IT research firm Gartner is being sued by ZL Technologies who claim that Gartner’s famous Magic Quadrants are unfair in that they give an advantage to “larger companies with large sales and marketing budgets”, who can afford to pay high fees to Gartner.

It’s not the first time that Gartner has faced charges of showing favoritism to large clients. A prominent Route 128 VC once shared with me that he had analyzed all of their (tech) portfolio companies and had uncovered a “magic number” of $73,000 (this was in 2004). According to the VC, all of their portfolio companies who spent at least that amount with Gartner each year appeared in a Magic Quadrant, while those which spent less than that number were not. Of course, that’s an anecdotal story and there’s no public evidence to substantiate it. But, it’s hard to shake that perception when you generate revenues from the same companies which you rate.

In many ways, it’s the same issue that has tarnished the credit rating agencies, which generate revenue from rating debit issues, as well as by selling research. In the early days of IT research, firms tended to fall into one of two camps. Firms like Gartner made their money by selling research to corporate IT departments, while those like IDC generated revenues largely by providing services to technology companies. But over time, those delineations became fuzzy or nonexistent. Technology companies were encouraged to buy services from the traditional IT research firms; a selling point was that you could have briefing sessions with analysts. The firms also began to sponsor conferences and events designed to showcase emerging technology companies. Here, you could gain exposure to potential buyers or investors, all for a hefty exhibitor fee (typically $25-40k). Before long, firms like Gartner, Forrester and others were selling $100k per year or more in services to the subjects of its research.

So, what’s the solution? It would have to be a market-driven solution. If corporate CIOs deemed IT research to be “tainted” by these conflicts of interest, research firms might be forced to “pick a side” and give up revenue streams from the either vendors or clients. But that’s unlikely to happen, especially in current market conditions.

A good start would be transparency and a “Chinese wall” between vendor-research and client-side research. I doubt they would do this, but Gartner could gain credibility by having an independent firm “audit” their clients and analyze relationships between dollars and quadrant results. At minimum, it would help for all industry research shops to disclose the extent of its customer relationships with any client that it also includes in its research. Gartner claims that would violate its client's privacy, but I truly doubt any Gartner client would object to this type of disclosure. It seems more designed to protect Gartner's competitive position than any concern for its clients.

In a post on her blog, Gartner Ombudsman Nancy Erskine tries to allay any concerns about the relationship between research and client status (HT to Andrew Spender for the link). In a follow-up post a few weeks ago, she added that "Anyone, client or not, user or vendor, can come forward if they think Gartner has published content that is inaccurate or misleading, or demonstrates bias or unfair treatment." But I think that misses part of the issue - for many smaller technology companies, just getting into a quadrant is what matters, not whether Gartner is publishing misleading or inaccurate information. 

In the meantime, IT research faces other challenges. While Gartner, Forrester and others still have a strong presence, they have largely ceded coverage of the emerging technology space to blogs like TechCrunch and Mashable. Meanwhile, GigaOm has launched GigaOm Pro, a subscription-based IT research product led by Michael Wolf. The GigaOm Pro model, with its $79 subscription price, is unlikely to displace traditional IT research, but it clearly changes the model for those firms as well.  At the same time, many analysts have launched boutique firms, like Charlene Li’s Altimeter Group, which recently hired Jeremiah Owyang, Ray Wang and Deborah Schultz from Forrester.

For those who like to read legal docs, Dave Kellogg takes a deep dive into ZL’s court filing along with Gartner’s response, and has some practical analysis.

Meanwhile, SageCircle points out that Gartner has been criticized in the past and has used those complaints as "evidence" to bolster its credibility.

Joining me on the panel will be Deena Burgess (aka @deenaesq) and TC Coleman (@upwardaction). Since Deena and TC are both attorneys, I'll focus more on the general application of Twitter for business and some of the how-to info.

TC, who runs a branding and social media agency, will focus on the rules & regulations for attorneys, while Deena, a sole practitioner, will provide insights as to how she has used Twitter to build her practice.

So, if you're an attorney (or work in the legal information market), this should be a great event. It's hosted by Gotham Media Ventures and you can register at the Gotham Site.

The session qualifies for CLE credits.

Hope to see you there.

UPDATE: I've posted my Twitter for Lawyers presentation for those who want a copy.

At first, it seemed to be just random comments, dismissed by those who heard them, but then a powerful voice joined the chorus, as Rupert Murdoch held forth that all of News Corp's newspapers would soon begin to charge for online access.

While Murdoch carries clout in the industry, we should remember that this is the same Rupert Murdoch who less than two years ago said he would likely make the Wall Street Journal free upon closing his acquisition of Dow Jones. He soon retreated from that position and now has reversed 180 degrees, suggesting we would soon see a day when consumers are paying for the New York Post.

Those who hope Murdoch’s words become reality cling to the examples set by the Wall Street Journal and the Financial Times. But, as this blog and others have long pointed out, those are two unique properties. They carry content that is uniquely required for the business and financial community and, for many, it’s a reimbursable business expense. Who do you know who gets their company to reimburse tabloid subscriptions?

The problem for most news sites is that there are too many substitutes available. Get rid of the Post and there’s still the Daily News and Newsday, Yahoo, Google News and dozens of other news aggregators.  If all newspapers were to shift to a paid model at once (which would require collusion), there might be a short time where there was a shortage of free news, but that void would quickly be filled by online media unencumbered by old models and cost structures. Any gains made by traditional newspapers would be fleeting.

The other model we’re seeing bandied about is the micro-payment model. This concept has been around since the early days of the Internet, but has never taken hold. And while many hold this up as the potential savior, it makes no sense to me. I don’t see consumers buying news content on a transactional basis, even if the individual purchases are insignificant.

Of course, there will be some sales, mostly to business users. But even if these small payments exceed current advertising revenues (doubtful, but with the weak current ad market, a possibility), is it worth giving up brand awareness and reach in return for a modest, short-term gain in revenue? Once a site puts its content behind the pay wall, for all intent it no longer exists on the Internet. Gone will be the links from blogs and social media sites. The content will no longer be part of the conversation. The New York Times receives 10% of its traffic from Twitter today. Those links go away when you move behind the pay wall.

The fundamental problem with all of these proposed models is that none of them are market-driven. No one is proposing a micropayment model because they believe that consumers wish to use micropayments for the consumption of news. These ideas are driven solely by newspapers, whose business models no longer work in today’s digital media environment.

The reality is that classified advertising is gone and display advertising is seriously depressed in the current environment.  Despite the cost-cutting efforts of the past few years, there’s no way that newspapers, in their present form, can cut enough costs to make up for those lost revenues. And that’s why, no matter what models are tested, the basic newspaper as we know it will never come back.

What seems apparent, however, is that if you are able to aggregate huge numbers of users who are engaged with a set of content, there will be models to fund it. Those dollars may not come from the consumers nor simply from traditional advertisers.  Instead, it may be a combination of sponsorship, lead generation, display advertising, ecommerce, mobile carriers and models that may not exist today.

For 100 years or more, news organizations were funded by a combination of (often overpriced and ineffective) classified ads plus inserts from department stores, auto dealers and other big local advertisers. That model doesn’t make a lot of sense, but in a world with limited channels to reach local users, newspapers were an attractive medium for advertisers. That world no longer exists and we’d be well served to all acknowledge that fact.

The printed newspaper model is increasingly becoming irrelevant. Newspapers no longer “break” news in print. Users learn about new events either through the Web or from television. And as users consume more and more content on mobile devices, the last value of printed newspapers – something to read on your commute – will soon be history.

Is there a potential paid model that could have consumers paying something? Perhaps. I’m sure that I would pay $10-20 per month for unfettered access to the New York Times on a combination of desktop and mobile devices. Would that same model work for local papers in smaller markets? I don’t know. But it suggests that the newspaper business of the future will be much smaller – lower revenues, a much lower cost structure (no longer supporting print), a narrower editorial focus and a much smaller mindshare and market share. At the same time, there will emerge numerous opportunities for alternative media to fill voids in editorial content by blending hyper-focused content with emerging business models.

It’s the death of newspapers, but journalism will survive.

The fact that the aggregator invests in building state-of-the-art technology, developing an audience and integrating disparate sources of information, well that's not really adding value. Similarly unimportant, I'd guess, is the fact that effective aggregators often find their sales opportunities come from meeting the requirements of clients which the underlying publishers are unwilling or unable to deliver.

Of course, these arguments have been around since the earliest days of digital media. But they tend to pick up steam during economic downturns and times of great change. And with the structural challenges currently facing the news industry, it's little surprise that news publishers are turning to news aggregators for revenue.

This spring, the Newspaper Licensing Agency ("NLA"), which represents UK national newspapers, launched a new initiative aimed at news aggregators. The NLA, in an effort to capture licensing fees from aggregators, has demanded that press clippings agencies must pay such fees to NLA members. The NLA is initially focusing on media monitoring services - aggregators focused on the professional market. The NLA seeks to get these aggregators to pay a license fee to its publishers; in addition, they want the aggregators' clients to pay a per-user license fee in order to access the content. Details of their proposed offering are published on the NLA site. (link ).

Today, a handful of aggregators, including Meltwater, Updatum and others, responded to the NLA plan with an open letter, calling the NLA plan an attempt to "tax the Internet". In their response, the aggregators state their claim based upon "fair use" principals. Specifically, they respond that the mere receipt of a hyperlink by an End User is not an act which gives the Publishers any rights in English copyright law. The act of clicking on a hyperlink is similarly not an act which copyright law entitles Publishers to restrict.

I'm not qualified to provide a legal interpretation over the doctrine of fair use. More importantly, I don't think that the courts will ultimately decide the fate of the newspaper industry. That will be decided by the customer.

Customers will demand access to news in whatever tools and applications they choose to use. A publisher's refusing to allow users to access their content on a specific platform or a specific device will be self-defeating. If I want to locate an article via an aggregator alert, an iPhone app or via a Google search, that should be my choice as the user.

Should Apple give me a share of iPhone sales, simply because a user chooses to read my content via an iPhone RSS app? Of course not. And asking the aggregators to share revenues back with the publishers in return for indexing their content makes no sense either. I am sympathetic to the plight of the news industry. The structural changes in the way users consume news has killed their old business model and there's not an obvious one to replace it. But the answer is not going to be found in trying to extract additional fees from technology companies and customers.

Publishers have an easy option today - if they don't want to participate in the "link economy" they can easily opt out. Simply use a <noindex> tag on your page and Google and most aggregators will leave you alone.

But publishers wanting it both ways - to get traffic from those indexers they deem beneficial (Google) while restricting those they deem harmful - will find themselves walking a slippery slope.

The public beta of StockTwits Desktop was released earlier today. In doing so, StockTwits has staked out some pretty interesting territory.

When StockTwits was initially launched last year, it was simply aggregating tweets by ticker symbol. During the past year, StockTwits has developed a robust community of more than 75,000 active traders, and wth the launch of StockTwits desktop, they've cut the umbilical cord to Twitter.

At first glance, the new StockTwits desktop resembles TweetDeck (no surprise, since StockTwits co-founder Howard Lindzon is a TweetDeck investor). But rather than simply a fancy Twitter client, StockTwits Desktop is an extensible desktop application that allows users to pull in Twitter feeds, RSS feeds and custom feeds of news, charts and more. When you post on StockTwits Desktop you can choose to tweet to both Twitter and the StockTwits desktop, or just to the desktop. There's also a channel to access StockTwits TV. StockTwits Desktop has support for Groups, though there are only a handful of groups right now.

StockTwits Desktop uses a tab interface to help you manage all the streams of information. Barry Ritholtz describes it as a “social Bloomberg” meets an iTunes Music Store for finance. There are numerous well-thought-out features, such as the ability to click a link and automatically launch a browser within a new tab of this Adobe Air app.

On initial release, StockTwits Desktop is a robust application, bringing together the best of community and RSS reading, but that's just the start. StockTwits Desktop has been designed to support permissioning for premium content streams. The StockTwits vision is for StockTwits Desktop to become an "unbundled Bloomberg" for active investors. While StockTwits Desktop is not going to push Bloomberg off institutional desktops, with the right content streams, an a-la-carte approach could be compelling for individual traders who are not in position to spend $1,500 per month for a Bloomberg.

In the coming years, I expect a number of providers to carve out vertical market niches around Twitter. StockTwits has taken bold steps with a foothold in the financial information space. And with the new StockTwits Desktop, it has given itself the flexibility to move beyond Twitter.

The StockTwits Desktop is available for download.

Candidates should have hands-on skills with SQL and data mining and operational/data quality experience in the digital content space.

This person will be responsible for the development and implementation of strategies for the creation and management of the databases which drive the Alacra Pulse applications. The role will work closely with our product development team and will oversee the outsourced research teams responsible for editorial review, database maintenance and content sourcing.

The ideal candidate will have a deep blend of technical and analytical skills and a thorough understanding of business/finance.

This role is based out of our downtown Manhattan headquarters.

Candidates should send their CV to nyjobs-at-alacra-dot-com. Feel free to pass this along to friends or peers.

Reader's Digest is just the latest old media company to file for bankruptcy protection, in order to restructure a massive debt load.

The Company had been acquired by private equity firm Ripplewood Holdings a little more than 2 years ago for $2.8 billion. Under the restructuring, the debt will be reduced from $2.2 billion to roughly $550 million, quite a haircut for both Ripplewood and its creditors.

But should it be a surprise to anyone that this company is in bankruptcy?

Let's read what Standard & Poor's had to say about Reader's Digest following the acquisition, as it lowered its credit rating to 'B' from 'BB':

More specifically, they state the obvious:

Now, let's take a look at Moody's comments from the same period (February 2007):

Now, use the content industry sanity test by asking yourself these questions:

• Do you know anyone who currently reads a Readers Digest product?

        and, more importantly:

• Can you describe a clear path to how Readers Digest can become an effective digital media company?

I'd be hard-pressed to find anyone who can answer yes to either of those two questions, which should tell you the future growth potential of the company.

Of course, Ripplewood is hardly the first company to use debt and leverage to buy a dying business. During my years at Primedia, the company struggled to pay down the debt used to fund the acquisition of too many companies which were on the wrong side of the growth curve.

And the team at Ripplewood will no doubt blame the credit crunch and the recession for their woes. But the economy simply exacerbated the bad business decision, which was to believe that a declining business would be able to fund a large debt load. Debt + leverage only work when you can generate strong organic growth or eliminate significant costs.

This week, Union Square Ventures' Brad Burnham weighed in with a thoughtful post entitled Chris and Malcolm are Both Wrong, which addresses a number of issues that have bothered me throughout this debate.

First, Brad points out that the examples Malcolm uses to debunk the Free model are much too narrow. I've long argued that using the WSJ and the FT as examples of getting people to pay for news makes no sense as those are two of the only sources where a large percentage of the subscribers get their companies to pay for the newspaper. Despite the latest comments from Rupert Murdoch that he intends to make users pay for online news, I don't think he'll really be able to get consumers to pay for online access to the NY Post or the Sun.

At the same time, he chastises Anderson for suggesting that the basic economic laws of scarcity no longer apply in the digital media world.

Burnham follows the Goldhaber argument that the new scarcity is attention, not information and that the platforms that provide the infrastructure for the attention economy (Facebook, Twitter, Craigslist, etc) have become the dominant players. The challenge, as Brad points out, is to determine the economic model for these social networks "that depend on the contributions of its participants and increases in value as more people use it". He suggests that model might look more like Craigslist than Yahoo, which may be a scary thought for large media, though encouraging for those of us who've lived in startup world.

This thoughtful post should be read by everyone in the digital economy.

Twitter users: here’s a chance to win an Amazon Kindle, while learning a little bit about Alacra Street Pulse.

Alacra Street Pulse aggregates comments from traditional analysts and the alternative media to answer the question: What do key opinion leader have to say about Company X today? There’s a free, ad-supported version of Alacra Street Pulse available at http://pulse.alacra.com. A Professional version, available for license, includes advanced search capabilities, email alerting, information sharing and other features for professional users.

To enter the contest you simply need to follow @AlacraPulse on Twitter, then retweet the following message:

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The contest kicks off Monday, July 27 and ends midnight August 2. Full contest details are available at http://pulse.alacra.com/contest

Three deals were announced yesterday. The big one was Amazon's acquisition of Zappo's. Earlier in the day we also saw Roll Call (the Economist) acquiring Congressional Quarterly, while private equity firm Apax Partners took out Bankrate.

The Amazon - Zappos deal seems to be a no-brainer. Reports indicate that Zappos CEO Tony Hsieh (@Zappos) was in no rush to sell, but was pressured to do so by their investors. A price of roughly 1x revenues is a bargain for a growth engine like Zappos. It seems to be a great fit. Zappos is known for its amazing corporate culture and its fantastic customer service and has been called the "Amazon of shoes". Amazon, of course, has the infrastructure, processes and scale to handle ecommerce at a tremendous scale. If Amazon can scale Zappos without damaging its customer service capabilities, that will be a huge win.

And while Amazon immediately becomes the dominant player in online footwear, I think the company will be able to extend Zappos' success into other soft goods, such as clothing, where Amazon has made some inroads but has only on a limited basis. Zappos has been able to get consumers to buy shoes online (where fit and comfort are key); it would seem other clothing items might be easier. That said, one challenge Zappos has faced is the huge number of returns. They have encouraged users to order multiple pairs of shoes, keeping the ones that fit best. While Amazon's logistics infrastructure can minimize the expense of shipping shoes back and forth, it seems that the "order two pairs and send one back" model is not sustainable in the long run.

I thought that Roll Call's purchase of CQ was also a terrific deal. And while the print media business has been under tremendous pressure, CQ is in one of the few growth spots in the industry. While deal terms were not announced, pre-announcement rumors were in the $100M range. While there's certainly overlap between the two companies, it's good to see CQ find a strong parent in the Economist. I'll be sorry to see CQ CEO Bob Merry step down, though. He's done a terrific job leading the company.

The Apax - Bankrate (NASD:RATE) deal struck me as a bit of a surprise. The $28.50 price, a 15% premium over the prior closing price, seems a bit rich for the current environment. Obviously, Bankrate has been hit hard by this economy. While the entire online advertising market has taken a big hit, that has been compounded for Bankrate, whose lead gen and advertising businesses are centered around home and auto financing. According to the 10K, Q2 revenues dropped to $31M from $40.2M a year ago, while net income plunged from $4.1M to $1.9M for the period. While I can see Apax viewing this as buying at the bottom, I think there are pure-play online media businesses in more attractive markets out there right now. I believe that the online ad market will be an early winner when the economy does come back, but banking and automotive will continue to drag for quite a while.