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

Stock research analysts get no respect these days. An academic study has concluded that share recommendations have little impact.

A 51-page study entitled “On the information role of stock recommendations,” finds that buy and sell ratings are uninformative and often try to “piggyback” on actual news for their influence. This begs the dismal question: if professional analysts can’t get it right, what hope for the ordinary investor? Click here for PDF.

Sell-side research — driven by the need of the analyst’s employer to trade stocks — dominates daily market conversations. Recommendations are the signposts of these debates, without which many investors would be lost.

Analysts are not alone in selling their independence to the highest bidder, and their reputation has suffered after so many were exposed as marketers for investment bankers, favoured clients or company managements. But independence is not the same as efficacy of stock recommendations.

Equities analysts are not unique in showing herd behaviour Oya Altinkilic of the University of Pittsburgh and Robert S. Hansen of Tulane University are correct to protest that stock ratings too often rely on past returns, and are poor indicators of future performance.

However, stock ratings are only a distillation of the analysts’ work. Their reports help investors make sense of announcements and prepare them for upcoming news. As with journalism, there is plenty of slip-shod analysis, or useless ratings changes made after the fact. Yet investors depend on analysts for a lot more than binary buy/sell ratings.

The methodology may explain the findings. The data measured the impact of ratings changes only for the 20 minutes before and after analysts published new recommendations.

The Pittsburgh/Tulane duo might instead have interviewed directors of those thousands of companies which are not covered by any analyst. Their stocks often have zombie status, with low ratings and no trade, because investors fear they will never be able to sell if they buy.

Analysis is not a road to riches from blindly following recommendations, but it oils the wheels of share trading, and the last year has shown what happens when liquidity dries up.

Rather than produce trite conclusions from some questionable research, the researchers might investigate why so many analysts are leaving the business under the pressure of compliance and regulation. Their loss makes markets poorer, whatever their recommendations.

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

There is nothing like the threat of a hanging to concentrate the mind.

The newspaper industry is in a collective panic over its future. The debate centers on the thorny issue of how publishers might find some way, any way, to make online readers to pay for what they read.

The fear is that the newspaper business model has suffered a mortal wound from the collapse of advertising that once funded it, and which has only accelerated in the current economic environment. Or perhaps it’s the realization that younger generations reared on digital media will never settle down to buy print.

This crisis has forced leading publishers and pundits propose all manner of last-ditch business strategies or glitzy technical solutions to cut off the abundant supply of free Web news undercutting their business models.

Print newspapers are limited by space on the page and the boundaries of physical distribution. But the volume of online news seems almost infinite and most of it is free.

Online readers are like butterflies fluttering from place to place. Very few pay directly for anything they read.

The dilemma is that if one Web publisher charges, users click elsewhere. It would take a general agreement among publishers to stop giving away their news for free to make charging for news on the web work widely.

A U.S. Congressional committee has been considering suggestions that the government relax competition barriers to let publishers cooperate in charging for online news, or perhaps offer them an educational, non-profit status.

Rupert Murdoch raised industry hopes last week by declaring that News Corp was studying how to make readers pay for reading news online and that News Corp would experiment with ways of doing so over the next 12 months.

One solution Murdoch is considering is micropayments, a kind of technological “silver bullet” that would allow publishers to levy a small charge per story on readers.

He’s vague on details, and until we know more, it’s hard to say how likely readers of the Sun or the Times in Britain would be to pay by the item.

However, paying by the item might work if the increments were small, like the cost of a text message, say 10 pence a story. Making consumers fill out endless forms and remember all their passwords won’t work either. Far better to figure out how to charge on a monthly bill, say through one’s broadband or mobile phone supplier.

Like the cost of phone calls, the individual cost of the article wouldn’t cause a fuss. It’s the ability to manage the overall monthly bill that would stop consumers from becoming frustrated.

Another alternative might be a subscription television model where readers might pay a single fee for access to 500 channels.

Murdoch is echoing former Time magazine editor Walter Isaacson who sees micropayments as a way to enable an electronic marketplace that trades all forms of media production, from professional journalism to user-generated video or blog posts.

Isaacson sees lessons for the news business in Apple’s iTunes or its iPhone Internet phone that has millions of users paying for music, movies, TV shows, software or games for a few dollars or pounds at a time.

The problem of micropayments isn’t technical. It has to do with the fickleness of news consumers in a world of abundant free content. It’s difficult to make potential readers appreciate the value of any particular news story before they read it.

But the newspaper industry must find a way to make work one or several of these proposals to make consumers pay for online news. The alternative is to accept that newspapers have had their day.

– 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 –

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

The U.S. venture capital industry is desperate to repair the market for initial public stock offerings, but reviving the goose that once laid hundreds of golden eggs may not get very far.

The National Venture Capital Association (NVCA) this week set out its comprehensive plan to revive the IPO market and the heady investment returns that once fueled the tightly knit venture capital industry’s success.

From October through March, there were no venture-backed IPOs in the United States — the first time on record of no venture IPO activity for two consecutive quarters.

The NVCA plan is entitled “The 4-Pillar Plan to Restore Liquidity to the U.S. Venture Capital Industry.” Institutions at every step in the process that turns bright business ideas into publicly traded companies come in for criticism for the decline of the IPO market.

But start-up entrepreneurs and their venture capital backers largely have themselves to blame for why public markets have become gun-shy about buying into IPOs.

There is now a noticeable dearth of entrepreneurs building companies with differentiated strategies and sustainable business models. Hot start-ups are now far more often built to be sold to established firms. And when good ideas emerge, VCs flood the market with a slew of copycats, making it hard for true pioneers to succeed.

Some of the hottest start-up sectors — the Internet, and cleantech — continue to ignore the need for a demonstrating a clear track record of sustained profits and defensible barriers to entry by competitors.

The exceptions where this entirely fair generalisation is wrong deserve to become the next successful IPOs.

Look no further than the hottest companies in Silicon Valley — social network site Facebook and text messaging service Twitter — the subject of widespread media speculation that they and their venture backers may seek to stage high-profile IPOs next year.

Both companies’ strategies have been to build huge audiences and only later to figure out how to generate revenue, profit and a sustainable business model. Fattening up and selling the companies themselves may be the business strategy.

Big banks have all too often worked against the long-term success of IPO companies by reserving the hottest shares for favoured clients, many of whom were hedge funds or short-sellers — whose objective was in quickly flipping or selling out.

Regulators intent on preventing the next Enron, Worldcom or Parmalat by breaking down the cosy relations between bankers and research analysts have meant that many small and mid-sized companies receive little analyst coverage once public.

On the receiving end of IPOs, committed buyers are in short-supply. Many investment managers that once bought IPOs by the bushel now run funds too large to make the effort to trade small companies. New funds devoted to technology, cleantech, and other emerging business sectors need to be formed to take up the slack.

With their plan, venture capitalists are looking to counter criticism they can work against the interest of public investors when they sell off ownership stakes too quickly after companies in which they have invested hold IPOs.

One NVCA proposal calls for VCs to consider accepting longer lockups on their holdings once their portfolio investments go public. This measure could go some way to restore confidence that venture capitalists can behave as patient investors.

The VCs want regulators to reduce burdensome compliance requirements that cripple the ability of small companies to raise public financing and asks for one-time only low capital gains tax rates to jump start the IPO market, perhaps in exchange for investors agreeing to longer-term holding periods.

Nonetheless, the IPO market is a cyclical one that has every sign of springing back to life once the current financial crisis subsides. In just the past few weeks, a trickle of successful new stock offerings has encouraged renewed speculation that the window for IPOs may open more broadly in 2010.

Reform or no, the IPO drought is bound to recover simply because the lack of supply eventually breeds pent up demand for new issues.

This is born out by data. After the decline in IPO activity earlier this decade following the Internet stock boom of the 1990s, 2007 marked the best year of IPO activity since 1996, outside the bubble years. And 2008 was on track to be even stronger for IPOs until the financial crisis hit home.

This crisis is itself creating conditions for another class of IPO darlings, but whatever transpires is likely to be a far cry from the IPO Golden Age for which VCs yearn.

(Editing by David Evans)

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

Once in a while a good computer security scare comes along that has all the makings of a taut Cold War spy thriller and the latest news of a global computer espionage ring is one such story.

A new report entitled “Tracking GhostNet: Investigating a Cyber Espionage Network,” argues that poorly defended computers used by government and private organizations in 103 nations may have been violated. The study has attracted widespread media attention after a New York Times story about it at the weekend.

The study by a group of activist researchers based in Toronto called “Information Warfare Monitor” says computers in various foreign ministries, embassies and Taiwanese trade groups have been pilfered by computers located at a Chinese government intelligence center on the island of Hainan. A computer in the private offices of the Dalai Lama was infected and e-mail lists and negotiating documents were stolen using a virus that “phoned home” to its controller, it alleges.

Data retrieved in the attacks appears to have been used to rein in Tibetan critics of China. But the report has trouble pinning the theft of computer secrets back to the Chinese government. It is also unclear how much information of value was gathered, outside a handful of instances. It conflates evidence of sniffing with acts of actual snooping.

A spokesman for China’s Foreign Ministry has dismissed the report’s claims as rumor and said his government was committed to protecting Internet security. “There’s a ghost abroad called the Cold War and a virus called the China threat,” ministry spokesman Qin Gang told a news conference.

In fairness, the researchers acknowledge up front that its findings raise more questions than answers and that it is “not clear whether the attacker(s) really knew what they had penetrated, or if the information was ever exploited for commercial or intelligence value.” It says that proving who is responsible for cyber attacks remains a major challenge — what experts refer to as the “attribution problem.”

The report was conducted at the request of the office of the Dalai Lama and Tibetan exile organizations, who have long accused the Chinese government of using cyber war to disrupt their activities. It describes the sophisticated techniques used to infiltrate the computers of the offices of the Tibetan government-in-exile. But the connections it draws to a wider global spy ring are sketchy. Some of the break-ins may be explained by shoddy computer maintenance.

In cyberliterature, the bad guys, typically unknown, break into vital government, military, banking or political organizations and cause immeasurable damage or steal uncounted billions of dollars. Throw in contemporary geopolitical rivalries and references to the latest techno-jargon and the formula is more or less complete.

To be sure, international computer security experts have seen the hand of Chinese hackers in growing number of computer intrusions around the world in recent years. The global scale combined with the sophisticated targeting of specific computers by GhostNet make most efforts at wiretapping government opponents scrawny by comparison.

But China is not alone among major world governments in viewing cyber warfare as a tenet of national security. To an unknown degree, for example, the United States, Israel and Britain snoop not just on their enemies but also their critics.

The problem with much of the writing about computer security is that it conflates basic issues of computer hygiene with diabolical threats to society or the economy. In the virtual world, teenage vandalism of web sites blurs into acts of terror. Police and government officials don’t help by painting the Internet’s inherent tension between openness and security as a danger to public safety.

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

The revolving doors are spinning ever faster in the executive suites of corporations.

CEO turnover has reached an all-time high, according to figures kept by recruiting firm Challenger & Gray. Last year, 1,484 U.S. CEOs resigned, stepped down or were fired — six casualties every business day.

Resignation has outpaced retirement as the leading reason for departure, as the credit crunch has dealt a savage blow to prospects for growth and investors grow restive over share dilution, dividend cuts and shrinking outlooks.

High profile departures stretch from the bosses of the global retailer, Carrefour, to computer maker Lenovo to a succession of financial leaders including those at AIG, Merrill and UBS.

Turnover among top executives may even be accelerating as we descend into 2009. Similar defections appear to be occurring around the world, although no one keeps track of exact totals.

Given the public’s newfound lust for revenge against the CEO class, this exodus may provoke little more than a wry smile among anyone struggling to fend off the effects of the credit crunch in their own lives.

But it presents a practical problem for those boards of directors left to pick up the pieces after a CEO departs with his reputation and strategy in ruins: Where to find the talent and experience to step in and shore things up as well as start to build towards the recovery?

Executive recruiter Heidrick & Struggles has come up with one idea to solve the brain drain. It has lined up hundreds of executives across industries and functions for what amounts to an executive temporary service.

Think Manpower or Kelly Girl, only for former captains of industry — CEOs, CFOs, chief marketing, human resources and information officers. The idea is to place these individuals with companies needing short-term leaders — either to solve a crisis or seize a new business opportunity.

Many of the executives taking part in the Heidrick & Struggles’ Chief Advisor Network have left high-powered positions and are no longer interested in full-time work. But, like many in their baby boomer demographic facing the prospect of retirement, they are unwilling to completely disengage from work.

Executive temping is a natural extension of Heidrick & Struggle’s established executive search and leadership advisory businesses. Tapping the experience and talents of executives with a solid track record of corporate leadership makes sense to fill obvious leadership voids. The idea of bringing back a wise old head, perhaps one that can even remember the last recession, after a disastrous few years under a whiz-kid CEO probably appeals to many shaken boards.

But while the approach may offer a quick fix to companies in deep crisis — and there are plenty of those around right now — it’s not clear that it is the way forward in other situations. And there are even questions about how effective that fix might prove. Bringing in an outsider with no deep knowledge of a company can be a recipe for chaos — especially when things are in flux.

There’s also the risk of bringing in someone who is motivated principally by financial incentives and won’t stay around to see how their decisions pan out over the long term. Wasn’t short-term decision making by managers and directors often what tripped up these companies in the first place?

Lastly, the ability to rely on a temping service may even encourage boards not to take hard decisions on management succession, figuring they can plug the gap if they need to.

Leadership is vital in the wake of an important executive’s departure. But dialing up a CEO is symptomatic of the wider breakdown in corporate governance that has occurred over the past decade. If the practice becomes widespread, such short-term solutions are likely to breed further disillusionment with corporate management.

– 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. –

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

Academics, family researchers and even baseball history nuts have noticed recently how some important archives of older newspapers from around the world have vanished off the Web.

The problems have surfaced since PaperofRecord.com, a collection of more than 20 million newspaper pages of papers ranging from the Toronto Star to Mexican village periodicals to newspapers as far as Perth, Australia, merged into Google News Archive.

The problem, researchers discovered, was that Google has had trouble reformatting the newspaper images and gaining rights to display some of the older publications. It has, at least, temporarily removed some of the archives from public view.

There is an idealized view of the Web that sees it as a storehouse of human knowledge, and in the sense of the breadth of what I can find with a random Google search, this is true.

But for all its openness, the Web has proven to be a leaky vessel for historical preservation, with much of its treasure trove lost in a maze of altered Web pages, broken links and deleted sites.

The head of the British Library recently warned in The Observer newspaper that if this digital memory loss is not fixed, we “are in danger of creating a black hole for future historians and writers.”

Archives of The Sporting News, founded in 1886, and nicknamed the Bible of Baseball, is among the publications that has fallen victim in the transition of PaperofRecord.com to Google ownership. Some older Mexican newspapers are also offline, academics complain.

Preserving history on the Web is a struggle even for Google, whose stated mission is “to organize the world’s information and make it universally accessible and useful.”

“We’re doing our best to find a solution to include as much of the acquired content as possible,” a Google spokesman says of the newspaper archive transition.

But as more and more of our collective memory is hosted online, the danger grows that we lose the content and context of events that happened just days ago, let alone weeks, months or decades back.

Try retracing the links to old scandals or unflattering images on the Web, say to Enron or Parmalat or other fallen corporate names. Most of them are gone, despite the best efforts of sites like Wikipedia or Smoking Gun or the combined energies of the blogosphere to ferret out and preserve such history.

Where is the global sense of outrage that followed the looting of Iraq’s National Museum as U.S. troops stood by in the turmoil following the ouster of Saddam Hussein in 2003? While hard to measure, I think it’s a safe bet that the world suffers the loss of a museum full of artifacts every day by depending upon the Web to host our precious cultural memories.

That’s not to neglect the enormous value of the Web as temporal medium for sharing information. The latest celebrated example of this is how independent analyst Alex Dalmady used financial data from the Stanford Group’s own website to uncover the unlikely financial returns promised by the bank.

His Web detective work is the exception that proves the rule. It was all information hiding in plain site and Dalmady simply had the courage to say the emperor had no clothes.

“One does not have to be a detective, or even a financial expert, to spot financial institutions that may prove insolvent, or worse, with the passage of time,” Dalmady crowed in a report he wrote. “As the saying goes, if it looks like a duck…”

Examples like Dalmady’s are, sadly, the exception.

The World Wide Web as it has evolved over the years has made it almost purpose-built for obscuring or deleting uncomfortable facts. That wasn’t the intention of Web inventor Tim Berners-Lee, whose vision was that every address would point to a discreet page of data. Instead, Web designers have found it convenient to create dynamic Web addresses that may make it impossible to find information the next time you return to a site.

Even Dalmady’s work in January is already hard to reproduce. The Stanford International Bank Ltd site informs visitors the company has been put into receivership and provides no links to its past business.

The recent privacy backlash by Facebook users began when the management of the world’s most popular social networking site attempted to address the issue of who owns the history of conversations that occur between Facebook friends if one of the parties leaves the site.

Changes made last month to Facebook user guidelines implied that the company owned the rights to users’ personal data, including message and photos, even after they shutdown their accounts. The company has since back-peddled and assured its 175 million members that, indeed, users control the data they create on the site.

Susan Feldman, an expert on Web search with research firm IDC in Framingham, Massachusetts, says the problem of the disappearing Web is very real and also partly a mirage. The limitations of current search technology that depend on users choosing the right keywords to find what they are looking for is part of the problem.

Help is on the way from improved search tools such as text analytics and concept clustering technology that will help users find more of the information they may think is lost on the Web.

But until the Web’s important information archives are secured in modern libraries and improved search tools are widely available, the sense that we are losing our collective digital heritage will only grow.

Enjoy the Web’s many benefits, while they are still on your screen. Keep copies of anything you want to remember, or risk losing it, perhaps as early as the next time you refresh your browser. We live in a time where the capacity to record and capture our lives has never been greater.

But using the Web to preserve those memories makes it more and more likely that future generations will consider the early years of the Web to be lost decades.

– 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. For previous columns, Reuters’ customers can click here.  –

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

Social networking phenomenon Facebook has beaten out arch-rival and former market leader MySpace by most measures of popularity, except the one that pays the bills.

While Facebook has outpaced MySpace in bringing in members — it has 175 million active users at the latest count, compared with around 130 million for MySpace — it has struggled make money from them. While MySpace is closing in on $1 billion in revenues, Facebook generated less than $300 million in sales last year, reports say.

Indeed, Facebook’s efforts to drum up revenue have led to it repeatedly becoming the target of some of the biggest online privacy protests on the Web. Its most recent fight earlier this month followed Facebook’s attempt to redefine its own rules and assert ownership over anything its members posted on the site. The company has since backed off and is rethinking its policies.

Why hasn’t Facebook benefited from the vaunted “network effect” that makes such services more valuable the more its adds members and connections between them? After all, Facebook is spreading quickly in nearly 100 languages, while MySpace has focused on the United States and five other markets where Web advertising flourishes.

The answer may lie in the origins of the five-year-old site started by then Harvard University student Mark Zuckerberg.

Its appeal at the outset was that it was a place where users could share tidbits of their personal lives with selected friends and acquaintances. This blurred the distinction between a private space and a public one. MySpace is more explicitly a public place where friends hang out in the equivalent of a cafe or a club and the aim is often to meet new people. Most of all, MySpace is a place to share music with other fans.

Users tend to view Facebook as a private forum and resent commercial intrusions. The company’s management has responded to these sensitivities by constructing a commercial model that would preserve the intimacy of the site without filling it up with crude banner advertising.

Facebook encourages advertising that seeks to trigger social interaction between members, in effect using networks of friends for viral marketing of messages. The snag is that rewiring how the site works to make such ads more effective, has actually alienated users. Many regard attempts to make money by passing on their information in subtle ways as positively creepy.

While MySpace has been criticized for flooding its member pages with garish advertising, it has never had to rewrite its basic privacy ground rules as a result and is unapologetic for its strategy. The straight ahead commercialism of the site does not provoke mass protests.

MySpace international director Travis Katz says the site always sold advertising, meaning that its basic business model of demographic targeting has had to change little as it grew.

“Our goal and objective is not to be the site with the most users,” Katz told me recently. “Our strategy is to be the site that makes all the money. We want to own the lion’s share of the profits.”

Facebook founder Zuckerberg told a German newspaper in October that making money was not the company’s primary focus and that it was happy to experiment with new ways of advertising over the next three years to discover what approaches will work for its audience.

To be fair, there is no evidence that Facebook has lost members as a result of these experiments. Worldwide, the site added 25 million users alone in January, up from 20 million new members in December.

But privacy eruptions will never end until Facebook clarifies the relationship between its advertising ambitions and safeguards for its users’ personal information. Deepening trust would give it more freedom to target advertising to users and their friends.

Facebook finds itself working upstream to impose this business model in the toughest advertising market in modern memory further complicates its chances. Any other start-up might have run out of time.

So far, its venture and corporate investors have been patient, not wishing to disrupt a company many think as having the best chance to become the next Google in Silicon Valley. And yet, as membership surges and the costs of technology to support those audiences grow, Facebook is under growing pressure to prove that it is not another money-losing, dot-com fad.

– 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. For previous columns, click here. –

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

By Eric Auchard

LONDON (Reuters) - With world economies fast running out of steam, it may seem an unlikely time for cash-strapped governments to discover universal broadband access as an urgent national funding priority.

Yet in this financial plague year, the Great Broadband Bailout of 2009 is rocketing up the political agenda as the global economic crisis deepens further.

Massive programs to save the banking sector are failing, so far, to revive business confidence. Instead, governments must stimulate the real economy, creating jobs and income that get the working world moving.

Building faster, more pervasive internet networks creates jobs and opens new avenues for business. It joins traditional ways of priming the economy like ditch-digging and pothole-fixing to save roads and bridges or newer efforts to invest in green energy, health care or education.

The classic complaint against government job creation is that monetary policy is a quicker, more direct way to put money in consumers’ hands. But as interest rates rush to zero percent, policymakers are desperate for alternatives.

The U.S. Congress is negotiating final terms of President Barack Obama’s $800 billion stimulus plan. It includes $6-7 billion to expand broadband networks in rural and other unserved areas and up to $30 billion in tax credits for builders of superfast 100 million bit-a-second networks.

Two weeks ago, Britain’s Labor government said it wanted to make universal broadband access a reality by 2012. Two-thirds of UK households now have broadband. That broader mandate looks designed to frame debate over an eventual stimulus package that goes beyond existing bank bailout measures.

A plan could include funding to push mobile broadband into hard-to-reach rural areas and tax credits for expanding construction of superfast fiber optic cables that would speed up existing broadband networks.

Countries from Australia to Portugal to Finland are investing public monies to build faster networks.

Why now? Because jobs, business and future investments in growth will not happen without networks that efficiently deliver the growing range of text, audio and video services that consumers and businesses demand. Alternative forms of broadband access, including mobile phone networks, only go part of the way to soak up demand for these data-intensive features.

REVIVING BROADBAND INVESTMENT

The communications industry has plowed billions into broadband networks to date, but is strapped to do more. Layoffs have been announced at most major broadband carriers.

Private network operators may be more amenable to government aid following a year in which broadband subscriber growth fell 9.1 percent worldwide after five straight years of healthy growth, according to data from market research firm iSuppli.

Limited government backing at this juncture can provide incentives to private investors to co-invest. Newly government-backed banks could even kick-start the process by freeing up loans for these new infrastructure projects.

An economist at the Communications Workers of America, a union supporting the Obama plan, estimates that each $1 million invested in broadband creates 20 jobs, directly, in terms of construction, installation or network services, or indirectly, from jobs created from money spent by employing broadband workers. A $7 billion grant could mean 140,000 new jobs.

Of course, injecting public money into private industry, even with the best of intentions, is likely to cause its own headaches. No one is talking about outright nationalization, or renationalisation in some cases. Arguments in favor of government intervention depend on speed if they are to have any effect in this economic cycle.

The biggest beneficiaries are likely to be the incumbent carriers — AT&T (T.N) and Verizon (VZ.N) in the United States and BT Group (BT.L) in Britain. Inevitably, there will be issues over who gains rights to broadband network capacity constructed with government funds, especially if tax credits or subsidies are targeted at incumbents.

Rival operators will demand open access to networks built with government funding. Compromises must be reached to avert legal delays. The question of how to structure further financing will have to consider whether private companies pay the money back out of future profits, or work out some sort of regulatory trade-off for shouldering risks at this time.

Brokerage Sanford C. Bernstein has described a more ambitious scenario that could involve the government creating a parallel network by buying up the broadband assets of credit-strapped cable TV and phone provider Virgin Media (VMED.O), the second largest broadband supplier in the UK, then laying new fiber lines.

The argument for bailing out the broadband industry does not rest just on the pressing need to put people to work. New broadband construction is ditch-digging with a purpose. Economists no longer debate whether broadband investments spur follow-on employment and new business prospects. The question now is how much and how soon?

– 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. –

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

Outsourcing, Indian-style, is challenged as never before by an erosion in business confidence that makes corporate spending, even to generate quick cost-savings, harder to justify.

“No New Investment” is the order of the day; cost avoidance, the mantra; zero percent, the growth target in the current era of uncertainty.

Software service providers emerged out of the 2000-2002 technology spending bust with sales growing up to 50 percent a year as they won over companies to contract out inefficient operations instead of managing them in-house.

But shocks to the world economy seen over the past 18 months are triggering reassessments of corporate growth expectations, cost considerations and operational accountability. It’s no longer safe to assume that the logic that drove outsourcing in the past will drive it again, once the economy picks up.

Here are reasons why the industry will find it difficult to repeat its past performance in the tough times ahead.

CUTTING BACK ON COST-CUTTING: The paradox at the moment is that spending on services meant to cut costs and save money is itself being squeezed.

Technology Partners International (TPI), a research firm that has tracked the outsourcing industry for 20 years, reported this week that total contract volumes fell 22 percent in the fourth quarter from a year ago.

Just how bad things could get this year is only likely to emerge as corporate customers nail down their 2009 spending plans to vendors in the next two to three months.

“The worst of the IT (information technology) spending slowdown likely remains in front of us as we start the clock on slashed 2009 budgets,” Goldman Sachs warned in a report on the software industry earlier this month.

The conventional wisdom is that companies will eventually need to cost-cut their way out of the economic morass. But as the software services industry has matured over this decade, Goldman analysts say the sector has become more cyclically dependent on overall IT spending, reducing the chances it will be an early winner in any corporate recovery.

Tata Consultancy Services , the largest of the Indian software service providers, estimates that budgets for IT outsourcing will fall between 5 and 20 percent during 2009. Market forecasters predict more declines in store for 2010.

KEY CUSTOMERS IN TROUBLE. One problem is that the $40 billion-a-year industry’s fortunes are heavily linked to the financial sector. Indeed outsourcing started out 30 years ago as a way to help banks automate tangled back-office operations.

But while it grew more diverse in the 1990s, branching into telecom, manufacturing, retail and other industries; banks, brokerages and insurers are still the biggest slice of the market at 20 percent of overall sales, Goldman Sachs estimates.

The finance sector is not just in trouble, it is experiencing a meltdown like no other since the 1970s or perhaps even the 1930s — long before outsourcing itself was invented. And while the credit crisis has left many institutions needing to slash costs, we are seeing a wholesale contraction of the market that will lead to steep reductions in overall demand. Whole parts of the business will disappear and not be replaced.

Moreover, the financial industry’s reliance on governments for bailouts has curtailed the autonomy of bosses. Governments are likely to be dubious should big banks and insurers seek to offshore financial jobs, especially in countries with mounting unemployment. Outsourcers may have to get used to having fewer, and more conservative, financial services customers.

GROWING COMPETITION. Even if volumes hold up, Indian software services may find their market share eroded. After all, Indian firms no longer lay claim to the sort of exclusive cost advantages — lowest cost technical labor — they did.

In recent years, the industry has expanded into other offshore regions such as Southeast Asia, Central Europe and Latin America but promises to handle sensitive work “near-shore” or onsite when customers demand or labour politics require.

Big computer services firms IBM , Hewlett-Packard and Accenture got in on the act by expanding into India or by acquiring offshore companies themselves.

Accenture now has more staff in India than in the United States. Because these firms are agnostic about whether they offer their services offshore or near-shore, they look better placed to navigate global labor politics than Indian rivals.

TRUSTWORTHINESS. Adding to the sector’s troubles is the massive corporate fraud uncovered recently at Satyam Computer Services Ltd , India’s fourth largest software services provider. The scandal has Satyam customers scrambling to find alternative providers.

Other offshore services providers report stepped-up scrutiny from clients of their own corporate governance and financial viability. It has also revived questions about the trustworthiness of Indian accounts and the adequacy of corporate controls.

That’s a big black eye for an industry that sells risk management and corporate governance services as a major client offering. It may raise the risk premium investors require for holding these stocks.

PRICE PRESSURES. Rising competition isn’t the only threat to offshore outsourcers’ margins.
Many of the more profitable, longer-term contracts worth tens or hundreds of millions of dollars are being put on hold as companies scramble to reassess their business strategies.

Customers want more control over projects and are demanding fixed-price deals that are more likely than not to limit margin growth. Infosys, Tata and others say they are doing their best to make up for price cuts by driving greater sales volumes.

The trend is disguised by the long-term nature of many existing software services contracts. Recent reports suggest many customers are scaling back or canceling long-term “mega-deals” until they can get a handle on the impact of economic decline on their own businesses.

The industry is subsisting on short-term, quick-fix contracts aimed at cutting operational costs as fast as possible. These price-sensitive deals are what software services firms had been trying to move away from in favour of higher-value projects to create new businesses for customers, not just manage existing software or customer services.

There is a big cultural change underway in global corporations that may be less friendly to outsourcing. Fallout from the financial crisis is likely to mean far greater pressure on chief executives to run a tighter ship. There’s likely to be less merger activity, less headlong expansion and less resulting need to consolidate organizations using external services.

Chief executives are sure to be more closely scrutinized for the operational choices they make, instead of farming out responsibility to lower level technical managers in order to focus on deal-making.
Inevitably there is a lack of control involved in contracting business operations out around the globe. This more constrained environment could be less favorable for outsourcing than downturns of the past.

– 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. For previous columns, click here. –

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

“There’s probably no God” runs the slogan of an advertising campaign humanists are running on buses across Britain. But if the supreme being has his doubters, few question the importance of Steve Jobs to Apple Inc.

In a letter to employees on Wednesday, the Apple co-founder said he would take himself “out of the limelight” for six months after learning in the past week that his still vaguely defined “health issues” are “more complex than I originally thought.”

While Jobs paints his absence as a temporary medical leave — he retains the Apple CEO title even as he steps aside — his departure leaves a spiritual void at a company most people think of as inseparable from the man.

The miraculous career of the prophet of the personal computer revolution, the self-made billionaire known for a career of second acts, draws frequent religious parallels: one biography of him is entitled “The Second Coming of Steve Jobs”.

In the 33 years since he co-founded Apple, Jobs has attracted the fervent devotion of his followers — the Mac faithful, and more recently, iPod and iPhone fanatics. To them, Steve is a secular messiah; to his detractors, a cult-leader.

Apple’s unmatched record of hit products has only been achieved under the famously tyrannical leadership of Jobs, whose obsession with sleek design and the hard to define “cool” factor of his gadgets is unique in the corporate world. Again and again, it is this aesthetic, and Jobs’ commercial success exploiting it, that have distinguished Apple products from so many copycat competitors.

On some level, anyone who has ever admired an Apple product harbors a little bit of the “design Nazi” in his soul. Managers who have endured Jobs’ withering demands to create nothing but “insanely great” products may have absorbed this.

But is culture enough to overcome a vacuum of leadership? Much as Microsoft Corp has become a smaller place since Bill Gates has wound down his role at the software giant and Apple adversary, Jobs can only be sorely missed.

How far can a company, its executives, engineers and salespeople go on the mantra, “What would Steve Jobs think?”

To be sure Tim Cook, Apple’s chief operating officer, is taking over Jobs’ daily responsibilities and Jobs said he will retain strategic oversight of the company’s direction while on leave. The pipeline of product innovation looks well-stocked.

If it’s a question of the man being bigger than the company, then Apple, which popularized the personal computer, the personal digital assistant and the handheld music player and is staking its claim on reinventing the mobile phone and, perhaps even, eventually, the television, is in big trouble.

CONTEMPLATING THE UNTHINKABLE

Inside Apple, the delicacy of Jobs’ planned absence was summed up in the innocuous headline given the company’s most dramatic announcement in years: The bombshell press release was simply entitled: “Apple Media Advisory.”

As if the only interested audience were baying reporters.

The news comes as a shock, but little surprise. It caps more than a year of widespread concern over the health of Jobs, aged 53 and a survivor of pancreatic cancer. More recently, his gaunt appearance and dramatic weight loss have added to the worries.

The immediate reaction to Jobs’ departure notice was a 6 percent decline in Apple stock. But the shares have fallen 60 percent after touching $200 at the end of 2007. It’s difficult to separate the impact of Steve Jobs’ health mysteries from the general decline all stocks have seen since then.

Wall Street analyst Shaw Wu argues that while Jobs deserves a lot of credit for the revival of Apple, “we believe the company has a deep bench and its culture of innovation and execution has more or less been institutionalized.”

Not so fast. Recall the dark years of Apple history starting sometime after 1985 and lasting until he returned in 1997. The famous Apple culture remained in place but product missteps and management in-fighting were the result.

The success of Apple has rarely been its technical innovation or engineering rigor. In that sense Cook is simply a placeholder. The company’s hit products all share a fascination with functionality and beauty that is unmatched in other gadgets. It is Jobs’ taste, his commitment to design and his micro-management of talent that drives Apple.

Jobs has pulled together Apple after the years of drift. That he has done so by being a control freak with a clear vision does not diminish his accomplishments. It’s hard to imagine how his despotism will be replaced.

– 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. For previous columns, click here. –