Daily Archives: July 23, 2006

AMD Announcement Tomorrow at 8am Eastern

Advanced Micro Devices will “make a significant corporate announcement” at 8am tomorrow (Monday). The expectation is that AMD will announce a $5.4-billiion acquisition of ATI Technologies, mostly in cash but also with a stock component. As discussed in this forum in an earlier post, the risks would seem to outweigh the benefits for ATI, but the deal has both its detractors and its proponents.

The Wall Street Journal reported a few hours ago (subscription required) that the companies were in the late stages of negotiations Sunday. If a deal announcement is pending, we can expect to learn more about what motivated the acquisition and how it will be structured.

Ericsson Should Benefit from Rivals’ M&A Mania

Ericsson issued its quarterly results late last week, and many analysts seized on the company’s apparent difficulties in thoroughly digesting its acquisition of Marconi, which it bought for $2.1 billion earlier this year.

Marconi has proven problematic for Ericsson, and further staff reductions, as well as product and facilities integrations, must occur before the house will be fully in order. Still, Marconi, which was acquired primarily for its account presence in fixed-line communications at European carriers, is a small part of Ericsson’s overall revenue.

Additionally, the Swedish company, the market leader in the manufacture and sale of equipment for wireless-network operators, appears to have a defensible plan for leveraging Marconi’s account base to win broadband build outs and perhaps even to stitch together converged wireless-wireline network infrastructure for some carrier clients.

The point is, Ericsson’s assimilation of Marconi — the largest acquisition Ericsson has made — is nearly complete. On the other hand, Ericsson’s largest competitors in the market for wireless-network equipment — Lucent, Alcatel, Siemens, Nokia, and Nortel — are just beginning to come to grips with a gargantuan merger, a cumbersome joint venture, and a difficult restructuring, respectively.

Some analysts express concern about margin weakness at Ericsson, but the company’s margins were better than the market expected in its latest quarter, and I suspect it will track to projections at least through the rest of  2006 and well into 2007.

It’s major competitors are in disarray, and Ericsson only needs to remain reasonably competent on the operational front to gain share. At present, the company is said to possess about 26 percent of the wireless telecommunications-equipment market, ahead of Nokia and Siemens, whose combined joint venture in wireless-telecom gear will account for approximately 21% of the market.

The joint venture between Nokia and Siemens will not be easy to pull off. Typically, companies lose share, at least initially, when they attempt combinations this massive, especially when they’re attempting to share operational responsibility for the resulting venture between two companies that previously competed with one another. One can envision organizational gridlock, decisions by committee, internecine squabbles, political gamesmanship, and a lot of confusion about what do to and how quickly to do it.

Then there’s Alcatel’s acquisition of Lucent. For a variety of reasons, I cannot imagine this marriage being a happy one for anybody except the merged company’s competitors. Alcatel stumbled into this deal — it’s most ambitious M&A project on record — and the whole debacle seems destined to end in tears, particularly for Lucent employees and shareholders of the combined entity. Watch for the Lucent talent that already hasn’t melted away to gradually find its way to the exit doors during the remainder of this year.

As for Nortel, its strategic priorities seem to be getting reordered, yet again. It’s partnership with Microsoft in unified communications is an indication of the new thinking. Although Nortel has no intention of abandoning its wireless-operator customers, it has only so many resources from which to address its various objectives, especially under a regime that has begun applying more scrutiny to ensuring tangible returns on its research investments.

So, that leaves Ericsson in an enviable position, at least in relation to its major competitors. With the mastication of Marconi almost behind it, Ericsson will concentrate on organic growth and "bolt-on" technology acquisitions. It will let its rivals contend with the daunting challenges and manifold complications that result from king-size pairings.

What GoogleTrends Might Reveal About Taylor’s Last Days at Microsoft

On one level, I don’t really want to dig further into Martin Taylor’s apparent ouster from his well-padded perch at Microsoft. It’s clear that something unexpected and perhaps even untoward occurred involving Taylor that forced the company to cut ties with him immediately. Do I want to know all the details? Should I even bother to pursue them?

Well, no, I am not interested in transforming this minuscule corner of the Web into a virtual gossip rag. Other people have more interest in purveying that sort of online titillation, and they’re eminently better suited for the job than am I. It’s just not my scene, nor is it my strength.

But what happened to Taylor is a mystery, and I understand why many of you are interested in learning more about what transpired. After all, whatever did unfold to occasion the split caught Microsoft completely flatfooted and unprepared. One day, quite literally, Taylor was a prominent senior-level executive at the company, and the next day, he was history, the subject of a terse media advisory. Subsequently, Microsoft’s marketing minions scrambled to modify his biography on the company’s website.

So, yes, it’s a mystery — one that hasn’t been solved.

If you cybersleuths want to test your hypotheses about what might have occurred, you could visit Google Trends toward the end of July, when its June database should be entirely available (it seems to extend as far as June 7th at the moment) and at your disposal. You can enter some search terms and see how often they were entered, and from where, at about the time Taylor left Redmond. You might be able to connect a few dots and get closer to solving the mystery.

Wouldn’t it be ironic if a Google online tool were used by outsiders to ascertain what happened to a senior MSN/Windows Live marketing executive behind closed doors at Microsoft?

Television Studios and Networks Grapple with Internet Disruption

In his Web Watch column in today’s edition of the Washington Post, Frank Ahrens discusses how executives at television studios and networks are attempting to deal with the Internet’s major disruptions to their supply and value chains.

Ahrens suggests that the denizens and power brokers of the television industry aren’t in denial about the threat posed by the Internet, but he also says they’re a long way from figuring out how best to respond.

In the article, Ahrens explains how deficit financing is used to create prime-time television shows. The way it works, a studio bankrolls the production of a show with its own money, and then sells the show to a network, which then airs it in prime time. On that transaction alone, however, the studio does not recoup its investment.

To get its money back and make a profit on the project, the studio must hope the show is sufficiently popular to run for several years in prime time and then go into syndication, where additional money can be made from repeat broadcasts.

That model, of course, is being severely disrupted by the Internet, but it already was being fractured by sales of television-program DVDs. Now, as YouTube and other Internet information and entertainment compete with television programming for the precious time of consumers, the television industry has no choice but to make its content available online.

In doing so, though, it further undercuts the traditional business model and value chain constructed to support and disseminate television-studio content.

What’s the role, for example, of television-station chains such as Tribune and Sinclair in a world where present and past shows are available at iTunes ,or at whatever becomes of MSN, for $1.99 and 99 cents, respectively? If you as a consumer already own the shows digitally, and you’ve seen them repeatedly before and can play them again at any time, why would you watch a local television station that has devoted itself to the broadcast of syndicated content?

Similarly, what happens to box-set DVD sales of an entire season of television-program episodes? In an era when shows can be bought and downloaded immediately, how will the season-encompassing DVDs, released annual, retain commercial appeal? Is exclusive content, including interviews with the actors and previously unseen footage and out takes, a means by which DVDs can remain relevant and economically viable as a distribution channel?

If the commercial value of syndicated programming is obliterated, as seems likely, and DVD sales suffer as a result of the rise of the Internet as an instant-gratification distribution channel, can the revenue from the new channel compensate for the lost revenue from the traditional channels? Perhaps it can, if the programming carries advertising as well as relatively inexpensive price tags. Then again, how much advertising will paying customers be willing to tolerate?

What happens if the lost revenue can’t be regained elsewhere? It is unlikely that television studios could continue to finance big-budget talent surrounded by extensive crews, extravagant sets, and top-of-the-line production values. Does that portend a further rise in so-called reality-based programming, which comes cheaper than star-laden entertainment concocted by blue-chip creative talent?

There are many questions, yet few answers. You can be sure that everybody in Hollywood, up and own the value chain, is trying to figure out how and where he or she fits in an industrial landscape being reconfigured by the Internet.

Scars from the Shards of a Burst Bubble

Venture capitalist Fred Wilson discusses how the experiences of the Internet boom and bust have left him and his VC brethren with emotional scars that keep them from being as aggressive as they might be otherwise. Generally, Wilson believes VCs and entrepreneurs who rode the boom and survived the bust are better off for it, because they’ve seen what can and does go wrong in the technology business and lived with the severity of the consequences.

Still, he is concerned that the hangovers and scars from the flameout might be causing many VCs and entrepreneurs to exercise too much caution and restraint. He is concerned about an ingrained conservatism that will prevent the community, financial and entrepreneurial, from implicitly understanding when to go from the brake pedal to the gas pedal and vice versa. To what extent, he seems to wonder, do the ghosts of dotcoms past haunt the boardrooms of VCs and technology startups today?

He writes:

Pattern recognition is human nature. When you’ve seen the movie before, you know how it ends. And so all of us who carry the scars from the last bubble are going to think twice before we make the same moves again.

But what if the same moves we made last time are the right moves to make this time? Then we are going to sub-optimize this current market opportunity. We are going to be too defensive. And someone else is going to step on the gas and pass us at the next turn.

Considering and commenting on what Wilson writes, fellow VC Ed Sim offers his thoughts on the conundrum:

Trust me, having lived through the bubble has changed my mentality a ton but I always have to remember that there is that lingering fear in my mind (fear can be good), and that I also have to temper my psychological mindframe with the data we have at hand and the opportunity in front of us. In other words, have a strategy and stick to it and if anything remember that old wounds can haunt you and use the data at hand to help make your decision. If the ROI and return is there, test it out and try it as you never know until you take that step. There is a huge difference in building your company because your competitors are doing it versus building because it is the right thing for your company and the data suggests it. Underinvesting in your company is just as much a sin as overinvesting in it. So find the balance and continue building.

Sim offers good advice for VCs and for the companies in which they invest. It’s imperative that we learn from our experiences, but it’s also essential for us to recognize when circumstances, times, and situations change. Whether micro or macro in nature, recessions and depressions don’t last forever, and neither do periods of hyperactive growth. None of us is perfect and events beyond our control can crush our dreams or torpedo our plans, but a balanced perspective, thorough market due diligence, assiduous research, and a fundamental appreciation of market dynamics can boost your probability of success and significantly mitigate your risk.

When the conditions are right, when the ROI analysis has been validated, and when the foreseeable trends coincide with your vision, then hit the gas pedal hard. When the red flags are shooting up like dandelions in the spring, it’s time to apply some pressure to the brake, rethink whether your assumptions are reflected by market reality, and revise your plans accordingly.

It isn’t rocket science, but it is infinitely more difficult in practice than in theory. Our emotions can get the better of us, when markets are on the way up as well as after they’ve hit bottom.