Category Archives: Irrational exhuberance

AOL offloads Bebo – for ‘exceptionally uninspiring number’

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For anyone seeking perspective on the social-networking business, the news that AOL has sold Bebo for what sounds like a fire-sale price should be required reading.

AOL is set to reap an "exceptionally uninspiring" sum for Bebo, the moribund social networking site for which it paid $850m just two years ago.

The Wall Street Journal says a sale could be announced today, with the likely buyer Criterion Capital Partners LLC of Studio City California. This is an interesting location – a suburb of LA nowhere near Silicon Valley.

The deal was confirmed this afternoon, though no details of the price were revealed.

The buyer apparently specialises in turning around companies with revenues of $3m to $30m, which doesn't say too much for the state of Bebo.

Still, it's AOL that is taking a bath on the deal. The journal, ahead of the official announcement, quoted one source familiar with the negotiations who said AOL's price was "an exceptionally uninspiring number" with almost total "value destruction".

As the say in the small print, the value of investments may go down as well as up.

Don’t drink the Kool-Aid

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This morning’s Observer column.

Sadly, there is no cure for megalomania. But venture capitalists ought to start funding the search for a cure, because it’s costing many of them a lot of money, and is likely to cost even more in the future.

Here’s how it works. A smart entrepreneur – a Harvard dropout, say, or some guy who made a lot of money by selling off his last venture to some clueless multinational – starts up a web business which grows like crazy by attracting millions of subscribers who use its services for free. Pretty soon, it's got 400 million of them and everyone is saying: “Wow! 400 million users! That must be good for something.”

Then several things happen. Firstly, the proprietor of the sensation du jour starts drinking the Kool-Aid and contracts the aforementioned megalomania. He begins to fantasise that he could own the whole internet. Secondly, thousands of other entrepreneurs think “Wow! He could own the whole internet. We need to make sure our stuff has hooks into his stuff. Otherwise, we’re toast.” And then the mainstream media, whose insights into this could be written in 96-point Helvetica bold on the back of a postage stamp, are going around saying, “Jeez, this stuff is the real deal. How do we get onside?”

P-day arrives

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Stand by for TV news footage of the faithful queueing outside Apple stores in the US. It’ll be like the iPhone all over again. Or will it?.

“The first five million will be sold in a heartbeat,” said Guy Kawasaki, a Silicon Valley entrepreneur who was a marketing executive at Apple in the 1980s. “But let’s see: you can’t make a phone call with it, you can’t take a picture with it, and you have to buy content that before now you were not willing to pay for. That seems tough to me.”

Apple and other technology companies that are introducing a wave of touch-screen tablets face an ambitious challenge. The industry wants to create a market for a new type of device that most people do not really need — or do not yet know they need.

Tablets are intended to allow people to watch video, browse the Web, play video games and read books, magazines and newspapers everywhere they go without the bulky inconveniences of a full-fledged laptop.

The people who have already ordered an iPad or will show up at the Apple store on Saturday “are technophiles — the phrase ‘leading-edge technology’ sends goosebumps all over their skin,” said Eitan Muller, a professor of high-tech marketing at New York University’s Stern School of Business.

But those people make up only 16 percent of the total potential market for the iPad, Professor Muller said. “The main market is made up of pragmatists, and the same phrase sends them into convulsions.”

My hunch is that those people who already have iPod Touch devices will be the hardest to convince. Either way, Apple’s big bet is that the iPad can create an entirely new market niche between smartphone and netbook.

Which brings to mind James Surowiecki’s thoughtful piece in the New Yorker recently about the way the market for devices has evolved. Here’s the nub of his argument:

For Apple, which has enjoyed enormous success in recent years, “build it and they will pay” is business as usual. But it’s not a universal business truth. On the contrary, companies like Ikea, H. & M., and the makers of the Flip video camera are flourishing not by selling products or services that are “far better” than anyone else’s but by selling things that aren’t bad and cost a lot less. These products are much better than the cheap stuff you used to buy at Woolworth, and they tend to be appealingly styled, but, unlike Apple, the companies aren’t trying to build the best mousetrap out there. Instead, they’re engaged in what Wired recently christened the “good-enough revolution.” For them, the key to success isn’t excellence. It’s well-priced adequacy.

These two strategies may look completely different, but they have one crucial thing in common: they don’t target the amorphous blob of consumers who make up the middle of the market. Paradoxically, ignoring these people has turned out to be a great way of getting lots of customers, because, in many businesses, high- and low-end producers are taking more and more of the market. In fashion, both H. & M. and Hermès have prospered during the recession. In the auto industry, luxury-car sales, though initially hurt by the downturn, are reemerging as one of the most profitable segments of the market, even as small cars like the Ford Focus are luring consumers into showrooms. And, in the computer business, the Taiwanese company Acer has become a dominant player by making cheap, reasonably good laptops—the reverse of Apple’s premium-price approach.

While the high and low ends are thriving, the middle of the market is in trouble.

Very perceptive IMHO.

Breaking up is so easy to do…

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This morning’s Observer column.

Here’s an idea for distressed newspaper editors: a regular feature entitled “Forthcoming Divorces”. Source material could be observations of squabbling couples in restaurants and supermarkets, comments written on Facebook walls, tagging of embarrassing photographs on Flickr, etc. And the feature could be surrounded by tasteful advertisements placed by legal firms specialising in matrimonial destruction, dating agencies, private detectives, house-clearance firms and purveyors of Viagra.

Those of us who watch the technology business do this kind of thing all the time. For years, for example, we’ve had our eye on a glamorous showbiz couple named Mr and Mrs AOL-Time Warner…

Forthcoming divorces, contd.

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What’s surprising is not that Time-Warner has finally decided to file for divorce from its former trophy bride, AOL, but that it’s taken so long to get round to it.

NEW YORK – Time Warner Inc. (NYSE:TWX) today announced that its Board of Directors has authorized management to proceed with plans for the complete legal and structural separation of AOL from Time Warner. Following the proposed transaction, AOL would be an independent, publicly traded company.

Time Warner Chairman and Chief Executive Officer Jeff Bewkes said: “We believe that a separation will be the best outcome for both Time Warner and AOL. The separation will be another critical step in the reshaping of Time Warner that we started at the beginning of last year, enabling us to focus to an even greater degree on our core content businesses. The separation will also provide both companies with greater operational and strategic flexibility. We believe AOL will then have a better opportunity to achieve its full potential as a leading independent Internet company.”

After the proposed separation is complete, AOL will compete as a standalone company – focused on growing its Web brands and services, which currently reach more than 107 million domestic unique visitors a month, as well as its advertising business, which operates the leading online display network that reaches more than 91% of the domestic online audience. AOL will also continue to operate one of the largest Internet access subscription services in the U.S.

Quite so.

In the time-honoured fatuity of corporate PR, the AOL bosses are over the moon about this. AOL Chairman and Chief Executive Officer Tim Armstrong said:

“This will be a great opportunity for AOL, our employees and our partners. Becoming a standalone public company positions AOL to strengthen its core businesses, deliver new and innovative products and services, and enhance our strategic options. We play in a very competitive landscape and will be using our new status to retain and attract top talent. Although we have a tremendous amount of work to do, we have a global brand, a committed team of people, and a passion for the future of the Web.”

Time Warner currently owns 95% of AOL, with Google holding the remaining 5%. The press release says that, as part of a prior arrangement, Time Warner expects to purchase Google’s 5% stake in AOL in the third quarter of 2009. After repurchasing this stake, Time Warner will own 100% of AOL. Accordingly, once the proposed separation is completed, Time Warner shareholders will own all of the outstanding interests in AOL.

Lucky them. Meanwhile, for those with poor memories, Good Morning Silicon Valley points out that AOL, which

was valued at more than $150 billion when it merged with Time Warner in 2001, is back on the market. But this time, despite its reach of “107 million domestic unique visitors a month,” it’s worth considerably less, with an analyst estimating its value at $5 billion.

And before you ask, that $105 billion is not a typo.

Need to read between the lines? Try Microsoft Word

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Today’s Observer column.

That left only Facebook as a focus for irrational exuberance. But how much was the preppy social-networking site ‘worth’? Arcane formulae were deployed by investment analysts to rationalise a range of fantastic valuations. Then Microsoft blew them out of the water by paying $240m for a 1.6% stake in the company. Here at last was a real number that people could latch on to. Even newspaper columnists could do the calculation: if 1.6% is worth $240m then 100% equals $15bn.

QED? Er, no. Even in those far-off days when a billion dollars was real money it was a preposterous valuation. But it entered the culture as a hard fact. After all (so the reasoning went) if those boys at Microsoft thought that 1.6% of Facebook was worth $240m, then it must be an exceedingly valuable company…

Toxic assets and silver linings

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This morning’s Observer column…

Every cloud has a silver lining. Ask the cybersquatters. Even as the short-selling vultures began circling Lehman Brothers, HBOS, Merrill Lynch and co, a legion of entrepreneurs began betting on domain names for hastily merged financial institutions. For example, when Barclays and Bank of America began to emerge as buyers for Lehman, names such as barclayslehman.com and bofalehman.com were promptly registered by enterprising hopefuls.

Some of these domains were being offered for sale on eBay last week. For example, www.bankofamericamerrilllynch.com was available at a starting bid of $1,500…

So how much is FaceBook ‘worth’?

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From the Sydney Morning Herald…

THERE has been speculation recently about what is being called an internal Facebook valuation – a value the company has assigned to its own common stock that is drastically lower than the $15 billion valuation set so publicly last year by Microsoft’s investment.

According to the transcript of a June 13 case-management conference in the lawsuit settled last week between Facebook and ConnectU – one of the few documents in the case not under seal – that figure is $3.75 billion, or one-quarter of the Microsoft valuation.

ConnectU had claimed that Mark Zuckerberg, a former employee and Facebook’s founder, got his idea from ConnectU.

The relevant passage from the document, under the section titled Defendant ConnectU’s Position, said: “The term sheet and settlement agreement is also unenforceable because it was procured by Facebook’s fraud. Indeed, based on a formal valuation resolution approved by Facebook’s board of directors but concealed from ConnectU, the stock portion of the purported agreement is worth only one-quarter of its apparent value based on Facebook’s public press releases.”

The piece goes on to point out that Microsoft bought preferred stock — i.e. ones with special voting rights, so the ConnectU figure is probably too low. But it’s still not $15 billion.

Property snakes

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Insightful piece about the UK housing market in this week’s Economist.

HOME renovation would seem to be as exciting a spectacle as, well, watching paint dry. But as Britain neared the peak of a decade-long housing boom, it became prime-time television as producers rushed to make shows like “Property Ladder”. Those happy days in which acquiring a house seemed a sure bet have now ended and even the boost of a quarter-point rate cut from the Bank of England on April 10th is unlikely to bring them back.

Prices, which had been drifting slowly lower over the winter, have started falling more rapidly and dropped 2.5% in March, according to Halifax, part of HBOS and the country’s biggest mortgage lender. The biggest monthly drop since September 1992 prompted widespread concerns in a country that still remembers its previous big bust, which started in late 1989 and from which prices did not fully recover for almost a decade…

So will we now see TV production companies rushing to make programmes entitled ‘Property Snake’? (After all, ladders take you up and snakes take you down.) I think not. Viewers aren’t interested in get-poor-quick stories.