Microsoft's online adv business after its first quarterly loss and aQuantive writeoff

We are continuing with your fictitious Microsoft interview in this post too. You were little lost in your thought when the interviewer came back with another person. Customary to strange interviewing process, the interviewer stepped out of the room 30 minutes ago, requesting you to wait for a while. 
The interviewer simply introduces his companion as a colleague who works in Microsoft’s online advertising vertical. For our convenience, let’s call this colleague of the interviewer, interceptor. The interceptor thanks the interviewer, greets you nicely at which point you notice that the interviewer gets up and takes leave from both of you. As the interviewer walks out of the room, the interceptor tells you that he would like this to be free-format discussion rather than a strict question-answer session. This is a new tack and it could mean that he will judge you based on how forthcoming you are in picking up the leads and how resourceful you are in fleshing up the conversation.
So, you start neutrally, “I read that Microsoft wrote off aQuantive and took a hit of $6.2 billion in its quarterly result. But you guys must be seeing this for some time?”
His eyes flickered, “Yes, you could say that.” He seemed to weigh his words before going any further. You decide to use silence as your tactical tool. Finally he spoke, “Online Advertising itself is a very new area and is going though continuous changes both from providers and advertisers’ point of view. Market saw explosive growth of online advertising spots in last two years, far exceeding the demand. In the hindsight, Microsoft may have put a little too high price for aQuantive.”

This is as far as it could get, you realise. You decide not to press further.  The interceptor goes back to more familiar line and asks you to talk about your experience, your achievements, and your failures. These are fillers and you know that all you need is repeat your well-rehearsed pitch, not too aggressive, neither too submissive, not too short, neither too elaborate, leaving pointers that lead to known territory, your space of comfort. You know that he will play with them for next 30 minutes. The important thing here is to maintain the flow but to not make any obvious mistakes. Eventually he will move to the ‘challenge’ phase. He will use chosen few questions as deal-breaker, assuming you have managed to maintain his interest till that point.

“What in your view is situation with online advertising space?” he changes the line and gives you a large canvas.
“Online advertising is the future, no doubt, but it is highly likely that advertising itself will see a large transformation before we reach there.” His eyes tell you that you have grabbed his attention. Now you need to carefully steer it.
Basic purpose of advertising, to start with, is to reach out to its potential buyers. It starts with a process of building general awareness of the product, its functionality, its value both at functional and emotional plane. In a world that is information-deprived, such as in the post internet-era, advertising was essentially broadcast. Print media or TV/entertainment media were the avenues to reach its audience and the advertisement content producer’s sole aim was to create content that sticks in viewer’s mind the longest. Building a brand is all about creating lasting impression in customer’s mind, creating emotional connectivity with customer’s thought process.

In the internet-era, information access has been practically ‘on demand’. It is buyers’ media now.  While TV and print media advertising continues and will continue to remain broadcast in nature, internet advertising must be focused on customer’s need and reaching to customer when his need arises. If broadcast advertising is more ‘push’ type, internet advertising is more a ‘pull’ type. Depending on the type of information that a person is searching/reading in the internet, the advertising agent has to pick and display the ad. If the agent provides too many irrelevant display ad, the viewer/user may block the content. So the role of the advertising agent is much more delicate, much more crucial here. With doubleclick, if Google has showed how to appropriate the value of display ads, it is also largely using its strength and dominance of its search engine. Microsoft with aQuantive and Bing although tried to emulate the model, fact that Bing commands a lot smaller share went against the model. Of course, with meteoric rise of Facebook, like the interceptor said, supply of advertising spots exceeded the demand by a large magnitude, bringing down the tariff of internet display ad overall.

Note : The average cost to reach 1,000 people with an online display ad fell to about $11.50 at the end of 2011 from $13.35 in late 2009, according to SQAD Inc, which tracks negotiated ad deals – source: Reuters

“Interesting! So how would you correct the course for Microsoft, if you are allowed to? What changes will you bring in?”

This unmistakably is the challenge question. Shying away is not only inappropriate, it will weaken your position. You must take this square on and try to be crisp while you are on it.

“I would start with basics. Microsoft is what it is because of Windows. I will start there. Windows is not only an operating system, it is a complete platform with whole lot of computing resources and with lot of crucial user-specific private data. Transferring the data outside user’s device would be tantamount to violating user’s privacy, so I will incorporate a sophisticated analytical engine inside Windows. It will continuously scan the information content being read/browsed and create a some sort of a live ‘top of mind’ list. When the customer invokes Explorer, I will provide a space which user can disable or resize or run in the background, if he likes to, but like news feed, this space will show display ads or links to the company that is absolutely relevant to his ‘top-of-mind-list’. More it is contextual, the better. Once this done properly same scheme can be used for Windows Phone too. Fact is with Phone the potential is lot higher. The phone soon is becoming the electronic gadget that will treble as communication device, entertainment device, gaming device as well as mobile commercial device and if I have a sophisticated platform like Windows, I will take full advantage of it by incorporating an analytics engine that maintains a live four dimensional profile of the user, the four dimensions being location, time, finance and emotional/behavioural state. With voice-assistance, I suspect that this, if it is done properly, it will be immensely useful to the customer too. Look at how popular Siri is for iPhone/iPad users and this will be lot more smarter that Siri! For amnesiacs, it will take the role of careful companion.

We will feed this engine with all the relevant advertising content which will be entirely contextual where high premium will be attached to relevance and physical/temporal proximity. That would not only create the channel that Microsoft is looking for, it will also be welcomed by its customers.

However, with the knowledge that Microsoft always works on competing strategies, I suspect that Microsoft’s post-aQuantive engineering team already is working on this line for it is the only way to deliver the promises of internet-based advertising which essentially pulls the right ad at right time to the right person, as many say!”

You did not notice when the interviewer came back but you seem to notice their momentary eye-contact as you were coming back from the whiteboard. You know that you have been fairly logical and accurate but were you a bit too assertive?

The interceptor tells you that he thoroughly enjoyed the discussion and gives you his card, when you realize your second interviewer is a Vice President in Microsoft.

How would you design a smartphone for Neanderthals?

If you have been in the software industry for a while, it is likely that you know about famous questions that are supposedly asked in Microsoft Interviews. Questions like ‘How would you move Mount Fuji?’ or ‘how would you design Mr. Bill Gates’ bathroom?’ are so publicized that there are popular books that are written entirely on Microsoft interview questions. Imagine yourself sitting in one such interview and the interviewer throws the question nonchalantly to you. Now that Microsoft is seriously investing to establish itself as serious Mobile Operating System player [marketing campaign for Windows 8 in so advance shows how serious they are!], you better be prepared to expect such questions.

Smartphone for Neanderthals, a species that got extinct 30,000 years ago?? What would a species that barely might have learnt to speak [even that is debatable], do with an advanced communication device like smartphone in a world where the most advanced technology perhaps was about making a stone axe!

While they may be perfectly legitimate questions, you also know that, putting them across is not an option. It is the interviewer who gets to ask questions and only right that is given to you as an interviewee is to answer them sincerely.

Since the interviewer did only ask about handset device, you assume that interviewer already has some kind of teleporting technology and also the right to erect wireless towers going 30,000 years back in time. Your job at present is to decide about the form-factor and necessary functionality that would be useful to Neanderthals.

So you start jotting down few artefacts that you know about Neanderthals.

1.  Neanderthals are not Gorillas, they are almost like us, so they can learn faster.
2.  Neanderthals had no script, which means no SMS.
3.  Would they know numbers?  Very unlikely so no number keypad is needed, in fact no keypad is needed.
4.  How would they identify each other? Visual cue should work, so the contact book would simply have images of different people.

Wow, that is good progress and in just a matter of minutes! You mentally pat yourself. In fact you now have started enjoying the exercise. 

Those artefacts tell you that your form factor design should be very simple and mostly visual. That means you need two powerful cameras: one for watching the caller and the other for capturing the environment. Will it be confusing to use two cameras? You take a mental note that you will revisit that later. Next, you need a large LED display, may be a AMOLED, that gives bright pictures but also is more flexible and sturdy. It also will double up as touch screen where any visual cue can be treated as a clickable object. Each visual object will have a sound profile so that communication is closer to their senses. Poor Neanderthals do not have alphabets or numbers, right?  So the device will look like a large rectangular tablet so that it is easy to hold in hand. Powerful microphone and speakers should be fixed on that.
What about battery recharge. Since neanderthals would not have any electrical charging facility of their own [except those that would be installed by the interviewer], you decide that you will equip the device with high-density thin solar-frame on the back and side faces of the tablet.
Now that you have decided on the form factor, you realise that two digital cameras, preferably with a wide-angle and auto-zoom lens, would be useful, one at the front and the other at the back of the display. Both would capture and transmit the feeds simultaneously, so no control is needed. It would in fact be a videophone. Caller will see the feeds coming from the receiver while the receiver will see the feeds from the caller.

Okay, good so far! Wait a minute, didn’t the interviewer mention, ‘smart’? He definitely did but what does it entail to make this device smart?

Your geek friend’s face flashed in your mind. With a few exceptions like when is sleeping or is in toilet, he spends almost all his time with his Android smartphone. His facebook updates (accompanied with photos and video captured in his smartphone camera) come almost every 30 minutes and updates include the most mundane things like how his pet dog licked his face in the morning or what he is taking for breakfast or how he showed his affection to his girlfriend in the café last evening to more esoteric stuff like how he realized that he is a genius. His phone is practically his all-weather companion, a kind of surrogate for a living friend who listens to him all the times without talking back and fills his personal space which otherwise is almost devoid of any human touch. You felt you have hit a streak of discovery. Neanderthals inhabited a world that was psychologically similar to your friend’s world: cold, isolated, paranoid. That tells you that they would have similar need for exhibitionism and emotional warmth, although they would not have internet or facebook.

So you deduce that smartness for a communication device in this world would necessarily entail a capability to communicate emotionally; the device must not only be 'always on and connected’ it also must be able provide a sense of emotional presence. It should be able to sense his mood and reciprocate with empathy e.g. when he is emotionally down, the device automatically would pick the video of his most pleasant experiences in the past and play them for him, or when he is afraid, it should assess the situation and suggest him possible choices and/or play some visual cues which can help him regain his courage. Based on his physiological condition and weather condition, suggest him to take shelters, pick certain herbs or wear clothes. All these are in fact technologically possible, they require few more sensors like temperature, humidity, around a terabyte of space for data storage, an application that maps facial experession and voice cues to emotional artefacts and a sophisticated analytics engine which will sift through past and present data feeds in real time.
Once such a phone is built, it will also become the smartphone for the facebook+ generations. This capability will convert the existing smartphone into a really intelligent personal companion gadget in addition to its present use for mobile communication, entertainment and online gaming.
However, it is more likely that data storage and large part of the analytics will transition to a computing cloud infrastructure maintained by the Operating System provider. This strategy, for example, is already adopted byApple for its iPhones with Siri and other apps.

You confidently finish your exposition. Your eyes did not miss the appreciative smile of the interviewer. So, you ask, “If I may ask, why Neanderthals?”

The interviewer magnanimously obliges, “Could any other way drive the point better?”

You acknowledge that he has a point there. Genesis of technology for future lies in understanding the basic human needs that remained unchanged through cycles of evolution for almost a million years.

Next disruption after smartphone

In Feb, 2011 I wrote in this blog, "it appears that soon smartphone by itself will be considered as a separate segment, decoupled from GSM/CDMA/3G and soon 4G handset market. People's expectation and usage of these device are going to drive this transformation where iPad-like device and smartphone will merge to create one single smart-mobile-device segment." I thought it would be interesting to do a reality check.
First, on smartphone, Gartner's May 2012 report says, “Smartphone sales are becoming of paramount importance at a worldwide level. For example, smartphone volumes contributed to approximately 43.9 per cent of overall sales for Samsung as opposed to 16 per cent for Nokia”  Gartner provided a table on comparative positions of different Smartphone OS in the report which shows Android's global dominance in 2012 and loss of market share for both Nokia and Microsoft.

Gartner Table :
Worldwide Smartphone Sales to End Users by Operating System in 1Q12 (Thousands of Units)

Operating System	1Q12 Units	1Q12 Market Share (%)	1Q11 Units	1Q11 Market Share (%)
Android	81,067.4	56.1	36,350.1	36.4
iOS	33,120.5	22.9	16,883.2	16.9
Symbian	12,466.9	8.6	27,598.5	27.7
Research In Motion	9,939.3	6.9	13,004.0	13.0
Bada	3,842.2	2.7	1,862.2	1.9
Microsoft	2,712.5	1.9	2,582.1	2.6
Others	1,242.9	0.9	1,495.0	1.5
Total	144,391.7	100.0	99,775.0	100.0

Source: Gartner (May 2012)

So, I appear to be on track this far. How about iPad and iPad like devices? Let's again go back to Gartner. Gartner says, "Apple's iOS continues to be the dominant media tablet operating system (OS), as it is projected to account for 61.4 percent of worldwide media tablet sales to end users in 2012."
Gartner's projection for this segment:

Worldwide Sales of Media Tablets to End Users by OS (Thousands of Units)

OS	2011	2012	2013	2016
iOS	39,998	72,988	99,553	169,652
Android	17,292	37,878	61,684	137,657
Microsoft	0	4,863	14,547	43,648
QNX	807	2,643	6,036	17,836
Other Operating Systems	1,919	510	637	464
Total Market	60,017	118,883	182,457	369,258

Source: Gartner (April 2012)

Although there is clear dominance of Apple in this segment, Android tablets are forecast to account for 31.9 percent of media tablet sales in 2012, as per Gartner. Gartner dutifully adds that once Windows 8 is realeased, it will become a game changer in this segment. Apple, however, will continue to dominate the segment for entire forecast period.
Numbers always make a very strong case, however they rarely tell the full story.
Will the consumers keep buying both smartphone and tablets? If they do, how will they use these two device differently? Tablets for reading document, watching media but smartphones for rich communication, or so does it appear.
But how strongly can one hold on to that argument? At the end, it is just the screensize that makes the difference, doesn't it? Both smartphones and tablets at present, are primarily touch-screen based. Communication protocol stacks are available on both the devices as part of the OS [Operating System], although may not be enabled. So why would you carry two devices if one single device can provide both viewability of iPad or Amazon Kindle and rich communication capabilities of a smartphone? In fact, if you had options you are likely to consider little larger screen size for tablet, especially for watching HD media content. What if the screen were foldable? That would let us spread out the screen when we need and fold it neatly to fit into smaller dimensions of smartphones when we do not need. That way smartphone could double as media tablet.
There is another option too! Thanks to large scale proliferation of 3D content, people are getting comfortable to wear special glasses. What if we could have a special viewing glass for display device? That glass would convert the smartphone to media device. Fact is however futuristic they sound, the technology is almost within our grasp. We already have OLED display that is as flexible and hundred times as thin as human hair. Called spintronics OLED, they promise to be more efficient and brighter compared to present OLEDs Within a year or two, these devices will replace all exisitng display devices on tablets or smartphones.
Thanks to continuous miniaturization of processors, multi-core CPUs already are finding their ways to smartphones, which means computing bandwidth will never be a bottleneck for these devices. One can expect to watch 3D media content over these mobile devices in very near future. If there is anything, the question is how fast will be the transition of these technologies. Given that almost entire electronics manufacturing of the world is getting concentrated in China and its neighbours, it is very likely that technology replication will be rapid bringing down the overall adoption cost dramatically for the entire handset industry. One in fact can expect that the technology upgrade will be viral pushing the latest of technology changes to the cheapest of the devices.
So it is quite apparent that display device will bring the next disruption to this segment. When it will, it is expected to sweep all the three segments of smartphones, tablets and laptops converting them to a single unified huge segment of mobile devices. It is too be seen who will ride that wave of disruption. Will it be a chinese player, this time?

Nokia in 2012: a luminous end of a glorious past?

Recently I walked into a local cellular phone shop and asked for a not too inexpensive but sturdy phone set. The salesman asked me if I am looking for a smartphone. I said that I have nothing particularly against smartphone as long as it is stable and inexpensive. Fact is I have personal allergy to all these marketing terms especially when everyone knows that there is nothing smart in a smartphone. The salesman gave me too sets, one Samsung 'Guru' that cost around Rs 1800 and another Samsung Galaxy SII, that costs around Rs 17000. Being a majorly Nokia user so far, I was a little hesitant. "No Nokia set?", I asked.
He said, "Sir, we do have Nokia set but my honest advise is that you do not buy Nokia. The Nokia phones are not like those in past, quality dropped drastically."
"Even for the basic sets?"
"Yes, Sir, even for the basic sets, we get so many complaints every month these days that we warn customers upfront; after that, of course it is their choice if they still like to buy Nokia set".

Yesterday, a friend of mine called me and told that he needed to replace his old handset with a new one and asked me if I had any suggestion for him. I told him, quite unconsciously that he should consider samsung or Sony-Erisson or blackberry models but not Nokia.
But I am sure I was not the exception. Nokia clearly lost its customer loyalty drastically in last few months. It is said that problems do not visit alone. If the customers and shoppers complain about detoriating quality of Nokia phones, the market is exceptionally pessimistic about Nokia's future. Rating agencies like Moody, S&P have downgraded Nokia's credit rating to junk status.
For last one year, we have been witnessing the impact of Nokia's CEO's landmark direction change and one does not need to go too far to sense how well Nokia is doing. Internet is abuzz with reports about how Lumia turned out to be a dud, how Nokia lost 52% of market share in just few months, how Mr. Elop, the ex-Microsoft Nokia CEO has wasted billions of dollar (e.g. in Lumia campaign) and made Nokia taste loss in last quarter by taking successive wrong decisions. Now it is debatable if Nokia would have fared better had Mr. Elop not taken those bold decisions. Fact is symbian was a dying elephant albeit 57% Phones in the market had symbian OS when Mr. Elop took over. People blame that, between 2003 and 2008, 'rather than spend its resources on building a next-generation software ecosystem—an OS that depended on novel interfaces and sensors, that allowed for outside development, that offered a brilliant user experience—the company “managed down” its cash by paying huge dividends and buying back its shares." During that period, Nokia spent 27 billion euros in dividend and share buy-back - a clear sign of organization trading long term engineering future with short-term stock appreciation. Were Mr. Elop's manoeuvre successful, Nokia could truly turn around and challenge iPhone dominance riding high on Lumia and Microsoft WP7.

Summary of the present situation

1. Nokia wanted to cannibalise Symbian with Microsoft OS but market cannibalised Nokia smartphones with Samsung and others. Android proved to be much stronger market force than WP7.
2. Nokia's deteriorating engineering focus had its toll in the low-end basic phone category too; customers are moving to alternatives to Nokia sets. People expect mobile phones to be lot sturdier than PC. Call-drops due to poor quality of handset cost customers money and fact is Samsung low-end phones are lot more stable compared to present Nokia models.
3. While Apple, Samsung, HTC have successfully established themselves in the tablet space, Nokia missed the bus altogether.
4. Nokia's network division, once a very strong market force is also struggling against Chinese competition from Huawei and ZTE, even after merging with Siemens Network.

It is interesting that all the present predicament of Nokia are hinged on single failure: its successive unsuccessful attempts to secure its platform strategy.

Is this the end of  a Glorious past?

Many argue that from where Nokia stands today, it is very difficult for it to get itself out of the mud and only viable option left is buyout by Microsoft. Although Nokia's past and stack of IP would be valuable asset for Microsoft, it is very likely that a direct buyout would bring the combined net worth further down, effectively eroding the value of Nokia to zero. A better path would be if Microsoft lets Nokia find its survival path rather than direct buy-out.
But then Nokia needs to change in many front. It must figure out its strategy for low-end phones where stability and robustness count higher than features. On the high-end segment, it has to open itself for multi-platform strategy like HTC and Samsung rather than firing all guns on Lumia. That should help Nokia to find its competitiveness against Samsung and HTC.  But above all, Nokia must find one software that its engineering should focus wholeheartedly.  Something like a platform-independent Nokia mobile software that can work seemlessly on both Android and Microsoft Windows. Alongwith that a great developer SDK could be a game changer. It could help Nokia to capture large unorganised app ecosystem making the Nokia Mobile software the de-facto platform for mobile app development. That would help Nokia to integrate tablets into its product portfolio like Apple and Samsung. On the technology front, using its strength in wireless technologies, Nokia could focus to bring the first stable 4G (LTE) smartphone that can seemlessly transition from 3G and 2G networks.
But then that would take time and lot of patience from the market. Question is if Nokia has so much time!
 Last year we witnessed Motorola going down the same trajectory ending with Google's buyout. Will 2012 witness fall of another hero of Telecom yesteryear? Negativity brings more negativity but gratification of 'I told you so' is too pale to such a loss if that happens.
A company that in its more than 150 years of history changed its core business 17 times to remain relevant and successful, if turns itself to such an end, it is not only painful, it is demeaning too.