The Power of Platforms

Side Note: RIP Steve Jobs

As we move into 2012, it’s readily apparent that the world has rewarded the creators of technology platforms quite well over the past 40 years. Companies like Amazon (shopping), Apple (iOS), Facebook (social), Google (search), Intel (x86), Microsoft (Windows), and Oracle (DB) all showcase world class platforms that are ubiquitous in the majority of modern life. Each one of these companies have been defined by a visionary leader who constantly drives new products and new technologies, capturing the world’s attention and ultimately improving lives with every iteration. These leaders carved their own path, typically not by creating something entirely new, but by reimagining current technologies and creating a platform and a “complete” vision. Take Microsoft for example, they were clearly not the inventors of the operating system, or even the GUI, but Bill Gates saw the bigger picture of the overarching value of an operating system that could be standardized in the marketplace and allowed a multitude of partners to be involved in it’s rise. Apple may have missed that boat, but instead with iOS, they created a portable platform for music, communication, and games. Each player started within a preexisting market, but redefined that market with their respective products. Let’s dive deeper into some examples of platform building and vision.

Microsoft: MS-DOS wasn’t the first Operating System, Windows wasn’t the first GUI

Vision: The Platform for the Personal Computer

Bill Gates realized that by partnering with the majority of the key personal computer manufacturers at the time, namely IBM, that he could define the experience of the PC and build an extensible platform for others to participate in. Because of this vision, he was highly aggressive at closing deals and iterating the operating system to ensure Microsoft software was the path of least resistance for developers. Further, Microsoft has always been highly partner focused, even recently evidenced by their desire to not bring a “Microsoft Phone” to market. This respect for partners has engendered a sense of safety in the channel.

Apple: iPods weren’t the first media players, iPhones definitely weren’t the first smartphones

Vision: iPod-The Platform for Music; iPhone- The Platform for Portable Apps

Steve Jobs redefined the music experience for the world in 2001. Building upon the prevalence of MP3s and the Napster generation, he brought music to a new generation with small, easy to use devices that organized large volumes of music. The click wheel allowed users to scroll through long lists quickly and accurately, and once the iTunes music store launched in 2003, Apple’s platform win was complete. Steve Jobs realized the success that the iTunes store brought to the iPod, and included it from day one in his iPhone plans. By bringing an open app ecosystem and convincing AT&T to heavily subsidize the iPhone hardware, he ensured success by making the smartphone accessible to all and leveraging the existing success of the iPod.

Facebook: Ever heard of Friendster or Myspace?

Vision: The Platform for Identity

Facebook started as one social network of many in 2004, but again had a few differentiators. Surprisingly, Mark Zuckerberg started it as a closed network, relying on only university students and verifying identity from the start. This highly structured network won out over time, because of key partnerships (Sean Parker) and lightning fast iteration to keep it ahead of every other player with pictures, music, games, and even various apps. Facebook continued verifying identity even after opening the network to all users, relying on real names and actively closing accounts for users that violate it’s policies. This builds user trust, and I think is one of the reasons that users flock to Facebook over other networks, since there is innate trust built in from the beginning.

Some people and business create platforms, others create features and add-ons. It’s easy to see over the long term where the significant value is. I’d like to say thank you to all the platform innovators of the past, present and future for your vision and execution.

Final Note: I’m definitely taking some liberties here, claiming that I know what all these guys were thinking, but from public speeches and talks, it’s clear that they had a distinct vision of their products and the ecosystem they were creating, whether they verbalized it or not. If anyone has any information to the contrary, feel free to correct me and I will update.

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Seagate: Why go private?

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Seagate announced yesterday that they were in preliminary talks to go private again. This isn’t the first time around the block for Seagate, or Steve Luczo.

On March 29, 2000, Seagate announced a complex deal that would take the company private, while divesting some of it’s non-core assets. The deal was valued at $19 billion, even though Silver Lake, TPG, and the Seagate executives purchased the hard disk drive business for ~$2 billion. A little more than two years later, on December 11, 2002, 17% of Seagate was offered in an IPO, valuing the shares a $12/each, and the company at $5.2 billion. A $3.2 billion profit in just over two years. Not bad at all…

 

I note the analysts’ roundup below, but I believe they are missing a big part of why Seagate might do better as a private company. However, even if Seagate goes private, one must ask what value the company’s stock is missing right now.

 

Public companies don’t typically have the stomach for tough moves and tough decisions that require large amounts of up-front investment to pivot their primary business model. Whereas the total storage market continues to grow at a extraordinary pace worldwide, magnetic hard disk drive technology is increasingly facing new challenges from other technologies. Seagate, and other HDD manufacturers, have benefited from the fact that a large number of consumer devices worldwide have required hard drives as a basic component in order to run a computer. The advent of the internet and emerging markets (third world) only increased the demand for personal computers. However, the advent of solid-state memory is becoming a strong competitor, and when you take a long-term view, a viable alternative to the spinning hard disk.

 

When Seagate originally went private, the company had interests in many different areas, such as Veritas, that were not a part of it’s core HDD business. The Seagate of today is largely HDD focused, and even its divisions, such as i365, are built around selling and maintaining HDDs. Thus, long-term, Seagate is at risk for being in a declining market. By taking the company private, Steve Luczo could change Seagate’s strategic direction and make outsized short-term investments that would have long-term benefits. While still a public company, the stock could take a beating, but if the company was private, it would largely maintain it’s value.

 

Possible Moves for Seagate

  • Solid-State — Seagate already has announced a partnership with Samsung to bring an enterprise-class SSD to market, but this isn’t enough to gain a significant share of the solid-state storage market and make up for a large loss in the consumer segment. Seagate could undertake a much larger R&D position on solid-state, possibly buying another manufacturer (Enterprise: STEC?/Consumer: OCZ?) or merging with a larger memory manufacturer.
  • Enterprise Storage — Seagate could add significant value from the experience they have had with partners (EMC, HP) in creating a truly vertically integrated storage company. Think of a Seagate merging or competing with an EMC or like company. Seagate has taken advantage of the benefits of having a vertically integrated supply chain, and while this would change the company dramatically, it should yield higher profits.
  • Prepare for M&A sale — Would a HP, EMC, or like company want to purchase the source of a large portion of their cost? HDDs are quite expensive when you look at the overall cost of computing systems. It may make sense to hold it as a fully owned subsidiary.
    • Samsung Buyout of SeagateThe rumor mill is claiming that Samsung is also a possible suitor for Seagate, but I don’t buy it. Samsung has had a hard drive division for years, which has always had a steady market share. They rely on partners for a variety of the components to make HDDs, and are not vertically integrated. That said, Samsung has a complete line-up of desktop and notebook drives, with enterprise technology that could be deployed, but they opted to focus on SSDs in the enterprise space. So, why buy Seagate? The only reason could be to gain the #1 spot in hard drive manufacturing volume. To me, that just doesn’t make sense.

 

Why Not?

  • Streamlined Operations — Back in 2000, Seagate was trading largely based on the value of Veritas, and not as a traditional hard drive company. This presented an opportunity to take it private, streamline operations, and repackage it on the market as something completely different than what is was trading for in 2000. Today, Seagate is a streamlined, vertically-integrated manufacturer of HDDs. Even if some of the possible “moves” I mentioned come true, the stock should largely be trading at the same values (unless SSDs or Enterprise Storage become wildly more profitable in the next three years; see SanDisk). There just simply isn’t a lot of fat to cut, and nothing to transform the company into.
  • Stock Valuation — Just a few weeks ago, Seagate was trading as low as $9.84, but as soon as the possible buyout was announced, the stock went up to the mid-$15 range. What was appealing at $10.50 may not be as appealing at $15, a full 30% premium.
  • Seagate Execs Playing the News — Anyone think that possibly Seagate knew that they would show weak profit and revenue results for Q3, but wanted something to keep investors and analysts at bay? Rather than focus on the core business in the past few weeks, all eyes have been on the buyout discussions. Even during Seagate’s quarterly conference call, the analysts were constantly trying to get Seagate to talk about any sort of future projection, but Seagate employed a lawyer to “prevent” them from saying anything due to the possible buyout.

 

Of course, these are just my notes from the outside… Here’s what the professional analysts have to say:

 

Analyst Commentary (from Barron’s)

  • Richard Kugele, Needham: He boosts his target on the stock to $20, from $15. “Based on our industry discussions and knowledge of STX, we do not believe any transaction would occur below 7x EV/normalized cash flow,” suggesting a price of $18-$20.
  • Kaushik Roy, Wedbush: Roy maintains his Neutral rating and $17 target. Roy says a bid for STX is not surprising considering they have lately been trading at close to 6x forward earnings. But he also notes that there isn’t a lot of fat in the company to squeeze out; he says CEO Steve Luczo has the company running at a “high level of operational efficiency,” and he thinks that rivals Western Digital and Hitachi likewise are being well run. “There isn’t anything significant private equity can do from an operational or strategic standpoint, in our opinion,” he writes. Roy also notes that the stocks have been depressed on near-term weakness in PC demand, as well as aggressive pricing that has hurt margins and profits. A wild card for the industry has been the cannibalization of notebooks by tablets, which hurts drive sales. That said, he thinks shorts should cover here.
  • Mark Moskowitz, J.P. Morgan: He keeps his $15 target, and writes that a take-out likely won’t be at a price much higher than his target, given “current secular trends and risks.:”
  • Ben Reitzes, Barclays Capital: “Assuming the private equity firms require a mid-to-high teens IRR, and using very cautious EBITDA and revenue assumptions, we can value Seagate in the range of $16 a share, which is close to the after-market price” yesterday.
  • Arun Sharma, UBS: “We believe private equity willingness to pursue a deal highlights the unrecognized value and overly negative sentiment still reflected in shares,” he writes. “While we still have some questions around the rationale of an LBO, as weakness in shares has been more macro/industry related rather than company specific, our checks indicate that the likelihood of a deal is increasing and expect further details on progress in the coming weeks.” He keeps his $15 target.
  • Jayson Noland, Baird: “We expect near-term upside to the stock followed by volatility given uncertainty around price, timing and likelihood of a transaction. We would not expect much more than $15 or $16 per share for STX off current levels.”
  • Rajesh Ghai, ThinkEquity: “While we believe shareholders, STX’s management, and private equity investors are likely to be very favorably inclined toward the deal, we fear the group unlikely to be convinced easily could be debt financiers of the proposed LBO,” he writes. “While the post-LBO capital structure is not clear at this point of time, we estimate at least $7 billion of the deal will have to be funded through fresh debt. Debt-holder concerns are likely to center around the riskiness of STX’s [free cash flow]…We recommend investors take some chips off the table on near-term strength in the stock emanating from the deal announcement.”
  • Amit Daryanani, RBC Capital: He still has a Sector Perform rating and $13 target. He notes that there have been four comparable deals over the last decade: the Silver Lake $2 billion acquisition of Seagate in March 2000 for about 0.3x EV/trailing 12 months revenue; Seagate’s acquisition of Maxtor in 2005 at 0.5x; Western Digital’s purchase of Hoya’s media sputtering operations this past April at 0.9x; and Western’s acquisition of Komag in 2007 at 0.9x. At Thursday’s close, he notes, STX was trading at 0.5x.
  • Sherri Scribner, Deutsche Bank: “At the time of the [previous LBO] deal, Seagate had a number of non-HDD related  businesses, including shares in Veritas, which were sold off to help repay debt,” she notes. “Today, STX is a leaner company, without any non-core HDD assets to sell. However, the HDD industry has consolidated and despite recent declines, the industry is more profitable than in the past.” She notes that STX had $190 million in free cash flow in FY 2009, at the height of the recession, despite a 23% drop in revenue. In FY 2010, the company had $1.3 billion in free cash flow. “We
    believe this ability to generate cash in the worst of times could be attractive to private equity firms.”
  • William Fearnley, Janney Capital: He’s sticking to his Neutral rating and $12 target for now. Fearnley thinks the most attractive part of the company is its enterprise business, which is about 35% of revenues.
  • Shebly Seyrafi, Capstone Investments: He keeps his Hold rating, while boosting his target to $14, from $12, “to reflect increased odds that the company be acquired and to reflect a notable pickup in PC sales at the end of September.”

 

The Power of Simplicity

Yesterday, if one were to ask me if I was going to change by blog from Blogger to Posterous, I would have laughed and said “Doubtful!”

However, some things are just completely unexpected. I saw a tweet from one of posterous’ founders, Garry Tan.

“Blogger users:  Switch to Posterous. Blog more. Tinker less. http://post.ly/m5J2 (via @posterous)” – @garrytan

I clicked on the link, just to see what kind of options that I had. The simplicity amazed me. Just two fields to plug in, my current blog address and my e-mail address. No password, name, city, etc. I entered my site and e-mail and clicked submit JUST TO SEE WHAT HAPPENED.

The process was amazing. All the information on a blog is public anyway, so it’s easy to scrape. In a matter of minutes all my posts were added, including pictures. I spent a couple minutes finding a simplistic theme, and setting it up with my custom domain. Within 15 minutes I was done with a process I had no intention of beginning.

This is the power of simplicity. When you make it easy for customers to get started with a very low barrier of entry, you’ll get a higher level of engagement. Especially when it comes to the web, the endless number of forms, passwords, etc become a hassle to maintain. Make it easy for a customer to become a customer, and then sell to them. Think of the bare minimum that you need in order to create a solid connection and then build out your needed information after they are already engaged. Will this end with lots of “hanging” customers with incomplete information? Of course, but overall I think it leads to higher numbers and higher engagement.

Quick Take: Seesmic

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Today, Seesmic announced yet another new product, entitled Seesmic Look. I applaud CEO Loic Le Meur at his ability to be dynamic, both in his presentation of this new product, and his insight to see that the Twitter ecosystem needed a game-changing app to really prevail. At first glance, I echo Robert Scoble’s review of the product, as he shares the same reactions I do. However, I see a deeper problem at Seesmic, and it comes down to long-term execution.

Let’s take a quick look at Seesmic’s product launches.

  • April 7, 2009 – Seesmic Desktop – Twitter/Facebook client built on Adobe AIR
  • July 10, 2009 – Seesmic Web – Web twitter client
  • July 10, 2009 – Seesmic iPhone app – iPhone Twitter client
  • November 17, 2009 – Seesmic Desktop – Twitter client built on .NET
  • November 20, 2009 – Seesmic Android & BlackBerry app – mobile clients
  • January 21, 2010 – Seesmic Look – a .NET Twitter client

First, these are all excellent products, and I’m glad that Loic has shared the development of these applications with the world.

However, outside of the mobile apps, I have yet to really see a version 1.0 worthy product. I really enjoy using Seesmic Desktop for Windows, especially in it’s new .NET form, but it still feels like a beta product. Facebook integration also was dropped along the way, and is not present in the web app either. So, while I applaud Loic’s development team in deploying great applications across a multitude of platforms in an unheard of amount of time, I’d really like to see some focus on bringing these products up to true 1.0 release status.

Thanks, and I’m sure I’ll be a long-time Seesmic user.

PS, when is video going to make a comeback to Seesmic? I’d like to see a basic video recorder/uploader built into the desktop client.

Social Graphs and Online Identity: What’s next?

Here’s some good questions: How many friends do you have on Facebook? How many on LinkedIn? How many on various IM services? What about Twitter? If your answer is the same for all these questions, I’d be very surprised.

Jeremiah Owyang wrote on this very issue back in November of 2007, and he was suggesting OpenSocial as the most likely solution moving forward. Facebook Connect launched a year later in November 2008.

Fast forward to 2010… Facebook now has over 350 million active users. MySpace claims over 76 million in the US alone. Twitter has over 50 million accounts. And the “old” social networks (e-mail & IM) claim millions of users as well (Windows Live 375M+). Each of these networks still maintain their own versions of social graphs, and none of them will actively “share” information with one another.

Today, I ran across a startup called Soocial, which claims to sync your contacts (read: social graphs) across multiple networks. WE’RE SAVED, right? Not really… The service requires client software on any phone to sync, client software on a PC to sync, and despite claiming to be “hassle-free”, is too much for most users to set up.

So, what will it take to really win in this space?

  1. Partnership at a high-level – Execs at Facebook, Microsoft, Google, AIM, LinkedIn, etc need to be willing to share social graph data with outside sources. Remember, the entire purpose of social networks is to publish and share information with others. If the data is already public, why not make it accessible?
  2. Constant Sync – Today’s sync tools are largely based around “importing” your contacts in a one-time data comparison. A true winner will maintain a synchronized relationship of data, pushing and pulling data as it changes across the network
  3. Published Contact InfoGoogle Profiles & Plaxo  are a great start of maintaining active contact information for an individual. The next step is providing this level of detail across multiple networks, maintaining a canonical contact card that can change whenever any linked service changes.

Some early attempts:

Further Reading:

Google’s Chrome O/S: A non-event?

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Today’s heavily hyped press event around Google’s operating system (which is still a year away from launch) would make one think that major new features were about to be announced. However, this is no Google Navigation announcement. MSFT closed down –1.10% for the day and GOOG also closed down –0.63% for the day.

First, the simple question, what is Google’s Chrome O/S? Chrome is a fast, lightweight web browser that does not allow any modification to the base system. Chrome O/S is a dumb terminal. There are no plans for storage built into the system, relying completely on the cloud to store data.

How are they handling the major points I raised in my last post?

  1. Device Compatibility – Google only announced compatibility with storage cards, digital cameras, and printers. Driver support for printers has historically been a problem for Microsoft (note over 2M results for searches around XP, Vista, and Win7). There are many vendors and legacy printers that users will expect support for. So, Google is focusing on only a few segments to support, but even then, it’s still a big problem to solve in the next year.
  2. Application Compatibility – As predicted, Google will support extensions and plugins, but not have “native apps”. Still to see if Chrome will support running web applications stored on an SD card…
  3. Web Compatibility – If I were at the press event, this would be where my questions would focus. Google glossed over what will be supported and did not show any OpenID, Facebook, or other online authentication modules. Presence is obviously built in, utilizing the current Google Talk interfaces. Nothing really new here.

All in all, I thought it was a great overview, although not very groundbreaking. Looks like Google will be offering this for free, mainly around netbooks, for launch sometime in Q4 2010. Windows 7 Starter is currently priced around $30, so it remains to be seen what sort of impact these Google Chrome “appliances” will have on this market. Historically, MSFT has dominated Linux in the netbook space, achieving massive market share even while charging for the product. Chrome is getting a lot of hype, but will it topple MSFT? Time will tell…

What makes a successful O/S? Chrome vs Win7

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First off, define “success”… Microsoft Windows is the de facto standard accounting for over 90% of all O/S share. Does Apple’s Mac OS X with ~5% count as success? Linux adoption is even less… Thus, one should realize that the operating system is the platform for devices to be built on, and that platform is quickly changing. As I posted about Microsoft Office earlier this week, the advent of the web as the new platform for application development will change the dynamic for what matters to consumers about an O/S. Google’s success will be determined not by market share, but by how effectively they can change public opinion about operating systems.

  1. Device Compatibility – The age old problem for computer hardware vendors can be summed up in a single word: drivers. One of the primary reasons Windows Vista had such a negative connotations in people’s minds was a lack of driver compatibility. What good is a device if you can’t use it? Users expect true plug and play. Windows 7 has this, can Google deliver?
  2. Application Compatibility – I think Google will leverage the developer ecosystem they’ve been building, and try to turn applications into operating system extensions. Perhaps it’s just nomenclature, but Google would be smart to have a similar open App Store for their O/S, much like Apple’s iPhone store, or the Android App Store (Possible Bonus: Allow Android apps to run natively in Chrome).
  3. Web Compatibility – I think Google will integrate the Chrome browser so tightly into the O/S that it will be indistinguishable to the user if an app/extension is on the web or on the desktop. I think Google will use extensive caching and focus on an “always on” internet connection. This fits in perfectly with Google Mail, Google Talk, and Google Docs. I believe presence and cross-site authentication will be major focuses of the operating system, allowing a user to unify their identity online being pre-authenticated by the O/S.

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I’m interested to see what the Google Chrome O/S launch contains. Hopefully, we’ll enter a new era of competition, which brings new innovations from both camps. After all, Microsoft can claim that if Google is already creating something (and offering it for free) that Microsoft should be able to as well. Look for increased bundling of applications and online services from both companies. Microsoft and Google realize that this game is about the platform, and that platform is increasingly becoming web-based.