Honey, who captured my value ??

"Capturing value" is as familiar a term to MBA's as "raising a bug" is to software engineers. It simply means if and how much is your business is making money out of the service or good it produces and sells to consumers.
For ex., lets say your firm manufactures cars. You create value to your consumer by providing her a means of transport that's going to save her time, make a style statement, etc. You capture the value you generate by getting the consumer pay for the car.
Now lets try to understand what value a car dealer captures. This is important to understand since my today's article is based on a similar concept. The car dealer adds value to the consumer by having a large collection of cars and providing a buyer an aesthetic environment for his customer to make her choice. The dealer captures his value add by charging a premium over the factory cost of the car.

But capturing value in some industries is not as simple as in the above example. This concept is such a menace that it has disrupted entire industries.

One such example is the telecom industry of the late 1990's. Carriers such as AT&T, MCI of that era had built up so much overcapacity (and therefore huge fixed cost) that in order to break-even they had to provide n/w access to smaller resellers at shoestring prices. These resellers consisted of calling-card companies, paid 900 services providers such as phone-in-astrology, etc. The services provided by such firms were so attractive that similar firms mushroomed at an exponential rate all over the US. You might think that this was good news for the bigger carriers. But in reality, it was disaster in the making. It turned out that the modus-operandi of the smaller firms was that they bought large bandwidth from the carriers, provide their services to their clients & go underground before paying usage charges to the carriers. Basically these firms were usurping the value provided the carriers thereby depriving the revenues that the larger carriers had to make. This shook up the entire industry.

MCI, the 2nd largest US carrier was supposed to have had many such customers but the problem was supposed to be so much out of control that the management had slyly buried such bad accounts receivables in the hopes of being acquired by another carrier, thereby having a chance to cash-in on their ESOPs. Ultimately, in '97, after WorldCom formed a $37 billion merger with MCI, the company wrote down $685 million worth bad assets (non-paying customers). Finally the company had to declare bankruptcy.

Now let me explain a 2nd version of this value capture problem, that's closer to my heart, prevalent in today's tech industry. It is none other than the Social Networking industry, comprising all the Orkuts, Facebooks & Myspaces. These sites boast of millions of users like you & me and are backed by some of the best venture capitalists. But these companies are struggling to break-even, even after more than a decade of operations. Wonder why? The simple answer is that these companies have failed to capture the value they generate. What value do these firms generate? Breaking down commucation barriers, providing another mode for people to express themselves and many more..

Certainly, these are pretty valuable that anyone might be willing to pay for. But the social n/w firms dug a grave for themselves by training the user to demand these services for free. Since then, the firms have tried various things such as advertising to claim the value, but haven't found critical success in any of them. As my team & I try to realize a strong business model for a social networking startup called VividCampus, this question continues to come back and bite us.

Oracle buys Sun

This is got to be the biggest tech news of the year, so big a news that its woken me up from a long blogging hiatus to write something about it.

The process has costed Oracle $7.4 billion and Oracle expects to achieve operating profit of $1.5 billion in the first year through this acquistion.

Let me try to apply few basics of Mergers & Acquistions I learnt in our finance courses to check if this acquisition was worth the trouble.

The sole purpose of a firm is deliver profits & increase shareholder (SH) value. Any activity conducted by a firm has to adhere to this principle. This rule is applicable to the case of acquistion too: if an acquistion doesn't increase shareholder value, then don't do it.

Now, how to decide if the acquisition is increasing SH value?
Let's say a company called Acme wants to acquire a company called Beta. The acquistion is SH value increasing if Acme's share value post acquistion is greater than value of Acme '+' value of Beta. If this condition wasn't true, the SH is better off holding an Acme share & buying a Beta share from the share market.

This means that Acme must see some level of synergy in acquiring Beta. Generally, there's high level of synergy if the two companies are in the same business so that the acquiring company can achieve greater economies of scale or scope, gain access to new markets or reduce costs by retiring redundant resources. This was the case when Alcatel-Lucent acquired the UMTS business of Nortel or when Oracle acquired PeopleSoft.

But in case the two firms are in different businesses, its difficult achieve scale economies, but the acquistion can be justified by applying better management expertise to the acquired firm.

Lets apply this principle to Sun's acquisition by Oracle. Oracle is into DBMS, while Sun has a large porfolio of products ranging from microprocessors to to high-level prgramming languages. Java, a programming laguage owned by Sun is widely used in user-interface development and by far its most popular product, even though its Solaris operating system & UltraSparc microprocessor are quite well established in the enterprise market.

Sun has an open-source DBMS product called MySQL that has quite a strong following in the FOSS (Free & Open Source s/w) world. MySQL seems to be a good enough reason for this acquistion. Are there any economies of scope (like providing end-to-end "back-end to front-end" solutions) that can be achieved through owning Java and Solaris (other main products from Sun)? The answer to this will be "it depends". If Oracle can achieve higher level of optimization in Java or Solaris systems running on Oracle DBMS, then its definitely a great value-add to the customers. Happy customers generally leads to happy shareholders.. :)

Overall, this seems to be quite a clever acquistion for Oracle and it seems to have to have got the timing right too: in the middle of an economic downturn !!

Indian IT industry in doldrums

Vinay had called today morning to gave an awful news. His company that was working on a leading-edge of telecom technology announced that it would be shut-down in a month's time !!
Vinay's company was not the first casualty for this global recession. Many other start-ups in Bengaluru have been shutting shops and the larger firms are announcing jobs/pay cuts.

Recession 2000: As I remember, the previous recession in 2000 was a boon of sorts for Indian IT industry. Back then, when the global tech firms such as Microsoft, IBM, Motorola were faced with the issue of cost cutting, they saw the large pool of talented Indian students as a low-cost substitute for their engineers. So they promptly reduced their head-count in North America & either outsourced to or developed their own centers in India. This had spurred the legendary growth of the Indian IT industry that lead to the growth of firms such as Infosys, Wipro, Sasken, etc.

Recession 2009: But in the current slowdown, its not just the global IT firms that are worrying about cost reductions, even the local Indian firms are facing the music to bring down their expenses. There's no other country that would offer the same kind of kind expertise and cost benefits. So they are either forced to decrease their headcount or salaries.

Companies that are working on the next-gen technologies are in a even worse state. These companies usually funded by VC's and their burn rate is high due to the heavy packages they need to offer to talented engineers they hire. Their break-even time is in the range of 3-5 years, when their technology actually gets adapted (if it eventually does get adapted !!) So if the investors get even a slight indication of not getting back their investment, they'll likely withdraw their investment. This is exactly what's happening in today's depressing economy..

Hopefully, as we've studied in our Macroeconomics course, this we'll recover from this slowdown by Q4 of 2009. Things will begin to get better soon..thanks to Barack Obama :)

a death blow to Nortel

Although last Wednesday's press release from Nortel was anticipated in the telecom community for quite sometime now, it made a huge uproar in the general media.
"This is the way, this is Nortel" used to be punch-line of this telco giant. But it seems that it has lost its way around. It's evident that Nortel's strategy to sell off its key assets such as 3G might have paid off in the short-term by pleasing the stock markets, but it has lead to its debacle on the long run.

As I mentioned in this previous article, telecom vendor industry is not a profitable one. One mechanism players use to increase/retain profits is through merging or acquiring competitors.
Having said that, Nortel still has significant market share in enterprise networks & MEN and has enough funds to burn cash for few more months. If the courts provide ample protection against debtors, Nortel still has a fighting chance to stage a come back. But the question is who has the competence to orchestrate its revival? Will its competitors who want a piece of its lucrative businesses allow a come-back?

Mobile advertising on the go

Mobile advertising is one of those fields that has high expectations but hasn't quite delivered to the expectations till now. This week I had the opportunity to interact with two leaders working on cutting-edge stuff in mobile/Internet space: Mr. Sumeet Khanna VP of Microsoft, Canada & Mr. Shane Green, VP of Navteq (recently acquired by Nokia). This article is based on my learning from these meetings & some research.

The two key aspects why mobile advertising has lured advertisers are:
1) Targeting - Mobile ads are highly effective in targeting customers.
Television, called the primary media is a very general form of media. Every member of the family watches TV, hence it's difficult for the advertiser to focus on the target audience. PC advertising has more focus, thanks to content based advertising pioneered by Google, but the effectiveness of the Ad is reduced because of far too many Ads on the screen. Mobile phone, with its personal use & far little display space can be most effective in advertising.

2) Location based ads - mobiles can be carried around everywhere & its easy to track the customer location. Because of these reasons advertisers can run location based ads. For instance assume you are in a shopping mall now. A clothes store that's running a discounts sale can send you an SMS about its sale. This might trigger you to go to that store even though you had no intent of shopping for clothes.


Let's now focus on the mechanisms that advertisers use to sell their product.
SMS, due to its ease of use & basic system requirements, continues to be the primary form of advertising. It leaves way behind other forms of advertising.
An average SMS takes much lesser space than the 160 character limit. Some of the service providers are experimenting with appending an advertisement to each incoming message.

With the advent of high speeds & smarter phones, advertisers can deploy graphics based & more interactive ads. Since mobiles are relatively slower devices with lesser graphics support compared to PCs, displaying mobile advertisements require a company to maintain a separate site for its mobile customers. 26% of top 100 US sites have a mobile micro-site now. Check m.facebook.com for an example. As I had mentioned in this previous article, iPhone seems to be real trend setter & has driven mobile data rates to new high.




To make effective campaings, its good to understand when a customer uses her mobile to access the Internet. According to Interactive Advertising Beureu, a mobile user accesses the Internet mainly in the following scenarios:
1) When the user is busy in a work & wants to access the Internet to lookup for some references. He doesn't want to switch on his laptop/PC for a small job.
2) He wants to kill some time by playing a mobile game or some similar app.
Understading these usage patterns of the user is essential to build effective mobile ads.


The main roadblock in future increases in mobile Internet access seems to be high prices charged by service providers for these services. Going forward, with increasing ad based revenues, service providers may reduce these rates. Virgin mobile with its "sugar mama" campaign is already experimenting on this front.


The future of mobile advertising seems to be on the slow but steady path now..

References:
http://www.iab.net/media/file/moble_platform_status_report.pdf
http://www.telecommagazine.com/article.asp?HH_ID=AR_4357

RIM's shares down by 25% on a single day

If you are in Canada, you would realize the weight of this blog's title. Of late there's been a strong correlation between RIM's performance & TSX's performance.
RIM is a household pride & is the newest face of Canadian technology prowess.

Today's value is the lowest in more than a year.
There have been two opposing reasons given for this downturn.
Some market analysts say that this negative dip is in line with the current global cues that hasn't spared even the best performers. More specifically, RIM has been over-evaluated for quite sometime & this downward slide was market correction.

On the other hand, RIM sympathizers argue that the reason was that RIM's Q3 results haven't met the market expectations. The market was expecting a return of 98 cents per share whereas the actual earnings have been around 88 cents!!
The markets may seem to be a little too severe on this company. Given the kind of cutthroat competition that's happening in mobile handset business, its imperative for RIM to invest more into R&D and bring out several more products to retain its market share.

RIM officials have clarified that R&D costs that were incurred in the present quarter will show profits in the coming quarters.

latest in Canadian telecom industry

Canada seems to be quite a happening place for telecommunications. With still 1/3rd of the population not having mobiles, there's a large market out there that needs to be tapped into.


Some of the recent happenings just show how dynamic the industry is:

1)Spectrum auction
New entrants would definitely lead to more options for customers.
New entrants would also invest in telecom infrastructure, and potential new entrants such as the traditional cable operator Shaw Communications suggest its intent to foray into the Broadband and IPTV domain. These provide an opportunity for already over-heated Network Equipment Manufacturer (NEM) space.

2)BCE & Telus going the 3G way
BCE & Telus finally decided to give Rogers a run for its money by announcing their foray into 3G space. They've announced that they'll jointly deploy a 3G HSPA network & have selected Nokia Siemens as their supplier and would spend $1 billion over a span of 3 years.
This network upgrade would allow them to sell the legendary Blackberry Bold & iPhone 3G that have a huge market but were not currently supported by BCE or Telus networks.

3)Acquisition of BCE
Posed to be one of the largest deal of the year, this $51.7 billion acquisition is certain to bring in new life into the largest communications company in Canada.


There are going to happen at a faster pace once the spectrum allocation results are announced.

m-commerce - the way people do business in 2015

I attended a session at Sasken on mobile Value Added Services. One of the most important avenues for growth for mobile VAS will be m-commerce. The speaker, Mr. Raja Chetlur shared with us some interesting prospects on this topic.

So, what is m-commerce? Suppose you are browzing through e-Bay with your new iPhone. You found a diamond necklace that you want to gift to your girl friend (obviously you are a rich guy). You just click on "add it to my cart".
The rest is taken care of e-Bay & your mobile service provider. Your service provider will act as your credit-card company, pays for that item & provides your billing address to where your item will be shipped to.
Thats how simple shopping is going to be in future.

Basically, m-commerce will be a spin-off from e-commerce, powered by broadband wireless speeds, Web 2.0 technology & new service delivery platforms like IMS (IP Multimedia Subsystem).

M-commerce seems to be the next ultra-cool app after SMS. But when looked at 2nd time, you'll realize there are more subtle things associated with m-commerce than what meet the eye. When your service provider pays for your product, it assumes a financial role, a role that's currently done by banks such as Citi, ICICI, etc.
As m-commerce grows rapidly, the banking biggies are certain to have a look at SP as possible acqusition targets. This development might revolutionize telecom space. Until now, it was just telcos acquiring or merging with other telcos, but with m-commerce even banking companies will get into the picture.

So, interesting times lie ahead.. :)

Fight for the 4G dominance

Although GSM & CDMA still rule the roost in most parts of the world & 3G n/w deployments have just begun to yield returns, the fight for the nextGen n/w has already begun. Its called the "4G War".

The 3 contenders are WiMax (Worldwide Interoperability for Microwave Access), LTE (Long Term Evolution) & UMB (Ultra Mobile Broadband). In this article, I'm analyzing the potentials of each of technology from various perspectives.

From technology point of view, all use OFDMA air interface with IP for data (and voice as VOIP) transmission. But UMB is supposed to provide the best bandwidth, with upto 260 MBPS (Fwd Link).

From backward compatibility with existing n/w's perspective, LTE with a strong evolution from UMTS-HSPA & UMB evolving from 1x EVDO, prove to be favorites among the Service Providers (SP) cos due to lesser deployment costs.

But from a 1st entrant perspective, WiMax had a clear lead over the other 2. Its already been deployed in some developing countries such as India, Egypt & Indonesia. In a sense, these countries have taken a leap above 3G & have embraced 4G technologies, making 3G to restricted mainly to North America & Europe.
LTE is nearing initial development & could be installed for trail runs very soon. UMB has got a long catching up to do here.

Regarding getting SP providers patrons, Sprint has already announced that it'll deploy WiMax for its 4G costomers, while Verizon has pledged to spend a few billion dollars on LTE upgradation of its current UMTS n/ws. But after its Alltel acquisition, will there be enough money for this venture remains to be seen.
UMB seems to have lost here also. Until now none of the SP's have announced that it would install UMB.

So, with two large disadvantages but being the best technology, can UMB still make it? Can Qualcomm, its sole evangelist right now, find good customers to support its development work?
But right now, it seems that only LTE with a strong customer backing & a logical evolution path from UMTS, can provide some competition for WiMax.

Note added on 6/7/8:
Chinese CDMA giant, China Mobile has also announced that it favors LTE for its 4G evolution. Can this be a death blow to UMB?

Blackberry & DoT locking horns

It happens only in India!!
The executives of RIM must have realized this in a nasty way. Nowhere else in the world have any governments asked the Blackberry to reduce encryption levels so that the government can spy on what their citizens are mailing each other & to the outside world.

The DoT (Department of Telecom) officials seem to have realized bit late how their supercilious demand will impact the entire E-Commerce industry. For an economy that has risen to power on the back of information technology industry, such a move will for sure send wrong signals to the rest of the world. Hence they have started a backing off action such that the government's face is not lost.

We need to wait & watch what these babus are going to do. The Canadian High Commission backing RIM is not doing any good to them.

On the other hand, RIM, well aware of the fact that India is the world's fastest growing mobile market & already having half a million customers, is discussing with Cellular Operators Association of India (COAI) the various possible solutions for the encryption issue & for setting up a Blackberry server within India.

I'll be tracking this story & post updates as & when they arrive.

@ STARTUP CITY

I had been to a convention yesterday, organized by SmartTechie called Startup City. The program was to showcase the works of the some of the high-technology startups that have been groomed in Bangalore. The were also some sessions & panel discussions catering to the startups' needs.

A panel discussion moderated by Dr. Y.L.R.Moorthi (an IIMB prof) focussed on marketing techniques for startups.
Bharat of Amazon.com opined that a strong word of mouth is essential for a startup.
Paul Murphy of Microsoft felt that its important to build a good network of partners, a B2B network.
Suresh from Nokia said that a product needs to have key differentiators & it needs to be innovated continously.
If you were wondering what were these people from the big companies doing in a convention meant to focus startups. The answer is these companies were main sponsors for the event & these companies are supposed to have initiatives specifically focussed on startups as customers. (I haven't been able to explore them yet)
In the Q&A section, when someone asked how the big cos reward failures. Paul answered that his department used to give bonus to the concerned executives on each failure!!

Later, I attended a seminar by Jinseh Varia from Amazon Web Services on Utility Computing or Cloud Computing.
Basically, Utility Computing has emerged with the idea that access to servers for storage or computation is no longer dependent on the server location, thanks to high speed broadband. Hence there's no more need for companies to have their own dedicated servers. Instead, they can make use of several terra-byte servers from host companies who provide the service for a fee. Use of such a service are supposed to allow you to work "under the clouds", anywhere on earth. This is also supposed to make your web portals more agile to sudden spikes in accesses.

After this I visited few of the desks of startups & got to see some of the cool work that's currently being done by these cos. Surprisingly, most of the apps showcased were for m-commerce, mainly catering to the local market.
A application developed by Seclore caught my attention. This application allows secured, password protected access to documents (MSWord, PDFs, etc) having different options to save locally, print, distribute, modify the document, etc.
I also got to talk to guys from Sloka Telecom who have developed a patented architecture for WiMAX. I was awestruck to see a Base Station of a size of a 14'' laptop, this was drastically smaller compared to its UMTS equivalent that I work on. The company has already deployed its solution in France, Sweden, Indonesia, etc.

Even though I wanted to attend few more sessions & explore more stalls, I was constantly getting calls from my gang to return soon as we had to go to Bonda's marriage. So with a heavy heart, I left early.

why we should thank Steve Jobs

First, let me clarify who the "we" here means -- its the multi-trillion dollar telecom networks business fraternity. An industry that is already running reeling under pressure from diminishing ARPU (Average Revenue Per User) rates and further deteriorated by the largely looming global slowdown. Many of the NEM (Network Equipment Manufacturers) biggies have been posting losses from past few years.
The NEMs were spending their fortunes to push the limits of high speed data transmissions (UMTS HSDPA (High Speed Downlink Packet Access) field trails showed speeds of 2 MBPS), while the LTE & WIMAX are poised to have speeds many times this.
But alas, not many end-users needed this much bandwidth. So it made no business sense for the SPs (Service Providers) to buy these new high-speed networks.
Infact, there were a few speculations that the SPs had already peacked their revenues in developed nations and from now on the strategy was more of sustaining those revenues. The game had changed from attacking mode to defending mode.
For the NEMs this simply meant: less revenues -> lesser R&D investments -> even lesser or no money for R&D staff like me..
Then came the ray of the hope, the "iPhone". Can you believe just in few months of its release, it has sold more than 4 million pieces? 2 million with AT&T itself?
According to AT&T figures, on a certain day, iPhone accounted for 80% of AT&T's Internet traffic, with the all the remaining mobiles accounting for the remaining 20%.
So the message for the telecom industry is quite clear: continue development of higher speed wireless technologies, but at the same time come out with super-cool & easy-to-use gadgets to harness the power of these technologies. This would ensure that the revenue graphs would look upwards once again..
This lesson had to be taught by someone of a stature of no less than Steve Jobs himself.

OHA – Google forays into wireless domain

OHA (Open Handset Alliance) is a body setup by Google along with some operators, semiconductor vendors and handset companies to develop a new mobile platform. Through this body, Google has developed Android, an OS having Linux kernel bundled with a web browser and a user interface and few other applications. As such, there’s nothing “open” about this platform, it follows Apache Software License that allows closed source redistribution. But the best part is that this platform is shipped free and hence will result in cheaper handsets.

It may take some time for Google to compete against the likes of Microsoft and Apple in PC operating system, but through OHA, its certainly posing a commendable competition to the big guns of mobile operating systems such as Symbian, Windows Mobile, Palm OS, etc. It must be already giving them sleepless nights !!!

But Google’s entry into the wireless space could actually be a boon for the telecom industry as a whole. Google's apps would induce more customers to subscribe to the high-speed wireless Internet services such as HSXPA or 1X EVDO. This could inturn revive the currently dwindling ARPU (Average Revenue Per User) rates & hence result in more money to all those involved in the telecom value chain.
Furthermore, the bandwidth guzzling apps such as YouTube.com, etc could make it necessary for the faster adaptation of 4G technologies.

Now, if the package that requires years and millions of $$ to develop is sold for free, how are Google and its partners going to get back their investment? To get to the answer, we need to understand how Google revolutionized fixed Internet domain through advertisement revenues based business model. Google will be implementing a similar strategy in wireless Internet too. Infact, the searches done over mobiles are more localized and specific due to which Google can charge more to the advertising companies.

Here are the strengths of OHA:

1) the Google brand name. I think this OHA’s biggest USP. Google has become a household name today. Its killer apps such as YoutTube, Google docs and not to mention the Google search have revolutionized the way people use the Internet. Now, if the company comes out with a wireless Internet product, there’s no doubt that its gonna be a runaway hit.

2) Its free and hence cheaper. Hence there will be more customers going for handsets having Android.

Here are a few challenges that could be of concern to the OHA members:

1) most mobile manufacturers have strategically aligned with OS developers and hence they may resist the penetration of Andriod. For instance, the market leader, Nokia (40% market share) is using Linux for its high-end phones, while Sony Ericsson (8% market share) is using its in-house UIQ platform. The other dominant players: Motorola, Samsung, LG are already part of the OHA. It should be noted that these other players are more dominating in the high-end category.

2) The important tier-1 mobile service providers see the entry of Google to the wireless space as a threat to their domination. AT&T and Vodafone have not joined the OHA and may support OHA’s competition. Google is trying to woo the SPs by allowing to share a portion of ad revenues with them.

All said and done, as an end user, I welcome Google’s entry into the handset domain & expect some cool stuff from it in the years to come.

www.openhandsetalliance.com

http://www.youtube.com/watch?v=6rYozIZOgDk