Positive Energy

Online Olympics coverage: too good to be true

A week or so ago, I was getting excited about the rich online coverage NBC was going to offer for the upcoming Olympics.  That coverage is apparently going to be a lot more restrictive than I had hoped.  Two points to highlight:

1) Olympic video cannot be displayed on any website other than www.nbcolympics.com.

Sigh.  Implications for NBC: your online viewership probably decreases (e.g., I’d definitely click back to NBC after seeing an interesting clip from some event on another site, to see more context) and you move toward the “doesn’t get it” side of the spectrum regarding online content.  Implications for me: the NBC site probably won’t be able to handle demand and so I’ll be out of luck for less-popular videos that don’t get illegally distributed.

As an aside, one of the things I thought I’d been observing in the past 12 months was that “old media” companies seemed to finally be “getting Web 2.0”.  Many newspapers, publishing houses, TV networks, music labels, etc. seemed to have made moves in the second half of 2007 or the first half of 2008 indicating that they were finally starting to get on board with the rest of the online world (maybe I’ll expound on this in another post).  For NBC, this is a big step backward, IMO.

2) No events that are scheduled for TV broadcast - on any of NBC’s 6 Olympic channels - will be available online until after they’ve been aired.

Are you kidding me??  I’m speechless.  This doesn’t qualify as “coverage”; it’s remnant live video plus an after-the-fact replay library.  I can guess the mindset: they don’t want to reduce viewership by having people watch online and then not watch the main TV broadcast, for big events.  Though I’m wary of extrapolating my own behavior to the mass market (an early eBay colleague once informed me that I was an “extreme edge case”), this is a situation where my instincts strongly say that TV viewership increases due to live online coverage.  If I see something amazing online at 3 am, I’m probably going to tune in the next day to see it live - on a big screen, with more color & context around it, and just to see it again with the non-die-hards in my family who weren’t awake in the middle of the previous night.

One of my favorite Olympic memories is from the 1994 Lillehammer Games.  Dan Jansen - the best short-distance speedskater in the late 80’s and early 90’s - had heart-breakingly fallen short of an Olympic medal in ‘84, ‘88, ‘92, and in the 500m (his better race) in ‘94.  His last opportunity for a place on the podium was in the 1000m.  The morning of the race, the TV announcer told the audience to turn down their volume and look away for a moment if they didn’t want to know the current results (the event was happening as he spoke, but wouldn’t be broadcast until that evening), and then informed us that Jansen, with only a few, non-medal-hopeful skaters left to compete, was in the lead, having set a new world record.

Nothing could have kept me away from the TV coverage that night - if I had had a wife who was having a baby, I probably would have skipped the birth.  It wasn’t the race itself - speedskating isn’t the most exciting sport when you already know the results; it was the experience.  … and the coverage was phenomenal.  I usually don’t have patience for the human interest stories, but CBS showed an absolutely fantastic piece, centered on a prior interview of Dan’s wife Robin by Charles Kuralt.  She talked about how she and Dan had made peace with his Olympic misfortune and then, just for a moment - when Charles said “what if, after all these years of Olympic agony, there is, at the end of it all, a place on the podium for your husband at last, and a flag flying?” - she showed a glimmer of hope, and her eyes lit up… and then you could see her remind herself “no, we’ve been through this; I can’t let myself revive the dream, because I’ll be disappointed again”, and she reassumed her resigned, but calm, demeanor.   Then, minutes later, Dan was receiving his gold medal, with his baby in his arms.  I bawled when I saw it the first time and I still tear up now at the memory.

This is what I’m talking about.  I watched more TV coverage that night because I knew it was a dramatic, special event and I wanted to experience all of the color around it, even though I already knew what had happened.  In this instance, at least, I don’t think I’m an edge case.

Here’s a further argument: TV networks are already aware of this phenomenon!  They sell highlight videos of the World Series and the NCAA basketball tournament and, yes, the Olympics.  People pay money for the privilege of watching something they’ve already seen, weeks after the fact.  Why does NBC worry they wouldn’t tune in for free TV coverage that night?

Four years from now, this may not even be an issue.  Spectators with mobile phones with high-quality video capability will stream live coverage of every event to Qik or Kyte.tv or whatever platform ends up winning in that space.  It may not have commentary or color - that’s what NBC will be for, and that’s fine.  … and I’ll still watch both.

Pining for the Triplecast, but glad for online Olympics coverage

When I saw that various blogs have quoted John Malone as predicting that NBC’s plan to stream thousands of hours of live and recorded video during the Olympics this summer will fail, I took note, since ths subject was at the intersection of my industry (the consumer internet) and one of my top passions (the Olympics; one of my dearest friends noted long ago that my “Olympics fetish has become even more pathological with age”).

I’m not a Web 2.0 purist who subscribes* to the Chis Anderson school of thought that “free is the future of business” - at least, not universally.  For many companies, subscriptions and pay-per-use models are the best way to generate revenue.  For others, they can be an effective piece of a multi-pronged strategy to serve different customer segments.

In some cases, in fact, “not being free” is a crucial positive factor regarding the customer experience.  eBay’s listing fees, for instance, have (especially early in eBay’s history) been an important filter to discourage spam listings.  (As with most things, context is important; Taobao competed very successfully against eBay in China with a free-listing model.)  For certain dating and job sites, a “cover charge” is important for “keeping out the riffraff” and maintaining the kind of community the company wants to nurture.

All of that said, NBC’s Olympics coverage feels like a case where free internet content will probably help their existing business (or, at least, not hurt it).  First of all, a big part of the US Olympics audience is pretty casual; the trend toward human-interest coverage in the last couple of decades is a pretty solid indication of that.  Those viewers, by and large, aren’t likely to be fleeing in droves from their TVs to their PCs to see Korean women win gold in archery or to see events live rather than on tape-delay.  Hard-core sports fans will probably watch a lot of online coverage, but they’re likely to mostly add that to their existing TV viewing (I fall into this category).  Plus, live streams can increase TV viewership through word-of-mouth in the case of particularly dramatic events.  (I recall cancelling some other activity during the 1996 Atlanta games to make sure I saw Kerri Strug’s dramatic vault-and-land-on-one-foot to clinch the women’s gymnastics team gold for the US, having heard about it before the West Coast TV broadcast showed it.)

What NBC loses is the opportunity to charge hard-core fans directly.  One the better two-week periods in my life was during the 1992 Barcelona games, when NBC offered the Triplecast: 3 cable channels showing Olympic coverage 24 hours a day, showing pure sports with basic commentary (no athlete profiles, no human-interest stories).  My family was apparently one of the few to buy the whole enchilada, which was something on the order of $170 for the entire Games.  More than once, I would watch until 2 or 3 am, fall asleep on the couch, and wake up at 7 and start watching again.  (I was in college, so I also had the luxury of devoting pretty much two uninterrupted weeks.)  It was glorious: track & field, swimming, boxing, wrestling, rowing, basketball…

Unfortunately, the Triplecast was a financial disaster (NBC probably lost $100 million on the effort).  I’d pay for it again in a second, but there aren’t enough people like me around to make that play viable.  … and that’s why NBC’s broadband strategy will probably work out just fine - in 2008, at least.  As watching internet video streams in your living room (through whatever channel) becomes widespread, it’ll be more of a concern, but that’s a matter for the future.

*(With apologies for the pun.)

Yahoo and Microsoft

I’m a big fan of Fred Wilson’s blog A VC, but I can’t agree with his latest post, where he says about the announcement that any Microsoft-Yahoo acquisition possibilities are finally and totally dead:

Now Yahoo! will do what it needs to do. Clean house, get lean, get out of businesses it shouldn’t be in. Focus on what it’s good at. And start making money and growing again.

They may need new leadership to do that. But selling this asset to Microsoft just because they had the wrong leadership and probably still have the wrong leadership is a mistake.

Imagine what the right CEO could do with Yahoo!

I think I understand Fred’s mindset: that Yahoo’s been drifting, that it’s demonstrated poor (pick any or all) strategy/organization/execution, and that if they could just get their act together, under the right leader, they could fix their problems.

The problem?  According to the market, it’s just not likely to happen.  Maybe they won’t be able to find “the right CEO”; maybe the organizational problems or execution difficulties are simply too large; maybe the turnaround will take too long.  Fred’s saying that Yahoo has great assets and strong potential, and that may be true; but likelihood of reaching one’s potential is as important as that potential itself, and right now the market doesn’t have a lot of faith in Yahoo’s ability to maximize its assets.

To torture a metaphor: I could draw up a complicated play for a basketball team that, if executed perfectly, always results in a dunk.  If the team mis-executes the play and turns the ball over 70% of the time, though, it’s a crappy play for that team.

The market doesn’t care what Yahoo’s assets are worth in theory; they care about what’s likely to happen in practice.  … and right now, they’re saying that Yahoo’s expected standalone value - including any turnaround strategies, changes in leadership, or other likely near-term changes - is worth a lot less to shareholders than MSFT’s former bid was.

eBay's ad marketplace

eBay’s closing of a marketplace for TV and radio ads has been reported pretty widely in the last day or so.  First, let me be clear: though I’m an eBay employee, I wasn’t involved with this initiative, and I don’t have any real inside information about it, so my opinions are basically those of an outsider.

Reading some of the reports, however - and this one in particular - reminded me of a post I wrote a few weeks ago, where I talked about a particular “rule” that I’ve used several times while evaluating businesses, which, in rough, simple terms, says: if your business disrupts a process, and the people who decide whether to use your disruptive offering have vested interests in maintaining the status quo, you’ve got a tough road ahead of you.

This sounds really, really obvious, but I’ve seen a lot of startups (and worked for one) that nevertheless try to bang their head against this kind of brick wall.  In particular, it’s easy to confuse one’s customer with the “people who decide”, when they’re often not the same person.  (Hell, they may not be in the same company.)  At my former company, our “customer” - who signed the partnership contract - would be some SVP.  The “person who decided” was someone several levels down who actually controlled where the excess inventory was stored, shipped, and sold.  … and, in practice, it was virtually impossible to get that person to break his cozy relationships with shady brokers who kept his golf game sharp and his pockets full of tickets to his favorite sport.

I’m not an expert, but offline advertising strikes me as an industry where there’s an entrenched value chain of companies and (more importantly) individuals who really aren’t eager to make a marketplace efficient, when “efficiency” = “cutting me out of the process”.  The poster referenced above says “ad agencies (media planners, creators and buyers) [aren’t likely to] give up their role as gatekeeper to a global $500B marketplace, off which they generate a 15% cut (so roughly $75B per annum)”.

In other words, the chance of success for this TV/radio ad marketplace was slim from the start.  Now, as an economist, I believe pretty strongly that markets will trend toward efficient solutions over time.  In cases like this, though, that timescale can be pretty long, and there can be a lot of bodies along the way, as the existing value chain participants fight to preserve their positions.

My data belongs... to whoever has it

Last Friday I read, with significant bemusement, a lively debate between Arrington, Scoble, and others related to the recent Friend Connect/Facebook Connect/Data Availability announcements by Google, Facebook, and MySpace.  (For the full debate, read deep into the comments…)

The beginning of Arrington’s post - that the announcements, and the Facebook/Google “scruffle” (as Arrington terms it) are about user control - is on the money; that’s not what I find odd.  It’s the subsequent religious debate about what data is “mine” and where & how I have the right to control it, export it, and so on that is difficult for me to understand.

Arrington: “My id, friend list, photos, etc. is mine, and I should be able to say what to do with it… My contact information, that i allow you to view in facebook via an image (not free text) is also mine.”

I don’t get this at all.  In what sense is my friend list mine?  If I’ve written it on a piece of paper and put it in my desk, then, sure, I own that piece of paper.  What I own, though, is the physical thing - the paper with scribbles on it - and not some abstract piece of information.

Let me construct a (perhaps odd) scenario: if I rent a billboard, and put my friend list on that billboard, can’t other people copy down the information thereon, and use it as they like (for marketing purposes, reference checks, blackmail… whatever)?  How is it possible for me to claim ownership over that information?

Similarly, I don’t see how one can assert some sort of moral right to own or control the data that you create, either explicitly (e.g., connecting with friends on a social network) or implicitly (say, clicking on certain search results on Google or listings on eBay).  I’ve taken an action and anyone who legitimately “sees” that action can, if they want, record it and use that information as they desire.  (My point of view is close to what Elias Bizannes and some others suggest - in other comments to the same post).  I’ll risk another analogy: if I walk down the street and talk to someone or pick something up, anyone who’s watching me is free to record my behavior and do whatever they want with that data (publish it in the paper, sell it to a 3rd party).  If they sneak into my house and observe me, that’s different - they’ve trespassed on my property and thus obtained the information illegitimately - but if the data is public, whoever has it, can do whatever they wish with it.

This doesn’t preclude some kind of arrangement between, say, you and the operator of a website to have your data used only in specific ways.  That’s a bargain reached between you and the company in question, however, not some sort of natural-law principle.  I understand that Arrington and Scoble and others are, to some extent, espousing principles to which they wish internet companies would adhere, but they (especially Arrington: “Pick a side… the side of Good or the side of Wrong”) seem to have convinced themselves that their desires have a moral supremacy.

Lastly: I’ve seen the “my data is MINE” argument come from a lot of tech evangelist types - in many cases, from people who also hold to a anti-intellectual property philosophy, whether with things like patents or with copyrights on digital media.  This seems particularly baffling and contradictory, since the second principle is often based in an axiom that intangible goods can’t be owned.

Pure entertainment IS a purpose

Though I’m all for games of all sorts - chess, poker, puzzle hunts, etc. - the articles in the last day or two about GWAP (“Games With a Purpose”) struck me as odd.  (GWAP includes things like the ESP game, which is supposed to use human input to advance automated image search, and various CAPTCHA-improving exercises.)

… but I find odd the implication that games that aren’t tied to some sort of CS research project are “purposeless”.  Is entertainment, in and of itself, not a legitimate raison d’etre?

Abstract vs. concrete

This article, from my daily science digest, is an interesting one.  It describes an Ohio St. experiment suggesting that using “real-world examples” - like measuring cups or pizza slices or trains heading toward each other - actually inhibits mathematics teaching.  Students who were taught abstract principles only performed better than those taught using concrete examples - and also did better than those taught using both abstract and concrete methods.

I’ll admit a bias here: I’m a 100% N (“intuitive”) in the Meyers-Briggs personality framework, which means that I’m naturally disposed toward abstract theory and frameworks.  Give me a couple of general principles and a set of empirical data points and I’ll usually trust and use the principles.  Not always, of course; to be good at theory, one needs good judgment about when and how the theory applies.  Often, too, the data is the input to the theory.  … but, most of all, heuristics and principles tend to be reusable and adaptable - and the more I can collect, the bigger & better a toolkit I have to apply to future problems.

A long example: at my previous employer, I developed a healthy skepticism for the B2B e-marketplace model.  In trying to get big electronics companies and their trading partners to buy & sell on our exchange, a primary difficulty that we encountered was resistance to change from employees who controlled the inventory.  A C-level exec would sign a deal committing multi-millions-of-dollars worth of end-of-life goods to be liquidated through us, and when we would send a program manager to the warehouse to look at the product, the place would be empty, the inventory sold off by the ”liquidity manager” to his buddies in the broker business.  Was it in the best interests of the company to use our exchange?  Absolutely.  Was it in the interest of the lower-level employees?  No way - they wanted to protect their relationships with brokers, who got inventory at below-market prices and, in return, took the manager golfing, to the Super Bowl… and in one case, bought the manager a vacation home in SoCal.

Fast-forward to my current role, where I’m reviewing a lot of different internet startups.  In a couple of cases, I’ve seen companies whose model depends on disrupting or removing certain pieces of the workflow within the organization - for instance, streamlining contract negotiation and review for licensing certain kinds of media.  (I’m intentionally being a little vague here, to not disparage specific companies.)

We’re talking about a completely different part of the value chain here - biz dev and legal types, not liquidity managers - but it still raised alarm bells in my head, because of the general principle from my previous experience: namely, disrupting workflows within an organization can be hard, especially when those that are in charge of the workflow have a vested interest (bribes, keeping their jobs) in maintaining the status quo.  Concrete examples don’t get you to that realization, but if I can draw a principle from an experience and adapt it to an outwardly-different situation that nevertheless has fundamental similarities… that’s useful.

Web 2.0: not a sector and not an activity

I can be amused by semantic debates, especially in cases where people somehow confuse semantics with some kind of universal, moral truth.  One prime example is the age-old question “what qualifies as a sport”? … which is clearly a purely definitional question that somehow nevertheless inspires heated passion about the level of required physical skill/exertion or the presence of a ball or of teammates or some other equally arbitrary criterion.  (My definition, just for the record: any competitive event where the main criteria for winning are basically objective.  I recognize that this definition has few adherents.)

One semantic debate that hasn’t interested me very much, however, is the notion of “Web 2.0”.  I’ve been asked what “Web 2.0” means by people inside and outside of the internet sector, in private and in public, and I usually try to explain that it’s a poorly-defined term usually used to refer to a collection of internet trends including various kinds of open platforms, user-generated content, collaboration, blah, blah blah.

I’ve seen intelligent people argue about details of the definition of Web 2.0, but I see it as a concept for which an imprecise definition doesn’t hamper its usefulness.  If you want to use it to describe some back-end stuff and focus on things like, e.g., AJAX, fine.  If you have a predilection for user-facing features like tagging and WYSIWYG interfaces, great.  If your thing is abstract strategic frameworks about platforms and network effects and the like, knock yourself out.  So, if you tell me that “old media companies are starting to embrace Web 2.0”, you’ll have to flesh out your idea, but I know where you’re going.

However: there are, IMO, very un-useful places to use the term, and one of these is as a descriptor - or, even worse, a category - for companies.  If I’m looking at a company summary and it says “StartupCo is a Web 2.0 company that…”, you’ve just wasted 7 characters and made me suspicious that a lot of what I’m going to hear will be meaningless marketing babble.

Even worse is when I look at a list of internet startups and there’s a category column that says Mobile, Search, E-commerce… and Web 2.0.  That tells me absolutely nothing about what the company actually does.  “Search” and “e-commerce” and “social network” and “gaming” are useful descriptors that tell me, albeit at a high level, to what kind of consumer activity the company’s product relates.  “Mobile” isn’t quite parallel to those, but at least it tells me something about the industry within which the startup will operate.  “Web 2.0”?  Useless.

So, as someone who spends a lot of time looking at internet startups, here’s a plea to conference organizers and those writing marketing copy: don’t use Web 2.0 as an adjective for a company.  As a subject for a keynote, great; to describe trends, fine.  … but when you describe a company, please tell me something about what the company’s product or service actually does. 

Great Urban Race: recap

Game season is starting with a bang.*  A few days ago I posted about Coed Astronomy’s leisurely mini-game, in which Meat Machine participated on April 19th.  Last Saturday, Chris (friend from Stanford and former eBay colleague) and I competed in the Great Urban Race.  (… and tomorrow, if we can field our team, Meat Machine will be playing in Shinteki.)

The Great Urban Race is sort of a cousin to a “true” Game.  You get all of the challenges at the start, and they tend to be easy by Game standards.  (In fact, most of them turned out to require nothing more than intermediate Googling skills; others weren’t puzzles at all, but were items to collect, in the vein of a traditional scavenger hunt.)  You solve as many puzzles as you can, and then plot the most efficient route to complete the challenges, and then complete that route as fast as you can.

It’s also a national competition: for 8-9 months, the GUR team travels to a different city every two weeks to hold local events, and the top teams from each city qualify to compete in the national finals (this year, they’re in Vegas on November 8).

Chris and I arrived at the starting point - a park a couple of blocks SW of Fisherman’s Wharf.  We made some good decisions before the race started: 1) get MUNI passes beforehand; 2) travel light (eschewing many usual Game tools); 3) even though it was heavy, do bring a laptop with a wireless connection.  There were 185 teams competing - some with funky costumes, others in serious racing gear.

We solved all of the puzzles in the first 25 minutes or so.  Our route was pretty clear: hit Pier 39, go down the Embarcadero to the Market and Mission locations; then travel north to Union Square and Jackson St. to get back to the start.  Our biggest strategic decision involved which clue to skip (we were allowed to skip one clue).  One location was Fort Mason, which would take about 10 minutes of extra round-trip travel time at the end of the race.  Another was a find-a-needle-in-a-haystack clue: we were to get a picture of the two of us in front of a particular banner for a nightclub, which was somewhere in a specific 3x3 block area.

One of the lessons that fans of the Amazing Race should appreciate: needle-in-a-haystack clues increase variance.  Thus, if you are desperate - or if it’s a winner-take-all sort of Game, or you need to increase volatility for any reason - you should aim for that sort of challenge.  If you’re confident in your ability to do well (in Chris’ and my case, “do well” = “qualify for the national finals”), you should avoid them.  It turned out that the nightclub was on the way to our next location - Pier 39 - so we decided to run by the club to see if the banner was at the club, or nearby.  No luck, so we kept going and committed to skipping that clue.

One of the scavenger-hunt challenges was a choice: 1) get a picture of both teammates holding a non-CA driver’s license, or 2) get a (real) $2 bill.  As we jogged toward Pier 39, we saw a couple that looked like they were tourists, so we accosted them and asked if they were from outside California.

Woman: “We’re from Australia!”

Man: (looks suspiciously at us)

Me: “Do you have your driver’s license?  We need to take a picture of it!”

Man: (looks REALLY suspiciously at us: who are these crazy San Franciscans who are probably going to steal his license and then mug him in broad daylight?)

Chris: “No, really - we’re in this scavenger hunt - see, here are our shirts, and our race bibs, and here’s the thing that says we need the picture of the license…”

Without too much delay, we convinced them that we were just geeks, not crazy muggers, and we got the photo we needed.

On to Pier 39, where we went to the Riptide Arcade, and needed 10 coupons - presumably the kind you get when you score well at Skee-Ball or something like that.  After a brief debate with the lady behind the counter about whether those were “coupons” or “tickets”, we decided they qualified, and she was nice enough to simply give us a bunch of tickets.  (Thank goodness, since my Skee-Ball skills are a little rusty…)

We hopped the MUNI and rode to the Ferry Building, and then, in order, got pictures of us at a scary spider sculpture, a statue in SoMa called Smile, and in front of the address for the Shaklee Terraces building.  (There had been simple puzzles to figure out each of these.)  Then came a crucial moment: the second scavenger-hunt clue was to either 1) get a $500 bill from Monopoly, or 2) get a picture of ten people within arms-reach of an ad for Grand Theft Auto IV.  Chris knew of a toy store about a half-block off our path; I rushed in and was able to buy a pack of Monopoly money.  (The GTA IV ads were all over the place, but we judged that getting 10 people to pose simultaneously would prove hard - the $500 bill ended up taking about 3 minutes and costing $4.32.)

We ran north to Union Square, where we got another statue-picture, and then further north to Jackson St., where we got a banana from a grocery store in Chinatown.  Running up the hills was tough; we caught up to a cable car at one point, but they were full.

We caught a MUNI to Fort Mason.  We had an amusing encounter with three other teams on the bus:

Other Team 1: “Look, there’s an ad of Grand Theft Auto IV on the side of that other bus across the street!”

Other Team 2: “Let’s all go take the picture!”

Other Team 3: “Yeah!”

Us: “… we’ve already done this challenge (Monopoly money)”.

Other Teams: (don’t notice, since they’ve already jumped off the bus and are now standing in the middle of the street, next to the other bus…)

You can see how this ends: both buses pull away from the stop, leaving those three teams in the street with cars honking, no picture of Grand Theft Auto, and no bus.

At Fort Mason, we had to find the statue of Congressman Philip Burton.  Using Google Earth on the bus, we could just barely see an overhead view of a statue in the middle of the Great Meadow, which turned out to be our target; we ran for that, then ran back to the starting point.  The final challenge was a cute little obstacle course - kind of like those bouncy-castle things, but with lots of tight squeezes - and we were done.

We finished in 2 hours and 6 minutes, placing 9th and qualifying for the national finals.  We were pretty pleased with our performance, though we’re astounded at how fast the winners finished (1:37!).  We probably ended up running a good four miles - over some nasty hills - during the course of the race; Chris and I have committed to getting in better shape before the finals in Vegas.  :)

Shinteki is tomorrow; this is a more traditional Game, with some hard puzzles and driving from location to location, though there will probably be 2-3 challenges that aren’t real puzzles.  (E.g., last year there was a “time & space” challenge, where teams split into pairs: one pair had to try to estimate the duration of 100 seconds, and another had to walk blindfolded to a target 100 yards away; you got more points the closer each pair was.)  The scoring system is pretty rigorous, in contrast to, say, Coed Astronomy’s game 3 weeks ago.

*For insiders that’s a (pretty bad) pun - BANG is the acronym given to the Bay Area Night Game, a tradition of short puzzle hunts that’s been going on since 2002.  It’s been dry recently - there hasn’t been one since April 2007.

Marc A. on dual-class stock structures

Marc Andreessen - currently near, and possibly at, the top of my “favorite bloggers” list - has a fascinating post today praising the virtues of dual-class stock structures.  The really short version: they’re good because they allow the founders (or whoever has the voting power) to ignore short-term market noise and incentives and stay focused on long-term objectives, thus increasing the company’s value for all shareholders.

While I agree with much of what he says, I want to make a few objections.

• Ignoring short-term market signals isn’t necessarily a good thing.  Does the market exhibit Brownian motion?  Sure.  Often, though, it’s telling you that you’re going in the wrong direction.  E.g., the market has effectively said that Yahoo’s shareholders would have been better off taking MSFT’s bid.  Yahoo has ignored that statement, likely to its’ shareholders’ detriment.
• Marc is implicitly asserting that the founders will have a better sense for the long-term direction than will the market - and that assunmption is often going to be wrong.  First of all, the wisdom of founders can vary pretty widely.  Second, even if the founders are pretty smart, there are cases when the market is smarter.  Jerry’s a sharp guy.  Did he make the right choice over the last few weeks?  The market says “no”, and my instincts agree.

These two points can end up being semi-religious discussions about market efficiency, blah blah blah.  I tend to believe in market efficiency - or, at least, the notion that the market is smarter than most people, most of the time - but it’s a reasonable debate, and one could also suggest that short-term market noise & incentives creates some sort of “friction” that destroys value for typical companies, even if the pricing signals are accurate on average.  In any case, however, my biggest concern with Marc’s argument is this: that goals are, very often, not terribly well-aligned.  Marc correctly notes that alignment of goals is key, and includes at the end a set of conditions for dual-class structures to work effectively:

The third point is the one that seems quite suspect to me.  Even if they’re in the same boat from a share-price perspective, their goals can be quite different.  Founders who are already rich may be driven by ego - to take a longshot at creating the most valuable company ever, to enjoy the power of running a big organization, to be in the press all the time - or other factors, that may at times indicate directions quite different from those that would maximize economic return to shareholders.  (Founders who aren’t rich might have a strong incentive to cash out quickly and retire, when building a long-term company might be optimal.)

“Treating all other shareholders fairly” is a nice principle, but in the end, the controlling voters will maximize their interests, and share-price alignment doesn’t mean that overall goals are truly aligned.

This doesn’t mean that I oppose dual-class structures, by the way.  If I were an entrepreneur and I could get such a structure (and still raise enough capital), I’d do it too (that way, I get to maximize my own interests, right?).  … and if, as Marc says, there’s no bait-and-switch - i.e., all investors buy in knowing the structure - then there’s no ethical problem.  The question is whether or when it’s a superior structure for maximizing the value of the company, and that’s where my concerns above apply.