Wednesday, December 31, 2008

Take the money and run!

There are a lot of woulda-coulda-shouldas in this year of extreme upheaval in politics, the financial and energy markets. Among these are the various acquisitions that didn’t happen.

This year more than any other year reinforced two hard and fast maxims for small (or smaller) companies

  • It’s better to sell high than try to sell at the peak.
  • Cash is king
On the NYT DealBlog, the “deal professor” Steven Davidoff has a comprehensive list of all the deals that did and did not happen. But earlier in the year, both the NYT and the WSJ listed a few where there must be non-seller regrets.

The latter quoted my favorite Steve Miller song from his hit album of 32 years ago:
Heard on the Street
(www.wsj.com/heard)

OCTOBER 27, 2008
Buyout Targets Should Have Gone for It
By MATTHEW KARNITSCHNIG

A few words of advice to recipients of unsolicited takeover offers: In the future, take the money and run.

Companies that have rebuffed takeover offers in recent months are now trading about 50% below the offer price on average. That's telling, considering that a typical takeover premium is about 30%. All told, 25 unsolicited offers have failed this year, according to Dealogic. In all but a few cases, the reason for the failure was the opposition of the target company's board.
From the various lists, four rejected tech deals stood out:
  1. I’ve written about Microsoft offering of $31/share (later $33/share) for Yahoo, but Yahoo rejected that in hopes of getting $37/share. Instead, the stock closed the year at $12.20, or 53% lower than the revised offer price. (Put another way, the offer was 170% higher than where the stock is today). The $47 billion deal was half cash and half stock, so in retrospect, demanding $33 in cash would have been the smartest move for Yahoo shareholders. (Microsoft stock held its value until Sept. 1, and even today is only one-third lower than where it was when Microsoft cancelled the deal).
  2. Almost as big was the proposed combination of former European telecommunications monopolies. In June, France Telecom offered $46 billion for TeliaSonera, itself the result of a 2002 hostile takeover (or at least a bear hug) by the Swedish ex-PTT for its Finnish counterpart. This may not have been as stupid: although the deal was valued at around 60 kronor/share and shares closed the year below 39kr, the deal was half-stock, half-cash. France Telecom shares actually finished around €20 — above where they were when the offer was outstanding in June, as shareholders feared the impact of the acquisition upon debt and strategic focus.
  3. SanDisk — the ubiquitous maker of flash memory cards — spurned a $26/share (nearly $6 billion) cash offer, and so Samsung gave up. Today, shareholders would be 170% richer if management had said yes.
  4. The other highly-publicized (and unwanted) suitor in the tech world was Electronic Arts, which offered $26/share for Take-Two Interactive (maker of Grand Theft Auto 1..∞). That would be a 244% premium over the 7.56 year-end price. That was $2 billion (cash) that shareholders never saw.
Davidoff (a real professor) gives a few managers credit for standing up for a better deal. On the other hand, for nearly all of the rejected deals the stock is trading far below the offer price. The caveat is that for some of these rejected deals, the offer was priced (entirely or in part) with the acquirer’s stock, which in almost all cases collapsed during the bear market of the 2nd half of the year.

In almost all cases, executives reject a takeover because it would eliminate their personal autonomy and control, but claim it’s because shareholders can do better. According to the research (this is not my area), the hostile takeover forces management to focus on fixing the company (to forestall future raiders), and if everything goes well, after the turnaround they engineer a successful sale at a higher price and everyone is happy.

This year, shareholders of the above targets would have clearly been better off accepting any all-cash offer. (They also would have been better off dumping their shares at any price before Sept. 1, but that’s another story). We will not see the summer valuations again for 2, 5 or perhaps even 10 years, so shareholders have lost billions due to executive hubris.

Tuesday, December 30, 2008

Updating the history of Silicon Valley

In July, I went to The Tech (a San JosĂ© children’s museum) to hear a talk on the history of Silicon Valley by John McLaughlin, amateur historian and founder of the Santa Clara Valley Historical Association.

In the early 1990s, McLaughlin researched an oral history of Silicon Valley’s origins. The interviews were aired on PBS and he also published as a coffee table book, The Making Of Silicon Valley: A One Hundred Year Renaissance.

At the July talk, McLaughlin aired some of the clips from the earlier show (still available on VHS) and talked about his current project to update the story to the present. I chatted with him afterwards about his interest in local history, how the earlier project came about and his hopes for the current project.

In the Merc this morning, columnist Mike Cassidy informed me (and the rest of the Valley) that the updated story is now out in book form. To update the story, McLaughlin enlisted Leigh Weimers, who retired in 2005 as a Merc columnist.

The new book, Silicon Valley: 110 Year Renaissance, is now for sale on Amazon (where else?) as well as the association’s website. The updated DVD (as well as the earlier DVD) are only available from the association, which also sells McLaughlin’s other books on local history.

Other important snippets of SV lore are available as articles on the association website. One of the most important is the history of Federal Telegraph, a key antecedent to the Valley’s concentration of electronics industries (including HP), but an old enough story to predate the 1990s-centric information available on the free WWW.

From my own knowledge of the Valley, McLaughlin has the details of the history right, and thus his current (and earlier) work are an important resource for anyone who wants to understand how the Valley came to be.

Monday, December 29, 2008

Fresh & Easy: What's the point?

Earlier today, we visited our first Fresh & Easy store. The specialty grocery chain is the first US market entry by the British retail giant Tesco, which has committed $2 billion over five years to the effort.

When we planned on going, my mother-in-law said “don’t bother.” She said it was like Trader Joe’s, only more expensive. My wife and thought it was somewhere between a Trader Joe’s and a Whole Foods, two well-established US specialty retailers. We were also surprised that there was nothing distinctively British about it, with no food items to appeal to expatriates or those who’ve lived in Britain.

Overall, if I’d never seen a Trader Joe’s, I would have thought Fresh & Easy was a nice store. Instead, it’s just a pale imitation — without the hustle & bustle of the loyal TJ’s shoppers spending their dollars.
But then I found that all of this is old news, particularly to readers of the LA Times. A year ago, the LAT headlined: “British food it’s not/Shoppers find Fresh & Easy a blend of Trader Joe’s and Ralphs” (where Ralphs is the local supermarket chain). In April, the LAT speculated the store is 70% below sales targets, and on its one year anniversary, noted that store openings are also behind target. (Since it’s non-union, it even has a smear site organized by UFCW.)

The thing I didn’t get is: why go head-to-head with Trader Joe’s, which has a similar format, but nearly a 50 year head start and now some 315 stores? TJ’s is headquartered and mainly concentrated in California, so why not start somewhere else, where its presence and footprint are less? If Tesco came in as a less expensive Whole Foods — in places that had never seen a TJ’s — I believe it would have had a more auspicious launch. As it is, unless it buys an established retailer — something it is wont to do — I can only see one end to Tesco’s US ambitions: ignominious defeat.

Photos: Fresh & Easy store in Lake Forest, Monday afternoon.

Sunday, December 28, 2008

Netbooks: the future of PCs

In my in-laws’ Sunday paper this morning, Fry’s advertised a Windows notebook computer for $300, their “everyday low price” albeit with “no rainchecks.” (Perhaps they now have better prices after suing a former exec for defaulting on $10m in loans to cover gambling losses). The same computer is $327 at Amazon.

While this particular model of the Acer Aspire One has only an 8gb flash memory drive, it otherwise has the recommended features: 8.9" screen, 1gb of RAM and Windows XP. It certainly makes me feel like a dolt for spending $150 to (as long planned) put Windows XP on my MacBook Air instead of buying a new $300 netbook.

There is no denying that the netbook boomlet — started in Fall 2007 by the Asus Eee PC — was one of the biggest computer stories of 2008. The 1 million units sold in 2007 have reached 13 million this year as both Taiwanese ODMs (like Acer) and major branded PC makers (Dell, HP, Lenovo) have jumped into the fray.

As it turns out, the netbook was also the subject of one of the better student projects earlier this month from my MBA technology strategy class. The four students started out asking whether netbooks are betwixt and between smartphones on the low end, and laptops on the high end. Their conclusion was that the netbook looks a lot like a Clayton Christensen “disruptive innovation” for the existing laptop market. I am inclined to agree (which is why they got a good grade).

I draw four conclusions from the rapid success of the netbooks.

First, Intel’s low-cost, power-saving Atom microprocessor has been both a success and a failure. It’s a success in that it’s becoming the popular choice for the various netbooks. However, with the exception of a (numerically) few Linux servers, Intel is still basically a one trick pony: selling microprocessors to run Windows. Their efforts to use the Atom to create an entire new category of device, the “mobile Internet device,” is instead commoditizing its main source of product growth, laptops.

Second, the fact that netbooks are Windows machines raises doubts about whether any new computing platform can be established, at least in the next decade. Sure, a wide ranges of vendors offer netbooks with Linux but 90% of buyers prefer XP. In retrospect, Palm never stood a chance in its hopes to establish the Linux-based Foleo on its own and so was right to pull the plug.

Third, within 18 months — if not Fall 2009 then Fall 2010 — netbooks will take over the US college market, becoming the standard computer for most entering freshmen. (In the rest of the world, it will be netbooks vs smartphones and I can’t predict the winner yet). For students, netbooks have no disadvantages and many advantages. Students don't buy CDs or software; except for PC gamers, they don’t need high performance machines. They walk all day across campuses, long distances, and thus need to lighten their backpacks as much as possible. They are cash poor, and some carry laptops in urban campuses where robbery is a risk. And unlike us geezers, they have good eyes, and thus can read smaller but higher resolution LCD screens.

Given all this, Apple needs to respond to the netbook threat. Yes, my MacBook Air is small, light, with a low-power processor, small hard disk and no DVD drive — but it’s $1600, not $300-400. There have been rumors of an Apple netbook in October and November, but they are so vague to make it clear that no announcement is coming at next month’s Macworld Expo.

While I think Apple will respond (and probably in 2009), I think the response will be different than expected; I believe today’s predictions will prove as inaccurate as the predictions of the “Mac tablet” (which proved to be the iPod Touch). For 20 years, Apple has been loathe to cannibalize its main franchise, and I don’t think it will cannibalize its 13" MacBook (or MacBook Air) sales to respond to netbooks.

Instead of a stripped MacBook, I think it more likely that Apple will offer a scaled up iPod Touch or iPhone: adding a keyboard and increasing from the 3.5" 480x320 screen to either netbook resolution (9", 1024x600) or perhaps even an HDTV-compatible 720p (1280x720). Unlike the Foleo, such an iPod Touchbook would start life with more than 10,000 applications.

The only question in my mind is whether the device will be a GSM phone or merely a Wi-Fi-connected mobile Internet device. I think requiring an AT&T contract would put Apple at a huge disadvantage, so my money would be on the Wi-Fi device (or both).

Saturday, December 27, 2008

Kindling competition

On Saturday, the WSJ published an interesting compilation of celebrity New Year’s resolutions, with major names (Mitt Romney, Martha Stewart, Wolfgang Puck) as well as prominent people who are mostly or entirely unknown to the general public. As they described their goals

For the New Year, The Wall Street Journal asked some influential people three questions: What professional project do you plan to complete in 2009? What personal resolution do you finally hope to keep next year? And what problem should your industry or professional community tackle more effectively?
One that’s directly relevant to readers of this blog (particularly after yesterday’s posting) is this of an Indian expatriate author:
Vikram Chandra, 47
Author, Mumbai and Berkeley, Calif.

PROFESSIONAL: I just started a new novel a couple of months ago, and in a magical, perfect world I'd finish it in 2009. But my last novel came in at 900 pages, so I'll settle for slow, steady progress.
PERSONAL: I'm the father of a 7-month-old baby, so I think it's time for me to get done with my driving lessons and face the terrors of the DMV.
INDUSTRY: I'd love the publishing industry the world over to accept fully and without further complaint that electronic publishing is here to stay, and to provide innovative, sophisticated and, above all, low-priced competition for the Kindle and Sony Reader.
His sense of realism about the future of dead trees is refreshing. His call for open standards (because that’s the only way the Amazon and Sony products will get competition) is the first I’ve seen from the content side, although such calls have been common from the consumer side.

Of course, there are two open e-book standards already, .epub and .opf, which are available to the maker of any reader. What’s missing is a content publisher building an infrastructure around distributing a large volume of content in an open file format.

Yes, it seems likely that the next entrant into online ebooks will emphasize open standards. As I noted in a chapter I wrote on open standards (in a 2006 book, openness is almost always a challenger strategy — not something firms do if they have a choice, but a weapon they use to gain leverage and increase the odds of success over established (proprietary) incumbents.

On ebooks, publishers probably don’t want Amazon exclusively controlling their channel to American readers, so perhaps (as record labels did for music downloads) they will support a challenger to Amazon.

So to compete with Apple’s iTunes and the lockin provided by its proprietary FairPlay DRM, the iTunes challenger promised in May 2007:
Every song and album in (our) digital music store will be available exclusively in the MP3 format without digital rights management (DRM) software. (Our) DRM-free MP3s will free customers to play their music on virtually any of their personal devices -- including PCs, Macs(TM), iPods(TM), Zunes(TM), Zens(TM) -- and to burn songs to CDs for personal use.
Sounds good? I think so. We could use the same choice for books as well, particularly since there’s only one Amazon reader to date (at least Apple has four different iPod form factors).

How would Amazon feel about this sort of competition? One might argue it should be all in favor of it — since the press release touting open MP3 downloads was to promote the Amazon music store. But, of course, now that they have a lead and lock-in built upon their market power and proprietary file format, for books (unlike music) Amazon probably considers open standards a bad thing.

Friday, December 26, 2008

iPhone anticlimax

iPhoneAs predicted, the iPhone is coming to Wal-Mart. The retailer announced this morning that starting on Sunday, the iPhone 3G will be available at 2500 stores nationwide.

Also as predicted — at least by those who knew anything at all about Apple Inc. — the phone is being offered at the same price as everyone else, less the $2 Wal-Mart discount (to $197 for 8mb and $297 for 16mb models). The phones will be sold at special kiosks within the stores, which explains why there were so many leaks so early for the new distribution channel.

I still think Target would have been a better fit to the brand, but since Apple hasn’t made an official comment, we can only guess as to its motives.

My guess is that Wal-Mart was chosen not for the number of stores (Target has 1500 US stores) but their fit to Apple’s existing geographic coverage. Wal-Mart began life as the discounter to rural America, whereas the suburban Target locations heavily overlap the existing Apple Retail Store and BestBuy locations.

Wal-Mart already sells the full range of iPod players, including the iPod Touch. The existing prices seem to be about $1.12-$1.18 below the corresponding Apple price, so the $2 discount is a big improvement.

From a practical standpoint, Wal-Mart has indicated it will be a price follower, with local stores allowed to match competitor’s prices, e.g. BestBuy’s $9 discount off of list.

Kindle shortage: What is Amazon hiding?

On Christmas Eve, the NY Times published a takeout on Amazon’s efforts this Christmas season to sell the Kindle. As with the 2007 season, the Kindle sold out, and won’t be available until February. The NYT notes that Sony is exploiting the shortage to gain its own sales, while other readers are either on the way or already here. In the latter camp are several iPhone book reading apps, such as Stanza and Classics.

Reading the NYT story on Christmas Day — in dead tree form syndicated to my in-laws’ newspaper — one paragraph jumped out at me:
It is difficult to quantify the success of the Kindle, since Amazon will not disclose how many it has sold and analysts’ estimates vary widely. Peter Hildick-Smith, president of the Codex Group, a book market research company, said he believed Amazon had sold as many as 260,000 units through the beginning of October, before Ms. Winfrey’s endorsement. Others say the number could be as high as a million.
Sorry, but there’s no excuse for such secrecy. In other consumer industries — such as MP3 players or PCs or cellphones (let alone records or automobiles) — reasonably accurate estimates of unit sales are taken for granted, and are the basis for strategic planning by the whole ecosystem. Amazon has been able to prevent any third party estimates of reader sales because it controls its own distribution, and has not chosen to share accurate information with shareholders or analysts.

The Kindle looks to be a big success. Why is Amazon hiding the truth? I can think of three reasons:
  1. It doesn’t want its competitors to know. Somehow I suspect that at least Sony has the resources to find out what’s going on.
  2. It’s saving it for some big splashy announcement. In other words, Jeff Bezos wants to be the next Steve Jobs.
  3. The numbers are embarrassingly small. In other words, the Kindle has sold out because it’s doing a bad job of managing its production supply chain, not because it’s a smash hit.
I will certainly admit that not every schlocky Chinese factory can assemble a device as small and precise as a Kindle, but it seems like after 18 months it should have been able to find a way to make enough units to meet anticipated demand. Perhaps Amazon didn’t want to produce a large number of units because it’s flushing inventories for the next model, but the Christmas season seems too important to miss — particularly if you’re trying to see consumers with a platform to buy your content.

Consistent with their aversion to full disclosure, Amazon issued a vaguely-worded press release Friday with lots of cutesy factoids but not a single dollar figure. In fact, there was no discussion of overall season results, just a claim of “record-breaking” unit sales on the “peak day.” Despite such a lack of information, this PR was oft-remarked (e.g. by Forbes and Henry Blodget) and was credited with raising the stock price (although less than 1%).

From what we can measure, Amazon has clearly been greatly successful at getting content for its book at good terms, leveraging its market power as the country’s second largest seller of books.

As my buddy Doug Klein made clear in several presentations to my SJSU students, cajole (bludgeoning?) the publishers and the existing distribution channel (and its inertia) are key to the success of any company that seeks to shift the book industry from dead trees to electronic distribution. Doug should know, since he was president/COO of the company that made the Rocket eBook, which fought the publishers a decade ago.

Content deals, as with publishing (or music downloads) will tend to be nation-specific, so being the US leader is not assured (or even likely) to lead to Total World Domination of book publishing. This is where open standards will be nice, so that a reader purchased in the US can read content downloaded in the UK or Australia or even Japan.

Will Amazon get the same pressure to open up its proprietary-formatted content as Apple has? Perhaps if it stays out of France, it can avoid such difficulties.

Thursday, December 25, 2008

Merry Christmas

Most companies have shut down for a four (or five) day weekend in celebration of Christmas (unless you’re a Chrysler factory worker, in which case you get a much longer vacation).

Every year when trying to get into the Christmas spirit, I burn through my 26 hours of Christmas songs before I get an itch to hear something new. My best luck has been with Live365, the onetime market leader in Internet radio that I discovered back in 2002 when asked to give advice on their restructuring efforts. Live365 still has the widest range of niche content, so this sort of use is a perfect fit.

After poking around, I can strongly recommend “A Blue Light Christmas,” a Live365 channel live from Elko Nevada that has all the good songs. As the description says:

Now in it's [sic] ninth year of broadcasting classic Christmas music on the Internet, featuring Bing Crosby, Frank Sinatra, Perry Como, Burl Ives, Peggy Lee, Johnny Mathis, Doris Day, Nat Cole, Andy Williams, Gene Autry, and many more
The site doesn’t explain the name. Nine years ago, it would not have been a reference to the blue glow of today’s LED illuminated Christmas lights. The obvious reference is to the name formerly used for K-Mart in-store specials — perhaps due to the frequent Wal-Mart audio ads? Everything on Live365 is cheap (unless you’re a VIP member), so that’s not it. A commentary about class?

Anyway, it’s a great station with the right music. If for some reason I get bored with this after a few days, I can always go back to my hard disk and listen to Christmas music from the Beach Boys, the Boss, or Mannheim Steamroller.

As Charlie Brown and his friends say: “peace on earth, good will towards men!”

Wednesday, December 24, 2008

Killing the Golden Goose

Michael (S.) Malone is a Silicon Valley pundit with a multi-faceted success trajectory. He wrote the definitive books analyzing the strategies and culture of two local icons, Apple and HP. (The former was a major source for the history portion of my dissertation).

Malone is a former HP employee who’s been covering the tech industry for nearly 30 years, having worked for the Mercury News, Upside (boy I miss that mag), Forbes ASAP, ABC and even the gray lady herself. He's even a successful Boy Scout leader: talk about all-American.

This week he took aim how the policies that once made such innovative startups possible have been eroded throughout this decade (i.e., under Bush 43 and under both Republican and Democrat legislative control).

As evidence, he cites the recent dearth of IPOs:

Washington Is Killing Silicon Valley
Entrepreneurship was taken for granted. Now we're seeing a lot less of it.
...
From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness. In the name of "fairness," preventing future Enrons, and increased oversight, Congress, the SEC and the Financial Accounting Standards Board (FASB) have piled burdens onto the economy that put entrepreneurship at risk.

The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.

Faced with crushing reporting costs if they go public, new companies are instead selling themselves to big, existing corporations. For the last four years it has seemed that every new business plan in Silicon Valley has ended with the statement "And then we sell to Google." The venture capital industry is now underwater, paying out less than it is taking in. Small potential shareholders are denied access to future gains. Power is being ever more centralized in big, established companies.
He then lists the usual suspects of regulation: Sarbanes Oxley, FASB, the SEC, as well as the capital gains tax increase promised by candidate Barrack Obama.

In happier times, his arguments might carry some weight. But after the various GSE and bank frauds that brought the stock market down 40% this year — not to mention Bernie Madoff — efforts to reduce regulation of private companies will fall on deaf ears for several years.

It’s clear that things will get much worse for entrepreneurs before they get better, not only with regulation, but with heavy-handed government intervention that crowds out private investment. There’s no guarantee things will get better any time soon: some impediments to free markets may last for decades. Some even could become permanent, if those who admire Europe’s nanny state succeed in importing it to the US, complete with Eurosclerosis. (Where’s Lady Thatcher when you need her?)

I suspect Malone knows all this: the article in Monday’s Journal is his stake in the ground to say “I told you so.” And perhaps when the President comes back to the Bay Area in 3 years to raise money for his re-election, some of his ardent VC supporters will remind him of these burdens on entrepreneurs and the damage that they do.

Tuesday, December 23, 2008

Better prices soon at Fry's

I always wondered why Fry’s didn’t have more aggressive prices, given its buying power, high volumes (roughly $70m/store/year) and low-overhead operations. Maybe this is why.

A one-time computer salesman who rose through the ranks to help build Fry's Electronics into a robust national retailer is facing allegations that he defrauded the San Jose-based company out of $65 million, much of which he used to pay off enormous gambling debts in Las Vegas.

Ausaf Umar Siddiqui, 42,who goes by "Omar" and has been Fry's vice president of merchandising and operations, appeared in federal court today, where prosecutors filed a complaint that alleges he was involved in a "secret kickback scheme to defraud Fry's Electronics of millions of dollars.''
...
According to the complaint, which was unsealed [Monday], Siddiqui convinced Fry's that the company should eliminate sales representatives on his accounts, and instead, he'd act as a middleman between vendors and Fry's. He promised that he'd save Fry's a lot of money that way. But instead, the complaint alleges, he ended up charging exorbitant commissions — up to 31 percent, or ten times the normal amount — to the vendors, which he funneled to his own "straw'' company PC International.

Vendors were guaranteed steady business, so Siddiqui would have a steady cash flow to pay off casinos. Siddiqui spent $162 million in three years at just two of his favorites, the MGM Grand Casino and Las Vegas Sands Casino, according to his bank statements detailed in the complaint.
Why wasn’t it detected earlier?
Siddiqui was a "longtime friend" of John Fry, said Fry's spokesman Manuel Valerio. The reaction of employees and management to Siddiqui's arrest, he said, "is one of surprise and shock — and that's an understatement."
Now that it’s discovered — and in the light of the declining economy with increasing customer price sensitivity — perhaps we’ll see better prices soon at Silicon Valley’s favorite electronics retailer.

Monday, December 22, 2008

Blogging high water mark

A friend (who didn’t know I have a blog) found this today on Seeking Alpha:


Of course, that and $4 will get you a vente latte at Starbuck’s.†

SeekingalphaI didn’t think that “Four Dying Silicon Valley Companies” was a particularly inspired posting — merely commentary on a solid (if somewhat conventional) column by Chris O’Brien of the Merc on the plight of 3 ½ local companies.

My reading on what wins popularity at Seeking Alpha (a stock investment site) is that writing something opionated about more than one publicly traded company will attract attention. And, alas, offering biting criticism is more interesting that attempting to come up with solutions for companies in a difficult situation.

Still, my primary audience is readers of this blog. At the end of the year, I’m going to be soliciting feedback from readers about what they find most interesting and, by implication, what I should emphasize in 2010.

† I don’t drink coffee, so I’m guessing that’s still a reasonable market price nowadays.

NY: we need more rich folks to soak

From the Associated Press:

ALBANY, N.Y. Gov. David Paterson said Friday that the loss of tax revenue from just six Goldman Sachs' executives will cost New York $178 million.

The executives complied with the urging of New York Attorney General Andrew Cuomo and others who said in November that major Wall Street companies benefiting from federal bailouts shouldn't pay out the usual huge bonuses to executives.
Technically speaking, NY is not soaking the rich: they extract large receipts from high-income residents, not those with high net worth.

Web? What web?

Newspapers have been in a long decline over 25 years, first with competition from electronic media and then, for the past decade, with the commoditization of information via the Internet. Publishers and owners — once used to spending the rents provided by their local monopolies — have now been choosing between bad options: cutting, selling or even closing their long-time cash cows.

The industry has split into two factions: those who embrace the Internet and those that just want it to go away. The former are desperately seeking new electronic delivery modalities and products, or even abandoning print altogether (and relegating the term “ink-stained wretches” to the dustbin of history). The latter are continuing to focus on killing trees, sometimes in combination with shutting off the electronic redistribution of their content that is fueling commoditization of their industry. These are tough choices, because neither strategy seems particularly promising.

On Sunday, NYT media columnist David Carr highlighted a tiny newspaper in Asburk Park, NJ. For NYT readers, Asbury Park needs no introduction: a small town 60 miles away on the Jersey Shore. For the rest of us, Asbury Park is the site of Bruce Springstein’s early career and in the title of his debut album.

Carr notes that the TriCityNews website has “has a little boilerplate about the product and lists ad rates, but nothing more.” The paper’s owner is defiant:

“Why would I put anything on the Web?” asked Dan Jacobson, the publisher and owner of the newspaper. “I don’t understand how putting content on the Web would do anything but help destroy our paper. Why should we give our readers any incentive whatsoever to not look at our content along with our advertisements, a large number of which are beautiful and cheap full-page ads?”
Local (if not hyperlocal) content has always been the most strategically defensible response to national electronic competitors. The problem is that the economies of scale work against highly local papers: the more focused the content, the more daunting the economics of paying that content. One possible future is that what we have left will be low-cost (if not schlocky) community papers that complement the TV stations and Google (or Yahoo) News.

Every time there’s a recession, newspapers merge or go out of business: this time, the 2009-2010 trough of the business cycle will be the perfect storm. About the only saving grace is that the newspapers that remain are the survivors of two decades of Darwinian elimination.

Sunday, December 21, 2008

Save your company or save the planet?

When running a company (like a household or a country), it’s important to distinguish between must-haves and nice-to-haves. The latter includes a lot of charitable activities, work in the community, parties, little morale-building perks, as well as many other things that help a firm with its image in the community or to attract good people.

When times gets tight for a company, or for an industry (think dot-com crash), or even the whole economy (i.e., now), a lot of nice-to-haves necessarily go out the window. So when one of my students who works at Cisco told me Friday that they cut out Red Bull to save money — complete with a memo explaining the cost-benefit analysis — we both agreed it made a lot of sense.

Certainly if times are supposed to be tight at a company, but instead it’s business as usual on spending, then employees will justifiably wonder how serious management is about tightening up and focusing on the job at hand.

This came to mind when reading this morning’s Merc:

Sun executives argue engineers must help larger society, not just business
By Brandon Bailey
Mercury News

Engineering isn't just engineering anymore. In the 21st century, according to an upcoming book by two senior engineers at Sun Microsystems, members of their profession must confront issues of environmental sustainability, intellectual property, economics and their own responsibilities as citizens of a global community.

"Citizen Engineer" was co-written by Greg Papadopoulos and David Douglas, both electrical engineers and computer scientists who are, respectively, chief technology officer and chief sustainability officer for Sun. Papadopoulos is responsible for Sun's research and development efforts, while Douglas coordinates environmental programs and heads the company's cloud computing and developer platforms division.

The book is part primer and part argument. The authors say they wrote it for engineering students, professors and working engineers who, in Papadopolous' words, "have that idea that maybe they need to think more about what they're doing."
I realize that the book would have been written months or even a year or more ago, but still it suggests an utter lack of urgency for a company that’s in serious trouble and has been struggling for years.

I don’t blame the executives for wanting to pursue their pet projects — nor am I passing judgment on the merits of the new book — but I question the management that allowed (if not encouraged) this effort when the company is in a life-or-death crisis. If every employee, from top to bottom, does not have a single-minded focus on growing revenues, cutting costs and finding a way back to sustained profitability, then the company needs new leadership.

Sun just got two new directors nominated by angry investors, but Therese Poletti of MarketWatch argues that the company that brought us Java® needs a more drastic solution:
SAN FRANCISCO -- It's time for the board of directors at Sun Microsystems Inc. to wake up and smell the coffee.

Instead of adding two new independent directors to deal with the apparent downward spiral of the company's business, the board should look at replacing Sun's chief executive, Jonathan Schwartz, who got them into much of the mess in the first place.

...

Wall Street has put pressure on the company to cut costs more drastically and investors are impatient. Since Schwartz took over, the board authorized a 1-to-4 reverse stock split in November 2007. Its shares closed at $5.14 before the split took effect. After the split, its shares traded at $20.51. On Wednesday, its shares closed at $3.89, down more than 80%.

Sun announced another big round of 5,000 to 6,000 jobs last month, but some investors think they should do more. The company also took a big impairment charge for its $4.1 billion acquisition in 2005 of StorageTek, meaning the company is no longer worth what Sun paid.

"At this point the graveyard watch should be more aligned on how long Jonathan Schwartz keeps his job and how long Sun stays independent," added [analyst Charles] King.

Saturday, December 20, 2008

What is an iPod Touch?

Forbes is running a feature article by a former iPod user, in which the reviewer argues a 120gb Zune is like an iPod Classic with a big screen, or an iPod Touch with 15x the capacity. (It would be 8x or 4x the capacity if you have the larger models).

This raises the question: what is an iPod Touch? Is it an MP3 player, as the reviewer argues? Or an iPhone Lite, as I claimed when it was released 15 months ago?

Perhaps a year ago, it might have been an open question. Today, with more than 10,000 applications in the app store — most also available for the iPod Touch — the question is now moot. The iPod Touch is a grown-up’s competitor to the PSP, except that it does more than games. I suppose you could say it’s like the N-Gage — except that it has many popular applications.

Friday, December 19, 2008

Four dying SV companies

On Sunday, Chris O’Brien of the Merc wrote about four dying Silicon Valley icons. For some reason, it wasn’t posted to the website Sunday or Monday, but it’s there now. He aptly summarizes the problems of three of these companies, and I recommend anyone interested in innovation (or the Valley) to read the analysis.

In my reading, two of the companies are (effectively) single-product companies where their product is no longer compelling and increasingly no longer competitive. AMD once was threatening Intel on the performance front, and now they are asset stripping in hopes of raising enough cash to stay alive. Palm created the pen-based PDA and for a while was a leader in smartphones, but their Treo remakes have long since run out of steam and their last Hail Mary wasted precious time and money.

The other two companies are diversified systems companies which were built around the idea of integration and economies of scope. Their stories diverge somewhat, in that Sun Microsystems was the dominant firm in a category that’s been dying since the end of the dot-com era, while Yahoo is #2 in a category that’s still very much alive.

Still, there are important parallels. Sun has been cutting its way to greatness for years, and is still floundering in search of a strategy that will somehow make up for its loss of a raison d’ĂȘtre in a world of commodity Linux boxes. (Thank you, Intel).

Yahoo has only recent begun to emulate Sun by cutting its way to greatness — with cuts of 7% in February (announced in January) and 10% earlier this month announced back in October. Even their cutting is not being done well: pre-announcing them makes it like a water torture, and they are also cutting staff from its winners and not just deadweight.

However, Yahoo has been floundering for as long as Sun — ever since it hired Terry Semel back in 2001. Semel was cast off in 2007, but his successor hasn’t done any better.

O’Brien puts Yahoo in a separate category, because he thinks they will do a deal in Microsoft in 2009 that will pull them out of a tailspin. But I think Yahoo’s problems are systemic, and even if they make nice with Microsoft, that won’t substitute for a lack of a winning strategy.

So will Yahoo die in 2009? No, but neither will Sun: it has enough inertia (through enterprise sales contracts) to keep limping along for another decade or more, as did DEC and Unisys and Cray and SGI and all the other computer systems also-rans.

Still, if Yahoo doesn’t get a better CEO and better strategy, all its point successes (like Flickr and mobile) will be for naught.

Not paying the price for failure

Listening to the radio, I was struck by this audio soundbite of the President this morning:

If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers. Under ordinary economic circumstances, I would say this is the price that failed companies must pay -- and I would not favor intervening to prevent the automakers from going out of business.
Of course, he then went on to explain why he’s handing $17 billion of taxpayer money to the car companies.

In other words, Bush knows that for a free market to work, there must be a price for failure. But when push came to shove, he didn’t believe that the managers, employees, unions and shareholders of the Big Three should pay that price. Not wanting to have two of the Big Three die on his watch, he backed down from strict accountability. (I wonder what kind of dad he was? It’s clear he wasn’t a very good manager.)

About the only thing to be said in favor of today’s bailout is that Bush is a lame duck — and with the change of parties, even lamer than most. So by keeping the car companies alive a few months, our next president and Congress will have the option to do as they please — consistent with the principles of a representative democracy.

Interestingly, our next president is not as big a believer in free and unfettered markets. But my hunch is that he has higher standards for accountability than most. The question is whether he’ll hold political allies accountable or (like most politicians) give them a pass.

Thursday, December 18, 2008

Against type casting

When I was studying and designing programming languages in the 1980s, the question of type casting (usually pointers) was a big issue. In some languages it was forbidden, in some languages it was unnecessary because it was automatic. However, type casting is a necessary evil in “C”, something I learned during my 15 years as a “C” language programmer and software entrepreneur.

Last night, we rented the new DVD of Mamma Mia!, the musical based on the music of Swedish pop phenom Abba. We didn’t get to see it when it came out, but noted it as a fun choice for later. As it turns out, I saw it on the long flight home last month, and then liked it so much to go to Blockbuster Wednesday (first time in more than a year) and pay full price to rent it. This was the day after the DVD’s record first day sales.

The star of the show was Meryl Streep, whose acting career was just getting started when I served as a college movie critic 30 years ago. While Streep was a talented actress — really the star of her generation — after a while I got tired of her string of earnest portrayals in “serious” cinematic releases.

In Mamma Mia, she’s cast against her longtime type. The role of Donna Sheridan is one of the most challenging ever: Streep must be simultaneously tough, vulnerable and funny, and (as with her earlier successes) Streep is so good that she makes it looks easy. Streep is luminous as she’s clearly having a great time, particularly on the title track: best of all, she can sing.

Of the remaining cast, Amanda Seyfried is fetching as Donna’s daughter Sophie, and has an even better voice than Streep. Colin Firth is also a surprisingly good singer, which is more than can be said for Pierce Brosnan.

Mamma Mia (the musical play) opened in London in 1999. My wife and I saw it there in 2001, and recommended it to all our friends. (One clear anachronism is that the play/movie are set in the present, but if you do the math the story clearly takes place in the late 80s or early 90s.)

The movie is a lot easier to follow than the play: the story, characters and plot twists are complex, and the film version makes these clearer. While the musical numbers were often contrived on stage, the campy, over-the-top enthusiasm of the movie helped in suspending disbelief. The location shooting in Greece is stunning, and I loved the cutaways to the chorus as they chime in for the twists and turns of Sophie’s wedding — as well as two big dance number set on a dock.

When I saw the movie last month, Streep seemed a shoe-in for a Golden Globe as best actress in a musical or comedy. (Unlike the Oscars®, the Golden Globes split the best acting awards between comedy and drama). Sure enough, Streep won a Golden Globe nomination last week, as did the movie. We’ll know the results next month.

The movie won’t win an Oscar, but Streep might. Streep has 14 Oscar nominations thus far — the most acting nominations in history. Like the #2 all-time nominee, Kate Hepburn, all of herwins are for dramatic roles. But — like Hepburn in Philadelphia Story — Streep certainly has earned it for Mamma Mia!

Wednesday, December 17, 2008

Not quite a Krugman hater

The question of Jeffrey Frankel’s quote being borrowed by Paul Krugman has been resolved. Prof. Krugman acknowledges the borrowing on his blog and Prof. Frankel accepts (as I would) the explanation that one doesn’t attribute a quote when live on Bill Maher.

The latter explanation is the simplest one, and much simpler than the one that I posited. Motives are difficult to measure directly and even more difficult to infer directly, so it would have been better to have offered the quote without comment and wait and see what developed. When I was a professional newspaper reporter (25 years ago) I would have known better. If I didn’t end up with egg on my face, I certainly leaped pretty far in hopes of reaching a conclusion.

However, I was a bit surprised at Prof. Frankel calling me a Krugman-hater, since I don’t hate anyone. I suppose if one were to call Krugman a Bush-hater then I could see how I could be considered a Krugman-hater. However term “hater” is overused if not abused as a rhetorical device in modern politics.


Since “hater” is inaccurate in this case, this is evidence that others don’t know my motivations anymore than I know theirs. Instead, the best policy is to be temperate in one’s words and let the facts speak for themselves.

The facts are that Krugman
  • is a Nobel Laureate (actually, winner of theSveriges Riksbank Prize in Economic Sciences);
  • has spent the last eight years as an angry (if not bitter) critic of the Bush administration;
  • wrote a 1996 book to attack former colleagues in international economics; and
  • as even critics of his recent punditry concede, had a profound impact on 20th century economics.
A few undesirable personal traits won’t take away from Krugman’s permanent place in history. Perhaps he will have a happier disposition once Bush is gone and the most progressive president of two generations takes office.

The end of an era or two

Back in 1985, at Brooks Hall, I flew up to San Francisco to attend the first ever Macworld Expo. While the franchise (temporarily) expanded to Toronto, DC and (for almost 20 years) Boston, the San Francisco show was always the main show, and attended every show for the next 15 years. (I was also a speaker from 1988-1998 until the show management ousted conference manager Peggy Kilburn so they could pocket that revenue themselves).

Yesterday, Apple announced that it’s pulling out of Macworld Expo after next month’s show, and everyone expects that will kill the show that has been produced by Patrick McGovern’s IDG since the very beginning. While Apple no longer needs the show — given its direct consumer marketing power — as Rob Griffiths writes, I wonder if it will damage the sense of community held by the Mac owners.

In particular, I wonder if it will hurt the ecosystem. Third party software and hardware vendors always used Macworld Expo as a way to get visibility for their new product launches, although these third parties too having been dropping out. Tom Krazit speculates they will create their own show (like Oracle’s), but since Apple used to have a show in Paris (AppleWorld) and dumped it, I think that’s even less likely. Apple says its growth demographic — iPod and iPhone carrying teenagers — don’t do trade shows, and I think they’re right.

Of course, the big financial news is Steve Jobs’ decision to skip Apple’s final appearance. The most benign explanation is that Apple wants to put its management bench in the spotlight, and this is the time to do it. The next most likely explanation is that Apple’s products are late and Steve has nothing to announce in January.

However, the stock opened down 7% today on speculation that Jobs is in declining health — reviving the rumors that appeared over the summer. That Apple won’t deny health problems has caused analysts to (rightfully) downgrade the stock until Apple puts out the truth.

If the Jobs II era (1997-2009?) were really ending, then it seems like 7% is not enough of a valuation loss. This would be an end (however temporary) of Apple’s latest run as a growth stock. The current executives could keep the lights on, but without Jobs around to provide the uncompromising vision and the tyrannical leadership, Apple would be yet another middle-aged bureaucratic Silicon Valley company (think HP, Sun, Oracle, Intel).

Losing Jobs is bigger than losing Jack Welch, and we all know how that turned out. It’s bigger than losing Alfred P. Sloan — or Hewlett and Packard — because the impacts will be felt immediately, rather than gradually over time.

The best option is for Apple to acquire an innovative startup with a monomaniacal CEO who can step into Jobs’ shoes. Although it hasn’t worked out so well for Sun, it is what saved Apple back in 1997 from certain oblivion.

The other option would be to steal back Jon Rubinstein, Jobs’ right-hand man from the NeXT days who knows Apple and its culture. If Palm somehow cheats death with its product and technology announcements next month, his stock will be on the rise.


This week I am praying for Steve Jobs and his family. While his children will not lack for any material thing, if they lose their father, it will (as my own father discovered) influence them the rest of their lives.

Tuesday, December 16, 2008

Today's funniest press release

As a world-famous blogger with dozens (if not hundreds) of readers, every month I get various unsolicited press releases and PR inquiries (when are you available to interview our CEO). Since I have to keep my priorities straight (i.e. keep my day job), I ignore anything that would require additional primary research, particularly if it’s to tout one company.

Today I got the first newsworthy press release ever. Well, actually, not newsworthy — but amusing and worth sharing. It began:

Wirefly.com Announces Winners of Its “Most Embarrassing Moment with Your Phone” Contest
The winners of the contest (lightly edited from the press release) were:
  1. Karen Emerson [won the grand prize] for her unfortunate, yet amusing story of absentmindedly forgetting her cell phone in her garter belt on her wedding day and having it ring to the tune of “Girls Just Want to Have Fun” at the most inopportune time -- as her father walked her down the aisle. The contest judges were taken with Emerson’s story because of its inimitability, as well as her gracious attitude to be able to laugh off an otherwise regrettable incident.
  2. Jon Froehlich: Believing he was speaking to a co-worker on the phone, Jon Froehlich referred to his boss, Mr. Clifford, as “The Big Red Dog”, referencing the popular children’s book. Unfortunately, it was Mr. Clifford on the other line.
  3. Stacy Sawyer: Stacy Sawyer had to mitigate an argument between her parents because her father was continuously receiving text messages from “Lo-Cell”, whom her mother believed was another woman, when in reality, Sawyer’s father was merely receiving notifications that his battery was low!
  4. David Toledo: David Toledo accidently dropped his BlackBerry into an airplane toilet on a flight to visit a client. He was able to fish it out of the toilet and it was still fully operational. However, when he arrived to the meeting, he was informed by his client that he had a huge blue stain on his face. The disinfectant in an airplane toilet was much stronger than he thought.
  5. Stacey Fisher: While attending a Renaissance fair with her husband, Stacey Fisher tripped over a tree stump, causing her cell phone to soar through the air and land directly into the bosom of an unassuming woman, who was dressed in a bustier and corset, an authentic renaissance costume typical of maidens during that time.
The complete winning stories can be found at WireflyContest.com.

Let’s hope this doesn’t generate more lame press releases for my inbox. Right now the batting average is below .050.

Prize-winning purloined quote

Former economist Paul Krugman picked up his Nobel Prize last week. This week, he received recognition for another accomplishment: producing two pithy soundbites in his current career as a pundit. As reported by the AP:

Palin tops list of memorable quotes
December 14, 2008 - 3:34pm
By The Associated Press

(AP) - The Top 10 quotes of 2008, as compiled by the editor of the Yale Book of Quotations:



10. (tie) "Cash for trash." _ Paul Krugman discussing the financial bailout, New York Times, Sept. 22.

10. (tie) "There are no atheists in foxholes and there are no libertarians in financial crises." _ Krugman, in an interview with Bill Maher on HBO's "Real Time," broadcast Sept. 19
Unfortunately, this is one award that Krugman should decline, because the latter quote was borrowed from a former classmate, a Harvard economics professor, who wrote in his blog:
Someone this week asked me what I thought of policy-makers who ex ante profess a free-market ideology and acute sensitivity to the dangers of moral hazard from financial bailouts, but who toss that ideology overboard when faced with a financial crisis. The reference was to Treasury Secretary Henry Paulson's lobbying this week in support of a rescue for Fannie Mae and Freddie Mac, the two big home mortgage agencies, following on the rescue of Bear Stearns in March. My reply was: “They say there are no atheists in foxholes. Perhaps, then, there are also no libertarians in financial crises.”

Jeffrey Frankel
Harpel Professor of Capital Formation and Growth, Kennedy School of Government
July 17, 2008
The comment (also posted to Seeking Alpha) references this news account:
Paulson Hit by Investors as He Seeks to Halt Crisis
By Rebecca Christie and Brendan Murray

July 16 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson, who arrived in Washington two years ago from the summit of American capitalism, has been pummeled by the markets that nurtured him.

Paulson has repeatedly emphasized the virtues of “market discipline” — code words for self-policing. Now, with Fannie Mae and Freddie Mac in crisis, he has endorsed what critics say may be an open-ended commitment to save them.

“They say there are no atheists in a foxhole,” said Harvard economist Jeffrey Frankel, a former Clinton administration official. “Well, there are no libertarians in a financial crisis, either.”
You would think that someone with a Nobel Prize would acknowledge borrowing a one-liner from an old friend. But I guess rules about intellectual honesty only apply to the common riffraff, not Nobel Laureates.

(As it turns out, both men were premature in their prediction, as 200 economists signed a petition in September opposing Bush’s (first) bailout plan.)

In fact, the Frankel and Krugman were classmates at the MIT economics department: Krugman got his Ph.D. in 1977 and Frankel got his in 1978. As Frankel recounted in congratulating Krugman for his prize, the two did a skit together as graduate students making fun of Paul Samuelson. Presumably they are not as close today as they once were, after Frankel won appointment to Clinton’s Council of Economic Advisors while Krugman was snubbed.

The assessment of the former economist seems remarkably convergent across a broad spectrum of economists. In October, Frankel described his onetime classmate thus:
For those readers of the New York Times who can only think of him as a columnist, let me assure you that long before he ever wrote a newspaper opinion piece, Krugman had become the leading international economist of my generation.
which sounds remarkably similar to what a Hoover Institute economist wrote that week in the WSJ:
A professor at Princeton University, Mr. Krugman is known to the American public mainly for his column in the New York Times, which reflects his highly partisan political views -- he hates George Bush and Republicans in general -- more than his solid economic understanding. Nevertheless, he is an original theorist in international trade and economic geography.
The divergence of views is so dramatic that one industry economist argued that Krugman’s prize was the Nobel committee’s first posthumous award. If the committee wanted to set a precedent on posthumous awards, it should have started with Mahatma Gandhi.

Update 3:45pm: Prof. Frankel points out that he earlier published the “libertarians in crises” line in the Spring 2007 issue of the Cato Journal.

Update Dec. 17: 14 hours after this item was posted, Krugman admitted the quote wasn’t his. Quite plausibly, he explained the oversight: “If I’d put it in a column, I would have given credit; but citations don’t work when you’re live on Bill Maher.”

Users lie

When we had a tech support operation, our former product dictator trained the tech support people with the maxim: “users lie.” I thought it was a bit extreme, but then this manager liked extreme rhetoric for effect.

The underlying truth is that when handling a tech support calls, the information from users is not 100% reliable. (As someone now on the other side again, I can certainly see that.) Users may leave something out and tell the story slightly inaccurately. Or they might deliberately leave out relevant information:

Q: When did your cell phone stop working?
A: I dunno, it just won’t turn on anymore.
instead of
Q: When did your cell phone stop working?
A: When I dropped it on the concrete sidewalk.
(I would have used the example of dropping in water, but cellphone companies now test for that.)

Michael Mace highlights another, curious example of deliberate misrepresentation — political retaliation over Proposition 8 (the initiative repealing the June court decision legalizing gay marriage). In this case, users can lie when generating user-generated content.

The why is pretty simple: Opponents of Prop 8 want to retaliate against any individual or business that supported Proposition 8. The example he uses is a Mexican restaurant where the manager gave $100 to Prop 8 and then gay marriage advocates retaliated on Yelp. (Of course, this might extend to other social or political controversies, such as a non-union grocvery store)

It seems to me there are at least three cases:
  1. Customers who complain about a business but then give ta numerical rateing that the store aotherwise deserved. While iritating, this does proviade additional information that might be important to some customers. The risk, of course, is if the sample of activist-complainers is biased: pro gay marirage types provide information but pro life (anti abortion) types do not.
  2. Customers who complain about the busienss polciies and then give a dishonest rating of the quality of the firm’s goods or services in a deliberate attempt to lower the numeric scores. Mike shows a lot of this going on in this case
  3. Customers who completely lie; the hyperbole of this example that Mike quotes is emblematic:
  4. “I’ve been here a few times, and this is without a doubt the worst place I know of in California. Do not go here unless you don’t mind bad food, high prices, a horrible vibe, and can turn your back on risks of food poisoning and human rights and health code violations!”
The more you try to stamp out #1 and #2 (which are recognizable), the more you get #3 (which are harder if not impossible to recognize.

Mike writes not about the implications for restaurants, but for the reliability of user rating sites. The problem is, such sites were never all that reliable in the first place. For example, I went searching for a hotel for a possible (now unlikely) Hawai‘i trip, and found a few places where the only rating was an anonymous 5-star with no comments; presumably these are posted by the owners or their friends. In fact, hotel sites in general seem to have unreliable ratings.

Yelp could go for weighting the contributions of users (useful/not useful) as does Amazon, but then this could becoming an ideological war of fellow travelers vs. enemies. Look at the reviews of any politically or socially controversial book on Amazon — any book (or comment) that takes a stand will become a battleground for ideologies rather than the merits of the book.

Some e-commerce sites will only allow you to rate what you’ve bought (and they can verify that). Although not applicable to independent ratings site, that does reduce abuse. However, the reduction of quantity means little or no feedback on thinly-traded goods and services.

In the end, this is exactly the same problem as Wikipedia or any other site built upon user-generated content. The site designers generally assume altruistic self-disclosure, and fall down (if not fail miserably) at any systematic source of bias in the evaluations. The goal of encouraging maximal coverage through maximal participation is in direct conflict with having control over the quality. The problem is magnified by fragmentation of contributions across many sites, thus increasing the pressure to attract contributions (of unknown quality) at all costs.

The incentives (and energy) to lie are stronger than those to catch the lie. Manual catching systems don’t scale; attempts to use peers to discover bias will only work if the peers also are free from bias (they aren’t). Algorithms might work for a while, but those who game the system will discover ways to make their bias more difficult to detect.

The problem will only get worse: as crowd sourcing and its impact becomes better understood, efforts to manipulate it become better organized, more common and probably more subtle (and thus hard to detect). It’s possible (by no means assured) that a decade from now crowd sourcing will prove to be a noble experiment that failed.

I think the end result will be to bring us back full circle, to where we were a decade ago: I will trust only the feedback of someone I know, either personally or a brand name reviewer or analyst who has proven reliable (by my standards) in the past. I’m not sure how that helps me find a restaurant in Los Angeles or Scottsdale, although my standards for under $10 restaurants are pretty lax.

Monday, December 15, 2008

Google's two sided markets

I was thinking about Google last week. One of my student teams did their report on Google (a popular topic around here). And the author of a Google book wanted to interview me about platform issues.

The students did an analysis of the search industry. Oversimplifying, they concluded that Google would have trouble making money because Google’s customers have high bargaining power due to low switching costs — because they can switch to another search engine at any time.

I had three problems with this. The obvious one is that Google is making money: last year, $4.2b net on income of $16.6b, or 25.3% net after. There are possible explanations for this contradiction, the first being that you can’t use the industry’s market share leader (and most profitable firm) as a proxy for the entire industry. We don't know what MS or AOL are making in search, because they’re too diversified, and Yahoo’s profits has shown wild swings in the past 4 quarters, from 3% to 30% net after.

Still, I always tell my students to check their industry analysis against industry profitability for consistency, so this big discrepancy was unsatisfying without being a conclusive proof of something wrong.

The second problem was that people could switch, but they don’t. Why not? Habituation — psychic switching costs — is an explanation, one consistent with the psychic costs I saw in my dissertation. But the switching costs between Google and Yahoo are 100x lower than between Microsoft and the Mac, and yet Apple is gaining share and Yahoo is not.

Which brings me to my third issue — the only one that produced a satisfying answer. Suppose users could switch — and they did? Would it affect Google’s profitablity? Of course not.

Google gets its revenues from advertisers, not users. It has a two-sided market (or, perhaps more accurate, a two-sided platform) supplying content to users and user eyeballs (or clicks) to advertisers.

So as long as Google does a very good job of delivering the right users to advertisers, the advertisers will have high switching costs and will stick with Google. So Google will continue to monetize its users better than its rivals.

Bush blinked

The bailout failed in Congress due to principled objections, offering the prospect of drawing a line for the nonstop series of bailouts.

However, the Bush administration decided to use its own discretion. In other words, as veteran (and prescient) auto industry report Paul Ingrassia noted this morning: “Bush Blinks on the Auto Bailout”

You have to hand it to Ron Gettelfinger, president of the United Auto Workers union, and his colleagues. Negotiating for a living is, you know, what they do. And they're good, very good. They know when somebody's about to blink.

So it was last Thursday night that Mr. Gettelfinger rejected the deal offered by Senate Republicans for interim bailout money to keep General Motors and Chrysler alive for a few more months. The UAW chief was betting that the Bush administration would blink, and that the union would get a better deal from the politicians than it would get from the marketplace or from a bankruptcy judge. It's a ploy we all learned in childhood. When dad won't give you what you want, turn to mom.

Mr. Gettelfinger was right, of course. By the next day the Bush team was rapidly reversing course and declaring its willingness to use TARP money -- from the $700 billion designated to bail out financial firms -- to keep the Detroit companies going without the concessions sought by the Senate GOP.
This is consistent with the Bush kick-the-can economic philosophy of the past 4-5 years. While he articulated some free market principles in his initial campaign, our 9-11 president spent the rest of his term making short-term economic choices rather than spending any political capital on a long-term fix.

Sunday, December 14, 2008

Replacing subsidies with something worse?

For decades, the US cellphone operators have been addicted to handset subsidies. Like crack addicts, they know they should stop but they can’t. It’s a form of prisoner’s dilemma — it would be great if they all agreed to end them, but none want to make this move alone.

The good aspect of subsidies is they reduce the sticker price of handsets (typically by $200), spurring adoption of more capable phones. The bad aspects of subsidies are that they raise the cost of wireless service (to reclaim the subsidy) and mean that most users are on some form of contract, making it unlikely they’ll do anything about a new phone (or new carrier) for two years. The only exception to the two year lock-in is if consumers pay an “early termination fee” to recoup the subsidy.

More seriously, in Europe (where subsidies never caught on), consumers buy often phones independent of service. (Such third party sales in the US are estimated at less than 5%). This means a wide range of models and choices, which many in the industry believe encourages innovation. It certainly reduces the gatekeeper role that operators play in deciding what handsets consumers can and cannot have.

The transition could be wrenching. In Japan, where the government has been pushing to phase them out, they are blamed (rightly or wrongly) for declining sales this year. However, DoCoMo profits are up on the change, and more consumers have less expensive monthly plans.

Now, change may be coming from an unexpected source. As reported last week by the so-called “consumer” columnist in our local rag, cellphone subscribers who don’t like early termination fee are (as is common in California) taking it to court. Also as is common in the US, the case is being driven by lawyer greed, in hopes of winning class action status and pocketing millions (if not billions) in legal fees.

One such attorney has won the first round of such a case against Sprint, awarded (at least temporarily) $18 million class action damages for all California consumers. The decision is patently absurd, but given the next step is the wacky 9th Circuit Court of Appeals, who knows what will happen?

The most likely outcome is that early termination fees will be pro-rated, to match the payoff of the subsidy over time. This probably wouldn’t affect things much, other than to perhaps pull forward carrier switching by a few months. (It’s hard to see how any reading of the law could go further).

However, the new Obama administration is expected to create a more populist (i.e. interventionist) FCC. The FCC — as both rule-maker and rule-enforcer — gets to make up its own policies, and thus could conceivably ban early termination policies entirely. If so, handset subsidies would evaporate with the mechanism to pay them back.

For handset makers, this could provide an entree: those with innovative products that are underrespeented in the US (notably Nokia and Sony Ericsson) have the most to gain. Companies with weak recent offerings but strong US distirbution (Motorola, Palm) have the most to lose.

However, paying the full price of handsets, consumers would tend to favor cheap over expensive handsets. This could easily increase pressures towards commoditizing handsets, away from the $400-500 models like the iPhone and towards the mature, entry-level models like those from LG, Samsung and Sanyo. Companies at the high end of the market without entyr plevel phones (RIM, Apple) would be at risk, and presumably would be forced to offer a wide range of products (as Apple does today with the iPod) to keep consumer mindshare and market share.

The impact of banning subsidies would be even more traumatic for U.S. network operators, disrupting their standard business model of the past two decades.

Churn will certainly go up, and without contracts, carriers will face a dilemma of how to pay for their billions in advertising costs. (In its last full year of independent reporting, Verizon Wireless reported advertising expenditures of $1.2 billion in 2005). To cover handset costs, operators could look more like dealers, using handset exclusives — with healthy markups — to recover marketing costs. Will this eliminate most TV advertising — thus nullifying the economies of scale enjoyed by AT&T Wireless and Verizon Wireless? Or it will widen the gap between the Big Two and the also-rans?

Without subsidies, the overall tendency will be to blur the lines between prepaid and postpaid market. Both would favor cheaper handset models, but postpaid would offer cheaper buckets of minutes via bulk pricing.

It’s also possible (if however unlikely) that the new Congress or FCC would ban locking handsets to a carrier, as is (mostly) true in Europe. The issue was briefly a hot one when the iPhone first came up. Who knows, since the SCOTUS prefers European law to the US constitution, it could even happen via the courts.

The operators are hoping that the FCC will pre-empt state regulation to stop cases in state courts and the associated legal fees and potential damages. But the carriers should be careful what they wish for: it’s clear that the Obama FCC would block a pro-consumer ruling only if it simultaneously substituted another (perhaps more far-reaching) measure to regulate operators in the name of consumers.