Paul Wallbank – Brilliant Communications

Tag: Facebook

  • Bubble values

    Bubble values

    The argument continues about Facebook’s purchase of photo sharing site Instagram.

    One side claims a billion dollars for a business with barely any revenue and 13 employees is clear evidence of a bubble while the other side say its a strategic purchase that is only 1% of Facebook’s estimated $100 billion market value.

    The latter argument is deeply flawed, comparing the purchase price against the value of other assets is always risky – particularly in a market where those underlying assets are being valued at the same inflated rates.

    We could think of it in terms of a Dutch farmer in early 1637 claiming that paying a thousand Florins for a tulip is fine when he has a warehouse containing hundreds of them.

    In reality, that farmer during the Dutch Tulip mania of the 17th Century held contracts for delivery; just as modern day investors held Collateral Debt Obligations.

    Measuring value against other inflated assets is always dangerous and only fuels a bubble.

    A much more concerning way of judging the wisdom of Facebook’s investment is against profit and revenue.

    If we compare the purchase of Instagram against Facebook’s revenue, then the investment has cost them three months income.

    Should we compare the acquisition against profit, Instagram has cost Facebook five years of profit at current rates.

    Both of those numbers are very high and it indicates how big a gamble the Instagram acquisition is for Facebook.

    It can be argued there is a lot of blue sky ahead for Facebook and that future profits and revenues will justify the Instagram purchase.

    There’s also a very compelling argument that Facebook has to get into mobile services and Instagram does that.

    Whether Instagram is worth three months income or five years profit to Facebook remains to be seen, but we should have no doubt it indicates we are well into Tech Boom 2.0.

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  • It’s all in the timing

    It’s all in the timing

    This morning I sat in on a corporate breakfast and heard a well known presenter talk about social media for business owners and managers.

    The advice was terrible and what was valid could have come from a 2008 book on business social media marketing.

    But the room loved it and obviously the client – a major bank – thinks the speaker’s work is worthwhile. He has a market while many of us who’ve been covering this field for a decade don’t.

    Timing is everything in business. Earlier this week stories went around the Internet about how Microsoft could have invented the first smart phone.

    Microsoft could well have done it, they tried hard enough with Windows CE devices through the late 1990s and there was also the Apple Newton and the Palm Pilot.

    While all these companies could have developed the smartphone in the 1990s it wouldn’t have mattered as neither the infrastructure or the market were ready for it.

    Had Microsoft released the smartphone in the mid 199os it would have been useless on the analogue and first generation GSM cellphone networks of the time.

    Customers were barely using the web on their personal computers, let alone on their mobile phones, so the smartphone would have been useless and unwanted.

    Ten years later things had changed with 3G networks and real consumer demand so Apple seized the gap in the marketplace left by Motorola, Nokia and the other phone manufacturers with the iPhone and now own the market.

    Apple weren’t the first to market with a smartphone, just as Microsoft weren’t the first with a Windows-style operating system and Facebook weren’t the first social media platform.

    Those who were first to the market stood by while upstarts stole the market they built.

    Plenty of people have gone broke when their perfectly correct investment strategies have been mistimed – “the market can stay irrational longer than you can stay solvent” is often proved true.

    That’s the same with the speaker this morning; he’s not the first to discover social media’s business benefits but his timing is impeccable.

    Being first is no guarantee of success if your timing is wrong.

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  • 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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  • 702 Sydney Weekend computers: April 2012

    702 Sydney Weekend computers: April 2012

    On ABC 702 Sydney Weekend computers this Sunday, April 8 from 10.15am Paul Wallbank and Simon Marnie will be looking at the end of innocence for Apple Mac users, the DNS Changer Virus and how political campaigning is coming to a Facebook site near you.

    Some of the topics we’ll discuss include;

    If you’d like to learn how to protect your Mac or Windows computers from malware, visit our Netsmarts article on the Flashback virus that explains the security settings and suggests some free anti-viruses.

    Listeners’ Questions

    While we had a great range of calls from listeners, there was only one we promised to get back to. Kay clearly has a virus infection on her Windows computers and we recommend the free MalwareBytes program to clean it up.

    Our IT Queries site has more instructions on cleaning up a virus infection if you’re worried about a sick computer.

    We love to hear from listeners so feel free call in with your questions or comments on 1300 222 702 or text on 19922702.

    If you’re on Twitter you can tweet 702 Sydney on @702sydney and Paul at @paulwallbank.

    Should you not be in the Sydney area, you can stream the broadcast through the 702 Sydney website and call in anyway.

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