Ravi K Srinivas

Better lighting with quantum dots

2011-08-21T21:04:00.000-07:00

2010-09-29T01:18:00.001-07:00

Journalism in the Age of Data from geoff mcghee on Vimeo.

Managing Talent during Turbulent Times

2009-03-22T00:13:00.000-07:00

Traditionally, HR function is viewed as one that fosters performance excellence, full participation, and personal and institutional growth. The HR function is required to be highly responsive and supportive to the needs of the institution as a whole as well as those of individual employees. HR personnel need to be flexible & creative problem-solvers, with collaborative and participatory work styles. A well trained, technically competent and knowledgeable HR team is a business imperative, and one that is accountable at the individual, managerial, and programmatic levels for being a strategic asset to any company. Typically, value in Human Resources should be defined by the receiver more than the giver, and HR professionals add value when their work helps someone reach his or her goals.

People, intellectual capital, and talent are ever more critical to organizational strategic success. This observation is so common today that it almost goes without saying. Digitization, labor shortages, growth through acquisitions, simultaneous downsizing and expansion, workforce demographic changes, and globalization are just a few of the trends that have made talent a top priority

However, the majority of today's HR practices, benchmarks, and measures still reflect a traditional paradigm – i.e. excellence defined as delivering high-quality services in response to client needs. HR helps the firm operate within a critical market - in this case, the market for talent. Organizational decision processes and tools employed in the talent market are far less mature when compared to other business functions such as operations, finance and marketing. Management of the talent resources is at an inflection point today.

HR can add the most value by starting a culture conversation at all levels of an organization. One way to accomplish this is to conduct a cultural assessment or audit of an organization through employee surveys, focus groups or interviews. An audit can be supplemented by a review of an organization’s history, leadership styles, HR programming and industry practices to determine what currently drives and reinforces the culture. Lastly, it is important to determine what customers are saying, what cultural elements are obvious to customers, and if the culture is aligned with business strategy. This can be the basis for healthy discussion at team meetings and employee chat sessions.

Acquire talent based on cultural fit by identifying characteristics of people who exhibit those behaviors that is identified as desirable. The people who fit and thrive in a particular culture will perpetuate that culture in everything they do. This could be achieved by redesigning the on-boarding process - making sure that every new hire knows what it will take to fit in, and understands the cultural imperatives. As an example, Southwest Airlines has a culture committee that facilitates this process. One can also try focus groups around topics; form cross functional teams; call random groups of employees together for monthly breakfast or lunch meetings; and engage the help and support of a group of passionate, committed people to identify cultural disconnects and recommend remedies.

With lifetime employment in one company not on the agenda of most employees, jobs are increasingly becoming short term. Today's high-tech employees desire a continuous up-gradation of skills, and want work to be exciting and entertaining - a trend that requires designing work systems that fulfill such expectations. As employees gain greater expertise and control over their careers, they would reinvest their gain back into their work. As strategists, HR professionals require to achieve integration and fit to an organization's business strategy. As interventionists, they need to adopt an all-embracing approach to understanding organizational issues, and their effect on people.

Maintaining and investing in talent programs even during an economic downturn will reinforce the message that ‘talent is everything’. Even if an organization needs to lay people off, it must be done surgically - focusing on the people, projects, and organizations which most need change. Yet, one must not forget to reward high performers even during a downturn. Continuing to search for great talent in a downturn potentially means hiring the best engineers, sales people, marketing people, managers, and executives. From a talent management perspective, rather than freezing all hiring, downturns must be used as an opportunity to upgrade the organization.

Most organizations display a natural tendency to spend a lot of time and energy on internal efficiencies during a downturn. While this is needed, organizations must make sure they spend even more time focusing on customers; products and services, and explore customers’ new needs.

According to a recent study conducted by Deloitte, CEOs are playing a greater role in talent management with two-thirds of the interviewed executives admitting they are connecting more with employees around the globe – particularly those with high potential. Even while companies are focused on reducing costs and headcount, they are making unexpected moves. For example, 52% of the executives surveyed by Deloitte report their company plans to restructure jobs to lower costs and increase efficiency. In addition, 40% of polled executives reported they will try to attract more critical talent with hard-to-find skills, while 30% report they are looking to bring on more critical leaders. In an environment where companies are continually rebalancing workforces to match difficult times, restructuring jobs to cut costs and increase efficiency, and redeploying employees to make the most of current talent, more than 25% of the executives shared that they will increase innovative work practices, such as the use of flexible work schedules through measures like telecommuting and reduced work weeks to engage and retain key talent.

Comeback Women

2009-02-16T19:48:00.000-08:00

Various academic studies conducted across the world suggest that notwithstanding conventional dogmas such as discrimination and economic inequity at workplace; women do choose to take career breaks to take up parenting, or for pursuing their dreams. Empirical evidence suggests that such women who take career breaks face both penalties and costs, particularly if they have taken a career break in order to care for their young.

However, this general labor market failure that penalizes women for taking career breaks could be plausibly addressed by relevant measures from government and corporates on one side, and by judicious planning from women on the other. The key success factor will be to ensure the right mix of human needs including income, working hours and the type and status of employment on their reentry into employment.

Academicians and researchers have found three major trends. First, women who take career breaks interrupt their accumulation of human capital and pay a penalty in terms of lower earnings, unless the career break is for work-related reasons, such as gaining an advanced degree. Second, women who take child-related career breaks could pay a further penalty because, within the class of women who interrupt their careers, employers might discriminate against those who interrupt careers for family and/or personal-related reasons. Third, women who take child-related career breaks might not be able to return to the same type of job, and this could generate an income penalty.

At a macro level, this failure could be corrected by designing suitable labor market structures, policies by government and employers, work practices and culture. However, at an individual level, the subject must act wisely and plan meticulously to overcome patriarchal attitudes and gender bias in employment practices. According to Suzanne Venker, author of ‘7 Myths of Working Mothers‘, one way of doing it, is by planning their careers around their motherhood, rather than planning motherhood around their careers.

While this may sound simple, in an Indian context, most data points suggest this may be improbable. Research shows the proportion of women employees in Indian industry drop sharply as we move up the corporate ladder - from the entry level (50%) to the middle (30%) and senior management (8%), possibly indicating at a non-conducive workplace environment for women to balance career and life. Another issue is lack of representation of women at senior level. A Confederation of Indian Industry study in 2005 found that although women make up about half of the population in India, they only comprise 6% of the workforce, and at the senior management level at domestic Indian companies, women only constitute about 4% of the total workforce.

According to Carol Fishman Cohen, author of bestseller, ‘Back on the Career Track’, some of the workable strategies for women planning to reenter the workforce after a break may include going back to school to jump start a career relaunch the way Jill Biden did is an excellent back-to-work strategy that can be calibrated to a person's schedule and professional goals. One can also enrol into continuing and supplementary education such as a part-time MBA. Women on break from careers in scientific or technical fields could take up post-baccalaureate certificate programs

While there isn’t a panacea for women looking to restart their career after a break, there are plenty of examples, internationally and in India, on how some women have succeeded in their endeavor. Below I list some famous examples, which clearly prove that a woman can indeed carve out a successful corporate career after a break from work.

Dr. Jill Biden, born on June 5, 1951- is an Academician, Educator, and the Second Lady of US as wife of Vice President, Joe Biden. Jill was born in Hammonton, New Jersey and grew up in Willow Grove, Pennsylvania. She graduated with a bachelor's degree from the University of Delaware. She married Joe Biden in 1977. They had a daughter together in. She taught English and reading in high schools for 13 years, and earned master's degrees from West Chester University and Villanova University. Jill stopped working for two years while raising her three children. She then returned to work, teaching English, acting as a reading specialist, and teaching history to emotionally disturbed students. Biden is the president of the Biden Breast Health Initiative, a non-profit organization begun in 1993 that provides educational breast health awareness programs free of charge to schools and other groups in the state of Delaware. She runs five miles, five times a week, and has run in the Marine Corps Marathon. In January 2007, at age 55, she received a Doctor of Education in educational leadership from the University of Delaware.

Kiran Carrie Chetry, born on August 26, 1974 in Kathmandu, Nepal is a Famous News Anchor at CNN. Kiran was born in Shanta Bhawan Hospital in Kathmandu, Nepal. Her father is Nepalese and her mother is 1/2 Ukrainian and a combination of Dutch and German. Her parents, Homa Chetry and Nancy (who met while serving in the Peace Corps in Nepal) moved their new family of three to America. Kiran grew up in Gaithersburg, Maryland, USA. Kiran is married to Chris Knowles, and the couple has two children – three-year old daughter, Maya; and two-year old son, Chris. Despite having an ethnic background, and a family, Kiran has successfully navigated the high-pressure world of television broadcasting, and has managed to carve a niche for herself. She has received numerous awards including ‘Best Enterprise Reporting Award’ from the Pennsylvania Associated Press Broadcasters Association. In 2006 Kiran made Maxim Magazine's top ten list of TV's Sexiest News Anchors, placing third on the list: Kiran was ranked as America's sexiest female anchor and the world's second sexiest female anchor.

Hema Malini, born on October 16, 1948 is an Actress and Bharatanatyam dancer-choreographer. Hema Malini R. Chakravarty was born in Ammankudi, Tiruchirapalli district, Tamil Nadu to, V.S.R. Chakravarty and Jaya, a film producer. Hema first tried to enter films in 1964, but was rejected; Tamil director Sridhar said she had no star appeal. She persisted and found her niche in Bollywood. After taking a back seat from films for a number of years in the 1990s and early 2000s, Hema has made a successful comeback with hit movies. Despite family and kids, she has successfully pursued her dreams – Dance, Politics and Movies.

A New Year

2009-01-26T07:37:00.002-08:00

While im tempted to share typical random thoughts such as the Economy, Terrorism and Geo Politics, and Business; im deliberating confining my musings on some unique and special events that has touched my life this year. Let me begin with an announcement of the formal launch of my consulting partnership www.stratix-inc.com The concept was on the drawing board for quite some time, and finally materialized after like minds collided. My dear friend and senior partner Dr Santanu Bhattacharya founded the company about five years ago, just after he had left A T Kearney's New York office. However, after Santanu assumed an executive position at AOL-Time Warner, he had to put the dream on the back burner until he decided to leave AOL-Time Warner last fall. The timing of Santanu's and my exit from AOL-Time Warner was incidentally around the same time, and we immediately figured out the way forward - Stratix - a management consulting shop focused around Strategy - corporate, operations effectiveness, global sourcing and marketing, including new market entry.

The second event of the year is the formal launch of http://www.salorix.com/ - founded by IIT alumni Monishi Sanyal and Santanu, the company provides Marketing Intelligence, Research and Advisory services to companies around the world in industry sectors including Retail, Technology-Media-Telecom (TMT), Banking-Financial Services-Insurance (BFSI) and Auto. Im delighted to be a part of the founding team, and so far, its been a pleasure working alongside the stalwarts.

The latest event has literally changed my outlook towards life, has shaken some of the most fundamental beliefs in me, and has given me a renewed sense of hope and inspiration. Here im referring to my personal side, and i must say, that i feel honoured and privileged to have met a charming, dignified and graceful lady from Delhi - and her even more charming little son. The duo has compelled me to introspect and dig deeper to understand the true meaning of life. They have been through some terrible times, unimaginable for the faint hearted, yet, the duo carry a happy and cheerful disposition uncommon even among the most happy people. Indeed, i have learnt another valuable lesson in life - that the endeavouring human spirit does have the capacity to overcome any challenges that life may throw at us. It is just a matter of realizing this fact.

The year 2009 has definitely begun on a bright note - and i hope that it ends similarly. I wish everyone a happy and successful new year.

Game Changers

2008-11-10T16:51:00.000-08:00

In this post, i present three exciting and innovative companies that im associated with, in one way or the other. I believe these companies are real game changers in their respective sectors.

www.cyberadworld.com

Cyber Ad World is an Israel-based digital media company that has developed a unique product CYBERAD™, to address the burgeoning needs of online video marketplace. CYBERAD™ is a web-based ad-server for inserting video ads into streaming video content. Sounds familiar! - wait till you read more. CYBERAD™ adopts a patent-pending Dual-Stream Technology (DST), wherein content and advertising video streams are transmitted separately. DST significantly reduces bandwidth needs, and thus lowers the costs associated with online video streaming. In addition to regular features available with conventional ad-servers such as targeting and measurability; CYBERAD™ provides additional flexibility for publishers to place ads at will at any time during a video stream content - thus an online video publisher can seamlessly port traditional broadcast-like content, and maximise revenue. Further, the low cost of video streaming enables the publisher to increase profitability.

www.accelegrow.com

Accelegrow is a US-based Agro-tech company that is revolutionising the agriculture industry. The company owns a patented product, which is essentially a 'Bio-Fertilizer Supplement'. This bio-fertilizer product utilizes a unique technology that delivers higher crop yield; is eco-friendly due to its ability to deliver higher carbon sequestering (and hence qualifies for carbon credits); and consumes significantly less water (ideal for water-starved areas). Accelegrow's wholly-owned subsidiary, Ecoverdance, is a carbon trading company that helps Accelegrow clients to monetize their accumulated carbon credits. Here's the best part - the product is distributed FREE to the farmers, and in return, accumulated carbon credits are traded (exchanged). Typically, the company shares part of its carbon revenue with farmers! Thus, all water-starved poor countries are huge target markets. Can anyone compete with a FREE product? Click on the link to watch an interview with the cofounder http://video.google.com/videosearchq=ecoverdance&hl=en&emb=0&aq=f#q=ecoverdance&hl=en&emb=0&aq=f&start=20

www.neutron-systems.com

Neutron Systems is a California-based company in the telecom-software space. The company has developed a path-breaking product that is likely to re-define digital convergence in a way never seen before. Neutron Domestic Data Gateway is a product aimed at the digital convergence home segment. The home service system is a secure access point device that will consolidate all existing services at a user level, and provides new generation multimedia services with carrier grade quality. For the first time, we can think about targeted advertising at a user level among multiple-media platforms. Neutron gateway integrates secure-internet access with Voip and traditional POT voice services, and standard or high-definition TV channels' video services. The product, in the form of a console, will allow tracking of consumer media consumption across the Internet-Mobile-TV-VOD. This will enable advertisers to target household consumers through integrated multi-media campaigns - truly game changing.

An American Revolution '08

2008-11-05T23:45:00.000-08:00

Barack Obama’s victory has in many ways reinforced my belief that disenfranchised workers, particularly in the services sector, are waging a silent revolution against free-style capitalists. However, this American Revolution has been waged by exercise of franchise. Average American worker has indeed used her ballot to bring about change.

Industrial revolution ensued an era of high productivity in the manufacturing sector in Europe, which led to a phenomenal growth in real wages for workers. Thus, the increasingly wealthy proletarian got disenfranchised with the socialist movement, and ultimately led the demise of socialism.

The Services sector contributes close to 50% of US GDP, and employs two-thirds of total workers. While technology has played a major role in the overall productivity of the services sector, average wage in the services sector has not risen. This implies that while the services industry has become wealthy, the major factor of input (labor) in the services sector has remained poor – as indicated by stagnation of real wages in services sector since 1973. Further, wealth inequality between executives and average workers has increasingly widened. Roughly one third, 32.5%, of all income in the US was earned by those households with an income over $150,000, approximately the top five percent.

According to 2007 annual survey of executive compensation from the Institute of Policy Studies, the CEO of a large company pulls down an average $10.8 million per year in salary and bonuses. That doesn't count the value of perks and some stock options, whose value can run to many millions more. But the average worker makes only $29,544 —only about 1.6 times of the poverty level for a family of four. Even the highest paid government employee—the President of the United States—makes $400,000 a year, far less than the average salary of a CEO of large corporation.

Despite an increase this year to $5.85 per hour, the real value of the minimum wage has declined 7% over the past decade and real wages have risen only a little over the same period. During this time, executive pay has soared by 450%. The twenty highest paid executives at publicly traded companies took home thirty eight times the income of the 20 top paid leaders from the nonprofit sector: $36 million vs. $965,000. A Financial Times/Harris poll found that 77% of Americans think CEOs "earn too much" and almost two-thirds think the wealthy should pay more taxes. According to data from the Pew Charitable Trust’s Economic Mobility project, a generation ago, American men in their 30s had median annual incomes of about US$40,000. Today, men of the same age, make about US$35,000 a year, adjusted for inflation. That’s a 12.5% drop over the last 30 years.

The ongoing financial crisis was the last nail in the coffin for free-style capitalism. I’m not suggesting the end of capitalism; but most definitely, old rules will be re-written to accommodate larger interest groups – in this case, the average American worker. I will not be surprised if we see some semblance of equity in pay – between the executives and workers. This is not to be misconstrued as socialism; but this is just neo-capitalism. As data indicates, despite a productivity boom, free-style capitalism has failed to create wealth for the average American worker, and instead, has enabled a handful of crony capitalists to amass humongous wealth. 2008 US Election will go down in history as one in which the average American worker revolted against injustice in a uniquely American way – by exercising her ballot. Ultimately, it’s a victory for Democracy.

The Environmental Paradox of Economic Slowdown

2008-10-22T23:43:00.000-07:00

While the effects of economic development on environmental degradation in the short-run are well established; the ongoing financial and economic crisis may actually hamper development and adoption of alternative energy that is so vital for sustainable economic development.

Deutsche Bank forecasted the economic slowdown will cause Europe's industrial CO2 emissions to fall by about 100 million tonnes next year compared with last year. Australian Climate Exchange, which operates a joint-venture trading platform for carbon offsets and abatement credits, said economic cycles were linked to emission trajectories. As a result of this economic slowdown, carbon emissions at major industrial nations are likely to remain inside their Kyoto cap.

Kuznets curve is the graphical representation of Simon Kuznets's theory that economic inequality increases over time while a country is developing, then after a critical average income is attained, begins to decrease.

Another situation where the Kuznets curve is alleged to appear is the environment. Many environmental health indicators, such as water and air pollution, show the inverted U-shaped curve. The argument for the environmental Kuznet's curve is based on the following argument. In a developing industrial economy, little weight is given to environmental concerns, raising environmental pollution byproducts. After attaining a certain standard of living from the industrial production system and when environmental pollution is at its greatest, the focus changes from self-interest to social interest. The interests give greater weight to a clean environment by reducing and reversing the environmental pollution trend from industrialization. This parabolic trend occurs in the level of many of the environmental pollutants, such as sulfur dioxide, nitrogen oxide, lead, DDT, chlorofluorocarbons, sewage, and other chemicals previously released directly into the air or water.

A recent New York Times column argued that for all the support that the presidential candidates are expressing for renewable energy, alternative energies like wind and solar are facing big new challenges - because of the credit freeze and the plunge in oil and natural gas prices. The column states that advocates are concerned that if the prices for oil and gas keep falling, the incentive for utilities and consumers to buy expensive renewable energy will shrink. That is what happened in the 1980s when a decade of advances for alternative energy collapsed amid falling prices for conventional fuels.

Venture capital financing for some advanced solar projects and for experimental biofuels, like ethanol made from plant wastes, is drying up. Worldwide project financings for new construction of wind, solar, biofuels and other alternative energy projects this year fell to $17.8 billion in the third quarter, from $23.2 billion in the second quarter, according to New Energy Finance, a research firm in London.

Renewable energy now meets 7 percent of America’s energy needs. Renewable energy has become a big business worldwide, with total investment increasing to $148.4 billion last year, from $33.4 billion in 2004, according to Ethan Zindler, head of North American research at New Energy Finance.

The current financial and economic crisis is indeed a paradox for environmental sustainability. While it may slowdown the pace of environmental degradation in the short-run due to reduced demand – in the long run, an economic slowdown will undoubtedly prove to be a disincentive for development and adoption of clean energy.

Theory of Fear and Greed

2008-10-14T21:29:00.000-07:00

In a recent New York Times article, Thomas L. Friedman opines that at their core, markets are propelled by fear and greed. “They’re just the balance at any given moment of those two impulses. Over the long run, you cannot spin the market. You cannot sweet talk it into going up or beg it not to go down. It’s going to do whatever it’s going to do — whichever way greed and fear tug it” says Friedman.

Despite active Government interventions around the world, including the G7, the European Union, Asia, Middle-East and Africa, capital markets around the world remain bearish, and as many experts believe, will continue to be bearish. Ofcourse, the collapse of the old financial order on the back of US-mortgage crisis exacerbated the global economic situation, which was already reeling under tremendous pressure. But equally important is the contribution of greed and reckless spending by everyone, and specifically the Western world led by the United States. Ergo, no amount of sweet talk is likely to allay the fear factor that has become deeply embedded in the minds and hearts of people – post the collapse of the old financial order.

Consider the following - The Finance Minister of India is a cabinet position in the Government of India. He drafts the general budget of the country, and is in charge of the national economy. The current India’s Finance Minister, P Chidambaram came out openly to persuade investors to stay tight! I quote Chidambaram’s statement in a recent press briefing - “Before you sell, you must remember that for every seller there is a buyer. You must ask yourself why the buyer is buying in these times of perceived uncertainty and, therefore, ask yourself the further question whether there is a need to act in haste or in panic. In my view, there is no reason at all to act in haste or to give room for panic”. What was he thinking, and what was he trying to accomplish?

What mankind needs today is not just some piece-meal measure or sweet-talk, but a new financial order – one which will not only compel the rich economies to curtail reckless spending; but also encourages the developing countries to use their hoard of forex reserves in a much more prudent fashion. There must be an immediate end to developing countries’ financing the consumption binge of rich nations. Indeed, the perpetrator of the current financial crisis, the United States, must be brought under the supervision and oversight of the IMF- not just to ensure economic stability, but also to ensure confidence and morality around the world.

What is this Bail-Out all about?

2008-10-05T02:41:00.000-07:00

I provide three different expert perspectives on what this bail-out actually means. While Legendary investor, George Soros, believes this bailout is likely to be in-effective if the injection is not in the form of equity, and if foreclosure laws are not amended. Professor Luigi Zingales believes the government should leave the task of ‘pricing risk’ to the markets. While Professor Bradford DeLong opines the bailout will result in a paradigm shift in central bank responsibility, making it as an agent responsible for setting not only the price of liquidity, but also as an agent administering the price of risk.

George Soros believes that the injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700billion in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble. By contrast, the addition of $700billion on the demand side may not be sufficient to arrest the decline of housing prices. Something also needs to be done on the supply side. To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. The terms of mortgages need to be adjusted to the homeowners’ ability to pay. Soros argues that it is essential to modify the bankruptcy law as it relates to principal residences to avoid the real crisis – a vicious cycle of defaults-foreclosures- and house price collapse.

Acording to Luigi Zingales, Professor of Entrepreneurship and Finance at University of Chicago Graduate School of Business, under Chapter 11, companies with a solid underlying business generally swap debt for equity. Old equity holders are wiped out and old debt claims are transformed into equity claims in the new entity which continues operating with a new capital structure. Alternatively, the debt-holders can agree to reduce the face value of debt, in exchange for some warrants. The reason why this is unlikely to work is that we do not have time; Chapter 11 procedures are generally long and complex, and the current crisis has reached a point where time is of the essence. Zingales argues that if banks and financial institutions find it difficult to recapitalize (i.e., issue new equity), it is because investors are uncertain about the value of the assets in their portfolios and do not want to overpay. Will government do better at valuing those assets? In a negotiation between government officials and a banker with a bonus at risk, who will have more clout in determining the price? The expert makes reference to the Great Depression, when many debt contracts were indexed to gold. So when the dollar’s convertibility into gold was suspended, the value of that debt soared, threatening many institutions’ survival. President Roosevelt’s administration declared the clause invalid, forcing debt forgiveness. The other problem in the current crisis, points the expert, is that since the many (taxpayers) are dispersed, individuals cannot put up a good fight in the US Congress, whereas the financial industry is well represented politically - for six of the last 13 years, the Treasury Secretary was a Goldman Sachs alumnus!

Bradford DeLong, Professor of Economics at the University of California at Berkeley, believes that with the looming crisis and the proposed bailout, central banks are about to assume a new role, hitherto unheard of. Historically, while the central banking authority administered the price of liquidity in the form of T-Notes and Fed-funds; the price of risk was left to the vagaries of market. And it is the price of risk that is the source of current distress, points DeLong. It is not that the world economy faces a liquidity squeeze - two-year US Treasury notes with a face value of $1,000 will fetch $998 in cash – the lowest liquidity price since the Great Depression. However, the risk premia on non-Treasury assets have soared - annual interest-rate premium for holding a CD issued by a private bank now stands at five percentage points. And it is this rise in risk premia that threatens the global economy. This is the reason why the expert feels the bailout will result in a paradigm shift in central bank responsibility – making it as an agent responsible for setting not only the price of liquidity, but also as an agent administering the price of risk.

Bail Out - For the Sake of Democracy

2008-10-01T10:37:00.001-07:00

With the naysayers preventing the bail-out plan from being ratified in the congress, critics of Washington (consensus), and sceptics of Capitalism, and now Democracy, appear vindicated. People are beginning to question the ideals of not only Capitalism, but also questioning the ideals of Democracy - after-all, what is good for the people must be good for the congress, isn't it? We all know by now that this ongoing financial crisis is not just a Wall-Street issue, it is very much a Main-Street issue. Another interesting fact emanating from this crisis is clearly lack of 'Leadership' in the US. Unfortunately, there seems to be no one capable of galvanizing support and build a political consensus to fix the immediate issue. This is pretty dangerous, not only for the US, but for all those who believe in the ideals of Democracy and Capitalism. If people in the US and in the West lose faith in the system, imagine the critics.

Let me try and draw a parallel - a situation that im being personally forced into. One of my UK-based client is in urgent need of bail-out. Yes - there were strategic and fundamental blunders that were (inadvertently) committed by my client, but this must not be held against an entrepreneur, and we must not allow a live and reasonably healthy business to die. If this unfortunate thing were to happen, it would mean loss of jobs, and probably, loss of faith in the system. However, after relentless efforts, i can finally see some light at the end of tunnel. The reason i was able to persuade and help build consensus is because there are just a handful of decision makers involved at both ends. Also, the client in question is a privately-held business. I'm feeling relieved that i didn't have to deal with multiple approval (bureaucracy) bodies - board, investment committee, compliance committee, regulators etc. I'm also tempted to believe that a centralised decision making structure is some-times more efficient, than a de-centralized (federal) structure. Although my logic may be based more on emotional reasoning than scientific rigour and analysis; in times of crisis, emotions do tend to override pragmatism.

If an informed person can experience such a dilemma, and grapple with such a moral conflict, i can only imagine the pain, chaos and confusion that must be going through less fortunate (read less informed) mortals. No wonder, people are increasingly feeling hopeless, and markets around the world are low in confidence. This is not the time for reflection, this is the time for action, and time is running out. If not for anything else, please bail-out the world economy for the sake of Democracy, and its ideals, on which the promise of the future of mankind depends. Democracy is OF-BY-&-FOR the people, and i don't believe 'People' want a long-drawn crisis. Do we really want the critics to point at Democracy as the reason for not being able to reach a concensus on a rescue plan, which is intended to rescue People?

India Story Looks Ever So Strong - Really?

2008-09-25T12:09:00.000-07:00

According to Indian central bank, Reserve Bank of India (RBI), foreign direct investments for the period April-July 2008 stood at $12.32 billion. This compares with foreign direct investments of just $5.70 billion recorded for the same period last year. Clearly, structural reforms undertaken by the incumbent government, coupled with increased confidence in the India Story has contributed to this incredible y-o-y growth of over 100% in foreign direct investments. If the run-rate sustains, we may well end up experiencing the highest inflow of foreign direct investments ever. Last year was a record $32.43 billion. However, the more volatile foreign portfolio investments have been a sadly negative $4.67 billion for the period April-July 2008. This compares with a record year set last year, when foreign portfolio investments were $14.3 billion for the period April-July 2008. RBI records indicate that while fiscal deficit has improved, revenue deficit has slightly worsened, when compared to last year. The data also indicates that trade deficit may well widen this year, and this may potentially cause weaker balance of payments position.

Ofcourse, oil is a major import item for India, and the continuing high price of oil is a major reason for the widening trade deficit. This is interesting, because since the reforms undertaken in the early 1990's, India's road to economic prosperity has been built around the central theme of 'devalue and export' mantra. The current prime minister was then at the helm of affairs, when that reform theory was designed. Is it time for India to revisit this core economic policy? - If we go by Dani Rodrik, professor of political economy at Harvard University, the answer may well be to rely less on exports to achieve economic prosperity. He points out to an imminent threat of slowdown in advanced economies, and the almost certain unwinding of global current-account imbalances, as a clear threat to export-dependent economies. Dani argues that the economics and politics of protectionism in the West is likely to cause a slow-down in exports. If exporting does become a tough business, then economies like India will be forced to rely on domestic demand to sustain economic growth.

But domestic demand fueled only by easy money has its own problems. M3 data, the broader indicator of money supply, indicates that money supply growth in India has far exceeded the GDP growth since 2005 - due to the central bank's active intervention in the currency markets. While this 'sterilization' process was successful in containing currency appreciation that was to be caused due to strong forex inflows - and thus help exports; the process did very little to help solve the trade imbalance, particularly in light of high oil prices. In addition, weaker domestic currency also meant higher input costs (oil being a significant input constituent), and this helped the already fueling inflation, partly led by easy money, and partly by high food and commodity prices. The net result of a high-inflation expensive credit economy is a potential slowdown in growth.

Is it time for the Indian central bank to stop excessive intervention in the forex market, and let the domestic currency on a more free float? I would argue on the affirmative, especially because (direct) investments continue to be buoyant. The challenge is for the government to push the pedal on structural reforms in such a way that it fosters not only investments, but also creates a healthy competition.

Capitalism in Crisis?

2008-09-20T19:02:00.000-07:00

At a time when financial markets globally appear nervous, and people increasingly look at the capitalist economic ideals with suspicion; I want to share some expert perspectives from the masters and proponents of capitalism, who had clearly forewarned us about the pitfalls that have caused the ongoing mess.

Authors Raghuram R. Rajan and Luigi Zingales, in their seminal work, 'Saving Capitalism from the Capitalists' conclude that “Politics—for better or worse—lays the foundations for markets, and thus for prosperity. For creative destruction, sustained by free markets, is the elixir that has let the free enterprise system flourish for so many years. Yet the disruptions that creative destruction spawns sometimes prove too big for a free society to survive without a safety net. Markets need to be preserved against their biggest enemy: Themselves. Markets need a heart for their own good.”

Louis O. Kelso and Mortimer J. Adler in their book 'The New Capitalists' describe the functions of an investment banker under a financed capitalist plan as the following:

- “The investment-banker function in the present mixed economy has been aptly described by Professor Merwin H. Waterman as that of a “transporter” of funds from the “savers” to those who would use the funds in capital formation.”

- “Far more important than the mere selling to corporations of their influence with or access to the owners of concentrated savings would be the functioning of the investment banker as the “attending physician” at the birth of new productive capital instruments and of new firms employing them. In this capacity, the investment banker would be charged with qualifying the stocks of new enterprises, or of existing enterprises seeking new capital, for financing through the financed-capitalist program. This function of investment bankers we might call their “entrepreneurial service” function. Thus their functions in this capacity would involve the articulation of the work of engineers, accountants, lawyers, marketing experts and all others whose services are required so to plan, design, and establish either a new enterprise or additions to existing enterprises that the newly formed capital will in fact “throw off” or produce the wealth that is expected of it. No service in the economy would be in greater demand or have greater importance than this function of the investment banker.”

The authors had forewarned us about the moral hazards of speculation and vested interests:

- “Speculation in stocks is both tolerated and encouraged today because of the lack of understanding of the nature of a capitalist economy. It is neither more necessary nor more justifiable to encourage speculation in securities representative of the means of production than it would be to gamble with the labor power of workers—the other active factor of production. The principles of economic justice, which are central to a capitalist economy, assert that wealth should be distributed to those who produce it. They also imply that the acquisition of wealth, other than through voluntary gifts, or genuine changes in value through changes in supply or demand, by those who contribute nothing to its production, is the height of injustice. The common justification for secondary-market speculation, aside from the necessity for orienting business transactions to ill-conceived tax laws, is that an active secondary market is necessary to “season” the securities of various corporations so that issuers can thereafter more easily obtain new capital when they seek it. This defense of the speculative stock market is almost groundless, since only a minute portion of new capital formation is derived from the issuance of stock to investors in the market.”

- “However, the enticement to finance the acquisition of new capital estates would far more than offset the tendency to suppress speculation, in terms of the volume of securities handled by investment houses or brokerage houses and stock exchanges. One of the goals of a capitalist economy is the financing of new capital formation entirely through the issuance of equity stocks directly to individual investors. The extent to which this would increase the volume of securities outstanding is incalculably great. Nor can there be any doubt of the desirability of a sound and active secondary market, in which market value would reflect, predominantly if not exclusively, the wealth-producing history and prospects—in the opinion of buyers and sellers—of the capital represented by such stocks”.

Martin Wolf in a January 2008 article in FT explained that “the world has witnessed well over 100 significant banking crises over the past three decades. The authorities have even had to rescue important parts of the US financial system - on most counts, the world's most sophisticated - four times during the same period: from the developing country debt and "savings and loan" crises of the 1980s to the commercial property crisis of the early 1990s and now the subprime and securitized-credit crisis of 2007-08. No industry has a comparable talent for privatising gains and socialising losses. Participants in no other industry get as self-righteously angry when public officials - particularly, central bankers - fail to come at once to their rescue when they get into (well-deserved) trouble. Yet they are right to expect rescue. They know that as long as they make the same mistakes together - as "sound bankers" do - the official sector must ride to the rescue. Bankers are able to take the economy and so the voting public hostage. Governments have no choice but to respond.”

Thanks Raghuram R. Rajan and Luigi Zingales; Martin Wolf of FT; and Louis O. Kelso and Mortimer J. Adler

A Lesson or Two in Customer Service

2008-09-16T22:31:00.000-07:00

While working on one of my most recent assignment, I had the delightful opportunity to interact with top-notch professionals at Toshiba/Westinghouse, who thought me a lesson or two in customer service. This pleasant experience is in stark contrast to what I had heard from a dear friend in London about her experience with my erstwhile employers. Incidentally, the lady’s husband is one of my best friend, and a former colleague at the company. Story goes, the lady, representing a big buy-side company as marketing head, approached my former employer with a budget, but the inside sales team out-rightly refused to even entertain the prospective client, simply because the incentives associated with the ‘small deal’ was not attractive enough. I found it quite bizarre to learn that employees could actually act against the interest of their own employers on trivial issues, even in today’s day and age. Maybe their morale was low, or maybe the organizational systems and processes were inefficient. Whatever the reason for the poor customer service, the lady swears never to work again with my former employer, and the company has, in the process, lost out on a big-budget client.

Coming back to my Toshiba/Westinghouse experience, I had less than 48 hours to gather critical information on a breakthrough product the company was developing. I had my deadline to deliver a preliminary assessment, and I was desperately searching for answers. Since the product in question is still under development, the company has obviously not made a lot of information available to general public. However, I had a job to do, and I relied on the government agency, NRC, to gather the names and contact details of key people involved with the project. The tactic worked! Little did I realize that I had actually mass-mailed about twenty people asking for information about the product - to my utter surprise, and great delight, I received an overwhelming response from everyone at Toshiba/Westinghouse. Remember, I’m not even a customer. I’m just a representative of a prospective customer.

I must admit that i now have the pleasure of working with great professionals who are not only masters in their respective fields, but who have also mastered the art of customer service. What is even more interesting here is that the set of twenty people that I had mass-mailed belonged to different business units. I am impressed with Toshiba/Westinghouse organizational efficiency and collaboration, which seamlessly facilitated the agile responsiveness.

As we approach the Gandhi Jayanti, a national holiday celebrated in India on 2nd of October, to mark the occasion of the birthday of great Mahatma Gandhi, I recall the Mahatma’s famous words “A customer is the most important visitor on our premises, he is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so.”

Clearly, folks at Toshiba/Westinghouse have indeed lived upto Gandhi’s philosophy, and have delighted me as a customer. I want to take this opportunity to say a BIG THANK YOU to - Brad Maurer, John Goossen, Richard Wright and Tony Grenci

We Need Nuke - But for the Right Reasons

2008-08-21T19:15:00.001-07:00

According the International Atomic Energy Agency (IAEA), Nuclear power plants provide about 17% of the world's electricity, about 75% of the electricity in France is generated from nuclear power, and in the United States, nuclear power supplies about 15% of the electricity overall. There are more than 400 nuclear power plants around the world, with more than 100 in the United States. Uranium, Plutonium and Thorium are the common fuels used in producing nuclear energy. However, there are problems with nuclear as an energy source. Mining and purifying uranium is still not a very clean process. Improperly functioning nuclear power plants can create havoc – ‘Chernobyl’ the infamous example. Spent fuel from nuclear power plants is toxic for centuries, and there is no safe, permanent storage facility for it. Transporting nuclear fuel to and from plants also poses some risk.

Recent advancement in technology has enabled mankind to reconsider this controversial energy source, especially in the light of surge in prices of coal and oil, and ofcourse, the environmental implication associated with power plants using conventional energy sources. Some of the cutting-edge fission reactors that are available today are much safer than ever, need very little maintenance through their life-cycle, and are extremely eco-friendly and cost-effective. Examples include - Hitachi RBWR (Resource Renewable Boiling Water Reactor); AREVA EPR; and Toshiba 4S (Super Safe, Small and Simple).

Consider the case of Galena in Central Alaska – this is an area around the river Yukon, with small, isolated population centers, limited infrastructure and harsh conditions. According to Galena’s council budget, the power produced had to be less than $0.20 / KWH O&M costs; and less than $1.5 million in annual fuel costs. In addition, the power generator had to be of zero-to-low emissions, with modular/factory construction and yet, reliable & safe. Galena short-listed Toshiba to commission a solution that would be truly pioneering. Toshiba, in collaboration with CRIEPI, developed 4S, which simply stands for Super Safe, Small, & Simple. 4S is a compact Sodium-cooled, metallic-fueled reactor that uses enriched uranium (<20%) alloyed with zirconium. 4S comes in two variants – a 10 MW that is being commissioned in Galena, and a 50 MW that is still under development. 4S is factory built and delivered by barge to Galena, and the reactor is housed underground. 4S requires no refueling during its entire economic life of 30 years, and hence operationally hassle-free. Capital costs for 4S works out to $2.5 million per MW, and the electric power from 4S is estimated to be available at 5-7 cents per KWH. 4S reactor generates zero air or water emissions, and the reactor is returned to Japan at the end of its useful lifetime of 30 years (thereby eliminating nuclear issues), and Toshiba bears all (or most) of the licensing costs. If successful, 4S could just be the solution for countries that desperately need an alternative safe and economic solution to meet their growing energy needs. However, Toshiba has not yet indicated the time associated with commercialization and mass-production of 4S.
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Coming from a nation that is riddled with power outages due to an acute shortage, I believe nuclear could provide a viable alternative for our ever-growing appetite for energy. Having been outside the Nuclear non-Proliferation Treaty (NPT), India has been largely excluded from trade in nuclear plants or materials in the past. The country is at the cornerstone of a new era, having signed the historic nuclear deal with the US, and this should pave the way for India to be on the same footing as China in respect to responsibilities and trade opportunities in nuclear industry.

Currently, The Atomic Energy Act 1962 permits only Government-owned enterprises in India to be involved in nuclear power. I sincerely hope the Government revisits this law and amends it to accommodate private players who could play a vital role in plugging the nation’s energy gap. Interestingly, India is home to about 30% of global Thorium reserves, and this could potentially make the country a net exporter of nuclear fuel. Only time will tell if this is achievable, and thus counter the challenges surrounding our dependence on fossil fuels. Watch this space.

McKinsey on Talent Management

2008-08-21T19:15:00.000-07:00

According to McKinsey Consultants, Matt Guthridge, Emily Lawson and Asmus Komm, most companies are unprepared for the challenge of finding, motivating, and retaining talent. The experts draw their conclusion after revisiting a McKinsey study conducted about a decade ago titled the War for Talent in 1997 - the study that drew attention to an imminent shortage of executives. The consultants conclude that even today, the problem remains acute, and if anything, has become worse.

The demographic landscape of global workforce is dominated by the looming retirement of baby boomers in the developed world and by a dearth of young people entering the workforce in Western Europe. Meanwhile, there are question marks over the appropriateness of the talent in many emerging markets. Lofty ideas and investments to address the talent problem have largely failed, compounding the frustration of many senior executives. In recent past, organizations have invested heavily to implement human-resources (HR) systems and processes, and talent issues have unquestionably moved up the boardroom agenda. Although these moves are laudable and necessary, they have been insufficient at best, superficial and wasteful at worst. Too many organizations still dismiss talent management as a short-term, tactical problem rather than an integral part of a long-term business strategy, requiring the attention of top-level management and substantial resources. To manage talent successfully, executives must recognize that their talent strategies cannot focus solely on the top performers; that different things make people of different genders, ages, and nationalities want to work for (and remain at) a company; and that HR requires additional capabilities and encouragement to develop effective solutions. Only in this way will talent management establish itself at the heart of business strategy.

The experts point at three external factors — demographic change, globalization, and the rise of the knowledge worker – as the reasons forcing organizations to take talent more seriously. But the threats don’t come solely from the outside; companies themselves have made matters worse.

While the developed world wrestles with falling birthrates and rising rates of retirement, emerging markets are producing a surplus of young talent; in fact, they graduate more than twice as many university-educated professionals as the developed world does. Many organizations have been eyeing this source of talent enthusiastically, but riding the new demographic tide won’t be straightforward. HR professionals at multinational companies in emerging markets such as China, Hungary, India, and Malaysia have told McKinsey researchers that candidates for engineering and general-management positions exhibit wide variations in suitability. Poor English skills, dubious educational qualifications, and cultural issues—such as a lack of experience on teams and a reluctance to take initiative or assume leadership roles—were among the problems most frequently cited.

A particular demographic challenge comes from Generation Y—people born after 1980—whose outlook has been shaped by, among other things, the Internet, information overload, and overzealous parents. HR professionals say that these workers demand more flexibility, meaningful jobs, professional freedom, higher rewards, and a better work–life balance than older employees do. Another challenge, as companies expand into new international markets, comes from globalization. To succeed in countries such as Brazil, China, India, and Russia, organizations must have executives willing and able to work abroad. They also require talented local people, with an international mind-set, who understand local ways of doing business and local consumers—notably, the needs of an expanding middle class. Finally, knowledge workers, the fastest-growing talent pool in most organizations, have their own demands and peculiarities. By one estimate, 48 million of the 137 million workers in the United States alone can be classified in this group; a single company can employ upward of 100,000. Knowledge workers are different because they create more profit than other employees do—up to three times more, according to McKinsey research—and because their work requires minimal oversight. Yet McKinsey research suggests that some of companies struggle to extract value from this newly enlarged type of workforce. Further, the technology supporting its work has created faster and better ways to share information, and that further drives the demand for such workers and their potential impact.

The expert state that emphasizing the recruitment and retention strategies for only the top-performing 20% or so is unlikely to yield significant long-term benefits. The impact of top talent on corporate performance hasn’t diminished, but as a result of the expansion of knowledge work — organizations can’t afford to neglect the contributions of other employees. A more inclusive approach is the need of the hour that involves thinking of the workforce as a collection of talent segments that actively create or apply knowledge.

The consultants feel that UK retailers are among the most enlightened employers in attracting young and old alike. Tesco explicitly divides its potential frontline recruits into those joining the workforce straight from school, students looking for part-time work, and graduates. Tesco’s competitor ASDA is the UK's biggest employer of over-50s—a population segment that ASDA equates with better customer service, improved team morale, and reduced labor turnover. In China, multinational companies such as Citigroup, GE, and HSBC, which must compete fiercely against local businesses for talent, tailor their employee value propositions to highlight opportunities for real decision making, career development, housing, and educational benefits and learning. The oil services group Schlumberger, introduced a path that proved to be a strong motivator in the technical community: performers at junior level were rewarded with promotions, status, and compensation comparable to what senior managers enjoy, as well as opportunities to shape research and product-development agendas. Senior technical peers rather than line managers review the performance of these specialists. Furthermore, Schlumberger has become one of the exploration and production industry’s leading recruiters of women engineers by introducing flexible work practices to accommodate mobility and other life cycle needs.

The experts conclude that only HR can translate a business strategy into a detailed talent strategy: for instance, how many people does the company need in order to execute its business strategy, where does it need them, and what skills should they have? For this to become a reality, HR directors should acquire deeper business knowledge. At Procter & Gamble, an aspiring HR manager is expected either to take a job in a plant or to work alongside a key-account executive to learn about a business unit and win the confidence of its managers. Coca-Cola Enterprises rotates top-performing line managers into HR positions for two or three years to build the business skills of its HR professionals and to make the function more credible to the business units.

Clear & Present Danger for India (IT) Inc.

2008-08-10T02:36:00.000-07:00

According to our friend Karl Keirstead at Kaufman Bros, in the IT services and consulting space, client demand is shifting beyond tactical IT projects to more strategic and complex cost-saving and transformational projects requiring greater innovation, deeper industry expertise, greater intimacy with the client's business and the need to sell beyond the CIO to other parts of the organization.

Most Indian vendors, however, have the seemingly dubious reputation for being project-based, less strategic and without deep industry expertise. This image has been further exacerbated by actions taken by the Indian vendors in the recent past. In an effort to cut costs and hold margins in the face of wage inflation and (until recently) the rupee appreciation, many Indian firms shifted the offshore/onsite mix to even more (higher-margin) offshore work, and shifted the employee base to even more (higher-margin) young college graduates. This has reached the point whereby the average number of years that software programmers at some of the large Indian outsourcing firms have been in the industry is now just two years or so. Many years ago, Accenture was mocked by its competitors as employing a delivery model of one senior partner and a "school bus" of inexperienced consultants fresh out of college. It now seems as if the Indian firms have deliberately shifted toward this model in an effort to hold margins steady and it may ultimately make any transition more difficult. Moreover, recent efforts to cut travel costs may help margins in the short term, but they end up further limiting client interaction at a time when the Indian vendors need to strengthen their client relationships and learn more about their client's businesses.

Looks like lack of proximity to on-the-ground client issues; coupled with lack of vertical expertise and weak client relationships are being responsible for Indian IT vendors’ increasing difficulty to engage the c-suite. This has resulted in Indian IT vendors being left out by the client while making strategic and transformational choices.

India (IT) Inc’s strategy of positioned herself as a ‘Thought Partner’ contributing to higher value solutions, rather than just an ‘Implementation Partner’ providing lower cost services, is definitely not working. It requires urgent and immediate actions on the part of Indian IT players to ensure sustenance.

Strategy & Some Basic Formulation Models

2008-08-05T23:13:00.003-07:00

The word ‘Strategy’ derives from the Greek word stratēgos, which derives from two words: stratos (army) and ago (ancient Greek for leading). Stratēgos referred to a 'military commander' during the age of Athenian Democracy. A Strategy is a long term plan of action designed to achieve a particular goal, most often "winning." Strategy is differentiated from tactics or immediate actions with resources at hand by its nature of being extensively premeditated, and often practically rehearsed. Strategies are used to make the problem easier to understand and solve.

In India, documented evidence on concept of Strategy dates back to 4th century BC through ‘The Arthashastra’ (Arthaśāstra), which is a treatise on statecraft, economic policy and military strategy; written by Chāṇakya, a professor at Taxila University and later the prime minister of the Maurya Empire.

According to Nick Obolensky, professor of Leadership and Strategy, the concept of strategy being applied to contemporary business first emerged after the Second World War through people such as Bob McNamara, then President of Ford and later Secretary of Defense under Kennedy. ‘Theory of Games and Economic Behavior’ by Von Newmann & Morgenetern formulated methods of resolving conflicts in politics, war and business. Moving beyond the traditional assumption that a market is a Zero-Sum Game, ex CEO of Intel, Andy Groves, coined a new word ‘Co-Opetition’ – a merger of cooperation and competition. Adam Brandenburger of Harvard Business School and Garry Nalebuff of Yale School of Management elaborated on the subject in their seminal work ‘Co-Opetition’ using the Value Net, which is a schematic map that helps visualize the game of markets.

Any successful business strategy, according to professor Obolensky, will need to ensure it has the following three building blocks: 1) fast & efficient processes and systems (IT strategy); 2) a structure & culture that supports the overall strategy (HR strategy); and 3) a shrewd financing strategy.

Any of the below three basic models can be employed to formulate a strategy: 1) matrix-based formulation model – with independent and dependent variables plotted on scale along ‘x’ and ‘y’ axes; 2) mnemonic letter-based formulation model such as SWOT; and 3) issues/theme-based models such as Porter’s Five Forces model.

An effective strategist must use her experience and instinct and apply the right type of model that is best suited in the unique situation of a company in question, and the context within which the company operates.

Google on Cloud & Enterprise Computing

2008-08-05T23:13:00.002-07:00

Below is the summary of opening remarks by Dave Girouard - Google Inc. - President, Google Enterprise at a recently held Technology Leadership Forum. Clearly, Dave’s remarks suggest to me that while MSFT may have won the desktop battle, its Google to watch out for in the online battlefield. One thing is for sure - with the envelope of efficiency being pushed further and further, it’s the consumers who will be the ultimate gainers.

On Cloud Computing
It's definitely gotten to a hype level in the press, and it can mean a lot of things. Generally speaking, it means accessing technology through a browser and having nothing to install on the client, nothing to install in your data centers. It can be used probably to describe consumer markets as well, and in some way probably describe all of Google. But I think a lot of the context for cloud computing is around business computing and enterprise computing. I tend to break it into two related but different segments. One really is applications, sometimes referred to as Software-as-a-Service. And then platform, or infrastructure, or Platform-as-a-Service or Infrastructure-as-a-Service--call it what you will--where basically you allow the developers or companies or third parties to build applications on top of infrastructure. So I think--and there's many, many flavors of that. So it covers a lot of ground, and that's a lot, I think a lot of people are using it conveniently to describe almost anything they do these days, which is probably the sign of ultimate hype in a term.

On what’s most attractive to Google?

With our products, stuff that we refer to as Google Apps, which is essentially a set of applications that we build for, not just for consumers, where they started, but now for businesses of all sizes and flavors. We refer to that suite as Google Apps. That's our application play, and there's a lot we expect to do with that to expand on it, build on it, more functions, more features, occasionally more applications on the application side. And then the infrastructure side, we're actually doing very little today. We're getting started. We have what we call App Engine, which is in essence a way for developers to build applications on top of Google infrastructure. And it's only a very simple preview release. It's not really a commercially offered application or platform today. But generally speaking, we want to offer over time more and more ways for companies and developers to take advantage of the computer infrastructure that Google has. And eventually we would envision a day where software developers would have the same access to our infrastructure like Google engineers do. And that has a lot of great potential, and it's going to take a lot of work to get from here to there. So we have interest in both. We're a lot further along in applications than we are in infrastructure today.

How to enter into a Client’s thought process?

2008-08-05T23:13:00.000-07:00

The best way to get around the attitude of the busy leader of a SME and deliver something that is highly valued; and one that makes profound difference to their business performance is – to begin one step back i.e. working first on whatever problem or issue is real and pressing today. According to management consultants, Rosemary Harris Loxley of Harris Consulting & Tony Page of Page Consulting, this means doing essential work rather than nice to have and fancy work. The experts opine that a consultant must use a lot of ‘Questioning’ and ‘Listening’ to enter the client’s way of thinking, and follow a process that produces learning, insight and lasting impact on the client. This way, the authors say, a consultant can lead on to ‘Implementing the Solutions’ and help clients see their world differently. This approach was famously proposed by Reg Ravens in ‘Action Learning’. The approach recognizes that consultants who ask their clients questions generally tend to trigger more active, and hence profound, learning in clients, than those consultants who merely solve the problem for their clients and serve pre-formed solutions.

The authors make reference to the tool that is derived from ‘Kolb Learning Cycle’, which uses a simple sequence of questions to identify and understand the client’s problem, and to help implement the solution. The questionnaire should ideally start with probing the current issue i.e. the problem that is occupying the client right now, and must slowly move into probing the shared pool of knowledge between the client and consultant. The questionnaire must make the client reflect, gain insight, and help explore alternative ways forward to ultimately help think towards implementing a solution. It is also useful to build a loop back process, to explore new alternatives after piloting or implementing a solution.

In the process, the consultant should bring the client’s deep experience and tacit unarticulated know-how to the surface. This must then be challenged, tested and amended, in conversation with the client. Lastly, the consultant must help the client internalize and embed the new know-how in revised operating practices.

A Sneak Peek Into WATER WORLD

2008-07-22T22:28:00.000-07:00

The water market is one of the world's five largest markets, amounting to $400 billion, and growing at 7% annually. In comparison, the $600 billion energy market is growing 1% a year. The semiconductor market is only half the size of the water market. In the U.S. alone, the water industry is expected to grow 7% a year to $150 billion. One factor driving this growth is that America's water systems—some of which were built during the Lincoln administration-- are crumbling. As a result, there are more than 200,000 water main breaks per year and as much as 80% of the water intended for delivery to consumers is lost en route. The nation's infrastructure for water delivery is in dire need of investment: the EPA suggests that $15 to $20 billion per year needs to be spent to address these issues versus current spending of around $3 billion per year.

The worldwide demand for water and water treatment is torrential. For instance, China plans to build 375 wastewater treatment facilities by 2009. The World Bank has estimated that in 2007 investments of between $400-$600 billion were made to meet the demand for fresh water.

Costs for treated wastewater in North America are usually between $1 and $39 per 1,000 gallons treated, while costs for USP purified water average $20-$60 per 1,000 gallons.

Industry

According to Stanford Washington Research Group, The global water market is widely estimated to be between $350-500 billion in annual revenues, with the U.S. market in the range of $95-150 billion. By any measure, the majority – about 60% of the total both in the U.S. and globally– comes from water and sewer utility revenues, most of which remain in the hands of local governments around the world.

The breakdown of the global industry is as follows: Municipal water & sewer revenues ($200-220 billion); Equipment & services ($75-80 billion); Contract services ($32- 40 billion); Transmission, delivery ($16-20 billion); and Chemicals ($13-20 billion).

The breakdown of the US market is as follows: Water and sewer utility revenues ($63 bil); Infrastructure construction ($19 bil); Treatment equipment ($8 bil); Treatment chemicals ($4 bil); Contract operations & maintenance ($4 bil); Consulting ($3 bil); Residential commercial POU/POE ($2 bil); and Analytical instrumentation ($1 bil).

Key Challenges

The outlook for growth in private sector participation in the municipal water and sewer markets that currently dominate the overall sector remains less clear. “Privatization” or “public-private partnership” in owning or managing water and sewer utilities remains highly controversial. Some environmental activists, along with many local government officials, remain vocally opposed to the private sector gaining a profit from bringing direct capital investment into the sector. However, private sector investment in government-controlled water systems, via taxes and tax-subsidized financing, or even charity, is fine.

The United Nations’ “Millenium Development Goals” state that 1.2 billion people already lack access to clean drinking water and 2.4 billion lack access to adequate sanitation, with these numbers continuing to rise. The UN set a goal in 2002 of reducing these numbers by half by 2015. However, Water is still largely taken for granted by consumers, governments, and even by industries that heavily depend on it. Corporations around the globe are at risk, since many industrial users – including agriculture, power, pharmaceuticals, food and beverage, microelectronics, and petrochemical – are dependent on a clean water supply to make their products.

According to the EPA in the US, 53,000 community water systems will need an estimated $277 billion over 20 years to upgrade their infrastructure in order to provide safe drinking water, with medium and large systems (those serving 50,000 people or more) comprising about 80% of the total. These include – transmission & distribution ($184b); treatment ($53b); storage ($25b); and source/supplies ($15b).

The second largest category of needs is treatment systems, which represent about $53 billion in total needs over 20 years and about $24 billion of current needs. This includes projects to install filtration, disinfection, corrosion control, and aeration, as well as associated chemical treatment, testing and automated monitoring and control devices.

According to the Census Bureau, In FY03, government entities collected about $63 billion in water and sewer revenues, but spent nearly $76 billion on their water supply and sewer systems.

Consolidation

Despite a flurry of M&A deals in 2004 and 2005, the industry is still heavily fragmented. The key industry players can be segmented into the following categories: · Water utilities, · Filtration and UV, · Diversified industrial companies with a water flavor, · Infrastructure services, and · Wholesale water rights.

Some of the key players are: French water companies, Suez and Veolia
Environnement; Siemens Water Technologies; GE Water and Process Technologies; Aqua America; American States Water; California Water Service Group; Southwest
Water; German major - RWE AG; UK based Kelda Plc; Danaher; ITT Industries; Pentair; Calgon Carbon; Pall Corp; Zenon; Millipore; Asahi Kasei; Nalco
Holdings; Watts Water; Walter Industries; PICO Holdings; Cadiz Inc; and PureCycle

According to Bill Burmeister, co-founder of Global Safe Water, the industry is likely to see further consolidation with big players mopping up smaller operators. Some notable transactions in the past include: GE acquiring Ionics Inc for $1.1b; Siemens acquiring US Filter division of Veolia for $993m; Pentair, Inc. acquiring WICOR, Division of Wisconsin Energy for $850m; and Blackstone Group & Goldman Sachs Capital Partners acquiring Ondeo Nalco, div of Suez S.A. for $4.2b.

Besides Diaspora - Domestic confidence also matters

2008-07-12T00:28:00.000-07:00

The Indian Diaspora is the largest in the world to-day after China and has roots in every country in the globe. According to Sunil Prasad, Economist with International Confederation of Free Trade Unions (ICFTU) and President of GOPIO-Belgium, the Chinese Diaspora numbers about 55 million and contributes almost 60 per cent of China’s total foreign direct investment, while Indians with 20 million contribute less than 10 per cent.

According to Sadananda Sahoo, Dept of Sociology University of Hyderabad, the Chinese Diaspora is dispersed in 136 other countries; but of all the Overseas Chinese, over half live in Southeast Asia. The Indian Diaspora is dispersed in 110 countries without concentrating on any particular region. Chinese emigrants fall into three distinct patterns i.e. indentured labour, free artisans and traders. They are a very diverse group of people, representing over 150 cultural and linguistic groups. These Chinese are largely Buddhist and Taoist, but represent the Christian, Islamic, and Jewish faiths as well. A majority of Indian immigrants belong to the class of the educated and professional elite such as engineers, scientists and college teachers as well as accountants and businessmen. However, recent emigration of the Indians to the West Asian countries is basically oriented to labor and servicing occupations on a contract basis. Indian immigrants are also a very diverse group of people representing different religion, ethnic, occupational and caste groups.

Chinese Diaspora's role in rural development in China is significant. The China Foundation, Inc. is a unique non-profit and charitable organization established in 1997. The mission of the Foundation is to raise funds for improving basic health services and elementary education programs in underdeveloped rural areas in China. In India, the Diaspora’s participation to rural development is confined to Punjab, Gujrat, Tamil Nadu, Andhra Pradesh, and Kerala.

Although the Indian Diaspora has miles to go to match their Chinese counterparts in fostering the economic development of their native country; India cannot just blame its Diaspora for showing lack of confidence. This is because, we have evidence to suggest that domestic Chinese population is doing a lot more than domestic Indian population to accelerate economic growth.

Consider the example of Chinese corporations who have listed their stocks in domestic capital markets and in Hong Kong stock exchange. All most all of these stocks enjoy premium valuation in domestic exchanges compared to multiples on the Hong Kong exchange – suggesting higher confidence and exuberance on the part of domestic Chinese investors, when compared to foreign investors who invest in Hong Kong. The magnitude of valuation differential was so high that Chinese regulators had to eventually intervene and allow for arbitrage trades between the exchanges in the hope of achieving price equilibrium. Despite the regulatory intervention; the valuation differential still persists – fueled by ever increasing appetite of domestic Chinese investors.

The opposite is true of Indian companies who have listed their stocks in domestic exchanges and in the US (via ADRs) and global capital markets (vis GDRs). All most all of these stocks trade at a discount in domestic exchanges compared to multiples attributed to their respective ADRs/GDRs – possibly suggesting lower confidence on the part of domestic Indian investors, when compared to foreign investors who invest in ADRs/GDRs of India Inc.

The higher confidence levels among domestic Chinese investors, relative to domestic Indian investors, could be another significant factor that will determine the difference in growth profiles of the two economies.

Fostering the Spirit of Entrepreneurship

2008-07-06T00:41:00.000-07:00

While on a recent pleasure trip to my home country, India, I visited the new R&D centre of Google. What a facility – wow! This sprawling research centre houses about 150 of the brightest minds from across the world to further Google’s engineering capabilities. I met Phd’s who apply their expertise to launch consumer-relevant products and services. Most people I interacted with are geography-agnostic. All they care about is a place where they can work with like-minded thought leaders. Google has built a unique culture with its 80:20 philosophy to achieve effective human resource management. The engineers work independently – donning the hat of an entrepreneur; and each one of them is mandated to devote atleast 20% of project time on special/personal projects that are eventually brought to the market through Google’s global work-force collaboration. A classic example of the success of this amazing entrepreneurial culture is the launch of Google Finance. What started off as one of the 20’s project for three bright engineers at Google has become a case study for lean production in digital media. In the process, Google has dismissed the age old theory that mega corporations are less likely to be nimble and fleet footed, when it comes to breaking the shackles of organizational hierarchy and the associated bureaucracy. The company has successfully designed an organization structure that fosters innovation and the spirit of entrepreneurship. In addition, Google has overlaid efficient systems and process that ensure maximum yield and employee productivity. This visit to the Google campus has reinforced the thought that entrepreneurial instincts don’t just come by birth. It is not a genetic phenomenon. Rather, the spirit of entrepreneurship can be fostered by intelligent management practices – through an organization structure; systems & processes; and culture that is deliberately designed to achieve desired outcome – in this case, developing market leading products and services to sustain the competitive advantage. No wonder - not only leading head hunters are making cold calls to the Google R&D campus; but leading VCs (from around the world) are trying to lure these Google entrepreneurs in ‘Search’ of the next big thing!

Product Placement - Lost Opportunity for UK TV

2008-06-22T03:59:00.000-07:00

Product placement, or embedded marketing, is a type of advertising, in which promotional advertisements are placed by marketers using real commercial products and services in media, where the presence of a particular brand is the result of an economic exchange. The most common form is movie and television placements and more recently computer and video games. Web publishers are also experimenting with in-site product placement as a revenue model.

According to research conducted by PQ Media, global paid product placement market size was $3.36 billion in 2006, and $4.38 billion in 2007. While the United States remains the largest global market for product placement, accounting for two-thirds of spending, growth is expected to decelerate over the next four years, although remaining in the double-digits. Meanwhile, growth in the European and Asian placement markets is expected to accelerate going forward, as legal restraints are loosened and global brand marketers move to capitalize on emerging opportunities in these regions, claims PQ Media. Countries with significant market opportunities include The United States, Brazil, Mexico, Australia, Japan, China, the EU, India and Canada.

However, despite the global phenomena, the UK seems determined to buck the trend, when Culture Secretary Andy Burnham declared that the UK Government would not accept the EU Directive allowing product placement on TV. The Government’s surprise opposition to product placement represents a lost opportunity for UK broadcasters, particularly for ITV. Ofcom estimates that product placement would contribute £25m a year to UK broadcasters. However, some media buyers suggest that this number could be significantly higher. Assuming a similar growth rate to the US product placement market, the estimated benefit to UK broadcasters could rise to as high as £150m in 3-4 years. Growth in the market has been driven by the increasing use of personal video recorders (PVRs), which has encouraged the use of ad skipping between advertising breaks.

Power of European Broadcasters & CRR in UK

2008-06-22T03:11:00.000-07:00

The television advertising market in Europe is heavily concentrated at the top, with market leaders in the UK, France, Italy and Spain enjoying significant market share. As per Nielsen data at end of December 2007, market leader ITV had a 42% share of the UK TV advertising market. In France, market leader TF1 garnered a 61% share of TV ad market. In Italy, Mediaset enjoyed a 64% share of the TV ad market; while in Spain, Telecinco commanded a 31% share of TV market.

Despite a seemingly monopolistic structure, however, it is interesting to note that ITV in UK is the only player in Europe that is subject to price regulation by the UK Competition Commission through a mechanism called the Contracts Rights Renewal (CRR).

ITV plc was formed post the merger of Carlton and Granada in 2003. Recognising the concerns of the advertising community about the extent of market power ITV plc could have post merger, the Competition Commission put in place the CRR remedy, overseen by an independent Adjudicator (currently Robert Ditcham).

CRR is intended to protect the advertising market: a) by guaranteeing that advertisers and media buyers are no worse off following the merger of Carlton and Granada; and b) by putting in place an automatic ‘ratchet’ which reduces the amount advertisers have to commit if ITV’s audience shrinks. The CRR sets out a number of rights that advertisers and media buyers have when buying advertising time from Carlton/Granada, and in particular, gives advertisers and media buyers the right to renew their contracts on a rolling annual basis, adjusted for changes in ITV’s audiences, with no reduction in the discounts they receive. Until the remedy is no longer necessary, the share of revenue committed by advertisers/media buyers on television advertising to Carlton/Granda need not increase above 2003 levels.

The Office of Fair Trading (OFT) is responsible for the CRR remedy, supported by Ofcom. Ofcom proposed a review of the TV ad market in its 2005/06 annual plan, but after undertaking preliminary analysis concluded that the case supporting the need for a full review of the entire market had not been made. Ofcom has not communicated any plans to conduct a review of this market.

The Changing Medial Landscape

2008-06-19T07:03:00.000-07:00

What the heck is happening to the media landscape? According to my friends at Bernstein Research, three factors are driving fundamental changes within media – 1) Price Erosion; 2) Increased Complexity; and 3) Declining value of traditional mass reach

The authors argue that as the barriers to content distribution fall, consumers have increasing access to the long tail of content that – in a pre-digital world – they could not access. As a result, the old oligopoly structure of the industry is eroded away. In addition, lower content production and distribution costs and the proliferation of legally questionable consumer practices are further creating downward expectations on pricing.

The proliferation of distribution channels and formats increases complexity, as all elements of content, from length to pricing to revenue model, have to be adapted to multiple channels. Case in point is Free-to-Air TV program, which can also be viewed online, albeit with a pre-roll ad. The same can also be sold on iTunes or viewed as a short clip of a key moment that is streamed on YouTube. Monetization of content across platforms (and cost control across distribution channels) will be increasingly challenging.

Historically, mass media has been successful in delivering the largest possible audience at the lowest possible cost. However, today the marketing community is increasingly embracing narrower and more sophisticated segmentation of advertising and promotional messages. While there are technology innovations that could help traditional media companies to adapt to this environment, their adoption will be very slow. As a result, the value proposition of traditional mass media is becomingly increasingly irrelevant.

Technology is changing the European TV industry landscape by fragmenting distribution platforms, altering viewing behavior and proliferating new economic models. Given the pressures that the two primary business models, Free to Air broadcasting and Subscription Pay TV, are facing in this world of fragmentation, the only way to sustain growth is to acquire premium content and/or access to new distribution channels to ensure content reaches consumers anywhere and anytime. In this contest, most broadcasters have started experimenting with online transmission by repurposing some of their programs to suit the online platform. However, the authors contend that one of the key underlying concerns of posting TV content online is that it can simply add costs without winning any incremental viewership, as audiences fragment across distribution channels.

Media is truly in a transition phase – where producers are embracing multiple delivery platforms in response to changing consumption patterns; and marketers are increasingly struggling to reach relevant critical mass. While we navigate through this turbulent phase, one thing is for sure - only the most efficient players are going to survive to see the light of day in a post-apocalyptic media world.

ITV Turnaround Strategy

2008-06-12T06:52:00.000-07:00

The new management (initiated in September 2007) at European media giant ITV Plc has adopted a three-pronged approach to turnaround the fortunes of the company. The three primary area of focus are: 1) Broadcasting; 2) Production; and 3) Online. I have summarized the approach below with action points against each of them that the company has published for the benefit of its shareholders.

Broadcasting
ITV’s turnaround strategy for broadcasting is: 1) achieve family share of commercial impacts (SOCI) of 38.5% in 2012 (including GMTV). This was a target first laid out by Charles Allen; 2) accelerate ITV1 SOCI recovery; and 3) invest in ITV2 to make it become the No.3 commercial network for 16-34 year olds behind ITV and Channel4.

There are eight actions associated with this plan: 1) Launch a new successful schedule at 9pm; 2) increase the ITV1 budget by only 1-2% pa, less than inflation; 3) work on Public Service Broadcasting (PSB-ongoing); 4) work to replace contract rights renewal (CRR); 5) invest in ITV2; 6) take share of advertiser budgets via advertiser-funded programming and product placement (ongoing); 7) take high-definition (HD) onto Freeview (joint plan in place), launch Freesat (achieved); and 8) launch ITV1 HDTV channel (achieved on Freesat and ITV refused to put it on Sky).

Production
ITV’s strategy for production includes a plan to 1) double content revenue from £600m to £1.2bn by 2012, this is a CAGR of just over 16% pa; and 2) grow ITV Production’s share of the ITV1 programming schedule.

The key actions associated with this strategy are: 1) create a single division with a talented creative leader (Dawn Airey); 2) move into high value genres. Here the plan is to accelerate long-running drama, factual and entertainment formats and comedy. It is also to do more documentaries, lifestyle, game shows and quiz shows, and content for new media. Lastly, it is to reduce one-off drama; 3) increase UK development spend; 4) introduce a more flexible strategy to attract talent, including co-production and part-ownership of independent producers; 4) expand international sales, building on the success of Hell’s Kitchen in the US and Dancing on Ice in Europe; and 5) spend up to £200m on acquisitions. The £200m is to be funded by disposals of existing businesses. Target size is businesses with sales of £10m-50m.

Online
ITV’s online strategy is to 1) achieve £150m of online revenue in 2010; and 2) make itv.com into a top-10 UK entertainment site by 2010.

This comes with four action points: 1) grow viewing of ITV on-demand content; 2) develop specialist online sites around key programme brands and communities; 3) build online advertising sales excellence; and 4) explore adjacent digital businesses.

According to comscore (April 2008) itv.com is now thirteenth in the UK, having been twelfth in September 2007. The company may look at acquisitions (ad network, for example) to approach its targets.

ITV’s new initiatives include Gaming Sites and Kangaroo.

Gaming sites
ITV is producing gaming sites for “soft-gaming” based around program brands such as Emmerdale (bingo), Countdown and Family Fortunes. The company has struck a deal on soft-gaming with Party Gaming.

Kangaroo
The BBC, ITV and Channel4 have formed a JV with the working title Kangaroo to be a showcase for their content online, in addition to their own websites and in addition to their syndication agreements. Kangaroo is an interesting response to the dominance of US internet companies of online video consumption, specifically YouTube. In the US, the share of videos viewed taken by Google, which owns YouTube, is increasing rapidly, whereas the share taken by the traditional companies is languishing or declining, with the exception of ABC, which is still very small. It was also formed with the decline of the sales of the traditional record labels in mind and the rise of pirate music services and the domination of the legal download market by Apple and iTunes. The UK broadcasters did not and do not want to be beholden to YouTube for the distribution of their precious content online – they need to have their own shop window and their own route to the consumer. This idea was also behind Hulu, a JV between US broadcasters.

According to Mediaweek, ITV is reportedly readying a price comparison site called Priceterrier.com

Phorm OIX & UK Display Advertising

2008-06-04T10:28:00.000-07:00

Open Internet Exchange (OIX) is a new online advertising platform powered by a combination of Phorm’s technology and anonymous behavioural data from the UK’s top three internet service providers - BT, TalkTalk and Virgin Media – representing a combined user base of over eight million households.

OIX has the potential to transform the way that display advertising is sold on the internet, enabling advertisers to target campaigns directly at relevant users, regardless of which site individual banner ads appear on. The ability to target ad campaigns based on an unparalleled realtime analysis of users browsing activity is likely to lead to a very substantial improvement in campaign performance, and therefore attract a substantial proportion of the online advertising market.

Phorm has stated that its technology complies with the Data Protection Act, RIPA and other applicable UK laws. This assertion is based on both a (written) legal opinion and consultations with a variety of organisations such as Ernst & Young, 80/20 Thinking, The Home Office, OFCOM, and the Information Commisioner’s Office.

Phorm’s technology assigns an anonymous cookie with a randomly generated ID number to a user’s browser. As the random number browses the system it compares pages seen with product category definitions (channels) stored in memory. The channels are a combination of rules set by advertisers and based on URLs, search terms and key words on pages. As each page is loaded and compared with the channels any record of that page is deleted instantaneously. No record of browsing behaviour is retained, the Phorm system only stores the anonymous ID, the advertising channel that ID matched and a date. When that random number arrives at a webpage participating in the OIX a targeted relevant ad is then served. No personally-identifiable information is obtained in the process.

The fact that the most important ISPs in the UK market are participants in the platform and are backing it with the full weight of their highly valuable consumer brands is indicative of the potential of the technology for the ISPs themselves.

For some time, ISPs have been seeking ways to diversify their revenue streams away from a reliance on subscriber revenues, given the increasing price pressure in the broadband market. ISPs have been viewing with some urgency the need to expand their ability to generate advertising revenue. To date, these companies have mostly been restricted to selling advertising inventory on their own portal pages. By contrast, when their customers leave one of their own websites to view another publisher’s site, they have lacked the ability to deliver advertising and have missed a significant revenue opportunity. Participation in the OIX will create a new revenue stream for the ISP sector, and will maximise the value of the internet traffic that goes through the ISPs’ networks.

By integrating Phorm’s technology into their own networks, the ISPs should be able to better monetise the wealth of information that they currently control, including users’ viewing histories and the contextual relevance of the millions of websites that their users currently view.

As part of the arrangements with the top three UK ISPs, the ISPs will jointly promote the consumer facing product, WebWise, to over eight million customers. This new product, which will be free to consumers, will incorporate both participation in the OIX and additional new benefits. It will be promoted as providing consumers a “safer, more relevant internet” and has been developed in response to a clear consumer demand for a higher level of online safety.
Thanks Canaccord Adams, 2008

A Look at Exec Comp in US Media

2008-06-04T10:13:00.000-07:00

Michael Nathanson and team at Bernstein commissioned a research to analyze how executives are compensated at big 5 US media conglomerates: Disney, Time Warner, Viacom, News Corp. amd CBS. Below, I have captured the summary of their findings.

As per data from 2007 filings, Total Compensation from Bonus is as follows:

At Disney: 49.4% of CEO’s compensation and 49.2% of CFO’s compensation is comprised of bonus.

At Time Warner: 35.8% of CEO’s compensation and 30.9% of CFO’s compensation is comprised of bonus.

At Viacom: 34.0% of CEO’s compensation and 34.1% of CFO’s compensation is comprised of bonus.

At News Corp: 49.2% of CEO’s compensation and 34.8% of CFO’s compensation is comprised of bonus.

At CBS: 50.2% of CEO’s compensation and 50.0% of CFO’s compensation is comprised of bonus.

Disney has multiple quantifiable factors for determining executive bonuses. These factors include (in order of importance): EPS targets (28.6% of weighting), operating income growth and earnings net of capital charge targets (25% each) and after-tax free cash flow growth targets (21.4%). Achieving or beating benchmarks within these metrics determines 70% of the bonus payment, while the remaining 30% is based on the compensation committee's subjective assessment of the executive's performance. Disney also adjusts its bonus payments by a factor that rewards or penalizes management for Disney's stock performance relative to the returns of the S&P 500 Index.

Time Warner's bonus structure is based on two factors which determine 70% of the bonus payment: Adjusted EBITDA growth (70% weighting) and free cash flow (30% weighting). The remaining 30% of the bonus payment is based on the attainment of individual goals.

Viacom's bonus compensation is based on three factors: Operating income growth (60% of weighting), operating cash flow less CAPEX (20%), and undisclosed qualitative factors (20%).

News Corp.'s management is paid on only one quantifiable metric – EPS growth.

In CBS's proxy, there are no pre-determined formulas or quantifiable metrics to determine bonus amounts. Rather, the proxy states that bonus awards are "subjective" and take into account many factors, like budgeted EBITDA and free cash flow, increasing the quarterly dividend, repurchasing shares, and expanding the company's digital presence.

Lazard Shareholders Meet in Bermuda – Q&A!

2008-05-31T07:18:00.000-07:00

Lazard held its shareholders meeting in Bermuda, and the event was hosted by Scott Hoffman - Lazard, Ltd - General Counsel. Other representatives from Lazard included legendary Bruce Wasserstein, Chairman and Chief Executive; Steve Golub, Vice Chairman; Mike Castellano, Chief Financial Officer.

Unidentified Audience Member
My name is [Robin Burson], and I live in New York City. My mother is a resident at Atria Riverdale, an assisted living facility in the Bronx that is part of the national Atria Senior Living chain. As you all well know, Atria is controlled by an affiliate of Lazard. I'm here today to ask you all to take some responsibility for what is happening at Atria, and to listen to the voices demanding change.
In my situation I have had such a hard time getting Atria to do what my 88-year-old mother needs. The facility management is unresponsive, and too often it seems that they're focused only on making money. The costs for these services are incredibly high, and I think Atria is exploiting a vulnerable population. For thousands of Atria residents, these are the final years of hard-working, decent lives, and it is appalling that they are suffering neglect, danger, short-changing and disrespect.
My mother didn't want me to come here. She was afraid. She was afraid for me to come here. She's afraid of retaliation from the administration of Atria. Unfortunately, it's clear that very little of the money you make from the care -- I use that term lightly -- of the elderly goes to the front-line employees at Atria's facilities who are the ones who provide the care to elderly residents.
Most of these workers earn poverty wages, and they cannot afford the health insurance you offer; they cannot send their children to see a doctor. Many of them lack the training and skills they need to guarantee that the elderly get the quality care that they're paying for.
The facilities are too short-staffed for even basic safety. Many of the residents suffer from disorientation and dementia, and wander the halls unsupervised. I know that Atria has had many problems with care failures and resident exploitation in several states. In Riverdale, there is sloppy administration of medication, leading to serious errors, and there are frequent food shortages. They run out. People cannot get food that is on the menu. My mother moved into Atria in 1999 and asked immediately about why there was no backup generator.

Scott Hoffman - Lazard, Ltd - General Counsel
Madam, I'm sorry. The meeting procedures are very clear. You need to limit the questions to two minutes, and you're past two minutes. Are you winding up your question?

Unidentified Audience Member
I am winding up my question, yes. I am asking you all to honor a commitment to community, to decency, and to ethics. Lazard is on record denying any responsibility for Atria, but the executives and directors in this room right now bear responsibility for what is happening at Atria. And you have the power -- you all have the power – to act decently and humanely, and to improve the lives of thousands, tens of thousands of elderly in the last years of their lives, and of decent workers who are just asking for a living wage and a right to unionize. Thank you.

Scott Hoffman - Lazard, Ltd - General Counsel
It's supposed to be a question-and-answer period, and if you'll allow me to answer that. We thank you, first, ma'am, for travelling down here to Bermuda, and we appreciate any concerns that our shareholders have. This company does not control the company that owns Atria. This is a meeting of Lazard Ltd, a publicly registered ompany in Bermuda. Lazard Ltd does not control Atria. I really appreciate your concerns, and to the extent we can do anything to facilitate your communication with the people who control Atria, we are happy to do so. I'll meet with you after the meeting to get your contact information, if that would be helpful. I would ask to the extent the rest of you have questions that are germane to this public company, we welcome them. But if they are speeches about a company that we don't control, I'm going to have to call you out of order. Thank you. Next question, please.

Unidentified Audience Member
Good morning. I'm living in New York. Atria Assisted Living in Great Neck, Long Island.

Scott Hoffman - Lazard, Ltd - General Counsel
Sir, is this going to be a question that is germane to the public company, or is it going to be about Atria? I just want to get to the question about the public company.

Unidentified Audience Member
We tried to form a union with our co-workers. The Atria facility, they fired me because I tried to work with a union. So they don't care about how [I'm feeling]. We tried to work the best in Atria, but they don't care. The [managers], they don't care how well I am working or how

Scott Hoffman - Lazard, Ltd - General Counsel
Sir, I'm very sorry that you've lost your job, truly. But I need, out of respect for the other shareholders of the Company that are here and that are on the telephone, to get to the business of this company, not to the business of Atria. Thank you.

Unidentified Audience Member
My name is [Daniel May], and I work with the Service Employees International Union and the Campaign to Improve Assisted Living. We are very concerned about Lazard's consistent denial of its corporate social responsibility to taxpayers, and refusal to pay its fair share. While average Americans worry about the economy, jobs and their homes, Lazard head Bruce Wasserstein earned 41 million in 2007, a staggering 25% of Lazard Ltd's entire profit his total net worth to over 2 billion.
To compare that to a man like (inaudible), who traveled 600 miles from New York City to be here, who works for the Lazard-affiliated portfolio company, that's just the beginning of the story. Lazard has used questionable means to avoid or reduce corporate income tax liability. Some of these tax avoidance measures have recently come under congressional scrutiny. At the time Lazard went public in 2005, it established an extremely complex ownership structure to reduce its taxes and limit its liability to shareholders. This structure, coupled with its offshore incorporation in Bermuda, is apparently intended to permit Lazard to be taxed as a partnership, making its effective tax rate substantially lower than most, if not all, of its peers in the investment and brokerage industry.
Since Lazard Ltd has elected to be treated as a partnership for US federal income tax purposes, the Firm does not pay any US federal income tax except on net income derived from or "effectively connected" to its US-based subsidiaries. Exemption from corporate taxation and executive compensation at this level is just outrageous, especially when our country's economy is struggling. Lazard plays a [leading] role in driving the vast income inequality that challenges our democracy, our economy, and our [civic health]. Rather than avoiding public responsibility, we urge Lazard to uphold a higher standard of corporate stewardship.

Scott Hoffman - Lazard, Ltd - General Counsel
I won't respond to the factual inaccuracies which were replete in your question, just to let the people know that they were distortions, and we pay tax in the United States. We pay exactly, if not more, what we're supposed to pay.

Unidentified Audience Member
Thank you. Good morning. I work for the Service Employees International Union and the Campaign to Improve Assisted Living as well. I'm here today because, like others who have spoken, I am concerned that Lazard may be failing in its responsibility to its shareholders and other stakeholders. Last year, as was stated, Bruce Wasserstein, your Chairman and CEO, took home $41 million in salary and bonuses. This payout was blasted in the press, and offended even those who normally don't blush at such things. But his 2007 payout didn't compare to the new contract that your board gave to Mr. Wasserstein at the same time, estimated by the press to be nearly $100 million.
And finally, the vote you've taken today to improve the new incentive compensation plan takes you even further down the road of unadulterated greed. This compensation plan for Lazard employees is at a level beyond comprehension to an average Atria employee, for example. By our calculations, the measure would limit executive compensation to almost $90 million a year, which is a token toothless gesture.
Such corporate largesse wouldn't be as big of a problem if Lazard were doing very well. But unfortunately, Lazard's share price has fallen by 30% since last year's shareholder meeting. By contrast, the S&P during that same period lost only 8% of its value. Unfortunately, shareholders can do little about this, because, as you know, Lazard seems to have gone out of its way to disenfranchise its shareholders.
Furthermore, the fact that you're having this meeting here today in Bermuda, out of reach of most of your shareholders, as evidenced by the attendance in this room, speaks volumes to the value you have for their concerns.
As your meeting agenda today included a vote on a new incentive compensation plan, we ask your chairman to explain to shareholders how your board plans to address potential risks posed by Lazard's widely-criticized executive compensation practices before implementing such a plan. It's our sincere hope that Lazard can move on to develop real value, long-term value, for its shareholders, rather than being a popular poster child for corporate excess.

Scott Hoffman - Lazard, Ltd - General Counsel
Thank you for your question. I'm glad you asked that question, actually. Let me just aggregate it, because you've raised three or four points within the question. First of all, with regard to our performance, if you look at our performance since the IPO until now, we've outperformed not only the S&P 500 index, 60% to 28%, we've vastly outperformed the S&P financial index, which are our peers, by 60% we're up; they're up 4%.
Similarly, just to take the time period that you referenced from the last annual meeting to now. We're down about 30%. The S&P financial index, which is the only relevant index, as opposed to industrial companies and companies that make widgets, that index is down 26%. So that's vastly in line. Would we like to do better? Of course we'd always like to do better.
The second question you talked about, you asserted, about Mr. Wasserstein's pay. Mr. Wasserstein, first of all, doesn't set his own pay. We have an independent compensation committee, people who have no affiliation with this company. With the help of outside consultants from one of the preeminent compensation consultants in the world, and one of the preeminent law firms in the world, they together determine what Mr. Wasserstein's pay should be because of the contributions he's made to this company since its inception. And independently, they looked at the parameters that you are required to look at from the SEC rules that lay out in exhaustive detail, which is set forth on pages 18 through 32 of our proxy, in our compensation discussion and analysis. And Mr. Wasserstein's pay fell well within those parameters, frankly.
With regard to the incentive plan that was voted on today, this is a business about people. The only thing that we have is our people. And that employee incentive plan is not just -- not for Mr. Wasserstein, that employee incentive plan is for our approximately 2500 employees, to incentivize them, to retain them, to attract new people that are just as talented as they are, in order to retain them, and also to give value to our shareholders.
I thank you for coming. I thank you for your questions. If there are no further questions, we'll adjourn the meeting. Thank you very much for attending our meeting.

Spread Betting

2008-05-30T08:36:00.000-07:00

Spread betting is any of various types of wagering on the outcome of an event, where the pay-off is based on the accuracy of the wager, rather than a simple "win or lose" outcome, which is known as money-line betting. A spread is a range of outcomes, and the bet is whether the outcome will be above or below the spread. Spread betting has been a major growth market in the UK in recent years, and the industry is regulated by the Financial Services Authority (FSA).

The concept of spread betting was launched in 1974 by IG Index so that investors could punt on the gold price without all the expense of buying bullion at a time of penal exchange controls. Popular spread bets were originally based upon performances of the Financial Times, Dow Jones Index and other financial barometers. The purpose was to hedge investment positions and the betting was largely confined to those in the financial community. City Index joined the market in 1983 and several others such as Financial Spreads, Cantor Index and Spreadex opened shop during the dotcom boom.

The spread betting industry is now a multi-million pound industry and there are more than 400,000 spread betting account holders in the UK, and firms multiplying simultaneously. According to research by TradIndex, 90% of spread betters are male, half live in south-east England, and they have an average income of £50,000.

There are now over 20 spread betting providers in the UK, and fierce competition has driven spreads down. A decade ago, the spread on a benchmark index such as the FTSE 100 index was around 10 points. Today it has fallen to around two. Consolidation rumours are constant, but most believe that the market is growing sufficiently to support this number of providers. The most popular include Capital Spreads, IG Index, Financial Spreads, City Index, CMC Markets and Cantor Index.

According to a report by Professor Chris Brady and Dr Richard Ramyar of Cass Business School, the number of people in the UK with a spread betting account could more than double from its current level of 400,000 to one million by 2011. The financial betting industry is poised to grow at a CAGR of 26.33% between 2005 and 2010. To achieve this, the industry has to extend its appeal to a more mass market audience by going beyond their existing client base of white affluent males under 45 years old to embrace women, ethnic minorities, older people and international markets. To sustain the industry’s current rate of expansion of between 20 – 26% per annum, the report claims that it must focus more on educating consumers on the role spread betting has, as a serious investment tool that can become part of a balanced portfolio.

However, the industry suffers from the stigma associated with betting when in actual spread betting closely resembles trading. Unless the industry overcomes this perception issue, its numerous attractions such as providing consumers with tax-free profits and the ability to hedge against falling markets, or even benefit from them, will remain largely overlooked. Trading in derivatives goes as far back as 3,800 years ago to help Babylonian farmers sell grain.

The spread betting industry faces a considerable educational task to convince the public, the regulators and legislators that all forms of trading are essentially the same type of activity. The only difference is the level of risk – which can range from post office savings at one end to betting on the proverbial two flies at the other end. For the industry to expand, it must work harder at segmenting and targeting the public because being first to market is no longer sufficient.

Female customers currently account for around 10% of the total number of spread betting investors. In online poker, 45% of participants are thought to be women. Research suggests that women do about 40% more research than men on every trade. The report’s authors believe that in order to generate more significant growth, spread betting firms must develop a more female-friendly profile and review their male oriented marketing approach.

The report states that in order to move into a mass market, spread betting companies need to focus on brand building and on educating consumers. Like the stock broking industry, spread betting firms will need to focus on the value added services offered to clients, such as full service trader support. The report also speculates that a move into the mass market may see spread-betting firms looking to establish upmarket bricks and mortar outlets, similar to a traditional bookmaker, and even online betting exchanges.

At the same time, the industry must remain vigilant to the threat of new regulations being imposed by British or EU regulators that could restrict spread betting to high net worth or professional investors and thus prevent any attempt to launch into the mass market.

Visa and Google – two (in)credible leaders

2008-05-26T10:09:00.000-07:00

This is an exercise that I undertook purely to satiate and stimulate my grey cells. Visa Inc (NYSE: V) successfully concluded a mammoth $10 billion IPO, which attracted everyone’s attention; and your’s truly is no exception. Like Google (NASDAQ:GOOG), Visa is a stock that every portfolio investor would want to own. However, the comparison doesn’t end here. In fact, the two have a lot more in common than I had original thought. Both Visa and Google are the current undisputed leaders in their respective industries. While Visa has well over 50% of total volume and value share of global electronic payments market; Google has roughly 50% share of the global online advertising market. Both the companies command an absolute leadership position – Mastercard, the number two behind Visa is less than half Visa’s size; while Yahoo the number two online destination is less than one third of Google’s size.

The global payments industry is undergoing a secular shift from paper−based payments, such as cash and checks, to card−based and other electronic payments. Similarly, the global advertising industry is undergoing a major shift from traditional media, such as Radio, Newspapers, Magazines and TV, to internet and other new media. While Visa’s real competition is cash and checks, which combined represent 57% of the total global payment volume of $20 trillion; Google is trying to compete with traditional ad budgets, which represent over 90% of total global advertising of $700 billion.

Both Visa and Google are thriving on increased consumer adoption, and both are intensely consumer-focused companies. They leverage strong brands to grow their respective businesses – both are number one brands in their respective industries. From a technology stand point, Visa global payments processing platform is extremely scalable due to a centralized architecture. Similarly, Google search platform has a central architecture and is powered by the same algorithm engine globally. The combination of brand leadership and technology edge has enabled the companies to embark on rapid globalization initiative relatively seamlessly. Organizationally, both the companies are functionally aligned at a global level; however, their respective regional operations are integrated to facilitate better regional coordination and management. The result is both companies earn a large share of their revenues outside the US. Roughly 50% of Visa’s volume and about 35% of its revenue is from outside the US. In the recently concluded quarter, Google declared that it earned more than 50% of revenues outside the US.

While Google has always been an active acquirer; Visa Inc CEO, Joe Saunders, indicated in a recent analyst conference that Visa’s focus is on looking at acquisitions that will provide technology that will enable to bring some of Visa’s strategic initiatives to market more quickly or to enhance them. Clearly, this indicates an increased appetite for acquiring companies in the future.

Undisputed market leadership; favourable secular shift in their respective industries; and large international operations have made Visa and Google relatively shock-proof in the event of a recession or an economic slowdown. Further, both the companies are continuously innovating to develop and launch cutting-edge products.

However, there could be a potential area where Visa and Google may end up competing with each other. Google Checkout competes directly with PayPal in online payment solutions. Visa commands a 47% market share in online transactions, compared with 3-4% for PayPal. Yet, in one of the recent analyst meetings, Visa CEO Joe Saunders expressed that the company considers PayPal as a competitor. Further, Visa is aggressively expanding not only in online transactions but also in the mobile transactions space. With its participation in the recent US wireless spectrum auction, and project Android, Google has made its intentions clear about mobile. Only time will tell as to if, when, and how, the two giants may end up competing with each other. Watch this space!

What can we infer from the Ad Price Index?

2008-05-21T05:39:00.000-07:00

The first ever initiative to build an index to measure online advertising price movements is the PubMatic AdPrice Index www.adpriceindex.com It is a broad-based measure of ad network pricing information based on anonymous data from over 3,000 publishers who work with PubMatic for ad network and ad layout optimization services.

The PubMatic AdPrice Index revealed surprising weakness in monetization for the vast majority of Web sites. Large Web sites fared the worst while small Web sites managed to maintain their monetization rates. eCPMs for large Web sites (more than 100 million page views per month) dropped dramatically by 52% from 38 cents in March to 18 cents in April. Medium Web sites (1 million to 100 million page views per month) were nearly flat, with monetization dropping from 34 cents in March to 33 cents in April. Small Web sites actually managed to improve their monetization, increasing from $1.18 in March to $1.29 in April.

PubMatic pricing data reflects net publisher monetization via ad networks and excludes ad networks' share of ad spends as well as inventory sold directly by publishers to ad agencies or advertisers. PubMatic computes the aggregate Index through data for all web sites using weighting of 65% large Web sites, 20% medium Web sites, and 15% small websites based on an estimate of overall traffic in the online publishing market. The pricing data reflects the pricing of text and banner inventory sold to ad networks only, and does not include inventory sold directly to advertisers. The data reflects net publisher monetization, not gross advertising spend or the money paid by the advertiser to an ad network

According to the index, average monetization dropped by 23%, from 49 cents in March to 38 cents in April. Among the verticals, Social Networking led the plunge with monetization dropping 47%, from 37 cents in March to 19 cents in April, below January lows of 22 cents. Entertainment monetization dropped 17%, from 40 cents in March to 33 cents in April. Gaming and Sports were down marginally (4% and 5%, respectively). Technology remained relatively flat at 83 cents in April vs. 82 cents in March, but is still below January highs of 92 cents. In April 2008, 77% of Small Web sites garnered net publisher eCPMs from ad networks of under $1.00, compared with 95% of Medium Web sites and 100% of large web sites. Across all Web sites, the range of eCPMs was $0.002 to $18.45.

There is a view among industry experts that these price movements may be possibly indicating weakness in display advertising led by general economic slowdown. Mixed results from the likes of Yahoo and Time Warner indicate that online publishers may be getting less money for the ad space they sell. More and more advertisers are opting for automated targeting and delivery through cheaper advertising networks instead of buying directly from expensive publishers. Sanford C. Bernstein & Company analyst Jeffrey Lindsay opines that recession fears might actually be a boost to some media companies, such as those depending on automated advertising systems like search. In a moderate or even quite severe downturn, online advertising actually improves, because people switch their advertising budgets out of traditional advertising formats - TV, radio and print - and move more online because it's got higher performance, it's cheaper and it's more measurable, feels Lindsay.

So Why Are CPMs Declining? According to Gerry Bavaro, the high CPMs commanded by large "premium inventory" sites equate to what ad sales teams can convince marketers to pay. This is one reason why premium sites such as Forbes and ESPN have in-sourced their sales accusing performance ad networks and ad exchanges of "commoditizing" their premium inventory. However, advertisers are increasingly moving towards a network and exchange route with more inventory, and we are rapidly moving towards a world where advertisers and publishers will meet at the CPM that they each will agree on. We will see a market where the price of media is not arbitrarily set by anyone, but is set by the market. Search engines are driving this trend, and as the "big three" ramp up development of bid platforms for more of this media, we will continue to see online advertising become a commodity whose prices will continue to be driven down by buyers and networks. The trend looks unstoppable.

Why Is Social Media Suffering? When we piece the Pubmatic numbers with another report by eMarketer, which has revised projected growth for social media advertising from 163% growth in 2007 to just 55% this year, we may being to question whether social media is truly an advertiser-friendly medium? This is especially so given the task-oriented, profile-fiddling mindset of users operating there. Or, should there be an alternate approach to monetize social media? Gerry Bavaro feels that the primary strategy for social media should be empowering customers to act as brand/product ambassadors using the media of branded tools (widgets, branded profile pages, blogs, etc.) that foster dialogue, awareness, and sharing (viral activity). This may mean – more customized and integrated media solutions to enhance interactivity and enrich the brand experience such as sweepstakes, online quizzes, interactive game shows etc.

Bottom line – publishers must go down the performance and measurability route – and this trend is being accelerated by the broader economic situation. Search may still end up taking a larger share, because, in the current situation, even the best performance networks/exchanges with their scale and targeting capability, do not possess the buyer interface of a Google – self-serve, no-frills, one-stop experience. Last thing – there are already proven case studies on how one can successfully run ‘Brand’ campaigns on search. In addition, marketers are also discovering the immense value of PPC campaigns by using the data and analytics to influence their offline campaigns.

According to PubMatic Co-founder and General Manager Rajeev Goel - top publishers are adopting three key strategies to overcome the current pricing situation: 1. Increased diversification, by working with more than one adnetwork to maximise pricing opportunities 2. Increased segmentation of content and categories to appeal to specific marketer focus 3. Globalization to expand beyond regional shores and earn international revenue (Google just declared that more than 50% of its revenue in the most recent quarter came from its international operations).

Valuengine Inc

2008-05-20T06:25:00.000-07:00

ValuEngine Inc (VE) is a stock valuation and forecasting service founded by Ivy League finance academics. VE utilizes the most advanced quantitative techniques and analysis available. The research team continues to develop, test, and improve the VE Stock Valuation Models and econometric models for forecasting stock price movement. In recent years, VE has expanded its research program to include portfolio construction and tracking products. Primary products are the ValuEngine.com website for individual investors and ValuEngine Institutional (VEI), a software package for equity fund managers and other financial professionals. The executive team includes Paul Henneman - President,CEO; Dr. Zhiwu Chen- Founder; Dr. Chiayu Chang – Founder; Dr. Yongjian Zhan - V.P. of Research and Development; Eric Stokes - Senior Editor; and Don Mitchell - Chairman, Advisory Board.

The company was founded in 1995, Transformed into ValuEngine in 1999, and Restructured in early 2001 to include both retail and institutional product lines. The company claims that it has proven models for performance, timeliness, and broad coverage of over 4,500 stocks. Its backend is robust and automated to facilitate speedy development and implementation. The company owns industry leading databases, research, and back testing processes. Probably the only research house that has an Ivy League affiliation.

ValuEngine employs many proprietary models, which were adapted from most innovative concepts in financial theory generated from academia and Wall Street practice. Each of the ValuEngine models represents the state-of-the-art in valuation, forecasting and advisory technologies. The model variables include three fundamental input variables: past one year EPS, expected one year forward EPS, and 30-year bond yield. Eleven parameters include 8 firm-specific parameters and 3 interest rate parameters.

The ValuEngine Stock Valuation Model was derived from recent research and findings of both ivy-league academics and wallstreet professionals. ValuEngine's model is more sophisticated than traditional valuation models and outperforms its peers by employing a three-factor approach to stock valuation. These fundamental variables such as a company's trailing 12-month Earnings-Per-Share (EPS), the analyst consensus estimate of the company's forecasted 12-month EPS, and the 30 year Treasury yield are all combined and used to create a more accurate reflection of a company's fair value. Armed with these framework features, the ValuEngine Stock Valuation Model then paints a detailed picture of a company's fair value, which is represented by ValuEngine's "model price."

Valuengine’s international coverage includes current daily coverage of over 700 ADR’s (foreign companies trading on US markets). Markets include Asia, Europe, South America, Middle East, Canada. In addition, coverage of 2000+ stocks that trade on Tokyo markets. Total coverage includes Asia: 203; Europe: 245; South America: 68; Middle East/Africa: 45; North America ex USA: 158

Products include: ValuEngine's flagship website - ValuEngine.com; Individual Stock Reports - VEReports.com; ValuEngine View Newsletter - ValuEngineView.com; and VEInstitutional software - VEInstitutional.com

Full access requires premium membership, and clientele include 45,000+ individual investors; Hedge fund managers, financial advisors, institutions, and professional money managers; UBS Warburg and Deustche Bank: ValuEngine supplies research as part of the SEC settlement with 12 of the largest investment banks.

Try Category Targeting in Europe – It’s not funny

2008-05-18T12:35:00.000-07:00

We all have our moments in life, sometimes driven by personal situations at home, while sometimes driven by situations at work. I’m going through the latter – and my approach to getting back in shape actually begins at the drawing board. Since the time I entered the digital media world, I have rarely looked at it from a media planners’ perspective. As a matter of fact, most of the available research is overwhelmingly skewed towards the sell side – the side that is so heavily fragmented that its really a nightmare being a media planner in today’s online world. Exception being search – the ease-of-use and simplicity that the medium brings, particularly Google, to online media planners

Let us look at what’s on offer in Europe for a media planner exploring content categories to target and run a campaign. I began looking at the comscore numbers by category to figure out how to allocate my budget.

The UK automotive category is quite well-spread among the internet population – reaching 45% of UK internet audience. However – within the space, my only chance of reaching any meaningful scale is via the leader of the pack, Trader Media Group. However, even if I buy the slots on all of their welcome pages, my campaign will reach only 17% of UK auto category population. Behind the leader is the trade group – Automobile Association Ltd. – with a reach of 12%, but with engagement levels so low that it would be futile buying the site. Within the top 10 are the car majors – who have audiences that are either incredibly loyal or are soon to be one. Is there any point for me to run a competitive campaign on these sites? – is this possible? – OK – let’s move on. I’m already beginning to get frustrated. Same story in France – although the automotive category reaches 34% of internet population, the top site Caradisiac reaches only 30% of online automotive enthusiasts. In Germany, the story is slightly better – auto category reaches 32% of online population, but the combined reach of top two, Mobile.de and AutoScout24 is a massive 70% of online auto enthusiasts.

At this point, I became very intrigued, and wanted to research another hot sector from a buy-side perspective – Money and Finance. In the UK, this category reaches about 80% of internet audience. However, within the top 10, which is where the category is concentrated, my only chance of running a successful campaign is Moneysupermarket.com with a reach of only 25% of UK Money and Finance category; and Reed Business Information and BBC, which have a combined reach of 12%. Wow! – I thought – isn’t this a text boon scenario of ‘Fragmentation’. In France, this category reaches about 56% of online audience, but I have no chance of running into any sort of success here, because I couldn’t find a single, consumer web destination, with any reasonable reach. Disaster, isn’t it? In Germany, the Money and Finance category reaches about 50% of online audience, and the leader, Sparkassen-Finanzgruppe reaches about 30% of this category. I felt relieved.

But to be honest – the entire experience has been truly frustrating, and I begin to think – if I should follow my friend Pete, who makes his job so simple – buy buying only Google keywords – for both Brand and Performance campaigns. It’s so easy, and value for money – so measurable etc. Surely, this strategy has its limitations, but atleast Pete can enjoy quality time with his family and indulge in his favourite pastime – Golf.

As I reflect back on this experience – I begin to wonder – where are the big portals? I would have thought that they will be there, somewhere, near the top. But this was not to be – I was wrong in my assumption. Of course, the marketing collateral coming out of these big portals may tell a different story – but that’s what they are meant to be – to be marketing collaterals, where apples are compared with oranges, and presented in the backdrop of a ‘Harry Potter’ or a ‘Jurassic Park’ in the hope that the buy-side will eventually buy the argument. Not anymore – as the buy-side community increasingly gets frustrated with the campaign ineffectiveness associated with a fragmented space, and as the search space gets increasingly smart and efficient, we will see an exodus – unseen and unparalleled before. This phenomena may already be occurring, albeit latently.

So – what’s the alternative? Is this the end of the road? Is there any chance that this situation can be corrected? – I don’t know – but I will keep working on my drawing board, and I will keep blogging on these, and many other issues, and hopefully, find a plausible solution. In the mean time – let me share another story – the story of David, who runs fencing and gardening company in local Chiswick area. His marketing campaign is self managed, and his only medium is a local weekly newspaper called The Chiswick, which also has an online edition! David buys an advert for £30, which is delivered in the weekly print edition, and also on the Chiswick’s website. David’s charges range from about £200 to £500 a visit – depending on the type and intensity of work. But, by adopting this marketing technique, David has managed to attract atleast 10 new leads a week, and the conversion rate is pretty high, given the specific nature of the job and the location. Meanwhile, The Chiswick is a completely ad-supported business, and is quite profitable. This is what is otherwise known as local media – and the money spent on them – local advertising, which is estimated to be about 1/3rd of total advertising (yes - 34% of total). Less than 10% of online spend is on local advertising. Google does offer an alternative to the Chiswick, with its simple buying interface, no-frills service and by providing ability to run low-budget campaigns. David is also trying Google, and claims to have received reasonable conversions. The challenge here for Google is competing with the Chiswisk's smart distribution. The Chiswick is delivered free in the mail box, which is non-intrusive. The content is locally relevant and quite engaging. For someone who spends less than 2% of media time consuming magazines, i end up reading the Chiswick, everyweek. You just have to flip the pages, unlike the internet, where one needs a connection and needs to be online to search on Google.

Am I suggesting a solution? No – but im only articulating the existence of an eco-system, where self-sufficient and sustainable ad-supported media business models are thriving, purely due to local demand. If I were to put this ‘local’ example in the context of my above category media planning experience – I’m sure there is a way for publishers to cater to the category needs of media planners who are seeking to target specific content categories with reach. The Chiswick is owned by Gannett, but the parent has been careful in retaining the Chiswick brand, which has managed to resonate so well with its loyal audience, for so long. This could be one of the ways forward for big portals. Watch this space!

Chief Strategy Officer

2008-05-08T08:01:00.000-07:00

Here’s a summary of a seminal work on high-performance organization design by Accenture consulting team - Tim Breene, Paul F. Nunes and Walt Shill – who argue that by creating a senior leadership team, under a Chief Strategy Officer, organizations can accelerate their objective of realizing the true benefits of strategy.

More and more companies are competing on organization design by configuring the C-suite in new and powerful ways. Organizations are increasingly adding a strategist, often called a chief strategy officer, or CSO, to their top ranks. The Chief Strategy Officer’s main responsibility is to ensure that execution flows from strategic planning.

Why do companies need a Chief Strategy Officer?
Complex organizational structures, rapid globalization, new regulations and the struggle to innovate, among other challenges, have obviated the need for the typical CEO to be on top of all parts of the business. Further, the nature of strategy itself has changed during the past decade, with strategy development becoming a continuous process, and successful execution therefore depending more than ever on rapid and effective decision making. Lastly, centralized control of execution often breaks down when maverick line executives define strategy according to their own plans and interests. This is where Chief Strategy Officer’s can come in handy. The CSO often confronts companywide issues that were once the sole responsibility of the chief executive.

Kimberly-Clark Chief Strategy Officer, Robert Black, whose previous jobs include chief operating officer of Sammons Enterprises (a conglomerate with more than $27 billion in assets) and president of international operations at Steelcase, the global office-furniture company, explains his role this way: “Over the course of a week, I’m spending time on consumer innovation, business process outsourcing, financial structure, product supply chain, international expansion, communications, acquisitions. Most people in today’s functionally oriented career paths don’t have the experience to address so many diverse challenges at once.”

Ideally, a Chief Strategy Officer should come with a string of high-profile positions, in a variety of companies and in a wide range of industries, organizational cultures and geographic locations. This experience and unique positioning at the top also enables the CSO to offer perspectives and ask questions that other senior executives can’t or won’t. Because the Chief Strategy Officer is willing to discuss subjects no one else wants to touch, important but buried issues no longer serve as barriers to agreement and action. At the same time, the Chief Strategy Officer must also ensure that the top ranks maintain the right market focus so that strategic initiatives don’t stall and business opportunities, a key to market position, don’t get lost. Chief Strategy Officer's actively resolve strategic questions that overwhelmed business-unit heads just don’t have time to deal with. Chief Strategy Officer's build world-class strategy development and execution capabilities within the company. In fact, many strategy chiefs are helping their companies compete on organization design by creating departments specifically for that purpose, hiring people with strong strategy-related skills and competencies (in business development, competitive analysis and M&A, for example). In the long term, the role of top strategy executive can become an effective succession-planning tool. People take on the chief strategy role because they want to run the business sooner or later.

For the Chief Strategy Officer, the most critical ingredient for success is probably a strong relationship with the CEO. Chief strategy officers are often given broad authority to tackle companywide challenges and seize new business opportunities, so there must be a strong sense of trust between the Chief Strategy Officer and the chief executive. A long professional and personal history between them isn’t absolutely necessary, but it helps.

Traits in a Chief Strategy Officer

1. A master of multitasking – Accenture survey suggests that Chief Strategy Officer's are responsible for an average of 10 major business functions and activ- ities, as diverse and demanding as M&A, competitive analysis and market research, and long-range planning. They must be capable of quickly switching between environments and activities
2. A jack-of-all-trades - most strategy executives reported that they had significant line management and functional experience in such areas as technology management, marketing and operations. Less than one-fifth had spent the bulk of their pre-Chief Strategy Officer careers on strategic planning
3. A star player - Most Chief Strategy Officer's achieved impressive business results earlier in their careers and view the strategy role as a launching pad, not a landing pad
4. A doer, not just a thinker - Although Chief Strategy Officer's split their time almost evenly between strategy development and execution, their bias must be toward the latter
5. The guardian of horizon two - Senior teams generally have a good handle on short- and longterm issues. The medium term, that period from one to four years out, can go underattended, however. Chief Strategy Officer's must focus the organization’s attention on horizon two, the critical period for strategy execution
6. An influencer, not a dictator - Strategy chiefs don’t succeed by pulling rank. They sway others with their deep industry knowledge, their organizational connections and their ability to communicate effectively
7. Comfortable with ambiguity - All executives today must exhibit this trait, but it’s especially true for Chief Strategy Officers, whose actions typically won’t pay off for years. The role tends to evolve rapidly and requires an extraordinary ability to embrace an uncertain future
8. Objective - Given their wide remit, chief strategy officers can’t play favorites. Openly partisan CSOs, or those who let emotions or the strength of other personalities cloud their vision, are sure to fail
Thanks Tim Breene, Paul F. Nunes and Walt Shill, Accenture Consulting, 2008

Free Press – at what cost?

2008-05-05T12:27:00.000-07:00

This indeed is a thought provoking piece by Craig Moffett. Given the backdrop, or rather, the harsh reality faced by the journalism industry, the literature does make us stop and reflect on the disruptive impact of internet on the fourth estate and demomcracy.

Consider the downsizing in the news paper industry including the likes of The New York Times, The Seattle Times, The Daily Herald, the Philadelphia Inquirer, the San Jose Mercury News, the Fort Worth Star Telegram, and a host of others. According to the American Society of Newspaper Editors, full time news staffs in the U.S. dropped by 2,400, the largest decrease in 30 years. Year 2008 could probably be worse.

USA Today owner Gannett reported an 8% decline in total revenues in the most recent quarter (including both newspapers and broadcasting), marking its fifth consecutive quarter of declining revenues. Gannett's newspaper advertising revenues were down 11% in the U.S. The problem is not just with advertising, which can plausibly be claimed to be cyclical, but with circulation, and the very value proposition of the newspaper itself. The Atlanta Journal Constitution has seen its circulation drop by 8.5% over the past twelve months (through the end of March). The Star Tribune in Minneapolis saw circulation decline by 6.7%. The 90 year old Capital Times of Madison, Wisconsin published its last newspaper.

As circulation has declined, once proud regional papers have been reduced to human interest wrappers around reportage that is increasingly outsourced to the AP and Reuters. Since 1990, a quarter of all newspaper jobs in the U.S. have been lost. And it's not just in the US. France's Le Monde was not published for one daily edition, since the workers were on strike to protest the elimination of 130 jobs. Most of them were journalists. In the UK, revenue from Gannett's regional papers were down 7% from last year. the demise of printed classifieds to likes of eBay, Monster.com, and Craigslist has unquestionably played a part, but there seems to be a broader, and more disturbing, pattern here.

CBS is exiting the news gathering business altogether, outsourcing its news gathering operations to CNN. What we are witnessing is not the demise of newspapers… it is the demise of journalism itself. The culprit for this inexorable decline is not a decline in our interest in news, although there is plenty of evidence of that sad trend, too. Instead, it is our unwillingness to pay for it.

Put simply, the economic model of news gathering – of maintaining costly overseas correspondents and news bureaus, of investigative journalists – is being eviscerated. And it is being eviscerated by the Internet. The Internet is effectively setting the new benchmark price for news. And that price is… "free."

Our need for news is being fed by Internet searches, one-line news "alerts," Wiki-sites, and special interest emails… and we don't actually pay for any of them. The notion of a "free press" was supposed to stand for something grander than this. To be sure, the serious democratic business of reporting the news has gotten a remarkable boost from the Internet. The potent combination of cell phone cameras and instant connectivity has effectively deputized millions of "vigilante journalists," each ready to report news as it happens anywhere in the world. And by posting it online instantaneously, for all to see, the all-important watchdog role of a free press has blossomed spectacularly in places like China, willfully forcing change in a way that would make our own founding fathers proud. But vigilante journalism serves only up to a point. We are rapidly replacing investigative journalism with news. For their part, the news organizations are all racing to the Web. If you can't beat 'em, join 'em, the thinking goes, and incremental revenues are, well, incremental.

But as with so very many other digital businesses, the news organizations are very publicly sowing the seeds of their own demise. The notion that the enormous cost of real news gathering might be supported by the ad load of display advertising, or by the revenue share from having a Google search box , or by a fifteen-second video is not adding up to lost revenues. The dollars and cents of traditional news distribution are being replaced with pennies of incremental advertising, and no amount of savings from avoided paper costs from electronic rather than physical distribution can offset the losses.

It's not just newspapers suffering this fate. Ratings of TV news are at all-time lows. By the time people get home from work, they have already consumed their news – Free – emails, blogs etc. A high-cost business model like journalism can't compete with "free." And so we settle for, simply, less news. Or at least less journalism.

According to EditorAndPublisher.com, the US supports just 25 full-time journalists embedded in Iraq. That's just one twentieth the number from thirty years ago in Vietnam. There isn't that level of reportage on the war because it is not affordable.

Five years into the video-over-the-Internet revolution, we have learned two things. First; consumers won't pay for content on the web, so it will have to be ad supported. And second; it won't be ad supported.

In the cable TV network world, half of all revenues come from affiliate (carriage) fees paid by the Comcasts and DirecTVs of the world. The other half comes from advertising. But in the TV world, a typical half hour show supports an ad load of about 8 minutes. On the web, early evidence suggests that consumers will tune out if they are forced to watch more than 30 seconds or so of advertising up front, and maybe another 90 seconds of advertising over the next thirty minutes. Hulu.com, for example, which has already been lionized by many as the future of TV, serves two minutes of advertising for every 22 minutes of programming (i.e. the programming duration of a typical half hour show from television). Assuming identical CPMs for web video and TV, and after accounting for lost affiliate fees, a 30 minute program on the web with two minutes of advertising yields approximately 1/8th as much revenue per viewer. Are content producers prepared to reduce production costs…by 88%?

Desperate not to be left behind, all of America's news outlets are bravely embracing the web, putting their best content on the web (for free, of course) in a game effort to generate "traffic." At the same time, the Sports section, the Business section, the Metro section… all are being replaced with individualized à la carte stories (clips) on the web. Each news dip is customized to suit our interests. And each consumes our attention (think ad loads) for a shorter and shorter period of time. Production budgets – editorial staffs – are necessarily being downsized and Fast.

However, enrollment in graduate journalism schools has actually increased over the past decade. Unfortunately, there are fewer and fewer jobs waiting for them when they graduate. Fewer jobs in journalism means a less attractive career. A less attractive career means that fewer and fewer of the best and brightest will enter the profession. Worse, a generation of readers will be trained to expect little or nothing of real merit from the news. The culture of "free" on the Internet has already brought low the music industry. But the music industry – or even the TV industry – can be easily dismissed; it's "just" entertainment after all, and selling bundled "albums" was inarguably an antiquated business model, anyway (wasn't it?). The threat to journalism – the Fourth Estate – is something different, however, and it is something profound. A free press that is sufficiently well-capitalized to fulfill its role as the watchdog is at the very heart of democracy.

The technologists behind the news bots and clipping services charge that change is good, and that business models must evolve. Fair enough. But it's hard to view this perspective without some cynicism. Piracy and the devaluation of intellectual property have become so commonplace in the tech community that these very notions have been elevated and recast from something base (stealing) to now something aspirational and high-minded (preserving and protecting "freedom" and "democracy"). But behind all the rhetoric – from all sides – is a simple truth understandable to almost everyone. Generally speaking, "free" is bad for business. And so the press, that pillar of democracy, crumbles. The job cuts are accelerating.
Many thanks to Craig Moffett, May 2008

MBA for the 21st Century

2008-05-05T03:26:00.000-07:00

The traditional two-year MBA curriculum, grounded in the functional disciplines — marketing, accounting, finance and so on — has been in existence since it was pioneered in the United States in the late 1950s. According to Joel M Podolny, Dean and William S Beinecke Professor of Management, Yale School of Management, today, the world of business education — which has historically been very resistant to large-scale change — is on the verge of transformation, a transformation that is as significant for the business education industry as the many industry changes that have taken place as a result of technological advances in the wake of the rise of the Internet. While the final contour of this transformation is still an open question, the fact of the transformation is remarkable in and of itself. Professor Podolny recounts two events that he attended, which further illustrate the significance of this fundamental shift. One was an international symposium of business school deans and senior faculty hosted at the Yale School of Management campus; there were 20 institutions (including three from India) from 13 different countries around the world — all of them were struggling with the relevance of the MBA to 21st century organisations. The second was a conference on the future of the MBA hosted at the Harvard Business School, again with deans and senior faculty from around the world well represented.

At both conferences, contends Professor Podolny, it was clear that some schools are already transforming, while others are still planning their next steps. Almost without exception, however, all see that the world of business education is changing — and indeed, it must change — in fundamental ways. There are two fundamental drivers behind the demand for changes in business education and MBA curricula. The first is that the world of management has changed tremendously from the 1950s. Then, a typical manager could spend his or her entire career within a single function — say, marketing or finance — of a large bureaucratic organisation. There was thus a strong alignment between these careers and MBA curricula that were siloed by related disciplines. But organisations have become increasingly flat, and the leaders of modern enterprises competing in the global economy are looking for managers who are capable of leading and managing across the boundaries of function, geography, and sometimes even organisation, industry, and sector. Professor Podolny illustrates an example when he visited Bangalore in late 2007, and toured the technology unit of Target India. It was striking the degree to which Target India employees were expected to understand the mindset of North American customers, and not simply rely on a marketing unit in North America to provide that key information.

The second driver, as per Professor Podolny, is that today’s students learn in a way wholly different from the way students learned in the 1950s or even in the 1980s. The Internet, the 24-hour news cycle, the popularity of social networking, and almost instantaneous ‘on-demand’ access to knowledge have all contributed to a significant shift in the mindset and the learning process for the 20-somethings now entering our MBA programmes. No longer linear, but instead lateral, in their thought processes, they seem to think in hyperlinks, assembling information from multiple simultaneous inputs. In the 1990s, scholars and teachers interpreted this lateral mindset as a kind of intellectual laziness, but now, they are increasingly of the view that the students of today are actually quite focused and energetic. They are willing to devote considerable effort to wade through vast amounts of material from disparate sources; they may even work harder than students of a few decades ago. They just don’t want to focus on any one piece of material (say a 50-page article or a 20-page case) for a considerable period of time.

So, both MBA customers (the corporations that hire MBAs) and MBA clients (the students who pursue MBAs) are primed for programmes that develop and refine lateral thinking and co-ordination capabilities. But many traditional, functionally defined business school curricula get in the way of this reality. New methodologies and new approaches to MBA pedagogy that more accurately reflect the demands of the contemporary work environment and the realities of the current MBA student population are urgently needed, argues Professor Podolny.

Many schools are developing such new tools and techniques, but one example of such a new approach is a reinterpretation of the traditional business school case format developed over the last year at the Yale School of Management. This new format, which is informally called, the “raw case,” is delivered online to make use of the multimedia capabilities of the Internet, and presents a complex (and often real-world, in almost real-time) business situation. The raw case conveys material through a variety of perspectives and data streams that can include original source documents such as 10-K filings and analyst reports, news media reports (print and broadcast), faculty-authored notes and background readings, scholarly articles, interview videos or transcripts with the parties involved, as well as other multimedia tools, such as Google maps. Raw cases consist of hundreds, even thousands, of “pages” of data. So, in addition to the lateral synthesis of many disparate piece of information, part of the student’s assignment is determining the most effective allocation of time and attention in order to answer the assigned question or perform the required analysis.

This innovative new teaching tool, the “raw case”, is distinguish from more traditional “cooked” business cases that deliver a particular business problem, and all the data required to analyse and solve that problem (usually from the perspective of a single discipline such as marketing or finance) in a self-contained document that is typically 10 to 20 pages long. This is not to suggest that “cooked” cases are not still useful teaching tools: for almost a century, the traditional business school case has provided countless MBA students with key insights and approaches to analysing and solving specific business problems in a convenient and well-defined format. Nevertheless, Professor Podolny says, that many business problems today are neither convenient nor well-defined. While the traditional business school case will continue to be a stalwart of the MBA curriculum, there is room — and necessity — for this new “raw case” format to help develop the lateral thinking skills and essential habits of mind — both the analytic discipline and the synthetic creativity — essential for today’s successful business leaders.

Whatever new approaches to curriculum or pedagogy are adopted, they will only succeed to the degree that they address the changed realities of 21st century organisations and 21st century learning. But regardless of what innovations take hold, it is clear that in order to maintain its relevance and to achieve its highest aims, the MBA education of this century will be — must be — very different from the MBA education of the last century.
Thanks Joel M Podolny, Dean and William S Beinecke Professor of Management, Yale School of Management, May 2008

Vertical Ad Networks

2008-05-03T13:09:00.000-07:00

A vertical ad network is typically a collection of content sites that are focused around a particular topic such as finance, parenting, sports, or autos, offering advertisers the ability to reach contextually and demographically similar audiences in a more efficient way than on a site-by-site basis. Vertical ad networks can offer publishers much higher CPMs based on the premium advertisers are likely to pay for the quality of content and added inventory to the network. Doug Anmuth, internet analyst at Lehman contends that as online advertising budgets rise and more brand-oriented campaigns migrate to the web, there is likely to be a growing need for higher-value, premium ad inventory, particularly for traditional brands which have greater sensitivity about the placement and context in which their ads appeal.According to Doug, bundling of publishers in order to leverage sales infrastructure costs is not a new concept and has occurred in other media, including radio and print, long before the Internet. However, the limitless nature of the Internet (unlimited sites, low barrier to entry with blogs, and minimal start-up costs) only amplifies the need for more efficient solutions for advertisers and media buyers. Further, as online advertising budgets rise and more brand-oriented campaigns migrate to the web, there is likely to be a growing need for higher-value, premium ad inventory, particularly for traditional brands which have greater sensitivity about the placement and context in which their ads appeal. According to Avenue A I Razorfish’s 2007 Digital Outlook Report http://www.avenuea-razorfish.com/reports/RegOutlook2008.html, vertical sites accounted for 39% of total media spend in 2007, up 20 bps Y/Y, and aside from search spend, was the fastest growing category in terms of media billings, growing 43% in 2007 compared to 14% in 2006. This compares to 36% growth across all billing categories. The relative out-performance of verticals was largely at the expense of portals, where media billings fell 500 bps to 19%. While most of the vertical billings Avenue A I Razorfish reported were likely placed directly on verticals and not through vertical ad networks, the continued strength and growth in vertical advertising likely exemplifies the continued shift in advertisers’ preferences to purchase inventory around the audience rather than primarily guaranteed impressions.This targetability and transparency is leading to higher average CPMs, with some of the larger vertical ad networks achieving average CPMs in the $10-12 range. While the value of hyper-targeting an audience seems apparent, historically, small-medium publishers focusing on a specific vertical likely lacked a sufficient audience size, overall scale, and investment needed to maximize the monetization of their content. With the emergence of ad networks like Advertising.com and Google’s AdSense, web sites which were mainly in the tail were able to monetize their content. As these sites grew in audience and scale, they likely reached a monetization ceiling, setting the stage for vertical ad networks to emerge.Different from traditional ad networks which are generally content agnostic with little (if any) O&O inventory and focus mainly on providing maximum reach across the Internet, vertical ad networks are typically built by publishers that directly operate sites that have achieved scale in terms of users, and also expand their ad network inventory across similar content sites. By focusing on a content niche, these networks can achieve audiences that advertisers desire and in a particular vertical that would otherwise be difficult to achieve. Some of the advantages vertical ad networks provide for advertisers include an efficient way to reach a highly-segmented and targeted audience. Whereas an advertiser could seek out individual golf, auto, or health sites on which to advertise, it is likely that few individual sites would have the available impressions needed to satisfy the reach goals of a major advertising campaign. For example, while there is no shortage of parenting sites on the web, most would have difficulty providing a large enough audience to satisfy the reach goals of a major national brand such as Pampers or Gerber. If a publisher is associated with a vertical ad network, it could potentially deliver the desired audience and reach that an individual niche-oriented site could rarely provide. In fact, this ‘problem’ is one of the key solutions Yahoo! looks to offer publishers with its announced Advertising Management Platform (AMP!) by offering the ability for publishers to fulfill audience and impression demands from advertisers. The current fragmentation of the Web has increased the availability of inventory online, but it has also created challenges for advertisers, agencies, and publishers alike as they seek to coordinate across different metrics and standards.For publishers, participating in a vertical ad network offers a way to outsource the infrastructure and staff needed to support the various components of online ad sales including sales, sales support, ad-serving and management, reporting, and billing while achieving higher effective CPMs than through more general ad networks. For example, the average effective CPM publishers generate through run of site ad networks is likely less than $1, vertical ad networks can offer publishers much higher CPMs based on the premium advertisers will pay for the overall quality of content and added inventory to the network in general. While some bigger name-brand publishers, including ESPN, have recently shown a preference to handle all ad sales in-house, eschewing the value of putting their inventory in a network, for small to mid-sized publishers who lack the resources, audience, and brand-name to build a large audience and manage direct relationships with advertisers, the value of a vertical ad network is more apparent.Vertical ad network playersTheKnot.com, Bankrate, iVillage, Glam Media,
Martha Stewart Living Omnimedia’s Martha’s Circle, Kaboose , Quadrant One (newspaper consortium including Tribune, Gannett, others), Revolution Health, CondeNet (blogs on fashion and technology), and Nickelodeon’s Parent Connect network. Doug quotes that while there is a revenue share component when expanding a network, the average split to content sites across vertical ad networks is likely below 50%, although some publishers could also receive guaranteed CPMs.What about major portals?While the major portals—Yahoo!, MSN, and AOL—have largely cornered the market on mass reach as they offer content across most verticals and are generally ranked within the top 5 sites per content category within comScore, their recent focus has been on expanding their monetization engines. This approach is largely consistent with their large scale in terms of audience and page views both across their O&O and their networks. One example of the solutions being built by the major portals could be delivering ads targeting specific users across content verticals. For example, if an automotive company is looking to reach “auto enthusiasts” and “people shopping for new cars,” the major portals would serve those individuals it believes are shopping for cars across various environments, including while that user is checking e-mail, reading a news article, or spending time on a social networking site. This is a form of behavioral marketing, in which the ad is served to the user rather than affixed to a particular page of content, and can be offered by most major Internet companies, particularly through Yahoo!’s SmartAds and its acquisition of BlueLithium, and AOL’s acquisition of TACODA. The portals would argue that it is the advertiser reaching the potential consumer that matters more than the context in which the user is reached (i.e. on specific content verticals). This form of advertising will increasingly gain adoption, and the larger Internets will have to eventually strike a balance between this type of laser-like behavioral targeting and the concerns an advertiser may have around the particular setting in which their ad appears.However, the investments of 2007 are likely to provide a basis for the major Internets to offer better targetability, customization, and scale, including the technology needed should they launch vertical ad networks. And the major portals are shifting their approach to verticals by bundling properties and launching new sites and networks targeted to specific demographics. Yahoo!’s newly released Shine site caters to women, and AOL’s recent launch of the AOL Technology Network couples some of its technology blogs such as Engadget, Switched, and TAUW (The Unofficial Apple Weblog), each of which could be used as starting points for larger vertical ad networks targeting women and technology enthusiasts. Ultimately Yahoo!’s AMP! platform is likely to include access to specific verticals as it focusing on providing publishers access to impressions across the web. Additionally, Google’s DoubleClick could be working on a similar vertical ad network solution. However, for the portals to be successful, it is important to view the expansion into vertical nets as premium content in order to benefit from the relatively high CPMs compared to current run of site ad networks.While ad networks, both mass-reach and vertical, are serving an important role in the online advertising value chain, there are many major publishers who have articulated dissatisfaction with the network model and have actively removed inventory from networks. Most recently, ESPN has stated that it would no longer work with advertising networks as it believes ad networks diminish the value of its content, while the WashingtonPost.Newsweek Interactive recently closed its ad network, Blogroll, as many advertisers could find cheaper inventory elsewhere. While mass each ad networks are effective in monetizing unsold inventory for publishers, participation in ad networks in general could: 1) dilute and diminish the differentiated nature of the publishers’ brand; 2) put downward pressure on CPMs based on the seemingly endless supply of inventory within a network; 3) minimize the relationships with the main advertisers; and 4) produce lower page yields when outsourcing sales to a network as opposed to inhouse or a vertical solution.Conversely, vertical ad networks seek to position themselves as an efficient way to achieve high-quality audiences in controlled contextual settings, while also providing an audience that meets advertisers’ reach goals. Vertical ad networks have emerged as advertisers are increasingly demanding more relevant and for lack of a better word, safer, environments to run their ads. And while many general ad networks do offer audience targeting tools which can likely accomplish many of the same goals as a vertical network, these networks can often suffer from the “low-hanging fruit” stigma given the early dependence on direct-response ads and use of remnant, low-cost inventory. The use of vertical networks will only grow as consumer packaged goods, pharma, food and beverage, and in general, more brand-sensitive advertisers increasingly turn to the Internet to reach their target audiences. As vertical ad nets expand their publisher reach, there is a risk to the operator that rising TAC rates could impact overall margin expansion. Currently, the average revenue split across vertical ad networks is less than 50%, with higher quality sites and those sites that give the vertical network more control over the inventory potentially receiving guaranteed CPMs. Although vertical networks sell the entire network’s inventory to advertisers, as traffic to O&O properties grow, it should mitigate the impact rising TAC rates could have on overall margins.InfrastructureAs the concept of vertical ad networks continues to gain adoption, several companies have emerged that provide the infrastructure and technology to power a vertical ad network by providing “white label” network management solutions. These “white label” solutions make it easier for a leading category publisher, such as Forbes in finance, or Martha Stewart in home and living, to launch a vertical ad network without significantly investing in technology. They also enable the main publishers to focus on the advertising relationships without having to build and maintain the technology to handle the ad-serving, yield management, and the analytic tools. Forbes and Martha’s Circle are using Adify’s vertical ad network solution for their vertical networks. Adify specializes in creating white-label ad networks and powers an estimated 90 vertical niche-oriented ad networks. Other providers of vertical network solutions include Collective Media, and DoubleClick could also be working on a similar solution as an extension to its DFP product line, while some of the larger vertical ad networks, such as Glam Media, also offer to provide the infrastructure for 3rd parties to build their own networks upon.
Thanks Doug Anmuth, April 2008

Flat-Rate Pricing for Online Services

2008-04-05T14:51:00.000-07:00

Warner Music is toying with the idea of charging everybody with an online connection $5 per month, and users can download unlimited music. With 150 million online households that would be ~ $9 billion per year in the US, collected by the ISPs, which can significantly improve margins. Colleges have about 32 million students – another $2 billion. At workplace, people listen to music - that's another 138 million – with 50% conversion, this is another ~$4 billion. In total, $15 billion per year that can put the music industry back on track, and that's just the US! Well, at least this seems to be the rosy version.

Ironically, a similar idea was rejected when a proposal was made in 2004 by the Electronic Frontier Foundation. The idea has re-surfaced, and with a very different music industry outlook, it certainly looks a lot more attractive to the labels than it did last time around. The concept of collecting a flat fee for unauthorized use of music is not new. The idea was developed in France in 1851 as a way of reimbursing composers whose work was being performed without permission in public venues. Nor is the idea new to the US: it has been used in the radio business since 1914 and also applies to webcasts and live performances. However, not everyone believe a flat music charge is a good idea. In fact, in many parts of the internet sector the new proposal may appear like a tax. In fact, some people might think that a dose of reality in the music sector wouldn't be such a bad thing.

The idea of a flat charge is not without appeal – and it might get some traction with the ISPs. What if you had the option to take broadband at say $30 per month with an agreement that you could only use limited P2P services but could pay $35 per month for service with unlimited P2P? The ISPs would want a cut, arguing that they would incur incremental capacity costs, but unlimited legal P2P – or even P2P that the ISP could throttle back at peak usage times – would be hugely attractive to the online public. So much so, that a large number of the users would likely go for it. The idea also lends itself easily to tiering and bundles – the cable guys' favorite. Say $5 per month extra for "managed" P2P, but $6 per month for unlimited P2P, and so forth. But if the regulations were managed well, the user would still have the choice and not be obligated to buy something that they didn't really want. Despite Microsoft's near abandonment of the DRM software that allows P2P services to exist, Real Rhapsody, Napster and Yahoo! Music are still managing. And, we must draw a distinction here between the subscription services and Apple iTunes – which is still a pay to download model.

Subscription services account for approximately 18% of the online market, and this might increase dramatically if Apple introduces a music subscription service as expected in H2 of 2008. The problem is, what happens to these services if the industry goes over to all-you-can-eat pricing? Possibly they would be able to adapt, at least to some degree but their role would change. Presumably, somebody would have to negotiate with splits with the bands, compile playlists, provide the music playing software to users etc. Apple is also rumored to be considering an all-you can-eat music service by charging a bit more for an iPod – say $100. If we assume that an iPod has an effective consumer life of 2 years, the extra amount works out to around $4 per month – not far from the suggested $5 per month by Warner Music. But given the potential pool of 115 million worldwide an additional $100 per unit would be some serious incremental cash – another $11.5 billion potentially.

At first blush, all-you-can-eat movies for a fixed price looks attractive – certainly to the consumer. But the concept is fraught with challenges. The MSOs and Telcos have invested a fortune in providing pay-per-view services of their own. And these services work pretty well too. The interface may leave something to be desired, but we can attest to the fact that Time Warner Cable has a fairly compelling movie-on-demand service. Would they forego $4.99 per movie for an all-you-can-eat package charged at the average pay-per view movie take rate? Time Warner Cable might actually like it because it eliminates billing and fair amount of customer service, but HBO probably wouldn't. Who would pay extra for a movie channel if you could have any movie any time direct from the cable provider? Provided users are not "taxed" by charging everyone in a service pool, the idea of flat rate pricing for music and possibly movies has a lot of potential. It might be one of the very few business models that could actually work online and still fit within business models of the existing players, albeit with some adjustments. The concept is not without precedent online either. Many would argue that the consumer internet was really born when AOL introduced flat rate pricing for dial-up access to the internet. AOL definitely is the one to keep an eye on , going forward.

With inputs from Jeff Lindsey in NY, April 2008

Keyword Buying Process on GOOG, YHOO & BIDU

2008-04-02T10:23:00.000-07:00

Comparing the process of buying keywords on Google US, Yahoo! US, Baidu China, and Google China; we find some interesting insights:

- Baidu has a roughly $400 USD minimum upfront account setup; Google and Yahoo! have no minimum and no upfront account setup
- Unlike Google and Yahoo!, Baidu does not use ad relevancy (you can purchase the first sponsored listing; competitor bids are public)
- Google AdWords China is identical to AdWords US
- Google and Yahoo! keyword buying processes are very similar, but quality control measures could be better at Google

While Google, Yahoo!, and Baidu all offer simple online interfaces for users to engage in keyword bidding, Google's interface seems to have the fullest features to optimize the search experience for end users and advertisers.

To set up a paid search campaign, neither Google nor Yahoo require the user to create an account until the user has entered in her list of desired ad locations, keywords, and bids. The user can then activate the account by entering a credit card; there is no minimum ad spend amount on Google or Yahoo! In contrast, Baidu requires the user to establish an account before beginning any keyword bidding. Baidu also requires the user to commit to a minimum 2,400 RMB spend (about $380) to activate the account. While this requirement helps Baidu to promote spending and potentially increase average revenue per customer once the user is committed to Baidu, it may limit participation of long tail advertisers with whom Google has had success.

Both Google and Yahoo apply a quality score to assess the relevancy of your ads to the keywords associated with it. The quality score of a user's ad along with her bid price determine the ultimate paid position of the ad. An ad with high relevancy may be positioned higher than a competing ad with a higher keyword bid price and lower relevancy. Competitor bids are never disclosed directly on Google or Yahoo. Baidu, on the other hand, does not apply a quality score to paid search ads; the highest bidder gets the best placement, regardless of the relevancy of the ad. Baidu also discloses the bids of the highest three bidders for a desired keyword, showing competitors the bid price to own top paid position.

The interface of Google China's version of Adwords performs identically to Adwords US, including payment. Google China accepts many credit cards for payment; however, credit cards are less prevalent in China than in the U.S. and other developed countries. Baidu accepts only local Chinese credit cards, but has established relationships with many Chinese banks to facilitate non credit card payment, which may ease the keyword buying process for local Chinese Baidu paid search customers.

The user experience for setting up search marketing accounts and buying keywords on Yahoo is very similar to that on Google. Google does incorporate some quality and protection measures that Yahoo does not. Google's system automatically flags keywords such as Pharmacy or Gambling and requires the buyer to be registered with an appropriate online bureau for the vertical. Google also flags and disallows direct calls to action in a search ad, such as "Click Here," and instead requires the buyer to enter more information about their website. Finally, when the keyword buyer is entering his search ad, Google scans her site and suggests relevant keywords based on the site scan. Although these are minor differences, they exemplify Google's focus on quality of the product for the end search consumer and advertiser.

The General Keyword Bidding Process:

Step 1 - Get Going
Google and Yahoo! start with simple interfaces to start a search marketing campaign; neither requires a initial account or credit card set up to begin bidding on search keywords. Baidu requires an account to be set up before keywords can be bid upon. As you start, Yahoo! offers to upsell its services to create your keyword campaign for for $199; Google and Baidu do not offer this service.

Step 2 - Geographic Targeting
Google and Yahoo! allow users to specify specific geographic locations to be targeted. The region could be a state, DMA, city, zip range, etc. Targeting is done through a combination of IP address and/or geographic location entered in search query. Local maps display and highlight the targeted region. Baidu offered no geographic targeting measures.

Step 3 - Create Your Ad
Ad creation on all of the 3 search engines is very simple. To create the ad, the user enters the URL to his site, the headline link, and a description link. Google actually scans the user's website and recommends keywords based on the scanned content.

Step 4 - Choose Your Keywords
All 3 search engines offer plenty of help upselling keyword buyers with additional keyword suggestions based on their entries. Users can enter one or many keywords in a single campaign depending on how the user would like her ad displayed for a given keyword.

Step 5 - Bid
In terms of bidding ease and direction, Google seems to do the best job. Google guides users to appropriate bid levels based on desired rankings, without explicitly stating other current bids (like Baidu). Google offers the user insight into projected position of a keyword/bid combination including an estimate of clicks per day. Yahoo! offers projected performance on the entire campaign, rather than specific keyword/bid combinations. Baidu, on the other hand, does not apply a quality score to paid search ads; the highest bidder gets the best placement, regardless of the relevancy of the ad. Baidu also discloses the bids of the highest three bidders for a desired keyword, showing competitors the bid price to own top paid position.

Step 6 - Activate
The final step in the process for all 3 search engines is to enter payment information and begin serving ads.

Digital TV Transition in the US

2008-03-24T04:25:00.000-07:00

On February 17, 2009, the U.S. will embark on one of the most ambitious technology transitions in its history. Nearly 2,000 television stations will cease broadcasting in analog and will begin broadcasting exclusively in digital. And nearly 14M households that currently rely on over-the-air (OTA) broadcast signals from those stations will be faced with a stark choice: buy a digital converter box, or buy a digital TV set, or sign up for Pay TV service, or simply stop watching TV. Viewed charitably, the Digital TV transition can be seen as a modest supplementary economic stimulus package. Millions of Americans will spend an estimated $4B on new converter boxes, new television sets, and new cable and satellite services, a small part of which ($1.3B) will be subsidized by a government coupon program for digital OTA converters. Viewed less charitably, the Digital TV transition can be seen as a tax, and one that overwhelmingly targets the country's poor and Hispanic populations. The digital TV transition has important implications for the companies. For the Hardline retailers, the key question is…how many new TV sets and digital converter boxes will be purchased because of the Digital TV transition? For the Cable and Satellite operators, the question is…how many OTA households will run to the waiting arms of Pay TV providers? And for the Media companies, the question is how will the Digital TV transition change what people watch?

While an estimated 14M homes will lose their sole source of TV reception; an additional 30M homes will lose reception in one or more rooms that are not currently connected by their Pay TV provider. Winners include the hardline retailers, cable networks, and cable and satellite providers, although the magnitudes of the impacts are likely smaller than generally expected. Losers include the broadcast TV stations, and the broadcast TV networks…and a largely unsuspecting broadcast television-viewing public.

The Telecom, Cable and Satellite sector will enjoy a subscribership boost from the DTV transition. Over 2008 and 2009, approximately 1.4M households will enter the Pay TV market as a result of the DTV transition, which is enough to roughly double the annual growth rate of the industry from 2007 to 2009. This impact is enough to push growth rates for the cable operators into positive territory in 2009, despite what are expected to be peak share losses to the TelCos' video offerings. While the absolute number of new subscribers is likely to be relatively low for any one operator, the impact on market sentiment could be significant. In the past, satellite and cable stocks tended to be much more sensitive to subscriber growth metrics than rational valuation would suggest.

For the consumer electronics retailers, the DTV transition will be more incremental than truly material. The retail value of the converter box market is estimated at ~$1.4B and the TV market at ~$1.7B, for a combined total retail impact of ~$3.1B. While this is clearly a large number, it represents only about 2% of the $150B+ consumer electronics market in the U.S., which is much more likely to be driven by the ability of consumers to maintain discretionary spending against multiple headwinds. In addition, given the characteristics of broadcast TV households and the characteristics of "untethered" TVs in pay-TV households, the consumer electronics channel is not likely to get any more than a fair share of this market opportunity.

Note that the average person who is still using rabbit ears or rooftop antennas to get a TV signal is disproportionately lower income (25.3% of OTA TV Households). So, if you think about these, for example, how many of them are going to buy HDTVs or how many of them are going to subscribe to Pay TV? They are also disproportionately Spanish language (over 50% of OTA TV Households), which raises obvious implications for how the think tanks and companies are going to reach them to educate them about the process. Disproportionately, these customers are actually urban customers (40.3% in A Counties). That is, they skew towards aid counties or denser counties. They also skew somewhat young. These are not just elderly customers, though there are quite a few of them who are elderly. OTA households are located disproportionately in the West (54.2% of OTA TV Households).

There are roughly 310 million active TVs in the U.S. This works out to just shy of 2.8 TVs per household on average, with nearly 3.2 TVs in homes that own more than one TV. Next question is how many of those 310 million sets are vulnerable, i.e. they don’t have a digital tuner, and they’re getting their signal from broadcast. One thing to consider here is the first piece of legislation that actually mandated the TVs to begin to have digital tuners in about mid 2004. There was a series of deadlines progressively through March 2007, moving down to smaller and smaller sets. If you just assume the minimum shipments per the mandate, they’re about 107 million cumulative TVs shipped to date that have a digital tuner. The second piece of legislation created a converter coupon program with funding for about 33.5 million coupons. Every household in the country is entitled to two. But once 22.5 million coupons have been issued, the coupons will be restricted to broadcast households only. How that possibly could be enforced is an unknown but that’s the beauty of legislation. It only has to be imagined not executed. There have been 50 approved converter boxes, and there are six retailers already selling converter boxes.

In order to figure out how many TVs are vulnerable, there are essentially two cohorts to think of. Cohort number one is Pay TV households with TV sets that are not hooked up to cable or satellite, and called as untethered TVs. Looking at multiple industry sources on this, the range is around 35 to 50 million TV sets that are out there in households with cable or satellite that are not hooked up. But no one really knows. The mid-point is 42.5 million. There’s a good chunk of those TVs that are used not for watching TV but for playing video games or watching movies, which is estimated at 30%. This leaves about 30 million TVs in Pay TV households that are vulnerable or possibly vulnerable. The second cohort is of those 14 million OTA households that are not hooked up to any kind of Pay TV service. Given the lower income, these have fewer TVs on average than the U.S. and this is estimated to be about 1.5 TVs. So that’s about 21 million TVs. So, combined, we’re talking about something around 50 million TVs in the US.

For cohort one (Pay TV households), possibly around 15% of households will do nothing. These are TVs in a spare bedroom, in a guest room, a TV that was moved upstairs and rarely watched. So, for a long time, people probably don’t have to do anything. Therefore, for 15% of households, that TV goes dark and never gets replaced. The second option, estimated at 33% will call up their cable company or their satellite company and say, "hey hook me up," in this extra room. And surprisingly, that’s a pretty cheap option - Cablevision in New York charges about $20 to hook up an extra room. The cheapest option is the converter box, with an average price point of about $50. The converter coupon is $40, which means the out-of-pocket cost is $10. This is estimated at about 42% of households. For cohort two (OTA households), possibly around 5% of households will do nothing; around 15% are likely to call a cable or satellite provider. That’s a very expensive option, and the vast majority of people – 70% – will solve their problem with a $10 converter box solution. The most expensive is to go buy a digital TV, which is going to run you anywhere from $250 to $10,000 depending on what you buy. And it is estimated about 10% of people may buy a digital TV in both the cohorts.

There’s 21 million sets in OTA households, and about 1 million that’ll be discarded, 3 million that’ll be connected by the cable company, 15 million roughly boxes that’ll be sold and 2 million new TVs. On Pay TV households – the 30 million sets untethered TVs – 4.5 million do nothing. About 10 million call up cable and get connected. Twelve to thirteen million get solved with the converter box, and three million new TV sets are sold. Assigning values for the Pay TV cohort - $20 to get cable hooked up to an extra room. Fifty dollars out of pocket to buy a converter box even though it’s only $10 after the coupon. TV’s cost $400, and the total cost for consumers for Pay TV cohorts is about $2 billion. For the broadcast cohort, it’s going to cost you $240 a year at $20 ARPU per month. So, in total, that's $240 a year to sign up for a Pay TV service and $50 for a converter box. That’s about a $3.8 billion cost to broadcast households. The total market size from the conversion will be somewhere between $3.3 billion and $4.2 billion; and the set top box market is $1.2 to $1.6 billion; and digital TV market is actually $1.3 billion to $2.1 billion in incremental in total revenue – $1.7 billion being the mid-point of that.

So the question for the cable and satellite operators is, how many of these customers are going to come to cable and satellite? There are certain obligations that the cable and satellite operators have when the US goes all-digital as a country. However, going all-digital themselves is not one of them.

The NTCA or the National Telecommunications Cable Association voluntarily, on behalf of the major cable operators, has entered into an agreement with the SEC and the National Association of Broadcasters (NAB)– whereby all the cable operators would agree after the digital TV transition to continue to carry an analog version of the must carry channels. That is, any channel that opts for must carry rather than negotiating for carriage like the big channels do in the given market – the ABCs, NBCs, TBSs and FOXs – they will be carried in both in a digital format and in an analog format. So, they refer to that as the digital Must Carry Obligation. And there are some questions for smaller cable operators whether they are going to be held to that same standard. Today they are, but they’re asking for some relief.

There are also some question marks about low power – LPTA – Class A stations. Nobody had ever heard of LPTA Class A stations before. In fact, they are pure enough even that when the SEC was originally designing the set top box requirements for the digital converters, even the SEC forgot about them and realized only later that they forgot to put a pass through for those stations which don’t go all digital after February 17th. And those stations won’t be viewable at all. So now everybody is scrambling to try and solve that problem.

The satellite operators may or may not face an obligation to do what’s called Carry-One-Carry-All. That is, start carrying all channels in HD TV in a given local market if they carry any channels in HD in a given local market. That would be a tremendous capacity burden that initially was written by the SEC in a proposal that they would be obligated to do that by 2009. Now they’re talking about phasing it in with 15% by 2009, 30% of markets by 2011 and so on.

Probably 95% of OTA TV subscribers have telephone service. That gives the cable operators, in particular, a real opportunity. Because the average cost of cable telephony service is about $12 lower than the cost of the RBOCs' telephony service. In fact, in many cases it’s an even bigger difference than that. The cost of the lowest level of cable TV service is about $12 a month. So it leaves the door open for cable operators to offer consumers a solution that is effectively – if you switch your phone service to the cable company, we will solve your TV problem for free – or what amounts to for free. Because you’ll be paying the same thing you were before but now you’ll have cable service. The satellite operators have a harder time with that kind of an offering because they simply don’t have anything else to offer other than the basic packages of television. So it could be that the cable operators pick up a somewhat disproportionate number of these customers because of those kinds of offers.

Inevitably, there are going to be customers who are likely to call their cable operator saying, I understand I have to go all-digital and therefore, I might as well go ahead and sign up for digital service. Now technically, the right answer would be "no, actually you don’t," you’re all set if you’re already connected to cable or satellite for that matter. But inevitably, there are going to be people that are confused, that are seeing the public service announcements who are going to call. Therefore, there is a likelihood of acceleration in digital subscribership simply driven by the confusion of customers thinking they need to do something when they don’t. There is also a likelihood of an increase in the number of customers who want to connect additional rooms in the house because a lot of these cable and satellite customers may have a second bedroom or something where they have a TV that still uses rabbit ears or roof top antenna that now they need to get wired to the coaxial cable to deliver the signal to that TV. That could trigger some additional customer acquisition expense or maintenance expense or they have to deploy trucks to add those extra rooms. So all of those types of things are extremely uncertain, because it’s just very hard to predict how those things are going to play out, but they’re all things to keep in mind. In general, they’re good. Faster growth of digital subscribership is good for everybody. To a degree, they are negative in the sense that there could be higher costs associated with the installations to additional rooms. Those costs by the way would be expensed rather than capitalized in almost all cases.

Broadcast TV consumption is in freefall, and will probably continue in the same direction. Broadcast ratings have dropped by an unprecedented double-digit rate for five continual quarters, and there seems to be no end in sight.

Net Net – winners from the Digital TV Transition include Hardline Retailers, Cable Networks, and Cable & Satellite Providers. Losers include Broadcast TV Stations, Broadcast TV Networks, and Broadcast TV-Viewing Public.

Thanks Bernstein Research, March 2008

AOL Gets Social with Bebo

2008-03-14T03:22:00.000-07:00

Here are some expert opinion on AOL-Bebo deal.

Jessica Reif Cohen, Merrill Lynch

AOL announced the acquisition of social networking site Bebo for $850mn in cash. With 4.8mn unique users and 1.2bn monthly page views, Bebo is the third largest social network in the US and a leading social network site in the UK. AOL’s price values Bebo at a low to mid teens revenue multiple (Bebo lacks material profitability). Bebo’s revenue is no more than $50-$75mn currently (and perhaps less) and that EBITDA is negligible. Strategically, the Bebo acquisition seems to be a very good fit for AOL. It will significantly improve its position in social networking and helps drive improved scale for Platform A, its online advertising platform. In addition, Bebo could both benefit from AOL Instant Messenger’s (AIM) huge installed base and potentially allow AIM to finally realize some of its revenue potential. The acquisition also provides AOL with an improved footprint internationally, a key strategic initiative for the company. However, AOL/TWX does not have a strong track record of integrating acquisitions, as highlighted by its struggles to integrate its various advertising platform acquisitions over the past year. There also remains significant concern about the long-term monetization opportunities for social networking in general, as underscored by Google’s disappointing results in this area.

Doug Creutz, Cowen and Company, LLC

Bebo acquisition furthers AOL’s strategy to transform itself into a content-driven advertising platform. While it is unclear how this plays into a potential spin-off of AOL, a break-up is unlikely to serve as a catalyst for TWX share appreciation. The Bebo transaction value reflects premium and hefty growth assumptions. Bebo currently earns annual revenue in the $30MM-50MM range and minimal, but positive, EBITDA. As such, the price AOL paid reflects both a significant premium for entry into the hot social networking space and assumptions on the part of management that AOL will be able to drive significant incremental monetization through its proprietary advertising platform. Bebo is currently the third largest social networking site in the U.S. after News Corp.’s MySpace and independent Facebook, however it lags both by a significant margin. Though Bebo has good technology and experienced leadership, the social networking business is driven by user scale and networking effects. It is unclear how combining a second-tier player with AOL’s struggling business model generates value. The transaction is unlikely to create significant economic value for Time Warner.

Imran Khan (JPMorgan)on the earlier YHOO-Bebo deal

Yahoo! has an agreement with Bebo to manage display advertising for the social networking site in the U.K. and Ireland. Bebo is a privately held social networking site targeted at teenagers and young adults. According to comScore Networks, Bebo was the U.K.’s most popular social networking site in July07, with 10.6M unique visitors in the U.K. and Ireland, and 18.2M worldwide. While the financial terms were not disclosed, this partnership will generate ~$16M in F’08 revenue for YHOO (revenue contribution assumption is based on a $1.00 CPM, 80% TAC and 50% Y/Y page view growth rate).

Jeffrey B. Logsdon, BMO Capital Markets

Bebo is the No. 3 social networking player in the US and has an even better position in a number of other English speaking countries (UK, Ireland, New Zealand, etc.). Bebo intends to launch in other European countries over the next six months. When combined with AIM and ICQ, AOL will now have 80 million unique users in the social networking-communications-entertainment segment. The acquisition compliments and enhances AOL’s Platform A display advertising focus and can leverage its behavioral and contextual marketing opportunities. This deal will likely dampen speculation that the AOL advertising businesses will be sold in the near term.

Benjamin Swinburne, Morgan Stanley

This acquisition is not inconsistent with the restructuring thesis of TWX, a restructuring that may include the monetization of some or all of the pre-existing AOL assets. While online advertising is expected to slow in ’08 versus ’07 in the U.S., social networking growth is expected to accelerate. According to eMarketer, global ad spending on social networking was $1.2 bn in 2007, and should grow to over $2 bn in 2008. This acquisition places TWX in this growing segment of online advertising. Questions remain regarding the near-term appetite for advertisers to shift meaningful levels of their existing budgets to social networking sites (particularly in the current weak ad environment), which is why social networking advertising growth has lagged usage growth. TWX, like NWS and its MySpace asset, hope the targetability of the advertising on social nets (users effectively volunteer their consumer tastes for advertising use) and their existing relationships with advertisers are synergistic. Bebo.com averaged 22 mm unique visitors (UVs) in January according to Comscore. Roughly 80% of its UV’s in January were outside the U.S. Bebo.com’s engagement level modestly exceeds its social networking competitors, averaging over 215 minutes per UV per month in January according to Comscore. In the last year, Bebo.com’s page views have grown 33% to 11.4 bn according to Comscore. At $850 mm, TWX is paying roughly $38 per monthly UV (using January’s 22 mm UV’s) which compares to private market value of MySpace of $35-40 using the average UVs in 4Q07. MySpace has been widely viewed as a successful acquisition, given the search agreement NWS struck with Google soon after acquiring it.

Heath P. Terry, Credit Suisse

With the Bebo acquisition, AOL hopes to grow its presence through the integration of AIM and ICQ, monetize the site utilizing Platform-A, and expand internationally. Bebo has the Open Application Platform in which content and application providers can monetize through advertising. Bebo has recently launched a Polish site and is testing local sites in France, Germany, Italy, Spain and Holland to launch in 5 to 6 months. Social networking is one of the fastest growing areas in the Internet properties, attracting media companies for a high audience engagement level in a new media platform. News Corps acquired Myspace for $580M in 2005 and has a deal with Google for a guaranteed payment of $900M through 2010. Microsoft paid $240M for 1.6% stake in Facebook in 2007. This gives AOL, particularly Platform-A, a rapidly growing inventory to apply its integrated effort in targeted marketing and ad utilization. While Bebo has a growing international presence and a smaller position in the U.S., AOL will face the same early-stage monetization challenge that Google, Microsoft, News Corp and Facebook have. That said, the price paid seems to account for these challenges.

Michael C. Morris, UBS Investment Research

In announcing the acquisition, AOL management highlighted that the acquisition puts the company in “a leading position in social media” and noted Bebo’s “fast-growing worldwide user base.” There are two significant potential benefits from a Bebo-AOL combination: (1) The ability to directly monetize the Bebo inventory through Platform-A. AOL notes that Bebo will allow AOL to offer advertisers even greater reach and marketers significant insights into the desires and needs of consumers. (2) The ability to use AOL’s existing products, most notably AIM, to drive increased traffic to Bebo. AIM has 23.9 million domestic unique monthly visitors versus 4.4 million for Bebo. Providing a direct connection from AIM to Bebo could drive higher Bebo traffic. However, there is a lack of several key pieces of information to connect the dots to true economic growth, because: (1) The company has not commented on Bebo’s current advertising relationship with Yahoo (for video and display advertising, entered in September 2007). When will this end? Will there be any incremental cost to terminating the relationship? (2) Management has asserted that Bebo has a “fast-growing worldwide user base” although comScore indicates that users have only grown 8% over the past six months to 21.3 million monthly unique visitors. Bebo’s Engagement Levels Trail Competitors and Are Flat or Falling.

According to advertising agency, Omnicom, “visits per day” is the metric most highly correlated to return on investment by advertisers as calculated by sales. As a result, sites with higher visits per day have higher engagement and will ultimately be best positioned to command higher CPMs or cost-per-click. Bebo’s engagement, as measured by visits per day, is below that of its primary competitors and has been declining since mid-2007.

Post-Capitalist Society by Peter Drucker

2008-03-11T03:25:00.000-07:00

A probing and incisive analysis of the major world transformation from the Age of Capitalism to the Knowledge Society and how it will affect society, economics, business, and politics now and in the years ahead. In Post-Capitalist Society, Peter Drucker describes how every few hundred years a sharp transformation has taken place and greatly affected society - its worldview, its basic values, its business and economics, and its social and political structure. According to Drucker, we are right in the middle of another time of radical change, from the Age of Capitalism and the Nation-State to a Knowledge Society and a Society of Organizations. The primary resource in the post-capitalist society will be knowledge and the leading social groups will be "knowledge workers." Looking backward and forward, Drucker discusses the Industrial Revolution, the Productivity Revolution, the Management Revolution, and the governance of corporations. He explains the new functions of organizations, the economics of knowledge, and productivity as a social and economic priority. He covers the transformation from Nation-State to Megastate, the new pluralism of political systems, and the needed government turnaround. Finally, Drucker details the knowledge issues and the role and use of knowledge in post-capitalist society. Divided into three parts - Society, Polity, and Knowledge - Post-Capitalist Society provides a searching look into the future as well as a vital analysis of the past, focusing on the challenges of the present transition period and how, if we can understand and respond to them, we can create a new future.

The book's thesis is based on a Marxist-like definition of capitalism. A capitalist society, according to the book, is dominated by two classes: a small group of capitalists who own and control the means of production, and the workers who own little. All of the rest of society is organized around this fact. In this view, the age of capitalism peaked around the turn of the century. The reason, according to Drucker, is that "no one has matched in power or visibility the likes of Morgan, Rockefeller, Carnegie or Ford." Apparently, highly visible capitalists are a necessary condition; without them we no longer have a capitalist economy.
Drucker concedes that there are still rich people, but "economically, they have ceased to matter." Why? Because most corporations are run by professional managers, a result of the "Managerial Revolution." Drucker contends that, with the owners of capital no longer directly managing the corporation, it cannot be described as capitalism. The recognition of this separation of ownership from control was a major intellectual issue thirty years ago.

Post-capitalism is, according to Drucker, when "new classes" will rise to dominance. These new classes are the likes of computer programmers and telecommunications specialists. Society will order itself around them because they control what will be the "new central resource," knowledge.

Past financial empires were built on steel, railways, or banking. These industries are no longer where the profits are. Post World War II has seen the rise of the "super rich" in the computer industry, telecommunications, television production and other industries producing information processing hardware and software. This, Drucker says, is evidence of the fact that we are already in a post-capitalist world. Information is the dominant commodity, even more important than the production and distribution of "things." He makes the curious statement, "the actual product of the pharmaceutical industry is knowledge; pills and prescription ointment are no more than packaging for knowledge."
This new central commodity of knowledge is throwing economic theory into turmoil, says Drucker. Conventional models cannot explain current events. "We need an economic theory that puts knowledge into the center of the wealth-producing process. Such a theory alone can explain the present economy. It alone can explain economic growth." Drucker believes that one of economists' basis assumptions is the existence of perfect competition. He believes economists think that information is free and universally available.
Drucker continues, "another of economists' basic assumptions is that an economy is determined by either consumption or investment." He contends that there is "no shred of evidence" that increasing consumption or investment increases knowledge.

Traditional economic theory, according to Drucker, lacks "a common denominator for different kinds of knowledge." He notes that different pieces of land give different yields and are therefore priced differently. He believes we cannot yet do that for knowledge.

Drucker's style is interesting and encrusted with anecdotes from numerous disciplines. He quotes from novelists, economists, politicians, historians and others. The book is a 'Must Read' for all leaders and administrators (current & aspiring).

MS-HOO – GOOG Likely to Gain

2008-02-25T05:57:00.000-08:00

According to Marianne Wolk of Susquehanna Financial Group, there remains a possibility that MSFT & YHOO might ultimately agree to combine Microsoft’s OBS with Yahoo! into an independent entity that Microsoft could own, all or in part (and possibly trade as YHOO).

Microsoft could potentially go down the path of a proxy fight, proposing its own slate of YHOO Directors. While some experts say Microsoft is prepared to authorize a proxy fight, others opine that the company has hired proxy solicitation group Innisfree M&A Inc. If true, Microsoft needs to file its slate of director nominations with Yahoo!'s company secretary by March 14th. Microsoft has been reportedly approaching prominent Silicon Valley insiders to join its proposed slate of new Directors. Yahoo! does not have a staggered Board, and its Bylaws suggest only a plurality of votes is required to win in a contested election. Microsoft is likely to win a proxy fight, if one is waged, as much of the shareholder base seems to have shifted toward speculators and arbitrageurs that would vote for the Microsoft slate of Directors. To ward off a hostile acquisition by Microsoft (and retain employees), Yahoo!’s Directors voted to award rich severance packages to employees terminated without cause within two years of completion of any merger. This move was aimed at thwarting a proxy fight, making it challenging for Microsoft to achieve its target of $1 bln in synergies in the first year of an acquisition.

Other, less likely, alternative offers for Yahoo! could emerge from News Corp., Time Warner, and private equity (in conjunction with Dan Rosensweig, Yahoo!’s former COO). However, a transaction with Google is ruled out.

While outsourcing search advertising to Google would add immediately to Yahoo!’s bottom-line – perhaps as much as 20% (raising revenue per query by 30-50% and reducing operating and capital expenditures), this would cede Yahoo!’s key advertiser relationships to Google. Long term, outsourcing search ad sales to Google would damage Yahoo!’s branded advertising franchise, because it would: (a) provide Google with meaningful insight to Yahoo!’s user base, their behavior and proprietary company data; and (b) enable Google to target Yahoo!’s users anywhere on the web with its own branded advertising, potentially cannibalizing the premium Yahoo! receives for aggregating significant pools of targetable users on its home page and other high-scale destinations. If Yahoo! proceeds in this direction, it would be mandatory for Yahoo! to invest more significantly into media and content, knowing that it has relinquished its position as an advertising technology and marketing company. Any partnership between Google and Yahoo! is likely to face significant regulatory scrutiny. Together, Google and Yahoo!’s sites generated more than 75% share of worldwide queries (comScore, December 2007), and Goo-Hoo! sold 95% of all search advertising in 2007 (for owned and partner sites). If Google had sold search ads for Yahoo! in 2007, it would have meant Google sold more than 50% of all online advertising that year.

YHOO could persist as a stand-alone company, but if so, might face litigation. If the acquisition does not go through, Yahoo! is likely to see its turnaround plan delayed and even damaged by the Microsoft merger proposal. This is because; Yahoo! is likely to lose critical management focus, momentum, and personnel during this process. Already, the Yahoo! Board has been sued by the Wayne County Employees’ Retirement System and two Detroit public pension funds (Detroit’s Police and Fire Retirement System and General Retirement System) for failing to negotiate in good faith with Microsoft regarding its merger proposal. If no deal takes place – with Microsoft or a White Knight – litigation could become more widespread.

In the interim, many predict disarray at Microsoft OSB and Yahoo! Since the deal was first announced, experts have suggested a growing fear of layoffs. To stave off these concerns, a memo issued by Kevin Johnson (President of Microsoft’s Platforms and Services Division) indicates plans by the merged company to maintain teams in both Redmond and Silicon Valley. While meant to comfort Microsoft’s employees, the fact that the strategic direction for the merger proposal is now led by the Platform and Services Division cannot be lost on Microsoft’s Internet team, which recently experienced a management shake-up (and loss of autonomy). The deal has distracted the engineers at both companies, likely diverting Microsoft OSB from its goals for adCenter, and slowing Yahoo!’s progress in key development areas, such as (a) monetization improvements at Panama; (b) development of an off-site branded ad-serving capability to support its emerging branded ad network; and (c) improved scale and targeting for Right Media. Net, Yahoo! is likely to report weaker than expected Q1 results due to the distractions of the merger.

Due to all these, Google is expected to benefit over the next 18-24 months, providing it a major opportunity to advance in branded advertising. Microsoft expects the transaction with Yahoo! to close in the second half of 2008, assuming an imminent agreement from Yahoo! and regulatory approval. If instead Microsoft is forced to acquire Yahoo! via a proxy fight, it would mean a more protracted closing process. In this instance, Microsoft will have to wait for the annual shareholder meeting in June to elect its slate of Directors and push for merger approval. Then, the transaction might not close until early 2009, when it would begin the complex integration of Yahoo!’s 14,300 employees, multiple advertising platforms, technology infrastructures, content sites, culture, etc. Thus, Google may not face a more competitive Microsoft-Yahoo! until 2010. While its competitors get sidetracked, Google should see: (a) increased success in hiring top engineers from Microsoft and Yahoo!, as they fear for their jobs in a consolidation; (b) strong gains in search traffic partners (on the heels of 4Q07’s win with Orange/Wanadoo) from both new wins and renewals as publishers seek to optimize near-term monetization; (c) a near-clear period to extend its lead in search monetization; (d) a major lead in emerging growth areas, such as video advertising, mobile, and local advertising; and (e) a window of opportunity to expand its role in display advertising (buoyed by its likely 2Q08 acquisition of DoubleClick), while its two leading competitors are in disarray.

Thanks Marianne Wolk, Susquehanna Financial Group, February 2008

CinemaElectric, Inc. (CINM)

2008-01-07T02:00:00.000-08:00

CinemaElectric is a wireless services company and creator of PocketCinema(TM) multimedia. The Hollywood-based studio produces downloadable video, applications, and graphics for a global audience. CinemaElectric was founded by filmmaker James F. Robinson in 1999 and is based at the Los Angeles Center Studio complex in Los Angeles.

Cinema Electric programming is distributed through its Global Distribution Network and seen in over 50 countries throughout North America, Europe, Latin America and Asia. The company’s production studio and editing facilities are optimized for mobile and staffed by an experienced team of professionals from the entertainment and wireless industries who understand the nuances of creating compelling entertainment for the mobile platform.

The company produces and acquires the raw content; and adapts it to mobile devices via a proprietary Dense Media Format (DMF) production process. CinemaElectric distributes the content via a network of wireless carriers, phone manufacturers, content resellers and web portals, and shares in download fee revenues. The company also produces revenue from production and marketing services.

CINM is essentially trying to port Turner’s broadcast model to the Mobile space. The company is keen on acquisitions actively scouting for Billing, Gaming and Applications companies in the Mobile Space. Approximately 36 million shares of CINM are traded on OTC.BB exchange; and the management owns a little over 9%.

Listen to interview with Adam Levin, CEO of Cinema Electric:

http://www.wallst.net/audio/audio.asp?ticker=CINM&id=444

GOOG Building Advertising's Operating System

2007-12-05T00:07:00.000-08:00

Google’s Dominance of Search
Google has been consistently gaining share in the search market both domestically and abroad. Although the company is the clear leader in most markets, it has found the going a bit more difficult in some of the Asia markets, particularly China, Japan, and Korea. In these markets where Google has found it more difficult to operate alone, the company has established partnerships with local businesses (Sina in China and Daum in Korea). Google is expanding its sights to focus on the non-PC search oriented markets as well.

Display Advertising (DoubleClick acquisition)
Google acquired DoubleClick for $3.1B in cash in mid-April of 2007. DoubleClick provides ad-serving technology and online advertising analytics for online advertising and publishing customers. With DoubleClick, Google will be able to offer its customers an online ad solution for both their search and display advertising needs. Before this acquisition, Google’s ventures into the display ad space have been met with limited success. The established relationships that DoubleClick brings to Google will help greatly expedite the ramp-up of display ad revenue. With the display advertising market one of the more developed segments within online advertising, revenue opportunities will materialize for Google, should the company be successful taking share from competitors like Yahoo, AOL, and MSN. With Google’s existing success in the search market, the company should be able to leverage its relationships from sponsored search to drive up its market share in display.

Mobile Ambitions and the Android Platform
Google has stated it intends to bid on wireless spectrum in the 700 megahertz band. In an open letter to the Federal Communications Commission, the company discussed its vision of open access for this spectrum for wireless broadband and the potential benefits of such an arrangement. As a result of its interest in this spectrum, Google has set aside the minimum $4.6B to bid on this spectrum. This highly publicized move by the company has been frequently been misinterpreted as an early indication of Google’s potential foray in mobile phone hardware market. Despite the much anticipated Google Phone in the press, it is unlikely that this would fit into Google’s overall strategy. If the company were to actually produce a cellphone, it would be dilutive to margins and would bring Google into a hyper-competitive market where it would not have a distinct competitive advantage other than brand recognition.

Google and its partners launch Android
Google and its partners in the Open Handset Alliance announced Android, an open platform for mobile devices that is expected to be available on handsets starting in 2H08. The platform is a fully integrated software stack that includes an operating system, middleware, a user-friendly interface, and applications, and it will be licensed under a developer-friendly open-source license. Thirty-four companies have formed the Open Handset Alliance, which aims to develop technologies that will significantly lower the cost of developing and distributing mobile devices and services. The Android platform is considered the first step in this direction. Handset manufacturers and wireless operators will be free to customize Android in order to bring to market innovative new products faster and at a much lower cost. Participants include Motorola, Qualcomm, T-Mobile, China Mobile, Google, HTC, Samsung, LG, Sprint Nextel, Telecom Italia, Telefonica, Texas Instruments and NTT DoCoMo among others.

Implications for Google and other Internet Companies
This is a very early stage step in Google's wireless strategy. Their aim here, as with most of their moves outside of search, is to drive more online usage and thus more searches. By opening up mobile devices so that consumers can have a more "internet like" experience, Google is taking the network advantages that it has online and carrying them over onto the mobile platform. While Google will, at least initially, likely share a large percentage of the revenue that they generate back to the carriers in much the same way that they have with other online deals, over time we see Google accruing a significant portion of the value that is created in much the same way they have online.

The Mobile Search Opportunity
Various estimates suggest 300M PC units will be shipped in 2008 relative to the nearly 1.3B cellphones in the same year. With the nearly four-to-one ratio of cellphones to PCs shipped, the mobile market is clearly one of the more attractive platforms for online advertisers. Looking at the relative growth rates, cellphones unit shipments are also growing a few percentage points faster than PCs as well. Looking at the install base of the two markets, there are just under 3.6 billion mobile subscribers by 2008 and roughly 1.1B PCs in the same timeframe. In addition, commentary from Google management indicates that in certain markets such as China, there are actually more mobile searches performed than that conducted on computers. With cellphones often the platform by which users access the Internet in emerging markets, this clearly presents an attractive opportunity for advertisers such as Yahoo and Google.

YouTube and the Holy Grail of Video Advertising
Despite the measurable ROI from online advertising, many traditional ad executives have been slow, even reluctant, to shift their advertising spend to this medium. With the rise of broadband connections globally, publishers and online advertisers can now increasingly run rich media ad formats across the web. Eventually, rich media ads should transform into full video advertising, with 10-second or 30-second spots on webpages. Video advertising on the Internet is a format similar enough to television and cable-based advertising that makes it significantly more tangible and accessible for advertisers. YouTube has announced that it would begin monetizing some of its web traffic by allowing advertisers to place in-video advertising on certain video clips. These unobtrusive video ads would be shown in the bottom 20% of the video player after a certain point during playback and will only show in their entirety should consumers click on them. Google has initially set a $20 CPM for these video advertising units and over time, pricing could reach $40. Since the insertion of advertising in YouTube videos, Google also recently launched video units for AdSense. The company announced AdSense will now be able to serve video advertising units that streams relevant YouTube content to the site. These new units are accessible through publisher AdSense accounts and are currently only available to domestic-based online publishers with English sites.

Television Advertising (EchoStar)
Google has signed a landmark deal with EchoStar that would result in automated television advertising across the EchoStar DISH Network. The agreement calls for Google to establish an advertising system to purchase, sell, and measure television ads across the network that spans across all channels on EchoStar. The main upside to the Google television advertising platform is the targeted advertising that could be delivered to users. Despite the value proposition offered by EchoStar and Google, executives have been generally slow to adopt these new initiatives. Google has also signed an agreement with Nielsen to track audiences for TV viewing. Google will pay Nielsen to obtain detailed information on the demographics of the viewers and will help to supplement Google’s efforts already underway with EchoStar. Over time, Google should be able to provide this viewership data on a second-by-second basis. With the EchoStar deal already supplying Google with viewing patterns and habits, the Nielsen agreement helps unlock the other side of the equation, consumer demographics. By pairing the user demographic with viewing habits, Google will be able to serve more targeted advertising to viewers, something that is not currently a viable option on TV. For example, TV ad inventory is generally purchased by advertisers in a broad swath and is generally inserted into inventory slots without much targeting. However, with Google’s efforts to integrate demographic information and viewership trends, the company will be more successful automating better targeted advertising. For example, when a program about barbeque appears on the Food Network, under an automated system, Google can help the right advertisers (in this case, Kingsford for instance) reach their ideal audience.

Newspaper Advertising
Among the major sub-segments within advertising, one of the most challenged industries has been the newspaper advertising segment. Not only have viewership trends been on the decline in favor of other mediums such as online, ad revenue growth has also been difficult to achieve. From 2001 through 2006, ad dollars to the medium have expanded at a 2.2% CAGR in the U.S., meaningfully less than the 4.5% CAGR for overall advertising. According to the latest forecast out of Veronis-Suhler Stevenson, ad spending for the newspaper industry is expected to grow at a 1.6% CAGR from 2006 through 2011, below the 5.2% growth rate for the ad industry as a whole. Google first announced it would be entering the print advertising industry towards the end of 2006 and formally expanded its print program in July of 2007. The group of newspaper advertisers has now grown from 50 in November of 2006 to more than 225 by July and are all accessible through the Google AdWords platform. Over the coming years, Google should be able to grow its share in this medium as it presents an improved and automated experience. Ultimately, the introduction of an automated Google platform to purchase and sell ad inventory could help reduce the cost of sales at the newspaper companies. Around the same time that Google announced its partnership with various newspaper companies, Yahoo formed a consortium with a group of newspaper partners as well. The Yahoo deal, however, only encompasses the websites of the newspaper partners and will integrate Yahoo’s search monetization in addition to Yahoo’s local products on the sites. On the other side of the deal, the newspaper consortium will also be providing Yahoo with original content that can be used throughout Yahoo’s network. Overall, the uptake on the Yahoo partnership has been somewhat limited and has not yet contributed meaningfully to revenues. The same can be said about the Google partnership, but the opportunity will grow significantly over time as advertisers become more comfortable purchasing ad inventory through the Google AdWords service.

Radio Advertising (dMarc acquisition)
Google purchased dMarc in order to enter the automated advertising market for radio. The system allows advertisers to access radio ad inventory via the Internet and buy and sell inventory across various radio stations. Since the acquisition of dMarc, Google advertisers have been able to access this platform via their AdWords accounts. This radio advertising deal is very similar to what Google offers to Echostar advertisers. The opportunity in radio advertising lies in helping these radio companies reduce their cost of sales. Again, with Google helping to automate the advertising buying and selling process, radio companies should be able to reduce the amount of salespeople required to sell inventory.

Introducing the Google Advertising Dashboard
The ability for advertisers, marketers, and ad agencies to perform their media buying across various channels through a single platform will be the key driver for the success of the Google advertising dashboard. The ability for marketers and advertising agencies to control ad purchases from a single location across multiple mediums will drive significant leverage in the business model. Google’s ability to provide real-time (or near real-time) feedback on ROI and consumer viewing habits should allow for greatly expanded flexibility between advertising mediums in the future.
Thanks Credit Suisse Research, November 2007

"Digital Dashboard" - Potential for TV Ad Sales

2007-12-03T06:32:00.000-08:00

The current sales process for the television broadcast industry is inefficient due to the many layers of personnel involved making it a prime opportunity for a more efficient online sales mechanism, like a digital dashboard. However, these layers also represent entrenched interests which would likely challenge any migration to a system that excludes them.

What is the “digital dashboard”?
A digital dashboard would give advertisers and agencies one digital platform through which to buy advertising, both online and off (television, radio, mobile, print, etc.) and manage their advertising assets. The platform would be used to better manage, target and measure the traditional media advertising that flowed through the digital dashboard platform. As more advertising becomes digital, advertisers would be able to house and manage all their digital assets through one platform; managing, deploying, targeting, and measuring the effectiveness.

Television Advertising Industry Fundamentals:
􀁑 Current analog process is inefficient and involves many interests.
􀁑 Slow movement towards selling ads via online.

Catalysts to Digital Dashboard:
􀁑 Current system is expensive, involves a lot of people.
􀁑 Easier-to-use digital platform could attract new advertisers.

Challenges to Digital Dashboard:
􀁑 Entrenched system employing a lot of people vested in keeping it unchanged.
􀁑 Networks protective of their inventory (especially broadcast primetime).

Television’s Current Advertising Sales Process
The television advertising market includes in-season broadcast primetime programming, out-of-season broadcast primetime programming, other broadcast dayparts, and cable network programming. Advertising is sold by both the networks and, in the case of broadcast television, local stations. The entire television market is expected to generate $74 billion in 2007 revenue or 25% of the entire U.S. advertising market.

Primetime Broadcast
The traditional broadcast primetime television season begins in September of each year and runs into May of the following year. Advertising buying for television season is sold through two processes: premarket sales, referred to as the "upfront," which account for approximately 80% of advertising sales and open market sales, referred to as "scatter," which are sold close to the program air date. The broadcast upfront takes place in the spring of each year, when networks introduce their fall lineups. Network primetime television is primarily sold at the network level.

Summer Programming & Non-Primetime Dayparts
Out of season network programming (summer months), and other dayparts are sold through a similar process, but by different specialists. Out-of-season is typically sold in the scatter market by the networks while other dayparts are typically sold at the local station level. All upfront segments including primetime, other network dayparts and cable accounts for approximately 25%-30% of total television and cable advertising sales.

Cable Network Programming
Cable network programming follows a similar process, but is more reliant on the scatter market. Cable networks sell approximately 50% of their inventory during an upfront process with the balance sold in the scatter market. Cable network programming accounts for approximately 36% of total television advertising sales this year.

Current Process Reveals Potential for Online Television Ad Sales
Currently, an immaterial amount of television advertising sales are done online, with the process generally facilitated by personal relationships. Traditionally, both the upfront and scatter sales processes involve numerous layers of buyers and sellers that pitch programs, negotiate rates and manage inventory. The large degree of human interaction appears unnecessary given the relative commodity status of the final product: viewers. However, this is an entrenched process that would require a significant change in philosophy to see a meaningful shift to an Internet-based process. Local sales and scatter sales would be most likely to shift to on online process, followed by cable network programming with primetime broadcast the last to shift.

Recent Steps toward Digital Sales are Small, but Significant
Recently, new entrants have looked to online as a way to sell advertising. In April 2007, EchoStar gave Google partial access to its inventory to create an automated system for selling, delivering and measuring impact of TV ads. This deal was not only low-value remnant inventory and included an interactive component. Another current seller of online ads is SpotRunner, which launched an Internet based ad agency in January 2006 that allows local advertisers to digitally create and buy ads to air on cable television. SpotRunner’s focus on cheap local ads highlights another opportunity for a digital dashboard, attracting new advertisers by opening up and simplifying the process. These are early steps toward digital sales of television advertising.

Economic Opportunity Should Pressure Migration to Digital Sales
A digital dashboard-type sales model for television advertising represents a solid economic opportunity for the broadcasters and cable network, but the migration could take a long time. However, the more aggressive the dashboard facilitators are in showing the economic benefits of online sales, the more pressure there will be on content providers and advertisers to start the transition to a new system.

Thanks UBS Research, November 2007

"Digital Dashboard” Approach to Media Buying

2007-12-03T06:22:00.000-08:00

At a high level, Google’s success has demonstrated that advertisers are willing to pay more than anyone thought possible for highly-targeted advertising with measurable results. Over time, advertisers will demand the same type of targeting and measurability as they get on search across the other ad mediums. While most other ad mediums will never be as targeted a search (where users self select and ask for information), targeting on virtually all advertising mediums can certainly be improved from current levels. Additionally, advertisers are looking for ways to measure their non-search ad spend as efficiently and effectively as they can with search. When discussing measurement, the old adage that “50% of advertising dollars work, but we just don’t know which 50%” remains true for most ad mediums. Over time, as more media becomes digital, a digital dashboard approach will become the norm for advertisers. Advertisers will use a digital dashboard platform to execute their advertising plans. Such a platform will enable advertisers to upload their advertising creative and more effectively execute their campaigns with better targeting and measurability across multiple ad mediums, further enabling optimization for both publishers and advertisers. At the end of the day, the ability to optimize, manage and target is the key catalyst to drive a digital dashboard approach to advertising.

The key questions surrounding the opportunity are:

􀁑 Who will control the digital dashboard?
— While the answers are not entirely clear at this early stage, Google, Yahoo, and Microsoft are best positioned to become the early leaders.

􀁑 On what mediums will it work?
— Mediums that go digital earliest will be the primary beneficiaries of this platform strategy. Internet is already there, television has very large potential, and radio and mobile also should work well.

􀁑 How will the business models and economics change?
— While the economics and business models are still evolving, better targeting and measurement capabilities will enable platform owners to charge a commission on the total ad spend. However, if a simpler ASP/license model develops that is not based on the percentage of dollars flowing through the system, the potential revenue could be lower than expected.

􀁑 How long will it take for the digital dashboard approach to gain traction?
— As far as timing, it is still too early. The market will develop over the coming decade. Interestingly, the major impediments will not be technological, but instead overcoming the resistance to change among many, many players. As stated in the recent IBM report, “The End of Advertising as We Know It,” there will be more change in the industry in the next five years than in the past 50 years.

􀁑 How big is the potential opportunity for the platform provider?
— While sizing the opportunity is difficult (this is an understatement), the dollars flowing through such a digital dashboard could reach $500b world-wide in roughly two decades.

The skeptics’ view
This concept is exactly that, a concept. The acceptance or inevitability of the digital dashboard is far from certain. When discussing this concept with various industry contacts, there is a high level of skepticism for a variety of reasons, including:
􀁑 Platform Independence - Users of the dashboard might object to the lack of- independence of the dashboard provider. Conflicts of interest could arise between purchases of owned inventory versus partner inventory, each of which would offer different economics to the dashboard owner. The dashboard would probably offer both types of inventory; will dashboard users allow their ad spend to be allocated for them? This issue of “independence” could be the most important factor for advertisers, particularly as it relates to Google.
􀁑 Resistance to change - The digital dashboard represents a massive change from the current method of ad buying. Change often takes more time than expected, even if it is more efficient. There are many players in the advertising industry with vested interests that are challenged by the concept of the digital dashboard and they do not want change. While the dashboard concept will eventually take hold, the timing is unclear. Advertiser adoption and education will take time.
􀁑 Opposition from advertisers – ironically, given the potential scope for improvements in efficiency, one of the main barriers to change could be the advertisers themselves, particularly the bigger advertisers. The current system, where advertising budgets are pooled by media buyers who then buy space on media platforms, is beneficial for larger advertisers, who are able to use the size of their budgets to demand the slots that they want. Under a more transparent system such as the dashboard, advertisers run an increased risk of not getting the slots that they want due to being outbid in an auction process.
􀁑 Inventory and commoditization - Can a player acquire inventory across multiple ad mediums and various partners? Different aspiring dashboard providers will approach this issue differently. Google has already signed agreements to acquire inventory across multiple mediums, but many current and potential partners are reluctant to cede control of their inventory. The traditional media players certainly have a leg-up in creating a dashboard to sell their owned inventory, although they have made limited progress at developing a scalable, off-network model. Publishers also worry about the commoditization of their inventory.
􀁑 Lower overall advertising spend - There may be zero-sum relationships. For example, if ROI is higher on one medium than for others, will spend decrease on one and increase on the other, leading to flat or declining overall spending? Basically, if the platform takes hold and increases efficiency, could that lower the overall spend?
􀁑 Regulatory and legal concerns – Consumers and consumer advocacy groups will likely try to limit ad targeting capabilities because of privacy concerns. Potential legal and regulatory developments could limit the effectiveness of a digital dashboard/platform approach to ad buying.

What is the “digital dashboard”?
This concept is simple: give advertisers and agencies one digital platform through which to buy advertising, both online and off (television, radio, mobile, print, etc.) and manage their advertising assets. The platform will be used to better manage and target and, as importantly, better measure the advertising flowing through the digital dashboard platform. As more advertising becomes digital, advertisers will be able to house and manage all their digital assets through one platform; managing, deploying, targeting, and measuring the effectiveness.

Better targeted and measured advertising will increase pricing
Google’s success has shown that better targeting and measurability can lead to higher pricing for ad inventory. The digital dashboard providers will use this lesson as a key selling point in driving advertiser and publisher adoption. As targeting and measurability continue to increase, spending on mediums and platforms that incorporate these capabilities should rise. If advertisers can target and measure, then they should be better able to understand the ROI. This should lead to higher pricing for inventory. Think about how much more valuable television advertising would be if an ad was targeted directly at a viewer such that when two people are watching the same television program in the same town, they are shown two different, customized ads. While this is likely a long, long way off (if ever), the value of the inventory would be multiples higher than under the current model. (Note that technology may make this type of customizable advertising possible, but that privacy concerns could limit the extent of its deployment.)

Scale and data across mediums
Coupling greater measurement and targeting with increased inventory across mediums is a meaningful selling point as media firms try to garner a larger share of ad spending. Google is quick to explain that the targeting and measurement of its products make them desirable to advertisers. This underpins their partnerships with EchoStar, Clear Channel, and various other offline partners, as well as their decision to make Google Analytics free to users of its search product. The near real-time reporting that Google offers advertisers allows them to have greater insight and understanding of their campaigns and the associated ROI. Google is moving towards a situation where they may be able to offer an advertiser a view of their ad campaigns across multiple mediums with analytics and ROI for each piece as well as in aggregate. The level of complexity here is enormous, but the potential reward may make the goal worthwhile. This is a winner-take-all model. At the end of the day, all the potential platform providers will try to position their digital dashboard as the largest and most efficient. However, alliances and other general competitive pressures should eventually cause the market to consolidate around the top 2-3 players.

Thanks UBS, November 2007

Management Innovation for Today's Organization

2007-11-07T21:33:00.000-08:00

In the near future, companies will be challenged to change in a way for which they have no precedent. In addition, decades of orthodox management decision-making practices, organizational designs, and approaches to employee relations provide no real hope that companies will be able to avoid faltering and suffering painful restructurings. McKinsey partners Lowell Bryan and Claudia Joyce, in their recently published book, Mobilizing Minds, arrive at a similar conclusion from a slightly different perspective. They find that the 20th-century model of designing and managing companies, which emphasized hierarchy and the importance of labor and capital inputs, not only lags behind the need for companies today to emphasize collaboration and wealth creation by talented employees but also actually generates unnecessary complexity that works at cross-purposes to those critical goals. Forward-looking executives will respond to this looming challenge, by bringing the same energy to innovative management that they now bring to innovative products and services.

The opportunity is substantial. Against the backdrop of the digital age’s dramatic technological change, ongoing globalization, and the declining predictability of strategic-planning models, only new approaches to managing employees and organizing talent to maximize wealth creation will provide companies with a durable competitive advantage. It won’t be easy. As companies discard decades of management orthodoxy, they will have to balance revolutionary thinking with practical experimentation to feel their way to new, innovative management models. Gary Hamel is of the opinion that it is like trying to teach a dog to walk on his hind legs. Sure, if you get the right people in the room, create the right incentives, and eliminate the distractions, you can spur a lot of innovation. But the moment you turn your back, the dog is on all fours again because it has quadruped DNA, not biped DNA. So over the years, it’s become increasingly clear that organizations do not have innovation DNA. They don’t have adaptability DNA. When you read the history of management and of early pioneers like Frederick Taylor, you realize that management was designed to solve a very specific problem — how to do things with perfect replicability, at ever-increasing scale and steadily increasing efficiency.

Now there’s a new set of challenges on the horizon. How do you build organizations that are as nimble as change itself? How do you mobilize and monetize the imagination of every employee, every day? How do you create organizations that are highly engaging places to work in? And these challenges simply can’t be met without reinventing our 100-year-old management model. Lowell Bryan, while trying to understand the impact of technology and globalization, concluded that these forces were creating a fundamental discontinuity. In other words, technology and globalization were creating a set of opportunities that didn’t exist before, and companies were struggling to take advantage of the opportunities created by digitization and globalization because their organizations were not designed for this new world. The Internet is making it possible to amplify and aggregate human capabilities in ways never before possible. But most CEOs don’t yet understand how dramatically these developments will change the way companies organize, lead, allocate resources, plan, hire, and motivate. In other words, how new technology will change the work of managing.

Throughout history, technological innovation has always preceded organizational and management innovation. Think back to the end of the 17th century, when muskets started to be introduced into European warfare. At the time, battle formations were very deep, very square, with the archers in the middle of the formation shooting over the heads of the archers in front of them. Eventually, those formations changed in size and scope to better reflect the capabilities of muskets. But it took almost 100 years for this to happen. Why? Because a couple of generations of generals had to die off before military planners were able to use this new weapon in a productive way. It won’t take 100 years this time. Still, if we’re going to fully mobilize human minds, we’re going to have to turn a lot of our legacy management beliefs on their head. The old model was, “How do you get people to serve the organization’s goals?” Today we have to ask, “How do you build organizations that merit the gifts of creativity and passion and initiative?” You cannot command those human capabilities. Imagination and commitment are things that people choose to bring to work every day — or not. The technological revolution that occurred in the past 15 years was basically equivalent to the industrial revolution — a fundamental discontinuity. And just as technologies have S curves, the technology of management also has an S curve. If you look at the big management innovations from, say, Taylor in the 1890s up to Alfred P. Sloan in the 1920s and then popularized by Peter Drucker and Marvin Bower — you could argue that the maturity of the 20th-century management model didn’t come until the 1960s and 1970s. Only then did modern management become pervasive throughout the world. In other words, it took 50 to 60 years. Modern management itself was basically an effort to deal with the aftershocks of factories, which were created over 100 years before Frederick Taylor was born.

We are in the early stages of a very long innovation of organizational design that will eventually go to places we can’t yet see. But you can see enough to identify huge opportunities for companies to take advantage of what is already known. Innovation in organization is occurring all over the place, but a lot of those innovations go nowhere. There’s lots of experimentation going on, but organizational barriers prevent the adoption of good innovations throughout the company. There are three reasons the technology of management may well change as radically over the first few decades of this century as it did during the adolescence of the last one. First is the impact of new technology. The availability of powerful new tools for coordinating human effort will profoundly change the work of management over the next few years. And then we have that new set of challenges of the increasing demand for companies to be adaptable, innovative, and exciting places to work. A third force for change is a revolution in expectations. Take a look at today’s kids — the first generation that has grown up on the Web. Their basic assumption is that one’s contribution should be judged simply on merits rather than on the basis of title or credentials or providence or anything else. This is the lesson they’ve drawn from the experience with “thoughtocracy” of cyberspace.

New organizational models are needed in all industries because all companies engage in thinking-intensive work. The traditional, hierarchically based 20th-century model is not effective at organizing the thinking-intensive work of self-directed people who need to make subjective judgments based upon their own special knowledge. Such people work in all companies, in all industries, and in the digital age it is these people who create wealth. We need a model for such work—a model that uses hierarchical decision making only for activities that need that authority, such as allocating resources, appointing people to jobs, or holding people accountable—but at the same time enables self-directed professionals to collaborate with their peers continuously. And that’s where one needs to adapt the model: by creating mechanisms to enable such collaboration to be efficient and effective. Such mechanisms can help the organization to work horizontally as well as vertically. Every large company, even a retailer or a mining company, has large numbers of thinking-intensive employees who need to collaborate with one another. That’s where the value is today. The winners will be those that enable their thinking-intensive employees to create more profits by putting their collective mind power to better use.

Everybody says they want more talent, so it’s almost uninteresting to ask people what their biggest challenge is; it’s always going to be talent. But to be very clear, it isn’t just intrinsically talented people a company needs. Corporations can hire all the intrinsically talented people they want. There’s a market for talent, and as long as one is willing to pay what that marketplace demands, one can attract talented people. The real challenge is making profits off those talented people. That’s where the big opportunity is. The leading companies today are combining talent and technology and organizational design to generate much higher profits per employee than was possible in the past. So the trick becomes, “How do I hire talent that I can profit from?” In a market where talent is largely a commodity and can be bought anywhere, the secret sauce is creating an environment in which you push that frontier out, in which you can steadily raise the returns on human capital. The combination of technology and talent is a powerful catalyst for value creation, but to take advantage of the Web’s capacity to help aggregate and amplify human potential in new ways, one must first of all abandon some of the traditional management beliefs—the notion, for example, that strategy should be set at the top. In terms of managing creative-thinking people, one has to separate the work of managing from the notion of managers as a distinct and privileged class of employees. Highly talented people don’t need, and are unlikely to put up with, an overtly hierarchical management model.

Increasingly, the work of management won’t be done by managers. It will be pushed out to the periphery. It will be embedded in systems. I think we’re on the verge of a post-managerial society. The idea that you mobilize human labor through a hierarchy of overseers and bureaucrats and administrators are going to look extraordinarily antiquated a decade or two from now. These thinking-intensive people are increasingly self-directed. In fact, they’re directed as much by their peers as they are by supervisors. The management challenge is akin to urban planning. The art of it is that you must enable people to make thousands and thousands of individual decisions about how to live and work, but you have to create the infrastructure to make it easy for them to do so. You’ve got to have the sewer lines, you’ve got to have the four-lane highways, you’ve got to have the pedestrian malls thought through in a way that individuals find it natural and easy to work either by themselves or with others.

There’s a danger too of creative apartheid. Too many executives seem to believe that while a few people in the company may be really clever and creative, most folks aren’t. When you look at companies like Toyota, you see their ability to mobilize the intelligence of so-called ordinary workers. Going forward, no company will be able to afford to waste a single iota of human imagination and intellectual power. The necessary innovation is to adapt the specific organizational-design ideas that enable individual companies to perform better. So it might be bringing talent or knowledge marketplaces inside a company or building formal networks or introducing dynamic management principles to a company. These are all ideas that have been tried somewhere; they just haven’t been integrated together, at scale, in very many companies. The outlines of the 21st-century management model are already clear. Decision-making will be more peer-based; and the tools of creativity will be widely distributed in organizations. Ideas will compete on an equal footing. Strategies will be built from the bottom up. Power will be a function of competence rather than of position. In terms of the future of management, we’re at the beginning of what will be a fairly long journey.

To become inspired management innovators, today’s executives must learn how to think explicitly about the management orthodoxies that bound their thinking—the habits, dogmas, and conceits they’ve never taken the trouble to challenge. For example, many people believe that it takes a crisis to change a large organization, and when we look at the evidence this seems to be the case. And yet it’s important to dig underneath that belief and ask, “Is this a law of physics? Is crisis-driven change the only way to change a large company, or is this reality the consequence of something we designed into our management system 100 years ago?”. It often takes a crisis to change an organization because in most companies the authority to set strategy and direction is highly concentrated at the top. As a consequence, a relatively small group of people at the top can hold the organization’s capacity to change hostage to their own personal willingness to adapt and to change. So the orthodoxy is that it takes a crisis to change. OK, but in order to change that reality you have to change the distribution of power in large organizations. Some of these things are not going to happen overnight.

Richard Florida, who wrote a wonderful book called The Rise of the Creative Class, argues that some of the most bruising battles that will be fought over the next 15 to 20 years will pit the forces of organization against the forces of creativity. One model is not going to simply surrender to the other. Frederick Taylor often talked about the need for a mental revolution when he was trying to move organizations from the craft-based model to the factory model. Today we need a new mental revolution. Some companies will lead and some will follow, but we won’t be able to reinvent management for this new century without some trauma and some risk taking. Companies should think about designing a managing concept or master plan — a master architecture. Such a master plan should lay out the big foundational elements to get the organization to work differently, including, what is the fundamental metric for performance? Should it be return on capital or profit per employee? Once the master plan is designed, one can launch a series of initiatives aimed at achieving the goals. Part of this process is to stage-gate the initiatives in order to manage the risks of innovating. The thing that really stops innovation is risk. CEOs can be terrified of organizational disruption because it can put at risk a company’s ability to meet quarterly earnings, which in turn is often what causes CEOs to lose their jobs. So part of what you need is a bridge so that they can be innovative but also keep their jobs.

Take the principles of private equity, venture capital, and R&D and bring them inside the company to stage-gate investments in organizational innovation, one can first learn what works and then scale it, without taking excessive risk. None of us are smart enough to see in advance the ultimate answer, because the real answer lies in discovering the operating detail to make new ideas work in practice. One can see the broad directions, but can’t see how it’s going to really work. You can’t even understand the secondary and third-level consequences of the design decisions you make. Those have to be discovered through trial and error. When it comes to reinventing management, you must have the courage to set seemingly aggressive objectives—like GE’s goal of growing at twice the rate of GDP, net of acquisitions. But the actual work of reengineering the musty old management practices will be more evolutionary than revolutionary. You don’t take a large, complicated company and tear up the entire track at once. To do so would expose a company to an intolerable level of operational risk. Yet companies must become as purposefully and creatively experimental in thinking about their management systems and processes as they already are in thinking about R&D or new-product development.

The folks who are responsible for the big management processes: the executive vice president for human resources, the CFO, the director of planning, and so on should spawn that portfolio of experiments. In terms of companies that are really pushing innovation and mobilizing mind power, some of the best examples are private-equity players. With private equity, one has principals who are activists, and they’re really shaking up many industries. There is a lot of discipline and work needed to migrate from one management model to another. It’s not obvious to a lot of companies that it’s really possible to experiment with management. As in any scientific experiment, you have to set some very clear boundaries around what kind of risks you’re willing to take and then challenge people to test new ideas within the boundaries. That’s a new skill for most organizations. A lot of the inspiration will come from looking entirely outside the world of large organizations and management—and understanding how experimentation is used in the sciences to engender new insights will minimize risks.

The real opportunity that companies have today is to take control of their own destinies and begin to consciously innovate. They need to take on strategic initiatives and organizational initiatives at the same time. The scarce resources in any company today are discretionary spending, talent, and the ability to focus. You need the ability to focus in order to be able to allocate the resources. Like it or not, in order to really create any innovation and scale it, you’ve got to deploy some resources. How do you do that? The issue is not just raw innovation; it’s actually being able to scale the innovation through at a large company. That’s where the wealth will be created. In this experimentation it’s critical to have the voice of the user very much front and center—the individuals, throughout an organization, whose work is heavily influenced by a company’s core management processes. These people know which processes choke off innovation, impede adaptability, and frustrate employees. Assuming the company is well managed, the direction that most companies need to go in is improving how they enable their people to collaborate with one another at much lower cost by dramatically reducing unproductive search and coordination costs. And that means deploying such devices as talent marketplaces, knowledge marketplaces, and formal networks to make intangible assets flow throughout the company, as opposed to going up and down vertical chains of command.

The ideas on how to organize for the 21st century have now reached a stage of maturity where people are ready to consciously innovate. It isn’t like ten years ago, when we were still trying to figure out digitization and globalization. There’s not 1 company out of 1,000 today that has created an organization in which innovation is truly everyone’s responsibility. CEOs are really serious about innovation —and what CEO isn’t these days is to go down to first-level employees and ask them a few questions. The first question is, “How have you been trained as a business innovator? What investment has the company made in teaching you how to innovate?” The second question is, “If you have a new idea, how much bureaucracy do you have to go through to get a small increment of experimental capital? How long is it going to take you to get 20 percent of your time and $5,000 to test your idea? Is that a matter of months or is it very easy for that to happen?” The third question is, “Are you actually being measured on your innovation performance or your team’s innovation? Does it influence your compensation?” And finally ask, “As you look at the management processes in your company, do they tend to help you work as an innovator or get in the way?” When you ask these questions of first-line employees, you quickly discover that in most companies there’s still a big gap between the rhetoric of innovation and the reality.

In any field of human endeavor you ultimately reach a point where you can’t solve the new problems using the old principles. We’ve reached that point in the evolution of management. When you go back to the principles upon which our modern companies are built—standardization, specialization, hierarchy, and so on—you realize that those are not bad principles but are inadequate for the challenges that lie ahead. More economic integration has taken place in the past 30 years, you could argue, than in the previous 10,000 years of human history. And the organization of companies is lagging behind the changes in the world economy. It’s just an incredibly exciting opportunity for the world at large because, for the first time, the ability to create wealth is being liberated from the inputs of labor and capital. Ideas are being monetized in ways never before possible, and the world is a richer place. It’s not just about creating financial wealth; it’s about a much more stimulating work environment, with more interesting jobs for employees to create more valuable products and services for the world’s consumers. It is just an incredibly exciting time to be alive

Thanks Joanna Barsh, McKinsey NY, Gary Hamel, Lowell L. Bryan and Claudia I. Joyce, Richard Florida

G-Phone – Threat or Reality?

2007-11-03T02:05:00.000-07:00

The first sightings of a G-Phone surfaced shortly after Google acquired Android (a mobile software company) in 2005. Google further acquired Reqwireless and Skia – two small but highly regarded wireless technology shops – and the patent applications and rumors intensified. However, Google has maintained an effective cordon sanitaire around the project allowing nothing of substance to leak to the press –leaving the field wide open to speculation. In the meantime, software downloads of Google Search, News, Maps, YouTube, and GOOG-411 have appeared for many devices including the Blackberry, Windows Mobile devices, iPhones, Palm OS devices - check out the following website for downloads: http://www.google.com/mobile/

The real problem for Google is not the PDAs and high-end devices – it is the regular handsets that could potentially do much more. Current options for an internet-capable Verizon phone are limited to Mobile Web 2.0. Technically, it is possible to get through to the web with Verizon's Mobile Web 2.0, albeit at the expense of user experience.

The problem for Verizon is not Google or the G-Phone, it's AT&T Wireless and the Apple iPhone, because of it’s DOS-era menu. It's widely perceived that if Verizon doesn't do a deal with Google soon, it's going to get its wireless clock cleaned by AT&T and Apple. But Verizon has always been the toughest nut to crack in the twilight zone of US wireless policy. Often perceived as a fiercely xenophobic and cautious operator, Verizon is notorious for the glacial pace of its product development process. This is despite the fact that the vast majority of the development work is done outside by the handset manufacturers and external developers. Verizon's internal barriers to innovation, largely raised under the flag of network integrity, quality and security – a legacy of its wireline history – are very high hurdles for any new service or innovation improvement to surmount.

If Verizon does do a deal with Google, the latter would almost certainly push the operator towards open standards, tapping into the vast eco-system of third party developers of games and applications. Verizon would also stand to make a lot of money. It is no secret that the mobile data market is enormous, there can be little doubt of this now because the potential has already been demonstrated by the more progressive wireless players overseas. The sad fact is that most of the U.S. wireless industry's overly-cautious approach to data service development has probably cost it billions of dollars in lost opportunities already, with only AT&T Wireless so far seeming to have received its wake-up call.

Google will finally have pried open the most closed of operating systems – a task that even the FCC found daunting – and drag US mobile consumer services at least into the 1990s. For Verizon, as well as making it a lot of money, it will stanch the current flow (which otherwise threatens to become a flood) of subscribers to AT&T Wireless. In the process, Verizon Wireless may actually get its mojo back and learn a few tricks that can help it in the wireline space.

The mystery surrounding Google's intentions deepened when the FCC released details of the upcoming 700 MHz spectrum auctions in August 2007. Despite having no background in the industry and never having bid in a national spectrum auction before, Google made a pledge that it would bid $4.6 billion when the time came – in January 2008. Google did this specifically to get the current wireless players off the dime. Google actually read the fine print in the rules and realized that a bid of $4.6 billion would trigger a provision to make part of the new spectrum "open access" like it is almost everywhere else in the world. Open access in its simplest terms means that consumers can buy any compatible phone, not necessarily from the carrier like they have to in the US today, and expect it to work on the system. Users can also choose to load whatever applications and services they like – as happens today in the UK.

In terms of opening access to the new spectrum, Google has already succeeded – the provision was triggered and the rules have been changed. Although both AT&T Wireless and Verizon signaled that they didn't really care, Verizon subsequently challenged the FCC on this point in the courts – and lost. This is probably another factor in Verizon's final acceptance of reality and may have been the final trigger in accepting Google's overtures.

Google would rather not bid on the spectrum when it comes to the crunch for $4.6 billion for three reasons: (a) the earliest services could be established on the new spectrum is 2010, and it would likely take years to move customers over; (b) the build-out would be at least another $3 billion in capex, and this would be expensive even with a partner to share the load, and (c) the margins on the wireless voice business are much lower than on the Internet and would likely dilute Google's overall future margins. Far better would be to use the threat of a bid to force the existing players to accept reality – and here again Google has out-thought its opposition.
Jeff Lindsey, Sanford Bernstein, November 2007

The Deutsche Bank Approach to Transformation

2007-10-01T11:42:00.000-07:00

Since 1999, Deutsche Bank has completely restructured its worldwide IT and operations activities in order to reduce costs dramatically, while at the same time making IT and operations more responsive to the needs of the bank’s business divisions. The steps taken to transform IT and operations included a wide range of efficiency improvements as well as the realignment of the IT organization and its governance model, and the outsourcing of a broad range of IT activities and business processes.

In 1999 the organizational structure and responsibilities of the existing IT and operations group, Global Technology & Services (GTS) were not sharply delineated. It was organized as part profit center and part cost center. On top of that, GTS was the required service provider in the bank, though the affected business divisions lacked control over the budget. Once a year, when the annual budget was to be agreed on, IT would propose a top down budget, instead of business divisions deciding on an investment focus that would support their particular strategies. Together with other cost-allocation problems, this led to a total misperception on the part of business divisions about their costs.

In the face of this, the bank made two fundamental decisions. The first was to establish the Global Transaction Bank, an organizationally distinct, profit-oriented business that would run a major part of the bank’s operations. Second, and building on this, the bank decided to dismantle the old GTS completely, to assign the pieces to the business divisions, and to establish a model of business-aligned IT and operations.

Deutsche Bank had to pry apart the existing structures and assemble new ones. It created, first, an applications-development organization, now aligned with the individual business divisions; second, a clearly dedicated infrastructure unit; and, third, named DB Services, which focuses on purchasing, credit card and point-of-sale services, payments and securities-settlement operations, and facilities management—altogether a unit of some 3,500 employees.

The next step was to build a governance structure that would in effect split the budget into two separate components with different characteristics:
• Run-the-Bank (RTB), and
• Change-the-Bank (CTB)

The Run-the-Bank budget is focused on maintaining existing operations, and the Change-the Bank budget is focused on new IT investments. The bank understood, very early on, that it had to address these two blocks of costs differently. The idea was to increase the degree of freedom for starting up new IT projects but not to continually increase the total budget. For RTB, the goal was to reduce costs by 5 percent per year. In the end, the bank not only reduced its nominal budget by 5 percent but also managed to cope with a substantial increase in transaction volumes.

With CTB, on the other hand, DB wanted to increase the budget to 25 to 30 percent of total spending. So productivity gains in RTB served as a funding source for additional CTB activities while at the same time allowing a nominal reduction of total spending. Getting to this point required two major changes. The first was restructuring the entire CTB budget into business-aligned budgets, enabling each business division to make its own investment decisions. This was sometimes difficult, of course, because IT would also have an opinion about a particular project or its implementation.

So, second, to take this into account, DB established the IT Investment Committee as a governance process for all new projects. Sitting on this committee are the business project leader and representatives of IT and of the COO area for overall cost control. Within this structure, business divisions decide on an investment, while IT serves as an informed receiver of their orders — In contrast to the original situation, where IT was often its own order giver. The basic prerequisite was complete cost transparency.

From the head count level down, you can see in DB today exactly who and what is being charged to whom. Before, the allocation process between IT, Operations, and other corporate-center functions, and the businesses was multidirectional and worked more like a no-win game: as soon as someone changed a budget, this changed the allocations to other entities. Then everybody adapted their budgets too in reaction. At the end, it was back to square one. To get rid of the smoke screen, DB introduced a cascading model, where all businesses and functions may only allocate downward, in a clearly defined waterfall fashion. These structural changes were, of course, very important for the improved professionalism of the IT and Operations function over the long term. But they surely wouldn’t have been as successful as they were if the changes hadn’t also delivered a visible cost reduction.

Between 2001 and 2003, DB reduced costs by some €1 billion. DB’s costs in 2001 were around €4 billion, and by December 2003 they were less than €3 billion. This was considerably more than DB expected to achieve. Most of the cost reductions were realized on the Run-the-Bank side. With Change-the-Bank, as planned, investments rose and now account for about 30 percent of the total. It was a combination of many levers.

Decisive in the process was starting out with a concise master plan and a clear implementation program. One key lever was an extensive spin-off of non-core functions. For example, former subsidiary e-Magine, which was bundled into an external service provider, GFT Technologies. The bank thus contracts with GFT for the management and brokerage of freelance applications development resources.

Another lever was systematically thinning out the Run-the-Bank side. Here, too, forms of outsourcing played a major role. DB focused its approach on the bank’s existing support organization. Many functions had already been bundled under the umbrella of DB Services into separate support units like DBOI. They were already quasi-outsourced to an internal service provider. This had always been a good indicator that DB could take the next step and outsource to a truly external service provider. An example is DB Payments, the operational unit for retail payments processing, which was sold to Deutsche Post. DB approached the task of outsourcing on three levels:
• Infrastructure,
• Business processes, and
• Commodity banking processes.

On the first level, basic infrastructure services activities like the data center, machine operations, and software stacks. DB’s outsourcing partner, IBM, has the task of maximizing availability time within specified cost constraints and of providing computing power in a sophisticated utility pricing model. An important argument for outsourcing the data center was the need to replace the physical infrastructure in the medium term and to revamp the Business Continuity Management (BCM) concepts in light of the 9 /11 experiences. DB also integrated all the Continental European data center operations — Belgium, Germany, Italy, Luxembourg, Poland, Portugal, Spain, and Switzerland — where in the past the bank had maintained a separate infrastructure. With outsourcing, DB had the opportunity to establish a transformational change not only on the technology and operations side but also by getting access to a much wider and deeper skill base.

The next layer was business processes where DB managed to place several complete applications areas, such as the maintenance of global PeopleSoft HR system, at outside companies. When outsourcing processes like these, companies should also outsource the applications systems that belong to them. Cost reduction was a major factor. DB did not pursue outsourcing unless there were significant cost savings to be realized. Typically, the hurdle rate was 20 percent and up. On the other hand, there must also always be qualitative improvements to be gained. This was where DB dealt with commodity-like banking processes—those that don’t provide either a competitive advantage or sufficient profit margins—retail security settlement and payments processing, for example.

The selection of processes for outsourcing will remain robust over time; it is unlikely that DB will consider reversing course. In fact, many other market participants will be doing the same, producing some rather interesting consolidation opportunities for back-office operations, called as the Industrialization of Banking.

For functions over which DB no longer has direct control, there are two possibilities:
• Competition and transparency, or
• “open book”

Competition means open bidding, so one can achieve a true market price. When it comes to infrastructure, DB was able to contract for equipment from any vendor, irrespective of IBM outsourcing. DB maintains a portfolio of several active providers for each area.

Open Book means complete transparency about costs, productivity, and performance indicators for each process. With offshoring, DB is facing a redistribution of white-collar labor, and IT applications development has certainly been one of the first areas affected. Given the fact that DB is a global bank that has vast experience with software development in India, for example, it is already sharing projects with offshore specialists.

On transaction data customer records, the main issue is the attitude of the regulatory authorities. Until told otherwise, the bank assumes that it cannot offshore this data. This is not due to concern about possible technical problems but rather about the ability, in an offshore environment, to ensure access, irrespective of any potential divergence of legal environments and political stability. If data from German banks on German customers were to be managed in China, there could be potential regulatory issues. This issue is also relevant when it comes to the expanded European Union, since regulation in Europe continues to be the domain of each member country.

For the future, DB has three key elements:
• The transition to a value contribution model,
• The separation of distribution and production, and
• A focus on customers.

With the value contribution model, the idea is to measure IT and Operations investments in terms of their true contribution to business value. DB has developed some preliminary approaches that enable how much business divisions are investing and with what effect on Return on Equity (ROE), at a product group level. The information has already produced some extremely interesting insights.

Further, the bank will continue to make the separation between distribution and production even sharper. This effort began with the separation of the bank’s private-client distribution entities from product factories such as mutual-fund management.

Finally, DB is pushing for customer orientation. This impulse will not come from new employees or from the 125th training course on cross-selling. It can only come from the technological capability to create new marketing formats, draw in new customers, or more fully serve existing ones. This will be the next “e-volution.” With its transformation efforts of the past few years, DB has built a foundation of transparency and performance orientation at the bank.

China Internet - Jeff Lindsay Perspective

2007-09-05T03:37:00.000-07:00

China will shortly overtake the US in total number of broadband connections at over 60 million. And while broadband penetration is slowing in the US, it is still growing very strongly in China. The China Internet Network Information Center estimates that the number of Internet users in China (currently 137 million) is growing annually at 23%, compared with 12% in the US.

Jeff Lindsay of Bernstein Research writes that GM seems to be doing better in China than Google. Chinese Government officials are easy to spot – they all drive black Audi A8s. There are a large number of Hyundais and Nissans, but the most popular cars seem to be Chryslers and Caddys, both of which are perceived as being especially powerful and luxurious to the Chinese consumer. Google on the other hand seems to be slipping in popularity – now down to 9.4% market share according to Analysis International, losing further ground to Baidu. The reason for this is because most people in China prefer the localized results from Baidu. High school and college students are the primary market for Google, mostly for essays and term papers where Google’s search capabilities have an edge. In fact many Google users in China actually search in English. Outside of academia and the ex-pat community, most people find local news, music, MP3s (which seem to be enormously popular) on Baidu. Some adjustment to local market conditions would seem to be needed here by Google.

The Chinese authorities are proposing to implement a new policy of pop up warnings every 30 minutes to Internet users. Apparently two cartoon characters "Jing" and Cha" which make up the Chinese word for "Police" will appear warning users to stay clear of “unapproved” websites. They are on the lookout for websites that promote criminal activity, secession (independence for Tibet and/or Taiwan), superstition, gambling and fraud. The police also provide a mechanism for users to report such activities directly.

For web sites outside of China there is a delay of about 3-5 seconds – like dial-up and occasionally the pages won't load. This is the effect of the Government firewall that checks every single web page coming from outside China. However, Chinese web sites load immediately without these delays. The most noticeable absence is the BBC. It seems that the BBC has been blocked by the Government in China. Others like the New York Times, The London Times, the Manchester Guardian, The Daily Telegraph and the Economist online are allowed. The main disadvantage for western Internet companies was to be on the outside of the firewall, because this gives a noticeable time lag in loading web pages. Google recognized this and hosted Google China servers locally on the inside of the firewall. To get permission to do so, Google voluntarily and controversially agreed to self-censorship. As per Jeff, many more websites are blocked in the US by corporate policy than seem to be censored by the Government in China. One can access MySpace in China but not at work in the US, the same for Facebook, Hotmail, Gmail and Yahoo! Mail. One can access the New York Post in China but not at work in the US. Similarly, the British tabloid press (The Sun, Star, Daily Mirror and Express) are open in China but blocked by US Corporates.

Almost all the US Internet players seem to be losing market share in China, and none seem to have either the respect or name recognition that they have in the US. Surprisingly, MSN and Yahoo! are favorites. Many Chinese people have email accounts with both players and generally like their local offerings. Google and eBay are both being mauled. In Google’s case, it is employing Chinese nationals and making acquisitions. EBay seems to have given up and may cut its losses and exit China. The leading search site in China is Baidu, which according to Analysis International has a 23.5% market share of search revenues compared to Google's 9.2% and Yahoo China/AliBaba's 6.4%. In e-commerce, eBay's market share has collapsed to 7.2% (from 34% in2005) according to Analysis International. Based on a general scan of the Chinese business press, the US players generally do worst on several fronts: (a) bad or nonexistent customer service, (b) unrealistic pricing, (c) no competitive response when losing market share, (d) staffing with second raters from abroad and/or giving too little autonomy to local managers.

Prominent Chinese destinations include: Baidu (BIDU); Sohu (SOHU) whose property seems to be the Chinese equivalent of FaceBook with virtually every single Chinese high school and university student listed; Sina (SINA) a news and information portal; and TaoBao, eBay's nemesis that is part of AliBaba. 163.com owned by NetEase (NTES) seems to be very popular and is believed to be the fastest growing source of new web mail accounts. China will become the largest and fastest growing Internet market in the world over the next 5-10 years, likely matched only by India. Players that stay the course and establish a beach-head stand to benefit from the massive growth of these markets. Conversely, players that do poorly or exit China do so at their long term peril. All international players should reexamine their strategies, and think seriously about hiring the very best locals, and putting their best US staff there on the ground to make sure that they do not miss out on the next Internet frontier.
Thanks Jeff Lindsay, Bernstein Research, August 2007

Special Economic Zones (SEZs) – India

2007-08-30T06:53:00.000-07:00

In April 2000, the Government of India introduced a policy to set up Special Economic Zones (SEZs) to provide an internationally competitive and trouble-free environment for exports. The policy was modified in November 2005 and ratified in February 2006. Interest in SEZs has picked up among Indian corporates recently, as, after 2009, SEZs will be the only World Trade Organization (WTO)-compliant mechanism through which to provide financial incentives to exporters. All other mechanisms currently in force in India (for example, the Duty Entitlement Pass Book scheme) will be noncompliant after 2009. Units in an SEZ can manufacture goods or render services.

The current SEZ policy has the following stipulations: 1) All imports/exports to/from SEZs are on a self-certification basis. 2) The units in SEZs have to be net forex earners over a five-year timeframe, but are not subject to any predetermined value addition or minimum performance requirements. 3) Sales in domestic tariff areas (DTA) by units in SEZs are subject to full customs duty and import policies. 4) SEZs can be set up by the public sector, the private sector, joint public/private sector collaboration, or by state governments in association with the private sector. 5) Minimum sizes for SEZs are 2,500 acres for a multi-product SEZ, 250 acres for a sector-specific SEZ; and 25 acres for SEZs in certain specific industries (Biotech, IT services, Gems, and Jewellery). For SEZs of 25 acres or 250 acres, the minimum processing area is 50%. For SEZs of 2,500 acres, the minimum processing area is 35% (25% under certain conditions).

The April 2000 SEZ policy provided several tax incentives for SEZ developers. The government modified the policy to include several tax incentives for the units within an SEZ as well. The latest policy provides the following notable financial incentives for the developer of, and the units in, an SEZ: 1) the developer may import or procure goods without paying import duties or excise duties, if the goods are to be used for the development, operations, or maintenance of the SEZ. 2) The developer is exempt from income tax for a block of 10 years in a 15-year period. 3) The developer is exempt from service tax for the services rendered in developing the SEZ. Services available within the SEZ (for example, electricity) are exempt from service tax. 4) Units in an SEZ can import capital goods and raw materials duty free from abroad and also from DTAs without paying terminal excise duty. 5) Units in an SEZ are exempt from income tax for the first five years of operations and liable to pay 50% income tax for the next five years. For five years thereafter, 50% of profits reinvested in the business are exempt from tax.

The February 2006 policy simplified the application procedure for setting up SEZs by providing single-window clearance; that is, a developer need only approach one approving authority, and permitting SEZs to have a processing area as small as 25% of the SEZ. These simplifications led to significant interest among corporates and real estate companies in creating SEZs. There are 13 SEZs in operation in India and 150 more have been approved. A further 100 applications are in various stages of approval.

The SEZ projects require funding in the initial years. Typically, investors favor a better capital structure than 100% equity-funded projects, especially in the case of long gestation projects such as SEZs. These projects will have to rely on internal cash flow generation from the sale of land to fund development and to meet working capital requirements. A shortfall in internal cash flow generation or lower-than expected debt funding could result in the need for additional equity infusion and the consequent dilution of promoter stake in the project.

Following agitations against land acquisition in West Bengal, the central government was to introduce new land use patterns and a new rehabilitation policy for farmers displaced by such conversion. There are several landowners in the case of the SEZ, and it cannot be predicted if or when final approval will be granted because of political/local resistance or legal challenges. Investors are best advised to considered these inherent risks before allocating capital to SEZs.
Thanks UBS Investment Research, July 2007

Secure Authentication for Online Transactions

2007-08-27T04:23:00.000-07:00

ComScore Networks estimates that more than 40 million U.S. customers now bank online, with the number growing at an average annual growth rate of 27%. The proliferation of online banking and e-commerce applications has exposed the users of these applications to face increasing risk in the form of malicious attacks, network infiltration, identity theft and denial of service attacks. According to an FBI survey, such risks and other computer-related crimes cost U.S. businesses a staggering $67.2 billion in 2005.

Gartner estimates overall IT spending for 2007 will grow at about 3% year over year. Within the IT spending, areas like Business Intelligence are expected to see spending growth in excess of 10%. IT security is not far behind with a projected spending growth of about 9.8% over 2006. Vendors and customers feel that barring a significant upturn in macro trends that downside risk relative to the Gartner forecast is more likely than upside.

According a recent IDC forecast, the worldwide internet security market is projected to grow at a CAGR of 16% from 2005 to 2010. IDC further predicts the Identity and access management part of internet security businesses is projected to have a market share of $4.5 billion in 2010 representing 11.2% CAGR over 2005. This growth rate projection is rational as financial institutions try to upgrade their authentication to meet FFIEC regulation and invest in long-term IT infrastructure to protect the growing online customer base. Highly publicized incidents like stolen credit card information have created a sense of discomfort among consumers and have the potential to become a detriment to the growth of e-commerce. Regulators like government and independent bodies have stepped up to formulate guidelines and benchmarks for protecting consumer information. One such regulatory requirement is multifactor authentication for online banking. Companies are taking a long-term approach to IT than in the past and such regulations have augured well for the growth of the internet security companies. Regulation continues to be the prime driver of growth in this industry.

The demand for secure access has never been stronger. As the demand for secure access to public and enterprise networks has seen growth, the landscape to be populated with a lot of authentication/secure access solution providers. Today, many companies like RSA (security division of EMC), Actividentity Corp, Secure computing, Entrust, Aladdin Knowledge systems, SafeNet, and Vasco Data Security International are among the many providers of this technology. The result is an industry characterized by intense competition and fast changing technological developments. These trends indicate that the wide range of alternatives for the market segment has resulted in a "buyers market" for security technology. To be successful, the solution must have features like reliability, interoperability and ease of implementation. Being a part of the OATH (Open authentication) consortium is a strong plus as this will enable interoperability under multiple enterprise and security infrastructure environments. The primary cost of the technology to the customer comes from hardware and software components, maintenance and services. The total cost of ownership thus forms a metric by which customers access the cost of implementing the technology. The market for authentication is expected to expand from the Consumer space and enterprise space in the traditional sense to other high growth areas like Enterprise Internal.

Thanks Morgan Keegan & Co., Inc. August 2007

Google & the 700MHz Auction

2007-07-26T04:02:00.000-07:00

Google has requested changes in conditions for 700MHz auction with the FCC urging the Commission to adopt four types of open platform rules, as part of the license conditions for the upcoming auction of wireless spectrum in the 700 megahertz (MHz) band. In addition, Google stated it would commit the minimum bid amount of $4.6B for the auction if the following four conditions were incorporated into the final license: 1) Open Applications: Consumers should be able to download and utilize any software applications, content, or services they desire. 2) Open Devices: Consumers should be able to utilize a handheld communications device with whatever network they prefer. 3) Open Services: Third parties (resellers) should be able to acquire wireless services from a 700 MHz licensee on a wholesale basis, based on reasonably nondiscriminatory commercial terms. 4) Open Networks: Third parties (e.g. internet service providers) should be able to interconnect at any technically feasible point in a 700 MHz licensee’s wireless network.

FCC Chairman Kevin Martin may incorporate the first two conditions suggested by Google into the final rules of the auction. However, it is unlikely the conditions related to open services and networks would be met, although such conditions would benefit consumers and provide a significant catalyst to innovation within the mobile Internet space. Initial success of Apple’s iPhone (~2MM of the $500+ device sold in 30 days) is proof that demand for easy-to-use and fun mobile devices with open applications is quite high. It appears that Internet usage of the iPhone has surprised many, particularly the use of Apple’s Safari browser, Google Maps + YouTube videos, Yahoo! email, and perhaps, WiFi access (watch for VoIP player Skype).

Google’s willingness to commit $4.6B to the spectrum auction, which could be more if a bidding war were to emerge, is a signal that the company believes the business opportunities derived from an open wireless Internet should be significant over time. Note that Google generated an estimated $29 in annualized gross revenue per unique visitor in Q207 (up from $21 in Q206). About 99.9% of Google’s revenue is derived from the PC-based Internet and it covets the opportunity to more effectively garner clicks / revenue from an even greater number of mobile users.

If indeed conditions are met and Google bids on the auction, it is highly likely that, in spite of its $12B in cash and marketable securities and $3B in 2007E free cash flow, Google would do so in partnership with other companies and / or perhaps in the form of a new entity whereby ownership / maintenance of the network would remain operationally independent. A new network is not expected to be operational before late-2009 or into 2010. Note that the traditional telcos buy and warehouse the new spectrum, i.e. don’t make it available to consumers, which would continue to restrain the development of the mobile Internet market in the US, and widen the competitive disadvantage the US has vis-à-vis this important emerging market in Asia and Europe.
Thanks M O R G A N S T A N L E Y R E S E A R C H, July 2007

Think Partnership

2007-07-08T07:53:00.000-07:00

Think Partnership is an interactive performance-based marketing company focused on delivering value through its Internet ad distribution platform, interactive direct marketing, and online advertising agency model. The company’s patent-pending ValidClick technology is currently the only real-time click fraud protection technology available in the market. Think leverages ValidClick to protect its ad network, penetrate affiliate marketing, and provide a tool for weeding out the risk of click fraud, which is estimated at 13-14% of overall traffic on cost per click (CPC) advertising networks. There is some nice momentum building, as evidenced by Oversee.net’s use of the ValidClick protected platform to operate revenue.net. Further, vendors such as AdMarketplace.net are licensing ValidClick technology for third-party validation of click fraud, while Microsoft has also signed up ValidClick protection for its first affiliate program in its new Microsoft-branded Affiliate Network. The company’s affiliate business products include affiliate management program MYAP and remarketing technology Second Bite.

Think’s network reach served over 118 million searches and witnessed 2.6 billion impressions and 61.5 million clicks in April 2007. Additionally, the company also serves the Internet marketing space through Direct and Advertising segments. Built around innovative technologies and high growth advertising networks, he Network segment provides Think with a competitive advantage. It includes click fraud protection technologies and shopping cart recovery technologies. These proprietary technologies, together with pay per click (PPC) and cost per action (CPA) advertising networks and affiliate management programs, position this segment as the primary growth driver for the company, in our view.

The Direct segment, which recently merged with the Consumer division, offers lead generation services and online dating and education sites. The direct segment provides lead generation services by maintaining registration databases for high demand demographics such as expecting mothers and new parents. It has merged with the Consumer segment to include web properties, offering dating and education services. The Consumer segment was recently available for sale, but management, encouraged by its improving performance, decided to retain it.

The Advertising segment provides traditional and online advertising services, a source of inventory for the company’s network. Its search engine optimitization business under Market Smart Interactive(MSI), earlier WorldMall.com, laid the foundation for the company and was the principal revenue earning business until 2005. However, MSI went through a significant decline due to competition in 2006. It has now been combined with the traditional advertising business under Market Smart Advertising. The segment also includes Catamount, Hispanic Unido and the newly acquired Web Diversity.

Think’s client list includes several highly recognizable brand names in the Internet space, including Microsoft, Yahoo!, eBay, Dish Network, Amazon.com, and Intuit. Yahoo! and Intuit have adopted the company’s affiliate tracking software MYAP over products from existing partners such as ValueClick. Think Partnership has built a portfolio of innovative technologies through a selective acquisitive strategy. Going forward, the company’s strategy is to leverage its flagship products to penetrate major corporations in the affiliate marketing industry, and to capture benefits from integration of acquisitions through the creation of differentiated services, cost reductions, and incentives.

Thanks Canaccord Adams, June 2007

China Online

2007-05-31T11:18:00.000-07:00

The Chinese Internet market is the second largest in the world, only a whisker behind the US with 150 million users, compared to the 154 million in the US. But the U.S has 68% penetration. That 150 million represents only about 10% of the Chinese market. At full saturation, the Chinese market will be almost seven times as large as that of the US. However, it may be a mistake to project the US experience onto the emerging Chinese market. Chinese culture is vastly different from US’, and their online community reflects this difference. Much of the Chinese online experience will likely happen through mobile devices, since the mobile market is much more mature. While the number of Internet subscribers is 150 million, the number of cell phone subscribers is significantly higher, nearly 500 million (as of October, 2006), and is growing at the rate of 5.5 million subscribers per month.

The Chinese like to be bombarded by visual stimuli. They operate at a frenetic pace, juggling several things at once, each loudly demanding attention. Some look at this as a lack of maturity in the Asian market. Western eyes see Chinese Web sites as garish, and this is because the designers aren’t very sophisticated yet. Perhaps it’s just designers catering to their audience, who like it “hot and noisy.” The other difference is how Western cultures treat information, compared to the Chinese. In the West, information is in no short supply, and for the most part, people inherently trust the source of that information. People in the west believe most things they read online to be true. The biggest challenge is to wade through the mountain of information available to people and to eliminate the irrelevant. The Chinese treasure information yet has a healthy skepticism as to its veracity. While Western Web users are ruthless in their filtering of information, particularly on a search page, the Chinese are more apt to gather and consider, taking time to digest and choose. They often have multiple windows open at the same time, both as a way to keep busy with the slower load times typical in China, and also because they like their desktop “hot and noisy.”

Two main Chinese search properties, Baidu and Google.cn experience significant difference in user behavior. In North America, the average interaction with a search results page, from launch to first click, is generally less than 10 seconds. In China, it averages 30 seconds on Google and up to a minute on Baidu. While North American scan activity is condensed in the Golden Triangle, in China, it's spread around the page. It’s fascinating to watch an individual session. The eye zips around the page, picking up information in an apparently haphazard manner. Baidu has been taken to task for the opaque nature of its listings, where you can pay for placement. The results are also much more prone to affiliate spam (on both engines, but particularly Baidu) than in North America. But the Chinese don’t mind. Baidu has captured 62% of the search market in China, compared to 20% for Google. After all, lack of trust in information is nothing new to the Chinese. Why should it be any different on a search engine? This is a market ready to explode. Innovation is happening organically and at an incredibly rapid pace. The development cycle to turn out new functionality on Chinese sites is 30% to 50% as long as their North-American-based rivals. In China, you point, shoot and then aim. Deliberation will kill you in China. This is a lesson Google is learning the hard way. The Chinese Internet market is like a Beijing taxi: there may be no logic to its route, but it’s sure getting to wherever it’s going in a hurry!
Thanks Ravi Srinivas, May 2007.

EBay Online Media Exchange System

2007-05-31T11:16:00.000-07:00

The Online Media Exchange system, created by eBay and a group of about 10 high-profile advertisers, including Home Depot, Hewlett-Packard and Microsoft, uses an online auction site for buying TV ad time. It represents a massive shift from the way ad time has been sold for decades, breaking from the traditional model, which is heavily dependent on personal relationships and haggling via phone, fax and email. Initially, the exchange failed to find any TV networks willing to sell ad time through the site. But now, the Oxygen network has agreed to participate, leading organizers of the exchange to decide to push forward with the venture. The exchange is still in testing mode to determine whether it's a viable way to buy and sell ad time. And even with the participation of Oxygen, which reaches only about 73 million homes, compared with 94 million for a network such as ESPN, the project faces long odds. Nonetheless, it is a sign of the new pressure that the decades-old model of buying ads is facing. Companies like Google are trying to take the way that Web ads are sold online and apply it to traditional ads. Google recently signed a deal to sell TV ad spots through satellite-TV provider EchoStar Communications via an online auction.

The consortium of advertisers behind the new exchange won't disclose their ad budgets for the site, but people close to the process say that the total ad dollars committed to the initial pilot over the next 60 days will be about $5 million to $8 million. The group signaled that it was trying to raise about $50 million from advertisers for testing the site. The exchange offers advertisers the ability to post online a request for ad time during a specific time frame, including details about the type of consumers they want to attract. Participating networks can look at all the requests on the site and decide if they want to bid for any of the business. The exchange has met with a tremendous amount of resistance from network and ad executives, who worry that, among other things, it would further commoditize ad time. Some of the biggest-spending advertisers, meanwhile, have been opposed in part because they get price breaks under the current system. The biggest blow for the exchange came when the Cable Television Advertising Bureau, a trade group that represents the major cable networks, came out against the plan. It said the system wouldn't help in buying ad time because ad deals have become more complex and now often include Web components, retail extensions and product placement on TV programs.

The advertisers behind the venture believe it will attract additional cable channels because, as networks lose ad revenue to the Web and other newer media, they can ill afford to walk away from sales opportunities. The consortium of advertisers hopes that their pledges to buy ad time via the site will stimulate more interest among other marketers. Thanks Suzanne Vranica, wsj.com, May 2007.

Going Vertical

2007-05-31T11:14:00.000-07:00

It is interesting to witness the new focus towards vertical ad networks, and away from the previous model of broad-reach, broad-targeted networks. The first wave of the network model focused on large reach networks, such as ValueClick and Advertising.com. These companies aggregated a large volume of audience for advertisers, and allowed for contextual targeting and demographic targeting, mostly via contextual relationships. The second wave focused on behavioral targeting being layered over the existing infrastructure, offering advertisers the ability to reach the same audience either contextually or based on previous traffic patterns and usage, thereby giving birth to behavioral targeting. The current trend appears to be focused on building a singular portal to reach a specific audience by tapping into them via a collection of smaller to medium-sized sites of a similar contextual relevancy. One of the first players in the category was Gorilla Nation. The company amassed a large collection of sites reaching the entertainment category, and has continued to build them over the last few years, while acquiring more into the mix. Recently, we saw Jumpstart Automotive Media being acquired by Hachette Filipacchi, aggregating together a large collection of automotive targeted sites and inventory. This deal enabled Hachette to build relationships with larger portals to weave together its inventory, either contextually or through behavioral targeting, to reach in-market auto buyers.

Even the start-up world is getting into the act, with properties like Real Girls Media and its first site, DivineCaroline. These start-ups are trying to pull together women-targeted sites in much the same way that early trailblazer iVillage did, but is focusing on the Web 2.0 elements such as blogs and user-generated content. Going beyond the network model, we are even seeing the development of platforms and services to help advertisers reach the types of verticals they are interested in. Centro is a platform and service that objectively aggregates together local online content for advertisers, while Adify is a start-up that builds vertical networks for specific advertisers, to reuse that inventory, building a marketing asset for later growth. All of these models signal the shift away from large aggregate audiences towards the development of solutions to reach the long tail and provide advertisers with the ability to go deeper into the lives of their audience. This is a means for reaching the portal audience without advertising on the portals. It is a means of going around them when they cost too much or wanted too much in the form of an upfront deal. These are all ways to build to the ever-important tools of reach and frequency. These long-tail vertical networks provide access to a targeted audience at a lower cost, in a way that is attractive to advertisers. You are able to do more than just run banners and buttons. You are able to run large page take-overs and larger rich media units, but in a smaller, more efficient, and possibly more effective environment. The venture capitalists seem to have gotten the message loud and clear. The majority of the dollars are going to business models that are focused on video and vertical. Of course, that means that a vertical video network or platform would be the most attractive option for VCs and advertisers alike.
Thanks Cory Treffiletti, May 2007.

Vertical - Universal – Holistic – Search

2007-05-23T08:25:00.000-07:00

Google's new universal search initiative incorporates some of its vertical and specialized search results into the main search engine results page. Google has been working on this since 2001. The first iteration of universal search right now centers on video, news, local, and books. Searches with video results showcase the most dramatic changes. For instance, for a search on “Coke Mentos”, Google includes three videos in the results, two from Google Video and one from YouTube. Each of the video results has a thumbnail image from the video, along with a "watch video" link which, when clicked, opens the video right in the body of the results. All three of those videos can be played at the same time. It looks like the purity of text-only search results is waning at last.

Typically, marketers have one of three reactions to the universal search news. Some say they have been anticipating this since 2001, and have aligned their search engine optimization strategy along these lines for years. There are others, who have been thinking this way for a while, but haven't done anything about it. However, some marketers feel they are screwed, and this is where the holistic SEO strategy comes into play. Right now, one has to optimize around all of Google's vertical and specialized offerings, namely news, video, and local. This is how universal search works. Consider a search on Google for a newsworthy topic. Previously, Google would sometimes feature listings from Google News atop the 10 natural listings on the first page. If links from Google News didn't merit appearing up top, then that section wouldn't appear at all. The inclusion of Google News links didn't affect the ranking of the first page of search results at all, though it did require that users scroll a bit more to see everything on the page. Now, with universal search, Google's algorithm decides whether or not to include Google News up top, or somewhere else among the first page of results. A search over the weekend for "Mets" brought up Google News listings on top, followed by nine other listings, including News. A search for "Tigers" brought up the Google News results as the fourth listing.

The first takeaway is that search engine optimization continues to get harder. Universal search gives Google one more way to compete with every other listing. There's something almost mythical about appearing on the first page of search results, but click patterns reliably show that clicks on search results follow a power curve distribution, where the top few listings get the most clicks, and each listing down, especially on subsequent pages, is stuck in the long tail. To tackle this challenge, marketers need to pursue a holistic approach that involves optimizing for all of Google's vertical services. With local, a starting point is Google's Local Business Center. For news, it means press release optimization. Video is a more complicated issue, as universal search aims to improve the indexing of Google Video and YouTube videos. Marketers who focus on optimizing video on their own sites will still want to redouble those efforts, especially if syndication isn't part of their strategy. Marketers should also look to the future. Google's specialized search functions span images, code, patents, scholarly journals, and blogs, to name a few examples. Marketers should optimize any asset they think Google will find of interest, keeping the other engines in mind. With Yahoo, marketers should optimize for Flickr, del.icio.us, My Web, and any of its vertical search engines. For Microsoft, marketers may well one day be optimizing around the Xbox. In other words, universal search's action item for marketers is to optimize everything.
Thanks, David Berkowitz, Director of Emerging Media, 360i.

Localized Search: A Threat to SEM?

2007-05-22T10:01:00.000-07:00

According to industry analysts, Localized Search is attracting billions of dollars in ad spending growth, and new players like BooRah and Oodle are striking lucrative deals and securing funding. Even big player like Google, Microsoft and AOL are concentrating on developing local and personal search capabilities. Organizations have finally started getting a handle on search engine marketing, only to have it change on them. The fact is, localized and personalized search are a danger to SEM campaigns. Both local and personalized search extend the "what" of typical search to add the "where" and "who." Geo-location techniques help search engines tailor for local and personalized search. In fact, if you have a Gmail account, you will see personalized and local paid search items based on your email content. What users may not see, however, is information from companies that span multiple geographies, who are at risk of losing ranking spots to more regional or personalized search algorithms.

With the rise in popularity, it would be particularly timely to take a look at how organizations can revamp their SEO strategy in this changing search landscape. First off, businesses better make sure that their Web site is fully optimized for content and is search engine "friendly" to begin with. Businesses have to make sure that the company name, address and contact information (complete with city, state, zip) are on every page of the Web site. Once a site is optimized correctly, start tackling localized search by maximizing presence on the mapping services like Google Maps, Yahoo Local and MSN Live Local. Sign up for Google Local Business center. Google sends out a postcard with a unique pin to the address of a business to confirm that it really is there. The registration can be completed online to be listed in their index. Businesses must make sure this information stays current by updating the account when information changes (fax number, address, phone number, etc.)

Businesses can also use AdSense with geo-targeting and create a Google Local Business ad. Geo-targeted ads are served next to Google Maps right above the Google Local Business results. Having a presence in the Paid slot, the organic local slot and a pointer on the map increases the likelihood that the link will be clicked. Another key factor in the quest to dominate localized and personalized search results is to ensure listing in local-specific search engines like Yellowpages.com, Verizon Superpages, Citysearch.com and AOL's City Guide. Most of these engines offer free and premium listings. At the very least, search the free listings to see if a business is already listed and ensure that the information is correct. Consider a premium listing to maximize visibility within that search portal. Premium listings are usually inexpensive, and as in regular search engines, the ads are placed above "natural" results. Another simple yet valuable tip is to get involved in any local online outlets.

Research shows that local searchers are more qualified and ready to buy than broad searchers. For example, a user who searches for "used mountain bikes Burlington VT" is probably a lot closer to conversion than a user who searches for "mountain bikes." Local businesses with little or no online authority can quickly outrank top brand and search competitors for their geographical area by using local search. With a projected growth rate of 80% per year over the next three years, local search may give SEO a run for its money. Big brands, who are already building multiple geo-specific versions of their Web sites (Nike Running Boston, Nike Running San Francisco, etc.) will suffer the most if they don't step up to fully optimizing for local markets. It has been said that search is the great equalizer for online businesses, but local search may just tip the scales in the favor of businesses that tap into its full potential.
Thanks, Heather Frahm, CEO and co-founder, healthcare SEM agency Catalyst.

Internet Retailer Survey - April07

2007-05-11T04:47:00.000-07:00

According to Internet Retailer Survey April07, E-mail remains one of the best one-on-one marketing tools retailers can use to attract and retain customers, although pay-per-click advertising and social networking are gaining status in retail marketing circles. The survey finds that merchants are expanding both the size and scope of their e-mail programs. Of the 302 merchants taking part in the survey, 94.5% are building bigger opt-in lists and 64.7% are conducting more e-mail campaigns than a year ago. The report says that 65.2% will increase the size of their opt-in e-mail lists between 10.1% and 40% in 2007; and only 28.8% of merchants in the survey maintain an opt-in list of fewer than 5,000 names. The survey report says that many merchants still have flaws in their e-mail marketing programs that may result in fewer readers and customers. The survey reveals that only 40.2% of all merchants are delivering between 90.1% and 100% of their e-mail messages; and only 59.3% of respondents have acceptable e-mail delivery rates. Only 17.1% reported e-mail click-through rates of 15.1% or more.

The Internet Retailer survey finds that 47.8% of merchants list increasing web sales as their main objective, followed by 17.2% who see customer retention as the top goal and 12.7% who use e-mail to attract new shoppers, and 19.7% who want more multi-channel customers or higher tickets and conversions. While the survey indicates that retail marketing managers are working to improve the effectiveness of their campaigns, many aren't paying close enough attention to conversion rates. About 30% of respondents to the survey don't know their conversion rates from e-mails. A low sales conversion rate is a key indicator that merchants need to adjust their approach to e-mail marketing. Today only 56.6% of retailers segment their e-mail lists, which could be segmented to identify recipients by demographics such as age, sex, annual income and past purchase histories to generate more effective campaigns. The report states that e-mail generates 1% to 2.5% of sales for 18.7% of all retailers in the survey, and between 2.51% to 15% of revenue for 37.4%. According to Jordan Ayan, CEO of SubscriberMail LLC, E-mail is likely to experience continued growth as a marketing vehicle, particularly as direct marketers look at even higher postage rates. However, a bigger program won't necessarily deliver better results if a retailer just takes a one-size-fits-all approach. If only 60% of a campaign is being delivered, the other 40% is a huge missed opportunity.
Thanks Internet Retailer, April 2007