Saturday, January 14, 2006

Dot.Bomb scenario for Google ?

Another book : Dot.Bomb by David Kuo

Not a great book, basically because it provides no insights at all. It just tells you a simple story of a company called Value America which promised to change the e-commerce landscape, but ends up bankrupt.

But it gives you a picture of how a whole industry gets into a bubble.

Value America promised the world this :
  1. An inventoriless e-commerce architecture which would sell everything from a Colgate toothbrush to an iMac on its website.
  2. No inventory will mean low costs resulting in lowest prices
  3. The e-commerce architecture will be built in such that it will be portable and potentially will run all shopping sites in the world
  4. With more and more people becoming netizens, Value America will get to be bigger than WalMart one day.

When someone pitches you such a proposal and you happen to have a million dollars in your bank, it is a no-brainer. And when a born salesman like Craig Winn sold such an idea, people like
Paul Allen were ready to put in their millions. But things could go wrong and how:

  1. You have to execute it well. When people dont get what they pay for or when they get the wrong product, they are not going to come back again
  2. Agency costs of Free Cash Flows is to be expected. Dont freak out !! Once in a while, I have to remind people I am an MBA. What that means is, when you have cash and lot of it, you dont necessarily have to spend it on the most productive stuff
  3. One crazy leader/visionary, who has dreams of the White House, cannot have a free run investing people's hard earned money.
  4. You cannot buy a jet for a company which making losses
  5. Using revenue growth as the only signal to showcase the company's future is dangerous. After all, you can buy sales. VUSA was buying just 1% Gross Margin (The difference between what you charge the customer for a product and what you paid for the product) !!
The dream that Value America sold is still alive. The problem was not with the logic of the idea : It was too convincing that everyone wanted to bet his money on it !!

Can Google do a Value America ? Some people seem to believe so !!

But as I see it there are some similarities and differences :

  1. Google too is promising something inventoriless and no marginal costs
  2. Post IPO, GOOG has had a dream run
  3. But, Google is showing good profits, and growing at a mind blowing pace
  4. It is run by arrogant (?!) visionaries
  5. It is spending money on stuff like 5 Star Chefs and of course, jets

For press coverage of the Value America Story:

Saturday, January 07, 2006

The PC story is taking a full U-Turn

I was lucky to read (rather listen to) two books back to back which basically told the story of the Computer industry during the days of the PC revolution from two angles:

Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround

This is an excellent business book, which I think is a must read for management students. The book narrates an unbeleivable turnaround, which is not what I intend to cover in this post. I would cover the turnaround in a future post.

What interested me most in this story was how IBM looks at the PC. It is true that IBM lost the PC battle. But it is not the full story. IBM could have made more money out of the PC, had it seen its true potential. But in reality, the PC did not fit the IBM portfolio at all. It took even IBM a long time to figure that out. Many view selling off its PC division to Lenovo as a disgrace, but IBM is very clear it is part of a long term strategy and looks at this sale as selling off a losing proposition.

Essentially, the game is all about 'Point of View' (PoV) about what a company sees as an industry's future. In the early 90s, IBM and Microsoft both took a PoV about the PC and its future. Bill took the right view and played his cards right, and ended up becoming the richest human being. But IBM during its turnaround took a PoV that the PC as a concept will not last long and the world at some point would have to depend on 'Servers' and 'Middleware', which were IBM's core competencies.

Now, as the world gets shaped around Web 2.0 and a host of handheld devices, the end of the PC revolution looks imminent, IBM is ready to regain its leadership position with its On Demand and other consulting services portfolio alongside its core server products. It is to be seen who wins the PoV gamble this time around.

Business @ the Speed of Thought: Succeeding in the Digital Economy

I read this book just after the IBM one and it was interesting to observe the power of Bill Gates' PC evangelism. The message in the book to corporates is simple : The IT revolution is here to stay, everyone of your employees will have instant access to information through inter-connected networks. So better get on-board by buying a PC or be left behind.

Bill Gates uses the term 'PC' atleast a thousand times in the book, not leaving any room for the reader to think of any other form of technology solution to their problems.

Definitely a good read five years ago. But, today it looks like reading old news. But was really surprised to notice every one of his predictions coming true.

The next two years are going to be crucial for both IBM and MSFT. Microsoft Vista release is going to be a huge bet for the future of the PC.

Newzingo !!

Check this site out. The interesting part is not what the site does using Google News. It is how it makes money using Google News, while Google still does not make money from Google News !!

And actually, Newzingo helps Google make some money too by using Google AdSense. But Newzingo will certainly get a better cut than Google. This very similar to how companies like Google who make more money than broadband providers whose networke drive Google's business, which could change in the coming years.

The moral of the story is: it does not matter how innovative you are in product development. It is crucial to be present in that part of the value chain which delivers the maximum value to you and essentially, get the revenue model right.

There are numerous examples where someone creates the core product and someone else ends capturing more value relatively:

  • Microsoft did this to the all companies which worked hard to deliver the concept of a 'PC'
  • iPod is doing this to the music industry, essentially deriving most of its value from pirated music
But everyone might not be able to take this value stealing to the last penny like what Microsoft has been able to do. The music industry is already asking Apple for a share in the value it creates.

It should be interesting to see how such things get resolved.