The Biggest Cost of Facebook's Growth

Running the world's largest social network will be a technical and financial challenge as it grows.

Data store: Facebook’s data center in Prineville, Oregon, is one of several that will help the company cope with its always growing user base.  Facebook

Facebook is the gateway to the Internet for a growing number of people. They message rather than e-mail; discover news and music through friends, rather than through conventional news or search sites; and use their Facebook ID to access outside websites and applications.

As the keeper of so many people's social graph, Facebook is in an incredibly powerful position—one reason its IPO this week is expected to be the largest ever for an Internet company.

But potential investors should take note that there's a flip side to Facebook's explosive growth and power; that flip side, as one analyst put it, is its bid to become a core piece of the Internet's infrastructure. Facebook's own technology infrastructure is expensive to build and operate, and it must scale rapidly.

Infrastructure is Facebook's biggest cost, and to support growing traffic and network complexity, it will have to spend even more. What's less clear is whether Facebook's revenues will likewise increase—especially if additional traffic comes from less lucrative visitors, such as people accessing the site from their phones or from outside North America and Europe.

To date, Facebook has been up to the infrastructure challenge. In less than eight years it has grown to host 526 million daily users, 300 million daily photo uploads, and nine million applications.

Two metrics highlight Facebook's success in this respect.

First, Facebook spent $860 million, or about $1 per active monthly user, to deliver and distribute its products last year. The bulk of that money was related to data center equipment, staff, and operating costs. That is up from about 80 cents and 60 cents per user in the two previous years. For the moment, however, Facebook's revenue, currently at $4.30 per user, is growing at an even faster clip. That's a good sign for any potential investor.

Second, Facebook is not only the Web's biggest social media site, it is also consistently the fastest. In 2010, Facebook's response time averaged one second in the U.S., but had improved to 0.73 seconds by mid-2011, according to AlertSite. By comparison, LinkedIn, the next fastest, took nearly double the time to load. Twitter's site was a full two seconds slower.

Facebook has come a long way since it was first hosted in Mark Zuckerberg's dorm room and expanded as he rented additional servers for $80 a month. By late 2009, Facebook disclosed it was using about 30,000 servers, and since then, the number has more than doubled.

As it has grown, the company's engineers have had to innovate to keep costs down and process a growing volume of data. For example, Facebook designed minimalist custom servers that are cheaper for it to build and run than off-the-shelf ones. It also built a program to optimize the performance of its code, cutting the computing demand on its Web servers by 50 percent. It has open-sourced many of its software innovations and also created the Open Compute Project to widely share its new server designs, with the hope that others could contribute useful innovations.

Today, Facebook is building its own data centers in Oregon, North Carolina, and Sweden. Last year it spent nearly a third of its revenues, $1.1 billion, in capital expenditures on networking equipment and infrastructure. It plans to spend as much as $1.8 billion on such costs this year.

These infrastructure investments are a good sign, says KC Mares, a data-center energy expert and the founder of MegaWatt Consulting; owning and operating rather than leasing data-center space will help Facebook save money in the long term. Other growing tech companies such as Google have pursued this same strategy.

But as Facebook's IPO filing makes clear, there is also a risk to investing in a global infrastructure to serve all users, regardless of their short-term profitability. It is a balancing act.

"If you add too much, it's a big cost that eats into your revenues. If you don't add fast enough, it's an opportunity cost of customers you can't serve," says John Pflueger, a board member of the Green Grid, an IT industry group.

Coming to the wrong conclusions about how to invest in infrastructure can have major consequences. Just look at Friendster, a social network founded before Facebook and MySpace. Friendster had more than 100 million users, but it quickly fell behind as Facebook came to dominate the landscape.

Jim Scheinman, head of business development at Friendster until 2005, says Friendster made product decisions that required too much computing power. For example, it tried to calculate up to six-degree connections between all users. As a result, the site slowed to a crawl. Today, big Web companies often calculate exactly how much revenue they lose when a page is slow to load, even down to tenths of a second.

Facebook, of course, is long past its early days and has more than a critical mass on its platform: almost half of the world's population of Internet users. But to stay relevant as it battles companies like Google, it'll have to stay on the cutting edge, and it will need the computing power to support that.

The question, says Scheinman, is less about costs and capital and more about engineering challenges: "When they have a billion people, and as people use the product more, does that create scaling issues they haven't yet seen before?"

By Jessica Leber Newscribe : get free news in real time  

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Tan: How I made money from Facebook

By JAGDEV SINGH SIDHU jagdev@thestar.com.my

PETALING JAYA: For a man who does not have a Facebook account, Tan Sri Vincent Tan surely knows the value of the Internet giant.

“I may have one later,” quips Tan on opening an account but he will be counting the windfall from the 3.5 million shares his company, MOL Global Bhd, owns in Facebook once the company is listed on either the New York Stock Exchange or Nasdaq.

Based on an assumption that Facebook shares start trading at US$40 post-initial public offering, Tan’s MOL Global stands to pocket RM420mil for its shares.

Speaking to StarBizWeek, Tan recollects how he came about getting his hands on a tiny but valuable stake in Facebook.

Tan: ‘We don’t want to hold them for too long.’

 

Friendster was among the first social networking websites. It preceded MySpace and Facebook. Starting operations in 2003, Friendster found the going tough and lost money for years.

The company continued to raise but spent money aggressively. In running up losses, Friendster had, nonetheless, built up a base of 140 million registered users, of which 40 million were active.

Tan said the losses then stemmed from Friendster not monetising its user base. Finding it hard to make money from its users, it was losing an average of US$10mil a year.

Eventually, the patience of the owners and investors in Friendster wore thin and they wanted to exit the business. Friendster then called for a process to sell the business and now Friendster CEO, Ganesh Kumar Bangah, who was then working with Tan, informed him that Friendster was for sale.

“I asked for the numbers and found that 140 million registered users and 40 million active users was interesting. If we could make them spend some money, maybe Friendster would be a good investment. Of course, the downside was the business will continue to lose US$10mil a year,” he said.

Tan said the owners of Friendster initially wanted US$100mil for the business but with losses mounting, he knew no one would pay that much for the company. “At that time, Facebook wanted to buy Friendster’s patents but Facebook was willing to pay US$10mil cash and later increased it to US$20mil cash.”

Tan was made to understand then that the owners felt that taking US$20mil only to lose US$10mil a year will soon see that cash vanish and then decided to accept US$40mil for Friendster but wanted a quick sale. “They gave the potential buyers about a week to decide. Many people were looking, including large firms from China and Japan, at Friendster.



“They were much larger than MOL but with the owners of Friendster needing a fast sale, I told Ganesh to do a quick due diligence on Friendster.

“We took two days for the due diligence and made a bid. We said since Friendster owed people US$2mil, we offered US$38mil.

“With other potential buyers doing their due diligence, I told them that if they accepted US$38mil, we will do the deal right away. They accepted our proposal,” said Tan.

After buying Friendster in 2008, Tan then turned his attention to Facebook, which remained interested in Friendster’s patents and whose offer of US$20mil cash for the technology rights was still on the table. “We had a conference call with the people at Facebook. I accepted their price but I wanted shares.”

Facebook officials told him that Mark Zuckerberg, the boss of Facebook, did not want to dilute the shares in the company but Tan stood firm and said “if there was no shares, forget it”.

Tan insisted on getting shares in Facebook because he felt the company will be big in the future. Finally, Zuckerberg agreed to a share exchange for the patents and Tan got his 700,000 shares. His shares have grown to 3.5 million following a 5-for-1 split in Facebook’s shares before the IPO process.

Tan did not leave Friendster to languish but devised a plan to get the social networking website to breakeven point. He closed the US, Singapore and Australia offices to cut cost and began rebuilding the company.

This year, Friendster has stopped the bleeding and Tan felt the company has become “quite valuable”.

“The number of active users on Friendster has fallen from 40 million to four million but these four million spend money with us. We put games and all kind of things on the website and they spend money. If they didn’t, we cannot monetise the business,” he said.

Potentially, Tan values his Internet business at around RM1bil. It does business in Malaysia, Singapore, Thailand, the Philippines, Indonesia and India and is trying to get into Vietnam and many other countries.

MOL makes money from points people buy to play online games. It is also a payments gateway and is a payment partner for Facebook and Zynga, which is the creator of the hugely popular Farmville.

Tan said business models employed by companies such as Zynga, instead of relying on advertising revenue, was how large sums of money can be made from the Internet.

“People play and buy cows and tractors for their game. It’s amazing why people pay so much for that and I cannot imagine it.

“I tell my kids ‘you don’t play Farmville. If you want to farm, you can go to Bukit Tinggi. I will give you a real farm’,” he laughs.

Will he hold or sell his Facebook shares?

“We will see where it goes,” said Tan. “We will probably sell them for our business. We don’t want to hold them for too long but will see where the shares go after the IPO.”

At any price, the Facebook shares Tan owns has been hugely rewarding and the profit from the shares means the Friendster acquisition was paid for plus a lot extra profit on the side. “We were lucky,” he said.

So where does this investment rank among the many that Tan has executed in his corporate life?

“It’s one of the good ones but none can beat DiGi,” he said. “DiGi was my best investment and I should have stayed with it. I sold when DiGi had a market capitalisation of RM5bil to RM6bil. Today, the company is worth some RM31bil.

“That’s the big one that got away,” he lamented.

Vincent Tan awaits Facebook IPO windfall

By CHOONG EN HAN han@thestar.com.my

 His stake in the social networking service company may be worth RM420m

PETALING JAYA: Tan Sri Vincent Tan is definitely going to “like” the much anticipated Facebook Inc initial public offering (IPO) as his stake in the world's largest social networking service company could be worth as much as RM420mil.

MOL Global Bhd, which is controlled by Tan, is said to have 3.5 million shares in Facebook and assuming the IPO price is set at US$40 a piece, this would translate to US$140mil (RM420mil), and even more after the listing. sources said.

However, the amount is still an estimated value as Facebook has yet to reveal its share price information and its valuation is still speculative.

Facebook has been discussing raising as much as US$10bil, making the IPO the biggest Internet or technology IPO the market has ever seen.

“With the outstanding shares of Facebook of about 1.88 billion, the stake of MOL does not even come close to 1%,” said the source.

Given the share base of Facebook, MOL Global's stake represents about 0.19% of the social networking service.

MOL Global is currently the payment partner for Facebook, as well as with game developer Zynga, which made its name through popular social games such as Farmville.

MOL Global first got its hands on the stake in Facebook in 2010 when it sold off the patents of Friendster, the world's first social networking site, to Facebook.

As part of the deal, it received 700,000 shares in Facebook which subsequently increased to 3.5 million shares last year after Facebook initiated a 5-for-1 split of the company's shares.

MOL Global made global headlines when it acquired Friendster for US$39mil in 2008, after winning the bid in an open tender against Chinese game and instant messaging company Tencent and other bidders.

According to regulatory filings for the US IPO, Facebook founder Mark Zuckerberg currently has a 28.4% stake in his company, with about 533.8 million shares.

The company said it conducted its own valuation of its stock at the end of each quarter, and as of Dec 31, it had determined its shares to be worth US$29.73 a piece.

In 2011, Facebook pocketed about US$1bil on a revenue of US$3.7bil with over 845 million monthly active users. In 2010, it made US$606mil.

The company's main revenue are derived from advertising, while another US$557mil came from payments, with most of the non-advertising funds coming from social-gaming partner Zynga.

M'sians to benefit from facebook IPO windfall

A FEW weeks ago, the fortunes of 70 households in an isolated farming village in Spain changed forever.
Initially the residents of Sodeto wanted to give Spain's huge Christmas lottery, known as El Gordo, a miss, because they were facing tough times due to the economic downturn and a severe drought.

But they bought tickets anyway out of loyalty to the homemakers' association and they hit the jackpot. Some of the farmers and unemployed people became instant millionaires.

Everyone in town had a share except for one man, who was apparently overlooked. Sadly, he will never find out what it takes to make a bet.

That brings me to the topic of Facebook.

Facebook is a social networking company that has changed the lives of many, and perhaps, destroyed some too. But who would have thought that Mark Zuckerberg and his college roommates could have created such a company way back in 2004 that could be raking revenues of more than US$3.7bil today.

Facebook started as a site that allowed students to interact via the Web, but later made accessible to everyone, thereby intensifying competition with sites such as MySpace and Friendster, founded two years before.

Going public: A ‘like’ sign is seen at the main entrance of Facebook’s headquarters in Menlo Park, California. Zuckerberg (inset) says the scale of the technology and infrastructure that must be built is unprecedented — AFP

Eight years later, it is going for a listing on the New York Stock Exchange or Nasdaq. The company is considering a valuation of US$75bil to US$100bil. Going forward, its biggest challenge is about keeping the advertising momentum because advertising is its key source of revenue.

Today, Facebook has over 800 million users and the numbers are growing every day because Facebook has created enough buzz that even a seven-year-old or a 60-year-old wants to get connected on Facebook.

Out of all this buzz, who would have thought that a Malaysian company MOL Global Ltd would have something to cheer about as Facebook goes for listing.

This smallish company is making headlines like never before.

MOL Global is majority owned by billionaire Tan Sri Vincent Tan and MOL group CEO Ganesh Kumar Bangah holds just over 10% in the company.

Tan is a well-known billionaire who has made a lot of bets, some have made him richer, others just fizzled out. Today, his empire spans across several sectors and several countries and he continues to make more bets to expand it further.

The story of MOL Global began in 2000, during the dot.com era.

He bought over his brother Tan Sri Danny Tan's company, Dijaya Corp, and renamed it MOL.Com Bhd. Like a venture capitalist, he invested in over 30 Internet companies, including Bangah's MOL Access. Of the 30, perhaps two or three grew.

MOL Access is involved in online games and was subsequently listed on the Mesdaq board in 2003, but privatised in 2008.

In late 2009, MOL.Com bought over Friendster for US$39mil and, in the same year, MOL Global was set up in Singapore. Today MOL Global owns Friendster and the MOL Access Portal.

In July 2010, Facebook forged a partnership with MOL Global for the patents of Friendster. For that, MOL Global received 700,000 shares in Facebook stock and that explains why it has a stake in Facebook.

Today, MOL Global's stake could be potentially worth US$140mil on assumption that Facebook may be valued at US$40 a share but any gain can only be realised if the shares are sold and there is a capital repayment or dividend payout.

Analysts are comparing Google's valuation with that of Facebook. The world's favourite search engine went public in 2004 and Google's shares were priced at US$85 at issue but are now at US$583. Can Facebook reach that level?

That aside, a question to ponder is, had Tan pushed the growth of Friendster, would Friendster's position be like Facebook today?

Whatever, only Tan knows if this was his best bet ever. Who will ever know?
Deputy news editor B.K. Sidhu hopes Zuckerberg will know how to reward the 845 million Facebook users who have helped him get his biggest break in his life and if he needs lessons on goodwill, then he should read up how Maxis Bhd rewarded some of its users when the company was listed and re-listed.

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Tech CEOs 2011: The best and the worst

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by Charles Cooper, CNET

Armchair critics of the world rejoice. It's time to select the year's best and worst tech CEOs. It's a judgment that some no doubt will lambaste as arbitrary, even biased. On both counts we plead guilty. So if you have candidates for either category, or take issue with our choices, add your voice in the talkback section below. 

THE HEROES
Steve Jobs and Tim Cook 

Skip to the next section if you're thoroughly sick of reading about how Apple keeps hitting the ball out of the park. Truth be told, it was more fun in the mid-1990s when Apple was Silicon Valley's running soap opera. Nowadays the company operates with the sort of steamroller efficiency epitomized by the 1927 New York Yankees led by Babe Ruth and Lou Gehrig. And for that, you have to credit the CEO tandem of the late Steve Jobs and his successor -- and alter ego -- Tim Cook.

Tim Cook sitting at Steve Jobs' right at an event in 2007.

(Credit: James Martin/CNET)
 

Jobs may be gone but his influence at Apple remains in the management team and product design philosophy that he left behind. Even though illness forced Apple's legendary co-founder to relinquish the reins to Cook in late August, his half-year as CEO was still better than full-year performances turned in by most of his peers. This wasn't an overnight handover. Whenever Jobs needed to take a step back, Cook was in the unique position of receiving extended on-the-job training, and whatever rough patches he might have encountered were well hidden behind Apple's carefully constructed PR screen. All the while, Cook got to learn first-hand from the tech industry's master marketer how it's done.



What a shame Jobs wasn't healthy enough to introduce the iPhone 4S. How the fan boys would have swooned when he offered them the first look at Siri. Cook's not a matinee idol and he doesn't try to be. Maybe that explains the relatively muted reaction to what was otherwise a very successful product debut. Some quibbled that the lines in front of Apple stores were smaller than for previous releases. But the bloggers and reporters who get hung up by the different style are making a big deal out of the trivial. Like Jobs, Cook has offered the leadership that you'd expect from a strong CEO. He more than justified Jobs' confidence as Apple's iPhones, iPads and iMacs continued to sell at a torrid clip in the second half of 2011, sending the company's shares are up more than 17 percent year-to-date, beating both the Nasdaq index and S&P 500.

The question everyone is asking is whether Cook can muster the magic on his own now that he's flying solo. Maybe we'll find out the answer in 2012. But so far, this rates as one of the most seamless managerial handovers in corporate history. And one of the most successful.

---

President Obama chats with Facebook CEO Mark Zuckerberg in February. (Credit: The White House)

Mark Zuckerberg

Here's one way to think about how entrenched Facebook has become in the cultural lexicon: When someone decides they actually want to leave everyone's favorite social network grid, this now qualifies as "news." That is no small accomplishment. Even though Google now offers its own rival service, Facebook remains by a wide margin the preferred social network for revelers, revolutionaries, and just plain folk posting their musings, pictures, and videos uploads.

Wall Street has apparently decided that Facebook is not of this world, according it a pre-IPO valuation now north of $80 billion. But somehow the peanut gallery remains reluctant to give Mark Zuckerberg his full due for building a magnificent platform. Yes, he's profiled in business magazines and gets sought out for interviews by everyone from Charlie Rose to "60 Minutes." But when you listen to discussions of the great CEOs of Silicon Valley, you're more likely to hear mention of John Chambers, who had Cisco buy the company that makes the Flip video camera for $590 million and then shut the division less than two years later. The worst Zuckerberg ever did is get sloppy with privacy controls, a faux pas that some within the blogosphere may never forgive.

But as 2011 closes, it's time to give it up for the Z-man. Through the years he has remained true to his vision and resisted sundry offers to sell out. Back in 2006, when he was approached with a $750 million offer, more than a few people thought he should take the money and run. Who was Zuckerberg and what was Facebook to think they could outrun then-juggernaut MySpace? But five years later, MySpace is irrelevant, while Facebook has over 750 million active users and earned $500 million on $1.6 billion of revenue during the first half of 2011.

Like Bill Gates, an entrepreneur who managed very well as CEO at a young age, Zuckerberg is growing into the role (helped in no small part by his able No. 2, Sheryl Sandberg.). The best example came this fall when he put a potentially distracting privacy fight with the government in the rear view mirror instead of venting publicly about government persecution. He's familiar with Microsoft's less than happy experience battling Uncle Sam and wisely ordered Facebook to strike a deal with the Federal Trade Commission that should put this issue to bed.

Zuckerberg can't go on auto-pilot. His biggest immediate challenge, of course, comes from Google, which launched its Google+ service in July and passed the 40 million user mark in October. Facebook has to keep pushing. It did a nice job with Timeline, the new profile design that finally went live last week. And with an eye toward avoiding further complaints about user privacy, Facebook also rolled out a useful tool called Activity Log which may go down as one of the site's most important additions since the inclusion of the News Feed.

The coming IPO, presumably sometime in 2012, will be a barometer of Zuckerberg's success, as well as the event of the year's tech calendar. And who knows what the future holds? Is it altogether nutso to imagine Facebook bringing out its own search technology, one that could sort through a gold mind of data about social interactions? Zuckerberg is aiming high, and Facebook is already a good part of the way there. This is how legacies get created. If it all works as Zuckerberg hopes, then maybe that $80 billion valuation will turn out to be on the low side. Scary but true.

---

From left, Google's Eric Schmidt, Larry Page, and Sergey Brin.(Credit: Google)

Larry Page

In Google's 2004 pre-IPO filing with the SEC, co-founder Larry Page sent prospective shareholders a Monty Python-like message that he wasn't interested in conducting business as usual.

"Google is not a conventional company. We do not intend to become one."

A bit full of himself, sure, but now that the proverbial buck stops at his desk -- he became CEO in April -- Page has had an opportunity to back up his words. Though his brief reign, this much is clear: While he may not be an unconventional CEO, Page has ably handled the awesome responsibility that he sought out. He set the company on a new course with the blockbuster announcement of a $12.5 billion deal for Motorola Mobility (a deal that gives Google more than 17,000 patents and will prove useful now that Apple is trying to nuke Android in a court case). Meanwhile, Android continues to grow by leaps -- according to Nielsen, it now powers about 40 percent of smartphones -- while Google's search dominance remains unquestioned. The company also made a successful entry into social networking with Google+, which finally offers Facebook its first serious competition for advertising dollars and user attention. Wall Street likes what it's seen. On the day Page took over, Google's shares closed at $587.68; with less than a couple of weeks left in the year, they're hovering around the $630 level.

By all accounts, Page's accession to the top job -- technically this is his second turn as CEO, though his first as the head of Google as a public company -- has been annotated by drive and energy. He wants to accelerate Google's corporate DNA, and in the near term, that may be his biggest challenge. The flip side of being big and successful is the spread of corporate sloth (as both Microsoft and IBM veterans can attest). With around 25,000 employees at Google, this is no longer a scrappy startup and it's become tougher than ever for good ideas to bubble up from the ranks and get proper consideration. That's why Page has winnowed the number of projects Google's engineers are working on, focusing their efforts on the areas where he thinks there's the best chance for the biggest returns.

OK, how difficult can it be to sit at the top of the mountain, take in your immense kingdom, and bloviate in SEC docs about being unconventional? In fairness, it's not as easy as it looks, so give Page deserving kudos for not screwing up what continues to be one of the most vibrant tech companies around. We're often reminded of the spectacular success stories registered by the likes of Bill Gates and Steve Jobs (his second time at the helm more so than his first go around) but any fair recording of CEO-founders includes no shortage of flameouts. Remember George Shaheen at Webvan.com, Philippe Kahn at Borland, and Ted Waitt at Gateway, to name a few? All were smart guys and their companies were once the toast of the town. Then the good times ended and they couldn't reverse the slide. If Page turns out to be as good as we think, Google's CEO won't ever find himself facing that sort of predicament.

---

THE GOATS Reed Hastings

Yesterday's hero can turn into today's goat in the amount of time it takes to launch a press release. Just ask Netflix CEO and founder Reed Hastings, who must still be wondering if it was all a nightmare.

Netflix founder Reed Hastings at one of the company's warehouses in Silicon Valley.(Credit: CBS)

 

Up until this year, Hastings was an Internet rock star, lauded for having changed the way we consume movies and television shows. Netflix was an easy-to-use service priced at the sweet spot. Consumers flocked to it. Wall Street sang its praises. But it all came a cropper in September when Hastings executed the sort of maneuver that one might have expected from F-Troop.

It wasn't just the 60 percent price hike on one of Netflix's most popular plans that got peoples' dander up. Netflix also planned to split into two parts: One unit named "Qwikster" would mail DVDs to subscribers, while the other would continue to focus on streaming movies over the Internet.

This turned out to be a public relations disaster. Even though the price increase would impact only subscribers who used both the streaming and mail-order sides of the business, the announcement left Netflix loyalists steamed. Two separate websites with two billing systems and two names? If there was a higher logic at play, it escaped most people. The reviews were uniformly lousy and Netflix became the butt of late-night TV hosts' jokes. Wedbush Securities analyst Michael Pachter summed up the general reaction with this icy observation to a reporter from USA Today: "They raised prices. They offered lower-quality content, and they made it more complicated." Within three weeks Hastings reversed the Qwikster decision and publicly apologized for having "slipped into arrogance" (though Netflix kept the price increase in place.) But the apology was too late to repair the damage. During the third quarter, 800,000 subscribers responded to the Qwikster fiasco by dumping the service. Shares of Netflix, which earlier in the year poked above $300, have since fallen to the $70 range.

People have short memories and this isn't necessarily the end of the world for Netflix. Fans do return. Think Bob Dylan and his move to electric guitar. After the initial freak-out, most of the faithful got over it. Nothing here rules out that kind of rebound for Hastings -- as long as he avoids hitting another sour chord. At that point, Neflix really could be left blowing in the wind.

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Leo Apotheker and Meg Whitman (Credit: Graphic by James Martin/CNET)

Leo Apotheker

In our quiet moments, it's reasonable to wonder whether some mischievous warlock left the curse of the cat people on Hewlett-Packard.

Carly Fiorina's years were marked by corporate drift and tumult. Her replacement, Mark Hurd, was ousted in an expense-fudging scandal involving a former soft-porn actress. In between, there was a bizarre novella in which corporate officers trying to plug a leak ordered investigators to spy on journalists.

But nothing -- and I mean nothing -- compares with the brief and utterly feckless tenure of one Leo Apotheker, hired in November 2010 to replace Hurd.

Apotheker was a highly regarded software executive who had been chief executive of SAP AG. Although he had little experience as a hardware executive, the company hoped he could take the management skills he had picked up over the course of his long career and apply them to the job at hand. It was only much later on that we learned most members of HP's board of directors had never even met Apotheker before voting to hire him. That's what you get when the company is overseen by what a former board member has described as the "worst" board of directors in the history of business. But I digress.

After 11 months as CEO, Apotheker got the boot and HP, once one of Silicon Valley's storied company, was reduced to a laughingstock. The chronology played out over the summer, when Apotheker announced that HP would kill off the TouchPad tablet computer, which had only recently debuted. He also canceled a crop of phones and products based on Palm's WebOS operating system. He was also convinced HP would be better off selling the PC business, a $30 billion division which at the time still enjoyed big market presence.

His plan now is easy to mock. But Apotheker had a strategy to remake HP into something resembling his former company and specialize in catering to enterprise-sized companies. On the surface, at least, it was intriguing. After all, the idea of jettisoning low-margin businesses to focus on software and service worked wonders at IBM under Lou Gerstner and Sam Palmisano. But it took time for those two to get all the pieces in place and plan IBM's exit from the commodity stuff.

In contrast, the clock was ticking for Apotheker right from the start. And with HP missing its financial targets, Apotheker quickly lost credibility with the financial community, making investors even antsier as HP's stock lost 40 percent of its value. He also lost credibility with another key constituency as the board grumbled at his poor communications skills (starting with the decision to kill the TouchPad) as well as the company's product direction. Rightly or not, Apotheker was labeled a zig-zagger with little feel for HP's hardware business. The board executed a mercy killing in September, replacing Apotheker with Meg Whitman. The former eBay CEO has since announced that HP would keep the PC business.

You can't make this stuff up.

---

RIM co-CEO Mike Lazaridis shows off the BlackBerry PlayBook.(Credit: BlackBerry PlayBook, Mike Lazaridis)

 

Jim Balsillie and Mike Lazaridis
 
After their company's latest earnings debacle, Research In Motion's co-CEOs James Balsillie and Mike Lazaridis announced they would take just $1 in salary. Given the collapse of this one-time tech darling, some shareholders may grumble these two are still being overpaid.

It's hard to believe how quickly RIM has collapsed. The company's stock has lost more than three-quarters of its market value in the last year while a myriad of app-hip mobile handset rivals have prospered. That's all the more remarkable given how we're talking about what once was the premier mobile device maker for businesses. Now RIM is a company that can't seem to keep up. With every new Android and Apple update, RIM promises a next-generation BlackBerry phone -- sometime in the second half of next year. Meanwhile, its PlayBook tablet has been turned into a bargain-bin product with RIM offering massive discounts.

Cue up Clayton Christensen and the perils of the innovator's dilemma, where one-time market leaders fail to capitalize on new waves of innovation. In the meantime, here's Lazaridis trying to explain why the on BlackBerry 10, the upcoming product RIM has touted as the basis for its superphone, is going to be delayed:

We need a highly integrated dual-core LTE platform.The processor we selected offers industry-leading power and efficiency, and also allows us to deliver the industrial design, that we believe is critical to the success in this market segment. This chipset will not be available until mid 2012. And as a result of this and certain other factors, we now expect our first BlackBerry 10 smartphones to reach markets in the latter part of calendar 2012. In the meantime, we believe that our strong BlackBerry 7 portfolio will continue to drive adoption of BlackBerry around the world.

One problem: In July, Lazaridis told shareholders that the BlackBerry 7 handsets were just "messaging" handsets compared to the "mobile computing" handsets slated to come out with the BlackBerry 10 software. Now the company's stuck with these same "messaging" handsets while the market keeps moving along. Sanford Bernstein responded to that performance by calling management "in complete denial of the situation" while another brokerage, Robert W. Baird, said RIM's U.S. business was "in a freefall."

There's a growing feeling that Balsillie and Lazardis, who share responsibilities for leading RIM, are congenitally conventional managers ill-equipped to handle an unconventional challenge. The situation has reached the point that some are even floating suggestions that RIM may need to consider dumping the BlackBerry if it's to survive. That sounds like a stretch but at this rate the situation is impossibly grim, with investors and customers holding onto faint promises of better times ahead. The fact that RIM has even reached this point constitutes Exhibits A, B, and C for the chorus of critics demanding new leadership.

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Tim Armstrong

As an early user of AOL's dial-up service, I have to confess to a twinge of nostalgia each time I watch "You've Got Mail." That's about the only warm and fuzzy feeling AOL gives off these days as CEO Tim Armstrong seeks to find on a formula that will save the company from media also-ran status.

AOL CEO Tim Armstrong.(Credit: Google)

Give the man credit for believing in a strategy. But after two years making the same pitch, the question is whether he's got the right strategy. Armstrong is an online ad sales guy -- he was Google's president of the Americas operations -- and has gone shopping for new content that AOL's ad sales team can sell against. Like Yahoo, AOL has a legacy business in the form of its dial-up operations which, remarkably, still throws off a lot of cash each quarter. That's allowed Armstrong to fund his bet that that content will create scale when he acquired the Huffington Post for $315 million as well as TechCrunch for a reported $30 million. It's still too early to say how those deals are going to work out for AOL though they were grand slams for the two blogs' creators, Arianna Huffington and Michael Arrington, who sold at the peak. The other big hope is Patch, the company's network of hyperlocal Web sites. AOL this year has sunk $40 million into Patch on top of the $75 million that it spent on the project last year. Good money after bad? Not according to Armstrong, who has predicted that Patch will start generating a profit by the end of 2011.

But despite adding a collection of works in progress, AOL has failed to distinguish itself from the pack. AOL may argue that its content Web site pickups will help boost traffic and revenues in a meaningful way but it is unclear whether traditional remedies for a traditional media company will provide the needed fix. Wall Street has not bought the story. With Armstrong scheduled to take home a total annual compensation package of $1 million, AOL's stock plummeted from nearly 25 earlier in the year to the mid-teens.

On top of that, Armstrong's reputation as a leader suffered when he was unable to effectively resolve the summer soap opera involving Arrington and Huffington. After losing a turf war, Arrington very publicly left AOL; he was soon followed out the door by several key staffers - including, most recently, TechCrunch CEO Heather Harde. But that was just a circus sideshow to the central question about whether Armstrong has what it takes to turn AOL into a money maker. Already calls are coming to split the company into pieces and jettison the units that aren't adding to growth. How long before some of those same voices begin asking why Armstrong should escape paying the same penalty exacted from Carol Bartz when she failed to revive Yahoo? After all, you can only be in turnaround mode for so long.

Charles Cooper

Charles Cooper has covered technology and business for more than 25 years. Before joining CNET News, he worked at the Associated Press, Computer & Software News, Computer Shopper, PC Week, and ZDNet. E-mail Charlie.

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Social Media Isn’t Free to Entrepreneurs or Anyone

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 By Martin Zwilling

If you are an entrepreneur today, and not using social media to promote your business, you are missing out on a huge opportunity. But, contrary to what most people preach, it isn’t entirely free. Most social media outlets don’t require a subscription charge, but they certainly require an investment – in people, in technology, your reputation, and your time.

There are hundreds of consultants out there who will take your money for guidance in this area, but I recommend that you start with some free resources on the Internet, or one of the many recent books on this topic. One I just read, “How to Make Money with Social Media” by Jamie Turner and Reshma Shah, Ph.D., hits all the right points from my perspective:

• There are risks as well as benefits. As with many startup activities, you only have one chance for a great first impression. You can jump into social media with a poor brand definition, poorly focused content, unrealistic expectations of customer service, or be killed by malware or viruses.

• Assess social media relevance to your product or service. If your business is industrial B2B products, social media should be low on your list. Spend your time and money on other platforms. If you are selling to consumers, especially younger ones, your business won’t survive without an effective social media presence.

• Attracting key stakeholders requires sensitivity. For some customers and many investors, a heavy focus on social networks and viral marketing may be a negative, rather than a positive. A balance of conventional and social communication and marketing is always advised.

• Pick the right platform for your business. Within each of the platform categories defined above, there is a right one and a wrong one for your audience. For example, LinkedIn is attuned to business professionals, Facebook is dominated by the social and upwardly mobile crowd, and MySpace is for tweens and creative types.

• Communication and writing skills are required. Heavy texting experience is not a qualification for communicating via social media. In additional to strong journalistic writing and storytelling, you need business acumen, strategic thinking and planning, and the ability to do the right research. These days, video production is also a useful skill.

• Make social media an integrated part of an overall strategy. An integrated marketing strategy starts with an overall brand management strategy, delivered through online and offline communications, promotions, and customer engagement vehicles. Your Twitter YouTube messages better match your print advertising message.

• Find the right tools to analyze the ROI. Return-On-Investment metrics are not new, but the tools are different. Get familiar with current social media tools, such as Google Analytics, Omniture, and HootSuite analytics. Over time, put together the data you need to measure your progress on a weekly/monthly/yearly basis.

The key social media platforms today include communications (WordPress blogs, Twitter), collaboration (Wikipedia, StumbleUpon), and multimedia (YouTube, Flickr). In looking ahead, don’t forget the mobile platforms (iPhone, Android), and location-based services (Foursquare, Gowalla).
As with any resource or tool, you need to optimize your social media costs against a targeted return. That means first setting a strategy and plan for what you want to achieve, then executing the plan efficiently, and measuring results. It’s not free, but it’s an investment that you can’t afford not to make.

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