Daily Archives: September 28, 2009

Auspicious Timing and Plans for Newegg IPO

I like a few things about the IPO announced today by Newegg.

First, I like that the company — a web-based retailer of computer products for businesses as well as of consumer electronics — is taking advantage of a window of opportunity on the equities markets.

At least for the moment, sunny rays of optimism have broken through the dark clouds of despond. Conditions could change again, though, so Newegg is striking while the markets are comparatively hot (hey, tepid is the new hot). The psychology of American investors, in particular, could be negatively influenced by chronically constrained consumer spending domestically.

I also like what Newegg wants to do with a portion of the IPO’s $175 million in proceeds. The company wants to expand its business operations in China, where it is seeing considerable growth. It’s a smart move. The Chinese economy has continued to grow throughout the worldwide downturn, and it will grow faster as China’s consumer class reaches critical mass in the next five to ten years. A strong presence in high-growth China could insulate Newegg from slow growth in North America. (The company also is expanding into Canada.)

Finally, I like that Newegg is responding proactively to competitive threats, seeking to preclude incursions into its established markets while moving aggressively into new ones.

The timing of Newegg’s IPO, as well as the underlying strategy and use of proceeds associated with it, has been well considered.

Does Microsoft Appreciate Its Core Market?

Over at TechCrunch, Michael Arrington is running a serialized interview with Microsoft CEO Steve Ballmer. The piece published today, on what Microsoft perceives as major opportunities, is well worth reading.

What interests me about how Ballmer articulates and categorizes Microsoft’s big opportunities is that he doesn’t clearly cross-reference or group them according to whether they are aimed at consumer or business markets. Instead, he breaks them down into three broad buckets: short-term opportunities, predicated on and extending businesses in which Microsoft already is active; long-term opportunities, comprising big-market ideas that will take ten years to bring to fruition; and shortcuts, comprising acquisitions of various shapes and sizes.

The article supplies plenty of grist for the analytical mill, but Ballmer’s conflation of business (enterprise) and consumer opportunities is particularly intriguing, if only because it might account for Microsoft’s inability to fully realize its growth potential in enterprise markets. Of course, it also might explain Microsoft’s longstanding and ongoing failure in consumer markets.

This blind spot, which is all the more remarkable in a company as rigorously logical and systematic as Microsoft, comes to the fore in the Arrington interview when Ballmer discusses what he calls “communications collaboration and productivity,” the biggest area of investment for the company.

At one point in the interview, Ballmer defines the area as represented by “the tools and technologies both at home and at work to help people communicate, collaborate, to be productive.” I don’t doubt that these tools and technologies will be used at home as well at work, but they’ll be used primarily for business purposes, regardless of where they’re used. It’s a distinction that Microsoft needs to make.

One of the things Microsoft must be clear about in future, regardless of whether its products or services are used in an office or in the home, is whether the primary value of the offering is connected to business (productivity) purposes or to recreational consumer use. Microsoft sometimes fails to draw that distinction as clearly as it should, which is why we see consumer failures such as the Zune and also why we see the company fail to tap its full enterprise potential.

Here’s a simple question that starkly illustrates the issue: Do people use Office — a gargantuan Microsoft cash cow that is present in businesses and homes — because it provides productivity value as a business-oriented tool or because it delivers fun as a recreational vehicle? I think the answer is obvious.

Following from Ballmer’s conception of deriving and extending growth from areas in which Microsoft already is successful, that understanding should lead to adjacent short-term opportunities predicated on business utility. I am not saying Microsoft isn’t pursuing such opportunities, but I am wondering whether they’re fully exploiting them.

If Microsoft had remained focused on what it does well, how did it end up in the consumer weeds with Bob, MSN, Zune, Xbox and even the Xbox 360 (which continues to struggle toward profitability)? Does Microsoft fully understand what it does well and why?

Fortunately, Ballmer seems to be placing greater emphasis on Microsoft’s enterprise growth prospects. That’s a wise choice. Microsoft has plenty of headroom in enterprise markets — SMB and above — but it needs to reinforce and extend its presence before others start cutting into it.

Startups Fewer in Number, Less Ambitious in Scope

The economic downturn, called the Great Recession by some, is supposed to be over. Numerous economists and pundits have pronounced an incipient recovery. If it has arrived, it’s an odd sort of recovery that is barely perceptible, even invisible to many.

We know the downturn has taken an enormous toll on the information-technology industry in North America. We know that jobs have been lost, companies have gone out of business, and that venture capital has contracted. We also know, as an article in today’s Wall Street Journal notes, that fewer startup companies – in all industries, not just technology – are getting off the ground.

From the WSJ:

Company formation typically dips slightly in recessions, says Brian Headd, a Small Business Administration economist. Earlier this decade, business starts — including new businesses and units of existing businesses — fell 9% between the third quarter of 2000 and the first quarter of 2003, the BLS says.

This time, the decline has been steeper. Business starts fell 14% from the third quarter of 2007 to the third quarter of 2008; the 187,000 businesses launched in that quarter were the fewest in a quarter since 1995. The number ticked up slightly in the fourth quarter, the latest data available. But those new establishments created only 794,000 jobs, the fewest since the government began tracking the data in 1993.

The reasons behind the declining numbers of startup companies are relatively easy to identify. Funding, from venture capitalists and banks, is harder to get. Entrepreneurs, recognizing the funding squeeze, are become less tolerant of risk, choosing to pursue less-ambitious startup ideas or not to pursue them at all. Many would-be entrepreneurs have chosen to ride out the economic turbulence as employees of larger, established companies.

For the most part, businesses that are getting started are smaller than those launched in previous periods, even in past recessions. That’s directly attributable to constrained funding, which compels entrepreneurs to focus on businesses and markets that require relatively modest capital expenditures and that already exist as established niches. Unfortunately, these smaller businesses are inclined to grow less than previous generations of startups. That means they will generate fewer jobs, too.

Also troubling is that many new businesses are in areas – such as babysitting and house-cleaning services – with low income potential. Relatively fewer businesses have been launched in areas with higher income potential.

One mistake being made by the mainstream business media is that they continue to treat the downturn we’ve been experiencing as just another recession in just another business cycle. That diagnosis just isn’t correct. I think this downturn’s origins, its immediate effects, and its long-term repercussions are different from what we’ve experienced previously.

We’re witnessing a reconfiguration of the global economy, not just an attempted rebound from a typical recession. Some things, such as high-powered spending by US consumers, are not coming back to their former glory. With new regulations and an overdue wariness inhibiting financial chicanery, Americans will save more and spend less. Their homes are no longer veritable automated teller machines, their jobs are no longer secure, and their retirement savings are no longer assured.

Conversely, China, which funded US consumerism by buying US bonds, has begun to lay the groundwork for its own consumer economy, largely in a bid to lessen its reliance on manufactured exports to the USA and Europe.

These are huge tectonic shifts beneath the surface of the global economy, and they don’t seem to be fully appreciated by the business press. Looking back at the past-performance charts of previous cycles won’t give us an accurate guide to where we’re heading this time.