Friday, October 22, 2004

Energy independence

James Zogby is talking on the commonwealth club right now on KQED.
He made two claims:

One, that although alternate supplies of energy are good, we aren't going to achieve energy independence. This is probably true. But I think that replacing any substantial amount of our current imported energy with new domestic sources can help our national security and economic situation.

Two, that even if the U.S. imported no energy that we still would not be independent of Middle East oil, because other countries, on which we depend, depend on Mideast oil. Like Japan, China, Taiwan, etc. This may be true. But it's also true that if the U.S. develops a domestic energy production capacity, other nations will follow to the extent that it makes economic sense for them to do so. The U.S. isn't going to have a broadscale switch to domestic energy supplies unless those supplies are cheaper than the alternative. Oil was one of the first big Globalized products, so if it's cheaper for us it'll be cheaper for them.

Google at $400, part II

Is the Yellow Pages really a profitable opportunity for Google?

  • Google would be competing with a solution that really works already.

  • Local businesses are not going to abandon the Yellow Pages, so a Google sale requires them to purchase two listings -- more money in a down economy.

  • Where is Google going to list these ads? Am I going to use Google's website to search through JUST ADS? (That is what I do with the Yellow Pages right now, after all.) What criterion would Google use to rank the ads presented to me? If it's not money, why would the advertiser pay more?
  • Google at $400?

    Google, Yahoo, and Ebay are trading at P/Es of 207, 92, and 90.8. As the companies get bigger earnings growth will slow. Eventually the P/Es will come down.

    But let's think short-term: how about next March?

  • The companies aren't going to grow enough in that time to saturate any market. No need for P/E to change because of that.

  • Maybe oil prices, the crashing economy, and a new president will make the market more reasonable. Or maybe enough people will sell their falling retail stocks and head for the only bright stars on the horizon -- our three horsemen. Note that all three are already diversified out of the U.S. economy.

  • So a P/E of, say, 80 is possible next March.

    But what about E?

    Text ads are a better business than graphical ads. Nevermind that web surfers prefer text ads. They are better from the ad buyer's point of view, too.

  • graphical ads take a lot of manpower and often external contractors to lay out, which takes time and money.

  • that initial investment in layout is not closely predictable.

  • graphical ads, especially the animated kind with Flash, take more IT work to get onto a website.

  • So essentially, there is a bigger hurdle to cross if you want to use graphical ads. From google's point of view, the nice thing about text ads is that basically the purchaser's entire ad budget goes to google. It's also nice that an explosion of ads does not require an explosion
    of media contractors creating those ads.

    Right now, most businesses don't know much about how their online ads are working. Google's term sheet specifically prohibits advertisers from discussing with one another how well the ad campaigns are going. What buyers do know is that online ads have buzz, and Christmas is upon us.

    After the Christmas rush (and Google's year-end earnings release, which is going to be wonderful again), ad buyers are going to analyze what just happened. My guess is that three things are going to happen at this point:

  • online ads will turn out to be not as good as hoped.

  • Yahoo will be selling context sensitive text ads.

  • Major media companies who publish online content will also be selling context sensitive text ads directly, licensing the context bit from someone else (like Yahoo).

  • At this point, Google will be competing by saying: we can get more clickthroughs. They may also say they can get higher quality leads or broader coverage, but the measurable bit will be clickthroughs. This number gets put in the face of the guy who signs the check, it doesn't take any IT work to get it.

    So I see four downsides to the E part of P/E:

  • Google will face competition.

  • Major media companies will negotiate better terms to keep more of the advertising revenue already going through their web pages.

  • Buyers will be willing to pay less for a clickthrough.

  • The world economy will be in the toilet next year.

  • And one more thing: after Christmas there is a lot less advertising for a while. Ebay looks great as people shuffle presents to those who want them more, but retailers don't spend as much on ads.

    I suspect that momentum buyers, used to seeing 18% per quarter growth rates, are going to balk when they see a flat quarter. They're going to balk even more when all those unlocked shares start to sell. The fund managers who feel so left out right now will keep the bottom from falling out.

    Thursday, October 07, 2004

    Definition of Insanity?

    I've heard two different commentators on the radio recently state that a definition of insanity is doing the same thing over and over and expecting different things to happen.

    When I hand-saw through a piece of wood, I perform the same action over and over. For a while, it doesn't look like much is happening. Eventually, I cut through the piece.

    I shorted a stock. It kept rising, I kept shorting. Was this insane? Eventually it went down like I thought it should.

    The underlying problem here is that the things we act on in the real world often have state that isn't immediately apparent. We know it's there, we know we're acting on it, and we have to gauge the effects of our actions on that unknown state. Working with the unseen is common.