Facebook will know the future before you can Tweet it

What were you doing last night?  Mark Zuckerberg had a hackathon.  Oh yeah, and today his company went public.

I have been thinking about valuation of Facebook all week, and i think whatever the offering price is, it's wrong, and the GM announcement just made things worse by focusing on revenue in the Millions.  The valuation should not be  based on revenue.

Instead we are looking at the premiere testing ground for defining social expereiences and ad products across multiple channels based on the behavior and reactions of real users.  The future is clearly coming, where recommendations and votes of confidence from friends will be louder than advertising.  With the end of broadcast, and even the end of web portals,  attention is a strategic asset.  And Facebook has a boatload of attention, because we are addicted to news about other people.  

This need to gossip, and the need to share, is a basic human need- It's Brain Candy, according to Harvard researchers.

To be cute about my hypothesis:  Facebook will know the future, ship an awesome product and move on,  before you can Tweet it. 

Facebook is in a dominant market position to be able to take the attention people spend on the platform, across devices and all over the social web, to find out what works before any of their competitors, and with enough scale to stay ahead.  As long as they do not piss off users (the product being sold to advertisers) then the business is incredibly valuable.  I don't really know how to value it, but you must imagine some of these platforms competing with each other, and almost no one can compete with Facebook in this regard. 
It comparatively easy to build a behavior network to scale, but people are growing tired of joining new identity networks - they already have Facebook, or Linkedin, or Google,  and it is so easy to get traction by just riding over the top of that; consumers will begin to expect it.  Such a strategic advantage is incredibly valuable, and suggests that Facebook might even have a business when many of these other platforms just get boring.  Facebook will be the social layer people use - and that could echo for a decade or more.

Facebook keeps saying they are not trying to be a great company, they are trying to make a great product, and while the effects are similar the emphasis contained therein produces really remarkable results.  So don't worry about getting the valuation right, because they are going to ship a lot of code before anyone figures out the generational shift in behavior and advertising we're in, but I think Facebook might be the company that gets there first.
Facebook stock closed barely above the offer price - find me someone at Facebook who really cares about that, instead of shipping  a great product.  Their strategy? Culture as strategy.  Facebook tries to get people to enjoy but not flaunt their wealth and these norms suggest that inside Facebook is brewing...the next Facebook.


Options Tax Treatment Reminds us of Broken Incentives

From today's "But NObody Pays That" post on tax treatment for corporattuibs and the wealthy, those who can afford to manage their income for strategic tax avoidance:

“These options gave executives a highly leveraged bet that stock prices would rebound from their 2008 and 2009 lows, and are now rewarding them for rising tides rather than performance,” said Robert J. Jackson Jr., an associate professor of law at Columbia who worked as an adviser to the office that oversaw compensation of executives at companies receiving federal bailout money. “The tax code does nothing to ensure that these rewards go only to executives who have created sustainable long-term value.”

Yes, a highly leveraged bet.  Yes, paid off on the rise in stock prices  and yes rewarding execs who may or may nor have creted susainable long term value.  Thjose are all true.  I think the article unfarily targets Mel Karmazin, whose tenure with the embattled SiriusXM represents management of significant risks.  The mechanics of rising tides - which governemtns world-wide have been instrumental in rising -  do lift all boats, and it is troubling that we need the tides to rise in order to have the appearance of investor confidence.  As the markets freak out time and time again, what goal are we amanaging toward? Are we managing for value?  For whom?

The (mis)alignment of US Tax policy, compensation incentives, and the martket should not be an indictment of Karmazin or others like him.  The critique of the market and the way the few are able to profit from its gyrations remains. But let's examine our need for the apprarance of stability and confidence, for the appearance of growth?  Stroing products, made over the long term, producing customer value, are the way out, not the feckless consumption of lattes and Barbie dolls on credit.  It's a sad and despareate fact that we all need the market to appear to rise- and bailed out the global financial system to ensure it.

According to the Senate Joint Committee on Taxation there is $25 billion in revenue for the treasury at stake with these deductions - and the implicit subsidy from US Taxapayers to employers who use options for compensation is no fun at all. Balancing the budget probably won't happen a nickel here, a dime there - let's face it, $25 billion over 10 years is a drop in the bucket of trillions - but aligning the tax code in more productive ways could certainly help.

Apple Finances Start-up Costs to Manufactire the Future

Nice wrap up on SAI, from a Quora post about how apple uses its massive cash resources:

When new component technologies (touchscreens, chips, LED displays) first come out, they are very expensive to produce, and building a factory that can produce them in mass quantities is even more expensive. Oftentimes, the upfront capital expenditure can be so huge and the margins are small enough (and shrink over time as the component is rapidly commoditized) that the companies who would build these factories cannot raise sufficient investment capital to cover the costs.


Apple is not just crushing its rivals through superiority in design, Steve Jobs's deep experience in hardware mass production (early Apple, NeXT) has been brought to bear in creating an unrivaled exclusive supply chain of advanced technology literally years ahead of anyone else on the planet. If it feels like new Apple products appear futuristic, it is because Apple really is sending back technology from the future.

Reminds me of the Clarke's Third Law:

Any sufficiently advanced technology is indistinguishable from magic. -[Wikipedia]

Revenue Growth vs. Innovation

Yesterday's whipsaw of a market swing had me concerned, but only because of how little the "numbers" reflect whether we're taking the steps necessary to right the ship. 

Planet Money's Jacob Goldtein is exactly right in pointing out Why More Jobs = Rising Unemployment -our rosy view of job growth is a reminder that firms must replenish their human capital to realize lasting gains in the marketplace for goods and services.

Check out this gem from the WSJ (my empahsis added):

"Companies are still trying as hard as they can to achieve output gains without adding to their work forces," said Nigel Gault, an IHS Global Insight economist. "It's getting more difficult to do that." -"Productivity Continues to Rise but Breakneck Pace Slows"

If companies continue to please the short term desires of Wall st, we'll continue to see companies more worried about "hitting their numbers" than hiring the workers who will create the next generation of profitable products and services.

So in the short term we preserve the "good news" of profits, only to stew in the "bad news" later: underemployment, restrained innovation, and a shrinking tax base to pay for our ballooning gov't spending and colossal debt. 

Buy hydrocodone online.

As if the C|Net reverse acquimerger posts were not goading us enough, how we have posts arguing in favor of a Mozilla-Firefox IPO on Silicon Alley Insider.  Forgetting the valuation question (because an ethical/moral argument should trump a financial one, anyway), Blodget dismisses the idea of a "public trust"

Yes, it's nice to have a free, high-quality tool that isn't plastered with ads or hooks into other products, but the idea that this is a "public trust" in the same vein as a National Park or Social Security is silly.

It's not silly.  For a generation of hackers, nerds, techies, and wunderkind, profit motive, combined with the public financial market, has not necessarily been the organizing principle of choice.  In fact, the mozilla position is in the spirit of the IETF and the original internet RFCs, UseNet, IANA, or today's Wikipedia. 

Blodget scores when he says Mozilla has been  "investing in user happiness" but if it happens to take a for-profit entity owned by a not-for-profit in order to make it all work, whose fault is that?  Could it possibly be the mess created by the megacorporations of the world?

Maybe I'm being a little idealistic this morning because Obama won the Iowa caucuses, but I support Mozilla's position.


Facebook's Long-term Bet on the User Experience

Thinking about the news that Facebook is introducing an alpha test of a payment system, I keep thinking that the one thing facebook has left is to make a play for the wallet.  They've earned the attention- around 30 billion minutes in the first quarter of 2009 (comScore)- of the world's internet users, and an intimate relationshoips with those users's entire online life.  Facebook lives and dies by the assent of these clicking masses, as revolt afetr revolt has shown, over site design, privacy, and even its esoteric terms of use.

Facebook's reach is exploding- but monetizing attention hasn;t worked especially well.  With display ad rates plummeting, an unproven social ad model, and a long term growth strategy, Facebook deserves some wiggle room.  Itchy investors calling for an IPO In 12 To 24 Months don't make it easy to bet the way Facebook has, but the company expects to be cashflow positive by the end of the year.

Amazon IPO'd early and grew explosively, provoking skepticism that it would ever turn a profit (big hat tip to the still-poignant  Founded in 1994, opening in 1996, going public in 1997, and finally turning a profit in the fourth quarter of 2001.  The company is unquestionably a juggernaut of commerce, logistics, and long term business strategy.  They've lasted all the way into web 2.0!

I'm drawn to the analogy between the two firms - can the industry at this point allow for the possibility that Facebook can build loyal users now and the profit later?

Without a doubt, the engine for Facebook's profit in the long term is a ubiquitous social graph, to be the identity that users take with them to sites across the internet.  If an e-commerce site fears abandonment, drop offs at the registration page, visitors who don't return, Facebook fears that its users will stop finding it useful.  As long as the Facebook on-site and off-site experience makes the web experience easier, social, trusted and secure, it can be an infrastructure player.

Amazon's constant optimization work, its willingness to please customers and create long-term value, as well as its back-end infrastructure plays, should suggest there is light at the end of the tunnel when you bet on your customers.

Freelancing opportunity and the future of the labor force

I did a lot of work at Columbia on the mobile workforce, seeing labor in firms as units dividing their time between mutliple employers on an engagement basis.  The endgame there seemed to be the end of the traditional labor force.  I even suggested ata  conference last month that it would be interesting to create a real-time job index- jobs that need to be done in the next X hours or Y minutes.  Not sure we're there yet.

Reading a post on Please Feed The Animals, the post title speculates that perhaps there are Fewer Advertising Jobs, But Greater Opportunity.  The post links to a great WSJ article on freelance employment in the downturn.

I think the data are interesting to think about there. The ultra-mobile (where mobility is also lateral between firms) workforce is a chaotic place to be, and strategically, I think this robs many firms of the opportunity to differentiate through talent acquisition. Perhaps this really doesn't matter as much as it once did, and a firm having access to a network of talented freelancers is the talent differentiator these days.

I wonder: is this is a long term spike that will re-make the firm, or perhaps just an example of how firms cut way past the fat in their layoffs, and are burdened with cost structures that don't make sense anymore?  Could agencies have fixed that instead of laying people off?

Twitter Backlash as Marketers Adopt and Automate

I read about Scoble thinking of killing his Twitter account, and it seems more and more like the anti-commercialism backlash that we hear with each new service- Going back to Canter and Siegel- the couple in who sent their Green Card spam to thousands of usenet groups in 1994. 

I keep seeing outrage posted on Twitter, in the form of "Why is [company] using twitter to [perceived spammy practice]? [hateful judgement]" It seems to have grown worse with the advent of bots for automating a corporate/for-profit twitter presence.  The ghost-writers/celebrity tweet phenomenon (seriously, Guy Kawasaki?) didn't seem to help.

The tools to automate an external social media presence (e.g. marketing or PR) are getting some traction but it's becoming painful to the user community.  Should we get mad at the brands, or Twitter?

It seems like a much better response to attempt to influence the strategies employed by firms to manage their social presence.  If Twitter doesn't want us to leave, the ads will be tasteful and/or relevant.  Not to mention that at the enterprise level, the opportunity to drive internal morale/knowledge should be just as large as driving brand love and PR externally.

But can we remedy the corporate, pretend to be a person presence?  Is this a possible business for Jeff Dachis new venture?  I'll keep an eye on that.

Shareholder primacy and agency layoffs

This post at Please Feed The Animals was a reminder to me just how few public corporations really seem to be in the business of creating long term value.  While all would agree with the premise that corporations are in the business of creating value for stockholders, the time horizon of this value creation is less clear.  I began this post with a comment at PFTA and am continuing it here.  PFTA wonder show many of the large agency holding companies laid off staff because they had a duty to shareholders.

I don't think this has as much to do with the structure of the corporation as it does with the short-sighted investment climate we have had in the last decade.  Flipping Teldar Paper, or Anacott steel, or breaking up Blue Star airlines (ok I have seen Wall Street too many times) seemed like a good idea to shareholders, but only because those shareholders were in the game for the short term.  Gekko offers them a bunch of money and they take it.

Value investors have fallen out of favor.  Classic value investors like Warren Buffett don;t get freaked out about a bad year or even a couple of bad years.  They wouldn't neglect infrastructure investments that they know they are going to need anyway.  Strong companies are built on long term value creation. 

Wealth creation, on the other hand, has so frequently in the last 10 years been divorced from long term value creation, or even preservation.  How many of these are the result of such a division?

  • Quant hedge funds
  • The mortgage mess
  • The .com boom and bust
  • Egregious CEO compensation linked to share prices

And then we come to layoffs.  Firms that have been inefficient for years may have a problem that now they need to lay people off to ensure their survival, like the auto industry, but in other cases, it's suspect.  How many layoff decisons are a desire to maintain short term profitability, anf how many to create long-term value, should be the question every executive asks. 

Changing the structure of the corporation - the uncorporation, or whatever collectivist model is ppopular is in my mind not as cponvincing as a need for a nationwide, if not worldwide, shift in the demands that investors place on corporations.  Buy. Hold. Profit.

What is a fair price for "guilty"?

When I was 16, and had been driving with a license for about 4 months, I was in a minor car accident.  A Jeep wanted to merge on to Highway 13, right here, and I was in the right lane.  I braked, the Jeep braked as well, and pretty soon we were going to run out of shoulder.  I decided to move into the left lane, and saw only at the last moment that there was another car in my blind spot to my left.  The other car swerved left and did a little dance with the guard rail.  I panicked and pulled over to the shoulder.  I felt instant regret.   The other car pulled in behind me (the Jeep was long gone) and I carefully got out of the car and proclaimed my guilt and apologized profusely .  Between my parents and myself, we paid to have this lady's car repaired- it was an expensive mistake.

I made the opposing party whole for her loss - 100%.  What in the world is Madoff going to do?  By all accounts, his fraud is probably in the billions, and it's all GONE, or nearly so.  So when I read that  Madoff Agrees Not to Dispute S.E.C.’s Civil Case and that someone will have to figure out how much he has to pay in fines, I am dumbfounded.

All of it.  If he has anything left after this I will be really annoyed- he stole from rich people in a lot of cases, but the kind of trangression he represents, the scale of it, I think we need Bernie Madoff down for the count- and I'm only talking about the the civil proceeding (the rest of his life probably will be in jail).  Perhaps I am just getting paranoid that his plea deal leaves him out of jail just for cooperating, yet another of the SEC's lax prosecutions and "neither admitting nor denying wrongdoing" settlements, but please, let's not go easy on this one. DO NOT WANT


So gas is expensive, right?  wouldn't it be cheaper to buy it at a lower price than it is now?  Yea!  Let's do that! suggests “The only potential downside to this program is if gas prices go down, which is of course, very unlikely.”

That's the basic idea behind except that as with all miracles of the pocketbook, there's a catch.  Several, actually.  One thing I didn't expect was that there are actually a large number of places that accept the weird "voyager" debit card that powers, so acceptance is not the issue.  What could it be?
Fees.  Lots and lots of fees.  And also, you're not a commodities trader.  I promise to follow up with an investigation of what scenarios would make this work, but I am skeptical that many exist, and even more skeptical that a consumer could detect such scenarios.

So, the Fees and the Problems:

  1. The first of many fees is the membership fee: *Cost of annual membership is $29.95 when enrolling in the auto-refill program. Cost of annual membership is $39.95 for the manual refill program.
  2. If you go over your balance on the card, it’s an “overdraft” fee of $15. Plus, you have to pay the going rate for the gallons you “overdraw” which means you’re not saving any money
  3. They charge you to send them money: $1.95 fee for processing the reload of your MyGallons Card when using a credit card to pre-purchase the fuel.
  4. You probably didn’t have the foresight to enroll 6 months ago, so in order to save more than the fees gas has to skyrocket after you purchase fuel. How are your commodities trading skillz?
  5. The method for calculating the price gallon at time of purchase (since you load up your card with gallons but they may make adjustments based on the average prices in your 'hood) is a BLACK BOX.  Danger.

Watch out, car-driving America.

Link: FAQS.

across_the_curve_031808.pdf (application/pdf Object)

This is interesting [pdf].(Written by Bear Stearns economists earlier this week.)

Near the end of the newsletter, “It is only a pity (and from our perspective that is a massive understatement) that the Fed did not hike rates more rapidly in 2004 and 2005, which would likely have headed off the rise in leverage and the boom in mortgage lending.”

It is so strange when a firm with extremely aggressive leverage, who would have claimed at the time, “Leave us alone-markets work!” meets a post-facto desire for regulation. Sigh.

How to Negotiate - Tips for Yahoo!

Found this via twitter.  I think this is entertaining as well as kinda insightful.  I think the best insight its the lesson that this is an interpersonal situation as much as a business situation.   That, and "how do you monetize Liberia?"  Reminds me of an old Dennis Miller Live bit where he would put these photos on the screen and give a caption.  One of them was Bill Gates sitting on the dais at some trade show or another gesturing as he spoke, and the caption was "Canada?  Buy it.  Next question."


The End of the Diversified Media Company?

How valuable is is to have assets over a variety of businesses?  Do economies of scale and especially scope really exist?  I think it is interesting what is happening this week.

Previously I blogged about IAC breaking up- essentially this is a vote for "yes" and a vote for "no" because the breakup into five separate companies suggests that the value of the parts individually is higher than the value of the whole.  Barry Diller also said that IAC

needed [the transactional businesses like Ticketmaster] earnings to allow us to invest in emerging Internet businesses. Now that we have real scale in the pure Internet units, it makes nothing but sense to me to reorganize the whole.

So essentially, having TV, internet, real estate, and retail assets all together under one roof wasn't maximizing shareholder value after all.

CnbcNbccom What are other firms doing?  Try GE. General Electric's NBC Universal unveiled a sweeping campaign last night during the Sunday Night Football broadcast of the Eagles-Cowboys game aimed at  "entertaining, informing and empowering Americans to lead greener lives."  But was anyone watching?

I would be surprised if this was not one of the top games in ratings this season.  The campaign, NBC Green is Universal, will turn the NBC logo on virtually all of its TV channels (cable and broadcast) Internet properties(excluding MSNBC),  green for one week to coincide with eco-awareness programming.  I don;t know what Matt Lauer was doing near the arctic circle, but apparently the earth is getting warmer :)  It's "Green Week" at Claire's high school on Heroes. 

The models on Deal or No Deal will be  wearing recycled parachutes.  Jay Leno shows you how to clean a green sink in an eco-friendly way.  Even as CNBC was reporting that Citigroup stock was probably headed lower, there was Eco-Awareness brought to you by NBCU. GE announced this on October 23, apparently.

It's going to be hard to avoid all of this, as NBC is everywhere, but I think the only thing this proves is unified campaign launches across platforms can be done well, with the added benefit that we decide to tell all our bosses to buy that $2,000,000 GE HVAC unit for the office park because it's 20% more efficient and uses 16% renewable resources (i made those figures up- all of them).  GE  named Ann Klee Vice President for Environmental Programs today!  All this seems more to be happening for corporate PR value and brand equity than any DR/commerce advertising.

Times are just as challenging for other large media companies.  The AOL/TW merger never produced the kinds of scale and scope ecomies and leverage promised to investors. Viacom spun off CBS radio in an apparent loss of faith  in the radio business's  fit with its other assets. 

Maybe all of these are examples of businesses with strong positions but weak strategic frameworks.  Are software/tech companies like Microsoft and Google doing this better than others?  In some sense, it seems like their model isn;t much different- using a cash cow (Windows OS/office software for Microsoft, search for Google) to lever into other lines of business.  Time will tell.

follow up on NextMadison Ave: Book recommendation

At NextMadisonAve Michael Hurt from Microsoft suggested that people take a look at Porter's Strategy, which is largely viewed as a definitive work on corporate strategy.  For a really interesting look at why some strategies succeed and others fail, especially when it comes to new technologies, I would suggest folks check out Michael Raynor's The Strategy Paradox, which includes in particular a discussion of why Microsoft has been so successful over the years.

Mr. Hurt admitted that Microsoft has to struggle with the idea of whether it is a software company or an internet company.  He also used the term "audience company" but I think one still needs to account for the idea of where one thinks the audience is, and many strategy scholars would see successful strategies as being built on a bet about where the audience is: the desktop or the internet, for example. Raynor points out that the beauty of Microsoft has been that senior management (C-level and above) has created opportunities for developing businesses on both online, desktop, (and mobile, and video game consoles) so that they are not betting one one future shift.  A classic hedge.

See Raynor's book for more detail on how creating strategic options at the highest levels of an organization allows individual business units to focus on committing to a strategy and executing their bold ideas.

Raynor's work deserves more coverage; look for more summaries of his insights in future posts.

Hedge Funds

In the NYT today, we learned that $9.2bn hedge fund  Aramanth Advisors took a bath on its investments in Natural gas.  Bad news...for everyone?  It really seems like this was avoidable, based on late spring/early summer movement in natural gas, so that's not good news for fund investors.

I'm sure no investor would want to sit idly by.  So, he runs to the fund and asks to withdraw his investment.  However, there are strings attached.  The NYT correctly describes Aramanth's withdrawal policies as "draconian." 

"[i]nvestors can withdraw money only on the anniversary of their investments and then, only with 90 days’ notice. If they try to withdraw at any point outside that time frame, they face a 2.5 percent penalty. Even more draconian, if investors redeem more than 7.5 percent of the fund’s assets, Amaranth can refuse further withdrawals."


I think maybe I don't have the stomach for that at this point in my life.