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Archive for the ‘Economics’ Category

AOL-Google Deal Closer

Posted by hs on December 19, 2005

(Updating a previous post)

NYTimes is reporting in AOL’s Choice of Google Leaves Microsoft as the Outsider that Time Warner would formally announce tomorrow Google buying 5% stake in AOL.

There’s an interesting parallel that NYT draws out between circa 1997 Netscape-IE battles and Google-MSN battles of today, with the slight twist: Microsoft is on the other side. Although MS was believed to have almost clinched the deal about 3 months back, this is what seems to have turned the tables: Microsoft’s refusal to take AOL’s Internet-access business, and its decision not to contribute its e-mail, messenger and, most important, its new Live.com portal to the venture.

AOL and Microsoft also passed on a chance to create a third big portal to compete against Yahoo & Google.

Google, on the other hand, provides AOL with, what is, arguably the best Internet search technology currently. It would also help AOL in sending traffic to AOL’s free, advertising-supported Web sites and give AOL the ability to offer its existing advertisers search ads for the first time and will allow AOL’s sales force to sell display advertising on Google’s extensive network.
Yahoo might have to look for other ventures for its search service business – MSN might switch away from Yahoo once its own technology matures, and that might be as early as next year.

Update: NYTimes Business report – AOL and Google Formalize Partnership to Include Shared Selling of Ads
Keywords: Google, AOL, Deal, Stake, MSN, Yahoo, Netscape, IE, Search, Advertising

Posted in Economics, Internet, Tech/Biz | Leave a Comment »

Google to buy stake in AOL?

Posted by hs on December 16, 2005

Coming as it does shortly after Steve Case made the case for splitting Time Warner (AOL – A Time-less Saga?), BBC is carrying a news item on purported sale of 5% stake in AOL to Google at approximately $1 billion.

This is especially valuable for Google since its the current search provider for AOL.com, and gets 2-4% of its annual net revenues. Google might also be interested in leveraging AIM (AOL Instant Messenger). AOL is valuable also because its one of the few independent big portals left. Google can’t afford to lose it to MSN or Yahoo (which already have their own portals – MSN.com and Yahoo.com).

On the flip side, Google might have already recouped some of the deal cost as reflected in the share price jump (7% to $435.20).

However, Carl Icahn doesn’t seem to be pleased:

It is my belief that, if the proper partner were allowed to have control of AOL, shareholder value would be much more greatly enhanced than through a half-hearted joint venture that might only serve the purpose of entrenching management.

Keywords: AOL, Google, Stake, 5%, Share price, Carl Icahn, AOL.com, MSN, Yahoo, Search engine, Portal, Steve Case, BBC, Sale

Posted in Economics, Internet, Tech/Biz | 1 Comment »

AOL – A Time-less Saga?

Posted by hs on December 14, 2005

Steve Case (AOL Founder) has joined Carl Icahn in calling for breakup of the Time Warner Company (which owns, among other things, AOL, Road Runner, CNN, Time Warner Cable & Time Magazine). In his article in Washington Post on Sunday (It’s Time to Take It Apart), Steve says:

“Although I played a key role in bringing AOL and Time Warner together six years ago, it’s now my view that it would be best to “undo” the merger by splitting Time Warner into several independent companies and allowing AOL to set off on its own path”

He goes onto say

“Given that Time Warner failed to capitalize on AOL’s potential during a period when it owned 100 percent of AOL, it seems doubtful that a scenario in which it has a lesser, but still controlling, stake will work better”

The logic for de-merger may look good, especially in this era of focus on ‘core competencies’, and Time Warner may indeed get a good value for its AOL unit from one of major suitors – Microsoft, Yahoo or Google, the question remains about the basic veracity of the arguments put forth by Steve Case.

Notice the argument where Time Warner is blamed for not being able to capitalize on AOL’s value. In 2000, although the union was termed as ‘merger’, it was pretty clear that AOL was taking over Time Warner, and indeed, AOL guys ran the show in the merged entity for the first few months after the merger. And having admitted to playing a key role in the merger, Case should take part of the blame for not having failed to achieve the merger objectives and not having done anything earlier.

To cite Steve’s argument for an independent AOL

Could a stand-alone AOL stage a comeback? Five years ago, most people thought Apple was a tarnished brand destined for declining market share and irrelevance. But some (including its co-founder Steve Jobs) saw the potential there, and a spirit of innovation has returned to the company to produce breakthrough products. Apple is now more valuable — and more relevant — than ever. Liberated to pursue its own future, AOL could have an Apple-like renaissance

Leave aside comparison to Apple, AOL is increasingly losing its relevance in the market. In dial-up market, it is facing stiff competition from companies like NetZero, whereas the DSL business itself is struggling hard against the Cable companies. Thus the ISP part of AOL might really not gain much from a demerger, save for some minor changes that might result from not having to accomodate sibling Cable services from the Time Warner stable.

The most valuable assets for AOL today would be the AIM (AOL Instant Messenger) and the AOL.com portal. It was mainly the AOL.com portal that MSN, Yahoo, Google were after. AIM has a large locked-in audience, but they have been rather late to the Internet Phone service game. Yahoo & MSN have provided similar service for a long time now, and newcomers Google & Skype are also making their presence felt.

Rather than taking the company apart, Time Warner should increasingly cross-leverage its media strength. With strengths in various media channels (TV, Internet), it has the wherewithal to compete against the new media companies.

Keywords: Time Warner, AOL, Breakup, Steve Case, Carl Icahn, CNN, Time, Time Warner Cable, Merger, Split, MSN, Yahoo, Google, Bid, NetZero, Cable, DSL, AIM, AOL.com, Skype

Posted in Biz, Economics, Tech/Biz | 1 Comment »

Printer Economy Update

Posted by hs on December 13, 2005

Continuing from a previous post: Patent’ed Profits vs. Freedom of Choice

Some numbers on the printer market economics (sourced from the article Ever Wonder Why Ink Costs So Much? in BusinessWeek Nov 14, 2005 issue)

  • Cost of 3rd party refilling (e.g. Cartridge World) vs. vendor-sold (e.g. HP) cartridges: 40-60%
  • Ink inside a new cartridge from HP, Lexmark or Canon costs more per ounce than Chanel No. 5 or Dom Perignon
  • Global market for printer ink: $59 billion
  • Refiller share: 5% (2004); Knock-off brands: 18% (2004)
  • Estimated market share (non-vendor) in 2009: 31% (source: Lyra Research)

No wonder people like Cartridge world are expanding so fast. From 1 store in Australia to more than 1,000 stores across 30 countries (including 275+ in North America) raking in $300m annually in less than 10 years is surely a good business by any standards.

Keywords: Printer, Ink, Cost, BusinessWeek, Cartridges, HP, Cartridge World, Lexmark, Canon, Printer Ink Market, Refiller, Refilled Cartridges

Posted in Computing, Economics, Gadgets, Tech/Biz | Leave a Comment »

Patent’ed Profits vs. Freedom of Choice

Posted by hs on December 2, 2005

(updated from a previous post)
CNN Money is carrying a story on a case that is currently before the US Supreme Court (Cheaper refills vs. patent profits).

Although this case (Illinois Tool Works v. Independent Ink.) might seem like the proverbial David vs. Goliath battle, it has lots more facets. The prime contention is: does buying a patented product force the customers to buy services (including consumables, spare parts, etc.) from the original manufacturers (or any other parties mandated by the manufacturer).

Such a coercive (or tied-in sale) is essentially market distorting. The patent-holding company can grow into a monopoly (or an oligopoly at best) and force the customers to pay higher-than-normal prices, thus maximising its own profits at customers’ expense. On the other hand, the patent-holding companies argue that it cuts down the incentive for them to invest in R&D and produce products in the first place.

The current case is a classic example in the technology industry. Printer companies sell their printers significantly below their cost price, and recoup the money by selling the ink/toner/cartridges at a premium. In Inkjet printers, this is exemplified in a very stark manner – customers often find that the cost of buying original replacement cartridges (1 black & 1 color) is often nearly the same as the original cost of the printer. It is just their insecurity which prevents them from junking a working printer and buying new one with full cartridges – otherwise, given the depreciation, and wear & tear plus warranty costs, it might actually be more economical to buy a new printer rather than replace cartidges in the old printer. And, it is also a technology refresh – better print quality, speeds, etc.

Similar is the case with companies that sell hardware for cheap, and then charge a premium for the services.

Arguments put forth by such companies are flawed – true that they put significant investments in R&D efforts and they need to recoup the same, with a decent returns, but earning those returns by distorting customer choice is not the right way. If some other company can come up with a product that interoperates with the orignal products and sell them at a lower price, then the second company is also well-within its rights to recoup the investments that it made in coming up with a compatible technology! And since their investments are not on the same scale as the original R&D, they can afford to charge lower prices – simple economics!

A better way to recover investments is to come up with products that customers can’t simply get away from – either a perfect product which customers simply love, or a highly advanced product that no other company can bear to match. Product Differentiation & Benefits Delivery – that is how customer business is won, not through litigation.

Update (20051201): Two other similar cases have come up recently – both pertaining to patent-holders suing other companies purportedly using their patents. One if MercExchange vs. eBay and the other relates to NTP (successfully) suing Blackberry-maker RIM. In RIM (Research In Motion) vs. NTP case, the most interesting aspect is that the patents NTP is claiming are all just paper-patents. NTP does not have any device based on the patents it is suing RIM for. Given the potential outcome of the case (Judge banning all Blackberry services in US for everyone except Governmental agencies), the dice is heavily loaded in favor of NTP. The only aspect that needs to be finalized is the amount which RIM would have to shell out to NTP. Viva la Patent system!

Update (20051202): The US Patent & Trademark Office (USPTO) has rejected NTP’s claim on one patent, and said that a Norwegian company might have filed for the patent before NTP. RIM can breathe a sigh of relief!
Keywords: Patent, Free markets, Printers, Ink, Court case, Supreme court, RIM, Blackberry, NTP, MercExchange, eBay

Posted in Computing, Economics, Gadgets, Tech/Biz | 1 Comment »