Silicon Valley Watcher

Shocking: NYTimes Article On Virtual Goods Misses Huge Controversy

Sat, 07 Nov 2009 13:03:50 -0800

The New York Times yesterday published a news story on the large profits being made in virtual goods without referring to the controversies that have rocked the sector this week.

In the article: Virtual Goods Start Bringing Real Paydays companies such as Playfish, Zynga, and games such as Farmville are mentioned. But there is no mention at all of the scandal that has rocked the virtual goods sector this week, and in one case resulted in a new CEO.

The closest the article gets to criticism is:

For outsiders, the selling of virtual goods -- items with no actual value in the real world -- might seem the very definition of a swindle.

Instead of reporting the accusation of scams in the virtual goods world, as kicked off by Michael Arrington in Techcrunch a week ago, it lamely reports:

"It's not about the good itself, it's about the underlying human emotion or desire," said Moshe Koyfman, a principal at Spark Capital, which has invested in two virtual-goods start-ups. "The recipient knows the person took time, picked something meaningful and spent money on it."

It's shocking that NYTimes editors would publish this article without any reference to the scams in online games which try to use "underlying human emotion or desire" to trick users into signing up for monthly charges for bogus services and using the allure of virtual goods.

The scams are spelled out in this article: Scamville: The Social Gaming Ecosystem Of Hell.

This publicity has led to virtual goods, online gaming companies and social networks to announce this week that they will be weeding out any scam advertisers and games. And in the case of Offerpal, one of the largest online gaming companies, the company announced a new CEO.

It's shocking that the NYTimes article would not mention the scams and the controversy since it is clearly relevant to the topic. Time magazine managed to notice what was going on: Facebook Game Scams Appear on Phone Bills - TIME. What's going on at the New York Times?

I expect more from the New York Times. I would also expect it to unleash its seasoned reporters and take this story further. After all, potentially millions of people have been harmed by these scams. Large companies such as the telcos are making tens of millions of dollars out of these scams by acting as the billing services. And the social networks are also making lots of money. Follow the money and you have a potentially great story.

Newspapers used to be "muckrakers" uncovering graft in City Hall, publicizing corruption, and looking out for the defenceless in society. I was hoping the New York Times might remember that tradition.

What's the point in running a bland article about virtual goods when there is a far larger story to be had? And why is there no mention of the scams in the article at all?!

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Please see:

Zynga CEO Mark Pincus: "I Did Every Horrible Thing In The Book Just To Get Revenues"

Offerpal Tries Out A New CEO. Shukla, Queen Of Scams, Is Out.

Facebook To Increase Enforcement Of Anti-Scam Rules

Analysis: The Business Opportunities From The Scam And Spam Epidemic

Grant Thornton Study: Scary Numbers On The Decline Of US IPOs

Fri, 06 Nov 2009 07:00:24 -0800

The lack of IPOs is harming the cycle of innovation in Silicon Valley but if you look beyond our region, it's effect is much larger.

Grant Thornton, a large accounting firm, has published a study that shows the connection between IPOs and the health of the US economy.

And it shows how new listings in Asia are helping to shift wealth and competitiveness outside of the US.

Here are some of the findings:

The scale of the decline in IPOs:
- Just 12 companies went public in the US in the first half of 2009 - 4 were non-US.
- 1997 was a peak year for IPOs, since then it has declined 39% (55% decline if adjusted for GDP growth.)

Asian IPOs:
- Asian growth in new listings is far higher than its GDP growth.
- Hong Kong new listings have doubled since 1997, tripled since 1991.

The US is losing the number of listed companies:
- Just to maintain US listings at the current level would require 360 new listings a year - a level not reached since 2000. There were only 54 in 2008 and an average of 166 a year since 2001.

- The US would require 520 new listings a year to keep pace with GDP growth of 3%.

The study claims the US has lost 22 million jobs because of the lack of new listings.

Pascal Levensohn, Board Member of the National Venture Capital Association (NVCA):

“The inability for emerging growth companies to access U.S. public equity capital by completing IPOs below $50 million inhibits job creation and hurts American entrepreneurs more than any other group. Starved for long-term risk capital in the U.S., the next generation of innovative private enterprises will continue to move to non-U.S. emerging innovation hotspots, where startups are nurtured through attractive capital incentives, if we can’t repair the bridge into public markets.”

The study offers a long list of possible solutions. Here are some:

- Create an alternative public market segment
A public market solution that provides an economic model that supports the “value components” (research, sales and capital commitment) in the marketplace. It requires a parallel market segment that leverages a fixed spread and commission structure.

- Make enhancements to the private market
A private market solution that enables the creation of a qualified investor marketplace – consisting of both institutional investors and large accredited investors.

- Free companies to market their securities more broadly
Eliminate SEC or statutory restrictions on “general solicitation” or “general advertising,” provided the ultimate purchasers are “qualified” investors. Permit companies and analysts to have media discussions of company performance and news...allow investment companies and ERISA accounts to invest a larger portion of their assets in unregistered securities.

- Overhaul verification of QIBs and accredited investors
Rather than requiring the company or private placement agent to verify, shift the burden to the investor to self-qualify (subject to liability for misstatements) for the new private placement market.

- Exempt companies from SEC registration
Permit holding of companies’ shares by an unlimited number of qualified shareholders (eliminating the 500-shareholder and the 100-accredited-investor limitations).

- Self-regulate trading spreads
To attract capital and promote liquidity, this new market must create and preserve economic incentive for its constituents. Allow the market to set minimum quoted spreads and commissions.

- Exempt market participants from holding period
Exempt new market participants from holding period restrictions, and remove the obstacle requiring market participants to purchase unregistered securities with “investment intent.” The “investment intent” requirement hinders the development of private markets, and is unclear and at odds with the very notion of what a market participant is supposed to do.

- Encourage centralized information, control and custody systems Companies should seek out marketplaces that provide systems to support the management and delivery of appropriate disclosure information, and that facilitate the tracking and delivery of shares.

-Research permitted to work with banking
As a market for “qualified investors,” research analysts would be permitted to work with investment banking and be compensated on investment banking business, rather than be barred by FINRA Rule 2711 and the Global Research Settlement.

Foremski's Take:
There is no doubt that the lack of IPOs is harming the economy. However, this study appears to be an excuse to drive large changes in regulations governing the stock market and investments.

This will be difficult to do given the current lack of trust in Wall Street and its enthusiasm to exploit any arbitrage opportunity no matter the cost to society.

There would be plenty of new loopholes for Wall Street to discover with such a large number of new rules.

Also, there is nothing said about changing Sarbanes-Oxley. This is a huge burden on young companies and it is one of the largest obstacles to an IPO.

It would be far better to leave the stock market and investor regulations in place and to focus on reforming Sarbanes-Oxley.

This would be a much faster strategy in opening the door to new IPOs than persuading Congress to pass the many changes in stock market regulations that the study's sponsors have requested. There's little chance of that happening.

You can see the whole study here.

AT&T Demos New Apps at SF Showcase

Thu, 05 Nov 2009 15:49:25 -0800

I just got back from a demonstration of new AT&T technologies and apps at its annual technology showcase in San Francisco.

There were about a dozen demonstrations. However, there is no guarantee that any of these will reach a commercial stage. They are designed to show off the kind of research At&T is working on in its labs.

I asked John Donovan, chief technology officer at AT&T if Apple's success in attracting more than 100,000 apps had affected the research projects at AT&T and if any apps projects had been cancelled.

He said that there hadn't been any effect on research programs and that the company was working on platform technologies and specialized apps that require tight integration with networks.

He did say that AT&T would soon be releasing some apps of its own such as one that allows users to quickly report any dropped calls and other problems.

These are some of the things I saw:

- Air Graffiti, an application that allows you to use your phone to leave digital graffiti at any location. The graffiti can be anything, text, picture, a link. The core of the app is a geo-database platform.

- Medical monitoring technology in the form of a "telesole." This is an insert into a shoe that monitors the quality of each step. It can send an alert if it detects abnormal steps or a fall. Also, an electronic pill box that helps people to track and take the right number of pills.

- A compact laser projector. This uses a three color laser system connected to an iPhone to project very high resolution images onto any surface without the need for any focusing. Applications in medical institutions. Made possible by new green laser semiconductor generating devices.

- A second-life type simulation of home and work/lab environments where turning on a lamp, for example, turns on a real lamp in the home. It maps the virtual world directly into the physical and vice-versa.

- A geo-location technology that allows mobile phones to communicate with each other using their local Wi-Fi capabilities without the need for a network. Could be useful in emergency situations such as earthquakes where rescuers can communicate directly with each other. This relies on the establishment of a geo/comms standard that is accepted by phone makers and network providers. It can also be used for geo-games.

- AT&T speech recognition technology that can understand terms such as "find all Chinese restaurants around here." It shows map location and contact details. This works surprisingly well and is much more useful than AT&T's 411 service, which costs money, while this is a free app. The speech recognition technology is also used for a TV remote control that recognizes show titles and show times.

The apps were interesting but with with very little information on when, or even if, they will be released, it's difficult to assess if the work by AT&T's researchers is useful in anyway.

Steve Jobs: Silicon Valley's Babe Ruth - Fortune's "CEO of the Decade"

Thu, 05 Nov 2009 10:54:51 -0800

When I first met Steve Jobs in the mid-80s he was already hailed as a "visionary." I wasn't that impressed.

It wasn't until he had come back to Apple and reinvented the company time and again, and taken risks and failed at some things that I began to appreciate him.

While it is possible to get "lucky" in Silicon Valley, it is very rare to be able to continue being able to build new businesses and continue being successful. Steve Jobs has done that time and again. And he has built incredible shareholder value.

For example, the New York Post, Oct 21, 2009 reported:

shares of Apple soared to a new yearly high and helped Apple's market cap sail past search-engine giant Google for the first time, reaching $179.3 billion, vs. Google's market cap of $174.3 billion.

Money invested in Apple on the day of Google's IPO would have returned far more profit. And the company continues to beat Wall Street expectations nearly every quarter.

Do we have to mention Pixar? The studio hasn't had a single flop - what other movie studio can say that?

You might not like Apple's marketing or the legions of obnoxious fan boys, and you probably wouldn't enjoy working with Steve Jobs because of his notorious micro-management style but you have to give credit where credit is due. Steve Jobs is Silicon Valley's Babe Ruth - he continues to hit them out of the ball park.

Here is Chris Foresman at Ars Technica:

Not a bad list of accomplishments for a man that, despite a bout with cancer and a recent liver transplant, is still a decade away from retirement age.

Fortune Magazine:

Youthful founder gets booted from his company in the 1980s, returns in the 1990s, and in the following decade survives two brushes with death, one securities-law scandal, an also-ran product lineup, and his own often unpleasant demeanor to become the dominant personality in four distinct industries, a billionaire many times over, and CEO of the most valuable company in Silicon Valley.

Gartner Prevails In Magic Quadrant Legal Challenge

Thu, 05 Nov 2009 10:26:40 -0800

ZL Technologies has lost the first round in its legal challenge against Gartner Group's use of its "Magic Quadrant" classification of tech companies.

Brian Tarran at Research. reports:

District Court Judge Jeremy Fogel agreed with the IT analyst's argument that its Magic Quadrant reports and the positioning of ZL Technologies in the 'niche' quadrant constituted "non-actionable opinion". ZL had argued that its placement in the reports was derogatory "because they are understood by technology purchasers as a warning, by Gartner, that ZL and the ZL products are not good choices for enterprise email archive applications".

ZL has 30 days to file an amended complaint. It had asked for damages of $132m.

ZL had the backing of many tech companies who believe that to get a good placement in the "Magic Quadrant" they need to spend large sums to become a Gartner client.

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Please see: Gartner in the dock over Magic Quadrant | Irregular Enterprise | ZDNet.com

PRWatch: Press Releases Must Be Labelled Says Google News

Thu, 05 Nov 2009 09:19:01 -0800

Some PR people love Google News because it often distributes their press releases as if they are real news articles written by independent journalists.

"This gets past the gate-keepers!" has been their gleeful mantra. However, studies have shown that nearly one in five people can confuse press releases with real news stories.

That's all the better if you want a press release to pull the wool over people's eyes. But it's not ethical. And it is not a good thing for society because we need to be clear about what is paid-for-content, what is advertising, and what is not.

New rules about site maps published by Google news state that publishers should use the tag to label their content:

The tag takes one or more of the following values, separated by commas:
- PressRelease (visible): an official press release.
- Satire (visible): an article which ridicules its subject for didactic purposes.
- Blog (visible): any article published on a blog, or in a blog format.
- OpEd : an opinion-based article which comes specifically from the Op-Ed section of your site.
- Opinion : any other opinion-based article not appearing on an Op-Ed page, i.e., reviews, interviews, etc.
- UserGenerated : newsworthy user-generated content which has already gone through a formal editorial review process on your site.

This needs to be done "because these properties can directly affect the experience of a user, it is essential to accurately characterize your articles in Google News."

I've advocated the clear labeling of online PR content for several years so I'm glad that Google agrees.

Schmidt: Don't Bet Against Silicon Valley - Or Its Weather

Wed, 04 Nov 2009 20:39:32 -0800

"Anyone who bets against Silicon Valley is betting against a successful track record of 40 or 50 years," says Eric Schmidt, CEO of Google [GOOG] in an interview with the Wall Street Journal, when asked if Silicon Valley is losing its edge.

You've got the universities. You've also got a very, very effective venture-capital industry, which is very well honed and you have the creations of at least a biotech revolution and a high-tech revolution, and the possibilities of the green revolution being created here.

But despite these advantages, Mr Schmidt believes it all comes down to the weather(!)

When I'm asked about this, and I've been asked this for years, I answer this the same: It is the weather. There's a reason why generations of young people who are willing to challenge assumptions and so forth have ended up in the Bay Area, and the weather is not a small part.

It is a surprising statement. I think the weather is a nice cherry-on-a-cake thing to enjoy. I think people are here for the cake, the layer cake that Mr Schmidt describes. It's not the weather.

If it is about the weather then we should be concerned about innovation centers springing up in Hawaii or Florida.

Here are some additional observations by Mr Schmidt:

Q: A lot of workers in Silicon Valley have been laid off. Do you think they will end up back in the tech sector? Will Google hire them?

A: I don't know about Google.

Q: Many of the industries you have outlined, like biotech and energy, require sustained investment and lots of investment in capital-intensive infrastructure. Does Silicon Valley have the culture to wait for those sort of transformative initiatives to bear fruit?

A: I think it is a mistake to assume that the only interesting businesses are the ones which require no capital like Web-based businesses. I don't see any particular reason why high-cost capital business cannot also be built in the same cauldron as these low-cost ones.

Excellent question but I can see plenty of reasons why capital-intensive businesses won't be "built in the same cauldron as these low-cost ones."

If you take a look at VC funding, there are very few funds willing to invest in businesses that require large amounts of capital. If you add the higher risk of longer periods between exits for many clean-tech/green-tech, pharma, and biotech businesses, even during normal times, that's not going to attract the same type of VC funds that invest in IT software and Web 2.0.

As it is, we don't have enough funding going into Silicon Valley's traditional investments -- that funding certainly isn't going to shift into riskier, longer-term investments in biotech and energy. VC funding is currently very risk averse.

It's surprising that Mr Schmidt didn't mention Google's investments. It is funding several projects in biotech and energy. This includes investments in 23andMe, a biotech startup founded by Anne Wojcicki, the wife of Sergey Brin, co-founder of Google; and investments in solar and wind energy ventures.

Google's investments are expected to make money but they are strategic in nature designed to help seed important new industries -- they are not directly related to its core business.

Google can make such investments without much concern for any concerned shareholders because its founders, and other insiders, own the majority of the voting rights. They own preferred stock with ten times the voting rights of regular shareholders,

Intel Capital also makes a large number of strategic investments but they are all related to its business and are chosen because they will help drive sales of its technologies.

Guest Post: Silicon Valley's Sputtering Engines of Innovation

Wed, 04 Nov 2009 16:01:23 -0800

Guest Post by Sue Lebeck, Program Director of the "Silicon Valley Letters to Washington" initiative from the Silicon Valley Innovation Society.

We are facing an interesting time here in Silicon Valley, and in the entrepreneurial community at large. Just as innovation has been re-confirmed as a critical element of our national success, our once potent "innovation engine" is sputtering and may soon stall.

Our nation, and the world at large, faces an unprecedented array of challenges today. These challenges come in all flavors -- economic, social and environmental. New solutions to old problems are needed now, more than ever. As President Obama recently declared and we believe, we must "innovate our way out of this recession."

Moreover, we must innovate our way out of the constraints of our outmoded ways - whether in the fields of healthcare, finance, transportation, construction, manufacturing, energy, water, or the information systems that control them - the systems which drive our economy need to evolve. But first, the innovation-related structures which drive or impede that process need themselves to evolve.

"Innovation engine" is a potent metaphor for our innovation-driving structures. It reminds us of what is needed, and it underscores what is often missing in our innovation environment today. An engine needs fuel and air to run. The "fuel", if you will, is money: first, "seed" capital for an entrepreneur to investigate a solution; then "venture" capital to launch and grow a company; and finally a "liquidity event", such as an Initial Public Offering (IPO) of stock or an acquisition by another company, that frees the entrepreneur to repeat the cycle. All three types of funding have contracted significantly. Early-stage companies, more than ever, are choking. Many others are DOA.

Equally important to the operation of our engine is "air", the environment in which innovation operates. Laws and regulations, including tax policy, accounting rules and intellectual property rights are critical to support an innovation-friendly environment. Government policies have not kept up with the realities of innovating in a global economy; often they actively, if unintentionally, work against our ability to compete.

The Silicon Valley Innovation Leaders group, an informal collaborative convened through the Silicon Valley Innovation Institute (SVII)in late Spring of 2009, decided to launch an initiative to address the critical issues faced by the entrepreneurial innovation community. We've dubbed this initiative "Silicon Valley Letters to Washington".

This all-volunteer initiative was executed this autumn. Three working sessions over the space of two months produced a collaboratively written letter, viewable in detail at www.svletterstowashington.org. Its authors and contributors seek to share with our policy leaders the financial and environmental reality currently experienced by Silicon Valley entrepreneurs and, we imagine, entrepreneurs everywhere. We are outreaching to those in Washington who direct innovation policy, with a focus on the offices which manage Science and Technology and related policy.

Many additional issues are on our minds, but we wish to focus on these structural fundamentals. Our goal is not to speak just for ourselves, nor for any particular field of innovation, but for entrepreneurial innovators everywhere. Our hope: to engage in a dialogue that will inform and influence future innovation-related policy. For details on this letter, its recommendations, its authors and its audience, go to www.svletterstowashington.org. We hope you will review our point of view. Then, if you are an advocate of innovative entrepreneurship, we hope you will add your name to our cause.

Because, at the risk of being cliché, an innovation engine is a terrible thing to waste.

Nvidia Could Be Prepping Intel Compatible Chips

Wed, 04 Nov 2009 14:30:10 -0800

As Intel faces the challenge of new anti-trust charges in New York, it could also be facing a new challenge from its Silicon Valley neighbor Nvidia.

EETimes reports:

''We believe Nvidia could enter the x86 CPU business,'' said analyst Doug Freedman of Broadpoint AmTech. ''Nvidia could become a supplier of x86 CPUs by necessity to preserve both GPU and chipset revenue.'' Nvidia (Santa Clara, Calif.) has been quietly hiring former employees of Transmeta, a now-defunct, x86-based processor supplier. ''We believe internally developed x86 solutions are more likely than external acquisitions (i.e. Via Technologies),'' he said in a new report, referring to rumors that Nvidia would acquire Taiwan's Via. ''We believe that Nvidia has hired former Transmeta staff extensively, and that instruction code "morphing" requirements have declined as more x86 instructions have come off of patent coverage,'' he said.

Foremski's Take: Nvidia needs an X86 capability so that it can better compete against Intel in key markets such as netbooks -- a fast growing sector.

It used to be a big project to create an X86 compatible chip, it required establishing a "clean room" where engineers could reverse engineer the microprocessor instructions. But with patent restrictions expiring it could be a faster process.

In today's world graphics processing functions are very important because of the proliferation of graphics user interfaces across nearly all computing devices, and also a wide variety of web browsers available for different types of computers. And video also plays a big part in the user experience. These all rely on graphic processors rather than general purpose microprocessors.

While Nvidia has some of the best graphics processors it can't sell chipsets that also include X86 technology, essential for Windows operating systems and Windows applications. Chipsets with X86 processing capabilities reduce production costs which makes them popular with manufacturers. Nvidia is locked out of these large chipset markets unless it can add X86 compatibility.

Hiring former Transmeta engineers indicates that Nvidia might try the approach that Transmeta used in developing low-power X86 compatible chips. It created a very high performance processor using what is known as a RISC architecture and then ran the X86 code in a virtual environment.

Nvidia, armed with X86 technology, could become a formidable competitor to Intel, and also Advanced Micro Devices in several key markets. It would be a very smart move.

Retreevo Study Discovers Vacuous iPhone Users

Tue, 03 Nov 2009 16:26:03 -0800

Retreevo, the electronics retail store, has published the results of a study of iPhone users:

The highlights:

- iPhone users are more attracted by a partner's cool gadgets than their college degree.

- 20% of iPhone users watch adult material on their phones (seems very high to me.)

- One third think "old gadgets" are a "turn-off."

- one-third have broken up with their partners by text or email.

- one-quarter have broken up with their partner because they spent too much time on their mobile device (I'm not surprised they spent a lot of time on their mobiles if this is the kind of iPhone user typified by the above behavior.)

I use an iPhone but I don't identify with any of these iPhone users.