Don Dodge on The Next Big Thing

Dave DeWitt opens Microsoft's Jim Gray Systems Lab

Database pioneer Dave DeWitt has joined Microsoft as a Technical Fellow, and will head a new research lab called the Jim Gray Systems Lab. Jim Gray was a legend in the database world, and was tragically lost at sea in January of 2007.

Ted Kummert, Corp VP at Microsoft said "It’s a great honor to be able to name this lab after Jim Gray.  Jim’s impact on the database and computer systems industry is immeasurable – not just in terms of the ideas and works he created, but as importantly on the people in this industry. Jim was very interested and supportive of education throughout his career.  Having his name on the lab is a way of honoring both his technical contributions to the field as a Turing award winner and his support of education and research."

I knew Jim Gray for more than 20 years. We worked together for many years at Digital Equipment Corp in the Database Systems Group, and again at Microsoft, although in different groups. Jim is the smartest guy I have ever worked with, and also the most friendly and humble. Jim received the Turing Award in 1999, the equivalent of Nobel Prize for computer science. I stopped by to meet with Jim in his San Francisco office 6 months after he won the award. He had a plaque and a picture from the award ceremony sitting on the floor behind a bunch of computer science journals. I asked him about it and he just shrugged and said "Well, my daughter is very proud of me...that is all that matters". The smartest guy I ever met also understood the simple things in life.

The Jim Gray Systems Lab will be in Madison Wisconsin, where Dave DeWitt was a long time professor. DeWitt recently retired as an active professor, and is now Professor Emeritus at the University of Wisconsin-Madison.  His technical contributions have been recognized with election to the National Academy of Engineering and the American Academy of Arts and Sciences. DeWitt’s research program produced numerous technical contributions to the database field as well as educating many students who went on to make major contributions to the database system field. Microsoft’s own Technical Fellows Peter Spiro and Rakesh Agrawal both were students under DeWitt. His PhD graduates are a veritable who’s-who of the database industry – many of those graduates here at Microsoft both in the SQL group and in the database group in Microsoft Research.

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Microsoft Worldwide Telescope explores the galaxies

Microsoft introduced the World Wide Telescope at the TED Conference. Robert Scoble said it made him cry tears of joy the first time he saw it, and again yesterday at  TED.

Roy Gould, Harvard professor at the Center for Astrophysics introduced the WWT to the TED conference. He called it transformative, and gave three reasons why he is excited about it;

1. “It enables you to experience the universe. . . . [It] lets you navigate through the universe to where you want to go.”
2. “You can tour the universe with astronomers as your guides. . . . people who are passionate about the various noooks and crannies of the universe.”
3. “You can create your own tours. You can share them with friends. You can create them with friends. . . . each of us is going to understand the universe in our own way. We're going to have a personal universe.”

The WWT software will be available for free download later this Spring. The Microsoft  World Wide Telescope site is up now.

Here is a short 6 minute video of Gould's presentation and demo of the telescope. The images are spectacular, definitely worth watching the video.

Microsoft proposes acquisition of Yahoo for $31 share

Microsoft has proposed acquiring Yahoo! for $31 per share in stock or cash which values the company at $44.6 Billion, a 62% premium to Yahoo's stock price on the eve of the announcement. Techmeme has LOTS of stories and blogs about the proposal.

Microsoft has been in serious discussions with Yahoo off and on for about two years. Henry Blodget, and many others have written many times about possible scenarios with Microsoft and Yahoo. But, two things to remember. First, this is an offer to acquire, which Yahoo's board and shareholders need to approve. Second, the regulatory authorities in the US and Europe must also approve.

Microsoft believes this proposed combination would receive all necessary regulatory approvals and expects that the proposed transaction would be completed in the second half of calendar year 2008.

Microsoft is also committed to working closely with Yahoo! management and its Board of Directors as they, along with Yahoo! shareholders, evaluate this compelling proposal.

Microsoft released the contents of a letter from Microsoft CEO Steve Ballmer to Yahoo's board of directors. Here is the letter in its entirety;

January 31, 2008

Board of Directors
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089
Attention: Roy Bostock, Chairman
Attention: Jerry Yang, Chief Executive Officer

Dear Members of the Board:

I am writing on behalf of the Board of Directors of Microsoft to make a proposal for a business combination of Microsoft and Yahoo!. Under our proposal, Microsoft would acquire all of the outstanding shares of Yahoo! common stock for per share consideration of $31 based on Microsoft’s closing share price on January 31, 2008, payable in the form of $31 in cash or 0.9509 of a share of Microsoft common stock. Microsoft would provide each Yahoo! shareholder with the ability to choose whether to receive the consideration in cash or Microsoft common stock, subject to pro-ration so that in the aggregate one-half of the Yahoo! common shares will be exchanged for shares of Microsoft common stock and one-half of the Yahoo! common shares will be converted into the right to receive cash. Our proposal is not subject to any financing condition.

Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008. The implied premium for the operating assets of the company clearly is considerably greater when adjusted for the minority, non-controlled assets and cash. By whatever financial measure you use - EBITDA, free cash flow, operating cash flow, net income, or analyst target prices - this proposal represents a compelling value realization event for your shareholders.

We believe that Microsoft common stock represents a very attractive investment opportunity for Yahoo!’s shareholders. Microsoft has generated revenue growth of 15%, earnings growth of 26%, and a return on equity of 35% on average for the last three years. Microsoft’s share price has generated shareholder returns of 8% during the last one year period and 28% during the last three year period, significantly outperforming the S&P 500. It is our view that Microsoft has significant potential upside given the continued solid growth in our core businesses, the recent launch of Windows Vista, and other strategic initiatives.

Microsoft’s consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers. In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together. These discussions were based on a vision that the online businesses of Microsoft and Yahoo! should be aligned in some way to create a more effective competitor in the online marketplace. We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected. While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing.

In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that “now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction.” According to that letter, the principal reason for this view was the Yahoo! Board’s confidence in the “potential upside” if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment. A year has gone by, and the competitive situation has not improved.

While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers. Synergies of this combination fall into four areas:

Scale economics: This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers. Additionally, the combination allows us to consolidate capital spending.

Expanded R&D capacity: The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform. Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities. Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.

Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.

Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.

We would value the opportunity to further discuss with you how to optimize the integration of our respective businesses to create a leading global technology company with exceptional display and search advertising capabilities. You should also be aware that we intend to offer significant retention packages to your engineers, key leaders and employees across all disciplines.

We have dedicated considerable time and resources to an analysis of a potential transaction and are confident that the combination will receive all necessary regulatory approvals. We look forward to discussing this with you, and both our internal legal team and outside counsel are available to meet with your counsel at their earliest convenience.

Our proposal is subject to the negotiation of a definitive merger agreement and our having the opportunity to conduct certain limited and confirmatory due diligence. In addition, because a portion of the aggregate merger consideration would consist of Microsoft common stock, we would provide Yahoo! the opportunity to conduct appropriate limited due diligence with respect to Microsoft. We are prepared to deliver a draft merger agreement to you and begin discussions immediately.

In light of the significance of this proposal to your shareholders and ours, as well as the potential for selective disclosures, our intention is to publicly release the text of this letter tomorrow morning.

Due to the importance of these discussions and the value represented by our proposal, we expect the Yahoo! Board to engage in a full review of our proposal. My leadership team and I would be happy to make ourselves available to meet with you and your Board at your earliest convenience. Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.

We believe this proposal represents a unique opportunity to create significant value for Yahoo!’s shareholders and employees, and the combined company will be better positioned to provide an enhanced value proposition to users and advertisers. We hope that you and your Board share our enthusiasm, and we look forward to a prompt and favorable reply.

Sincerely yours,

/s/ Steven A. Ballmer

Steven A. Ballmer

Chief Executive Officer

Microsoft Corporation

Microsoft Revenues Up 30%, EPS Up 92%

Microsoft announced record revenues and earnings for the quarter ended December 31, 2007. Revenues were up 30% to $16.4 Billion. Operating Income was up 87% to $6.5 Billion. And Earnings Per Share (EPS) were up 92% to $0.50 per share.

All Microsoft (Nasdaq MSFT) business units reported strong results. Here is a breakdown by division:

• Windows Client (Vista/XP): $4.3 Billion, up 68%
• MBD (Office/SharePoint): $4.8B, up 37%.
• Server & Tools (SQL Server/Visual Studio): $3.3 Billion, up 15%.
• Entertainment (Xbox & Zune): $3.1 Billion
• Online Services (MSN/Live): $863M, up 38%.

Other Highlights:

• Windows Vista has sold over 100 Million licenses
• Xbox 360 has sold 17.7 Million units
• Xbox Live - over 10 Million subscriptions
• Windows Live - over 420 Million accounts

Strong Outlook - The outlook for next quarter and the fiscal year remains strong too, even in light of stock market woes and talk of recession. Here is the guidance from Microsoft management;

Microsoft management offers the following guidance for the quarter ending March 31, 2008:

Revenue is expected to be in the range of $14.3 billion to $14.6 billion.

Operating income is expected to be in the range of $5.6 billion to $5.7 billion.

Diluted earnings per share are expected to be in the range of $0.43 to $0.45.

Management offers the following guidance for the full fiscal year ending June 30, 2008:

Revenue is expected to be in the range of $59.9 billion to $60.5 billion.

Operating income is expected to be in the range of $24.2 billion to $24.4 billion.

Diluted earnings per share are expected to be in the range of $1.85 to $1.88.

 

It is nice to see some good economic news this week after all the turbulence in the stock market. Wall Street is always looking ahead so the "guidance" is sometimes as important as the actual numbers for the quarter. Microsoft gave strong guidance for the quarters ahead as well. Let's see how investors react. Henry Blodget at Silicon Alley Insider likes what he sees.

UPDATE: Steve Lohr at The New York Times talks about the guidance and why it is so important. I encourage you to read the whole story but here is an excerpt.

Other leading technology companies, like Intel and Apple, have reported strong quarterly results, only to have their shares punished after they warned of cloudy outlooks given the increasing possibility of an economic recession.

But Microsoft executives still sound confident. In a conference call with analysts, Christopher Liddell, Microsoft’s chief financial officer, said, “We have not seen any significant spillover for an economic slowdown in the U.S.”

Sixty percent of Microsoft’s business is now outside the United States, which helps insulate the company from the chill of a slowdown in the American economy. Even so, Mr. Liddell noted that Microsoft’s sales in the American market in the last six months had grown at a healthy 15 percent clip.

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Microsoft Startup Accelerator Fuels Startup Success

Microsoft Startup Accelerator  is a special program for innovative early-stage startups that are a strategic fit for Microsoft.  The Emerging Business Team, the group I work for at Microsoft, is leading the program. There are currently over 50 companies in the program with a goal of reaching 100 companies worldwide.

Several of the startups I work with are part of the Startup Accelerator program including; Lijit, Me.dium, Xobni, Clarizen, and RingCentral.

   Me.dium is a web browser plug-in that turns web browsing into a social experience. It gives you a personalized map of the Internet showing you what web sites your friends are visiting in real time. You can use it to discover new people and places that are relevant just to you. It also allows you to surf with friends in real-time. It's just like hanging out in the real world, but online.

Listen to what David Mandell, VP at Me.dium has to say about the Microsoft Startup Accelerator Program;

Getting direct connections to developers within Microsoft speeded our own internal development time significantly, I would estimate about a 50% velocity increase. In addition, gaining exposure to some of the Microsoft MVP’s gave us critical product feedback that we simply didn’t have the manpower to gain on our own. Getting on the Windows Marketplace site quickly took our customer mix from almost completely Firefox users, to a ratio of 75% IE to 25% Firefox, all through new customer acquisition. 

The Emerging Business Team and The Microsoft Startup Accelerator Program have truly turned into an invaluable resource for Me.dium.  We would never have imagined that a company as large as Microsoft would have the desire to focus on a small startup such as Me.dium, but we were completely blown away by the attention and access to people that we were given and owe much or our current success to that relationship.

Microsoft is committed to serving as a valuable technology and business partner for emerging startups and investors. The Microsoft Emerging Business Team (EBT) has been working with the startup community since 1999, and today engages with hundreds of technology startups each year to identify those with the strongest potential to succeed in the market, shape the industry’s future, and enhance the overall value of Microsoft products and services for customers.

The team looks at a number of criteria, including marketability, growth potential, funding, management and management history, platform decisions, and strategic importance to Microsoft. The Microsoft Startup Accelerator Program has local implementation in France, Germany, India, the United Kingdom and the United States. Interested startups can apply via the process outlined at the Microsoft Startup Zone at http://www.microsoftstartupzone.com.

Bill Gates Last Day At Microsoft - The Video

Bill Gates did his last CES Keynote address at the 2008 Consumer Electronics Show. He will officially retire in July of 2008. He asked some friends to help him think about life after Microsoft, and put together this video for your enjoyment. This is Bill Gates as you have never seen him before. Includes cameo appearances by Bono, Mathew McCounaughey, George Clooney, Hillary Clinton, Barak Obama, JayZ, Steven Spielberg, NBC's Brian Williams, and more.

Will advertising revenues drop in a recession? Who will win and who will lose?

In business it is commonly understood that advertising is the first thing to be cut in a business downturn or recession. Henry Blodget, former Wall Street Internet stock analyst, believes we are headed for a deeper recession and that advertising, even web advertising, will be hurt. My take? Advertising in general will fall, but CPC Internet advertising will increase.

Display advertising will be hurt

Newspapers will be the first to feel the pain. Newspapers are already getting hammered and it is only going to get worse. TV and Radio will also feel the pain, but to a lesser degree. Advertising mediums like these don't have good feedback mechanisms. It is really hard to accurately calculate how effective an advertising campaign has been. You pay your money up front and hope for the best.

Web based CPM advertising will be hurt too

Web based display ads and banner ads are the online equivalent of print display ads. The costs are substantially lower, but the results are still hard to measure. Cost Per Mil (CPM) ads are not well targeted like search advertising. There is also no user interaction like there is on Cost Per Click (CPC) ads. Big web sites like Yahoo, AOL, Cnet, Marketwatch, and others get most of their revenue from display/banner ads. Advertisers are likely to cut back first on print ads, and later on web based display ads.

CPC advertising could actually increase

With CPC ads you pay nothing unless someone clicks on your advertisement. This is a huge advantage for advertisers who really want to increase sales but can't afford to gamble on a display ad. CPC ads are easily justifiable and trackable. In a recession, with declining sales, there is enormous pressure to do anything possible to get sales moving. CPC advertising, principally on search engines, will be very appealing to advertisers.

A recession could accelerate the trend to web based CPC advertising.

The trend towards Internet advertising has been growing for years. Still, less than 10% of all advertising dollars are spent on the Internet, up from about 6% a few years ago. The trend will continue and probably accelerate with a recession. This is great news for search engines like Google, Microsoft Live Search, and Yahoo Search.

The Yahoo problem

Yahoo is a huge web destination with great traffic numbers. The problem is that most of their traffic (over 80% last time I checked) is generic, untargeted page views. Meaning, their traffic is to a Yahoo home page, Yahoo email, or some other generic content page. This traffic is hard to monetize effectively because it is not targeted. Search traffic is easy to target and commands very high advertising rates because it is so tightly targeted and effective.

Where is the opportunity?

Ad targeting technology that targets ads to the user, not the content they are looking at, will be a huge winner. Imagine if Yahoo, or any other big content site, could better target their advertising to users. They could go charge much higher prices for their CPM ads, and convert lots of generic page views into advertising dollars.

There are lots of companies working on this from lots of different angles. Quantcast is doing deep click stream analysis and layering on demographic data for better targeting. MatchMine is taking a different approach. By analyzing the content you like, and recommending more content like it, they build a profile to help you get better content, and help advertisers target their ads.

Behavioral targeting for advertising is already a hot area, and likely to get even hotter. Especially if an economic recession hits the advertising world.

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Does Google have its head in the clouds?

Yesterday the New York Times said "Google Ready To Rumble With Microsoft", referring to Google's foray into online Office Apps. Today a survey from NPD says 73% of PC users have never heard of Google Apps, and another 21% have heard of them but never used them. Just one half of one percent said they use web based apps instead of desktop software.

Google CEO Eric Schmidt was asked by the New York Times if he really believed that 90% of all computing would be done in the cloud. Schmidt's response?

“In our view, yes,” Mr. Schmidt says. “It’s a 90-10 thing.” Inside the cloud resides “almost everything you do in a company, almost everything a knowledge worker does.”

The NPD survey supports what Microsoft's Jeff Raikes said in response to Google's claim;

“It’s, of course, totally inaccurate compared with where the market is today and where the market is headed,”

It is fair to say that Google has its head in the clouds. (pun intended) That is a fine place to be if you are a web search company, but that is not where office productivity software is now, or will be anytime in the near future. Google's arrogance will be its undoing. Their total reliance on internal Google engineers while ignoring customer feedback, and their lack of experience in direct sales and customer support, will not work in the business software world.

Duncan Riley at TechCrunch is singing the Google song. He proclaims "Majority of Americans on Google Docs" and says "...given the online alternatives there is little doubt that the number making the switch to online apps will continue to grow."

Joe Wilcox at eWeek takes the other view with the provocative headline "R.I.P.- The Web 2.0 Office Suite" The eWeek article included this pie chart of survey responses.

 

The eWeek article goes on to say; "The scant adoption makes some sense of Microsoft's Office Live Workspace, which went into broad beta last week. The service clearly is designed to be an adjunct to Office desktop software rather than a Web-based alternative. If NPD's numbers are indicative of real-world usage, Microsoft hasn't much to worry from Google Docs and Spreadsheets or other online alternatives. Maybe too many people make too much about the Web 2.0 threat to Office. "

Mary Jo Foley of ZDnet gets it right when she says;

To me, the way that Microsoft is addressing the so-far small number of users who want Web-based productivity software is disruptive. Microsoft isn’t listening to the venture capitalists and A-list bloggers who are ridiculing the Redmondians for not discontinuing immediately any more client-based Office development and turning Office into a Web-based product.

Instead, Microsoft is doing what the majority of productivity-suite users currently want, by adding a Web-collaboration element to Office with Office Live Workspace. At the same time, Microsoft also is sowing the seeds for a Web-based consumer office suite with the Notes and Lists components of Office Live Workspace. If and when there’s enough customer demand for such a product, Microsoft won’t be starting from scratch to build a Web-based suite.

Not rushing headlong into a bubble-licious market doesn’t equal denial. Sometimes resisting peer/pundit pressure can be pretty disruptive, too….

As I said yesterday, Microsoft has played the role of market disrupter before against IBM and the mainframe software crowd. Microsoft has adapted to many market shifts and disruptions over the past 20 years.

Microsoft has a long history in enterprise software and office productivity applications. Microsoft has done a great job listening to customers and even anticipating their needs. The recent announcements from Office Live and the investments in massive data centers signal where Microsoft is going.

Software plus Services as opposed to Software as a Service. Microsoft is giving customers the best of both worlds; powerful desktop software, complimented by web based services. It may not make headlines with the Web 2.0 crowd, but it is the best path for customers who want the best of both worlds.

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Google vs. Microsoft = Microsoft vs IBM 30 years ago

This battle of the titans has been brewing for 5 years or more. It is inevitable. Not because of animosity between the companies, but because of underlying business and technology trends driven by new customers and technology advances. There are lots of examples of this happening in many different industries. Think Toyota vs. Ford 30 years ago, or Microsoft vs. IBM.

The New York Times has a story today "Google Gets Ready To Rumble With Microsoft". The NYT interviews Google CEO Eric Schmidt, and one quote sums up the Google view that the future of computing is web based applications and services hosted in "the cloud" on the web.

To explain, Mr. Schmidt steps up to a white board. He draws a rectangle and rattles off a list of things that can be done in the Web-based cloud, and he notes that this list is expanding as Internet connection speeds become faster and Internet software improves. In a sliver of the rectangle, about 10 percent, he marks off what can’t be done in the cloud, like high-end graphics processing. So, in Google’s thinking, will 90 percent of computing eventually reside in the cloud?

“In our view, yes,” Mr. Schmidt says. “It’s a 90-10 thing.” Inside the cloud resides “almost everything you do in a company, almost everything a knowledge worker does.”

Jeff Raikes, President of Microsoft's Business Division, responds by saying;

“It’s, of course, totally inaccurate compared with where the market is today and where the market is headed,” says Jeff Raikes, president of Microsoft’s business division, which includes the Office products. TO Mr. Raikes, the company’s third-longest-serving executive, after Mr. Gates and Mr. Ballmer, the Google challenge is an attack on Microsoft that is both misguided and arrogant. “The focus is on competitive self-interest; it’s on trying to undermine Microsoft, rather than what customers want to do,” he says.

Henry Blodget, former Wall Street analyst and currently of Silicon Alley Insider, casts the debate as the classic "Innovators Dilemma", made famous by Harvard's Clayton Christensen. Henry distills the essence of 'The Innovators Dilemma" and the situation between Google and Microsoft in a few short paragraphs;

Disruptive technologies do not destroy existing market leaders overnight. They do not get adopted by the entire market at the same time. They do not initially seem to be "better" products (in fact, in the early going, they are often distinctly "worse.") They are not initially a viable option for mainstream users. They do not win head-to-head feature tests. Initially, they do not even seem to be a threat.

Disruptive technologies begin by providing a cheaper, more convenient, simpler solution that meets the needs of the low-end of the market.  Low-end users don't need all the features in the Incumbent's product, so they rapidly adopt the  simpler solution. Meanwhile, the Incumbent canvasses its mainstream customers, reassures itself that they want the feature-rich products, and dismisses the Disruptor as a niche player in an undesirable market segment.

But then the Disruptor improves its products, adding more features while keeping the convenience and low cost. Now the product appeals to more mainstream users, who adopt it not because it's "better" but because it's simpler and cheaper. Seeing this, the Incumbent continues adding ever more features and functionality to its core product to try to maintain its value proposition for higher end customers. And so on. Eventually, the Incumbent's product overshoots the needs of the mass market, the Disruptor grabs the mainstream customers, and, lo and behold, the technology has been "disrupted."

It is important to remember that Microsoft has played the role of "Disruptor" in the past, and learned a lot along the way. Jeff Raikes and Ray Ozzie totally get it. The people in charge of Office and Live get it. .

Microsoft has a carefully planned strategy to provide customers with the best of both worlds; packaged software for applications that require lots of graphics and computing power, complimented by web based services for easy access and group collaboration. Microsoft calls this "Software plus Services", and it is important because the user experience is seamless and synchronized no matter where you are. Microsoft has invested billions in huge data centers to support this vision.

On the business side there is another delicate balance. Microsoft Office is a $15 Billion dollar business. Balancing that business with advertising supported web services, or monthly subscriptions, will happen gradually over time.

Another important thing to remember is that this isn't a "winner take all" scenario. This is a huge market and there is room for different solutions and business models. Look at IBM. They are still a very large and successful company 30 years after they were "disrupted" by Microsoft.

Ultimately the customers decide who wins. Great companies adapt to changes in the marketplace. Lazy companies cling to their "tried and true" business models in the face of disruptive forces. Microsoft is a great company...so is Google. Both will be successful in their own way...and the customer wins either way. That is the American way!

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Open vs Closed Networks, the future of 700 MHz wireless spectrum

There is a big battle brewing over control of the 700 MHz wireless spectrum that the US government will auction off in January. The winner of the battle will determine if cell phone wireless networks remain closed, or will be opened up to anyone like the Internet. This is a high stakes game, probably costing $7 to 10 Billion. However, US wireless carriers collected $95 Billion in revenues.

The Wall Street Journal reports that Google is seriously considering making a bid and building out a wireless network. Microsoft has declined to bid, and instead will work with carriers and manufacturers by providing Windows Mobile operating system.

What is special about this spectrum? The 700 Mhz wireless spectrum was formerly used by UHF TV stations, so it is very powerful and capable of transmitting long distances, even through walls and barriers. Most of us grew up in the cable TV generation so you may not remember when TV was broadcast over the air and picked up by an antenna at your house. Back then the  VHF channels (1-13) were used by the major networks and affiliates, and UHF channels (14-69) were used by public TV and smaller private stations. With the advent of cable TV, and now full digital TV in 2009, the 700 Mhz UHF spectrum is no longer used. The auction will be for the spectrum used by channels 52 through 69.

More powerful and cheaper to deploy - The 700MHz spectrum is more powerful than the current cell phone spectrum and can go through walls much easier. It is cheaper to deploy because the spectrum is more powerful so it requires fewer transmitters and towers, making it 50% to 70% less expensive to build out a nationwide network.

Open versus Closed? Everyone has a different definition of open, but what it boils down to here is the difference between the Internet (open) and the cell phone network (closed). 

Cell phone networks are closed. Verizon, Sprint, or AT&T control the networks. They decide which hardware manufacturers (Motorola, Nokia, Samsung, etc) can work on their network, and which applications (maps, games, music, etc) can be used on their network. The wireless carriers control their "walled garden", make all the rules, and collect most of the money.

The Internet is open to anyone who wants to launch a business and will carry any content; web pages, video, music, etc.

It is pretty obvious why there are millions of businesses and applications on the Internet and very few on cell phone networks.

Open doesn't mean free - The Internet backbone is owned by the major land line telecommunications companies. They own the fiber optic lines and networks, and some of the Network Access Points (NAP's). They sell usage of their bandwidth to Internet Service Providers (ISP's) like AOL, NetZero, and others. The ISPs in turn charge you each month for Internet access.

Who pays for the Internet? Both consumers and businesses pay in both directions, downloading and uploading. Most consumers pay a flat rate per month, around $50, for unlimited use, mostly downloading. Businesses pay more based on bandwidth usage, both uploading and downloading. Web based businesses pay a LOT more based on their bandwidth usage. You can imagine a business like YouTube serving millions of video streams pays a lot for the bandwidth they use. So consumers are paying a flat rate for what they download and businesses are paying for bandwidth in both directions.

Why aren't cell phone networks open like the Internet? In some European and Asian countries the cell networks are open. In those cases the governments made the spectrum available for free or at very reduced rates, and mandated that the networks be open to any business.

What is the FCC doing? The US government (FCC) is trying to have it both ways. They want to collect billions of dollars by auctioning off the spectrum, but they also want some of it to remain "open". The rules of the spectrum auction require the winning bidder to allow any device or application to access the network at "wholesale" rates, provided the winning bid meets the reserve price of $4.6 Billion. Google has already committed to bidding at least $4.6B, so that means the reserve will be met and the open rules will prevail.

Who will win? Everyone. Consumers win because they will have lots of choices. Entrepreneurs in hardware, software, and e-commerce win because they will be able to launch all kinds of new products and services. The winning bidder will win because they will own the future of the wireless business. That winning bidder could even be one of the "closed" network owners. Think about how they will juggle two very different business models; walled garden versus open networks. It will be interesting to see how the losing bidders respond to the open alternative. Competition always brings out the best.

The auction will be held on January 28, 2008. It could be a historic date for the wireless communications industry.