Facebook and the Private/Public Dilemma

Its been a big story all year and will be the focus on media scrutiny in 2011 – when is $FBOOK going to IPO (ideally on NASDAQ, so that our $FBOOK becomes the actual ticker)? When will the founders, early management, and investors take some of their cash off the table and let the rest of us shlubs in? As it turns out, this is no simple question, particularly given the current state of their business.

After all, it used to be that companies went public to raise capital needed to take them to the next level. This would make sense for companies like $LKIN, $TWIT, or $GRPN who are either seeking out a business model or need cash to continue growth at the pace they’re on. Last time I checked, $FBOOK has 500M users, is the largest website by traffic surpassing even Google, and has a robust business model based on advertising, micropayments with enormous upside. They’ve raised an enormous amount of capital, and most of top management (and a fair # of employees and early investors) have begun to convert shares to cash via our friends at SecondMarket and Sharespost. There is no specific need for new infrastructure or a larger workforce than they can currently handle from the cash they’ve raised. What exactly is the incentive to let us all in on the party?

When you think about it, there’s really no reason why $FBOOK needs to be the next $GOOG of $AAPL and not the next $BBERG or Edelman, namely large private companies – captains of their respective industries, owned by the founders and a handful of investors. These companies benefit from being able to focus on long-term gains without the markets pushing for QoQ growth, and they don’t need to worry about pesky Sarbanes-Oxley related issues. On some level, these two companies were able to grow to the top of their respective markets by thinking and acting a lot more like a nimble small business, than their competitors who are publicly traded – I wonder if being private has anything to do with it?

Now, who knows whether $FBOOK will succumb to public demand and go public, but I’m struggling to see why they would? With the exception of the SEC probe and potentially antsy investors, its not so obvious to me.

Much Ado about Netflix…

$NFLX has been one of the hottest tickers this year, with enormous, compounding growth, and seemingly limitless potential. Its business represents the shift from traditional movie rentals (a la Blockbuster) to on-demand distribution through the cloud – naturally many investors are intrigued by the growth and see the business model as the dominant strategy going forward.

That being said, there has been a lot of discussion these last few weeks around the viability of Netflix, particularly due to both bandwidth requirements and potential caps coming from the cable providers, as well as concerns over pricing for content distribution, which Netflix has traditionally gotten on the cheap. A great post by Whitney Tilson outlines these concerns in great detail. The buzz in the market was the direct response taken by Reed Hastings, CEO of Netflix, which can be found here.

Today, the buzz on the street is Netflix as an acquisition target, specifically for $AAPL, another high-flyer who has been fueling innovation in the consumer electronic/PC market for the better part of the last decade. The iPhone, iPad, iPhone, and iTunes phenomenon has really been a modern marvel, and a brilliantly played chess game by Steve Jobs and Co. to own the ecosystem.

As Gleacher & Company’s Brian Marshall figures, $NFLX solves a problem for $AAPL, particularly library coverage and large distribution. The iTunes model was originally based on ownership of MP3 and proprietary video content, as a replacement for CD and DVD sales – but more recently, the company has taken on the rental approach with TV and Movies. Netflix on the other hand, has always been about rentals and has built a large streaming video business that is supposedly 5x larger than the iTunes business. Additionally, $AAPL has already proven an appetite to acquire businesses with the all-you-can-eat model, with the acquisition of Lala last year.

Of course, assuming $AAPL even wants to go the acquisition root to enhance the iTunes TV and Movie business (which may be a stretch on its own), $AAPL has multiple options available including a wholesale purchase of $BLOAQ.PK (BlockBuster Video) which is shuttering stores left and right while building an online business to compete with $NFLX and $AMZN VOD.


Despite bankruptcy, Blockbuster could be a cheap and useful buy for $AAPL as it still has excellent relationships with the major TV and Movie content partners (they still get video faster than anyone else in the industry), has a brand that could be leveraged potentially, and has built a reasonable streaming business based on the iTunes a la carte model, as apposed to ‘all-you-can-eat’. Blockbuster CEO Jim Keyes also has targets set on $NFLX. Additionally, looking at acquisition costs – $AAPL would probably need to spend less than $1Bn to acquire Blockbuster (bankruptcy was over $980M in debt that was restructured to $100m with the help of Carl Icahn), whereas for $NFLX, they’d need to go to $10Bn+.

Given the risks associated with Netflix over the next few years, particularly due to saturation of the market by #AMZN, $HULU, and others, I’d be considering the Blockbuster assets pretty seriously.

When does Expertise cross the line of “Privileged”?

Excellent article this afternoon from Bloomberg Businessweek covering the recent consultants from Primary Global hired by hedge funds to provide them with access to their expertise. Apparently, the SEC looked into the matter, and has decided that these consultants did not share expertise, but rather insider information, in exchange for payments of $200k or more. Allegedly, these five consultants offered information on Marvell ($MRVL), NVidia ($NVDA), $DELL, $AAPL and $AMD (not a shabby list of firms who each manage significant demand in several key tech ecosystems. Sounds like a bargain at $200k.

Interesting story, and one we’re going to see more of over the next few years, as information sharing has become commonplace, and access to decision makers and key players has gotten easier to achieve. Firms like Gerson Lehrman built their business on matchmaking hedge funds, lawyers and others who need access to privileged information with the right sources. Social networks like LinkedIn and communication platforms like Twitter have lowered the barrier to connect with influential minds – many of whom are appreciating the ability to check the pulse of their related communities.

Today, anyone with a few bucks in their pockets, or more ideally with a few ideas in their mind, can reach decision makers and actually befriend them, regardless of age, socio-economic background, or credentials. The latter is what we try to perpetuate every day at StockTwits, because we do believe that anyone can have a great idea, and excellent ideas should be passed around, embraced, argued/discussed, and ultimately associated with their originator. This happens every day with the remarkable folks who live in Social Media, whether they be Fred Wilson, Howard Lindzon, Brad Feld, Jeff Hayzlett, Jeff Pulver or others.

The former however is a side effect of this new open culture – people always seek an insider’s edge and will pay a handsom fee for information no one else has. VCs, Management Consultants, I-Bankers and others have always gone out of their way to bring in team members (or hire consultants) of influence who can ensure that their portfolio gets special attention from a key strategic partner. Washington Insiders often get a big payday when they leave their posts and enter the private sector for much the same reason. In today’s world, its even easier to procure an expert, and many an ex-executive have found lucrative roles of this nature…

John Reed and Sandy Weill with their new prize Robert Rubin, fresh off the repeal of Glass-Steagall which Rubin helped push along as Secretary of Treasury

Why shouldn’t hedge funds be allowed to pay insiders for semi-confidential insights that can help them profit in trading public securities? The big difference here is the requirement for corporate disclosures to the shareholders and investor community – when access is granted to a specific research professional or insight is shared over a casual cup of coffee, the government interjects (if they can prove it) because the cardinal rule of disclosure is being violated. This is why the SEC is looking into $FBOOK so seriously, as their stock is on the verge of having a properly liquid market provided via private markets – to the point that they might need to publicly share their financial statements. Insider information in the $FBOOK case, particularly for those sitting on the board and privy to financial statements and projections, provides a massive advantage to them.

As part of keeping our public markets credible and affording market participants of the chance to trade in a fair free market, we need to actively draw out insider information transfer, and encourage more open trading conversation. The best traders will still rise to the top, because they can interpret all the news/analysis and data flow quicker than competitors, and know when to close our positions. Traders who do depend on getting questionably sourced data will not succeed in the long-run, as it is hardly a scalable or legal model.

When the Buy Side Attacks…

What happens when the largest asset management firm, Blackrock, decides to formally clear trades on their internal trading floor? While the buy-side has always held the upper hand on the sell-side, particularly the largest asset managers, this is a big deal, b/c it signifies a further separation of traditional Wall St. from sweetheart fees. It used to be that investment managers would push their transactions to investment banks as a reward for research or other services (kind of a you scratch my back, and I scratch yours).

“BlackRock is the world’s biggest asset-management firm, a $3.45 trillion powerhouse that is Wall Street’s largest trading partner, set to pay investment banks $1 billion in fees this year.” – Bloomberg 12/9/10

However, if BlackRock succeeds in pushing a sizable portion of their transactions between their internal managers on their internal trading floor, it will help ‘mark to market’ the services being provided by the investment banks. This is a great thing for investors and for the markets at large, but will likely hurt the sales and trading operations at the banks, and further push Sell-Side Research to the brink of collapse.

The key question is, if Sell-Side Research cannot generate trading fees for the banks, what has it become other than a large cost center?  It already has been pushed off investment banking fee generation, due to conflict of interest (pushing a company through research to get their IPO, bond of equity issues is definitely full of moral hazard). The mass migration of ‘name brand’ analysts to the buy-side has been going on at a fairly alarming rate (think Rick Sherlund, decorated analyst of $MSFT and other tech companies at $GS, who left in 2006 or Meredith Whitney, decorated analyst of the $C, $JPM, $BOA for $CIBC, who left to start her own independent research outfit)…

Another stake was driven into the coffin of the Sell Side research business this morning. It’ll be interesting to see how the banks respond…

StockTwits and Finance 2.0

Since joining the StockTwits team in May, I have constantly felt the need to get back to blogging. My last blog post was written on May 10th under the FinTechIsrael.com blog, discussing Finance Narrowcasting and Reuters Insider. Since then, I’ve gotten married, taken an amazing honeymoon in August, moved to NYC from sunny Tel Aviv and taken over the StockTwits office in the Flatiron district, as the VP of Business Development. So here goes…

Why StockTwits?

I first came across StockTwits back in 2009, and wrote a post on my thoughts at the time. I then had the pleasure to host Howard and Ellen in Tel Aviv in February 2010, and have Howard keynote  one of our FinTechIsrael events (with Yoni Assia, of eToro). You can find video of that event here.

Over the next few months, I touched base with Howard on several occasions, as I started to consider my next move. While in New York for Passover in April, I met with several VC firms and a bunch of startup companies. Despite a few very tempting opportunities, the allure of working with Howard and his young and ambitious team, coupled with excellent investors, compelled me to push Howard to give me a position at the company. The rest, as they say is history…

StockTwits and Finance 2.0

Howard Lindzon, our fearless leader @ StockTwits ($STWIT), has had a vision for a new paradigm in finance, where the old barriers of entry into financial media are removed, and where good ideas, regardless of source, can be shared, discovered, and profited from. From Day 1, StockTwits has focused on keeping an orderly and meaningful conversation around Financial Securities on our site, while ensuring speed and reliability of message delivery. The result is a real-time, meaningful stream of ideas, discussions and debates, that users can customize, query and participate in.

Now, why is this important, and who actually cares? Good question (and yes, I get this a lot). In my view, StockTwits sits at the apex of three key macro trends going on at once, namely:

  • The always-on (mobile), always connected (social),  and always updated (real-time) world, in which $MSFT (of all companies), can suggest that we’ve gotten too extreme with our focus on real-time communications via the smartphone
  • The shift away from Sell-Side Research, which has been going on ever since the Frank Quattrone CSFB scandals of the early 2000’s (e.g. the chinese wall between investment banking and research); The best analysts are now striking out on their own, as its more lucrative to run an independent research house than work at a traditional firm (think Meredith Whitney)
  • The advent of informal sharing tools, whether it be through platforms like Tumblr ($TMLR) or Posterous, character limitations on Twitter ($TWIT), expansion of the activity feed (think Zynga ($ZYNGA) game updates or Foursquare updates, or that pesky little ‘Share on Facebook’ ($FBOOK), or ‘Share on LinkedIn’ ($LKIN); People are sharing lots of information in a less eloquent and more direct manner than ever before

StockTwits allows for a truly real-time, social experience on nearly all platforms, in which analysts (both pro and amateur) can share their insights and build their notoriety, both through traditional means (long-form blog content) or the new forms (short-form messaging, chart pics, screencasts, and live video). Active traders can connect with contributors directly or just watch the magic unfold. It’s a true win-win for everyone involved…

Needless to say, I’m excited about our prospects going forward, particularly this coming year…

Closing Notes

I’m excited to be back on the blog scene, and hope to extend topics beyond just StockTwits in future posts. Feel free to leave comments/questions or just send me a note directly.

Finance Narrowcasting: The Future of Financial Media

David Carr’s coverage of Reuters Insider in the New York Times yesterday, shares a glimpse of the future of media in the financial community, at least as TV is concerned. As we’ve seen in other segments of the news media, particularly US politics, there is a limited value a single network can provide via 24/7 news coverage (and a lot of wasted airtime reiterating the same point over and over again). The result is incomplete coverage and lots of laughable sequences (see Jon Stewart’s Daily Show for more information).

On the financial media side, CNBC, Bloomberg TV, Fox Business, and a handful of others have been the stalwarts, providing this 24/7 coverage. They’ve been successful in attracting users, due to their breaking news during market hours, but have struggled in after-hours. Additionally, the content is usually quite bland, as its attempting to be a catch-all for all consumers of financial news.

Financial professionals are in need of in-depth, value-add content provided to them in a timely manner, and relevant to their specific needs. A bond trader wants to hear about bonds and bond-related news, not about retail sales and IPOs. A value investor doesn’t want to see candlestick charts. A day trader doesn’t want to listen to the same story reported over and over again, when news is breaking all day.

The future is narrowcasting. Providing users with a tailored, relevant content stream that can be accessed in real-time. Enter Reuters Insider for buy and sell side professionals.

Reuters Insider, as per their website and the NY Times article, will be attempting to offer video streams to users of their terminal products. The streams will cover content from major news networks and investment research firms, in real-time, both in video and accompanying text.

The concept is a very strong one and a potential win for Thomson Reuters, assuming they can convert enough of their users, and Bloomberg doesn’t have similar plans in mind. To their benefit, they seem first to arrive at the concept, and have signed up some good partners.

Either way, this is where media is going, and at least for the moment, is a big win for innovation at Thomson Reuters.

FintechIsrael February Event Video & Slides

Sorry for the delay, but we had some technical issues that needed to be resolved. The video is in two parts, and the slides are below. Both can be found here as well.

Part I

Part II

FinTechIsrael February Event Presentation

Please, let me explain… : The Financial Crisis Panel Review

After two days of testimony from senior executives, government bureaucrats, and economists, the US government’s Financial Crisis Inquiry Commission has brought to light some of the root causes of the crisis. After reviewing the comments made by the executives, specifically Panel 1 featuring Lloyd Blankfein (Goldman Sachs), Jamie Dimon (JP Morgan Chase), John Mack (Morgan Stanley), and Bryan Moynihan (Bank of America), one can clearly see a distinction between they style and demeanor of the firms who survived the crisis relatively unscathed, namely Goldman Sachs and JP Morgan Chase, and those that suffered heavily (and continue to do so), namely Morgan Stanley and Bank of America. Have a look below at the video, in case you missed it:

Here’s a few key links for those interested in more background:

Commentary

As menti0ned in the press above, there were no big winners here. Goldman Sachs did survive the crisis intact, but did so while supporting a business model that was articulated nicely by ormer California state Treasurer Phil Angelides, chairman of the Financial Crisis Inquiry Commission, saying

“It sounds to me a little bit like selling a car with faulty brakes, and then buying an insurance policy on the buyer of those cars.”

Clearly, Blankfein’s comments about how the financial crisis was like a hurricane, e.g. a storm no one could see coming, were not taken well by the media either.

For JP Morgan Chase, Jamie Dimon clearly got himself in trouble when he described the main flaw in his bank’s approach, namely that they “didn’t stress test housing prices going down by 40%.” Despite the comments, Jamie is largely viewed as the standout executive who kept his firm afloat during the crisis, with an iron-clad balance sheet that could handle the acquisitions of Bear Stearns and Washington Mutual, two firms who had severe hemorrhaging due to the crisis. It is clear from their financial standing that JP Morgan was the best prepared for this ‘long tail event’, and has been able to hold on to much of their core, while staying profitable throughout the crisis.

Morgan Stanley’s John Mack was articulate, and shared how his company lowered their leverage levels, and increased their loan loss levels, coupled with a last minute investment from Mitsubishi bank, kept them afloat. Given the relative weakness of the bank throughout the crisis, it was not surprising that he avoided being photographed or dealing with too many questions (as described in several articles).

Bryan Moynihan of Bank of America was the lucky one here, having recently been moved into the senior ranks, with most of the country seeking his predecessor Ken Lewis.

Missing from the spectacle was Citigroup, arguably the bank in the worst shape from the crisis. Speculation on future Citigroup inquiries, including Vikram Pandit (current CEO), Chuck Prince (past CEO), Robert Rubin (past Chairman), and Sandy Weill (past CEO and Chairman) are discussed here. If there are hearing with Citigroup, it will be fascinating to hear how the company made the poor decisions it did. Of course, for a sneak peak, check out these two exposes by Rubin and Weill.

Needless to say, a sad day for finance, but hopefully one where

Mobile Payments: Interesting Stories of ’09 and Hopes for a Brighter Future

The mobile phone as a real multitasker finally took hold in 2009, partially due to the ongoing success of the iPhone (remember, iPhone prices dropped around the 3GS launch on June 8th of this year), and the increased maturity of applications. Additionally, banks across the world, and especially in the US began taking mobile banking seriously, building apps leveraging the iPhone, Blackberry and Android OS capabilities. The assault on traditional plastic for payments has been waged, and we’ll be watching as the battles are fought in the coming years.

Western World

In the Western World, the big story has been NFC’s continued growth in POS coverage, its enhanced accessibility andusage amongst consumers and the development of decoupled NFC products (Bling Nation).

When the first NFC terminals came to pharmacies, convenience stores, gas stations, taxi cabs and fast food restaurants, it was the start of the Card Association’s final attack on Cash. No longer did a person living in major metropolitan areas, such as New York, Chicago, Los Angeles, Hong Kong, or London need to stop at the ATM nor carry cash of any kind. The inclusion of the mobile phone in the NFC equation further lightens the traditional wallet.

With the economic crisis, merchants began to find relevance in the argument for ACH-based decoupled debit payments, which cut their merchant fees in half (or more). Startups like Bling Nation and Revolution Money were being heralded as the new saviors of the discount rate, allowing for much more flexibility than the traditional models of V/MC. Ultimately American Express purchased Revolution Money for roughly $300M, in hopes of bringing their technology platform to the more established Credit Card firm (and potentially build a secondary brand).

Square, which was recently announced with much fanfare attempts to convert the iPhone to a wireless and efficient POS, with a unique authentication solution based on audio and a network of user photos. Its a nice concept, and one we’ll be watching closely, but may not actually have a place in the Western Market (as a colleague reminds me, if the current solution works, your solution must be infinitely better to get noticed). In this case, Square’s dongle for CC reading is a bit bulky and pales in comparison to the relatively inexpensive and full featured wireless POS terminals available across the western world. As a result, the problem Square solves is on the long-tail side, covering individuals or extremely small or one-time businesses that do not have the ability or interest in having a POS. I’m not sure that market is large enough for a sustainable business.

In the UK, firms like MoBank have begun offering Mint.com-style apps for the iPhone, allowing customers to do online banking and also transact over their mobile phones. These mobile wallet apps with transaction capabilities will likely become the norm going forward, reinventing the online banking experience, and further pushing the traditional bank teller out of the equation.

Developing World

In the developing world, particularly Africa, Eastern Europe, Asia, and parts of South America, the mobile phone has become the one piece of consumer electronics owned by the largest percentage of the population. Given the nature of banking and money in many of these countries, the mobile banking and payments space has been very hot, focused on building the non-existent payments infrastructure in those areas entirely around the mobile phone. Over the last year, I have had the chance to see numerous technologies in the US, Europe and Israel being developed to combat this exact problem, with a few key thoughts –

1) P2P transactions, such as those available through Obopay or M-Pesa, are a critical function in these markets, but one that is not yet easy, reliable and secure enough for mass usage. SMS does not fit the bill for any of this. Alternative and more efficient technologies, which require no user downloads and no ‘terminal’ on either side will be the key to success. Companies like Trivnet have unique approaches in this space, and we’ll be watching them closely to see how they progress.

2) C2B transactions will be best served in these markets by a ‘Square-like’ device, only one that will work on a non-3G non-Smart Phone infrastructure. Companies like AcCells are working on finding the least intrusive and easiest to operate option.

Welcome 2010

With the new year coming later this evening, its useful to organize a hopeful message for the market going forward.

  • Resolution of the stalemate on NFC payments in the Western World. Of course, this will require a resolution between mobile carriers and banks / associations, but with the market primed for a resolution, I am hopeful that it will be resolved this year.
  • Growth of alternative payment technologies used at the Online/Offline POS. Paypal X and Revolution Money/AXP are both expected to allow greater control over the payment process to developers interested in new payment models. I would love to see the mobile phone become a larger part of this ecosystem, both for online and offline transactions.
  • Operation of Multiple Mobile Payment Solutions in the Developing World. Someone is bound to break through all these pilots going on across Africa and other parts of the Developing World as a leader with an easy to use, secure and timely transaction model that can be scaled across these markets. The value of such a network would be huge, both economically and in enhancing the standard of living in these places. I hope that this coming year we will begin to see the beginning of widescale usage of the mobile payments economy.

Happy New Year to all!

Gift Card Revolution: The New Wildcard iPhone App

Wildcard Networks, a startup with the same name as a major issuer processor acquired by eFunds in 2005 (acquired by FIS in 2007), has just released an exciting iPhone app that may revolutionize the Gift Card business.

The user tracks their gift cards on the app, including the balance, transaction history, associated barcode/PIN.

The app can be used at the POS, without the need for the physical card.

Additionally, the user can buy new cards and top-up existing cards from anywhere, using the app.

The result is a smart and user-friendly gift card wallet, with potential for a social component.

Commentary

The iPhone has played a very critical part in the progression of consumer behavior, particularly around payments and mobile banking. The holy grail, sought by the likes of Paypal, Square, and traditional banks is the use of the mobile phone as the direct interaction point with banking/payment services. The mobile phone is the only device that consumers carry all the time, and is likely the only device capable of replacing the traditional wallet.

Some firms are already attempting to make mobile payment and mobile banking a reality today, albeit for P2P or restricted remittance payments and basic banking services (including demand deposits via USAA). Consumer adoption of these tools will take time, due to security concerns and the habit adjustment required.

The Wildcard tool, and similar tools like it, covering a much less concerning ecosystem (prepaid gift cards) will likely find a real following with consumers, and will hopefully help bridge the gap to larger mobile services in the future.

It will be interesting to see if Wildcard intends to attack the larger payment space in the future…