Juniorbird.com

I hate my job; I spend all of my day fooling with financial projections, and when I don’t get everything done that I’m supposed to, my boss hassles me and makes me feel like I’m a failure. Dammit, it’s just no fun at all.
Did I mention lately that it’s my own company and I’m my own boss? Yeah, that’s how it is. It’s tough when there’s work you don’t really enjoy doing (hey, if I truly loved balance sheets, I’d have gotten a job as an I-banker). But it’s all got a good reason for getting done — otherwise I wouldn’t do it. Now that is one benefit of being in charge, I only do what’s worth doing.
So what’s worth doing is getting my financials forecasted out to the highest possible level of detail. I actually rather enjoy putting together the “cash flow statement”:http://en.wikipedia.org/wiki/Statement_of_cash_flows, because that’s where the rubber really meets the road: it answers the question “can we cover our expenses this month?” The “income statement”:http://en.wikipedia.org/wiki/Income_statement is moderately handy, because at least it tells me if we’re making a profit or not. But the “balance sheet”:http://en.wikipedia.org/wiki/Balance_sheet? Well, that’s great if you’re doing strategic planning or valuation for a large corporation, but of less value if you’re asking whether or not you can stay alive another week.
So, yeah, I’m bored of my work, but that’s good, because I left the boring stuff for last. So that means I must be almost done, and, if I’m almost done, then things must be about ready to happen. And that’s exciting, ’cause I’d like to be actually, ya know, _doing something_. And my own company is agreat place for that to happen.
Anyway, it’s either that or move to Vietnam. For the food, you know, and the women, and the colors.

I’ve had a couple of friends IM me asking “what’s going on with the whole “Apple stock option SEC trouble thing”:http://www.law.com/jsp/article.jsp?id=1155027932371?” Now, I know nothing more about this than the average business school student with a few classes on options and on financial reporting, but I guess that’s a few more than average so I’ll expound a bit on what appears to be going on, and if it’s serious or not. Everything below should be taken with a small grain of salt, at least, since there have been no public, comprehensive statements on what’s going on by either Apple or the SEC, but the stories in the press appear to be quite consistent and clear in what they’re describing.
h3. What’s an Option?
Let’s start by getting our basic terms down. An option is the right to buy a share of stock at a certain price after a certain date. Imagine that I have a company, Juniorbird Inc., and the stock is trading in the market at $10/share. If I gave you an option to buy one share of stock at $5, you could then immediately re-sell the stock at the $10 it’s trading for in the market and make a quick $5. This may not sound like much, but then assume I give you 10,000 options — that’s a good chunk of dough! Typically, options can’t be exercised (an option is exercised when you pay the company the value of the option and they give you a share of stock) *now* — they “vest”, or become usable, at some point in time in the future; that can provide an incentive for the option-holder to look to the long-term success of the company, sticking around until their options vest and working to get the stock price as high at possible at the time at which they can exercise options, in order to make as much of a profit as possible.
It’s possibly worth noting that options don’t entitle the holder to buy a share of stock that’s already in the market; instead, the option-holder gets to buy a share of stock that is owned by the company. Technically, this means two important things:
* That the company should own enough of its own stock to be able to cover all of the options it has outstanding. Technically, many companies don’t; if all of their options are exercised, then the shareholders of the company will have to vote to issue new stock, which is a bad deal for the shareholders — by issuing new stock, they make their total holding a smaller percentage of the company than it used to be.
* That, if a company uses a lot of options as part of its incentive program, people who have bought shares in the market can find that they own very little of the compan, because the number of shares owned by the company and given away as options is high compared to the number of shares that had been in the market.
Both of these are interesting points but aren’t really relevant to our discussion here; I only include them for their nerdly value.
h3. How Are Options Priced?
An option is more or less priced at whatever the company pleases to price it at. Typically, to keep accounting single, options will be given out to employees in large blocks, all with the same price; for instance, all options granted in a six-month period may be granted at the same price. Of course, because the value of a $10 option is different if the stock is at $12 or at $50, companies will, from time to time, change the price at which they grant new options to keep compensation relatively equal across time (if you want to give an employee 1,000 options worth $10,000 dollars, you’d better price those options at $2 when the stock is at $10, but at $40 when the stock is at $50; if you don’t increase the option price, then you end up giving the employee $48,000 worth of stock options).
The important thing is that, once an option has been granted, the price shouldn’t change. Re-pricing options is an accounting nightmare for companies and can have tax consequences for companies as well. Re-pricing options is an act that, itself, brings up ethical concerns; typically it’s done when the stock price is not high enough to allow the option holder to make a profit on the options, but, since the point of options is typically to incentivize the holder to work to bring up the stock price, re-pricing options gives the holder a gain even though they didn’t accomplish the stated goal. Re-pricing is a good way to piss off stockholders, because the re-pricing company is basically saying “‘sorry, we didn’t manage to increase the value of your investment in our company but we’re going to give this person a windfall profit anyway.”
h3. So What Did Apple Do?
As you can see, it’s really important to get an option at the right price, but you generally can’t change the value of an option once it’s granted. As I described above, options are often granted with an exercise price that changes at a few points in time — so therefore it’s desirable to get your options granted before a decision is made to increase the exercise price of the option. Sometimes, a grant of options will be _backdated_ to come before some change in exercise price. This is perfectly legal.
What “Apple apparently did”:http://www.law.com/jsp/article.jsp?id=1155027932371 is _change the date of options granted after granting the options_, which ,when you think about it, is pretty much the same thing as re-pricing options, as discussed above. They didn’t file the proper declarations that they re-priced their options, didn’t go through the proper accounting procedures, and therefore hid from shareholders — and even other option-holders, since Apple apparently only did this for senior executives — what exactly they were doing.
Apple’s said that they will re-state their earnings for past years, which means that we’re not just talking about a few dollars — there are real differences in Apple’s financial results caused by this stealth option repricing. Reasonable investors might have made different investment decisions, had they but known about the option repricing, and Apple’s officers had a legal obligation to make this information known to the investors.
h3. What are the Consequences for This?
Well, I’m no lawyer, but this sounds like securities fraud. Laws passed after Enron require the CEO and CFO of publicly-traded corporations to personally certify the annual reports given to shareholders, annual reports which must now be restated. Thus, we can be sure that Steve Jobs has at least *some* responsibility here. Since Enron, the SEC has been disinclined to seek out slap-on-the-wrist punishments, which might mean that someone senior would go to prison; fines, at least, seem likely, and anybody found guilty of securities fraud would be ineligible to serve as a director or officer of a publicly-traded corporation. (The SEC has recently filed criminal charges against officers of other companies involved in this kind of a backdating scheme, a scheme which has apparently been pretty common in Silicon Valley.)
So could Steve Jobs go to prison? I can’t guess, but I also wouldn’t want to think of Apple without Steve. If he were convicted, they could keep him on with some sort of a VP or “Chief Innovation Officer” – type title, but he couldn’t run the place. I do tend to think that Apple is concerned that Jobs will suffer some type of consequences here, because, at their latest developer’s conference, the keynote, which is typically given by Jobs alone, was given by Jobs and three other people, all of whom would usually speak but none so much. I tend to see this as an audition to find out who might be a good face for Apple, and, if you “watch the WWDC”:http://events.apple.com.edgesuite.net/aug_2006/event/index.html, you can see that VP of Platform Experience Scott Forstall was young, artsy, engaging, and natural on stage — a good successor, at least for a public leader. Of course, given Jobs’s recent brush with prostate cancer, this might just be good succession planning in general — but I do wonder a bit.
The SEC clearly wants companies to be squeaky-clean these days, and, as both an investor and an entrepreneur, I think this is a good idea. The free flow of investment funds to help companies grow depends on investors being able to trust the companies in whom they invest, and that includes not hiding stock option repricing when it’s material to the companies’ results, as it cleary is in the case of Apple. So that is what I think is going on and what I fear might happen. (I realize this entry might have fit better at Wadearmstrong.com, but I’ve already written it here and I’m too lazy to move it, so you’re stuck reading it.)

Did you know that Sweden used to have a world monopoly in matches? It’s true, they made and sold pretty much all of the matches out there for a long time. The reason why is deceptively simple: at the opening of the industrial age, some Swede (or Swedes) had the insight that you might want to have exactly the same number of matches in every matchbox. Filling matchboxes by count, rather than by volume, made it easy to mechanically fill matchboxes, which took one of the most labor- and, therefore, cost-intensive parts out of match manufacturing, which meant that Swedish matches were suddenly cheaper, and more profitable than other matches — plus the purchaser would be sure to get the same value for their dollar in matches with every purchase. Sometimes the insight you need to succeed is surprisingly small.

My Management Accounting Prof once told us this great story about how TWA went out of business because they didn’t listen to the Marketers. It may be a bunch of baloney, but when I hear the Accounting people say “up with Marketing!” then I figure it’s time to listen. Also, it’s funny.
Some of my older readers may may remember “TWA”:http://en.wikipedia.org/wiki/Trans_World_Airlines, one of America’s most famous, and most red-painted, airlines; my younger audience may have been introduced to TWA when they saw “The Aviator”:http://www.imdb.com/title/tt0338751/. Leo DiCaprio notwithstanding, TWA was a great American airline for many years, but it fell into some disrepute during the late ’80s and early ’90s.
The specific problem that TWA had was its on-time performance: its planes were horribly late. Naturally, nobody wanted to fly TWA, and its planes were often only about 50% full. This is a real problem for an airline, because it costs a certain amount at minimum to run a plane, fill it with fuel, put in a cockpit crew, etc. — in fact, it costs about the same amount of money to fly one passenger as it does to fly 200. Naturally, your profits are higher if you have 200 passengers in that 737 than they are if you have just 1.
So TWA was in trouble. But the Marketing department came up with a good idea: they took out a bunch of those empty seats — about 20% of the seats in the entire plane. That meant a lot more legroom for all the passengers. And customers loved it! Lots of tourists, who didn’t care if they were a half hour late, opted to spend on the comfy, spacious seats, and TWA’s load factors (% full) skyrocketed.
In fact, the load factors got so high that the planes were full. And then management started thinking “suppose we put in more seats, then we can make more money!” And Marketing was aghast. The only reason TWA was making money was that they had so much legroom! But management was intransigent: those new rows had to go in!
So they did, and people noticed they didn’t have the legroom, plus the flights were still late, so they stopped flying TWA. Then American bought TWA, and now the red and white is gone forever. The moral of the story? Always listen to Marketing.

Like many Americans, I flew our nation’s fine airlines this holiday season. While I was waiting for my five hour-delayed, two-and-a-half-hour flight to Houston, I thought one simple thought: _this is a business model?_ “Ten thousand lost bags”:http://www.washingtonpost.com/wp-dyn/articles/A25814-2004Dec25.html? All flights on Christmas Day “cancelled”:http://www.cnn.com/2004/TRAVEL/12/26/flights.canceled.ap/? I want my vacation to start as soon as I leave the door. And, Amtrak, it’s time for you to help me out with that.
It can be good business for Amtrak to make travel pleasant — happy customers are repeat customers and bring friends and family and colleagues along. Rather than a languishing system with a few successful commuter routes, Amtrak can become Big Business by making travel a pleasant, special occasion again. Our country’s train monopoly needs to target three audiences:
* Families
* Couples on romantic vacations
* Businesspeople
h3. Core Message
Amtrak can offer a core set of services and tune some outward-facing aspects to each of these audiences, building loyalty and delivering, at last, a real alternative to the drudgery of air travel. The core message is “Start your vacation (or business trip) the minute you leave your front door.”
h3. Competitive Advantage
Because it’s a less busy mode of transport, because train stations are invariably located in the downtowns of cities, and because of the inherent attributes of travel by train, Amtrak has advantages over airlines in several areas:
* Easy check-in, especially in these days of the TSA
* Keep your luggage in-hand throughout your trip
* Spacious commuter cars
* Amenities throughout the train
* Less hassle getting to and from train stations than airports
These need to be supplemented with features and messages that cater to the specific demographics mentioned above.
h3. Families
Just moving a big family around is hard — geting five or six people in the car, dealing with children of different ages and genders, handling the hyperactive ones and the quiet ones. Airports and airplanes make the whole project worse, because they’re loud and hectic and boring. Trains aren’t. You can walk up and down train aisles, there are real cafes on trains, and there’s “the internet”:http://www.netstumbler.com/2004/06/16/amtrak_boston_to_baltimore_goes_wifi/ to keep those surly teenagers occupied. A family can reserve a compartment, so there’s no need to keep track of several kids in several different rows of an airplane, and worry about what kind of people they’re sitting next to.
Families need:
* Spacious compartments
* Snack bars
* Easy group check-in
h3. Couples
Airplane flights are in no way romantic. There are no candlelit dinners, everybody’s pressed up against you, and it’s loud inside a plane. Trains have private compartments, real restaurants, full bars, and a great view of the countryside as you pass by. Couples can even take overnight trips and stay in a sleeping compartment.
Couples need:
* Cozy compartments
* Sleeping compartments
* Fine dining
* Bars
h3. Businesspeople
Flying for work is a hassle. To take an hour meeting in another city, you leave three hours early to wait in line 45 minutes to get a boarding pass to wait in line for security for 45 minutes to wait in line 20 minutes to take your seat and park your bag — containing your $5000 LCD projector — in an overhead compartment five rows away. Then, everyone’s in a different row so you can’t work together, 1/3 of your flight disappears because it’s not permitted to use electronics during climb-out and landing. Finally, when you land, you wait inside the plane for 30 minutes, hunched over below the overhead compartments, and then fight to get your $5000 LCD projector, hitting someone over the head with it as you get it down, then grab a $60 cab downtown.
Trains can beat this easy. They already drop you off downtown, so it’s a quick trip to the client. But trains need more business-oriented features. How about a Business Car (like a Sleeping Car)? This would have larger, reserveable compartments featuring:
* Tables
* Ethernet hook-ups
* Conference call phones, possibly using VOIP
* Whiteboards (also useful for projecting presentations)
* The car could also have a larger washroom, suitable for primping
In addition, Amtrak can offer express business check-in, with a lot of the up-front work completed over the Internet.
All of these, together, offer a compelling suite of services on both short- and long-haul operations. I know that I would happily spend a few extra hours on a train in return for a pleasant trip. Wouldn’t you?

I’m a loyal “Movable Type”:http://movabletype.org user, so MT maker Six Apart’s “acquisition”:http://www.sixapart.com/press/weblogging_software_leader_six_apar.shtml of online journaling pioneer “LiveJournal”:http://livejournal.com is of great interest to me. What could inspire the one company to buy the other? What’s the plan? It’s hard to see.
From both a business and a software development point of view, there appear to be a small number of possible drivers behind this merger: buying users to increase the user base, buying talent to improve the product, selling the hassle of running a company, and, last but not least, a next-generation vision of online personal presence and community-building based around “Web Services”:http://en.wikipedia.org/wiki/Web_service.
h3. Buying Users
One real, but simple, possibility is that 6A and LJ were feeling squeezed as large companies entered the blogging sphere. Google bought “Blogger”:http://blogger.com, and Microsoft has introduced “MSN Spaces”:http://spaces.msn.com. These big players are scary, and maybe 6A and LJ felt they’d find strength in numbers. Apparently LJ has “5.6 million users”:http://www.livejournal.com/stats.bml and that’s sure a lot of strength in numbers. Still, that’s just buying momentum, and Google and MS have plenty of money to do that.
One more useful reason to buy users is to create a continuum of products along which individuals can move as their demographics change — much like General Motors, which starts you out with the Chevy, moves you through the Buick, to finally the Cadillac. LJ draws a “younger crowd”:http://www.sixapart.com/corner/archives/2005/01/current_mood_op.shtml and 6A an older, more professional one. Is the plan to get ‘em young and keep ‘em when they get older? It’s difficult to see how two such different products as MT and LJ could form a continuum.
h3. Buying Talent
In the aforelinked post by 6A owner Mena Trott, she mentions LJ founder Brad Fitzpatrick’s ninja coding skillz, and, especially, the very effective server tools he’s built. While MT is a downloaded application — I pay my host, “Freedom2Operate”:http://f2o.org, for space on a server, then run the MT application from there — LJ is hosted on central servers. LJ has learned a lot about running said servers effeciently, and, especially as MT branches out into hosted services with “TypePad”:http://typepad.com (and runs into “server load issues”:http://www.movabletype.org/news/2004/12/comment_spam_load_issue.shtml#more for even the local application), MT may simply need to buy Brad and his staff’s skill to build a scaleable application and grow.
It’s not at all uncommon for small companies to hire outside talent this way. It allows the outside talent to gain ownership in the company, to wrap up their outside work, and is a way for the acquiring company to give (abundant) equity in lieu of (scarce) cash for technology and services.
h3. Selling The Hassle
Brad makes an important statment when he says:
bq. I love technology and designing the LiveJournal architecture but I hate running a business. While I’ve been learning a lot of business stuff over the past 5 years and it’s been kinda interesting, I just don’t love it and I’m not great at it. Plus it just keeps getting harder as LiveJournal grows, sucking away more of my time and youth. I’m ready to pass off what I see as “the boring stuff” to somebody else that I trust and focus on the fun stuff.
A lot of entrepreneurs are people with great ideas, not great businesspeople. For these kinds of entrepreneurs, a good — and quick — exit strategy can be very important, especially if these entrepreneurs get in a position of power within a growing and original company. Brad is becoming 6A’s Chief Architect, so this seems to be that kind of a move for him. If so, well done, Brad!
h3. A Web Service-Based Vision
There is one other possibility. As the blogosphere has grown, so has the popularity of “RSS”:http://en.wikipedia.org/wiki/RSS_%28protocol%29. This is good evidence that new technology drives new ways of consuming information, and maybe we’re just on the cusp of a new wave of personal, meaningful, information-sharing, and relationship-building presences on the Web.
What if your next blog had not only what you wrote, and what you linked, but similar links, and links your friends had made, and everybody could discuss these items? That’s a possible future for blogs, and not so far away. 6A has a big advantage in Web services, pioneering “TrackBack”:http://www.plasticbag.org/archives/2003/03/what_is_trackback_part_one.shtml and using “XML-RPC”:http://en.wikipedia.org/wiki/XML-RPC to enable all sorts of blog-posting approaches (I’m quite the “Luddite”:http://dictionary.reference.com/search?q=luddite in that I only use the Web interface). LJ has the community aspect down. Maybe, together, LJ and 6A can pioneer the protocols that drive the next wave of blogging tools, and gain a march on their larger competitors and direct the path of development for a little while, gaining both money and momentum while running the show.
There’s nothing wrong with a plan with a touch of World Domination thrown in. In fact, the impetus for the merger probably includes some of all of the above points, and the near-term plans for both companies probably run
# Buying Talent
# Selling Hassle
# Buying Users
# Owning The Web-Service Based Future
Not a bad plan. I’ll be interested to see how it turns out, and when I get threaded comments!

It’s not just the content owners who have completely lost it; that old-line content distributor, radio, seems to have gone completely off the deep end as well. Radio has been losing listeners to the internet and to digital media players, like the iPod, for years. Now, apparently, radio’s hopeful that “the security issues that portable hard drive media players pose will doom them to extinction, leaving only radio for behind”:http://www.fmqb.com/Article.asp?id=57584.
The article linked above suggests, rather reasonably, “Corporate America has always seen data security as a pressing issue and the introduction of portable devices that can store vast amounts of data represents yet another threat that must be addressed” But then it takes that too far: “A ban on iPods would only reinforce what our industry already knows – that radio remains the most effective, least obtrusive, and least harmful medium available”
I’m very sympathetic to radio. It’s a medium that has been very successful over a period of decades and is undergoing an uncomfortable transition. But looking for its salvation in the security threat posed by pervasive posession of portable hard drives is pitiful indeed. It’s pitiful in three specific ways:
# From a security point of view, banning iPods is no security at all
# Waiting for iPods to wither away of their own accord is an entirely passive approach
# Banning iPods falls well short of an actual business strategy
I’ll review these at a bit more length below. And, since I’m not much for whining without being positive as well, I’ll suggest a few strategic responses radio might want to take.
h3. Security
I’m tackling this topic because it’s the shortest. As the article linked above suggests, “Any device that can be easily connected to the USB port and can download data poses a threat.” This doesn’t just mean iPods (and similar products like Rios, Archos’s products, Dell DJs, etc.), it means those flash-based thumb drives (I bought a 128MB one a few months ago for $29.99), it means portable hard drives, it means digital cameras, it potentially even means cell phones (my year-and-a-half-old Nokia can easily exchange files with my desktop, and I have 128MB of memory in that too). Now, imagine you’re in charge of security for a large corporation. You have two choices:
* You can ban these products, and try to ensure that no employees bring in, say, a portable flash drive that’s smaller than my car keys
* You can install software on your computers that secures sensitive data
Which one do you think will work better? Which one do you think employees — who own cell phones and iRivers, and most of whom don’t want to steal your stuff — will like better?
h3. Passivity
Actually, this will probably be the shortest one to deal with. Who in their right mind has the following thought process:
# My opponent’s product is threatening the success of my product
# People seem to really like my opponent’s product
# My opponent’s product has a problem
# Neither my opponent nor anybody else will ever find a way to solve this problem
# Therefore, my business is safe!
Number 4 above seems particularly wishful. Business is all about solving problems, and has been forever; it’s a safe bet that someone out there will solve the problem you can’t. Cars are expensive and only for the elite? Henry Ford invents mass production. Clothing is laboriously handmade by every family? The English and Dutch invent textile factories. Can’t send non-Roman characters over the Teletype? Japanese figure out how to make cheap, fast, good faxes. Waiting for others to fail is never a good business plan.
h3. Not A Business Model
As stated above, this is really a corrolary to the passivity point. Virtually every industry has some plan going forward, whether it’s an official vision put forth by an association or simply a general agreement on the direction of market forces. The steel industry is moving towards smaller, faster plants. There’s no airline industry planning association, but Delta and United and Continental are all trying, or have tried, to launch low-cost, short-haul subsidiaries. What’s radio’s plan?
# Have all radio stations bought by Clear Channel
# ???
# Profit!
h3. So What Could A Plan Be?
This is the point at which I’m put on the spot to add something positive to this rant. Let’s see how I can do! I’m going to take the following limitations as given:
# We need a plan that doesn’t rely on satellite
# Radio must remain commercial
Existing commercial radio does a good job of getting certain very popular artists and songs, and artists and songs that sound like those very popular artists and songs, in rotation. That’s not a bad thing; it’s a good way to get people introduced to music. A lot of companies do just that — GM starts you out with a Chevy, then moves you up to a Cadillac; Sony starts you off with a regular TV then moves you up to a WEGA; The Gap starts you off at Old Navy then moves you up to Banana Republic; and so forth.
Radio moves its listeners through segments based on, principally, age. But being old enough that the music you listened to growing up is on the oldies station doesn’t mean anything — it just means you’re old. Rather than moving listeners through a series of age segments, radio needs to move listeners through a series of increasingly targeted stations that deliver:
* Greater listener loyalty
* Demographics of a sufficiently high level of specificity to allow advertisers to make targeted buys (I’ve bought radio in the past, and it’s very much a “shotgun” medium, reaching all sorts of people at once — not a good buy unless you have a very large budget and are prepared to saturate)
* An obvious “hand-off” path such that listeners can self-select to stations to which they will be more loyal and to which they provide a more valuable advertising property
This means a three-level strategy:
# A top level of broad Clear Channel-style stations that provide trend-conscious, younger, and browsing listeners the chance to get acquainted with a wider variety of top artists and songs on a single station.
# A second level of more-targeted stations that stick to one genre, introduce the listener to a wider set of artists, market events related to the genre and artists to the listeners, and provide more-targeted advertising that appeals specifically to the type of people who listen to that genre.
# A third level of very-targeted stations that play a smaller set of artists in a particular sub-genre. These will be the hardest stations to keep profitable but these stations should make a good profit by being in national, not local, networks that syndicate content and even DJs to stations around the nation and even broadcast that content through the Internet. These stations will deliver very targeted ad buys and so should command a premium price.
# If desired, these third-level stations could hand off to satellite radio.
This plan requires real work to pull off — stations need to be marketed to advertisers, more-targeted stations need to be publicised on less-targeted stations, and DJs need to spend a lot of time learning about specific genres and local music scenes. But it offers real potential for payoff, by building a very loyal set of listeners and defining reliable and useful advertising income streams.
That’s what I’d do if I was in charge of the world.