Saturday, February 14, 2009

Internet Giants Return to Basics
Published: NYT, January 21, 2009
Growing away from your core is difficult as highlighted by these examples of VERY successful companies. However, some have done it quite well like Apple (used to be Apple Computer). We will try to highlight why some can do it and other can’t in future positings.

Microsoft and Google have more in common than the dominance of their respective markets. Both are also essentially one-trick ponies that have used their prodigious cash flows to pursue many side projects in attempts to diversify. And neither has had much success.

A trying economic climate is reining in their efforts. Google, the more recent empire builder, just axed its print advertisement ambitions, and Microsoft sold its long-held stake in the cable operator Comcast. Their other noncore projects should be next.

Microsoft’s core expertise remains software — its ubiquitous operating system and other programs. These account for 82 percent of its revenue and nearly all of its operating income. The company has used a lot of those profits to support forays into products like video games and online search.

But those have not become the money spinners it hoped for. Microsoft’s Xbox game console just turned its first profit last year after seven years on the market. In 2007, the company had to take a $1 billion charge to repair defective units. Microsoft’s online search effort has also struggled. Its MSN portal has a dismal 8.5 percent share of the American search market, and the unit that houses it lost $480 million last quarter.

Google makes virtually all its revenue from advertising related to Internet searches. Still, that has not stopped it from pouring money — and employee time — into online video, cloud computing and lobbying for renewable energy projects.

For example, it snapped up YouTube for $1.65 billion in 2006. Analysts say the video site remains barely profitable. The same goes for Google’s free online software initiative, in which it has invested heavily.
Of course, some loss leaders can be strategically valuable. Google’s online utilities directly threaten its search rival Microsoft’s cash-cow software business. And Microsoft’s hordes of loyal Xbox gamers may add a crucial bit of cachet to the otherwise stolid reputation of its software.

But with both companies’ shares down sharply over the last year, and few of these noncore projects generating money, shareholders have diminished tolerance for using profits to finance long shots. Investors would probably applaud if Microsoft and Google shed more of these nonessential distractions.

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