Internet Outsider

NAR: Don't Worry, Housing Prosperity Just Around Corner

Off topic, but I can't help but note the similarities between the dotcom-crash rhetoric/predictions back in 2000 and the housing-crash rhetoric/predictions in the last 12 months. 

Those of you who had the misfortune to live through the dotcom crash will recall that I and other analysts correctly predicted that there would be a slowdown and shakeout, but drastically underestimated its severity and duration.  All the way down, we kept revising forecasts (read: cutting estimates) to previously inconceivable levels, and each time we cut them, we reiterated our expectation that the inevitable trough and upturn was about six months away.  It wasn't until two years after the shakeout began, when half of online advertising revenue had evaporated and more than 75% of the companies in the sector had keeled over that the downturn finally ended... And by that time, most of us were so demoralized that we'd stopped predicting that there would ever be an upturn.

Housing obviously won't experience as deep a correction as the dotcoms did, but I haven't heard a single persuasive argument explaining why this downturn won't look like every previous housing downturn: i.e., will last a lot longer and drop much farther than most people think--until price/rent and price/income ratios return to or below their long-term trend.  Instead, all I hear are arguments like this one, which are based not on long-term historical trends, but on short-term bubble-year pricing and price trends (arguments I am very familiar with, having made similar ones in late 2000 and early 2001):

WASHINGTON -- The National Association of Realtors again lowered its U.S. housing market forecast for this year, saying the market remains "soft." In its latest forecast for the real estate market, NAR projected that existing home sales will fall 4.6% this year to 6.18 million, compared with its previous forecast of a 2.9% decline. New home sales are expected to plummet even further. The NAR said new home sales are likely to fall 18.2% to 860,000, compared with the prior forecast of a 17.8% drop. While near-term prospects for housing remain fairly grim, NAR said sales should pick up toward the end of the year.

"Overall housing levels are historically strong, but sales remain sluggish compared to the recent boom," said Lawrence Yun, NAR senior economist, in a statement. "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year," Yun added. Existing home sales are projected to rise 3.7% in 2008, to 6.41 million, according to NAR's forecast.

Attention Web 2.0 Start-Ups: Party May Be Ending

Who says Wall Street firms are always bullish?  According to Reuters, Merrill Lynch published a report today suggesting that housing market woes could drag the economy into a recession and that, if it does, investors can expect a drop in the S&P 500 of at least 30% from the peak.  Even if there is no recession, and the market just does a head-fake, we should expect a drop of about 20%.

How will a public-market stumble affect Web 2.0 start-ups?  The same way the market crash in the fall of 2000 did, albeit to a lesser extent:

• Money will get harder to raise.  (Because VCs will be feeling pressure from their clients, and exit valuations will be lower).

• Financing and exit valuations will be lower.  Because the stocks of acquirers and comparably public-market companies will be lower.

• Investors will get impatient for start-ups to develop businesses instead of "products" and "communities."

• The growth rate of online advertising will slow dramatically.  In tough times, advertising is one of the first expense lines to get cut (by big businesses and small).  What's more, some start-ups that are currently buying advertising will cut back or cease to exist. 

In short, being a Web 2.0 entrepreneur or employee may soon get more difficult and less fun.  Hit the bids while you can!

UPDATE

Oh, well.  Merrill Lynch's economist David Rosenberg just blasted Bloomberg for mischaracterizing his report and said he is merely suggesting that we could have a "growth recession," meaning that the economy's growth rate could slow, and this only if the Fed doesn't cut interest rates.  So that's still bullish.  For what it's worth, I am calling for a real recession, in which the economy shrinks and the stock market tanks, regardless of what the Fed does. 

Happy Ending For HP's Patricia Dunn

Cooler heads prevailed in the HP spying scandal: All charges against former Chairman Patricia Dunn were dismissed, and the charges against the other defendants were knocked down to a single misdemeanor apiece (and in September, even those charges will disappear).

This is as it should be.  The HP scandal was a major embarrassment for the company, one that showed myopia and poor judgement on the part of Dunn and others.  But there's a big difference between a bad business decision and a crime, and Dunn, at least, should never have been charged with the latter (let alone multiple felonies).

Even as she breathes a sigh of relief, of course, Dunn will presumably be asking the same question that many executives savaged by an emotional rush to judgment have asked: "Now, where do I go to get my reputation back?"

ISPs Are Selling Your Clickstreams!

At Open Data, David Cancel, the CTO of Compete, Inc., reveals that ISPs happily sell clickstream data--and that it's a big business.  They don't sell your name--just your clicks--but the clicks are tied to you as a specific user (User 1, User 2, etc.).

How much are your clicks worth?  An symposium member extrapolated from David's round numbers and estimated about 40 cents a month per user (per customer)--a number with which David appears to agree.

Someone points out that this is more information than was shared by AOL in the search-term brouhaha.  It's much more! David says.  Someone else observes that the benefits/drawbacks of this are in the eye of the beholder: for the ISPs it's awesome.  Someone else points out (see comments) that the credit card companies sell far more interesting data than this and no one gives a damn.

David steps down.  Thunderous applause.

You Own Your Attention! And Google's Cashing In On It...

At the Open Data 2007 conference in New York.  Will post some tidbits.

Right now, AttentionTrust.org CEO Seth Goldstein is reminding everyone that we Internet users are what we look at (click on) and that a host of companies are storing that "attention" (and cashing in on it) without our permission. 

Seth believes that we own our attention.  And that we should be able to control how it is used.  And that companies shouldn't be able to store it or use it without our permission.  (As a horror story, Seth invokes the "anonymous" AOL searcher who conducted dozens of searches about her dog's urinary problems--and was quickly outed by a New York Times reporter.)

In addition to being a successful entrepreneur, Seth's an intellectual, and this conference is about brainstorming, so Seth turned over the floor without presuming to solve the problem.  But he turned it over to the guy who stored (and released) all that search data at AOL: Abdur Chowdhury.

Asked immediately what he would have done differently if he had it to do all over again, Mr. Chowdhury from AOL said he...

• Would have moved more cautiously
• Would have established licensing agreements so the data could only be used for research.

The silver lining, he says, is that the incident raised awareness of the issue--and spawned conferences like this.  Esther Dyson challenges this: Do people really know how much data is being collected?  No, says Mr. Chowdhury.  Then why release it, someone else asks?  The goal, Mr. Chowdhury says, is to help people.  Did it help people?  An executive from Root Markets says he immediately tried to use the AOL data to spot patterns in mortgage searches, but that there weren't many patterns, so the exercise "quickly descended into voyeurism."

Were there any benefits from the release?  Mr. Chowdhury suggests that awareness is good (because we can start thinking about how to solve the privacy problem) and that many companies are now exploring the possibility of licensing data from AOL, Yahoo, etc.  Skeptical protests and grumbles: Everyone's giving up their privacy!  Everyone's being tracked!  Mr. Chowdhury on his heels, but Seth gets up and reminds everyone that nothing is black and white.  Esther says the key is selectivity, awareness, and control.  We as an industry have to do better!  Mr. Chowdhury leaves to applause.

Market Crash = End of Web 2.0?

Probably not, but it's worth considering. 

Using cyclically adjusted valuation measures (those that take into account today's record-high profit margins), the U.S. stock market has been overvalued for years.  The Internet sector is not particularly stretched, especially not relative to the multiples of the late 90s, but if the entire market goes into the tank, the 'Net stocks will go with it.  Any number of factors could end the party--housing, flattening corporate profits, recession, China recession, etc.  Whether the market will actually tank is anyone's guess, but it could drop another 30% and still not be "cheap" using cyclically adjusted measures.

For the past few years, meanwhile, Internet entrepreneurs have become ever more brazen about not needing a business model in order to cash out big (and who can blame them, given the bounteous rewards that have gone to Google, MySpace, YouTube, and dozens of other companies that postponed revenue for as long as possible--not to mention the vast amounts of venture capital that keep pouring into the sector?).  This is reminiscent of the late 90s, when all that was needed (apparently) was a business plan. 

In the late 90s, of course, the early stages of the market crash revealed that much of the Internet economy was dependent on public-market leverage (10 companies a week going public, raising $100 million each, and spending it on advertising, software, real-estate, accounting services, etc.).  When the IPO market dried up, so did the Internet sector.  Today, the situation is different--today's start-ups aren't usually "exiting" via the public markets but by acquisition, and a fraction of the number of companies are competing to win the entrepreneurial lottery.  But a crumbling of the public market would still have a significant impact on the industry. 

Reduced market caps and multiples would mean lower acquisition prices and, likely, a more cautious approach to risk-taking (no more $4B eBay-Skype fliers, for example).  This, in turn, would mean more caution on the part of the angels and VCs who are funding the revenue-less prosperity of many Web 2.0 companies.  And a slowdown in the economy (either as a result of or as a cause of the market decline) would mean that revenue of all types would be harder to come by.  So, just when they needed it the most, many emerging companies might find that the AdWords bounty they had always kept tucked in their back pockets might amount to less than they had once imagined.

A disaster scenario?  Not likely.  But a scenario that would lead to another cold winter for the Internet start-up ecosystem?  Very possible.  Possible enough, certainly, that conservative Netrepreneurs (and their backers) might want to hit the summer-time bids while they still can.

Bartiromo in the Hot Seat

Another digression before we get to the next round of Big Media vs. GooTube...   

Landon Thomas of the NYT has weighed in on the Money Honey Scandal, noting that in addition to a Shanghai-NY private jet ride at Citigroup's behest, Maria also enjoyed a Ferrari ride, and that another CNBC reporter, Charles Gasparino, may have had a sock stuffed in his mouth as he attempted to report on some of this stuff.  CNBC has defended Maria and denies gagging Gasparino, and Maria herself has wisely avoided comment. 

If nothing else, the scandal has allowed a planet-full of media organizations to run Maria's picture, resulting in the predictable spike in readership (Landon's story rocketed to No. 1 on the Times' most emailed business stories this morning).  It has also rekindled a debate about what is and isn't appropriate for journalists to do as they cozy up to potential sources.

As with other conflict-of-interest scandals, there is often an element of Puritanism in the Maria coverage (though not Landon's)--the implicit idea that journalists should live in hermetically sealed bubbles or else risk losing their "objectivity."  Usually missing is the acknowlegement that no journalist is ever truly "objective".  Every decision about what to report, how to report it, which sources to listen to, which sources to ignore, and even which words to choose (the difference between "he said" and "he claimed" is enormous) compromises objectivity.  This is not to say that journalists should trade good coverage for suitcases full of cash or midnight visits from the "Pussy Patrol," as a sleazy film critic on Entourage does.  It is, however, to suggest that we should probably get less enamored with the word "objective" and just settle for "fair."

Did Maria's accepting private-jet and Ferrari rides from Citigroup cross the line?  Did spending the 14 hours at 40,000 feet alone (presumably) with a senior Citigroup executive cross the line?  At the very least, it probably made Maria less eager to recklessly bash Citigroup.  This in itself, however, is not necessarily a bad thing.   The most objectivity-compromising influence on most journalists is not sources but readers and viewers--specifically, the need to tell a compelling story or else be ignored.  So strong relationships on the source side can in some cases mean more objective coverage. 

Ultimately, perception aside, the question here is not whether Maria's close relationship with Citigroup (and the senior executive) "affected her coverage"--EVERYTHING affects coverage.  Ultimately the question is whether the relationship prevented her from telling a story that otherwise should have been told.  At this point, anyway, Maria seems to be the only one in a position to address that.

Readers Weigh In: Goldman Bonuses "Pure Greed"

Off topic, but thought you might enjoy the reader response to an Op-Ed I recently wrote for the New York Times on the astronomical bonuses awarded this year at Goldman Sachs.  I argued that although the bonuses obviously weren't fair in a moral sense, they were at least justifiable in the context of the amount of profit Goldman generated.  Even after the $16.5 billion payout, Goldman still generated more pre-tax profit per employee than almost any other company in the economy, including Google (so it is hard to say that Goldman's shareholders got cheated).

Not surprisingly, Times readers weighed in, and their responses were unanimous: The Goldman bonuses are undeserved, unfair, and the result of unadulterated greed.  So take that, Goldman (and me).

Wall Street does consistently generate otherwordly pay-packages, even for the rank-and-file, so the reaction is understandable.  Other industries generate vast wealth, too, though--it just doesn't come from salaries. 

For example, I wonder if the reaction would be the same if I had written about the average post-IPO wealth of pre-IPO Google employees.  My guess is no--most people have more respect for entreneurial success stories like Google than perennial success stories like Goldman--but even here the admiration would probably be fleeting.  Today's inspiring start-up is tomorrow's oppressive incumbent, as Microsoft employees learned in the 1990s and Google employees have been learning over the past two years.  (Goldman employees, meanwhile, have long since learned to preserve the health of their golden goose by remaining as discreet as possible.)

Success over a career at a Goldman--for those who can manage to get jobs there--is probably more likely than success in a series of promising start-ups (would love to see some numbers on this), so perhaps the comparison is unfair.  In any case, those of us who don't have the good fortune of working at a Goldman or Google this holiday season can always dream...

HP's Patricia Dunn...Felon? UPDATED

Sorry for the digression, but it's a slow Internet news day, and something feels wrong here.  Before I describe what, however, I need to discuss what is not wrong.

It is not wrong that former HP Chairman Patricia Dunn was publicly ridiculed for ordering and overseeing a cloak-and-dagger investigation of boardroom leaks.  It is not wrong that Dunn (finally) resigned over this (she should have taken responsibility and resigned immediately, whether or not she knew about the "pretexting").  It is not wrong that HP board members like Thomas Perkins would be outraged about the investigation and quit the board in protest.  It is not wrong that everyone thinks pretexting (a.k.a., fraud) is unethical--it obviously is.  It is not wrong that everyone thinks Dunn made a bad business decision--she did.  It is not wrong that HP has been globally shamed for engaging in such a practice--it should have been.

What feels wrong is that Patricia Dunn has been charged with four felonies.  Unless the California attorney general knows something that the rest of us don't (possible), Dunn neither intended to commit a crime nor knew one was being committed.  On the contrary, she took repeated steps to assure herself that the investigation was legal.  She sought and received assurances from, among others, HP's general counsel, Ann Baskins--a legal expert far better qualified to know (and who, for some reason, has not been charged with the same crimes).  Baskins reportedly concluded and still believes that the investigation was legal.  Wilson Sonsini, HP's outside law firm, concluded and still believes that the investigation was legal.  As do other legal experts. 

So what more could Patricia Dunn have done?  Used her own legal spidey sense to say, "Hey, my lawyers tell me it's fine, but I think they're wrong"?  Again, the issue here is not whether the investigation was smart or ethical--it wasn't--but whether it was criminal.  And it seems a more-than-fair defense for Dunn to say, "I consulted legal experts--not hacks, mind you, lawyers at the top of their field--and they assured me it was legal."  Dunn will have an opportunity to make this defense, of course, but she will have to do it in court, after sacrificing her board seats, reputation, more than a year of her life, and tens of millions of dollars in legal fees.  And given that hindsight is always 20/20 and juries aren't omniscient, she might still go to jail.

Meanwhile, the person who allegedly put some of these events in motion, an alleged leaker, Dr. George Keyworth, has been portrayed as a helpless victim, worthy of sympathy.  Keyworth has every right to outraged that his employer defrauded the telephone company to get his phone records.  He does not, however, deserve to feel holier-than-thou about his own conduct in the affair. 

On the contrary, if Dr Keyworth did, in fact, chat secretly with reporters about ongoing board discussions, he betrayed HP, HP's shareholders, and the rest of the board.  He violated his professional duty, and then (by not resigning when called on it), refused to take responsibility for his actions.  Keyworth's defenders point out that he "had HP's interests in mind."  Maybe, but secretly dishing to reporters about inner workings of board discussions was just what the board was trying to prevent, and, if he did it, he betrayed the company by doing it. 

[UPDATE: Since publishing the initial version of this post, I have received polite notes from a Dr. Keyworth supporter who argues that there is no evidence that he leaked "confidential information" or that he did this "repeatedly", as I suggested in the initial post.  This supporter also points out that despite the pretexting, etc., the investigative report of the leaks was "inconclusive."  I still think sharing details about a board retreat, ongoing board decisions, etc., in the context of a explicit board-wide consternation about press leaks--which I think Dr. Keyworth has acknowledged doing on at least one occasion--constitutes a breach of trust, but I don't know all the facts.]

Was Keyworth's alleged behavior a crime?  Of course not--just as what Patricia Dunn personally did to try to stop it doesn't sound like a crime.  But it was unprofessional and a betrayal of responsibility and trust.  So hold off on the Keyworth hagiographies, at least as far as his conduct in this affair is concerned.

The HP scandal is major embarrassment, one that deserved to lead to firings, resignations, regret, apologies, and bad publicity.  Based on the facts that have been released to date, however, it does not deserve to lead to jail time or a criminal indictment, at least for Patricia Dunn.

UPDATE

A couple of smart readers have observed that 1) ignorance of the law is not a defense, and 2) Dunn's changing stories and refusal to take responsibility undermine her defense. 

On point two, I am taking Dunn at her word in her Congressional testimony--which, as I recall, was that she didn't know the investigators were "pretending to be someone else" and that HP's corporate counsel, Ann Baskins, who did know, had pronounced the investigation legal.  If either of these assertions is false, then the picture changes.

On point one, I agree that ignorance of the law is no defense when the law is clearly defined and when the accused knows that someone is violating it.  In this case, although there should have been a law against pretexting, many legal experts think that there wasn't.  More importantly, Dunn claims that she didn't know that the investigators were engaging in pretexting, so that even if it was against the law, she says she was unaware of it. 

In other words, there is an important difference between ignorance of the law and ignorance that the law was being broken.  The latter isn't a defense, either, if the person should have known.  But if the person takes reasonable steps to assure themselves that a law is not being broken, I think this should be a viable defense.  If it isn't, then every person who manages employees who commits crimes will be liable for those crimes--a situation that would deter most sane people from ever becoming managers.

Those Irresponsible Publicity Seeking Analysts

Well, there was a bit of a traffic/linking explosion after yesterday's post about Jordan Rohan's MySpace-might-be-worth-$15 billion musings.  Jordan mostly took it on the chin, as did I for not dismissing his comments as idiotic and irresponsible. 

And maybe the howlers are right.  Maybe Jordan's a braindead moron who just wanted to see his name in print.  Maybe MySpace is such a pile of junk that it will never be worth anything more than Newscorp paid for it (This seems to be the general line of reasoning: Newscorp paid $600 million a year ago, so the property can't possibly be worth much more than that).  Maybe.

But here's the thing: Yesterday, amid the screams, Jordan's comments triggered some intelligent debate.  Could MySpace be worth $15 billion someday?  (The equivalent of about 1/3 of a Yahoo! and 1/10th of a Google)?  If not, why not?  If so, why?  I haven't read Jordan's note, so I don't know what his reasoning was, but I'd be interested in hearing it.  And so, I imagine, would many thoughtful observers, whether they ultimately concluded that Jordan is a far-sighted thinker or a reckless idiot.

Back when Google went public, at $85, the consensus was that this price was absurd: A six-year old search engine worth $30 billion, almost as much as Yahoo! or eBay--how ridiculous was that!?  And, so, dutifully, carefully, terrified of being ridiculed, most analysts painstakingly constructed 10-year DCF models, with perfectly calculated WACCs and terminal multiples, and ventured--to howls of ridicule--that Google might someday, if all went well, be worth as much as...$150!  And then, when Google blasted through $150, the analysts scrambled back to their DCFs, adjusted their assumptions, and carefully, dutifully ventured that Google might someday be worth...$180!  More howls.  Then Google broke $200.  And analysts raised their targets to $220.  And there was pandemonium--those cheerleading idiots were just taking a time-machine back to 1999!  And so on.

Bottom line: Back in September 2004, I, for one, would have appreciated an analyst with the balls to explain why Google could be worth not $150, $180, or $220 after a few years, but $500 in one year.  Even if I decided that the analyst was an imbecile, I'd have been grateful to him or her for helping me think through the extremes. I would have the same admiration for an analyst who made a compelling argument that, say, GE, Microsoft, the DOW, or some other sacred cow was about to drop 90%.

So, here's a toast to Jordan Rohan, prophet or moron.  And here's a toast to any analyst with the guts to say something interesting.