DE Shaw and Convergence: Putting the Issues on the Table

Ah, convergence. An oft-repeated yet seldom understood word, at least as it relates to hedge funds and private equity firms. Sure, a hedge fund with a loose document can do lots of illiquid investments, either in the main fund or in side pockets, but this raises a whole host of issues concerning valuation, fee calculation, lock-up periods and culture that I've written about in the past. And now I read in the Financial Times that DE Shaw is contemplating the creation of a discrete private equity fund, into which it would sell certain of its private equity-like assets held within its main hedge fund. The article, written by James Mackintosh, hits on several of the key issues I've raised concerning the booking of illiquid assets within a hedge fund structure:

According to people who have discussed the fund with DE Shaw, in which Lehman Brothers bought a 20 per cent stake last month, a separate fund would be structured with fixed life and buy-out-style fees, rather than hedge fund charges.

The move would further demonstrate the speed with which the private equity and hedge fund industries are converging.

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Hedge funds have been increasing their involvement in buy-outs, putting an increasing amount of money into illiquid investments they could not sell quickly.

But this creates a mismatch between the liquidity of their investments and their investors, who can typically withdraw money quarterly. Private equity structures avoid this problem by locking in investors up for 10 years, while some hedge funds get around it by setting up “side pockets”, specialist separate vehicles for private equity investments with strict limits on withdrawals. Hedge funds have also been changing their terms, imposing lock-ups and requiring longer notice periods for withdrawals.

Let me present some discussion from previous posts that gets right to the heart of DE Shaw's decision-making: why to split off its illiquid, private equity investing activities into a separate and distinct private equtiy entity. My conclusion is that DE Shaw's move addresses most of the complexities and conflicts associated with running private equity investments within the context of a hedge fund structure and culture:

07/21/2006: Broadening the Multi-Strategy Mandate - Where do Hedge Funds end and Private Equity Funds begin?

...I think what is more interesting is to look at the structural differences between hedge fund firms and private equity firms and how this might impact performance-based compensation, disclosure and regulation. Private equity firms generally collect commitments for investment, draw on those commitments, make investments, and get paid performance fees as those investments become liquid over time, e.g., perform. Seems to make sense - match the payment for success with the successes themselves. Hedge funds, interestingly enough, grew up differently, as the concept of a "hedge fund" generally meant buying good stuff (long) and selling bad stuff (short) in an effort to minimize the impact of the broad market on performance (beta) and isolating the manager's skill (alpha). Since this buying and selling, by necessity, took place in the public markets, there were readily ascertainable values for the hedge fund's positions at each reporting period. It was these values that were used to compute the payment of performance fees (the net asset value or NAV). As long as the portfolio is liquid, fair values are readily observable and, in theory, the entire book could be liquidated at the NAV (absent bid-offer spread). But as I mentioned above the world has changed - a lot. Hedge funds now have portfolios that are a mish-mash of liquid assets, somewhat liquid assets (where one could go and get bids from 5 dealers and obtain a fair value) and totally illiquid assets (where the value is highly subjective a dealer would not be willing to provide a 2-way quote). So how have hedge fund compensation customs changed to reflect these altered portfolio characteristics? Not much.

Now, I am firmly convinced that this trend - hedge funds and private equity firms looking more and more alike - will not stop, and I am also a strong believer in market-based regulation (as opposed to ill-conceived legislation developed by bureaucrats who don't understand the investment business). But this issue - getting paid on NAV when NAV itself is highly questionable - is a real problem. It looks bad. Real bad. The implications extend beyond compensation. For instance, if you can't arrive at a fair value for an asset, a "thumb in the air" method is used like book value minus an illiquidity haircut. This approach dear friends, is not very scientific and is extremely prone to error. Beyond error, once an approach is used for a particular asset that approach tends to be used again and again and again. This has two potentially adverse effects upon disclosure and compensation: (1) compensation may be overstated because NAV might be much lower that the level reflected in the NAV calculation; and (2) volatility of returns will be understated since this asset, whose value invariably is moving up and down but whose value is difficult to measure, is being valued in the same way quarter after quarter after quarter. This is called autocorrelation. This skews the analysis of fund returns and makes a fair comparision across different firms and different strategies nearly impossible. Does any of this sound good?

Well, my prognostication certainly came to pass as more and more hedge funds are investing in illiquid, private equity-like assets. As noted in the FT article, Fortress, Cerberus, Blackstone and TPG already run discrete hedge funds and private equity funds, and DE Shaw is poised to soon join their ranks. A far less stressful and conflicted ranks, to be sure.

08/01/2006: Convergence Redux

I think this issue of Hedge Fund/Private Equity convergence comes down to two fundamental issues - culture and compensation. Sure, there are "glamour" issues such as the potential conflicts of interest between those trading in the public markets (the hedge fund guys) and those with access to non-public information (the private equity guys), but these risks can be managed through a strong control environment. No, the much more interesting questions to address are: (1) will these efforts work; and (2) why are these efforts happening in the first place?

Will these efforts work? Good question, hard to answer. The first issue comes down to a melding of cultures which are very, very different. Private equity guys are deal guys. They tend to be pretty good communicators. The have a modicum of patience. They understand the concept of delayed gratification, i.e., waiting for the big payout when the investment is liquidiated or a large dividend is scooped out of the portfolio company. Hedge fund managers, conversely, are often lousy communicators, highly impatient, and want to be paid yesterday. OK, so maybe the private equity guys and hedge fund guys won't go bowling together on Wednesday nights. But what about setting them up in separate, walled-off units with an eye towards addressing both the conflicts issues and the culture issues? OK, I'll buy that. But there is this one lingering issue gnawing at me - compensation.

This is where culture and cash really get into it. You have a bunch of senior people with huge egos with the same company name on the business card. They each have giant bank accounts and the trappings of financial success. But one set of guys gets a few million bucks a year and then a big wad of cash 5-7 years later, while the other set of guys get $25 million a year, every year, right now. How do you reconcile this fundamental structural difference between private equity and hedge funds? Insanely hard if not impossible.

Hedge fund guys are from Mars, private equity guys are from Venus. When you try and get them to play nicely together in the context of the same fund, better watch out. Far better to let them have their own distinct areas within which to operate that have their own culture, approach and compensation structure. Otherwise you are just asking for discord and conflict.

08/04/2006: Side Pockets - Use or Abuse?

Today's WSJ article highlighted the flip-side of how hedge fund should be using side pockets and segregation of illiquid and hard-to-value assets - namely, cherry picking - which will only serve to bring greater scrutiny to the industry:

An accurate value for these investments sometimes can be derived only when they are disposed of, so hedge funds often are slower to put up-to-date valuations on the accounts. Regulators say side pockets are appropriate for investments that are difficult to value or are illiquid, that is, hard to trade, noting that if a fund was forced to place an inappropriate value on these investments, it could penalize a fund's investors.

But side-pocket accounts often have more onerous terms for investors, such as limits on their ability to withdraw their money, terms that are put in place so a fund can avoid being forced to sell investments at a sizable loss if a number of investors suddenly want their money back.

Now, regulators are expressing some concern that hedge funds might be tempted to store investments with less rosy prospects in these accounts, enabling firms to make their returns look better.

The real issue here shouldn't be viewed as the delayed withdrawl issue, as long as the hedge funds are following the illiquid asset percentage outlined in their offering document (which they generally all do). The bigger issue on this score is that these assets should attract delayed compensation as well. The asymmetry between delayed withdrawl and current compensation just doesn't make sense, and in my view is not sustainable and will be modified - either voluntarily or by regulation - over time. This is a structural problem that requires changing conventional mores and practices.

The truly insidious issue here is that of cherry picking, where a hedge fund manager, regardless of the liquidity characteristics of the assets, will shift between the main fund and its side pockets in order to hype fund performance (and associated compensation). This is accomplished by either shunting off less succesful liquid investments into the side pockets or including hard-to-value but seemingly successful illiquid investments into the main fund. This is just wrong yet is sometime done. Just as with the rules governing the valuation of employee stock options, this is an area where there is simply too much latitude that will (and has) inevitably give(en) rise to abuse. Rules or practices will evolve to address this issue, with a clear and consistently applied framework for determining the following:

• What is a liquid asset (and should be in the fund)? What is an illiquid asset (and should be in a side pocket)?
• How should risks be quantified?
• How should the valuations be performed?
• How should performance be measured and communicated?
• How should compensation be paid?
• How should redemptions be handled?

Suffice it to say, operating private equity-like investments in the context of hedge fund side pockets raises lots of important questions that simply go away when these investments are booked in a separate private equity vehicle. Much clearer. Much cleaner. Fewer potential conflicts. Better GP/LP alignment of interests. Quite simply: why not do it this way?

As convergence continues apace, we will continue to see more moves like these. DE Shaw isn't a hedge fund. It's an institutional asset manager. Hedge fund, long-only, and private equity all under one roof. We are seeing the future here.

Text Analysis for Trading: Moving the Ball Forward

Text analysis for trading and investing: this is area where I've spent a lot of calories over the past few years.  A significant amount of progress has been made in this area, and it is receiving increasing attention as the markets become ever-more competitive, "information overload" gets worse every day and technologies for performing entity extraction and sentiment measurement get better and better. These are hard technical problems to solve and require money, experience with the data and domain expertise, three attributes that are not often found in the same firm.

So after hearing rumblings over the past few months, it was just announced the Reuters is acquiring the Israeli text analysis company ClearForest for $30 million. Each has moved the ball forward in their own way and now they will try to advance it even further as a team. It is very validating that a company like Reuters would see the value in a firm like ClearForest; clearly this small band of technical experts has something to contribute to helping Reuters manage and display its content. I look forward to watching their progress over the ensuing months and years.

Congratulations to Tom Glocer and Barak Pridor on this union of two smart teams and interesting companies.

The Weekend Review: Three From Barron's

It has been a while since I've done a "weekend review," but Saturday's Barron's had so much fun and meaty stuff in it the time has come.

1. When Growth is Artificial by Vito Racanelli

Mr. Racanelli's article raises two interesting questions: (1) the implications of stock buybacks on EPS and market signaling specifically; and (2) the impact of the LBO/private equity boom on the future of equity returns generally. Some extracts relating to his stock buyback arguments provide both a historical perspective and short-term effects:

The current magnitude of equity shrinkage hasn't been seen in the past 16 years, says Francois Trahan, a senior managing director at International Strategy & Investment Group. This is generally a bullish sign. But the naysayers, and there are a few still around, note that stock buybacks also juice earnings-per-share growth artificially.

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ISI's Trahan figures that about 3.5 percentage points of that 5% is due simply to a lower share count, or a lower denominator, not higher profits. Short term, buybacks are investor friendly, but it's not a commitment to the longer term. "Ideally," you'd like to see that cash go to raising dividends, he says.

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A dividend increase better aligns management's interest with shareholders'. The market knows that EPS increases are declining, but perhaps it doesn't get that "the total amount of earnings available for shareholders is decreasing," he says.

I've written quite a bit about mis-communications and falsehoods concerning stock buybacks. And while this article doesn't portray buybacks in a totally adverse light, it does go to the issue of the impact of buybacks on EPS. Which to me is a necessary but insufficient treatment of the topic. Sure, buybacks can impact EPS (positively or negatively, depending on the after-tax cost of capital used to implement the buyback and net margin), but the more salient point is the execution of sound corporate finance policies. Is the excess cash that management deems to be available for a buyback cyclical or sustained in nature? If the excess cash is cyclical, and if sufficiently attractive organic investment opportunities are not present, then a targeted stock buyback is what I would want as a shareholder. However, if the excess cash position is deemend to be sustained, then I agree with Mr. Trahan of ISI's contention that a change in dividend policy is a more effective means of aligning management and shareholder interests. But an isolated discussion around the impact on EPS strikes me as a waste of time; we all know that the accrual accounting system is overly complex, game-able and broken, and that operating cash flow generation is where it's at. So a discussion of buybacks without seamless integration into overall corporate finance policy is both short-sited and missing the point, IMHO.

But equity -- like matter -- can't be destroyed, only changed into another form. Those ubiquitous LBO firms will have to sell that equity back to the public a few years down the road to realize their investments, notes John Goetz, research director at Pzena Investment Management, in a recent report.

The current LBO boom will create a subsequent explosion in initial public offerings, pushing lots of new stock from debt-laden companies onto the market, he writes. "Any time investment dollars rush in one direction, in this case private equity, future returns will, by definition, be lower."

Now this is an interesting point. Private equity is also something I've written about a lot, and the fact that PE firms are spreading their tentacles and moving into other non-LBO asset classes to soak up their assets. There is no question that a pipeline of IPOs will fill over the next 1-3 years, placing downward pressure on expected equity returns as the supply/demand imbalance flips. We can already see this happening as the private equity and hedge fund firms themselves prepare to go public, because why would they want to be at the rump end of the IPO wave? Better to be on the front when supply is short and demand is dear. They are traders, remember. They've got your number.

2. Brokers Spruce up Their Systems by Theresa Carey

In the wake of the sale of Stockpickr to TheStreet.com (which I blogged about last week), there has been increasing attention paid to the application of Web 2.0 technologies to the investing arena. Ms. Carey provides another example of an interesting company applying such principles to the building of a robust trading and investment platform: 

TRADEKING (www.tradeking.com) is just one of several firms branching out from existing product offerings. It is enhancing its social-networking capabilities to promote collaborative learning and community sharing. Think of them as the financial equivalent of Websites like MySpace and FaceBook -- allowing members to post a profile and blog about trading. Participants can also interact online via live chat rooms and instant messaging.

"People socially network about investments in the real world. It's a natural extension to have these conversations amplified through technology," says Donato Montanaro Jr., CEO of TradeKing.

One new wrinkle known as Certified Trades allows members who are also clients to publish their verified trade history. That way, when you're reading a blog on the site, you can tell who's actually making the trades that they're talking about -- helping you avoid possible touters and pump-and-dump schemes.

TradeKing is one of many new companies working to integrate social networking into the investment process, albeit with a higher level of professionalism, transparency and trust then many of the social-networking-for-stock-picking start-ups that came on the scene last summer. As noted in my earlier post on the topic, I am excited to see the wave of new companies hit the market at the intersection of trading and social networking yet with a control/transparency overlay that makes such models increasingly compelling. 2007 will be the year of massive evolution in this space, to be sure.

3. A Legend Lashes Out by Lawrence Strauss

Michael Steinhardt is a legend and for good reason: his returns rocked and he is widely acknowledged as one of the greatest traders of all time. And Mr. Strauss does a good job getting Mr. Steinhardt to reminisce a bit about his time in the hedge fund business, comment on where he sees the industry today and to distill what, in fact, hedge funds should be about: the ultimate alignment of investors' interests with those of the GP in the unerring quest for alpha:

MICHAEL STEINHARDT, WHO LAUNCHED his hedge-fund firm 40 years ago and quickly became an industry giant, doesn't think much of some of the people making huge fortunes in the business today.

Back when he started, he says, hedge-fund chiefs were members of "a very limited, elite group that had mystery and excitement and élan. Now, it's all about making money for the managers." Steinhardt, who routinely made 20%-plus annually for his investors, adds that a lot of his modern counterparts are far better at gathering assets -- a key factor for their pay -- than they are at generating investment gains. "If I made 11% in a year, I'd be committing hara-kiri. These guys make 11% in a year and they are overjoyed."

He's even more critical of mutual funds, whose collective performance he denounces as a "disgrace."

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With managers now collecting management fees of 1% to 2% -- or even higher -- on billions of dollars, "they are extraordinarily well-compensated," says Steinhardt. "I used to say that I should not make a dime unless my investors made a dime, and the 1% [management fee] was supposed to be enough just to pay expenses." However, he adds, "This is a free market" and investors sign up "of their own free will. So one shouldn't feel sorry for them."

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Steinhardt liked to make contrarian calls and to invest in just a small number of stocks, especially those not well-covered on Wall Street. "You're not going to bring anything to the party on IBM," says Lattanzio. "They will tell the same thing to everybody. It doesn't mean it's a bad investment. But he liked to find things that were different." And, he adds, Steinhardt "was very good at understanding if there was an edge there."

There is not much more to say except that I couldn't agree more with Mr. Steinhardt. A supply/demand imbalance has skewed the game to the point where motivations between investors and GPs aren't always aligned? Why? High management fees. How important is true alpha if there is more risk to the GP of losing assets by pursuing true value-added ideas (which entails risk and necessitates true hedging) versus doing just ok, capturing a stratospheric management fee and large absolute performance fees due to high assets under management?

Sure, one can argue that truly great managers will always have the competitive fire to pursue alpha with laser focus, regardless of management fees. But how many mediocre managers are out there running $3-$10+ billion in assets and getting richer than Steinhardt, Robertson and the like who couldn't carry their jockstrap in the investment game? Quite a few, for sure. And this is what sucks about the hedge fund business. Not the pay of whose who truly deserve it. But the pay of those who truly don't. But we live in (and should live in) a market-driven world, and for those who can reap these rewards due to massive flows into the asset class without being truly great, enjoy. Because the day will come when the pendulum will swing in the other direction, and at that point, may the force be with you and may you have taken your chips off the table. Because markets like these don't last forever.

An Investors-eye View of Gaming: Today's Perfect Storm

So I've caught a ton of crap from various readers, writers, pundits and gamers of all stripes as an outgrowth of my financially and strategically-oriented posts on the big console makers, specifically Microsoft and Sony. I've been told I suck because the Xbox 360 and PS3 consoles are great, short-sighted because I just don't get the long-term strategy and rationale behind Microsoft's $20+ billion investment in its Home & Entertainment Division, out-of-touch because of my belief that the Japanese market does matter in gaming (much like Iowa matters in a US Presidential race) and superficial and fanboy-ish because I happen to think Nintendo has done a particularly good job with its management of the Wii. Real sorry, folks. I guess I appear as a jaded contrarian in this highly partisan battle, and maybe that's right. But I'd like to remind readers that my thoughts and analysis are from the perspective of an investor, not a gamer, so for those who take issue with my positions, consider this response to a comment in my most recent post on Microsoft.

First, the comment:

This is a great argument as it's clear and uses lots of past references. I disagree however.

Again and again, there are people giving all sorts of reasons why Sony or Microsoft are going to fail this "war" because of this reason or that.

Today you say it's about the lack of focus on the gaming and a focus on multimedia and "extra" features. It doesn't take a hardcore gamer to enjoy these features, it takes someone who enjoys advances in technology.

I love to find out what my new hardware can do and play around with it. I like to understand the features enough to use them and most importantly, I love to be surprised.

Nintendo has gone the route of making a console that is easy to figure out and it's innovative features don't take weeks to surface. It's all right there out of the box. The controller is what makes this system different and to say it's more than that is just wasted words.

I own two 360's and a Wii. I play my Wii like there's no tomorrow. The thing with it is, because of the controller, it makes all these games I've seen before new. It makes playing games fun again. Sony and Microsoft's big reason for not having my playtime at the moment is that I've played through the games I've been anticipating and I'm anticipating more later.

To say that Sony or Microsoft are going to win this war is shortsighted and more importantly it's completely not the point.

The point of this competition between companies should be to create better games and push video gaming into a new area of innovation. Well done on Nintendo's part for doing so in a manner we'd never expect.

I suggest people stop focusing so much bloody attention on what's wrong with the systems today and start focusing on what's right with them.

I love games, gamers used to love games but then the gaming industry went the way of politicians and mainstream news. Backstabbing and painting a nightmarish picture of something that is not really so dire.

Give up the negative media, tell me something good about any system. Write a rant about an amazing game. Stop influencing peoples impression of the game industry with such negative press.

It's all about the games, the fun. That's all.

Caid autobot.

Posted by: autobot | April 26, 2007 at 12:01 PM

Then, my response:

Autobot, thanks for your thoughtful and heartfelt response. However, unfortunately you just don't get where I am coming from: I DON'T CARE ABOUT THE GAMES, THE CONSOLES OR ANYTHING ELSE IN A VACUUM. I CARE ABOUT CORPORATE STRATEGY AND SHAREHOLDER VALUE. PERIOD.

Sometimes the joy consumers get out of a product, profits and corporate strategy are aligned, and sometimes they are not. I am currently in the camp that they are not at present - with Microsoft and Sony. So you will not see me comment on the quality or appeal of a specific game -that is neither here nor there to me. I am most assuredly not a gamer. But I do care about the user experience as it relates to branding, image, sales and therefore profits.

Sorry if my sensibilities and interests don't align with yours, but these are mine quite clearly and this is my blog. So this is what I have and will continue to write about.

Your quote: "The point of this competition between companies should be to create better games and push video gaming into a new area of innovation." NO. As a shareholder, the point of competition should be to use my superior insight into customer wants in light of my competitors' offerings to fashion a strategy and product array to kick their ass. If helping me make money requires innovation, then innovation I will do. If not, from a shareholder perspective, who cares? Nintendo's box isn't all whizzy and fancy. The graphics don't rock. But man, that thing sells. And THAT is what I care about.

Posted by: Roger April 26, 2007 at 12:29 PM

No matter how many times I say this, the gamers want to suck me back into a discussion about features, and because of my critical view of the business strategies of two of the three console titans I get labeled as negative. I am negative on their strategies and approaches to the marketplace, from an investment perspective, but not necessarily negative on their products. But this doesn't mean they will be value accretive for shareholders. I guess taking lots of shots is part and parcel of commenting in an area rife with passionate and loyal users. Or sell-side analysts who enjoy parroting conventional wisdom.

Consider three very interesting news items today, and think about them with respect to some of the stuff I've written over the past six months (and even the past two weeks):

1. From PaidContent.org - Microsoft Gunning for Japanese Gamers

Microsoft is hoping that the launch of its Games for Windows Live service in Japan will give PC gaming a boost in that country, which will in turn give a boost to sales of the Xbox console. But since the point of the new service is to connect PC gamers to the Xbox network, the argument seems a bit circular.

If there's not many PC gamers, then connecting them to the console with the lowest market share isn't goign to spur a spectacular change. Microsoft's Xbox hasn't sold as well in Japan as in other countries.

"Xbox 360 are climing, albeit slowly. In the week ending April 15th, the console sold 2,900 units across Japan, according to estimates from Media Create. In the same week, sales of the competing PlayStation 3 console were 11,948 units, while the significantly cheaper PlayStation 2 hit 12,872 units. The lead remained with Nintendo's Wii console at 75,759 units," reports InfoWorld.

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Remember my Failure-in-a-Box post concerning Microsoft, the Xbox 360 and Japan?  I had postulated that success in Japan was pretty important for the Xbox 360, and it appears that Microsoft itself shares my view. So to all of you who read my post and who said that Japan doesn't matter, either as a predictor of global success in console sales in general or Xbox 360 in particular, well, I accept your apology.

2. From Joystiq: Nintendo announces record year, thanks DS and Wii

If you've been following our Japanese hardware sales series, or caught last month's NPD report, or have a pulse and leave the house, you've no doubt heard that Nintendo's DS and Wii consoles are ... well, they're sort of a big deal. How big a deal? The pair are responsible for Nintendo's "record high" fiscal year, which ended March 31, 2007. The stats:

• consolidated fiscal year revenues of ¥966.5 billion, a 90% increase
• operating profits of ¥226.0 billion, a 150% increase
• 23 million Nintendo DS consoles last year, lifetime sales of 40 million
  
• 5.84 million Wii consoles in less than five months, "nearly" 29 million Wii games

Now for the projections for the fiscal year which began April 1, 2007:

• consolidated sales increasing nearly 18% to ¥1.14 trillion
• operating profits growing nearly 20% to ¥270 billion
• 22 million Nintendo DS systems and 130 million games
• 14 million Wii systems and 55 million games worldwide (will that be enough?)

Not quite the mom 'n pop outfit, are they? We're gonna need a "THEY PRINT MONEY!!!" graphic for these sort of things going forward.

So, remember all those post I've written about Nintendo, the Wii and the DS, their success in understanding the pulse of the mass-market and being a shining example of my thesis about the Consumer Era of Computing? Am I really being a fanboy here, or just a sharp-eyed investor looking at business strategy, consumer sentiment, market conditions, and the competitive landscape and distilling an empirical and unemotional conclusion? You be the judge. The proof is in the earnings and stock price.

3. From Reuters: Sony PlayStation creator to retire

The inventor of Sony Corp.'s (6758.T) (NYSE:SNE - news) PlayStation video game consoles, Ken Kutaragi, will retire as chief executive of the Japanese company's game division on June 19, Sony said on Thursday.

Kutaragi, 56, known as the "Father of PlayStation," steps down at a time when the new PlayStation 3 has made a weaker-than-expected showing against Microsoft Corp.'s (Nasdaq:MSFT - news)

Ken is a legend. He did tremendous things in his career. But he had more than a few problems with getting the full Sony organization behind the PS3, and certainly didn't help Sir Howard Stringer with his  transition into the CEO slot. I have spent a lot of calories studying and analyzing the culture problems at Sony, and Mr. Kutaragi was one of the main perpetrators of siloed, we vs. they thinking that has contributed to its weak financial performance. It is time for him to move on. Lone rangers have a hard time succeeding in an increasingly complex, multi-dimensional world, and Ken was a leader in this mold straight out of central casting.

So bottom line, gamer or analyst, friend or foe, I am an investor first, second and third. And my healthy cynicism arising from the analysis of Internet information has largely been validated in the offline world. I enjoy the dialogue and debate and appreciate the thoughtful and insightful comments posted on this blog and elsewhere. But to the gamers out there who think I am an a** hole I have this to say: get over it. And if you think of my words as it relates to your 401k and not your gaming persona, I think you'll find that I'm actually a pretty cool dude.

A Vertical Web 2.0 Success Story: TheStreet.com Acquires Stockpickr

Since becoming a blogger, running a vertical Web 2.0 company and making investments in the digital media space, I have come to learn a decent amount about the intersection of technology, domain expertise and social networking. One such example is Stockpickr, the site founded by my friend and fellow Internet denizen-cum-writer James Altucher. Now James isn't your ordinary tech-geek: he has been a technology entrepreneur; a hedge fund manager; a widely-published author; and is currently doing all of these things at the same time. And in a stunningly short period of time, built Stockpickr into arguably the premier site at the intersection of blogging, technology, investment management, and social networking around these three pillars. And today it was announced that TheStreet.com, Stockpickr's 49.9% owner, is buying the remaining 50.1% in order to fully leverage its impressive traffic into sticky eyeballs and advertising dollars. Congratulations, James. You have built an asset of real value in record speed, and it is to Tom Clarke and TheStreet.com's credit that they had the vision to take you out right now. This is a true win-win; this is how vertical Web 2.0 deals should be done. Strategic buyer, informed and value-added seller.

I have been quite critical of social networking sites for stock-picking. In fact, I penned a scathing post in the wake of socialPick's write-up in TechCrunch way back in August last year. If you want a granular explanation for why I think social networking for stock picking, in a vacuum, is both stupid and potentially dangerous, please check out the post. This is not what Stockpickr is about, to be sure, and I made this distinction clear in an interview I did on Wallstrip back in January. Stockpickr provides the portfolio data of some of the top investors of all-time and today, offers a wide variety of investment resources, and supports a vehicle for social networking as an overlay. This is a model that combines domain experts (legendary investors, their portfolios and investment philosophies), data and social networking to enable investors to make good, informed decisions. This is a much more robust, scalable and less variable model than one based upon "wisdom of crowds" or short-term tracking of an individual's trades which may or may not work out over time. While I personally don't invest in single stocks many, many do, and if you are going to do so on your own better to understand the principles of highly successful investors with long-term track records than a group of people who may or may not generate attractive and sustainable investment returns. If this doesn't resonate with you, I'm sorry. Good luck and good bye.

I think we've just scratched the surface of vertical Web 2.0 applications, and believe we are in the early stages as these applications relate to finance and investing. I see interesting and compelling business plans all the time that are targeting investors using zippy, Ajax-fueled Internet technologies, and the question is less about getting eyeballs than it is the monetization of these eyeballs. Especially where video is concerned. I've seen the explosive traction of vertically-oriented online content first-hand through my Board seat at Wallstrip, and the creative use of different methods of advertising that are palatable to consumers and effective for advertisers without disturbing the presentation of the content. This is a painfully hard balance to strike, but one where we are closer to cracking the code every day. Further, strategic acquirors of these Web 2.0 assets can turbocharge these scalable business models by leveraging existing content together with a massive book of legacy advertisers (not to mention squadrons of highly effective ad sales professionals). As I said above, this is a win-win.

All that remains is for smart, insightful, dedicated entrepreneurs to develop new, relevant vertical apps and for the large strategic acquirors to get with the program and get busy extracting maximum value from the Internet. They can use the help. Keep your eyes open for some new and interesting deals in the next 12 months. The best is yet to come, my friends.

Separated at Birth: IA and Kotaku

I have long enjoyed reading the gaming site Kotaku, both for the posts themselves and for the comment threads. It is a heavily traveled site that both creates and links to excellent content and provides a forum for those in the gaming world (gamers, investors, developers, etc.) to vent their spleens. And vent they do.

Kotaku frequently injects their posts with a healthy degree of cynicism and sarcasm, and today was no different. It just so happens that today they picked on one of my favorite targets - sell-side analysts - so I felt compelled to share this with you:

Analysts Conduct Intensive Research, Can't Find GHII Or Wii On Shelf

Oh good. Further proof that "industry analysts" have the most pointless jobs in the industry. A.G. Edwards have conducted a survey for investors that concludes it's very difficult to find Guitar Hero II and Wiis on store shelves. You. Don't. Say.

Surveying 100 stores in the US, only one had a copy of GHII, and none had a Wii in stock. Every single store did have both 360s and PS3s in stock, so David, their supply can't be that constrained.

Sadly for investors, no information was provided as to how many copies of BMX XXX were in-stock, though preliminary estimates indicate it too is quite difficult to find.

Luke Plunkett

And Luke, in true wise-ass blogger form (which I happen to love), references an earlier post, where the "David" mentioned above is David Karraker of Sony Computer Entertainment. David was defending their stocking levels (and, in fact, called them "nowhere near an "in-stock" position," implying that PS3 inventory levels are too low) in the prior post, to which Luke connects the recent survey results and basically says "Good explanation, David. Too bad those PS3s are sitting on the shelves while the Wiis are nowhere to be found." This is both good substance and a funny, enjoyable read, two of the keys of successful and impactful blogging IMHO. Keep up the good work, Luke and Kotaku. You're striking the right chord - at least with me.

 

Microsoft, Sony and Gaming: Fighting a Battle, Losing the War

Microsoft vs. Sony. Xbox 360 vs. PS3. This is principally how the console wars have been defined by both the media and the players themselves. When the Xbox 360 came out, there was no question that it was in response to Sony's console offering. When the PS3 came out, it was the Xbox 360 in Sony's sights. And the rules of engagement have revolved around functionality, features, graphics capabilities and enhanced storage, with the vision of the gaming console as a multi-functional media center residing in living rooms the world over. This is one of the justifications given for the billions that these companies have sunk into these platforms, for which the payoff is at some undetermined point in the future, with the following sentiment: "You just don't get it; it will take 5-10 years for these investments to bear fruit, and they will spend what it takes to execute this vision. This is not a short-term play." But what happens when Nintendo and Apple take elements of your value proposition and go after them with laser focus? And do so in a way that makes money - and fast. And take mind-share - quickly. What once looked like a bipolar competitive landscape has gotten a lot more complicated very, very rapidly.

The runaway success of the Wii, the introduction of AppleTV and the problems encountered by both Microsoft and Sony raises more than a few questions:

1. Does the grand "media center" vision really have legs?
2. Are the high-priced Xbox 360 and PS3 consoles viewed as inaccessible by the casual gamer?
3. Can you get to 100 million in console sales without the casual gamer?
4. Does the casual gamer value the added features and functionality of the Microsoft and Sony consoles?
5. Will the Nintendo beach head with both the DS and the Wii keep it ahead of the pack for the next few generations as it innovates over an increasingly large installed base?
   

Dean Takahashi and N'Gai Croal recently had an interesting little exchange that was carried in the San Jose Mercury News on April 10th, with N'Gai taking out his ugly stick and calling Microsoft to task for its flawed console strategy:

To: Dean Takahashi
Fr: N’Gai Croal
Date: April 5, 2007
Re: The Kings of Wishful Thinking

excerpt: “After hemorrhaging billions of dollars during all but one quarter of the Xbox unit’s existence, there is clear pressure on Robbie Bach and Peter Moore to turn a profit this generation. Nowhere is this more clear than the cost of the company’s Xbox 360 accessories: $100 for a Wi-Fi add-on. $100 for a 20 gigabyte hard drive. $50 for a 512 megabyte memory card (originally $40 for a measly 64 megabytes.) Add to that now $179 for the 120 gigabyte hard drive, and it becomes clear that Microsoft’s strategy can only be described by a single word: price-gouging.”

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This isn’t a strategy. This is wishful thinking–and a recipe for consumer confusion.

Just as anyone who buys an iPod is doing so primarily to listen to digital music, anyone who buys a videogame console is doing so primarily to play disc-based videogames. There is additional functionality to both devices, like video and photos, but those are the main reasons to purchase each one. (Besides, when it comes to the Xbox 360’s additional functionality, the appeal of video and photos is nowhere near as proven as it is on the iPod. Especially given the reasonable assumption that Xbox 360 early adopters are quite familiar with file-sharing protocols like BitTorrent and LimeWire.) Increasing the size of the hard drive on an iPod lets you store more music. Increasing the size of the hard drive on an Xbox 360 doesn’t let you play more disc-based videogames, and you don’t need 120 gigabytes worth of storage for Xbox Live Arcade games. No, 120 gigabytes of storage is all about one-upsmanship and digital video–which, as I’ve pointed out, is still largely unproven market share driver for the console.

Dean's retort, which isn't as virulent as N'Gai's opening volley, includes a very telling admission that represents the core of my concern as it relates to Microsoft's and Sony's strategy and their competitive positioning versus Nintendo:

Again, you are right about the dangers of milking profits. Sony and Microsoft are trying to charge what the market will bear. Nintendo is moving in and seizing the opportunity to grab the consumers who want reasonable and historical prices. If Nintendo gets too much momentum, the tables will turn, Microsoft will squander its advantage, and Sony won’t get liftoff.

The mass market is not price insensitive, friends. This is a fact. And the amount of money being invested by both Sony and Microsoft in their nextgen consoles does not indicate that they are pursuing a niche, hard-core gamer strategy. They are looking to shoot the moon, to sell tens of millions of consoles and to use the console as a lever to becoming the living room media center. Does it seem to you that we've kind of seen this movie before? Feeling a sense of deja vu? It might be because someone once tried a similar strategy and failed miserably. The company: Sony. The product: The PSX.

From Sony's PSX press release 10/07/2003:

Tokyo, October 7, 2003 - Targeting the year-end shopping season in Japan, Sony Marketing (Japan) Inc. will launch two models of PSX, a new generation HDD+DVD recorder, created through the convergence of electronics and games technologies of the Sony Group.

Empowered by two key semiconductors ("EmotionEngine®" and "Graphics Synthesizer"), CPU and graphics rendering processor used for PlayStation 2, PSX has realized a high-speed high-definition GUI (Graphical User Interface), the likes of which have never been experienced before. This first-of-a-kind GUI enables speedy and easy access of various content to be enjoyed on PSX, with the same level easiness as switching TV channels with a remote control.

PSX is also equipped with various features as a digital media player, providing storage and playback of a variety of entertainment content such as high-resolution, mega-pixel images from digital still cameras and music from various package media.

Since PSX is designed to run various features by firmware  via a powerful hardware engine, users can upgrade or add new features later by accessing the network.*

The two PSX models of DESR-5000 and DESR-7000 are equipped with maximum capacity HDD respectively to accommodate various features in serving as a digital home electronics product as well as a game device for enjoying PlayStation and PlayStation 2 games.

Sony Marketing (Japan) aims to accelerate the expansion of the DVD recorder market by positioning PSX as the key to home entertainment and the core for digital electronics products throughout the living room.

You get it. Totally whiz-bang. Totally cool. Features galore. And a total financial flop. The console was priced  high, was loaded with features consumers didn't value and, therefore, was the victim of brutal (and necessary) price cutting and production pauses a scant six months after launch.

From The Register 04/15/2004:

Sony has suspended production of its PSX games console-cum-personal video recorder in a bid to flush the channel of unsold stock.

According to Sony officials cited by Japanese magazine Shuukan Gendai, the move is a temporary one, but they could not say when production of the machine would begin again.

Whenever manufacture resumes, the delay doesn't say much for the demand the public has for the machine. Either Japanese consumers are not buying the machine, or Sony wildly overestimated the numbers that would do so. The bottom line is that there are too many PSXs sitting on dealers' shelves.

Sony PlayStation chief Ken Kutaragi claimed that some 100,000 units were sold during the PSX's first week of release, last December, but clearly sales have fallen off over recent months.

From The Register 09/07/2004:

Japanese retailers have slashed the price of Sony's PVR-cum-games-console, the PSX, by almost 50 per cent in a bid to drum up consumer interest, according to Internet reports.

Sony offers two PSX models in Japan, the only territory in which the machine is currently sold. One sports a 250GB hard drive, the other a 160GB unit. To date, the two have retailed for ¥95,000 (£484/$863) and ¥74,000 (£377/$672), respectively.

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But according to GamesIndustry.biz, citing unconfirmed third-party reports, a variety of Japanese retail outlets have cut those prices to ¥52,900 (£270/$480) and ¥39,800 (£203/$361).

If the cuts have not been sanctioned by Sony - their size suggests these are not manufacturer-led reductions - it will surely come as something of a disappointment for the consumer electronics giant. Launched last year just before Christmas, sales were so far below Sony's forecasts that it was forced to suspend production during the Spring in an attempt to clear out channel inventories.

This didn't happen that long ago. Did Sony completely lose its institutional memory? Even worse, as the PSX was doing its big swan dive, Sony was still planning to up the ante on features, functionality - and price - with its nextgen console, the PS3.

From Gamesindustry.biz 06/24/2004:

An annual report into the games industry published by Wedbush Morgan Securities has suggested that added media functions in PlayStation 3 could push its launch price up to $500, alienating many consumers in the process.

The 144-page report, titled The Definition of Insanity: Why The Next Console Cycle Will Start Off With A Whimper, was authored by industry analysts Michael Pachter and Edward Woo, and is a largely positive look at the future of the games industry which projects strong growth over the coming years in most sectors.

However, as the title suggests, it also sounds a number of warning notes regarding the coming hardware transition - perhaps the most surprising of which is the suggestion that Sony's PS3 could debut at such a high price point.

Pachter and Woo claim in the report that Sony will try to introduce the PS3 with significantly more functionality than current consoles, building on the model of the PSX device - which includes a digital video recorder (DVR), DVD burner and a number of other home media centre style functions.

The report suggests that by late 2006 - generally considered to be the earliest possible launch window for the PS3 - these features will cost roughly $250 to include in a system, leading to a $500 price tag for the next generation console.

"At this level, we believe that many consumers will be alienated," the report warns; and indeed, such a high price tag would definitely place Sony in a difficult position, especially as not all consumers will want the extra PSX-style functions.

Fast forward to today. Both Microsoft and Sony are offering super-premium versions of their products, more firmly cementing their bets in the multimedia space. Hard-core gamers seem willing to pay for the high-end graphics and extra functionality, but what about the casual gamer? They seem to be much more in tune with the features, functionality, usability - and price - of the Wii. Nintendo has clearly struck a chord with the everyman, someone who just wants to step to the plate, bowl a game, smash that serve or share with their friends. Nintendo is about accessibility, ease of use, value and fun. Theirs is not a holy war against a competitor, but a quest for understanding and acceptance from their market. THE market. The market where you can sell 100 million consoles. The market that provides you with the foundation to layer on additional features as technology costs continue to drop and even more games are developed for the platform. Microsoft and Sony are battling it out in the trenches. Nintendo isn't playing their game. Interestingly enough, they are clearly winning. Just look at the stock price.

The Wall Street Series Part V: Moving On - When is it the Right Time?

"Should I leave my current job?" I've gotten this question on many occasions and figured I'd share some thoughts on this important and anxiety-inducing topic. Changing jobs, altering paths, switching careers is an exciting, dramatic and risky proposition, and certainly not one to be taken lightly. There are clearly few black-and-white answers here, though there are some. And there are certain issues you must consider that require a great deal of introspection, perspective and honesty. Being honest with yourself? This is very, very hard to do, especially when the stakes are high (with those fat Wall Street pay packages being dangled in front of you). And the stakes aren't just about money - they are about job satisfaction, being in a position where you can succeed, feeling good about your peers, and general happiness. That said, we're talking about your career, right? So hard or not, facing into your underlying motivations is really important - no, actually critical - in order to make a smart, educated decision concerning career path and long-term objectives. I know you're up to the task.

The Obvious 10% - When to Move On No Matter What

1. You are stagnating

One of my favorite sayings (which I've uttered around 3 million times) is "If you're not moving forward you're moving backward." I really believe this and live my entire life this way. High achieving, highly motivated people can't live in a state of stasis. It is a waste of time. You're not learning. You're not growing. You're not sharpening your skills. And you most certainly aren't having fun. So move on. Right this second.

2. You are positioned to fail

Motivated people like to win. And, at a minimum, they need a chance to win if they do their jobs, use their intellect and drive and execute well. There are times, however, when a situation is wired for failure. And there can be a wide range of situations where this is the case. But you've really got to analyze the situation in a cool, calm, dispassionate way in order to make this assessment. Because things have to be really, really crappy for this to true. So just make sure you are not getting emotional and too locked into a losing mind-set. Because situations that may seem bleak can, with a little perspective, look a whole lot better very quickly. And it is incumbent upon you to use any and all tools and relationships at your disposal to test your assumptions before saying you're positioned to fail, no matter what. But if after this process your conclusion is yes, then run, don't walk, out of the place to greener pastures.

3. Life circumstances necessitate a change

Somtimes non-work life trumps work, and a situation calls for a dramatic re-assessment and re-positioning of one's work life. And if this happens, there is no amount of job happiness that can change the calculus. It is what it is, and moving on becomes not about work life but about your entire life. And this is when flexibility, a hallmark of a high achiever, will help you through, painful though it might be to leave a situation that is working for you in that sphere of your life.

The Not-so-Obvious 90% - When Moving on Makes Sense - I Think?

Oof. This is tough stuff. Let me use the mechanism of a list to organize a few of my myriad thoughts on the topic:

1. You get a killer offer for a job you are really excited about

Sounds great, right? Sure it does. And it may well be. But how long have you been at your current job? Will you be viewed as a "job jumper" if you bail, putting yet another shop on your resume? This looks really lousy over time; it really does. How about non-monetary issues? Are your really happy where you are, feel good about your work, dig your peers, like your clients, and just basically have fun? How much is this worth? To properly answer this question you've got to think in terms of utility, that fungible measurement that puts every factor on an equal plane. Sure, more dough has more utility, but the grass is always greener, right? That job that looks so plum right now could turn out to be a nightmare. You're the new guy/gal with the guarantee. Therefore, by definition, you're a prima donna a**hole. Then what? So before grabbing the pen and signing that offer letter, take a deep breath and give yourself some time to make a list of pros and cons, taking into account both monetary and non-monetary factors, as well as short- and long-term goals. This will help you make a cogent, thoughtful decision. And if it turns out that your well-thought out utility function is better served by taking the offer, then take it with the knowledge that you went through the right process. A good process will always set you free.

2. Your boss is a prick

Gee, nobody has a worse boss than you, right? Bullshit. There is a place for shithead bosses like there is an island for misfit toys - except it's much, much bigger. Kind of like Manhattan. Anyway, having an annoying boss sucks, but it can also be a vehicle for your reaching out and really honing those networking skills. Let's say you are a high achiever, get paid pretty well but your boss sucks. Bosses don't unilaterally pay their minions; others generally have a measure of input, especially if you are a highly compensated individual. So, by definition, you are pretty well thought-of at the firm. Use this goodwill and network around. Get to know some of the other power brokers at the firm. Maybe they'll help you switch groups. Or maybe you'll just be in line for a bigger job if the prick leaves or goes to run something else. It happens all the time. But having a prick boss can be the impetus for looking outside yourself and becoming the networker you can and should be. And maybe some day you'll buy your ex-prick boss a box of chocolates as you step on his head while ascending the corporate ladder. That said, if you are locked into a shitty situation and nobody is willing to toss you a life preserver and help is definitely not on the way, use those newly acquired and well-developed networking skills to outplace yourself. You see, you just turned a negative situation into a positive outcome. Aren't you proud of yourself?

3. You are unhappy with your bonus

Oh, boo hoo hoo. You're unhappy with your bonus. Welcome to the club, buddy. Everyone on Wall Street is unhappy with their bonus. If you got $10 million, you're saying "What a bastard. I should've gotten $12." It's almost like a broken record. In fact, I've never met a Wall Streeter that has affirmatively said "I'm happy with my bonus." Because if they did, they wouldn't be enough of an a**hole to be on Wall Street. So, let's say for a minute that you aren't just unhappy, but you are surpremely pissed about your bonus. Ok, what now? Tell your boss that he's a cheap dick and hit the bid from B of A? Whoa, there, big fella. Calm down. Look at 1 and 2 above. Are you in a good environment but just got screwed? Does your boss lack the political capital to get you paid right? Did the overall group suck ass but you had a rocking year? All of these things can be the reason why you didn't hit your target number. So my advice to you: if you like where you are, really don't want to leave but feel you got jammed, get a cover bid, wave it in the face of your current employer but couch it in the best of ways ("I've always been loyal to the firm, loyalty is a two way street, I wasn't looking for this competing offer but got it, etc.") and see what happens. Most likely they'll come up with more dough (it will generally be a 1 year guarantee instead of the 2 year you got from the cover shop, and be a bit below the average annual comp of the 2 year deal), and you'll be able to make an educated decision. This is a game you can play precisely once; because if you try it again, you will really burn bridges and look like a total shithead. And if they overplay their hand with the loyalty card and aren't willing to come up with the requisite cash, there is only one thing left to do: bye bye.

4. You hate your job

I hear you. I really do. Sometimes it happens. But the operative question is why. You don't like the firm? The culture? Your boss? Your peers? They pay like crap? This is a hard one which requires maximum honesty. There are too many possible good and bad reasons to list. But I'd make a list of the good/bad aspects of your job and the firm in order to isolate the source of your agita, because it will become pretty clear pretty quickly whether or not you are being petty or are concerned over issues of substance. If they are substantial and you don't see a clear path towards remedying them, move on in a deliberate, thoughtful manner. If they are annoying issues but don't rise to the level of "This job and firm are hopeless," then create a plan that is a mix of personal development, seeking out a mentor and actively managing the situation in order to give it a shot. Because it is always better, all things being equal, to stay where you are. Moving is hard. It just is, even under the best of circumstances.

There is so much more to say but this is at least a start. Hopefully my dime-store advice will help a few of you out there. If there are other specific threads where you feel I can lend a helping hand please shoot me a note. And be careful out there.

Affect and Effect: Managing Emotions Matters

While not my usual area of focus, psychology is a discipline I have studied quite a bit and for which I have the utmost respect. Further, I am convinced that my attention to managing not just performance but behaviors and attitudes has had a marked positive effect on my career (not to mention on my personal and professional relationships). A recent article discussing a paper by Sigal Barsade, a professor of Management at Wharton, served to validate and reinforce what I've already known: that emotions in the workplace can have a marked impact on job performance, creativity and teamwork, among other things. I think it would do any manager - no, any thinking and motivated member of an organization at any level - well to read the article and to consider its important message. Pay attention to the verbal and non-verbal cues of those around you. They are telling you something. Listen. And listen well.

Here are some particularly interesting and insightful extracts from Professor Barsade's article:

You know the type: coworkers who never have anything positive to say, whether at the weekly staff meeting or in the cafeteria line. They can suck the energy from a brainstorming session with a few choice comments. Their bad mood frequently puts others in one, too. Their negativity can contaminate even good news. "We engage in emotional contagion," says Sigal Barsade, a Wharton management professor who studies the influence of emotions on the workplace. "Emotions travel from person to person like a virus."

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"The state of the literature shows that affect matters because people are not isolated 'emotional islands.' Rather, they bring all of themselves to work, including their traits, moods and emotions, and their affective experiences and expressions influence others," according to the paper, co-authored by Donald Gibson of Fairfield University's Dolan School of Business.

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The researchers' paper discusses a concept known as "emotional labor," in which employees regulate their public displays of emotion to comply with certain expectations. Part of this is "surface acting," in which, for instance, the tired and stressed airline customer service agent forces himself to smile and be friendly with angry customers who have lost their luggage. That compares to "deep acting," in which employees exhibit emotions they have worked on feeling. In that scenario, the stressed-out airline worker sympathizes with the customer and shows emotions that suggest empathy. The second approach may be healthier, Barsade says, because it causes less stress and burnout, particularly emotional exhaustion from having to regulate one's emotions and "play a role."

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"The idea behind emotional intelligence in the workplace is that it is a skill through which employees treat emotions as valuable data in navigating a situation," according to the authors.

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The paper cites a study showing that people tend to be overconfident about their ability to convey the emotion they wish in an e-mail, particularly when they are trying to be funny or sarcastic. "Video conferencing, also increasing in its use, has more cues, but it is also not yet the same as interacting face to face, particularly in group situations. Given that these technologies continue to grow as a primary means of communication within the business world, it is crucial that we understand how the interpretation and communication of affect occurs in these contexts," the paper says.

Workplaces need to get smart about the best use of e-mail, Barsade states. Her advice is that "if something is important, and you know that the emotional context is going to be an issue, then pick up the phone; don't just rely on e-mails." And even the phone may not be good enough. "Sometimes, if it is really important, you just have to fly to where they are and meet them face-to-face to get the message across."

This is serious stuff, friends, and not easy to be sure. Isn't it easier to be on "auto pilot" and simply do and act the way you instinctively feel? Well, not necessarily, especially given the inter-connectedness of complex organizations. As it mentions above, people aren't islands, and the moods, feelings and emotions of a single person in an organization is like a pebble dropping in the still lake, sending ripples far beyond their immediate sphere of influence. I think this same metaphor applies in the blogosphere, where a particular meme can get picked up and rapidly disseminated across seemingly disconnected circles of influence. An employee with a toxic attitude and a few friends can get a very dangerous ball rolling, one that needs to be quickly - and decisively - addressed.

But, more importantly, healthy attitudes towards communication and collaboration need to be embedded in the culture of an organization, lest senior management be in a constant state of dealing with crises due to bad behaviors arising from poor culture. Cultures where people aren't listened to. Cultures where people don't clearly understand their roles. Cultures where people aren't on the same page strategy-wise. This is a tone that needs to be set at the top and bought into up and down the organization. Otherwise, the road to success will be rocky, painful, and elusive.

I Heard it Through the Grapevine: MSM Themes Echoing the Blogosphere

This morning I woke up and was reading Gregory Zuckerman's very good article in the Wall Street Journal titled Big Hedge Funds Get Bigger, Leaving Less for Small Rivals when it occurred to me - the key themes he is hitting on I've read somewhere before. Oh yeah, now I remember: on my blog. About nine months ago. The key thrust of his article was touched on in one of my first posts as a blogger titled Where is the Hedge Fund Industry Going? on July 17th, 2006, and most if not all of his subsidiary points were also discussed on my blog over six months ago. Fact.

Now Greg and I have never met and he probably doesn't know of my blog, but it raises an interesting point: just how much stuff do we read in mainstream media that is already written about, processed and commented upon within the blogosphere? And by people who know at least as much if not more about the domain than the mainstream author in question? This is clearly one of the big challenges of search - both online and offline -  today: how do I get synched up with subject-matter experts who have knowledge and perspectives that I can access earlier than when it is written about in mainstream media? The is the goal of several companies, including my own, and represents a major challenge when you consider the sheer scale of the Internet, the need for timely discovery and the importance of sifting the truly excellent sources from those of less merit. We are making headway in solving this seemingly intractable problem but it is challenging, let me tell you. But it is, without question, a necessary and worthy mission.

This morning's experience just reinforced what I already knew and basically validated the last two years of my life. There is a lot of valuable information being offered up by mainstream media. Its just that some of it has already been written about, and written about well, in the blogosphere. And identifying this early information is valuable. And it has to be done. And done well.