Yahoo, Alibaba and Marissa Mayer

Yahoo had a spectacular jump in stock price over the last one year ( nearly doubling it value). But how much of it can be attributed to the core Yahoo business? Since the new Yahoo CEO took over, the company has gone on an acquisition road with more than a dozen companies now under its belt. All the acquisitions have been made mostly to increase their target audience ( like Tumblr) or for engineering talent. But not much effort or inefficient effort has been made to reinvigorate their advertising model  and hence revenues in their core products have not increased substantially.

Even the core Yahoo products of mail and news are currently mediocre. Marissa Mayer’s emphasis on redesigning these products have not yielded dividends. In fact as a long time Yahoo user, I feel that the quality of Yahoo mail has decreased. Even Microsoft is proving itself in the email department through its improved Outlook.com mail service.

Yahoo vows a lot of its market value to it stake in Alibaba. And with Alibaba’s IPO on the horizon will Yahoo sell its stake and use it for more acquisitions? If I judge Marissa Mayer’s performance over the past couple of years, I see a lot of emphasis on redefining Yahoo’s culture to be more closer to a startup. Now one cannot fault that rational since Yahoo was not performing well when she took over. But the culture of a startup is to release great products and move quickly to attract new customers. Has Yahoo achieved any of the above? The short answer is No and if that is the case what exactly has Marissa Mayer accomplished? 2 years is a long time in a CEO tenure to show performance improvements or at least a vision of higher growth or new game changing products on the horizon ( what is the use of acquiring engineering talent with no quality products to showcase). Having failed to bolster Yahoo’s growth ( 1% growth YoY is not good enough for Yahoo when competing with Google, Microsoft etc), is it justified for the Yahoo CEO to have such a huge yearly compensation (to the tune of $150m which includes stock options)?  As a student of Corporate Governance, I just cannot justify this compensation model. The shareholders of Yahoo and the Board of Directors should revisit such a compensation model where the CEO is rewarded for a growth in stock price without actually playing a part in that growth.

* Maybe Yahoo should reward Alibaba’s CEO Jack Ma instead of Marissa Mayer. 🙂

Satya Nadella is the new Microsoft CEO

I know that many investors wanted an outsider CEO. I know that Microsoft is lagging behind in new emerging technologies and needs a wave of new thinking. But in my view the CEO choice was very appropriate. In the past we have seen companies who wanted to revitalize their fortunes ( think Yahoo, HP, Ford etc) go along with outsiders. And the experience has been either bad like in the case of HP, mediocre in the case of Yahoo and great in the case of Ford. In case of Ford, the company was facing a far greater crisis. And going with Alan Mullaly helped turnaround the company since the executives were driven to his ideas without any opposition.

But in the case of Microsoft, it is different. The company is still making profits, has huge growth potential and a solid talent base. All it needed was a CEO who could make decisions on accelerating growth in the emerging technologies. And these decisions cannot be made without support from the executive team. Satya Nadella, is a veteran of Microsoft and commands respect within the organization. And he is already in charge of the cloud services previously. Therefore he has the clout within Microsoft to convince the executives to back him on his decisions. All he needs to do now is make good and rapid logical decisions. (not like Steve Ballmer who couldn’t see the impact of mobile and cloud until it was too late)

Google puts Moto’s Handset business on sale to Lenovo

I see two main inferences from this initiative:

1. After repeated failures to penetrate the hardware market, Google has now one more failure to ponder on. It is time to take stock of this reality and incorporate some serious changes before they embark on their next hardware market endeavor. The main issue which I see with Google’s repeated failures is that the company is too data driven when making decisions. In the hardware market, aesthetics and brand plays a huge role in sales. And aesthetics design cannot be driven solely by data.

2. Google can sign a breath of relief that they do not need to antagonize their Android mobile handset partners any more. With Moto’s handset business out of the way and the patent portfolio still within their control, Google can repair the relationships with the mobile manufacturers. Samsung had recently ventured forth with creating their own mobile OS. Maybe the sale of the Moto’s handset business will make Samsung turn their focus back on promoting Android within their mobiles for the foreseeable future.

Microsoft’s Reorganization

Basically Microsoft has moved off from a Divisional structure to a more Functional structure. Would this be the magic bullet to turn Microsoft around?

Each organizational structure has its own merits and demerits. Choosing one over the other solely depends on whether it is inline with your overall strategy. Ballmer’s emphasis on “One Microsoft Strategy” suggests the functional organizational structure would suit this strategy. But does it?

I do have my own qualms about functional organizations. It does improve efficiency since resources can be moved around from one product to another easily and various products would be in sync with each other in terms of market strategy. But such an organizational structure also restricts innovation since every function now has the power to override any innovative ideas. There is no central consolidation of decision making by business owners since the functional owners now call the shots. (and the question remains on whether the functional owners are the best persons to make those decisions).

I personally thought that what Microsoft was missing was an overarching growth division which cuts across all their product lines , oversees and synchronizes their strategies. Such an overarching Division whose members would be the directors of each separate division and the VP level execs could have easily led to the “One Microsoft Strategy”.

Now it remains to be seen whether this new functional organization structure truly works or it is the last straw for Ballmer to hold on to Microsoft.

Barbarians at the Gate- Again

 

The above book is said to be like the Bible for any aspiring candidate in the private equity industry with an in depth glimpse into the investing world. I had recently watched the HBO made video of this book and was sad to see that it missed out some of the informative parts of the book. But nonetheless a good watch.

Currently the battle for Dell is playing out pretty similar to what happened with RJR. In lieu of Ross Johnson, we have Michael Dell, and for Henry Kavis we have Icahn ( though Henry was from PE industry while Icahn is from Hedge Funds).

I myself have not run the financial numbers for Dell, but the current share price seems to be an apt assessment of its value. Even though I believe markets are irrational and sometimes cannot truly value public companies, in the case of Dell the markets are spot-on in light of the declining PC industry and no Dell tablet to rave about. Any upside for Dell in terms of growth for Software/Services would take a long time as it tries to transform itself.

In light of the above Michael Dell’s offer at $13.65 does seem pretty generous and would not laden the company with too much debt ( which the company takes on with its assets as collateral) once it becomes private. Icahn’s higher offer which does seem more attractive to shareholders might not be good for the company in the long run. Higher debt levels hamper the company since management would be more focused on paying off debt rather than improving the company earnings and market share. RJR is good example of what happens when a company goes private with too much debt.

It would be interesting to see who wins, i.e Michael Dell or Icahn.

The battle for the top Next-Gen Gaming Console begins

I will not go through the spec comparisons between the Xbox One and PS4. There are a huge number of webpages dedicated to that effort. Here I am going to look at the console strategy of these two companies: Microsoft and Sony.

Microsoft:

Microsoft is looking to conquer the gaming world. It’s aim is to conquer the hone entertainment world. And this is not a recent vision. If you look at their reasons to their Windows Smartphones, their Surface tablets/laptops the Xbox One and the future Windows run TV sets, you could see a company who is trying to create an ecosystem for its customers. The Xbox One is supposed to appeal to everyone in the family whether gamer or non-gamer. The market potential is huge and if implemented correctly has the potential to give Microsoft a monopoly in the home entertainment business. It’s major competitors in home entertainment are Apple and Google in this aspect due to their similar ambitions. But both the competitors lack a gaming console and this where Microsoft has the advantage. (The iOS and Android Gaming ecosystem is too secluded and would not fit in the home entertainment space).

I personally think this is good strategy ( inspite of the fact that gaming takes a backseat in Xbox One) since customers no longer require 2 devices in their living rooms: a gaming console and a content streaming box like Roku or Apple TV. And at the same customers could be locked into a Windows ecosystem  (visualize a Nokia 920 or Surface connected to the Xbox One and using the TV as your big screen).

With the regard to the pricing, well Xbox One is indeed higher than PS4, but you do get the Kinect with the system. The Kinect would make the Xbox One appeal more to a family with kids who are thinking of buying a gaming console. (The PS4 eye is still not up to mark as compared to Kinect).

Finally, Microsoft’s emphasis on DRM and Internet Connectivity might not appeal to customers at first look. But if you look at it with a sensible eye, after heated emotions have died down, one can see that it’s not all too bad. DRM does protect the video gaming industry and the companies would be encouraged to pour in more investment to create better games. And most of us do connect to Internet at least once an hour. Thus the Internet Connectivity restriction ( once every 24hr) set by Microsoft is nothing to be concerned of.

Sony:

Sony took a more traditional approach with its emphasis on gaming and of course the social media aspects of gaming like sharing videos etc. It appeals to the core gaming community who are looking for a console dedicated to games without any of the DRM and other restrictions. So for Sony the market potential is nearly the same or just a little higher than the previous generation. The initial exclusive games on PS4 are already making a mark upon the gaming community and they outnumber those from Xbox One. ( I myself am an Playstation gamer)

So who will win?

Most consultant would say, it depends (but I am not a consultant). If you look at the last generation, Nintendo won on profits, Microsoft won on market share, and Sony I think finally got up to Microsoft and might win on revenue in these dying years of the last-gen.

In this generation, Nintendo has already failed to garner much support for its console- Wii U and I think very soon they would have to make some new additions to their console either in hardware or software to recapture the gaming world attention.

PS4 is set to make a quick start to the console race and I expect to see the PS4 fly off the shelves. Xbox One would still be reeling from the negative gaming feedback. But PS4 is limited by its target market while the Xbox One has a bigger market potential. Once the outcry on DRM subsides and the sales to the hardcore gaming community is complete, the tide could turn. I believe that 1 year later, you will see the Xbox One trying to catch up to the PS4 and maybe 2-3 years down the road, even overtake it.

Should Sony break up????

Lets look the below chart showing Sony’s annual performance by Business Segment. 

It is pretty clear that the Consumer Electronics division is a big drag on overall Sony’s earnings leading to drastic reduction in shareholder value. This has led shareholder activists like David Loeb to propose that Sony split the more profitable entertainment business so as to extract better value for him and other shareholders.

Sony is trying to push forward the idea that the future will be a fusion of content, hardware and services. Whichever company has the right mix of the above three ingredients will rule the roost in the tech industry. From my perspective, Sony is right to stick to its guns and should try to build more synergy between their segments. Lets take the example of the Playstation. Gamers buy Playstation not just because its has better specs than other gaming consoles ( in fact sometimes it doesn’t). Gamers buy Playstation because of the exclusive games, a.k.a content, which are on offer by this system. Similarly in the future we might even see consumers buying handphones, tablets, TVs, wrist watches etc based on the exclusive content which are available on those device. And at that time Sony Entertainment division is the crown jewel which can help Sony to be on top of the Hi-Tech industry again.  How about an Avenger’s ( I believe Sony holds the rights of the movie content)  Sony phone or a tablet with exclusive XYZ rock band ( sponsored by Sony entertainment) songs???

In fact Sony should create a separate division called Cross-Segment Strategic Business Growth to provide alignment between all the major segments. Any major new project in a segment should be reviewed by this division so as to create offshoots to either grow other segments or entice other segments to support this project.

Sony’s CEO does have a tough job on his hand since in most big companies, each business segment is narrowly focused on its own priorities and pays little attention to driving growth in its sister segments.