Content Matters

Google (NASD:GOOG) and Amazon (NASD:AMZN) are the two big winners in the Internet race, while Yahoo and IAC/Interactive Corp are also-rans. That’s the conclusion of the new Sanford Bernstein Black Book, U.S. Internet: the End of the Beginning.

The report looks at the ultimate winners and losers during this next phase of the Internet, as well as the potential impact of the current economic slowdown on the online segment.



Bernstein suggests that the Internet is somewhat recession resistant.  Compared to the burst of the bubble in 2001, they feel the sector is strongly positioned. Online advertising accounts for 8% of all U.S. advertising and is growing at a 20% annual rate.  In fact, as the economy sours, they expect more offline advertising to move online, where metrics allow advertisers to quantify the ROI on their investment.  With Bernstein estimating offline advertising revenues in the US of $299 billion in 2008, each 1% that moves online is roughly $3 billion. On a global basis, Bernstein forecasts online advertising, estimated at $55 billion for 2008, to grow to $97 billion in 2012, at which time it will account for 13.1% of all advertising spend.

Breaking down the individual components of online advertising, they remain most bullish on paid search (CPC), continuing to strengthen Google’s dominance.  Paid search should generate $19.1 billion in 2008, according to their model, growing to more than $36 billion in 2012, a 20% annual growth rate.

Bernstein projects hyper growth for the nascent IP video and mobile advertising markets, with mobile growing from $4.7 billion in 2008 to $17.5 billion in 2012 while video grows from $2.8 billion to $10 billion over the same period.

At greatest risk from economic pressures is CPM-based display advertising, used more for brand awareness than driving specific actions. Brand advertising online is likely to behave similarly to traditional media advertising, with advertisers pulling back during difficult markets. That won’t be comforting to Yahoo nor to the ad networks that were the target of last year’s M&A frenzy, such as DoubleClick, Right Media and aQuantive.

Meanwhile, consumer comfort with eCommerce is strong, and Bernstein expects etailers to be the beneficiary of consumers moving more of their retail spend online. For 2008, Bernstein projects online retail revenues of $362 billion, less than 3% of the total retail spending of $13.2 trillion. They project the online spend growing to $692 billion in 2012, more than 4.2% of their $16 trillion global retail forecast.

The report explores other factors, such as whether U.S.-based internet players will be able to penetrate Asia, the impact of regulatory issues (online sales tax, net neutrality) and the future for video and mobile.

So, how will it all shake out?
No real surprises here. Bernstein views Google and Amazon as the big winners. They also see eBay as a bit of a comeback story, while projecting it’s eventual acquisition. The losers in the segment – Yahoo (NASD:YHOO), which they still believe may be acquired by Microsoft, and IAC/Interactive Corp (NASD:IACI), though they seem optimistic that the restructuring and divestitures could give IAC the kick it needs to get back on track.

The long-hyped awaited semantic search engine Powerset has finally launched. To start, Powerset is running its search engine against Wikipedia and including reference data from Freebase.

Powerset uses semantic analysis in a few ways:
There is a natural language query box, so it can interpret questions like "Which companies has Microsoft acquired?", matching entities and facts from your search request to those in the Wikipedia data.

In displaying results, it first attempts to disambiguate multiple references to your search and arranges the content accordingly. Next, it applies fact extraction, identifying relationships between entities and displaying what it calls Factz.

In this example, we see how Powerset handles the "disambiguation 101" example of the word Java, starting with the island, the programming language, a band, and more. Next, it shows Factz about Java - relationships for programmed, used and supported.

The Factz seem a bit simple - it appears they're simply extracting noun-verb pairs. So, while the initial factz for Java make sense (such as programmed-language), as you dig deeper you find examples like "jarred confdesigner", whatever that may mean. The fact was apparently extracted from the sentence: ConfDesigner can be started directly via "java -jar confdesigner.jar" (because of added jar-Manifest).

I show this example not to disparage Powerset, but rather to point out how difficult it is to do semantic analysis on a massive corpus of text like Wikipedia. With a homogenous data set, for example, business news or bioinformatics data, you can tune a semantic engine for maximum precision and recall. With such a general data set, it's incredibly hard to consistently generate strong results.

The Powerset user interface is very clean. For any Wikipedia page, they add an "Article Outline" floating toolbar. This Ajax-based toolbar can either display the standard outline of the page (simply parsing the wikipedia tags around heading sections) or you can click on "Show Factz" and it will display the facts that it uncovers within each section as shown here. I think this adds a lot of value to Wikipedia.

Overall, I'd expect that I will use Powerset to search Wikipedia going forward, rather than going to the underlying site. While other power users may do so, the bulk of the wikipedia traffic comes from Google and I expect that to continue in the future.

I don't think the team at Powerset expects to make their money as a better search tool for Wikipedia in the long run. Rather, it's a proof-of-concept to demonstrate the capabilities of semantic search. Powerset has delivered a very compelling site search engine. While others may try to compare Powerset to Google, that's not a realistic comparison. Barney Pell and company have set their ambitions on replacing Google, but in the long run, I think they'll find their niche will be in semantic search for the enterprise, a web site or a specific domain.

I've been pretty close to the semantic search and text mining space since my early days at ClearForest in 2000, and while the promise of semantic analysis has always been great, the actual deliverables have consistently come up short.

Powerset seems to be making a credible claim to be the first legitimate semantic search engine of any scale.

Powerset has been 2+ years in the making, which seems a lifetime in the persistent beta world of Web 2.0, but they've built on 15+ years of computational linguistics and seem to have a viable offering. It will be interesting to see where they take it next.

For more on Powerset, read John Blossom, TechCrunch and ReadWriteWeb.

Lots of blog posts and tweets on the Microsoft (NASD:MSFT) - Yahoo (NASD:YHOO) breakup this morning.  If the market closed now (1pm EST), my prediction in Fred's poll would have nailed it:

I pegged it at $24, though I think it may initially trade down to the $21-22 range before trading back up to a close of $24-25.

So, while I'm on a hot streak (one in a row), I'll throw a few more predictions out there:

1. Jerry Yang will step down by December as the stock languishes in the $20-22 range
2. Microsoft announces a big acquisition (Salesforce (NASD:CRM)?) by the end of the summer, so Ballmer can repair his reputation.

Here's some of the interesting comments on the blogs and twitter:

Henry Blodget reports that Yahoo claims it didn't realize MSFT had bumped up the offer to $33 until they received Ballmer's letter. His take: First, Microsoft walked away in part because of price and in part because Steve Ballmer lost his enthusiasm for the deal. In our opinion, this makes a future deal less likely (especially over $33). Second, Yahoo misjudged Steve Ballmer's commitment to the transaction and, as a result, blew it.

Rafat Ali notes that big institutional investors would have pushed Yahoo to make the deal if the offer was at $34 per share -- just a dollar more than Microsoft's final offer.

Paul Kedrosky notes "this is a red letter day for VCs, btw. not only aren't two startup acquirers turning into one, MSFT & YHOO are going to be buying like mad."

John Blossom suggests the breakup was good for Yahoo based upon the two companies approach on IP: "While there were some important synergies that would have come out of a Microsoft deal, in general it would have been an acquisition by a company driven by old concepts of intellectual property value of a company that is starting to move far more aggressively into new concepts for realizing the value of intellectual property."

Doug McIntyre suggests as a next step that Microsoft buy Chinese search engine Baidu (NASD:BIDU), noting that Asia is the future growth spot for Internet search and that Baidu's current market cap is $12 billion, a fraction of the $47 billion it offered for Yahoo.

From a shareholder perspective, who's been the biggest winners and losers?
Looking at stock price changes since the deal was announced on Jan 31 and including today's close:

MSFT dropped from $31.91 to $29.08, a loss of nearly 9%
YHOO has gained 29.7%, going from $18.87 to $24.47
GOOG, meanwhile, has gone from $511 to $595, a gain of 16% by executing its plans while watching its supposed competitors implode.

After Yahoo (NASD:YHOO) rebuffed its increased $33 per share bid, Microsoft (NASD:MSFT) has walked away from the table. Reports indicate that Yahoo's Jerry Yang indicated they would not accept an offer below $37 per share, a valuation of roughly $53 billion.

So, what's next for the two companies?

First, we can expect to see Yahoo stock price plummet at Monday's open. The stock was trading around $19 before the initial bid; it had traded up to around $30 per share in February and has hovered in the $27-29 range for the past month.  Fred has a poll on his blog asking what Monday's closing price will be. I pegged it at $24, though I think it may initially trade down to the $21-22 range before trading back up to a close of $24-25.  I've posted Fred's poll below, so feel free to cast your vote.

Longer-term, I think we'll see Yahoo try to go it alone, at least for the time being. There were a few other potential suitors out there such as AOL and News Corp, but neither is in position to do the deal right now.  I do think hope that Yahoo will take some of the knowledge gained from this experience and change they way it does business. The first step should be a deal to use Google for search, following the recent test of that technology. Hopefully, recent events will put enough pressure on Yang & Co to make the changes that many had lobbied for even prior to Microsoft's approach.

On the Microsoft side, this is clearly a black eye for Ballmer, though they are probably better off in the long run that the deal fell apart. Microsoft has taken the position that to close the gap with Google, they need to catch up on the Internet advertising side of the business. But the bigger threat to Microsoft is Google making inroads in the corporate IT market with cloud versions of Microsoft Office or Exchange.  As RBC analyst Robert Breza noted in the past, using the same $45 billion they planned to spend for Yahoo, Microsoft could probably acquire Salesforce.com (NASD:CRM), web advertising analytics platform Omniture (NASD:OMTR) and Facebook. The combination of those three would strengthen Microsoft's existing products and provide them with a competitive foothold against Google.

In other notes and comments about the non-deal:

Kara Swisher's BoomTown decodes Steve Ballmer's breakup letter to Jerry Yang.

TechCrunch shares the text of Ballmer's internal email to Microsoft employees outlining their post-Yahoo strategy.

Larry Dignan notes that Google is the big winner (though I think Google might have been even better served by watching Microsoft struggle to integrate Yahoo for the next 18 months)

Danny Sullivan posits that Microsoft was pound foolish in not putting up another $5 billion to get the deal done.

Time Warner (NYSE:TWX) reported Q1 earnings of $771 million today. The $0.21 per share earnings were just shy of the $0.23 street consensus and the big news from the announcement and earnings call was the news that they plan to spin out  the cable business. But, the number that jumped out at me was the AOL results. In a quarter where Google beat their targets and Yahoo managed to hit theirs, AOL revenue was down from $1.46 billion to $1.13 billion over the same period a year ago.

PaidContent quotes new CEO Jeff Bewkes: "We were not satisfied with the performance of display advertising on our owned-and-operated network. ... We didn’t integrate Platform-A fast enough .. and that led to sales-channel conflict".

Whether it was the integration of Advertising.com and Tacoda or not, AOL needs to produce stronger results from its core advertising business. Analysts have long been clamoring for them to spin out AOL; as Google continues to grow and MicroHoo shakes out, they better get their act together before time runs out.

After two months of foot-dragging and stumbling by both Yahoo and Microsoft doing nothing for shareholder value, the action has heated up.

Yahoo (NASD:YHOO) took an early shot yesterday, announcing a test under which they would route 3% of their search traffic through Google (NASD:GOOG). This is a potential precursor to outsourcing search to Google, a move that analysts called for more than six months ago.  Such a move could provide an EBITDA boost of between $300-500 million per year, according to Silicon Alley Insider.  As SAI points out, while such a deal might not scuttle the Microsoft bid, it could help justify a bump of $5 per share in the price.

The bigger blow came last night, as it emerged that discussions with Time Warner (NYSE:TWX) had heated up and that Yahoo was close to finalizing terms for a potential merger with AOL. Under this deal, Time Warner would merge AOL into Yahoo, along with a cash infusion, in return for 20% of the combined company. The cash would be used to buy back Yahoo shares in the public markets at a price somewhat higher than the $31 Microsoft offer.

Meanwhile, Microsoft (NASD:MSFT) is apparently poised to launch a counter-offer in combination with News Corp  News Corp (NYSE:NWS) has been trying to figure out a way to get into the Yahoo sweepstakes but hadn’t been able to find financial backers for the deal.  According to reports, the deal would combine Yahoo, MySpace and MSN into a massive consumer internet business.

So, which of these potential deals seems more attractive? In part, that depends from whose vantage point you look at it.  Let’s take a closer look:

YahooAOL:
For Time Warner, the deal is a no-brainer. They’ve been trying to figure out how to get value out of AOL for quite a while and the combination of the two would create some immediate benefits:
•    Dominant positioning for online display advertising and ad networks
•    Increased leverage with Google (assuming the combined entity would outsource its search to Google)
•    Combination of strong destination sites in finance, travel, entertainment and other markets
•    There would be obvious cost-cutting opportunities due to the large amounts of overlap between the companies.

For Yahoo, the deal is attractive for some of the same reasons, but does the combination of two declining properties really create a competitive player? Yahoo is pushing this deal as they want to remain an independent company but that desire alone does not create the most long-term shareholder value.

MyYahooMSNSpace:
From a Yahoo or News Corp perspective, this could actually be the more compelling of the two deals.  Combining Fox Interactive with Yahoo could provide significant growth opportunities. The combination of Yahoo’s display advertising expertise plus the social networking growth of MySpace would be extremely attractive.

The benefits to Microsoft are questionable, as has been pointed out in the past.  Microsoft is sitting on a good amount of cash today. The question is whether they’re best served investing that into a consumer Internet play or focusing on the b2b software markets. While the Internet side has more sizzle, the software side of the business could be a better long-term investment. Analysts have suggested that for the same price, Microsoft could acquire businesses like Salesforce.com, Omniture and Facebook.

SAS Institute this week announced the acquisition of Teragram Corporation, a provider of text mining and NLP products.

Slowly but surely, all the BI companies are buying into the text mining market. Business Objects bought Inxight, SPSS bought LexiQuest and later bundled it into their Clementine data mining app.   SAS had entered the text mining market a few years ago with the launch of their home-grown SAS Text Miner.  Teragram has been a niche player in what remains a niche space, despite vendor efforts to make it a mainstream app.

To-date, none of the business intelligence software companies have shown the ability to closely integrate these unstructured data technologies with their structured data solutions. Part of the challenge for most has been that text analytics software does not provide neat answers the way that their BI dashboards do. It will be interesting to see if the SAS user base, who are accustomed to data mining, are quicker to acclimate to text mining.

While the press release quotes Teragram CEO Yves Schabes stating "Teragram and its technology fit perfectly into SAS' analytics and text mining efforts, as SAS continues to innovate in this rapidly growing market", it's interesting to note that they do not mention any joint customers of the two products. I'm skeptical about how close a fit this really will be.

Lost in yesterday's announcement of the EU approval of Google's acquisition of DoubleClick was the news that the post-merger integration process will come with something associated with old media mergers: layoffs.

Posted to the official Google Blog were Eric Schmidt's comments:

As with most mergers, there may be reductions in headcount. We expect these to take place in the U.S. and possibly in other regions as well. We know that DoubleClick is built on the strength of its people. For this reason we’ll strive to minimize the impact of this process on all of our clients and employees.

At one level this comes as no surprise. This was not a small bolt-on acquisition. DoubleClick has more than 800 employees and there is bound to be some overlap between the two companies. At the same time, it's another signal that Google is no longer on the same growth curve that it was a few years ago. As they integrate this acquisition and with pressure on their stock price, it will be interesting to see if the Google corporate culture begins to change.

Over the weekend, the Yahoo (NASD:YHOO) board spurned Microsoft's (NASD:MSFT) $31 per share offer, claiming that the offer "massively undervalues" the stock. That's a bold statement, considering the stock had been languishing in the $18 range until the bid. While the stock had traded in the $40's as recently as two years ago, it's only peeked above the $30 range a few times since, generally on takeover rumors, only to slide back again shortly thereafter.

It sounds as though it's mostly an ego-driven decision, as there are no obvious white knights to jump in with the $45-50 billion it would take to do a deal. While Microsoft may be willing to up their offer a few dollars, the negative response from their shareholders to the initial bid suggests that they would be unlikely to go beyond the $34-35 range.

The Times of London reports that Yahoo is reconsidering a possible merger with AOL (NYSE:TWX) and is also looking at potential deals with DIsney. While a Yahoo-AOL combination would be sizable, it's hard to see how that would provide shareholders with the value of the Microsoft offer. Yahoo has had ample time to get its house in order and failed to do that. Now, with an attractive offer on the table for Microsoft, it seems to be willing to dance with anyone to avoid being acquired by Redmond. Seems to me like it's all about ego at this point and not about shareholder value.

UPDATE: Henry Blodget explains why $31 per share does not massively undervalue YHOO. Meanwhile, Yahoo released the full text of the letter it sent to Microsoft. Turns out that we were wrong; rather than "massively undervalue" they say that it "substantially undervalues" the company. I guess the lawyers at Skadden and Munger Tolles felt that substantially was a more appropriate term. Guess that's why they get paid the big bucks.

Reuters has announced the release of Calais, a web service with an open  API.  According to the release, users will be able to use the Calais service at no charge for either commercial or non-commercial purposes.

In conjunction with this, they are creating OpenCalais, an open source community to foster development around the Calais web service.

Calais is a renamed version of the ClearForest technology acquired last year.  The initial launch includes the ability to extract entities such as company, person or industry term along with some basic facts and events, what ClearForest previously packaged as their financial module.

This is the first news we've heard out of ClearForest since the acquisition. Many have wondered what Gerry Campbell's strategy would be for ClearForest.  Reuters is not positioned to sell enterprise software, so it seemed like an odd acquisition. It still seems to me that their primary focus is to leverage the technology internally, though perhaps they are hoping that an open source community may help them establish it as a tagging standard.

In the early days of ClearForest, we had batted around the concept of opening up the rule development platform to an open community as a means of fostering the development of rulebooks extraction modules, though the idea was never pursued.

More details are available on their developer website.