Deep Breath Necessary to Stop the Hyperventilation and to Get Oxygen to the Brain

I enjoy reading Nicholas Carr’s blog precisely because he tends to throw grenades at the Web 2.0 echoplex, but his latest post is in almost every way hysterical.

Carr — and his brother-in-arms, Andrew Keen — argue that web 2.0 technologies that “democratize media” will “democratize talent” and we’ll be “left with nothing more than ‘the flat noise of opinion — Socrates’s nightmare.’” And that we’re “building a machine that will, to great and general applause, destroy culture.”

This is just silly, silly hyperbole. (And it should be noted I write that as someone who loves his old media, who has also questioned the utopian claims of the web 2.0 evangelists, and who thinks that the online, interactive world may not be right for all talented people.)

Long before any “Web 2.0″ service came along, some people, for example, decided Britney Spears, Danielle Steele, and Yanni were talented. Some people deemed their works “culture” or “art.” I can pretty much guarantee they weren’t bloggers or Google or Craig Newmark …

These two posts are so full of apocalytic prose, and so lacking in any logical argument, it’s hard to figure out what their case really is. But I think they’re trying to say the following:

1. Web 2.0 technologies will make it easier for more people to create more content, and a lot of that will be crap.
2. Personalization technologies and filtering technologies will make it easier to get only the crap we really like.
3. Real “talent” and thus culture will be strangled by these twin forces.

Can I say “Yanni” again?

Look, lot’s of people have been able to create bad art, music, writing for a long, long time. And people have been able to quaff down that badness without restraint. Web 2.0 technologies will not change those entrenched human behavioral dynamics much — either for the better, as the utopian cheerleaders proclaim, or for the worse, as envisioned by Carr and Keen.

And while new technologies will undoubtedly cause some disruption in how we find and celebrate real talent, I do not doubt that there will be mechanisms to sustain their work in some way. This is not a new problem, really. Saul Bellow managed to make a living while most people were reading Danielle Steele novels, not Herzog.

The ultimate irony — and unintentional hilarity — of these posts is captured in this phrase from Keen’s piece (cited approvingly by Carr):

“Blogs personalize media content so that all we read are our own thoughts.”

That sentiment — with which I so fundamentally disagree — I found, of course, in a blog, via my personalized Bloglines feedreader. Hah!

Real Alumni

I had lunch today with a friend and fellow alumnus from Real. He’s doing a start-up, his idea is a good and interesting one, he is off to a nice start, and I would bet it will be a success given his track record. I won’t write about it here because what he is doing is not yet public or announced, but it did remind me that there have been so many alumni from Real who have gone on to do other, interesting things with success. I try not to write much about Real or my experience there on this blog, but thought it would be useful to list some of the successful alumni here (at least the ones I know of), as I am not sure it has been tracked comprehensively in one place.

First, there is an impressive roster of activity by some of the folks who were among the first 200 or so at the company, before it went public (for the record, I just barely qualify for that group, joining Real in October 1997 as employee 180 or so). Maria Cantwell is the junior U.S. Senator from Washington state. Philip Rosedale founded and runs SecondLife, the virtual world phenomenon. Mika Salmi (who left Real before I joined) and Matt Hulett started AtomFilms, which merged with Shockwave, and which Mika now runs. Matt went on to run the enterprise travel unit at Expedia. Sujal Patel started and is now CTO of Isilon Systems, which has created pioneering clustered storage used not only by Philip’s service Second Life, but companies like Myspace and NBC (for broadcast) among others. Len Jordan, who ran our Systems business, is now a partner at Frazier Technology Ventures. Bruce Jacobsen, who was President of the company when I joined, runs an educational software company, Kinetic Books.

Some who joined Real after it went public and who left in recent years are also up to interesting things, including Andrew Wright, who just launched his new company Smilebox at the Demo conference last week, and alums who are in senior positions at Apple, Turner Broadcasting, AOL.com, MLB.com, Googe Europe and Amazon.

I am sure I have left out many, many others who are off doing compelling work, but the list above is impressive in its own right given the size of the company.

A Modest Proposal

I’ve just read my bazillionth fluffy piece about a brilliant serial entrepreneur with their shiny new start up.

While reading it, I wished that it had included a Real Value Index for this serial entrepreneur; indeed, maybe this could be a new feature of reporting/blogging about these specimens.

The RVI would include things like:
– Do the products and services the serial entrepreneur created in earlier ventures still work, are they still used, and did they ever make any difference to anyone?
– What was the ratio of acquisition cost to their companies’ revenues (say, acquisition costs/revenues three years post-acquisition)?
– How many employees remained in the company after acquisition?
– What was the average user growth rate for the three years after acquisition?

Conversely, the RVI could be used to celebrate the entrepeneurs who stick with their products and services, who work constantly to make them better for users, who get their businesses to profitability, who create more good jobs for folks.

It’s naive, I know. And certainly heresy in this part of the world. But dare to dream.

Schadenfreude and Web 2.0

It was just the snippet of a line — it was in Daivd Remnick’s New Yorker piece on Tony Blair just before the election last spring, happily reproduced here — that made me laugh out loud and that came back to me this week. This was it:

“England, the one country where, it is said, the people feel schadenfreude toward themselves.”

I remembered that line, the sentinment of that idea, as post after post went up this past week to this wall of web 2.0 company logos, followed by another predictable round of wailing about how boring web 2.0 has become, posts starting with lamentation about “yet another (fill in social networking or web 2.0 or ajax or social search) company” and the cynical posing of people who act like they’ve seen it all before, but so many of whom have just graduated from college (or are still in college for all I know), or not yet old enough even for Mick Jagger to have said they shouldn’t even be trusted (which he said long before people who haven’t reached that age were born, when he was less than half his current age).

This all following Act I of the drama, of course, which started with last Fall’s Web 2.0 conference: the knowing winks among the technorati about “the new bubble” and “everything old is new again” memes.

I wondered, is this another case of self-directed schadenfreude — by the so-called web 2.0 community, towards their progeny, the web 2.0 start ups?  Without the humor and fun and pathos of the English towards themselves and most of all their national teams (especially in soccer/football)?

Well, who knows and who cares, that’s just the turn to get me to (yeah, yeah, a little postmodern flourish of seeming transparency and misdirection in this post) what I really want to write, which is that that whinin’ ‘n’ wailin’ about how many web 2.0 start ups there are is pretty damned ironic. Ironic because there actually are important underlying forces and developments happening under the broad rubric of the web 2.0 label, things that are fundamental and that will have an impact for a long time. I’ll pick just one, a really simple example: the use of tagging to harness what could be chaotic, random noise from the community of users to make it more productive and relevant. There are others, developments that are important and real and that will change over time how all internet services work.

I think the schadenfreude is probably despair, well placed, too, because there is a problem — which is, that while some of the new web 2.0 companies have figured out how to solve interesting user problems, none have really figured out how to make interesting businesses out of that work. Including the big flipmeat examples, Skype and MySpace, and certainly the smaller burger flips, such as Flickr or del.icio.us. There has been a surprising amount of laziness on thinking through the commercial model implications of what is happening with the web 2.0 development — just reading through the Demo 2006 reports you can see it still — with the canned reliance on ad words or “we’ll figure out a targeted search strategy.”

In my mind, there are two companies that provide a guiding light on the business model front if people would think it through: eBay and Craigslist. Not Google (despite the fact they have a great business right now). AdSense and AdWords are arbitrage plays, bounded by time and taking advantage of the current immaturity of the internet platform. More on that later.

And, finally, and apology for the David Foster Wallace-inspired sentence structures. No light, lean, clear prose here, tonight.

Quick Colophon

Tips and tricks from the community of bloggers are helpful, so here are mine for the moment.

Obviously, I publish on wordpress.com here, but also worth noting I maintain a typepad blog here. Those are my publishing tools, they work fine for me, I haven’t so far felt compelled to run a full stack of blogging software on my own. Yet. I prefer in some ways the simplicity and stability of wordpress, but typepad has a some additional flexibilty (in terms of putting little html nuggets into sidebars, that’s fun) and so I’ll continue to use and experiment with both, from time to time.

As far as html nuggets, there are a few I like. The last.fm badges on my typepad blog; I think they provide a great clue as to how we’ll use services like that to build out our digital identities on the net, in our blogs and through services like MySpace (post coming on that shortly). I also like the idea of chatango and flickr badges, but confess I don’t really use either very much.

Most importantly, my writing tool. I type these words on the Performancing Firefox extension. I really like it as a tool, I’ve played with ecto, but in the end this works fine and its free.

Irrational Exuberance?

Let me confess two things right off the top: I can only pretend to know something about stock valuations, and I’m troubled by my continual posting on Google.

Now that I’ve confessed both my obsession and ignorance, I want to write one more post about GOOG, its earnings and its valuation. I’ll try to make it my last, on this topic at least.

First off, three clear camps emerging today after the earnings announcement yesterday:

Analysts cheerleaders, who are still pushing GOOG $500
The market, which hasn’t really punished the stock too badly, and is essentially aligned with the analysts
The valley observers (as chronicled best by Om Malik), who are still bullish on Google

Basically, all three of these groups effectively have the same outlook. They all believe the earnings report yesterday was a blip, the miss largely a technical tax and accounting issue, that GOOG still rocks and is still delivering blowout growth. Sure, fine, I agree — but it conveniently ignores the real issue, which is what is a rational price for the stock?

Right now, the stock is hovering at about $400.  That provides it with a forward P/E of about 48, based on the consensus of most analysts for about $8.76 in non-GAAP EPS in 2006. That non-GAAP EPS probably translates into about $2.65B in  non-GAAP net income for FY 2006. By comparison, non-GAAP net income was about $1.6B in 2005. To hit these net income targets, they’ll have to deliver roughly $10B in revenue in ‘06, off a $6.1B 2005 base.

To have a rational PEG ratio based on that forward P/E, you would then have to believe that they can deliver between 30-40% growth in the following 4-5 years, FY 2007-2010 roughly, while maintaining GAAP net income at about 25% and non-GAAP net income at about 27-28% of total revenues. That would take GOOG to a $30-35B top line revenue ($8-9B net income) company by 2010. Basically achieving what the best technology company to date — Microsoft — achieved in its first fourteen years as a public company, but in about half the time and without the benefit of a monopoly.

That’s the outcome you have to believe for it to make sense to buy GOOG as a rational person at $400 a share, with a plan or hope to make money.

So, is it possible for Google to do this? The expectations for 2006 seem achievable based on nothing but Google’s trendlines and the scope of the opportunity. Hard — because they’re pretty much relying on continued outstanding growth in their one line of business — but achievable.

What is less clear to me is how Google gets from $10B in top line to $20B, let alone $30B, between now and say 2010. Right now, Google is depending pretty much entirely on the search-driven targeted advertising business. It really has no other business. And it has not demonstrated — at least so far — that it can really deliver a world class, compelling product (other than Google Maps and Google Earth) that is clearly better than what competitors offer beyond the core search product.

It’s interesting to compare their situation with Microsoft at a similar point in the Softie’s history. Microsoft was a $100B market cap company at the beginning of 1997. That was only 9 years ago, about 18 months after the launch of Windows95, when Microsoft was viewed as the behemoth that sat astride the industry, and had a full range of products including not only Windows but Office and a large array of server-side products, was generating about twice Google’s top line, and almost 2.5 times its GOOG’s net income. It had a trailing P/E of 50, and would continue to enjoy 40% net income growth (on average) over the following three years (which then stalled out to low double digit growth — the law of large numbers finally catching up with it — starting in 2000-2001).  To take a trip down memory lane, read this interesting piece on MSFT by James Surowiecki then writing at Fool.com.

So to convince yourself about Google’s chance to outdo Microsoft’s feat, it seems to me you really have to believe in the continued growth prospects for keyword search marketing; that Google will be able to continue growing it’s share of that market, despite incursions by Microsoft and Yahoo! among others; and that there will not be commoditization and thus lower pricing because of increased supply of avails. Or, you have to believe some combination of those things AND that Google will find a way to innovate and build other, new businesses — perhaps with a company like dMarc.

I like and admire Google tremendously — how can you not? — but I guess where I net out is that I’d be a lot more comfortable as a buyer with their shares between $200-250, a trailing P/E in the 40s and a forward P/E somewhere in the 20s. That would seem more appropriate given they are currently a one-trick pony and the unknown unknowns. But don’t listen to me, I’m also one of the idiots who thought it was pricey at $85!