This is a column I wrote that ran in the Technology section of the Globe on Thursday, and on globetechnology.com

The exclamation mark in their company’s name must really bug people at Yahoo! sometimes — like when the CEO announces that Yahoo’s profit fell almost 40 per cent in the most recent quarter, as he did Tuesday. That’s not exactly something to get excited about (unless you sold the stock short six months ago, of course, in which case you’d have every reason to celebrate).

Why is Yahoo doing so poorly? The company says on-line advertising growth is slowing, and that profit margins on those ads are also slipping. That isn’t just bad news for Yahoo and its shareholders, it’s potentially bad news for all sorts of people, including those who work at other on-line advertising-dependent companies (such as Google and MSN), and those who own shares in such companies.

Just a few years ago, people were debating whether on-line advertising would ever take off and become a real force in the market. Take off it did, thanks in large part to Google. Unfortunately, however, it became such a hot property that everyone jumped into it with both feet, counting on continued growth in on-line ad spending to provide them with a business model.

There are signs emerging — and Yahoo’s announcement is one of them — that this may have caused an on-line ad glut, exacerbated by a slowdown in spending on the part of financially strapped car makers and other prominent ad buyers. That in turn has had a fairly predictable effect on prices. All of which is great if you’re buying ads, but not so great if you’re selling them.

MySpace, the social-networking site owned by News Corp., and video-sharing site YouTube — which Google recently bought for $1.6-billion (U.S.) — are only two of the most prominent examples of companies whose entire business model relies on on-line ads. AOL recently dropped its membership fees and made all its content free, supported by advertising.

Yahoo CEO Terry Semel blamed this glut of ads for increased price competition and thinner margins. And the story could be getting worse: A report from Blackfriars Communications estimates that on-line ad spending by U.S. businesses will come in at 7 per cent of overall corporate spending this year, down from initial estimates of 10 per cent.

Is Yahoo’s weak performance a sign of a broad decline in on-line ad profits and revenues, or just a case of Yahoo losing ground to competitors like Google? Many analysts will be poring over Google’s quarterly results Thursday, looking for an answer to that question. There is little doubt that Google continues to take market share: A recent report from consulting group eMarketer said Google could wind up with as much as 25 per cent of the entire on-line ad market this year. Last year, Both Google and Yahoo each had market shares of about 20 per cent.

According to the report, Google’s on-line ad revenue is expected to hit $4-billion for 2006, up by 65 per cent from 2005. Yahoo, by contrast, is expected to see only 17.5-per-cent growth and revenue of $2.9-billion. Last year, ad revenue at the two companies was almost neck-and-neck at $2.4-billion.

The consulting firm says on-line ad spending continues to grow at fairly impressive rates, but that those rates are likely to slow over the next couple of years, from 30 per cent last year to about 26 per cent this year, and as low as 15 per cent in 2007. Major advertisers are expected to continue to move their ad spending on-line, but not as rapidly as they have been over the past year or so.

The amount that companies are having to spend is also declining in part because oversupply is pushing prices down, and that means advertisers can get a lot more on-line bang for their buck. MySpace, for example, reportedly has a CPM (cost per thousand) as low as 10 cents, compared with anywhere from $4 to as much as $50 for a major property like Yahoo.

Sites such as MySpace, YouTube and Facebook are also growing much faster than Yahoo — by some estimates, the number of visitors to MySpace is actually larger than the number that visit Yahoo properties. That gives Yahoo even less leverage to raise prices for on-line ads, or keep from having to cut them. And there are a host of smaller Internet companies that are just as willing to undercut the big Web players on price.

The bottom line is that while on-line advertising is growing, so is the number of players offering websites and web pages to host those ads. When the latter outstrips the former, it’s not just companies like Yahoo that get hurt, but any company that relies on ads for a major proportion of its revenue — and that includes Google, which still gets about 90 per cent of its income from on-line advertising.

It’s nice to see a couple of brave voices suggesting that Google, which has climbed by almost 400 per cent since it went public less than 18 months ago, might be a little overvalued — or at least “fully valued,” as analysts like to say when they’re trying to be cautious. Are they right? That remains to be seen. But it’s difficult to feel comfortable with a stock (particularly one with such a short track record) when almost every analyst that covers it has a “buy” or “hold” rating.

Small companies can grow as quickly as Google has and not hit any speed bumps or potholes, but a company that goes almost straight up from a market value of about $22-billion to one of almost $130-billion is doing the equivalent of driving an ocean freighter at the speed of sound. Bumps are inevitable. When analysts are uniformly bullish, many investors take it as a contrary indicator — and they are probably right to do so. Such an atmosphere suggests that whatever weaknesses or risks there might be (and they almost always exist) are being either ignored or glossed over.

Could Google be the Web equivalent of Wal-Mart, which went from being a small, regional retailer to the biggest company on the entire planet? Sure it could. But it’s unlikely to get there in two years when it took Wal-Mart two decades. The Internet is fast, but it’s not quite that fast. And that’s why it might be handy to know about some of the potential speed bumps in advance.

Please read the rest of this column in progress at globeandmail.com

Here’s a column I’m working on for globeandmail.com:

Once an also-ran in the computer and personal electronics game, Apple Computer is now one of the superstars in that universe, thanks to the magic combination of a sexy and user-friendly music player — the iPod — and a profit-spinning online store called iTunes. The company’s handhelds have more than 80 per cent of the market for digital music players, and Apple’s financial performance has also been supernova-like: in the fourth quarter, the company’s profit more than quadrupled, and it had sales for the year of $14-billion (U.S.).

The market is looking for even better things in the future — all eyes are trained on Macworld this week, where Apple CEO Steve Jobs is expected to announce a number of new products. Among other things, the rumour mills have been churning out talk about an Apple Mini-style PVR, or personal video recorder, or even a kind of digital-media hub for the living room. Some have even speculated that Apple could launch a high-definition TV with a built-in computer.

Along more prosaic lines, the company is expected to announce Intel-powered laptops, an upgrade to the iPod Shuffle (perhaps adding a screen) and a new video player. Some or all of these products might — and no doubt will — find a ready market. But could Apple be sowing the seeds of its own failure, by pinning its success on a proprietary product, much as it did in the past with the Macintosh?

That’s the controversial argument being made by Clayton Christensen, the author of a well-received book called The Innovator’s Dilemma. Mr. Christensen told BusinessWeek magazine recently that he’s afraid Apple might be making some of the same mistakes it did with the Mac, by not opening up its products and software. Apple fans will no doubt scoff — after all, this isn’t the Mac we’re talking about, but a product with 80-per-cent market share. Still, it’s an argument worth considering.

Please read the rest of this column at globeandmail.com

Here’s a column I posted at globeandmail.com about Sony’s DRM rootkit fiasco:

“For a company that has so much great technology behind it, including a number of firsts like the compact disc and the portable music player, Sony Corp. often seems to behave more like a dinosaur — and a slow-moving, club-footed dinosaur at that. A case in point is the company’s recent ham-handed attempt to protect some of its music CDs by installing anti-copying software on its customers’ computers. A simple thing, you might think. Plenty of other companies do it. Sony, however, has managed to turn what should have been a non-event into a public-relations disaster, one that has helped to cement its reputation as the technology giant with the best technology and the worst execution.

The company has said that it will stop using the “rootkit”-style copy-protection software — first discovered and publicized by Mark Russinovich on his blog — but the damage has already been done. Not only does Sony look stupid as well as sneaky, but a list of the artists whose CDs have been “protected” by the company’s technology has been published far and wide. Is anyone going to rush out and buy those particular discs, or are they going to stay as far away from them as possible? If I were an artist with Sony Music (such as Canada’s Our Lady Peace), I would consider asking the company to compensate me for the effects of its reverse PR.

The worst part isn’t even that Sony used a form of DRM (digital rights management) technology that mimics a hostile Trojan computer virus, by installing itself at a low level — i.e., “root” or system level — and disguising itself so it can’t be found by normal means. It isn’t even that Sony’s rootkit allowed an enterprising malicious hacker to piggy-back his (or her) way into a computer and cloak his or herself with the Japanese giant’s technology. The worst part is that Sony first denied that its technology was anything more than a simple anti-copying app, then denied that its end-user license agreement (EULA) was vague and misleading to the point of being useless, then forced anyone who wanted to remove the rootkit DRM to go through an almost comically convoluted and inept process to do so.

Sony’s successes are well known — the compact disc, the VCR, the Sony Walkman, the Grand Wega television, the PlayStation, and so on. Almost as numerous are the roadblocks the company has thrown up to block its own way: the use of a proprietary standard for music files instead of supporting MP3; the use of a proprietary music storage format (MiniDisc) instead of using an existing one; the use of a proprietary data storage format (MemoryStick) instead of supporting the existing ones. Is anyone sensing a theme? To that list we can now add: using a technology to “protect” its music that amounts to a finger in the eye of its customers — the ones who are actually buying its music — and then doing its best to compound the problem by dissembling, obfuscating and delaying. Nice work, Sony.

Sony’s argument seems to be that because end-users signed the almighty EULA, they agreed to let Sony download whatever it wants onto their computer, install programs wherever it wants, disguise them so they aren’t findable and then make it almost impossible to remove without a computer science degree — and without possibly crashing or damaging your computer. Lawyer Eric Goldman says an EULA does give a company leeway to install things, but he also notes that in some cases doing so could run afoul of the Computer Fraud and Abuse Act, which applies to anyone who “intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains… information from any protected computer.”

Here’s a column I posted at globeandmail.com about rumours that Yahoo might acquire TiVo:

“In what was no doubt a welcome ray of sunshine for shareholders of TiVo, the maker of personal video recorders announced a deal with Internet portal and search engine company Yahoo, which will allow TiVo owners to click a TV listing on Yahoo’s pages and automatically record shows on their PVR. This gave a small boost to TiVo’s somewhat beleaguered shares, but unfortunately the warm glow of the deal didn’t last for very long — the shares lost ground on Tuesday, the day after the announcement, and are still down by more than 50 per cent from their peak early last year.

Not surprisingly, the deal with Yahoo renewed the speculation that TiVo might be an acquisition target — if not for Yahoo then for Google, or Microsoft, or AOL, or maybe your Aunt Phyllis (that last one is just a joke). It might be stretching things a little to say that behind every TiVo takeover rumour there stands a disgruntled shareholder, but at this point an acquisition of the company seems to be about the only thing that might breathe some life into the share price. Although it more or less invented the PVR market, TiVo hasn’t been able to capitalize on that “first-mover” advantage, and so has been forced to watch the world pass it by.

Would a takeover by Yahoo, Google or Microsoft make things better? No doubt it would for TiVo shareholders. But will it happen? Anything seems to be possible in the tech sector at the moment — just look at the similarly unlikely $4-billion (U.S.) deal between eBay and Skype — but the odds of a rich takeover of TiVo coming any time soon don’t seem particularly high, despite the latest arrangement with Yahoo.

One of the reasons why news of the deal failed to spark much cheering could be that TiVo has offered users a similar service for more than two years, either through the company’s own website or through a deal with America Online that TiVo signed in 2003, which offers similar features to the deal with Yahoo. Neither one of those has produced much in the way of added revenue or profit for the PVR maker, which is what makes some analysts skeptical of the bottom-line impact from the arrangement with Yahoo.

Susquehanna Financial Group, for example, said in a research note that while it sees the Yahoo deal as positive for TiVo, “we believe these announcements are more likely to increase customer satisfaction as opposed to attracting a material number of new subscribers.” Doing the latter, the brokerage firm said, is “critical to TiVo’s future growth.” Susquehanna said that its rating on the stock remains “negative.”

The companies mentioned that as part of the deal, users would be able to get access to other things from Yahoo on their TiVos, such as photos (Yahoo bought Vancouver-based photo-sharing service Flickr earlier this year), traffic reports and weather. But it wasn’t clear when those services would be coming, or how much TiVo would have to pay for them. As a result, Susquehanna said it would be “more of a churn reducer than a subscriber acquisition vehicle.”

As for a takeover, there has been plenty of talk but nothing more. In February, TiVo’s stock soared by 17 per cent in a single day based on a rumour that Apple was going to buy the company. Cable and entertainment companies have also been rumoured as potential acquirers, including Time Warner, Comcast and Liberty Media. Why someone would want to buy the company when they can get the same benefit more cheaply by doing a licensing deal with TiVo — the kind of deal Comcast has already done, and that DirecTV used to have — is never really explained.

The rumours and speculation about Yahoo, Google and Microsoft seem to be based on the idea that these companies could turn the PVR company into a kind of WebTV-style portal to the Internet, blending the television with the Web. Apart from the fact that trying to do just that with WebTV has been an unmitigated disaster for Microsoft, which has poured hundreds of millions into the effort for virtually no return, it’s not clear how buying TiVo — as opposed to designing their own TV box or doing deals with cable companies (several of which Microsoft has invested in) — would help them make that kind of strategy work.

One of the alternative theories is that Yahoo, Microsoft or Google might be able to use TiVo as a kind of TV portal for Internet video content — which all three companies have been trying to become the leader in indexing — by allowing users to find video clips on the Web and then play them through their TiVo boxes. But then, people can do that already using their computers without paying an extra fee for a TiVo box, and if they have a media PC they can connect it to their television quite easily. And even if Yahoo or Google had that kind of thing in mind, they still wouldn’t need to buy the entire company in order to make it happen.

Of course, none of this is going to stop TiVo investors from dreaming of a nice juicy acquisition. But they are likely to remain just dreams.”