"The Travelling Quack" (1889), Tom Merry.

ACADEMIC: A Look Back At Tech Spending By Big Biz

Jonathan McCarthy
Federal Reserve Bank of New York
June 27, 2003

This paper examines patterns of capital expenditures across types of equipment and software as well as across industries during the recent investment boom and bust. The analysis indicates that the end of the boom and the bust reflect developments in the telecom sector, as the role of communications equipment was well beyond its size in the economy. More generally, industries that invested more during the boom reduced their capital expenditures more during the bust. One possible explanation for this pattern is that capital overhangs were one factor behind the bust.

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NEWS: Surveys Say Bloggers Not Yet Big For Mainstream

A CNN/USA Today/Gallup poll released March 11 found 56% of 1,008 adults surveyed have no knowledge of blogs. Even among Internet users, only 32% said they are very or somewhat familiar with blogs. Only 3% read a blog every day. On the other hand, 27% of U.S. Internet users, or 32 million people, have visited a blog site.

Another report, "The State of the News Media," said blogs have potential.

It also said, "They are still experiencing growing pains that will force them to live up to the highest standards of ethics and responsibility -- not to mention dealing with unwanted lawsuits for posting unwanted publicity -- if they are to become a central part of the online media experience."

This report, by the Project for Excellence in Journalism, part of the Columbia University Graduate School of Journalism, said 2004 would likely be seen as a turning point in the evolution of blogs.

According to the two research reports, bloggers get almost all of their news from the mainstream media, rather then breaking news themselves.

The most popular Web sites for news and information remain those run by traditional media outlets, and by a large margin.

The 20 biggest media companies own half of the biggest news sites. A separate survey by Pew Research, an independent opinion research group, found that 71% of people who get news from the Web do not stop using other sources. They just add the Internet blogs as another news source.

Of 19.3 million blogs that have been created, 13.1 million have been abandoned, the firm says. Fewer than 50,000 blogs are updated daily, the firm says.

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NEWS: Inventions that Don't Benefit the Inventors

The transistor. In 1947, scientists at AT&T's Bell Labs created the world's first silicon transistor. Three of its scientists would later win the Nobel Prize in physics for the invention. Bell Labs obtained a patent for the device, but the invention was licensed to, among others, IBM, Texas Instruments and the forerunner of Sony. The goal was to avoid antitrust problems with the U.S. government. (In a 1956 consent decree, AT&T agreed to license the transistor freely.)
But relatively easy licensing terms cost AT&T millions in royalties.

Owning a bit of the Internet. Back in the early '90s, Robert Cailliau of the European Organization for Nuclear Research, or CERN, contacted venture capitalist Sven Lingjaerde to see whether the lab could get funding for its World Wide Web project.
At the time, Lingjaerde was at Swiss firm Genevest; now he's a co-founding partner at Vision Capital.

"When the project grew in size, more money was needed, and the top management of CERN then decided to cut the budget, claiming it was not directly linked to fundamental research and it was starting to cost too much," Lingjaerde said in an e-mail. "We were considering putting money behind the project, but only if a strong U.S. VC would join. We knew that our small means (would) not be enough. The business model was also not clear."

Onsale. Jerry Kaplan had burned through $75 million while running GO Computing, a foiled attempt at pen-based computing chronicled in his book "Startup: A Silicon Valley Adventure." But in 1994, he co-founded Onsale, one of the first online-auction companies. Backed by Kleiner Perkins Caufield & Byers, it became an early leader.

"It's like money from heaven," he described Onsale to BusinessWeek.

Jerry KaplanCo-founderOnsale Heaven was short-lived. In 1995, eBay was born. A few years later, Onsale went on to merge with Egghead and got auctioned off in pieces.

"If you don't get the model exactly right, capitalism can be unforgiving," Kaplan said in an interview. eBay created a forum for people to

Relational database software. IBM's engineers can take credit for inventing the hard disk drive, the RISC (reduced instruction set computing) chip and speech recognition software, among other technology. The company has been granted in excess of 22,000 patents in the last decade, more than its top 10 competitors combined. But the company doesn't take all of its inventions to market successfully. Take the relational database, for instance.

A young IBM engineer named Edgar Codd defined the concept and structure of the relational database back in the '60s and '70s. Codd's revolutionary idea was to organize data into tables of rows and columns, and to relate that data to other tables. His work produced the blueprint for how to build a relational database, as well as the foundation for what would become SQL, or Structured Query Language, a standard way to access data.

At the time, however, the technology didn't mesh with IBM's corporate strategy. The company was heavily invested in an older database model. The result: IBM didn't market a product based on Codd's ideas until 1978--one year after a young entrepreneur named Larry Ellison founded Oracle. Ellison's company went on to become the leader in relational database software, a $13.5 billion market that Oracle leads to this day.

DOS Microsoft got into operating systems by chance, but this story starts with IBM.
For its first PC, IBM initially considered using the C/PM system from Digital Research. Because Digital Research wouldn't sign a nondisclosure agreeent, IBM asked Microsoft, then developing applications for IBM, for MS-DOS.

MS-DOS, however, was actually based on QDOS, an operating system created by Tim Paterson of Seattle Computer Products. Microsoft bought QDOS from SCP (which didn't know about the IBM deal) for $50,000.

The sale became the basis of an empire. Subsequently, Paterson worked temporarily at Microsoft.

Yahoo passes on Google. Most technology mergers don't work, but there are cases in which an established company could have avoided big headaches later. Google was a project at Stanford University's engineering labs in 1998, when the founders showed it off to Yahoo co-founder David Filo. According to Google, Filo said he wanted to talk with them when the technology was fully developed and scalable. Sources said Yahoo even had a chance to buy Google.
Since then, Google, of course, has become Yahoo's biggest competitor. But in retrospect, it seems somewhat reasonable that Yahoo wouldn't have been jumping to buy the company. Search was a flooded field at the time. Stanford had little luck finding early investors.

Yahoo, however, isn't alone. It offered itself--in vain--to Netscape back in the mid-1990s.

The microdrive and hard-drive-based MP3 players IBM started shipping an invention called the microdrive--a mini hard drive with a 1-inch diameter platter, in 1999 and waited for business customers to snap it up. And waited...and waited.

Sales never materialized, and IBM, which invented the hard drive back in the '50s, continued to lose money on drives. (HP also came up with a small drive in the '90s but snuffed it.)
Apple Computer's iPod

Fast forward to 2002: IBM dished its drive business to Hitachi. In 2003 and 2004, the mini iPod and other music players made mini drives a hot commodity.
"IBM didn't see the consumer," said Bill Healy, senior vice president of product strategy and marketing at Hitachi Global Storage Technologies and a former IBMer. "Hitachi is the GE of Japan. They make rice cookers, refrigerators, nuclear-power plants."
Mistake? Hitachi has had more luck selling drives, but the business is still notoriously competitive and profits are often elusive. And, unlike IBM, Hitachi faces a slew of competitors in this market.

On a somewhat related note, Compaq Computer, Dell and others marketed MP3 players with hard drives before Apple did. However, they were home systems with standard PC hard drives. In January 2001, it seemed like a promising market. In October 2001, Apple came out with the first iPod based on a novel 1.8-inch drive that had interested few manufacturers. Portability won out.

Xerox PARC Move along, folks, nothing to see here. Xerox has been flayed mercilessly for allowing concepts such as the desktop PC, Ethernet networking and the laser printer--all invented at its famed Palo Alto Research Center, or PARC--to get exploited by others.
The photocopier giant is now trying to stay afloat in a world going paperless. Still, PARC did help launch the careers of a number of people: James Clark, Alan Kay, Robert Metcalf and Lawrence Tesler, among others

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NEWS: Search-Ad Bubble Shows Resilience

By Kevin Kelleher TheStreet.com Senior Writer4/5/2005 5:55 PM EDT

As search giants Google and Yahoo! get ready to report earnings for the first quarter of 2005, a debate is growing over just how good -- or bad -- the environment has become for the glowing core of the nuclear reactor known as the Internet economy: search-related advertising.

Last year, the sponsored-link ads that appear on Google and Yahoo! search results, as well as a growing number of small-content sites such as blogs, generated growth at a rate that was faster than most areas of e-commerce. In the fourth quarter, sequential search-ad revenue grew 30% at Google and 16% at Yahoo!. But after eBay, one of the biggest buyers of sponsored-link ads, said it was dialing back on its search spending, concerns arose that a small search bubble was about to pop.

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REPORT: Credit Derivatives May Pose Risk

By CARRICK MOLLENKAMP Staff Reporter of THE WALL STREET JOURNALApril 6, 2005; Page A6

LONDON -- The International Monetary Fund, in an otherwise sanguine review of the world's financial system, warned that the growing market for credit derivatives and other complex securities could suffer a rapid and "disorderly" selloff if conditions turned negative.

The IMF's Global Financial Stability Report, which is aimed at identifying potential weaknesses in the global financial system, also expressed concern that it had found anecdotal evidence that big banks may have relaxed credit standards in the hotly competitive race to attract hedge funds as clients for trading, a business known as prime brokerage. Hedge funds increasingly have become a big source of revenue for investment banks both as trading clients and as borrowers.

In the review of the market for credit derivatives -- instruments designed to protect banks and borrowers from losses on loans -- the IMF study said investors could be hurt if the market turned sour. In general, the credit-derivatives market has been praised for dispersing loan and asset risk across a wide array of investors. The overall credit-derivatives market stands at more than $1 trillion and includes complex financial structures such as collateralized debt obligations, or pools of loans divided into different layers of risk and return.

But "if market conditions turn negative, many investors in these products could rush to exit at the same time, causing market liquidity shortages that could amplify price movements," the IMF said in prepared remarks. "Furthermore, elements of risk management systems designed to deal with these complex products have not been through a live test, particularly to see if in time of need, counterparties stand ready to absorb the additional market and credit risks from those who would like to shed them."

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Can You Spot the Next VC Bubble?

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ACADEMIC: Econometric Tests of Asset Price Bubbles

Refet S. Gurkaynak
Division of Monetary A.airs
Board of Governors of the Federal Reserve System
Washington, DC 20551

January 2005

Can asset price bubbles be detected? This survey of econometric tests of asset price bubbles shows that, despite recent advances, econometric detection of asset price bubbles cannot be achieved with a satisfactory degree of certainty. For each paper that finds evidence of bubbles, there is another one that fits the data equally well without allowing for a bubble.

We are still unable to distinguish bubbles from time-varying or regimeswitching fundamentals, while many small sample econometrics problems of bubble tests remain unresolved.
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NEWS: Too much money going into VC

Aftershock
Mar 31st 2005 From The Economist print edition

...America's venture capitalists put $20.4 billion into deals in 2004. Although this sum was far below the amounts of the bubble years, it marks the first increase after three years of declining investment, according to VentureOne, a research firm. The biggest rise by far was in software, where investment grew from $4.1 billion in 2003 to $4.9 billion last year. Median valuations for American start-ups in 2004 were $13m—the highest since 2001, and a 30% increase compared with 2003.

...Following the dotcom crash, venture-capital funds did not invest much because good deals were scarce. Last year's uptick in investment came from finally finding suitable uses for funds raised in 2000 and 2001, says Matt Garlick of VentureOne. Still, an “overhang” of uninvested money—a breathtaking $54 billion in 2004—is now looking for deals. And more is to come: last year American venture-capital funds doubled the amount of fresh capital they raised from investors, taking in $17.5 billion, against $8.8 billion in 2003.

...But the allure of returns remains. “Limited partners are so desperate to deploy assets in this class that they are willing to fund new firms or old, bad firms—that is unprecedented in history,” says William Sahlman of Harvard Business School.

...Meanwhile, many veteran venture capitalists are fretting, especially now that pension funds and endowments are racing to place money in venture capital (partly because they cannot get decent returns elsewhere). “I am concerned that the inflow of so many dollars will result in overvaluations and inflated prices that we can't recapture on exit,” says Peter Barris of New Enterprise Associates, a large venture fund. Apparently, you can have too much of a good thing.

COMMENTARY: Blogs will Transform Media but Lead to Tiny Profits

There is a lot of excitement about blogs these days. Reminiscent of the heady days of the mid 1990s, upstarts are calling for a revolution. “Off with their heads” they cry pointing to the big media titans. Some of these titans are disdainful of the mobs carrying pitchforks unimportant. The bloggers, cry back, “you don’t get it.” Others in big media are quaking in their boots launching their own preemptive strikes. We’ve all seen this movie before. But like any great movie – we just can’t help getting swept away in the excitement no matter how many times the same types of characters do the same things.

When investor money and corporate development is at stake its key to remain dispassionate – skip the drama – and focus on some key economic lessons.

1) Innovation is fast but transformation is slow. As fast as blogs seem to have arrived and gain in stature every day, the real impact will be gradual. It will not be a revolution that overturns the established order overnight, rather a slow evolution over time. What we are seeing now is the rapid adoption among a ripe and ready group of consumers. According to Technorati, there are more than 8 million online blogs, up from 100,000 just two years ago. A new blog is created every 7.4 seconds generating 275,000 posts a day and 10,800 updates an hour. However, moving to large segments of the population where numbers need to hit tens of millions to register will take a lot longer. That means established companies have a longer than they think to figure out the most effective way to respond. Just remember even now, not even Barnes and Noble was “Amazoned.”

2) Despite the transformation, profits will be elusive. Think about email. It transformed the way humans interact with each other across the globe by making communication free, easy and fast. Despite this it is very difficult to generate notable profits. Yahoo! recently announced that it is increasing its free email storage to 1 Gigabyte. 2 GB is offered fo $20 per year. Blogs offer the potential to further transform communication by making broadcast media more social and interactive. But like email it will be very hard to make real profits. It takes about 45 seconds to log on to blogger.com and create a blog for free.

3) Where will the money go? Over time look for a very small handful of successful personalities to emerge from the blogsphere and capture a large enough group of followers whose demographic is appealing enough to advertisers that they can generate some advertising revenue. However, this model will be little different from an individual perusing a career as a talk show host.

Blog content aggregators and search engines may be able to generate some targeted advertising revenue similar to the paid search approach of Google and Yahoo. But as hot as paid internet placement is today, the market is getting stretched fairly thin with a growing number of competitors and more savvy and demanding buyers.

A few lucky start-ups might eventually get bought by larger media firms and if they time it at the right moment in the hype cycle, they will get far more money than they are worth. If they time it wrong, no one will touch them.

Most likely the money will remain with existing media companies that successfully adapt. Increasingly, traditional media are setting up their own blog content such as Business Week’s The Tech Beat. Local newspapers around the country are dong the same, from the Philadelphia Philadelphia Daily News' anti-war "Attytood," to News & Record, of North Carolina. Njo.com was started by a group of New Jersey newspapers focused on Bruce Springsteen and "The Sopranos."

The future of blogging is bright indeed but long term profit potential is dim.