Tuesday, July 7, 2009

Google lobs ChromeOS to Microsoft's Bing?

In recent days we have heard the announcement by Google to introduce their Chrome OS to take on Microsoft's stranglehold on the OS market. There have been many pundits all over the blogosphere who have sliced and diced this story to no end.

Here's my take on it. I don't for a second believe that google is doing this in response to Microsoft's Bing. Some of the blogosphere pundits are suggesting that since Microsoft seemed to get some traction with search, the best way Google could hit back was to announce Chrome OS.

Google has its own challenges. It has a gorilla size market share of the search and the associated ad market. Sooner or later it position there will be threatened either directly by some new startup or indirectly as it has been hit recently due to the economic downtown. Ad spend has been lowered by many companies as they try to recover from this economic storm. But, google's balance sheet is strong, with cash aplenty.

In a mobile ecosystem it is critical to ensure that speed, simplicity and security are addressed and that is what Chrome OS focuses on according to Sundar Pichai, their vice president of product management. Larry Augustin, a prominent Silicon Valley investor said that “Market changes happen at points of discontinuity” and I couldn't agree more.

What I see Google doing with Chrome OS and Android is that it realizes that "mobile has become the mode of first consumption for all information". To this end with the convergence of the mobile device headed to some middle ground between smartphones and netbooks, Google wants to have a greater play in that space. Can they still play with the Windows OS dominating in this space. Yes they can. Can Google's applications (cloud based) be threatened by Microsoft or others? Absolutely.

But the true question is, Do they see an opportunity to grab a chunk of this converging opportunity that is still nascent so that they can play a greater role in guiding the market? Yes, they do. Therefore, In my view, Google is not entering the OS market just to go head to head with Microsoft. They are entering this market for they see a convergence toward mobility which they can leverage better than anyone else right now. Like I said earlier, "mobile has become the mode of first consumption" and if companies are not headed there, then they are headed to oblivion.

Thursday, July 2, 2009

CSCO - Omnipresence

When Cisco (Nasdaq: CSCO) purchased WebEx Communications (Nasdaq: WEBX) for $3.2 billion, it seemed like an impulse buy at overinflated prices. WebEx whose service which allowed customers to share presentations and host video conferences online was paid a whopping $57 for each share. At the time, it seemed that Cisco was trying to expand its market by reaching out to smaller companies and directly to consumers. After all, the 2003 acquisition of Linksys, a homes and small office network gear maker had already pushed Cisco in that direction.

So recently when Cisco purchased Flip-Maker Pure Digital For $590 Million (CSCO), I was really puzzled. It wasn't just merely pushing into the consumer play again. There had to be some long term strategy here. So instead of guessing as to what their play may be, I got the opportunity to ask John Chambers, the CEO of Cisco the question directly, thanks to twitter. So here is his response.

(Jump to the 2 minute mark to see John Chambers answer my question to him via twitter)

Cisco's recent announcement of working with phone and cable carriers on products and services that let consumers hold videoconferences through their televisions shows Cisco's commitment to leveraging their TelePresence corporate-videoconferencing system for the consumer market. This system they say will debut within the next 12 months. In addition to holding video chats, users will also be able to exchange messages and leave videos for friends.

Cisco is well placed to make this happen and successfully as well. They purchased Scientific Atlanta (a maker of cable set-top boxes for $ 6.9B) back in November of 2005. John Chambers, Cisco's president and CEO, commenting on the acquisition back in 2005 said that, "Video is emerging as a key element in the service provider's quad play, In fact, video may be the most critical in this bundle for consumer loyalty."

While demand may be waning for networking equipment from businesses, the peer to peer consumer component represents that largest growth market for services. The set-top boxes can be easily configured to work with the flip video cameras to enable the video conferencing via TV. Now take that to the next level and integrate conferencing capability along with webex type file sharing functionality and voice and Cisco stands prime to take a major chunk of this peer to peer sharing and collaboration market.

Cisco will certainly face challenges to replace voice and video conferencing services from players such as Skype. Cisco will also face competition from consumer brands such as Apple Inc., which has its own iChat service for video conferencing, and Google Inc., which has video chat via gmail. However, I still think that Cisco can prevail and make inroads into video conferencing for the consumer, if they can make the technology easy and simple to use and also open up API's to allow third party players to develop applications as well.

CSCO is now trading at about 15 times earnings at $18.50. It has traded as high as $25 within the last year. Armed with a very strong balance sheet and a strong current asset position, Cisco has enough cash to make key acquisitions to help them bolster their product mix. The key question is can they put this all together in a way that enables them to achieve the very same margins from the enterprise world as they dabble with the consumer directly.

Given market uncertainty for the rest of 2009 and a weaker recovery for the second half of 2009, my personal opinion on CSCO is a buy at an entry point of $16.