Facebook’s positive and unique problem

Most sectors globally are seeing a reduction in demand. Businesses are cutting down on expansion plans. Yet Facebook the poster child for social networking, continues to soar.

It signed its 200 millionth user this month, doubling its size in just 8 months. It has now established itself as the world’s most extensively used avenue for personal networking and has surpassed competitors like MySpace, hi5, Orkut etc.

Each day they are signing 500,000 users bringing in traffic, photos, data etc.

More users are getting addicted to Facebook. More than half the users use the site everyday and spend an average of 20 minutes on the site.

It is the 5th most trafficked site in the U.S. and is the largest photo sharing site on the planet.

Microsoft invested $240 million for a 1.6% equity stake in 2005 when Facebook was just making revenues of $50 million, effectively valuing them at $15 billion.

Who would not envy Facebook’s growth?

Yet paradoxically, growth seems to be the real problem.

Even with such a large subscriber base, it is not profitable. Its 2009 revenues are projected to be $350 million (based on very optimistic estimates) and its costs are spiraling upwards since it just needs to put in more infrastructure to cater to the bludgeoning subscribers. Experts reckon that the costs to run the infrastructure would be $600 million. Currently, it is still struggling to find a profitability model.

Based on Businessweek’s recent article, it is hunting for more money. It would be difficult to raise equity at the earlier valuation of $15 billion in current business environments. Hence it is looking for debt financing to lease the computers to run its sites.

The revenue projections are primarily based on advertising and is primarily for the U.S. audience which is estimates to be around 60 million. it looks like the growth in the U.S. has flattened and all the international users are not necessarily factored as prospective users for the revenue model.

Its revenue models– primarily advertising (self serve ad system) and their talks with various advertisers have been ’soft” given the current business environment. A new kind of engagement advertising is being tested out, and is unproven.

More fundamentally, the company has been having an unprecedented challenge: It created a community and now the community has become so powerful that it is challenging the company and forcing the company to retract from several key business initiatives. It had to withdraw the Beacon advertising system in 2007 and also withdraw its earlier move to take commercial control over the user content.It also had to deal with a huge user protest over some design changes.

So, where is Facebook headed with all these positive challenges?

Will it reinvent the social networking space with some new killer applications.or just go the way other social networking platforms like Friendster and MySpace?

Will it be a candidate for acquisition either for Google or Microsoft or AOL?

What is needed to be done to monetize their user base, given that users have become dominant and aggressive in the way they would like to be treated?

And finally, is social networking as a business model viable?

Skype in the Enterprise

Saw the news item that Skype  is finally targeting the enterprise. Makes you wonder, why they didn’t do it earlier and what were they waiting for!

Few people know that Skype with 33 billion minutes of use is the largest provider of international voice traffic in the world. And it surpasses AT&T. More importantly, Skype grew by 41% in 2008, compared with traditional international call traffic at just 12%.

With revenues of $550 million in 2008, it is now trying to penetrate into the Enterprise segment with a view to grow aggressively.

Skype launched its Enterprise offering which enables employees to make domestic and international calls using normal PBX systems instead of using computers. The key dependency is that the PBX needs to support SIP (an open source PBX protocol)

This is another potential game changer, but Skype doesn’t have an enterprise sales team nor the alliance network to penetrate the enterprise. If Skype can find the right go to market model, some of the IP Telephony vendors could feel the heat.

Well, why they didn’t pursue paying customers earlier beats me! Worse, EBay paid $2.5 billion for Skype in 2005. My hunch is that EBay may very soon put up Skype for sale.

Tags: Skype, Unified Communications, eBay, PBX, SIP, enterprise telephony, telephony

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Does IBM need Sun?

No sooner had I finished posting my blog post on Cisco’s Unified Computing strategy and its implications, I saw that IBM is in talks to acquire Sun for $6.5 billion.  Sun has over $2.5 billion in cash, so the entire Sun business is valued at $4 billion.

I had expected a spate of acquisitions to happen, but not so soon. Not IBM acquiring Sun. My take was that it would be either EMC or Dell or HP acquiring Sun.

Here’s my analysis assuming that the news is for real and that it is not one of those rumor balloons:

1. IBM gets more share in a shrinking UNIX server market. IBM is already doing a good job with Linux (IBM’s overall market server market share is 31%) and doesn’t need the extra 10% market share coming from Sun. I have already said here that with Cisco entering the server space the already low margins could even get lower. So, IBM with a server margin (around 10%) buying Sun for just the servers doesn’t make compelling logic.

2. Maybe IBM is eyeing Sun’s MySQL database! It makes sense, but IBM has its own DB2 and it also has Informix. So, adding MySQL to their product portfolio makes limited sense.

3. Java may be the crown jewel in Sun’s assets, but it hasn’t made money for Sun. I wonder how IBM will make it sing.

4. The rest of Sun’s products –  storage, SOA stack, professional services none of them are compelling enough.

5. No compelling next generation chip architectures from Sun.
   

Clearly there’s little strategic fit from a technology standpoint or from a marketing standpoint for IBM to acquire Sun.

Maybe there are some new initiatives from Sun in the cloud computing space. But Sun has not been investing in any kind of cutting edge architecture for a long time.

One possible reason for this rumor balloon to gain credence is that this move could thwart other vendors like HP, Dell or  a Cisco to acquire Sun. It doesn’t make any sense, because they could enter the bidding fray themselves. My own thinking is that a Dell or a Cisco may have a better fit with Sun’s products, channels and even culture.

Some analysts seem to believe that after acquiring Sun, IBM may sell the hardware and license the Solaris business to Fujitsu. This seems too far fetched to me.

Most importantly, Sun doesn’t offer any great networking product or technology — something that IBM needs to counter Cisco’s Unified Computing proposition.

So, I will be surprised if this deal goes through. But in the world of M&A, value perception is entirely different and a lot lies in the eyes of the beholder.

Tags: IBM, Cisco, Sun, Unified Computing, M&A, servers, open source, synergy

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Cisco declares war on IBM and HP

Early this week, Cisco announced a major initiative which has the potential to shake up the overall server, storage markets completely.

Cisco announced a blade server ( Unified Computing system) that combines computing, storage and networking into a single layer all being managed by a specialized software being offered by BMC. It is increasingly becoming clear that virtualization is the primary driver.

This is a game changing play.

First, it puts Cisco directly in competition with their established partners like IBM and HP who have a lot of stake in the server and storage segments. Till now IBM and HP (especially with the EDS acquisition)  held the keys to the data center and now they will face a frontal attack from Cisco. My own view is that Dell may be least affected as they cater to the low end of the server segments. So, Cisco is up against their own partners and this partnership with IBM and HP is at risk.

Clearly Cisco which has not had a legacy in the data centre equipment of services business has created a new value proposition of building an “intelligent and carrier class digital” IT infrastructure. It would be difficult to ignore this value proposition as new data centers emerge.

There is an entirely new market opening up for mega data centers — the ones owned by Google, Amazon, Facebook etc. This market is poised to grow at over 30% over the next 3-5 years as digital data grows and as many companies go through the M&A process. My own estimate is  that one of every 5 servers (medium to high end) sold finds itself in a data center. So, Cisco is clearly addressing a potentially huge market.

But will this new customers accept Cisco’s proposition? Clearly Cisco is trying to own everything in the data center and many data center managers would resist lock in.

Apart from the fact that Cisco would treading into an unknown territory, the dynamics of competition makes the play interesting:

Cisco’s gross margins in the routing/switching market is around 62% while the typical server markets fetch close to 22%. Assuming the bundling (computing, storage and networking) finds acceptance, Cisco’s margins for this business may be around 40%. Hence this may lower the overall profitability. How Cisco manages their margins in this business would be interesting to watch.

HP emboldened by the success of ProCurve is likely to take a more aggressive stance. IBM will have to figure out how to fill the gaps in their product line up.

Both IBM and HP are likely to make a slew of acquisitions and companies like Juniper and Brocade make interesting candidates. Should any of these occur, Cisco might end up acquiring VMWare completely (currently it owns 2%) or might even attempt to acquire EMC to bolster its position.

Now, everyone is waiting for IBM and HP to come up with competing announcements. The battle for the data center is beginning and promises to be long drawn. Cisco would also need to make a lot of investments in getting their partner network ready and some of the Cisco partners also have relationships with IBM and HP.

Tags: Cisco, HP, IBM, data center, competition, alliances

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MBA schools and Ethics.

I recently caught up with my learned friend Dr. Kulwant Singh – Professor of Strategy and currently Deputy Dean of the NUS Business school. Our discussions are always interesting because we hold diametrically opposite views on many issues and the exchanges are often robust, yet mutually respectful.

One such discussion recently was my suggestion that all Business schools should make Ethics a core subject in their BBA/MBA curriculum. I also quoted Dan Ariel’s research on the subject. His response was that by the time the student comes to do the MBA program his values are more or less set and there’s little that the Business school can do to shape it as the prospective student spends only between 1-1.5 yrs there. Fair point. Yet, business schools cannot use this to abdicate their responsibility, especially when most business schools claim their role is to produce business leaders for tomorrow.

Every time there’s a business collapse, invariably the discussion veers around the pedigree of the culprits. The Enron episode put the prominent Harvard Business School into the spotlight as the CEO was a famous alum. With the current global crisis, it is again time for the same school to be on the spotlight as there are a number of Harvard alumni who played a role both in the collapse and now in the rescue.

A recent article (by a Harvard alum) is unsparingly critical of Harvard Business school and makes some great points. It also makes the point of how distinguished professors got sucked by the business fads created by organizations and sung their praises only to be embarrassed when the organization collapsed. Gary Hamel of London Business School also had his share his blame as he praised Enron only to see the firm collapse in months after his book praising Enron was published.

This raises a few legitimate questions about the role of business schools, the faculty and the students:

Are some of the academics as gullible as the rest of us that they can’t see the structural weaknesses that some of the firms (the firms they study) face? Or are does the glitz and the glamor of the corporate world blind them in some way? Recent events seem to provide evidence. This time Prof Joel Podolny of Harvard Business School writes a great case about how Royal Bank of Scotland has deployed a new financial architecture. Another don from Harvard Business school — Prof Krishna Palepu who was on the Satyam board was criticized for not having asked the right questions when the Satyam – Maytas saga broke out.

Does the business school education accentuate their greed and “the get rich quick syndrome” that could be present in many of them? It is safe to assume that a lot of MBA aspirants are there to become rich, and become rich soon.

Do the business school students lose the element of critical thinking about their own personal values and define themselves by the outcomes they deliver, which by and large is making more money for themselves? Would a different pedagogy of learning by reflection that supplements the case study method help them with assessing their own personal value systems and recalibrating them if necessary?

I clearly don’t have the answers. I have been thinking about these issues for many years now.

The article somewhat  loses its credibility by over-generalizing the Harvard instance and seems to overstate the flaws and failures of the MBA education.

Notwithstanding the limitations that business schools face, if one has to consider the collateral damage that businesses and society as a whole pays for the neglect of the Ethics aspect of education, finding a way to inculcate the right values may turn out to be a wise investment.

The current global financial crisis has lessons for all of us including for business school academics and administrators. I do hope they get out of their ivory towers and make attempts to create not just business leaders, but the right kind of leaders.

Tags: Ethics, financial crisis, global meltdown, MBA education, business school, Harvard

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Play, not persistence drives innovation

The spirit driving innovation is undoubtedly complex. And these drivers vary depending a lot on the individual’s motivations, the overall context of the problem. Some innovations happen through painstaking effort, some occur due to serendipity and some occur due to a certain “fun process”.

If you analyze the major breakthroughs that we have seen and some of the significant innovations that led to great products, it has been because there was an interesting and intertwined relationship between passion and play. There was persistence, but in the absence of passion and the element of play, the dogged persistence served little purpose.

In an interesting article, Microsoft Research Principal Scientist Bill Buxton suggests some important ways to innovate.

He suggests that it is always better to be a beginner at something and always be in love with the thing that you are beginning.

The energy to be passionate can be addictive, and you need the balance.

When you get good in a skill, make room for a new passion.

You can learn from anyone.

And finally innovation comes about by sustaining the passion, curiosity, delight, energy and enthusiasm of the beginner with the wisdom and experience of the expert.

Tags: creativity, passion, energy, enthusiasm, play, Microsoft

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Innovation hot spots

Mckinsey in partnership with the World Economic Forum has created an “Innovation Heat Map” by identifying factors that are common to successful innovation.

Not surprisingly, the Silicon Valley comes as a clear leader. And numerous countries like Singapore have tried to emulate the Valley. Bangalore, often  called the Silicon Valley of the East and it is not even represented in the Innovation heat map.

I am equally surprised that none of the countries in Asia — barring Japan and Taiwan appear on the Innovation heatmap. I would have expected Seoul, Bangalore and maybe even Shanghai to appear on the map.

This map seems to contradict another report released by the Information Technology and Innovation Foundation  which found that the U.S. was ranked sixth based on their indicators.

Singapore has been spending billions of dollars (all tax payers money) to spur innovation. And I belong to the skeptics community often wondering whether this  is the right approach. Surprisingly Singapore doesn’t seem to be anywhere in the Mckinsey’s Heat map.

I have always been skeptical about these rankings because there is always a risk of causality often being mistaken for co-relationships.

And on a more operational note, with global collaboration and work being distributed to talent spots, how is it possible to identify the exact nature of contribution from each location.

Tags: Innovation, singapore, heat map, McKinsey, collaboration

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Experience can be a big liability

The Wall Street Journal has an interesting and a provocative article on the relevance of experience. Though the article by and large focuses on the project management area (an area where I have significant experience both as a practitioner and as a consultant and hence competent to comment), the broad implications of the article are relevant across all disciplines.

In times of profound change, the learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.

In my own personal endeavor, I have often felt that to remain current, one needs to constantly have a curious and questioning mind. It is too tempting to impose a solution that has worked in the past, or a solution that we are personally biased towards and force-fit the problem to the solution. As a consultant and an analyst, the temptation is all the more greater. And I have seen some unpleasant consequences of using an obsolete approach in the name of best practices.

This is another situation where an ounce of perspective is worth more than a pound of analytics and regurgitation.

I have blogged about the how being trained to see often masks our ability to see and why despite being wise, not being able to have the much needed perspective often leads to us going astray here.

Tags: learning, perspective, training, experience

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Warren Buffet– An enlightened sage!

The surest test of a man’s character is his behavior when he has to deal with adverse circumstances and his admission of his errors or mistakes.

Warren Buffet often referred to as the sage of Omaha and considered to be the greatest investor of all times had his worst year. Berkshire Hathaway book value per share fell 9.6% in 2008 its biggest decline ever. The company also reported its fifth year-over-year quarterly decline. The $117 million quarterly gain  in the Q4 2008 is a 96% drop from Q4 2007 $2.9 billion in fourth-quarter income.

Despite the poor results,  the company’s book-value performance in 2008 still far outpaced the Standard & Poor’s 500-stock index, which fell 37% last year, including dividends, as well as hedge funds, which last year averaged about an 18% decline.

The share price is actually revealing and the share price has dropped 32% in 2008 and about 19% in 2009 beating the S&P marginally.

In his characteristic humble way, Warren Buffet in his annual letter to the shareholders said:

“During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt. … Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.”

For  the richest man on the planet to admit that he was dumb should teach all of us lessons about humility and the fallibility of human judgment. I have long been an admirer of the Warren Buffet’s wisdom, but now with this humility, he truly is not just a Sage, but an Enlightened Sage.

Coming after Alan Greenspan’s admission of shock that markets didn’t work, it only goes to show the ultimate measure of one’s greatness — Admitting one’s mistakes.

Tags: Alan greenspan, Warren Buffet, Bershire Hathway, humility

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