31st October 2010: The Social Network (2010)

The most interesting stories about internet sites are about their internal politics.

Almost a decade ago, during a dinner with a co-researcher, I got introduced to a fan of the news site Disinformation. I was its site editor at the time. We chatted about the site, stories, the founding myths, and the recent Disinfo.con 2000. “What goes on within the production team in any site or magazine is different to what its readers may perceive,” I said. “The team has a different relationship to the material.” This conversation foreshadowed events that would occur four or five years later, which this single exchange foreshadowed.

David Fincher’s The Social Network gets many of these elements right. Fincher is helped by Aaron Sorkin’s witty script, and a dark, ethereal soundtrack from Trent Reznor and Atticus Ross. At its core The Social Network is less a generation or decade-defining film and more a case study in the hurdles that entrepreneurs and cultural creatives face to launch new ventures. The details are in scenes about fast prototypes and rapid development, court depositions, and venture capital negotiations over shares. Although Facebook is amongst the most prominent, the underlying story of The Social Network has probably played out in many deals and websites over the past 15 years.

Entrepreneurs can be motivated by hubristic emotions and real-life events. Mark Zuckerberg (Jesse Eisenberg) launches the voting site FaceMash when Erica Albright (Rooney Mara) breaks up with him. When FaceMash crashes Harvard’s servers, Zuckerberg is interviewed by Harvard’s administration, profiled in The Harvard Crimson, and comes to the attention of entrepreneurs Cameron and Tyler Winklevoss (Armie Hammer and Josh Pence). Zuckerberg agrees to develop Harvard Connection for the Winklevosses. Over several weeks, Zuckerberg then develops The Facebook as a ‘first-to-market’ competitor, funded by friend and investor Eduardo Saverin (Andrew Garfield).

Zuckerberg and Saverin differ over The Facebook’s direction and how the early stage venture should earn revenues. Zuckerberg wants to grow the site and undermine the traditional ‘facebooks’ of Harvard’s elite colleges. Saverin opts for a New York internship and hunt for advertisers. When Zuckerberg meets Napster co-founder Sean Parker (Justin Timberlake) the ‘balance of power’ in the team shifts. Parker introduces Zuckerberg to Paypal co-founder Peter Thiel (Wallace Langham) who provides $US500,000 as an angel investor. Parker and Thiel then convince Zuckerberg to cut Saverin’s share from 34% to 0.03% in order to bring in other seed capital and early institutional capital investors. Saverin and the Winklevosses pursue Zuckerberg with federal court lawsuits.

Fincher’s eye for detail is on how others surround ‘players’ like Zuckerberg, Parker and Thiel. Harvard’s Larry Summers (Douglas Urbanski) counters to the Winklevosses that their dispute with Zuckerberg is a private matter for the courts. Parker dresses up his Napster losses with a Victoria’s Secret model (Courtney Arndt), a ‘positive deviance’ story of taking on the music conglomerates, and throwaway lines on branding suggestions. Zuckerberg is praised by Harvard students, courted by sorority admirers, and circled by lawyers. Meanwhile, Harvard’s elite clubs, teaching, and administrative hearings continue, oblivious to Zuckerberg and Saverin’s ‘small team’ juggernaut until the re-named Facebook cascades to other universities, and later to the general public.

The Social Network captures several business truths that makes it perhaps the best film about .com business since Jehane Noujaim’s Startup.com (2001) and Ondi Timoner’s We Live In Public (2009). Find a wedge topic — such as a choice over the direction and structure of a business — and you can isolate and split a creative team. Play to the ‘halo effects’ and ‘positive illusions’ of people and you can entrance them and restructure a deal to your favour. The real story lies in what happens behind the spin-doctored public image and talking points — in what people actually do when the pressure is on. Put a lot of money on the table – or the valuation promise thereof – and your friends may ‘throw you under the bus’ out of self-interest at a strategic inflection point. Online social networks may promise connection and influence yet can also play to narcissism and sound-bite exchanges over substance. Similar dynamics played out during Evan Williams’ CEO tenure at Blogger and Twitter, and in Hollywood films about entrepreneurship.

Fincher closes The Social Network on a haunting image: Zuckerburg alone in a legal office with a laptop, hovering over the profile of his college ex-girlfriend Erica Albright. It’s haunting because Fincher evokes the simultaneous loneliness and yearning for connection that can drive social network ‘chatter’ and traffic. Zuckerberg pauses on ‘send request’, hesitates and stops, and the camera pans away. Some of the most important, past people in my life either don’t have Facebook or Twitter accounts, or don’t visit them often. The Social Network then is a timely reminder of the individual and one-to-one bonds at the heart of social network sites, and how easily they may become frayed.

29th October 2010: Weekend Reading

Dealbook Special Section (Fall 2010): Private equity experienced a bubble in 2005-07 reminiscent of the 1980s. This special section examines how private equity survived the 2007-09 global financial crisis; the role of inflection points; and the regulatory games ahead. I keep an eye on stuff like this as a reminder of graduate school classes in organisational strategy.

Diplomatic History: This is the ‘house’ journal (A-ranked ERA) of the Society for Historians of American Foreign Relations. I keep an eye on it for two reasons: (1) it often covers some interesting, relatively unknown incidents in American political history (some that may interest Russ Kick); and (2) the articles illustrate how to do archival and historical research, using the kind of sources that you won’t find online.

The Social Network: Aaron Sorkin‘s script (PDF) for David Fincher‘s film takes me back to the 1995-2000 dotcom bubble. I wrote a graduate school paper on the experience, here.

28th October 2010: On Data Journalism

Ben Eltham and Tim Norton have each praised Simon Rogers’ Guardian article on data journalism. Rogers explains:

It represents the convergence of a number of fields which are significant in their own right – from investigative research and statistics to design and programming. The idea of combining those skills to tell important stories is powerful – but also intimidating. Who can do all that?

Actually, this is an old yet interesting topic. Barry Saunders notes he wrote a thesis on data journalism “before it was cool.” In 2001, during my stint as Disinformation’s editor, I wrote a profile of information visualisation tools and a glossary of coding terms (links now outdated). In 2002, I did a Swinburne University presentation on developing an editorial framework for interpreting data and event-based news. However, the roots of today’s ‘data journalism’ can be traced back to the 1960s movement in ‘social indicators’, statistical inference methods, and early computer-assisted journalism. A good primer on these techniques is Philip Meyer’s Precision Journalism: A Journalist’s Guide to Social Sciences (Rowman & Littlefield Publishers, Lanham MD, 2002).

Rather than data, for me the more interesting area is analytical models, causal inference and judgment. This deals with how to evaluate data, and how to infer findings when there is no ‘smoking gun’ or ‘deep throat’ source. In two celebrated papers for Journal of Political Economy and NBER’s Working Paper series, Columbia’s Ray Fisman and UC Berkeley’s Edward Miguel inferred patterns of corruption from parking tickets. Greenlight Capital’s hedge fund manager David Einhorn made a speech at the 2002 Ira Cohn Conference, and then a follow-up book in which he explained his research process using mosaic theory to uncover information about a ‘target’ company and to short-sell their stock. Philip Tetlock, Robert Jervis, and Gregory Treverton have written extensively on this, in terms of the epistemology and research methods of intelligence analysis.

27th October 2010: Scrivener for Windows

Barry Saunders mentioned the Macintosh writing program Scrivener to me several months ago. I’m yet to make the jump from PC to Mac – so I added Scrivener, Papers and others to a list of ‘nice to have’ and ‘maybe/someday’ software. [For speed writing sessions there's always Write or Die by Dr. Wicked; for self-therapy there's Eliza and Daryl Sharp's Kafka study The Secret Raven.]

Literature and Latte recently announced a beta version of Scrivener for Windows. I’ve played with a copy for 24 hours and found the corkboard and outlining tools very useful for planning out ideas. I also like the export function to Final Draft for film and television scripts. Literature and Latte’s Twitter feed has further info on Scrivener for Windows and user reactions.

I didn’t know The Atlantic’s James Fallows and other writers use Scrivener for their blogging and reportage. Anyone else?

26th October 2010: Ben Eltham on Currency Fluctuations and Australian Screen Production

Coauthor Ben Eltham and I recently had a paper published in Media International Australia (August) – ‘Boom and Bust in Australian Screen Policy’ – that discusses the impact of cross-border location competition, international tax arbitrage and financing structures on Australian screen production. MIA‘s university subscribers can download a copy here and non-subscribers can read a proof version here.

Our paper focuses on the Australian industry’s reliance on ‘runaway’ productions and the speculative bubbles in Australian screen policy. This includes discussion of the 10BA period during 1981-84; the founding of the Film Finance Corporation; comparison of film financing structures in the US and United States; and inter-state and international competition involving the studio production facilities in Sydney and Queensland’s Gold Coast.

Ben discusses the impact of currency parity between the US and Australian dollar, and recent coverage by the Australian Financial Review on the local film industry. He notes that — as our model would predict — currency parity means an outflow of foreign productions from Australia to Mexico, Canada, and competing states such as Louisiana and Texas. Ben’s reflection prompts some further questions: What sensitivity analysis do Australian screen policymakers do on their forecasts or pipeline for future deals? How is this sensitivity analysis used in actual negotiations and deal structuring with Hollywood producers? What enticements or trade-offs are given, when, and under what conditions? What, if any, currency exposure and hedging models are used in risk management strategies? How do these factors inform the decision-making of: (a) local producers; and (b) Screen Australia?

Our analysis also fits several other factors that Robert Shiller notes in his second edition of Irrational Exuberance (Crown Business, New York, 2006), which I just finished reading. In particular, Shiller warns about ‘new times’ thinking; the media as an amplification mechanism; and psychological biases that affect investment decision-making. We wrote the article in part as a rebuttal of the local media’s portrayal of the Australian screen industry and the lack of discussion about structural and international factors. Shiller’s ‘new times’ thinking such as the 1995-2000 dotcom and the 2003-2007 real estate bubbles, is evident in how 10BA, the FFC, and new studio production facilities were portrayed by the local industry, irrespective of the policymakers’ original intentions. We suggest psychological biases subtly influenced the FFC’s screen production portfolio, and the resource allocative decisions on local facilities and talent pools. Shiller’s overall patterns and observations closely fit our article’s analysis, and suggests that Australian screen policymakers can learn much from behavioural finance and macroeconomics.

25th October 2010: ‘Quality’ Journalism and Defunding NPR

New York Sun founding editor Seth Lipsky contends public choice theory is one way to resolve the dilemma of how to fund ‘quality’ journalism:

The president of Columbia University, Lee Bollinger, has emerged as a leading voice for pouring more government money into news gathering. How badly would that chill the capital markets for those who dream of privately funded news gathering, completely independent of oversight by Congress? My guess is that the effect would be a great deal more significant than those who have not been out trying to raise such capital might imagine.

Lipsky made his comments after NPR fired reporter Juan Williams for perceived anti-Muslim comments. High-profile Republicans then suggested that NPR’s federal government funding and subsidies should be cut. For Lipsky, a competitive government means less space for efficient capital markets and venture entrepreneurs who can fund ‘quality’ journalism.

However, Lipsky leaves out a third option: foundations and grant-makers that establish special funds for investigative journalism. Barry Saunders and I examined this in a conference paper and presentation on ‘quality media’ and investigative journalism. For example, The Huffington Post announced on 20th October that it will transfer its HuffPo Investigative Fund to the Centre for Public Integrity. The merger consolidates grant-maker funding and newsroom resources for nonpartisan investigative journalism projects.

22nd October 2010: Streamlining

Late afternoon: starting to reorganise three boxes of archival material and notes, taken over a 15 year period, mainly from 1998-2005. This will take months to do.

Streamlining projects: (1) PhD notes (with two spin-off projects); (2) potential academic articles; (3) valuation skills for personal research; and (4) ongoing day-to-day stuff.

Realisations: (1) for every article published in the past 15 years, there’s probably another article or material that didn’t make it into print; and (2) being at universities for 10 years has given me ideas for 160 article topics, and some of these will probably become blog posts.

Long-term: gathering more focus and clarity.

20th October 2010: Adam Lambert’s Backing Band

Glee soundtrack? Check. Kings of Leon? Check. Black Eyed Peas? Check. Justin Timberlake? Check. Beyonce? Check. Michael Jackson? Check. 8-80 age audience? Check. That was just the pre-show ‘intro’ mix.

In the early-to-mid 1990s as an aspiring rock journalist I learnt to keep an eye on several things during a gig. I spent most of Adam Lambert‘s concert at Melbourne’s Palais Theatre last night watching his bassist and guitarist/musical director. Lambert’s post-American Idol career fits a Glee teen audience, with a nod for older audiences to Boy George, mid-1980s Los Angeles glam rock, and fans of Richard Kelly’s Donnie Darko (2001). Lambert’s guitarist spent the 70-minute set switching between various guitars: a Gibson SG for the three opening numbers, two Ovation acoustics for a mid-set ‘unplugged’ sequence, a Flying V for guitar solos playing the Phrygian and Mixolydian scales (probably), and a Fender Stratocaster for the obligatory, big finale.

Lambert appears to have spent more on costume changes than on the set. His backing band and four dancers aren’t cheap to tour with as variable costs. They appeared crowded. The show may work better in a Las Vegas torch-song environment, although Lambert’s fans gave him ecstatic, rapturous applause. Here’s what I’d do if I were music director for a day (after post-gig discussions with Rosie X): let the singers go on Marilyn Manson‘s tour instead. Move the Tears for Fears cover of ‘Mad World’ earlier in the set. Re-sequence the songs to have more of a flow. Segue into and out of the ‘unplugged’ section so that the energy doesn’t just suddenly drop. End with the obligatory, big finale and leave the audience on a high note. Invest in some more backing slides and lasers.

On the ‘Glam Nation’ tour theme, spread the love: Take out healthcare insurance for your touring musicians as risk management.

19th October 2010: KKR’s Perpetual Gambit

KKR‘s $A38-40 unconditional bid yesterday for fund manager Perpetual Investments may revive Australia’s M&A market.

Tony Boyd observes in today’s Australian Financial Review (‘No longer perpetually waiting’, 19th October 2010, p. 60):

Perpetual is a classic takeover target for private equity. Its chief executive is on the way out and his replacement is yet to be named. Its financial performance has been lacklustre for several years. It has high costs that can be cut quickly and it had assets that can be sold relatively easily. Also, its balance sheet is relatively ungeared now that the Perpetual Exact Market Cash Fund has passed the worst of its valuation problems.

The AFR‘s media coverage focuses on several factors: (1) the exit of chief executive David Deverall as a timing issue;  (2) the Australian Government’s regulatory changes and the prospects of regulatory arbitrage as another timing issue; (3) the ‘showstopper’ role of Perpetual’s equities team leader John Sevior and the possibility of “shadow equity”; and (4) the possibility that KKR may merge Perpetual with Legg Mason and sell-off the private wealth management business and other assets.

Meanwhile, Steven M. Davidoff of The New York Times assesses 11 M&A deals announced in early October and the prospects for an upswing in M&A activity in 2011. Davidoff notes:

“. . . the small value of these transactions shows that private equity is still firmly stuck in the lower middle market. The availability of credit will help, but targets are also likely to drive hard bargains and shareholders to rebel against low pricing . . .  This will limit private equity’s ability to find bargains in sizable transactions where there is more room for activism.”

There’s still time to watch those Sir James Goldsmith videos.

18th October 2010: Web 2.0 IPO Watchers

Dow Jones reporters Tom Io Geron and Scott Austin note a new trend: managers raising funds for the IPOs of Web 2.0 properties such as Facebook and Twitter.

Their watchlist? JP Turner & Co; technology investor Felix Investments LLC; and Chris Sacco’s Lowercase Capital. Critics? Acquisition and valuation lawyers.

Geron and Austin have two ‘takeaway’ points: (1) managers raising funds is a ‘weak signal’ for possible IPOs; and (2) how others evaluate the fund-raisers and pitch-books can be an invaluable ‘reality check’.