Octavianworld

Dazed and Confused #opensource @perryhewitt @oreillymedia @roughtype @thebafflermag @evgenymorozov

Earlier today, my friend Perry Hewitt pointed me to a very thoughtful essay by Evgeny Morozov in the latest issue of The Baffler, titled "The Meme Hustler: Tim O'Reilly's Crazy Talk".  

A while back I worked at a free software firm (ArsDigita, where early versions of the ArsDigita Community System were licensed under GPL) and was deeply involved in developing  an "open source" license that balanced our needs, interests, and objectives with our clients' (the ArsDigita Public License, or ADPL, which was closely based on the Mozilla Public License, or MPL).  I've been to O'Reilly's conferences (<shameless> I remember a ~20-person 2001 Birds-of-a-Feather session in San Diego with Mitch Kapor and pre-Google Eric Schmidt on commercializing open source </shameless>).  Also, I'm a user of O'Reilly's books (currently have Charles Severance's Using Google App Engine in my bag).  So I figured I should read this carefully and have a point of view about the essay.  And despite having recently read Nicholas Carr's excellent and disturbing  2011 book The Shallows about how dumb the Internet has made me, I thought nonetheless that I should brave at least a superficial review of Morozov's sixteen-thousand-word piece.

To summarize: Morozov describes O'Reilly as a self-promoting manipulator who wraps and justifies his evangelizing of Internet-centered open innovation in software, and more recently government, in a Randian cloak sequined with Silicon Valley rhinestones.  My main reaction: "So, your point would be...?" More closely:

First, there's what Theodore Roosevelt had to say about critics. (Accordingly, I fully cop to the recursive hypocrisy of this post.) If, as Morozov says of O'Reilly, "For all his economistic outlook, he was not one to talk externalities..." then Morozov (as most of my fellow liberals do) ignores the utility of motivation.  I accept and embrace that with self-interest and the energy to pursue it, more (ahem, taxable) wealth is created.  So when O'Reilly says something, I don't reflexively reject it because it might be self-promoting; rather, I first try to make sure I understand how that benefits him, so I can better filter for what might benefit me. For example, Morozov writes:

In his 2007 bestseller Words That Work, the Republican operative Frank Luntz lists ten rules of effective communication: simplicity, brevity, credibility, consistency, novelty, sound, aspiration, visualization, questioning, and context. O’Reilly, while employing most of them, has a few unique rules of his own. Clever use of visualization, for example, helps him craft his message in a way that is both sharp and open-ended. Thus, O’Reilly’s meme-engineering efforts usually result in “meme maps,” where the meme to be defined—whether it’s “open source” or “Web 2.0”—is put at the center, while other blob-like terms are drawn as connected to it.

Where Morozov offers a warning, I see a manual! I just have to remember my obligation to apply it honestly and ethically.

Second, Morozov chooses not to observe that if O'Reilly and others hadn't broadened the free software movement into an "open source" one that ultimately offered more options for balancing the needs and rights of software developers with those of users (who themselves might also be developers), we might all still be in deeper thrall to proprietary vendors.  I know from first-hand experience that the world simply was not and is still not ready to accept GPL as the only option.

Nonetheless, good on Morozov for offering this critique of O'Reilly.  Essays like this help keep guys like O'Reilly honest, as far as that's necessary.  They also force us to think hard about what O'Reilly's peddling -- a responsibility that should be ours.  I used to get frustrated by folks who slapped the 2.0 label on everything, to the point of meaninglessness, until I appreciated that the meme and its overuse drove me to think and presented me with an opportunity to riff on it.  I think O'Reilly and others like him do us a great service when they try to boil down complexities into memes.  The trick for us is to make sure the memes are the start of our understanding, not the end of it.

Facebook at Fifty (Billion)

Is Facebook worth $50 billion?  Some caveman thoughts on this valuation:

1. It's worth $50 billion because Goldman Sachs says so, and they make the rules.

2. It's worth $50 billion because for an evanescent moment, some people are willing to trade a few shares at that price. (Always a dangerous way to value a firm.)

3.  Google's valuation provides an interesting benchmark:

a. Google's market cap is close to $200 billion.  Google makes (annualizing Q32010) $30 billion a year in revenue and $8 billion a year in profit (wow), for a price to earnings ratio of approximately 25x.

b. Facebook claims $2 billion a year in revenue for 2010, a number that's likely higher if we annualize latest quarters (I'm guessing, I haven't seen the books).   Google's clearing close to 30% of its revenue to the bottom line.  Let's assume Facebook's getting similar results, and let's say that annualized, they're at $3 billion in revenues, yielding a $1 billion annual profit (which they're re-investing in the business, but ignore that for the moment).  That means a "P/E" of about 50x, roughly twice Google's.  Facebook has half Google's uniques, but has passed Google in visits.  So, maybe this growth, and potential for more, justifies double the multiple.  Judge for yourself; here's a little data on historical P/E ratios (and interest rates, which are very low today, BTW), to give you some context.  Granted, these are for the market as a whole, and Facebook is a unique high-growth tech firm, but not every tree grows to the sky.

c. One factor to consider in favor of this valuation for Facebook is that its revenues are better diversified than Google's.  Google of course gets 99% of its revenue from search marketing. Facebook gets a piece of the action on all those Zynga et. al. games, in addition to its core display ad business.  You might argue that these game revenues are stable and recurring, and point the way to monetizing the Facebook API to very attractive utility-like economic levels (high fixed costs, but super-high marginal profits once revenues pass those, with equally high barriers to entry).

d. Further, since viral / referral marketing is every advertiser's holy grail, and Facebook effectively owns the Web's social graph at the moment, it should get some credit for the potential value of owning a better mousetrap.  (Though, despite Facebook's best attempts -- see Beacon -- to Hoover value out of your and my relationship networks, the jury's still out on whether and how they will do that.  For perspective, consider that a $50 billion valuation for Facebook means investors are counting on each of today's 500 million users to be good for $100, ignoring future user growth.)

e. On the other hand,  Facebook's dominant source of revenue (about 2/3 of it) is display ad revenue, and it doesn't dominate this market the way Google dominates the search ad market (market dominance means higher profit margins -- see Microsoft circa 1995 -- beyond their natural life).  Also, display ads are more focused on brand-building, and are more vulnerable in economic downturns.

4. In conclusion: if Facebook doubles revenues and profits off the numbers I suggested above, Facebook's valuation will more or less track Google's on a relative basis (~25x P/E).  If you think this scenario is a slam dunk, then the current price being paid for Facebook is "fair", using Google's as a benchmark.  If you think there's further upside beyond this doubling, with virtually no risk associated with this scenario, then Facebook begins to look cheap in comparison to Google.

Your move.

Who's got a better take?

Postscript:  my brother, the successful professional investor, does; see his comment below (click "Comments")

Filtering For Friends: My Google Reader RSS Feed

In case you're remotely interested, here's the RSS feed for items I'm reading in Google Reader that I've marked "shared" .  There's also a link to this feed in this blog's sidebar, to the left of this post.