How to blow $6.2bn

Verily, you could not make this up. A headline saying that Microsoft had made its first-ever loss caught my eye. I assumed it must be a mistake: Microsoft doesn’t make losses for the simple reason that it has a licence to print money. It’s called Windows+Office. But then it turns out that Microsoft blew $6.2bn a while back on an advertising company which has now turned out to be worthless. What always amuses me about tech company valuations is how solemn are the assurances from men in suits that the valuation they have arrived at by consulting the entrails of a goat is in fact a perfectly rational assessment of the asset’s value. I am sure that that $6.2bn valuation was likewise quality-assured by the same clowns.

Microsoft has written down the value of an online advertising firm it bought five years ago by $6.2bn (£4bn).

Microsoft bought Aquantive for $6.3bn in cash in an attempt to catch rival Google in the race to increase revenues from search-related advertising.

The writedown effectively wipes out the acquisition’s value, although there was little impact on Microsoft’s shares in after-hours trading on Monday.

The purchase of Aquantive in 2007 was then Microsoft’s biggest acquisition.

It has since been eclipsed by the company’s $8.5bn purchase of internet phone service Skype last year.

Microsoft said in a statement on Monday that “the acquisition did not accelerate growth to the degree anticipated, contributing to the writedown”.

Mighty Meg and HP

This morning’s Observer column.

‘Hewlett-Packard to lay off 27,000 employees,” said the headline, prompting a grimace from this columnist. For while it’s great fun to observe a smart-ass startup such as Facebook screw up (as it appears it did with its IPO), it’s quite another to see one of the world’s great technology companies apparently entering a death spiral. What you need to understand is that for geeks of my generation, HP was a synonym for engineering excellence in the same way that Rolls-Royce is for aero-engine designers. And what makes it worse is that most of HP’s wounds were self-inflicted.

So it was with a sinking heart that I dug out the transcript of the internal video that HP’s newish CEO, Meg Whitman, sent to her 350,000 staff, announcing the job cuts and other measures she is taking. Having read it, I came away thinking that not only does Meg get it, but that she might even turn this supertanker round…

Taming the email monster

This morning’s Observer column.

Email has become the central communications channel of all modern organisations, to the point where none of them could now function without it. But there’s increasing evidence – both anecdotal and empirical – that it has become dysfunctional. It eats into people’s working and thinking time, for example, distracts them from doing “real” work and generates guilt feelings that ratchet up stress levels to unsustainable levels.

In the old world of desktop PCs, you could at least leave it behind when you left the office. But the advent of the smartphone changed all that. Email has now infiltrated leisure time, family time – even sleep time. It’s become a monster that’s destroying our lives.

Deep down, most of us know this. But we daren’t talk about it out loud, for fear of seeming inadequate…

The tyranny of hindsight

This morning’s Observer column about Kodak’s demise.

A good way of inoculating yourself from the wisdom of hindsight is to read Clayton Christensen’s seminal book, The Innovator’s Dilemma, which is the best explanation we have of why and how successful firms can be undermined by disruptive innovations – even when they appear to be doing everything right: listening to their customers, watching the marketplace, and investing in research and development.The really sobering thought to emerge from Christensen’s book is that good decisions by great managers can still lead to corporate disaster. The reason is that while big companies are often good at fostering “sustaining” innovations – ones that enhance their positions in established markets – they are generally hopeless at dealing with innovations that completely disrupt those markets.So the question that Kodak’s demise raises in my mind is this: would any of us have done any better in 1976 after our R&D guys had come up with an idea that would cannibalise our core business and reduce our margins to near zero?

Notes from an MBA reunion

Lovely piece by Megan McArdle in The Atlantic about the 10-year reunion of her University of Chicago MBA class.

I have a theory about what happened to us, and our nation: when too much money is piled together in one place, it starts to decay, and as it does, it emits some sort of unidentified chemical that short-circuits the parts of your brain controlling common sense. When my class matriculated in 1999, ads for a firm called Discover Brokerage featured a tow-truck driver whose passenger notices in the cab a picture of the home—an island—that the driver has purchased with his fabulous online-trading profits. The passenger looks taken aback while the driver muses, “Technically, it’s a country.”

What’s even more amazing than the fact that this ad was ever made is that this sort of triple-distilled balderdash could intoxicate a large group of very smart people at one of the nation’s top finance schools.

Oh, don’t get me wrong: none of us was simpleminded enough to take those ads literally. Oh, ho-ho, no, not us! No, we made only the most erudite and sophisticated sorts of mistakes, like gang-rushing banking internships, and telling ourselves we were “consumption smoothing” as we used student loans to finance vacations. Believe it or not, many of us talked frequently about the echoes of 1929—but we still didn’t necessarily act on that insight, as the markets cratered in the early 2000s.

For my summer 2000 internship at Merrill Lynch, I chose the technology-banking group despite having watched the March 2000 NASDAQ crash from the lobby of Merrill’s auditorium, where we were supposed to be undergoing orientation. Ignoring the helpless, angry flapping of the HR staff, a bunch of us spent the afternoon telling nervous jokes and watching the eerie flicker that billions of dollars give off when they evaporate on live TV.

Predictably, the technology-banking group had almost no work. Also, I was not a good fit with Merrill’s very conservative, very competitive culture. I felt as if I’d decided to intern with a mathematically gifted baboon tribe, and I’m sure they were just as puzzled by me. Unsurprisingly, I didn’t get a full-time offer. Having learned my lesson, I very sensibly turned around and took a full-time job upon graduation at … a technology-strategy consultancy. I got laid off even before the bankers.

I love that metaphor of Merrill Lynch staff as “a mathematically gifted baboon tribe”. But I’ve been reading Michael Lewis’s wonderful book, The Big Short: Inside the Doomsday Machine, and as a result I would delete the “gifted” part and just stick with the baboons. Except that that’s a bit hard on baboons. And they live in troops, not tribes.

The SOPA opera

Last Sunday’s Observer column.

The key to survival – in business as in the jungle – is to be able to learn from your mistakes. The strange thing is that some industries haven’t yet figured that out. Chief among them are the so-called “content” industries – the ones represented by huge multimedia corporations which own movie studios, record labels and publishing houses.

Every 20 years or so, technology throws up a challenge to these industries. When audio cassettes arrived, for example, the music industry fought tooth and nail to have the technology outlawed or crippled. Why? Because it would encourage “piracy”. What happened? The record labels wound up making lots of money from cassettes as well as records.

Then along came the video recorder, and the movie industry fought it tooth and nail because it was the handmaiden of the devil – on account of facilitating “piracy”. What happened? Same story: it turned out that the studios were able to make tons of money from videocassettes, because films continued to sell long after they had disappeared from cinemas.

Since then the story has been repeated at least twice more – with DVDs and portable MP3 players. So you’d think that the penny would have dropped in what might loosely be called the minds of those who run the content industries. The lesson is that new technologies that look like threats can become glorious opportunities. But there’s still no evidence that media moguls have grasped that simple idea.

Rage against the machine

Good editorial in this week’s Economist. Excerpt:

To the man-in-the-street, all this smacks of a system that has failed. Neither of the main Western models has much political credit at the moment. European social democracy promised voters benefits that societies can no longer afford. The Anglo-Saxon model claimed that free markets would create prosperity; many voters feel instead that they got a series of debt-fuelled asset bubbles and an economy that was rigged in favour of a financial elite, who took all the proceeds in the good times and then left everybody else with no alternative other than to bail them out. To use one of the protesters’ better slogans, the 1% have gained at the expense of the 99%.

If the grievances are more legitimate and broader than previous rages against the machine, then the dangers are also greater. Populist anger, especially if it has no coherent agenda, can go anywhere in times of want. The 1930s provided the most terrifying example. A more recent (and less frightening) case study is the tea party. The justified fury of America’s striving middle classes against a cumbersome state has in practice translated into a form of obstructive nihilism: nothing to do with taxes can get through Washington, including tax reform.

Online banking, pshaw

Much to the annoyance of some of my consultancy clients and my bank — and the amazement of friends (“What? Call yourself a technology columnist and not use Internet banking!!!”) — I don’t use online banking for the simple reason that I don’t think it’s secure. So this report from Good Morning Silicon Valley is grist to my mill.

The high-profile cyberattacks continue: Citigroup has been hacked, too, it told the Financial Times Wednesday. The May attack allowed hackers to access the names, account numbers and contact information of about 200,000 North American customers of the company, according to Reuters. Citigroup says other information such as card security codes, expiration dates and customers’ Social Security numbers are kept elsewhere and were not accessed.

While the FT quoted a Gartner analyst who said that “for the actual breach to happen at a bank is a very big deal,” because banks’ online systems are usually more secure, Federal Deposit Insurance Corp. Chairman Sheila Bair said this morning that banks are frequent targets, according to the Reuters article. Bair said the FDIC may push banks to improve their online-security measures.

On a related note, and in case you missed it: What does happen when your bank gets hacked and your money is stolen? According to a judge’s ruling in one case in Maine, the bank can only do so much. Wired’s Threat Level blog reports that a construction company that fell victim to a password-stealing Trojan on an employee’s computer is out of luck in trying to recover about $300,000 from Ocean Bank. While Magistrate Judge John Rich agreed that the bank could stand to have a more secure authentication system, he said the law does not require it to have such a system, and that its system is comparable to that of other banks.

Quote of the day

“The Irish banking system is worse than too big to fail; it is too big to save. The first duty of the state is to save itself, not to load its taxpayers with obligations to rescue careless lenders…The Irish state should have saved itself by drastic restructuring of bank liabilities. Bank debt simply cannot be public debt. If bank debt is to be such debt, bankers should be viewed as civil servants and banks as government departments.”

Martin Wolf, writing in today’s Financial Times.

The boys from the IMF

The only Irish novelist with the range to encompass what has happened to Ireland in my lifetime is Colm Toibin, and so I live in hope that one day we will get a blockbuster novel from him about the Republic that wasn’t. In the meantime, his reflections on the current crisis are interesting. He begins by revealing that he got to know some of the IMF guys who came to sort our Argentina after its economic collapse, and in the process came to understand how they think.

I remembered my American friends this week as news came that a delegation from the EU and the IMF were to arrive in Dublin on Thursday. I think I have an idea how dedicated and serious-minded these fellows would be, especially on weekdays, and how little interest they might have in Irish history, Irish pride, Irish sovereignty or even Irish doublespeak. They like to get the job done and then get home.

On the night before these figure-crunchers arrived in the city, I watched a discussion programme on Irish television in which commentators, people younger than me, invoked the dead heroes who had fought for an independent Ireland, naming some of them, including patriots from the 18th century, and wondering how they would feel now were they to find out about the shame we Irish felt.

We had fought so hard for our freedom, they said, and now, with the arrival in Merrion Street, where the government is housed, of besuited stone-faced economists with German and Scandinavian names and number-crunching knuckles, we had betrayed our dead. Patrick Pearse eat your heart out, the Germans have arrived.

I hadn’t known that Toibin comes from a Republican background. His grandfather fought in the 1916 rebellion and was imprisoned afterwards. “I was brought up”, he recalls, “in the proud memory of his bravery. My uncle and my father worked all their lives for the Fianna Fáil party which has run Ireland most of the time since 1932 and which is in power now. I have never ceased to believe in their patriotism and idealism”.

But he puts his finger on what has always been wrong with our little Statelet:

The problem is not merely that there is no blueprint in Ireland now, no agenda, for how this might be done. The problem is also that it wasn’t there before the Celtic Tiger either, nor during its heady reign. In areas which really matter, such as health and education, Ireland has, since independence, been deeply divided.

There are two health systems here, for example. One is for middle-class people who pay health insurance and the other for those who can’t afford to pay. There are short waiting lists for one, and long waiting lists for the other. Often, both see the same doctors, who treat the first group in private hospitals, or private rooms in public hospitals, and the second group in public hospitals.

Everyone here knows that the difference can be a matter of life and death. Some of the doctors make a fortune. There has been no serious effort to reform this, but many efforts instead to copper-fasten it. This is one example of what sovereignty has done to us.

As for Irish “shame” about having to be rescued by “the Germans”, well, that’s also a bit rich coming from a country that has so manifestly proved unable to govern itself.

The more I found out about contemporary Germany, for example, and the more I travelled there, the more I came to admire it and the more I came to hope that some of its best qualities could come to influence and affect Ireland.

Thus when the Irish Times on Thursday mentioned “the German chancellor” I did not automatically feel that this person was in some way a malignant force in the world. Instead, I saw someone rational and prudent, sensible and deeply intelligent.

I’ve been thinking a lot about this in the last week. In the late 1970s I spent a year working in the Netherlands and it changed my life, because it gave me an insight into what a well-governed society could be like. Holland was devastated after the war, with its population starving and totally dependent on foreign aid. And yet out of those ruins the Dutch built a prosperous, liberal, humane democracy. So did the Germans, labouring under an even bigger psychic burden. What these societies did demonstrates what can be done with political will and intelligent outside assistance. That’s what Ireland needs to do now. And if the IMF and EU boys can get that process started, then more power to their elbows.