Paul Wallbank – Brilliant Communications

Tag: investment

  • The death of local newspapers and media

    The death of local newspapers and media

    The bankruptcy of Lee Enterprises, publisher of 48 newspapers across the United States, is the  latest episode in the steady decline of local  printed media. Is the newspaper, particularly the local publication catering for a smaller market, dead?

    Futurist Ross Dawson certainly thinks so, last year predicting US newspapers won’t exist as we know them by 2017 with them being replaced by digital platforms like the web, iPad and Kindle.

    The problem for the media industry is how to fund news gathering in a digital environment. Newspapers are dying because advertisers have moved online, so Google now makes $30 billion a quarter on the income the local paper has lost in classifieds and display advertising.

    For web surfers, this is also a problem as much of what appears on the net — in blogs, Facebook, on Twitter and circulated around message boards — comes from newspapers and largely subsidized by their rapidly eroding print revenues. Take out the traditional media, and many of the authoritative online sources disappear.

    Much of the free web content we’re seeing is a transition effect as we evolve to paid online models, something that is going to be driven by advertisers following consumers’ eyeballs to the net.

    For the publishers who don’t go broke in the meantime, this will probably save them in whatever form they evolve into.

    Cutting costs to survive the current lean period is essential for newspapers, the tragedy is many are following other industries in cutting the very areas that give them their competitive advantage while keeping antiquated and expensive management who hang on to failed strategies.

    Poor management is probably a bigger threat to the news empires, as it is for many other industries.

    The damage done by poor business leadership is far greater than the cost of outsized management salary packages and entitlements. Until shareholders address the number, cost and suitability of the managers charged with running their investments, the future for these organisations is bleak .

    Local journalism is going to change as we start seeing old media’s economies of scale being replaced by cheaper technology that allows local people to reclaim their news and community stories.

    They will be doing this through blogs and social media while using their mobile phones and cheap cameras to capture and document local news.

    For the local newspapers and media outlets who understand and harness their community, they’ll remain valued local commercial citizens; for those who see their readers as a mass of dumb consumers, they’ll be lucky to last the decade.

    Similar posts:

  • The case for faster internet

    The case for faster internet

    The National Broadband Network (NBN) is a project designed to deliver faster and more reliable broadband to Australia’s regions. While a good idea, it’s not without its critics and a fair degree of controversy.

    One of the problems the project has is the inability of NBNCo, the company established to build and run the network, to articulate the benefits and scope of the project.

    Last Friday night “John from Condobolin” grilled the Gadget Guy, Peter Blasina, about the project. John’s questions, and Pete’s answers, which can be found at 35 minutes into his program, illustrates the confusion the surrounds NBN and the failure of the project’s supporters to explain the benefits.

    So how should proponents of the National Broadband Network – people like me who believe that high speed broadband are the freeways and railways of the 21st Century – respond to questions. Let’s answer John’s questions from last Friday.

    Lightning might affect fibre networks

    John’s first question was about lightning affecting the NBN, commenting when Pete confirmed electrical storms would affect the network that “it’s no better than the existing service.”

    Sadly all infrastructure is affected by weather – a freeway is just as affected by fog as a dirt road, perhaps even more so, but it doesn’t mean you don’t build a highway because of that. The same applies for the NBN.

    Interestingly the wireless and satellite alternatives proposed to fibre optic cable are even more susceptible to electrical storms, which perversely makes a better argument for running a fibre optic network.

    I don’t need any NBN

    “I have got quite good reception in Condobolin and I don’t need any NBN, I can assure you” was John’s next big statement.

    That’s nice for John that he’s happy with what he has – the rest of us should be so lucky.

    For many of his neighbours and those in the surrounding district, particularly those dealing with remote suppliers and overseas markets, reliable and fast communications are essential.

    Now is good enough

    A farmer doesn’t need broadband for selling into America, he’s able to do that today, was the crux of John’s next comment after he and Pete had an exchange about rolling broadband out to remote locations.

    It’s true that farmers can do a lot with today’s satellite and ADSL connections, then again they were able to ship exports in the days of bullock carts and sailing ships. We could extend that argument against railway lines, roads, containers and bulk carriers.

    Once upon a time some guy argued against the wheel. Today’s technology has been good enough has always been the argument of those who don’t see the benefits of new tools; we’re talking about tomorrow’s markets and society, not today’s.

    Broadband is all about fibre

    “You’re talking about satellite dishes and things like that, not NBN.”

    The National Broadband Network isn’t just about fibre; fibre optic cables makes up the network’s core and bulk of connections, but wireless and satellite are essential in order to make sure the entire nation has access to the network.

    Unfortunately the nonsense argument that technology improvements in wireless will render fibre optics redundant has been allowed to take hold by self-interested politicians and sections of the media pushing a narrow agenda.

    Wireless, satellite, fibre optic and other cable technologies are all part of the mix, the real argument is on the proportions of that combination and the consequences to the government’s budget.

    Spotting the clueless

    As an aside, the cable versus wireless argument is a good yardstick for measuring the knowledge of anyone joining the NBN debate.

    Someone clueless arguing against the project says investment in fibre optic cable is unnecessary as it’s speed and data capacities will be one day superseded by those of Wireless networks.

    This betrays a failure to grasp the inherent advantage of having a dedicated cable connection to your property as opposed to sharing a wireless base station with hundreds, if not thousands, of others.

    Equally anyone pro-NBN who says that fibre is faster because it travels at the speed of light is equally clueless as wireless, copper wire and even smoke signals also travel at – or close to – the speed of light.

    Games and videos

    “Is this only to watch videos and DVDs?” was John’s last question.

    Well, does Condobolin have a video store? A quick Google search shows it does, along with local and satellite TV stations. So the residents of Condobolin are just keen as the rest of us to watch the tube.

    Increasingly our viewing habits are moving online and fast broadband is necessary to deliver that. John may be happy to exclude his town from being able to do that, but my guess is plenty of his neighbours would like to have that option.

    What’s more, many of those farmers, processors, trucking companies and other service providers in the Condobolin region will need those video facilities for tele-conferencing with suppliers, customers and training companies.

    Building for the future

    Video conferencing isn’t the only application for what we consider today to be high speed networks, these are going to change society and business in the same way the motor car changed us in the 20th Century and railways and telegraph in the 19th.

    Australia made a mess of the railways and the roads, in both areas we’re still playing catch up. The National Broadband Network is an opportunity to avoid the mistakes of the last hundred years and get the 21st Century right.

    Unfortunately, the objectives of building a better nation are being lost in a fog of disinformation, political opportunism and corporate incompetence. We can do better than this.

    Similar posts:

  • A Capital Question

    A Capital Question

    How do you raise funding for new venture? Business coach Lindy Asimus asked over the weekend. It’s a question that perplexes many people starting out a new enterprise or trying to grow an existing one.

    The real question though is “how much capital do you need?” Being undercapitalised will often stunt a venture’s growth and is probably the reason why many otherwise excellent business ideas fail to achieve their potential.

    How much money do you need?

    While business plans are often disparaged, one of the great advantages of doing one is the budding entrepreneur gets an idea of the capital required along with the cash flow required to service any debts. Even if the business plan itself is filed away and never looked at again, understanding the upfront cash requirements can help avoid some nasty mistakes.

    The other key factor is the business itself, if you’re buying a fast food franchise, setting up a store or fitting out a restaurant then there’s going to be some big upfront capital costs involved before you start trading but there is more to it than just the immediate cash needs.

    What is the type of business?

    A business’ capital needs are going to vary with the type of business and the objectives of the owners, not just in size but also in type. As business writer and educator Steve Blank says, there are six types of startups and for certain types an equity investment from say an angle investor or venture capital company will be more appropriate than a bank loan.

    For small businesses, the type that Steve Blank describes as “work to feed the family” businesses, a bank loan that can be paid back out of cashflow is going to be the most obvious way to fund an enterprise while it would be rare a venture capital investor would even answer a phone call from such a business.

    On the other hand, a family member or friend might be interested in taking equity in such a business, the old “families, friends and fools” is a time honoured way of setting up a venture.

    Government grants

    In these times of rampant corporate welfare for big banks and major corporations, it’s tempting to think the government may be able to help the small businessperson. Sadly most of the grants available are small sums for specific purposes like export programs or hiring trainees, they aren’t designed or intended to provide entrepreneurial capital.

    Bootstrapping and “sweat capital”

    Most businesses though are best served by “bootstrapping” and “sweat capital” for most, particularly in the service sectors, funding your business out of cashflow and the hard work of the founders is the way to grow a viable enterprise.

    The term “sweat capital” refers to the founders working hard and capitalising their businesses from the sweat of their brows while  scrimping and saving every penny. Most founders of successful businesses have stories of spending years expending that “sweat capital” while living on cheap pizzas or packet noodles.

    Bootstrapping, funding your business through sales, is the other great capital source. In many ways, this is the best form of capital in that it proves a business is viable and doesn’t involve signing over assets to banks or giving equity away to investment partners. Again a well thought out business plan quickly shows whether this is feasible.

    So the question of capital is complex, but having enough is always the biggest struggle for those starting a business.

    Of course it is possible to have too much capital and we might talk about that in another blog post.

    Similar posts:

  • Greater fools and lesser fools

    Greater fools and lesser fools

    As Groupon struggles to get its public offering to the market and the startup mania continues in the tech sector, it’s worthwhile having a look at what underpins the modern Silicon Valley business model along with it’s limitations and risks for those who want to imitate it or invest in it.

    Distilled to the basics, the aim of the venture capital funded startup is to earn a profitable exit for the founders and investors. While there’s some exceptions – Apple and Google being two of the most notable – most of these businesses are not intended to be profitable or even sustainable, they are intended to be dressed up and sold onto someone else.

    This can be seen in what many of these companies spend investors’ money on; in an example where a startup receives 10 million dollars VC investment, we may see a million spent on developing the product, five million allocated customer acquisition and four million on PR. The numbers may vary, but the proportions indicate the investors’ and management priorities.

    Focussing on PR and customer acquisition is essential to attract buyers, the public relations spend is to place stories in the business media and trade press about the hot new business and spending millions buying in customers backs the narrative of how great this business is. By creating enough hype about a fast growing enterprise, the plan is prospective buyers will come knocking.

    But who buys many of these business? In some cases a company like Microsoft or Google may buy the startup just to get the talents of some smart developers or entrepreneurs, but in many cases it’s fools being parted from their money.

    Greater Fools

    The greater fool model the core tech start up model; two guys set up a business with some basic funding from their immediate circle; the friends, family and other fools. A VC gets involved, makes an investment and markets the company as described above.

    With enough hype, the business comes to the attention of a big corporation whose managers are hypnotised by the growth story and possibly feel threatened by the new industry or have a Fear Of Missing Out on the new hot, sector.

    Eventually the big business buys the little guys for a large sum, meeting the aim of the founders and venture capital investors. The buyer then steadily runs down the acquired business as management finds they don’t understand it and find it a small, irritating distraction from their main business activity.

    While there are hundreds of examples of this in the tech sector, the funny thing is the biggest examples are in the media industry with Time Warner’s purchase of AOL and News Corporation of MySpace.

    Lesser Fools

    As a bubble develops we start seeing the Initial Public Offering arrive and this is where the lesser fools step in.

    The mums and dad, the retiree, German dentists, the investment funds and all the other players of the stock market are offered a slice of the hot new business.

    Usually the results are interesting; the IPO is often underpriced which sees a massive profit for the initial shareholders and underwriters in the first few days then a steady decline in the stock price as the pie in the sky valuations and the realities of the underlying business’ profitability become apparent.

    Steve Blank, a Silicon Valley investor and entrepreneur, put the greater or lesser fool scenario well in a recent article asking Are You The Fool At The Table? Sadly too many small and big investors, along with big corporations, are the fools at the table ignoring Warren Buffet’s advice on avoiding businesses you don’t understand and finding themselves the patsies that the Silicon Valley startup model relies upon.

    The fundamental misunderstanding of the venture capital driven Silicon Valley model of building businesses is dangerous as our governments and investment mangers are seduced by the glamorous, big money deals. It’s also understandable funding from banks and other traditional sources is difficult to find.

    An obsession with this method of growing businesses means that long term ventures with profitable underlying products and services are overlooked as investors flock to the latest shiny startup. That’s a shame and something our economy, and investment portfolios, can’t really afford in volatile times.

    For business owners, the venture capital model might be a good option if your aim is a quick, profitable sale to a fool. If your driving reasons for running a business are something different, then maybe the Silicon Valley way of doing business isn’t for you.

    Similar posts:

  • Is Facebook worth $50 billon?

    Is Facebook worth $50 billon?

    Goldman Sachs’ recent $500 million investment in Facebook that values the entire business at fifty billion dollars raises the question, can a business that was founded in college dormitory seven years ago really be worth that sort of money?

    It is possible Facebook is worth that sort of money, but to figure out if it really is, we have to crunch some numbers. So here is a back of an envelope calculation.

    Learning from others

    The first thing we need to look at is similar examples, the closest comparison is Google who were launched on the stockmarket shortly after Facebook were founded and today have a market worth of $195  billion.

    So Facebook’s investors are valuing the business at about ¼ of Google’s size. Yahoo’s stock analysis of Google allows us to look at the rough numbers.

    Income

    Currently, Google is earning 29.3 Billion and making a profit of 8.5billion for a Price to Equity (P/E) of 23.26.

    To justify a 50 billion dollar valuation on similar rations, Facebook would have to make around 2 billions dollars profit on revenues of $8 billion .

    Facebook is reported to have made $1.2 billion in sales with $355 millon profit in the first nine months of 2010. If we extrapolate that, crudely assuming no revenue growth in the last 3 months, we come to 2020 earnings of $1.6 billion and roughly $450 million profit.

    So Facebook has to grow revenues and profit by a factor of five, based on the same ratios as Google, to achieve the $50bn valuation. Where could this come from?

    Advertising revenue

    The bulk of Facebook’s current revenue comes from advertising, according to Inside Facebook in 2009 all but $10million of their $660 million earnings came from one form of advertising or another.

    Online advertising is going to continue to grow spectacularly, a 2010 Morgan Stanley research paper illustrated (on slide 25 of the previous link) how advertisers will have to increase spending onling by $50 billion to match the Internet’s share of media consumption.

    It’s a fair assumption that Facebook, as the biggest social medial platform, will get a large slice of that $50 billion. If Facebook were to capture 10% of the market’s growth, they’d achieve their valuation easily.

    We should also consider that most of Facebook’s revenue is coming from the United States and they barely touched international markets, so there’s even more potential growth in their advertising revenue.

    Games revenue

    One of Facebook’s biggest growth opportunities comes from the games. Games like Farmville and Mafia Wars are proving popular with the user base; Zynga, the developer of Farmville, itself has a projected market capitalisation of $5.8 billion.

    The global games business is valued at $105 billion dollars and much of this market is moving to web based, online platforms. Should Facebook based games grab 10% of that market, the platform’s 30% cut would see another 3 billion go into Facebook’s revenue, most of which would be profit.

    The credits market

    Related to the games market is the sale of credits for purchases of games and other features like virtual, and real, gifts and products.

    It’s almost impossible to quantify what that market would be but already credits have gone on sale in US stores like WalMart and Best Buy and the virtual world site Habbo Hotel reports 2010 credit revenues of 4.5 million Euros on a user base that is a fraction of Facebook’s size.

    So is Facebook worth $50 Billion?

    Facebook’s fifty billion dollar valuation is feasible. That’s not to say there aren’t risks, it’s possible Facebook could turn out to be another fad like Myspace or that users might decide to value their privacy over Facebook’s benefits.

    While it’s not an investment you’d like to see your grandmother in as a safe source of retirement income, for risk tolerant Russian fund managers and high income clients of Goldman Sachs, it’s a punt worth taking.

    Similar posts: