December 2008 Archives

Innovating in the Great Disruption

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Scott Anthony:

While the global economy began slowing down in late 2007, forces transforming the face of business trace back more than a decade. Over that time period, technological improvements have made it ever easier to start and scale a business. Convergence went from being a cliché to a reality. Companies from countries like China, India, and Brazil burst onto the world stage. The global slowdown coupled with the credit crunch in late 2008 accelerated these forces.

If sagging employment and dwindling economic prospects led historians to term the 1930s the Great Depression, perhaps it is appropriate to tab today's hyper-competitive market where competitive advantage dissipates in a heartbeat the "Great Disruption."

In 2009, managers will realize that they are no longer dealing with a crisis; they are dealing with a condition. In the Great Disruption, companies simply can't anticipate that today's competitive advantage will last for more than a few years. Former Intel Chairman Andy Grove anticipated this more than a decade ago when he wrote, "Only the paranoid survive."

On Social Networking Site Spam & Their Declining Value

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Cringely:

This is nothing more than social networking spam, folks, and it is sucking the value out of social networks just like mail spam sucked the value out of e-mail. And to those venture capitalists who see all these applications and rejoice because of the added network volume, which they think translates into higher valuations, understand that this very volume will eventually KILL every one of these companies, making your investment in them worthless.

If you think Facebook is immune to this effect because of its success, you are wrong. It's very success makes Facebook even more likely to fail as a result. It won't happen right away but it will happen when we'll all jump overnight to some other platform whose only advantage over Facebook is that it lacks such sludge.

So if you are in touch with me for any reason please understand that while I will become your friend or contact on these services I will NEVER join a group, NEVER join a cause, NEVER accept an invitation (even if I actually end-up attending the event), NEVER become a fan, and NEVER, NEVER, NEVER install third-party applications.

Once Trusted Mortgage Pioneers, Now Pariahs

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Michael Moss & Geraldine Fabrikant:

Herbert Sandler, the founder of the Center for Responsible Lending, is standing in his bayfront office watching a DVD that trains brokers to pitch mortgages by extolling the glories of the real estate boom.

The video reeks of hucksterism, and it infuriates Mr. Sandler.

"I would not have approved that!" he declares. "I don't think we should be selling our loans based on home prices continuing to go up."

But the DVD was produced in 2005 by a mortgage lender that Mr. Sandler and his wife, Marion, ran at the time: World Savings Bank. And the video was a small part of a broad and aggressive effort by their company to market risky loans at the height of the housing bubble.

The Sandlers long viewed themselves -- and were viewed by many others -- as the mortgage industry's model citizens. Now they too have been swept into the maelstrom surrounding who is to blame for the housing bust and the growing number of home foreclosures.

Once invited by Congress to testify about good lending practices, the Sandlers were recently parodied on "Saturday Night Live" as greedy bankers who handily sold their bank -- and pocketed $2.3 billion in shares and cash -- in 2006 before many of their loans began to sour.

Can You Afford it Now?

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Peter Hong:

We've pretty much blown through the first couple of stages of grief with regard to the Southern California housing bust.

There's no room left for denial now that home prices in the Southland are down 44% from their peak in 2007, and there's not much use for anger.

Now we're bargaining.

Previously stubborn sellers are dropping listing prices and banks are increasingly agreeing to "short sales," in which a home is sold for less than the amount of its mortgage.

Andrew Orlowski:

Google this week admitted that its staff will pick and choose what appears in its search results. It's a historic statement - and nobody has yet grasped its significance.

Not so very long ago, Google disclaimed responsibility for its search results by explaining that these were chosen by a computer algorithm. The disclaimer lives on at Google News, where we are assured that:

The selection and placement of stories on this page were determined automatically by a computer program.

A few years ago, Google's apparently unimpeachable objectivity got some people very excited, and technology utopians began to herald Google as the conduit for a new form of democracy. Google was only too pleased to encourage this view. It explained that its algorithm "relies on the uniquely democratic nature of the web by using its vast link structure as an indicator of an individual page's value. "

That Google was impartial was one of the articles of faith. For if Google was ever to be found to be applying subjective human judgment directly on the process, it would be akin to the voting machines being rigged.

Julie Creswell:

"Traditional private equity is dead and has been for a year," says Mr. Black, seated at a round conference table in an office once occupied by L. Dennis Kozlowski, who was ousted as chief executive of Tyco International. "It will probably remain so for a couple of years."

Part of the allure of private-equity honchos like Mr. Black is that they made an art out of making money during the boom years. Their fist-pounding negotiations were legendary. Their corporate turnarounds became Harvard Business School case studies. Their multiple homes, black-tie parties, sports cars and yachts were alternately envied and vilified.

Today, with Wall Street in tatters and the easy money long gone, the question now for Mr. Black and his peers is whether they have enough moves left to turn the bleak outlook for private equity into something rosier for themselves, their companies, their investors and the legions of workers they employ.

Achieving that will hinge on whether Mr. Black and his peers can persuade banks and investors to give their companies more time to make good on their debts, something that Mr. Icahn's lawsuit suggests is not always easy.

....

In an effort to conserve cash and give themselves some breathing room, Harrah's and Realogy are trying to persuade investors to exchange the securities for new debt that will reduce overall leverage or lengthen maturities. Currently, Harrah's, Realogy and Claire's are keeping up with some of their debt payments by issuing more debt to investors rather than paying them in cash -- a maneuver made possible by agreements reached during the boom.

Some analysts see these moves as little more than putting off the inevitable.

"What they're doing is putting more debt on a company at a time when we are in a recessionary environment. Also, the companies that we're talking about are some of the lowest-rated companies out there, so the margin for error is razor thin," says Diane Vazza, head of global fixed-income research at Standard & Poor's. "What this does is buys them a little bit of time, but the day of reckoning is around the corner."

Trump Sues Deutsche Bank over Chicago Condo Debt

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Floyd Norris:

But he isn't cutting the prices. He says the banks won't let him.

The project is the Trump International Hotel and Tower in Chicago, which is to be the second-tallest building in that city (after the Sears Tower). By Mr. Trump's account, sales were going great until "the real estate market in Chicago suffered a severe downturn" and the bankers made it worse by "creating the current financial crisis."

Those assertions are made in a fascinating lawsuit filed by Mr. Trump, the real estate developer, television personality and best-selling author, in an effort to avoid paying $40 million that he personally guaranteed on a construction loan that Deutsche Bank says is due and payable.

Rather than have to pay the $40 million, Mr. Trump thinks the bank should pay him $3 billion for undermining the project and damaging his reputation.

He points to a "force majeure" clause in the lending agreement that allows the borrower to delay completion of the building if construction is hampered by such things as riots, floods or strikes. That clause has a catch-all section covering "any other event or circumstance not within the reasonable control of the borrower," and Mr. Trump figures that lets him out, even though construction is continuing.

"Would you consider the biggest depression we have had in this country since 1929 to be such an event? I would," he said in an interview. "A depression is not within the control of the borrower."

He wants a state judge in the Queens borough of New York to order the bank to delay efforts to collect the loan until "a reasonable time" after the financial crisis ends.

Viral Marketing

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The Economist:

Viral marketing involves choosing a small group of well-connected individuals to launch a product or service via the internet or their mobile phones. The idea is that their approval will spread rapidly via their online network of connections, create a buzz around the product being marketed and result in millions of sales. The most desirable individuals for viral marketing are those with what is known as high social networking potential (SNP). People's SNP is a combination of the size of their online social network and their power to influence that network.

Viral marketing is meant to work like the spread of an epidemic. If every infected person infects, in turn, more than one other, the epidemic spreads rapidly. If every prospect reaches more than one other, sales rise rapidly. At the height of the dotcom boom there were few business plans that did not include viral marketing as a central part of their strategy.

Viral marketing moved into a new phase with the growth of online social networks such as YouTube and Facebook. On such networks information gets sucked out by the participants instead of being pushed out via e-mail. It gives the virus greater potential to multiply. But as the internet grows more diffuse and more commonplace, most people's SNP seems bound to decline.

Few marketing viruses are known to have succeeded on anything like the scale of Hotmail, commonly considered to be the father of viral marketing. Hotmail's success was based partly on the fact that it was free--viral marketing seems to work well when there is a free element to what is being marketed (as there often is with online services). Whenever someone sent a Hotmail e-mail message, for example, there was a note at the bottom saying, "Get your private, free e-mail at www.hotmail.com".

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