Felix Salmon

I had a fascinating conversation last night with a chap from Kickstarter, a site designed to help creative professionals realize projects. And it’s still doing that, pretty well. But there’s clearly a degree of mission creep at Kickstarter, too — especially with regard to some of the most successful and highest-profile projects on the site.

“A project is not open-ended,” says Kickstarter: “Starting a business, for example, does not qualify as a project.” Yet that’s exactly what Matter is doing with Kickstarter.

What’s more, Kickstarter can only be used to fund projects “from the creative fields of Art, Comics, Dance, Design, Fashion, Film, Food, Games, Music, Photography, Publishing, Technology, and Theater”. Which one of those fields is a bar of soap supposed to fall into? Design, I guess. But if the fields of Design and Technology can be so broadly construed as to mean anything, they ultimately mean nothing. And the bar of soap — just like Matter or the famous $1.5 million iPhone dock — is at heart an attempt to start a business, much more than it is an attempt to fund a creative project.

The bar of soap and the iPhone dock are glossy and sophisticated sales pitches: one of the questions yesterday was whether they were closer to SkyMall or to QVC. But there’s a huge difference: SkyMall and QVC sell products which exist. On Kickstarter, you’re buying a hypothetical future product. And I worry that this is going to end in high-profile tears and recriminations at some point, the first time a big funded project fails to produce what it promised.

Getting a product to market is hard. Even companies with business plans and executives and millions of dollars in funding — and a fully-functioning product — can fall down on that front. Look for instance at the Switch lightbulb: in July 2011, Farhad Manjoo of Slate said it would go on sale in October 2011 for $20. In August 2011, Dan Koeppel of Wired magazine ran an article saying that the bulb would go on sale in October for $30. But here we are in March 2012, there’s still no sign of the thing, and the company’s Facebook page is filling up with comments saying things like “I’m going to start my own company making a product that no one can buy. Hmm….what should I not sell? So hard to decide.”

There are two big hidden risks which I think that Kickstarter should emphasize much more than it’s presently doing. The first is on the side of the person with the project. It’s easy, when you’re trying to raise funds, to promise lots of things to lots of people, in that glorious utopian future where you’ve raised the cash that you need and you can actually finish your project. So then you finish the project, and you’re still incredibly busy and stressed, but now you have hundreds or even thousands of things to send out. Which can be a decidedly unpleasant chore. Kickstarter buries its page warning about how shipping “may end up being a bigger part of your budget than you thought”, and doesn’t really talk at all about the massive time commitment involved. For rewards which are individually hand-made, the result can be something much sloppier than the project owner originally intended. Which isn’t really good for anybody.

The bigger risk, however, is on the side of the funder — and that’s the risk that the project will get funded, you will spend your money, and you will end up getting nothing in return. For original-concept Kickstarter projects, that’s probably OK: you supported the arts by funding an artist, and you hoped to get a memento of that funding, but the reward was just a reward, and not necessarily the main reason you funded the project. For things like bars of soap and iPhone docks, however, the great majority of the funders are thinking of themselves as buying a thing. And they’re not properly discounting the very real risk that they will end up with nothing at all.

Even the most well-intentioned projects can run into unanticipated obstacles, some of which could be fatal to the project. And of course there’s the risk too of outright merchant fraud. You put together a glossy Kickstarter video, raise a few hundred thousand dollars, and then just pocket the money while telling everybody that the project is taking longer than expected.

In either situation, your funders have very little recourse. They may or may not, at some point, be able to get a refund from their credit-card company, if they paid with a credit card. But it’s extremely unlikely that they’ll be able to get a refund from the project owner.

Kickstarter doesn’t keep statistics on the number of projects which get funded but not completed, or the number of projects where funders fail to receive what they were promised. It’s hard to know how such statistics could possibly be generated, since projects don’t come with deadlines by which the rewards are deliverable. I, for one, have a number of Kickstarter receivables coming to me; I don’t have them listed anywhere, however, and if they don’t arrive, I’m not going to be particularly upset. There are 12,521 people expecting an iPhone dock, however, and 21 of them have paid upwards of $5,000 to receive 100 docks or more. If I was expecting a shipment of 100 iPhone docks, I’d consider that a real business contract, rather than a much fuzzier form of support for some creative project.

The JOBS act which recently passed in the House would allow Kickstarter to allow project backers to receive equity, rather than specific rewards, in return for their money. The regulatory and compliance costs for Kickstarter would surely be enormous, but might well be worth it, given that SecondMarket is now valued at $200 million. But before Kickstarter moves into the realm of equity stakes, it should probably start thinking much harder about the way in which it’s becoming a shopping site. Because if it doesn’t have a good way of regulating the people on its platform who are fundamentally just selling things, then it’s going to have a really hard time becoming a platform for people selling ownership stakes in companies.

In the general atmosphere here in Davos of worry and apprehension, it was great to be able to sit down with Esther Dyson this afternoon and get a dose of refreshing optimism — and about Russia, of all places. There’s an elite group of Russian technologists here — Dyson, a lifelong Russophile who’s fluent in the language and on many boards of Russian technology companies, introduced me to both Arkady Volozh of Yandex and Anatoly Karachinsky of IBS. And she’s convinced that the success of the Russian technology sector can not only make for thriving companies but also for a much improved country.

I was skeptical, but Dyson made a number of good points. For one thing, it’s really hard to build a successful software company through corruption and bribery and other dark arts — especially when you’re creating websites which are judged on their broad popularity. And while natural resources can be stolen, human resources really can’t be.

More importantly, a whole generation of Russians is growing up on the internet, freely using Russia-developed websites which are every bit as good as their US counterparts. Their life online is transparent and not controlled by large and oppressive bureaucracies, and Dyson is convinced that once they’ve experienced that much freedom online, they’re going to start demanding it in real life as well.

Not immediately, of course: Putin is going to win the next election, and he’s going to do so legitimately. But at some point a majority of the Russian population will have no memories of the Soviet era. And already that younger generation is both demanding change and driving growth.

They’re fantastic engineers, for one — look at the way, for instance, in which Boeing does a large part of its engineering work in Russia. Or, more generally, at the Israeli technology sector, much of which is powered by Russian emigres. Russia has many problems, but there’s no doubt that its computer-science colleges are churning out a lot of smart graduates, and that the likes of Karachinsky are hiring those people at a rate of thousands per year. And they’re not robots, either: these kids are creative.

Dyson is intimately familiar with projects like Digital October in Moscow, and she’s a huge fan. Meanwhile, of course, there are the much larger phenomena which get a lot of global attention — things like Mikhail Prokhorov’s bid for the presidency, or the massive Skolkovo science park. If these things fail — and there’s a good chance that both of them will — that’s not necessarily a bad thing: free and successful societies have lots of failure. And importantly, when you look at both of them, you see hope and optimism. Which are not what you might call classic Russian traits.

I’m not entirely convinced. The population of Russia has been declining for the past 20 years, and is continuing to shrink: there are 14.2 deaths per 1,000 people per year, and just 12.6 births. And if you look at the weirdly-shaped population pyramid, you can see that the post-Soviet generation is dwarfed by its more conservative elders. It’s going to take a very long time indeed before they can or will effect any real change.

Still, if there’s any hope for Russia, it’s in the idea that democracy will percolate up from youth and the internet, rather than being demanded in some kind of revolution. As Prokhorov says, “every time we have a revolution, it was a very bloody period”. Russian democracy is not going to mean a US-style free-market economy: Russia tried that, in the 1990s, with disastrous results for the broad population. But a wired country is, by its nature, always going to be a little less corrupt. And a little more hopeful.

Maija Palmer, with another one of those end-of-email articles, finds this intriguing story:

Andy Mulholland, chief technology officer at Capgemini, says email works poorly for people working in unstructured roles, such as engineers solving IT problems. “Someone asks you a question you don’t know the answer to, so you send out emails to everyone you know. Out of 20 people, 19 have their time wasted and the 20th gives you half an answer,” he explains. Social networking, in this case, can give faster and better answers.

He cites a recent example where an engineer had an unusual problem with some Unix code. He posted the question on Yammer, and within two hours had an answer from someone in the company he didn’t know, in a department of the business he barely knew existed.

On its face, this doesn’t make a lot of sense. If you’re worried about wasting people’s time, why is it better to waste hundreds of employees’ time on Yammer than a couple of dozen over email? I think the answer to that question is the key to understanding the power of social networks.

The Yammer solution here is clearly superior for the person asking the question, in other words — but why is it superior for all the people reading and thinking about and maybe or maybe not answering it? After all, they spend much more time on this question, in aggregate, than any email cc list would.

But it’s voluntary time: Yammer is the kind of thing which fits neatly into whatever interstices one has in one’s day. It doesn’t ping at you and annoy you and distract you at inopportune moments.

Social networks are also supererogatory: they have none of the feeling of being forced to read and participate that comes with almost all corporate emails. Much of the current case against James Murdoch, for instance, is based on the idea that if he was emailed something, he must have known it. No one would dream of making the case that if some fact was revealed on a Yammer board, and Murdoch had access to it on Yammer, then he must have known that fact.

Related to that is what you might call lurkability: you can spend as much (or as little) time as you like on these boards, learning about anything you’re interested in, without being formally copied-in on anything. Something which might be a waste of time to you can be useful and valuable to me — and social networks are a great way of giving people access to the stuff they find valuable, without anybody having to second-guess what it is they want to know.

Finally, if and when you do choose to participate, you get to do so in public. The engineer who answered that question got noticed, in a good way, and no one else took credit for what he said or tried to hide his participation in the process. No space is entirely free of office politics, but social networks, because they’re public, make such politicking rarer and less harmful when it does happen.

It’s also much easier to share information you find on a social network: worries that some piece of information might be confidential tend to be much smaller and much less important. As a result, such networks have much less friction than email does.

And anything which reduces the mounds of emails we all have to deal with every day has got to be a good thing. My work email account, in particular, is a nightmare: it’s 95% unsolicited PR pitches and 4% internal emails going out to enormous distribution lists which I have no interest in at all. Which means I have to go to a lot of effort to find the 1% of emails that I actually want to read. There’s got to be a better way.

What’s behind the rise in bus travel in recent years? It certainly seems very impressive, according to the latest research from DePaul University.

Here’s how Bloomberg’s Jeff Plungis characterizes it:

Megabus.com and BoltBus led U.S. curbside bus companies that boosted trips by 32 percent this year as travelers opted to leave their cars behind and surf the Internet while traveling.

And here’s Matt Yglesias, with a slightly different take:

Like Duncan Black, I’m far from certain that the right way to understand this is actually as intercity bus trips substituting for intercity car rides. The way I would primarily interpret it is as these services leading to additional trips that wouldn’t otherwise have been taken. Instead of riding Amtrak to New York once a year, you ride the bus three times instead.

If you look at the data, Yglesias seems closer to the mark than Plungis. Could the massive 30% rise in curbside bus ridership be accounted for by the 1% fall in private autos? Possibly. But it’s more likely that something else is going on.

Both Plungis and Yglesias, I think, miss the elephant in the room, and the obvious reason why the DePaul measurements for bus ridership have been growing at such a startling rate. Here’s how the paper puts it:

The analysis we provide also excludes all “Chinatown operators,” which have significant different qualities than mainstream operators. As a general rule, those carriers listed on the GotoBus.com web site are considered for purposes of our study to be Chinatown operators. Many of these carriers do not invest in a brand identifiable by the paint scheme or insignia on their buses.

Indeed, DePaul specifically excluded the dramatic growth of California’s USAsia Bus Lines, just because they determined that it counted as a Chinatown operator.

The obvious theory, then, is that big operators like Megabus and Bolt Bus saw the huge success of the Chintaown bus market and saw an opportunity there. They brought in branding and professional marketing and wifi and much higher safety standards, and succeeded in taking a huge amount of market share from the Chinatown operators who were never part of the DePaul survey in the first place.

That theory is borne out by my own anecdotal experience: when my friends took the bus from New York to DC or Boston ten years ago, it was normally a Chinatown bus. Today, it’s more likely to be a Bolt Bus, or even a higher-end product like the Limoliner.

In other words, the DePaul data is consistent with total bus ridership actually staying constant, with the recognized curbside buses simply taking ridership share from unrecognized Chinatown operators. In reality, I suspect that bus ridership is growing. Just not nearly as fast as the DePaul paper would have you believe.

As for the much-vaunted wifi on these buses, it’s basically the same as the wifi on Amtrak, or from Gogo in-flight: in a word, crap. If you’re working on a laptop and can download emails or web pages in the background while reading or writing something else, then it’s fine. But it’s pretty much useless for people on iPads, where the lack of multitasking means you can’t read one thing and download something else at the same time.

It seems to me that the travel industry in general has done a very bad job of adjusting to the fact that most wifi-enabled devices these days are not laptops. I even stayed at one pretty high-end hotel in England, recently, which thought that providing an ethernet cable was a perfectly good alternative to providing wifi, and which didn’t have any kind of Airport Express devices or similar that it could lend out to guests who didn’t have ethernet ports on their computers or tablets.

So far, no one’s really cracked the problem of the mobile web — we’re still in a world where connecting to the internet when on the move is far too difficult, and needs to be configured (and often paid for) on a device-by-device basis. Companies like Lightsquared want to change that, but for the time being they’re vaporware, and I’m not holding my breath for them to arrive. Which means that for the time being it’s a bit of a stretch to say — as Plungis, for one, does — that the mobile web is actually changing the way we travel from city to city.

I spent Wednesday night in Silicon Valley, at a very geeky discussion of Bitcoin, the unregulated digital currency which managed to get a lot of anarcho-utopians very excited. But Bitcoin fever seems to be on the wane right now, and the number of real-world places where Bitcoins can be spent is still, to a first approximation, zero.

One of the subjects we spent a fair amount of time discussing was the question of chargebacks and reversibility of transactions. Bitcoin was designed to be as cashlike as possible: once it’s spent, it’s gone. As one user discovered in spectacular fashion.

There are good reasons for setting payments systems up in a non-reversible way: it makes things much simpler and easier, for starters, and there is real demand out there for a digital equivalent of cash. On top of that, many Americans are unaware of the rights they have when money is spent on their credit or debit card, by themselves or others.

But consumer-advocacy organizations like Consumers Union are very aware of those rights. And as we move, very slowly, into a world of mobile payments, Consumers Union is trying its hardest to ensure that such payments are as reversible as possible.

Most cell phone and tablet users can purchase digital goods and charge them to their monthly bill or prepaid phone account. But they may not get the protections they need to limit their financial liability if something goes wrong with the transaction…

“Consumers using mobile payments should get the same strong protections they currently enjoy when they make purchases with a credit card or debit card,” said Michelle Jun, senior attorney for Consumers Union, the nonprofit advocacy arm of Consumer Reports. “But we found that consumer rights can vary widely between wireless carriers and the protections carriers claim to provide are often nowhere to be found in customer contracts.”

Jeremy Quittner wrote up the Consumers Union findings under the headline “Banks More Consumer Friendly than Carriers for Mobile Payment”:

Banks have been much maligned for nickel-and-diming their customers, but in another area — cardholder fraud protections — they are being praised as consumer champions.

A Consumers Union report released Wednesday shows that protections for purchases that consumers make using their mobile phone numbers are much weaker than those consumers get from standard cardholder agreements regulating their credit or debit card purchases.

I suspect that as the world moves increasingly towards digital and mobile forms of payment, these issues are going to be key in determining how popular those forms of payment become. People are naturally resistant to change, and they still worry much more about spending money online than they do about spending money in much less secure real-world transactions. So long as headlines about digital and mobile payments continue to frame the issue as one of “consumer protection,” the payments industry is going to have to take such things very seriously, even if they run counter to the anarcho-utopian leanings of the geeks developing the underlying technologies.

The tension, of course, comes with regard to anonymity: while cash is perfectly anonymous, other forms of payment are not. And it’s pretty much impossible to create a reversible payments system if the users are completely anonymous.

But that’s OK: if I’m making a payment by swiping my phone, I don’t really feel the need to be anonymous at all. In fact, if the payments system knows not only my identity but also my location when the payment is made, there are lots of ways that it can use that information in ways I could find extremely valuable. We’re seeing this already: various payments companies are putting together systems whereby every time I walk into my local coffee shop, say, I can just pick up my regular order and walk out, and the payment will happen automatically. As will the free coffee I get after paying for ten at a regular price. All I need to do is have my phone in my pocket.

The future of payments, then, is likely to be highly personalized and reversible — exactly the opposite of the anonymous and irreversible protocols built into Bitcoin. And that’s one big reason Bitcoin is not going to be a long-term success.

Andy Zaky at Bullish Cross has a great post on Apple’s valuation, showing the astonishing degree to which the market is discounting the value of a dollar of Apple’s earnings today, compared to just two years ago. Back then, it was worth $32; now, it’s worth just $13. In the eyes of the market, Apple earnings are worth less than those of Cisco, Comcast, IBM, or AT&T, and are worth just 13% of the earnings of Amazon.

All of which raises the obvious question: why is Apple trading at such a seemingly depressed level? I have a few ideas, none of which are particularly compelling.

1. It’s run out of buyers. The Apple bull run has been going on for so long, at this point, that anybody who wanted to buy it has bought it already. And they’ve done pretty well by doing so. If they want to rebalance so that they keep their Apple holdings constant as a percentage of their total portfolio, they’re more likely to be selling than they are to be buying.
2. We’re all long Apple already. Apple is now firmly ensconced in its position as one of the two most valuable companies on the US stock market, in a world where ETFs and index funds are only getting more popular. As a result, if you’re long the S&P 500, you’re long Apple in quite a big way. And a large amount of the trade in Apple is going to be index-arbitrage trading. This is inevitably going to increase the correlation between Apple and the S&P 500. And when the S&P 500 has much lower earnings growth than Apple, that’s going to act as a drag on Apple’s share-price growth.
3. The headline share price is high. This shouldn’t matter, but it does. Small investors feel a bit weird about spending $2,500 on Apple stock and getting the grand total of seven shares in return. And the high share price sends a message to bigger investors, too: it says that Apple isn’t in the business of managing its share price, and is not about to engage in shenanigans like stock buybacks. Indeed, the market shouldn’t even expect a dividend any time in the foreseeable future, despite the fact that Apple clearly has more cash than it knows what to do with.
4. The headline market capitalization is high. When a company is worth $340 billion, a 10% rise in the share price means that the stock market has created $34 billion of new wealth. Which is harder than creating $3 billion of new wealth.
5. The appeal of the mean-reversion hypothesis. Apple can’t go on increasing its rate of earnings growth forever; indeed, it can’t even sustain its current level of earnings growth very long. It’s so big, and has come so far, and is making so much money, that at some point the only way to go is down. This is true on a conceptual level, but I don’t think it’s true on a practical level: Apple’s market share is still pretty small in the US, and positively tiny in the rest of the world. There’s a lot of growth potential left in this company, as smartphones increase their global penetration and as more people move from Windows to Macintosh.
6. Steve Jobs is dead. Apple’s p/e ratios started shrinking at about the same time that Jobs did, and all the hagiographic attention on how unique Jobs was only serves to remind us that he’s not around any more. If the next generation of Apple products is a success, people will still give Jobs the credit, and worry that Tim Cook won’t be able to replicate Jobs’s achievements. It’s going to take a long time before Cook can truly own the company and come out from Jobs’s shadow; in the meantime, investors are naturally going to worry that the glory years are over.
7. Apple’s earnings come from the frothiest, most disposable part of consumer income, which is the first part of consumer spending to go away if and when the economy heads south. As such, Apple’s more vulnerable to an economic downturn than most of its peers.
8. There isn’t a real bear case for Apple: the closest thing I can find is all technical-analysis astrology. And the way that markets work, stocks are much more likely to rise when people are bearish than when they’re bullish. No one seems to think that Apple is actually overvalued; indeed, analysts are ratcheting up their earnings forecasts at an astonishing pace. Here’s a table from Bill Maurer:

Estimates are up 12% over the past 90 days for the first quarter of 2012, and they’re up 7.5% over the past 90 days for the full year. This also helps explain the compression in forward p/e ratios.

What’s certain here is that the market simply isn’t rewarding Apple for its astonishing level of earnings growth of late. Which is weird, since that kind of earnings growth really wasn’t priced in a couple of years ago. Zaky’s convinced we’re seeing a market failure here, and I’m not convinced he’s wrong. But I’d be happier if someone could persuade me that there’s actually a good reason why Apple earnings seem to be worth so much less than so many of Apple’s less-successful peers.

Apple products have always cost more than the equivalent products elsewhere. It’s one of the reasons that Apple has historically had very high brand loyalty and very low market share — a classic luxury-good combination. But now that Apple has become a mass-market brand, it’s reaching millions of sensible people, who like to save money. And that, in turn, causes an interesting tension.

Back when Apple sold widgets, things were easy: you paid through the nose for your widget, and then you were happy. But now Apple makes mobile devices like iPhones and iPads, an that means it has no choice but to get into bed with the much-hated wireless companies. It tries to control the experience as best it can — but people still end up being faced with ludicrous charges like $30 a month for text messaging. And then, on the perfectly reasonable grounds that $360 plus tax per year is a ridiculous sum of money to spend on a minuscule amount of data, they decide that they’re going to try to get around those charges.

It is indeed possible to get around extortionate wireless charges. Rather than buy a 3G iPad, for instance, you can use one with only wifi, and then connect it when you’re on the go to a tethered smartphone or some kind of MiFi device. And rather than spend lots of money on text messages, you can sign up for Google Voice, and do all your texting with that number.

These money-saving techniques are perfectly rational. And they don’t cost Apple any money — just the wireless carriers. But they’re still bad for Apple, because they defeat the elegant perfection which Apple puts so much effort into getting exactly right. And what’s more, these techniques are most attractive to people who are tempted by Apple products but can only just afford them, or can’t quite afford them. As it seeks to increase its market share, Apple has to sell its products to more and more of these people, who will often be buying an Apple product for the first time. And the last thing that Apple wants is for its carefully-crafted user experience to be sullied by something as banal as an attempt to avoid text-messaging charges.

Take the iPad, for instance: I can attest from personal experience that the 3G iPad is just miles better than trying to use a wifi-only iPad with a MiFi. It downloads emails automatically, even when you don’t ask it to; you can pull it out of your bag and look up anything you like instantly; there’s no waiting around for the wireless modem to get online and generate its wifi signal; you don’t need to worry about how charged up your MiFi is, or where you left it; you get all the advantages of real GPS; etc etc. An iPad + MiFi is adequate; it’s good enough; it’s “all I need”. But the 3G iPad is why people love Apple. And it costs $300 a year over and above the cost of the iPad, which is itself $130 more than the wifi-only version. There are definitely cheaper ways of getting your iPad online. But you lose a significant amount of elegance and ease of use in the process.

As for Google Voice, you can either just install it on your phone with a new number, or you can go through the rather convoluted process of transferring your current number to Google Voice. Either way, you’re going to be using the Google Voice app a lot — an app which is slower and buggier than the phone and messaging apps built in to iOS. And — to answer Ryan O’Donnell’s question — I can’t really recommend it.

Yes, you get to check your text messages on the web, which can be useful — although it’s not that useful. But you also break a lot of things which otherwise work seamlessly in iOS. There’s no MMS, for instance. There’s no iMessage. There’s also — this is big — no texting to anybody with an international number. You can’t text from Siri. FaceTime integration goes away. You can no longer just click on a phone number to call it, if you want to call people from your Google Voice number. And the whole thing becomes generally much less reliable, because you can’t get any text messages at all unless and until you have a data connection. And as anybody with an iPhone knows, there are many, many occasions when you have cell service but data service just doesn’t work at all.

On top of that, you might well be violating your wireless carrier’s terms of service.

Now for some people — specifically people who are very comfortable with iOS, who know their way around an iPhone, and who value the ability to save money — a switch to Google Voice still makes sense. Text-messaging plans are ludicrously expensive, and I support anybody who comes up with a way of avoiding having to pay those bills. (Including, it must be said, Apple, whose iMessage platform, if it catches on, neatly circumvents existing text-messaging systems.)

But it does seem to me that so long as Apple has to deal with the hated wireless providers, people will always be voluntarily accepting a subpar user experience because they want to save on monthly charges. Apple has always hated it when its customers have a subpar user experience, but this problem isn’t going to go away: in fact, it’s only going to get worse.

And in the meantime, if you buy a wireless Apple product, it’s a good idea to be aware that the premium you’re paying for the hardware is not the end of the story. You’re going to be feeling the monthly bills for as long as you use that thing. And they’re going to add up.

Here’s something I haven’t seen before: an IPO roadshow appearing online for the world to see. (Click the link on the left; the link on the right basically just takes you to a copy of Groupon’s S-1.) In fact, I’ve never seen an IPO roadshow pitch before. They’re boring! And, they feature senior executives looking uncomfortable wearing ties in front of a dark-grey background, talking to slides!

But, this roadshow is also very helpful indeed for people looking to understand Groupon’s business. And it includes cohort information which has never been made public before, and which is rather more bullish on Groupon’s prospects than the analysis we’ve had to make do with to date from Yipit.

First, though, it’s worth taking a look at the price tag on this company. As Anthony Hughes reports, the price range indicated here values Groupon at no more than $11.4 billion, with Groupon itself getting a maximum of $540 million in cash. These are big numbers; the valuation is essentially double the amount that was reportedly offered by Google for the company in December, and is 2.3 times the $4.875 billion valuation at which Groupon raised money that month. (Interestingly, Groupon is actually raising less money in the IPO than it did in that round.) Still, the valuation’s nowhere near the $25 billion or even $30 billion numbers that were being whispered a few months ago.

Andrew Ross Sorkin is very critical about all that $30 billion number, talking about known issues surrounding Groupon, and writing:

How did so many Wall Street firms desperate to underwrite the Groupon I.P.O. miss these warning signs when pitching such a sky-high valuation? …

A deep dive into the numbers should have raised alarm bells at the outset about even talking about the possibility of a $30 billion valuation…

If it were to really slow its marketing spending, it is possible Groupon could turn a profit.

Even so, it does not fully explain how Groupon’s underwriters, whose endorsement of the company is supposed to be considered the Good Housekeeping Seal of Approval, originally came up with Groupon’s questionable $30 billion valuation.

Sorkin, here, is saying that Goldman Sachs and other banks, when pitching their IPO services, told Groupon that they could bring the company public at a $30 billion valuation — indeed, that they “originally came up with” that number. And, frankly, I don’t believe him. All conversations about these matters are off the record, of course, so it’s hard to be definitive. And Sorkin certainly talks to many more bankers than I do. But going public really isn’t about the IPO — it’s about being a publicly-listed company in perpetuity. And Groupon has very little incentive to launch at a bubblicious valuation which can only exacerbate volatility over time.

I think that the $30 billion number was never something that bankers seriously pitched to Groupon as a launch-valuation possibility. Instead, it was a number thrown out by people looking at LinkedIn’s first-day pop, and was intended to reflect not the IPO price but rather the level at which Groupon shares might trade in the secondary market, if the market remained frothy. (And even today LinkedIn is worth more than $8 billion, which makes $11 billion for Groupon seem pretty reasonable in comparison.)

As for Groupon’s business, I do still like the model — with the proviso that I have no idea how to place a present value on such a thing, so I take no position at all on what a sensible valuation for the company might be.

And in the light of the numbers Groupon released today, it’s no stretch at all to say that “Groupon could turn a profit”: the company’s total loss in the third quarter was a tiny $239,000 — essentially, the company broke even.

One thing which makes me look more favorably on Groupon now that I’ve seen the roadshow is the company’s cohort data. One of my biggest concerns about Groupon, up until now, has been the idea that its subscribers suffer from “deal fatigue”. You sign up in a fit of enthusiasm, you buy a few deals, and then the novelty wears off and you go back to your old life. That thesis was supported with charts like this one, generated from some of the relatively sparse information that Groupon provided in its S-1.

This chart could show that subscribers spend less and less money over time. On the other hand, it doesn’t necessarily show that. There’s an alternative explanation: basically, that there are diminishing marginal returns to marketing spend. Groupon picks the most valuable low-hanging fruit first, and then as its subscriber base grows, the newer subscribers spend less money than the older ones, bringing the average down. Even if the older subscribers keep on spending just as much as they ever used to.

And that’s what’s shown in two charts from the roadshow. They look at the numbers associated with the subscribers that Groupon acquired in the second quarter of 2010:

As Groupon CEO Andrew Mason explains with regard to the first chart,

This shows the repeat purchasing behavior of a typical cohort of customers; this one joined in Q2 of 2010. You can see that quarter after quarter after quarter, they continue to buy at the same pace.

The first chart shows the quarterly revenue from the customers that Groupon acquired in the quarter; the second chart shows the quarterly profit from those same customers. In both cases, the numbers are remarkably consistent over time — they’re not falling off.

My other big concern is about targeting — Groupon’s ability to differentiate between consumers based on much more than just what city they live in, and to show them deals they’re likely to love. Groupon product head Jeff Holden talks about this around slide 26. Groupon has something called Smart Deals, which tries to implement just that kind of targeting. One way it’s doing that is by getting its customers to click on categories called Deal Types, so that it knows what kind of deals that customer is interested in. And then of course given that customers keep on buying deals over time, it’s easy to see what kind of deals they’re buying, and what kind of deals they’re not.

Holden also gives the best explanation of Groupon Now that I’ve seen — the way it offers yield management for merchants.The idea is that the Groupon app on my phone is a great way for me to save money: I fire it up, and immediately see a list of deals nearby. Merchants can offer or not offer those deals in real time: they can make them better when business is slow, and turn them off when business is already overwhelming. That’s great for both merchants and consumers, who hate turning up to a Groupon-featured merchant and finding it overwhelmed with bargain-hunters.

There’s a rewards system, too. You know those punch-cards at coffee shops, where you get a free coffee after you’ve bought ten? That can now be built in to what the company is calling Groupon OS — all you need to do is allow Groupon to associate you with your credit-card number, and then every time you use that card to buy a certain item, it will automatically show up in the Groupon app. Eventually, you become eligible for a reward. It’s pretty effortless, for the consumer, and it brings an element of addictive gameplay into the shopping experience.

There’s a couple more slides which are relevant too, and directly address my concern that Groupon has to develop a reputation for high-quality deals. It can’t just let its salespeople maximize revenue, as sales people are wont to do: it has to delight its customers, by pointing them to great merchants. And it turns out that Groupon does actually attempt to do just that. One slide talks explicitly about “curation”:

And another (with the dreadful title “operational excellence”) shows the huge number of steps that need to be gone through before and after an offer appears on the site.

I love the way that under “Editorial” there are separate steps for “Humor”, “Voice Edit”, and “Copy Edit”. So there are systems in place here. But the really crucial step is buried somewhere in that “Deal Quality Assurance” circle. Groupon does not have the best reputation for picking only fabulous merchants; it probably needs to work on that a bit.

Overall, then, I think it’s pretty clear that people who think Groupon’s some kind of Ponzi scheme are wrong. There’s a real business here, with a real business model. The big question is whether Groupon can execute. Can it create a much-loved mass-market brand, which people and merchants trust and return to on a regular basis? We will always hear about bad experiences, of course — that’s a statistical inevitability, given the number of deals and employees going through the Groupon system. But will those significantly damage Groupon’s reputation? That’s a harder question to answer. (And it’s worth remembering, too, that for comparison reasons some small percentage of Groupon customers are going to have to continue to receive offers which are not targeted to them. If you’re one of those unlucky few, you might have a much worse experience of the company than everybody else.)

If I had to make a forecast, I’d say that Groupon is going to be around for the foreseeable future, but that the error bars on its future size are enormous. It could just slow down and lose its competitive advantage over its competition; it could, on the other hand, genuinely revolutionize the infrastructure of commerce and even become that thing everybody wants to be these days, a platform.

Like all fast-growing technology companies, Groupon is a risky bet from an investor’s point of view; it’s in no sense a widows-and-orphans stock. Like many consumer-facing companies, it’s probably better for most people to just take advantage of it as consumers. Individuals are much better at judging whether a money-off deal is a good one than they are at judging whether a particular stock is a good investment. But if Groupon’s sales continue to grow at anything like their recent pace, that’s an indication that a lot of individuals will continue to love what Groupon’s doing. And ultimately that’s going to show up on the bottom line.

Jon Stokes has a fascinating column making a credible case that the VC and tech bubble is hampering development of the cloud.

I recently had a sit-down chat with Ping Li, a venture capitalist at Accel Partners who does investments across the layers of the cloud stack… he explained that the talent shortage is stifling fundamental innovation in the cloud space.

To do really fundamental engineering innovation of the kind that was done, say, in the early days of Google and VMware, you need to hire and retain teams of talented engineers. But in today’s go-go funding environment, top engineers are being enticed with truckloads of money to break off and form two- and three-person startups. This phenomenon, explains Li, is why “many of the really big innovations happen in less frothy times.” He did go on to clarify that “some great companies do get created in these times (like Amazon in the last bubble). It’s just harder given talent shortage.”

I asked Jon if this meant that real innovation in the cloud requires pretty big teams, and can’t be done by smaller startups. And the answer there is absolutely yes — if you’re looking for something huge like Amazon’s AWS, which required the full focus of Amazon’s large technical staff over a multi-year timeframe. Scalable websites can, thanks to Amazon’s cloud, now be launched with a handful of employees. But to develop the cloud itself takes serious resources — to the point at which it’s now conventional wisdom that you need to be Amazon, Apple, Google, or Microsoft to even play in that game. And even they’re starving for talent.

There’s the email I got a few months ago from a friend of mine and product manager at Apple, who was wondering if I knew any cloud computing hackers that they could hire. When we get to the point where Apple product managers on the client side are reaching out to their personal networks in search of cloud coding talent for the world’s largest tech company, you know it’s bad out there.

Jon frames the problem as one of supply and demand:

The current crisis in the cloud is the product of too many dollars and transistors chasing too few coders and sysadmins. It will take a while for the latter to catch up with the former… unless, of course, another major downturn strikes. It seems ironic that less money could equal more innovation, but it wouldn’t be the first time that a wave of downsizing and tight money boosted productivity.

I asked him whether looser skilled-immigration policies might help, and he said probably not:

I think that the root problem isn’t one of geography–it’s that this stuff is happening so fast (i.e. Moore’s Law and my cheap transistors argument) that the hardware build-out is outstripping programmer education. And by “programmer education” I mean not only the number of programmers being trained in aggregate across the world, but also programming as a discipline’s ability to empower ordinary mortal to develop and deploy software on these massively parallel systems. The cloud has to be “de-ninjafied”, so to speak. Getting max productivity out of the cloud has to be brought within the grasp of non-ninjas, the way that, say, VisualBasic from MSFT brought building a relatively complex custom relational database application within the grasp of the average local technical college graduate.

This rings true to me. The cloud is not located in any particular country, and if there were great engineers who could be hired to work on it from Beijing or Bangalore, I’m sure that Apple and Amazon are more than capable of doing that. What needs to be done here is basically cloud-development grunt work: taking a young and complex technology, and building the tools which can bring it to the masses. There’s not a lot of glory in that — while companies which live in the cloud, like Airbnb, can find themselves worth billions, the engineers who work on the cloud are more like the utility workers of the internet. And it’s easy to see why they might be finding more attractive opportunities, right now, elsewhere.

Here’s how Jon puts it:

In order to move the cloud itself forward in a major way by solving large batches of related fundamental technical problems you need longer timeframes. You can fiddle around in the guts of the cloud, smoothing out this and optimizing that, and adding features and bells and whistles. But to do the big projects, you need time.

Now, there are shorter-term innovations that can and will get done in the cloud, so VCs have plenty to fund. But to shift the tectonic plates, you need time and resources.

This isn’t like sustainable energy — it’s not something that the government can or should be stepping in to fund. More money pouring into the tech space would only exacerbate the current problems.

There’s a case to be made that AWS is the result of what happened when Amazon, after the dot-com bust, found itself with an unusual degree of access to the time and talent of a large number of engineers. The cloud is young; it could do with a lot more development along those lines. But as Jon says, we’re unlikely to see such fundamental evolution in cloud architecture for a while. Because for the time being, smaller, lighter, and riskier projects look much more attractive.

Nick Denton lost his bet with Rex Sorgatz by the narrowest of margins — just 10 million pageviews, or alternatively just four days. But he handed over a check for $100 with a smile, and even threw us a huge party into the bargain! Hence, obvs, my not-entirely-sober status by the time we’d waited for Lockhart Steele to finish his eleven-course dinner and make his way up to the Gawker Media rooftop.

Here’s to next year — when Denton will have to achieve 700 million pageviews in order to avoid writing a second check. I promise to film the outcome, whoever the winner might be.

I’m in Sofia today, where I gave a talk on Groupon at the DigitalK conference. This post isn’t the speech that I gave, which was much shorter and more conversational; the slides I used are here.pdf. There’s not much new in this post, for those who have been following what I’ve written on Groupon over the past few months; I basically wrote it to get a feel for how I wanted my speech to flow. But here you go anyway.

It’s almost universally known, among people who live or work anywhere near the intersection of technology and finance, that Groupon is the fastest-growing company the world has ever seen. Technology companies are often fast-growing, of course, but Groupon’s growth rate is astonishing even by tech standards. Check out this chart:

Starting at zero, Groupon got within shouting distance of $1 billion in revenues within a single year. It took Zynga two years to get to that point, it took Amazon three years, and it took Facebook four years. eBay hadn’t even got there after five years. This isn’t entirely or even mostly a function of Groupon’s business model; much more important is the massively increased willingness of people to buy things online now than when the likes of eBay, Yahoo, and Amazon launched in the 1990s.

And it’s possible to quibble over terminology here, too: in its latest filing, Groupon now calls this number “billings”, with “revenues” being about half of what we see here. But whatever you call it, it’s a monster stream of cash which is flowing into the company, and you can add to these revenues some $1.1 billion in new equity capital, which is also helping to fuel expansion. Groupon isn’t just growing fast: it’s also raising money at a rate that no other company has ever dreamed of.

Importantly, the stream of cash flowing out of the company is even bigger. Half of Groupon’s billings go to merchants, usually small local businesses. Much of the rest goes towards Groupon’s rapidly-growing payroll, and to fund expansion into new cities and countries. And then there’s more than $900 million which has been used to cash out early investors in the company, including CEO Andrew Mason — a man who is now extremely wealthy even if Groupon stock goes to zero tomorrow.

Groupon is a very innovative company, and this is one of its most important innovations — the idea that the founder can and even should be able to cash out to the tune of millions of dollars very early on in the company’s lifecycle, while it is still raising new VC funds.

The argument here makes a certain amount of theoretical sense. VC investors are looking for home runs, and they’re willing to see a reasonably large percentage of their portfolio investments fail to achieve that end. Essentially, they want the CEOs they’re backing to take on as much risk as possible.

But there’s a problem with this model: CEOs are human, and humans are naturally risk-averse. When Andrew Mason first saw that he’d built Groupon into an inherently highly-profitable Chicago company, he could have decided to fund further expansion only out of the company’s profits, while keeping some portion of those profits for himself and his investors. Groupon would have grown at a much more normal pace, and would certainly never have generated eye-popping charts like this one.

Over the course of one year, from the first quarter of 2010 to the first quarter of 2011, Groupon’s subscriber base increased 24-fold; its revenue increased 14-fold; its sales rate increased 15-fold; and it swung from a profit of $8 million to a loss of $146 million.

These are the kind of figures which make eyes go wide — with greed, if you’re a VC, and with fear, if you’re an businessman trying to build a company which can deliver a reliable long-term profit stream. By cashing out a significant portion of the CEO’s stock, his backers essentially turned him from businessman to VC — they aligned his incentives with theirs. He won’t want for money ever again, so he’s no longer the type of person who would look at a company making $8 million a quarter and think that was pretty good. Instead, he wants to take risks, grow at a breakneck pace, and create a company which is likely to go public, later this year, at a valuation somewhere in the neighborhood of $15 billion. He wants to change the world.

That’s the idea, anyway; we’ll see how it works out. Historically, VC rounds have been about providing capital to companies which need it; in Groupon’s case, they’re more about finding a way to cash out early investors. And so a lot of people who own Groupon stock today didn’t really put money into the company, so much as they simply bought pre-IPO stock on the secondary market. If they end up making a fortune in the IPO, then other companies will certainly start looking at the Groupon model as something maybe worth emulating.

What’s sure, however, is that the kind of growth and ambition exhibited by Groupon is catnip to journalists looking to puncture something which looks very much like a bubble. Going public before you’ve achieved sustainable profitability? Using seemingly made-up measures like Adjusted Consolidated Segment Operating Income instead of generally-accepted accounting principles? Becoming a billionaire before the age of 30, while refusing to play according to the spoken and unspoken rules of both Wall Street and Fleet Street? It’s a recipe for getting the press to turn on you.

But in fact the conventional wisdom on Groupon is narrow-minded, a little bit silly, and largely based on journalists kidding themselves that “everybody” thinks Groupon is a huge success, and that therefore it falls to them to debunk the myth. In reality, the huge-success meme was extremely short-lived, and stems largely from the fact that Google attempted to buy Groupon for $6 billion at the end of 2010. Ever since Groupon turned Google down, there’s been a steady drip of stories saying that they were idiotic to do so and that valuations of Groupon in the $15 billion to $25 billion range are utterly ridiculous.

Now, I’m not going to take a position on how much Groupon is worth; I’m neither an investment banker nor an equity analyst. But what I’d like to do is run down a few reasons why a stratospheric valuation could conceivably be justified, and then look at a few of the potential potholes which face Groupon in its attempt to justify that valuation.

First of all, Groupon has cracked local, in a way that pretty much nobody else has been able to do. We spend most of our disposable income at merchants located within easy striking distance of where we live — but until Groupon came along, those merchants had no good way to reach us online. Everybody’s interested in what’s going on locally, and Groupon worked out that a steady stream of daily emails, each one touting a great local deal, would be hugely attractive to millions of people. This is advertising you want to get.

Second, Groupon has created advertising that is guaranteed to work. By setting a minimum number of people who need to sign up for a deal before it’s activated, merchants can be sure that the needle will be moved and their effort won’t be wasted. This is something of a holy grail in advertising and marketing circles, and it absolutely helps to explain Groupon’s spectacular growth. Merchants hate to spend money on marketing because they fear they’re being swindled by fast-talking sales reps. With Groupon, they know exactly what they’re signing up for, and they won’t end up spending huge amounts of money on nothing.

Indeed, those merchants are not spending any money at all: they’re being paid. This is another great Groupon innovation: create a form of advertising which merchants not only pay nothing for up front, but which they actually get paid. Yes, there’s a cost to providing their goods or services, and in many cases that cost is greater than the amount of money they’re getting from Groupon. Merchants who get too greedy for a big up-front paycheck can end up ruining themselves when those coupons get redeemed. But anybody who’s ever run a small business knows that the promise of money in hand is always going to be incredibly attractive when compared to advertising or marketing which has to be paid for.

In fact, Groupon gives advertising away for free. It has an astonishingly valuable email list, and many merchants would pay good money to be able to send out wittily-written ads to local Groupon subscribers. But they don’t need to do that. Groupon makes its money from the tiny minority of customers who actually pay for a deal. But that leaves millions of people every day who read ad copy which is targeted directly at them. That targeted advertising is extremely valuable, and Groupon isn’t charging a penny for it. Because it has an alternative source of income, Groupon doesn’t need to charge merchants for the privilege of being included in its emails. And so a merchant who values that exposure is well ahead of the game as soon as the email goes out.

But another Groupon innovation goes one further than that — it’s the Groupon commitment device. A commitment device is the way the people force themselves to do something which they know they want to do, for fear that for some reason or other human weakness might otherwise mean they wouldn’t do it. The classic commitment device is marriage: it helps people stay together when otherwise they might drift apart. A mortgage is also a commitment device, which forces you to spend a large sum of money every month slowly building equity in your home, until after 30 years you own it outright. A Groupon, of course, is nowhere near as important as marriage or a mortgage. But it has a similar effect. I see a Groupon in my email — let’s say it gives me $50 off a meal at a restaurant I’ve been meaning to try down the street. By buying the Groupon with a click of my mouse, I force myself to go to that restaurant — something I might well never have got around to, otherwise.

Groupon forces its customers to buy its products using something which isn’t very innovative at all — the hurry-it-won’t-last-long sales pitch. By making sure that offers can only be bought for a day or two, Groupon forces people to make a decision now as to whether they want to do this thing. And that non-innovative part of the Groupon model is one of its big potential weaknesses, as I’ll come to in a minute. But first of all there are some potential strengths to Groupon.

What we’ve seen up until now is the way that Groupon has worked and grown to date. But looking forwards, optimists see lots of other great promise in the company. I don’t want to dwell on these, because forecasting the future of any tech company is always a mug’s game. Some of them are likely to work, others will probably fail. There’s Groupon Now, and the mobile applications which are nascent but growing fast. There’s the move from services into products. There’s the Getaways travel product. And there’s targeting — the crucial way in which Groupon promises to be able to target customers according to their purchasing preferences and a myriad of other factors, rather than just going on what city they live in. It hasn’t happened yet, but I suspect that over the medium term, Groupon will succeed or fail based on whether it manages to crack the targeting nut. Having a huge subscriber base is a necessary condition for targeting, but it’s far from sufficient.

I have no idea what any of these businesses might be worth, or what kind of probability to apply to them succeeding. But looking down this list, and looking at the kind of money which Groupon is bringing in without these businesses, it’s definitely possible to see how this could be a $20 billion company, potentially.

But.

There are also risks to the Groupon model, and we’re already seeing some of them materialize.

One risk is that merchants stop wanting to play ball. Maybe they move their business to to a Groupon clone which offers them a bigger cut of the proceeds. Maybe they don’t return to Groupon because it turns out that too many Groupon buyers are only coming because they bought the Groupon, and don’t become valuable repeat customers. Or, conversely, maybe it turns out that too many Groupon buyers are people who would have come anyway, and so the merchant is simply taking a big haircut on their normal revenues. Or perhaps — as we’ve seen happen a few times, according to press anecdote — merchants simply get overwhelmed by Groupon traffic, and thereby alienate their existing customers.

If you look at the established market of Boston, the trend here is not good. As markets mature, they won’t be as white-hot as they were in their youth. But one big problem for investors is that none of them really have a clue what kind of revenue per merchant is necessary for profitability.

The other big risk is that consumers stop wanting to play ball. The novelty wears off, they find too many Groupons sitting unused in their desk drawer, they get burned one too many times by a deal which seemed really good in the email but which turned out in real life to be disappointing.

Already we’re seeing signs that this is happening: according to a guy called Sam Hamadeh, Groupon’s revenue per customer has fallen from $15 per month to $3 per month. Now the number of customers is still growing fast, but clearly profits are going to be hurt if those customers don’t spend nearly as much as they used to. Here are the numbers for Boston, again:

And there are other risks, too, including big possible legal risks. There are lots of laws governing coupons, in all 50 states and around the world, and Groupon seems to be happily violating dozens of them, while doing its utmost to fob legal responsibility off onto merchants who can’t possibly know what the law says.

But the biggest risk of all, which pretty much encompasses all of the other ones, is simply that Groupon will develop a bad reputation. If people don’t trust Groupon, then it’s all over.

In the beginning, Groupon got away with a lot, thanks partly to how innovative it was and partly because of the jocular tone to its emails. But at this point everybody knows what the model is, and the humor is hardy surprising any more. And increasingly consumers and merchants are asking just how good Groupon’s deals are, really. Not in terms of save $X if you spend $Y, but in terms of the intrinsic quality of the merchants being featured.

It seems to me that if Groupon wants the Yipit charts to start going up and to the right, if it wants to delight consumers, and if it doesn’t want to become shorthand for desperate-and-crappy merchants resorting to a last-ditch effort to get people into their otherwise-empty stores, then it’s going to have to start imposing more editorial control over its sales team.

In the long run, people will buy coupons only from those sites they trust to send them to great merchants. Groupon has first-mover advantage, but consumers are fickle, and will happily switch their allegiance to smaller companies they think are cooler, if Groupon makes them feel a bit unwashed every time they buy into an offer.

How can Groupon ensure that it features only merchants its email list will love? I haven’t a clue. But that’s the single biggest task facing the company. If it wins at that, it’ll be fine. If it fails, I fear it will slowly wither away.

BankSimple came out with a preview of their service today and it’s very cool.

A couple of hours after watching this video, I got an email from Citibank — addressed to “Dear Feliz Salmon” — with the subject line “Announcing the new Citibank Online”.

Citibank has a video too, but it’s not embeddable. After looking at it, I have to say that the new Citibank Online looks much like the old Citibank Online: I don’t think there’s anything for BankSimple to worry about here.

The most interesting bit, for me, was the huge difference in the way in which the two banks put their videos together. BankSimple got its CEO to walk us through his bank account, as it appears on his website. Citi, by contrast, showed us an impossible account which looks like this:

“Jim Smith”, here, has $54,662.00 in his checking account. Of that, just $23,612 is “Available Now”. Maybe one of those 25 unread messages might tell him what seems to be the problem with the other $31,050. But he’s unlikely to read them: after all, his last login was on May 14 and it’s now sometime in the fall: his credit-card payment is due November 10, even though his Expense Analysis stops at June 5.

But my favorite bit of this screenshot is the breakdown in the expense analysis. Apparently Mr Smith withdrew $68,040 from ATMs in the past five months — that’s $13,608 per month, or about $450 per day, every day. All that cash is 57% of Smith’s total expenditures, which means that those expenditures add up to $119,368 in all, or about $286,484 per year.

Except: we’re also told that travel expenses of $9,948 are 13% of the total, which implies an expenditure rate of about $183,655 per year.

And then there are the wonderful “Other” and “Uncategorized” expenses. (The difference between the two, of course, is unexplained.) “Other” is $3,000 and 14% of the total, implying $51,428 of expenses per year.

But “Uncategorized”, at 16% of the total, is — get this — $299 million. Which means that Mr Smith seems to be on track to spend roughly $4.485 billion this year, in total.

Citi obviously poured much more money into its video than BankSimple did into theirs. It has high production values, even unto graphs which literally come out of your computer:

Clever trick, that — although customers expecting to see it in real life are probably risking disappointment. Again, the numbers aren’t internally consistent: the top expenditure category on the left is Groceries, which is just $55.50, or 2.3%, when broken down in the list on the right. Other big expenses on the left, like Business and General Merchandise, don’t even appear in that list. And Mr Smith seems to have gone on a serious diet: his total expenses from January 1 through July 20 now total just $2,411.22.

It’s literally inconceivable to me that anybody, watching these two videos, would get remotely excited about the Citibank product. Meanwhile, BankSimple already has a long waiting list of people desperate to switch over — a list which is likely only to get even longer now that glimpses of the product are being made public.

The first BankSimple accounts will start being opened in “a few weeks”, according to today’s post. They will be glitchy, as any 1.0 product always is. But I’m quite certain that BankSimple’s early customers will be patient and forgiving and that BankSimple’s executives and employees will be accessible, helpful and responsive whenever there’s a problem.

BankSimple will never release a screenshot or video of one of its products where there’s a line item showing $299 million in personal “Uncategorized” expenses. I know this despite the fact that they haven’t even launched yet, because that simply isn’t who they are. Citi, by contrast, is rudderless, spending huge sums of money putting together silly videos advertising its website and sending out 346 million card offers to North American customers per quarter. It won’t change the way it does banking. But I can.

Christopher Mims makes a really good point:

It makes no sense that writers like Felix Salmon, who is generally excellent on just about everything, describe Netfilx, even pre-split Netflix, as an inexpensive alternative to cable. It’s not. It’s only inexpensive if you take fast broadband at home for granted — you know, like every tech pundit and journalist on the planet.

To be fair, it’s a mistake all of those pundits makes regularly — the conflation of their own situation with that of the wider public. But only one in three Americans pays for broadband, which means that something like two-thirds of the population has access to it. That’s not bad (it’s not great either – it puts us something like 27th in world broadband penetration) and it leaves out precisely the people who are being left behind by both our economy and the digital divide.

I moved to the US before the rollout of the cable modem, and for me it was a game-changer: within a few months of its arrival, sometime in the late 90s, I switched from cable-and-no-broadband to broadband-and-no-cable. I was one of the earliest cord-cutters, long before YouTube or Netflix or any real video content on the web which I had any desire to watch. I didn’t want to watch TV on my computer: I just preferred content online to the content on the TV.

Now, over a decade later, it’s possible to look at the population more broadly, and see how their preferences have revealed themselves. And Mims is right: if you have a cable line coming into your home, you’re much more likely to have cable-and-no-broadband than you are to have broadband-and-no-cable. Cord-cutting was a privileged, yuppie behavior when I did it in the 90s, and it remains a privileged yuppie behavior today.* Sure, I like having an extra $100 in my wallet every month due to the fact that I don’t have cable. But I could easily afford it if I wanted it — the fact is that I stopped watching cable long before I cut that cord.

For the time being, the price of broadband — largely set by cable companies — is being set high enough that cable-but-no-broadband subscribers are not switching to broadband-but-no-cable. In order to cut the cord, it seems, you need broadband first: you need cable and broadband, and then you need to come to the decision that you can do without the cable bit.

So, yes, let’s slow down on visions of free or cheap online services supplanting cable for America’s poor. Because Mims is right: broadband is not free. And the cost of Netflix is therefore comparable to the cost of cable — with no live-TV services at all, and in general a much narrower selection of things to watch. At some point, I’m convinced that IP-based video will indeed replace cable. But in order for it to do so, the cost of broadband is going to have to come down. And that doesn’t look as though it’s going to happen any time soon.

*Update: What I mean here is that the behavior is displayed by privileged yuppies, not that it’s inherently yuppie. The kind of people I’m talking about are people who, given the choice between a lean-forward activity and a lean-back activity, tend to choose the former. Either because they prefer surfing the internet to channel surfing, or else because they have work to do online. Those people tend to be part of the employed-and-educated middle classes.

Our fabulous social media guru, Anthony DeRosa, doesn’t use Groupon, and neither do I, and neither do any of the people in our social circles, that we know of. Now we’re guys, while Groupon skews female. And most likely we do know people who use Groupon; we just don’t know who they are. But the fact is that at heart it’s pretty uncool. That’s fine — many hugely successful companies are uncool and based on saving people money, up to and including Walmart. But here’s the problem: Groupon can’t afford to be uncool just yet, because it needs to do one last big capital-raising round at a high valuation in order to get the cash it’s going to burn through in the coming year or two.

Henry Blodget has some smart analysis today, concluding that “if Groupon raises a boatload of money in an IPO, the company will be able to keep spending aggressively on marketing and not have to worry about running out of money or dealing with slower growth for a while.” So it’s important that Groupon is able to tell its high-growth, high-intrinsic-profitability story at least through its IPO.

But Groupon’s web traffic looks like it might be falling, and Connie Loizos has been talking to analysts, including PrivCo’s Sam Hamadeh, who increasingly, don’t buy it:

Groupon’s model simply doesn’t make sense, say the number crunchers. While the company’s early success was premised on customers spending an average of $15 per month — and being affordable to acquire — these days customers cost Groupon in the double-digit dollars to acquire, says Hamadeh, and they’re spending closer to $3 a month, with “every indication” that even that figure is declining, says Hamadeh.

The monthly spend per customer is a key number to look at. There doesn’t seem to be any doubt that it’s going down; the big question is whether it’s going to level off with Groupon becoming a big and sustainably profitable business, or whether it’s just going to approach zero.

Or, to put it another way, can Groupon make the transition from being a fun fad to being a basic part of the way people spend money on a monthly basis? I think it can. But in order to do that, it’s going to have to concentrate increasingly on targeting and on the quality of the merchants it chooses to feature.