investment | Paul Wallbank - Communications Professional

Collecting tolls on the information superhighway

The failure of Melbourne IT’s management proves that clipping tickets on the internet is not always the path to riches.

The news that internet services company Melbourne IT is looking at cutting management costs and returning cash to shareholders in the face of declining revenues doesn’t come as any surprise to observers of the firm.

In many ways Melbourne IT is a historic relic, one of the last examples of the late 1990s dot com boom where management from those heady days survived unscathed by the realities of the 21st Century.

Melbourne IT story illustrates the poor management and flaw investment strategies of the big dot com float and also illustrates the risk of under-investing in key areas, as anyone using the site or the services of its Web Central subsidiary will understand.

Both companies feature clunky sites and extremely poor customer service. For resellers and customers using the Web Central command center, the experience and technology is straight out of the late 1990s.

While overseas businesses like Rackspace, GoDaddy and Bluehost innovated and invested in their platforms, Web Central and Melbourne IT sat back and how expected their dominant position would guarantee them profits.

Much of that management complacency was born out the founding of Melbourne IT when it was spun off from the University of Melbourne to exploit the then monopoly the university’s computer faculty had on granting Australia commercial domains.

In 1998, as the dot com boom was entering its most heated phase, Melbourne IT was floated and immediately attracted anger and allegations of wrong doing – none of which was proved – as the stock debuted on the stock market at four times its listing prices which generated huge profits for the insiders who were fortunate to get shares allocated before the sale.

Melbourne IT’s huge stock valuation was based on the belief the company would exploit its dominance of the critical domain market – it was similar to other technology floats of dominant players at the time such as accounting giant MYOB in 1999 and Telstra’s spin off of its small business Commander operation the following year.

All of these stock market floats proved to be disastrous as each company’s management showed they were incapable of exploiting their privileged market positions.

Of the three, Melbourne IT’s management survived longest partly because of the riches expected to flow into the company’s coffers through Top Level Domain sales as gullible government agencies and corporates being driven by a Fear Of Missing Out overpay for new online addresses.

Now it appears ICANN’s top level domain river of gold isn’t going to flow, partly due to arrogance and management incompetence in that organisation, so Melbourne IT is now going to have to cull its executive ranks.

Steadily, both Melbourne IT and Web Central have gone from being dominant to irrelevant and provide a good case study of how poor management and complacency can squander a dominant market position.

The failure of Melbourne IT’s management proves that clipping tickets on the internet is not always the path to riches, particularly when you don’t invest or innovate.

Can Russia build a Silicon Valley?

Can Russia build its own Silicon Valley in Skolkovo?

Like many other countries, Russia is trying to build its own equivalent of Silicon Valley at Skolkovo on Moscow’s outskirts as Tech Crunch reports.

Across the world governments are trying to find a way to replicate Silicon Valley – from London’s Tech City to Australia’s Digital Sydney, the hope is they can create the same environment that built California’s success.

In some respects, Russia should be well placed to create their own Silicon Valley having had the same massive Cold War technology investments as the United Stated. The old Soviet system also left a deep scientific and mathematics education legacy.

As the Tech Crunch article points out though, the Russian financial and legal systems are working against the nation with most local startups looking at incorporating in offshore havens like Luxembourg and Cyprus rather than taking their chances with the local tax laws and courts.

If finance was the sole criteria for succeeding then Skolkovo would be almost guaranteed success with twenty billion US Dollars of private and government fundiing behind the project.

Funding alone though isn’t enough, and most industrial hubs are the result of happy accidents of transport, natural resources and skills being found in one region.

It might take more than a load of cash for Russia to build their own Silicon Valley, but with a shrinking and aging population the nation needs to find a way to diversify away from simply being an energy exporter.

Image courtesy of Skolkovo Foundation through Flickr

Dealing with the digital investor

The Telstra Digital Investor report shows the problem facing the financial services industry and many other sectors in dealing with connected consumers.

Telstra’s Digital Investor report released earlier this week looked at the generational changes for the financial planning industry and the effects of technology on delivering advice and services.

At the core of the report is the projection that by 2030, 70 per cent of Australia’s financial assets will be held by the digitally savvy Generations X and Y and the advice industry is doing little to cater for this group”s media and reading habits.

This is barely surprising, financial planners are one of these fields subject to arcane rules and regulations which make practitioners extremely conservative about innovation or changing work habits, even when the new tools don’t breach any laws.

One of the nagging questions though with the report is the underlying assumptions on wealth generation over the next twenty years. Will it really follow the same pattern as we’ve seen for the last few decades?

As the Stanford Graduate School of Management notes in its dissection of the Forbes richest 400 Americans, the path to wealth is changing.

“Three of the 10 wealthiest people in the United States – Bill Gates, Larry Ellison, and Michael Bloomberg – built their fortunes on information technology that barely existed in the 1980s,” says the author Joshua Rauth.

It may well be that the financial planning industry’s core assumptions, of a large, stable middle class workforce steadily squirreling away a nest egg is going to be challenged in an economy undergoing massive change.

Another generational aspect in the Digital Investor report is the handing down of family owned enterprises. The paper quotes social analyst Mark McCrindle saying “Succession planning is already a key issue (for SMEs) – yet by 2020 40% (145, 786) of today’s managers in family and small businesses will have reached retirement age. We are heading towards the biggest leadership succession ever.”

As this blog has described before, many of the current generation of small business owners will never pass their operation on. Their barber shops, car dealerships and factories will retire or die with the proprietor as Gen X and Y entrepreneurs can’t afford to buy the business and the owner can’t afford to retire.

The investment climate of the next quarter century will be very different from the last fifty years as will the business models and the paths to wealth. It’s something that shouldn’t be understated when considering how Generation X and Y will manage their finances.

Despite the weaknesses, the Telstra Digital Investor report is an interesting insight into how one industry is failing to identify and act upon the fundamental changes that are happening in its marketplace.

The financial planning industry isn’t the only sector challenged though and that makes the report good reading for any business trying to understand how marketplaces are changing.

What happened to the not so nifty fifty?

Assuming an investment is safe because a business is big could turn out to be costly as 1970s investors found.

One of the must read investment blogs is John Mauldin’s weekly Thoughts From the Frontline. This week’s post is a particularly compelling guest post from tech investor Andy Kessler.

Kessler’s post is the forward to George Gilder’s book Knowledge and Power and in describing his investment journey Kessler mentions the 1970s Wall Street view of investing in Nifty Fifty, the fifty biggest stocks on the US market which – because they were perceived as safe investments – traded on substantial price equity ratios.

Trading cost 75 cents a share, but who cares, there were only 50 stocks that mattered, the Nifty Fifty, and you just bought ’em, never sold.

Towards the end of 1972, Xerox traded for 49 times earnings, Avon for 65 times earnings, Polaroid for 91 times earnings.

Numbers like that were unsustainable and those days of safe investing couldn’t last. So what happened to The Nifty Fifty?

It’s hard to track down today’s figures but an academic paper from 2002 looked at how those stocks performed over the following thirty years. It isn’t pretty.

Few of the Nifty Fifty performed well over the subsequent thirty years, which should give pause for those just buying the top stocks like the Dow-Jones, FTSE 100 or ASX 20 – just because they are big doesn’t mean they are safe.

In fact names like Eastman-Kodak, Polaroid and Digital Equipment Corporation on the Nifty Fifty shows just how risky such assumptions are.

Kessler also has a good point about today’s index huggers who are the modern equivalent of the 1970s buyers of the Nifty Fifty.

An index is the market. It’s a carrier, a channel, as defined mathematically by Shannon at Bell Labs in his seminal work on Information Theory. An index can only yield the predictable market return, mostly devoid of the profits of creativity and innovation, which largely come from new companies outside the index.

Like the Nifty Fifty today’s index funds are safe and predictable – until they’re not – while at the margins, the next great businesses and industries are being built far from the attention of the funds managers.

For Australians there’s a particular sting in the tail from Kessler’s post as the bulk of compulsory superannuation goes into the local market’s stop stocks. It wouldn’t be too unfair to describe the modern Aussie funds manager’s motto as being “buy the ASX Eight and have lunch with your mate.”

Forty years ago, an investment in Eastman Kodak would have looked pretty nifty. Today Kodak has gone. We should remember that when we’re looking for ‘safe’ places to put our money.

Bull Market image by Myles through SXC.HU

Venture capital’s false jackpot

Thinking that raising capital is a jackpot prize misses the point of a much bigger business journey.

When a business run by a 22 year old raises 25 million dollars it certainly gets attention and Crinkle’s successful seed funding has provoked plenty of commentary.

Particularly notable are stories like the gush piece from the New Yorker magazine calling the fund raising “a $25 million jackpot.” Reading those, those, you’d think Crinkle’s Lucas Duplan had won the lottery.

The truth is, getting a fat cheque from investors is only the beginning of the business journey; the real work starts when you have a board and shareholders to answer to.

Where the real jackpot lies is in selling the business to a greater fool and the story of Bebo founder Michael Birch is a good example.

Bebo was bought by AOL, probably the greatest greater idiot buyer of all, in 2008 for $850 million. Five yearrs later Birch has bought it back for one million and promises to ‘reinvent” the social media service.

While Birch didn’t get all the $850 million AOL spent on Bebo, he and his investors did hit the jackpot. Whether Lucas Duplan and the backers of Crinkle do is for history to tell us.

Image courtesy of sgman through sxc.hu

Australia’s small business crisis

A survey on Australian family owned businesses raises some disturbing questions about the nation’s economy.

The 2013 MGI Australian Family and Private Business Survey is a disturbing document describing a sector that’s aging, pessimistic and struggling with change. It bodes poorly for what should be the powerhouse of the nation’s economy.

Having been conducted over nineteen years, the MGI survey is a very good snapshot of how the sector has evolved over the last two decades and it’s notable how owners are older and not optimistic about their prospects of selling their businesses.

Another key aspect is the changed focus of Australian family businesses; in 2003 forty percent were in manufacturing, this year its half that which probably tracks the decline of the nation’s manufacturing industries.

Most striking though is the aging of the small business community with one in three proprietors being in the 60 to 69 year old bracket, up from one in five just 3 years ago.

That the average age of Australian small business owners is increasing shouldn’t be surprising given the nation’s increasing obsession with property. As home prices become more expensive, it becomes more difficult for younger people to pay off their mortgages or risk their equity on building a business.

Probably the most heart breaking comment from the report is that over half of Australia’s small business owners don’t see an immediate prospect of retiring and nearly two thirds don’t see any chance of an early exit.

58% of family business owner-managers see themselves working in the business beyond 65 years of age, with 65% indicating that their businesses are NOT exit or succession ready.

Part of the reason most Australian family businesses aren’t succession ready is that Generation X and Y buyers crippled by big mortgages simply can’t afford to pay what the older Baby Boomer and Lucky Generation proprietors need to retire upon.

It’s hard not to think that the grand 1980s corporatist vision of Bob Hawke and Paul Keating – that most Australians will work for one of two big corporations while being members of one of two big trade unions – has largely come true.

For Australia though this is not a good thing as the wealth of those corporations, along with that of the nation’s households, is largely tied into the domestic property market.

A discussion on the Macrobusiness website about New Zealand’s property obsession has a graph which illustrates both the Kiwi and Australian economies’ dependence upon house prices.

Those financial assets in the second graph include the value of businesses, and that statistic staying largely flat while housing wealth has gone up fifty percent over the last fifteen years illustrates how dependent the Aussie economy has become upon property speculation.

Property speculation can be fun, particularly when you’re watching people bash down walls on the latest reality TV home improvement show, but it isn’t the basis for a strong economy.

That Australia’s small business sector is aging and increasingly shifting to low value adding service industries is something that should be discussed more as the nation considers what its global role will be in the 21st Century.

Staging a sales blitzkreig to win the market battle

Retailer The Iconic is a good example of the Silicon Valley greater fool model

Part of the Silicon Valley greater fool model requires ramping whatever metrics are necessary — page views, unique visitors, revenue or profit to attract prospective buyers to acquire the business.

Elizabeth Knight in the Sydney Morning Herald looks at the cracks appearing in online retailer The Iconic where revenues of thirty million dollars were subsidised by forty-four million in losses in the e-commerce operator’s first year of trading.

The Iconic has all the hallmarks of a classic ‘buy me’ Silicon Valley operation — big marketing spend, high customer acquisition costs and fat operating losses in an effort to build market share.

Getting market share is one of the key aspects of the greater fool model, being the leader in a segment almost guarantees a buyer, usually the one of the shellshocked incumbents.

Knight quotes emails from one of The Iconic’s founders, Oliver Samwar, on the importance of being number one in their sector.

‘‘The only thing is that the time of the Blitzkrieg must be chosen wisely so that each country tells me with blood when it is time. I am ready – anytime!’’ one said.

‘‘We must be number one latest in the last month of next season. Full month, not a discount sales month

‘‘Why? Because only number one can raise unbelievable money at unbelievable valuations. I cannot raise money for number 2 etc and I have seen it how easy (sic) it is for me in Brazil and how difficult in Russia because our team f….d up.’’

As we’ve seen with companies like Groupon, being number one can impress gullible corporations but when that market position has been bought by investor’s money subsidising operations, the business is rarely sustainable.

Whether investors are prepared to continue subsidising The Iconic’s losses or if the business can attract a buyer will depend upon the business maintaining momentum on its key metrics.

Probably the most important thing for companies like The Iconic though is the availability of easy credit and accessible funds.

As we saw in the original dot com boom, when that easy money evaporates so to do most of the businesses.

For the incumbent businesses threatened by well funded upstarts, some might find the best hope for survival is to hope challengers run out of money.

In the meantime though, they may have to survive a market blitzkrieg.

Telling the broadband story – the government makes its case

The minister’s office replies to my NBN criticisms and illustrates how the broadband story isn’t being told

Further to yesterday’s post about NBNCo’s inability to tell a story, I received a polite message from the long suffering staff at the Minister’s office that pointed me to some of the resources that NBNCo and the Department of Broadband, Communications and Digital economy have posted.

Here’s the list of case studies and videos;

http://www.nbn.gov.au/nbn-advertising/nbn-case-studies/

http://www.nbnco.com.au/nbn-for-business/case-studies.html

http://www.nbn.gov.au/case-study/noella-babui-business/

http://www.nbn.gov.au/case-study/seren-trump-small-home-based-business-owner/

All of these case studies are nice, but they illustrate the problem – they’re nice, standard government issue media releases. The original CNet story that triggered yesterday’s story tells real stories that are more than just sanitised government PR.

It also begs the question of where the hell are all these people successfully using the NBN when I ask around about them?

What’s even more frustrating is the Sydney Morning Herald seems to get spoon fed these type of stories.

The really irritating thing with stories like yesterday’s SMH piece is that it’s intended to promote the Digital Rural Futures Conference on the future of farming being held by the University of New England.

Now this is something I’d would have gone to had I known about it and I’d have paid my own fares and accommodation. Yet the first I know about this conference is an article on a Saturday four days out from the event. That’s not what you’d call good PR.

The poor public relations strategies of the Digital Rural Futures Conference is a symptom of the National Broadband’s Network’s proponents’ inability to get their message out the wider public.

When we look back at the debacle that was the debate about Australia’s role in the 21st Century, it’s hard not to think the failure to articulate the importance of modernising the nation’s communications systems will be one of the key studies in how we blew it.

Despite the best efforts of a few switched on people in Senator Conroy’s office, a lot more effort is needed to make the case for a national broadband and national investment in today’s technologies which are going to define the future.

You can’t buy cool

Yahoo!’s purchase of Tumblr in the pursuit of ‘cool’ is the latest example of Silicon Valley’s greater fool business model.

In many ways it was Yahoo! who pioneered Silicon Valley’s Greater Fool Business Model during the dot com boom of the late 1990s.

The Greater Fool model involves hyping a website, online service or new technology in the hope a hapless corporation dazzled by the spin will buy the business for an improbably large amount.

Fifteen years later many of those services are closed down or languishing and the founders who were gifted millions of dollars by gullible boards and shareholders have moved on to other pursuits.

The news that Yahoo! has sealed a deal to buy blogging site Tumblr for $1.1 billion dollars shows the company’s urge to buy in success remains under new CEO Marissa Mayer.

It’s difficult to see exactly what Tumblr adds to Yahoo!’s wide range of online properties except a young audience – exactly the reasoning that saw News Corporation’s disastrous investment in MySpace.

What’s particularly concerning is a comment made by Yahoo!’s CFO Ken Goldman at JP Morgan’s Global Technology Conference last week.

“So we’re working hard to get some of the younger folks,” Goldman said on a webcast from the J.P. Morgan Global Technology conference in Boston.

It’s all about trying to “make us cool again,” he said, adding that Yahoo will focus on content that’s “more relevant to that age bracket.”

So they are spending a billion dollars to “make us cool again” – it’s disappointing Marissa Mayer has allowed middle aged male executives to run free with the shareholders’ chequebook in a quest to rediscover their youth.

Like most middle aged life crises, it’s unlikely to end well.

For Tumblr’s founders and investors things have ended well. It’s time to buy those yachts and fast cars those middle aged execs covet.

In the meantime the quest for internet ‘cool’ – whatever that is – will move onto whatever online service teenagers and twenty somethings are using.

Snapping out of Australia’s China Dreamtime

China analyst Patrick Chavonec has a wake up call for Australia’s business and political leaders

Australia’s leaders need to snap out of their China dreamland analyst Patrick Chovanec told the Australian Davos Connection’s China Forum two weeks ago.

What triggered this comment was a speech by Australian Treasurer Wayne Swan to the Financial Services Council in Sydney last September where the Treasurer compared China’s economic performance to sprinter Usain Bolt;

It’s like Usain Bolt easing off a bit at the end of the 100 meters because he’s 10 meters in front and has already smashed the world record.

“My response was that if that’s the way Australia’s leaders are thinking about China’s economy, if that’s the dreamland that they are in, then they need to snap out of it really fast,” Chovanec said in his keynote.

“Because China is facing a very serious and potentially disruptive economic adjustment. A realistic idea of where this adjustment is going is essential to countries like Australia.”

Chovanec’s view is that China cannot sustain current growth rates by “providing the fodder of the consumerist economy.”

This was borne out in the Global Financial Crises where exports fell from 8% of GDP to 2%. To make up for the drop the PRC government stimulated the economy and investment went 42% of the economy to half.

It was this stimulus that drove the soaring commodity prices in recent years and underpins the Blue Sky Vision of Australia’s political and business leaders.

The establishment view is that China will move from infrastructure spending driving the economy to a consumption driven society.

Moving to a consumption driven economy though means a very different Chinese society which means a different group of winners and losers, Chovanec warns.

He also doesn’t see urbanisation as the real driver of the Chinese economy, “If you look around the world, urbanisation has not always driven economic growth.”

“It’s based on a premise that moving people from a rural environment to an urban environment generates productivity gains.”

“Now for China over the past thirty years that has proven largely true,” says Chavonec, “but going forward most of that hanging fruit has been picked.”

“In order to realise productivity gains, China is going to have to discover new areas of competitive advantage.”

The biggest risk that Chovanec sees at present though is the level of bad debts in the economy and the rate of credit expansion with a trillion dollars pumped into the Chinese economy over the last quarter.

“You’re getting less and less bang for the buck from credit expansion.”

Chovanec doesn’t see China’s future as bleak though, “the China growth story doesn’t have to be over.”

“There are a lot of sectors in China where there’s real potential for true productivity gains – agricultural, logistics, health car, services, consumer branding, retail.”

“The challenge for China is not that the growth story is over but the engine of that growth story is going to have to change.”

Dealing with those changes is also a challenge for countries like Australia who have staked all on the current growth story.

Chovanec’s wake up call to Australia’s leaders is timely – the question is how quickly they can wake up to the changes in China.

Doing social media right

Whoever runs your social media feed is an official spokesman, it’s important to choose the right person and give them authority.

After last week’s Associated Press hack and the stock exchange fallout, regulators are struggling with implications of social media and informed markets.

In a speech delivered last week the Australian Securities and Investments Commission’s Deputy Chair Belinda Gibson and Commissioner John Price gave some refreshing commonsense views on how businesses should handle public information.

The continuous disclosure advice given by Price and Gibson is aimed at meeting the requirements of Australian corporate law, but it’s actually good social media advice.

Having delegations in place for who has authority to speak on behalf of the company – whether in response to an ASX ‘price query’ or ‘aware’ letter, or when they become aware of information that needs to be released to the market, perhaps in response to speculation.
Ensuring that there is a designated contact person to liaise with the ASX, who has the requisite organisational knowledge and is contactable by ASX.
Have a clear rapid response plan and ensure all board members and senior executives are fully appraised of it. Give it a practice run every so often – a stress test of sorts.
Have a plan for when you will consider a trading halt appropriate.
Have a ‘Request for trading halt’ letter template ready for use.
Have guidelines for determining what is ‘material’ information for disclosure, tailored to your company.
Prepare a draft announcement where you are doing a deal that will
likely require an announcement at some time, and a stop-gap one in case of a leak

Having a nominated contact person with requisite organisational knowledge is possibly the most important point for any organisation.

Even if you think social media is just people posting what they had for lunch or sharing cute cat pictures, it isn’t going away and those Twitter feeds and Facebook pages are now considered official communications channels.

The intern running your social media is now your company’s official spokesperson. Are you comfortable with this?

A good example of where this can go wrong is the Australian Prime Minister’s Press Office where an immature staff member has been put in charge of posting messages. The results aren’t pretty.

The funny thing is the Prime Minister’s office would never dream of some dill getting up and saying this sort of thing on her behalf, yet allows an inexperienced, loose cannon put this sort of material in writing on the public internet.

Here’s Twenty Rules for Politicians using the Internet.

On a more mature level, the ASIC executives also have some good advice on writing for social media.

Don’t assume that the reader is sophisticated or leave readers to read between the lines. Companies need to highlight key information and tell it plainly.

While the ASIC speech is aimed at the specific problems of complying with company law and listing requirements, it’s a worthwhile guide for any organisation needing to manage its online presence.

Don’t be like the Prime Minister’s office, understand that an organisation’s social media presence is an official channel and treat it with the respect it deserves.

What is a fully informed market?

Controlling how a stock market receives information is becoming a huge task in the modern economy.

Given the stock market movements following last week’s Associated Press Twitter Hack it may be time to reconsider the way exchanges and listed companies share and control information.

One of fundamental principles of modern stock exchanges is that the market is fully informed – that everybody buying or selling security gets access to the same information at the same time.

In an Australian context, this is covered by a term called ‘continuous disclosure’, should a company’s management become aware of any issue that could affect they must advise the market immediately.

What’s interesting with this principle is the way that information needs to be made public, specifically clause 15.7 of the ASX listing rules.

An entity must not release information that is for release to the market to any person until it has given the information to ASX and has received an acknowledgement that ASX has released the information to the market.

This puts the Australian Securities Exchange, a private company with an almost monopoly position in the Australian investment community, in the position of being the ultimate gatekeeper of knowledge.

While there’s good regulatory and probity reasons for having a central clearinghouse – that the clearinghouse itself has some serious conflicts of interest is another matter – one has to wonder how long its position can be retained in a world where information is moving fast.

It may be however that we’re in a passing phase as the financial of the global economy has reached a stage where no stock exchange, futures market or clearinghouse can manage the data that’s flowing through it.

Time will tell, but the markets themselves are finding other ways to inform themselves.