Fiscal Philanthropy

… And so it’s Bill and Melinda Gates, Time Magazine’s “people of the year”. The U.S. popular culture weekly declared boldly before Christmas: “Imagine a kinder, humbler Microsoft – one designed to spend money, not make it. That’s the kind of philanthropy Bill and Melinda Gates have invented.”

 

The award – spread over more than ten pages – features a pretty thorough investigative piece about the couple’s foundation and work with musician Bob Geldof in conquering the battle of poverty and H.I.V. in the developing world, most revealingly shedding an interesting light on the billionaire who gave the world the software standardisation that led us into the twenty-first century.

 

In November, this blog published some crucial errors of judgement in forecast, for which exposure and further analysis is surely the only remedy for correction. It all started with a piece titled “In Search of the Future: Google Vs. Microsoft”, which analysed the two companies from a financial perspective and concluded that with a price-to-earnings multiple of nearly five times Microsoft’s, and a valuation of less than half the Redmond giant’s, Google looked perilously overvalued. The overwhelming popularity of that piece spawned perhaps more “from the hip” and less thought through articles such as “Google Noise, Industry News” and “Time For a Hatrick?”, a by all accounts dismally unpopular piece about how Chairman and Chief Executive Dick Parsons was likely to sell a five percent stake in AOL to Microsoft rather than Google which “will have the effect of restoring some rationale back in the NASDAQ”. The latter analysis not only ultimately ended up as the direct opposite what happened, but quite shamelessly ignored the fact that Google and America Online had been in cahoots for an “internet century” in linking ad’s and searches to one another.

 

The net result of all the criticism late this year has led some to believe that the sole purpose of this blog is to denounce the meteoric rise of Page and Brin’s NASDAQ darling. For purposes of official clarification, then: it is not. In retrospect, I should have left the commentary to the pundits after the gratefully received rationale documented in “In Search of the Future”: it was a powerful piece, and contained some considerable truths based on nothing other than hard market data, and it still holds true. The irony is that what appeared to be continued Google-bashing from “The Global Perspective” ultimately detracted from all the valid insight that went into the first piece. In the interests of face-saving, I return now to more considered analysis.

 

Philanthropy Acts

 

The question is, what to make of the aftermath of AOL’s five percent garage sale to Google, which was considerably lower than expectations? There is a lot of speculation about the “end of Google ad’s” as pundits worry about the confusion the link between the two will create and images that will now appear in Google ads, but this criticism misses the point. Google has been destined for a fall in equity value for some time now, and as easy as it will be construe AOL as responsible for this, the sale is quite unrelated.

 

This December, I had the priviledge of attending a seminar by Jan Grönbech, Head of Google Norway. When I put to him his view that Google stock “still had a long way to go” at a P/E of over 90, his reply was succinct: “What was Microsoft’s P/E in the early 1980’s?”

 

It’s a fair point, and needs publication in light of the above, but the scenarios are different, not least because there is no clear fiscal resemblance between the market climates of the early 1980’s and today. No doubt much of this is generated as a result of Google’s unrivalled reputation right now as “the best possible place work in the world”: after all, this is the organisation that in hurricane Katrina whose founders Page and Brin went one better that the Commander-In-Chief of the world’s formidable superpower and personally airlifted employees and employees’ relatives alike out of devastated areas of the United States at considerable cost to themselves.

 

Such compassionate corporatism cannot be overlooked, and should not, but in light of the recent Time expose, raises some critical indicators as to the momentum behind Silicon Valley and Redmond, Washington prioritisations. Many a corporate billionaire, in search of the elusive meaning of life, has opted for semi-retirement and saving the world rather than focusing continued entrepreneurial energy on building an already gargantuan enterprise, only to see the latter suffer as a result: while financier George Soros has been out saving the Eastern European education system many a nimbler hedge-fund has posted gains far beyond anything the Soros and Quantum funds have come up with. The key difference between Microsoft and Google is that it seems to be the case that while Gates’ energy is now turning increasingly to the Bill and Melinda Gates Foundation, Google has the advantage of two energetic founders who are throwing all their philanthropic resources into the creation of their baby, which is creating some credible reactions to the latter an some acts of revulsion to the former.

 

Such growth by competitors is misleading however, for the fact remains, no amount of goodwill or philanthropy can substitute for real financial variables. Just as for the case of dynamic hedge funds that post seventy percent returns year-on-year, the gains against the size of the organisation is as much an indicator of risk management as it is of successful performance. Such competitive processes can have a deceiving effect, for while product/feature maximisation takes off with some degree of awe-inspiring alacrity, the same cannot be said for the variables that underlie the speculation that is surrounding the enterprise, and by that measure, Microsoft looks good. By all means buy Google ads, but not the shares.

Know Thyself

Last month I wrote a piece titled “The MBA Conundrum” which has subsequently appeared on more websites than I have the time or patience to continually check up but most of which are ironically disguises for cheap marketing operations for purchasable “Online MBA’s” using genuine articles on genuine MBA programmes to give the impression of authenticity.

Whether purchasing an online degree is technically fraud or just a misleading con is currently the subject of intense debate, but one thing is for certain: if it doesn’t defraud an unsuspecting employer looking to hire on the basis of academic qualification, it certainly defrauds the purchaser of the online degree.

In the midst of the current workload of my MBA programme at the BI in Oslo, there has been some considerable complaint from some of my contemporaries that it is difficult to actually “learn” anything when one is being required to read and write far beyond what appears to be a rational schedule. To this criticism, the Harvard educated teacher of our Strategy class responded last week that although it seems as if there is no actual process of “learning” taking place, there is actually far more than if courses were just structured in a steady, leisurely format with plenty of time for analysis and interpretation of every assignment. “I don’t mean to be unsympathetic,” she announced to a belligerent ochlocracy, “but this is the way it ‘goes in’ best”.

As much as I am reluctant to admit it right now, sitting up at two in the morning between three unfinished assignments, there is a degree of truth to what the Professor says, and it is the same degree of truth that separates purchasing a title and actually earning.

γνωθι σεαυτον

 

In another class last week, an interesting discussion concerning the epistemology of Plato’s phrase “Know Thyself” came up when I mentioned that the truer interpretation of the Greek, “γνωθι σεαυτον” was probably “learning how to be oneself”. The subject came up as a result of Jim Collins’ attribution of the quote in his management bestseller “Good To Great”, which charts the development of organisations that have consistently returned successful results over a fifteen year period and have at one point made a gigantic leap without using the dubious artificial processes of stock manipulation or creative accounting.

 

What makes for a great degree is much the same as what makes for a great organisation: the process of discovering oneself within the structure of the current climate. Purchasing an online degree is akin to bolstering the balance sheet of a company through illegal means – such as Enron, Worldcom and numerous others in the competitive market climate of the turn of the century: while there may be some fantastic short-term benefits, the consequence can only ultimately end in tears.

 

The confusion comes from people’s inability to distinguish between success and experience. Success is what comes out of experience, which is ultimately, what leading a full, complete existence is about, whether one ends up with an MBA, a PhD, or host of stories which make for fascinating telling. It is a sad fact that a competitive society spawns such vagrant hoaxes in the infrastructure, for, predictably enough, it is not the hoaxers who end up missing out – they usually pay penance and end up cashing in again at some point - but those who are hoaxed.

Outsourcing Fun?

There truly is no end to the possibilities of outsourcing. Tom Peters recently picked up on a reference to a New York Times article “Ogre To Slay? Outsource it to the Chinese”, about how affluent western children are paying their Chinese counterparts to complete the first levels of video games that they find monotonous. Peters comments: “The ‘factory’ is in Fuzhou, China. The workers are youngsters logging 12-hour shifts. Their clientelle? Fellow youngsters from ‘Seoul to San Francisco … who want to avoid the pain and time associated with those first few levels … Yup! I thought I’d seen it all! Goes to show you …”

What is most eye-catching about this startling trend however is author Dan Ward’s observation that “this (is) an opportunity to provide commentary on the video game developers who clearly aren't satisfying their customers. If the games were really well designed (Design is everything in an experience economy, no?), they would be compelling from start to finish. No need to outsource level 1-3 to China … these kids aren't outsourcing their entertainment - they are outsourcing the boring / easy / introductory parts they don't care about... and they are sending the video game industry a message. I wonder if anyone is listening.”

There is a lot of talk about how services are outsourced because they are more cost-effective, but the points raise an interesting question about how firms might consider using outsourcing as a measure of their product and service effectiveness too. Specifically, they reveal a serious potential danger in management thinking: that business leaders begin to accept the process as a natural extension of globalisation rather than see it as a specific comment on their own business.

An article on bizhelp24.com makes the point pretty precisely under the heading “What do Businesses Outsource?” suggesting; “Basically, anything that you may consider a business ‘process’ can be outsourced,” from Marketing to Accounting down to Editing. And in light of the above, down to entertainment now, too.

There has been a lot of whining about outsourcing by, in particular customer service firms over the past few years. Giving the bog standard reply “Margins are being squeezed due to outsourcing” every time profits are suffering may not be acceptable soon as the flattening of the global playing field becomes a standardization itself: sometimes Chief Executives have to look honestly at the service they are providing their customers and just plain admit that what they provide, their customers don’t want. After all, value, as the expression goes, is not just the bucks you pay for something, but that bang you get for them.

Copyrighting Themselves Out of Business

If there is any industry less out of touch with its customers than the music industry then I defy it be suggested. As if going after die-hard fourteen year-old Coldplay fans wasn’t enough, record companies are now extending their copyright war by taking legal action against websites that offer unsolicited music scores (BBC news). When are the CEO’s of these belligerent organisations going to wake up and realise that you don’t make money suing your customers?

Since the arrival of MP3 files, record company chiefs have been on nothing short of a witch hunt to identify the key perpetrators of their traditionally gargantuan and monopolistic hold over music buyers, fining key offenders of the Copyright Law up to sums of $150,000. Unlike their plans to prosecute websites ‘illegally’ publishing music scores however, the disolusioned Chief Executives and their equally moronic corporate camaraderie of amateur A&R producers haven’t been able to touch offending sites like KaZaa, Grokster and Morpheus for as far as legalese is concerned, these sites are just ‘pipelines’ and the prosecutable offenders are, unfortunately, individuals.

Most industry chiefs would have acknowledged, logically enough, that the sheer number of offenders was too overwhelming on both time and cashflow to address through the courtroom and responded to the problem by trying to provide some alternative platform for distribution to the one their ‘customers’ were currently using, offering features which made them want to pay for it. But the Magnates of Music have never much cared for treating their customers with courtesy, and they weren’t about to start this time round.

What has transpired is a five-plus year spending spree of what can only be described as cringeable management practice, with the net result of most legal campaigns – even richer prosecuting attorneys. In the process, record companies have done little else but whine to anti-trust regulators about how margins are being squeezed and get away with outrageously gargantuan mergers the likes of which would be inconceivable in any other industry.

“The problem for major record companies is that they are less music publishers than they are music retailers” one industry executive told me at a party in London earlier this year. “Where they make their money is in the in-store margins, in selling CD’s. Record companies have been clamping down so hard on copyright because it’s the income stream.”

Well that, and the fact that these companies are led by poorly-trained Chief Executives who have little understanding and no interest in learning about the dynamics of disruptive technologies. One can’t help but speculate whether had EMI spent the same time and money on developing “EMI-Tunes” as it has wearily suing teenagers over the past five years whether its balance sheet and stock price might not look considerably healthier.

Still, the news shows that they haven’t got the message yet, or the irony that they are suing themselves out of business as savvier competitors like Apple cash in on massive consumer demand, for the truth is, prosecuting two hundred and fifty offendors a year is not going to stop the other sixty million people from changing habits that mean more convenience as the wealth of product information and availability continues to rise.

The rule “stay close to your customer” was immortalised by Tom Peters and is almost universal today: His Master's Voice should do a little less shouting and a little more heeding the voices of the masses.

Consumer Democracy

A reader of this blog suggested recently that some of the articles here should be submitted to “Digg.com”, an online website where readers submit and vote for newsworthy and interesting pieces. The advice was flattering, and indeed it seems that some of what is said here is by all accounts of interest to a broad spectrum of readers, but more interesting still is the process by which Digg.com aims to achieve objectives of newsworthiness.

The website operates on the democratic principle that readers can pick and choose what submitted articles they want to read and whether they want to “digg” them, with the obvious result that those articles with the most number of “digs” receive front-page coverage and therefore exposure. For articles that readers deem uninteresting, instead of just not voting, readers have the option to choose “This is lame” – if there are enough of these “lame-votes”, the article is removed by supposedly light-handed moderators.

So far this all sounds like fairly intuitive democratic reasoning, and by all accounts there should be little complaint with the method, but there have been some considerable voices of opposition to the site’s worthiness. The most recent attack was by one fairly high-profile writer named Charlie Demerjian, who published an article called “Digg.com is worthless as a democratic concept” in which he recounted an experience of having written a fair piece about gaming online to discover that it was overwhelmingly popular. Deciding to submit it to Digg.com, Demerjian unsurprisingly saw its popularity rocket and received more e-mails and comments, some in agreement and some in disagreement with what he had to say, but all fair.

When the young writer conducted a search on dig.com for his article several days later then he was surprised to find that it had been deleted. Querying the moderators of the website, he was told that the piece had also received ten “lame votes” and hence had been removed as this was the required number. Logically, he pointed out that despite an article receiving over one-thousand potential votes, it could be removed if only ten dissenters chirped in.

Consumer Democracy

Demerjian’s rant is somewhat reminiscent of attacks launched at Prime Time shows such as “American Idol” and “The X Factor”. The Spanish version, Operaccion Triumfo, recently received accusations by two investigative journalists that the final rounds were rigged in a currently banned expose.

On the occasions that there certainly was no unauthorised “editing” involved from producers however, viewers have complained at the lack of quality of the winners’ albums, and this has reflected in the mostly poor record sales once they hit the stores. In large part this is why it costs so much to make a phone call to vote for the candidates – because if revenues from shows where consumer democracy prevails were to be left up to end product sales most of these shows would display a net loss.

Demerjian summarises; “Luckily for humanity, the editing process has been left to professionals, or in our case, monkeys on crack. Regardless, they are professional monkeys on crack, and they show a good deal more common sense than the unwashed masses”, and here he hits the point.

Although we like to think that we know exactly what we want, and that we are capable of choosing our preferred product, as inexperienced consumers we are in fact notoriously inefficient, which is why as a society we have traditionally always been happy to have “professionals” do the selection process for us.

If there is no natural editing process, an artificial one often has to be implemented in order to make the venture commercially viable. The reason Digg.com has the ridiculous rule of 10 vs. 1000 is that, were this not the case, consumers would leave popular articles on the front page for ridiculous amounts of time to the degree where they abandoned the site because it became “more of the same”.

It all comes down to habit. The difference between consumers and professionals is that, whereas consumers are notoriously habitual in their behaviour, professional editors and producers are anything but – in their eternal commitment to the “latest new thing”, they perform the natural recycling process which would seem exhausting to us in practice but which makes us content to return to shows and stores.

As the current trend of “reality” aligns itself with democratic knowledge-sharing technological capabilities such as the internet, such artificial ways of replacing a natural editing process will have to become necessary, because, as the evidence shows, consumer democracies are fundamentally dysfunctional.

Product cycles are best left up to the chosen few, even if, as Demerjian points out, they do happen to have a crack habit.