Tim Oren's Due Diligence

"Smart Money" Indeed

This is both a gross privacy violation and a fascinating result. Seems some Finnish researchers managed to get their hands on that country's records of IQ tests of its soldiers. They then joined that data with several public databases to correlate the intelligence tests with not only income, but stock market participation and portfolio structure. Multiple regression and factors analysis ensued. The punchline:

...the consumption of smarter individuals, rather than the wealthy, may be what drives the pricing kernel. This latter conclusion is not currently featured in formal neoclassical models of asset pricing. However, it is consistent with neoclassical folk wisdom—that economic behavior, divorced from utility optimization, is irrelevant for market efficiency because savvy investors determine asset prices.

How politically incorrect. How fascinating. Read the whole thing. (Hattip: Tyler Cowen.)

The Consumer and Recovery: This Time It's Different

An excellent analytic piece on consumer credit and spending at Zero Hedge.

Good reading for anyone investing in consumer sector stocks, or consumer-facing startups. Not only is it a tough analysis of what lies ahead, but it assumes a recovery started in Q3. If, like myself, you see that less than one percent GDP growth as a self-serving number put out by a government that has largely p***ed away the stimulus money in unsustainable and unproductive directions, you may need to slide everything right by a few quarters as well.

A Well-Deserved Nobel

No, not that one. It's the economics Nobel awarded to Oliver Williamson and Elinor Ostrom. I don't know Ostrom's work first hand, but Williamson's bridges between Coase's concept of transaction costs and an analysis of the various ways of organizing economics activity through markets, contracting and firms. The guys at Marginal Revolution have a more complete take on his work. For many years, Williamson's Economic Institutions of Capitalism has been my go-to reference to stimulate thinking about economic reorganizations precipitated by the net and other technology innovations. (Copyright 1985, so it's safely pre-net, forcing you to think it through yourself.) So I'm glad to see the good professor get his recognition, and I will hoist a drink in his honor this evening.

Rocky Mountain Retrospective

Here are some useful reflections from the editor of the deceased Rocky Mountain News on how and why it died. (Via the InstaProf). Very likely too late to do any good for other newspapers, but John Temple's lessons learned apply to most any established company that finds its market changing rapidly due to forces beyond its control.

Of all the sins in his list, the most deadly is the mental habit of evaluating every move by its impact on the former core business. Not only does it cripple the formation and success of internal ventures, but it forms an obvious constraint that the entrepreneurial minding can alleviate by leaving and setting up in competition. Temple talks about the Rocky's difficulty in retaining its Web staff against recruiting from 'pure plays', the lesson transfer to other industries and markets.

The Roving Eye: Green Bubble Sighting, 24 Hours vs. 22 Minutes, Big Iron of Yesteryear

It's not really about energy. How late in silly season does it have to be before you get stories like this? A treadle to borrow a few ergs from autos passing by. Somehow the writer involved (and some franchise owners who let their brands be used) completely missed the back-of-the-envelope analysis that you'll find in the fourth comment to the story, which makes it obvious that this placement is about gullibility, not greenery. Do I have to be a cynic to guess it has more to do with this chart than it does the environment?

And that's the news tonight. Jeff Nolan nails an unwittingly self-revelatory comment from ABC Nightly News' executive producer, John Banner. Banner is mentally stuck in the constraints of his legacy distribution platform, and won't stand back to realize that 24 hour availability is not a problem from the point of view of his former audience, it's a feature. I can't put Jeff's summation any better:

What the traditional news business can’t seem to stomach is that their profession isn’t that complex after all and their historical barrier for entry was not access but distribution, which in our age is not a steep barrier to overcome at all.

Check your six, JB. Regardless of your politics, you've got to respect the launch of Breitbart's Big Government site. From rumor to legislation mover in a week. And talk about 'afflcting the comfortable'. This is going to end up a textbook example for new media launches, up there with the canonical Blair Witch viral campaign.

Speaking of legacies. A blast from 50 years in the past as IIHC crashes a current model car with a '59 Chevy.

Did they get their clunker credit? At least it wasn't a '57, which would be a mortal sin. (Via the Insta-guy. Go back 50 more years, and there's this:

That's the S. S. Keewatin, dating to 1907, the oldest surviving Great Lakes steamer, moored at Douglas, Michigan where we're vacationing and visiting family.

The Roving Eye: FB Noms Yahoo, Technorati Repositions, Stupid Crypto Tricks

Coincidence or enemy action? Two stories with the same protagonists made it through the filter this holiday weekend. In one, Facebook grabs Old Friend Arturo Bejar from Yahoo. In addition to being a digital photography and racing nut, Arturo has been the 'Chief Paranoid Yahoo' for a number of years. That's the site CISO in any other organization. There are less than ten guys in the country with his level of experience in not only securing a diverse site under continuous attack, but dealing with the organizational and motivational issues of being security conscious. Arturo will be director of Site Integrity at Facebook, reporting to VP Engineering Mike Schroepfer. Considering all the issues FB has to hand in trading off security, user acceptance, and an actual revenue model, he will find plenty to keep him amused.

The second blip was a mention from a friend that Facebook has been gaining popularity with women over 30. Not only that, but a small amount of digging finds that women over 55 are joining quickly, and indeed that senior citizens on FB now outnumber the high-schoolers commonly thought to be the main users. There's no explicit mention of Yahoo in any of those stories, but if you happen to know that Yahoo's core demographic has shifted to older women, you can make the correlation: Yahoo's continued failure at social media is becoming Facebook's gain.

There's no blog search niche, after all. A while back I was scratching my head about Technorati:

...a nice feature when the Technorati API service is running and stable, which is not always the case. (It's evidently not part of their core business model, whatever that may be.)

Evidently their funders were wondering, too. Jeff Nolan calls their repositioning:

It’s easy to have missed what Technorati has been up to but CEO Richard Jalichandra has done an impressive job building a vertical content network and advertising network. In the process he has extricated himself from being in the competitive crosshairs of Google...

Good spot on the shifted business model, which should come as no surprise to bloggers who have noticed the erratic maintenance and performance at Technorati of late. Hmmm, shifting from search to content aggregation. Haven't I heard that somewhere else recently?

From the 'WIll They Never Learn' Dept. It's not enough to try to make digital goods scarce, now some geniuses want to make it possible for your copy to be stolen, not just copied in turn. This 'advance' is called Digital Personal Property. I suppose I should admire the ingenuity going into this, but instead I'm filing it under 'Dumb Research'. It's not that there are burning, unsolved technical issues in the domain, it's that the customers don't want it. Even white haired grannies have figured out that digital goods are not inherently scarce, let alone the savvy younger generations that are the marketing targets for most of these goods. From their point of view, DPP - like DRM before it - is a way of subtracting value.

Flying on water. Eye candy of the day - the French trimaran foil l'Hydroptère:

(Hat tip: Ole Eichhorn. This is bloody amazing. Can't wait to see what happens as the architectural implications of this design work their way into other classes of sailing vessels.

Behind The Cloud

The Recession and The Cloud

One of the few hot themes in software and services investing right now is 'the cloud', an easily scalable pool of computing or storage resources located in the network, and (usually) run by someone else. Along with bona fide new entrants, every surviving grid computing company and also-ran virtualization venture is getting a 'cloud' label slapped on it (and 'green' besides, of course). What's going on, given the general state of IT spending amidst a global recession?

Part of what's going on is precisely that recession. Short term adoption of virtualization (and cloud itself) within the enterprise data center is being slowed by the usual caution and cuts in IT spending associated with an economic downturn. Every investment proposal gets hard scrutiny and had better have a short-term, low-risk ROI. Virtualization and cloud might actually offer those returns, but it's a hard sell considering the radical operational transformations they imply in the data center.

Meanwhile, the public cloud is getting an inadvertent boost from the recession. Amazon Web Services (AWS) has been joined by Google, RackSpace, EMC and a bunch of others in providing storage and computing on demand. It's the latest step in reducing capital requirements for starting up venture or enterprise software and services projects. The combined reductions created by off-shoring and open source had already led to what I've called two-stage ventures, where engineering to the point of market test could be accomplished with minimal startup funds. Now public cloud offers the would-be net entrepreneur a way to avoid both the upfront costs of putting service infrastructure in place for a launch, and the 'success failure' risk of not being able to obtain capital or equipment fast enough if the offering turns out to be a hit. In an extremely tough fundraising environment, staying capital-light as long as possible is just the ticket. The upshot will be even more 'below the radar' ventures launched on personal or angel funds, and only turning to venture when and if they prove demand and require external capital to scale their marketing.

A similar argument holds for the recession-beleaguered enterprise. Public cloud plays well in a capital constrained environment. The new department level project or customer-facing venture can start on a public cloud, without implicating the operational pattern of existing infrastructure, or having to consider the capex requirements of building capacity to host and scale the software. Rather than put all innovations on hold, business unit managers may be willing to take a risk on a public cloud provider and worry about internalizing the project when and if it succeeds.

Being well-aware of lock-in risks, enterprise managers will make sure they have the ability to pull their services into their own 'private cloud', in part or whole, sometime in the future. This suggests that ventures like Eucalyptus Systems, which allow emulation of a public cloud API on a private infrastructure, are well-positioned. It's also a good bet that applications born on a public cloud, where redundancy and surge capacity are built in, may continue to rely on public infrastructure for these contingencies, rather than deal with the capex and operational implications of internalizing them. This suggests that public providers will not be substantially threatened by 'privatization' of the cloud, but that management platforms extending across private and public clouds are a good long term bet.

The Cloud Over The Cloud

That doesn't make everything sweetness and light. Putting sensitive data onto a cloud provider's infrastructure doesn't remove security risks - it could compound them. The enterprise or startup handling PII or PCI-compliant data isn't going to get a break just because it's been pushed onto S3 or another storage provider. The software stack deployed on a public cloud is still vulnerable to attack from the network, and it may be more difficult to monitor would-be intrusions from afar. One also has to assume that the cloud provider is successfully maintaining separation of applications against inadvertent or malicious compromise by others on the same infrastructure. Even those who encrypt their sensitive data when at rest in a public storage cloud have to acknowledge that it will be brought into the clear at the moment of processing in a public computing cloud, and that will happen beyond the usual corporate security perimeter. Extending security and privacy monitoring and control into public clouds is another spot for entrepreneuring, though the long term advantage may go to incumbents in the enterprise market.

Then there's that 'green' claim. It seems perfectly reasonable that an application that's deployed on a virtualized infrastructure or a public cloud will suck less power than one which has dedicated resources, no matter how cunning the energy management scheme on the latter. There are a number of before/after and side-by-side comparisons that support the logic, though with wildly varying estimates of energy savings. What seems to be totally missing is any form of ongoing energy accounting. The moment the question changes from "Are you saving energy?" to "How much energy does this really use?", the answer comes up empty. So far as I've found, there is no solution for 'front to back' monitoring of direct and indirect energy usage by applications running on a virtualized or cloud infrastructure. Whether greenery ever comes to point of requiring an audit trail is a speculation, but if so, there is a market hole.

Buzz Phrases and Pundits

Then there's the risk that hangs over all terms that become industry buzz words: semantic heat death. Shortly after something is declared hot, the label will be hung on every venture in sight, and about the same time the ill-informed pundits will start to outnumber the useful analysts. Jonathan Zittrain's recent NY Times article is a bad example in point (BugMeNot). There he properly worries about privacy of data in a cloud, but sloppily confounds the term with another business model: audiences. Zittrain worries about the freedom to innovate in Facebook's cloud, and thereby participates in the semantic destruction of the term. Ask yourself this: Is anyone running an app on Facebook because of their awesome infrastructure or open architecture? Give me a break. The only reason anyone's there is access to the Facebook audience, in the hope of monetizing that exposure in some way. Similarly with his bad example of Apple's iPhone store. Who knows or cares how the backend infrastructure for the app store is built? It's all about access to Apple's customer base. Are Facebook's or Apple's management going to suddenly shift their business models from audience building to open infrastructure provider, and abandoned the value they've created? Give me a break again. Jeff Bezos figured out the distinction: you can buy your public cloud infrastructure from AWS, but it doesn't come with access to amazon.com's customer base. But that's too much analysis for lawyers trying to make political points.

Actually using 'cloud' as an analytic concept is going to get ever harder as time goes on, so those in the field had better be backstopping their new buzz phrase with some explicit description of what they are offering and why.

The Roving Eye: The Grin Test, Buh-bye Pontiac, Red State CA

Sovereign Risk. Everyone who's pitched knows about the 'grin test' - where you get to take your best shot in front of the executive staff/board/investment committee/limited partners, and then have to smile - and mean it. Just now a lot of hedge fund managers are thinking about that test as it regards investing in unionized companies in politically charged industries. Wonder what that means for the unionized, leveraged, leftist newspaper industry?

I learned to drive on my father's 1967 Pontiac Catalina station wagon. Big honkin' V8, 3-speed manual shifter on the column, as long as my current F-150 and probably weighed more. It was a pig, and even more fun when towing a trailer. It was years later when someone informed me that I'd taught myself double clutching to keep it (and my later VW bus) from ripping out the clutch. Here's some other memories of Pontiac for those who date. Good bye, GM, you're dead to me.

Bankrupt in Sacramento. The electorate paints the state red as the Democrat and RINO taxes and budget fiddles fail big time. Except the proposition to cut legislators pay when there's a deficit. Let's see: no deficit, no new taxes, and no budget chicanery. Just what part of stop spending can't the political class understand? Under the Democrat legislature and Schwarzenegger, the annual budget has increased $41 billion in five years - nearly 40% - while businesses and citizens flee the state. Meanwhile, Ahnuld is in DC, hoping for a bailout. How pathetic is this?

Revolution. Is that a description, or a recommendation?

If I Tried This, I'd Be On My Way To Prison

Negotiated alternatives to bankruptcy, and negotiated bankruptcy settlements that differ from strict seniority rules happen all the time. Particularly when there's the chance that some viable entity or set of assets might emerge from the wreck, the various creditors and equity holders will often dicker and deal towards an outcome that reflects their own sensitivities towards getting back some cash now, versus hoping for a better tomorrow. Terms that include 'carve outs' to offer a return for executives or even staff who agree to stay through the process are also common. It happens all the time in the venture world, just more quietly than the ongoing Chrysler debacle.

But these outcomes are all voluntary. Unless there are specific 'drag along' provisions that were disclosed at the time a financing occurred, any holder can decline to participate in such a work-out agreement, and throw the matter into the hands of the bankruptcy court. Which court is then obliged to respect the interests of the debt and equity holders in strict order by statute and prior contract.

Voluntary means no coercion. If an interested party in the matter threatened retaliation outside the deal for not cooperating in a desired outcome, that would be actionable, and quite likely criminal (a little matter known as blackmail). If I pulled such a stunt as a VC, and got caught, I would expect to be having a chat with my counsel and perhaps the district attorney.

Bringing us to the behavior of the Obama White House and the Treasury Department in respect of the Chrysler bankruptcy. It is now confirmed that Treasury officials threatened retaliation against Chrysler creditors who declined to accept terms proposed by the White House. And further used implied control over TARP banks to intimidate holders who have other business with them. See the second link for some specifics on the administration behavior and relevant bankruptcy law.

I hope the 'speculator' hedge funds stick to their guns, and bring the White House behavior into open court. This administration has been playing fast and loose with the law and Constitution, and is being covered by the Democrat-controlled legislative branch. Time to see if the judicial branch still has any cojones. Meanwhile, I'll just nod agreement with this quote from Finem Respice:

There are three things that are scarier than the actual resort to common thuggery. The ease with which it comes to this administration. The ubiquitous and rank ineptitude that makes a resort to thuggery necessary in the first place- and promises it will become a common tactic in the days to come. And the forgiveness the population regularly affords the administration after one or another of these episodes is, yet again, made public.

Update: Thuggery has consequences. Check out this Roger Kimball column at PJ Media, and scroll down to the open letter from hedge fund manager Clifford Asness. Here's a sample:

Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won’t work because of this irresponsible hectoring.

Update 2: 'Gangster government', including the full text of Asness' letter.

The Roving Eye: Facebook's Down Round, Print Cartel?, Rants of the Week, Government Or Mob?

Did MSFT get a ratchet? After peddling shares to Microsoft at a $15b valuation, the growing but still money-losing Facebook needs more funding to keep the boilers stoked. Problem is, the best valuation they're being offered is $2 billion.

Party like it's 1978. Newspaper employment of reporters is back down to 1978 levels, another way in which we've returned to the Carter years. (HT: American Digest) Meanwhile, a bunch of the MSM's best and brightest have founded Journalism Online, yet another attempt to wring micro-payments from the Web, this time by getting the press to move all of their content behind one pay wall. As I recall from econ, that's called a cartel, and it's got a few known problems with defections when there's an actual surplus of the commodity in question. OTOH, having publicly called for the extinction of the propagandizing MSM by market forces, I applaud this latest effort. You go!

Tell us what you really think Dept. Presented without further comment: Bill Whittle. Nick Gillespie. And this older rant from Andrew Klavan has become a catchphrase around our household as we've watched the MSM and political class react to the Tea Parties. Shut up!

Chilling effects? And speaking of our beloved media, last week featured CNN 'reporter' Susan Roesgen debating and insulting Tea Party protesters in Chicago, in a performance captured by both the network's own cameras and those of the 'Founding Bloggers' crew. It was of course YouTube'd immediately, and became the subject of derision and embarrassment to both the reporter and the network. Their reply: Shut up! Err, actually it was to to issue DMCA takedown notices against the clips. Having blatantly dropped its pose of 'reporting' on the story, and become part of it, CNN has little grounds to claim that their material is not subject to fair use as part of the debate. Patterico's article challenges CNN to sue him - that could be an interesting case if a reasonable judge doesn't throw it out immediately.

Welcome to the Family. A bit back I suggested that banks repaying TARP money would be a good thing. Not so fast! You have to have a talk with Guido Tim Geithner first. It becomes more and more obvious that this is about government power, not saving the banks. I loved this comment in response to a post I wrote at Wind of Change about what's missing from the Tea Parties:

"...i'd love to see the WF [Wells Fargo] chairman call a press conference and just turn it into a huge check signing ceremony. Thank the government (thanks for nothin) and announce it a big victory on the road to economic recovery. Then make a little aside saying the cynics believe the government might not want the money back and might use audits as a punishment, but he doesn't believe it and will happily keep the public informed of how business is going."

Any bank with the cojones to do that will make me a customer for life.