Category: Investment

Distorted priorities

How government subsidies distort industries like film, aviation and motor manufacturing

Every year the bureaucrats of the world’s movie production industry make their way to the Locations Show where governments compete to attract movie producers to their states with fat subsidies.

This year, the preparations for the Locations Show conference are overshadowed by the US government’s struggling with continued subsidies to the Export Import Bank, an organisation going by the wonderfully Soviet name of the ExIm Bank.

While ExIm and screen subisidies aren’t directly linked in the US – the bank being a Federally funded body that finances American manufacturing sales to foreign market while state governments compete for productions – both though illustrate the zero sum game of corporate welfare that leaves citizens poorer in the process.

Delta Airline’s law suit over Exim subsidies to Boeing gives us a real life illustration of how business loses in these battles for government largess.

When Delta Airlines goes to buy or lease a Boeing 777, they have to find funds at a commercial rate of interest. Air India on the other hand gets a subsidised rate courtesy of ExIm bank.

However if Delta chooses to buy an Airbus A330, European governments will offer similar subsidies to the American carrier.

So the subsidy system actually encourages American carriers to buys European jets rather than the US products. Nice work.

This distortion is something we see too in film subsidies, as government funds are siphoned off to support large corporate movie productions.

Nowhere is this truer than in Louisiana where the state embarked in 2009 to capture the so-called “runaway production” market of footloose movie projects that shop around the world for the most lucrative subsidies.

This has worked, with Louisiana based movie production expected to total 1.4 billion dollars in 2011 on the back of $180 million in subsidies.

One of the productions Louisiana grabbed in 2010 was The Green Lantern which came as a surprise to the government of the Australian state of New South Wales who thought Sydney had secured the project.

The Green Lantern loss was the nadir for the Australian film industry that ten years earlier had been overwhelmed with productions like The Matrix Trilogy.

At the time of the Green Lantern loss the industry appeared to be in its death throes, crippled by a high Australian dollar and disadvantaged by relatively lower government subsidies.

You’d have thought that riches to rags story had taught Australian politicians that dumb subsidies don’t work and may have actually damaged the local film industry more than it helped.

Unfortunately not.

Last week the Australian Federal government announced $13 million in support for production of Wolverine. The Prime Minister’s office gushed;

To attract The Wolverine to Australia, the Gillard Government granted the producers a one-off payment of $12.8 million which will result in over $80 million of investment in Australia and create more than 2000 jobs.

The payment effectively provided The Wolverine a one-off investment package equivalent to an increase in the existing Location Offset to 30 per cent.

Without this effective tax offset incentive, the producers of The Wolverine would not have chosen Australia as the location.

In the 1950s, it made sense to invest in the industries of the future such as aviation, movie and car manufacturing industries.

Unfortunately for our politicians in Washington, Canberra, Sydney and Baton Rouge, we don’t live in the 1950s.

It’s all in the timing

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

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.

Hubris and risk

Technology brings benefits and risks, we need to understand both

Today is the centenary of the Titanic’s tragic sinking. In many ways, the RMS Titanic described the 20th Century conundrum; a blind faith in technology coupled with a struggle to deal with the consequences of those innovations.

It’s worthwhile reflecting on the hubris of those who believed their technology made a ship unsinkable, or those who believed their shipyards would never close and – probably most relevant today – those who believe the sun never sets on their empire.

Technology can liberate our lives which is shown by the fact the average American, European or Australian lives far longer and better than even kings did two centuries ago. But we should never assume these improvements don’t come at a real cost to ourselves, the environment or the ways of life we take for granted today.

Rivers of gold

Can there be a downside to Google’s massive profits?

Google’s announcement that their revenues have increased by 24% over the last year shows the search engine juggernaut keeps rolling on.

It’s tempting to think that Google is untouchable and that’s certainly how it appears when you’re on track to earn forty billion dollars a year and book close to 40% of that income as profits.

On the same day, Sony announced a massive restructure including with 10,000 redundancies and the company’s CEO, Kazuo Hirai, spoke of a sense of urgency to address the once dominant corporation’s drift into irrelevance.

Twenty years the thought of Sony – one of the world’s innovators in consumer electronics – would be wallowing in the wake of companies like Apple and unknown upstarts like Google was unthinkable.

Fortunes are won and quickly lost in a time of great change and this is something we should keep in mind about Google when we look at their rivers of gold.

“Rivers Of Gold” was a term coined to describe the advertising riches of the newspaper industry in the 1980’s. Google’s online advertising is partly responsible for destroying that business.

Today Google is a search engine business that makes its money from the advertising that deserted print media and went online.

It may be that manufacturing mobile phones, running “identity services” disguised as social media platforms or augmented reality spectacles are the future of Google but right now they it’s search and advertising that pays the bills and books the massive profits.

The challenge for Google is not to lose sight of its current core business while building the future rivers of gold.

If Google’s leaders can’t manage this, then they risk following the newspaper industry that they themselves disrupted.

Tracking the end of the consumer society

One statistic illustrates how economies are changing

I’m currently researching a presentation about the retail industry.

One of the things that leaps out when researching consumer behaviour is the savings rate.

For twenty-five years from the early 1980s to mid 2000s, the savings rate collapsed in Western economies; below are the US and Australian rates.

The US Personal savings rate shows the rise of consumerism
US Savings rates 1950 to 2020 – St Louis Federal Reserve
How did the Australian savings rate fall during the consumer boom
Australian Savings Rates 1980 to 2012 – Reserve Bank of Australia

 

The graphs show the same thing; households spent their savings over the 25 years which drove the consumer economy. It’s no accident that period was a good time to be a retailer.

Being on a deadline, I don’t have time to analyse these number further right now, but one thing is clear; most of the consumer boom from the Reagan Years onwards – or the equivalent from Maggie Thatcher or Paul Keating – was driven by households reducing their savings.

That couldn’t last and didn’t. Businesses and governments that are basing their decisions on what worked through the 1980s and 90s are going to struggle in the next decade.

Looking at these figures raises another suspicion – that graphs showing non-real estate investment by businesses and government would show similar declines over the 1980-2005 period.

It might be that golden period of what appeared to economic success was just us living off society’s collective savings.

Bubble economics

The fear of missing out drives most investment booms. Today’s Silicon Valley is no different.

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.

Hyping start ups for pleasure and profit

The Silicon Valley VC model is not sustainable for most businesses and industries.

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.

What if Bill Gates had been born in Australia?

Can a society that puts property speculation before innovation succeed in the 21st Century?

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?

Should Australia pass a jobs act?

Can legal reform help Australian start ups?

Last week the US President signed the Jumpstart Our Business Startups (JOBS) Act into law.

The US law seeks to make funding easier for new businesses by lifting the burden of regulations like the Sarbannes Oxley Act (SOX) and various other financial rules.

One of the main planks of the reforms is it changes shareholder thresholds, for instance allowing 2,000 investors rather than 500 maximum before it has to go public, and allows companies to advertise their shares subject to certain restrictions.

Whether it achieves the stated aim of allowing new innovative businesses to raise funds or triggers a new generation of “boiler rooms” and investor fraud remains to be seen but it begs the question of should Australia pass a jobs act.

The funding crisis

There is no doubt Australia has a business funding crisis. Before the global financial crisis of 2008, it was difficult for smaller business to access finance.

In the aftermath of the GFC, it became even harder for businesses to raise funds as banks withdrew from the small business sector, increased their lending rates and tightened criteria.

While this situation has eased somewhat, partly due to the entrance of new angel and VC investment funds, financing of startup and small business is patchy and still tough.

An Australian Jobs Act would make it easier for business to raise funds and well crafted one might encourage both self managed and public superannuation funds to allocate some of their investments into the startup and innovation sectors.

A Scammer’s dream?

One of the big criticisms is that it reduces investor protections; while it restricts investors with less than $100,000 in annual income from punting more than 5% of their income, it’s quite clear in a full blown mania the Jobs Act will enable plenty of shoeshine boys and self funded retirees will do their life savings.

The question of course is how well the existing regulations protect investors or the community given the financial disastersof 2008.

Despite tough rules like SOX and the Basel Agreements, massive institutionalised fraud occurred and it’s surprising there have been no reforms in these rules given the huge and unprecedented costs of rectifying the problems.

In an Australian context, it’s clear local regulations aren’t working when thousands of investors are defrauded by their financial advisors in financial planner led scams like Westpoint. So reform is due.

While it’s clear the legislation isn’t working, it’s also clear the Australian financial planning industry doesn’t have the skills or ethics to advise clients should a local Jobs Act be passed.

Perhaps we should be accepting there is risk in investing and an Australian Jobs Act could help by simplifying business rules and improving transparency in accounts rather than bogging business and investors down in masses of unread paperwork.

Is the US experience valid?

Looking at the US Jobs Act it appears the Silicon Valley insiders are finding ways to extend their business models, whether this is successful creating new American jobs or just enriching the good folk of Sand Hill Road will pan out in the next few years.

For Australia it’s important we reform our laws to make business and innovation easier though we need to be careful we don’t ape the worst aspects of the Silicon Valley business model.

Why VCs hate Amazon

How cloud computing is changing investment and entire industries

“Venture capital investors hate us” said Dr Werner Vogels, CTO of Amazon.com at the April Sydney FED, “once you needed five million dollars to launch a new technology business, today you need $50,000 and a big box of ramen.”

Dr Vogels was talking about the Amazon Web Services (AWS) platform that underpins many of the cloud computing and social media sites which are redefining how we use computers and the web.

What’s really interesting with the doctor’s comment is it’s only part of the story; for businesses outside the tech sectors –say retailers or service companies – they get cheap or even free access to the cloud computing services running on AWS or its cloud competitors like Windows Azure.

For those businesses, it’s possible to start an idea for nothing but the founder’s time; rather than putting fliers up at the local bus stop or shopping mall an entrepreneur starting an online store or neighbourhood computer repair business now can create a website and all the local search profiles without spending a cent.

Being able to start up a business with little, if any, capital means we’re seeing a new breed of innovators and entrepreneurs entering markets.

At the corporate level, or in the $50 million dollar VC investment field, the opportunities for exploring Big Data without buying big supercomputers is another benefit of the cloud computing services.

Services like ClimateCorp which insures farmers against extreme weather couldn’t have existed a few years ago as the processing power to analyse historical rain and drought data was only available to those with insanely expensive super computers.

Today, the combined power of millions of low powered cheap computers – the definition of cloud computing – delivers the processing grunt of a supercomputer at a fraction of the cost.

Access to cheap computing power means innovations can be bought to market quickly and at a fraction of the cost that was normal a decade ago.

We’re in early days with what the effects of super cheap computing means to most industries, but it is changing industries as diverse as agriculture, banking, logistics and retail quickly.

Cloud computing is giving big business the tools to understand their markets better and small business the ability to grab customers from bigger competitors who are too slow or don’t want to face what their clients really think.

These are the forces that are changing the way business is being done; if you’re in business it’s time to start paying attention.

In reality, Dr Vogels is pulling our legs – the smart VCs aren’t hating Amazon, they are rubbing their hands at the profits that are going to be made in disrupting cosy industries.

Super connecting cities

How can cities re-invent themselves in the connected economy.

I’m chairing a panel this week in Newcastle for the New Lunaticks on How Cities can Become Super Connected where we’ll look at how a city can develop its broadband infrastructure and how the local economy can grow in a global, connected marketplace.

The challenge for a city like Newcastle is great as in many ways the city’s economy is a microcosm of Australia’s – a massive restructure of the local economy over the last forty years has left the region with a consumer driven suburban society and the massive coal resources of the region have made the city the biggest coal exporting port on the planet.

Much of the wealth flowing out of the port to India and China isn’t being distributed into the city and the Newcastle central business district is suffering from years of underinvestment and neglect by the business community and governments of all levels.

So the rollout of the National Broadband Network offers an opportunity for the city and the local economy to reposition itself. The question on the panel is how?

Waiting for Godot

The first aspect is that waiting for a government agency or telephone company to come to town is risky; recent history shows Newcastle gets no favours from state or Federal governments so expecting the region to be a priority for the National Broadband Network is unrealistic.

Indeed this has proved the case so far with no planned rollout locations for the NBN announced in the Hunter region to date.

At present higher speed Internet access comes through ADSL over the telephone lines and Telstra’s 4G mobile network in the downtown part of the city.

So it’s up to the community to create the conditions and demand for faster broadband.

Building the infrastructure

One way to make Newcastle more attractive to the providers of high speed internet is to make the supporting infrastructure easy to access. The local council can work on this by making streets, building and underground services like conduits accessible and available.

Part of encouraging investment in the local telecoms infrastructure includes an attitude from council that doesn’t put unnecessary barriers in the way of developments.

This isn’t to say local residents’ views should be over-ridden; if a city is going to be successful then it need the support of the residents.

Who funds the network?

While the city waits for the NBN or expanded 4G services to arrive, what happens in the interim? Should local and state governments build a temporary Wi-Fi network to cover the Central Business District?

If so, why just the CBD? Why not key industrial, commercial and shopping centres in the suburbs? Over the last forty years, Newcastle residents have shown they prefer to work and shop outside the city centre.

Of course the biggest question is who is going to pay for such an interim network. Putting the load on already stretched local governments guarantees the project will be strapped for capital.

Open data, open processes

An area where local governments can encourage growth is by being open and innovative themselves.

By making data available they encourage local developer communities and attract entrepreneurs who see a welcoming environment.

More importantly, having open procurement and recruitment processes that encourage local business to apply for government work and suggest innovative ways to work is one way industries in the region can be encouraged.

Connecting communities

Even with the best infrastructure you’re not going to build a vibrant economy without the community working together.

If we look at successful industry clusters such as Silicon Valley or the Pearl River Delta today, or historical successes like Birmingham in the 18th Century, we see industries built around a small core of determined entrepreneurs utilising local resources.

For Birmingham this was access to coal, iron ore, skilled labour and waterways to ship the products out. Silicon Valley’s role developed because of its access to high technology defense spending, good quality education facilities, a highly educated workforce and a free wheeling capital market.

Cities like Newcastle have to identify what the local economy’s strengths are and how these can built upon. It needs government, business and educational groups to be co-operating.

A liveable city

The key to all successful cities is making them attractive to entrepreneurial, skilled and younger workers. In some respects Newcastle has aspects that can attract these groups.

For Newcastle, and other centres, the challenge is to use their advantages to attract the human talent that will build the networks that matter.

You hold us harmless

How the terms of social media sites risk your assets and their business

Social media site Pinterest was recently caught in one of the ongoing quandaries of social media – the ownership of content.

The subject is tricky; social media sites rely on a vibrant community of users posting news and interesting things for their online friends.

Unfortunately many of things social media users post are someone else’s property, so almost every service has a boilerplate legal indemnity term like Pinterest’s.

You agree to defend, indemnify, and hold Cold Brew Labs, its officers, directors, employees and agents, harmless from and against any claims, liabilities, damages, losses, and expenses, including, without limitation, reasonable legal and accounting fees, arising out of or in any way connected with (i) your access to or use of the Site, Application, Services or Site Content, (ii) your Member Content, or (iii) your violation of these Terms.

Facebook have similar terms (clause 15.1) as do LinkedIn (clause 2.E) and Tumblr (clause 15). Interestingly, Google’s master terms of service only holds businesses liable for the company’s legal costs, not individuals.

Boilerplate terms like these are necessary to provide at least an illusion of legal protections for investors – those venture capital investors, greater fool buyers or punters jumping into the latest hot technology stock offering need a fig leaf that covers the real risk of being sued for copyright infringement by one of their users.

The risk in these terms shouldn’t be understated; by agreeing to them a user assumes the liability of any costs the service incurs from the user’s posts. Those costs don’t have to be a successful lawsuit against the service, it could be something as minor as responding to a lawyer’s nastygram or DMCA takedown notice.

Of course, none of the major social media platforms have any intention of using these indemnity terms; they know that the first time they go after a user all trust in the service will evaporate and their business collapse.

Somewhere among the thousands of social media services though there is going to be one that will pull this stunt. Strapped for cash and slapped with an outrageous claim for copyright damages, the company’s board will settle then send out their own demands to the users responsible.

Those “responsible” users – probably white, middle class folk sitting in somewhere in the US Midwest, South East England or North Island of New Zealand – will be baffled by the legal demand that requires them to file a defense somewhere obscure in California or Texas and will go to their lawyer friends.

When the lawyers tell them what it means their next step will be to their local news outlet.

The moment the story of a middle class person facing losing all their assets hits the wires is the moment the entire social media business model starts to wobble.

In many ways what the social media sites are trying to do is offset risk.

Risk though is like toothpaste. Squeeze the tube in one place and the pressure moves elsewhere.

By laying off a real risk by using legal terms the social media sites create new, even bigger risks elsewhere in their business.

The dumb thing is these terms really don’t protect the services anyway – it’s unlikely the typical social media user will have anything like the assets to cover the costs of a major copyright action by a rich, determined plaintiff.

It’s going to be interesting to see how many services still have these indemnity clauses in 12 months.

For the industry’s sake, the big players will need to have ditched these terms before that first dumb attempt to claim damages from users hits the wires.