FutureTech Business

But the World Goes 'Round

Music by John Kander.  Lyrics by Fred Ebb.

Sometimes you're happy, sometimes you're sad
But the world goes 'round
Sometimes you lose every nickel you had
But the world goes 'round

Sometimes your dreams get broken in pieces
But that doesn't alter a thing
Take it from me, there's still gonna be
A summer, a winter, a fall and a spring

And sometimes a friend starts treating you bad
But the world goes 'round
And sometimes your heart breaks with a deafening sound

Somebody loses and somebody wins
And one day it's kicks, then it's kicks in the shins
But the planet spins, and the world goes 'round-
But the world goes 'round
But the world goes 'round

Sometimes your dreams get broken in pieces
But that doesn't matter at all
Take it from me, there's still gonna be
A summer, a winter, a spring and a fall

And sometimes a friend starts treating you bad
But the world goes 'round
And sometimes your heart breaks with a deafening sound

Somebody loses and somebody wins
Then one day it's kicks, then it's kicks in the shins
But the planet spins, and the world goes 'round
And 'round and 'round and 'round and 'round
The world goes 'round and 'round and 'round
And 'round!
(From "New York, New York")

Political Haste Makes Fiscal Waste

By Eleanor Haas

“Without government help” is how Wells Fargo snatched Wachovia from under Citigroup’s nose just four days after an oral agreement of government subsidy  to enable Citigroup’s acquisition.  How many options were examined before Treasury’s decision to underwrite the Citigroup deal?  If Wells Fargo was in a financial position to do a deal, how many other healthy banks are out there, ready to ride to the rescue of troubled institutions without government help?

The core issue everyone agrees is liquidity.  Banks won’t lend..  And that’s the primary reason given for the heavily hyped bailout bill.  Banks are required to maintain a 12:1 cash reserve in order to lend, and mark-to-market accounting rules mean that toxic assets have driven the value of these reserves below the legal requirement for lending,.  What has been considered to address this issue directly?  Is there no rifle-shot approach short of what is now an $810 billion bailout bill with all its add-ons?

Freddie Mac and Fannie Mae have been in trouble for a long, long time, but suddenly they’re nationalized.  But what about the underlying causes for the collapse?  What difference will government ownership make if the old business policies and practices continue?

What if the bailout bill does pass today but consumer confidence continues to plummet?  Then what?

Armageddon or Opportunity?

By Eleanor Haas

Yes, this is a major inflection point, a revolutionary change from one economy to another.  Ever the optimist, I see radical change, not disaster!  And radical change always means opportunity to the entrepreneur and innovator.  This all seems to me to have been inevitable.  We could not possibly continue down the mad, mad, mad path of ever more complex and deceptive derivatives and spiraling debt.  Nor could we continue down the road of government to the rescue.  That’s just not the American way.

No, we are not entering another Great Depression – thousands upon thousands of unemployed men – and today, women as well – standing in line for food handouts.

But we are certainly in a crisis of uncertainty.  Banks aren’t lending at the moment, and properly managed debt is fundamental to all businesses.  So now what?  Bankruptcy for those with overleveraged financials.  Is that such a bad thing?  It’s the normal way of the world.  It doesn’t mean the company dies.  It just means the owners lose their investment, and creditors take over.  It doesn’t mean everyone loses their jobs.  It just means employees may have some new bosses.

How many companies will fail?  Given the failed bailout amount of $700 billion, a lot.  But is it better for that amount to come out of the pockets of those responsible for overleveraging or out of the pockets of taxpayers who had nothing to do with it?

The bailout bill was a bad, bad idea if you believe in the free enterprise system.  It was a terrible idea if you believe in personal responsibility and accountability.

CNN just published a point of view that happens to agree with mine by someone eminently qualified on the subject:  Jeffrey Miron, a senior lecturer in economics in Harvard.  Here's what he has to say:    

http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html

What do you think?

Yes, Mr. Carr, IT Does Matter – It Matters A Lot

By Eleanor Haas

Does IT matter? In his provocative book of that title, Nicholas Carr argues that the strategic importance of information technology is diminishing, not growing, because it has become what he describes as “a commodity input that is necessary for competitiveness but insufficient for advantage.” He goes on to define what he means by IT: an infrastructure, a common resource – and then proceeds to demonstrate how competitors readily and rapidly copy infrastructure innovations as the infrastructure matures.

In all fairness, Mr. Carr’s challenge was timely. Vast sums were being invested in the early years of this century in IT infrastructure by enterprises on the basis of potentially false assumptions. At the same, time, the challenge seems in retrospect to have been remarkably shortsighted. IT infrastructure per se is not the issue today. Nor was it as late as 2004 when the book was published.

As I reflect on the value and role of IT, commoditized IT infrastructure seems to me to have been an essential first step to what matters today:  (1) The Internet, a network of networks that has become fundamental to all aspects of business and communications. (2) Software applications that have changed and continue to change the way people in industrialized nations work and opened new learning channels for people in both industrialized and developing nations. (3) Out of these has come social computing, which is changing the way increasing numbers of people communicate with each other and relate to one another with profound implications for our society. Software applications and social computing, in turn, are being effectively used to create new kinds of competitive advantage by small businesses and enterprises alike, to say nothing of political candidates and nonprofit organizations.

Forget sustainable competitive advantage – Michael Porter’s dream of continuing cost or differentiation advantages. That died years ago. Today continuous improvement, continuous innovation and relationships are the only viable basis for advantage. Ubiquitous IT accelerated the pace of change. But it also facilitates continuous improvement and innovation, which can provide such competitive advantages as are possible in this environment.

So, yes, Mr. Carr, IT matters a lot. It could not matter more. Commoditized infrastructure was merely the tip of the iceberg.

High-End Computing for General Purposes Becomes an Eco-Friendly Possibility

By Eleanor Haas

How quickly both information technology and social values are advancing! Bringing supercomputing capabilities down to a general-purpose level where they can serve consumers, not just advanced scientists – as a new IBM product does - is a giant leap forward in our ability to access, analyze and manage massive amounts of information efficiently and cost-effectively. But that alone is no longer sufficient. Today our society requires that this be done in ways that minimize climate change effects. Greentech is not just a fad. It’s here to stay.

The new IBM iDataPlex line of server products does both. It seems to me to represent an historic break-through: It enables cloud computing that supports Web 2.0 applications as well as the high performance computing (HPC) requirements of life science researchers, engineers, petroleum exploration, financial services, and government and academic research. But perhaps the most important attribute of the new hardware design is that it requires 40 percent less electrical power to run than alternatives with comparable computing power and can eliminate air conditioning when outfitted with a water-cooled wall.

As Web sites evolve, they add features that impose new demands on the infrastructure and challenge performance standards critical to the user experience. Web 2.0 applications empower users to do a great deal more than just retrieve information. Now users can activate interactive features inherent in Web 1.0 at a higher level and exercise new degrees of control over data, even add value to applications as they use them. These new capabilities drive enterprises to scale capacity in a secure, reliable and cost-effective way in order to deliver a satisfactory user experience. Cloud computing is one of the most important new concepts that is emerging to make this possible.

Cloud computing is computing done at a remote location, which is to say, out in the clouds. It is computing on a massive scale in terms of both computing power and the range of computing tasks.

Supercomputers were mainframes invented to enable advanced scientists to handle enormously complex calculations. Then Google and others started locating the data storage and processing power of supercomputers on vast banks of computer servers in remote data centers – Google called these distant servers “the cloud” - instead of on mainframe computers or a network of multiple processors on the Google campus. And Amazon and others started providing cloud computing services - remote computing services, also called web services - delivered over the Internet. And so cloud computing was born.

Cloud computing is hugely important but still nascent. A recent report by Forrester Research said in its executive summary that: "Cloud computing is a new IT outsourcing model that doesn't yet meet the criteria of enterprise IT and isn't supported by most of the key corporate vendors.  It's wildly popular with startups, exactly fits the way small businesses like to buy things, and has the potential to completely upend IT as we know it.”

Cloud computing represents a fundamental shift in how we handle information, according to BusinessWeek, because it enables companies to write their own programs to run on a cloud provider’s servers. Irving Wladawsky-Berger, Chairman Emeritus, IBM Academy of Technology and Visiting Professor of Engineering Systems, MIT, sees two major factors that make cloud computing qualitatively different from all IT concepts to date: One is massive scalability. The other is the much higher quality of experience it can provide for users. “As with the Web in the mid-‘90s, every enterprise will have to develop its own cloud-like capabilities, or work closely with partners that do.” he writes on his blog.

But cloud computing can be no more than a vision until something is done about the data centers on which it relies. In general, today’s data centers can be described as massive, sprawling and pushing the limits of power and space available to them. Many have grown through mergers and acquisitions, with different departments having their own servers and a proliferation of small and mid-size servers. As a result, they are inefficient, expensive to operate and have high energy requirements. Worse, they cannot be scaled effectively.

The new IBM iDataPlex system represents a solution, a basis for the data center of the future. It reduces the cost per server by approximately 20 percent to 25 per cent by using off-the-shelf components and open source software, fits 138 percent more servers in the same floor space and, best of all, as we said, requires 40 percent less power to run. It is intended both for enterprise cloud computing initiatives and clouds designed to host Web 2.0 applications.

Not a lot of iDataPlex systems will be sold. The target universe contains only 1,000 prospects, each valued at upwards of $20 million, and each system will be custom-built. But it’s already clear that cloud computing builds on itself, as large companies become suppliers for smaller ones. And IBM has the pieces in place to help customers acquire new data centers conveniently. IBM Global Financing will offer them lending and leasing opportunities, IBM Global Asset Recovery Services can manage the disposal of equipment in accordance with environmental regulations, and IBM will team with third party technology companies to drive a product ecosystem around iDataPlex..

That’s smart of IBM because iDataPlex has the markings of a hot product. According to Forrester, “Cloud computing . . . has all the earmarks of a disruptive innovation: It is enterprise technology packaged to best fit the needs of small businesses and start-ups – not the enterprise.” An eco-friendly cloud computing system.  What a thought!

What do you think about all this?  Where do you see it going?

Some Resources:

http://www-03.ibm.com/press/us/en/pressrelease/23991.wss

http://www-03.ibm.com/systems/x/hardware/idataplex/index.html

                                                                                                                                                  

PDF documents
	Pund-IT Research Report: IBM System x iDataPlex – Enabling Web 2.0 with Internet-Scale Solutions (133 KB)
	Cabot Partners White Paper: IBM System x iDataPlex: The Newest Economical Workhorse in the Computing Cloud for Next Generation HPC Data Centers (1 MB)

The Consumer is King - Not Content After All!

By Eleanor Haas

A decade ago, the cry was “Content is King” as we tried to make sense of digital  technologies that were changing everything about how we received and used information, did business and related to one another.

Now technology has not only enabled new kinds of media unimaginable even ten years ago but has empowered consumers in ways that enable them to control the information they receive, once the exclusive province of publishers. Most serious of all, technology has transformed so much so fast that today’s adults are no longer competent to forecast what happens next. As Strauss Zelnick, founder, ZelnickMedia, pointed out at yesterday’s digital breakfast, our media habits today are those we formed by the time we were 16.  Look to the 16-year-olds for what’s cool and try to understand how they use and experience media.

Listening to media business leaders discuss the future of digital entertainment – and digital “entertainment” now encompasses all digital “content,” another startling convergence – right after reading Chris Anderson’s piece on “Free!” as the future of business models throws light across the full spectrum of the media universe and related business models. The business leaders spoke at a GothamMediaVentures event sponsored by Frankfurt Kurnit Klein & Selz. They were Ellie Hirschhorn, Chief Digital Officer, Simon & Schuster; Andrew Lack, Chairman, Sony BMG Music Entertainment, and Strauss Zelnick. Richard Hofstetter, a Frankfurt Kurnit partner, drive the discussion with probing questions.

Digital Business Models

Hofstetter described the digital platform as a source of new opportunities for monetizing consumer relationships and for bringing customers to media brands – i.e., supporting the traditional entertainment business model of advertising, subscription and pay-per-view or pay-to-use. This is certainly true. In many ways we are, in Zelnick’s words, moving increasingly away from a paying economy to an advertising economy. But that is only part of the story.

Anderson takes the story to another level, talking about radical new business models enabled by low-cost digital distribution, such as free video content online while theaters make money from concessions and sales of a premium movie-going experience. Google is free to consumers, he says – and generates revenue from advertisers who want to reach those consumers.

“Technology is giving companies greater flexibility in how broadly they can define their markets, allowing them more freedom to give away products or services to one set of customers while selling to another set,” he writes, adding that “anything that touches digital networks quickly feels the effect of falling costs.” Web technology is all about scale, he explains, and transistors, which he calls “the atomic units of computation,” are now close enough to costless that storage, bandwidth and processing power are being offered free by companies like YouTube and Google, and IT developers can afford to focus on delighting computer users, not just on running algorithms efficiently. As a result, we have increasingly sophisticated user interfaces, new forms of digital entertainment and a flood of new ways to make “free” part of business models.

The New Economics of “Free”

Attention and reputation are the new scarcities, not money, writes Anderson, and it’s to acquire these that “free” exists for the sake of a business model. It’s a seismic shift in our values as society.

Anderson clusters variations on the theme in six categories:

• “Freemium” – the subscription model – a free basic version,      supported by premium versions with more features.
• Ad-supported – free content, services, software, etc., paid for online by ad banners, text ads, affiliate ads, site sponsorships, search results inclusions, paid listings, lead generation, product placements and paid personal connections on social networks.
• Cross-subsidies – giving away one product (razor) in order to sell another (blades).
• Zero marginal cost – a de facto business model: the product becomes free because distribution costs nothing. Example: online music.
• Labor exchange – the user creates value for the publisher by supplying information and gets free access to Web sites and services.
• Gift economy – beyond money to altruism and sharing now that zero-cost distribution makes this economically viable – Wikipedia, open source software and UGC, for example.

New Business Models for Digital Music

Looking back, Zelnick says “we (the record industry) drove people to piracy.” How? By not having the technology to support peer-to-peer sharing except for free and by so fearing what had happened to the film industry with VCR rentals – retailers made money but not film studios – that the music industry would not allow retailers to make money with digital music.

Anderson’s point about cost-free distribution supports this. Consumers saw what was possible and acted on it. The record industry lacked the access software and the strategy to take action.

Now new business models have emerged that make online music economically viable with multiple revenue streams, including two of

Anderson

’s categories: ad-supported and paid premium subscriptions.

· Entertainment content download sales are booming at both iTunes and Napster.

· MySpace Music, announced less than a week ago, is a joint venture of MySpace with the big labels: Sony BMG Music Entertainment, Universal Music Group and Warner Music Group. For the first time, the most popular digital music community, My Space, is in partnership with leading music companies for purposes of marketing music content in a way that legitimizes downloads and generates multiple revenue streams. This represents a sea change from iTunes because it helps music titles bubble up in peer-to-peer interactions as opposed to being pushed down by large companies’ choice of materials. (The success of the joint venture will depend to some degree on the autonomy granted to partners who are otherwise competitors.)

· Device manufacturers are taking an “all you can eat” approach, loading devices with music so that consumers buy the music with the device.

 

Radiohead and other alternative bands left their record labels, released new albums on their own Web sites and invited downloads for free or whatever consumers wanted to pay. But by then they were already established and could use tours and other vehicles to generate revenue. (Anderson’s cross-subsidy model.)

The value record companies and movie studios deliver is discovering and establishing new artists, who need nurturing and a company behind them even if they no longer need the old distribution of traditional media.

Film Business Continues as Before

New films continue to be distributed and marketed in the traditional manner, and the studios continue to provide the financing. The business has not yet been disrupted because the Internet pipe isn’t fat enough for downloading movies.

Book Publishing has Yet to Adapt

Music, video and social media have been the first three waves of the digital content revolution, which the book publishing industry has sat out, according to Hirschhorn. Storytelling is still in demand, and people still read books. Opportunities are evolving for e-delivery and integrated e-commerce that can provide a rich media reading experience, but it’s early days.

Authors are assets as well as books. Like musicians, they have fan bases. Opportunities exist for them to connect with consumers, build personal brands and franchise and have a voice beyond their books.

What’s different from some digital entertainment businesses is that the book business is not in the ad sales business, looking to build audiences. Publishers want their authors out there broadly, leveraging syndication.

How Do Story-Tellers Get Paid?

One way storytellers get paid is apparently by developing online games.  Zelnick mentioned a new interactive game that contains eight hours of narrative!

Beyond this, however, how they get paid seems to be the $64,000 question. Technology business plans are clear. But content companies are under pressure. The middleman/distributor is in competition with the creative force. TV viewers zap commercials, and networks now give away content for free at sites like Hulu – online streaming video on demand, free snippets of programs. Creators are getting into their own businesses but have to rely on agents and lawyers to fight for the right to do their own exploitation. Will advertisers buy this? Yes, says Lack, advertisers will follow if consumers buy in.

It’s all about what consumers want. And that, in turn, is determined by our habits at 16!

New Directions for News.

TV news has begun cutting news-gathering costs, looking to outside sources. Yesterday, CBS was reported to be in talks with CNN about outsourcing some of its reporting operations. (Whoever thought the heart of the news business would ever be outsourced?)

In addition, citizen journalism has become a reality. CNN introduced ‘iReport” a year ago, soliciting UGC for consideration by CNN editors. Now ireport.com offers unvetted online content from users and bloggers. What happens to credibility with citizen journalism?

Lack characterized blogging aptly: “Blogging is part of grassroots bubble up content – some news, a lot of opinion and junk – a platform trying to find its place.” But, he added, it should not dominate serious news gathering. a lot of established companies have too much baggage for the digital age, he continued. The high cost of their infrastructure is challenged by digital media and will be replaced by some of these, including blogs.

But there’s no need to get news from an existing company. Social networks are rapidly becoming an alternative. Are they being overvalued? Zelnick’s answer to this is a good one: “News Corp. paid $580 million for MySpace and got a good buy – even though the valuation is too high.” Why? Because of the enormous growth potential of interactive entertainment, based in part on the same model as the traditional movie business: give consumers what they want and grow with the demographics.

And the reason for this is what might be termed the new economics of consumer control.  Social networks add a measure of consumer control that has never before existed.  Content bubbles up in peer-to0peer interactions instead of being pushed down by large companies.  Being incontrol transforms the value proposition for consumers.

What’s Next?

 

The next business to be disrupted will be television, and it will be an ugly transition, predicts Lack, but this will take longer than we think – as did the battle between videotape and 35-mm. film, which took decades.

Whither Wikis?

By Eleanor Haas

Wikis, those indispensable reference resources - Web sites where anyone can add or update content - are still “cutting edge social media” after nearly 13 years, “with best practices an evolving target,” says John Blossom, president, Shore Communications, who organized and moderated a panel on the subject at a recent SIIA Brown Bag Lunch.

Wikipedia has proven user-generated content can be very high quality and can be accepted as authoritative and reliable when done right.  As proof of this, social media sites increasingly come out at top of a Google search. What's next?  Video and photos are bound to play a greater role as equipment quality continues to go up and prices to come down.

What the wiki delivers that’s different from a search engine is “a well-packaged story,” said Michael Sha, co-founder and co-CEO of Wikinvest, a new wiki, still in beta. That speaks clearly to their market appeal. Their diversity is an equally clear indicator. The key to their quality control, the primary topic, varies:

• Wikipedia, the granddaddy of them all, was founded in 1995. It achieves quality, said Mark Pelligrini, senior editor/contributor, by enabling quality to evolve in real time through policies requiring verifiable information, a neutral point of view, accuracy on a par with the encyclopedia Britannica and peer review. All the filtering is manual.
• Newsvine, a new kind of news site, does it with an algorithm that causes content to fall away to an archive after 24 hours unless it gets enough votes, said Chris Thomas, top contributor. “Filters catch advertisers and astroturfers – corporations and other vested interests who try to create the appearance of a grassroots net movement,” he continued.            

Content is provided by both professional journalists as well as everyone else to create a comprehensive ecosystem of both subject areas and contributors that mirrors the real world. New user content lives in the “greenhouse,” a purgatory with no live links for search engines to follow. After users prove themselves, their content gains full access.       

• Wikinvest, an investment information site, has “a broad population of people who are knowledgeable about certain areas” of finance – people “passionate on the topic who desire to interact,” Mr. Sha stated. “Filtering tools bring out the best,” he added.  The tools identify the most valuable contributors, those requiring the least review. This wiki can be a great platform for asset managers, positioning them as authorities on investment strategies.

The site consists of objective summaries of companies and of investment areas, or industries, subjective bull or bear commentary on each, and descriptions of the contributors creating the content – already more than 100,000 of them.

Transparency is Wikinvest’s secret of quality control. Every edit can be tracked.

• WikiAnswers, a Q&A community acquired by Answers.com last year, consists of questions and answers, each entered by the same or different contributors, each open to edits by anyone, reported Bruce Smith, Chief Strategic Officer. Over100 supervisors – all with day jobs – control quality in their specific subject areas.

What motivates contributors? Fun – pure enjoyment - is the No. 1 reason, according to a recent MIT study, with which panelists agreed. Contributors are enthusiastic about their subjects and enjoy sharing their knowledge and interacting with like-minded individuals. In addition, they can improve themselves and advance their careers by building a reputation and even driving clients. Newsvine adds one further dimension: it shares advertising revenue with contributors whose content attracts the ads.

But how does free content generate revenue?

• Wikipedia solicits individual and corporate contributions.  It also sells feeds to subscribers, big search engines and cell phone providers. Some people license the database and post a mirror site with advertising. On-site advertising is not feasible because the community reacts “very negatively.”
• Wikinvest will test syndication. If it moves to charging for premium services, these charges would never involve content access. Advertising is a distinct possibility for the future.
• WikiAnswers will monetize with AdSense and with ads when answers can add user value by being on an iPod but, like Wikinvest, will not charge for Web access to content.
• Newsvine carries ads and pays 90 percent of ad revenue to contributors.

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Mayday or Payday?

By Eleanor Haas

Just how far-reaching is the fallout from July’s credit crash? Major financial markets firms took big hits, and two lost their CEOs – Merrill and Citi.  Morgan Stanley just lost a co-president. News commentators wonder aloud whether we’re headed for a recession. In fact, news media are full of gloom and doom. But perhaps their heads are too high up in theoretical clouds to see the reality that the sky has not fallen - smart investors are still making money.

My friend John says his HNI friends (High Net Worth Individuals) are fleeing to the security of mutual funds. My friend Jeff is having success raising a new venture fund.  My friend Arthur is judiciously managing his portfolio of real estate investments, buying or selling, wherever the best advantage lies.  Three different kinds of opportunity for three different kinds of savvy investors.

In other words, financial life goes on. maybe It’s not mayday after all – at least not yet.

Speakers from three private equity funds bore this out last evening in the course of a panel discussion on Exit Strategies and Fundraising in a Changing Environment, which was sponsored by WAVE (Women’s Association of Venture and Private Equity). Opportunities abound for those who know what they’re doing.

Timing is everything, said Raquel Palmer, a partner with KPS Capital partners, which buys troubled companies and fixes them. “We had nine exits in fourteen months,” she said, “the foreign market is still open. The US is on sale. European and Japanese strategists get good value.”

“The market is open, but selectively, by company and by sponsor” said Linda LaGorga, Managing Director, Financial Sponsors Group, Goldman Sachs, who sees good exits for strong assets in the $50 million EBITDA and above market. “The financing market is volatile. It’s there for some assets, not others. You have to get ready and time it.”

“Strategics were not hurt by the bank pull-back on financing, as private equity funds were,” said Bill Jarrett, Managing Director, Lower Middle Market, Goldsmith Agio Helms/Lazard Middle Market. “We’re more selective. Some industries are out of favor – housing. Service industries are dong well, for companies with good cash flow and EBITDA.”

Services with good cash flow and steady growth, which are not cyclical, sell well in this market, and buyers are out there, agreed Ms. Gorga. Large private equity funds want to buy by the end of 2008, so they play at the lower level, $750 million, look at smaller assets in order to put money to work. PIPES are another way to put equity to work now and be in a good position later.

Niche companies in their segments - often with consolidation - are a good bet. Mr. Jarrett sees “lots of buyers for rollups and synergistic acquisitions. An international component to the transaction can be a deal sweetener – a foreign buyer or an international component of the company.

What private equity buyers have to look at in making an investment is the exit opportunities, so they look for companies with strong market share – a good niche player with a franchise, Ms. Palmer pointed out.

What about valuation, pricing and terms?

• There’s still a backlog of leveraged loans, and this      impacts big buyouts, as does concern about a potential recession and the      volatility of the housing market. Most deals in the $50 million and above market have covenants,      going back to the more traditional deal. Leverage has come down. It’s      2002 all over again. The market      will recover.
• Valuations are down. There’s a shifting of risk – escrows, warrants, liabilities. Sellers may take lower multiples if the      terms remove certain escrow commitments. Seller financing is coming back, which can help bridge the gap      between expectations and valuations.
• The lower middle market depends on smaller banks for      financing. The pullback is at the      high end of the market, not this one, where lending may now be a 3 times      EBITDA as opposed to 3.5 times. Smaller banks are cautious now, but they’re still financing      transactions.

What kinds of deals have you had since the credit crisis began?

• KPS is having “great deal flow” because companies      can’t readily get bailout funds. Two of four companies KPS is looking at are operating in Chapter      11. This makes them easy to clean      up and recapitalize. KPS expects to      see more of this. Investment banks      used to dictate pricing with staple financing, but people are not seeing      these any more.
• The Middle East has huge amounts of money -  multiples of the largest US funds - and offers good ways to sell a company. New lenders are stepping up – new banks are entering the market. Mezzanine funds are key. Goldman has a $9 billion fund that is stepping in and taking a subordinated part of the capital structure.
• Typical deals take six months but now often take longer. On the other hand, a strategic - a domestic strategic – just did a deal at 10 times revenue in two months – with no book. International buyers take longer.

What about buy side opportunities?

• There’s still a lot of liquidity in the market. People will have to put in more equity,      and sellers have to have more reasonable expectations. Private equity funds raise funds to buy      debt and then take on debt to do this. That’s high risk. Many      private equity funds won’t be successful raising funds because they can’t differentiate or create value for investors. Smaller PEs will vanish.
• It’s a good time to buy a business and to buy it      cheaper, and lots of companies in distress is an incentive to buy. Hedge funds are tempted. Their managers know how to run funds but      lack experience with Chapter 11 and restructuring. They’re getting smart about Chapter 11      strategies with distressed companies.
• Seller expectations will come down, i.e., valuations. The credit market will stabilize. 2002 buyers did very well. You just can’t predict the timing of the cycle.
• PEs continue raising a lot of money. This adds to the buy side. Boomers are aging, are concerned about possible increases in the capital gains tax and so want to sell now. Corporate performance is strong. The stock market is off but companies still make acquisitions. Smaller banks will continue to lend.

To quote the French, the more things change, the more they are the same. Those who remember 2002 and other periods like this have the confidence to make wise decisions. Those who know what they’re doing do it right. For them, it’s payday. For the unknowing or under experienced, beware. For them, it could well be mayday.

# # #

Advertising is dead! Long live advertising!

By Eleanor Haas

As everybody knows, paid media advertising is declining in effectiveness. Why? Because audiences have too many options. They have more and more media to choose among. They are deluged with messages – to the point of information overload. They have found ways to skip TV ads.  And they are captivated by new kinds of media, such as You Tube and Facebook.

Three technology-enabled alternatives to the status quo were discussed this morning by a panel sponsored by the law firm Frankfurt Kurnit Klein & Selz. The focus was on who owns creative content and how these ideas are paid for. What the new accepted practices will be will have to evolve over time. But clearly, advertising is undergoing a metamorphosis.

The challenge is what it has always been: how to come up with a compelling creative concept that will make the cash register ring for a product. Technology has added a new twist. Aren’t ads simply a form of content? Can’t they be interactive games or songs? How does user-generated content figure in this as opposed to ads created by professionals?

But once ads become content, the creative brains behind them take on an importance greater than that of a hired hand, something comparable to that of a star screen writer or songwriter. That’s when you get into serious questions of intellectual property ownership and compensation.

One new direction comes from OpenAd.net, which calls itself “the world's first online marketplace for buying and selling advertising, marketing and design ideas.” OpenAd wants to democratize the ad businesses by enabling students, professional free-lancers and ad agencies to compete side by side. In addition, it wants to give creatives a chance to benefit financially from really great ideas that work.

Creatives all over the world who have registered with OpenAd create ads in response to briefs from ad agencies or advertisers. Buyers who have enrolled as OpenAd members get access to diverse creative approaches and can license these ideas as they use them. Creatives are compensated proportionate to the value the buyer perceives in their ideas - as expressed in frequency of use - as opposed to the traditional one-time fee based on time and materials.

Grey Worldwide has been pioneering another new direction for at least five years: creating ad content as branded entertainment. It’s also helping brands get ownership of songs they use as well as using songs as key branding tools. The agency becomes the brand’s A&R consultant, proposing artists and songs as well as their interaction with the brand. In one ad, for example, Rihanna plugs both her own album and Cover Girl products in a format reminiscent of MTV. In another the Black Eyed Peas chant hip hop lyrics owned by Dr. Pepper to promote sales of Dr. Pepper soft drinks.

GO Film, a production company, collaborated with McCann Erickson to produce two music videos by Christopher Guest that pitch Intel processors through original songs that incorporate technical terms specified by Intel. The videos, which were posted on various techie and non-techie Web sites, are designed to deliver pure entertainment value as a basis for an enhanced brand image. One video tells a story about a soft-rock singer – representing Intel software – and a hard-rock singer – representing Intel hardware – and the pleasure they bring their audience of office workers.

Advertising is still a message controlled by a sponsor who is identified and who pays for distribution. But the nature of the message is taking on radical new dimensions, dimensions that at times seem to erase the line between entertainment and advertising.  The times they are a'changing!

 

 

Israeli Technology Delivers a Brave New World to Advertising

By Eleanor Haas

NY:MIEG, a media information exchange group, billed the breakfast event as “Cutting Edge Digital Media Trends featuring Israeli Technology Innovators.” “Cutting Edge Digital Advertising Trends” would have been more accurate.

What trends surfaced?

1. The future of advertising lies in accountability – advertising that can be precisely targeted, tracked and measured – which is to say, digital advertising.
2. Internet content will be increasingly in full-motion video, not text, as today.
3. To quote John Dillinger, “I rob banks because that’s where the money is” – and Israeli technology entrepreneurs come to New York City – not Silicon Valley - because that’s where their media customers and financial sources are. R&D tends to stay in Israel.

4. Mobile is what’s next for interactive advertising. Consumers will be connected through a device that’s always on wherever they are.

5. For new opportunities, look to services that we pay for at present to be liberated – such as what Jingle Networks is doing to “destroy a fat existing market” for telephone directory services and Skype gives users a way to bypass costly phone networks. It’s likely people will in time be paid to carry a cell phone rather than having to pay for it.
6. Telecom carriers are afraid of becoming just a pipe, like the ISPs before them, but it’s only a question of how and when the rules of the game change so that they have no choice but to go with a free operating system. Google may well be the catalyst for this.
7. Out-of-home advertising, once largely billboards, will become increasingly digital and will expand exponentially. (Taxi Tech is one example – I loathe it, as does the man sitting next to me but younger people who have grown used to having in-your-face advertising 24/7 may well take it in stride and make us seem like fossils from a bygone age of more gracious – and private - living.)

Five Israeli innovators told their stories:

• AlmondNet, Inc., (www.almondnet.com) has helped pioneer behavioral targeting and profile-based advertising since 1998 – targeting interactive ads to viewers based on a profile of   past viewing behavior. (I’m sure this works to at least some extent for travel, finance and sports, but they’ll never catch me! My viewing is far too diverse – and seldom in these easily tracked areas.)
• Pando Networks (www.pandonetworks.com) has established a managed, hybrid peer-to-peer content (and ad) delivery platform designed to maintain central control of content distribution. It enables viewers to multisource online video and music content by downloading Pando’s software, which, in turn, makes it possible to use existing content delivery networks (CDNs) to support viewers’ bandwidth. (Napster put control in the hands of viewers, who used it to steal music and video content. Pando gives control to the content owner.)
• Outbrain, Inc. (www.outbrain.com) is developing a rating and recommendation platform for blogs and RSS feeds along the lines of what Amazon.com does. (As with behavioral profiling, this just doesn't work with viewers who have insatiable curiosity about a broad range of subjects.  Amazon’s efforts to entice me with recommendations seem laughable and irrelevant !)
• Taxi Tech (www.taxitc.com) developed the touch-screen systems we’ve begun seeing in New        York City taxis, which track locations through GPS technology, provide destination and weather information (and ads) and enable passengers to pay their fares with a credit card. (You’ve already read where I stand on taxi video screens – and if cab drivers don't have better luck with credit cards than e-commerce vendors have had, it could well be the credit card companies that put an end to this.)
• Aditall (www.aditall.com) makes professional interactive video ad creation, production and delivery cost-effective by automating creation and production and partnering with distribution companies to deliver the ads by demographics and interest to relevant target audiences.  (User-generated advertising! I guess it was inevitable!)