Monthly Archives: January 2010

Valley’s Commercial-Property “Bloodbath” Symptom of More Serious Malady

The sorry state of Silicon Valley’s commercial real estate is a symptom of a more serious malady.

Quoting commercial-property numbers from CB Richard Ellis Group Inc., Bloomberg reports that more than 43 million square feet (4 million square meters) of office space — the equivalent of 15 Empire State Buildings — stood vacant in Silicon Valley at the end of the third quarter, the most in almost five years. It is the biggest office-property glut to afflict the peninsula since the dot-com bust.

Bloomberg reports that about 21 percent of Silicon Valley’s Class A office space is vacant, as is 20 percent of low-rise “flex” (research and development) space, which can be used for offices or manufacturing, according to CB Richard Ellis.

Given the Valley’s persistently high unemployment rate — holding at about 12 percent — and the generally weak state of the broader economy, the situation is not expected to improve any time soon. With layoffs mounting at some of the Valley’s largest employers, a steady flow of jobs being transferred overseas, and a paucity of venture-backed startup companies to pick up the slack, the market dynamics don’t favor those who own and manage the area’s office buildings.

Foreclosures of commercial property are expected to double in 2010, and job growth isn’t anticipated to increase until 2012, according to some projections. Meanwhile, Valley companies that remain in business are unwilling to pay sticker-price rents, using the abundant supply of space as negotiating leverage for sharp discounts.

I suppose it’s good news for those seeking space. On the whole, though, the data suggests the Valley is in frail health. Unemployment is way up, commercial-property values are about to go way down, the traditional IT industry has tottered into slow-growth maturity and seemingly endless cost-cutting, the VC community has been decimated, and the social-networking upstarts depend (to a certain extent) on robust consumer spending that is unlikely to materialize in the near term.

The hope is that new industries can supersede information technology as the Valley’s growth engine. That could happen. Cleantech startups are drawing an increasing percentage of overall investment dollars, and the long-term prospects for that sector are bolstered by geopolitical as well as economic imperatives.

But it will take time. As the title of this blog proclaims (and has done for some time), we are witnessing twilight in the valley of the nerds.

Explaining Cisco’s Slowing Pace of Acquisitions

In terms of making acquisitions of venture-backed companies, Cisco led all other industry behemoths during the lachrymose decade known as the “oughts.”

According to a post at the Wall Street Journal’s Venture Capital Dispatch, quoting figures compiled by Dow Jones’ VentureSource, Cisco acquired 48 venture-backed companies from 2000 through 2009. Also reaching the medal podium for acquisitions were IBM, which closed 35 such transactions, and Microsoft, which consummated 30 deals.

In recent years, particularly the last two, Cisco’s acquisitive pace has slackened considerably. The networking giant made only two purchases of VC-backed startups in both 2008 and 2009. This past year, in fact, Cisco wasn’t among the foremost acquirers of VC-backed companies. Instead, Oracle finished at the head of the 2009 table, with five deals; EMC bought four companies to rank second.

You might wonder, as did I: Why is Cisco slowing down? I think several factors are at play.

For one thing, there aren’t as many compelling VC-based startup companies entering Cisco’s ecosystem as there were a few years ago. In general, VC backing for early-stage IT startups has fallen off the charts, and the same holds for startup companies in networking and many of the “market adjacencies” of most interest to Cisco. The lake has been fished, and nobody is restocking it with healthy specimens.

Related to that first point is the fact that the IT industry, including the networking segment, has matured. It’s moved into a slower-growth stage, replete with consolidation and fewer leading players. In its core markets, Cisco runs the numbers and often concludes that the right business decision involves building rather than buying. That wasn’t always the case, as amateur historians of networking’s heyday will tell you.

The slow growth, maturation, and consolidation in Cisco’s legacy markets of enterprise and carrier switching and routing have driven it toward a major diversification effort, with some of the forays into new spaces seeming more adjacent than others. Some of these new markets will bring Cisco back into acquisitive fervor, but it hasn’t happened yet, perhaps because Cisco hasn’t fully committed to some of them. (An area where I think you’ll see Cisco eventually make some interesting purchases is smart-grid technologies.)

Cisco’s acquisition juggernaut has slowed for another reason, too. If you examine the composition and distribution of Cisco’s vast cash reserves, you’ll discover — as I have discussed previously — that most of the money is located overseas. If that foreign cash were repatriated, Cisco would have to pay taxes on it. With the US government refusing to relent on that point, Cisco has chosen to leave the money overseas. As a result, that cash cannot be used for domestic acquisitions. If Cisco wishes to use those funds, rather than stock, to consummate deals, it must identify, pursue, and execute transactions in foreign markets.

Effectively, because of its cash allocation and the increasing reluctance of prospective takeover candidates to accept stock in lieu of hard cash, Cisco is geographically constrained in making deals over a certain size. Given Cisco’s tax strategies and the growing internationalization of its business, the ratio of foreign-to-domestic cash reserves isn’t likely to change markedly. Cisco will spin more cash through quarter-to-quarter operations, but most of it will land in the foreign pool.

At least in the near term, for the reasons adduced above, I don’t foresee Cisco returning to its acquisitive frenzies of the late 90s or the early to mid oughts, when it took advantage of the dot-com implosion to consolidate power through strategic acquisitions. Cisco remains a big, old dog, but it is being forced to learn some new tricks.

Android Versus iPhone: The Illusory Cage Match

Earlier today, in a post regarding Apple’s acquisition of mobile-advertising company Quattro Wireless, I touched on the different approaches and objectives that Apple and Google bring to the smartphone marketplace.

As I mentioned, it’s fashionable to see Google’s Android-based handset, not to mention the handsets of its Android-based partners, as a cage-match warrior in mortal combat with Apple’s iPhone. It’s a facile metaphor, though, and it doesn’t help us gain a deeper understanding of the actual dynamics at play.

In truth, Apple and Google might have products and services that compete, but they are not in a zero-sum struggle for survival. Not even close. To the contrary, closer inspection reveals that Apple and Google have different approaches, philosophies, and objectives in the mobile world.

Apple wants to make money from everything it does. It closely manages and controls practically every aspect of the iPhone experience, and it wants to generate margin from the device sale, from application downloads at the AppStore, and from content downloads at iTunes. It would like to get a piece of advertising revenue, too, which is why it bought Quattro.

Google, on the other hand, is focused overwhelmingly on extending its advertising empire to smartphones. It will push text ads, displays ads, and any other ads that make sense in a mobile context. To do so, it has come to the conclusion that it needs its own mobile platform, which is where Android enters the picture.

Now, if you consider these two very different companies and their distinct perspectives on the mobile market, you can easily envision circumstances in which Apple and Google each prosper in their respective spheres of influence.

That’s just what Bill Gurley has done over at abovethecrowd.com. In a cogent, eminently readable piece that advances logically and patiently to its conclusion, Gurley explains why Apple and Google aren’t on a path toward mutually assured destruction, despite what the hyperventilation and sensationalism of some commentators might lead you to believe.

Gurley begins by examining the claim from a Morgan Stanley analyst that “Apple is playing is to become the Microsoft of the smartphone market.” By end of his post, he’s refuted that assertion, contending instead that Google is aiming for that distinction.

All of which leads to the obvious question: Where does that leave Microsoft? As I’ve explained before, to the extent that there is a so-called smartphone war, Microsoft has suffered the greatest losses. Google has pillaged Windows Mobile handset licensees and left Microsoft with one last chance, represented by Windows Mobile 7, to redeem itself.

Some reports suggest that Windows Mobile 7 will not ship until the fourth quarter of 2010. That could be a case of far too little, far too late.

ESPN to Go 3D

I wrote yesterday about the marketing push behind 3D television. Understandably, consumers, even in the best of times (which these are not), will be reluctant to part with their hard-earned cash for a 3D television set unless they have a reasonable expectation of being able to use it for the enjoyment of 3D content.

For that to happen, consumers would have to make investments in 3D Blu-ray players, and they’d want 3D movie titles, delivered by DVD or over the Internet, from the film industry. They’ll also want to see support for 3D content coming from television channels and networks, as well as from their cable and satellite providers. Presuming that’s made available, consumers also might have to purchase new 3D set-top boxes.

Essentially, for 3D to become an attractive proposition in the living room, all the vendors in the ecosystem must work together to provide a compelling, seamless experience to the consumer — from hardware and content availability to content distribution and delivery.

Then, of course, they’ll have to hope the consumer is willing to tolerate the inconvenience of having to wear 3D glasses to partake of the in-home spectacle. That’s the last hurdle, and perhaps the biggest one. Even so, I wouldn’t want to underestimate any of the other challenges. If 3D is destined to become a cash cow for all the industry players in the food chain, everything must come together in perfect synchrony. Anything less will result in failure.

Fortunately for the nascent industry, ESPN is jumping aboard the bandwagon. 3D movies have obvious appeal to a mass audience, but sports entertainment is a huge business in its own right. What’s more, most major sports events — football, soccer, basketball, hockey, baseball — could arguably benefit from the 3D treatment. Having accurate depth perception, much less protrusive visual effects, would enhance viewing enjoyment of, let’s say, the World Cup soccer tournament.

ESPN obviously agrees. It is one of the organizations, to which I alluded in yesterday’s post, that has done extensive research into consumer acceptance of 3D television. It now has decided to launch ESPN 3D, which will provide at least 85 live 3D events in a one-year span, starting on June 11 with the broadcast of a World Cup soccer match between South Africa and Mexico.

Other soccer games likely to be part of the broadcast mix, as will Summer X Games (extreme sports), NBA games, college basketball, and college football. ESPN will not provide reruns of sporting events. When there are no live events to show in 3D, the channel will remain dark.

Will 85 (or slightly more) live events be enough to make the channel a commercial success? Will they be sufficient to motivate consumers to take the plunge on 3D home entertainment?

One wonders about how the channel will be priced for subscribers, and about how many cable and satellite providers will pick it up and on what terms. Consumers will be sensitive about paying a subscription charge for a channel that’s available on a part-time basis, as well as one that carries only some content in which they might have strong interest. After all, it’s a rare bird who’s interested in World Cup soccer, X Games, the NBA, and college sports.

According to a USA Today news item, ESPN expects deals with distributors will be in place prior to the channel’s launch. It’s not only availability that will matter, though, but also the terms of that availability. It will be interesting to see how ESPN shares risk with, and potentially defrays costs for, its distribution partners, who might be reluctant to pick up the channel without a reasonable expectation of success.

As the USA Today article mentions, 3D broadcasts cost more than high-definition productions. You need two cameras (or specialized 3D cameras) rather that one, for instance, and you have think about whether camera placement should be different for a 3D production than for conventional sports coverage. The USA Today article notes that broadcasters might require a separate set of announcers for 3D productions, but I’m not sure I agree. It should be possible to use a single set of announcers in the broadcast booth, presuming there’s enough space for the additional camera equipment.

One interesting aspect to this story is that ESPN is committing to the 3D network only through June 2011. At the end of one full year of operation, ESPN will decide whether and how to extend the service.

Will ESPN keep the service going? It all depends on how it’s received in its first year. If I were forced to make a wager on the outcome, I’d say ESPN 3D doesn’t get renewed.

I’m not sure 3D home entertainment is ready for prime time, and I’m not confident that cash-strapped American consumers have the disposal income to upgrade from the HD gear they’re just now beginning to enjoy on a regular basis.

Apple’s Uncharacteristic Acquisitions Speak Volumes

Although Apple has nearly as much cash on hand as Cisco Systems, it is not a company known for acquisition-fueled growth. Instead, Apple has grown organically, through its own research-and-development initiatives. Apple has a flat, lean corporate structure and unique corporate culture, both of which militate against acquisitions.

Lately, though, Apple has been going against form. In December, it bought Lala, a digital-music service, for an undisclosed sum. A year earlier, it bought PA Semi, a designer of low-power microchips, for a reported $278 million.

Admittedly, that’s not a blazing pace of acquisitive activity. Still, while some companies are more casual with their acquisition strategies, Apple only pursues such deals as a last resort. When Apple buys a company, you know it’s because the folks in Cupertino felt they had absolutely no chance of building a viable alternative within a reasonable timeframe. You also know that Apple must have genuinely and strongly believed it needed to play in a particular space.

All of which brings us to today’s news, brought initially to light by AllThingsDigital. According to Kara Swisher, Apple will acquire Quattro Wireless, a mobile-advertising company, for approximately $275 million.

Launched in 2006, Quattro had received about $28 million in aggregate venture-capital investment from Highland Capital Partners and GlobeSpan Capital. Based in Waltham, Mass., Quattro was on a revenue run rate of $50 million, according to the Boston Globe. Quattro has about 150 employees, who are expected to remain in Waltham.

The Boston Globe reports that the deal closed before the end of 2009. It says Quattro is expected to notify its partners and customers of the transaction today, though there’s no word on when Apple will make a formal announcement.

In the wake of this deal, many observers will immediately point to the increasingly adversarial relationship between Apple and Google, formerly on friendlier terms, even with cross-pollination at the board level. While that’s an aspect of the story that bears notice, it’s also important to maintain a broader perspective, to resist seeing everything that happens in the industry as a cartoonish cage match between bloodthirsty foes.

Yes, Google recent announced an agreement to buy AdMob for $750 million, outbidding Apple in the process. Now Apple has responded by acquiring Quattro, an AdMob competitor.

However, Apple didn’t bid for AdMob or acquire Quattro because of a vendetta with Google. Apple doesn’t do acquisitions on a whim, and it doesn’t pursue them just to keep a property away from a competitor. Apple pursued both deals for reasons of its own, reasons having far more to do with its own strategic plan than with a preoccupation with Google.

Still, both companies see the same opportunities in mobile advertising. Each company has its own strengths it can leverage. For Google, the predominant player in search advertising, mobile advertising is the next frontier. It developed its Android mobile operating system as a platform for that push. For Apple, mobile advertising is an untapped source of potentially rich revenue in mobile communications and entertainment, realms in which it has established market leadership with its iPhones, iPods, iTunes, and AppStore.

While Apple and Google have intersected in competition, they’ve taken very different paths, with very different motivations and rationales, in reaching this juncture.

3D Television Touted at CES 2010

With the annual edition of the Consumer Electronics Show (CES) in Las Vegas almost upon us, marketers are working diligently to engender consumer interest in a range of new products and technologies. Their job is to make you want things you don’t really need.

3D televisions are getting a big push. I’ve worked in 3D-visualization technology, so I feel qualified to offer an opinion, learned or otherwise.

For 3D television sets to succeed commercially, content must be widely and readily available, the devices themselves should not inconvenience consumers, and the prices of the sets should not be prohibitive.

Sony says 2012 will be year of 3D television, and it might be right. Even then, I wonder whether enough content will be available for delivery to consumers. More to the point, I question whether consumers will want to make the compromise of wearing specialized goggles to enjoy the 3D experience. For me, that is the litmus test. It’s why I believe 3D television, at least in its first incarnation, will fail to make the commercial grade.

When people flock to a cinema to see a 3D movie, they go for the big-screen spectacle. They’re willing to pay to enter that dark cathedral, to don their 3D glasses, and to settle into plush seats alongside other congregants for approximately two hours of immersive entertainment. Then, at the end of the movie, they take off the 3D eyewear, leave the theater, and return to the real world.

A lot of research into 3D home entertainment has been done by cable companies, satellite broadcasters, and television networks. They’ve all looked into the tolerance level of consumers for 3D glasses. What they’ve found, for the most part, is that consumers are willing to wear the glasses at movie theaters, but are disinclined to wear them in their own homes.

That’s because of the disparity between the cinema experience and the home-viewing experience. People bring a different set of attitudes expectations to the theater than they bring to their own living rooms. What they’ll accept at the cinema, where they get a larger-than-life entertainment experience for a limited period of time, is different from what they’re willing to tolerate in their own homes.

Besides, consumers behave differently while watching television. For the most part, filmgoers give their undivided attention to what;’s on the big screen. (Yes, we all have been in the same theater with rude talkers and senseless jabberers, but those cretins belong to a small minority of the audience, thankfully.) Television viewing tends to be more episodic, less focused. Your attention is diverted occasionally from the television set to other things in your home. During a commercial break, for example, you might walk to the kitchen or to the washroom, or you might take or make a phone call.

Given how you watch television and how you live within your home, would you be wiling to wear 3D glasses for extended periods? Ubergeeks among you might say yes, but most of you would be reluctant to make the sacrifice. That’s why ubergeeks are the earliest of early adopters, and why everybody else isn’t.

Consequently, we won’t see widespread adoption of 3D televisions until they can be viewed autostereoscopically (without glasses). That will take a few years. Autostereoscopic technology needs to improve, and standards for it need to coalesce. Effective and simple means of converting stereoscopic (requiring glasses) cinematic 3D content into autostereoscopic formats must be brought to market, too.

None of those challenges is insurmountable, but each will take time. The glasses-based 3D-television products on the market today are necessary precursors for their glasses-free successors of the future.

Unfriendly Skies Boost Cisco Videoconferencing

Even before the latest mental defective attempted to use explosive underwear to blow up a Detroit-bound flight from Amsterdam, commercial air travel has been thoroughly unpleasant. As when we go to the dentist, we actually pay airlines to inflict pain and inconvenience on us. What a business model!

In a bygone era, when Frank Sinatra sang “Come Fly with Me,” air travel was seen as exotic and sophisticated. Now it’s an airborne bus ride, replete with endless travel delays, intrusive and humiliating security checks, and customer service that verges on the aggressively antagonistic.

Yes, the security procedures might be necessary in an era of unhinged madness, but that doesn’t make them any more palatable. (Moreover, even with the advent and widespread deployment of full-body scanners, “ass bombers” — I’m not making this stuff up, unfortunately — could still wreak havoc.)

Commercial air travel is a form of self-abasement. Even without the heightened security measures – in which we all get an inkling of what it’s like to be interrogated and processed as criminals – the penny-pinching accountants at the major airlines have been doing their worst to make commercial flights ordeals worthy of the Inquisition.

This is where I get to Cisco. No, Cisco is not a commercial airline, but it stands to benefit from increasing customer dissatisfaction with the airline industry.

As its tortuous $3.4-billion acquisition of Tandberg demonstrates, Cisco is banking heavily on video-based collaboration, such as high-end telepresence and videoconferencing. This is one of Cisco’s “market adjacencies.” in that video consumes larger amounts of bandwidth than does data or voice communication, and the adoption of video-based communication will drive network upgrades of routers and switches at carriers and enterprises alike.

For that reason, the intensive push into video represents smart strategy for Cisco. To be hugely successful, however, one needs a certain amount of good fortune as well as tremendous proficiency. In that respect, the increasingly disagreeable nature of commercial air travel should play into Cisco’s hands. Air travel has been costly for enterprises for a long time, and now it’s become an exercise in self-loathing for anybody who must go on a business trip. At some point, sooner rather than later, a growing number of enterprises will consider investments in videoconferencing as alternatives to a wide range of travel on commercial airlines.

There will, of course, be instances where seeing the customer or partner in person is necessary. On those occasions, airlines will continue to be patronized by reluctant business travelers. Even then, however, gilt-edged CEOs and their rarefied ilk will consider private jets over commercial airlines. They’ll justify the investment somehow.

What’s more, the bar will be raised on what’s considered essential business travel. More meetings will be done by videoconferencing. The quality of the product, and of the experience, has improved significantly. Now, instead of feeling like you’re participating in a jerky, jitter-delayed Russian satellite broadcast from the 1970s, you actually feel like you’re taking part in a natural discussion. Videoconferencing solutions will only get better, while it’s hard to make the same claim for commercial air travel.

Consumers, too, will become more averse to the airport experience. They’ll give more consideration to driving, to buses, and to trains. As desktop videoconferencing improves, they’ll give more consideration to that option, too.

Maybe it’s time, again, to short the airlines.