About Me 0110: Making Internet Money

MSFT Rising With Markets
The markets are staging a wild rally as lower yields in Italy and strong housing numbers are producing a major snap back from yesterday. Shares of MSFT are up, although less than the rest of the tech market. Upcoming catalysts include Windows 8 next year; entrance into the tablet market; Windows Phone 7 / Mango rollout and adoption with hardware partner Nokia; strides against current market leaders in cloud computing; making money in the online business, including integration of Skype and improving the search / display business; and continued evolution of Kinect and next generation Xbox. The stock currently trades at 6.9x Enterprise Value / TTM Free Cash Flow.

To Compete In The Cloud, Microsoft Will Have To Sacrifice Margin (Bloomberg)
Microsoft’s push into cloud computing will help the company compete, but it also will hurt profit margins. The company’s cloud software lets corporate customers pay a subscription to manage data with software stored and run on Microsoft’s servers. The cost of which means the company may miss profit estimates for fiscal 2012 according to Goldman Sachs analyst Heather Bellini. That said, no financial data has been released on how Microsoft is doing in the space. If the company really wants to convince the world that it's serious about cloud, it should tell the world how those products are doing.

Bing Gains Search Share At The Expense Of Partner Yahoo! (comScore)
Bing has managed to gain enough market share that it's basically tied for the number-two position in U.S. core search. Unfortunately, those gains have come from its partner Yahoo, rather than its competitor Google. The bigger search picture is still the same, however. Google dominates with more than 65% share, and the Microsoft-Yahoo deal hasn't really dented that. At least it didn't gain any share this month, unlike the previous two.

Chrome Dethrones Internet Explorer As The Most Used Browser (ComputerWorld)
Google Chrome continues its incredible rise, finally overtaking Microsoft's Internet Explorer as the most-used version of a browser, according to a study done by StatCounter. This only applies to Chrome 15 overtaking Internet Explorer 8. If you lump all versions of all browsers together, Internet Explorer still has the greatest marketshare: Chrome 15 (24%), Internet Explorer 8 (22.9%) and Firefox 8 (14%).

Based On DCF Valuation, Microsoft Is Highly Undervalued (Seeking Alpha)
Based on discounted cash-flow methodology (which you can derive and justify any valuation you want), Microsoft is significantly undervalued. Fair value is $39 per share, a significant increase over current levels. Microsoft has an excellent combination of strong free cash flow generation and low financial leverage. Free cash flow margin should average about 29.4% in coming years. Total debt-to-EBITDA was 0.4 last year, while debt-to-book capitalization stood at 17.3%. And the firm sports a very nice dividend yield of 3%+.

Creative America, a group launched over the summer to support Hollywood's anti-piracy campaign, recently released the video above, explaining that thousands of jobs and billions of dollars are lost because of online piracy of movies, music and television.

In the video, writer and producer Bruce Leddy shares his experience of piracy of his independent film "Wedding Weekend," the costs of which he was hoping to cover through DVD sales. "Literally, the day the film was released on DVD, I got four emails.. saying, 'Watch the Wedding Weekend here for free'.. And I could click on that link, and my movie would start instantly. These sites.. are making money. I didn't. I lost my money. It makes you angry, embarrassed, frustrated because there's not recourse. I can't call up bit torrent and say, 'Hey, that's my movie! Stop giving it away!'"

Creative America's effort continues a battle between two of California's most lucrative and powerful industries: Hollywood vs. Silicon Valley. Hollywood, claiming the film, music and television industry is being threatened by Internet piracy, is lobbying for the House of Representatives's Stop Online Piracy Act (SOPA) and the Senate's Protect IP Act. Internet giants are fighting back, saying the legislation qualifies as Internet censorship and would not solve the piracy problem.

As the Associated Press reports, the pending legislation would allow copyright holders to force credit card companies and online advertising companies, including Google, to drop websites that distribute pirated material. The Motion Picture Association of America, the Recording Industry Association of America and the U.S. Chamber of Commerce argue the legislation is necessary because online piracy results in an estimated $135 million in lost revenue a year.

In response, a group of Internet companies, including Google, AOL, eBay, Facebook, Yahoo and Twitter, wrote a letter to legislators saying, "We are concerned that these measures pose a serious risk to our industry's continued track record of innovation and job creation, as well as to our nation's cybersecurity," Reuters reports. Google Chairman Eric Schmidt said in a presentation to the MIT Sloan School of Management, "The solutions are draconian. There's a bill that would require [Internet service providers] to remove URLs from the Web, which is also known as censorship last time I checked."

Schmidt added that advertisers should be targeted. "The correct solution, which we've repeatedly said, is to follow the money," Schmidt said. "Making it more explicitly illegal to make money from that type of content is what we recommend."

Each industry has spent over $90 million lobbying Congress and the public for support, the Los Angeles Times reports. A coalition of Internet companies has published full-page ads this month in major newspapers warning that the pending anti-piracy legislation would set a dangerous precedent.

About Me 0110

Monday, December 26, 2011

Making Internet Money

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