Don Dodge on The Next Big Thing

Why Powerset is important and different

Microsoft announced yesterday the acquisition of Powerset, a natural language search engine. Techmeme has lots of stories about the acquisition. Today the stories are all about Microsoft/Yahoo potential deals. But lets take a step back and look at how Powerset works and why it is an important development in search.

There are two key things to consider;

1. Powerset technology is more about indexing the content and understanding its meaning, than the query itself. This has enormous implications.
2. There are many lucrative markets for this technology...not just consumer web search.

How does natural language search work? There is a lot of linguistic rocket science to this but basically it breaks the search problem into two parts. First, understanding the intent of the user's query by using (NLP) natural language processing. Second, training their search index algorithm to parse the structure and context of individual web sites, and add meta data about the pages to the index.

Powerset is using linguistics and (NLP) to better understand the meaning and context of search queries. But the real power of Powerset is applied to the search index, not the query. The index of billions of web pages is indexed in the traditional way. The big difference is in the post processing of the index. They analyze the indexed pages for "semantics", context, meaning, similar words, and categories. They add all of this contextual meta data to the search index so that search queries can find better results.

Who is the best ballplayer of all time? Powerset breaks this query down very carefully using linguistic ontologies and all sorts of proprietary rules. For example, they know that "ballplayer" can mean Sports. Sports can be separated into categories that involve a "Ball". Things like baseball, basketball, soccer, and football. Note that soccer does not include the word ball, yet Powerset knows this is a sport that includes a ball.

Powerset knows that "ballplayer" can mean an individual player of a sport that includes a ball. They know that "best of all time" means history, not time in the clock sense.

Powerset understands the intent of the query, but more importantly, it understands the meaning and context of all the relevant web pages. Rather than just match keywords from the query, Powerset looks for "semantic" matches in its index of billions of web pages.

Why hasn't this been done before? Powerset uses all these rules and linguistic approaches to analyze billions of web pages, and adds "meta data" hooks into each word on each page. As you can imagine this is a huge scaling problem, that has been impossible to solve economically until now. With Moore's Law applied to constantly reducing the cost of computing, storage, and bandwidth, it is now possible to solve this problem, although it is still very expensive.

Where else could Powerset technology be used? Consumer web search is one obvious market, but there are many more.

• Enterprise search, companies searching their own internal documents and information, is a huge market that would benefit from Powerset technology. Enterprise search is a multi-billion dollar market.
• Advertising targeting. It is easy to target ads to search terms, but extremely difficult to target ads to general web content or User Generated Content. Today ad targeting technology does a poor job of understanding the context and meaning of a news article, a blog post, or magazine article. Powerset technology could be used to better understand this content and better target more relevant ads. This is a multi-billion dollar opportunity.
• Vertical Search - News search, medical search, people search, resume search, and basic knowledge search could be dramatically improved with Powerset's "semantic" search indexing.

I am sure you can think of many other places Powerset's semantic technology could be used. The technology will improve and expand over time. There is enormous potential here, more than a small startup with limited funding could hope to address. This is why Powerset joining forces with Microsoft makes so much sense.

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Microsoft innovation in Boston/Cambridge

Microsoft is making a big investment in innovation in Cambridge, Massachusetts. The Boston Globe has a front page story about Microsoft's new Concept Development Center led by Reed Sturtevant. Reed was recruited by Ray Ozzie and his brother Jack to build the new lab.

The Boston Globe story says;

Boston software legend Ray Ozzie replaced Bill Gates as Microsoft's chief software architect in 2006. Ozzie has been pushing for a transition from the desktop software that accounts for the bulk of its revenue to the Internet services that are the wave of the future.

"Microsoft is making a big investment in Massachusetts," said Reed Sturtevant, 51, the director of the Boston Concept Development Center, who worked with Ozzie in the 1980s at Lotus Development Corp. and joined Microsoft last fall. He's spent most of his time so far recruiting. "There's a huge amount of talent in Boston," he said, "and the question is, how do you bring new talent into Microsoft?"

Microsoft's presence in Massachusetts is growing with the acquisitions of Groove Networks, Softricity, and Danger Inc. Microsoft is also growing internal product groups in the Boston area and consolidating many of the groups at One Memorial Drive in Cambridge.

Ray Ozzie, creator of Lotus Notes, and founder of Groove Networks, has lived and worked in the Boston area most of his life and wants to see Microsoft build a much larger presence over time.

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Dan'l Lewin in San Francisco Chronicle

Dan'l Lewin is Microsoft's Corporate VP for Strategic and Emerging Business, based in Silicon Valley. I work in Dan'l's organization so it was a treat to read a story in the Chronicle about Dan'l's work with VCs and startups around the world.

Dan'l is a legend in Silicon Valley where he was one of the early employees at Apple, and later started Next with Steve Jobs.

Dan'l (that is not a typo, that really is his name) was hired by Steve Ballmer almost 8 years ago to oversee Microsoft's global relationships with venture capitalists, startups and Microsoft technology partners as well as industry and community organizations in Silicon Valley.

Great quotes from Mike Moritz of Sequoia Capital "He ensures nothing gets lost in translation between here and Redmond" and Sam Altman, CEO of Loopt "Were it not for Dan'l - if we just knew Microsoft by reputation - I don't think we'd be working with them nearly as closely as we are."

The Chronicle story goes into how Microsoft works with VCs and startups, what areas are hot now, and how Microsoft handles acquisitions. You can read the whole story on SFgate, the Chronicle web site.

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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