by Dana Blankenhorn
Volume V, No. XII
For the Week of March 26, 2001

This Week's Clue: Recession and Recovery

This Week's Clue: Recession and Recovery

SSP (Shameless Self Promotion)

The Novell-Cambridge Deal

Red Herring: Arbitrageur's Tool 

The Harry Potter Fight

Clued-in, Clueless

Now that we're all in agreement that the U.S. economy is in recession, important truths must be told. Because recessions have causes and so do recoveries. Without understanding the first we can't embark on the second.

This recession could have been prevented. Interest rate cuts take 6-12 months to have an impact. Had interest rates been cut in the fall we'd be feeling that now. If Republicans were the incumbent party last fall those cuts would have occurred. The Federal Reserve Board, like the Supreme Court, came out of the partisan closet last year and we must all take a lesson from that. 

Politics can also keep an economy down. We have chosen (or had chosen for us) a President devoted to the status quo. The last time a President's descendent beat the incumbent party (without winning the popular vote) the status quo meant a high tariff spent on military pensions. Today it means rigid protection for copyright and spending the surplus on tax cuts. 

The Web challenges the status quo. It demands new economic arrangements, just as the rise of American manufacturing in the 1880s demanded new economic arrangements. We won't get them from this President just as our ancestors didn't get them from Benjamin Harrison. George W. Bush fears the Web. The press is complicit in creating that fear , especially the right-wing media , but real leaders embrace change - they don't fear it. 

Instead of encouraging (even demanding) that copyright holders negotiate with the market, this President will use police and the threat of prison to protect current market arrangements and prices. Elsewhere the West is passing anti-Internet laws that are easily broken, and which can be only be enforced erratically or through a regime in which police watch every Web session and read everyone's e-mail. (It should also be asked that if we succeed in stifling liberty what chance do the Chinese have of attaining it?) 

Simply put, the Internet demands liberty. Without liberty, the Net perishes. Liberty requires privacy, an assumption that unless you're attacking someone else you can do as you wish. Yet that is not what these laws (and current US copyright laws) are about.

You shouldn't have to encrypt your messages, surf anonymously, or break the law in order to read, write and hear what you want. Liberty should not belong only to the technically adept. It is the natural property of all of us. Software deserves the same First Amendment protection as speech. These are the legal changes the Web demands. These are changes the incumbent Administration will resist.

The irony here is that the protective policies of the current Administration help mostly those in industries opposed to the President and hurt those in industries supporting him. Irony, however, belongs to journalists and historians who can afford it. 

The proper policy, the way out of recession, is through incentives for renewable energy and trusting the people to use the Internet as they have used the telephone and printing press. Absent such policies this recession will not only linger, it will get worse.

America today is a technology nation. U.S. Steel and General Motors can't bring about its recovery. Only companies like Cisco and EDS can do that. Their recovery demands policies that encourage free and open use of the Internet, free and open change in technology and basic trust of the people by their government. 

Failure won't become apparent all at once. Failure can grind down slowly, painfully, over more than a decade. That's what has happened in Japan, where the people have given up on their government and institutions. Necessary reforms here must still walk a fine line between complacency and demands for revolution, but that's the walk we must embark upon. That's how we take back the Net. 

SSP (Shameless Self-Promotion)

I'm pleased to note that I've gotten new orders for reporting from AdAge, B2B and Boardwatch, ending a personal freefall in orders due to the Internet recession. I hope your business is turning around as well.

Join the A-Clue.Com discussion at I-Strategy , our shared e-mail digest produced with Audettemedia. You can also read me daily at ClickZ , monthly at B2B, and Boardwatch, and once every two weeks at Internet Content. (More deals are being negotiated as this is written, so call me at 404-373-7634 to get in on it.) Remember that it's journalism that keeps the Clues coming...

Takes on the News

The Novell-Cambridge Deal

Lost among the general hubbub last week was news that Java creator Eric Schmidt has found a way out of his chairmanship of Novell, merging it with Cambridge Technology Partners and putting a CTP executive in charge.

Analysts have been falling all over themselves dumping on the deal . Both companies have had trouble recently, and Cambridge hasn't been in love with Novell's stuff .

But it's hard to see what other moves Novell had. Schmidt, who we called "clued-in" back in 1997, was unable to use a year's head start on key features or true Internet agnosticism to sell Netware or Novell Directory Services to enterprises. The Operating System wars had ended years before, it turned out, and Microsoft won them - Novell no longer had the scale to compete.

Given that reality what could Schmidt do? He looked at what IBM, Compaq's Digital Equipment unit, Unisys, and every other OS game loser had done and moved toward services. Instead of selling software Novell would sell "solutions" based on its software. At $266 million Cambridge was cheap, its executives know the business better than Schmidt, and Eric gets to go back to being what he's best at being, a theoretician.

Merging troubled companies at the bottom of an industry downturn is always going to look stupid, but if it's the only viable move on the board that's what you do.

Red Herring: Arbitrageur's Tool

All the way up Red Herring  claimed to speak for venture capitalism and the value it was creating. On the way down, it seems, the whole thing was just a grand pump-and-dump.

How else do you explain Robert La Franco's begging (on bended knee) that Barry Diller take out Yahoo . Diller is a financial manipulator, not a manager of assets, but his USA Network has held up fairly well in the last year, so now it's assumed he's a genius.

But look at La Franco's own figures on Diller's Internet results. Losses of $158 million on $257 million in revenue would have been worse except for the Ticketmaster monopoly (meaning his Internet division isn't really an Internet play at all). Everything else - CitySearch, Styleclick, Evite, and HSN.com, is a kennel.

To survive Yahoo needs a manager and a vision. Diller offers neither. But he does offer commissions to brokers and a take-out to arbs. That's all Red Herring cares about.

The Harry Potter Fight

Who owns Harry Potter?

The obvious answer is J.K. Rowling. The honest answer (the one she would give) is that Harry's fans own Harry Potter.

For several months now, however, Warner Brothers has been under the impression that it owns Harry Potter - lock, stock, and broomstick. The AOL-Time Warner muggles have been on the warpath against Potter fans and their tribute sites for the character, demanding that their URLs be given to the movie studio for exploitation.

The official site  is high gloss but in some ways is truly atrocious. Click to the home page, then click the "back" button, and you'll land right back where you started. (Great thing to teach our youth isn't it - mousetrapping!) Even after you succeed in leaving you get a pop-up advertising the movie trailer. And the main chance here is all that Harry Potter merchandise - yes, they're going to turn Harry into a Disney character.

Given the vivid, personal views millions of kids have over how the Potter story looks - a view you can only get through reading - any Potter movie starts with two strikes against it. You think antagonizing the book's truest fans will improve things?

Obviously in backing down here AOL-Time has learned something from Viacom's "Star Trek" debacle. In the mid-1990s that company's Paramount unit went after its fan sites, and wound up destroying the franchise. Warner's is threatening to do the same thing.

The right way to proceed is carefully. Look at sites before sending any e-mail. Ask for links and offer cooperation. Get these people on your side and they will do your marketing for you. Antagonize them and you kill yourself. Certainly lawyers for trademarked properties must go after fast-buck artists trying to profit at their expense, but when you're dealing with children (or adults with childlike faith) you must tread carefully.

A lawyer letter is the ultimate flame. The same rule applies. Put it in your pocket and wait a day before sending one. Better yet, don't send it at all.

Clued-in, Clueless

Clued-in is Altavista's agreement to add Moreover news to its search results . Altavista has never been able to properly capitalize on its innovations (like image searches), but perhaps this deal will lead to others, because Moreover looks more and more like the Google of the news business.

Clueless is the widespread media assumption that the "free Internet is over." No viable company lacks an up-sell, and any revenue from such a sell is free money. The fact these moves are being made in panic and without thought is the news. The fact is they were long overdue and they're not the "end" of anything, but the beginning.

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