Google's Schmidt resigns from Apple board

Posted by Caroline McCarthy on 3 August 2009

In a move that comes as little surprise, Apple announced Monday that Google CEO Eric Schmidt is resigning from its board of directors.

"Eric has been an excellent Board member for Apple, investing his valuable time, talent, passion and wisdom to help make Apple successful," Apple CEO Steve Jobs said in the release. "Unfortunately, as Google enters more of Apple's core businesses, with Android and now Chrome OS, Eric's effectiveness as an Apple Board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest. Therefore, we have mutually decided that now is the right time for Eric to resign his position on Apple's Board."

Schmidt had been on Apple's board for almost exactly three years, since August 2006.

In May, Google confirmed that the Federal Trade Commission (FTC) was planning to hold discussions concerning potential conflicts of interest related to Schmidt's presence on both companies' boards of directors. Google's chief legal officer, David Drummond, said at the time that Google did not believe there was a problem with the situation.

Schmidt has said repeatedly that he recused himself from Apple board discussions pertaining to areas in which the companies' interests overlap--the iPhone, for example, given Google's work on the Android operating system for smartphones. But the similarities grew more difficult to reconcile when Google announced the development of its Chrome operating system, which will compete directly with Apple's OS. (The companies already own competing Web browsers, Apple's Safari and Google's Chrome.)

Last month, Schmidt said that he was planning to discuss the future of his role on Apple's board given the advent of Chrome OS.

More recently, potential competitive turf became evident when Google's third-party applications for the iPhone--which comes preinstalled with Google Maps--started to get well-publicized scrutiny from Apple. Google's location-aware service Latitude, for example, has been restricted to a Web-based app rather than an installable one, and a Google Voice telephony app was outright rejected by Apple.

Last week, a report surfaced that the Federal Communications Commission had sent letters of inquiry to Apple, Google, and iPhone carrier AT&T concerning the blocked app.

Resources: http://news.cnet.com/8301-13579_3-10301612-37.html?tag=newsLeadStoriesArea.1

Behind Microsoft-Yahoo: The Online Economics of Scale

Posted by by Steve Lohr on 30 July 2009

In their persuasion assault on Wednesday, Carol A. Bartz and Steven A. Ballmer repeatedly explained the Microsoft-Yahoo deal using a term from classical economics: “scale.”

“What this deal is really about is scale,” Ms. Bartz, the chief executive of Yahoo, said in the morning conference call with analysts and journalists, adding that advertisers, consumers and the two companies themselves would all benefit as a result.

Mr. Ballmer, the Microsoft chief, said during the conference call that in Internet search “scale drives knowledge,” which, in turn, fuels innovation. That was his shorthand description of what he said was the particularly powerful “feedback loop” in search and search advertising.

In traditional economics, scale typically refers to the efficiency gains that result from size. These observations were originally applied, and measured, in industrial markets. In high-technology markets, like software and the Internet, scale advantages can sometimes behave as if on steroids — faster and stronger. The mechanisms include the feedback loop Mr. Ballmer described and “network effects,” the concept that a technology or online marketplace becomes more valuable the more people use it.

Microsoft’s Windows operating system is the textbook case of a supercharged scale technology. The more people use it, and the more developers write software applications to run on Windows, the more valuable it is to everyone in that technology ecosystem.

Just how powerful the scale economics and network effects are in Internet search is a subject of considerable debate among economists, antitrust experts, investors and business executives. In the conference call, Mr. Ballmer seemed to be suggesting that the snowballing effects of scale in Internet search were even stronger than in operating systems.

But understatement is not Mr. Ballmer’s first instinct. So in an interview after the conference call, I asked him if that’s what he meant. “In my view, scale is more important in this business than any other technology business I know,” he replied. Which helps explain why Mr. Ballmer has long been so intent on getting hold of Yahoo’s search traffic, one way or another.

The Microsoft-Yahoo partnership will now have nearly 30 percent of the search market. In Microsoft’s thinking, that figure may well be significant. David Yoffie, a professor at the Harvard business school, and co-author with Michael Cusumano of M.I.T. of an insightful book on the browser wars, “Competing on Internet Time: Lessons from Netscape and Its Battle with Microsoft,” pointed out that the 30 percent threshold has been important to Microsoft’s strategy in the past.

In 1996, Microsoft’s goal in catching Netscape was to move from about 5 percent to 30 percent share of the browser market in a year. “The view inside Microsoft was that until you got to 30 percent, you weren’t credible in that market with business partners and developers,” Mr. Yoffie said.

There is another dimension of scale behind the deal, according to Murthy Nukala, chief executive of Adchemy, a Silicon Valley startup that uses statistical models, advanced data mining and machine learning to help target online advertising.

The pursuit of “data scale” in search, Mr. Nukala said, fueled the Microsoft partnership. The data-scale benefit, he added, comes from more than just generating more search traffic, though sheer volume is crucial.

A key challenge in search, he explained, is estimating the likelihood that a given user will click on a particular ad from a certain advertiser. In the search world, this problem is called “pCTR estimation,” for probability of click-through rate. The ranking algorithms for search advertising, Mr. Nukala explained, incorporate not only the price per click an advertiser is willing the pay, but also the estimated click-through rate (calculated by applying clever algorithms and machine learning to vast quantities of query data).

“It is well understood,” Mr Nukala said, “that as pCTR estimates improve, the quality of ranking is better, which leads to higher revenue per search.”

It is also important to understand, he added, that the click-through estimates do not improve merely proportionately as search traffic increases but by something more like an exponential multiplier. Presumably, that is the sort of thing Mr. Ballmer had in mind when he said “scale drives knowledge.”

Mr. Nukala concluded, “I believe that ‘data scale’ drove the strategic imperative and the structure of the deal.”

Resources: http://bits.blogs.nytimes.com/2009/07/30/behind-the-microsoft-yahoo-deal-the-internet-economics-of-scale/?ref=technology

What does the Microsoft-Yahoo deal mean?

Posted by Tom Krazit on 30 July 2009

With a few strokes of a giant purple pen, Microsoft's Steve Ballmer and Yahoo's Carol Bartz finally signed a deal Wednesday that will turn Microsoft into the second-largest search company in the world, and turn Yahoo into a media-driven advertising broker.

Here's a breakdown of the deal from the perspectives of the key players:

Yahoo

What it gets: Yahoo is paying below market rate for an outsourced search engine: Microsoft will pay Yahoo 88 percent of future search revenue, a better ongoing deal than had been expected, according to IDC.

It gets a guaranteed stream of search revenue for 18 months, and it gets to sell all the search ads on both Yahoo and Microsoft properties. And it gets to save money, one of the highest priorities for Bartz and new Yahoo CFO Tim Morse: the company estimated it will save $200 million in capital expenditures and see an overall benefit of $500 million in operating income.

What it loses: The ability to control its own destiny when it comes to search, still the most profitable sector of online advertising by a large margin. Yahoo's search revenue is now tied to the performance of Bing for 10 years, an eternity in the Internet world, and 88 percent of something is less than 100 percent of something.

What's next: Probably another reorganization, and another wave of departures as talented search engineers weigh their options among Microsoft, Google, Ask.com, and start-ups.

Expect rosier earnings calls where Bartz can point to the cost savings from the deal, and the evolution of a long-term plan for the company that doesn't involve dumping businesses.

Microsoft

What it gets: Far more search market share in one day than it could have hoped to obtain from organic Bing growth -- no matter how much people may like it -- over several years. All of Yahoo's search technology is now available to Microsoft to pick and choose what it might want to use on Bing.

And Microsoft also avoided having to make an upfront payment to take control of Yahoo search, as had been rumored for months leading up to the deal and hinted at by Bartz herself, claiming "boatloads of money" would be needed to pry Yahoo search away from the company.

What it loses: Relationships with advertisers on search ads, although it preserves its display ad sales operation...for now. Otherwise, Microsoft seems to have emerged from this deal pretty clean.

What's next: Heated search competition with Google, which only means the two companies have even more reason to detest each other.

Google

What it gets: Time. This deal will take months, if not years, to complete, and it will be a messy integration process. Google sales representatives likely called up all of their major clients this morning to remind those clients of the uncertainty that will accompany the integration process, and the notion that their ad dollars might be better spent with the more stable operation.

Google also gets to deflect some of the antitrust scrutiny that has been directed its way by pointing out that a combined Yahoo-Microsoft search property has a very healthy share of the market.

What it loses: The ability to play Yahoo and Microsoft search off one another: fractured competition meant it would have been much harder for either company to make serious inroads against Google on their own. It also turns Microsoft into a credible technology threat with Microsoft's right to pick and choose the best of Yahoo's search technology developments and match them with the well-received Bing.

What's next: Business as usual, for now. Google never had any intention of ceding its search lead before this deal was announced, and while there's arguably more pressure now to live up to that promise over the next several years, it's not anything that wasn't expected in Mountain View.

Advertisers

What they get: A credible second option for their ad spending, assuming ad spending ever becomes trendy again amidst the current economic backdrop. They're also in store for a renewed pitch on the benefits of Internet display advertising, which probably still doesn't resonate on Madison Avenue but may one day start to make sense for the Internet advertiser.

What they lose: The relationships between advertisers and the two companies will likely grow very complicated over the next several months as those used to working with certain representatives transfer their business to new faces. Those problems aren't insurmountable, but they can be annoying.

What's next: If the ad market ever comes back, renewed competition in search advertising for keywords, placement, and reach.

Consumers

What they get: "Powered by Bing" search results on Yahoo pages.

What they lose: Usually, consolidation is seen as bad for consumers--take banks as an example -- because it reduces choice.

What's next: The consumer impact of this deal is not obvious, especially not at this point with so many details left to be hammered out. One could argue that if Yahoo wasn't really committed to search, consumers would see better search results over time on Bing-powered Yahoo pages. And there are indirect benefits to consumers that come along with having advertisers that aren't chained to one search engine.

But this is really about freeing up Yahoo to focus more on its other businesses, and giving Microsoft more market share to force Google into playing defense on search, which could alleviate some of the pressure Google is putting on Microsoft with things like Google Apps and Android.

It will take some time for the impact of these decisions to filter down to the consumer: assuming the government gives the deal its blessing.

Resources: http://edition.cnn.com/2009/TECH/biztech/07/30/cnet.microsoft.yahoo.deal/index.html