Commentaries

from Rolfe Winkler:

Lunchtime Links 1-19

MUST READ -- Souring mortgages, weak market put FHA on tightrope (Timiraos, WSJ) Good article, though Timiraos doesn't address the absurd circularity perpetuated by FHA Chief David Stevens when Stevens says, on the one hand, that more gov't lending protects the housing market from further declines, while simultaneously arguing that such lending isn't sustainable. That said, Timiraos has worked lots of interesting stuff into this piece, especially towards the end. For instance, in late '07 investors were refinancing at-risk borrowers into FHA loans in order to shift risk to taxpayers. Barney Frank defends permanently raising FHA maximum loans for certain geographies to $729k. Also lots of data about how badly FHA loans are performing.

Citi's Q4 earnings: Not terrible but not great (Wilchins, Reuters) Trading revenues in the investment bank were much weaker compared to last quarter. Citi also benefited from a tax break, without which they wouldn't have met consensus estimates for the quarter. Here's a helpful chart.

(Click here to enlarge in new window)

How the French outplayed AIG and the Fed (Berman, WSJ...subscription req'd) Great column. Goldman gets all the bad press, but it was far from the only bank that got 100¢ on the dollar for derivative contracts with AIG...

Too big to fail is here to stay (Salmon, Reuters) Felix does a great takedown of Andrew Ross Sorkin's latest column.

Record cash means S&P 500 at half 2007 valuation (Xydias/Nazareth, Bloomberg) A very interesting idea, though lots of bones to pick with the way this piece was written. In nearly 1,300 words the writers never manage to provide a solid definition of how they're computing valuation. What is price to cash flow? Do they mean price to free cash flow? Do they mean price to EBITDA? There's a line about cash flow being earnings plus depreciation and asset writedowns. That may be a very relevant metric. But it's not one that investors know or understand and the authors fail to explain it.

from Rolfe Winkler:

Afternoon links 1-13

Must Read -- Kyle Bass: Testimony before the FCIC (fcic.gov) Bass is a hedgefunder that made big profits betting against subprime. His testimony has many fascinating facts and figures. [The pie charts on page 9 look familiar.]

Obama to push tax on too-big-to-fail banks (Nasiripour) Not a lot of details: "the planned tax would be imposed in a way that targets firms' riskiest activities, such as proprietary trading. It would be crafted in a way that doesn't affect a financial company's retail banking, so that the cost theoretically would not be passed on to retail customers -- but it wasn't clear exactly how that would work." And will it tax other TBTF firms besides banks? What about insurers? What about GE? Update: WSJ says the tax will target bank liabilities.

Earthquake in Haiti may have killed over 100,000 (Farie/Varner, Bloomberg) The epicenter of the 7.0 magnitude quake was 10 miles from Haiti's capital city.

Google China spat shines spotlight on cyberspying (Prodhan/Lee, Reuters) Google has consistently tried to thread the needle between the revenue opportunities provided by the Chinese market, and the censorship restrictions imposed by the Communist Party. This attack was so egregious that Google said it's had enough.

Prime jumbo RMBS delinquencies jump to 9.2%: Fitch (Golobay, HousingWire) ht Implode-o-Meter.

SEC proposes effective ban on naked access (Younglai/Spicer, Reuters)

FDIC's Bair blasts other regulators for reluctance on banker pay plan (Paletta, WSJ) I'd hoped to share the video archive with all of you but a day later it's still not available. There are good arguments that additional curbs on pay will be both tough to design and ineffective at curbing risk. A better regulator is failure. But that's not Dugan's point. He just wants to protect banks.

Google’s golden one-trick pony

Google chief executive Eric Schmidt declared “the worst of the recession is over” while unveiling third quarter results. Certainly Google’s recession doesn’t look like anyone else’s.

Revenues of $5.945 billion were up 7 percent from a year ago  and up 8 percent over the previous quarter, after  two flat quarters. Earnings of $5.89 per share were comfortably ahead of the consensus estimate of $5.32. Cost per click, the average amount advertisers pay, was up 5 percent from the second quarter, although still down on the previous year. And Google gushes money — the third quarter had $2.5 billion in free cash flow.

There are, however, factors that give pause. Part of Google’s strong recovery came from discipline. Capital expenditure was way down ($186 million compared with $452 million year on year), contractors in the workforce were largely eliminated, staff numbers were cut, and even the famed free food at the Googleplex was trimmed. Schmidt suggested that some of those constraints will be loosened. Capital expenditure will rise – the third quarter was already ahead of the second – and Google is hiring again.

Schmidt also talked about making strategic acquisitions, although these are likely to be small. When Google was growing by double figures each quarter, discipline was an afterthought. The company has shown it can clamp down, but there is some risk that it will return to previous profligacy.

Given the global downturn in advertising, which still accounts for the vast bulk of Google’s revenues, the results count as stunning. They were only 10 percent ahead of estimates, but estimates had been boosted in recent weeks by a stream of bullish comments from Google executives. During the darkest days of the recession, Schmidt insisted that search advertising would prove more robust than other forms, and he has been proven right.

There are also signs that Google may be finding ways to make money on drains like YouTube. On the earnings call, CFO Patrick Pichette said that Google is monetizing more than 1 billion videos views each week (YouTube streams more than 1 billion videos each day).

Ideas continue to stream out of the Googleplex, from clever phone service Google Voice to the over-hyped Google Wave. There’s also Android, Google’s mobile phone operating system. Schmidt said that “Android adoption is about to explode.” We’ll see. Most, however, don’t move the needle in Google’s multibillion revenues.

Gut feeling: How Google CEO valued YouTube deal

Let the second-guessing, the mock horror, the disbelief, the crowing begin.

Google CEO Eric Schmidt has acknowledged he realized upfront that he was overpaying to acquire YouTube, to the tune of $1 billion, judged by any conventional measures.

The many critics of Google’s $1.65 billion deal to acquire the video-sharing site three years ago will claim this confirms everything they have always said about the deal. Not quite.

In fact, not really at all.

Schmidt came clean in a deposition by lawyers in the Viacom copyright lawsuit that there was very little revenue coming into YouTube to justify the price his company paid.

No surprises here. There were intangibles to consider:

1. YouTube’s popularity was sky-rocketing, making it the runaway market leader among video-sharing sites. 2. It was crushing his company’s own site, Google Video. 3. YouTube was up for auction and would be sold to a competitor unless Google jumped first. 4. Google overbid to ensure YouTube didn’t fall into rival hands.

Cashing in on the data you create

– Eric Auchard is a Reuters columnist. The opinions expressed are his own. – 

By Eric Auchard

SAN FRANCISCO, Sept 17 (Reuters) – You created it. They make money off it.    That’s the business strategy of popular Web sites, led by Facebook, which is just beginning to tap the value of its 300 million members, triple its base a year ago.    The paradox of so-called “user-generated content” is that big companies such as Facebook and Twitter look to grow rich on information users share with one another.    But some users are beginning to grow savvy to — and protective of — the value of the data they share about themselves. This has prompted Web players to make democratic noises about users owning their own information.    The companies face a dilemma: they must find ways to sell advertising to support the cost of hosting their customers’ creative content without scaring off the users who make it all possible.    Last week, Twitter, the Web-based short-messaging phenomenon, revised its terms of service to reassure members that they retain the rights to any messages they post on the site. The key change Twitter made is that now it has laid the groundwork to sell relevant advertising based on users’  messages, known as “tweets.”     Such moves are putting the legal conditions in place to offer targeted advertising based on user behaviors and intentions as they can be deduced from the content they create or watch. Individual activities can be used by advertisers to identify potential audiences, which in aggregate, are served up specific marketing advertising.    But it’s hard to see how existing forms of online advertising can be crammed alongside the rapid fire bursts of 140-character messages that Twitter users produce. Advertising experts say the company’s best hope lies in making corporate marketers pay to deliver marketing messages over Twitter. Some recent rule changes seem designed to enable such ads.      Facebook got into hot water with its members earlier this year for adding two sentences to its terms of service that asserted ownership of messages, photos and other user content.

It has also struggled to figure out how to target messages to its fast-growing audience beyond serving up simple banner ads based on a user’s location and other basic demographic factors.    “Facebook really doesn’t have advertising figured out at all,” Forrester Research advertising analyst Emily Riley says. “Their philosophy is to serve up fewer ads and not bombard users with flashy display advertising. Unfortunately they have to invent a new form of advertising to do that.”    Google this week gave the issue of user data ownership a twist by making it easier for users to import data in and out of Google products. The Internet search leader is promising to help users extract data out of or into 23 popular Google services.    It says it is about two-thirds of the way through analyzing its product portfolio to accomplish this result (More details can be found at DataLiberation.org).    The data ownership issue for Google is not about new advertising ambitions so much as about reassuring regulators and easing user privacy concerns. The company says making it easier for less technically inclined users to switch to sites offering similar services shows its openness to competition.    Nevertheless, it appears Google’s move to liberate data is also a bid to win customers from rival sites by making it easier to transfer everything from bookmarks to emails to videos back to Google. Of course, for this to happen, rival sites must give customers more control over data they post to those sites.    Another problem is that the value of advertising sold alongside all this grassroots creative activity remains minuscule. Despite high-profile experiments by many advertisers, most remain nervous running marketing messages alongside content they cannot control in some fashion.    EMarketer, a research firm, estimates U.S. online advertising sold along all types of user generated content will reach between $615 million and $870 million by 2013. That’s a tiny fraction of the total U.S. online advertising budget of $24.5 billion predicted by eMarketer this year, which it expects to grow to $33.7 billion by 2012.      So while Facebook boasted this week that it is turning a profit on its business as a whole, the company’s revenues will have to grow very rapidly to justify the heady valuation put on it by investors of between $6.5 billion and $10 billion.      Twitter, which TechCrunch reports is closing a round of fundraising that values it around $1 billion, faces a similar challenge. Data-sharing trends may promise to stoke the amount of Internet user activity, but the question of how to make advertising pay the bills remains unanswered.

– At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund –

Read some of Eric’s previous columns here.    (Images: Twitter TOS screenshot; a user’s Facebook photos page; DataLiberation.org)

Ex-Google China chief’s dream factory

Google’s former China head Kai-Fu Lee wants to create China’s next internet giant in a factory. He believes that by combining the smartest entrepreneurs, the shrewdest business people and the brightest business ideas, he will be able to create five highly sellable companies a year. That sounds like an ideal model for venture capital, but is he being realistic?

Lee’s plan, formulated while he spent time in hospital over the summer, follows a battle with Beijing regulators who wanted to censor Google  searches that lead to pornographic sites. It has drawn strong support from investors.   Lee has managed to raise $115 million in just one month, winning support from YouTube Inc. co-founder Steve Chen, as well as Foxconn Electronics, Legend Group, New Oriental Education and venture firm WI Harper Group.     They believe that as China embraces a start-up culture, Lee’s business, which is a mix of venture capital and development lab, will be well positioned to capitalize. Lee’s plan is to hire 100 to 150 young engineers, help nurture their ideas, then spin off 50 to 75 of them a year with funding from his venture, whiling hiring new people to make up for the loss.    However, it looks as if his company, called Innovation Works, has yet to line up ideas or engineers. This kind of “incubator” model became popular in the U.S. and Europe during the dot-com boom, but most of them just burned through a lot of money and then folded.   Lee and his backers believe that China’s market is more favourable, as it is at a crucial point regarding “cloud computing” and mobile technology, and there is a strong need for early-stage funding.   The new fund is still starting off, but Lee plans to expand from its base in Beijing to places such as Taiwan, the Asian hardware manufacturing base and his hometown.

Investors are attracted by Lee’s reputation as the single largest magnet for talent in China. Lee, who went to school in the United States, has won a loyal following from Chinese students through his numerous coaching books, public speeches and blogs, although critics say he has spent too much time promoting his personal brand.

An expert in speech recognition technology, he founded Microsoft’s China research lab in the late 1990s. When he left to join Google, Microsoft sued him for violating a promise not to join a competitor.

Nimbler local rival Baidu now dominates China’s search market with 75.7 percent in terms of total search queries, dwarfing Google’s 19.8 percent share, according to iResearch. At Google, Lee was caught between the Beijing authorities who insist that foreign web companies censor the Internet and his U.S. bosses who demanded he drum up more business in China.   He has wanted to break away from his corporate role to start his own company for a decade, but it looks as if he is stuck in the corporate mindset. Lee is adopting an almost a planned economy approach to an industry that has always relied on markets to determine who is the fittest to survive. Indeed, he is even promising to tailor-make companies for interested foreign investors.   A factory model lowers the risk for investors as they will enjoy more control, but that also means less incentive and ownership for entrepreneurs, since their roles are reduced to that of employees. Why would young people take their ideas to Lee rather than make a go of it themselves?    Unlike Silicon Valley, China does not have an ecosystem where start-up companies can easily find angel investors. Even though China is a hotspot for venture capital, with $50 billion chasing mid- to late-stage projects, less than $1 billion in total is earmarked for early-stage projects.

Lee prides himself on his doggedness in chasing after talent. One year while at Google he made offers to graduates, only one of which was initially rejected. He called the student, found out that his girlfriend thought Google was a bit of a start-up, then asked for his girlfriend’s number and called her up. That year he achieved a 100 percent offer acceptance rate.    Nevertheless, it remains to be seen whether Lee can retain his ability to attract and inspire the best young people now that he is no longer at Google. He needs a lot of them to make his dream come true.

from Rolfe Winkler:

Google developing micropayment system for online news

From the San Francisco Business Times (ht J Lit): Google working on painless payments for news

Google’s platform, which should be ready within a year, would simplify the way newspapers and other publishers charge for online content. Some readers have balked at the need to sign in, create an identity and password, and jump other hurdles to access online news at sites that charge money. Google’s idea — based on its existing “Checkout” system — would let people create just one sign in for many different sites and subscriptions.

It would also let publishers combine subscriptions to many different web sites or titles and charge one price for them.

The platform would also allow creation of different levels of search access, from “snippets” to preview pages to complete access.

Google would get a piece of the pie for facilitating the transaction.

Newspapers complain that Google commoditized news. But that's unfair. Newspapers are free to keep their content behind a subscription wall if they want. The trouble is they don't have the leverage, individually, to charge for content. Readers will just go elsewhere.

If Google can help publishers work together, they may just take a little bit of leverage back.

This would be good for readers too. News costs money to produce, believe it or not. At the other end of every link is a reporter working a beat, or an analyst putting together a report. It takes time to create good content and people have to be paid for their time.

It will be easier for readers chip in if the cost is low and the execution is greatly simplified. That is the promise of a unified micropayment platform.

Online video: Revolution, Evolution or Counter-Revolution?

Lots of news in online video world, some potentially significant. 

And some we can only wait and see about.

Google Inc, Cisco Systems and News Corp are separately doing things that could mean sweeping changes in the way video is produced and consumed on the web.

Revolution?

Video compression technology can be interesting, really.

Most people forget how online video worked before YouTube popularized the embedded Flash video player. Remember the frustration of making sure you had the right video player to play this or that web video? It was YouTube that popularized giving people one-click access to videos.

On Wednesday, Google said it had agreed to acquire On2 Technologies, a maker of video compression technology, in a deal that could have sweeping effects for how video works on the web. The Internet search leader has a bland blog post about how it intends to use On2 to innovate in how video working on the Web, but it isn’t at all clear how far it Google is ready to go.

There’s lots of speculation that Google may choose to open source, or give away, On2′s video compression technology, undercutting royalty-bearing video compression technologies in use across the Web. That could undermine Adobe and its widely used Flash player, Microsoft, with its Silverlight alternative, not to mention Apple Inc and RealNetworks. Dan Frommer at Silicon Alley Insider spells out how far-reaching the Google gambit could be.  As a counterpoint, Dan Rayburn of StreamingMedia.com argues the Google move is no big deal.

Google is only paying $106.5 million in stock for the American Stock Exchange listed-firm based in Clifton Park, New York. Because the deal involves two public companies, there’s an outside chance that a competitor may want to mount a rival bid. The On2 board would have to consider a richer bid for fiduciary reasons. Google might have more on its hands that it bargained for.

(Images: Beet.tv, Google Finance)

Apple-Google learn Corporate Governance 1.0

LONDON, Aug 3 (Reuters) – The resignation of Google CEO Eric Schmidt from Apple’s board should come as no surprise to anyone with an inkling of what corporate governance means.

But then Silicon Valley’s idea of corporate boards has long consisted of cozy, interlocking directorships which would be considered collusion in most other industries.

Google’s CEO is not leaving Apple’s board voluntarily. He is only stepping down in response to the increased government scrutiny of obvious potential conflicts of interest between the two companies.

Yet regulators shouldn’t be content with Schmidt’s departure. The truth is that Apple and Google have been heading into the same markets for years. A veritable chain of overlapping business ties remain in place even if the most obvious formal link is now broken.

The chairman of Apple’s board, former Genentech CEO Art Levinson, remains on Google’s board. Another Google board member, Ann Mather, is the former chief financial officer of Steve Jobs’ former animation company, Pixar Studios.

Paul Otellini, the CEO of Intel Corp, Apple’s main chip supplier, also sits on Google’s board. Al Gore remains on Apple’s board, but in his new turn as venture capitalist he has many business ties to Google and its founders. Gore is a partner of Google board member John Doerr at legendary Silicon Valley VC firm Kleiner Perkins.

For months, the U.S. Federal Trade Commission has been examining Schmidt’s participation on the boards of the tech world’s two most dynamic companies. Last week, the Federal Communications Commission said it was looking into Apple’s decision to reject a Google phone application to run on the iPhone.