 2007 to $261.2B. Worse still, 2009 sales are expected to fall by 5.6% next year, the first contraction since 2001. While this forecast appears to be a big of a lagging indicator - after major chip companies like Intel have already doused hopes of a rebound in the chip world, the SIA’s thoughts are a good breakdown of areas which may struggle looking out over the coming 12 months.
Some detailed points:
- Visibility is very low at present. Q4/08 is expected to be negative YoY followed by a seasonal sequential decline in Q1/09.
- Things may unfold differently in the past given 3 important differentiators: 1) Overall industry demand is different now, with consumer and enterprise segments equally important to overall demand; 2) There’s no inventory overhang (unlike in 2005) which is a positive sign; and 3) Global demand patterns are very different now, with emerging economies more important than ever.
- The long-term growth trends still looks positive, and SIA expects 2010-2011 to both grow in the 7-8% range.
- Hot and cold areas for 2009. Looking at the consumer breakdown, SIA believes that cell phones will drop by 6.4% on a unit basis, and PCs will drop by 5% on a unit basis. Together these two drivers are important, and will be responsible for 58% of the total semi spend (with PCs responsible for 39%). This cell phone unit forecast comes after Nokia announced that it thought 2009 unit sales would drop from its 2008 expectation of 1.24B, a year after growing from 1.14B in 2007. Nokia expects that more mainstream segment unit sales compression, with growth in smartphones likely. In other areas, the forecast looks better, with SIA expecting 8% growth in portable media players (like iPods) and 7% growth in digital still cameras.
The key point of the SIA’s forecast is that 2009 will be problematic with the end consumer increasing important in the semi mix and consumer confidence struggling at present. A return to growth in 2010 remains likely, though it is contingent on an easing of the macro factors that can enable the consumer to increase spending. When this does occur, the fact that inventories haven’t increased with semi companies is a positive, suggesting that the long-term trend for Tech remains intact.
Microsoft buying Yahoo is a no-go… for now
Comments from Microsoft’s CEO Steve Ballmer regarding buying Yahoo a few hours ago torpedoed Yahoo’s stock price (now down 17% on the day), squashing hope that Jerry Yang’s exit as CEO of Yahoo would rekindle takeout talks with the Redmond giant. Said Ballmer at the company’s annual meeting, “We thought we had something that made sense…. We’ve moved on.” But have they?
Ballmer did admit that Microsoft would still be interested in doing a deal with Yahoo in search advertising, particularly with Microsoft running a distant third in this lucrative vertical dominated by Google.
But is Steve Ballmer really against a Yahoo acquisition? Believing so would require Microsoft’s chief to dismiss a lot of reasons to pick up Yahoo on the cheap, especially at a time when Microsoft NEEDS to beef up its Web 2.0 capital to compete with Google longer-term. Some points to consider:
1. Not repeating the mistakes of the past. The last time Microsoft openly solicited taking over Yahoo, what happened? The stock price jumped from $19 to $30, and the board then asked for a premium on top of that. The uncertainty during this period also disrupted employees from both Microsoft and Yahoo, leading to a number of departures, seemingly all for naught. If this light, if it’ll take a 30-50% premium on top the current price to conclude a deal, why would Ballmer tip his hand at this point? Instead, if the stock bottoms out at $9-10, then perhaps a $15 offer seals the deal for Microsoft (~$21B). Lesson learned.
2. Lots of complementary pieces for Microsoft. The Internet properties offered by Yahoo are definitely Tier 1 assets, starting with the #1 site on the Internet Yahoo.com, suggesting that it’s offerings within the portal are very good as well (Yahoo News, Yahoo Finance, Yahoo Games). This leads to the company’s dominance in display advertising, which will be under pressure as a result of the economic crisis but will simply grow slower than search ads… the move away from traditional advertising (esp. newspaper) will help display ads no doubt. In terms of specialty sites, Yahoo’s Flickr is the premium photo site on the Internet and would help to lend credence to Microsoft shift to the cloud, while being very complementary to Microsoft’s efforts in building out its mobile phone business (Windows Mobile phone operating systems could build in support for synchronizing with Flickr). In addition to all of the eyeballs gained through the portal, Yahoo Mail remains a very important asset as well, with over a quarter of a billion users at present and merging these users onto a Microsoft mail platform could be a very good thing.
3. Getting stronger in overlapping areas. Even in areas where Microsoft and Yahoo overlap (e.g. mapping), presumably some benefit would be achieved by joining forces. Extending the mapping reference further, Google has really pushed location-based services in a number of exciting new directions (Street View, pedestrian mapping, transit directions)… a combined Microsoft and Yahoo mapping team should be tasked with one simple goal - out-innovate Google engineers. In other words, instead of producing two “inferior” mapping products, joining forces could help to out-Google Google itself. As seen in the battle for search advertising, losing market share = death.
4. The mobile arena is a gold rush. Building out a search advertising business in the mobile phone arena remains a work in progress, hence why it’s so important that Microsoft bulk up today. With Microsoft definitely losing its mojo in terms of mobile operating systems (Apple’s iPhone has been a blowout success, Google’s Android OS appears to be gaining momentum from developers as it starts to roll out over more smartphones, and even Symbian is now being open-sourced after being bought by Nokia), gaining more carrier deals to provide search is going to be really important as the smartphone market explodes. A sign that Yahoo’s mobile search is competitive with Google’s is the fact that it dislodged Google at Germany’s Deutsche Telekom earlier this year, and also won at AT&T a few months ago in the U.S. With Microsoft pushing hard to win deals (reportedly close to getting Verizon Wireless) by offering more guaranteed revenue for the carrier, taking out a competitor helps Microsoft going forward. Having more bundled features within its platform (e.g. Flickr) helps as well in making its mobile platform more attractive, and more “stickiness” also allows Microsoft to guarantee more carrier money as well since it can be more aggressive with its financial forecasts.
The bottom line here is that with Yahoo seemingly now in play, there appears to be lots of Internet “real estate” available now on the cheap. For investors in Yahoo, this Microsoft play has been a disaster, with Microsoft blocking Yahoo’s alternatives (Microsoft lobbying efforts in Washington have been successful in getting Google to drop its deal with Yahoo to outsource a part of its search ad business). At present levels and given that Ballmer appears to have learned his lesson from the first go-around, the upside here on Yahoo appears to be in the $13-15 level. With the stock now dropping like a stone, there is now increased pressure on Yahoo’s board to QUICKLY find a warm body in the CEO seat and present a reasonable price to Microsoft. The downside? If Yahoo’s board is in fact slow in picking a new CEO candidate, we could be looking at months before a major deal is consummated. With investors now believing that Microsoft is now a distant possibility and with the likely realization that Yahoo may not be able to realistically effect a turnaround within the next 12 months, the short-term could be even rockier for longs on this stock.
Intel drops a bomb on the Tech world
Last night, Intel revised its expectations for Q4 that was surprising on a number of levels. The revision comes less than a month after it issued its quarterly guidance and Intel couldn’t wait until its mid-quarter update in early December to issue the news. Coupled with the billion dollar magnitude of the sales revision (Intel had expected $10.1B-$10.9B in sales and now it is guiding to $9B +/- $300M), this news suggests that the supply chain has moved to curb inventories much faster than Intel had expected, and that end market conditions have worsened thus far through October and November faster than anyone had expected. According to Intel’s press release, “Revenue is being affected by significantly weaker than expected demand in all geographies and market segments. In addition, the PC supply chain is aggressively reducing component inventories.”
In addition to the sales hit, gross margin from Intel is going to be approximately 55% versus a previous expectation of 59%, though this is to be expected for a manufacturer like Intel which is asset heavy and needs huge unit volumes in order to spread out the amortizations on its fabs. The response from Intel? Clearly, the chip giant isn’t panicking at present, and is mildly curbing R&D spending in Q4 and in 2009. Intel plans to spend $2.8B (versus $2.9B previously expected) in Q4 and $11.4B (versus $11.5B) in 2009. One reason why this spending isn’t coming down drastically is that R&D isn’t an area where Intel can let up since it doesn’t want to relinquish its lead over AMD - AMD today announced its 45nm server chip called Shanghai which is expected to perform around 15-20% better than its previous generation Barcelona chip, and AMD is also pushing to get its 45nm desktop CPU called Deneb to market in early 2009. With Intel bringing out its 2nd generation 45nm product called Nehalem any day now while also working to enter the graphics processor market (currently dominated by Nvidia and AMD), Intel can’t really scale back on its R&D roadmap given the current competitive dynamic… unless it thought consumer and enterprise demand was permanently impacted.
Intel, at this point, thinks that the revenue hit in recent days is more temporary in nature, and the supply chains having learned their lesson from 2005 where there was a serious glut in chip inventory. At any signs of end consumer weakness, the supply chain will now err on the side of caution and shut off the tap, so to speak. How long would it take for these taps to get turned back on? In the case of an oversupply situation, it wasn’t a one quarter phenomenon - it took several quarters before excess supply worked itself out from distributors and from the manufacturers themselves (in the form of work-in-progress and sometimes stored as wafers). In the case where the supply chain hasn’t built up a large supply, then the situation could rectify itself faster. The magnitude of Intel’s revenue drop might suggest that the supply chain is behaving cautiously at present, though we’ll need to wait to see what inventory levels are being kept by these chip companies when they report their Q4 numbers.
From Intel’s perspective, there is good news and bad news out of this announcement. While the magnitude of the revenue shortfall is indeed shocking, some revenue revision out of Intel isn’t a big surprise. The stock is currently down only about 1% as well on the day, which suggests that the stock may have bottomed to some degree. The fact that the stock is also at its lowest point since the dot come crash does provide some comfort for Intel investors (a 4% dividend yield doesn’t hurt either). Is there any upside in the very near-term for Intel and I suspect no, with retail outlooks for Q4 seemingly getting worse. Still, owning the dominant PC CPU company over the longer-term seems like a good bet… at some point over the coming quarter or two.
Nortel shifts gears into survival mode
Nortel’s results this morning were troubling, pushing the stock down 13% to the $1.00 level (or around 10 cents pre-consolidation). This quarter’s results were not the problem, as their Q3 results were roughly in-line with expectations at $2.82B and an adjusted EPS loss of $0.30. A weakening carrier business was already expected based on earlier warnings from the company back in September, and Nortel’s carrier business was down 24% YoY in Q3, but the company now expects that future earnings may come in its already lowered expectations… for 2008! Revenue for 2008 is now expected to drop by 4% (was 2-4%) and an operating margin improvement of 125 basis points (was 125-175 basic point). The biggest problem here is visibility, as Nortel provided the caveat that “actual results may be lower than these current expectations”.
According to CEO Mike Zafirovski, “we have seen worsening economic conditions, together with extreme volatility in the financial, foreign exchange and credit markets globally, further impacting the industry, Nortel and its customers”. A relatively stronger U.S. dollar is not helping Nortel on the revenue front (Nortel had to recognize a reduction in its deferred revenue balance), and on the enterprise side, Nortel did note that its customers appear to be delaying purchasing decisions at the present time. Nortel’s orders dropped in Q3 to $2.0B from $2.4B last year, due to a decline in CDMA spending in North America - this resulted in a book-to-bill of 0.87 (below 1 indicates that orders were less than revenue in the quarter), though its Metro Ethernet business’ book-to-bill was 1.08.
In this light, tt’s no wonder that the company has transitioned into “survival mode” and noted the steps it is taking it its earnings release. On the cash front, NT has around $2.3B, which will be become $2.6B as it re-classifies some short-term investments into “cash equivalents”. A big concern for many investors is its debt load, which remains hefty at $4.5B. Nortel reprted that it doesn’t have any public debt due until July 2011, and its composed of senior unsecured notes with no unusual debt covenants. However, with an uncertain topline, the latest round of cuts has started, with another 1,300 positions to be eliminated through 2009, and we’ve finally seen some cuts to the executives at Nortel, with its CMO Lauren Flaherty, CTO John Roese, head of global services Dietmer Wendt, head of sales Bill Nelson, and chief legal officer David Drinkwater expected to leave by year-end, which is expected to save $400M next year. Why is this change being made? Nortel is restructuring to become 2 completely separate business units - a carrier business and an enterprise business with separate executives running each business, thus eliminating some top-level positions. The reality is that this is “waving the white flag” to some degree as it goes contrary to the “strategy of hyperconnectivity”, where Nortel was going to leverage its experience in a number of verticals to provide solutions to customers. Well, this strategy has not been officially “down-sized”, and the business units look like they are being restructured to be more “available for sale”, so to speak, especially after indicating that it would be selling its Metro Ethernet business back in September.
In summary, while Nortel’s business relationships with global carriers and businesses continue useful and worth something, but efforts to tie them together under Mike Zafirovski’s leadership have clearly not gone so well. This latest restructuring at Nortel effectively makes Nortel two separate companies and is a reflection that being all things to all people is simply not within Nortel’s scope - and something that hasn’t gone well for Alcatel or Motorola either. At the end of the day, I think we’re already seeing signs that Nortel is tranforming itself from being a technology leader to simply wanting to monetize the value that remains within the company, and for investors, that would be a welcome transition. Is Mike Zafirovski the right man for the job? Ironically, in the short-term, he might be, as he’s been focused on cost reductions from day one on the job. In the long-term, this company needs to be split up into separate businesses that can be either sold or run independently, and Nortel is now heading along that path. It’s an uncertain path mind you, but I’m actually somewhat optimistic that the company is now moving in the direction it should have embarked on years ago. And for the beleaguered NT investor, while things won’t look much better over the coming 6 months (carriers could cut back on spending even more through Q1/09), the longer-term prospects for NT have gotten a little bit better, in my view.
Apple eating RIM’s lunch in the Enterprise? Not any time soon…
A Reuters article this morning notes Apple’s progress is selling smartphones in the U.S. enterprise. While larger corporations (especially in areas like Banking and Law) may still remain solidly in RIM’s camp due to the BlackBerry’s focus on end-to-end security and centralized management , small and medium-sized are increasingly taking up the iPhone.
The reason? Research firm J. Gold suggests that around 15-20% of iPhone buyers are going to be using the phone for business purposes, perhaps convincing their IT departments to support the device, especially after Apple announced integration with Microsoft Exchange earlier this year. The fact that Apple sold 6.9M iPhones in the September quarter versus RIM selling 6.1M BlackBerries means that more than 1M of these iPhones may be addressing a need that might have been filled by the BlackBerry. It’s debatable, however, whether Apple has simply expanded the entire market through adding enterprise functionality to its iconic device or whether it’s been eating into RIM’s growth potential to a substantial degree.
How many larger organizations have been switching to the iPhone as a principal smartphone? Not that many high profile companies have announced a switch though I’m sure that it’s an ongoing point of discussion. After Genentech, Nike, and Disney announced that they would be buying thousands of phones earlier this year, high-profile smartphone defections have not been coming fast and furious, though a story in early October of technology consultant firm BearingPoint convincing Japanese carrier Softbank to adopt the iPhone for 1,000 of its top executives does lend credibility to the notion that the 3G iPhone IS becoming a much more compelling device for corporations. For smaller to midsized companies, it may be that employees are simply wanting to take their consumer iPhones that they’ve paid for themselves and wanting to get access to e-mails and data within the corporate LAN. If this trend is actually taking place, we may see over time that RIM will need to become more flexible in terms of its pricing structure to allow SMBs to support both devices in the future.
The time horizon in this trend is an important thing to keep in mind. Research firm IDC notes in the article that “It’s inevitable that Apple will move into the enterprise space”, but I think that in this case, the enterprise is really just gravy for Apple, and they know that with a smartphone being a very expensive proposition for the end consumer, if they can pack more value into their decidedly consumer-oriented devices (in this case, Exchange support and over time, more security and centralized management features), then consumers will increasingly be able to rationalize their purchases. Ultimately, is it easier to sell a smartphone going from the enterprise towards the consumer market or vice versa? Given the scale economies for Apple, the long-term trend should be positive for the iPhone maker.
For RIM, they are clearly shifting to be more consumer-oriented, with its new clamshell design and the upcoming Storm touch-screen from Verizon, but given the combination of Apple’s brand, app strategy, and multimedia platform, I think that the BlackBerry may not really hamper Apple’s growth in the consumer arena. The bigger question for RIM is what impact will the iPhone have on its core enterprise market? Just as we’ve seen some evidence of Google already impacting some pricing of Microsoft’s productivity suite, over time, Apple will provide increased pressure on RIM to bring down its ability to monetize the corporate world. Up until now, we’ve only seen limited defections from RIM to other devices (notably devices from Nokia and the Treo)… for the first time, CIOs now have some leverage in getting better deals from RIM to maintain their BlackBerry platforms, and with more devices on the horizon (Google Android phones, Nokia touchscreen phones) I expect that gross margins may be under pressure through 2009 while I wonder whether RIM will actually be able to ease off on spending at a time when RIM is exploring new form factors (clamshell, touchscreen) and a new app strategy. With Apple being very innovative in terms of new user interfaces (multi-touch has been a game changer) and Nokia being very acquisitive in integrating new functionality into its Ovi platform (notably in terms of multi-media and mapping courtesy of Navteq), RIM may need to actually crank up its spending to keep up at a time when ASPs are coming down. Not a good combination in any case.
Bottom line, the problem with being the leader in an area is that it puts a target on your back, and RIM may start to feel increasing pressure over the coming 12 months as increasingly capable consumer smartphones start to be readily usable in corporate environments. Apple hurting RIM’s focus and profitability in enterprise does make for a weaker consumer push by RIM and suits Apple just fine, and pressuring RIM in its home court does borrow from Google’s playbook - Google attacking Microsoft in its core productivity market is really meant to weaken the Redmond giant, helping to soften Microsoft’s push into Google’s core search ad business.
The FCC opens up white spaces for wireless broadband. A big deal? You bet.
After hearing arguments on both sides of the issue, the FCC has announced that it will allow the use of unused white spaces (the gaps between over-the-air digital TV broadcasts) to be used for wireless broadband data use, particularly in rural areas in the 700MHz band. The National Association of Broadcasters (NAB) had opposed the move, claiming that interference with other unlicensed devices like wireless microphones would be harmed by this move. Obviously, incument wireless service providers were against this initiative because it would devalue their existing wireless spectrum which they paid billions for, while opening up competition from non-Telcos (which is already getting more competitive after cable company Cox announced it is building its own wireless network). On the day when the FCC also approved the Sprint-Clearwire WiMAX consortium as well as the Verizon-AllTel deal, the FCC approved the white spaces initiative with 2 provisions: 1) that devices are fully tested in a lab to ensure that they are standards-compliant, and 2) that all devices are also geographically aware, which will enable them to access a “conflicts database”, ensuring that these devices don’t transmit or receive signals on reserved channels.
To put it mildly, this is a very important decision in the tech world, as it has ramifications across telcos, software makers, over-the-top service providers, and even content owners. The opening up of an unlicensed data network across the U.S. is a significant step, bringing us one step closer to a truly mobile and low-cost Internet.
A “free” wireless Internet? Unlike new 4G services like WiMAX and LTE, white spectrum may be essentially free for users but unreserved to some degree, making it a “best effort” service. This means that it won’t be really suitable for wireless data that needs a guaranteed quality of service, but could be good enough for e-mail updates and data lookups. Even accessing YouTube videos isn’t life-or-death, and accessing the occasional video on the move should be popular even if the white spaces service isn’t always rock solid.
“Free” consumer services have worked well in the past… GPS devices providing location data has been a success in part because consumers know that the devices can continue to work reasonably well for the foreseeable future with few additional costs being levied, while over-the-air ad-supported television and radio have been staples for decades. Wi-Fi service is also seen as something which is now basically free at many retail locations like coffee shops (AT&T is now offering iPhone users free Wi-Fi access in the U.S.), but the cost of deploying Wi-Fi access points hasn’t proven economical… yet. One of the reasons is the large number of access points required with Wi-Fi due to the limited range of the technology, but other considerations like backhauling all of this traffic back to a central office does create significant cost issues as well.
Unlike WiMAX (which is running on 2.5GHz spectrum in the U.S.), the white space broadband spectrum will available on 700MHz spectrum, using the gaps between over-the-air digital stations in the spectrum that previously had been used for analog TV broadcasts. This is ideal spectrum, because at 700MHz, the towers can be spaced much further apart thus covering more ground, as long as the bandwidth speeds we’re talking about aren’t too high. The speeds hoped for are in the 10Mbps range, but given that backhauling this traffic is key consideration, it may be significantly lower than this. However, would I be interested in a free, advertising-supported 1Mbps data service on a device for e-mail updates, text messages, and web searches? Absolutely. At this speed, a wireless radio service also starts to make sense - especially if there’s no risk of racking up a huge wireless data bill at the end of the month. With “best effort” service in use, deploying wireless access to a wide range of devices like cars could be feasibly put together, enabling instant messages and news flashes on the go, with embedded advertising included in order to help pay for the service. At the end of the day, if anyone can come along and figure out how to make a useful service absolutely free, it’s Google, though other over-the-top service providers like Microsoft and Yahoo will no doubt follow suit as well.
What does this mean for Google? The big question is that once this new spectrum frees up officially next February, what is Google going to do? In the past, Google had hoped that it would be able to work with existing carriers to get true “open access” on wireless devices, replicating the environment we have on wireline Internet services where consumers can get access to any service from any service provider they choose. While the incumbent wireless service providers have slowly moved towards fixed data plans courtesy of Apple’s iconic iPhone, the tie between devices and wireless networks remain, along with phone subsidies in the U.S. and Canada. The promise of being able to by any device and enabling it on-the-fly to work on any network remains a long ways away, and Google likely believes that Verizon, after winning a significant block in the recent 700MHz spectrum auction, will continue to lock devices to its own network for devices sold by Verizon. In other words, Google now knows that incumbent wireless service providers have really no interest in “open networks”, and that setting up parallel networks over which it has some control will be critical going forward. This explains Google’s $500M in the Clearwire WiMAX network, and if Google has the opportunity to invest in a white spaces network on 700MHz, I’m fairly certain that Google will move in that direction.
On the devices side, the fact that this is unlicensed spectrum is a critical factor - and for the consumer, a white spaces wireless interface could access both public networks (run by traditional wireless ISPs or by ad-supported ISPs) as well as local wireless networks within homes. For Intel, it will be critical for them to roll out an integrated chipset supporting these white spaces networks over the coming year, particularly in light of their efforts to drive wide adoption of WiMAX (which still haven’t been widely adopted). Why would a consumer pay extra to buy a laptop supporting just WiMAX, especially if the network hasn’t been fully deployed? This chicken-and-egg issue with WiMAX remains a significant barrier to wider adoption of this next-gen network from Clearwire in the U.S. Intel, unsurprisingly, is now planning on delivering multimode chipsets in 2009 supporting 4G LTE + WiMAX, and adding white spaces support to these laptops may finally be the value proposition that could prove very attractive to consumers.
A fundamental problem with the current wireless broadband situation in the U.S. has been two-fold: In rural areas, service providers don’t roll out very good services because they customers can’t be monetized, while new wireless networks in urban areas don’t make sense unless a lot more devices come on-line, but how can this be done without cratering the business models and high ARPUs for the incumbents? This creation of a parallel, lower-quality best-effort wireless broadband service is a match made in heaven for the millions of unconnected consumer devices that could make use of occasional low-bandwidth connectivity.
This paradigm shift is an important step for the industry, and will be good for over-the-top service providers like Google, Yahoo, and Microsoft as they look to roll out services across users and devices that haven’t been connected before, and for equipment providers like Motorola (making wireless broadband devices) and even Cisco. Even for PC makers, getting the PC finally connected to the Internet on the move is a mixed phenomenon, as we should continue to see growth in Netbooks and ultra mobile devices as a result, but the availability of more Internet services on the go could so MORE adoption of web-based applications, a decidedly negative thing for PC makers. The upside here for PC makers is if they can get more PCs used in cars, but that may still be years away. And finally, for telecom service providers, this opening up of cheap unused spectrum is really not a good thing, particularly in the battle between traditional telcos vs. over-the-top service providers. The problem for the incumbents is that their dominance is very much like a dam - and they’ve been very good so far in keeping the water back by buying up new spectrum that comes up for auction and by leveraging their brand with the consumers. With Apple and Google now being better known than the service providers themselves, could we see the iPhone (once its deal with AT&T expires) and Google’s G1 making use of this white spaces network? Seems like an ideal fit to me.
In the battle of search engines, Google starts to dig deeper through character recognition
In the battle between the big 3 search engines (Google, Yahoo, Microsoft), Google has been able to steadily expand its share, largely through delivering better technology for the most part - resulting in Google’s more than 60% share in the U.S. For competitors without scale, it’s hard to compete with Google’s capabilities, and Google is also able to bring very complementary products like Google Maps (and Street View) to the table. An example of this dynamic is Australian Telstra’s announcement that it will outsource its Maps and Search needs for its Yellow product to Google. While having a leading mapping product is important to drive search (especially in the mobile arena where Maps as a starting point seems logical, Google’s ability to continue to differentiate within its core Search product remains an important consideration in my view.
Taking a step back, Google really shouldn’t be able to be head-and-shoulders about MSN and Yahoo in this regard. After all, actual search algorithms are pretty “fuzzy” to some degree (which engine produces the most relevant search results is a matter of opinion), but WHERE Google searches provides a better launching point into the growing mass of content in the Interweb.
- Searching into user-generated content can be done through Google Blog search
- Searching into official news sources can be done through Google News search (News content is folded into Google.com searches to a limited degree)
- Searching video content can be done through YouTube search (which are also incorporated into Google News search and the main Google Search)
The holy grail to some degree has been image recognition, because there remains a LOT of content that has simply been scanned into PDFs or images. The problem with images is that they haven’t been understandable by machines, meaning that this content hasn’t been processed by search engines. To date, Google has provided the ability to view PDF files in a text format, but this content hasn’t been automatically added to search engines… why? Accurate optical character recognition (OCR) is a compute time-intensive process, and doing this on each and every PDF file available on the Web is a daunting task. The other reason why this may not have been done in the past is that in doing an OCR conversion, Google risks doing some of these conversion wrong - and linking the wrong PDF files to web searches would look very bad. Google now enabling full text search of PDFs in its search results does suggest that the technology is improving.
To see if there was a difference in search engine performance, I searched for the term “spin lock performance” across all 3 search engines… what was the end result? The results were fairly similar… all 3 provided a link to the University of Washington within the first few results. But Google’s was subtly better, provided a section of the content from the PDF file directly in the search results, along with a direct link to the PDF. In other words, Microsoft search and Yahoo search both found the page containing the PDF file and linked to it, while Google search concluded that the PDF file itself was what the end user was actually looking for. At the end of the day, the ability for search engines to get users to their final destinations quickly is what’s important, and in this regard, I haven’t seen Microsoft or Yahoo getting better in their abilities to improve their products along this dimension over the years.
Longer-term, Google’s ability to dig through scanned documents is going to be increasingly important, particularly as countries like the U.S. and Canada move towards initiatives like e-Health and online document tracking. One of the things preventing these systems from moving faster is the sheer volume of paper-based documents but making errors in digitizing this information is an invitation for lawsuits. But if Google can play a role in quickly and accurately transforming this mountain of paper into a centralized and searchable database of information, it could allow Google (and potentially Microsoft) to assume an important role as an information broker going forward, and could open up solid revenue streams in areas such as health care data transactions, government document handling, and academic document management, over the medium-to-long term.
Microsoft looking to bring Office fully on-line as Google makes progress with its Google Apps strategy
The Microsoft vs. Google competition in the enterprise productivity space has been very slow to develop and remains an important investment consideration for Microsoft - will Google Apps eat into Microsoft’s dominance in the enterprise space as represented by Microsoft Office? As corporations look to avoid large capital investments in software, Google Apps low $50/user fee is attractive, enabling corporations to not only delay costly software upgrades but also delay upgrades to desktop and server PCs as well (a simple browser is all that’s needed). The ability to do collaboration built into the product in addition to centralized document management is an important trait of Google Apps - something that requires a bit more planning with Office out of the box. But customer reactions to Google Apps have been the big worries for Microsoft. Back in June, Microsoft had to fly in its COO to convince Proctor and Gamble to not go the way of Google and this is a sign that Google at least is providing a solid negotiation point for enterprise customers looking to pay less for IT (an article from the Chicago Tribune describing the scenario can be seen here).
In this competitive situtation, it’s no surprise then that Microsoft announced earlier this week that they will be providing a beta of its fully online Office product next year. The picture below is of its Online Word app, which will allow users to use any browser, though surely it’ll be better tested in Microsoft’s own Internet Explorer - my experience using the Web-based Outlook on Firefox suggests that they won’t go out of their way to make sure that all of the bells and whistles work on Firefox).
Microsoft has had a dilemma to date in that they haven’t been willing to cannibalize its own sales of Office with an online product, but the P+G story and feedback from customers may be finally bringing the Redmond giant into the online apps game in 2009. It seems that with this new product, Microsoft is trying to have it “both ways” - clicking on an online document will enable users to either edit it on-line or to edit it locally using a local version of Microsoft Word. Ultimately, I don’t know if a separate licensing deal for Microsoft is sustainable in the long run, as Google will ultimately try to bundle local editing (through Google Gears’ support for local files on a PC) for free. Still, Microsoft needs to provide this product to customers in 2009 in my view in order to at least be able to show its customers “we’ll be able to offer everything that Google does”. Microsoft’s ability to execute in this arena is somewhat suspect though, as it hasn’t done this type of app before, is saddled with a lot of legacy expectations (”will this support my old Word Macros”), and its recent track record of delivering major new systems (Windows Vista) on-time isn’t great.
The problem for Microsoft is that Google appears to be slowly improving its Google Apps functionality, learning from some of the best features of Office. What do I mean by this? The best feature of Office (in a corporate setting) in my view is Outlook, which provides a centralized calendaring and messaging base which can then drive other Office applications. Google Apps to date has been really just a mish-mash of different apps like Gmail, Docs, and Calendar. But with the most recent Google Labs features, I can see that they’re slowly starting to get it right.
The sidebars for Gmail now allow Google Docs and Google calendar items to be shown on one screen along with messages, which is very similar to Outlook’s main screen. Along with Google Talk, Gmail can now becoming that central portal for consumers and enterprises, encorporating messaging, appointments, instant messaging, and document editing in one spot. This is a powerful combination in my view, and helps Google Apps replicate an important piece of functionality in Microsoft’s flagship productivity suite.
Bottom line, increasing collaboration is going to be an important driver for productivity apps in corporations looking ahead to 2009, and Google is definitely pushing Microsoft to make a long-needed transition towards cloud computing. The open question mark in my mind is whether Microsoft can execute here and this remains to be seen, in my view.
