Internet outlook « discourse and notes

There are little businesses and big businesses. (Sometimes big businesses are also little.) Little businesses, whether big or little, should start small and expand. Big businesses – that is, the truly big – have to begin large. An example of a big business is aircraft manufacturing, or satellite communication, or other such enterprise that is based on heavy capital investment and a large addressable market that must be tackled in masse. An example of a little business is daily deals. Sometimes little businesses behave as though big, and that is a mistake.

The daily deal business is a local business. It is built on relationships with local merchants and the local consumers who may or may not purchase goods or services from them. It is a an easy business to understand and, relative to higher technologies – say, robotics or nanotechnology – it is not dependent on leading-edge innovation. To execute the model, the publisher has to serve two masters. The consumer has to be shown good deals, and the merchant has to be delivered good customers. Little businesses are not simple, no business is simple if well executed, but little businesses are little.

The complexity of a little business, oftentimes, lies in the delicacy required to handle little things. It is such delicacy, after all, that differentiates good execution – a quality service provider – from the less good in a business that – unlike, say, capital intensive satellite communications, or high-tech driven robotics and nanotechnology – has few if any barriers to competition. Delicacy is not only a matter of detail and quality of service, but also flexibility. It is a matter of testing and iteration, and it’s dependent on limiting one’s mistakes to tiny ones.

When little businesses have perfected the trade, in a small market or in a given sector – perhaps, and even ideally, a combination of both – these businesses may begin to branch out, little by little, or otherwise consolidate. In this fashion, over time, little businesses grow and in some cases become dominant. For example, Facebook: a little business that launched its enterprise modestly, on only a few college campuses, while figuring things out. For example, newspapers: local market flyers that grew and consolidated and in some cases became national, later on.

The daily deal business has much in common with both newspapers and social media. Like newspapers it is at its core a local business, as stated, and one that is not substantially different from local flyers. Like social media it is reliant on virality and network effect, both of which depend on a platform that hits a fickle market just right. That many local newspapers have started to offer daily deals is not coincidental, nor is it random word selection that daily deals are often referred to as social commerce.

The daily deal segment has the potential to become a formidable force in modern commerce. (For purposes of this commentary, daily deals and group buying and flash sales and all such related offerings can be used interchangeably.) Although the concept is not strictly speaking new, the technology exists and the market is ready for daily deals to thrive. The process will be evolutionary, and it is almost certain that the present format will be tweaked and further molded, maybe even reshaped. There will be winners and losers, as we like to say, and in the long run consolidators and consolidated.

The most visible symbol of this sector, for the time being, is Groupon. The jury is out – although there is chatter that isn’t heartwarming – and the initial verdict will be delivered when the company’s IPO is priced. Then we will see how the company performs in the days, months, and years that follow. In the meanwhile, one could make a case that Groupon has grown too big too quickly, and that this constitutes the root of all criticism against it. One could make a case that Groupon is a little business that has behaved as though big, and will as a result face the challenge of nimbleness and flexibility and, in short, delicacy, while having to steer an enormous vessel.

There is a conflict in theoretical finance between technology evolution (obsolescence) on one hand, and the concept of perpetuity (ongoing concern) on the other. In theory, business appraisal is based on a series of cash flows capped off by a terminal value, reflecting an enterprise profile extended into an indeterminate horizon. In reality, the modern enterprise does not lend itself to such easy extension. What, for example, was the forecasted terminal value of the telephone company twenty-five years ago, and what can it be for the wireless carrier today? How confident did we feel then, and how confident do we feel now in pinning down an exit multiple, or in determining the cash flow profile on which to base it? How can we know the line of work of, say, a broadcaster in five years’ time? When we take in Amazon and WalMart in the same picture, which one do we see as most likely to compete with Facebook, and exactly how? And how likely is it that Facebook’s evolving platform will displace Google’s, or Groupon’s, or both, or neither?

It is a question of relativity, I suppose. IBM the typewriter company may in its day have been as difficult to appraise as our contemporaries, but the foreseeable future then was (at least according to nostalgia) more robust than it has become. In the long term, then and now, everyone is… you know… but the long term is now the least of our problems. When two-year old companies are transforming retail and retail is transforming entertainment and entertainment is driven by social media, which is driven by perpetual innovation, our financial models fall apart beyond Year One. From a valuation perspective, the rapid-fire transformations imply that equity value, more than ever, is really option value. We invest in order to be in the game, so to speak, and in our assessments the best we can often do is try to avoid clear mistakes, focus on certain themes, try not to miscalculate the markets, and follow guideposts with some degree of flexibility.

In media, which encompasses a great deal today, one set of guideposts that we can navigate by – there are several – are the following three value drivers and pillars of competitive differentiation: technology, profit, network effect; not necessarily all three, and not necessarily in that order. As we look at the sector holistically, as we try to the best of our ability to sift through the distractions, unpredictability, and option value disguised as equity, these three areas of strength may be as close to a permanent rule as we will likely encounter. In this context, if the following leaders are now seeming to emerge from the crowd and set themselves (permanently?) apart – Amazon, Apple, Facebook, Google (and Microsoft?) – the event is more than happenstance. In regard to technological advancement, profit generation, and network effect, these companies have proven their superiority and are prime exhibits to demonstrate the theory posited. We can probably proceed from this basic core and analyze new opportunities according to its rules. Whether a new or mature business, the parameters of judgment seem to have been established.

The legend of the Tower of Babel is, among other things, a morality tale about excessive specialization. Civilization had become technically so advanced as to lead us to contemplate challenges of almost unimaginable proportion, and in so doing we discovered the advantages of focus. This was taken to an extreme, and the result was an atmosphere of misunderstanding, an environment in which the specializations were no longer able to connect. The tower project failed.

Anyway, this is one way of looking at it. For purposes of current discussion it will do. The recent state of affairs has not been dissimilar, (which shows the lasting value of the classics, among other things). A list of examples would border on very large numbers, so we’ll stick to one industry segment and one aspect. To wit, media and its financing. From newspapers to radio to television to online to mobile, from advertising to direct commerce, from analog to digital, in all these trends the degrees of specialization and sub-specialization have increased to a point of segmented isolation. A mobile commerce executive, say, would find it hard to relate to the radio business model, and vice-versa. (Yet these businesses are not vastly dissimilar, and even share a heritage. Radio is the precursor of mobile, and its ads were the predecessors of promotions. Of course there are differences, major differences, but the contrast is not like between healthcare and natural resources, certainly not like speaking different languages.) Put these two in in the same room together, and you’ll discover the sound of absolute silence, or something worse.

But this is only an example from a high level. We could easily step further down and observe similar motifs. Take, for instance, the founder of a business that is based on social apps. Will this executive be equipped to operate an advertising exchange, or manage a daily deal platform? Maybe, depending on the person and circumstance, but it isn’t something to take for granted. Not in the same way that a radio operator could probably buy into television or newspapers and hit the ground running back in the day. Both the technology and the business models are more complex now, and the technical and business development expertise picked up in one digital field won’t necessarily translate to a head-start in another.

In finance, the same issues apply. Risk mitigation, valuation analysis, deal structures, syndication processes, governance, investor networks, these are all vastly different as we move around capital supply categories – venture capital, leveraged buyout funds, banks, angels, strategic buyers, hedge funds and other public market investors – and as we move from stage to stage of the enterprise lifecycle. What’s more, although these in many ways influence each other through a domino effect or through occasional interaction, the further apart they are on whatever continuum one would choose to place them, the less they are in tune. For example, angels and banks. For that matter, VCs and banks, or even VCs and LBO firms. Or hedge funds and strategic buyers. And as these groups are impacted by economic variables that also are enormously complex, economics study too requires several specializations of its own.

The point of this discussion is neither to suggest that specialization is a flawed approach – on the contrary, it is necessary – nor to imply that an individual could not be versatile enough to cover multiple subject areas or to migrate from one to another. On the contrary, the point is that in the described environment – and precisely because we are very capable – an effort has to be made, an effort to steer clear of the confines of focus. Or, stated differently, to steer clear of insularity. Although the odds are stacked against us – because we must compete and demonstrate top credentials – a cross-disciplinary profile could be the next step and a differentiator in the evolution of our competition. If so, it will be for a constructive cause, depending on how you interpret the old story.

When we say “bubble” these days in relation to tech and venture investing, we really mean “herd.” There are important distinctions. The frenzy that occurs in a bubble and causes values to spike without fundamental underpinning is an almost indiscriminate frenzy. When a herd moves, on the other hand, even when this is irrational and lacking in fundamental support, it is in a singular, purposeful direction. The difference is not one of degree as much as scope.

The dot-com bubble of the late ’90s was aptly named, as it was then only necessary to slap a dot-com suffix onto a business name – regardless of its nature – to get immediate attention from investors (and sometimes much more than that). The real estate bubble was aptly named because it swept across all markets and categories. The broader markets today may well be in a bubble, as asset prices have almost indiscriminately surged across categoriesÂ since the implementation of QE2, which may or may not soon come to an end. If and when it does, we’ll find out for sure.

In contrast to these examples, the phenomenon leading to a 50% increase in Facebook’s trading price in a period of months, or leading us to talk about a $25 billion post-IPO valuation for Groupon, is the same phenomenon that would lead an investor syndicate to fund a pure startup with $41 million on the basis of an idea that seems trendy enough and a team that has some experience. While these data-points may resound bubbly, these are in fact outliers in the broader sense. The $41 million injected into Color is the equivalent of at least twenty interesting new businesses that are not being funded. The money finding its way into Facebook in secondary private markets is money not flowing elsewhere in the same general category.

Unlike a bubble – which suggests an investor mentality driven by exuberance and swagger – the examples cited above strike me much more as emblematic of fear: fear of missing out, fear of taking chances where the terrain is untested, and, by corollary, safety in numbers. As introduced all the way at the top, this is quite literally the behavior of a herd.

I don’t want to rush to call the Color situation genius, but the beauty of it is that it both reflects the environment described and feeds on it. Why $41 million? Why not 40 or 4 or 42 or 400? Unlike any of those other figures, $41 million implies incredible precision and thoughtfulness, and at the same time a substantial sum that is not going too far into plain excess. That would have been $50 million… after all, we’re talking about a start-up… and we can almost hear the secondary market gears grinding already, as angels and VCs will no doubt want a piece of that action. We can already see the imitators crowding around with all sorts of â€œaugmented reality” angles for the money that’s been left out.

Unlike a true bubble, again, this pattern is presently still one of narrow focus, regardless of the whims and fancies that may change from one month to the next; and there is a very different reality down below. Out on the street, as it were, and despite the abundance of seed investment vehicles that have popped up (herd-like in many ways) during the past year or two, very smart entrepreneurs with very good ideas and prototypes still have a difficult road ahead. Raising start-up capital is still a grind for most, and may be a grind even for those who are successfully seeded as they proceed to bigger rounds in a shrinking venture capital segment.

In short, here also, in the scrappy domain of entrepreneurship, innovation, and (what should be) meritocracy, the world is not exactly the way it should ideally be. Unlike in a true bubble scenario, in which there are almost only “haves” anywhere one looks, in the scenario depicted – one driven by herd action – there is a large and perhaps growing divide between “haves” and “have-nots.” A true bubble would in some ways be fairer.

Everything is easy now. Investing is easy, building a business is easy, opining about it is easy. It’s all easy. Do you have an idea about a web app that can do something for someone? Beautiful, you’re an entrepreneur now, it’s easy. Do you have capital to invest meaningfully in equity? Great, you’re a market visionary, or a super-angel, or both.Â It’s almost miraculous, in such an easy environment, to stumble upon four blog posts (on the same day!) of which the subject is difficulty, its advantages, and its proper place in entrepreneurship and capital markets.

Written by some of the more experienced participants in the trade, these raise attention to theÂ challenges of execution, and in at least one instance the perils of prevailing groupthink. One commentator goes so far as to describe any long-term outlook as a contrarian approach today, while another points to a dearth of analytic insight – indeed, what seems like a dismissal of such things in favor of “buzz” – as the reason for his separation from the collective.

I raise these issues – both the easy environment and the reaction to it from certain corners – because these are reminiscent of the themes and dialogue one used to encounter around the peak of bubbles gone by. The markets – both private and public, and maybe the former in consequence of the latter – have swung from famine to feast in very short order, and the abundance of change may cause many to forget how matters used to stand (not long ago). The forgetfulness would be acceptable, in fact indicated, if our new market environment were to produce reasonable confidence in its sustainability. But mustering up such confidence for the longer term, groupthinking optimism notwithstanding, requires measures of blind faith.

Regardless of whether the subject is micro- or macro-oriented, liquidity can cover up major underlying faults in a system. At the general level, such liquidity has been particularly pronounced in consequence of artificial infusions from central banks in mass. At the next level down, the largest and most visible enterprise have benefitted from resulting capital availability – in public markets that have opened their doors widely. At the private level, the more substantial entities have thrived, much like their public counterparts, as has the startup ecosystem riding on the coattails of private capital accessibility (as described). In all of this, there is a chain reaction of sorts, a domino effect, that in important ways begins and ends with macro liquidity that isÂ unlikely to continue flowing indefinitely.

If and when the noted liquidity should purposefully (i.e., through central bank policy) or reactively (i.e., in response to political or economic events) reverse, its macro- and micro-lift for all involved will at a very minimum diminish, quite likely in domino sequence. If and when this should happen, the optical ability of capital to cover over underlying fault-lines will accordingly disappear. When capital does not serve to prop up value, value has to be raised from within. That is not an easy assignment for business builders, and it is not an easy assessment for investors. Expert execution, thematic long-term focus, and in-depth analysis aren’t going to be contrarian motifs against the groupthink for long.

Whether there is a bubble or not – an argument now taking place with greater frequency in both Internet and more general capital market circles – is a misplaced debate. There is, in actuality, both a bubble and not, depending on criterion, depending on many things, most of all depending on perspective. The answer is so much more nuanced than commonly assumed, it’s even possible for a bubble and not-bubble to coexist in the same data-point. First, my definition:

In capital markets a bubble exists when perceived value exceeds (by far) the fundamental economic basis of an asset. Although seemingly straightforward, this definition is itself a breeding ground for circularity and debate. Are economic fundamentals not also a matter of perception, and is perceived value not more a question of the future (which nobody really knows) than the present? Because of such murkiness, it is an accepted truth that we don’t know a bubble until it’s popped. So, if a bubble does not pop, is it less of a bubble? What if it does not pop next year but some time in the next decade? (Maybe the answer is that a bubble will eventually pop.) Does it matter when? And when it does, what if it pops for reasons unrelated to present circumstance or presently established fundamentals?

These mind-twisting questions aren’t so much academic as illustrative of the subject’s complexity. When Facebook, for example, is valued at $50-$70 billion on a given private-trading day, the 25-35x revenue multiple is both bubbly and not, depending on whether Facebook’s potential takes shape next year, the year after, or never. It also depends on how that future potential is defined, and by whom. And if Facebook never lives up to expectations, this does not make such expectations irrational but only lacking prescience, which won’t be known for some time. By the same token, if Facebook is indeed worth 35-times revenues, it does not mean that Twitter should necessarily be, let alone Foursquare, let alone Quora. On the other hand, any of these could be worth even more.

To further complicate these discussions, the supply-side of money flows has recently been pumped and manufactured. The subject of quantitative easing in its successive iterations, and the impact thereof on money supply and asset inflation, has been debated as much as – and is in fact part of – the bubble discussion. The case has been made that the market is now divorced of economic fundamentals and is more correctly reflective of liquidity that continues to be infused. So, maybe Facebook, Twitter, Quora, and the S&P 500 index all correlate to money supply more closely than to prospects. But does such liquidity then not itself become economically fundamental? At what point does liquidity even become the focal point, and is that necessarily a flaw in the system or just a repositioning of variables?

When looking back on the last couple of years and the sweeping global shakeup that these have brought to bear – in market mechanics, in fund flows, in economies, in technology, in behavior, in circumstance, and in relations among such characteristics and others – one starts to realize that we are presently more limited than ever in our ability to come to a definitive view on the components of value and economic fundamentals. Trying to do so often feels like trying to grab hold of particles in a volatile solution. For this reason, perhaps, if there is any kind of bubble building it is manifest in a flight to quality, size, and popularity, because therein lies solid ground. In short, the flight is to consensus and consolidation.

In Facebook there is some safety in knowing that 600 million users agree, in the voluminous high-yield market there is paper that can be more easily traded than a micro-cap business-loan, in precious metals there is the perception of a lasting symbol in limited supply, in the Fortune 500 there are global platforms on which one can confidently stand, and finally, in a seed or venture capital syndicate that includes highly-credentialed investors, there is perceived risk-mitigation in the opinion of others. Does all that comprise a bubble? Not really, and at the same time, without doubt.

It has been a week of large and unexpected change in digital technology. The week began with Apple’s announcement about the departure of Steve Jobs and his temporary replacement by Chief Operating Officer Tim Cook, and it is ending with Google’s announcement about the departure of Eric Schmidt from his Chief Executive Officer position, to be replaced by Larry Page, who will be focused on execution. A COO emphasis at Apple, and execution focus at Google. Such perfect bookends for a week to kick off earnings season.

These themes taken together serve to remind us that the sector is entering a season of maturation. In one way or another, we talk about maturity and mature issues when we talk about operations, execution, big changes at high levels, and for that matter very sizable cash balances that continue to accumulate. To be clear, maturity in the context of this article does not imply diminished growth, but a diminished rate of acceleration, at least in contrast with the 10-15 years past. Attention to detail and competitive positioning, in this context, takes on paramount importance, and a COO background for the CEO may be the ideal calling card. (The subjects of innovation and execution were covered in a previous article here already.)

And when we talk about such mature issues involving Google and Apple, we really should not leave out Facebook from the discussion. Because just as Google may be challenged to find a substantial growth area outside of its core search business, and as Apple may not be able to continue its 10-year roll of disruption much longer (iPod, iPhone, iPad, etc.), so too Facebook is at some point going to test a few limits. For example, December data shows that Facebook’s U.S. growth has probably plateaued, with the U.S. contributing only 5% of new users during the month. Applications supported by Facebook are arguably only beginning to crystalize, but revenue growth will always be closely linked to user growth, and the subscriber statistic referenced is not insignificant.

All of the above notwithstanding, it’s too soon, undoubtedly, to throw around maturity labels – especially in any financial sense – in a discussion about Apple, Google and Facebook. Nevertheless, it may not be too soon to speculate and to think about next steps for these three sector giants. Projecting out a few years… what? And what, especially, given market valuations predicated on growth for a long time to come, (in the case of Facebook most of all)? In mature industries – say, like digital technology and consumer media in a few years, when Zuckerberg’s like 30 – participants begin to consider consolidation possibilities or other strategic combinations. (In the media industry more recently, the cable segment consolidated, and then Comcast bought NBC.) Projecting out a few years… what will Google, Apple and Facebook muster up?

Oh, I don’t know, but it is great fun to speculate, and as I play around with permutations and combinations among the subject trio of this article, my conclusions seem always to point to one likely outcome: Apple and Facebook. I usually begin my speculations with the idea that Facebook’s vulnerability will always be the sources of its revenue, which will always create an internal conflict with Facebook’s source of popularity – private user information. Were Facebook not under pressure to make money, this conflict would not exist. By extension, Facebook can only reach its full product potential when advertising revenue is eliminated from its business picture.

A combination with Google will not resolve this issue, but will in fact aggravate it, and for this reason (among others) any strategic combination between Google and Facebook is likely to face some regulatory obstacles. Apple, on the other hand, does not sell advertising. Apple, moreover, quite possibly never will. Apple sells product as a hardware vendor, and Apple sells software as an app retailer. In neither of these cases is the use of private data of any consequence or advantage. What Apple does not have, however, is a network with a network effect, and this adds pressure to the company to keep creating new products that are better than last year’s, every year.

Now, we’re talking about a maturation scenario, remember, in which Apple at some point in the future may no longer be able to keep this up. And we’re talking about Facebook in a scenario in which subscriber and advertising growth are in a natural state of tension. Would it not make sense, at such a point, for Facebook and Apple to combine in a unified business model that does not require advertising or use of private data, and that is based off a unified content distribution platform? Considering the emphasis on operations, execution, and sundry subjects of maturity for all parties involved, maybe this point arrives sooner than one would expect. And anyway, why wait?

The situation at Apple is emblematic of the broader media and consumer technology segment in some ways. In other ways, the rest of the sector population could only wish that Apple were emblematic of it. The second comment alludes to Apple’s stellar earnings report, handily beating all expectations. Any company, in any industry, would wish to be like Apple at such a time. The first comment, on the other hand, refers to a different reference point, one having to do with the descent of invention and ascent of execution in the ranks of relative visibility – and relative value – for both Apple and the industry it leads.

Coming out of a 10-15 year stretch during which Apple, and consumer media more broadly, gave rise to a string of innovations that is unprecedented, such a run will be difficult to sustain. For Apple, the list includes iTunes, the iPod, the iPhone, the iPad, Apple TV, and the App Store – all of these segment-redefining in greater or lesser degrees. For the Internet, the list includes Google, Facebook, Twitter, now Groupon, and Apple.Â While we can’t go so far as to claim that popular media innovation has reached its absolute limit, a case can be made that probability at this point favors incremental adjustments – a steady progression of enhancement – rather than revolution and the breaking out of brand new systems. There are only so many times that telecommunications, consumer devices, and popular entertainment can be torn down and recreated in the span of a generation or two, let alone 10-15 years.

Still, while the social network can no longer be invented, it can be perfected. Digital communication exists, but can be improved. Digital advertising is everywhere, but has a very long way to go. And online commerce is only beginning to test out possibilities, despite having been around since Amazon and eBay.Â As Apple has just demonstrated, substantial growth can be realized even if only one novelty – and really just a giant iPod Touch at that – is introduced in the course of a year. Growth is now likelier to happen on the heels of execution, successful competition, and tight management.

With all this by way of background, the Apple news that everyone has been thinking about these past couple of days can be taken in context: The unfortunate departure (hopefully temporary, if not brief) of Steve Jobs from his regular position. While this is truly sad for Mr. Jobs, it is not catastrophic for Apple, and the stock market seems to agree. It is to Mr. Jobs’s credit, in fact, that he has succeeded to implement a system, a set of values, and a brand, that necessitate his presence less and less to preserve at Apple. Given the more probably evolutionary than revolutionary changes in the industry ahead, a well oiled machine with emphasis on operations will fare quite well. Competitors, entrepreneurs, innovators, investors, should take note, as Apple once again leads the way into what will undoubtedly be a lasting trend: To grow by execution.

It has been at times trying on one’s patience, truth be told, spending one’s adulthood immersed in the modern evolution of media and technology. After another game, another way to share pictures, an app to facilitate the inconsequential, a product that stirs up giddiness for three or four days until something else does the same, one is prone to develop a sense of envy for those involved in healthcare, education, energy, why heck, even law. In the past months, however, I’ve begun to feel with increasing profoundness, with real conviction, that there was all along a bigger purpose to the games and apps: There was a collective learning, a Â mass adjustment, that has made the world a different, more efficient, place.

And not a moment too soon… considering the exponential population growth of the last century, the globalization of commerce, and other forms of acceleration and complexity that impact daily lives worldwide. The introduction of digital efficiency into nearly every stratum and geography may have been a byproduct or a cause of such phenomena, but either way is an important reality that is now intertwined with, (if not the essence of), the gamut of worldly aspects from capital flows to politics to sociology to the previously listed subjects of intermittent envy: healthcare, education, energy, heck, even law.

We are reminded of the enormous importance of digital technology and its close relative, the Internet, in a number of news headlines that have coincided these past days. The CEO of what is maybe the world’s most influential financial institution did not attend an IPO pitch meeting at one of the world’s largest insurance conglomerates, in which the U.S. Treasury happens to be the principal shareholder, but around the same time did attend an IPO pitch for Groupon. This company may be only two years old, but it Â has served to reshape the global retail industry with digital communication, and the segment will never be the same. At another level of impact and relative importance, we now read in The New York Times that the threat of a military catastrophe has been set back substantially, cleanly, and without violence, by hacking. Regardless of political orientation, this has to go down as a landmark in military history if nothing else. Similarly regardless of politics and sides, the influence of Wikileaks, most recently manifest in a government overthrow, has to be noted.

It seems inevitable at this point that the effect of digital media, networks, and communication will expand and even take over new spheres. Certain consequences of this growing immersion will be good, and others will be less so – in any case much of that will be subject to interpretation, perspective, understanding. Either way, however, there is an aspect of improved traffic – of clean organization, of openness (and this is key) which does not spell chaos – demonstrated and made possible by digital technology in its various forms. This is a welcome addition to our evolving culture, and in order to arrive at this point, it may have been expedient, most likely also unavoidable, to begin with basics: A game, an app, a message system, a gadget. The world works in mysterious ways, but works.

Upon the report of a major Facebook financing, registering third after Groupon and Twitter had also announced spectacular funding rounds in the space of one month, the question was asked: What about Zynga and LinkedIn? Where are they in this spectacle? Such a question implies that there might be an indiscriminate craze for the best names in media, and that the popular names absent from festivities may soon arrive upon the scene as well. This could certainly be the case, and perhaps even beyond Zynga and LinkedIn there are other spectacular rounds being planned as we speak, some of which may well provide the “bubble” chatter with all sorts of additional nourishment. There is, however, a different way to see recent events, so that the particular selection of three names – Facebook, Groupon, Twitter, (in size order) – no longer seems incomplete but rather very particular. And by the same token, the absence of Zynga and LinkedIn and others would come across as less of a lapse than a different grouping entirely – one that does not belong in the pattern at all.

Putting size order aside for the time being, and forgetting relative valuations and the appropriateness or inappropriateness thereof, the key to the question is one of definition. Because Facebook’s is the largest and most recent of the three deals, we may be inclined to see it as the defining event, the anchor transaction by which the other two are to be taken in. By that standard, the three deals are milestones in social media involving the most outstanding names in the field, and by that standard it is correct to wonder where the others are, (for example, Zynga and LinkedIn). But what if the defining event, the anchor transaction, is not Facebook at all but instead Groupon? Seen in this light, from the special angle of what sets Groupon apart, then the trio of situations is not anything like popular media at large, or particularly even social, but three unique platforms that facilitate retail and online commerce in specific ways, and that may find themselves at the start of a massive industry evolution. Seen in this light, Zynga and LinkedIn simply don’t belong, but Yelp or Foursquare or Gilt well might.

From such a perspective, the eye-popping surge of Facebook, Twitter and Groupon in the world of private investing, may have fewer public market parallels at, say, Google, Microsoft, Aol, or even Apple, than they might at Amazon and eBay. Out of the first-mentioned group, Apple (also surging) is closest to e-commerce (ref. iTunes and the app store), and Google is, for a variety of competitive reasons, most anxious to get in. (I note, by way of evidence, the effort made by Google to acquire Groupon, and I suggest, by extension, that Twitter may not be a terrible second choice.) This being neither here nor there, I would nevertheless put forth, and with confidence, that the notion of Apple, Google and Facebook dividing the world between them – a notion that among industry observers has for some time become a standard rule of thumb – is a flawed and antiquated notion. We should not rule out the commerce plays: Increasingly the distinction between commerce and media is being blurred. (I note, by way of evidence, that Groupon has begun to direct much attention to editorial quality and is providing organized training to its copywriters, as though it were a real content shop.)

discourse and notes

Tag Archives: Internet outlook

Technology, profits, network effect, not necessarily in that order

The short path from focus to insularity

A bubble would almost be fairer

The ease of everything that is liquid

A bubble according to last year’s definition

Apple, Facebook, as they age

Growth by execution: Apple leads the way again

Pride in digital technology and its consequences

A deal surge in media, which is actually commerce