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Posts By Ben Rose

Google Vs. Amazon.com: Episode 8

December 6th, 2011

google vs. amazon.com internet equity researchInvestors long accustomed to thinking of Google as the leader in online search and Amazon.com as the king of commerce may be surprised to learn of the growing rivalry–some might say hostility— between the two companies. Only last week The Wall Street Journal suggested that Google may be speaking with brick and mortar retailers about a one day shipping service that would up the ante on Amazon’s two day free shipping service, which it provides to its most elite customers. If the report is true, one would surmise that Google could only have had the intent of taking Amazon off guard, in advance of the critical holiday shopping season.

Given the vast no man’s land which defines the border between ecommerce and online search, one may ask where the seeds of this now bitter rivalry were sewn.

We would speculate that it began with Google’s bold online book initiative, in which it sought to scan the world’s out of copyright book collection ensconced in the bowels of the nation’s great universities, including the University of Michigan. With the intent of making hard to find texts available online for the first time, Google’s ostensibly altruistic effort, lauded by researchers, became the object of scorn among the world’s publishers and authors who resented Google’s efforts to corner the market on out-of-print, and out-of-copyright books, without due consideration to paying author royalties.

Amazon.com, no doubt looking to fend off a challenge to its position as the world’s dominant online book reseller—which, by the way includes used, out of print, and out of copyright books—saw it as an obvious threat to its franchise. Thus, it joined forces with Microsoft and others to fend off the Google challenge.

To make a long story short, a period of détente began to emerge between Google and Amazon.com when Google sensibly abandoned or at least temporarily suspended its book initiative. Amazon.com, in keeping with its sophisticated yet sphinx-like approach to ecommerce (see Amazon.com: ecommerce Sphinx), began to sell Google’s internet PC on its website. Amazon.com, in a gesture of rapprochement, selected Android as the operating system for its new tablet, the Kindle Fire.

Dissatisfied with the pace at which the rest of the world was adopting Android, Google suddenly, in our opinion, lost patience with the pack of Android licensees, and purchased, out of left field, Motorola’s Mobility unit, whose Xoom tablet places it in direct competition with not only Apple, but Amazon.com.

Thus, the ante has been upped in the tablet wars, with Amazon.com’s Kindle Fire an increasingly sure bet to become the number two tablet in the next 12-18 months. This probability may have been realized only recently by the Googlers, and serves to explain—or at least better understand—its controversial decision to acquire Motorola’s phone and tablet group.

Mr. Zuckerberg’s Visit to Cambridge

December 2nd, 2011

Mr. Zuckerberg's Visit to CambridgeFacebook founder and CEO Mark Zuckerberg recently visited Cambridge MA, where he spent time at MIT and Harvard, speaking with students and recruiting for his company. While in Cambridge, Zuckerberg, who started Facebook in his Harvard dorm room, said that while his company wishes to tap into the local talent pool, Facebook has no near term plans to open an East Coast office.

We would not, however, be surprised to see Facebook make an about face on that decision.

Mr. Zuckerberg may soon come to the same conclusion reached by many other Silicon Valley leaders, namely that the West Coast talent pool is a finite resource from which to draw. Moreover, many of the most talented engineers and entrepreneurs—for a variety of reasons—may not be interested in leaving the East Coast.

Mr. Zuckerberg may well conclude that his best bet for recruiting local talent may be to take a page from Google’s playbook that will give Facebook a ground-level presence in what is widely considered an area rife with talent.

Google began its New England presence with a modest outpost in Cambridge, and after building up a relatively modest staff announced in July of 2010 that it would acquire ITA Software, whose specialized search algorithms for the travel industry have since been subsumed into Google, albeit after a lengthy anti-trust review. In one fell swoop, Google acquired a local company which it will use as a base for future recruitment.

Facebook’s near term expansion plans include opening an office in Seattle, which Mr. Zuckerberg notes is less than a two hour flight from Palo Alto. Our sense is that this may be a short term palliative to what may become a longer term growth issue: how to attract and keep the best talent independent of geography.

Amazon.com: eCommerce Sphinx

November 14th, 2011

Amazon.com: eCommerce SphinxOne of the most perplexing aspects of Amazon.com’s business model is the ability to sell products and services that compete directly with its many suppliers and resellers. For example, Amazon is the world’s largest reseller of new and used books, both physical and digital, yet it offers CreateSpace, a venue for self-publishing authors, as well as seven publishing imprints. Thus, Amazon competes with major book publishers for new author talent.

Amazon also conducts a large music download business, competing directly against Apple, yet it also sells both new and used iPods on its website. In its most audacious move to date, Amazon will sell the Kindle Fire, a bona fide competitor to Apple’s iPad, and Motorola’s (soon to be Google’s) Xoom. Yet Amazon sells both iPads and Xooms on its website.

Amazon recently boasted that the Kindle Fire will support Netflix’s streaming service, even as it ramps up its own movie and television show streaming service, a portion of which will be free for any Amazon.com Prime customer, of which there are millions.

How and why does Amazon do—or get away— with this?

First, it is important to know that its seeks to be dominant in any category in which it participates. This means that it takes an interest in not just reselling others’ products, but in creating products itself.

Second, unlike other companies that evaluate profit margins by product line, seeking to maximize the sales of their most profitable products, Amazon.com has a completely different strategy: maximizing gross margin dollars. This means that it seeks to gain market share, regardless of the level of profitability generated by the category.

Finally, I suggest that the company is respectful, or perhaps fearful of the potential anti-competitive implications of its success. Amazon.com’s management team is likely mindful of Microsoft’s missteps when it fought against the USgovernment’s anti-trust efforts. It is not difficult to imagine Amzon.com, through the success of the Kindle Fire—or Apple through the success of its iPad—guilty of anti-competitive behavior, should the government decide that bundling proprietary services stifles competition.

Old School Software Company Seeks Cloud Entry

October 28th, 2011

oracle software equity researchIn a brief but crystal clear announcement Monday morning, old school software giant Oracle (NASDAQ: ORCL) announced that it would acquire customer service software pioneer RightNow Technologies (NASDAQ: RNOW) for $43.00 per share or roughly $1.5 billion. Oracle’s generous valuation of 6.6 times RNOW’s projected 2011 revenue provides the latest evidence of old school, client software companies’ interest in cloud computing.

Founded by CEO Greg Gianforte in 1997, and based in Bozeman Montana, RightNow Technologies sells a suite of software products that help companies improve customer service, while reducing support costs. From its heritage in website customer support, RNOW expanded into several adjacent segments, including marketing automation, call center management,  online chat, and, most recently, social computing for customer service. With an average order size of about $100,000 per customer per contract, RightNow provides hosted, or what is more commonly referred to as cloud-based services for its customers. Thus, there is no need to purchase the software outright.

Over the years, RightNow has developed a solid presence in online customer service, a critical component of customer relationship management, and can now boast the leading market position in this segment. The company serves a broad array of roughly 2,000 customers.

In November of 2010 RNOW closed a $170 million convertible debt offering, and, more recently completed the acquisition of Q-Go.com, a Dutch-based company, for which it paid $34 million. Q-Go.com offers natural language search technology that helps large banks, travel services, and telecommunications companies improve the quality of customer service on their websites.

Ironically, Right Now began fourteen years ago as a client server software company, selling on premises perpetual license software. Several years ago the company began a painful and courageous transition to adapt its core technology to harness the many benefits of cloud computing. Over the last two years, RNOW managed to grow steadily and predictably, with a top-line growth rate of roughly 20 percent, across a broad number of industries.

Oracle’s generous valuation of 6.6 times RNOW’s projected 2011 revenue, and roughly 5.4 times projected 2012 revenue, indicates the length to which client server software companies may go to improve their prospects in the public cloud.  The valuation appears to be on par with other publicly-traded cloud-based software companies, such as Salesforce.com (NYSE: CRM) , athenahealth (NASDAQ: ATHN), SuccessFactors (NASDAQ: SFSF), and others.

We do not doubt that there may have been other interested bidders for RNOW, such as Salesforce.com and/or SAP—both of whom seek to extend their presence in cloud computing. However, our sense is that Oracle’s generous offer leaves little chance for an alternative bidder to emerge successfully.