Author Archives: Dan Ramsden

About Dan Ramsden

Dan Ramsden is founder & CEO of CoRise Co., LLC, a New York based merchant banking firm specializing in disruptive media & digital technology. Dan has covered the media segment, with all its ups, downs, transformations & evolutions, since 1994. He has been on Wall Street for a few years longer. Discourse and Notes is a forum for his favorite discussion topics.

Long capital in option season

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A buyer is offered two items: an armchair and a formula. The armchair is used for sitting, storage, cushion, obstruction, place-holding and decor. The formula may be applied to some of these things. It might never be useful at all. It may be used destructively, but that isn’t fully established. There will be experimental uses, retroactive uses, multidimensional uses, limited and unlimited uses, and so on, and one day the formula may even become an object with cushions and other practical nicknacks. Maybe one day the formula will turn into the most valuable armchair in the world. Whereas the actual armchair, the one that is offered, will never be that, or if it is, its price reflects this special status.

In digital media – and all media is digital now, even the media that isn’t – there are many formulas and few armchairs. Even the armchairs are formulaic on inspection, which is to say, these may turn into something else before long, or may become extinct. Without putting too fine a point on the notion, in this volatile and transformative segment most value is option value. That’s an exaggeration, but we are speaking relatively. Take Google, for instance: Is it farfetched to consider that its search mechanism may not be favored by the world in perpetuity? Is it possible even that search as we know it will change in a matter of years? Can we say with precision that Google will always be a search platform foremost? Google, in this manner of speaking, is more formula than armchair, its ample cushions notwithstanding.

And that’s Google, one of the world’s dominant. Think of the wannabes, Twitter for instance. But that isn’t even the best example, that one is sitting pretty, all things considered. Think of the startups trying to go where Twitter is, and maybe someday Google (in its prime). And think of the poor buyers and investors as they look into this hodgepodge of formulas and no armchairs. When I say poor, I don’t mean this in the literal sense, there is more dough in the petty-cash box than there are hashtagged tweets out of Austin. And that is a lot, that’s enough to buy every platform in attendance at #SXSW plus every idea dreamed up there in moments of enthusiasm, at a premium to satisfy every liquidation preference several times over. They call it cash hoarding, you know, for a reason.

But when somebody evaluates a formula for purchase, the evaluation can’t be like when we are buying furniture. One can’t sit on a formula, bounce into positions, unzip a cushion or two. When buying formulas, it’s the idea that matters, the way that it fits in the context of others, the ways in which context evolves with time. There is strategy to consider, there is changing circumstance, there is competitive response and new competition, all manner of predictable and unpredictable variations. When price is heavily predicated on option value, evaluation is hard for the buyer, hard for the investor, and hard for everyone in between. Armchairs are easy, is what I’m saying, but armchairs are a thing of the past.

These observations, like so many others, are traceable back to capital and its behavior. When volatility is high, so is option value, but costs are best held in check: Thus, note the cost control emphasis in the new business paradigm. When the landscape is fluid, so is opportunity: Note the expanding entrepreneurship motif in the broader economy. When the environment is constantly transformed, it is best to monitor and study, and to treat investment with greater discipline and care: Note, thus, the previously mentioned cash hoarding; note also the diminished average acquisition-size in key digital and technology sectors. When traveling as though on waves in choppy water, it’s best to know how to adapt and maneuver, how to avoid riding a single wave down to the ocean bottom.

In short, the most efficient capital in present circumstance may be intellectual capital. This requires work, and it is never-ending. The armchair metaphor was picked here for a reason: It’s best these days not to sit around much; one may find oneself relaxing on a formula, thinking it might be a cushion.

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The world as will and representation

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The title refers to a very long story, don’t ask. It’s doubtful that when Schopenhauer penciled in his treatise he was anticipating Pinterest, although I can’t vouch for anyone’s anticipations, least of all Schopenhauer’s. Regardless of all that, the author was so prescient that the only way to have  described social media more precisely would have been to draft up a chapter on Facebook. In fairness, will has been a fixture in the world since forever, but representation has sure come up fast, and there could not have been so strong a hint of its potential in 19th century Germany. Let’s give credit where it is due: Schopenhauer understood his market. Like Zuckerberg, he had his finger on the pulse.

This post, however, is not about Schopenhauer, not per se, but rather about data and commerce, some aspects of security, and the association these all have to advertising (with media as go-between). At one time there was something of a ritual, a game of sorts, in which the merchant-pursuer courted the consumer-pursued while the latter hid modestly behind a curtain, listening to pebbles tossed against the glass from below. Blip, yoo-hoo, show yourself, look at the merchandise I hold. Occasionally the curtain might stir, signaling impatience, or maybe that the message was heard, and maybe – but this was more than the pebble-tosser could hope – that the merchandise was being studied. There was a mystery to the affair, and the will of the consumer was revealed only in measures. That was before representation really took off.

The consumer-pursued, in a reversal of roles, is now turning to pursuer. The curtain is pulled wide and the presence that was previously mysterious and delicate is chucking blunt objects back at the merchant. No hints and giggles, no side glances, but a loud show of interest, whack, I want this and that and I want my friends to want these also. The world as will and representation, like I said, and Schopenhauer couldn’t have scripted the scene more clearly.

Again, this leads us to consider data and measurement, the safeguarding of consumer information, and the association these have to commerce (with media as go-between). In the days of modesty, when the consumer-pursued played games with merchant-pursuers, the role of data would have been to draw down hints of what went on behind those stirring curtains, and security (among other things) closed windows and wrapped curtains tight up there behind the glass. (The past tense, incidentally, is used for effect – these days are kind of still present – but Pinterest may be providing us with clues of what could lie ahead.) If we extrapolate out to a futuristic era in which the windows are swung open and the rocks fly down with fervent precision to let merchants know precisely what’s expected and when, then the roles of pursuer and pursued may not be the only reversals we will witness. The supporting cast – data, and that which would keep merchants from getting it – may also be reconfigured.

When the consumer doesn’t want to hide, when buyer chases vendor without hesitation, then maybe data turns into a tool for shoppers. When representation is less a process for advertising but a demonstration of consumer will, the veils too may change from one side to the other. The Pinterest phenomenon is fascinating to observe, and the platform’s popularity – taken with continued growth in check-ins and similar expressions of consumer preference – might be studied in relation to data and security trends. While rules of engagement may very well be absolute, the direction of these – such as, for instance, the path that leads from will out to its sequence of representations – is often relative, and might even change course every so often.

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Match-funding ventures when the distinction between early and late is vague

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Match-funding was the subject here in the previous entry. The idea was proposed that the matching of an asset’s life-expectancy with a funding source of similar duration is as applicable in technology investing as in, say, inventory finance or plant and equipment. It was suggested, however, that different technology types have different life-expectancy, while institutional funding sources for these – at least in the early stages – are fairly uniform in their term. For purposes of this discussion, technology refers to digital media and related software, hardware, applications and services; and funding sources are venture capital and its derivatives. The issue is one of technology obsolescence, innovation and evolution that happens at different rates, more or less rapid, and the mismatch this might cause for funding sources based on standard multi-year horizons.

This was all heading in the direction of explaining low venture capital returns in the past decade (as a general category) in terms of more than over-supply of capital – a quantitative discussion – by also introducing qualitative aspects. Increasingly as I consider these themes, I arrive at one of two places. Given that long-term hold-periods are most appropriate for long-term assets (match-funded), in digital media this lends itself best to networks and network-related businesses. As discussed in previous posts here and there, these have shown great resiliency, even as circumstances changed (and continue to). These businesses have been the ecosystem in which new modes may or may not thrive, while networks themselves survive (in one way or another) the technical transformation. Perhaps not surprisingly, the venture funds with the top returns have been those highly weighted in these categories (thus match-funded).

Conversely, shorter-lived technologies should be matched up with shorter-duration capital. Perhaps this is a function of exit timing, but not all exits are the same. Businesses most likely to be independent – and in a fast-paced innovation environment this also means those most likely to transform and readapt with time – make more appropriate IPO candidates (or candidates for other secondary market exits). The others should be sold to a portfolio aggregator – which is to say, a strategic acquirer that is best suited to combine and diversify platforms – realizing that certain technologies will withstand the test of time for longer periods than others and accepting the risk in a portfolio system. Such acquirers, given their size and resources, will also be best suited to evolve with changing technology trends, and the acquired platform might thus be best positioned to optimize its value.

Regardless of the profile and alternative, however – and the complexity of issues and options far exceeds the summary presented – the idea of matching asset life-expectancy in technology with its proper financing model is an idea that warrants much further consideration. It isn’t clear that the startup ecosystem is as evolved in this regard as its more mature corporate finance counterparts, but the basic tenets of corporate finance apply to startups as much as mature companies. This is especially the case in an environment in which the distinction between one and the other is blurry at best, and arbitrary at least. As I wrapped up the prior post: Not all early-stage businesses are equally early, not all mid-stage ventures are equally in the middle, and not all exits are mature. By the same token, not all multi-year commitments are equally appropriate.

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New corporate finance and the lost art of match-funding

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All the innovation in the world doesn’t change fundamental corporate finance. We may not value some assets the way we once did, we may not always have revenue to compare or cash flow to multiply, but assets are still governed by asset rules. We just have to look at it that way, which is to say, we have to remember that we are dealing with assets. For instance, assets have finite lives – it’s only a question of how finite – and between now and then assets depreciate, amortize, or deplete. Further, assets are funded with liabilities, and it is best for the two sides to overlap. Back in the day when corporate finance precepts were based on a greater vocabulary than Series A and IPO, there was the notion of match-funding. This had to do with the term of liabilities (not to be taken literally as debt only, but any financing) as corresponding with the life of a given asset. The two went hand in hand back then, and theoretically still do. We only have to look at it that way.

To transport these old-fashioned concepts from the era of leveraged buyouts and inventory cycles and working capital management to the new era of innovation and Series A rounds, we should begin by thinking of apps and technology solutions and websites as the new inventory and working capital and so on. Like inventory, like property and plant and equipment, like accounts receivable, the new apps and sites and technology solutions are assets with finite lives. For instance: the mainframe, the disk, or the walkman, or for that matter the physical book, the TV network, the web portal. In some cases the asset manager, as it were, has been able to reinvent or introduce new assets – IBM being an example – and in other cases this is less so. (Because of technical obsolescence in particular, such assets have typically been funded with equity, the murkiest and least rigid of the liability classes, where liquidity is a matter of secondary sale rather than repayment.)

From this synopsis, which is limited although extensive enough to get us going, we derive several themes: Different types of technology solutions and apps and sites have different (expected) lives; some owners and operators are able to extend the lives of some assets, and others are not; some owners and operators manage a better portfolio than others, knowing how (and when) to acquire, exit, reinvent, transform and such things for which Apple is a good case study; and the match-funding of assets is, at least theoretically, based on a liquid equity profile that is as long- or short-lived as a given situation warrants. From these ideal roots to the reality of actual branches – characterized by frenzied innovation, funded privately and not necessarily efficiently – there are a few disconnects and rough patches worth noting. Here are some, just to get going:

Entrepreneurs and their funding sources alike often talk about differences between products, features and businesses – in the context of startups and the prospects of these – but not so much about life expectancy. In this regard, there are substantial differences in profile. Some technologies – security software, for example, which gets hacked over or otherwise rendered old fairly quickly – might have a limited term to maturity, as it were, while a network asset – even MySpace or Aol’s dial-up service – is likely to linger around and sustain repeated beatings. It isn’t that these networks will survive into perpetuity – we see now that cable systems are even at risk of cord cutting – but there is a resilience to networks that mere technologies don’t possess. And in between, there are variations, permutations, and combinations, which can cause (expected) lives to vary along an extensive continuum.

… While on the other side of the ledger, at least in the early stages of development – from birth to infancy and into adolescence at the very least – the funding of these assets is, as a rule, uniform in term. The sequence is usually one of seed finance to a variety of venture capital series, all (or most) of which are private and marked by uneven liquidity options. Institutional participants in these financings typically strive for five- to ten-year capital commitments, and this is a general rule of (financial) asset-class that doesn’t seem to differentiate between (operating) asset-life profiles, as noted. In short, there is an absence of match-funding, or if there is some of it, this is in many cases haphazard and not necessarily ruled by fundamental corporate finance analysis.

A lot has been said about sub-standard returns in venture capital in the past several years, especially as the effect of the late-90s bubble has been processed out of the ten-year calculation. The discussion has for the most part honed in on issues of amount and an excess of capital supply. Correctly, this is an angle driven by ever-diminishing startup costs in the technology segment. But in the past decade another phenomenon has emerged, which is a quickening of maturation cycles for these businesses. It is no longer standard fare that maturation is a multi-year process, and by extension neither is life-expectancy insulated by such a cushion. As life terms have been exposed, in a manner of speaking, and are now a purer function of technology type, as discussed, we should begin to see the funding discourse also evolve. Match-funding – which is a qualitative trait – should start to play a much more prominent part alongside quantity in the financing analysis. Not all assets are equally young or old, and not all should be financed or un-financed in the same way.

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Easing back into the lasting basics

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The entrepreneurial experience is one of intensity and turns. One has to look out into the distance and at the same time with a magnifying glass at a spec of dust that may be the beginning of a crack in the terrain. The distance may then be more intimidating or less, depending. Decisions are made that might at any point build or just as easily destroy precious value – value that took intensity and turns to create – and I don’t think this is being overly dramatic. Then there are the milestones, past and future, and with each that the business passes the business evolves. Which is to say, the business changes, and so do milestones ahead. The intensity and turns, however, are pretty much the same. This is constant.

There is a great deal of advice in the world for entrepreneurs, and some of it is contradictory. There are fits and starts and there is occasional follow-through. There is plenty of formula, but each situation is different. There are charts and relational schematics, there is data and visualization, and at times the result is like a ball of yarn all tangled up in a mess that denotes the competitive environment. And yet, most situations are simple when stripped down to an elemental core. Elements are pure and the core of most subjects is accessible; but organized thought is required. Sometimes this is a matter of reduction, sometimes elimination, or it needs lining up in an ordered row, and it’s always a matter of filtering out excess. There is plenty of that.

The ancients, I’ve tended to conclude, were better suited to the task, better conditioned for clarity. Maybe they had more time on their hands, or maybe they were more patient, more meticulous, in carrying arguments through. Sometimes, although not often enough, when I am able to hide away and block out the noise, I try to remember the ancients. If read figuratively rather than for literal meaning, the parallels and lessons for business building are almost startling in these ancients. The Republic, for instance, is not only a treatise on the building of a city, and The Politics is also about preparation and execution. There is a wealth of such material worthy of keeping on one’s shelf, and just knowing that it’s around sort of clears one’s head.

There are, as well, one or two books for the nightstand. These are not quite as actionable, strictly speaking, as the aforementioned. Those being for the day, as it were, these others are for bedtime. In ways these are meant for balance and easier rest, to keep readers and other decision makers grounded: The Meditations and The Book of Ecclesiastes come to mind. Calculation, clarity, strategy, vision, management and all that, are well and good, but one shouldn’t ever lose one’s cool and forget the truth of seasons, tides, and the sun’s rotation. The ancients, I think, were mindful of this also.

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Networks and switches are different now

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Necessity, inertia and fickleness are points along the same continuum of consumption. We talk about network effect when we talk about some of these points, and there is the notion of switching cost when we talk about some others. These may be separate points, but these are also related. If network effect is a positive attribute – a quality based on value offered – then switching cost is defensive and almost negative: One is reason to stay, the other one not to leave. When options are plentiful and often interchangeable, the distinction between these is vague and maybe inconsequential. By the same token, a vendor in a plentiful and increasingly undifferentiated market has to consider these yings and yangs with increased care.

In the four spheres of media – social, information, entertainment and transactional – we look to Facebook, Google, Apple and Amazon respectively for illustration. That Facebook benefits from network effect is essentially a given, and after years of building one’s user profile and accumulating associations, a subscriber’s cost to discontinue use is almost frighteningly real. The other three have networks of their own, and switching cost strategies that go hand in glove, although perhaps less obviously. These often have to do with hardware and software combination, or with the blending of other seemingly disparate codependencies: payment systems, messaging tools, email protocols, recommendation engines, file storage, device integration, retail outlets, and other imaginative ways of building consumer dependence in an otherwise commoditized environment.

An iTunes library, for example, is something you wouldn’t want to lose, and when access to this is consolidated across multiple devices – iPhone, iPad, iPod, MacBook – you probably don’t want to lose these either. You probably want to upgrade, in fact, and visit the Apple store on occasion to keep up with the latest. This is network effect also, in a sense, and now that iMessages are being rolled out across the spectrum of products, the network is no longer merely proverbial. Seen in this context, Amazon’s aggressive move into hardware and integrated software and eBooks and now also a store outlet is almost a perfect replica. In this context, again, Gmail and Wallet and (coming soon) Drive and all the other apps and paraphernalia in the Android ecosystem are a collection of hooks to grab us back. A time may come when a more popular search experience is introduced elsewhere, and then these hooks could really prove their mettle.

As we consider these and related sector trends – strategies pursued and behavior observed – the thought occurs that social networks are not the only networks in new media realms. The thought also occurs that old networks – the telephone and cable systems – are losing some of their fabled cachet. This leads us to consider: In an environment of media innovation on one hand and technical commoditization on the other, network effect requires constant nurturing, and switching costs have always to be multiplied.

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This isn’t about basketball

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It is painful for a New Yorker to hear about Jeremy Lin and not be able to see him. This epitomizes the adage, to be a Knicks fan is to suffer. For more than ten years we have suffered through bad trades, mismanagement, underachievement, and we’ve almost become numb to it, even as matters have gotten systematically worse. We already suffered in the ’90s – John Starks in game 7 of the ’94 finals, the Ewing fingerroll in ’95, the Riley fax soon after, the Miami suspensions in ’97, injuries in the ’99 finals run (poor LJ, bad back and all, 6-feet 7-inches when standing up real straight and in high-heeled sneakers, covering both Duncan and the Admiral in game 5, oh how I remember). But that was nothing compared to the decade that ensued. Please don’t get me started, I could write a book, it would be long and sad, it would lead to existential doubt.

And now, as if to mock the suffering of fans all over New York and in an especial way as to leave no doubt about the mockery, the Knicks have produced a legitimate sensation (although, in fairness, they did stumble upon him bass-ackwards), are on a five-game win-streak with a cast of rookies, journeymen, and castoffs, the whole world gets to watch and cheer… but New Yorkers do not. From the perspective of art, I have to say this is genius. This sets a new standard of irony that will be hard to match, even in New York. (For those of you who are not aware, Knicks games are not televised by the local cable system this season on account of a contract dispute. The situation had escaped the notice of many locals until recently, because, you know, so many of us had reached a point of inertia vis-à-vis caring.)

All of which said, there is no better time to formulate opinions than when one doesn’t have full access to the matter at hand. The more informed one is, the more complicated and nuanced a subject becomes, and you get to a point of paralysis eventually. Not so with the Knicks, it’s a very simple subject, and rendered more so because none of us have seen them play. At the beginning of the season I was contacted by an old friend, who, aware of my long suffering, was cheering me on with the All Star front line the Knicks had accumulated. I questioned his optimism, in part because it’s been a long ten years, but mainly because of this: basketball is a game of chemistry and rhythm. Unlike, say, baseball, where individual statistics rule, basketball is not about numbers in isolation but about striking the right formula. It isn’t easily predictable, and far more complex a task than accumulating talent.

With history as a guide, let’s take a look: Michael began his legendary run only when the right coach with the right system were introduced; Shaquille, with the same coach, still needed the right partner, who wasn’t his first; the San Antonio Spurs have won their litany of titles with one of the lower payrolls in the league and a revolving door around a systemic core; and even the current Heat with three of the current league’s best have had to implement a system in which each of the three has made substantial adjustments: It’s the system, the chemistry, the formula, not merely the statistics. In the case of the Knicks, we note that their recent success has come precisely in the absence of the All Star flash, two of which players have not participated in this stretch of games.

Somewhere I saw someone post that the next commentary he sees about Jeremy Lin and the Knicks as analogous to enterprise building will prompt him to stop reading. I understand and sympathize. So let’s say that my commentary is not about any of that, let’s say that it’s strictly about the notion that success begins with a system and is perfected by chemistry. Let’s say that this is not only about business, but about many things. And let’s say that sports can teach us many lessons, and that ten years of suffering by Knicks fans has not been for naught.

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The author’s voice

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I am thinking about nuance, about the space between the digits. If 1s and 0s make up our communication systems, I am thinking about the messages that get lost. It’s a complex subject, extending beyond the isolated confines of programming. The binary simplicity of code has its parallels in other modern systems and perceptions, and maybe a program can solve the circular causality. Take, for instance, the term social graph, used to describe the totality of our interactions. Take, for instance, LOL, an expression of humorous appreciation. Take big data, a way of collecting information about whole groups of individuals. Or take even high-frequency trading, the dominant driver of capital markets volume, often associated with programmed interpretation of news headlines. These are examples of depth reduced by formula, color translated by algorithm, even if only as a form of expression.

This reduction is a necessary step in technological evolution, which in the last century (and the last decade even), has made huge strides. But there is a risk, I think, in premature celebration and basking in the glow of what is still an intermediate step. If our digital solutions end here, if our communication mechanisms stop at the current 1s and 0s and simplistic LOLs, this will have been an underachievement. The next goal, at least to my way of thinking, should be to capture the space between the digits, the nuance; and when this occurs – when the grandeur of analog is recaptured by digital – the truer potential of technology should be one step closer to realization. (Artificial intelligence, as a general field, is possibly the forefront in this effort, and it is indeed a very large field and work-in-progress. Siri itself would undoubtedly confess to that, in its monotone.)

To ellaborate the point, and what got me thinking about these digital subjects recently, let’s sample three different Bob Dylan releases of Idiot Wind. Each is the same melody, with more or less the same lyrics, telling the same story (“Someone’s got it in for me, they’re printing stories in the press…”) in the same key with the same chords. And yet, each is an entirely different song because the author’s voice is different in each of them. There is the Blood on the Tracks official-release version, marked by anger, defiance, and occasional sarcasm; there is the outtake in the Bootleg Series, on which the voice is toned down and the song becomes a melancholy, often heart-wrenching, reflection; and there is the live rendition on Hard Rain, care-free, liberated, almost jubilant. The same song, three different songs… and what galaxies of meaning there are surely in each trifle of an LOL.

The point here, again, is not to pick on text messaging or emoticons or social graphs and big data and high-frequency trading, but only to illustrate the diminishing and constraining quality of these methods that underly much of our communication and digital technology. To continue with the analogy, these are often like song lyrics read in the manner of text, in isolation, without melody, tonality, and the singer’s interpretation. From the perspective of the audience, these are like mere boos or cheers, 1s and 0s, the only possible reaction.

Nor is the point to pick on technology and its many gifts – that have caused such advances in science, economies and human progress. The commentary, rather, is in relation to the distance that must still be traveled before we can rest (if even then). And on some level, I suppose, it’s also a call that we shouldn’t settle, content to reside in some demographic definition, some trading algorithm, some social graph. These are all intermediate stages towards a goal, means to other means to others, and so on, rather than a discrete conclusion. Anyway, I was thinking about these things the other day as I was listening to Bob Dylan.

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Evaluating a big network, which isn’t the same as a big product

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The financial event that defines our era is, according to reports, upon us. Maybe its significance is not actually all that – considering other events that have shaped finance in our time – but beyond the obligatory panache of an opening line there is an element of truth to the statement. There are approximately seven billion people on this planet, and more than one of every ten (including newborns and residents of remote unconnected places) are registered on Facebook. When Facebook prepares for its initial public offering, this is almost a redundancy. And while its IPO may not be as consequential as, say, TARP or QE rounds or LTRO, or all the littler happenings that led up to those trillion-dollar items, Facebook is as real a symbol of our era as any bailout; on some level, perhaps, these symbols are anyway intertwined.

The reason for the introductory bombast is more than stylistic, and really quite substantive; it has to do with valuation. As the punditry are already circulating financial metrics and operating assumptions, seeking to benchmark these against an expected $75-100 billion reported value range, I say this already misses the point. Because Facebook is not merely a large business, or merely a dominant product, but rather a global network with its precedent elsewhere. Were Facebook a growing and substantial business alone, were it a utility only, then revenue multiples and such conventional analysis would apply. As a global interconnection of massive scale, however, as a standard of interpersonal communication – like, possibly, the telephone or email before it – conventional analysis is rendered secondary.

Let’s assume for a moment that Facebook’s current revenue model collapses immediately. Let’s assume that advertising goes away. Does this mean that a network of 800 million registered users has lost its value? This would imply that the value of a global network of such scale resides within the confines of foreseeable business prospects, which begs the following question: If email or phone technology were owned by one entity, would its current monetization mechanism really matter or would its existence alone suffice? The rhetorical point being this: A network transcends fleeting business models and products that come and go. A network makes business and products possible, and it can’t be circumvented.

Valuing such a thing, putting a number to it precisely, is no easy feat. If absolutely pressed, I’d be inclined to go with something like a customer lifetime value calculation, but staring into the unknown. I would ask myself: How much, on a present value basis, would the total of all current and future entities in this world pay Facebook to gain access to its average current user? This is overly simplistic, of course, because the user base grows and also churns with time, and a lot depends on which of these outpaces the other. A lot also depends on the cost to maintain the user base and secure the network, whether growing or shrinking, and capital cost plays a circular sort of role in the calculation, as always. It is not an easy trip, like I said, but we should at least start on the proper track, in the correct direction; I don’t believe conventional metrics are appropriate.

In coming months we should expect a great deal of arguing to happen, as is fitting for a financial event that defines our era. When the dust settles and the deal gets priced, the market will have, as always, passed its sage judgment. When this occurs, I would look for Facebook to become the benchmark against which other digital media businesses are valued, rather than the other way around, and I would look for standards to be established on its basis.

February 3 Update:

Facebook has filed its S-1, as expected, to launch its monumental IPO. As is natural, the punditry and analyst community have been vocal, and my partners and I at CoRise have contributed to the dialogue. Please see our overview presentation, seeking to develop the ideas expressed in the preceding commentary and to quantify some of the variables described. This may be accessed through our website or directly here.

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The value of elemental networks

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It’s been about a year since I wondered about the origins of networks and their specialties. I was thinking at the time that there’s a reason why Facebook is not the end of all discussion, full stop, dominant and well positioned as it is to be the only network for everything, at least on the surface. I was thinking at the time that there’s a reason why networks and their uses are different from, say, search – an activity more prone to standardization and universality – and why we use different networks for different reasons even if we mainly use the same search engine for everything. I concluded then that both phenomena have something to do with habit that gets formed at inception, which is difficult to break individually and even more so globally as networks solidify out of intertwined individual habits.

I still think this, a year later, and because it is a year later and evidence keeps pouring in, I now think a little more. It was my recent introduction to Instagram that planted the seed. A friend turned me on to the picture sharing platform the other day. As I played around with it and as it quickly grew on me (I had been a viewer but now also as contributor), it dawned on me that social networks are different from applications – say, search – because networks mirror our mental processes and the variety of our daily existence, while applications are strictly utilitarian. Instagram is about as pure an illustration of what I mean, functioning as it does as an outlet for its users to describe how they see. By the same token, Spotify or other music networks are a reflection of how they hear. To extend this reasoning a bit more broadly, Twitter is an outlet for how we think (sure enough, in snippets), Facebook for what we like, Foursquare for where we go, LinkedIn for what we do.

More than to (hopefully not) state the obvious – and certainly not to diminish the scope of large global platforms – the point of the above is principally to say this: Just as we don’t, strictly speaking, see with our ears or hear with our eyes, we have tended not to intermingle the networks that reflect our assorted states. And unlike our use of functional applications – say, search – which is perhaps more truly attributable to habit, social networks are profound elements of who or what we are. A corollary to this generalization is that a utilitarian application – a search engine, for instance – depending as it might on mere habit in a commoditized environment, will be at risk of being displaced (because habits can be broken), while a network is much less exposed to this risk. It also follows that elemental networks have an ingrained asset-value that functional applications have to perpetually build.

Having jotted down these thoughts, I’m going to post a link on Twitter, which is where my snippets are carried every day. Because this article relates to sector analysis and certain stocks, I’ll take it directly to StockTwits, where the audience shares my analytic interests most of all. Follow me there, if you like, or if you’re curious to see how I see, check out this batch of pictures I loaded up on Instagram. These were taken on a recent trip to Los Angeles, which is a city I love.

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