This acquisition is exceptionally interesting because it clearly shows Google recognizes the vulnerability of the Telcos bread-and-butter voice and long distance business and intends to capitalize on their failure to deliver incremental value.

Note: ‘Telcos’ in the context of voice services applies to any provider of simple landline voice service, whether Cable (like Comcast (CMCSA) ) or copper based Telco (like AT&T (T ) or Verizon (VZ). I view the ‘war’ between Telco and Cableco as increasingly irrelevant as both are fighting for a rapidly depreciating and irrelevant asset – POTS and long distance voice minutes. (see “Comcast: Party like it’s 1999“)

The greatest voice feature from the Telco establishment in the last 20 years was Caller ID. Your teenage daughter might argue Call Waiting is more important, but then again she probably hasn’t used a landline since she became a teenager, preferring the vastly superior features of a mobile phone or IM client.

In the meantime, the Telcos have completely failed to implement any evolutionary or revolutionary improvements based on VoIP. Upstarts like Vonage (VG) have impaled themselves on the lance of the incumbents while running up huge customer acquisition costs. You would be correct in saying that VoIP has been a consumer success and a commercial failure.

The big guys like Google, Yahoo (YHOO), and yes, even Microsoft (MSFT) don’t have the same problem. They have deep pockets and more relevant marketing platforms than the Telcos themselves – their email and instant messaging platforms. Voice is a natural extension of their business.

Their offerings up until today have focused on computer to computer connectivity and address the most cost sensitive and technically savvy customers of the telephony market. GrandCentral type services are a big step up the value chain and offer much higher value than the home phone I pay $50 a month for. They are also dead simple to use.

I just do not see how this ends well for the Telcos, whose oxygen is derived from overcharging for landline service, a service that is vastly superior and cheaper when provided over VoIP. Telcos are great at innovating the pipes (digital switching, digital voice, SONET, DSL, FiOS) they are awful at innovating with features. Just ask your teenage daughter.

Author owns no positions in companies mentioned. And keep the jokes about Microsoft as Phone company to yourself, as my readers should have sufficient imagination there.

The Wall St. Journal editorial yesterday captures the true issue at hand, and why the FCC is now deadlocked on approving the merger.

Meanwhile, Congressmen Ed Markey and John Dingell deserve their place in this story, having bared their teeth at Mr. McDowell in a threatening letter last week that questioned Mr. McDowell’s suitability to vet the merger. Their true interest was in strengthening the hand of Democratic Commissioners Copps and Adelstein, who seem bent on using this merger review to advance “Net neutrality” mandates that neither Congress nor the FCC have seen fit to impose through normal channels.

We’d like to see these two Congressmen demonstrate the same concern for public integrity by calling on the Commission to quickly approve a merger that everyone from shareholders to the relevant unions supports. But that probably makes us “uncurable optimists” too. The duo are eager to do favors for the campaign check-writers at Google and MoveOn.org, which want Net neutrality rules so AT&T and other telecom companies can’t charge market prices for use of their broadband pipes.

Check out the latest video from the “Save the Internet” coalition.

The only thing worse than having Washington involved in free markets is when they are trying to solve a problem that DOES NOT EXIST. My extended opinions can be found here.

I’m writing this post today because I haven’t written anything substantial for a week and a half and readers deserve better. Brightcove, a company I have written about, released their video content distribution platform today (WSJ Link, free article here). It seemed necessary to footnote what I  have written before and summarize why I’ve closed the door on Akamai.

First and foremost: Everyone is talking about Akamai and how great they are (This is a great example, and is what catalyzed me to action).  I rarely read articles or speak with anyone who has anything bad to say about Akamai. This indicates the market has built in perfect expectations to the price.

Of greater concern is whether Akamai is a high margin service provider, or a low margin hosting service.

Today, Akamai exists to outsource hosting for companies using their large, distributed datacenter. Whether it is Salesforce.com, NBC, Apple iTunes, etc. – Akamai sells a distributed hosting infrastructure that ultimately is application agnostic. 

Building and operating large data centers is a depreciating barrier to entry. Google (GOOG) has them. Yahoo (YHOO) has them. Microsoft (MSFT) is building them. This blog is hosted on one. They are not the unique resource they used to be. Therefore, Akamai’s hardware infrastructure is no longer a unique advantage.

They do have a compelling advantage on the sales side, with a large direct Salesforce and great connections into the big media companies. This advantage is eroding as well. The issue is Akamai offers nothing but hosting. Companies like Microsoft, Google, and Yahoo can add value beyond hosting. These companies all have the infrastructure to not just host content, but also pair it with the appropriate advertising to extract revenue.

From ‘The Inevitable Competition of Akamai and Google‘:

Our assumption appears to be breaking down, as Google deftly repositions itself a more of a mediator of video content rather than an author/owner. The WSJ article captures the leading edge of this trend very well. Google appears to be convincing major networks like CBS to allow them to host and monetize high value content. This is very negative for Akamai.

This was before Google bought YouTube. Google bought YouTube because they wanted to monetize the video content. Akamai provides an agnostic solution that requires the content owners to monetize the content. Extracting value from content is inherently a higher margin business than hosting it on a server.

I believe that Google, Yahoo, Microsoft can better pair content and advertising for each individual viewer. NBC, CBS, ABC, etc. evolved in a world where 50mm people all view the same content and advertising (broadcast TV). It is hard to imagine they will evolve better advertising systems than the ones already evolving within the search behemoths.

The cost of hosting quality content that can generate revenue will be zero. Google, Yahoo, Microsoft, and others will line up for the chance to cache content for free in order to pair advertising with it (extracting a success based fee). Akamai has no means and has shown no interest beyond operating a very sophisticated hosting company (see Brightcove vs. Akamai from Feb ’06). This business model does not deserve a triple digit P/E.

Hosting is a commodity. Akamai’s service is no different. The market will eventually price this in; next week, next month, or next year. I don’t want to be a stockholder when it does.

I can calculate the movement of the stars, but not the madness of men. – Isaac Newton

I am a Yahoo Music (YHOO) subscriber. I signed up one year ago for an annual contract that gave me unlimited access to download music from their library to my PC, as well as transfer that music to Plays For Sure Devices (Yahoo Music to Go). Yahoo recently notified me that my contract would end October 28th, and my subscription would be auto renewed.

Since I no longer transfer music to Plays for Sure devices, I decided to renew but at the cheaper rate that only allows me to listen at my PC, and not with mobile devices. I struggled with the menu options at Yahoo to change my subscription. I sent email back and forth. Finally, sick of wasting my time for what to me is a small amount of money (but a great deal of principle) I called Yahoo.

I spoke to a nice woman in the Philippines. Her name was Jen. She told me that it was not necessary to change or even cancel my subscription because the Yahoo Music service would be canceled at the end of October.

I guess this is fallout from the recent Microsoft (MSFT) Zune announcement, where they indicated the new Zune device would not support the Plays for Sure codec. This announcement was like Brutus slipping the knife into Caesar – after Microsoft encouraged the proliferation of music subscriber services using their DRM they decided to pull the plug and own the business themselves. It may also be related to the fact that Plays for Sure DRM has been cracked wide open.

Now it appears the fallout is complete if Yahoo Music is shutting down. If anyone can confirm this independently, that would be great. I think this would also be the begriming of the end for Rhapsody, the Real Networks (RNWK) music solution.

DRM will always be a necessary evil, and one commenter on this site has repeatedly indicated Yahoo will move to a watermarking system. Maybe an announcement is forthcoming at the end of this month?

Update: Yahoo has contacted me and told me this is not true. I’m just hoping I can get my account edited.

Hi. Ian from Yahoo! Music here.

We’re most definitely NOT shutting down. Not sure what the miscommunication
was with customer support, but that’s completely untrue.

Give me a call to discuss. xxx.xxx.xxxx is my cell.

Full Disclosure: I hold shares in Microsoft.

Google holds a commanding lead in search queries with 45% share, compared with 30% for Yahoo! and 15% for MSN. They do a fantastic job of monetizing this share, much better than Yahoo or MSN. But the reality is – outside of search and advertising based search, Google just doesn’t matter much.

Google is fantastic at producing products that elicit the praise of the tech press and blog-jihadists, but it appears to me that their solution to everything is Search, and that a white box that you type text into is the only thing that should seperate a user from content.

I strongly believe in the concept of the disintermediation of media – i.e. eliminating the middleman between the content producer and the consumer. But I think Google takes too minimalist an approach to appeal to the mainstream.

Unix is a fantastic operating system for the same reasons, but what percentage of the population knows how to use vi?

Yahoo is more of an aggregator, with a less minimalist approach than Google. It is far more application and service oriented. This approach works better for applications like Finance, News, Maps, and Media. I like the fact I can get movie reviews next to the showtimes. Yahoo has always struck me as being more sticky, and more mainstream. Yahoo is what most people I know use.

Most people will love the concept of disintermediation as it extends to more and more content, but they won’t like the cold sterile approach Google uses. As the middleman is cut out of media, Google will need to adjust their approach as people seek applications and services more like their previous couch potato experience.

There is tremendous value in the aggregation Yahoo provides today. They need to figure out how to monetize that better.

Installed it this weekend. Very nice. You can install it on your own Windows XP machine by downloading here. It can be uninstalled by using the Windows ‘rollback’ function. If you don’t know what that is, then don’t install this Beta!

I have not tried the URGE online music service, I am completely in-hock to Yahoo! and their music service- changing at this point would require that I identify and re-download all of the subscription tracks I currently own. Lucky for me, WMP11 plays all of the downloads from Yahoo.

Yahoo’s software interface is horrible – if the URGE service is as good as the player itself, Real Networks Rhapsody/Yahoo Music/Napster are in for some tough sledding.

I’m not going to make the “Apple iTunes is Dead” statement as the device has legions of committed users (I use the word ‘users’ in the same way a heroin addict would). But this player, combined with the new syncing infrastrucutre built into Vista will certainly stop the bleeding.

Your broker neglected to mention that the biblical Four Horsemen of the Apocalypse were steered by four riders – Conqueror, War, Famine and Death. I’ll leave it to my readers to pair them appropriately.

Today, I like to refer to Google (GOOG), Apple (AAPL), HP (HPQ), and AMD (AMD) as the new Four Horsemen of Web 2.0. Reading and listening to the media chatter about these companies induces an uncomfortable dot-com deja vu.

Bill Gates, CEO of Microsoft (MSFT) and Paul Ottellini, CEO of Intel Corp. (INTC) co-wrote an editorial in today’s WSJ. Clearly they are appealing to those who have fled their equities for the promises of Web 2.0.

Recently, we’ve read on the pages of The Wall Street Journal that we’ve reached the end of the personal computer era and that the open, broad industry approach that has enabled today’s rich computing experiences doesn’t apply to the world of digital devices.

The reality is a little different. The truth is that the model which has fueled the incredible popularity and affordability of the PC will continue to drive innovation and choice in the burgeoning area of personal devices such as cell phones, digital players and mobile PCs. As such, the PC is becoming more important and popular as a key enabler for these new digital scenarios in every corner of the world, from Indianapolis to Istanbul. If anything, it is, to paraphrase Churchill, perhaps the end of the beginning…

Gates and Otellini have a very valid point. While MP3 players, digital cameras, phones, and web based applications have stolen the show in the marketplace, all of them still rely on the PC as a digital hub. Nothing has emerged that will replace it. The only threat is the ‘thin-client’ web based application model, an idea that gets trotted out every few years and then is subsequently put back in the barn.

In addition to Intel and Microsoft, two other big-cap companies that have suffered as a result of this shift in perception are Dell Inc. (DELL) and Yahoo! Inc. (YHOO).

Competitively, all four of these companies are still forces to be reckoned with.

• Yahoo earned more money than Google in the trailing twelve months from a more diversified business model.
• Dell’s supply chain for electronics rivals Wal Mart’s in terms of efficiency and they will eventually succeed in their efforts to commoditize the consumer electronics space. The current market’s perception that PC’s are anything but commodities is a brief vacation from reality, and Dell is the best commodity producer out there. I believe the cost structure of Dell’s supply chain and web retailing model will beat HP’s.
• Intel will rip the throat out of AMD with their new low power designs for servers. They have a much bigger capital base to borrow from to build next generation fabs if (when?) money becomes more expensive. Otellini realizes the company has become too free-spending. AMD isn’t going away but the earnings multiple gap between the two is absurd.
• Microsoft has been cornered before and recovered. The Vista upgrade cycle will re-energize the cash machine. Over half of all Smartphones now run Windows Mobile 5.0 (Yes, more than Blackberry and Palm combined). Xbox 360 is looking to take share from Sony and has the best online service hands down. Meanwhile, Apple trundles along with a 5% market share in PC’s and 1/4th the valuation of Microsoft.

This is what the market cap vs. P/E multiple relationship looks like.

While the new ‘Four Horsemen’ may be the preferred growth engines of Web 2.0, I think these four out-of-favor companies represent a better investment vehicle for the next five years. Those with more exotic tastes can hedge by selling AMD, AAPL, HPQ, GOOG short while going long INTC, MSFT, DELL, and YHOO. This is a more market neutral strategy.

Inspiration and some data: USA TODAY

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