BizBlast

Norway's Sovereign Wealth Fund and Ethical Investing

2008-07-21T05:06:00.000-04:00

It's always nice to think that you could maintain an investment portfolio while strongly taking ethics and social justice into account. Apparently Norway is doing just that. It's pulled out of Wal-Mart (labor issues), BAE Systems (nuclear weapon production), and almost two dozen other companies whose behaviors it has found wanting. And yet it's worth almost $406 billion. Nice work if you can get it ... and, apparently, you can.

Oil Futures Up, Oil Stocks Down

2008-07-14T05:29:00.000-04:00

It seems a complete contradiction, but oil companies' stocks aren't keeping pace with rising oil prices. Far from it, according to the Wall Street Journal:

The stock price of major oil companies hasn't kept pace with the price of a barrel of oil, which is now 95% more expensive than 12 months ago. Investors are skeptical that majors such as Exxon Mobil Corp. and Royal Dutch Shell PLC, which do everything from drilling oil to refining it to selling it, are going to have big futures. The stocks are actually down this year.

Apparently analysts are saying that they face problems in oil production in the long term, "making some observers think these companies may not even be around in 10 to 15 years." Jeez, Louise. It makes you wonder why they aren't pumping huge amounts into alternative energy - or even something that seems totally unrelated. When your business depends on goop you pump out of the ground and you know supplies are limited, you might think that finding something with some long-term potential would be, oh, I don't know ... necessary?

When the CEO is Fired, Does the Director Follow?

2008-07-10T10:50:00.000-04:00

On BNET, I had a piece on VMware's CEO being summarily fired and the accompanying attempt to clean up the PR mess. In doing the research, I noticed that although the bio of the old CEO (and co-founder) had been taken down, her name was still on the list of directors. And that got me scratching my head. Had the company forgotten that part of the web site?

And then I realized that while the board could fire a CEO, it wasn't clear that it could necessarily fire a director. Oh, it might not put the person up for another term, but I don't know how many companies allow removal of a director for anything short of some great legal failing. If she decided to hang around, they might have to put up with her views for the near future. Granted, most people wouldn't want to stay around after being told they were unwanted, but what of the stubborn cusses who refuse to give up? It could make for a very uncomfortable board room.

The Myth of the Long Tail

2008-07-03T10:25:00.000-04:00

As I'm trying to get ready for weekend festivities, I'm putting a premium on efficiency, so I'm going to point to a BNET post I have on a new study looking at the "long tail" concept, and how it simply doesn't seem to hold water when you start looking at what is happening in businesses.

The real question is when does having access to many products really help a business. I'd argue that for a store, money would go out the window because you couldn't get enough people physically through the doors to make money from their interest in the vast majority of items. In my own business experience, I've found that some amount of "extra" items can help a catalog appear to be the place to go for products, even though the bulk of sales still come from the normally hot items, but even then you have diminishing returns because of the cost of printing a catalog. Even in a web-only environment, there's still a cost of bandwidth, of managing a database, and of communicating with vendors to get products in. So, the long tail - in moderation - can help boost overall sales and even profit (higher margins) of resellers. If you're a vendor, though, putting your faith in what this can do for you is probably foolish ... unless you're the vendor that came out with the book in the first place.

Dollar Takes Another Pounding

2008-07-02T10:55:00.000-04:00

The Guardian notes that the dollar has just fallen to a low against the pound ($2.10) and the euro ($1.47). Driving the proof that, when it comes to expectations, there may be no bottom, is speculation whether China is going to start shifting its foreign reserves out of dollars.

Analysts said today's falls had been sparked by comments made by Cheng Siwei, vice chairman of China's National People's Congress. He told a Beijing conference on Tuesday that China would "favour stronger currencies over weaker ones, and readjust accordingly".

A vice director of China's central bank, Xu Jian, was also quoted as telling the conference that the dollar was "losing its status as the world currency".

Those hoping for lower oil and fuel prices in the US should not keep holding their breath, because relief is a long way off. As my wife, after reviewing some old receipts, said to me last night, "I started longing for the days of $1.89 gas. Then $2.89 gas." And then $3.89 gas.

Wal-Mart Changes Logo

2008-07-01T06:12:00.000-04:00

As the Wall Street Journal noted, Wal-Mart is about to change its logo. "The new logo has white letters on an orange background followed by a white starburst, and the store's name will appear as one word: Walmart. "

Have you thought about what it will cost the company? New bags, new broadcast and print ads, new collateral, web site changes - literally, any and every thing that had the logo on will have to be changed. At least none of us who write about business will have to remember the old spelling. We'll just have to learn and remember the new one. It'll be worse than remembering to change the year on checks after January 1.

Yet Another Investment Scandal: Duping Investors

2008-06-30T05:53:00.001-04:00

I know it must be hard to believe, but there's more evidence that when financial services companies have conflicts of interest, they tend to pay more attention to their own than to those of clients. The New York Times reported yesterday that Massachusetts has turned up evidence that USB was deliberately trying to foist risky securities that it and its employees owned onto individuals:

Auction-rate securities are preferred shares or debt instruments with rates that reset regularly, usually every week, in auctions overseen by the brokerage firms that originally sold them. They have long-term maturities or, in the case of the preferred shares, no maturity dates whatsoever. The securities are issued by municipalities, student-loan companies, closed-end funds and tax-exempt institutions like hospitals and museums.

In mid-February, the $300 billion market for these instruments collapsed, trapping investors who had been told that they were safe and easy to cash in — leaving both wealthy investors and those of modest means unable to finance their small businesses, buy homes, pay college tuition and otherwise use their money as they had planned.

Although USB is denying it, Mass. secretary of the commonwealth Bill Galvin's office apparently uncovered some blatant emails. Read the story (at the link) to see some of the panic that knowingly ran through the company as it wanted to dump inventory - and that some emails by brokers themselves suggest that they felt they were being kept in the dark about real risk as well. If it really was cash equivalent, as they allegedly claimed, then why was it so hard for them to get cash? Could they be ... lying? Maybe: were their fingers typing?

Blogging on BNET, Too

2008-06-27T10:05:00.000-04:00

In addition to my other blogging mania, I'm now covering the high tech industries at BNET, the business news and opinion arm of CNET.

The Fed in an Insulated Nutshell

2008-06-26T08:10:00.000-04:00

The Washington Post has a good editorial on the Fed that explains a lot. Yes, it's been worried about the credit crisis, but it's always worried about something, and that has kept the U.S. central bank from significantly raising interest rates for years. "No worry of inflation," it has claimed. Guess what? The Fed's definition of inflation comes with a pair of blinders:

Every American who drives or shops for groceries understands this [that prices of food and energy are soaring], except at the Fed, where they bow before something called "core inflation." This is a way of measuring prices without including food and energy, and so we are supposed to take comfort that "core inflation" is rising at only a 2.3% annual rate. Yet it is the Fed-induced price spike in food and energy since last August that has Americans in an uproar and Congress in a panic that may yet produce major policy blunders.

In other words, the Fed ignores some of the most potentially volatile basic commodities that there are.

In some sense, I can understand the impulse. When you want to see a trend, it's a common enough practice to eliminate wild variations to get an overall pattern and not go off on a quest after what is only a transitory effect. By the time you change policy, and maybe pass legislation, the variation is over, or moving in another direction, and you've committed yourself to a course of action that will now have an effect other than what you wanted.

But we're talking about oil more than doubling price - possibly tripling - and food prices that, experts say, are going to be up for a long time, possibly a decade. Changes this high, or that will go on for that long, are more than transitory, because they have a transforming effect. It could be enough to shift the economy from one steady state into another - an older term for the more fashionable "tipping point" phrase that represents the same well-established engineering concept.

One big factor in the price rises, and the overall shakiness of the economy, is the weakness of the dollar, and, as my feeble brain understands it, that results from pumping money into the system and keeping interest rates too low for too long so those who have money aren't screaming at you that they cannot borrow even more money cheaply enough.

Maybe borrowing is over rated. Yes, it's convenient, and, yes, it can make certain types of transactions possible. But there are a lot of companies with enough profits to invest sizable amounts into their new ventures. It's called capitalism, folks - you make capital and then you invest/risk big chunks of that to get to the next place. Those who want assured profits perhaps should be apprised of the nature of the endeavor. Real wealth comes from long-term investment and building, not from squeezing every possible dollar out of the business.

Instead of appeasing the loud cries, the Fed governors should grit their teeth and do the hard work that is necessary. Yes, people will scream and call for their heads, but they took the job, and it's their duty to take the actions necessary for the long-term health of the country. When you hear from person after person wondering whether they will be able to afford to heat their homes this winter, it's not healthy.

Product Review: Jott

2008-06-24T06:33:00.001-04:00

As part of testing another online service, I've been trying out Jott, and am impressed. It lets you dial up a toll-free (in the US) number, pick out a recipient from a contact list you've supplied, dictate a message, and have a transcribed version zip along via email to the destination. You can't dial it from just any phone; you need to register the numbers you'll be using with Jott. That could be a problem if you aren't calling from your usual cell. I tried calling from my home number (don't get out much, anymore) and sending messages to myself. Before you write that off as quasi-pathetic, remember that there are plenty of times you'll think of something when traveling and you'll want to make sure you remember. Instead of jotting a note, you can Jott an email. Simple messages worked well, so I decided to try something complex without taking the time to spell difficult words:

My eyes are fully open to my awful situation – I shall go at once to Roderic and make him an oration. I shall tell him I've recovered my forgotten moral senses,And I don't care twopence-halfpenny for any consequences. Now I do not want to perish by the sword or by the dagger, but a martyr may indulge a little pardonable swagger, and a word or two of compliment my vanity would flatter, but I've got to die tomorrow, so it really doesn't matter!

It's from the patter song in Gilbert & Sullivan's Ruddigore. Here's what I got in the email:

Note: We had difficulty understanding some parts of this message. Please Listen to the original message [this part is a link to the actual recording] if some parts are unclear.]

My eyes are fully open to my awful situation. I shall go at once to Roderick and make him anoration(?). I shall tell him I've recovered my forgotten moral senses and I don't care to pen(?) sap(?) penny(?) for any consequences. Now I do not wish to perish by the sword or by the dagger, but a marker may indulge a little partanipple(?) swagger and in order to have compliment my vanity would flatter, but I've got to die tomorrow. So, it really doesn't matter.

A bit unintentionally humorous toward the end, but pretty good, and paired with hearing the original, you could certainly get the message. You cannot enter contacts on the fly, so if you suddenly needed to send an email to someone new, you're out of luck. But there is plenty of utility in this.

You can also send messages to various services, including Google, Blogger, and others, including some that manage projects and collaboration, reminder services, Trapster (alerts about speed traps), and T-Sheets (a time tracking system I'll review).

During the beta phase, and I don't know how long that continues, Jott is free, so no reason not to give it a shot.

SEC Chief Can't Win for Losing

2008-06-23T11:05:00.001-04:00

It must be tough to be the head of the SEC, when you know that you'll always be under a microscope - and gun. Business moaned and complained about Sarbanes-Oxley, how regulation would be the death of business on this continent. (Notice how profits are doing pretty well, thank you very much?) Now Christopher Cox is getting pummelled over not having a higher profile during the Bear Stearns financial crisis. Of course, it was the Fed that had to pull the bank out, and Congress that has to deal with how to better regulate the industry (and maybe, who knows?, go back to some of those old deposit requirements that seemed to work so well). I think the problem is that people want someone to blame - anyone. Businesspeople are just regular folk, when you get past the bespoke suits and expense accounts, and they get scared when the entire framework of their world quakes. But I'm not sure there is a happy or short answer. Regulation may work for a while, but will eventually fail as people forget why it was put there in the first place, or someone locates gaps that let them do as they wish. And when things go wrong, we can only blame ourselves. Perhaps a bit less yearning for something from nothing might go a much longer way to sanity.

Forbidden Fruit at Apple: High Developer Salaries

2008-06-18T08:50:00.000-04:00

There's a site called Glassdoor.com, which lets people find out what their peers at other companies make if they willingly provide their own salary information - plus get ratings on and reviews of companies. What an instrument for corporate mischief, and showing that potential is the blog TechCrunch, which compared software engineer salaries and bonuses at Google, Microsoft, Yahoo, and Apple. Interestingly, Apple without a doubt - assuming that people are honest - had the lowest average compensation for programmers: $89,000, versus about $105,000 at Microsoft and Yahoo and just over $112,000 at Google. And then you get comments like the following about Google:

If you enjoy your individuality and time alone, Google is not the place for you (keep in mind I’m not an engineer). Google pushes a highly “googley” atmosphere, which is something akin to what the Brady Bunch would be like if they lived in communist Russia. . . . People are encouraged to have googley attitudes, wear plastic smiles, and not to question the infallible nature of the executive management group. . . . If you like feeling awkward during forced group activity, Google is your haven. It isn’t exactly “forced” (no guns), but if you don’t participate you become labeled as “ungoogley.” Once deemed “ungoogley”, you’re practically viewed as a rotten apple that threatens to spoil the bunch.

HR officials at most high tech companies must be shaking at the thought of what salary reviews and negotiations are going to be like in about two years.

US Financial Groups Face Parmalat Backlash

2008-06-17T07:55:00.000-04:00

Parmalat spells disaster in Italian much the way that the US can substitute the word Enron. It was an unmitigated fiasco involving 14 billion euros of debt and some very unhappy investors. But the Europeans are obviously learning something from their American cousins, because they're heading to court in a class action suit, according to the Financial Times, and going after the only people left with pockets of any size: the financial institutions and auditors - such as Citibank, Bank of America, Deloitte & Touche, and Grant Thornton - they think must have known about the precarious situation because, hell, it's inconceivable that these savvy organizations could have messed up that badly.

A year ago I might have agreed, but now I can only think of a quote from the movie The Princess Bride. Wallace Shawn's maniacal character Vizzini keeps calling every setback "inconceivable!" Inigo Montoya, played by Mandy Patinkin, eventually says, "You keep using that word. I do not think it means what you think it means."

Given the real estate bubble, it seems all too conceivable that people running money shops of various kinds are quite capable of flushing tens of billions of dollars down the nearest storm sewer while blinking in a confused way. "Inconceivable that we [they] could have screwed up so badly!" Or not.

ExxonMobile Tries Dodging PR Bullet

2008-06-16T08:50:00.000-04:00

It's tough when your own business processes and success come back to bite you. That's exactly the picture that the Financial Times has painted for ExxonMobile selling off its 2,200 company-owned service stations. (Here's the link, but it does require a paid subscription.) The problem is having the company name sitting above those big $4+/gallon price signs. The paper does make one point I've been considering - that oil companies may make a whole lot in gross dollars, but the real price setting comes at the well head, not at the pump.

However, let's take a look at the ExxonMobile financials for a moment. When people have criticized it for windfall profits, it has argued that its prices have gone up as well - which is true, as the company buys gas from nations that own their oil. But look at the income statements from the last three years and you see an interesting pattern. If costs had gone up equivalently with profits, then the operating income should have been roughly the same as a percentage of total revenue.

In 2005, operating income as a percentage of revenue was about 16.4 percent, with net income before taxes being 9.7 percent. In 2006, that jumped to about 18.3 percent and 10.6 percent. And in 2007, the numbers were 17.8 percent and 10.0 percent. In other words, yes, the company has managed to raise its net income slightly. But even if you look at operating income, not net income, the jump is under 2 percent. A low price for regular gas in my neck of the woods is about $4.05 a gallon. Cut 2 percent and you get about $3.97 a gallon - a savings of 8 cents a gallon. Sorry to disappoint everyone who wants to raise taxes on "unjust" profits, but all that will do is transfer some of those profits to the government and not lower prices at the pump.

The LA Times: When Investors Should Stop Trying to Run Businesses

2008-06-10T17:00:00.000-04:00

I wrote about the LA Times Magazine story on my blog about words and writing. However, it turned into a business rant, so I thought a link here might be worthwhile.

Why Free Software Is Such A Big Deal

2008-06-04T06:20:00.000-04:00

People have come to expect certain types of software to be free - like browsers. In fact, that's how Netscape started, making its software available for nothing. Eventually Microsoft beat them back with its own browser, Internet Explorer. But interestingly, the free browser wars are not over, according to a story in Computerworld quoting a Net Applications' study:

Mozilla Corp.'s Firefox browser is on pace to hit the 20% market-share mark next month, a Web metrics company said today. Firefox boosted its share by 0.6% in May, accounting for 18.4% of the browsers used during the month and putting it within shouting distance of a major milestone, according to Net Applications Inc. "Firefox is trending to hit 20% market share sometime in July," said Vince Vizzaccaro, the company's executive vice president of marketing, in an e-mail.

This is fascinating, not because someone other than Microsoft can give software away, but because in doing so, a company can take so much market share. It's another sign that the Redmond-based corporation needs significant change and some direction that stresses real invention.

Companies Paying Bond-Holders "In Kind"

2008-06-03T07:25:00.000-04:00

In the non-profit world, there is a term called "payment-in-kind." That means an individual or company has supported a non-profit not with cash payments, but through donations of goods or services that the non-profit needs if it is going to operate. But when you bring payment-in-kind to the world of investing, you might also bring along the non-profit label - as in, this can be a great way of making nothing. According to the Financial Times, many companies have sold bonds with a PIK feature that allows borrowers to pay bondholders with shares or bonds rather than cash.:

During the buy-out boom, Standard & Poor’s Leveraged Commentary & Data estimates 43 bond deals were done with a PIK feature. Some analysts suspect, however, that the actual number was higher.

And now some of those companies are turning the concept into practice. This should be pretty damn disturbing to people who lend money to corporations. It's a credit crisis of a different kind.

In the past, when times were flush (at least on paper), companies often did not want to dilute ownership and its control and value. But what happens when a company can say, "Oh, that money we owed you? Here's another bond to make up for it." The bonds then effectively become IOUs, and when you expect to get cash, instead there is more paper. Companies may avoid default, but to what end? This turns credit ratings on their head, since, I'd argue, this lets borrowers effectively walk away from obligations in a legal manner. If compaies can, then often they will - and if they do, then the credit ratings that attempted to quantify how safe an investment was become meaningless.

Putting Money in the Bank

2008-05-30T06:29:00.003-04:00

US banks are apparently in much riskier positions overall than even some of the pessimists may have thought. According to an article in the Financial Times, statistics from the FDIC are not looking good:

The agency says that net income for the entire industry during last year's fourth quarter was not $5.8 billion as previously thought, but $646 million. The downward revision was the result of bank financial restatements, presumably as they wrote off the billions of dollars of imaginary profits and bad loans.

"Problem" banks have risen from 76 to 90 in number, although that is still a lot lower than during the S&L crisis in the 80s and 90s, when a full 10 percent of banks fell into that category. Their combined assets are $26.3 billion, or about $292 million on average. That is diddly for a financial institution, even a relatively small one.

So far this year, three banks have failed. Even in last year's turmoil, three failed total, and none failed in the two years prior. The FDIC expects additional failures.

The coverage ratio - or amount of cash on-hand compared to the total dollar amount of loans that are 90 days or more overdue - has dropped for the eight straight quarter. It's now 89 cents in reserve for every dollar. That's the lowest level since some time in 1993.

According to a quote in the FT, the FDIC is not happy:

“This is the kind of thing that gives regulators heartburn,” said Ms Bair. “We also want them to beef up their capital cushions beyond regulatory minimums given uncertainty about the housing markets and the economy . . . It’s only prudent to be building up capital at a time like this."

There are three reasons I can see that banks may not be putting away enough money: they underestimated how bad things were, they continue to engage in overly risky behavior, or the rate at which loans are going bad is continuing to escalate and every time they think they know what's going on, reality intrudes. My bet is that it's some combination.

Dell Guilty of Fraud: How Not to Make a Name for Yourself

2008-05-29T18:13:00.002-04:00

Sometimes it's tough to top a factual roundup of what is happening to a company, and in this case, Dell's latest circumstances say a lot. Being found guilty of fraud? Just how badly does a major company have to behave when a court can rule its business practices fraudulent? It came down to deceiving people - promising technical support that it didn't delivery, and apparently didn't intend to deliver, if my understanding of the law behind fraud is accurate at all:

The company effectively tried causing customers so much pain that they wouldn't or couldn't use the support services they purchased.

It often didn't provide the on-site repairs it was contractually obligated to.

People who purchased "next day" support sometimes had to wait ... an entire year to get a problem resolved.

The company and its financial services affiliate would advertise no-interest financing and then deny it to almost everyone. It would sometimes charge people interest rates as high as 30 percent even when those people actually did qualify for the special financing.

Here's Dell's response, according to the IDG News story:

The court laid out plans for investigating how many people have been affected as a way to determine restitution. Dell hopes that the court will find that only a few people had bad experiences. "We're confident that when the proceedings are completed, the court will determine that only a relatively small number of customers have been affected," Dell said in a statement. "We believe that our customer service levels are at or above industry standards."

I know that computer companies generally have pretty bad technical support - at least, that's what I've found with a number of them. But this actually makes most of them look good. The problem is that Dell apparently sees customers as cattle waiting for slaughter. A few years ago, at the height of the company's reputation among investors and a fawning press, I predicted that one day magazines would run the major story, "What Ever Happened to Dell?" However, I was thinking in terms of how the company has tried to drain dry the money from its own supply chain. This is even more extreme.

No Money in Web 2.0

2008-05-27T07:15:00.000-04:00

The Financial Times did a piece on the underlying profitability of "Web 2.0" and came to the conclusion that it isn't:

Many members of the Web 2.0 generation of Internet companies have so far produced little in the way of revenue, despite bringing about some significant changes in online behaviour, according to some of the entrepreneurs and financiers behind the movement.

The shortage of revenue among social networks, blogs and other “social media” sites that put user-generated content and communications at their core has persisted despite more than four years of experimentation aimed at turning such sites into money-makers. Together with the US economic downturn and a shortage of initial public offerings, the failure has damped the mood in Internet start-up circles.

Well, there's a surprise - companies banking on exciting technology are unpleasantly surprised when customers don't find it quite as intriguing. Features aren't the same as benefits, and the value the seller perceives may not be the same as what the buyer perceives. As "cool" as something might be, a company could find - they do find - that no one is interested in spending money on it. You'd think that people might remember the dot com bust, which was only seven or eight years ago.

What gets confusing with the Web 2.0 apps is that many seem so popular. So why don't they make money? Again, it's the perceived value, at least in part. But I've begun to wonder about the underlying psychology. People are used to being social without payment: they go to parties, chat on the phone, talk to a neighbor, and exchange recommendations with friends. The habit is, what, at least tens of thousands of years old? People assume it to be an essential right, and in that case, why would you pay for it? Now you're back to advertising, and that means that companies must decide that they can sell to the audience. Sounds like waiting for Web 2.0 success might take some time more, perhaps when Web 3.0 emerges.

If You Can't Buy Yahoo, Maybe You Can Buy The Customers

2008-05-23T09:45:00.000-04:00

Microsoft is trying to pay users to shop online with its Live Search. According to a BBC story:

Under the cashback service, the software giant promises to pay back a portion of the purchase price of anything shoppers buy online from any of its 700-plus selling partners who are offering more than 10 million products.

Among the big box retailers who have signed up are Barnes & Noble, Sears, Overstock.com, Home Depot, J&R Electronics and a host of others.

Money will be paid either via PayPal, a cheque or into a user's bank. It will only be open to people living in the US.

The story then quotes Om Malik, a tech heavy weight and founder of GigaOm, as saying, "This is not going to affect Google. Google is so much better." I'd have to agree that it's no great shakes, but more because I think it's simply a bad business idea.

This is not the first time Microsoft has tried paying users to switch to its search technology. Last July there was a report on how it had fared. My comments then still go: this is bribing consulers, and the result is attracting only mercenaries who will be gone at the hint of the next offer. The only way you keep them is to keep increasing the incentives. In short, paying people is a tacit acknowledgment that you offer nothing else they might value. That means the cost of maintaining the customers will be extremely high and they will feel virtually no loyalty to the vendor, just loyalty to their billfolds.

Now lets add the new wrinkle. This is money back for purchases made from searches. Given that Microsoft wants huge markets, they are probably assuming that this should be a big part of the search business. But how often does a search end in an immediate purchase? I'm guessing fairly seldom. People and companies buy according to their own schedules, not to the seller's. What if they use search to get information and eventaully get around to buying days, weeks, or even months after? Google keeps that business and that means so many more times to help tie the customer close.

Furthermore, if this was such a good strategy, why didn't it work so well when Microsoft started it last year that they didn't need to try and buy Yahoo? What Microsoft needs is not an old strategy based on where they were, but a new, forward-looking stategy based on where they want to go. The more they stick with the old playbook, the more they are stuck in an old game, while Google and other companies are in a different open field using different rules.

AOL Time-Warner Merger A Crock From Day One?

2008-05-21T05:44:00.001-04:00

Bloomberg has an interesting story: the SEC is suing some former AOL execs for allegedly overstating Internet advertising revenue by more than $1 billion between 2000 and 2002:

In mid-2000, before AOL completed its $124 billion takeover of Time Warner, the Internet service provider began overstating revenue by paying more for goods and services in exchange for customers' ad purchases, the SEC said. The company agreed to pay $300 million in 2005 to settle a related regulatory probe.

Interestingly, the whistleblower, called as a witness in a number of cases, is also being pursued by the SEC. Now that seems plain silly. You'd think that the SEC would want to encourage people to come forward, and it sounds as though someone needed to at the company. Now what are people going to do in other companies? Help hide anything because they don't want to be held accountable?

Microsoft Won't Take No For Answer

2008-05-20T05:49:00.000-04:00

According to at least a story in the Financial Times, Microsoft has proposed to Yahoo something between a partnership and full buy-out. The subject of speculation is whether Microsoft is trying to buy Yahoo search.

Even though Google is huddling over what to do, as they find the combination threatening (and want to partner with Yahoo themselves), I don't see why. They might lose the revenue opportunity that advertising on Yahoo search might bring, and that would be a pain. But there is nothing that Microsoft would add to Yahoo search to make it particularly enticing. They can't integrate it into Windows because of their past anti-trust dealings, and if they had something compelling for users, you'd think it would have come out on MSN already.

Microsoft continues to push only because it doesn't know what else to do, and management there isn't willing to encourage real innovation because, well, it's not guaranteed to be a blockbuster. Here is where Microsoft could learn a whole lot from the old IBM. Not bloated bureaucracy - the Redmond company already has that in spades. No, it's the concept of a research lab that can hit on not just innovation, but out and out new concepts. They could even do it in software alone and fund it for what would be a song to them. The current state of affairs is management by fear. Perhaps the company could use someone at the top who is a little bolder. It will take some daring to move in some direction, because change is inherently threatening to the old order, and so far the company has communicated that it wants to stay exactly where it is.

The Follies of Portfolio Theory in Risk Management

2008-05-08T08:02:00.006-04:00

As the price of gas starts to approach that of cheap wine, foreclosures hit a record, and companies find themselves unable to get the loans necessary to do business, I think again of portfolio theory in corporate risk management. I mentioned this a while back as a response to an article by Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable. But today I started doing some rough calculations. One of the problems with complex mathematical models is that they have to simplify to make things easy for most people to understand.

However, sometimes there are simple calculations that can show you the potential folly of your ways. Assume for a second that in the financial world, there are, at any given time, 20 things that could go horribly wrong and wreak havoc. Say that the chance of any one of them occuring is only half a percent. Pretty low odds, right? Yes, for each given event, there is only a 0.5 percent chance in a year that it could happen. But remember that there are 20 of them, and because they are independent, they have a multiplicative effect. But 0.5 percent chance of going wrong is the same as 99.5 percent chance of going right. But when you multiple 99.5 percent by itself 20 times, you end up with about 90.5 percent. We've just gone from the psychology of safety in only a half percent chance of disaster to a more sobering 9.5 percent chance. Take that over a decade, and you see numbers that would make you bet the financial world would implode to some degree.

You can quibble with the percentages, or the number of disaster factors, even though I'd say I'm being pretty reasonable. So change some of the percentages, or the number of disaster scenarios. You're still left with the fact that, over time, the world will periodically drive itself into a brick wall at high speed.

I remember interviewing ChevronTexaco CEO David O'Reilly a few years ago. At one point I asked about geopolitical factors, as those are a problem in the oil business. He said that over time, there's always some war or political unrest that affects their business. The company just assumes there will be one at any given time and figure out how to live with it. If more companies should take that attitude, the world might be in far more secure shape.

MicroWahoo is a Corporate Disaster

2008-05-06T16:26:00.002-04:00

They want to do a deal, they don't want to do a deal - the only way to figure out where the two companies have been going is to find a lower-case "o" oracle. I think that the CEO and board at Yahoo are now toast because they turned down a major premium on a stock price that hasn't yet heard a value low enough to make it satisfied. Push will come to shove, and look for either major resignations or institutional investors to push for a dissident slate of directors.

As for Microsoft, if the Yahoo deal was that important, what happens to Ballmer for not being able to make it happen? I'd ask if there was a plan B to find a direction for folks in Redmond, but I think that the Yahoo pitch was just whistling in the dark, because it was essentially an approach that was a me-too-more-of-the-same strategy. In other words, they aren't moving anywhere and probably won't be in the near future. Of couse, there is that little probelm of needing to protect the revenue base of Windows and Office.