The humble consumer probably has no idea that there is a war being fought to bring him or her something they dearly do not want, and that is advertising on the handsets. Handset advertising over the next ten years has the potential to become the biggest advertising market in the world ‘ hence the war.
After Microsoft spent four months trying to court the 11 members of the Yahoo board, CEO Jerry Yang, saw off a Microsoft bid for the company that supposedly foundered on price, but was really about corporate culture clash.
Yahoo has done surprisingly well on the handset, in January opening up its Mobile Developer Platform to third party applications, and showing off a revamped version of its Yahoo Go wireless web front door, and offering a new system to integrate content and advertising on device. On the developer front, Yahoo offered tools to write widgets (tiny applets) once, for instant publication across the device ecosystem and convinced eBay, MySpace and MTV to use it.
It then followed this up by signing something like 16 Asian wireless operators to reach around 40% of all Asian handset owners through companies like Aircel, BPL and BSNL in India, and multiple operator deals in Indonesia, Malaysia, Singapore, Hong Kong, the Philippines, South Korea, and Taiwan.
The fight that is blazing for Yahoo’s hand is as much a fight about putting advertising on the handset, as a consolidation between the world’s major web portals.
This week two more events put the outcome in jeopardy, with the US Department of Justice realizing that they need an anti-trust investigation into the advertising partnership which Google and Yahoo have signed, and investors trying to eject the entire Yahoo board so that they can go ahead and accept a deal with Microsoft instead.
The deal that the Board think will keep Yahoo as an independent company is the one cut in mid-June which will mean that Yahoo searches will use Google served advertisements. If that deal goes ahead, it is likely to see Google overnight dominating advertising not only on all search, but also on the handset, and our take on that is that this will mean ‘more’ advertising on the handset. It will also be the first time that one monopoly, which Google has on internet search will have subsidized another on the handset, making it potentially illegal.
The deal was supposed to last for four-years and will up Yahoo’s annual advertising take by around $800 million. We find it hard to see how such a deal can be sanctioned given the amount of search advertising control this grants to Google. This step can only happen if a severe consent decree is signed by Google, limiting its ability to dominate other neighboring markets. Private and publicly funded anti-trust deals will be likely, not just in the US, but in both Europe, where Nokia will feel compromised, and in Asia, where local providers will feel the same pressure. We have always thought that this deal is a ‘non-starter,’ but then again we have the long memory of what has happened to IBM and Microsoft in anti-trust suits, which grants perspective.
We have to remember that Google already has its Android initiative, which will create a sub-section of the handset market where it will likely end up with all on device advertising, not just search. And recently we have seen the launch of the Nokia Advertising Alliance, bringing together couponing, location-based targeting, image recognition on Nokia devices to offer advertisers a simple way to increase consumer engagement.
Also this week Microsoft has ‘kind of’ declared itself back in the game, by saying that if activist investor Carl Icahn manages to remove much of the board at Yahoo, in a vote that will happen on August 1st at the Yahoo shareholder meeting, then it is happy to resume takeover negotiations, but more likely just the purchase of the Yahoo search business, which may escape regulator review and not leave the transaction open into the next US government administration.
Given that the share price at Yahoo has collapsed since talks with Microsoft were declared off, and that it has already recovered slightly only as the potential for an Icahn delivered proxy fight occurs, then there is every chance that the entire board could find itself out of work come August 2. Today the share price is a shade over $24 after a low of $20, when the Microsoft offer price was $37.
There have been conversations between Icahn and Microsoft’s Ballmer, because clearly, Icahn has a bigger chance of kicking out the board if there is a suitor waiting in the wings, than if there is none.
The world has to find a standoff between complete capitulation to Google on internet and eventually handset advertising, so that there remains a competition going forwards, and we think that on handsets Nokia and Yahoo each have strong parts to play, and that Microsoft is poised somewhere between irrelevance and becoming part of the Yahoo effort. Because if Google takes a stranglehold on ALL search, both mobile and fixed, then it will have the power to go after the declining TV broadcast advertising market, and the entire IPTV advertising market and then there will be no stopping it, to the detriment of all our media experiences, but more importantly to the detriment of global advertisement pricing.
US funds still awake, and swarm to buy into Huawei, first of many?
Many views of China are that it will somehow invade the world, physically and militarily, as much as the export of its cheap labor has dominated world economics for the past decade.
But the events surrounding Huawei this week show us just how this happens economically, with or without the social reforms and political powerbroking and the country coming up to our standards of human rights.
The biggest concerns about the Olympics is that China is not yet ready. It could bungle the Olympics over issues like media access and ensuring that there are enough seats sold to outsiders so that it can impress as many as possible. China in our lifetimes may never be a place you go on your holidays or dream of retiring to, due to political uncertainty.
The two simple facts revealed about Huawei, is that it is growing at a fantastic clip, some 48% this year to $12.6 billion and that this represents something like $4 billion of extra business this year ‘ single handedly this could represent the shortfall of all of the US and European majors in telecommunications equipment supply ‘ denting Ericsson and Alcatel Lucent, and perhaps chipping away at business that Nokia Siemens Networks might have had.
If it can soak up another $1 billion for each of the next four quarters, after it sells its devices division, it will go even further up the pecking order than 5th place globally in telecommunications equipment supply after Cisco, Ericsson, Alcatel-Lucent and Nokia Siemens having already outstripped Nortel.
But like everyone in the world it finds it tough to make devices cheaply enough. Chinese labor already builds Nokia, Motorola and Samsung devices, and already Huawei has less of an edge here. But the key thing about devices is that it is consumers that choose their devices, while it is network operators that buy the networks that serve them, and even that isn’t sacrosanct in China.
In June Alcatel, through its Chinese subsidiary Alcatel Shanghai Bell, which has supplied most of the broadband lines in China, head to head with Huawei, which is the second largest supplier, landed a big, $1 billion slice of a cellular upgrade for China Mobile, for its TD-SCDMA transmission and IP router equipment. The issuing of the Chinese 3G licenses, and the resolving of China’s telecommunications operator structure will mean that Huawei has its future assured, but only if it can land the lion’s share of contracts like these, and increasingly aware rivals, with a strong understanding of how China does business, will gradually make that more difficult.
But the other major event is that the short list for buying the Huawei devices division is made up entirely of Western private equity companies, with Bain Capital Partners, Goldman Sachs, Kohlberg Kravis Roberts and Silver Lake Partners named in the Wall Street Journal and other sources this week. The fifth bidder is reported in some quarters to be AEA Investors in a bid led by Bill Owens, the former CEO of Nortel Networks.
It shows two things, that US money is extremely interested in investing in China, and that there is still plenty of US money, and that’s just how this has to play out in all of the markets we cover ‘ in IPTV, Mobile TV, cellular generally and even in web portals ‘ US money will want to invest in Chinese companies in order to get a piece of China markets, while Chinese companies will today want to take investment from companies that can potentially open up US markets to them. Ostensibly it will be a simple asset sale of the Chinese company’s mobile phone and data card business, except that it is only for a 50% ownership, so that any good that comes out of the transaction for the devices division, may also be reflected in business for the networks operation. But it’s so strange that there is such a queue for Huawei devices, but not for Motorola’s far larger, more imposing handset operation.
At least two other US private equity firms Blackstone Group and the Carlyle Group are known to have been involve in earlier rounds of bidding. Let’s think about this for a minute? All seven of these can lay their hands on $2 billion or so, around half the value of the division, from US sources. So that’s as much as $14 billion of available cash to invest coming from the US, although of course, some of the debt based resources may be on offer to more than one of these bidders.
Given the history of what has happened to all the European devices divisions ‘ Siemens, Philips, and Ericsson (now doing okay at Sony-Ericsson) ‘ and the condition of both Motorola and the smaller Japanese suppliers, this is a high risk market.
So despite all the fallout of the sub-prime mortgage scandal in the US, private equity is roaring once again.
This week the Dow Jones Private Equity analyst report showed that private equity had indeed declined during the first six months of 2008. but nowhere near the decline that we have all expected. US private equity funds alone raised $132.7 billion across 185 funds which is only 3% less than the $137.2 that was raised in the first half of 2007. And this was across fewer funds, so, some companies just decided not to test the market this year. Neither figure is close to half of last year’s total money raised, which was a record at $313 billion, so we will find out more in the second half of the year, but so far it is looking good.
The big weakness was the raising of money for corporate finance, but this was more than offset by gains in Mezzanine funds to support existing businesses, and represents a small ‘flight to safety’ but not a truly significant alteration of the structure of US funding markets
Warburg Pincus raised the most for a buyout fund with $15 billion, and Lightspeed Ventures topped VC funds, raising $800 million.
In Europe private equity funding actually went up, not down, but almost all the money there is focused on the safety conscious management buy out, and this doesn’t really represent free flowing cash that might chase the types of opportunities that Huawei represents.
Huawei says that it has now overtaken Alcatel in the multiservice access node market in China ‘ which means broadband infrastructure along with IP DSLAMs, another reason why Alcatel is not doing so well globally, as leadership in the biggest broadband market in the world has been wrested from it.
So perhaps the future is a set of Chinese institutions, backed by money raised through US private equity in an unholy alliance of American-Chinese interests gradually making the two countries closer than the US-Middle East petro-economic ties. And that brings us back to the political dimension. It is hard to see the US taking strong political steps against a super power that holds its cheap manufacturing base, and in which it has invested $100s of billions. An economic disaster then in China, would make the US sub-prime mortgage collapse look like the tremor before Krakatoa.