It is Tough to Break Up in the Digital Age

The WSJ has a neat article on breaking up in the digital age. It seems like it is, in a word, impossible. My favorite part is the Nokia mention.

Some exes are unwittingly reunited in cyberspace. One Philadelphia couple of 29 years got divorced and both the ex-husband and ex-wife posted profiles on JDate.com, entering in details such as their age, education, marital status and location. Shortly after signing up, the ex-wife says, she received a message from the site declaring her a match with her ex-husband.

The cellphone is usually among the first items that need cleansing. Wireless-handset maker Nokia Corp. even touches on the idea in a TV ad that features a woman named Jill, who says cellphone-number deletion is a sort of post-breakup therapy.

"It is so great because when you go to the phone and you delete [the number] and your phone asks 'Are you sure?' You look at your phone and you're like, oh yeah, I'm sure," she says in the ad.

The cheesy human interest articles on the front page of the Journal are always a treat. I think it's time to do a mass cleaning of my address book. Who do I start with?

Mr Wave Theory

Skype Founders Getting Skyped by Morpheus!

The founders of Skype always seem to be getting into trouble. They are a magnet for trouble. Or are they just trouble itself?

This time, Nikklaus and Janis are getting sued by Mike Weiss of Streamcast. The story of Skype is incredible. Mike hired the dynamic duo to build Streamcast's Morpheus client - which they did. Mike launched the product. It became an instant hit reaching over 20 million uniques in several months. And that's when the plot thickened. The two miscreants had built a backdoor into Morpheus without telling Mike. (A backdoor is a secret way of controlling a piece of software.)

Not content to see Mike's success and their meager consulting fee for all that work, the duo used the backdoor to disable Morpheus and shut it down - on over 20 million desktops - overnight. Yes. Overnight! What a plot? Huh? It gets better.

So Mike's overnight success was shutdown overnight. To add insult to injury, Nikklaus and Janis launched Kazaa and they updated the entire based of Morpheus users into Kazaa users. The rest as they say is history. The duo sells Kazaa to Sharman Networks, use the P2P technology they developed to launch Skype and sell it (or unload the legal liability) upon eBay for a cool $2 billion.

Someone should make a movie of this story.

Mr Wave Theory

Google Gets Added to S&P 500: Post Addition Performance is Disappointing

The WSJ writes that many trading desks overestimated the number of Google shares index funds were required to buy because the S&P is float weighted rather than market cap weighted. Instead of being required to buy 28 million shares as most of the Street had expected, index funds were only required to buy 18.8 million shares. That means most buyers of Google overestimated the potential demand by 48%. No wonder the stock opened at $368.62 and closed at $365.80. Frankly, the performance was underwhelming.

The S&P 500 is a "float weighted" index. That means a company's prominence in the index is determined by the value of shares available to the public. In the case of Google, a big chunk of shares aren't publicly available. Instead, they are held as a separate class by founders Larry Page and Sergey Brin as well as other insiders.

The information S&P first provided on Google last week left many Wall Streeters thinking the company would go into the S&P 500 index as if all its shares -- including the ones held by insiders -- were freely floating. But the announcement was misinterpreted, says S&P managing director David Blitzer. Insider shares aren't counted.

Instead of needing to buy about 28 million shares, index funds will need 18.8 million, according to Credit Suisse's derivative strategy group. When S&P corrected the misimpression, a flurry of selling resulted. In 15 minutes on Friday, the share price fell to $363.70 from $368, a 1.2% decrease.

For the record, Google traded 15.1 million shares on Friday which means if index funds all started to buy on Friday (rather than earlier), then there are 3.7 million additional shares to be bought. This is a far cry from most estimates that there will be multiple days of supply imbalances. I seriously doubt index funds would have waited until Friday to buy.

Did A Few Large Hedge Funds Trade on Inside Information Prior to Google's Addition into the S&P 500?

Some bloggers have pointed out that some funds may have had advance information on the S&P addition. Large numbers of deep in the money puts were apparently sold prior to the close on Thursday. On Friday, they would have been worth substantially less, netting the put sellers a substantial profit. While I don't have the figures on hand, I have seen figures estimating that the value of the puts sold is anywhere between $50 to $100 million worth of contracts.

Google's Valuation Is Guilty Until Proven Innocent

Frankly, I find it unforgivable that most investors still haven't realized that Internet stocks go from undervalued to overvalued and are never fairly valued. When Google completed its IPO, it was undervalued and the valuation was "innocent until proven guilty." Today, Google is overvalued especially after the latest earnings miss and the valuation is "guilty until proven innocent."

Mr Wave Theory

Google Sets Double Standards: Does Not Support Free Speech

Do Not Be Evil is the motto of Google. I got this email from Google thanking me for applying for AdSense but denying me the ability to participate because Mr Wave Theory "does not meet our program criteria". Google, where do you publish your program criteria? What are your program criteria if I may be so bold as to question you or ask? If there is a standard for these program criteria, I would like to know. Step out from behind your veil of secrecy and double standards, because as far as I can tell, Google appears to be more like a dictatorship rather than a democracy.

Google, why are you so evil? Yahoo, I would love to join your Yahoo Publisher program. If anyone knows how, please comment.

Thank you for your interest in Google AdSense. After reviewing yourapplication, our specialists have found that it does not meet ourprogram criteria. Therefore, we are unable to accept you into ourprogram.We have certain policies in place that we believe will help ensure theeffectiveness of Google ads for our publishers as well as for ouradvertisers.

We review all publishers, and we reserve the right todecline any application. As we grow, we may find that we are able toexpand our program to more web publishers with a wider variety of webcontent.Please note that we may not be able to respond to inquiries regardingthe specific reasons for our decision. Thank you for your understanding.

Sincerely,The Google AdSense Team

Mr Wave Theory

Will Google Earn $1.99 Per Share in Q1 2006?

Most analysts are estimating Google will earn $1.99 per share in Q1 2006. I was curious to see if it was reasonable so I looked at their earnings history.

Earnings History	Mar-05	Jun-05	Sep-05	Dec-05
EPS Est	0.92	1.21	1.36	1.76
EPS Actual	1.29	1.36	1.51	1.54
Difference	0.37	0.15	0.15	-0.22
Surprise %	40.2%	12.4%	11.0%	-12.5%

Google earned $1.54 per share in Q4. In order to earn $1.99, it needs to add 45 cents sequentially to the bottom line. Has Google historically been able to achieve this type of growth in EPS?

Below, I calculated the sequential EPS increase from quarter to quarter.

Q2 = +7 cents from Q1
Q3 = +15 cents from Q2
Q4 = + 3 cents from Q3

In the past 3 quarters, Google has never added more than 15 cents sequentially to its EPS.

To assume a 45 cent increase seems like wishful thinking. Is it possible? Sure. But going by the numbers, they've never added 45 cents sequentially to the bottom line from one quarter to the next. Also, look at the amount by which Google has surprised the Street and you see a trend developing. The amount Google has surprised the Street by was 40.2% in Q1. It proceeded to decline sequentially to 12.4% in Q2, 11.0% in Q3, and -12.5% in Q4. Do you see a trend?

EPS is suffering from poor expense control, high levels of hiring to fight Microsoft, and dilution from stock options exercise

I think the lack of EPS growth has to do several factors including poor expense control, high levels of hiring, and all the stock options management exercises - none of which appear to be slowing down. Take stock options. It is not rare to see around 250,000 shares of insider shares being sold any given day. That annualizes to 60 million shares in a year or $18 billion of stock. If you round the numbers, that implies 18% dilution. Or take the hiring that is happening which is necessary because of the threat from Microsoft. Or finally, the lack of expense control or financial control which really reared its head in Q4.

Judging from these factors, my conclusion is that it will be difficult for Google to meet its EPS target.

Love the product. Dump the stock.

Mr Wave Theory

Microsoft Announces Major Restructuring to Compete Against Google: Redmond Giant Awakes from Slumber

As I mentioned yesterday, the delay of Windows Vista is a major negative for Google because Microsoft will be integrating Windows Vista more tighly with Live.com and MSN.

Today Microsoft officially announced at 1 pm ET that it will be realigning its Platforms & Services Division under Kevin Johnson and Jim Allchin. Steve Sinofsky will be running Windows and Windows Live. Brian Valentine will be leading Windows Vista. Blake Irving will be running Live.

Microsoft announced the following:

Microsoft Corp. today announced a broad restructuring of its Platforms & Services Division (PSD) to better align existing Windows® and MSN® assets with Microsoft's overall Live strategy, and to ensure the company delivers a full range of software- based services to consumers and businesses around the world.

The realignment speaks to what I discussed yesterday, which is that Windows Vista will marry the desktop and the online strategy of Microsoft.

"Expect Vista to be tightly integrated with Live.com and MSN and strike Google where it is weakest, which is in the productivity application space. Unlike Google, which has focused on building light weight Internet applications with low barriers to entry, Microsoft will be focused on building rich, Internet productivity applications with significant lead times and high barriers to entry."

Mr Wave Theory

Would You Have Turned Down An Offer to Buy Google?

Matt Marshall from SiliconBeat writes that these guys did. Jeff Ullman, a Stanford professor and adviser to both Google and Junglee, told Junglee to acquire Google. Junglee passed on the offer to buy Google.

What is interesting is Jeff Ullman's quote on Sergei. (For context, Junglee was a comparison shopping engine.)

Two of the other Junglee guys had studied or otherwise worked with the Google co-founders. "Perhaps we could take a look at merging with Google," Rakesh recalls Ullman advising the Junglee team. Rakesh passed on having a serious conversation about this, he said, because the two companies seemed to be headed in separate directions, and besides "it wasn't clear that the team would integrate well with Sergey." Rakesh called him "headstrong."

Of course, a year or so later, after Junglee had been scooped up by Amazon.com, Rakesh found himself on the plane with colleague Anand (now at Kosmix) flying from Seattle down to Silicon Valley to have a meeting with Sergey -- namely to see if he'd be willing to sell Google to Amazon. That's when Sergey responded, outrageously at the time, but humbly in retrospect: "The only kind of price we'd accept would be something with ten digits." In other words, billions.

Mr Wave Theory

Why Most Analysts Are Overestimating the Size of Google's Total Addressable Market for Internet Advertising

I am sick and tired of hearing analysts make wild projections about Google's growth prospects based on wild projections about the size of Google's total addressable market. I call it Bubble 2.0, while some call it Web 2.0.

The logic goes like this:

"The offline advertising market is $300 billion and only $30 billion of it is online. Therefore, we (a very respectable and highly paid investment bank) argue that if only 10% more of it went online, Google's addressable market would double and go to $60 billion. Therefore, the stock is worth mega $$$,$$$,$$$,$$$ (billions)."

I made up the $300 billion number for sake of argument. But this argument (from the very respectable investment bank) is fundamentally flawed for several reasons.

1) The investment bank has failed to segment the offline advertising market properly and market segmentation is crucial when it comes to projecting Google's ad revenues.

The offline advertising market is 80% brand advertising spend and 20% direct marketing spend. What is the difference between brand advertising and direct marketing and why does it matter for investors in Google?

The distinction is important because Google's customers are primarily direct marketers (which is the smaller peace of the pie) - they are the annoying people who in the offline world would send you junk mail and call you at dinner, and who in the online world get you to click on their ads on Google. Direct marketers spend money to sell you a product immediately. They care that when you click on their ad, you also make a purchase. More importantly, they care that the amount they spent to get you to click on their Google ad is less than their gross margin. They know exactly how much they are paying to get you to their website and they won't pay a nickel more - because they are highly price sensitive and they stop spending if they know they can't get you there for cheap. For instance, if an online shoe company knew that their gross margin were 15% and that their average order size is $100, then they know their gross margin per customer is $15. That means they will not spend more than $15 to acquire a customer on Google. (In marketing parlance, a $15 CPA is the max they can spend. If CPAs go out of control on Google or Yahoo or MSN, they kill the spend.) This might sound complex, but you just need to leave with one thought

2) Direct marketers are math geeks and direct marketers are very price sensitive to their customer acquisition costs and they make up the bulk of Google's Customers. They love Google.

Brand marketers (who form the larger piece of the advertising pie) on the other hand couldn't care less about cost acquisition costs because they are not there to sell you a product immediately. Examples include TV spots by Budweiser or sponorship advertising by Coca Cola. Brand marketers spend money for creating liking or familiarity with their product - Kraft, Pepsi, Coke. The ROI of brand marketing spend is very very difficult to quantify. In fact, it is nearly impossible to quantify how much money it costs to make you like Kraft Cheese or Coca Cola. If you can figure that out, you'll be the next Bill Gates. And that is why you don't see Kraft spending big bucks on Google. For instance, if you typed in a query for "Kraft Cheese" on Google, there is no Kraft ad because buying the Google keyword for Kraft Cheese will not enable them to make you like Kraft Cheese more. Type in "Coca-Cola" and you see an occasional ad by "Coca-Cola" - but the clicks are minimal because people don't go online to buy Coca Cola. If you are confused, just leave with one thought

3) Brand marketers are liberal arts majors who can't do math. Brand marketers don't know the meaning of customer acquisition costs and they don't care. They don't know what to do with Google.

So, why does the distinction between brand marketers and direct marketers matter so much for Google?

Google is a direct marketer's wet dream because customer acquisition costs can be calculated in real time. But it is a brand marketers nightmare because they don't know what to do with it or how to use it.

Google was popular and grew tremendously fast because it offered a "MORE EFFECTIVE" source of ad spending for direct marketers. Unfortunately, even though Google was an effective form of direct marketing 3 years ago, today, direct marketers are running for the hills. Google's golden days are over because spending ad dollars on Google keywords is no longer cost effective. Listen to the e-commerce conference calls from the big shops like Amazon, Overstock, and ProFlowers, and you will hear repeatedly that the biggest headwind to their growth in revenue is increasing CPAs (cost per acquisition for those who don't know advertising). This is alarming especially when CPAs are rising 10-20% per quarter for some of Google's largest customers. There is no golden goose or "MORE EFFECTIVE" ad spend - at least no longer on Google. I will grant you that initially it was "MORE EFFECTIVE" - but when everyone has figured out that buying Google keywords is cheap, the no-arbitrage condition is being proved correct again right in your face.

4) Google's biggest customers (direct marketers) are no longer finding it cost effective to spend on Google and its smallest customers (brand marketers) have no need for it

If we take $300 billion as the total size of the offline advertising market, then direct marketers will comprise $60 billion of it and brand marketers will comprise $240 billion. Brand marketers (who comprise 80% of the offline advertising market) have no use for Google and will never use Google. You ask why? I ask you this - Tell me how you would convert a searcher for Kraft cheese into a paying customer and I will rest my case. I typed in "kraft cheese" into Google and I saw no ads for Kraft. Know why? Because no body clicks and buys cheese online. Brand advertising is incredibly ineffective on Google. Only direct marketing works on Google. I will repeat again - Google is a direct marketer's wet dream and a brand marketer's nightmare.

5) $240 billion of the $300 billion opportunity will never go online

This means that the $300 billion market opportunity is actually a $60 billion opportunity and our young analyst at the venerable investment bank has made an order of magnitude rounding error in sizing up the market opportunity in front of Google. He (or she) has also nonchalantly forgotten to mention that not all of that $60 billion will go online and that the part that does go online will be split among the top 5 players - Yahoo, MSN, AOL, Interactive, Google.

After reading the rubbish published by the venerable investment bank, I respectfully called and encouraged our analyst in question to go back to the drawing board and correct the $240 billion mistake. By the way, the picture at the top of this post is not meant to be the likeness or name of the firm that made this multi-billion dollar rounding error. It is only meant to represent a venerable investment bank. I apologize that I am not particularly good with computers.

Mr Wave Theory

Bubble 2.0: Why Most Analysts Are Overestimating the Size of Google's Total Addressable Market for Internet Advertising

I am sick and tired of hearing analysts make wild projections about Google's growth prospects based on wild projections about the size of Google's total addressable market. I call it Bubble 2.0, while some call it Web 2.0.

The logic goes like this:

"The offline advertising market is $300 billion and only $30 billion of it is online. Therefore, we (a very respectable and highly paid investment bank) argue that if only 10% more of it went online, Google's addressable market would double and go to $60 billion. Therefore, the stock is worth mega $$$,$$$,$$$,$$$ (billions)."

I made up the $300 billion number for sake of argument. But this argument (from the very respectable investment bank) is fundamentally flawed for several reasons.

1) The investment bank has failed to segment the offline advertising market properly and market segmentation is crucial when it comes to projecting Google's ad revenues.

The offline advertising market is 80% brand advertising spend and 20% direct marketing spend. What is the difference between brand advertising and direct marketing and why does it matter for investors in Google?

The distinction is important because Google's customers are primarily direct marketers (which is the smaller peace of the pie) - they are the annoying people who in the offline world would send you junk mail and call you at dinner, and who in the online world get you to click on their ads on Google. Direct marketers spend money to sell you a product immediately. They care that when you click on their ad, you also make a purchase. More importantly, they care that the amount they spent to get you to click on their Google ad is less than their gross margin. They know exactly how much they are paying to get you to their website and they won't pay a nickel more - because they are highly price sensitive and they stop spending if they know they can't get you there for cheap. For instance, if an online shoe company knew that their gross margin were 15% and that their average order size is $100, then they know their gross margin per customer is $15. That means they will not spend more than $15 to acquire a customer on Google. (In marketing parlance, a $15 CPA is the max they can spend. If CPAs go out of control on Google or Yahoo or MSN, they kill the spend.) This might sound complex, but you just need to leave with one thought

2) Direct marketers are math geeks and direct marketers are very price sensitive to their customer acquisition costs and they make up the bulk of Google's Customers. They love Google.

Brand marketers (who form the larger piece of the advertising pie) on the other hand couldn't care less about cost acquisition costs because they are not there to sell you a product immediately. Examples include TV spots by Budweiser or sponorship advertising by Coca Cola. Brand marketers spend money for creating liking or familiarity with their product - Kraft, Pepsi, Coke. The ROI of brand marketing spend is very very difficult to quantify. In fact, it is nearly impossible to quantify how much money it costs to make you like Kraft Cheese or Coca Cola. If you can figure that out, you'll be the next Bill Gates. And that is why you don't see Kraft spending big bucks on Google. For instance, if you typed in a query for "Kraft Cheese" on Google, there is no Kraft ad because buying the Google keyword for Kraft Cheese will not enable them to make you like Kraft Cheese more. Type in "Coca-Cola" and you see an occasional ad by "Coca-Cola" - but the clicks are minimal because people don't go online to buy Coca Cola. If you are confused, just leave with one thought

3) Brand marketers are liberal arts majors who can't do math. Brand marketers don't know the meaning of customer acquisition costs and they don't care. They don't know what to do with Google.

So, why does the distinction between brand marketers and direct marketers matter so much for Google?

Google is a direct marketer's wet dream because customer acquisition costs can be calculated in real time. But it is a brand marketers nightmare because they don't know what to do with it or how to use it.

Google was popular and grew tremendously fast because it offered a "MORE EFFECTIVE" source of ad spending for direct marketers. Unfortunately, even though Google was an effective form of direct marketing 3 years ago, today, direct marketers are running for the hills. Google's golden days are over because spending ad dollars on Google keywords is no longer cost effective. Listen to the e-commerce conference calls from the big shops like Amazon, Overstock, and ProFlowers, and you will hear repeatedly that the biggest headwind to their growth in revenue is increasing CPAs (cost per acquisition for those who don't know advertising). This is alarming especially when CPAs are rising 10-20% per quarter for some of Google's largest customers. There is no golden goose or "MORE EFFECTIVE" ad spend - at least no longer on Google. I will grant you that initially it was "MORE EFFECTIVE" - but when everyone has figured out that buying Google keywords is cheap, the no-arbitrage condition is being proved correct again right in your face.

4) Google's biggest customers (direct marketers) are no longer finding it cost effective to spend on Google and its smallest customers (brand marketers) have no need for it

If we take $300 billion as the total size of the offline advertising market, then direct marketers will comprise $60 billion of it and brand marketers will comprise $240 billion. Brand marketers (who comprise 80% of the offline advertising market) have no use for Google and will never use Google. You ask why? I ask you this - Tell me how you would convert a searcher for Kraft cheese into a paying customer and I will rest my case. I typed in "kraft cheese" into Google and I saw no ads for Kraft. Know why? Because no body clicks and buys cheese online. Brand advertising is incredibly ineffective on Google. Only direct marketing works on Google. I will repeat again - Google is a direct marketer's wet dream and a brand marketer's nightmare.

5) $240 billion of the $300 billion opportunity will never go online

This means that the $300 billion market opportunity is actually a $60 billion opportunity and our young analyst at the venerable investment bank has made an order of magnitude rounding error in sizing up the market opportunity in front of Google. He (or she) has also nonchalantly forgetten to mention that not all of that $60 billion will go online and that the part that does go online will be split among the top 5 players - Yahoo, MSN, AOL, Interactive, Google.

After reading the rubbish published by the venerable investment bank, I respectfully called and encouraged our analyst in question to go back to the drawing board and correct the $240 billion mistake. By the way, the picture at the top of this post is not meant to be the likeness or name of the firm that made this multi-billion dollar rounding error. It is only meant to represent a venerable investment bank. I apologize that I am not particularly good with computers.

Mr Wave Theory

Motley Fools Says Google is Worth $154

Seth Jayson of Motley Fools says Google is worth $154 - "Yuck" is the word he describes Google, the stock. A brilliant investor once remarked, "A great product doesn't necessarily make a great stock."

Followup: I have posted my own reasoning on why the consensus on Google may be wrong.

Mr Wave Theory

Why French ruling hurts Apple, iTunes and the iPod

The French National Assembly passed a bill which according to CNN "would force Apple, Sony and Microsoft to share proprietary anti-copy technologies so that rivals can offer compatible services and players." Doing so would enable consumers to download iTunes songs onto devices other than iPods which consumers cannot do today. You can only download songs from iTunes onto iPods.

While the French rulling is bad news for Apple whose iTunes service operates in a closed ecosystems, it is great news for consumers. The philosophical question at hand is simple:

Does a Government Have the Right to Force Interoperability Upon Closed Proprietary Technologies?

The French government clearly thinks so. I believe it wants to break Apple's dominance in online music which frankly Apple has earned due to the superiority of its hardware design. Philosophical questions are impossible to answer, so enough said. The question investors need to ask is this:

How sustainable is Apple's leading marketshare in the online music space?

Simply looking at the competing products on the market, one can easily tell that 1) competitors are copying Apple's hardware design (Sandisk, Creative Labs, and let's not forget the almighty Dell perenially late, but always a force to be reckoned with) 2) competitors are copying iTunes (Sony Connect, Microsoft Music Store, Yahoo Music) and 3) prices are dropping ferociously.

It is often said that in order for a consumer product to be successful, it needs to break below the $100 barrier. Apple broke that barrier with the iPod Shuffle. While some would call it success, I would argue that breaking below the $100 barrier is the beginning of the end - and the beginning of rapidly diminishing margins.

Why Windows Vista Delay is Bad News for Google and Apple

Many pundits argue that the delay of Windows Vista will allow Apple to sell more Macs and Google to gain more marketshare while the giant from Redmond sleeps. I would argue that the delayed launch of Windows Vista is bad news for Google and Apple. Unlike previous versions of Windows, Vista is not about selling a desktop OS. It is about selling a rich Internet experience positioned to compete directly against Apple and Google. While Apple and Google have built their businesses around vertically integrated Internet platforms such as iTunes and Google Search, Microsoft is taking a step back and delaying its launch so that it can integrate more tightly with its Internet content partners and distribution partners. Unlike Google and Apple, which operate closed ecosystems, Microsoft is launching Vista with more of a partner approach. First, Vista's core functionality is being revamped to strike Apple at the heart of the broadband Internet experience. Unlike Apple, which is notorious for strongarming content partners, Microsoft is playing nicer with content owners. Second, expect Vista to be tightly integrated with Live.com and MSN and strike Google where it is weakest, which is in the productivity application space. Unlike Google, which has focused on building light weight Internet applications with low barriers to entry, Microsoft will be focused on building rich, Internet productivity applications with significant lead times and high barriers to entry.

Windows Vista Is Being Re-Shaped as an Apple Killer
To fully appreciate Vista's threat to Apple, look no further than the Windows Vista launch page. Vista is first and foremost about making the PC the center of your rich media experience focused around your pictures, your music, and your movies. These are the three things that Apple has built its business around via its iLife strategy and the three core products supporting this strategy are iPhoto, iPod, and iMovie. Microsoft knows that in order to beat Apple, it must attack Apple where it is weakest. Apple's biggest weakness is that it works very poorly with third parties. In the PC world, Apple was terrible at working with PC manufacturers because it wanted to own the whole food chain. In the online music world, Apple has effectively created a closed ecosystem boxing out content owners from the distribution chain. Microsoft understood several decades ago that in order to win its PC battle against Apple, it needed to ally with PC manufacturers. Today, Microsoft is doing the same with content partners. Microsoft is going to empower rather than hinder content owners who have been held captive by Apple's lock on the music hardware business.

If there is one thing that Microsoft does better than Apple, it is enabling third parties to build products and businesses on its software platform (and collecting its share of the winnings toll via licenses) rather than encroaching on the businesses of its partners. In the PC business, Microsoft focused just on the software - enabling PC manufacturers to make money off hardware. Microsoft won. Its partners also made money. In the content business, Microsoft is doing the same thing. It is making Windows Media Player a platform for enabling content owners to make money off their music and movies, while Microsoft makes money off the platform.

In the music space, you can see that Microsoft Music Experience for Vista is built around partnering with the premier names in music - it has already announced partnerships with MTV, VH1, and CMT. In the TV and movie space, you can bet Microsoft is doing the same.

Vista Delay May Lead to More MSN and Live.com Integration and Make Google Irrelevant

Microsoft understands that the PC experience is now an Internet experience. It is not about selling licenses or owning desktops. It is about owning the webtop. Bill Gates commented at MIX 06 that Microsoft is already working on the next two versions after Internet Explorer 7, which is due later this year with Windows Vista and that Microsoft intends to build deeper RSS support in Windows Vista and Internet Explorer 7, allowing people to subscribe to Web pages as well as podcasts and photos.

The Vista delay will allow Microsoft to integrate Vista more tightly with Live.com which is frankly a Google killer. Unlike Google, Live.com is open, meaning that users can customize their experience with any content they like just by clicking "Add Stuff". Live.com is user generated meaning each Live.com experience is different. Finally, Live.com is familiar and the interface handles like a PC quality software experience. That said, Live.com is a real work in progress, so it is unsuprising that Vista is being delayed. This is Microsoft's third try at building an Internet presence after Start.com, MSN and I would bet that, as always for Microsoft, the third time's the charm.

Mr Wave Theory

Google Finance Shows that Google is No Longer An Innovator

The last two major product launches from Google have been Google Maps and Google Finance. While Google Maps redefined mapping and I am a fan of the product, Google Finance is merely a cheap knock off of Yahoo Finance done in Flash. While everyone is blogging about Google Finance, I believe the relevant question for investors is this:

Have Google's new product launches created new revenue streams for the company?

The answer is firmly no. In fact, Google Maps does not generate significant revenue and judging from Google Finance, the product will not either. In fact, what is incredible is that Google has taken its serendipidous approach to product management (that was perfectly fine for a 10 person startup) and now hope to make it work for a $100 billion company. Frankly, I don't know any $100 billion companies that run product like Google. I believe it is because the ones that did (including Excite, Lycos, @Home) have all perished because the strategy simply didn't scale. In fact, several well-respected tech executives who have visited Google have said to me, "Google is run like a zoo. There is no adult supervision." While conventional wisdom should usually be taken with a grain of salt, it should be taken seriously when some of the smartest folks in the tech industry are uttering those words.

Google's Product Management Strategy Is Flawed

A successful product management strategy is based on the creation of a well-defined set of functions that serve the unmet needs of users while creating value for the entrepreneur. Google's product strategy has been firmly focused on serving the unmet needs of users. With Google Maps, Google created a new way of visualizing data. With Google Finance, it is hoping to do the same. But in both cases, Google failed to create value for itself and for shareholders.

Google's New Product Launches Have Largely Been Business Failures

Good product management marries technical superiority with a keen understanding of what customers are and are not willing to pay for. Google's search product was not good product management. It was a technology looking for a business model that ended up finding one due to sheer luck. Google's new product launches have largely been failures because it has been unlucky this time around. Investors need to be mindful that while it is better to be lucky than smart, a product strategy based on knocking off existing products of competitors will not be successful in the long run particularly when there is no business model attached to these products.

Are mutual fund managers taking the lifeboat on Google?

Four times every year, fund managers must report their holdings in their quarterly filings. And this quarter is the same. With Google underperforming the market for the first time this quarter, and also exhibiting negative returns, one blogger speculated that fund managers quietly unloading before the end of the quarter when grades are due. Managers are taking the lifeboat on this name. Google is the largest position in several of the largest funds in this country. One of the largest funds (Fidelity, American Century) apparently is doing the dumping according to this post. I have included the post below because there is no direct link to the article.

20-March-2006The Google Factor, from Ross Miller
While some members of the list are resorting to numerology to divine the future of Google, it is worth noting that key players in the mutual fund industry (including Fidelity and American Century) loaded up on Google several months ago. My own quick and dirty statistical analysis of one of the largest of these funds indicates that their Google holdings have been so great that Google is more significant in explaining the fund's pattern of returns that the entire NASDAQ 100 is. This is even more impressive when one considers that Google itself is a fair-sized chunk of the NASDAQ 100. The Google factor continued through last week to exert a major pull on certain funds -- enough to turn what would otherwise be an up day for them into a down day.
1Q2006 is the first quarter since Google arrived on the scene where Google is down big-time from where it started the quarter, and still with two weeks left to go. It has only had one down quarter before, 1Q2005, and that decline was modest. Mutual fund managers may be loathe to exhibit large chunks of Google in their quarterly reports. While the efficient market hypothesis indicates that window dressing is already "baked into the pie," there is also a lot of academic evidence that end-of-quarter anomalies are real. While I am certain that Google is keeping announcements of nifty new things in its silo to spring on the market over the next two weeks, the question is whether those goodies will be enough to offset the tide of fund managers taking to the lifeboats.

http://www.dailyspeculations.com/

The Key Metric at Google : Revenue per Query

If there is one metric at Google that should be looked upon, it is revenue per query (RPQ). It is also the metric that Google no longer releases. Google only released its RPQ in Q4 2004.

Why do I think RPQ is declining?

Eric described that Google's revenue equation is simple. It is:

Number of queries X Click through rate X Cost per click = Revenue

Eric also described during analyst day and in the 10-K that primarily, revenues grew in Q3 and Q4 2005 due to increases in traffic (You can find the post in my prior post.) This is the first term in the equation. He also said that monetization improved which means the second term. What Eric did not talk about improving is the third term. So, by process of elimination, I conclude that RPQ is declining. That is the process of elimination, My Dear Watson.

Mary Meeker caught on to the declining cost per click

Below is an excerpt from the Q4 2005 conference call. Mary Meeker hit the nail on the head when she asked Eric - Is cost per click declining? You can see that Eric avoided answering the question since he was "running out of time." Eric dodged the issue.

Mary Meeker
Thank you. If we compare the 3rd quarter sequential results with the 4th quarter results, I think you said on your last call your query growth was kind of flatish, I don’t want to put words in your mouth, so please correct me if need be. And the revenue growth was pretty powerful so the monetization increase sequentially in the September quarter was very high. In this quarter, you in your press release and on the call you talked about seasonal strength in traffic and also in monetization. Could you give us a little more color on the differences in the degree of incremental monetization you had in the 4th quarter versus the degree of incremental positive monetization you had in the 3rd quarter? Thanks.

Eric Schmidt, Chief Executive Officer
This is Eric. We saw both strong user traffic in the December quarter as well as continued improvement in the monetization. I wouldn’t characterize them as being on the monetization side as being materially different than the rate of improvement that we saw in Q3. We are continuing to invest heavily in improvements in quality; those improvements in quality and many other enhancements that we offered in our product line, result in continuous improvement every quarter in monetization on a constant flow of traffic. In addition to that, traffic grew quite strongly, perhaps because of seasonality, perhaps because of gains in market share, perhaps because of all the new products, or perhaps because of a combination of all three. But we know that both are working and when both are working well, we see very, very strong resonant growth, which is of course wonderful.

What I’d like to do now since we’re run out of time is go ahead and wrap up by saying that to all of you first, thank you for taking the time to be on the call. We’re very, very pleased with our performance on every level.


Most analysts estimate the Google will earn $12 per share in 2007. I find it hard to believe. Google cited in its own 10-K filed last week that earnings growth is slowing and no longer accelerating. If earnings growth was 55% last year, then I expect it to be less than that this year. But the question remains ...

What is a reasonable rate of growth for Google?

A good proxy for estimating growth are comps - the largest comps like Amazon and Yahoo. Long term growth estimates at Yahoo are 25% over the next 5 years and at Amazon they are 20%. Give Google the benefit of the doubt, and let's say it is 35%, that is still substantially lower than the 55% consensus estimate.

Is growth becoming a problem? Yes, there are signs of trouble.

The biggest sign of trouble for a search engine arrives when they are trying to grow using "monetization improvements." Eric cited that term at least 3 times during the Q4 call. Recently, I came across this post on how Google is testing new UIs. As someone who knows search, I can tell you that you test new UIs to accelerate click throughs. Amr Awadallah, an engineer at Yahoo, has a post on Google revenue accelerators. Amr insightfully predicted Google's Q4 miss.

Google - Why are you so sexist and racist?

I recently looked up the executive management group of Google and discovered that the company practices an unspoken type of discrimination and racism. Of the 13 top executives at Google forming the executive management, there is only 1 woman and 3 non-whites (an African, an Asian, and a Hispanic American). Does Google represent America? And more importantly, does it represent Silicon Valley?

Google Executive Management Distribution by Race
10 Caucasian (79%)
1 African (7%)
1 Asian (7%)
1 Hispanic (7%)

Google Executive Management Distribution by Gender
12 Males (93%)
1 Female (7%)

Contrast this with America.

America Distribution by Race
201 million Caucasian (68.4%)
41 million Hispanics (14%)
39 million African (12.7%)
13 million Asian (4.6%)

Look at the disparity. Caucasians are overpresented by 10%. Hispanics are underrepresented by 7%. African Americans are underrepresented by 5.7%. What is interesting is that Asian Americans, while seemingly overrepresented, are actually significantly underrepresented. Does Google represent America? No. Not even close.

Contrast this with Silicon Valley.

Silicon Valley by some estimates has townships which are 30-50% Asian American. It is common knowledge that the bulk of the blood and sweat equity in Silicon Valley is provided by this group of hard working individuals. Asians are probably the largest group of engineers. Within Google, Asians probably represent 20-30% of employees. Yet, within the executive management, there is only 1 Asian American. Some of the hardest working, most creative, and inspiring people I know are Asian, and I find it hard to believe that they are not worthy of being represented. Not only does Google not represent America, but also the executives at Google don't even represent their employees. Google, why are you so racist?

The disparity doesn't end there. Look no further than the gender distribution.

America Distribution by Gender
144 million Males (49.2%)
149 million Females (50.8%)

I find it alarming that there is 1 woman who is part of Google's executive management team (7%) when in America 50.8% of Americans are women. Eric, please help me understand why. At Stanford, the number of women engineers is probably between 20-40%. Why is it that only 1 woman sits on the executive management group Eric? Google, why are you so sexist?

I live only a few minutes from the Googleplex and there are plenty of co-eds Eric. I can attest to that personally. And some of the smartest and most accomplished people I know, managers and engineers, are women. They are of my generation. The Internet generation. If you read this post, Eric, I urge to defend your actions to the rest of America when the numbers clearly show that the hiring practices at Google box out women and minorities from leadership roles and are clearly tilted in the favor of Caucasian males.

Mr Wave Theory

Since the Washington Post article cites significant click fraud at Google, I went through the 10K to see what Google says. According to the filing, Google has regularly refunded invalid clicks to advertisers and intends to do so even retrospectively. This implies that Google is exposed to past fraud and also future fraud. In fact, the paragraph on click fraud ends with a warning from Google that it continues to be exposed to litigation risk from click fraud, even after the recently announced $90 million settlement. Past click fraud, which has been undetected, could become an unquantifiable future liability. Henry Blodgett seems to agree.

If we fail to detect click fraud or other invalid clicks, we could lose the confidence of our advertisers, thereby causing our business to suffer.

We are exposed to the risk of fraudulent clicks and other invalid clicks on our ads from a variety of potential sources. We have regularly refunded fees that our advertisers have paid to us that were later attributed to click fraud and other invalid clicks, and we expect to do so in the future. Invalid clicks are clicks that we have determined are not intended by the user to link to the underlying content, such as inadvertent clicks on the same ad twice and clicks resulting from click fraud. Click fraud occurs when a user intentionally clicks on a Google AdWords ad displayed on a web site for a reason other than to view the underlying content. If we are unable to stop these invalid clicks, these refunds may increase. If we find new evidence of past invalid clicks we may issue refunds retroactively of amounts previously paid to our Google Network members. This would negatively affect our profitability, and these invalid clicks could hurt our brand. If invalid clicks are not detected, the affected advertisers may experience a reduced return on their investment in our advertising programs because the invalid clicks will not lead to potential revenue for the advertisers. This could lead the advertisers to become dissatisfied with our advertising programs, which has led to litigation, could lead to further litigation and could lead to a loss of advertisers and revenues.

The Washington Post reports that Advertisers Are Coming Up Empty with Google. Radiator.com, which spends $40,000 per month on Google found that 35% of paid clicks reported by Google were fraudulent, and that 17% of paid clicks on Yahoo were fraudulent. The Washington Post implies that nearly 1 in 3 to 1 in 5 clicks on Google are fradulent.

Radiator.com got a jolt this month from the firm it hired to audit the nearly $40,000 worth of sponsored links it buys every month from Google and Yahoo.

It appears that many of the clicks on the Web site's search-engine ads were made not by potential customers but instead by automated programs or people trying to drive up Radiator's advertising bill. Like other advertisers that place links on search engines, Radiator.com pays only when people click on the links.

After analyzing where and when each click came from, auditing firm ClickFacts Inc. estimated that 35 percent of the referrals that Radiator paid Google for stemmed from bogus traffic. Likewise, 17 percent of the leads that came from Yahoo search results were illegitimate.

Google's 10-K is out today. There are several interesting notes in there:

1) Our revenue growth rate has generally declined over time, and we expect it will continue to do so as a result of increasing competition and the difficulty of maintaining growth rates as our revenues increase to higher levels.

Mr Wave Theory's Translation: Growth rates and margins are exepcted to slow and not accelerate as most Wall Street analysts would predict.

2) Prior to the second quarter of 2004, these seasonal trends may have been masked by the substantial quarter over quarter growth of Internet traffic focused on commercial transactions and ultimately by the substantial quarter over quarter growth in our revenues. In addition, in the third quarters of 2004 and 2005 these seasonal trends may have been masked by certain monetization improvements to our advertising programs, as well as by the continued expansion of our global advertiser base and partner network.

Mr Wave Theory's Translation: In Q2 2004, internet traffic masked slow down in our business. In Q3 2004 and 2005, we masked the slow down by adding more ads to our search results and increasing their font size.

3) Beginning in the second quarter of 2004, growth in advertising revenues from our web sites has exceeded that from our Google Network members’ web sites. We expect that this will continue in the foreseeable future although the relative rate of growth in revenues from our web sites compared to the rate of growth in revenues from our Google Network members’ web sites may vary over time.

Mr Wave Theory's Translation: Expect to see us tweek our mix of revenue so that we hit our operating margin targets. We will do so by adding fewer partners into the Google Network. We will be spending less to buy other people's traffic.

4) Our operating margin may decrease as we invest in building the necessary employee and systems infrastructures required to manage our anticipated growth. We have experienced and expect to continue to experience substantial growth in our operations as we invest significantly in our research and development programs, expand our user, advertiser and Google Network member bases and increase our presence in international markets, as well as promote the distribution of our Google toolbar and other products in order to make our services easier to access.

Mr Wave Theory's Translation: We will be spending more to buy other people's traffic by paying for toolbar distribution.

5) We currently anticipate that our effective tax rate will decrease to approximately 30% in 2006 from 31.6% in 2005, primarily because we expect that our Irish subsidiary will recognize proportionately more of our earnings in 2006 as compared to 2005, and such earnings are taxed at a lower statutory tax rate than in the U.S. However, if future earnings recognized by our Irish subsidiary are not as proportionately great as we expect, our effective tax rate will be higher than we currently expect.

Mr Wave Theory's Translation: We get a real sweet tax deal in Ireland so we will be moving more business there to get a tax break.

Google then lists a laundry list of risks which most analysts have been happy to ignore so far:

1) AOL - We rely on our Google Network members for a significant portion of our revenues, and we benefit from our association with them. The loss of these members could adversely affect our business. In addition, advertising and other fees generated from one Google Network member, AOL, primarily through our AdSense program, accounted for approximately 9% of our revenues in 2005.

Mr Wave Theory's Translation: We still haven't closed our deal with AOL but we're going to bend over backwards to do it.

2) Click fraud - If we fail to detect click fraud or other invalid clicks, we could lose the confidence of our advertisers, thereby causing our business to suffer.

Mr Wave Theory's Translation: Click is a major issue and we'd just like you to be aware that you are factoring it in.

3) Index spamming - Index spammers could harm the integrity of our web search results, which could damage our reputation and cause our users to be dissatisfied with our products and services.

Mr Wave Theory's Translation: We are getting spammed like crazy by direct marketers and expect us to throw a lot of bodies at cleaning up this problem.

3) Privacy concerns - Privacy concerns relating to our technology could damage our reputation and deter current and potential users from using our products and services.

Mr Wave Theory's Translation: We keep all your search history and data and this is becoming a big liability.

4) Hiring and stock options - The incentives to attract, retain and motivate employees provided by our option grants may not be as effective as in the past and our current and future compensation arrangements, which include cash bonuses, may not be successful in attracting new employees and retaining and motivating our existing employees. In addition, we have recently introduced new stock award programs, and under these new programs new employees will be issued a portion of their stock awards in the form of restricted stock units.

Mr Wave Theory's Translation: Google is no longer a place to get rich, so we may have problems hiring talented people. In order to fix this problem, we are granting GSUs which will dilute your ownership in our business. Our old employees are vesting in peace (VIPs).

The WSJ finally prints the news that Mr Wave Theory broke last night - that AOL is launching In2TV to compete with Google Video. The article does have an interesting factoid.

An estimated 63 million U.S. Internet users watch online video at least once a month, according to Parks Associates, a Dallas-based market researcher. Eight percent of those viewers say they are paying for the content, according to the survey, completed this month.

The FT reports that Google is considering a retail push. Frankly, I don't get it. If someone does, please educate me. It appears to be yet another PR stunt - call it the daily Google PR stunt.

Google (NASDAQ:GOOG) is attempting a significant push into the European retail industry with plans to launch a service aimed at giving traditional bricks-and-mortar retailers a base from which to market and sell their goods online.

The US-based search engine company plans to develop Google Base, a product still in testing, into an online retail platform. The service would give retailers access to the hundreds of millions of Google users.

As I mentioned yesterday, the Microsoft news would have a negative impact on the stock price of Google which fell -6.66 today to close at 344.50. While a significant number of institutional investors are still in denial, I think it really has made the Microsoft threat more real. Microsoft's breadth of products makes Google's products look like toys in comparison.

Live Mail wins hands down against GMail
Office Live wins hands down against Blogger
MSN portal wins hands down against Google Personal

Why is Microsoft's advertising announcement bad for Google? Because Microsoft is attacking Google's weakest link. Google excels at catering to direct marketers but it is horrible at dealing with brand advertisers. To put things into perspective, hear this out.

Google is a direct marketer's wet dream. Unfortunately, direct marketers are very price sensitive. These are the companies hawking flowers, toys, and other unwanted products. When keyword pricing moves up, they bail. That's what happened in Q4. Keyword prices went up and Google's revenue growth slowed down because direct marketers rebelled.

Google frankly stinks at brand advertising. Have you seen a Coca Cola ad on Google? No. Why? Because you can't sell the image of Coca Cola with a one line text link, and until Google figures out how, Coca Cola won't do anything. So, for now, what does Coca Cola want from Google? Nothing.

Now, ask yourself what happens when MSN offers Coca Cola or Yahoo branding opportunities on their home page with video spots and Flash rich media? Coca Cola jumps at it - as in the case of the MSN trial. Coca Cola loves it. That's their bread and butter because that's what they know. Coca Cola doesn't do direct response marketing. They do brand marketing. And while direct response may be big, brand advertising is huge. Brand advertising = television advertising.

Why can't Google do this? Simple. Google's product management philosophy is to build a site that allows users to find what they are looking for and leave the site as fast as possible. Oh and by the way, in case you haven't noticed, Google doesn't sell ads on its home page.

Mr. Softie has fired its first shot against Google. Microsoft Developing Web's Largest Advertising Network - Ad Testing Begins on Office Live, Windows Live Mail and MSN Spaces. Apparently, most of Microsoft's next generation initiatives will be advertising supported. The announcement is interesting for several reasons. First, Microsoft's test partners are brand advertisers as opposed to direct marketers (which are Google's primary customers). Since the vast majority of ad dollars are spent on brand advertising, the market size is significantly larger. Second, Microsoft is not merely focused on search. In fact, the announcement shows that Microsoft's advertising strategy is much broader as tests are conducted through Office Live, Live Mail, and MSN Spaces. Finally, the message is clear - Microsoft will not take the heat from Google lying face down. Google will have to spend more money either on acquisitions or on talent, meaning that costs will be going up. This announcement really marks the beginning of the end for Google. The barriers to entry for Google's businesses are very low as evidenced by Amazon's unexpected announcement that it will be attacking the online storage market which Google has been secretly working on and also plans to enter. And yet the barriers to success are very high. Google has shown that it can only succeed in one business - search. Watch out Google.

Coca-Cola Brazil, JCPenney and Monster Worldwide are among the 20 global marketers participating in the initial ad tests. The results of the multiple ad formats being tested will help determine which ad offerings provide the best return on investment for marketers while adding value to the consumer experience.

“Taking part in the Windows Live Mail beta program is something that perfectly matches Coca-Cola’s day-by-day attitude,” said Monica Horcades, marketing director for Coca-Cola Brazil. “We understand that one of the most important roles of a global brand like us is to believe, support and stimulate innovation in communication of all kinds, especially on the Web. Coca-Cola has always been a pioneer on talking to young people wherever and whenever they are. It’s in our brand’s DNA. And we believe that Windows Live Mail is going to be a great way to do that.”

Microsoft will continue to invest heavily in MSN.com, as well as continue to explore new advertising opportunities on Live.com, OfficeLive.com, Microsoft.com, the Xbox Live® service, Internet Protocol television (IPTV), mobile devices and other Microsoft properties.

AOL announced that video is a core part of its online growth strategy. AOL clearly sees itself competiting with Google. You may recall that Google Video is a direct competitor to AOL Video. It is surprising to see that there is no mention of Google as an advertising partner since Google is currently AOL's largest source of advertising revenue. It looks like AOL is done using Google and now plans to go stag. This only makes sense since AOL owns a treasure trove of online content that it produces via TimeWarner, while Google has no content production capabilites of its own. Watch out Google - your largest partner is turning into your largest competitor.

AOL said it plans to launch on Wednesday one of the biggest free video services on the Internet, serving up vintage shows and short clips backed by online advertisements.

The service, called In2TV, will launch with four advertisers -- Intel Corp., (INTC.O: Quote, Profile, Research) Kia Motors Corp., (000270.KS: Quote, Profile, Research) Kraft Foods Inc., (KFT.N: Quote, Profile, Research) and Hershey Co. (HSY.N: Quote, Profile, Research)
"It's from the strength of the online advertising market that we can bring free on demand (videos)," Kevin Conroy, executive vice president of AOL Media Networks said in an interview.
In2TV will feature thousands of shows from corporate sibling Warner Bros., which owns the rights to shows that include "Welcome Back Kotter", "Kung Fu" and "Growing Pains."

AOL now sees video as a linchpin to the company's turnaround after its online presentation of the Live 8 global concerts last year were watched by more viewers than those on TV. Free videos will make up the bulk of its growth, Conroy said. "The real volume of activity is in the free streaming (video) model," he said.

Marketwatch reports that the US may levy tariffs and protectionist policies against China. The tariff would have devastating effects on the economy, bring the US back to an era, post circa-1929, of the Smoot Hawley Tariff.

"When China fails to act, it only strengthens those who want to build protectionist barriers around the U.S. market," Gutierrez said. "That's the last thing we need." Pending legislation would impose tariffs of 27.5% on all Chinese imports unless China revalues its currency.

The WSJ reports that Google must turn over data to the DOJ.

A federal judge said he is likely to require Google Inc. to turn over some information about its users' searches to the Justice Department, after the government said it would scale back its request.

After a hearing in San Jose, Calif., U.S. District Court Judge James Ware said he will pay special attention to privacy concerns as he weighs the government's request for the information with the interests of a private company.

The legal showdown over how much of the Web's vast databases should be shared with the government has pitted the Bush administration against the Internet giant, which resisted a subpoena to turn over any information because of user privacy and trade secret concerns.
The Justice Department downplayed Google's concerns, arguing it doesn't want any personal information nor any data that would undermine the company's thriving business. At Tuesday's hearing, a lawyer for the Justice Department told Judge Ware that the government would like to have a random selection of 50,000 Web addresses and 5,000 random search requests from Google, a small fraction of the millions the government originally sought.

BERKSHIRE HATHAWAY INC.

Warren Buffett wrote a very interesting vignette in his annual letter about the Helpers and the GotRocks. To provide some background for readers, Warren asks the reader to suppose that all American corporations are owned by a single family. The GotRocks are truly a wealth family. One day, the Helpers take notice and begin to hover around.

Imagine for a moment that all American corporations are, and always will be, owned by a single family. We'll call them the Gotrocks. After paying taxes on dividends, this family -- generation after generation -- becomes richer by the aggregate amount earned by its companies.

Today that amount is about $700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious

But let's now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers -- for a fee, of course -- obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what.

So the family's annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend, and in a wide variety of ways, they urge it on.

If you don't have time to read the entire post, at least walk away with this. The Fourth Law of Motion as posited by Warren Buffett:

For investors as a whole, returns decrease as motion increases.

Google has acquired @Last software. @Last are the developers of the truly awesome SketchUp application - a 3D environment for Windows and Mac OS X.SketchUp is an incredible and innovative tool. I love playing with it, but I can't possibly justify the $495 price tag. Could it be that Google might offer it for free? I hope this is an acquisition in the style of Picasa (which was released more-or-less as-is but for free) and not in the style of Urchin (which completely screwed over TextDrive in a big way). Check out the posting on the Google Blog http://googleblog.blogspot.com/2006/03/new-home-for-last-software.html

I am starting to understand Google's M&A strategy.

We buy profitable software companies that have paying customers and make them free and turn them into unprofitable companies.

The DJ Wire says Judge Expresses Reservations about DOJ Claims vs Google. What does this cryptic note mean? Is the judge supportive of the secretive and illegal information being distributed by Google? This is a move to fade.

CFA Magazine's January/February Cover is "What If Markets Are Targets." Requires subscription. Post your email if you would like a PDF copy. The opening paragraph is about a real life act of terrorist where 260 people were killed at the Bombay Stock Exchange when a car bomb exploded in the garage.

It was a perfectly ordinary day at the stock exchange. Three thousand brokers crowded the busy trading floor. At 1:25 p.m., a bomb went off in the basement garage. “We were all lifted above the ground by two feet,” one trader told the newspapers later. “There was blood everywhere and people were rushing to get out,” the director of the exchange said. Some traders were trampled to death in the stampede. In all, 50 people died at the exchange that day.

Fact or fiction? It really happened. The explosion at the Bombay Stock Exchange in 1993 was one of several attacks that killed 260 people across the city that day. And
it wasn’t the first time a stock exchange had been bombed. In 1990, a bomb destroyed most of the visitors’ gallery and tore a hole in the façade of the London Stock Exchange. There were no casualties, partly because the bomb threat was phoned in but also partly because electronic trading had already supplanted activity on the trading floor in London to the point that the visitors’ gallery was scheduled to be closed. (The “electronification” of trading is a key point in security thinking, as we shall see later.)

Add to these incidents the suspension of trading in the United States for four days after the terrorist attacks of 11 September 2001, and you cannot help but wonder what major security threats face financial markets today — and what investment firms, stock exchanges, and regulators are doing about them.