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Analyst Blog

Last week saw technology stocks heading higher again, although some didn’t quite keep up with the market.

Unlocking the Value in a Facebook “Like”

Facebook (FB - Free Report) has announced a new service called Graph Search that allows users query-based access to social information in the form of posts, photographs and other content that others have shared. The service showcases the amount of personal and behavioral user data the company has accumulated, which along with its swelling monthly active users (MAUs), could be of great value to advertisers.

The single most important drawback is the quality of a Facebook like. Often, a “like” simply means “seen” or “acknowledged.” Similarly, some sites require a user to “like” them for obtaining discounts. When the like doesn’t reflect personal interest, it could affect the quality of search results the data generates, thereby leading to poor targeting of ads, which is the main concern. Facebook is roping in Microsoft’s (MSFT - Free Report) Bing to make good insufficient data, but only time will tell how effective this is.

Second, the mobile strategy has not been announced yet, although this is where it’s likely to be more effective.

Another drawback is that the success of the service is dependent on the users’ willingness to continue sharing personal information so advertisers can target them better. Since Facebook is more appealing to younger users who may care less about this, it is a lesser concern. It does of course mean that it is unlikely to replace the search services Google provides.

Microsoft’s New Operating System

Microsoft announced its much-anticipated corporate shakeup last week to accelerate its conversion into a “devices and services” company. Its previous operating structure that highlighted product groups and created a good deal of infighting is now giving way to a more collaborative approach.

The device side of things – the new Devices and Studio Engineering Group -- will be headed by Julie Larson-Green. This group will include hardware development as well as games, music and entertainment. The goal is to get Microsoft devices on the same platform and create an ecosystem like that of Apple’s (AAPL - Free Report) .

The Operating Systems Engineering Group will be headed by Terry Myerson, the Applications Services Engineering Group by Qi Lu, and the Cloud and Enterprise Engineering Group by Satya Nadella. The goal here is to develop the software and services that could position Microsoft strongly in the cloud computing market to deal with the growing competition from Amazon’s (AMZN - Free Report) AWS and others.

Microsoft hopes this dual focus on mobile and cloud will set up the company for future growth and help offset the persistent decline in its core computing market.

The entire company will be organized around eight functions: engineering (including supply chain and data centers), marketing, business development and evangelism, advanced strategy and research, finance, HR, legal and COO (including field, support, commercial operations and IT).

Sounds like a good plan.

Disorganized, Unprepared…Could This Be Apple?

Judge Denise Cote found Apple guilty of ebooks price-fixing back in 2010. Apple’s defense was taken down systematically, but a central point was the “most favored nation,” or MFN clause that served as the Trojan horse.

Apple denied that it was part of a plan to raise ebook prices, but it had an MFN agreement with the publishers that allowed it to match prices, if anyone charged less. Therefore, Apple’s own actions showed that it was protecting itself from harm when prices were raised. So according to the doctrine of estoppel, Apple could not deny that it was a part of the conspiracy to raise prices.

The judge also noted that the testimony of some key witnesses was suspect inasmuch as they tried to skirt around the questions, practically perjuring themselves on occasion. On the subject of Amazon’s leading market position and monopolistic practices, the judge said that "Another company's alleged violation of antitrust laws is not an excuse for engaging in your own violations of law."

Apple has a high price to pay. The lack of MFN clauses could redefine the way it has to strike deals for other content such as music as well. Moreover, a defeat in this case could result in triple damages (not such a hardship for Apple) and also bring on other damages from state governments and class action lawyers. Apple should have learnt a thing or two from Google, which had Schmidt looking after government relations a couple of years back.

Amazon shares gained 7.32% last week compared to Apple’s 1.75% and the Nasdaq Composite’s 3.05%.



Last Week’s Performance

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The week ahead –

This is a huge week for the technology sector with many companies reporting earnings. Zacks methodology indicates that of all the companies reporting, Intel (INTC - Free Report) has the best chances of beating estimates, although Yahoo (YHOO - Free Report) , eBay (EBAY - Free Report) and Advanced Micro Devices (AMD - Free Report) also have a fair chance. It’s hard to tell if Microsoft, Google, International Business Machines (IBM - Free Report) or Xilinx (XLNX - Free Report) will beat, but read our previews on to know more.