Monthly Archives: September 2006

Will Panasonic and Sanyo Gain at Sony’s Expense?

As the recall of Sony notebook PC batteries spreads, encompassing more PC vendors and an increasing number of affected models, one wonders how seriously the Sony brand and its business as a battery purveyor will suffer.

MarketWatch’s Andrew Simons considers the question, poses it to a few analysts, and comes away with an ambiguous picture.

Roger Kay, president of market-research firm Endpoint Technologies Associates, believes Sony is in danger of losing considerable patronage in the lithium-ion battery business. Says Kay:

Sony’s brand is severely damaged. I think it’s going to be a question whether they can be in the battery business at all.

Still, he doesn’t think Sony’s is about to get whacked overnight. Says he:

Given the nature of the relationship, in the real world the way that it plays out is that the [computer manufacturers] decrease what they buy from Sony. They’ll say, ‘We used to take two million from you and three million from Sanyo. Now we’re going to take four million from Sanyo and one million from you. And that’s punishment’."

Indeed. One can understand why notebook vendors would want to punish Sony, too, not just for selling defective battery technology, but also for occasioning the logistical nightmare of a major recall program.

Even so, switching battery-technology suppliers is not like changing socks, as Eric Ross, an analyst with ThinkEquity Partners, explains:

They could choose another battery supplier, but Sony is a huge supplier. They screwed up, but they didn’t screw up royally. Switching battery suppliers takes time.

He’s right. It does take time, and it isn’t a decision that should be made in anger. I think, though, that it’s debatable as to whether Sony merely "screwed up" or "screwed up royally." I’m not sure the notebook PC vendors will be able to make such a fine distinction.

At the end of the day, the scenario Kay envisions, with manufacturers gradually and methodically shifting their business to other vendors, including Panasonic and Sanyo, is a likely outcome. They won’t be taking this decision as a reprisal or to exact vengeance; instead, they’ll be doing it to mitigate risk and to protect their interests, including their own brands.

It won’t be personal. It’ll be strictly a business decision. 

HP Buys Into Gaming PCs

Shortly after its CEO Mark Hurd and former chairman Patricia Dunn were castigated and reproached at length by a House of Representatives subcommittee, Hewlett-Packard announced Thursday that it had acquired VoodooPC, a high-end gaming PC vendor. Terms of the deal were not disclosed.

HP’s move follows a few months behind Dell’s acquisition of Alienware, another vendor in the fast-growing gaming-PC market.

Unlike Dell, HP will take a different tack in its post-acquisition integration of VoodooPC into its corporate fold. Whereas Dell has left Alienware as a wholly separate operating division — even continuing to sell its pre-existing XPS line of gaming PCs — HP will take something of a hybrid approach, keeping the VoodooPC brand and allowing the company to remain based in Calgary, Alberta, but also integrating VoodooPC into a separate business unit, focused on the gaming industry, within its personal systems group.

VoodooPC co-owner Rahul Sood will become chief technologist for the HP Gaming unit, and his brother and co-owner Ravi Sood will become the division’s director of strategy. Both will report to Phil McKinney, chief technology officer for HP’s PC business.

The intent of the integration plan is to allow HP to benefit from direct exposure to the demanding requirements of gaming enthusiasts, who typically don’t mind paying a small fortune for their machines, so that leading-edge innovations for gaming platforms can be incorporate into mainstream PCs. Additionally, VoodooPC will benefit from access to HP’s research-and-development programs as well as from the larger company’s established relationships with component suppliers.

Obviously, HP won’t object to the higher margins that accrue from sales of gaming systems.

Even though VoodooPC’s sold approximately 4,000 units in the past year compared to HP’s PC shipments of more than 30 million units, HP’s McKinney said various estimates suggest the game-PC market is worth $3 billion to $5 billion per year. It’s clear that HP is motivated by the growth and high-end cache of the space, not to mention a competitive imperative to counter Dell’s move into the market.

It remains to be seen whether HP or Dell has taken the better approach with regard to integrating (or not integrating) its gaming-PC acquisition.

There’s less risk involved with the Dell approach, but there also are fewer spin-off benefits to be had. HP is taking a more complicated, ambitious approach, one that is fraught with integration risks — there’s a real danger that VoodooPC could be utterly subsumed and diluted — but might pay off enormously if HP’s vision comes to fruition.

The Strange Story of Liberate Technologies

Some of you might recollect, as I do, the prior incarnation of Liberate Technologies, when it was a vendor of software for digital cable-television systems, including set-top boxes.

As this cached SEC filing attests, Liberate essentially wound up that business last  year when it sold its North American assets to Double C Technologies, LLC, a joint venture majority owned and controlled by Comcast Corporation with a minority investment by Cox Communications, Inc. That asset sale closed in April of last year, with Liberate receiving approximately $82 million in cash.

Subsequently, Liberate sold the remainder of its business assets to SeaChange International, Inc. That left Liberate with no product- or service-related business to operate on an ongoing basis. As Liberate put it in its Form 10K issued on August 15, 2005:

We will continue to operate Liberate to resolve existing liabilities, prosecute and defend pending litigation and pursue other claims as appropriate that we may have against third parties, and dispose of non-operating assets to maximize shareholder interest. Although our board of directors has not yet made any determination, we also will continue from time to time to evaluate and potentially explore all available alternatives including a dissolution and liquidation of Liberate, a share repurchase, an extraordinary dividend or other transactions to maximize stockholder value. We believe that our cash, together with the proceeds from Asset Sales, will be sufficient to meet our working capital requirements for the next twelve months. In fiscal 2006, we expect to continue to use net cash to fund our operating activities.

Apparently, Liberate Technologies has found a business it would like to enter. You’re probably thinking it’s a technology business, somewhat related to the markets and technologies in which the company had been involved previously. Well, you’d be wrong.

Instead, Liberate Technologies announced today that it has offered to pay $21 per share for medium-haul trucking company USA Truck Inc., which apparently has declined the proposal.

As a result, Liberate’s CEO, Paul Vachon, has gone to the extraordinary lengths of publishing an open letter, addressed to Jerry D. Orler, USA Truck’s president, in the guise of a press release. You have to read it to believe it. Basically, Liberate wants to take USA Truck private, and it’s willing pay a decent premium to do so.

How many other failed technology firms, literally shells of their former selves, will take this route? Are we about to witness a trucking bubble paralleling the technology bubble of a few years back?

I’m being facetious, of course, but I think it’s fascinating that a former technology company is attempting to remake itself as a acquirer of decidedly old-school companies in industries such as commercial transport.

For those of who hadn’t noticed, or who are in a persistent state of obdurate denial, this is just another data point emphatically stating that we aren’t in the late 90s anymore.

Bechtolsheim Leaving Sun for Startup?

Rumors are intensifying that Andy (Andreas) Bechtolsheim, co-founder of Sun Microsystems and a certified serial entrepreneur, will leave Sun for the second time in his career to join and lead a startup company.

Bechtolsheim first defected in 1995 when he founded gigabit-Ethernet switch vendor Granite Systems, which was acquired by Cisco the following year for $220 million. A savvy investor as well as a brilliant technologist, Bechtolsheim was said to have owned 65 percent of Granite at the time of the transaction. He also made an early investment in Google, which proved to be a particularly sagacious move.

His circuitous route back to Sun began when he left his role as vice president and general manager of Cisco’s Gigabit Systems Business Unit to launching Kealia, Inc., a vendor of high-performance Opteron-based servers.

Sun acquired Kealia in a stock-for-stock transaction in early 2004, with Bechtolsheim and his 58 Kealia engineers becoming  the Advanced Systems Technology Group within Sun’s Volume Systems Products unit. There’s no doubt the Kealia and its technology played an integral role in reversing Sun’s flagging fortunes in the volume server market.

It’s not clear at this point whether Bechtolsheim’s latest active entrepreneurial vehicle is Cresta Technology, a stealthy wireless-chip company based in Los Altos. Until now, Bechtolsheim has been a “passive investor” in that enterprise, but, as the playwright David Mamet wrote, things change.

Whether he’s moving fulltime to Cresta or to another venture, the word is that he’s decamping from Sun, which cannot be auspicious news for a vendor that still needs as much positive reinforcement as it can get.

Lifestyle MVNOs: More Bust Than Boom

When the acronym MVNO was first explained to me several years ago, I was skeptical that such a business model could work over the long haul.

I grant that there’s a certain plausibility to the concept of lifestyle-oriented mobile virtual network operators. Still, practice often diverges from theory, and the devil, as the saying goes, is in the details.

The MVNO game, to my mind, seemed like a pure reseller arrangement, whereby a lifestyle company — Virgin, MTV, or ESPN, for instance — slaps its brand on an existing wireless-operator’s services, leveraging its network infrastructure, while defraying the mobile carrier of operational costs relating to billing, marketing, sales, and support.

I can see the appeal for the wireless operators, which often do not have the marketing acumen to address relatively untapped demographic market segments, but I wondered how much control or game-changing value the MVNO could realistically deliver to differentiate its service from the wireless operator, which — at the end of the day — still overwhelmingly controls much of what subscribers will experience. 

In the case of Mobile ESPN, which functioned as a wholesaler for Sprint Nextel Corp., the MVNO model apparently did not deliver the goods. Launched earlier this year, Mobile ESPN will fold its tent and close shop at the end of this year.

ESPN’s parent company, Walt Disney & Co.,  had been under mounting pressure to pull the plug on its sports-oriented MVNO operation, which an analyst at Merrill Lynch claimed would lose $80 million and attract just 30,000 subscribers by the end of his year.

I understand that the failed ESPN MVNO experiment is just one data point, but I haven’t seen compelling evidence to suggest that the MVNO model serves the interests of the brand that resells the services as much as it does the interests of wireless operators.

As a rule, there are more productive ways, offering more compelling ROI, to enhance an established lifestyle brand than entering the MVNO space.

HP’s Omerta?

According to several news reports that surfaced this morning, including one from CNET’s, Hewlett-Packard General Counsel Ann Baskins has resigned her position with the company, effectively immediately.

The timing is uncanny, because Baskins, through her lawyers, also announced that she will not  testify today before a U.S. House of Representatives subcommittee that is investigating HP’s bizarre and potentially illegal probe into leaks from its board of directors to journalists.

Baskins, again through her legal representatives, said she had every intention of testifying at the subcommittee hearing, but that she was advised to invoke her constitutional right to remain silent.

As reported in today’s edition of the Wall Street Journal, Ms. Baskins’s lawyers, K. Lee Blalack at O’Melveny & Myers and Cristina Arguedas of Arguedas, Cassman & Headley in Berkeley, Calif., issued the following statement:

Please understand, however, that Ms. Baskins very much wants to testify and discuss these matters with the Subcommittee. Were she to do so, we are firmly convinced that the Subcommittee would recognize that she acted legally and ethically at all times. Given the current environment, however, Ms. Baskins simply has no choice.

Yes, that last sentence, particularly the reference to the "current environment," puzzles me, too.

The "current environment" includes a separation agreement between Baskins and Hewlett-Packard. In exchange for her agreement to aid HP with its investigation into the board leaks and to refrain from suing the company, Baskins will be indemnified by HP, which will also pay her legal expenses.

What’s more, Baskins retains rights to exercise vested stock options, valued at nearly $3.7 million as of Sept. 27. HP also has agreed to accelerate the vesting of other options so that the "aggregate intrinsic value" of the unvested options equals $1 million on November 20.

It’s no wonder Baskins has declined to provide testimony today to the House subcommittee. It clearly is not in her interest to talk.

Return of the Apple iPhone Rumors

I suppose it’s possible that Apple could be working with Cingular on a mobile phone sold exclusively by the latter. Almost anything is possible.

It isn’t probable, however, and David Pogue does a commendable job explaining why on his New York Times blog. As Pogue opines:

The problem is that when you build a cellphone, the carriers (Verizon, Cingular, etc.) have veto power over EVERY move you make. You have to fight, wheedle, cajole, beg, demo, refine, lather, rinse, repeat…all in hopes that the carriers will accept your design–and stock your phone.

I cannot imagine Apple giving veto power to ANYONE over its software design. It just ain’t gonna happen.

Pogue’s reasoning is sound.

It’s unlikely that Apple would be able to make the endless design compromises and business accommodations that are conceded on a regular basis by mobile-phone market leaders such as Nokia and Motorola. Those companies, too, would enthusiastically embrace more creative freedom, and more business latitude, in their relationships with wireless operators, but they know such a favorable state of affairs is unlikely to materialize.

In the world as we find it today, wireless operators control the relationship with the mobile-phone customer. Handset vendors are equipment suppliers, and their customers, unfortunately, are the wireless operators, not the ultimate consumers of their products. They’re at one remove from the customer.

Is that a situation that Apple would amenable? Even if did, is there any reasonable expectation that the bastardized and neutered products that eventually filtered through the process would meet the aesthetic and functional standards of Apple’s iPod and other products?

Don’t get excited about the prospect of an Apple iPhone. Even in the remote likelihood that it comes to pass, it won’t be up to Apple’s usual standards. Remember the ROKR? Well, you’d probably see an incremental improvement on something like that.

Perhaps it’s better than Apple stay away from the mobile-phone market, at least for now.