Yahoo Delivers Three Disappointments to Investors

Yahoo announced its financial results for the second quarter today. The company billed as the world’s largest Internet media company let down analysts and investors on three fronts, and its stock paid the price during after-hours trading.

The first disappointment was that second-quarter profit dropped 78 percent after sales missed analysts’ estimates. With advertising expenditures shifting to Web, market analysts surveyed by Thomson One Analytics had been expecting sales growth of 30 percent. Yahoo came in below that number, with a 28-percent increase. On its own, that revenue shortfall probably wouldn’t have tanked the stock — the company, after all, fell within the range of earnings expectations when one accounted for an extraordinary after-tax investment gain recorded in last year’s quarter — but Yahoo had additional information to disclose.

Yahoo’s second disappointment came in the form of guidance it offered regarding third- and fourth-quarter financial performance. For the third quarter, currently underway, Yahoo forecast revenue of $1.12 billion to $1.23 billion. Analysts had expected $1.15 billion to $1.24 billion.

The third and final disappointment came when Yahoo CEO Terry Semel apprised analysts that the company’s forthcoming upgrade to its search-advertising platform would not go into production until the fourth quarter rather than in the third quarter, adding that analysts should not expect a significant revenue contribution from the new system until the first quarter of 2007. The implementation delay, according to Semel, resulted from some quality-assurance issues that came to light recently.

That last bit of news seemed to be the straw that strained investor’s forbearance, because Yahoo’s share price began a steep descent on after-hours markets as soon as Stemel concluded his last sentence on subject. Investors rightly inferred that, without the upgraded search-advertising system in place, Yahoo has no hope of closing immediate ground on market-leader Google in search-related advertising. In fact, without the system upgrade, Yahoo stands to lose further market share.

Speaking of which, the latest market data also indicates Yahoo is falling further behind Google on the Web-search front.

According to data from ComScore Networks Inc., Yahoo’s share of Web searches fell to 28.5 percent in June from 30.4 percent a year earlier, while Google’s share rose to 45 percent from 37 percent. While Yahoo isn’t losing ground as badly as some others — Microsoft’s MSN garnered just 12.8 percent of searches this June compared to 15.7 percent of searches in June 2005 — schadenfreude is cold comfort when the objective is to the close the gap on the market leader.

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Cisco in Crosshairs of Microsoft-Nortel Strategic Partnership

Earlier today, Microsoft and Nortel announced a strategic alliance in unified communications. It’s a significant partnerships for multiple reasons, a few of which I will now discuss.

First, it is important to understand that Microsoft’s ultimate goal in unified communications is to have its software bring together presence-based communications (email, IM, telephony, plus multimedia conferencing) on the computer desktop. Microsoft looks askance at communications silos in the enterprise, especially those that it doesn’t own completely. It takes particular offense at what it regards at the unnatural dichotomy between the office phone and the office PC. It practically cringes at this chasm of functionality.

Microsoft’s goal is to own the entire desk, never mind the computing desktop, and it must be topple the office telephone to do so. You see, the hardware-based telephone, even if it is an IP phone, is sold and maintained by other vendors, increasingly through an IP PBX, and that foothold gives those vendors room for further account expansion. That’s revenue that Microsoft doesn’t generate, and growth that it cannot deliver to shareholders. The problem is, Microsoft isn’t a PBX vendor, and it doesn’t possess the credibility, expertise, or market mandate — at least at this point — to lay claim to the province of enterprise telephony.

The vendor that concerns Microsoft the most in that regard is Cisco Systems, which leads in the market for IP PBXes and IP phones and also provides sophisticated multimedia conferencing software and associated infrastructure. Cisco could conceivably control a lot of the infrastructure, services, and software that enable and facilitate the next generation of unified communications. Cisco and Microsoft maintain an uneasy relationship marked by pragmatic cooperation and future strategic competition.

Understandably, Cisco worries Nortel just as much as it concerns Micrsooft.

After years of self-inflicted accounting scandals and the enormous devastation that it incurred when the telecommunications boom became a cataclysmic bust, Nortel needs newfound credibility and market legitimacy. With its telecommunications customers doing a morose dance of consolidation and retrenchment, Nortel must elsewhere for growth. Naturally, it looks to the enterprise, where it has had nearly as many stops and starts as 3Com. Unfortunately, when it looks to enterprise, it sees Cisco, the network behemoth when it comes to the provision of networking infrastructure, from core switching through to the wiring closet and the VoIP PBX. Nortel, particularly in its diminished conditions, isn’t up for that battle — not on its own, anyway. But with Microsoft, its thinking goes, maybe Nortel has a change to tap into a significant new revenue stream, ensuring growth and a new beginning for its tattered stock.

Nortel was desperate, and Microsoft was looking for a telecommunications-equipment vendor who would give it the VoIP credibility that it needs to win the hearts and minds of those enterprise-communications guardians who stand in the way of the all-Windows, all-Office, all-the-time vision of integrated unified communications that Microsoft envisions.

Hence we have this alliance. Let’s look at components of the agreement, excerpted from a joint press release that appears on Nortel’s website:

• Strategic alliance
• The companies will enter into a four-year alliance agreement, with provisions for its extension.
• Nortel will be Microsoft’s strategic partner for advanced unified communications solutions and systems integration.
• The two companies will form the Innovative Communications Alliance (http://www.innovativecommunicationsalliance.com) as a go-to-market vehicle.
• Microsoft and Nortel will deploy the other’s technologies in their enterprise networks.
• Solutions and systems integration
• Nortel becomes a strategic systems integration partner for the advanced unified communications solution.
• Nortel believes it can capture substantial new revenue through service offerings such as convergence planning, integration, optimization, monitoring and managed services.
• Joint product development
• Nortel and Microsoft will form joint teams to collaborate on product development that spans enterprise, mobile and wireline carrier solutions.
• The two companies will cross-license intellectual property.
• Nortel and Microsoft will engage in early-stage integration and testing.
• Nortel will deliver solutions that complement Microsoft’s unified communications platform, including enterprise contact center applications, mission-critical telephony functions, advanced mobility capabilities and data networking infrastructure.
• Go-to-market initiatives
• Microsoft and Nortel will jointly sell the advanced unified communications solution and integration services. The plan is to develop a training and incentive program for the companies’ sales teams.
• Both companies will invest substantial resources in marketing, business development and delivery.
• Microsoft and Nortel will build a joint channel ecosystem using both companies’ systems integrator, reseller, and service provider relationships.
• The two companies will develop a series of compelling solutions for a range of customers, including small and medium-sized business, large corporations and service providers.

Reading between the lines, Nortel has become a systems-integration agent for the deployment of Microsoft-based unified communications into the enterprise and beyond. Nortel will provide the technical expertise to ensure backward compatibility with customers’ existing products and technologies as well execute on a blueprint for an all-Microsoft, softphone-based unified-communicatoins paradigm of the future.

Nortel believes it can derive $1 billion from this partnership through 2009, taking into account revenue from professional services, voice products and applications, and other data-based integrations. Maybe that’s true, but it’s betting on a lot of help, on many levels, from Redmond.

Can BlackBerry Become FunBerry?

Research In Motion (RIM), Canadian vendor of the BlackBerry email device, believes that it can expand its presence into consumer markets by adding multimedia features and lifestyle applications to its successful business-oriented handhelds.

I just don’t see it happening. Neither RIM nor BlackBerry has brand cache with consumers, and RIM’s corporate and technology DNA straddles the workaday worlds of the enterprise and the telecommunications industry, not the stylish, fashion-conscious realm of consumer electronics. I fundamentally question whether RIM could ever truly comprehend the vagaries of the youth market. Those who have spent time on RIM’s campus will know what I mean when I say that the company is hardly a bohemian enclave of unbridled creative passion.  

RIM does have an opportunity to play in the consumer market, however. I can do so by partnering with companies who already understand consumer markets, have channels into those markets, and possess a brand and a profile that makes their products attractive to the capricious masses.

One company that has been mentioned as a potential partner is Apple. If RIM were to license its email and other messaging technologies to Apple, leaving the iPod vendor with the product design and marketing responsibilities, including integration with Apple’s music and media features, perhaps RIM could indirectly share in the consumer spoils. It’s certainly better than nothing, and it’s a guided first step that makes a lot of sense.

To go it alone, though, would be an unacceptably risky path for RIM to follow. It possesses neither the brand nor the expertise to successfully address consumer markets.

Microsoft Buys Talent with Winternals Acquisition

Companies make acquisitions for different reasons. Some companies look for acquisitions that expand installed bases dramatically, providing a larger audience of customers for future product releases and upgrades, while others pursue acquisitions that significantly enlarge channel reach. Microsoft, for its part, typically makes targeted acquisitions that provide it with products and technologies it lacks — especially when it has neither the time nor the immediate engineering resources to develop comparable alternatives internally — or because it seeks rare, specialized talent that the target company possesses.

Today’s acquisition of Austin, Texas-based Winternals seems to be all about buying talent. Yes, Microsoft gets the company’s Windows-based utilities for system management and availability, and it also gets a community site called Sysinternals, which provides downloadable tools and a forum for relevant technical discourse.

What Microsoft really wanted, though, and what it got through the acquisition, is unique expertise in operating-system kernel engineering. Winternals’ Mark Russinovich and Bryce Cogswell will join Microsoft in technical leadership roles, with Russinovich joining the Platforms and Services Division (PSD) in the role of technical fellow, while Cogswell will assume the role of software architect in the Core Operating Systems Division.

At Microsoft, receiving the profoundly revered title of technical fellow is like being named a Cardinal at the Vatican or being given a knighthood at Buckingham Palace. Only 14 technical fellows currently roam Microsoft’s worldwide facilities, and they include only those individuals whose exemplary technical vision, expertise, and world-class leadership are widely recognized.

As with most of Microsoft’s smaller acquisitions, terms of the deal were not made available.

Google’s Domain Proliferation

Neil Patel has attempted to provide an inventory of all the domain names that belong to Google. In all, he counted 520 of them. Most of them were accrued when Google launched new services or acquired companies that had existing services.

In some cases, it’s obvious that Google procured domain names purely for defensive reasons, so that nobody else could claim them and use them for, um, mischievous ends. After all, I don’t think we’ll be seeing future Google service offerings at googleblows.com or googlesucks.com, and probably not at googleporn.com, either.