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More Disruptions: Google and RIM

Google is going one further in taking on Microsoft:

Mountain View, Calif. - February 22, 2007 - Google Inc. (NASDAQ: GOOG) - today introduced Google Apps Premier Edition, a new version of Google’s hosted services for communication and collaboration designed for businesses of all sizes. Google Apps Premier Edition is available for $50 per user account per year, and includes phone support, additional storage, and a new set of administration and business integration capabilities.

It's about time. Recently I've noticed that as most of what I write is usually for e-mail anyway, and my gmail has an in-built spell check, I'm using Word less and less. As a result, I've become so comfortable with the font in Google's e-mail that when I gravitate back towards Word I tend to change it to simulate my gmail font, rather than sticking with Times New Roman. This is not something I had previously envisaged happening; at one point I never wanted to type in anything but Times New Roman. It's a classic example of a disruptive technology in action: it's technologically inferior, but it's cheaper and just more convenient so you end up making it a standard. Google however still has some way to go in terms of catching up with the full sophistication of a Word package, and the "docs and spreadsheets" application on the gmail is still just a basic extension of gmail itself, so it will be very interesting to see how this new application fares.

While on the subject of gadgets, I've noticed a lot of scathing criticism of the Blackberry phones - namely the Blackberry Pearl and the Blackberry 8800. "... Well done overall ... but this device's keyboard, a highly important feature, left me frustrated no matter how many e-mails I typed," wrote Katherine Boehret in yesterday's Wall Street Journal, in a product review of the Blackberry 8800. I've heard the same complaints elsewhere: principally that "the keyboard is too small", and "I don't like the trackball" (the blackberry's 'mouse'). Journalists have come down on Research In Motion (RIM) with no shortage of criticism for making these stylistic changes.

I have a Blackberry Pearl, and I find it very easy to use, so at first the criticism surprised me. But then I began to notice a common feature: all the lambasting was coming from people over the age of 35. What no one has succeeded in noticing is that the Pearl and the 8800 are not blackberries designed for existing blackberry users: rather, they are blackberries designed for the under-30's who want to step up to a blackberry from a smart phone but find the old model just too bulky. This demographic - of which I am a member - has been conditioned since the age of 15 on increasingly miniaturized hand-held devices, and therefore expects the same thing from a blackberry. Neither do we have a problem using tiny devices.

It's a great coup for RIM, which now secures a new, and younger, market segment - and one which practically lives through e-mail.   

$35.1 Million for Instapundit.com

With all this interest in social networking sites around, and creative new private equity concepts in general, it's about that time in history again when leaving your prestigious investment banking job to go and start a private equity venture capital or buy-out fund focusing on overlooked online assets doesn't seem like such a bad idea if you have the contacts and a bit of chutzpah.

On top of that list of overlooked online assets are perhaps the big blogs. With increasing numbers of readers who demonstrate great brand loyalty, clicking on hundreds of links a day and even taking time out to blog on their own smaller platforms what the 'A-listers' have to say and offer up, the big blogs offer some lucrative potential cross-promotion and marketing concepts. Plus, as an increasingly sizeable number of readers turn to the big blogs for political news before any other source, the potential for search can even be expolited down the road. That's a whole pile of growth. And at considerably less risk, one could argue than other newer social networking sites offer too; most big blogs like Glenn Reynold's Instapundit have been around for at least five years - middle age by online standards, especially in light of My Space, You Tube, Facebook and the rest which haven't even tested their brand stickiness for half that time.

With this in mind, I e-mailed Glenn Reynolds earlier today, asking him how much he'd be willing to let his blog go for, either including or excluding him in the package. "I dunno," he replied. "Make me an offer! Er, a big one ..." Well, after some valuation calcs, it appears the law professor is right to ask for piles of cash, and this indeed is exactly what he may well find himself with in the next couple of years.

There are several ways to calculate the value of Instapundit, but the most accurate one would be based on growth versus current private market value for similar sites offering the same growth features. There's the traditional link-based blog calculator, which puts Instapundit at just under three and half million dollars, but there's a lot wrong with this. Principally, it's based on a formula developed from the AOL-Weblogs Inc. deal several years ago, when the private market for new online tech wasn't nearly so bullish. It's also based on links and their individual component values, but we now know that VC's are less interested in links and current ad revenues than they are in potential market share maximisation (You Tube has very little outside links and doesn't make any money at all).

Let's start with the News Corp-MySpace deal, then. Earlier this year News Corp paid $580 million for My Space, which then had a core subscriber base of around 18.5 million. That's a value of about $31 a head per subscriber, based on forward growth so far of about 25%, meaning News Corp's My Space nominal valuation model peaks at just under $40 per subscriber. Based on those figures, let's assume that Instapundit's average CORE daily readership are the subscribers, which is about 150,000. That's a valuation for Instapundit of $5.87 million. But this figure doesn't take into account the fact that that deal created a wave of private equity deals for online subscriber bases which led to an instant industry growth in valuation of about 250%. Basically, that's what you could have bought Instapundit for just right after the News Corp/MySpace deal. In a minute you'll wish you had.

Next to follow suit was Facebook, for which a private venture capital firm paid for 25% of the company on a valuation of $550 million for a subscriber base of only 7 million. That put the price of subscribers at $78 a head (and in all honesty, Facebook's subscribers probably had less than that in their bank accounts); for Instapundit, that means a valuation of $11 million. Using the Viacom's previously outright rejected offer price of $750 million, Instapundit's value rockets to $16 million.

But then Google got in on the act and paid $1.65 billion for YouTube. Here is a company that hasn't even turned a profit yet, and has less than 10 million subscribers so far. So that's $165 per subscriber, or a value for Instapundit of $24.7 million. Using these recent deals as the basis for blog calculations are sensible: blogs are interactive, they are essentially 'hang-outs' for online communities, and could certainly be developed that way if the owners wanted them to be. Plus, Instapundit's subscriber base is considerably more sophisticated and wealthy than any of the above social networking sites, which means more demand for search and higher margins on subscribers.

Now, Instapundit has an annual subscriber growth of 50%, and valuation growth for online sites is about 100% excluding the YouTube deal. Using those stats alone, we can estimate Instapundit's readership to reach a conservative 225,000 average in the next 18 months, at an industry average of growth to $156 a head (and what's more, the average Instapundit reader has considerably more than that in his/her bank account meaning plenty of ad/cross promotion bucks and elite education which is good for search habits). That puts Instapundit at a current valuation of $35.1 million.

Assuming Glenn Reynolds stays for another five years (as is the case with most PE buy-outs), that's not bad at all for ten year's work.

*UPDATE* Welcome back Instapundit readers who came by for the recent Dow and NASDAQ (links are to posts) analysis last week, and welcome to those who have never visited here before! This is a blog about the economy, which is really to say it's about everything from politics to the arts to technology too, because that's really the jist of the economy. There's also a greater analytical scope on markets here than you'll find in most places. As always, please feel free to take a look around, comment and of course, come back.

**UPDATE** For some good election news and opinions, go and see Brian over at Iowa Voice.

All The News That's Fit To Debate

Another debate between the blogosphere and the main stream media (MSM) seems to be surging up again. These altercations centrally concern the validity of news put out by what the bloggers perceive as biased and sloppy press corps, acting on their own political agendas rather than with a geunine desire to report the facts.

It's a good thing for the press to have critics, just as it's a good thing for everyone to have them - after all, it is through criticism that we principally polish and progress our skills in whatever we do.  But when criticism becomes both argumentative and personal in nature, it often misses the point and ends up confusing an already complex issue rather than clarifying the issues which need to be addressed. It is with this in mind that we should approach this latest squabble.

Yesterday, Michelle Malkin reported that the Associated Press is now covering - five months later - the capture and detaining of press photographer Bilal Hussein by the U.S. military, whose work, she claimed in an August 12 post on her blog, has "raised serious, persistent questions about his relationship with terrorists in Iraq and whether his photos were/are staged in collusion with the enemy." It's quite a long and complex story so I'll boil it down: the allegation is that Hussein was working alongside terrorists in order to grab exclusive photos for Associated Press. Michelle Malkin's response to September 19's AP release on the story was that "it's spin time. The Associated (With Terrorists) Press is now waging a p.r. campaign against what it calls the "so-called blogosphere" over detained photographer Bilal Hussein." She went on; "After five months of stonewalling, the "so-called reporters" at AP finally reported what this blog reported on April 12--that Hussein had indeed been captured by the US military in a Ramadi apartment building where bomb-making materials were found...along with an alleged al Qaeda leader. Hussein reportedly tested positive for traces of explosives." Her big problem with AP was two-fold: why so late, and why the continued insinuous defence of their photographer rather than the acceptance that they got it wrong?

Then there's Brendan Nyhan. Mr. Nyhan was asked by American Prospect to write a column criticising the media. As he notes in yesterday's  homily, the idea struck him as rather odd given the U.S. media's bias towards the left and the fact that "the Prospect is a liberal magazine ... but I assumed they knew who they were hiring.  I was wrong." As he goes on to explain, he "slammed two liberal blogs for using an airline employee's suicide after 9/11 to take a cheap shot at President Bush." The piece he found question with, which appeared on the popular left wing blog Atrios, commented that "The American Airlines ticket agent who checked in Mohammed Atta on 9/11 later committed suicide - unlike the man in charge who, being briefed on the potential threat, told his briefer, "Okay, you’ve covered your ass." Mr. Nyhan's point was that this was the loss of a human life, and that the post was "politicizing a suicide". Regardless, pressure from left wing bloggers and letters of complaint to American Prospect prompted the editor to order the columnist to stick to criticising only right wing blogs, an offer Mr. Nyhan declined along with handing in his resignation.

These are two quite different, but nevertheless prescient examples of the emotions so prevalent in the debate over the blogosphere vs. the media. One concerns the reporting of hard facts, the other is about 'opinion journalism'. Nevertheless, both show a disappointing flavour of personal - rather than objective - attack which only undoes the real goal.

It's worth bearing in mind here first what the real goal in journalism is all about, be it opinion or fact: an honest and upfront package of news-delivery, in a format everyone can understand. On the first count then, Michelle Malkin has good reason to be angry: cooperating with terrorists in order to get an exclusive - and a staged exclusive at that - is at its best, ethically conspicuous. But due to her personalisation of the attack, her partisans are incentivised to go one further; they would have journalists make no ethical judgement calls at all. This is just counter-intuitive. Every profession which serves a crucial role to society, be it banking, medicine, law or journalism, involves at times making judgement calls based on a limited knowledge of the facts and which may turn out to
be for the worst, and by which by fat the bulk of which the professional has to go by is his or her own ethical assesment of the situation and the inherent trade-offs. It's not that Michelle Malkin is wrong to lambast AP for this fiasco (which admittedly they've dug themselves into) - her fine reporting skills do a justice to clarifying the facts in a complex situation, for sure. But by making her attacks so personal, and by bringing the blogosphere vs. media debate into the fray, she undoes much of the constructive work she has set out to achieve by beginning a whole new - and arguably less worthwhile - polemic.

And there's a vague sense of hypocracy in Michelle Malkin's criticism of the main stream media, too, for it was exactly there that she learned all the skills which have equiped her with the means to attack this story on her blog.

Wall Street Columnist and author Jeremy Wagstaff today writes on his blog, loose wire, "Media companies (itself shorthand for mass media) are no longer about content, and all about the medium. For the past 80 years the mass media has been about leveraging the technologies available to deliver standardized content over as large an area/population as possible. Now it’s about using the technologies available to enable as large a population as possible to swap their own content." This is disappointing to hear from a seasoned columnist, indeed. For, to continue with the example above, it is not the fact that Ms Malkin is writing this report on her blog that is the most important thing here, it is the fact that she is a good reporter with a strong sense for when something does not add up, and has the ability to deliver on it. Whether she publishes on her blog, in The New York Times, or in a fanzine is irrelevant - in other words, quite the contrary to what Mr. Wagstaff is saying, it is misleading to get side-tracked into a debate on medium, when content is what it's about.

The medium is changing, but this is nothing new. One hundred years ago most newspapers did not have pictures; now they do. So what? The act of news reporting and delivery is what the economics of journalism is about.

Here, Mr Nyhan's story is particularly disheartening news, for both the main stream press and for the blogosphere. For the media set, it is sad to see a logically valid and justifiable attack affect their strategy to criticise and seek the truth. What Mr. Nyhan was saying was completely defendable, after all: remark about how the flight attendant who let the terrorist responsible for one of the 9/11 attacks onboard committed suicide whereas President Bush did not is, whatever your view, politicising a suicide (i.e. making an inherently political point by using the example of a suicide). Atrios and left wing bloggers' criticism of the piece should have been water off a duck's back to the chiefs at American Prospect, but instead, they chose to withdraw and alter their original, admirable and truth-seeking strategy.

But it's also bad news for the blogosphere, more than anything because it shows one pivotal fault with bloggers: they are often unable to accept forms of criticism constructively or lightly. One of the strengths which news reporters are forced and trained to aquire early on is to accept and digest criticism in a way which can continue to improve their work, largely through having to re-work countless versions of the same piece until their editor is content (which in itself is rare). Those that do not acquire this skill don't stick around for long; it's usually as simple as that. If bloggers intend to become a widely-received outlet for news reporting, criticism and humility are qualities they mjust learn, and this story is a classic example of that. You can't always get it right - not as a trader, not as a doctor, not as a judge, and not as a journalist. Because of the intensely personality-driven nature of blogging, many bloggers become emotional about criticism that would be best received thoughtfully.

It is unclear exactly what the aim of bloggers who denounce the media is, too. Would they have us a society with multiple 'citizen journalists', all running around with their cell phone cameras and writing from their laptops in wireless internet cafes as and when they are on-site? I don't mean this derogatorally; after all, I write a blog, and I sometimes use it to report events which I think are interesting to others. But a world without newspapers, without magazines, without television would derive us of much of the rich cultural and linguistic development we have today and have had for centuries, for all these mediums provide one unified platform for their expression.

Certainly, the world is changing, and technology is bringing with it an empowering force to the individual. But the individual can still monitor, criticise and scrutinise the corporation and live in harmony with it. That's what the media, science, politics, the courts, and the democracy we have fought for are all about. Let that be the case, not the more violent alternative.

Somone Has To Pay For It All

It's not always just consumers who can't pay their bills. At least, according to a Reuters newsflash today on Zimbabwe, this seems to be the case. "Internet traffic in Zimbabwe has come close to a standstill after an international satellite firm slashed its bandwidth because the cash-starved government failed to pay the bill," the wire reports.

Government-owned TelOne, which owns the country's main satellite Internet link, said satellite firm Intelsat had cut its international bandwidth because it failed to pay the $700,000 fee.

"The link is slow because they reduced the megabits on our satellite link until the payment is made," TelOne spokesman Phill Chingwaru told Reuters on Wednesday.

... "It is a nightmare because of the congestion and we are getting calls from desperate clients, some of them who can't even access the Internet," said an official from a private ISP, which uses TelOne's satellite link.

As the report further points out, Zimbabwe's 1200% rate of inflation and 70% unemployment are the principal drivers behind such calamaties. The story is a great reminder that technology - and indeed any scientific development - is not free of charge, even when its infrastructure has already been implemented. Too often in developed economies we tend to think that no matter what happens, as long as we remain relatively protectionist and guard our assets sufficiently, the chances of any kind of real reversion of development is minimal.

Zimbabwe is a great counter-example to this over confidence. It is precisely liberalised trade that has brought us the technological developments which improve our lifestyles, and all asset guarding tends to do is create a barrier towards growth of commerce. Granted, Zimbabwe is also run by a dictator who hoards many of the country's assets himself, but even then, was the country open to foreign trade it is highly unlikely it would be in the kind of mess it finds itself in now.

The key difference between the world of the twenty-first century and the one of the centuries before is our high degree of interdependence. Intelsat - the company which cut off Zimbabwe's connection - is a Bermuda-based global providor of satelite communication, a whole two oceans away from Africa. It's a story worth remembering - especially in light of current talks of protectionism in response to other fast emerging  powers, which again, are a couple of leaps of the pond away.

Is E-Bay spinning off negative PR?

WSJ columnist and writer of Loosewire Andy Wagstaff questions the number of users E-bay-owned VOIP mega-brand Skype claims to have signed up:

Internet telephony folks Skype today says that it now has 100 million registered users. A press release (free registration required) says that this was achieved in “just two-and-a-half year's time [sic], and has nearly doubled in size from September 2005 when it had 54 million registered users.” This is truly impressive. But if this is the case, where the hell is everyone?

My Skype currently shows 3,633,607 users online. Admittedly this is during the Asian day, when traffic is not as high as when the Europeans and Americans wake up. But that’s less than 4% of registered users actually online ... I can’t help wondering whether the 100 million figure is a) a wild exaggeration, down to people registering twice, b) people registering and then ditching it or c) the number of users that appears in the Skype program is just not reflecting reality.

This sounds like a classic dot-com era piece of PR hardball: not exactly fictitious, but a little misleading. Considering that, according to parent company E-Bay's website, E-Bay's total number of customers is only 181 million, the likelihood of 100 million regular Skype users certainly sounds like an exaggeration. Those figures, put in perspective, mean that more than a third of E-Bay's customer base is not from their own sui-generic brand, but from that of a recent private acquisition. If this was the case then Skype executives would surely be playing a much more prominent role in the E-Bay boardroom than they do now, and it's unlikely VOIP would have come as such an easy acquisition. Butthen  the question begs: why the need to exaggerate? Skype was an impressive purchase, is an impressive brand in a disruptive industry: why imply that 100 million people are regularly using Skype?

A quick glance at the Reuters newswire might help to explain a few things. First of all, E-Bay's just gone and spent 365 million Swedish Kroner - about $60 million - on Tradera.com, a Swedish online auction site. In other words, E-Bay, despite its enormous global customer base, is having trouble cracking the Scandinavian marketplace and needs to acquire a competitor in order to establish market entry. Then one sees that E-Bay might "increase ad spending with (a) chosen partner (such as Yahoo! or Microsoft in a collaborative effort against Google) and provide access to the data it has collected about its consumers". Translate this piece of flamboyant PR into "E-Bay wants to justify more advertising to it's shareholders" and it makes more sense. To cap it all off, however, not only is E-Bay increasing it's spending on advertising and buying new competitors because it's brand isn't strong enough to penetrate certain regional markets, but it's second quarter earnings are expected to be below analyst's expectations this year. The press release even goes as far as to cite non-GAAP (generally accepted accounting principles) figures in the statement, an inclusion that quite frankly begs disbelief  as it tells investors nothing meaningful about the financial state of the company.

E-Bay's conundrum then is how to sell what by all accounts could be quite reasonably construed as negative PR by shareholders and the market as positive signals of growth. Boasting about extensive customer bases is an obvious way to do that.

Alcatel Lucent Finalising

Scott Moritz over at the Street.com is a little unimpressed with the Alcatel Lucent deal:

The postboom era hasn't been all that fruitful for Lucent. The stock has been stuck below $5 for more than three years. And at this point, Lucent is facing a wall rather than a lot of encouraging options.

True enough, Lucent stock has not exactly flown over the past five years, but then again, neither has that of any telecoms company. And getting together in the capacity of a merger with a company whose market cap is 40% higher than your own is a pretty soft wall to face.

Apple

The latest developments at Apple Computer, as featured on Google News and Google Finance:

... if the radical New Economy/NewMedia giant can sustain a sufficiently high equity price and snub combative parties in the courtroom over the next few months, it will send a clear signal to the market and to traditional competitors such as the ailing EMI that the franchise over the music industry has now changed hands.

My hunch is that Apple will pull through victorious: the industry platform is changing, and this is the last fight to hold it back.

Is Technology Working In Today's World?

Wired Magazine on technology in the workplace:

""Most U.S. workers say they feel rushed on the job, but they are getting less accomplished than a decade ago, according to newly released research.

"Workers completed two-thirds of their work in an average day last year, down from about three-quarters in a 1994 study, according to research conducted for Day-Timers, an East Texas, Pennsylvania-based maker of organizational products.

"The biggest culprit is the technology that was supposed to make work quicker and easier, experts say.

""Technology has sped everything up and, by speeding everything up, it's slowed everything down, paradoxically," said John Challenger, chief executive of Chicago-based outplacement consultants Challenger, Gray & Christmas.

""We never concentrate on one task anymore," Challenger said. "You take a little chip out of it, and then you're on to the next thing. It's harder to feel like you're accomplishing something.""

This sounds more like a call for different working skills than it does for less technology. Whining about how technology provides disractions and blaming it for poor performance is just ridiculous: for decades, there have been numerous distractions, most notably the drinking lunch. I have yet to meet anyone who still regularly drinks alcohol at lunch on a working day these days, and yet twenty years ago it was the norm.

Trends and social habits change: the pace or momentum of change, however, has little to do with whether one can aptly focus or not. That's down to education, and this is where the problem lies: most of Generation X and before were educated without technology and have had to adapt it into their working habits - for tomorrow's executives, however, combining the two with maximum effectiveness won't be an issue at all.

The Online Tabloid Effect

More insightful news from Editor's Weblog:

The famous financial daily, The Wall Street Journal, may be thining itself from a width of 15 to 12 inches and the globetrotting newspaper designer Mario Garcia may be pushing for a compact, but it doesn't appear that the Dow Jones' flagship will be cut down to tabloid size.

Garcia is currently working on a redesign after having helped the Journal add color to its front page in 2002.

But despite having switched its European and Asian editions to a compact format, it is doubtful the Journal itself will adopt the design that Garcia predicts will soon be standard.

"In five years, you will hit a generation of readers who don't remember life without the Internet," said Garcia. "People who are coming from . . . the screen of the Internet are used to reading within the confines of a smaller place and transfer more quickly to the tabloid.""

This should be required reading for anyone who still claims that newspapers are going to be the dominant medium for news distribution in twenty years time. Once printer developments catch up with the pace of online and software developments too, it is difficult to believe that anyone will make the trip out to purchase a newspaper or magazine when they can stay in and print their own at home.

Garcia's observation that the next generation will think differently is prescient: far too often, businesses tend to think in terms of the habits of today's customer base, and when they do talk about tomorrow's, they do so without thinking of the habits and practices of those customers now.

Long-term business effectiveness depends upon thinking about what everyone who is not your customer is doing instead.

The famous financial daily, The Wall Street Journal, may be thining itself from a width of 15 to 12 inches and the globetrotting newspaper designer Mario Garcia may be pushing for a compact, but it doesn't appear that the Dow Jones' flagship will be cut down to tabloid size.

Garcia is currently working on a redesign after having helped the Journal add color to its front page in 2002.

But despite having switched its European and Asian editions to a compact format, it is doubtful the Journal itself will adopt the design that Garcia predicts will soon be standard.

"In five years, you will hit a generation of readers who don't remember life without the Internet," said Garcia. "People who are coming from . . . the screen of the Internet are used to reading within the confines of a smaller place and transfer more quickly to the tabloid.""

The New "Idols"

From TheStreet.Com:

Published reports indicate that Amazon is close to launching its own digital music service that would compete with Apple's industry-leading iTunes store. In conjunction with the move, Amazon also will apparently offer its own line of Amazon-branded digital music players that would work hand-in-hand with the service, according to the reports.

As the leading e-tailer with lots of experience in selling music online, Amazon has significant advantages that could help lift its service above other digital music also-rans such as RealNetworks' Rhapsody service.

Include Myspace, and it is clear that traditional record companies are conspicuously absent from all the talk about developments in the digital music market. What has happened, of course, is that record labels have found that, since they make the bulk of their cash on in-store retailing, they would be leaving too much money on the table by abandoning that business model in favour of an online strategy. In the meantime, technology companies and web sites have found that they are perfectly positioned and have nothing to lose by trying to start out the first kind of real online record company, and it's starting to pay dividends.

In 20 years time, EMI, Sony Music and the rest of the traditional record company camaraderie may well be a thing of the past. The hardest loser so far, however, has been Time Warner, which with subsidiary AOL, should have taken much better advantage of its market positioning in rolling at least a Beta module out.   

Environmental Data

Ordinary Gweilo, another excellent Hong Kong-produced blog, highlights something many readers will be familiar with: the curious behaviour of Lotus in its almost anti-user design of Lotus Notes.

“I remember that when Lotus Notes was released, it seemed that no-one knew quite what to do with it.  Everyone agreed that it was clever stuff, but maybe too clever for its own good, and what is was actually for, anyway?” the piece, titled “Lotus Notes – what is it good for?” starts. After some deliberation, and an atribution to website Lotus Notes Sucks, he concludes:

“I know that everyone hates Microsoft, but you have to give them credit for making most of their software reasonably intuitive to use.  I appreciate that it's not really an option for other vendors to slavishly copy Microsoft's standards, but designing a willfully eccentric user interface is equally daft.  The really amazing thing is that Notes is still around and hasn't gone the way of Word Perfect, Lotus Smartsuite, etc. etc.  Maybe soon...”

The irony is that the whole reason Lotus was incorporated in the first place was because the initial built-at-home data-management applications were the only highly sophisticated, easy-to-use packages available to corporations and the demand was eventually too strong to support the previous mail-order business model. This is often the case with a market entrant: it doesn't seek to make its architecture any more user-friendly, even as competitors are making it a "do or die" policy to do so. Just as for some entrepreneurs, some companies are better at getting a movement off the ground than sustaining its market share.

When is a company like Lotus going to roll the dice and focus its technically excellent resources on designing solutions for markets where there is no competition and massive need, as it did in the early days? Environmental and energy management, for instance, will pay huge dividends for the dominant entrant, and the logic behind it is not that far away from the logic of any data organiser – the commodity is just physical rather than virtual.

Old Media On New Media

The FT this weekend published an interesting oppinion piece denouncing blogging as being a potential "crock of virtual gold - a meretricious equivalent of all those noisy internet start-ups that were going to build a brave “new economy” a few years ago."

The article, written by Geoge Butterworth and entitled "Time For The Last Post", posed the question "Would George Orwell have made a good blogger? Maybe. But it still would have been a waste of his time, as it is for a lot of others..." and suggested that we should "just be a tiny bit sceptical of another information revolution following on so fast from the last one - especially as this time round no one is even pretending to be getting rich ... the problem of the media right now (is) that we barely have time to read a newspaper, let alone traverse the thoughts of a million bloggers?"

The postulation carries an element of truth, but ignores some key considerations. For one, the reason newspaper ciculation is going down is not, as Butterworth suggests, because "we barely have time" to read one, but because most former print newspaper readers are going online to read the news: the former suggestion is classic old-Fleet Street ignorance. Secondly, for sure, there is much out there that is not of a particularly high quality, but there is also a lot out there in the traditional print media that is of low quality (think the "free" advertising-choked local tabloids). In every trend there are inevitably going to be high-profile and low-profile providors: to suggest that there are the latter does not exonerate the possibility that there is not a substantial place for the best in society.

Lastly, Butterworth ignores the trends of "disruptive technologies" - but he can always find a reasonable summary here on yesterday's post. 

The "F5" Factor

Its high time organisations and educational institutions started doing their homework on how information systems work before they start unleashing them on bands of users more sophisticated than themselves. Only today, a story began circulating on various news providers about a student of a small-town Stark-County, U.S. high school who set his web page encouraging visitors to follow the link to his school’s website and click “F5”, refreshing the page so many times that it began to slow the systems down. Principles at the school detected the intrusion – or “act of terrorism” as it was described – and informed local law-enforcement officers about it who pulled the student out of class and arrested him, charging him with a felony carrying up to a potential sentence of five years imprisonment.

This kind of overreaction is typical of the behaviour of management that implements infrastructure they have no idea of how to use and discovers that there is a perpetration. Instead of viewing the stunt as just a juvenile prank – and it is difficult to see it any other way – they overreact because of the limitations of their own knowledge in the area and in order to save face, take the most draconian possible action they can construe.

There is a further ironic twist to this formerly unremarkable story however. Once the story hit online news wires, it didn’t take very long for teenagers across the world to find out which high school had inflicted the radical punishment, and soon the story with all the relevant links was posted up on Digg.com, an online news search engine where readers submit favourite stories for review and discussion. Needless to say, sleepy Stark-County principles now have a nightmare of unenviable proportions on their hands: with hundreds of thousands of teenagers, all ringing with adolescent sympathy for a fellow student now continuously refreshing the school’s website, the likelihood that they will see functionality back anytime soon is pretty slim. My guess is too that just as the problem seems to have eased up, come Monday morning, the “page refreshers” will be back en force, probably with an even greater camaraderie than before as they have all informed their friends who missed the online spectacle on Friday night for the second round of the showdown after the weekend has finished.

The "F5" factor is depressingly however, not just confined to this one story. This reminds me of a recent conversation I had with the taxi driver who was taking me to Heathrow for my return to Norway over Christmas. The driver was telling me that his thirteen year-old daughter’s school had decided to give the first year students – of which his daughter was one – laptops for use in class,  which much to their surprise and dismay  they discovered were being used for music downloading and file sharing. In order to counter this, the school banned the use of USB sticks – a totally counterintuitive policy as it prevented students from taking work home with them in the evenings, but still meant that the students were sharing files over MSN messanger.

Not so far off the same point, The London Evening Standard recently published an investigative piece by a journalist who drove around the city in a taxi with a laptop and a computer hacker, only to find major international conglomerates with open servers from which confidential client files and account deatails could be downloaded without much effort.

Progressive implementation of technologies is fantastic – but not if the managers and principles of organisations and educational institutions can’t be bothered to learn about how to use them and think about the consequences themselves. The very people who implement these systems would never think of teaching a book on the school syllabus or implementing a strategic policy that they had not vetted previously, so why should they do so when it comes to technology?

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.

PR Malfeasance

Back in July this year, blogger and Yahoo! employee Russell Beattie published a well-publicised rant about the tactics PR firms are using to insert their promotional press in this untapped domain of publishing. In it, he fumed at the PRrazzi: “What are these people thinking? Do they really think the same lies and manipulation that they use on the corporate media establishment is going to work on me? Blogging isn’t my “job” - I do this for fun. I’m not looking to fill column inches or dead airtime with your crap, I’m looking to provide real information and opinion to my readers who in turn return the favour and educate me.”

This type of article should make anyone working in PR sit up and think hard. As media trends towards a more democratic process, everywhere from sit-at-home online book reviewing on Amazon up to the more substantial form of Blogging, customers are becoming increasingly savvier about identifying PR insertions.

The most obvious – and intellectually redundant – aspect of PR is that it is designed specifically to sell products, and as such it initiates a dialogue but does not follow up on it. On the few occasions that it does follow-up, the dialogue contains none of the natural reasoning that ordinary conversation tends towards and hence there is little valuable exchange of information, opinions or ideas.

What the PR firms miss in targeting ‘weblogs’ and media platforms where people are publishing for themselves is that this new form of media is more akin to a dinner party environment than a newspaper. Just as no reasonable person would never think of attending a social function with the sole purpose of selling a product in mind, so no PR firm should seek to disguise comments geared at selling products as ‘newsworthy exchanges’ in the more democratic form of online publishing.

This is in stark contrast to advertising, which has had some encouraging success online with the likes of banner ads and Google Ads. As the publishing process becomes more user-oriented, the boundaries of forms of product promotion are going to have to become more clearly defined, or organizations are going to end up doing one worse than not selling any products at all: making sure that no one wants to buy them in the first place.

NETworking

On Friday night I attended an Alumni dinner for the previous MBA students who had studied on the programme before me at the BI in Oslo. Like most networking events it was supposed to be an occasion where both previous and current MBA candidates could ‘network’ – swap ideas, names and numbers, business cards and contacts etc. Pretty though the setting was however, in one of the capital’s few ostentatious venues, the Grand Hotel, which towers over the city centre just adjacent to the National Parliament, I couldn’t help but draw comparisons with a Network Marketing conference I once attended in the U.K.

At the beginning of the dinner the President of the Alumni association stood up to great applause and announced that one of the committee members was not able to be there this evening as she was celebrating a birthday dinner with the King of Denmark, where she concluded “so I don’t know what kind of contacts she has!”

There were some inevitable guffaws from the tables, but this kind of problem is typical of such networking functions. Usually the problem is that those who are the most valuable to a networking event have too many other (bigger and better) things to do than to attend these types of gatherings of hungry amateurs and wanna-be’s.

Of those that were present, again either those there were all too keenly looking for opportunities and contacts without thinking what they themselves had to contribute, or the people that genuinely did have something interesting to say and were actually doing something of some importance were badly prepared and had not thought to bring along their business cards to exchange with the others. Hence the dinner function resembled a jumbled combination of ‘feel good’ exchanges of power-maxims and meaningless condescending power talks, where just as in Network Marketing conferences, the hierarchy of those who had first completed the MBA ten years ago stood to give speeches about how the programme wouldn’t be what it was today if it weren’t for what they had been able to go on and accomplish as a result of the Master’s Degree.

Online

In the excellent book, “The Rise of the Creative Class”, social economist Richard Florida opens with a somewhat critical appraisal of the “tech-utopians” who propose that technology will change and better our entire future as technology erodes “the powers of despots and bureaucracies, powers and principalities”, and concludes sceptically that “I haven’t seen a technology yet that cures the dark side of human nature”.

In the same way many assume today that the internet, by the very fact that it is a massive platform for knowledge-sharing and networking, will necessarily fulfil this purpose. What such tech-utopians miss, however, is exactly what the organizers of the function of the MBA Alumni dinner missed in preparing for Friday – that unless the participants are willing enough to part with their information, (that is assuming they have anything useful to part with at all), and unless they are even willing to be there to participate in the first place, a platform has the net result of serving no purpose but to reinforce what most of the participants already knew anyway and merely wastes time which one might have used to do something genuinely constructive had the platform not been put up to begin with.

And indeed, as most of us will testify, this is absolutely true of the Internet itself. While it can be used as a great platform for any kind of research and exchange of information, it can equally be an endless portal for time-wasting activities that contribute little to the constructive thinking or working process.

It seems that whenever a novel technology hits the scene we tend to get very excited about how it is going to improve our lives and enhance our effieciency and capability, without thinking about how we already use our existing infrastructure. A new communication platform is not going to make those who previously had no interest in knowledge-sharing at all suddenly start opening up and networking.

When consultants and managers start talking about “knowledge-sharing” as a solution to efficiency performance then, as you commonly hear today, they should also think about the potential downside. In order for any kind of networking platform to function well, the inputs remain the same, no matter what the platform, and those inputs are age-old: a mixture of the right people, at the right time, in the right place. Get any of those wrong, and the platform is pretty much worthless, whether it is real or virtual.

The Outsourcing Rush

Is it just me, or is the heat starting to go to everyone’s head south of the equator?

In his bestseller “The Power Of Unfair Advantage”, John Nesheim illustrates the boom-bust cycle of market phenomena as a “Wave” consisting of six stages: Displacement, Euphoria, Overtrading, Mania, Financial Stress and finally, Revulsion (where no one gets funded). It’s a good model, and one which those of us who experienced the tech bubble five years ago (who didn’t?) will identify with. And before that, those that were invested in China in the late nineties will recognise. And if you were active at the time of the market crashes of the late eighties and even 1929, you’ll recognise the stages of Nesheim’s “wave model” too.

Those are just a few examples, so what is it about the nature of waves that keeps them coming back time and time again, only to eventually suck in a zealous camaraderie of supposedly informed market participants? Usually the problem in identifying an overly bullish market is in the fact that it takes on a form we don’t recognise, so it’s harder to see coming. But if there’s a fairly standard pattern, shouldn’t it be obvious?

I’m not sure about everyone else, but almost monthly on the front covers of the Business Monthly’s and daily in the financial presses at the moment I read more amazing news about the development of outsourcing to all these cheap, far-flung locations and how it is saving Western companies millions/billions of dollars a year on such ‘overpriced’ organizational components as IT and Customer Service at the same time as providing an entire platform/solution for economic development for these poor economies. In fact, one would be forgiven for thinking that some Western companies are contemplating ‘outsourcing’ the entire organization altogether (actually I think I saw something on that too) and that such reputable enterprises as AT&T and Bell Canada might soon re-brand as IT&T and Bell India. Has everyone forgotten the days only half a decade ago when every company was going to become ‘virtual’ overnight and the internet was going to totally replace physical reality with such ground-breaking concepts as Pets.com (virtual pets and pet food!), Bamboo.com (virtual real estate agents!) and infamously … Worldcom (what was it exactly that they were going to do again other than make more millionaires than any other company around?)

Nesheim breaks down his six-stage wave model into the following summaries:

1. Displacement: Something arrives to upset business as usual.

2. Euphoria: The first excited investors being to put money into related new enterprises

3. Overtrading: A rush starts to get in on the ground floor, and money flows into many new companies.

4. Mania: A wild rush to get in before it is too late sends a river of money flowing into anything related.

5. Financial stress: Reality arrives as new enterprises begin to crash and optimism turns to pessimism.

6. Revulsion: Investors depart, many with nothing.

In my experience, stages 4 and 5 are usually accompanied by a distinct set of psychological conditions.

• First of all, common sense hits the window. Any type of rational analysis is usually put aside at the expense of the hype being circulated in the marketplace.

• The advocators of the trend being hyped usually admonish “This is happening and you can’t top it!” as pretty much a blueprint reply to any kind of critical attempt at reasoning.

• At these stages the press is full of articles about how glorious this new revolution is, as the PR machines of organizations that are eager to promote the new trend are working in overdrive.

• There can be absolutely nothing wrong or potentially perilous about this new trend and anyone who dares to criticise it is “old fashioned” or “behind the times”.

• There are usually just a few market participants who are benefiting big time off the new trend, with most zealously “following the crowd” in implementing this exciting new trend of standardisation.

The parallels between a bull-market rush and the outsourcing phenomenon are so remarkable, I’m very surprised no one has thought to point them out yet.

In Context

Common sense suggests to me that if you pay bottom dollar for something, you’re probably getting bottom dollar delivery. Only for a very short period in time does a trend or solution represent actual value, as Microeconomic theory dictates. Someone suggested to me the other day that outsourcing was not only cheap, it was higher in quality than if you did the process yourself. My response to this is: Please. But it’s not just the cost-saving that is worrying in the outsourcing phenomenon, it’s where the cost-saving is being exercised, and the degree to which it is being done. Areas of organizational operations such as “Customer Service” are the fundamental building blocks to any kind of successful operating principle: who would honestly, given the choice, rather have an unknown company eight thousand miles away dealing with their customers on a more regular basis than doing that themselves. What is really worrying though is point this perfectly valid criticism out to anyone in the outsourcing industry and you get the standard response: “It’s happening anyway. You’re behind the times.”

Most of the hype is centred around India, but on closer analysis, one has to seriously question the validity of the outsourcing model as a Long Term strategy. India’s infrastructure is not just second-rate, it’s practically non-existent. One-third of the population is illiterate (half of those women), the transport systems are a nightmare and the national power grid is some of the worst in the world. To this kind of criticism Indian politicians reply flatly: “We’re a democracy. We can only grow so fast.” That may be all well and true (though it sounds more like a statement to appeal to Western organizations) but with these massive infrastructural faults in place, is there really room for the mass-development of an entire quality industry?

In the Dot.Com boom, it was the Corporate Finance departments of major investment banks who were making a killing branding traditional and new businesses with the tech logo and taking them public, which ultimately led to a series of lawsuits and subsequent penalties. In this instance, it seems the Consultants are at fault. Consultants love outsourcing for an obvious reason: it enables them to point to a clear cost saving solution that looks original and dynamic and implement it with minimal hassle. And at first they may have had a point. I’m not denying that outsourcing was not a smart idea and that it has a sustainable future, just that the current rate of quality implementation is unsustainable. The danger is that consultants will become the investment bankers of the turn of the millennium, and end up paying high penalties for poor advice. After all, if a consultant has an existing relationship with an outsourcer in India, for example, and feeds client business that way, where’s the difference in an investment banker giving chunks of what they think is a ‘hot IPO’ to their favourite clients?

Most people by now have spoken to an ‘outsourced’ department in one capacity or another. Ask yourself: was it always great quality? My experience has been that the quality of these outsourced call centres has declined dramatically in the last few years. Outsourcing is undoubtedly a smart concept, and right for some: it’s just that the current hype in the marketplace is not sustainable given the infrastructure in the outsourcing countries. In the stages 4 and 5 above, one of the key signals to an over confident market is when the quality opportunities start running out, and the ‘suppliers’ begin manufacturing clones just to keep the momentum going. Take a look at Chinese private equity in the nineties. There were a number of excellent value opportunities in the market, where a few people were making some above-average returns until London and New York decided that they could develop ‘funds’ to invest in all these exciting opportunities. The reason investors lost so much money is that it turned out there just weren’t enough quality private equity opportunities in place to feed the purchasing demand. In the mad rush to get in on the action at any cost, these funds started purchasing anything that could be reasonably construed as Private Equity, a strategy which was obviously very much in China’s favour as it encouraged more investment directly into its own pockets but which left lots of unsuspecting Westerners seriously out of pocket.

The same can be said for outsourcing. It is in countries like India’s interest to keep Western companies in the outsourcing cycle; this is what is contributing so massively to the GDP growth, and short-term thinking consultancy companies have the incentive to keep recommending outsourcing as a viable alternative to keep the fees rolling in. The big irony is that outsourcing as a cost-saving phenomenon is going to leave some Western organizations seriously out of pocket just as boom-bust cycles in markets have consistently left the retail investors.