Category Archives: Web 2.0

Unjustified Attack on Facebook “Mercenaries”

Sarah Lacy seems perplexed and indignant that current and former Facebook employees would sell their common stock to Russian investment group Digital Sky Technologies. The Russian investors planned the share buyback when they put down $200 million in exchange for preferred shares of Facebook earlier this year.

In aggregate, with preferred and common shares taken together, Digital Sky Technologies will own about 3.5 percent of Facebook. The terms of the stock buyback value Facebook at about $6.5 billion.

Let’s get back to Lacy’s criticisms, though. I don’t want to take any of what she said out of context, so allow me to excerpt directly from the BusinessWeek column in question. “The Mercenaries in Facebook’s Midst“:

And yet a flood of employees rushed to sell their stock for a price that values the company at just $6.5 billion, never mind that the buyers of those shares are the very ones who invested in Facebook at a $10 billion valuation the month before the tender offer was made. In May, Facebook said a Russian company called Digital Sky Technologies would buy at least $100 million of Facebook common stock from current or former employees.

I’m pretty certain that a few years from now, when Facebook does go public, I’ll be writing about the $100 million deal that gave Russian investors a chunk of Facebook on the cheap, and the boneheaded employees who gave up too soon.

I seriously question whether Facebook will IPO for anything close to $10 billion. Facebook still hasn’t figured out how to fully monetize its assets without alienating its subscribers. At the end of the day, let’s remember, Facebook is nothing without subscribers, those people willing to trade their personal, private information for the right to frequent and socialize on Facebook.

But Facebook must exploit them — that is, it must market and sell their personal, private data to advertisers and others, sometimes explicitly and sometimes not so explicitly — to make money for itself and its investors. Tricky, that. It’s a difficult dilemma. I wouldn’t want to be counting Facebook’s money before it’s been made.

But it’s Lacy’s next statement that’s truly provocative:

But in the meantime, I have a more immediate concern: What has happened to the startup work ethic in Silicon Valley? Time was, the region was teeming with believers—be it believers in a company or believers in the sometimes naive, lottery-ticket hope that options would make them billionaires. People who work at the most highly valued startup in Silicon Valley and rush to sell for a smaller valuation—just as an IPO is starting to look likely—aren’t believers. They are mercenaries. What’s next? Giving up options altogether for a bigger paycheck? . . . .

. . . . Silicon Valley was founded on the belief that stock options were worth something—and that something was a big windfall at an exit, when the whole company watched that ticker crawl across the Nasdaq for the first time, calculated their paper net worth, and popped open the champagne. Does it always work out? Of course not. But that is why it’s considered high risk, high reward. How has this gotten so lost on people? Are we just so jaded that we can’t believe in promises anymore, even at a company like Facebook?

In the above excerpts, Lacy repeatedly invokes the words “belief,” “believe,” and “believer(s)” Those are words typically more associated with faith, religion, and even cults than with the hard-headed world of business. In business, trust and belief must be earned, by employee and employer alike. When one joins a company, one doesn’t usually consent to treat the founder as if he’s Jim Jones or L. Ron Hubbard.

It should be obvious: Businesses exist to make money. Their primary purpose, marketing palaver aside, is to make money. They are investment vehicles, not churches. Everybody who joins a company, which is a business, needs to enter it with his or her eyes wide open.

When one joins a company, one is making an investment — of time, of opportunity, of value. The employee isn’t the only one benefiting from the exchange. The employer benefits, too.

Everybody in that exchange is looking out, first and foremost, for number one. That’s just the way it is. Sometimes, in the spirit of enlightened self-interest, employers and employees strike arrangements that provide sustained mutual benefit. But those arrangements need to be predicated on logic, reason, and, yes, calculation, not on misplaced religious fanaticism.

Finally, have you noticed that Lacy’s observations in the above excerpt are rooted in nostalgia?

She’s talking in the past tense about a Silicon Valley that doesn’t exist anymore. Stock options in startup companies might have been worth something — even something potentially substantial — back in 1999 or 2000, but they’ve been worth less and less in fewer and fewer circumstances as the years have advanced. We’ve reached a point now where the economy has cratered, IPOs are as rare as unicorns, and the prospect of lucrative exits has diminished greatly.

People, the employees at Facebook and other companies, aren’t jaded, Sarah. They’re living in the real world, the way it is today. They can’t afford to live in Silicon Valley’s past. They have to do what’s right for them today, in a tough economy, in a world that bears scant resemblance to the halcyon days of weekly IPOs, bursting beer fridges, and champagne Fridays.

If you ask me, the Facebook employees who took the Russians’ money and sold a portion of their Facebook equity made rational, well-reasoned decisions. They looked at what was offered, considered their options, and chose to sell some shares for a certain gain rather than to keep them for a future payoff that might be better, might be worse, or might never come at all.

They’re employees at Faceboook, after all, insiders who presumably have some insight into what the company is doing and how it is doing.

I don’t begrudge them their choice. It doesn’t make them mercenaries. It makes them realists.

What Happens to Tech if Consumer Spending Doesn’t Rebound?

What happens to Silicon Valley, and to the technology world in general, if consumer spending doesn’t bounce back?

Despite hopeful pronouncements from economists and business media about a nascent economic recovery, American retailers still confront tapped-out consumers reluctant to spend the meager discretionary income they have at their disposal.

When they’re not being optimistic, economists will inform you that consumers account for 70 percent of expenditures in the US economy. In other western economies, the percentage of consumer spending is closer to 65%, which is still a lot.

Think intently about that reduced retail spending and consider that it might persist for a long, long time.

I hate to be the bearer of bad news — in certain societies, that distinction can occasion nothing but grief — but we’re not in a standard, factory-issue recession.

There’s something bigger happening here, and not everybody has recognized it, though consumers, to their credit, haven’t bought the blandishments from on high that it’s okay to go back to the free-spending habits that contributed to (but did not create) the bubbles of yore.

For years, the world worked on the basis of US consumption of Chinese-manufactured goods. The Chinese would underwrite that consumption by buying US treasuries. Banks kept the party going by extending cheap credit to everybody that needed it and many that didn’t. The party seemed as though it would go on forever.

But nothing lasts forever, as Roxy Music told us in “The Same Old Scene.” Even credit-fueled bubbles end, it turns out. And, as at the conclusion of many parties, nearly everybody wakes up the next day with a severe hangover.

American consumers cannot keep the party going. They are financially strapped, with less income than they had before, less job security, reduced-value assets in the form of securities and real estate (including their depreciated homes).

Credit doesn’t come easily anymore, either. Banks have become more stringent in lending policies. Even if many consumers wanted to spend, they wouldn’t be able to get the money to do so.

As noted above, this situation will be with us for a long time.

Here’s a question to ponder: With the US consumer no longer able to fuel economic growth with his spending — and with European consumers unlikely to pick up the slack — who’s going to buy all the goods that manufacturers will churn out to restock depleted inventories?

For the time being, it won’t be Chinese consumers. They’re not ready to take the baton. Even as they gradually assume that mantle, they’ll be inclined to buy Chinese-made goods rather than those made in America or Europe.

So, we find ourselves in an uncomfortable global economic transition, not a typical recession. We live in interesting times, and, as the Chinese proverb suggests, that’s not always a good thing.

What does it mean for the Valley and for information technology? It probably means all bets are off regarding a revival of IPOs on a grand scale. It probably means venture-capital spending will remain depressed and highly selective. It also means exits, even by acquisition, will be few and far between.

What’s more, many Web 2.0 companies predicated on robust spending by the American consumer will become lost causes. Paid content directed at consumers also will fail. (Hear that, Rupert Murdoch?) Consumers will be able to pay for their Internet connections, but they won’t have enough spare change to spend on for-pay online news content.

As unfulfilling as they have been for countless content purveyors, advertising-based business models will be the only game in Web 2.0 town. Consumers won’t have the discretionary income to spend on content. Regrettably, advertising spending will be constrained by the diminished pay off from enervated consumer spending.

It’s a world of diminished expectations.

There’s always opportunity, though, and one that I definitely see ahead is for anything that helps businesses and consumers cut costs, become more efficient, and do more with less. Just as so many technology companies have been slashing costs, often by jettisoning employees, consumers will be looking to reduce their overheads, too.

For the time being, as top-line fortunes recede from immediate view, the world will become all about reduction of operating expenditures.

Andreessen Backs Likely Facebook Spin-In Company

I don’t have much to say on the subject because I think Facebook gets far more favorable attention that it deserves, but Marc Andreessen, who sits on the Facebook board of directors, has invested in what I would classify as a likely Facebook spin-in company developing a specialized Facebook browser.

Enough said.

Cisco’s Eos Spawns Questions, Few Answers

As Cisco expands further into relatively unfamiliar markets and solutions, I believe it is fair to ask whether the company is overextended and playing a high-stakes game well beyond the confines of its comfort zone.

Has it reached a point where its zealous pursuit of continuous growth has taken it into foreign markets where it possesses neither the cultural sensitivity nor the language skills to flourish? Does Cisco have a mandate to be in these places?

I’m not talking about geographies, and I’m not asking these questions rhetorically.

I don’t think the jury, as represented by the abstraction of the marketplace (with its less-abstract buyers and sellers) will be able to return a definitive verdict for a while. For Cisco, these new markets are works in progress.

One of the many new businesses Cisco has launched involves its EoS online social-entertainment platform, which Cisco believes it can grow into a major technological enabler (and a billion-dollar business) for beleaguered entertainment companies — purveyors of music and movies, respectively, but also potentially professional sports leagues — trying to brand and monetize their artists and properties.

Toward that end, Cisco Systems announced today an expansion of an existing relationship with Warner Music Group (WMG) Corp., the world’s third-largest music company. As a result of the deal, Cisco will allow Warner Music Group to use the web-based Eos platform as a fulcrum on which the recording company will design and develop customized, interactive sites — replete with social-networking features — for a growing number of its musical artists and their fans.

Today’s announcements builds upon an existing relationship the two companies announced at the Consumer Electronics Show (CES) in January.

Neither company has provided a wealth statistical data on how the relationship is faring commercially, nor on what sort of financial arrangement Cisco has with Warner Music. It isn’t clear, for example, whether or to what degree Cisco shares in advertising revenue or in revenue generated from music and merchandise sales that occur on the sites.

PaidContent.org reports that WMG has seen scaling in traffic per site and in the number of sites built on Cisco Eos. The major label sees four potential revenue streams: an enhanced site experience, ticketing with enhanced experience, subscriptions, and advertising/sponsorships.

It’s very early yet, for Cisco Eos and for its partnership with Warner Music. As mentioned above, Cisco Eos was announced in January, and Warner remains Cisco’s only Eos account. Nonetheless, Dan Scheinman, senior VP and general manager of Cisco’s Media Solutions Group, says his company plans to announce partnerships with other entertainment concerns in the months ahead.

With that in mind, Jennifer Martinez at GigaOm believes Cisco’s incursion into media and entertainment will put it on a collision course with MySpace, which is trying to position itself — at least partly — as a venue for interactive music and entertainment communities.

Cisco, however, refutes the notion that it will compete with MySpace, Facebook, or with other social-networking sites. We’ll see how it plays out.

To be sure, there are many unanswered questions connected with Cisco’s EoS.

Data-Center Investments Go East

In matters involving information technology, it isn’t often that Silicon Valley takes a back seat to Virginia, much less New Jersey.

Still, that’s what is happening in the wholesale data-center space, where investments and data-center real estate are increasing on the east coast, often at the expense of data-center expansion in Silicon Valley.

It remains to be seen whether Silicon Valley will experience a shortage of data-center capacity. On the demand side, much will depend on the ongoing health of venture-backed Web 2.0 startups.

Looking Back, Delicious’ Schachter Suffers Seller’s Remorse

Those who report on mergers and acquisitions sometimes forget that the deals often end badly. Statistics vary, but research shows that anywhere from 50 percent to 80 percent of acquisitions fail — in that they produce negative results or deleterious consequences for the buyer — or don’t live up to their potential as measured by revenue or market-share gains or ROI metrics.

Some companies have better acquisition track records than others. Cisco Systems, for instance, does a good job of identifying, acquiring, integrating, and assimilating companies and their employees. It has had misfires, of course, with StrataCom — an early and sizable acquisition — being notable among them. Other companies — Alcatel-Lucent springs readily to mind — have not fared nearly as well in the M&A field.

Yahoo is another company that hasn’t enjoyed a stellar record at the M&A casino. It seems to put its chips down on the wrong number far too often, and it occasionally fails to play a strong hand as well as it might have done.

Everybody has heard of buyer’s remorse, and most of us have experienced it at some time. A lesser-known phenomenon is seller’s remorse.

One man with a distinct case of seller’s remorse is Delicious founder Joshua Schachter, who sold his company to Yahoo in 2005.

At the time of the acquisition, Schachter had high hopes for Delicious and for how Yahoo could make it bigger, better, and more popular. Things didn’t work out. The promise of the merger wasn’t realized, neither party benefited to the degree they’d imagined, and elation was soon supplanted by disappointment and regret.

There’s no question that Schachter looks back in sadness if not in anger:

I wish I had not sold it to them (Yahoo). The cash and freedom do not even come close; I would rather work on a big, popular product.

There’s a lesson here for founders and entrepreneurs. The lesson is not that you shouldn’t sell your company. Sometimes there are very good reasons for selling a company, either because the offer is too good to refuse or because the commitment of the buyer to enhance the value of the property is enduring, sincere, and strong.

No, the lesson here is that once you sell your company, it’s no longer yours. Founders and entrepreneurs often don’t internalize that reality, and it leads to personal grief for them and to exhausting conflicts with their new colleagues. If founders can’t make that cognitive and emotional disconnection, they shouldn’t do the deal or they shouldn’t include themselves as part of the transaction.

Either way, nobody wants to be afflicted with seller’s remorse.

Facebook Ranks Fourth Among Most-Visited Websites Globally

Facebook has become the fourth-most-visited website in world, according to an article published at TechCrunch.

Quoting the latest site-vistor data from comScore.com, TechCrunch reports that Facebook gained 24 million unique visitors in June, giving it a total of 340 million visitors worldwide.

In the popularity contest as determined by site visits, Facebook is behind sites belonging to Google, Microsoft, and Yahoo, respectively, but finds itself ahead of the likes of Wikipedia, AOL, eBay, and CBS Interactive.

You know what I think of Facebook. Not for the fist time, I am gobsmacked by popular taste.

Questions in Air at Allen and Co. Media Summit

I just wonder, after years of feting MySpace and Facebook and Twitter, whether the media industry’s largest companies and their investment bankers will realize that most Web 2.0 entities are muddled fringe players.

The next well-hyped social-networking site probably isn’t the prescription for all that ails the media industry, which admittedly needs to think carefully about the creative and not-so-creative destruction that technological innovation has wrought.

Such introspection and deliberation, however, are unlikely to lead to acquisitions of dodgy startup companies that have no idea how to generate revenue or profits.

The big media companies — most of them, anyway — still possess brands that have greater commercial value than anything a Web 2.0 startup could bring to the table. In most instances, the ideas and technologies behind those web startups are not patentable intellectual properties. Barriers to entry are minimal, and sustainable technological advantage usually isn’t a practical consideration.

The solutions to many of big media’s problems can’t be bought from boutique investment bank. Media’s titans need to think through their dilemmas, realistically look ahead at how demographics and technological evolution will continue to roil their once-peacebale waters, and then devise practical strategies that leverage their brands and partnerships to best effect.

They can remedy at least some of the problems they created for themselves. They don’t need to throw money at media neophytes who will bring a different set of problems along with them.

Viable Product or Service First, Then PR

The New York Times ran a feature article today in its business section ostensibly about how the nature of public relations has changed in an epoch no longer dominated by print and broadcast media.

In the era of Web 2.0 phenomena such as Facebook, Twitter, and blogging, public relations must adopt new strategies and tactics to remain relevant and effective, reporter Claire Cain Miller suggested.

It’s an interesting thought, and there’s some merit to the argument.

But to these jaded eyes, the story seemed a cleverly devised advertising vehicle for Brooke Hammerling and her company, Brew Media Relations. As the story unfolds, the writer grapples less with big questions about media and promotion and focuses more on how Hammerling seems to know everybody in Silicon Valley and beyond.

Still, at one point in the story, light shines through. Talking about a company called MobShop that she promoted in 2001, Hammerling notes that it got “more press than I’ve ever seen,” but that it still died.

Said Hammerling:

“It shows that P.R. can’t be the end-all and be-all,” she says. “Everyone knew who they were, but at the end of the day, they couldn’t make any money.”

Whatever one thinks of the remainder of the story, that’s a nugget to take away and remember.

One can attempt to polish and shine a ball of dust, but it will never be a diamond. Similarly, technology executives can mount an aggressive public-relations campaign, getting somebody such as Hammerling to attract the notice of various industry grandees and media potentates, but public relations – no matter how it’s executed –cannot and will not, in and of itself, make a technology business successful.

Public relations, whether aimed at new-media bloggers or old-media newspapers and magazines, can help spread the word about a new product or service; but it is incapable of creating a good product or service.

At the end of the day, a company must have a product or service that delivers value to customers, be they consumers or businesses. If it doesn’t have that, all the PR in the world won’t make a difference.

Yes, PR can draw attention to a company, and to its product or service, but that’s all it can do. Once customers investigate the company in question, they’ll make their own decisions as to whether the product or service on offer has value or utility. If they decide the offering is irrelevant to them or of poor quality, the PR payoff will have been negligible and fleeting.

Even Web 2.0 companies need to keep that in mind. Before launching the PR salvos, they should start with a well-defined product or service that delivers tangible value to a clearly identified target market, sometimes known as cusotmers. They should do the market research, submit to the discipline of rigorous product management, and come up with a well-qualified creation. Then, they ought to try to devise a sustainable business model, one that ensures ongoing revenue and profitability. This tends to be the hard part, especially for Web 2.0 companies, as evidenced by the chronic business-model struggles of putative success stories such as Facebook and Twitter.

When all that is sorted, these fledgling companies will be ready to take their messages to the world, or to that part of the world that will care about what they’ve created. Then, and only then, should they unleash the media-relations hounds. If they make that move too early, they might get some exposure, which tends to gratify egos, but they will not see meaningful business benefits.

After all, nobody wants to end up like MobShop.

Craigslist Warns Off Criminals

It was inevitable that the criminal mind would try to exploit online classified-advertising forums such as Craigslist. Criminals are active in the real word, and the virtual world is just an extension of the real one.

However, I suppose the lack of real privacy online works in society’s favor when it comes to criminal activity. When you are on Craigslist or Facebook, you are traceable. You leave electronic tracks behind.

On Facebook, the proprietors can use those tracks and your user data to exploit you as a consumer entity in their dealings with advertisers. That’s the dark side of being an online denizen of an electronic social network.

The bright side is that criminals who use Craigslist typically will be identified, apprehended, prosecuted, and imprisoned. They are highly unlikely to get away with their crimes.

Facebook Ultimately in Conflict with Its Users

Cutting to the chase, I’ll say up front that the latest Facebook controversy doesn’t surprise me in the least.

Faceboook isn’t done generating controversies. There will be more of them.

Here’s why: Facebook is a company, a business entity, and its objective is to make profit — preferably plenty of it. To do so, it must exploit — sorry, but there’s no other term that is accurate and honest — its 175 million users.

Therein lies the rub. Many of its Facebooks users, perhaps the majority, simply perceive it as an online venue in which to meet “friends” — for now, let’s put aside whether social networking in general and Facebook in particular have devalued that formerly meaningful word — socialize, trade juicy gossip, and exchange embarrassing photographs.

But Facebook is something else, too. It’s a business. Its executives have investors breathing down their necks in search of breakneck growth and, ultimately, an obscenely rich exit scenario. Mark Zuckberberg and his team are under intense and unremitting pressure to show tangible business results.

Considering that the company continues to lose money, that means the head honchos at Facebook must continually explore how to derive revenue from the subscribers who frequent the site. If, in pursuit of filthy lucre, Facebook must compromise the privacy of its users, it will do so, because that’s the only business card it can play.

That said, Facebook will try to hide or otherwise obscure the online diminution of subscriber privacy. Most of its subscribers, even in an era of increased social exhibitionism and voyeurism, don’t want everything that Facebook knows about them sold to advertisers or to have their online postings live in perpetuity, long after their Facebook accounts have been canceled.

Still, Facebook knows confidential personal information represents a business asset, a tradable commodity. It is constantly tempted and compelled by relentless business imperatives to exploit those assets.

All of which explains why the company must attempt to sneak privacy incursions into its Terms of Service (ToS). It’s just hoping the Facebook natives don’t notice the changes. It’s easier leading lambs to the privacy slaughter if they don’t realize that’s where they’re heading.

There really isn’t much transparency into how Facebook conducts its business, to whom it sells private information and for how much. Until Facebook becomes more transparent, its subscribers might want to assume the worst.

Tech Blogging Not a Contact Sport

Much has been written about the supposedly scabrous nature of technology blogs, bloggers, and those who read them.

Personally, I think it’s a lot of overheated sensationalism. Blogging, like any media, is just an interactive conduit to an audience. The audience that a blogger chooses to serve, and the message he or she chooses to impart to that audience, will largely determine the sort of dynamic that will result.

If a blogger calibrates his content for a broad audience, it is reasonable to expect that he will get a wide spectrum of readers, including a few who might be unbalanced. Similarly, if the tone of the blog is exuberant and rollicking, one can expect a similarly rambunctious following to accrue.

Some deranged individual spat on Michael Arrington of TechCrunch. In no way am I suggesting that Arrington deserved such a fate. What I am willing to suggest is that Arrington sought fame, fortune, and controversy. He took provocative positions on startup companies and Web 2.0 culture, and he did so with the clear intent of stirring the pot, of creating a loud and insistent buzz.

Even so, the vast majority of his readership is sane. By and large, it is not composed of lunatics, though it does attract a passionate and sometimes verbally abusive element.

Like newspapers and the old media that came before it, blogs attract a wide range of audiences. The New Post and the New York Times have different readerships, just as People and the New Yorker have different readerships. The same holds true for blogs. Each one is a reflection, to a degree, of the person or persons who created it.

There isn’t a anything inherent about blogging and blogs that makes them any more volatile than their media forebears.