Solon Partners

The steady drizzle of criticism  questioning the viability of Web 2.0  social networking site’s “free” business model turned into a monsoon.  A flood of stories swept over blogs and news reports querying why building huge audiences with cool new entertainment experiences has not  translated into profits. Some of the additional attention was no doubt related to the reportedly “somber” and “bearish” tone the journalists witnessed at the Allen & Co. hosted conference of media industry heads in  Sun Valley.

New York Times M&A reporter did a retrospective on 9 July on the three year old Google - YouTube deal initially valued at $1.65 billion. The story cited a Credit Suisse estimate that YouTube will lose almost $0.5 billion this year, and  Bernstein Research report which “questioned whether YouTube’s advertising revenue would ever be enough to cover Google’s costs related to bandwidth and data storage.” Google simply has not been able to convert the audience numbers into substantial revenues, and it is unclear how it will with audience allergy to more advertising.

Ryan Tate  in his Valleywag story on July 9th describes Max Levchin’s Slide’s business model as a failure, and reported that opinion leaders like Barry Diller  and  New York Times‘ Andrew Ross Sorkin were “disparaging” Twitter’s business model at the conference.

Don Dodge’s latest blog cites his friend’s situation - the Facebook App developer with a killer app that is generating 300 million page views per month. This kind of mammoth traffic however translates into only a total of $6K to $15K of advertising revenue per month, depending on the current range of ad rates.  Dodge explains that Web 2.0 sites don’t have specific search terms like Google AdWords to key off, so instead of Cost per Click (CPC) they have to charge Cost per Thousand (CPM) rates.

Assuming even a very generous $0.40 CPM rate, Dodge  calculates that your Facebook/MySpace app will not earn earn $1 million from advertising, until the app gets to the  outrageous number of 2.5 Billion page views per month. [for perspective - Yahoo has a total of 1.5 billion searches per month and Google has a total of 6.1 billion searches]

Social Networking’s ‘Naked’ Truth, a CNBC.com story published on 10 July by Silicon Valley Bureau Chief Jim Goldman  questions whether we are “staring another dot com boom/bust right in the face.”  Goldman’s post  blows the whistle on social media’s inability to generate profits in the foreseeable future.

Facebook is addictive, even magical to millions. Same goes with MySpace, and Twitter, and LinkedIn, and Digg, Badoo, Classmates, Bebo, Flixster, Friendster, Orkut, and hundreds of others. They are powerful, fun, convenient. They offer value. And they build connection. Look no further than the Michael Jackson news tsunami to see how social networking affects our lives and drives information.

But with hundreds, even thousands of these sites out there already, with many attracting millions in venture capital, I simply ask, Where’s the return on the investment? What’s the business model to MAKE money and not merely to attract investment?

Partly this web 2.0 bashing is just the old media’s response to quickly losing entertainment market share  to the “free” competition on the Internet, but there is something to these warnings of overvaluation. If the current advertising revenue rates remain the same, the Web 2.0 landscape will be forced to change, consolidate and find brand new new revenue models.

Looking at Zynga’s revenues and the profits of virtual gift business around the world, we can see that  monetization can be done quite successfully with some formats. Warrent Buffet recently suggested that he would be willing to pay $5 per month for the pleasure of watching YouTube, and I know I was happy to pay $13,95 for HBO’s great programming  in the US (although it took airing of such phenomenal content as the Soprano’s and Rome to get me to subscribe).

yrjo economy, internet social networking, web 2.0

Financial Times headline “The Cold War in high frequency trading turns hot” caught my eye. It sounded very James Bond and high tech, not just another routine business numbers piece.

To pace my almost obsessive need stay up to date on the daily flow of  business blogs, reports, news, analysis and other  data streaming through the internet - I relax by reading modern fiction.  The FT story sounded like some of  the plot lines I have read in my favorites works by   Neal Stephenson, Charles Stross, William Gibson, Chuck Palahniuk, Richard Morgan and others.

The crime plot sounding eerily similar to these authors’ books  -
Sergei Aleynikov was about to receive a $1.2 million paycheck for allegedly hacking into  Goldman Sachs’ computers and stealing 32MB worth of proprietary HFT  trading code (technology behind 10% of the daily world total of equity trades). The information was related to Goldman’s proprietary equities electronic trading strategies. He had been clumsy covering up his tracks and was caught by the Goldman IT people who handed the matter to the FBI.

FT described as follows:

Aleynikov claims to have created a tarball - a Unix aggregate of a number of files (like a .zip file) - on June 5 to transfer some open source stuff on the Goldman server to the XP-Dev.com server. He says he encrypted the files, then erased the encryption software, the tarball and the bash history — which is basically a back up of the Unix commands used to amalgamate and transfer the files. Goldman’s security server, however, apparently prevents or at least alerts the company to bash deletions, which appears to be how Goldman found out about the alleged theft.

yrjo reading, uncategorized hacking

While across Europe the center-right , far-right and green parties are celebrating their election victories with the center-left suffering a historic defeat. In Estonia the big winners are the center- left party and an independent candidate, with the greens and center right showing weak results.

This may seem quite odd to most Europeans and may be written off as further proof to some of failed integration of Eastern Europe, but actually the result makes perfect sense when put into perspective through the local political context. Like elsewhere in Europe the voters voted with their pocket books - the state of the economy was the central issue.

Left wing won based on voter dissatisfaction with the economy

Center-left party (Keskerakond) won the election with 103 525 votes. Their campaign capitalized on the dissatisfaction with the ruling coalition’s inability to deal with the economic crisis which has resulted with drastic pre-election buget cuts of popular programs.

Protest vote went to Independents

The same protest vote that showed the extent of voter anger and frustration with the continuing economic crisis and high unemployment fueling gains by far right in Italy, Netherlands,  Austria, Hungary, Denmark, Slovakia and Finland was the force also behind the independent candidate  Indrek Tarand’s 102 509 votes. Estonia has a fairly small foreign-labor population (no Turkish, Polish or Algerian laborers here to blame for high-unemployment) so the anti-foreigner anti-immigrant theme was not picked up by any parties for their election propaganda.

Ruling right wing parties lost due to the economic crisis

The center-right (Reform and IRL) parties’ coalition has been in power since before the beginning of the economic crisis. The right wing parties that were elected into office under the promise to get “Estonia into the top 5 wealthiest nations in Europe in 5 years” were punished by the voters facing the stark reality of salary, pension and benefit cuts. Therefore, it was inevitable that the voters blame the center-right for its inability to deal with the economic crisis, and the draconian budget cuts that have now been implemented.  This voter backlash explains why the right wing parties did not triumph in Estonian elections, but were glad to just hang on to their seats. In the final tally the Reform party received 60 899 votes and IRL 48 489 votes.

Greens have failed to win economic credibility with the voters

The Green party is still seen by the average Estonian voter as a one-issue novelty group than a legitimate political force that can realistically propose and drive through a full platform of economic and social reforms for the entire nation. Many people also associate the Greens with their leader Marek Strandberg who is seen as a good public speaker as well as a vocal and intelligent critic, but unable to find the necessary political compromises to actually execute strategies.

In the end the Greens were unable to convince the voters that their ideas would bring back jobs and rapidly improve the Estonian economy, rather than making growth based on clean energy, agriculture and manufacturing slower and more expensive. As a result their votes totaled a mere 10 845.

Low voter turnout

Just like elsewhere in Europe voter turnout continued to fall as ever less people use their democratic rights to elect representatives. Only 43% of Estonia’s eligible voters voted (more than in 2004, but still rather low), on par with the low European turnout of 43%.  Although it should be noted that Estonia pioneered Internet voting for these elections, and the electorate seems to have enthusiastically adopted the e-vote with over 14% of the voters casting their vote electronically.

yrjo economy, mobile apps election

I have noticed over the past few months at various business conferences and networking events a curiously steady rise in attendance by legal professionals. Where before 2007  many top professionals were too booked-up to spend time trawling for new clients, now client relations, conference appearances and networking are back in vouge.

Alan Heuer has an insightful story in the New York Times describing the downsizing taking place at New York top firms. Associates and partners are being let go to adjust to the drop in business.

The recession is crashing the business model for NY full service commercial law firms, which in good times used to compete amongst each other for the right to pay first year incoming baby-lawyers  $160,000 per year plus bonuses. With the Lehman Brothers collapse, CDO catastrophy, and surrounding economic crisis the capital markets transactional work dried up. The transactional deal-flow ran down to a trickle, and there had already been a long drought of  IPO work.

Lawfirms work mostly on a cash on hand basis, and do not carry large reserves. As such, very quickly there is not enough money to keep the large numbers of associates waiting for new work.  The firms have been forced into  firing both partners and associates and telling new recruits their start date will be delayed by a year. Heuer Reports:

In the first quarter of 2009, demand for legal services in New York decreased by nearly 10 percent over 2008, according to the Hildebrandt International Peer Monitor Index. At least 10,000 employees at major firms across the country have lost their jobs so far this year, according to the macabre but wildly popular “Layoff Tracker” run by another blog, lawshucks.com.

Steve Verrier a Partner at White & Case (2,000 lawyers in 34 offices in 23 countries) described his choices upon assuming the management of the firm as follows:

Do nothing, which risked the firm’s survival; couch layoffs as decisions based on poor performance; or own up to the crisis and bid large numbers of lawyers a harsh but needed goodbye.

They decided for the layoffs. A partner at White&Case explained the atmosphere has changed significantly at the large firms: “The problem is we’re supposed to all be in this together. But at some point, you stop and think: ‘Well, maybe we’re not.’ ”

Crisis forces innovation in the legal field.

Clients are beginning to look ever more closely at the legal bills they receive. Large businesses have started to employ legal auditing service companies. Essentially they audit the clients’  legal bills, identifying incorrect entries as well as inefficiencies and possible over-billing. The company gets paid a percentage of the “savings” achieved. As one can imagine, the performance fee structure ensures sufficient motivation to find mistakes and cost-cutting opportunities.  For example, Stuart Maue saved Kmart $15 million in legal and professional fees in the bankruptcy proceedings.

Denver based Law firm Watson& Associates just announced that it is now offering a  flat-price full-service packages for businesses. The reasoning is as follows:

The firm hopes its innovative approach to helping clients reduce the staggering fees typically associated with legal advice will strengthen the firm’s position as a business partner, rather than a line item in the budget.

We are hoping that law firms will also recognize their role in bringing the economy back, by offering legal services to startup companies which hope to rapidly grow their business on a discount basis, or in exchange for some equity (where this structure is allowed by the bar) or structured on growth basis. By sharing in the risk with the entrepreneurs, the law firms are creating a network of grateful and loyal entrepreneurial customers and their referrals, but also are investing into ensuring the survival of their own future client base.

This is an opportunity for lawyers to help out seed and early-stage companies by giving them some basic services and business contract forms cheap or free, instead of charging heavy fees later by telling the company about the damage done to the valuation, money lost to overtaxation, or intellectual property lost because they could not afford lawyers and failed to use proper legal forms.

yrjo economy economy, law

The startlingly honest and straightforward admission by President Obama came under questioning by Steve Scully during the C-SPAN interview. President Obama cites the failure to fix the US health care system as the long term reason for this fiscal crisis, and in the short term the extreme demand for money to rescue the financial sector, the auto industry and address the “huge recession.”

The current US national debt of $11 trillion comes out to$36,000 pear each living US citizen, and has continued to increase on an average at the rate of $3.8 billion per day since 2007. Of course US is not alone in this situation as IMF has calculated that average government debt for the richest G20 countries will exceed 100% of their GDP in 2014, compared to 40% in 1980 and 70% in 2000.

The growing debt burden has been mainly financed by printing money (technical term - quantitative easing) as we have reported in our previous posts here and here. However, the concern for rising debt has now pushed UK and US creditworthiness to the brink and put their AAA national debt credit rating very much at risk. However, tough budget cuts must still wait a while, as current stimulus spending is necessary to bring life back to the US economy. This creates for a very tough challenge for any world leader.

Full transcript of President Obama’s interview is available from C-Span here, but the relevant portion of the interview went as follows:

SCULLY: You know the numbers, $1.7 trillion debt, a nationaldeficit of $11 trillion. At what point do we run out of money?
OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we’ve made on health care so far. This is a consequence of the crisis that we’ve seen and in fact our failure to make some good decisions on health care over the last several decades.
So we’ve got a short-term problem, which is we had to spend a lot of money to salvage our financial system, we had to deal with the auto companies, a huge recession which drains tax revenue at the same time it’s putting more pressure on governments to provide unemployment insurance or make sure that food stamps are available for people who have been laid off.
So we have a short-term problem and we also have a long-term problem. The short-term problem is dwarfed by the long-term problem. And the long-term problem is Medicaid and Medicare. If we don’t reduce long-term health care inflation substantially, we can’t get control of the deficit.

yrjo books, economy economy

• General Motors spends $17 million per year on Viagra (ConsumerAffairs)
• How to start your own company without quitting your day job (SB Informer)
• Facebook (and other social networks) may infantilize your mind  (Guardian)
• Psychology of Twitter (Psychology Today)
• Warren Buffet’s short commentary on newspapers (Business Insider)
• Avoiding Swine Flu: A Lesson From The Porn Industry (Wilmott)
• CEO candidate demanded private jet as a part of his compensation (New York Post)

rait reading

The epidemic spread of the information age has ensured that there are far too many good articles on the web to comment on. Even skimming through them all has become a considerable challenge. Therefore I decided to take a short-cut and just start posting our favorite picks from the endless fountain of information.

• New bill may give Obama ability to shut down Internet (The Industry Standard)
• You can soon use iPhone to monitor your health (VentureBeat)
• The management gospel according to the Godfather (PEhub)
• Teens rather spend on cheap entertainment than food (AdvertisingAge)
• Microsoft running behind the train again, launching its own Twitter (Silicon Alley Insider)
• Gutenberg meets on-demand books - Espresso Book Machine (Guardian)
• Confessions of an Entrepreneur’s Wife (Inc Magazine)
• Michael Douglas & Oliver Stone to make “Wall Street” sequel (Huffington Post)

Stay tuned, more to come …

rait uncategorized

My friend Harles Mägi has been pursuing his passion for music and entrepreneurship through his event promotion agency HiMusic Agency. After a several smaller classical music events the Agency is now staging a very interesting series of concert experiences that combine opera and jazz elements in the original production entitled “Femme Fatale.”

The production is rather unique as it combines everyone’s favorite scenes from classic operas such as “Carmen”, “Don Quichotte” and “Samson and Dalila,” but instead of a symphony orchestra there are four saxophones.  The intriguing narrative of  each man confrontation with his Femme Fatale combined with a mix of musical cultures makes this a very innovative approach to opera that is sure to win new fans to the genre.

The star of the performance is undoubtedly Yaroslava Kozina - a raising European  opera star. Kozina has quickly won acclaim for her performances on stages of Paris, Lyon, Berlin, Frankfurt, Bremen, Strasbourg and other European cities. In 2006,  the highly respected European music publication „Opern Welt“ conferred her the title “Young Singer Of The Year”, noting her unique velvet-soft timbre, great acting talent, captivating individuality and charming temperament. In 2007, the singer was awarded the coveted „Young Wagner Singer Grant“.

The concert has received positive reviews in the local press (for those of you that can read Estonian the article can be found here). I recommend seeing the performance (14 April in Tallinn or 17 April in Tartu) and experiencing innovation in this cultural arena.

yrjo entrepreneurship innovation

At a recent speaking event in Estonia I reminded the enreprenurs in the audience that while it is important that they contribute creative online content to better promote themselves and their businesses - everything they say can and will be used against them at some point.

In case there was still doubt - here is a California Appeals Court decision to cement that truth. Cynthia Moreno,  a student at UC Berkeley, posted on her MySpace page an online rant about how much she thought that the neighboring town Coalinga sucked - stating among other  thing  “the older I get, the more I realize how much I despise Coalinga.”

Low and behold, the Coalina local paper sensing an opportunity to rabble rouse printed the rant in the paper - which naturally caused a flood of hate-mail directed at Moreno and her family.  According to the complaint, Moreno’s father’s 20-year-old business in Coalina lost so much money that it had to be shut down and the family had to move out of town.

Ms. Moreno sued the newspaper for invasion of privacy and intentional infliction of emotional distress - claiming that the writing was intended for just her MySpace friends.

The California Court of Appeals decided that even if  Moreno intended the information for a limited audience, there is no expectation of privacy online. The ruling by Judge Levy dismissing the privacy claim  states that:

Cynthia’s affirmative act made her article available to any person with a computer and, thus, opened it to the public eye Under these circumstances, no reasonable person would have had an expectation of privacy regarding the published material.

So the moral of the story is again that everything you post of Twitter, MySpace and Facebook is public information which your employers, business partners and the public in general will see. Think before you post!

yrjo internet Facebook, MySpace

In an announcement recently posted on Amazon’s website, the company revealed that it will no longer pay referral fees to Associates that send them traffic through keyword bidding and other paid search results on Google, Yahoo, MSN, and other search engines.

Amazon announced the following:

After careful review of how we are investing our advertising resources, we have made the decision to no longer pay referral fees to Associates who send users to www.amazon.com, www.amazon.ca, or www.endless.com through keyword bidding and other paid search on Google, Yahoo, MSN, and other search engines. As of May 1, 2009, these paid search Associates will not be paid referral fees.

The reason I bring this up is that I have seen references in some software  startup business plans to earning revenue from the Amazon Associates program.  So - make sure you deleta that from the business model and revenues before sending out business plans and powerpoint slides to your Angels and VCs

yrjo internet