Paul Wallbank – Brilliant Communications

Category: Innovation

Google and Microsoft show how online business is changing
Both Microsoft and Google yesterday reported their second quarter earnings for 2013 and both missed the targets expected analysts. Does this really mean anything?

Microsoft’s earnings were particularly notable as they included a $900 million dollar write off on Surface RT inventories, this almost certainly means a key part of the company’s tablet strategy has failed.

What’s striking in Microsoft’s earnings report is the terrible performance of the Windows Division which saw sales increase 10% year-on-year to 4.4 billion dollars, but earnings collapse by over 50%. Excluding the Surface RT write off, the division would still have seen a ten percent fall.

The company’s statement emphasised how the division is struggling with increasing costs.

Windows Division operating income decreased $1.3 billion, primarily due to higher cost of revenue and sales and marketing expenses, offset in part by revenue growth. Cost of revenue increased $1.2 billion primarily reflecting product costs associated with Surface and Windows 8, including the charge for Surface RT inventory adjustments of approximately $900 million. Sales and marketing expenses increased $344 million, reflecting advertising costs associated with Windows 8 and Surface.

At Google, the company’s 2nd Quarter report show trend is still upwards but the core business of online advertising is showing some cracks as the total number of paid clicks grows, but the value of each falls. At the same time traffic aquisition costs are rising at the same rate as revenues.

This could indicate that advertisers’ appetite for online links is fading. For smaller businesses, the cost of adwords campaigns has been escalating to the point where the old days of newspaper classifieds and Yellow Pages listings start to look cheap.

Couple the cost of advertising with the inevitable ‘ad blindness’ that web surfers have developed and a worrying trend for Google starts to appear. Overall Google’s net profit margin was 26%, down from 31% a year earlier.

While both companies remain insanely profitable – Google earned $14 billion this quarter and Microsoft $6 billion – both businesses are showing stresses as their markets evolve. It proves no business can afford to be complacent in these times.

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July 19, 2013
The sport of racing dinosaurs
The admission from Bud Selig, the US Major League Baseball Commissioner, that he has never used email raised lots of eyebrows around the world.

As Business Insider notes, Selig is 79 years old and there are plenty of other sports administrators challenged by technology so it’s understandable that the commissioner might not see the need to use a technology that became common twenty years ago.

Bud Selig’s story illustrates a much more important issue facing the professional sports industry, that it’s run on an aging business model.

The last fifty years has been very good for professional sport as television and Pay-TV networks bid sporting rights higher across the world.

In most nations, the dominant sport did extremely well as broadcasters fought each other; the Olympics, Soccer leagues in most of the world along with baseball, American football and basketball in the US, Cricket in India, Aussie Rules in Australia, Rugby in South Africa and New Zealand all became incredibly rich.

There weren’t many competitive pressures on the managements of those sport as the dominant sports rarely had any competition, it was a matter of just playing the TV executives off each other.

As a consequence, many sports are run by people with a somewhat exaggerated sense of privilege – they believe it’s their talent, not Rupert Murdoch’s or NBC’s money, that is responsible for their game’s riches.

Bud can dismiss the disbelieving gasps of people in the real economy because for most of his career the only competition he’s had to deal with was from his colleagues has he fought his way to the top job which he won in 1998.

In the real economy, there’s no such luxury. In fact, email may be becoming yesterday’s technology as social media and collaborative tools take over. David Thodey at Telstra and Atos’ Thierry Breton are two leaders in this field.

The danger for sporting organisations is that they are ripe for disruption, so far broadcast media rights have stood up well while revenues in other parts of the entertainment and publishing industries has collapsed. There’s no guarantee though that broadcast sports will remain immune from those changes.

Should disruption come along, even just in the form of sporting rights stagnating, many professional codes will suddenly find inefficiencies like Bud Selig are an expensive luxury.

While Bud’s story is amusing, in reality there’s little the rest of us can learn from how Major League Baseball’s senior executives run their offices.

Image of Bud Selig courtesy of bkabak through Flickr.

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July 16, 2013
Could 3D printing be lurching up the hype cycle?
3D printing is undoubtedly a game changing technology that changes the economics and scalability of manufacturing. But is it possible the technology is becoming over-hyped?

Two stories today illustrate the opportunities and potential of 3D printing; a home made SLR camera and NASA manufacturing their own rocket parts.

NASA’s experiment shows how precision, low demand components could be made. One of the problems with procuring parts like rocket engine injectors is that the production runs are low so the manufacturing costs are high given there are no economies of scale involved.

Additive manufacturing, or 3D printing also has the advantage that components can be manufactured in one piece rather than requiring assembly from a number of different parts. In turn this reduces production times and errors.

Printing your own camera seems a bit of waste of time and money seeing that cameras aren’t particularly expensive and the one printed isn’t a digital SLR – your have to find somewhere to buy and process the film.

The point though with Bozardeux’s project is that it is open source – anyone can modify or adapt the design and that is where the potential lies.

While the possibilities are endless with 3D printing, it may well be that the technology is being overhyped. Both the rocket engine injector and the SLR camera are early stage proofs of concept, neither are ready for full time use.

It also has to be kept in mind that traditional manufacturing methods aren’t going away – there will always be products more suited to mass production or using materials that can’t be fed through a 3D printer.

Right now we’re on the early stage of the hype cycle with 3D printing and while the potential is clear, the immediate future of the technology being oversold is also becoming apparent.

That of course means opportunity for many entrepreneurs and their investors, but it also means you have to be very careful in choosing technologies or where to place your bets.

In poker it’s said if you don’t know who the patsy is at the table, then it’s probably you. The same is true when a new technology is being hyped.

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July 15, 2013
Five years of the app store
It’s been five years that the Apple App Store has been open for business. in that time they’ve revolutionised the smartphone industry, reinvented the tablet computer and had fifty billion downloads.

While the App Store wasn’t an original idea, plenty of telcos and handset manufacturers, had them, Apple were the first to get the formula right for the iPhone.

Their success in changing the smartphone industry lead to their dominance of the tablet industry, another sector which had settled incumbents who were disrupted by Apple’s entry into the market.

It’s notable how in both the smartphone and tablet markets, the established incumbents were struggling with the same business model that Apple got right. This is something other industries should pay attention to.

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July 9, 2013
What happened to the not so nifty fifty?
One of the must read investment blogs is John Mauldin’s weekly Thoughts From the Frontline. This week’s post is a particularly compelling guest post from tech investor Andy Kessler.

Kessler’s post is the forward to George Gilder’s book Knowledge and Power and in describing his investment journey Kessler mentions the 1970s Wall Street view of investing in Nifty Fifty, the fifty biggest stocks on the US market which – because they were perceived as safe investments – traded on substantial price equity ratios.

Trading cost 75 cents a share, but who cares, there were only 50 stocks that mattered, the Nifty Fifty, and you just bought ’em, never sold.

Towards the end of 1972, Xerox traded for 49 times earnings, Avon for 65 times earnings, Polaroid for 91 times earnings.

Numbers like that were unsustainable and those days of safe investing couldn’t last. So what happened to The Nifty Fifty?

It’s hard to track down today’s figures but an academic paper from 2002 looked at how those stocks performed over the following thirty years. It isn’t pretty.

Few of the Nifty Fifty performed well over the subsequent thirty years, which should give pause for those just buying the top stocks like the Dow-Jones, FTSE 100 or ASX 20 – just because they are big doesn’t mean they are safe.

In fact names like Eastman-Kodak, Polaroid and Digital Equipment Corporation on the Nifty Fifty shows just how risky such assumptions are.

Kessler also has a good point about today’s index huggers who are the modern equivalent of the 1970s buyers of the Nifty Fifty.

An index is the market. It’s a carrier, a channel, as defined mathematically by Shannon at Bell Labs in his seminal work on Information Theory. An index can only yield the predictable market return, mostly devoid of the profits of creativity and innovation, which largely come from new companies outside the index.

Like the Nifty Fifty today’s index funds are safe and predictable – until they’re not – while at the margins, the next great businesses and industries are being built far from the attention of the funds managers.

For Australians there’s a particular sting in the tail from Kessler’s post as the bulk of compulsory superannuation goes into the local market’s stop stocks. It wouldn’t be too unfair to describe the modern Aussie funds manager’s motto as being “buy the ASX Eight and have lunch with your mate.”

Forty years ago, an investment in Eastman Kodak would have looked pretty nifty. Today Kodak has gone. We should remember that when we’re looking for ‘safe’ places to put our money.

Bull Market image by Myles through SXC.HU

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July 6, 2013