Paul Wallbank – Brilliant Communications

Category: economy

  • Bubble economics

    Bubble economics

    You know you’re in an investment bubble when the pundits declare “we’re not in a bubble”.

    A good example of this is Andy Baio’s defence of Facebook’s billion dollar purchase of Instagram.

    Justifying the price, Andy compares the Facebook purchase with a number of notorious Silicon Valley buyouts using two metrics; cost per employee and cost per user.

    Which proves the old saw of “lies, damn lies and statistics”.

    The use of esoteric and barely relevant statistics is one of the characteristics of a bubble; all of a sudden the old metrics don’t apply and, because of the never ending blue sky ahead, valuations can only go up.

    Andy’s statistics are good example of this and ignore the three things that really matter when a business is bought.

    Current earnings

    The simplest test of a business’ viability is how much money is it making? For the vast majority of businesses bought and sold in the world economy, this is the measure.

    Whether you’re buying a local newsagency outright or shares in a multinational manufacturer, this is the simplest and most effective measure of a sensible investment.

    Future earnings

    More complex, but more important, are the prospects of future earnings. That local newsagency or multinational manufacturer might look like a good investment on today’s figures, but it may be in a declining market.

    Similarly a business incurring losses at the moment may be profitable under better management. This was the basis of the buyout boom of the 1980s and much of the 1990s.

    Most profitable of all is buying into a high growth business, if you can find the next Google or Apple you can retire to the coast. The hope of finding these is what drives much of the current venture capital gold rush.

    Strategic reasons

    For corporations, there may be good strategic reasons for buying out a business that on paper doesn’t appear to be a good investment.

    There’s a whole host of reasons why an organisation would do that, one variation of the Silicon Valley business model is to buy in talented developers who are running their own startups. Google and Facebook have made many acquisitions of small software development companies for that reason.

    Fear Of Missing Out

    In the Silicon Valley model, the biggest strategic reason for paying over the odds for a business is FOMO – Fear Of Missing Out.

    To be fair to the valley, this is true in any bubble – whether it’s for Dutch tulips in the 17th Century or Florida property in the 20th. If you don’t buy now, you’ll miss out on big profits.

    When we look at Andy Baio’s charts in Wired, this is what leaps out. Most of the purchases were driven by managements’ fear they were going to miss The Next Big Thing.

    The most notorious of all in Andy’s chart is News Corp’s 580 million dollar purchase of MySpace, although there were good strategic reasons for the transaction which Rupert Murdoch’s management team were unable to realise.

    eBay’s $2.6 billion acquisition of Skype is probably the best example of Fear Of Missing Out, particularly given they sold it back to the original founders who promptly flicked it to Microsoft. eBay redeems itself though with the strategic purchase of PayPal.

    Probably the worst track record goes to Yahoo! who have six of the thirty purchases listed on Andy’s list and not one of them has delivered for Yahoo!’s long suffering shareholders.

    The term “greater fools” probably doesn’t come close to describe Yahoo!’s management over the last decade or so.

    While Andy Baio’s article seeks to disprove the idea of a Silicon Valley bubble, what he shows is the bubble is alive, big and growing.

    One of the exciting things about bubbles is they have a habit of growing bigger than most rational outsiders expect before they burst spectacularly.

    We live in exciting times.

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  • Hyping start ups for pleasure and profit

    Hyping start ups for pleasure and profit

    Monday’s announcement that Facebook would buy photo sharing website Instagram shows the power of Silicon Valley investor networks and how they operate, we should be careful about trying to emulate that model too closely.

    Intagram has been operating for 18 months, has 13 employees, has no prospects of making a profit and is worth a billion dollars to the social media giant. Pretty impressive.

    A look at the employees and investors in Instagram shows the pedigree of the founders and their connections; all the regular Silicon Valley names appear – people connected with Google, Sequoia Capital, Twitter, Andreessen Horowitz.

    The network is the key to the sale, just as groups of entrepreneurs, investors, workers and innovators came together to build manufacturing hubs like the English Midlands in the 18th Century, the US midwest in the 19th Century and the Pearl River Delta at the end of the 20th Century, so too have they come together in Silicon Valley for the internet economy.

    It’s tempting for governments to try to ape the perceived successes of Silicon Valley through subsidies and industry support programs but real success is to build networks around the strengths of the local economy, this is what drove those manufacturing hubs and today’s successful technology centres.

    What’s dangerous in the current dot com mania in Silicon Valley is the rest of the world is learning the wrong lessons; we’re glamourising a specific, narrow business model that’s built around a small group of insiders.

    The Greater Fool business model is only applicable to a tiny sub set of well connected entrepreneurs in a very narrow ecosystem.

    For most businesses the Greater Fool business model isn’t valid.

    Even in Silicon Valley the great, successful business like Apple, Google and Facebook – and those not in Silicon Valley like Microsoft and Amazon – built real revenues and profits and didn’t grow by selling out to the dominant corporations of the day.

    The Instagrams and other high profile startup buy outs are the exception, not the rule.

    If we define “success” by finding someone willing to spend shareholders’ equity on a business without profits then these businesses are insanely successful.

    Should we define business success by creating profits, jobs or shareholder value then the Silicon Valley VC model isn’t the one we want to follow.

    We need to also keep in mind that Silicon Valley is a historical accident that owes as much to government spending on military technology as it does to entrepreneurs and well connected venture capital funds.

    It’s unlikely any country – even the United States – could today replicate the Cold War defense spending that drove Silicon Valley’s development and much of California’s post World War II growth.

    One thing the United States government has done is pump the world economy full of money to avoid a global depression after the crisis of 2008.

    Some of that money has bubbled up in Silicon Valley and that’s where the money comes to buy companies like Instagram.

    Rather than try to replicate the historical good fortune of others, we need to make our own luck by building the structures that work for our strengths and advantages.

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  • What if Bill Gates had been born in Australia?

    What if Bill Gates had been born in Australia?

    Microsoft founder Bill Gates is today one of the world’s biggest philanthropists having built his business from an obscure traffic management software company to what was at one stage the world’s biggest technology corporation.

    But what if he’d been born in Sutherland, New South Wales rather than Seattle, Washington? How different would things have been for an Australian Bill Gates?

    The first thing is he would have been encouraged to study law; just like his dad. In the 1970s lawyers had far more status and career prospects than software developers in Australia.

    Causing more concern for his parents and career counselor would have been his determination to run his own business. It’s far safer to get a safe job, buy a house then start buying investment properties to fund your retirement.

    The Funding Drought

    If Bill still persisted with his ideas, he’d have hit a funding problem. No bank wouldn’t be interested in lending and his other alternatives would restricted.

    In the Australia of the 1970s and 80s they’d be few alternatives for a business like Micro Soft. Even today, getting funding from angel groups and venture capital funds depend upon luck and connections rather than viable business ideas.

    Bill Gates’ big break came when IBM knocked on his door to solve their problem of finding a personal computer operating system; the likelihood of any Australian company seeking help from a small operator – let alone one run by a a couple of twenty somethings – is so unlikely even today it’s difficult to comprehend that happening.

    Eventually an antipodean Bill Gates would have probably admitted defeat, wound up his business and gone to work for dad’s law firm.

    Invest in property, young man

    Over time a smart, hard working young lawyer like Bill would have done well and today he’d be the partner of a big law firm with a dozen investment properties – although some of the coastal holiday properties wouldn’t be going well.

    While some things have changed in the last thirty years – funding is a little easier to find in the current angel and venture capital mania – most Australians couldn’t think about following in Bill Gates’ path.

    Part of the reason is conservatism but a much more important reason are our taxation and social security systems.

    Favoring property speculators over entrepreneurs

    Under our government policies an inventor, innovator or entrepreneur is penalised for taking risks. The ATO starts with the assumption all small or new businesses are tax dodges while ASIC is a thinly disguised small business tax agency and assets tests punish anyone with the temerity to consider building an business rather than buying investment properties.

    At the same time a wage earner is allowed to offset losses made in property or shares against their income taxes, something that those building the businesses or inventing the tools of the future are expressly forbidden from doing.

    Coupled with exemptions on taxing the capital gains on homes, Australian households – and society – is vastly over invested in property.

    Making matters worse, the ramping up of property prices over the last thirty years has allowed generations of Australians to believe that property is risk free and doubles in value every decade.

    That perception is reinforced by banks reluctant to lend to anyone who doesn’t have real estate equity to secure their loans.

    So we have a society that favours property speculation over invention and innovation.

    Every year in the run up to Federal budget time tax reform becomes an issue, the real effects of negative gearing and other subsidies for housing speculation – the distortion of our economy and societies investment attitudes – are never discussed.

    In Australia there are thousands of smart young kids today who could be the Bill Gates’ of the 21st Century.

    The question is do we want to encourage them to lead their generation or steer them towards a safe job and an investment property just like grandpa?

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  • Risks and opportunities in crowdsourcing

    Risks and opportunities in crowdsourcing

    Crowdsourcing and offshoring are changing bringing to small business the same changes we’ve seen in manufacturing and low level office jobs over the last forty years.

    Those trends are going to affect local businesses – particularly the home based service providers – in a serious way as the local web designer and bookkeeper find themselves undercut by freelancers in countries where an Australian day rate is a month’s pay.

    With those thoughts in mind I went along to a round table discussion with crowdsourcing advocate Ross Dawson, Freelancer CEO Matt Barrie and Design Crowd founder Alec Lynch to hear them discuss some of the issues around the concept ahead of their half day workshops in Sydney later this months.

    Having read Ross’ recent book, Getting Results From Crowds, many of the concepts and arguments are familiar but its worthwhile considering how the trend of a globalised workforce is changing.

    The benefits of crowdsourcing services

    Crowdsourcing services like Design Crowd and Freelancer have benefits traditional outsourcing services don’t have.

    Alec Lynch describes these as reduced expense, speed and risk. A broad range of cheap, accessible suppliers mean businesses aren’t locked into costly contracts with the attendant risks while they can bring projects to fruition in days.

    Until recently, globalisation only bought benefits for major corporations with manufacturers contracting work out to China, back office functions to India and software development to Eastern Europe.

    The rise of web based services where smaller, one off projects could be paid for by credit card has bought global outsourcing into the small and medium sized business markets.

    Now local businesses are affected by business practices that, until recently, were the concern of those working for large organisations.

    This is bad news for local service businesses; the suburban web designer or bookkeeper is now finding themselves competing with individuals who, as Matt Barrie points out, have a very good weeks’ income for the equivalent of a day’s pay in Australia.

    Basically the same forces that drove most low value manufacturing offshore are now driving services and white collar jobs the same way.

    Responding to the threat

    There are major downsides for clients using these project based outsourcing services; for instance designing a logo is only part of a much bigger branding exercise which in turn has to be considered against the orgainisation’s longer term objectives.

    Often, most of us don’t know what we don’t know and that’s the real reason why we hire an expert to explain why a logo should look a certain way, an expense should be allocated to one specific cost centre and not another or why we should one software package over another.

    When we outsource our services, particularly to a low cost provider, we lose that expert insight and end up with someone just carrying out a task; it is up to us to supervise something we probably don’t understand ourselves.

    Part of that supervisory role is project management, in the design field managing creatives can be like herding cats. This is why experienced project managers are worth their weight in gold.

    Like many essential skills, project management is one of those which most of us don’t have and is chronically undervalued but when a business is outsourcing to a freelancer in Estonia or Eritrea then this service is essential.

    Providing those skilled supervisor and management roles is where the opportunities lie in a crowdsourced market place.

    In many ways, we’re seeing the end result of the post-industrial society. Just as we offshored the manufacturing industries through the 1970s and 80s then the low skilled office work in the 1990s and 2000s, we’re now outsourcing local services to low cost countries.

    Whether ultimately this is a good thing or not is a big question but for local businesses, the trend is clear and much of the basic work is going offshore. Those who choose to whinge rather than adapt will be left behind.

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  • We come here to work

    We come here to work

    “We come here to work and not to play” is the quote from a Chinese production line worker in Reuter’s article on Foxconn factory workers.

    That quote could have come from a hundred years ago in Western societies as young workers fled agricultural communities to make better money and find greater opportunities in the factories and cities of North America, Europe and Australia.

    In their report on Chinese labour conditions commissioned by Apple and its supplier Foxconn, the US Fair Labor Association confirmed the quotes from the Reuters article.

    48% thought that their working hours were reasonable, and another 33.8% stated that they would like to work more hours and make more money.

    These workers have an average 56 hour working week and over a third are putting in 70 hours each week.

    Like our great grandparents they are focused on bettering themselves and deeply conservative; they know their immediate livelihoods and future prospects depend upon the work they can get.

    They also understand the government owes them nothing and their expectations on what the authorities will do for them are low.

    It often said the Communist Party of China is the most effective capitalistic organisation on the planet today. In reality it’s the workers on the assembly lines who personify what we know as the free market.

    As the leaders of Western nations continue to indulge in corporate and middle class welfare while believing in magic pudding economics where massive mis allocations of resources have no cost and tax cuts pay for themselves, it might be worthwhile thinking of the businesses those 23 year old factory workers in Shenzhen or Chengdu might be running in thirty years.

    Just as our great-grandparents built modern economies and industrial empires out of their hard work, which most of us still reap the benefit from, those young Chinese workers are doing the same thing.

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