Wednesday, February 09, 2005


Fiorina is out as Chair of HPQ. Another merger of two businesses that has not worked out well. It has been about 2 years since HPQ (Hewlett Packard to us old guys) purchased Compaq Computers. At the time, it was clear that Dell was beating all comers in the personal computer market. The theory grabbed in these situations always seems to be that the competition is out growing us so lets get bigger by combining the two biggest losers.

HPQ is a fine company. Dell is a focused company. When Dell needed to expand beyond PC's many thought it would buy a printing company. Dell made a deal with Lexmark (LXK) to supply Dell with branded printers. Dell continues to be the lost cost producer of PC's and its branded printers are rapidly taking market share. LXK has gained market share and has continued to be focused on making the best printers at the lowest cost.

CNBC put up performance charts this morning. I used Big Charts to make similar comparisons. In the past two years, DELL is up 78%, LXK is up 42% and HPQ is up 23%.

None of my monitored accounts hold LXK but DELL has been a core holding in many. IBM just sold its personal computer business (retaining a 20% interest) and Gateway sells low margin entry level machines to consumers. The business has become a commodity business but it will experience new growth when the next generation of features are added. DELL will not experience the growth of the 90's again but it is a focus company that will continue to rule the pc market.


"My Old Merrill PAL" points out that MSFT circled the wagons years ago. MSFT is fighting battles from all sides. In the early days, MSFT held the keys to millions of computers. The buyer had to buy the operating system and got word processing, spread sheets, browsers and other stuff "free". The company has followed the traditional retail cycle which includes the need to expand into lower margin areas to achieve growth after a certain size has been reached.

YHOO has expanded into lots of businesses but since the management change about three years back, YHOO has been much more focused. The growth of revenues and profits has been very strong.

GOOG has been and remains extremely focused. GOOG has only one business which is to find ways to connect those who need information or services to those who have them. The internet is a remarkable tool for storing information. The amount of information stored is growing at break-neck speed. One of the new areas is the digitization of all TV and Movie content. In the near future, consumers will be able to scan for any word spoken in any TV show or movie.

So far, there has been no need for GOOG to expand into any other area. Google maps are nice. It is so neat to be able to slide them over as needed. It is so nice to see all the pizza restaurants or gas stations plotted with address and phone number. Google surely spent money and time building Google maps. However, these excellent maps do the job of connecting those who need services or information. Google will get a very high click through rate and businesses will be more than happy to show customers exactly where consumers can find the products. The site will even give detailed driving directions.

MSFT is preparing to spend $500 million dollars to promote the new MSFT search engine. MSFT can claim superiority because the engine includes Encarta Encyclopedias 150 Billion "answers". MSFT, AOL and others missed the importance of search in the early going. Now all vendors are "playing catch up to Google".

The place Google leads the most is in contextual advertisement. Google makes half its revenues over this exploding service. On the sideboard of this site please note the Google contextual ads. I do not pay one penny to place these ads but if anyone clicks on any one of them I get about 80% of the revenue. I and millions of other folks are happy to give back a little space to Google in exchange for revenue.

Content is the long-term key. Google has gone to extraordinary lengths to build content. Google is scanning every page in the library, every TV show and giving away a long list of services including gmail and blogger sites. Google is taking reams of catalogues that were print only catalogues and scanning them into the web so that all people everywhere can find the info.

AOL recognized the importance of content and merged with TWX. Only recently has the company begun to find the way to capitalize on the huge amount of content owned by TWX. AOL, AMZN, Ask Jeeves (ASK) and many others are now building content and search capacities. ASK just purchased Bloglines and the most interesting thing is that AMZN took 20 million digital pictures so when you search on an address you can see a picture of the address searched.

The battles to own content could be huge. Yesterday, Priamerica announced plans to sell is a content rich web site and there are indications that Google, Yahoo and others will bid.

Google has added volumes of content in "partnership" with others. Google does not own the library but will share revenues with the library. There are many other examples. Rumors swirled over the past couple of weeks that Google would buy GURU. GURU operates The reality is that Google and GURU have signed agreements to work together. For example, if a person types define xyz into the Google search, they will be directed to the dictionaries hosted at Again, advertising revenues will be shared.

The point remains that successful businesses are focused businesses. HPQ lost its focus and has floundered. Google is in in a fast growing business and does not need to get into other businesses. It is probably true that Google will get into the business of connecting telephone calls over the internet. However, connecting a consumer by voice to a vendor of a product is no different than connecting them through a web site.

Chances are good that Google will partner with a VOIP company. There are a growing list of VOIP companies. Some are very large businesses expanding into other businesses such as TWX and Comcast. Others are telephone companies such as SBC, Quest and AT&T. Still others are start-ups such as Vonage and SKYPE. Google does not need to own the phone business. Google only wants a tiny piece of the fees earned to get a consumer to connect with the vendor. It would suit Google fine if several phone companies adopted the model of free calls to the consumer and a fee only to the advertiser of the product.

It is hard for folks to believe that services can be offered free. I agree that there is an extremely small cost to Google to allow me to type this page and post it on the internet; extremely small. The service is free to me. Several thousand people have read my articles and about 150 people regularly read my articles and they are free to all of them.

Google may eventually need to buy content. However, there will be enormous growth in what is posted and available on the internet because the Google model works. Google can afford to scan every page in the library. The library can freely offer the pages to Google and the consumer can freely search these pages. The cost will ultimately be paid by the vendors who advertise on these pages. Even the vendors will not pay unless the consumer contacts the vendor!

Yahoo has announced a product that has similarities to the Google Ad Sense program. Sooner or later MSFT, AOL, AMZN and others will offer similar products. The growth is going to be very large. Google cannot hold on to 100% of the market. However, by the time Google is down to a 30% market share, the market is going to be many times as large as it is now.

Some of the analyst who are negative on Google make some good points and some ludicrous points. A good point is that MSFT is about to spend $500 million promoting its new search engine and other search engines have prospered for a time and then died. The point I really laugh about is that Google gets lower margins on the Ad Sense program than on direct search. The margins on this business are extremely high. It cost Google almost nothing for its computers to place an ad on any sight. Googles revenues grew at about the same pace on direct search and the Ad Sense program but Google made half its profits from the Ad Sense program that no one else has. If Google lost all its search business within the next 10 years but placed advertisements on 20% of all the web pages in the world, investors would be well pleased.

Focus Google Focus.


Jack's Old Merrill Pal said...

Please help recall a successful mega merger where the results 5 years later the operating results were much improved with synergies. This is what Fiorina was trying to do. I would bet the game she played was encourage Wall St to back her with the merger in exchange for high fees for a less than brilliant idea.

Jack Miller said...

Exactly right. Big mergers that work well are rare. I can think of dozens of small companies that grew quickly through mergers. Large companies must cut costs to make the deals work. I'm talking about cutting to the bone.