Cap’n Ken’s Homespun Wisdom

So back in April Dish Network was slapped with an injunction against selling certain DVRs in the wake of the TiVo patent infringement case. The models affected included the HD 942 DVR that I have as my upstairs unit, but Dish’s announcement of the injunction specifically said units already in use were not subject to the the injunction and may continue to be used by customers.





Or not.

This afternoon I got a call from Dish customer service saying that my 942 DVR will no longer receive Dish programming after August 1 and must be replaced. That’s very different from what was said before and has apparently been reported to this point. Dish, as usual, is cool about the whole thing - they’re setting me up with a no-cost lease of another HD 622 DVR (because I own my 942) and hustling a technician out here on Monday at no cost to set it up.

I’ll have to endure the usual pain of either losing recorded programs or moving them off the 942 to something else (I don’t remember if the 942 supports USB transfer or not), but the 942 doesn’t get the expanded set of HD channels I get on my 622, so all in all I call this good for me.

It’s not so good, however, for the unaware folks who are about to close a deal on eBay for a receiver with a useful life of 28 days from today.

I can’t stay I still quite understand what makes the newer DVRs not infringe upon the TiVo patent, but Dish has filed suit to get that judgment made official by a Delaware court. So given that they are taking a solid move to rid the world of the offending DVRs, filing suit against TiVo’s statements about their new one and heavily promoting their new DVRs, they must feel pretty strongly that they’re in the clear now.

Let’s hope so. New DVR will be something like my 10th one in about seven years.

Going out to my car the other day, I noticed this coffee mug hanging out on the garage floor. It had fallen off the shelf where I put empty Coke Zero cans and travel mugs when I have fresh beverages to take with me somewhere.

Yep, there it is. One of the more practical bits of corporate schwag I received from Google during the three years I worked with them as the search guy for EarthLink - lying there collecting dust. And I gotta say, that’s how I’ve been feeling about my “career” of late.

I was happy to get laid off last fall - as strange as it sounds, having it happen about a month after my first child was born was great timing. Severance came in handy and things are shaky enough at my former company that I would have been nervous having the wife quit her job to stay at home with the baby.

After the layoff, our plan became for me to stay home with the kid until my wife was done with some major projects at work. Then we would switch roles and I would go back to work. My window to go back opened about June 1, so I’ve been actively looking around for not quite two months now. I don’t like what I’m finding.

As my buddy Dave and I were discussing the other day, it’s not that there aren’t jobs available in Atlanta - just not interesting ones. Actually, I imagine there are some interesting jobs out there, but I’m not in a position to find them right now. I can manage to do interviews during the day, but networking and the like is really difficult to do with a 10-month-old tagging along.

In the best of times, Atlanta isn’t a bad market for interesting new media things. In not-so-great times, it’s not so great. The best leads and casual but serious offers from former colleagues have all come from the west coast. But as much as I enjoyed spending time in L.A. and the Valley at my old job, moving there just isn’t going to happen now. It was highly unlikely before I had a child - and just isn’t going to happen now. As I told one recruiter from the Valley; I like being married, and my wife and kid wouldn’t come with me to California even if I wanted to move.

Something will come along, I’m sure. But it’s different now that I’m actively looking - I’ve started to feel like that coffee mug collecting dust. I thrive on the challenge of new things. I get that with my little sideline bits like EAV Buzz, but in the best weeks I might get 20 hours to devote to the “professional” projects I do for fun and to stay sharp. And I ramble on about Yahoo and things to just keep my product brain healthy.

Keeping perspective is the hardest thing - what I’ve done is best for my daughter and it shows in her development. She is the “product” I’m “managing” right now, and we’ve had a successful launch. Maybe if I put together a PowerPoint showing her progress I’ve feel more “in the game”.

In an award-eligible and widely-ignored piece about five weeks ago, I detailed my unoriginal thoughts on a potential search outsourcing deal that could save Yahoo from collapse in the wake of Microsoft’s failed bid to buy the company.

And today Yahoo and Google struck just such a deal. So I figured it worthwhile to take a look at what they’ve announced and what it means to Yahoo’s financials and future. It’s less worthwhile to write about it here, but what the heck.

Disclosures and street cred: I am still a Yahoo shareholder and picked more up on the tanking this afternoon. I am no longer a Microsoft shareholder. And I used to run a Google-powered web search product for what used to be a major Internet company. So AdSense for Search … I’ve been there.

OK, so what’s the deal? Most significantly, Yahoo is not shelving its own paid or natural search systems; they are simply bolting AdSense on to some or all of their search results page in the U.S. and Canada. AdSense becomes just another monetization route for Yahoo Search - if they can’t serve a valuable ad; just let Google handle it.

And maybe that’s a smart move. It might quell some of the anti-trust sentiment already swirling around the deal, and allows Yahoo to still tinker around trying to build a better search. On the “anti-trust” stuff, by the way, I’m still perplexed at what the issue here would be. Yahoo is entering in to a contract with Google, and other competitors from AOL to the New York Times have the same deal with Google. Google will have no ownership in Yahoo … just a contractual relationship. The companies said flat-out today that the deal is not an anti-trust issue, so we’ll see.

OK, so the financials. Yahoo says they expect to see an extra $800 million in annual revenue, so running the assumptions from my first piece ($80 gross RPM from Google; 75% rev share) alongside ComScore data suggesting Yahoo’s annual query volume - that comes out at right about 50% of searches being monetized by Google. Hey, a round number - and room to grow. Yahoo says Google is going to be serving the deeper “tail queries”, which makes a lot of sense. Yahoo probably gets good value for everyday terms, but there’s no way their base goes nearly as deep as Google’s.

But Yahoo says the $800 million in annual revenue will result in just $250 million - $450 million in incremental net cash flow.

That incremental cash flow is projected to be only 31% - 56% of gross revenue is an interesting projection. Assuming the AdSense deal is set up as Google usually does it, that $800 million should have very little operating expenses laid against it (maybe 10% in administrative / support costs), so I’m thinking Yahoo is going to use a lot of the Google revenue to increase investment in their own search and advertising systems while showing enough bottom-line benefit to hold off the wolves.

Based on Yahoo’s projections, the deal would boost annual revenue 11% from the last four quarters and net income between 24% - 42% depending on where incremental cash falls in their projected range. That … ain’t bad.

Project that out with Yahoo’s current stock P/E ratio and you get a suggested value of $29 to $33 a share. Thirty-three dollars a share … why does that sound familiar?

So if you believe Yahoo’s projections (Google has provided no guidance on what to expect), the company gets a lot healthier real quickly. And I’m inclined to think they have a good handle on what to expect and are providing good guidance.

The Google Effect is very, very real. Hooking up with AdSense is like turning on a money faucet if you have any decent level of search traffic. There’s no reason to believe Yahoo won’t see a tremendous Google benefit. There’s a lot more work to be done in Sunnyvale (let’s see Jerry step aside at the annual meeting for starters), but what Yahoo has shown Mr. Icahn, Mr. Ballmer and everybody else is they do have value to tap and selling out at a discount isn’t in the best interest of the company.

Update: Interesting conclusions can be drawn from Yahoo’s SEC filing on the Google deal. Google has a right to cancel the deal if it doesn’t end up pacing at $1 billion a year in gross revenue for Google; Yahoo projects $800 million a year in gross revenue to them - suggests an 80% rev share for Yahoo. Yep, that’s about right.

Also, the rev share will adjust based on “specified monthly gross revenue thresholds”. Google’s not going higher than 80% rev share, so I’m thinking Yahoo’s take goes down as monthly gross goes up. So Google is giving Yahoo the surety of the big rev share up front to shore up their earnings; then the benefit to Google is a higher take than usual once Yahoo has made its nut.

The “Change in Control” terms are also interesting:

As defined in the Services Agreement, the term “Change in Control” means (a) a merger, consolidation, statutory share exchange, recapitalization, restructuring or business combination involving directly or indirectly a party or a subsidiary of a party in which voting securities of the party outstanding immediately prior to such transaction do not continue to represent more than 50% (or 65% in the case of a transaction involving Microsoft Corporation (“Microsoft”), Time Warner Inc. (“Time Warner”) or News Corporation (“News Corp”), in each case together with their respective affiliates) of the voting power represented by the outstanding voting securities of the surviving entity immediately following the transaction; (b) any “person” or “group” becoming the “beneficial owner” (as such terms are used or defined in Sections 13(d) and 14(d) under the Securities Exchange Act of 1934, as amended) of more than 50% of the voting power of the then outstanding voting securities of the party, except that, in the case of Time Warner and News Corp, the percentage will be 35% instead of 50% and, in the case of Microsoft, the percentage will be 15% instead of 50% and a Change in Control will also be deemed to occur if Microsoft (i) beneficially owns 15% of the voting power of the party or (ii) acquires directly from a party any equity or voting securities of that party representing (or having a right to receive in the aggregate) 5% or more of the total equity value of the party or 1% or more of the party’s annual revenues on a consolidated basis); (c) approval by the stockholders of a party of a plan of liquidation or dissolution; (d) the sale or disposition of all or substantially all the consolidated assets of a party; or (e) at any point in time, Yahoo! no longer owns and, with respect to the U.S. and Canada, controls a majority portion of Yahoo!’s technology and intellectual property assets that in the 12-month period prior to that time had been owned by Yahoo! and used by Yahoo! to provide services in the U.S. and Canada for either its algorithmic search or search advertising business. The Services Agreement also permits Google to suspend performance of the Services under certain circumstances, including a pending Change in Control of Yahoo! involving Microsoft, Time Warner or News Corp and a change in a majority of the board of directors of Yahoo! following an annual or special meeting of stockholders if a majority of the new directors did not serve on Yahoo!’s board immediately prior to such stockholder meeting and were nominated or solicited for by Microsoft, Time Warner or News Corp or, solely with respect to Yahoo!’s first two annual or special meetings held after the Effective Date where the election of a majority of directors is before Yahoo! stockholders (but not later than September 1, 2009), by any other person or group.
If the Services Agreement is terminated by either party within 24 months of the Effective Date as a result of a Change in Control of Yahoo! (other than a Change in Control triggered only by Microsoft either (x) acquiring beneficial ownership of voting securities representing more than 15% of the voting power of outstanding Yahoo! voting securities or (y) acquiring directly from Yahoo! equity or voting securities representing 5% or more of Yahoo!’s total equity value or 1% or more of Yahoo!’s consolidated annual revenues, unless Microsoft becomes the beneficial owner of more than 35% of the voting power of such securities within such 24 month period), Yahoo! is required to pay to Google the sum of $250,000,000, which payment will be reduced by one-half of an amount equal to (a) all gross revenues received by Google pursuant to the Services Agreement through the date of termination less (b) the amount equal to Yahoo!’s share of such gross revenues during the same period.

Lots of financial legalese up in there. Specific references to Time Warner and News Corp. are interesting, as is the reference to Yahoo not owning its search business anymore.

So I opened a new business checking account with SunTrust Bank - had to support the one bank left in East Atlanta Village, and you can’t beat “free” - a couple of weeks ago and ran in to the most frustratingly stupid unsupported browser experience I’ve ever seen.

When you sign up for Business Checking, SunTrust emails you an access code to set up their Online Cash Manager service (what they’d call “online banking” for a regular account, I guess). So I go to the enrollment site, put in my info and access code and hit Submit. I’m left at a “Server Not Found” error when redirected to whatever other site they needed to send me to.

OK, fine. No big deal - I’ll just try again later. Later = same deal. Later still = still the same deal.

I’m not in a particularly big hurry to get set up, so I emailed customer service to find out what’s happening. And several days later - with no response whatsoever from customer service - I needed to get things rolling to move my AdSense payments over to the new account. So I opt for the last resort; talking to a human.

Five minutes on hold and one transfer later, I land at the desk of a SunTrust OCM agent. I tell him what’s happening, and he asks “are you using Firefox?” I tell him yes, and he says “you have to use Internet Explorer. Try that.”

Oh, for F*ck’s sake. I told the guy that they really should let customers know of this limitation, and he agreed. From the tone in his voice, I imagine he gets this call many times a day. I mean, Firefox has about 40% share of the browser market now.

So SunTrust requires new business accounts to go through a process that requires IE (the actual OCM system, by the way, supports Firefox), but they don’t tell you that. Unreal.

They could:

- Actually support Firefox (hard, I guess)
- Mention this limitation in the email they send out with the access code (unbelievably easy)
- Detect your browser and mention the limitation on the sign-up page (easy)
- Detect your browser and send you to an actual error message when you submit the form (harder)

But, instead, they say nothing, ignore customer support emails and probably field calls on 40% of the new accounts when people try to set it up. If anybody is up for the job of VP of Customer Care at SunTrust, there’s a really easy way for you to meet your support-call-reduction goals.

The kicker of the story is that a couple of days later I get a courtesy “welcome” call from the East Atlanta branch manager. I tell him all is fine with my account, but mention this problem with sign-up.

His response - “I know. That’s a problem.”

Yep.

So last night Microsoft officially bailed on its offer to buy Yahoo. Jerry’s kids stuck to their guns on acceptable pricing and scared Ballmer away from a proxy fight with talk of a Google alliance. Well done, I say.

The only thing that would have made sense about this acquisition was a really big premium for Yahoo shareholders (I am one), and what Microsoft (I own it, too) was offering was a big premium on a stock depressed by a lot of missteps and the general decline in stocks over the past six months. YHOO was trading above Microsoft’s offer as recently as late October, you know.

It was an opportunistic move by Microsoft to snap up a battered company at its weakest moment. That Yahoo wiggled its way out of the Redmond Death Grip is impressive. In the short term, I’m sure Yahoo stock is going to get hammered, shareholder lawsuits will be filed and the pain of the Microsoft ordeal will linger a while.

But ultimately, Yahoo is much better off not being a subsidiary of Microsoft. Yahoo is a much, much stronger online brand than MSN (as represented by MSN.com, Live.com, Hotmail.com, MSNBC.com and whatever else makes up the mishmash of Microsoft’s online presence), and Microsoft is the poster boy for the futility of just throwing money at the Internet.

Microsoft has been growing its online business of late, and also growing its online losses. In the first quarter of 2008, Microsoft did $843 million in revenue and lost $228 million in their online segment. Yahoo, by the way, did $1.8 billion in revenue and made $121 million in the quarter.

Why, then, would Microsoft be a better owner of Yahoo? They wouldn’t. Microsoft just has plenty of cash on hand ($26 billion in cash equivalents) and thought they could pick up a great online asset on the cheap. And it would have been a hell of a nab for Microsoft, but ultimately “Yahoo - A Microsoft Company” would really sell short the Yahoo potential.

Having been a part of the kind of b.s. company outlook presentation Yahoo put together (PDF) to counter Microsoft’s advances, I don’t buy the “look how big we’ll be!” make-believe numbers, but Yahoo is right that the market under-values the company right now.

And the reason is this - all of the focus these days is on search advertising. Yahoo has poured a ton of time and money into their Panama ad platform with little effect against the Google machine, and that failure is what Wall Street has focused on. Microsoft, as well, has failed to put a dent in Google with its Live Search and AdCenter platforms.

Google has won web search as we know it. Period. Fighting that battle has been very bad for Yahoo, and it’s time to wave the white flag. With $50 billion in revenue and net income of $14 billion a year, Microsoft has the ability to continue the fight should they chose, but Yahoo needs to get out.

The logical move for Yahoo now is to syndicate Google AdSense for Search. Not outsource their search engine; just kill Panama and serve AdSense ads instead. An informed hypothetical effect of such a move:

- Say Yahoo now earns $50 per thousand queries (which is probably a high estimate) and their net margin after development costs, administrative costs, etc. of web search and Panama is 25% (what Google nets).

- Say using AdSense, Yahoo would see $80 per thousand queries (a reasonable estimate), get a 75% rev share (also a reasonable estimate) and have administrative expenses at 5% of their Google net. Then spend another 30% of that net on search engine development.

The Yahoo DIY model would net out $12.50 per thousand queries, while the AdSense syndication would net out $39.90 per thousand queries. Throw some conservatism into the estimates and it’s a safe bet that Yahoo could double its net search revenue while getting out of the losing game of chasing Google. Using my hypotheticals and ComScore search data, it seems plausible that Yahoo could add somewhere around $1 billion in net income per year just by getting (back) on board the Google train.

There is, of course, the anti-trust consideration. In a practical sense, Google (through its own site and its many, many syndication partner sites) currently has about 68% U.S. market share for search, with Yahoo probably holding about 23% - 24% with its sites and partners, and Microsoft picking up the remaining 8% - 9%. So if you’re arguing against a Google / Yahoo deal, you’d say essentially that Google would end up with 90+% market share. Of course, if you’re arguing against the deal, you’re probably Microsoft, which holds a 90+% market share in operating systems.

Adding Yahoo would obviously be a huge market share gain for the AdSense platform, but Google is already the ad provider for AOL (No. 4 in web search), Ask.com (No. 5), the web portals for Comcast, Verizon, AT&T, Cox and most other major ISPs, CNN.com, MySpace, NYTimes.com, LATimes.com, etc. etc. You get the picture - Google is web search advertising.

Would the Trust Busters really block a service agreement (not an equity stake) between Google and Yahoo because of AdSense market share concerns? Maybe, but it seems like a stretch to block a non-equity contract between two companies. Akamai is pretty dominant in the content-serving business, so are they going to be denied big new contracts because of “anti-trust” concerns?

I have to think the anti-trust hurdle is one Yahoo could clear on an AdSense deal with Google. The actual combination of the No. 1 and No. 3 display advertising companies and No. 2 and No. 3 companies in total online audience probably would have been a bigger anti-trust concern. And Yahoo’s long-held position as the king of online content is at the heart of its real value.

Even having lost a lot of luster during its “Hollywood” years, Yahoo is a stellar online content brand. Their future promise lies not in fighting Google, but in building online audience and monetizing well through display ads. If they had been focusing on that instead of chasing after movie deals and search advertising for the past several years, they would be in much better shape today.

When they’ve done smart things (like buying Flickr), they’ve managed to totally screw up integration after the fact. I guess they’re working on that now, but a real sharp focus is needed on re-crafting the Yahoo product set. The company was barely over its Semel Hangover when the Microsoft bid hit, so it’s going to take a while to really right the ship.

Once tightened up, Yahoo will be in a great position to fight the next online revenue battle - targeted display advertising that yields much higher CPMs. Google, of course, has taken note with its DoubleClick acquisition, and AOL is raising eyebrows with its Platform-A program.

Again, had Yahoo recognized earlier that search was lost, its focus could have been put on the next battle - one it was once in a dominant position to win. But Yahoo is about on par with AOL in terms of its display advertising network and dominates inventory on its own sites. Be smart, focus on the right things … and for God’s sake get a real CEO in there. Jerry Yang stopped being CEO the first time a year and a half before Yahoo reported having 155 employees (including 44 “surfers”) and generating $19 million in revenue. And he’s the guy to turn around a troubled $7 billion company? Please.

Yahoo is full of potential, but given their miscalculations and missteps over the last five years, their potential remains just that. The company could be the Google of Display Ads 2.0 if they start doing things right, or it might get picked up by Microsoft next year for half the offer they just turned down. I’ll be interested to see what the fate of Yahoo is now.

I’ve been tinkering around with things on my new Wordpress install, and one of the tweaks I just rolled out was changing the default behavior of the “link” button in my post editor to add ‘target=”new”‘ to the end of URLs I’m linking to. Simple enough tweak (look for quicktags.js in your wp-includes/js directory, kids), but the lack of this as a configuration option hints at the disdain for “target=new” among the Lords of the Internet.

If you don’t know, “target=new” in a link makes that link open in a new browser window, rather than in the window you’re currently looking at. And for many minds absorbed with Internet propriety, that’s just wrong. It’s not quite on the level of “breaking the Internet” (I cherish my freedom …), but it’s widely viewed as “bad user experience”.

But I challenge that notion when it comes to pages referenced in content. Navigational links; links to original sources at the end of an article, blogrolls, etc. - sure, the good user experience is sending folks along and away from your site. It’s been perceived that “bad actors” use “target=new” or “target=_blank” to keep their site alive in your browser even after you’re done with it. And that’s probably the case a lot of times.

Within the context of an article, however, that logic often falls apart. I’ll reference this Wired blog post about Google & ComScore as an example if you’d like to follow along.

Wired links to five outside sources in this rather short article, with each link providing some background or context to the topic at hand. It’s good context and just linking over to previous Wired pieces or outside data or opinion provides quick and easy reference without having to dump a lot of background information, quotes, etc. into the article.

Presumably, the reader has come to the article to read the article. Reference links invite the reader to leave the article and visit the linked content. Having links open in the same window requires the reader to use the “back button” functionality to return to the article they were reading. Using the “target=new” attribute requires the reader to switch back to the original tab or window to return to the article. Neither is an ideal experience, but I would argue that keeping the original page open is a preferable flow. In any case, I don’t think “target=new” is the evil monster some would make it out to be, and in the world of connected content I’d like to see it embraced a bit more.

Ideally, the reference links would appear in such a way as to not disrupt the reader’s flow in the current article. Perhaps something akin to the rather annoying and generally useless Snap Shots functionality some sites such as TechCrunch are in love with is a model, but it’s difficult to display much more than images in a way that makes sense in less than a full-window view.

Not long ago, online content was a series of silos. Newspaper articles republished online would rarely include in-content links, and there was so little original web content out there that linking between pieces wasn’t an issue. That’s changed, of course, so I think more thought is needed on how to best flow users through interconnected content.