Will Microsoft Become a Leader in the Online Advertising Market?

Microsoft® reported results for its Bing search engine and its online advertising business during its Q3 2014 earnings conference call. Mr. Satya Nadella, CEO, noted “We saw continued improvement in search, with our U.S. search share growing to 18.6%, and search revenue increasing by 38%.” Ms. Amy Hood, CFO, added “Display [ad] revenue from portal and email declined, while we saw ad revenue growth in products like Skype and XBOX.” (Quoted from a transcript of Microsoft’s F3Q 2014 Results webcast. The transcript can be found on the Seeking Alpha web site).

Readers should closely consider Ms. Hood’s comment, especially in light of a similar shift to a focus on App advertising opportunities, which Google reported in its latest quarterly earnings report, and an outright drop in Amazon’s Media sales, as reported in their latest earnings report.

Is it fair to say Microsoft is in a leadership position as the shift to App advertising spreads across the online advertising market? Perhaps the sales revenues, when compared to Google, or Amazon, are comparatively insignificant. But, in my opinion, Microsoft has an important advantage: MSN never went away. Any owner of a Surface 2, or Windows Phone device joins an MSN-like audience whenever they’re using the device. Bing News, and, indeed, 3rd party Apps from prominent content providers (including The New York Times, WSJ, and other publications). Ad placement within these features of the Surface 2, or Windows Phone “experience” may be more appealing. At least it’s safe to say, per Ms. Hood’s comments, revenue is growing for this type of online advertising.

The significance of Microsoft becoming a force in this market is, perhaps, more important for its competitors than Microsoft, itself. The online advertising market is a hotly contested space, unlike the market for cloud, IaaS offers. It is worth noting Mr. Nadella’s remark about the latter (he called it something of a “boom town” with “plenty of room”) for its consistency with similar remarks made about the same market made by Mr. Nikesh Arora during Google’s most recent earnings report.

But, as I’ve published recently to this blog, the combined market cap of the major contenders for the online advertising market (Microsoft is not included in this group, at least not yet), grossly exceeds PwC’s published forecast of the total global online advertising market for 2017. Competition is fierce for this business.

Disclaimer: I’m long Microsoft and have no current position in Google or Amazon

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Microsoft Enters the Next Stage of Its Mobile First Cloud First Strategy

During Microsoft’s Q3 2014 Earnings Conference Call, Mr. Satya Nadella, CEO, signaled an important transition for the business: from “reinvention” to execution of its “Mobile First/Cloud First” Strategy. This signal can be found in Mr. Nadella’s response to a question posed by Mr. Keith Weiss of Morgan Stanley.

Mr. Weiss asked if Mr. Nadella is ” . . . reviewing the businesses? And should we expect any big changes in the strategy of Microsoft?” (this quote is excerpted from a transcript of Microsoft’s Q3 2014 Earning’s Conference Call. Readers can review the entire transcript on the Seeking Alpha web site).

Mr. Nadella responded to this question by emphasizing ” . . . this mobile-first, cloud-first thing is a pretty deep thing for us.” (ibid). The signal of transition sends an important message to anyone following Microsoft®: the strategy has been vetted, accepted, and is now being implemented across the organization.

One can argue the performance of the business, for the quarter, as it’s represented in the report is evidence of the transition. For revenue to grow by 8%, year-over-year, is a significant, positive achievement. Microsoft no longer appears as a “software REIT”, resting comfortably in its niche. Rather, the company has assumed some of the qualities of a high growth story. In comparison to Google, which, one can argue best typifies this type of “new” business, the growth trajectory of Microsoft’s revenue performance came within 33% of the former’s own year-over-year performance for the same calendar quarter.

But the story gets better. Office 365, which is Microsoft’s cloud, SaaS, offer grew over 100%. Mr. Nadella and Ms. Amy Wood, CFO publicized an annual run rate of $2.5 Billion for this product, 28% better than the year-over-year performance of Google’s “Other Business” segment, which was reported as producing $1.8 Billion for the same time period.

Perhaps readers will want to recalibrate their notion of Microsoft’s likely performance over coming quarters as the result of gaining an understanding of what the signal means for Mr. Nadella and the rest of the Management team.

Disclaimer: I’m long Microsoft

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved



Is Apple Overvalued?

On Wednesday, April 23, 2014, Apple reported Q2 2014 earnings after markets closed for the day. Net profit for the quarter posted a comparative increase, and exceeded analyst estimates. Sales, which were generally assumed to be flat, comparatively, actually increased by approximately 5%.

Despite these results, which can only be fairly called subdued, investors drove the stock price up by over 7% after hours. Does this activity make sense? Or are investors basing their share purchases on a set of possibly suspect assumptions?

Anyone positing some future performance for Apple will want to research the performance of the iPhone product line. The iPhone is the biggest money maker for the business, so any further improvement to sales and/or profitability will likely depend, to some extent, on the performance of this product.

Where is there room for iPhone smart phone sales to grow further?

There is ample indication of a saturated market for smart phones, at least in the U.S. and western European markets. Carriers, who, in the past, opted to subsidize the cost of these devices for consumers are abandoning the strategy (T-Mobile appears to have lead the U.S. carriers in this new direction. AT&T has taken a similar path and reported some results in its latest quarterly earnings report. Verizon has announced similar plans. Sprint is likely not to be far behind).

If surveys are credible, smart phone consumers are tired. Handset manufacturers (including Apple) announce new features, which amount to subtle improvements in operation, or performance. A major breakthrough in technology is needed, but there isn’t any indication any of the manufacturers will announce one anytime soon.

So the room for growth in this market, in my opinion, is to be found in emerging markets and at the low end of the acquisition cost for these phones. The present iPhone is not a contender in these promising markets. Therefore, it doesn’t make sense (at least for me) to forecast a substantial increase in sales for this product anytime soon.

One last word on this product: Consumers are likely to value any substantial enhancement to Smart Phone speech features. Drivers include law enforcement, and a host of factors specific to mobile device operation. It’s simply not possible to operate even a touch screen while navigating a turnstile to board a train, etc. But managing the device via a spoken command does make sense.

In my opinion, consumer appetite for a full featured set of audio commands can justify an increased market, even at the high end. But it may be the case Microsoft® has assumed the position of market leader in this space, based on public announcements made at its recent, annual “Build” conference, held this year in San Francisco.

Tablet Sales are Growing Rapidly, Apple is the Leader and Looks to Maintain Its Dominance

The market for tablet computer is growing rapidly, perhaps at a faster pace than the smart phone market. Apple dominates this market. The iPad Mini is a strong sales performer, ostensibly as the result of its convenient size, Retina® display and cost to the retail consumer. Perhaps this market presents Apple with a solid opportunity to build some of the enormous growth in sales and earnings to justify further increases in its valuation.

But Apple has not announced any new features for the iPad likely to be received as something “really new”. On the other hand, major competitors like Samsung, with tablets running on the Android O/S are determined to capture market share; so they continue to innovate.

Certainly Microsoft’s recent announcement of Office availability for the iPad is a positive development for Apple. But Intel’s Atom Bay Trail CPU and chipset has started to make sense for big enterprise PC OEMs (including HP). It may soon make more sense for enterprise customers to opt for Windows Tablets than to continue to purchase iPads with Office. Note: Microsoft wins either way.


Based on the above points, I think Apple is over-valued at its current stock price.

Disclaimer: I’m long Microsoft and have no position in Apple

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Business Valuations of Key Players in the Worldwide Online Advertising Market Widely Exceed Total Market Size

According to some data published on the PwC web site, Internet advertising segment insights from the Entertainment and Media Outlook: PWC, the likely size of the worldwide online advertising market should be worth more than $185 Billion by 2017.

If we add in another $30 Billion to this 2017 forecast, for the mobile advertising market (smart phones and tablets), then we come up with a total 2017 worldwide market forecast for online advertising of $215 Billion. To understand my reasoning on this 2017 forecast for worldwide mobile advertising, please visit Gartner Says Worldwide Mobile Advertising Revenue to Reach $11.4 Billion in 2013. I included a healthy 20% year-over-year increase in total worldwide consumption of mobile advertising products from 2016 to 2017.

But the combined business valuations as of 17:07 hrs on April 23, 2014 (3+ years away from 2017) for simply four of the major publicly traded players (Google, facebook, Yahoo and Twitter) in this market (conspicuously absent is Ali Baba, which is yet to go public, and Baidu) amount to approximately $589 Billion, or just about 174% more than the total 2017 market.

Perhaps readers will agree these valuations are unsustainable. Nevertheless, investors continue to buy up shares. While facebook was reporting its Q1 2014 earnings, today, the stock was up, after hours 5.66%, which amounts to a market cap for this business of somewhere above $180 Billion, or 84% of the total forecasted worldwide market size.

If one argues Google presents a wide range of products targeted to other markets, I would argue where are the compelling results for these other efforts? Having closely reviewed Google’s Q1 2014 conference call webcast over the last week, I have to say the combination of the spin off of Motorola Mobility, and relatively insignificant performance for the “other business” segments (Google Apps, cloud IaaS, and Chromecast) render the “Google is a diversified business” rather less than an accurate read on their business, at least as they report it in the current quarterly earnings statement.

It’s difficult to come up with any other conclusion, on this topic, than the valuations of these businesses are clearly highly inflated (in other words, the whole market is likely a bubble). Anyone with a position in these businesses might want to consider adopting a defensive strategy, and soon.

Disclaimer: I have no current position in any of the mentioned businesses in this post.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Some Final Comments on Google’s Q1 2014 Conference Call

In the final moments of Google’s Q1 2014 Conference Call, listeners get a clearer sense of the verticals exploiting the best advantage from the CPC online advertising campaigns, some near term hurdles for mobile advertisers, and Google’s confidence level about the market for IaaS.

Autos, Travel, and Real Estate are the Top Vertical Consumers of Google CPC Ads for Q1 2014 in the US

Real Estate and Vacation Travel companies market intangible products. Real Estate offers are location sensitive; therefore, while the actual relative performance of product segments won’t be publicized in Google’s quarterly earnings reports until Q2 2014, it’s likely safe to say real estate advertisers play a big part in the growth of Google’s mobile CPC ad business for this quarter.

Near Term Technical Impediments to Further Growth in Google’s Mobile Ad Business

Per Nikesh Arora, Senior Vice President and Chief Business Officer at Google, until mobile users can avail of a simplified payment enablement method (delivering what’s likely to amount to a “one click” shopping experience), Google will continue to face obstacles as it works to help advertisers achieve better conversion rates. For a related reason, mobile users searching for specific information, online, need a method of rapidly navigating web sites to identify the information they require, without the kind of drill down click experience typical of desktop users. According to Arora, work is being done, at present, to lessen the severity of these obstacles as impediments to further growth.

Is Google Over Confident about the Future Potential of its Cloud IaaS Business?

Arora expressed a very high level of confidence in Google’s Cloud Business. A summary statement on his thoughts might be, as follows, “the efficiencies represented by Cloud IaaS will not fail to make themselves known, to businesses of all types”; “we’re very clearly in the early stages of this business”; “we don’t need to worry right now about product differentiation, there’s plenty of business to go around”.

All of the above are great thoughts, and readers should listen closely to the last 10 minutes of this webcast to catch Arora’s exact statements on this topic, but he did not mention any of the steps required to hasten the speed at which a larger proportion of businesses consume Google’s Cloud, IaaS offer. As I have written, all along in this blog, “Cloud First” is a great idea, but, unless and until a reliable method of securing business confidential information on public cloud data repositories is available, I wouldn’t plan on meteoric sales growth for this product anytime soon. As well, the user interface of any one of these services is still far too challenging to attract SMB and truly small business consumers, so improvement in the interface is critically important to increasing market size. Finally, Google should offer support for Microsoft® applications. My latest visit to their cloud offer web site did not result in any evidence they offer support for Office, Windows Server, SQL Server, SharePoint, etc.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Are Mobile Digital Advertising Expectations Overly Optimistic?

During the Q&A session for Google’s Q1 2014 Earnings Conference Call, Nikesh Arora, Senior Vice President & Chief Business Officer began his response to a question with what I consider a pretty ambitious claim: ” . . . Over the medium to long term, mobile pricing has to be better than desktop pricing.” (quoted from a recording of Nikesh Arora from Google’s Q1 2014 Earnings Conference call) The veracity of this claim, of course, is up to the listener to determine.

Arora supported his claim with a rationale, as follows: ” . . . in mobile you have location, you have context of individuals, which you don’t have on the desktop and the more you know about the user and their context, the more effective advertising you can provide them, ah, the better the conversion is likely to be for a search or any piece of advertising that you do.” (ibid)

My immediate response to these claims is to ask about the type of products Arora has in mind. After all, if a prospect is considering the purchase of an intangible, for example, a term life insurance policy, then the location of someone viewing an ad for term life on a mobile device is pretty irrelevant, and, likely, not worth much to the advertiser.

In my opinion he’s envisioning tangible products sold to retail consumers, for example, a wedding dress, or the like. Searching online for something from a smart phone, or tablet computer, or viewing an ad on this type of device doesn’t, inherently, provide any more reliable indication of conversion likelihood, unless the kind of products we have in mind are tangible, and the people viewing the ads we’re talking about are retail consumers.

So, with this in mind, several other of his answers to questions make a lot more sense. For example, certainly Google would want to compete with TV Broadcasters for this type of ad dollar and using Youtube as a perfect site for their efforts makes a lot of sense.

But there is little I can find in this argument to support a confident assumption mobile advertising will enjoy better pricing. Of course, Arora is not the only advocate of this view. Facebook executives have made similar claims. There is little availability, as of yet, in the way of advertiser reaction to these assumptions. The next couple of quarterly reports from Google, facebook, Twitter, and even LinkedIn should provide us with some useful information, one way or the other.

It’s also important to note how Arora’s comments paint more of a picture of a hole in Google’s digital market strategy, and, in all likelihood, the strategies of its competitors: there is no mention here of any better methods of supporting advertisers marketing intangibles with better digital marketing tools.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


On the Need to Set Boundaries Around an Internet of Things

The March/April 2014 edition of Foreign Affairs includes an article titled As Objects Go Online, which was written by Professor Neil Gershenfeld of MIT, and JP Vasseur, Cisco Fellow and Chief Architect Internet of Things at Cisco Systems.

This article appears to have been published to coincide with a one day IOT Festival held on Saturday, February 22, 2014, on the MIT campus in Cambridge, Massachusetts.

While the enthusiasm of the authors is to be applauded, and the promise of increasing the scope of what I would call “rapid device to device data communication” (which presently depends entirely on one data communications transport — Ethernet, with a set of markup languages running at the application layer) is certainly an important objective (which, should we achieve it, will certainly expand the usefulness of devices, along with the range of what people can do with them), I think a lot of caution should be exercised about the entire notion.

Tellingly, it isn’t until approximately 5 paragraphs from the end of “As Objects Go Online” that the authors address the question of whether it makes sense, from the perspective of data security, to open the Smart Grid to data communications over the Internet of Things, which they champion. In light of the recent exposure of the Heartbleed security hole in the Open SSL protocol, in my opinion, the following claim by Gershonfeld and Vasseur should be very carefully considered by anyone seriously considering the “open” SmartGrid notion: “The history of the Internet has shown that security through obscurity doesn’t work. Systems that have kept their inner workings a secret in the name of security have consistently proved more vulnerable than those that have allowed themselves to be examined — and challenged — by outsiders. The open protocols and programs used to protect Internet communications are the result of ongoing development and testing by a large expert community.” (quoted from Gershonfeld and Vasseur’s article as published on the Foreign Affairs web site).

In the next paragraph they present their argument on the real cause of many of the “Internet” / “Web” serious security problems–human error. I certainly agree with this claim, which points to the predominant role played by human error, poor procedural planning, and a lack of effective risk management when one reflects over the history of successful, malicious attacks conducted over “The Web”. But this is, by no means, to excuse what can only be called shoddy software development at the foundation of the heartbleed problem. Procedures and controls are useless, even when correctly implemented, if the Open Source software the authors laud is, itself, full of holes and bugs.

As I wrote recently in this blog, in my opinion we need much better methods at the transport and application layers of the data communications protocol stack to ensure, at a minimum, the suitability and security of software before we condone using it for something as mission critical as the SmartGrid.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Motorola’s Moto G Does Well in Q1 2014

During Google’s Q1 2014 webcast, Patrick Pichette, CFO cited strong emerging market sales for Motorola’s Moto G smart phone: “And before I close, I want to give a brief update on Motorola. Motorola had a great quarter in Q1, with the Moto G showing strong sales momentum, especially in emerging markets.” (quoted from the webcast).

While I could find no specific detail to substantiate this claim, neither in the handouts accompanying the webcast, nor in the 8K filed with the SEC, I did find even stronger claims made on March 31, 2014 by Kantar WorldPanel Comtech: “Dominic Sunnebo, strategic insight director at Kantar Worldpanel ComTech, comments: ‘Motorola was nowhere in Europe before the Moto G launched in November last year, but the new model has since boosted the manufacturer to 6% of British sales. It highlights the speed at which a quality budget phone can disrupt a market.'” (quoted from Kantar WorldPanel’s web site).

In a November 20, 2013 post to this blog titled Channel Conflicts — Android Style: Why is the Moto G Hitting the Market, but not the Chinese Market? I noted the Moto G ” . . . sports a high resolution screen and “the latest Android” O/S, [and] is available at a very low retail price of $179.00.” But I read these strong specifications to signal Google had crossed the line, by coming to the consumer market with its own smart phone powered by Android O/S (which it “owns”, if such a term can be applied to whomever manages this type of Open Source O/S).

Comparisons with Samsung’s Galaxy 4, arguably one of the better selling smart phones offered by the largest Android OEM, were, perhaps inevitable, but who would make them, and why?

Back on November 21, 2013, Vlad Andrici published this in an article titled The Motorola Moto G: An Impressive Addition: “Motorola has compared the Moto G’s performance with the Samsung Galaxy S4, when performing minor tasks. Despite Moto G’s mid-range SoC, lower amount of RAM and less powerful graphics chip, the handset apparently manages to make a call 1.1 seconds faster than the Galaxy S4, it answers a call 1.2 seconds faster, returns home 0.5 seconds faster and boots up 5.3s quicker too.”

If Andrici’s claim is true, then this direct comparative claim of superiority over Samsung’s Galaxy S4, coming from non other than Motorola Mobility, an Android O/S handset OEM wholly owned, at the time, by Google, itself, likely made a lot of waves for the Android handset OEM channel.

Does Pichette’s remark lend credence to the notion I expressed last November? Did this handset shift the balance of the handset OEM market too much in Google’s favor? I have no information to indicate this is the case, beyond pointing to the comparatively strong performance for the handset in, at least, the UK market.

Also, the Moto G appears to be winning over precisely the right kind of customers, to ensure lots of sales volume: Kantar WorldPanel Comtech notes “The Moto G in Great Britain has attracted a very specific consumer profile. Almost half of owners are aged between 16 and 24, 83% are male and generally they come from lower income groups with 40% earning under £20,000.” (quoted from the Kantar WorldPanel Comtech article on Motorola’s Moto G. I’ve provided a link to the entire article, above).

The Moto G’s success signals likely good news for Motorola Mobility’s new parent: Lenovo. When and if someone starts selling the phone to the Chinese market, sales may really take off. Too bad Google appears to have had feet on either side of a potentially dangerous Rubicon.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Some Thoughts on Google’s Growth Rates as Reported for Q1, 2014

During the Google, Q1, 2014 Earnings Conference Call, Patrick Pichette, CFO, presented a set of headlines on business performance:

  • Google’s revenue grew by 19% year over year to $15.4 Billion, which was down 2%, quarter over quarter.
  • Google Sites revenue was up by 21% year over year, to $10.5 Billion.
  • Network revenue grew 4%, to $3.4 billion.
  • Other business revenue grew by 48%, to $1.6 Billion. In this category, Chromecast sales were a strong performer

Pichette provided his own judgement of the quality of business performance for the first quarter. Interspersed among his remarks were a lot of “good”, “very strong”, adjectives. But are these results typical of a still early stage ISV? Or are they, actually, signs of a maturing ISV struggling to retain the early shine of meteoric growth results.

Perhaps one can argue the performance of the “Other Business” group still retains the growth characteristics of an early stage ISV, but how many Chromecasts will Google need to sell (with an MSRP of $35.00 per Chromecast) to power this vertical to some sort of meaningful stature as a revenue producer for the company? In contrast, a very mature ISV, Microsoft®, recently reported meteoric results for Office 365, a Cloud, SaaS offer requiring no hardware, shipping, etc.

It may be time for analysts and investors to close the book on the question and just treat Google, going forward, as a mature ISV. A check of the GOOGL Class A stock P/E ratio on Thursday, April 17, 2014, reveals near parity with MSFT: GOOGL carries a P/E Ratio for trailing 12 months of 14.99, just 2% higher than MSFT at 14.68 for trailing 12 months.

Despite the recalibration of Google’s stock prices, analysts continue to make a big deal of the pace at which revenue growth has decelerated, perhaps more from a concern over the actual forward potential of the entire online advertising market (of which Google is clearly the leader) than anything else. This concern makes sense given the comparatively poor performance of the display network vs. Google Sites businesses.

If the concern is justified, then one would think the valuations of online businesses like Yahoo, Twitter, and even Facebook may soon experience versions of the same recalibration to better align them with their more mature ISV competitors.

Disclaimer: I’m long MSFT and have no current position in Google, Twitter, Facebook, or Yahoo

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved


Intel Q1 2014 Earnings Conference Includes a Glimpse of How It Broke New Ground in the Tablet Market

During the Q&A session at the end of Intel’s Q1 2014 Earnings Conference Call, Blayne Curtis of Barclays asked a big question: ” . . . it’s pretty clear [the MCG (Mobile and Communications Group) business] is now losing $3 -$3.5 Billion, how do you think about this business? Obviously you’re trying to ramp the product set, you are a bit behind, you’re entering from the low end and that pricing seems quite tough, and you’re facing some subsidies that you need to do on the tablet side . . . Are there some milestones that you look at to get this business back profitable, or, maybe, would you consider this strategic enough that you would continue to run this as a loss?” (quoted from the Intel Q1 2014 Webcast)

Stacy J. Smith, EVP and CFO took the question. Smith emphatically affirmed the strategic importance of these markets: “It’s critical from two in one devices down to the Internet of Things” As to the MCG Group loss for the quarter, he noted: “We don’t go into these businesses thinking that we’re going to lose money. We believe we have a road map to get to profitability in that business.” (ibid).

Intel is a mature ISV. But the process for Intel to take the kind of new direction represented by the MCG product line is no different than would be the case for an early stage ISV attempting to come to market with, for argument’s sake, a new Cloud SaaS offer. In other words, the experience Curtis’ question brought under an analyst’s microscope included:

  1. a “Ready, Fire, Aim” product strategy. Intel chose to retool the Baytrail chipset from the PC market over to the tablet market. Opting for this method hastened their full scale entry to the tablet market. But the components, themselves, were brought to the task at a comparatively higher cost than comparable offers from Intel’s competitors.
  2. and a set of subsidies for OEMs for some of these higher costs

Presumably Intel’s rationale for opting for “Ready, Fire, Aim” was to quickly make a long overdue entry to the tablet market as a serious competitor. Smith noted why Intel’s market-leading experience producing SOC systems with the widest possible range of communications options promises to fuel their advance, which makes a lot of sense.

The rationale for the subsidies to OEMs is no different, I would argue, than the kind of “freemium” business model Cloud SaaS ISVs implement to persuade consumers to get started with their offers.

Disclaimer: I’m long Intel.

Ira Michael Blonder

© IMB Enterprises, Inc. & Ira Michael Blonder, 2014 All Rights Reserved