quid.pro

Briefly peering outside our reality distortion field

We Silicon Valley types love both inflection points and business jargon and when the two collide, we discover meme ectasy. In the early 90's, Geoffrey Moore taught us that technologies could cross the chasm and by 2000, Malcom Gladwell introduced the newer concept of the tipping point. In my days as a VC, I often thought that PowerPoint must have a cliche wizard that I somehow had overlooked. The vast bulk of presentations sent to me used one of those two expressions to short-cut "here's how we go mainstream."

I mention this in 2009 as we argue over whether Facebook has gone mainstream or Twitter has hit a tipping point. It's important every once and a while to look away from our giant HD LCD TVs attached by HDMI cables to DVRs, Apple TVs, Roku and Vudu boxes and remember that analog TVs (attached to... nothing!) are still prevalent enough to warrant Congressional action:

"The Senate passed a bill on Monday to delay the nationwide switch to digital TV signals, giving consumers nearly four more months to prepare.

The transition date would move to June 12 from February 17 under the bill that was fueled by worries that viewers are not technically ready for the congressionally-mandated switch-over."

Anyone know someone still struggling to convert their TV? The Senate does!

Why do people join start-ups?

I've been mulling over the comments on my previous post on Long term greed and the argument that employees joining start-ups don't value stock options too highly anymore. The assertion — which I do generally agree with — is that post-2000 bubble no one joins a start-up expecting to get rich off stock options. I don't have any stats in front of me to support this, but having worked in start-ups on and off since 1991, it's certainly my experience that start-up salaries have moved a lot closer to bigger company levels and the portion of compensation ascribed to stock options has gone down materially. Needless to say, the current economic environment and complete lack of exits for start-ups will do nothing to bring back the allure of option riches any time soon.

Why do people work for start-ups? It's not because start-ups provide the allure of riches, it's actually because bigger companies have lost any semblence of longer term stability themselves. Every company is risky, so you might as well work on something interesting. Sarah Lacy has a great column in BusinessWeek discussing this newly discovered lack of trade-off:

"Already in Silicon Valley much of the risk associated with working for a startup compared with a listed behemoth has dissipated. For one thing, there's so much VC money sloshing around that most companies can afford to pay engineers every bit as much as Google (GOOG) or Yahoo! (YHOO). Then, of course, there are the thousands of jobs being eliminated from the publicly traded companies, including Hewlett-Packard (HPQ), Yahoo, and even Google. So if I can get the same money, comparable security, and the prospect of stock options from a startup, where do I sign up?"

My sense is that this recession has so far been much worse on the big corporate America than on technology start-ups, whereas the 2000-2003 period was the opposite. There's ever more money coming into VC funds while start-ups are much more capital efficient than they used to be. Given the complete lack of liquidity on Wall Street, Sand Hill Road is a lot safer place to hang out these days. Maybe the start-ups those VCs back are actually the safer bet too.

Quick update: right after I wrote this post, I saw this story on the NY Times talking about the flight to safety among job seekers. Also worth a read.

How media hates media innovation

Scott Adams, the creator of Dilbert, recently launched yet another send-a-file-by-email service. The last four days of Dilbert have discussed the new site (which is putatively launched by Dilbert the character) and three of the strips include the URL to the new site. Here's the first of the mentions:

So who cares? It seems to depend on who you ask. I first found out about the issue from Jim Romensko writing on Poynter Online, a well known journalism commentary site. Jim writes "...some readers griped, though. 'This isn't funny, and is nothing more than a blatant attempt at advertising,' said one." And on Editor & Publisher (yes, another journalism site), is this wonderful paragraph:

"The move brought opposition from some observers such as Mark Van Patten at the Newspaper Business blog, who wrote: 'Scott Adams is filthy rich. And he didn’t get that way from what newspapers pay him. He got that way by leveraging the brand newspapers created for Dilbert into mega-book deals and merchandising deals.'"

I tried searching for actual people who are unhappy with the comic strips and this new model for monetizing Dilbert and couldn't find anything substantial. Maybe a complaint that the strips aren't that funny, but not a lot of anger at the product placement itself. Could this fear of new business models be part of the problem that media (and especially print journalism) finds itself in today?

IRS to bloggers: pay up! Eventually. Maybe.

There's an interesting article over at Stinky Journalism that's gotten a fair bit of play on journalism sites but I haven't seen mention of it in the UGC/web 2.0 world. The premise of the piece is that users who create and donate content to sites such as Huffington Post are actually creating a tax liability... for themselves:

"Is the 'donation' of a citizen's content (video, articles, commentaries, images) to for-profit media outlets that exceeds a fair market value of $12,000 in any single year subject to gift tax? Judging from the IRS guidelines, the answer is 'yes.'"

The article goes into a lot of detail on the gift tax and the ultimate issue, which is the fair market value of contributions a user makes to a UGC website. Obviously if you contribute something of little or no value, then there is no gift and thus no tax. So dropping one more picture into the large pool of Flickr photos is not shifting a whole lot of value from the photographer to Flickr. But if a user writes a post (or uploads a photo or video) to an established media site and that site sells ads against that asset, then there's a clear argument that some amount of value has been transferred which could then create a taxable event:

"Since copyrighted materials such as articles and videos have inherent and marketplace value--are bought and sold, require investment, generate production costs that can be tax deductible, defended as valuable in copyright violation cases and are often appraised as assets in estates (all taxable events as judged by the IRS rules)—it would only be sleight-of-hand or a new ruling from the IRS that would make the transfer of ownership of content from the citizen journalist donor to the for-profit media company not a taxable event."

In my mind, this is more of a barter transaction than a gift: users create for and upload to these sites with the hope of getting paid back in attention, links and internet fame. Of course, a barter of such kind is still a taxable transaction, something that the authors do discuss briefly towards the end of the piece. Either way, these types of user generated media sites are arguably creating a tax liability (insignificant though it may be) and the folks at Stinky Journalism do raise interesting questions.

Right now for the most part, little value is passing back and forth so it's hard to imagine this is an area that the IRS is going to spend much time with any time soon. This is not the first time the internet has moved faster than taxing authorities, in the early days of internet retail one of the big values of buying online was avoiding sales tax. Now that online retail has scaled up, it's become a much bigger issue that is still not settled. I'm not sure we'll see enough scale up in the aggregate value of user created content donated to media sites to make this issue a real one any time soon.

Don't be transformative

At some point in the down cycle, the acquisitions kick in. Not the company-running-out-of-money kind, but good, small companies getting rolled into the larger players. In the last cycle, it was companies like Google and Yahoo buying up everyone in sight. These kinds of acquisitions are generally a sign that values are stabilizing and often can wake up interest in the broader start-up economy. So can we hope for any, some time soon?

According to Barron's, John Chambers has the cash ($27 billion) and he's ready to spend:

"Chambers says Cisco is always aggressive in making acquisitions during downturns. He says the best time to make acquisitions is in downturns."

"Chambers says the perfect target is a company with 100 people and a hot product that customers are saying they should go out and buy"

In a posting last week, CNET confirms that the market for smaller companies isn't as weak as overall M&A activity:

"Technology M&A deals fell 17 percent to 3,751 transactions in 2008 over the previous year, according to a report released Friday by ICON Corporate Finance. But small technology deals of under $100 million fared better, posting only a 15 percent decline. These smaller deals, which account for 95 percent of all IT mergers and acquisitions, are expected to show more resiliency in weathering the tough economic storm, given they tend to be funded through the buyer's cash flow, rather than the tight credit markets, according to the reports."

A recent 451 report predicts a dearth of transformative (i.e., large) transactions in 2009. That's probably right although hard to imagine there won't be something out of Yahoo-Microsoft and both AOL and Ebay seem ripe for something larger.

The rich actually are pretty different from you and me

I'm going to use every excuse I have to drag baseball into Quid Pro. Mark Cuban has a great piece on his blog about his (so far, unsuccessful) pursuit of the Chicago Cubs. He discusses his negotiating strategy in trying to acquire the team and the politics of the ownership approval process. Baseball is a legal monopoly (it was exempted from Federal anti-trust laws in the 1920's) and as a result it's arguably just as hard to get the other owners' stamp of approval as it is to get the many hundreds of million dollars necessary to buy the team. There's nothing worse than feeling like you're not even in the negotiations:

"I never thought it conceivable that it would be hard to spend a billion dollars on a sports team. In this case it was. Add me to the list of people who never want to participate in this type of sales process again. I tried every trick I knew to try to get them to commit to me. It reminded me of when I was 16 and selling magazines door to door “Do you mean to tell me Mrs Doe, that when you tell your husband that you spent 75 cents per day on the education and enjoyment of your family, he is going to get mad ? Of course not, he will be proud and excited for you and your family”. You name the trial close, I went for it. But I couldnt close them."

As Mark goes on to explain, the credit crisis ultimately did as much to kill the deal for him as the approval process: the Cubs just weren't a billion dollar team anymore. The story isn't over as the Cubs will get sold anyway in the next few months thanks to the bankruptcy of its parent, the Tribune Company. More likely sooner rather than later, which I'm sure has something to do with the timing of Mark's post. Still, he has nothing to complain about: it's a nice time to have a free billion dollars.

Long term greed is good

Silicon Valley is a long term greedy place: we are very comfortable postponing potential small wins for a much bigger potential win later. We're never in a hurry to make money — check out this wonderfully dated BusinessWeek article from nine years ago ("Although Google does have other revenue sources, such as licensing and text-based advertisements, the privately held company's business remains limited compared with its competitors'.") The venture model that underlies every large success in Silicon Valley is based on investing a little today for the hope of more tomorrow. When it works well... a lot more.

According to a great read in yesterday's New York Times, Wall Street's short term greed is the cause of the problems we're in now. Michael Lewis and David Einhorn's two part op ed opus, ("The End of the Financial World as We Know It" and "How to Repair a Broken Financial World") is a stunning indictment of laissez-faire capitalism gone awry:

"OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest."

After taking on the SEC and bond rating agencies, Lewis and Einhorn viciously go after Hank Paulson and the executive branch's handling of the meltdown of 2008:

"SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers."

I highly recommend reading both pieces. The second offers a number of proposals ("nothing all that radical") for fixing the underlying causes of Wall Street's short term greed, many of which Michael Lewis also touched on in his most recent book, Panic. Long term greed is not new to Wall Street, it's the "Don't Be Evil" of Goldman Sachs. But like Google's famous motto, its practice, even at that esteemed firm, has been quite questionable recently.