Worth Reading

Personal Research Program

McKinsey asks Conde Nast for an across-the-board 25% cut to its expenditure budgets.

US M&A deal flow is on the rise, such as the Xerox-ACS deal (CNBC video).

The New Yorker‘s John Cassidy on the ‘rational irrationality’ of financial markets.

How private equity targets the vulnerabilities of integrated supply chains in America’s automobile manufacturing industry.

Australian strategist Paul Monk on the rise of the market state.

Tweet Memes

New York Times and Slate obituaries on speechwriter and columnist William Safire.

TNR‘s Daniel Pauly poses a dystopian scenario: the ‘aquacalypse’ or end of fish.

Influencing The Gamble

Fiasco author Thomas E. Ricks is gaining positive media reviews for his new book The Gamble: General David Petraeus and the American Military Adventure in Iraq, 2006-2008 (Penguin Press, New York, 2009). The Washington Post has published excerpts; NYT and LA Times have reviews here and here. Ricks joins my list of journalists and open source intelligence researchers who are exem

The reviews suggest Ricks has uncovered lots of rich insights from his reportage on how Petraeus changed US counterinsurgency doctrines in Iraq and Afghanistan, and its policy framework in the Bush administration. Petraeus was informed about Vietnam’s counterinsurgency lessons through his PhD studies at Princeton, completed in 1987. He also chose several foreign-born advisors with subject matter expertise such as Australian Lt. Col. David Kilcullen. Finally, Petraeus cultivated several allies in military and policy circles who led a counter-response to convince the Bush administration to re-evaluate its policies. American Enterprise Institute resident scholar Frederick W. Kagan was a prominent warrior-scholar in the successful counter-response. So, timing, an institutional track record, a team of advisor-experts and coordination with co-journeyers was vital to Petraeus’s successful case for policy and doctrine change.

Chinese Democracy

Chinese Democracy looks set to be the most delayed and expensive album in history: a rumoured $US13 million recording budget, 5 guitarists, 14 studios and a horde of Pro Tools digital editors.  I’m not exactly a Guns n’ Roses fan but I bought the album anyway for the CD booklet: a list of production credits for the massively overrun project.  For the project’s background see Wikipedia’s CD history page and Jeff Leeds’ article “The Most Expensive Album Never Made” (New York Times, 6th March 2005).

Interesting that Axl Rose augmented the Best Buy-only release with a MySpace streaming strategy and that Amazon.com’s top search today for “Chinese Democracy” is Metallica‘s Death Magnetic (Elektra, 2008) . . . Rose’s CD is ninth on the search algorithm’s list.

I’m saving most of my thoughts on Chinese Democracy for a journal article. 

Former Gn’R co-founder Slash in his autobiography Slash (HarperEntertainment, New York, 2007), co-written with Anthony Bozza, has a prescient and interesting anecdote (p. 371) on Rose’s decision to use Pro Tools in the recording studio:

There were rows and rows
of Pro Tools servers and gear.  Which was a clear indication that Axl
and I had very different ideas of how to do this record.  I was open to
using Pro Tools, to trying new things–but everyone had to be on the
same page and in the same room to explore new ideas.  The band managed
to do a little bit of jamming and come up with some things.  A couple
of the ideas I had come up with Axl apparently liked and they were
recorded onto Pro Tools and stored for him to work on later.

We’d show up at different times every evening, but by eight p.m.
generally everyone in the band would be there.  Then we’d wait for Axl,
who, when he did come, arrived much, much later.  That was the norm; it
was a dark, miserable atmosphere that lacked direction of any kind.  I
hung out for a bit; but after a few days I chose to spend my evenings
at the strip bar around the corner, with orders for the engineers to
call me if Axl decided to arrive.

Duelling Web 2.0 Scenarios: Boom/Bust

Has Tim O’Reilly’s Web 2.0 meme become a high-tech bubble about to burst?

Origins of the Web 2.0 Boom

O’Reilly’s vision of a new Web platform originally fused two developments.

The first development: C, Smalltalk and object oriented programmers devised design patterns in the early 1990s to reuse software code and workaround solutions across projects.  A 1995 catalog catapulted its four authors to software engineering fame.  To capture the rapidly growing number of design patterns programmer Ward Cunningham created the first wiki: the Portland Patterns Repository.

The second development: a re-evaluation of dotcom era business models to encompass new technologies that enhanced the end-user experience including the site interface and information architecture.  Industry buzz around News Corporation’s acquisition of MySpace (18th July 2005), Yahoo!’s purchase of Flickr (21st March 2005) and del.ico.us (9th December 2005), and Google’s stock-for-stock deal for YouTube (9th October 2006) made O’Reilly’s vision the ‘default’ vision for Web pundits and investors.

The media’s buzz cycle soon went into warp speed as Facebook frenzy replaced MySpace mania.  In a move that exemplified the pivotal role of complementors O’Reilly & Associates morphed into the juggernaut O’Reilly Media.  Ajax and Ruby Rails soon replaced Java and C# as the languages for new programmers to learn.  For activists in community-based media, angel investors investing in scalable programming prototypes and international conglomerates seeking to control their industry white-spaces Web 2.0 provided an all-encompassing answer to venture capitalists on how they would change the world.

Two Scenarios: Web 2.0 Boom & Bust

For industry pundits Google’s decision in October 2008 not to acquire Digg may signal the Web 2.0 boom has become a bubble.  If true Google’s decision could be the mirror of News Corporation and Yahoo!’s acquisitions in 2005.  Slate‘s Chris Anderson points to several factors: no tech IPOs in the second quarter of 2008, the cyclical nature of the digital consumer market, the exit of Yahoo! as a potential buyer due to internal problems, market noise due to low barriers of entry for startups, and a smaller “window of opportunity in which startups can think of a new neat trick, generate buzz, and cash out.”  YouTube’s co-founder Jawed Karim adamently believes that Silicon Valley is in a bubble.

Twitter is the latest startup in the duelling scenarios of Web 2.0 boom versus bust. New York Times journalist Adam Lashinsky experiences a similar euphoria to Facebook and YouTube when he visits Twitter’s co-founder Jack Dorsey.  Sceptics counter that Facebook and YouTube have not ‘monetised’ their business models into profitable revenues.  Portfolio‘s Sam Gustin raises the ‘monetisation’ problem with Twitter co-founder Biz Stone who believes that service reliability is a priority over the “distraction” of revenue pressures.  In support of Stone’s position Anderson observes that cloud computing and open source software are lowering the operational costs and slowing the burn rates of startups.

Yet monetisation remains a primary concern for Sand Hill Road entrepreneurs and other venture capitalists.  They differ in their decision-making criteria to Web 2.0 pundits and high-tech futurists: for angel investors and first round VC funding the entrepreneurs will demand a solid management team, the execution ability to control an industry whitespace, and viable sources of future revenue growth.  This is the realm of financial ratios and mark-to-market valuation rather than normative beliefs and ideals which probably influenced the acquiring firm’s decisions and valuation models in 2005-06.

Furthermore, if a Web 2.0 bust scenario is in play, the ‘contrarian’ sceptics will look to Charles Mackay, Charles P. Kindleberger, Joseph Stiglitz and other chroniclers of past bubbles, contagion and manias for guidance.  With different frames and time horizons the Web 2.0 pundits, high-tech futurists and venture capitalists will continue to talk past each other, creating still more Twitter microblogging, blog posts and media coverage.

Several preliminary conclusions can be drawn from the Web 2.0 boom/bust debate.  In a powerful case of futures thinking O’Reilly’s original Web 2.0 definition envisioned the conceptual frontier which enabled the social network or user-generated site of your choice to come into being.  The successful Web 2.0 startups in Silicon Valley have a distinctive strategy comparable to their dotcom era counterparts in Los Angeles and New York’s Silicon Alley.  Web 2.0 advocates who justify their stance with MySpace, YouTube and del.icio.us are still vulnerable to hindsight and survivorship biases. There’s a middle ground here to integrate the deep conceptual insights
of high-tech futurists with the quantitative precision of valuation
models.

It’s possible that the high-visibility Web 2.0 acquisitions in 2005-06 were due to a consolidation wave and strategic moves/counter-moves by their acquirers in a larger competitive game.  There are two precedents for this view.  Industry deregulation sparked a mergers and acquisitions boom in Europe’s telecommunications sector in the late 1990s comparable to the mid-1980s leveraged buyout wave in the United States.  Several factors including pension fund managers, day trading culture and the 1999 repeal of the US Glass-Steagall Act combined to accelerate the 1995-2000 dotcom bubble.  Thus, analysts who want to understand the boom/bust dynamics need to combine elements and factors from Web 2.0 pundits, high tech futurists and venture capitalists.

If the Web 2.0 boom has become a bubble then all is not lost.  Future entrepreneurs can take their cue from Newsweek journalist Daniel Gross and his book Pop! Why Bubbles Are Great for the Economy (Collins, New York, 2007): the wreckage from near-future busts may become the foundation of future bubbles.  Web 3.0 debates are already in play and will soon be eclipsed by Ray Kurzweil‘s Transhumanist agenda for Web 23.0.

Foreclosure Of A Hedge Fund Dream

Media personalities who took a career detour into managing hedge funds are the latest casualty of the subprime fallout, reports New York Times journalist Andrew Ross Sorkin.

Sorkin profiles Ron Insana the former CNBC news anchor who founded Insana Capital Partners at the height of easy credit in 2006 and closed ICP in August 2008.  Insana raised $US116 million from major investor Deutsche Bank and media contacts.  Rather than invest directly in complex financial instruments Insana chose an intermediary position: a fund of funds investor in a diversified portfolio of hedge funds.

Insana made several errors that led to ICP’s blow-up.  Sorkin notes the US$116 million was a smaller capital raising than its blue chip competitors.  The fund of funds positioning meant a rational herds strategy on the hedge funds that ICP invested in.  Subprime-caused market volatility set off a cascade: the hedge funds didn’t make alpha returns above the market and ICP didn’t have the diversified portfolio to weather the volatility.  Consequently, ICP still had to pay out investors in full for their original investments (the ‘high water mark’ rule) before it could earn its ’1.5 of 20′ fee (1.5% management fee on funds and 20% of fund profits).

Sorkin is insightful about the cost structures of hedge funds:

That would have been enough if it was just Mr. Insana, a secretary and
a dog. But Mr. Insana was hoping to attract more than $1 billion from
investors. And most big institutions won’t even consider investing in a
fund that doesn’t have a proper infrastructure: a compliance officer,
an accountant, analysts and so on. Mr. Insana had seven employees, and
was paying for office space in the former CNBC studios in Fort Lee,
N.J., and Bloomberg terminals — at more than $1,500 a pop a month –
while traveling the globe in search of investors. Under the
circumstances, $870,000 just wasn’t going to last very long.

This ‘contrarian’ observation highlights the leverage of institutional investors, and, in contrast to the usual media portrayal, the regulatory burdens of institutional compliance on funds.

Sorkin’s profile raises some interesting questions beyond his comparison of Insana and the media-savvy millionaires who blew-up after the April 2000 dotcom crash.  Did ICP adopt the trend following strategy from CNBC’s media coverage and Insana’s popular books?  If so, could Insana distinguish between market noise and critical events?  How did Insana grapple with the career change from CNBC news anchor to hedge fund head?  What risk mitigation steps did ICP’s investors demand, and did Insana exercise prudential caution? When he had to close ICP was Insana able to be self-critical about his past decisions and errrors?  Are there firm-specific, operational and positioning risks for fund of funds?  That would be a really interesting post-implementation review for aspiring hedge fund mavens.

Don’t expect to see it in CNBC European Business or Bloomberg Markets anytime soon.