Youth flock to mobile messaging apps, may be threat to Facebook

(Reuters) – Create personal profiles. Build networks of friends. Share photos, videos and music.

That might sound precisely like Facebook, but hundreds of millions of tech-savvy young people have instead turned to a wave of smartphone-based messaging apps that are now sweeping across North America, Asia and Europe.

The hot apps include Kik and Whatsapp, both products of North American startups, as well as Kakao Inc’s KakaoTalk, NHN Corp’s (035420.KS) LINE and Tencent Holdings Ltd’s (0700.HK) WeChat, which have blossomed in Asian markets.

Combining elements of text messaging and social networking, the apps provide a quick-fire way for smartphone users to trade everything from brief texts to flirtatious pictures to YouTube clips – bypassing both the SMS plans offered by wireless carriers and established social networks originally designed as websites.

Facebook Inc (FB.O), with 1 billion users, remains by far the world’s most popular website, and its stepped-up focus on mobile has made it the most-used smartphone app as well. Still, across Silicon Valley, investors and industry insiders say there is a possibility that the messaging apps could threaten Facebook’s dominance over the next few years. The larger ones are even starting to emerge as full-blown “platforms” that can support third-party applications such as games.

To be sure, many of those who are using the new messaging apps remain on Facebook, indicating there is little immediate sign of the giant social media company losing its lock on the market. And at a press event this week, the company will unveil news relating to Android, the world’s most popular smartphone operating system, which could include a new version of Android with deeper integration of Facebook messaging tools – or possibly even a Facebook-branded phone.

But the firms that can take over the messaging world should be able to make some big inroads, investors say.

“True interactions are conversational in nature,” says Rich Miner, a partner at Google Ventures who invested in San Francisco-based MessageMe, a new entrant in the messaging market. “More people text and make phone calls than get on to social networks. If one company dominates the replacement of that traffic, then by definition that’s very big.”

Facebook spokespeople declined to comment for this article, citing this Thursday’s planned announcement.

Facebook’s big challenge is reeling back users like Jacob Robinson, a 15-year old high school student in Newcastle upon Tyne in the U.K., who said the Kik messaging app “blew up” among his friends about six months ago. It has remained the most-used app on his Android phone because it is the easiest way for him to send different kinds of multimedia for free, which he estimated he does about 200 times a day.

Robinson said he trades snapshots of his homework with friends while they stay up late studying for their exams – or not.

“We also stay up in bed with our phone all night, just on YouTube searching for funny videos, then you quickly share it with your friends,” he added. “It’s easy. You can flip in and out of Kik.”

Facebook “has really started to lose its edge over here,” said Robinson, who found his interactions on Facebook less interesting than his real-time chats.

Waterloo, Ontario-based Kik has racked up 40 million users since launching in 2010. Silicon Valley entrants in the race include Whatsapp, funded by Sequoia Capital, and MessageMe, launched earlier this month by a group of viral game makers. MessageMe has received seed-stage funding from True Ventures and First Round Capital, among others, and claimed 1 million downloads in its first week.

Meanwhile, Asian companies are producing some of the fastest-growing apps in history. Tencent’s WeChat boasts 400 million users – far more than Twitter, by way of comparison – while LINE and KakaoTalk claim 120 million and 80 million users, respectively. Both have laid the groundwork to expand into the U.S. market.

MOBILE WAVE

The growth in the messaging apps reflect the dramatic shift in Internet usage in recent years, as Web visits via desktop computers have stagnated while smartphone ownership and app downloads have skyrocketed.

Chief Executive Mark Zuckerberg has publicly called Facebook a “mobile company” to emphasize the company’s priorities. Last year, he splashed $1 billion for photo-sharing app Instagram, which has remained red hot, while Facebook also launched its own Messenger app, offering a suite of smartphone communication tools.

Still, Facebook has also been forced to play defense. Earlier this year, the company cut off its data integration with a young startup called Snapchat and then mimicked its feature with a new messaging tool called Poke, which sends messages that self-destruct. It has also shut off its integration with messaging apps like MessageMe and Voxer.

At the same time, Facebook has also hired graphic artists to draw emoticons and graphics for Messenger that emulate features of the wildly popular Asian apps like LINE, according to people with knowledge of the matter.

Dave Morin, an early Facebook employee who left to found the “private” social network Path in 2010, said he recognized last summer the critical role of messaging functions in smartphone apps, and quickly began working to incorporate them.

Since Path released a new version of its app earlier this month, the number of Path’s daily users has risen 15 percent, which Morin attributed to the new messaging features.

“What’s the number one reason why people have this thing?” said Morin, holding up his iPhone. “It’s to call, to text, to communicate.”

Messaging, Morin added, is “the basis for the mobile social network.”

PLATFORM THREAT

While established social networks move to incorporate messaging features, the new-wave messaging apps are looking to grow into social networking platforms that support a variety of features and enable innovations from outside developers.

“The tried and true approach for a social network is first you build a network, then you build apps on your own, then you open it up to third party developers,” said Charles Hudson, a partner at early stage venture capital firm SoftTech VC.

The moves mirror Facebook’s younger days, when its user growth and revenues were boosted by game publishers like Zynga Inc (ZNGA.O), which made popular games like FarmVille for the Facebook platform.

In the South Korean market, for instance, eight of the top ten highest grossing Android apps are games built on top of KakaoTalk. Tencent announced in November that it would introduce a mobile wallet feature enabling payment for goods with WeChat. And Tencent also makes money in China by using the app’s location data to displaying nearby merchants’ deals to potential customers.

If the messaging apps reach a certain scale, they could form networks that rival Facebook’s “social graph,” the network of user connections and activities that enable highly targeted delivery of content and advertising.

“The folks on your address book are very different from your Facebook friends and your LinkedIn contacts, and that’s a natural place for a very powerful graph to be created,” said Jim Goetz, a partner at Sequoia Capital.

Ted Livingston, the 25-year old chief executive of Kik, said he developed the capability for his service to support external features in November, and he plans to open the platform to outside developers in the near future.

Livingston said Kik and Whatsapp were “in a race to see who’s the first to build a platform.”

Whatsapp, which has been the most widely downloaded communication app for both iOS and Android in recent months, according to analysis firm App Annie, has been profitable by selling subscriptions to its service for $1 a year. Although it has remained mum about its platform plans, the company has been rumored to be in talks with Asian game publishers about hosting games, according to news reports in South Korea.

Goetz declined to address the reports, saying only that because it relied on a subscription business model, Whatsapp did not need to sell games or ads to make money.

Still, he said, the Whatsapp team “spends a lot of time thinking about the developer community.”

DEAL POTENTIAL

Established social networking giants could also swoop in for the upstarts – and Facebook has demonstrated its appetite for acquisitions.

Indeed, investors are eyeing a round of potentially lucrative buyouts resembling the series of deals involving group messaging applications in 2011.

Facebook acquired group messaging app Beluga in March of that year, enlisting its founders to help build its own stand alone app, Messenger, which launched six months later.

In late 2010, First Round Capital, an early stage venture capital firm, invested in GroupMe, a group messaging startup that was sold to Skype just fifteen months after it launched.

Kent Goldman, a First Round partner who has backed MessageMe, said it was unlikely that the market in the long term could support numerous independent messaging startups, which by their nature become more powerful as they grow larger.

Dell’s board evaluates rival bids – source

REUTERS – A special committee of Dell Inc’s (DELL.O) board is evaluating separate takeover proposals from Blackstone Group (BX.N) and billionaire investor Carl Icahn to decide whether either or both are likely to trump an existing $24.4 billion take-private deal, a source familiar with the discussions said on Sunday.

Icahn and Blackstone put in preliminary bids late last week, potentially upsetting the plans of the No. 3 PC maker’s founder, Michael Dell, and private equity firm Silver Lake to take Dell private.

Icahn has offered $15 per share for 58 percent of Dell, while Blackstone has proposed paying more than $14.25 per share, the source said. The Silver Lake group has agreed to buy all of Dell for $13.65 per share.

One issue before the special committee would be how to compare the three proposals. Both Blackstone’s and Icahn’s proposals envision that a portion of Dell’s stock will remain publicly traded, which raises questions about how that would be valued.

Dell could make an announcement as soon as Monday about whether either of the rival offers were reasonably likely to lead to a superior bid, the source said. But the source warned that the special committee of the board may also decide to take longer to reach a decision.

Blackstone and Silver Lake declined to comment. Dell and Icahn could not be immediately reached for comment.

The unexpected rival bids for Dell throw the future of the PC-maker into question. A “go-shop” period – during which the target company actively looks for rival offers – for a deal of this size rarely yields competing offers. The bids now could potentially turn the sale of Dell into a three-horse race, which could drag out for months.

It also could threaten the future of Michael Dell, who founded the technology giant at the age of 19 with just $1,000. Under the Silver Lake plan, he planned to contribute his roughly 16 percent share of Dell’s equity to the deal, along with cash from his investment firm MSD Capital, and to remain CEO of the company. Silver Lake is putting up $1.4 billion in the deal.

The Silver Lake group has no plans to increase or amend its offer until Dell’s special committee comes out with a ruling on the rival proposals, two sources close to the matter said late on Sunday. They said for now the buyout firm and Michael Dell planned to move forward with their current deal.

But the current plan to take the company private has come under attack from several high-profile Dell shareholders such as Southeastern Asset Management and T. Rowe Price.

The shareholders have said that his offer undervalues the company and pledged to vote against the deal, which requires a majority of shareholders, excluding the founder, to pass.

Brian Marshall, an analyst at ISI Group said in a report on Sunday that he did not expect the Silver Lake group to raise its offer meaningfully above the rival bids, “given significant challenges facing the PC business and a long transformation ahead.”

Dell’s shares closed at $14.14 on Friday.

RIVAL BIDS

Under Icahn’s proposal, Dell shareholders will have a choice of electing cash or stock, but there would be a cap on the amount of cash they could get, the source said.

In other words, if all Dell shareholders chose to cash out, they could only sell 58 percent of their stock, retaining the other 42 percent that will remain publicly traded.

Icahn is being advised by investment bank Jefferies Group Inc. He plans to fund his bid with his own money, Dell’s cash as well as new debt, the source said.

The activist investor, who has taken a stake in Dell, earlier this month demanded Dell pay out $15.7 billion in special dividends. He is no longer asking for that, the source said.

Jefferies declined to comment.

Blackstone, which recently hired Dell’s former vice president of corporate strategy David Johnson, has offered to pay in excess of $14.25 per share for Dell, the source said.

The New York-based alternative investment firm has not specified a range of the bid, but has two other equity partners – Francisco Partners and Insight Venture Partners.

Francisco and Insight could not be reached immediately for comment.

Under Blackstone’s proposal, Dell also would have a certain amount of stock publicly traded, the source said. But unlike the Icahn proposal, Blackstone has proposed buying out any shareholder that wants to cash out of Dell.

Instead, Blackstone is proposing to cap the amount of stock that would be outstanding in the publicly traded equity stub, the source said, adding that the private equity firm has not specified what that cap is.

Blackstone is being advised by Morgan Stanley (MS.N), which has also given it a highly confident letter of financing, the source said.

Morgan Stanley declined to comment.

There have also been some conversations about the Blackstone group selling Dell’s financial services business, but that is not part of the current proposal, the source said.

NEXT STEPS

Dell was regarded as a model of innovation as recently as the early 2000s, pioneering online ordering of custom-configured PCs and working closely with Asian component suppliers and manufacturers to assure rock-bottom production costs.

But as of 2012′s fourth quarter, Dell’s share of the global PC market had slipped to just above 10 percent from 12.5 percent a year earlier as its shipments tumbled 20 percent, according to research house IDC.

Michael Dell returned to the company as CEO in 2007 after a brief hiatus, but has been unable to engineer a turnaround thus far. Dell’s focus on corporate computing in recent years has yet to yield results, critics note.

Competing successfully against incumbents, including IBM (IBM.N) and Hewlett-Packard (HPQ.N), will not be easy no matter what the corporate structure.

A source earlier said that Dell had slashed its internal forecast for fiscal 2013 operating profit to about $3 billion – down sharply from the $3.7 billion it had predicted previously. The source added that more details will be revealed in a proxy filing which is expected by the end of this week.

Meanwhile, if the special committee of the board decides that either – or both – of the rival bids for Dell are reasonably likely to lead to superior offers, Icahn and Blackstone will have to present firm bids for Dell. The negotiations are likely to take weeks, the source said.

At that point, the special committee will again need to decide whether the firm bids from Icahn and Blackstone, which include features such as committed financing, were superior to the Silver Lake-Michael Dell agreement.

If they are superior, Silver Lake and Michael Dell will get one shot at revising their original bid. Unlike most other go-shop processes, where the original bidders get several chances to match rival bids, Dell has given its founder and Silver Lake the right to do so only once.

EXCLUSIVE – Southeastern had eyed joining

(Reuters) – Dell Inc (DELL.O) is set to disclose next week that its largest independent investor, Southeastern Asset Management, originally expressed interest in joining the proposed leveraged buyout deal that it now opposes, according to two people familiar with the matter.

On January 29, a week before the technology company’s founder Michael Dell and private equity firm Silver Lake Partners announced their $24.4 billion buyout bid, Southeastern and its lawyers met with one of Dell’s independent directors, Alex Mandl, who was part of a special committee reviewing the company’s strategic options. Also at the meeting was the committee’s legal adviser, Debevoise & Plimpton LLP.

Southeastern said at the meeting that it was interested in joining the leveraged buyout and retaining a stake in Dell, said the sources who had knowledge of the Dell filing on the proposed merger, which is expected to be published as soon as next Monday. Southeastern owns 8.5 percent of Dell, which made its name as a personal computer maker, but now also sells business software and technology services.

Southeastern also said it would oppose any buyout in the range of $14 to $15 per share (a range that had been mentioned in some media articles) that did not permit participation by large shareholders, one of the two sources said. The proposed deal, announced on February 5, is for $13.65 per share.

Representatives for Dell and Southeastern declined to comment. Southeastern has said publicly since the proposed buyout was announced that Dell is worth at least $24 per share, and the asset management company has been trying to persuade other shareholders to oppose the buyout.

It is unclear what Mandl’s response was to Southeastern’s request to join the buyout or whether Southeastern’s proposal was communicated to Michael Dell and Silver Lake.

People close to the Dell camp say the merger document will show that Southeastern is now trying to kill a deal that it had wanted to participate in. But a person close to Southeastern said there is no inconsistency in their private discussions and public statements.

The person close to Southeastern pointed to the money manager’s February 8 public letter to Dell’s board, which stated that Southeastern would have endorsed “a go-private type sale where current shareholders could elect to continue to participate in a new company with a public stub…Unfortunately, the proposed Silver Lake transaction falls significantly short of that.”

It is unclear whether the buyout group’s insistence that the company be taken private was critical in Southeastern’s eventual opposition to a takeover by the Michael Dell-led group.

Dell’s board has approved the Silver Lake buyout and also set a 45-day “go shop” period to see if better alternatives emerge. The period ends early Saturday morning.

Memphis-based Southeastern, led by fund managers Mason Hawkins and Staley Cates, has a lot of money riding on Dell. The fund accumulated its Dell stake – worth about $2 billion – at an average cost of $16.88 per share. That adds up to a loss of almost $400 million at the current buyout price.

Billionaire investor Carl Icahn has also thrown his weight against the buyout, arguing that Dell should borrow money to pay shareholders a special dividend of $9 per share instead. Icahn has not disclosed the size of his stake but CNBC reported on March 6 that he owned around 100 million shares, or 6 percent of the company.

Cyber attack on S.Korea came from Chinese IP – Seoul

(Reuters) – A hacking attack on the servers of South Korean broadcasters and banks originated from an IP address based in China, officials in Seoul said on Thursday, raising suspicions the intrusion came from North Korea.

An unnamed official from South Korea’s presidential office was quoted by the Yonhap news agency as saying the discovery of the IP address indicated Pyongyang was responsible for the attack on Wednesday.

A previous attack on a South Korean newspaper that the government in Seoul traced back to North Korea also used a Chinese IP address.

“We’ve identified that a Chinese IP is connected to the organisations affected,” a spokesman for South Korea’s Communications Commission told a press conference.

The attack brought down the network servers of television broadcasters YTN, MBC and KBS as well as two major commercial banks, Shinhan Bank SHINBC.UL and NongHyup BankNAGRIB.UL. South Korea raised its alert levels in response.

Investigations of past hacking incidents on South Korean organisations have been traced to Pyongyang’s large army of computer engineers trained to infiltrate the South’s computer networks.

“There can be many inferences based on the fact that the IP address is based in China,” the communications commission’s head of network policy, Park Jae-moon said. “We’ve left open all possibilities and are trying to identify the hackers.”

It took the banks hours to restore operations. Damage to the servers of the TV networks was believed to be more severe, although broadcasts were not affected.

About 32,000 computers at the six organisations were affected, according to the South’s state-run Korea Internet Security Agency, adding it would take up to five days to fully restore their functions.

North Korea has in the past targeted South Korea’s conservative newspapers, banks and government institutions.

The biggest hacking effort attributed to Pyongyang was a 10-day denial of service attack in 2011 that antivirus firm McAfee, part of Intel Corp, dubbed “Ten Days of Rain”. It said that attack was a bid to probe the South’s computer defences in the event of a real conflict.

Apple’s iPad to fall behind Android as tablet war grows

(Reuters) – Shipments of tablets running Google Inc’s(GOOG.O) Android will overtake the iPad this year for the first time, research house IDC predicted on Tuesday, as Apple Inc(AAPL.O) cedes more mobile market share to hard-charging rivals around the globe.

A growing variety of smaller and cheaper Android tablets from Google to Amazon.com Inc will catch on this year with more consumers and chip away at Apple’s dominance since the first iPad launched in 2010, International Data Corp said.

iPad and iPhone shipments are expected to keep growing at enviable rates, but arch-rival Samsung Electronics (005930.KS) and others have hurt Apple with a combination of savvy marketing, greater variety and rapid technology adoption.

On Thursday, Samsung takes the wraps off the fourth generation of its flagship Galaxy, the smartphone that helped the South Korean giant knock the iPhone off its top ranking for part of last year.

A growing perception that the company co-founded by Steve Jobs may be losing its competitive edge has weighed on its shares, which have lost more than a third of their value since hitting a high in September.

IPHONE COULD GO WAY OF BLACKBERRY?

In the latest criticism from Wall Street, Jefferies analyst Peter Misek on Tuesday compared Apple to Blackberry (BB.TO) saying the iPhone is now on the defensive against Samsung’s devices.

“Historically when handset makers fall out of favor (e.g., the Razr, Blackberry, HTC) they fall faster/further than expected,” Misek said.

Now, IDC says Apple may begin losing some its lead on tablets as well, though it remains the top seller among manufacturers.

iPad shipments are expected to account for 46 percent of the tablet market in 2013, down from 51 percent last year, IDC said. Devices running Android are expected to grow their market share to 49 percent this year from 42 percent last year.

Google’s Nexus 7 tablet and Amazon.com Inc’s (AMZN.O) Kindle, which uses its own customization of Android, made major inroads with consumers last year. In November, Apple launched its own foray into smaller-sized tablets with the iPad mini.

“One in every two tablets shipped this quarter was below 8 inches in screen size. And in terms of shipments, we expect smaller tablets to continue growing in 2013 and beyond,” IDC said in a press release.

APPLE REVS GROWTH SLOWS

Last month, Hewlett-Packard Co (HPQ.N) announced the launch of the Slate 7 tablet powered by Android, a centerpiece of that company’s effort to expand from the shrinking personal market into mobile.

Apple is expected to grow its revenue by $26 billion in its fiscal year ending in September, just over half of the $48 billion increase in revenue it saw the year before, according to Thomson Reuters I/B/E/S.

A group of suppliers that depend on Apple for more than half of their business saw its sales slump 31 percent in February compared to January, according to Topeka Capital Markets analyst Brian White, who does not identify the companies in the group.

Shares of Cirrus Logic (CRUS.O), which gets three quarters of its revenue from selling audio chips to Apple, have fallen 23 percent this year, including a 2.89 percent drop on Tuesday.

Many component suppliers to Apple, like Qualcomm (QCOM.O) and Toshiba (6502.T), also do significant business with Android device manufacturers.

“The open ecosystem at Android has allowed there to be more suppliers. As a chip guy, I always want to have as many irons in the fire as possible because the ride at the top tends to only last five years,” said RBC analyst Doug Freedman.

Underscoring the increasing opportunity in mobile for Apple and its competitors, IDC also raised its 2013 tablet shipment forecast to 190.9 million units, up from its previous forecast of 172.4 million units.

Last year, global tablet shipments grew to 128.3 million units, up from 72 million in 2011, according to IDC.

In the smartphone market, which reached 545 million units shipped last year, Apple has already fallen behind Samsung.

Samsung is likely to sell 290 million smartphones this year, up 35 percent from 2012, according to Strategy Analytics. Apple’s smartphone sales are projected to reach 180 million this year, up 33 percent.

IDC said tablets running Microsoft’s (MSFT.O) Windows 8 platform would grow their market share from 1 percent last year to 7.4 percent in 2017.

Tablets running the Windows RT operating system, which is not compatible with older software that runs on Windows, will see their market share stay below 3 percent through 2017, IDC said.

App lets children, budding designers create 3D printable dolls

(Reuters) – A new iPad app enables budding designers and artists to create their own dolls that are made overnight with 3D printing technology.

The London-based company MakieLab, which also offers customized toys and games, said it seeks to encourage creativity and crafting. With the Makies Doll Factory, children can design the doll’s facial features, hairstyle and clothing.

“The technology means we can make dolls with individual faces, or dinosaurs with unusual markings, or cars with specially-designed trims,” said Alice Taylor, the company’s founder and CEO. “That’s something that mass production can’t do, and 3D printing can do.”

When the digital version is finished in the app, it is sent to 3D printers that manufacture the body parts, which are assembled and dressed so the 10-inch (25.4 cm) dolls can be shipped within 24 to 36 hours after ordering.

The 3D technology prints objects from computer designs by adding plastic layer-upon-layer until an object is formed.

The dolls, which are manufactured in Amsterdam and London, can also feature flashing eyes and cheeks by inserting an electronic chip into the doll’s head.

The basic dolls sell for 59.99 pounds. Hair, skin and clothing can each be added for additional fees ranging from 7 to 30 pounds. The company said it is working on iPhone and Android apps and a game that will allow the dolls to co-exist in the digital world.

Taylor said with 3D printing toys can be manufactured locally and quickly, but she doesn’t expect the technology to replace traditional toy manufacturing methods.

“A lot of people ask, ‘Is this going to replace injection molding?’ And the answer is of course not because injection molding is cheap and we’re always going to need mass produced stuff,” she said.

On Facebook, app makers face a treacherous path

(Reuters) – Last spring, the future for Viddy, a video-sharing Facebook app, seemed as sunny as southern California’s skies.

Based a block away from Venice Beach, the 30-person startup impressed prospective investors with skyrocketing user growth figures and won funding from them at a $370 million valuation. The tech press hailed it as the “Instagram for video,” potentially ripe for a billion-dollar-plus buyout. Justin Bieber wanted to invest – and the pop star eventually did just that.

But this month, the company fired its chief executive, laid off nearly half of its staff and blamed plummeting user numbers on something it once believed to be its ticket to success: Facebook Inc (FB.O).

“Everyone has known for years that Facebook can be a huge driver of traffic, but Facebook also frequently changes who gets traffic,” said Brian O’Malley, a Viddy director and a partner at venture capital firm Battery Ventures, which is an investor in Viddy. “We certainly didn’t anticipate the decline.”

Viddy’s dramatic reversal of fortune is a common tale among builders of software and services that rode the No. 1 social network to viral stardom, only to plummet when Facebook made one of its frequent changes in the way third-party apps can communicate with and solicit customers.

Investors and entrepreneurs say that the unpredictable way that Facebook cuts off apps or suppresses their presence has made them increasingly wary of building companies that rely on Facebook. Some believe Facebook could eventually attract regulatory scrutiny because of its ability to make or break companies that rely on its billion-strong base of users.

Douglas Purdy, Facebook’s director of developer products, said the company boosts traffic to apps that prove to be popular and takes it away from those that overwhelm people with notifications or are otherwise abusive or unpopular. In the past year and a half, Facebook has cut down spam complaints by 90 percent, he said.

“We don’t want to be in the business of king-making,” Purdy said. “In the end, users decide what they care about, and they have control over it. If you’re a great developer and you’re good at sharing really good content, you’re going to get traffic.”

He declined to comment on relationships with individual developers.

Developers sympathetic to Facebook say that the company has rightly prioritized its users, who could abandon the network if they feel overwhelmed by solicitations from apps.

“Facebook thinks first and foremost about the user,” said Riccardo Zacconi, the chief executive of game maker King.com. “For companies that were relying 100 percent on virality, there’s been a negative impact, but it’s been a better user experience.”

Viral growth occurs when current users recruit other users, by inviting them to join, touting the content or sharing an application.

It is not clear if Viddy and other firms who have partly blamed Facebook for declining fortunes would have run into difficulties eventually anyway as, for example, rivals came out with new products.

HOT STARTUPS

But as consumers spend increasing time on mobile devices, disaffected developers could choose to focus on marketing their apps directly to Apple Inc’s (AAPL.O) App Store and Google Inc’s (GOOG.O) Play market – two platforms that compete with Facebook.

“Facebook is in a platform battle that they’re losing right now,” said Nabeel Hyatt, a partner at Spark Capital, a venture capital firm that has backed rival social media companies like Twitter and Tumblr. “When we have startup companies coming in and presenting about where they’re going to get users, most of those conversations are about <Apple’s> iOS and then Android, and then maybe Facebook.”

For hot startups, the Facebook platform used to be “the cocktail party you had to be at,” Hyatt added. “It’s becoming just another cocktail party.”

For years, startups like Viddy and news apps like The Washington Post Social Reader used automated messages or posts on its users’ Facebook pages to lure other users to install its app. But that put them at the mercy of “EdgeRank,” the opaque and closely guarded algorithm that Facebook constantly tweaks to control whether an app’s posts are broadly exposed to users.

In financial disclosures, Facebook has warned investors that a fundamental challenge in its business model is finding the balance between the “frequency, prominence and size of ads and other commercial content we display” with its user experience. While Facebook is under intense pressure from Wall Street to turn its massive audience into growth in advertising revenue, a lot of the changes that rattle firms like Viddy seem to be more related to Facebook’s attempts to retain users.

Viddy’s implosion has been spectacular – it fell from 35 million monthly users at its peak last year to half a million recently, according to Appdata.com, a tracking service.

But the collapse is not unique. Branchout, a business networking service built on top of Facebook, raised $25 million last April from A-list backers including Accel Partners. But now it languishes with just 100,000 monthly users on Facebook, down from a high of 39 million, after Facebook limited the automatic notifications that Branchout used to attract users.

The poster child for fallen Facebook stars has been Zynga Inc (ZNGA.O), the game publisher that shot to popularity, and a lucrative IPO, with viral Facebook games like FarmVille that distributed a deluge of notifications about virtual farm animals before Facebook clamped down.

Zynga, whose shares are trading two-thirds below its IPO price, has since announced that it would loosen its ties with Facebook and develop its own network for gamers. Zynga declined to comment for this article.

PUSH-AND-PULL

The fate of Facebook apps have drawn attention to the perennial push-and-pull between large technology companies and smaller developers. Like tech industry heavyweights before it, Facebook recognizes it can expand its market power and offer new features by fostering a thriving ecosystem. But those relationships have historically been fraught.

In the 1990s, the Windows operating system rose to dominate personal computing, but its maker Microsoft Corp (MSFT.O) was accused of favoring its own browser and word processor over its competitors’ offerings like Netscape and WordPerfect.

Similarly, Apple Inc’s iPhone dominated smartphone sales 15 years later with the help of third-party apps – but it, too, has periodically attracted attention from the Federal Trade Commission over whom and what it lets into its App Store and iTunes platforms. Recently, Twitter has also clashed with some third-party developers.

Facebook first opened its programming interfaces to outside developers in 2007. The company later rolled out log-in credentials for third-party sites and then the powerful “Open Graph” protocol, which gives apps developers access to troves of data.

The company said it expects developers to contribute interesting content – rather than game the system for growth.

“Facebook is a story-telling device,” said Purdy, the Facebook executive. “Driving millions and millions of installs is not why we built it.”

“There are always going to be players who, for whatever reason, aren’t seeing what they want or feel disenfranchised,” he added. “But when we look at the totality of the ecosystem, it’s never been stronger.”

And current and former Facebook employees argue that the company has sought to communicate to its developers that they shouldn’t be over-reliant on Facebook.

In Zynga’s early years, for example, Facebook employees advised Zynga CEO Mark Pincus on renaming Zynga’s highly successful “Texas Hold’em” poker game on Facebook to “Zynga Poker,” in order to strengthen Zynga as an independent brand and differentiate it from competing gaming companies, people close to the situation said.

COMPETITIVE PRACTICES

But there are signs that Facebook may not be as collaborative as it once was.

In January, Tom Katis, the chief executive of Voxer, a voice-messaging app that has raised $30 million from Institutional Venture Partners and Intel Capital, received an email from Facebook representatives requesting a phone call. Facebook told Katis that it intended to cut off Voxer, which had used Facebook’s log-in credentials for over a year, from accessing Facebook’s friends data because it did not share its own data with Facebook – and because Voxer replicated communications features that Facebook wanted to build itself.

Katis has brushed off the incident, saying he is confident Voxer will continue to grow swiftly independent of Facebook.

“We were flattered that Facebook called us a competitor,” Katis said. “It’s their platform. They can do whatever they want. But it’s just another cautionary tale.”

Later that month, Facebook blocked Yandex, the Russian search engine, from crawling through its network. Facebook said that those companies took advantage of its network without sharing any information back.

Facebook’s Purdy denied the company is being less collaborative, saying it is seeking to have “nuanced and mature” discussions with developers when conflicts arise.

Although there are no indications that the Federal Trade Commission, which has wrestled with Facebook over privacy issues, has looked into its competitive practices, experts broadly say that this is all but assured as Facebook continues to grow.

“One of the issues that Facebook faces that is also true for Google is that it supports so many developers,” said David S. Evans, a professor at the University of Chicago Law School who has advised Google and Microsoft on antitrust matters. “Just by the law of large numbers, you’re going to get complaints. That’s a real vulnerability for the big Internet platforms.”

For now, developers say they are frustrated mostly because they cannot anticipate the vagaries of Facebook’s EdgeRank. Last week, Facebook took the rare step of publicly refuting comments by a New York Times writer who opined that the social network might be artificially suppressing user posts as a way to encourage people to pay to disseminate their posts.

“You have the combination of few tools available to build your business and no clear lines of communication,” said the founder of a startup who spoke anonymously because his company still depends on Facebook for its traffic. “Is it worth it for founders today to quit your job, raise a bunch of money, hire a bunch of people, only to get to a point where it’s really hard to get viral?”

REAL BUSINESS MODEL

But even if it left some companies in ruins, app makers who take the long view concede that Facebook’s crackdown had an unintended benefit: It helped deflate a social media bubble propped up by unsustainable startups.

“You need a real business model now,” said Aaron Ginn, an expert in Web traffic development who formerly worked for StumbleUpon, a website discovery app. “You can’t rely on viral growth.”

Branchout Chief Executive Rick Marini said his company was in the midst of improving its own offering.

“Facebook made several changes to the viral channels and app developers needed to react,” Marini said. “For Branchout, the silver lining is that we’re focusing more on our product development instead of viral user acquisition.”

Meanwhile, a much leaner Viddy consolidated operations under co-founder J.J. Aguhob and released a new version of its iPhone app.

O’Malley, the Viddy investor, said in hindsight, the boom in traffic from Facebook – and the stratospheric investor expectations that followed – set the company on the wrong track.

“With the Facebook traffic and with the larger round, did we lose focus on what was important? Yes,” O’Malley said. “If you can get traffic from Facebook, great. But don’t bank on it.”

U.S. judge will not suspend Apple vs. Samsung case

(Reuters) – A U.S. judge on Friday refused to suspend Apple Inc’s (AAPL.O) patent lawsuit against Samsung Electronics Co Ltd (005930.KS), a case that includes search technology in Apple’s Siri voice assistant.

The ruling came from U.S. District Judge Lucy Koh in San Jose, California. Apple’s Siri lawsuit involves different patents than the case that went to trial in California last year.

Representatives for Apple and Samsung declined to comment.

Apple won a $1.05 billion verdict last August against Samsung, but last week Koh slashed about $450 million from that amount and ordered a new damages trial. The judge had already rejected Apple’s request for a permanent sales ban against several Samsung phones.

Apple has appealed and a ruling is not expected until September at the earliest.

Apple also accused Samsung in a second lawsuit of violating a separate batch of patents, including the rights to search technology that is part of the iPhone Siri voice feature. That case is scheduled for trial in March 2014.

At a hearing last month, Koh asked whether the second case should be put on hold until after the appeals court ruled on the first. Apple objected to the idea, and on Friday Koh ruled that the case could continue.

However, Koh ordered both companies to “significantly” streamline the issues in the case by cutting down on the number of legal claims and expert witnesses.

The legal fight has been widely viewed as a proxy war between Apple and Google Inc (GOOG.O). Samsung’s hot-selling Galaxy smartphones and tablets run on Google’s Android operating system.

The case in U.S. District Court, Northern District of California is Apple Inc. vs Samsung Electronics Co Ltd et al, 12-630.

Facebook unveils ‘mobile first,’ picture-friendly newsfeed

(Reuters) – Facebook Inc(FB.O) introduced the biggest change in years to its popular newsfeed on Thursday, with a new look and focus on photos that is expected to make the social network more ad-friendly and may entice users to spend more time on the website.

The changes to the newsfeed, whose look and feel had remained largely unchanged since Facebook’s inception, include a division into several sections, with separate areas for photographs and music.

The newsfeed is the ever-changing stream of photos, videos and comments uploaded from friends, and is the first page most users see upon logging in.

Facebook Chief Executive Mark Zuckerberg said the makeover was part of an effort to position the social network as a “personalized newspaper,” complete with different sections for users to explore.

It comes with a revamped interface that gives more prominence to visual media, such as photos and videos.

The makeover comes roughly a month after Facebook introduced a new social search feature it dubbed “graph search” that makes it easier for the social network’s more than 1 billion users to discover more content on the social network.

The much-needed changes unveiled on Thursday, which standardize the network’s look across different types of desktop and mobile devices, bring Facebook up-to-date as Google+, the much younger social network started by Google Inc (GOOG.O), begins to incorporate more video and images.

“This is just going to provide more opportunity for people to click around and stick around,” said Brian Blau, an analyst with industry research firm Gartner, about the revamped newsfeed.

“The newsfeed was kind of outdated. This sort of brings it up to maybe what’s comparable to…their competition, and partner sites that are focusing on media and richness.”

Facebook’s newsfeed is one of three “pillars” of the service, along with search and user profiles.

The updated newsfeed provides more space for the photos and videos that users share on the network, and provides a more consistent look and feel between the version for PCs and for mobile devices such as smartphones and tablets. The changes will begin rolling out in limited fashion from Thursday, Facebook said.

Facebook executives say the updates will help keep organized the increasing jumble of content available on the social network as its user base grows.

The last major update to the feature occurred in September 2011. Since then, the company has incorporated ads directly into the feed and has shifted its focus to creating “mobile-first experiences,” because more people now access the social network from smartphones than from desktop computers.

FACEBOOK VERSUS GOOGLE

Marketers will be able to fashion more compelling ads thanks to the increased real estate for photos, said Hussein Fazal, the chief executive of AdParlor, a firm that helps companies advertise on Facebook. “Larger images will result in higher click through-rates, a higher level of engagement and better performance,” Fazal wrote in an email.

Still, analysts say the company needs to tread carefully to avoid inundating users’ various feeds with advertising, as Facebook tries to sustain a rapid pace of growth that helped it debut on public markets at the highest-ever valuation for a technology company.

The world’s largest social network is moving to regain Wall Street’s confidence after its botched IPO last year, addressing concerns about its long-term prospects – many of which center on an industry-wide shift toward the use of mobile devices.

Facebook shares, which are still more than a quarter off their IPO price of $38, closed up 4 percent at $28.57 on Thursday on the Nasdaq.

Facebook and Google, which both got their start on desktop computers, are now managing a transition of their products onto smartphones and tablets, which typically yield less revenue than on PCs.

The two Internet mainstays are also waging a war for revenue in mobile advertising – a market that is still small compared with the traditional desktop but that is growing exponentially.

In terms of overall mobile advertising, Google commanded a 53.5 percent share in 2012, aided by its dominance in search-based ads. Facebook had just 8.4 percent, a distant runner-up, according to estimates from research house eMarketer.

But in terms of mobile display ad sales, Facebook narrowly edges out its rival with 18.4 percent of the market versus Google’s 17 percent, the research outfit estimated.

PRESSURE ON THE SYSTEM

The makeover is partly prompted by complaints about increasing clutter on Facebook’s network.

As Facebook has grown to more than 1 billion users, the amount of content that users and companies post to the website has surged. Facebook users only see a small portion of that content, culled by Facebook’s proprietary algorithm.

In recent months, some companies and users, including entrepreneur Mark Cuban, have grumbled that their content was not getting enough exposure in the newsfeed, because Facebook gives paid ads priority in the newsfeed.

Facebook’s vice president of product, Chris Cox, acknowledged that there was “more pressure on the system” to feature the various content, as Facebook has grown in size.

The additional newsfeeds provide more opportunities for content to appear in front of users. A photos-only feed displays pictures shared by a user’s connections on Facebook as well as on Facebook-owned Instagram and other photo apps that are integrated with the social network.

A revamped version of an existing but little-used Music feed aggregates the songs that a user’s friends are listening to, and includes posts from bands and performers in which a user has expressed an interest.

Facebook also introduced a “Friends Only” feed that displays every message shared by a user’s friends in chronological order — rather than chosen by an algorithm — as well as a “Following” feed that gathers posts from news publishers, celebrities, sports teams and other groups or businesses that a user subscribes to.

“The basic idea is sometimes you want five minutes and you want to see the top stuff, sometimes you want to spend an hour and go through a lot of different stuff,” Cox said in an interview after the event.

The additional feeds could also provide Facebook with more space to offer ads on its newsfeed, though a spokeswoman said the additional news feeds would not initially feature ads.

BRICs still lag in annual cloud computing scorecard

(Reuters) – Brazil, Russia, India and China still lag far behind developed countries in policies considered critical for the future of cloud computing, but each made some progress over the past year, a U.S. industry group said on Thursday.

The Business Software Alliance, which represents U.S. industry heavyweights such as Microsoft Corp (MSFT.O), said the BRIC nations all came in at the bottom half of 24 countries surveyed in its second annual cloud computing report.

Brazil moved from final position to 22nd with a tally of 44.1 out of a possible 100 points.

China, India and Russia each also rose two slots with scores of 51.5, 53.1 and 59.1, respectively.

Cloud computing refers to providing software, storage, computing power and other services to customers from remote data centers over the Web.

Demand for cloud-based software is rising rapidly because the approach allows companies to start using new programs faster and at lower cost than traditional products that are installed at a customer’s own data center.

“The cloud is really the hot sector of IT right now,” and U.S. companies have a big interest in countries harmonizing policies instead of chopping the cloud into pieces, said Robert Holleyman, president of the Business Software Alliance.

At the same time, the aggregation of massive amounts of data in large data centers “creates new and highly tempting targets” for cyber attacks, making it vital that both law enforcement officials and cloud providers have adequate tools to fight the intrusions, the BSA report said.

“Australia, France, Germany, and Japan score extremely highly in the cybercrime section. Canada, China, (South) Korea, Russia, and Vietnam score poorly. The country that shows the most improvement is Brazil, which finally passed cybercrime laws after a long campaign,” the report said.

The 24 countries included in the survey represent 80 percent of the global information and communications technology industry. They were assessed in seven areas, including data privacy, security, free trade, intellectual property protection, infrastructure and support for industry-led standards to promote smooth data flows.

China got a small boost in this year’s rating for introducing new data privacy laws, while Russia got credit for reforms made as a result of its entry into the World Trade Organization. India’s improved score reflects changes to its copyright laws to bring them in line with international standards, the report said.

Japan came in first again with 84.1 points. It was followed closely by other developed countries, including Australia, the United States, Germany, Singapore, France, Britain and South Korea, which all scored in the upper 70s.

Singapore jumped to fifth place, from tenth last year, after it passed a new data privacy law praised by BSA for its “light touch” and balanced approach.

“They are really taking on digital trade as another way of putting a stake in the ground and to say they are going to be global hub of business,” Holleyman said.

The United States finished second in the survey, up from third in the inaugural report, while Germany, France and Britain each slipped a notch and Italy fell four spots.

Holleyman said the European Union was working on data protection regulations that could potentially make it harder to move data across its borders.

“If that happens I think you can continue to see further sliding by the major European countries,” Holleyman said.

Talks on a U.S.-EU free trade agreement are expected to start by June, he said.

Cross-border data flows are already a focus in talks on the Trans-Pacific Partnership (TPP), a proposed regional free trade agreement between the United States and ten other countries in the Asia-Pacific slated for conclusion this year.

One of the TPP countries, Vietnam, finished last in this year’s cloud computing scorecard, with a tally of 40.1 points.

Vietnam, Indonesia, China and India have pursued policies that threaten to divide the cloud, either by trying “to wall themselves off or by imposing local requirements that are antithetical to the very underpinning of cloud computing,” Holleyman said.