*michael parekh on IT*

ON DISNEY'S PUZZLING ONLINE MOVE

BUY vs. BUILD

This Wall Street Journal article lays out one of the most perplexing things about how established companies, leaders in their industries, behave with an incumbent's mind-set.  Titled, "Fans resist end of Virtual Disneyland", the piece explains:

"For Walt Disney Co., the task of opening a virtual version of Disneyland on the Web was relatively easy. Closing it, though, is proving to be quite a bit more difficult, thanks to the wrath of obsessive fans of Disney's theme parks.

Virtual Magic Kingdom

This screen allows Virtual Magic Kingdom's gamers to build an  avatar they can play with.

In conjunction with the 50th anniversary of Disneyland in 2005, Walt Disney launched a free online game called Virtual Magic Kingdom whose look and layout mimics Disneyland's. Users created avatars and explored the online park's various regions, such as Tomorrowland and Main Street; chatted with other users; and participated in online promotions that crossed over into real-life activities at the company's resorts in California and Florida.

Disney's notoriously obsessive fans got deeply into this. Using their online personas, fans of Virtual Magic Kingdom -- VMK to aficionados -- accumulated points by playing games and completing tasks inside the world. These points could then be used to buy in-game objects like animated hats, pins and furniture to decorate their virtual private rooms. Points could also be accumulated in the real world through purchases of Disney movie DVDs and the like.

When players tired of the online world, they could keep playing VMK as they visited Disney's theme parks. There, they could go on scavenger hunts tailored specifically to them -- and use their rewards to purchase special Virtual Magic Kingdom items that increased their status among fellow gamers.

On Wednesday night, however, Disney plans to throw everyone out of VMK and lock the gates -- erasing their online profiles, lives and collections of virtual trinkets and real estate. Disney says it never intended the 50th-anniversary promotion to run this long, but money is also a factor: Virtual Magic Kingdom is free, and full access to Disney's other online game sites -- like Club Penguin and Toontown -- costs as much as $9.95 a month in the case of Toontown."

The closing apparently has raised hue and cry from some Disney faithful, both online and off.  The 18 month promotional experiment did however manage to garner quite a few "sticky eyeballs", as we say in the online business:

"The situation shows how sticky things can get when free, nonrevenue-generating gimmicks blossom into hits. In 2006, Disney boasted that one million avatars had been created inside VMK, though the company declines to say how many users the site actually has (individuals can create multiple characters). The site, which operates from 7 a.m. until 10 p.m. Pacific time, still boasts a few thousand daily users."

Couple of remarkable takeaways from this little quote.

1.  Disney managed to get a million folks to translate their off-line affinity for Disney parks into some online activity.  It fizzled in growing users from there  of course, since the whole thing was designed just as a short-term "promotion" for the perennial off-line properties.

2.  Disney actually had off-line operating hours for an online site, which presumably can be accessed 24/7, from anywhere in the world.

Some of these questions popped into my mind reading this saga:

1. How much does it cost to keep the site running?  How does that cost compare to other promotional initiatives by Disney for it's off-line properties that last for years or indefinitely?

2. What are the pros and cons of moving the site from it's marketing/promotional departments, to the operational side?  What if this were turned over to some in-house employees with a "start-up mentality", and ask them to see how something like this could be turned into a sustainable virtual presence of Disney's real-world properties?  Could it be morphed into being both a permanent promotional and an entertaining  online property in it's own right?  And of course, could that be turned into a profitable operation in the long-term?

3.  Would an effort like this cost anywhere near the $700 million it cost Disney to buy Club Penguin last year from outside entrepreneurs with the right "startup mentality"?

4. Or is buying third-party online properties, the only real strategy for a leading incumbent like Disney to get it's online game?

I'm sure there are some questions and issues I'm missing in why closing the promotional site and not doing anything else with the latent opportunity is a real good idea.  Just saying.

ON PEN-COMPUTERS REDUX

TRY, TRY AGAIN

Some readers may recall an anticipatory post I'd done last May on a new "pen-computer" device by a company called LiveScribe.  Well, the product is finally shipping and David Pogue of the New York Times just reviewed the device.  And the results are not happy for LiveScribe.  First, more on the promise of the device:

"Jim Marggraff, a veteran of both Anoto and Leapfrog, is now at a new start-up company called LiveScribe. This month, it introduced the Pulse smartpen, which Mr. Marggraff says is the final step in his vision for “paper-based computing.”

In an anodized aluminum barrel about the thickness of a Sharpie, the Pulse has a camera, microphone and surprisingly loud speaker. It also has a bright black-and-white screen (18 by 96 pixels) that displays messages, menu commands and even little animations. There’s a nonremovable, rechargeable battery (6 to 7 hours a charge), a headphone jack and contacts for a U.S.B. charging cradle.

Oh, and it’s also a ballpoint pen.

The Pulse’s primary power is its ability to record audio while you write. Later, if you tap a written word, the pen plays back the audio it recorded at that moment. (Or, rather, what it heard five seconds before you started writing, to compensate for your reaction time.)

In the special microdot notebooks, the bottom of each page offers little preprinted “buttons” that control the playback speed, volume and so on."

And here's where David thinks the version 1.0 of the device misses the mark:

"Maybe that glorious age of “paper computing” will arrive, and maybe not. In the meantime, LiveScribe has a lot of work cut out for it.

The screamingly obvious limitation is the requirement to write on special paper. True, LiveScribe has priced the pads fairly reasonably ($20 for four 100-sheet perforated notebooks), and says that in June, you’ll be able to laser-print your own microdotted paper from a downloadable PDF template. Still, the real fun won’t begin until digital pens work on any kind of paper. (Iogear has one, but it doesn’t record audio.)

Another problem: when you use the pen’s built-in microphone, you record not just your own voice but also the scratching of the pen itself on the paper.

When you’re recording anybody else, or recording a telephone call, you’re supposed to wear the Pulse’s earbuds, which contain microphones. When you play the recording back, you get an enhanced 3-D spatial audio experience.

Unfortunately, these earbud-mikes are big, hard and uncomfortable. My first set didn’t even work, and had to be replaced.

I found software bugs at every turn — on the pen, in the Windows software and on the Web site. The company promises to fix them promptly.

Beyond the basics, the Pulse is also jaw-clenchingly hard to learn. This itty-bitty thing actually has menus and submenus.."

So we're not quite where the device should be at this juncture.  I think I'll still wait for the unit I ordered a while ago and reserve judgment until then.  But would have liked to have seen the eagerly awaited version leave a better first impression.

ON DUAL-CLASS STRUCTURES FOR TECH COMPANIES

TEN FOR ME, ONE FOR YOU

Marc Andreessen has a post well worth reading today explaining why he's gone from being an opponent of dual-class share structures for companies to being a support of them, especially for young tech companies with passionate founders interested in creating a major long-term franchise. 

It's a comprehensive and well-argued position, covering everything from how it's worked so far for companies like Google and how it may have changed the merger dynamics between Microsoft and Yahoo! had Yahoo! had a similar structure.

Marc makes a particularly seductive  argument on how the current public market environment has short-term forces that can be truly distracting to creating long-term shareholder value.  And how dual-class structures would insulate world-class, deserving tech companies from these nasty market forces.

The whole argument works only if the founders turn out not to be bozos in the long-run, so ensconced in their own cocoon that they truly don't work in the best interests of their majority, long-term shareholders.

It works only if the founders stay wise and visionary, and are able to execute through both the short-term and and long-term challenges of running a large, fast-growing, world-changing technology company.

And the history of the markets, both public and private, have taught us that those folks are few and far between to be found.

And even visionary, extraordinarily capable founders invariably run into periods where their very successful companies are in a long period of funk.  In the world of technology, Bill Gates, Michael Dell and Larry Ellison come to mind.  Not to mention Steve Jobs, who got in to trouble enough to have to leave the company he founded.  And go through a  unique set of circumstances to be invited back and save the day.

And all those successful and rewarding companies where both founders and  public share-holders did just fine without dual-class voting structures.

Problem is, no one is immune from turning into a bozo at least one time in their life.  There's no guarantee that they won't do evil things regardless of any initial promises.  People change, motivations change and so do the most initially aligned of shared interests.  There are not guarantees, and dual-voting structures merely fore-stall and prolong the inevitable as in the case of the New York Times, which Marc eloquently discusses.

The other thing that is trouble-some about a dual voting structure is that goes against the very spirit of the compact with public market shareholders, regardless of whether these investors are large or small, short-term or long-term in their investment horizons.  It's about creating efficient marketplaces after all, with all the bad that they sometimes entail with the good.

To paraphrase Ian Malcolm, the mathematician in Jurassic Park, "Markets find a way", despite all the best-intentions of visionary founders.

Marc goes on to explain how Google today is a poster-child for dual-class voting structures in tech companies.  It is a good example in the here and now.

And there's no question that in the near-term, some emerging tech companies that are next in line to go public will be sporting dual-class share structures in their IPO.  It'll be the fashionable thing to do for a while, until it isn't.

As an aside, it's interesting to bring up Facebook here, which has been fast emulating all things Google, hiring Google folks as fast as it can, including Google's global head of PR today.  And if as Kara Swisher also reports today that Marc Andreessen has verbally accepted an offer to go on Facebook's board, a dual-class voting structure is almost a certainty for Facebook as and when it goes public.

In the meantime, the debate about the pros and cons of these structures will continue, I'm sure.

DISCLOSURE:  I remain a long-time shareholder in dual-structure public companies like Google.

ON THE DAY AFTER AND BEYOND

MSFT/YHOO DAY 2

After the dust settled on the first trading day post Microsoft withdrawing it's bid for Yahoo!, 279 million shares traded hands, and the stock closed at $24.37.  That's a touch under $7 billion dollars worth of Yahoo! at the closing price, and compares to the average trading volume in Yahoo! of about 34 million shares a day.

The topic of course lead Techmeme all day, including this post by Yahoo! co-founder and CEO Jerry Yang on the company's corporate blog.  To Yahoo!'s credit, they've kept the comments open on their blog, and most of the hundred comments I went through seemed to reflect some pretty unhappy shareholders.

Many existing Yahoo! shareholders seem to be jumping directly to Anger on the seven stages of grief, whilo folke selling the shares in presumable disgust.

At the same time there seem to be quite a number of folks (and folks at institutions), who're already at the final stage (Acceptance and Hope), amongst the buyers of Yahoo! shares today.  Presumably, these shareholders are a patient lot, and likely less concerned with where the stock closed today, which was the subject of a post by Fred Wilson yesterday and today.

Following Fred's lead though, I thought I'd ask the following question here*.

Quizzes by Quibblo.com

I picked eighteen months because presumably the remaining and new shareholders of Yahoo! have a longer-term horizon for going with Yahoo! in the wake of the Microsoft bid.

Feel free to re-post this quiz on your blog.  As Fred points out in his post on "Distributed Polling" today:

"The poll I did yesterday on Yahoo!'s closing price has been taken almost 2,200 times in about a day. How did it get so many takers? By being distributed on many blogs at the same time."

Let's see what the Wisdom of the crowds has to say how well (or not) the folks on the buy-side of today's 279 million shares will do over time.

* There's a typo in option 2 in the poll above.  The official original Microsoft bid price should read $31 instead of $32.  Editing the Quibblo quiz would erase the existing poll and results, so I'm highlighting the error in this footnote.

ON A YAHOO! VICTORY OR DEFEAT

BINARY OUTCOMES

The big discussion today on Techmeme of course, is the news of Microsoft officially withdrawing it's offer for Yahoo! over the weekend (and Yahoo!'s official response).  The bid-ask at the point of break-down of the talks was apparently $33-$37, with some large Yahoo! shareholders rooting for a result at least in the middle.

Fred Wilson has a post with a survey question on where Yahoo! might close Monday afternoon, which is an interesting short-term exercise.

Quizzes by Quibblo.com

More critical for longer-term shareholders is whether a future without Microsoft promises higher or lower returns in a reasonable time-frame.  Unquestionably the Microsoft bid has instilled a higher urgency in Yahoo! management and board to prove this to be the case. 

Now we go from one waiting game to another.

Disclosure:  I'm a long-time Yahoo! investor.

ON A NEW TECH HUNTING SEASON

JUMPING IN

Don't know if three data points make a trend, but with the unsolicited $2 billion bid for game software company Take Two by Electronic Arts, we now have at least three 30% plus premium bid deals for public technology companies in a depressed stock market.

The other two of course are the on-going bid for Yahoo! by Microsoft, and the just accepted $2.4 billion deal for Getty Images by private equity firm Hellman & Friedman.

With the tech sector battered more than most in this most recent correction, and still relatively strong growth fundamentals, it shouldn't be surprising to see more of this in the coming months.

Both strategic and/or financial buyers seem anxious to take advantage of the relative bargains in the public markets, assuming of course they can finance the deals via their balance sheets despite a tough debt financing environment.

At least someone putting their toes into these turbulent tech waters.

ON MICROSOFT VALUATION OF YAHOO! AND FACEBOOK

NOTABLE BOOKENDS

A couple of days into Microsoft's audacious $45 billion bid for Yahoo!, the story as expected still dominates the discussions on Techmeme.

The current consensus opinion conveys a sense of fait accompli, even though rumors abound of other companies like News Corp., hedge funds and private equity firms and hedge funds trying to jump into the bidding.

And there are several good posts like this one by Tim O'Reilly on what Yahoo!'s email assets bring strategically to Microsoft.

But what strikes me the most about this bid so far is how Microsoft has chosen to value to important Internet companies, one new and one old.  While it values an emerging internet icon Facebook at $15 billion on October 24, 2007, it then goes on to value an Internet icon like Yahoo! at $45 billion past week.

Admittedly the first valuation is in the public markets while the second is in the far more forgiving private markets.  But it's also interesting to note that Yahoo!'s close on October 24th, 2007 was $30.68, not too far away from Microsoft's current $31 bid.

But as an active investor in both markets, the two valuations do give a moment of pause.

Which valuation is potentially a steal?

DISCLOSURE:  I'm a long-time shareholder in Microsoft, and Yahoo!

ON MICROSOFT BIDDING FOR YAHOO!

ABOUT TIME?

The long-expected and almost inevitable happened this morning.

Microsoft has an unsolicited bid of $31/share for Internet icon Yahoo!

Many observers would of course ask, "What took them so long?"

The answer of course is that Microsoft was waiting for the right timing, and they couldn't have picked it better.

The 60% plus premium to Yahoo!'s recently depressed market value, makes this almost a $45 billion deal, the largest one in Microsoft's history, and it's first unsolicited bid.  Lot more discussion of all this on Techmeme.

Yahoo! of course is doing what it has to do, and will evaluate the proposal "carefully and promptly".

The question of course is what happens next?

Such an acquisition, which would make the new Microsoft/Yahoo! the number two player in search with 30% share vs. Google, would likely have large integration execution challenges.

The next question of course that comes up is what should Google do if anything?

The timing of the bid comes at a tactically bad time for Google, having just missed it's first quarter in memory, resulting in a stock down almost 10% beyond the 20% it's already declined before that due to recent market turmoil.  In addition, it's participating in a multi-billion wireless broadband spectrum auction run by the FCC.  And that potentially limits any other big multi-billion dollar initiative it might want to consider.

At both a strategic and cultural level, the argument can be made that the better alternative fit is Google buying Yahoo!  However, that would likely face anti-trust issues, in addition the more onerous timing for Google in terms of it's financial capabilities.

There were rumblings of private equity firms circling Yahoo! given it's recent price weakness, but with a 60% plus premium in Microsoft's offer with limited financing questions, it may be tough for them to muster a competitive counter-bid, especially given the turbulent and unsettled market conditions in the debt markets.

From the perspective of battered Yahoo! shareholders, the bid of course represents a bitter-sweet event.  It's good to see something offered, but it's obviously a disappointing price given that Yahoo! traded in the mid-thirties only six months ago.

But the case can be made that a lot of existing Yahoo! shareholders are still under water despite the seemingly generous bid by Microsoft.

So all in all from Microsoft's perspective, the timing for Microsoft's bid couldn't have been better.  And the timing for Yahoo! ambitions to remain an independent company couldn't have been worse.

Microsoft's initiated it's 'Bear Hug" with almost exquisite timing.

Not to mention a bid price that almost represents a garage sale for Microsoft.  Given that Yahoo!'s holdings in Alibaba in China and Yahoo! Japan can be conservatively valued at $10-15, the argument can be made that the core Yahoo! business is a steal at a $31 price.

It wouldn't be surprising to see Yahoo! and it's shareholders hold out for a higher price.

The bidding has begun.

DISCLOSURE:  I remain a long-time shareholder in Microsoft, Yahoo!, Google.

ON SCRAPPY SCRABULOUS

SHOT ACROSS THE BOW

The inevitable has happened, with the BBC reporting that "Facebook asked to pull Scrabulous", by Hasbro and Mattel, the owners of one of my life-long addictions, Scrabble.  What are we talking about you ask?  Here's the back-story:

"Lawyers for toy makers Hasbro and Mattel say Scrabulous infringes their copyright on the board-based word game.

The move has sparked protests by regular fans of Scrabulous keen to keep the add-on running...

"Scrabulous is currently one of Facebook's ten most popular applications - little programs that Facebook members can add to the profiles they maintain on the site.

The request to remove the add-on came from both Hasbro and Mattel because ownership of the Scrabble trademark is split between the two. Hasbro owns rights to the game in the US and Canada while Mattel has rights everywhere else in the world..."

"The Scrabulous add-on was not created by Facebook but was built for the site by Rajat and Jayant Agarwalla - software developers based in Kolkata (India).

According to the Scrabulous website it has 594,924 daily active users - about a quarter of the total that have signed up to play it."

Hopefully, this legal action is but an opening move by Hasbro and Mattel to negotiate a buy-out and/or a licensing deal with  Scrabulous.

I don't know the parties involved here personally, but would venture to say if Hasbro and Mattel were able to bring this game and it's founders in-house, they'd have a shot at building a more vibrant and successful online franchise for their other properties.

In any case, the game has just begun when it comes to Scrabulous.

ON A NEW GAME OF TELEPHONE

MAKING THE ROUNDS

One of the unintended side-effects of services like Techmeme is how stories get passed along, commented on, and morphed up and down the discussion chain.

Whether it's this morning's discussion on the valuation of TechCrunch, or the valuation of Facebook on any other day, it's now possible to see the chain of comments as never before.

It's the old game of Telephone, done Web 2.0 style (image source).

And unlike the traditional game of Telephone, where the players remain somewhat anonymous, this game is played in full view, and for posterity.

Ain't the internet grand?