by Dana Blankenhorn
Volume III, No. XV
For the Week of April 12, 1999

This Week's Clue: What the Senator Did After the War

This Week's Clue: What the Senator Did After the War

Shameless Promotion (Our New Department)

SSP (Shameless Self-Promotion)

Chain Letter Marketing

A Tale of Two Strategies

Clues for the Cluetrain


Clued-in, Clueless

Anyone can kick someone when they're down. This week we're taking William Safire's advice and kicking someone when they're up. 

That someone is John McCain, former prisoner of war, now Senator from Arizona and Presidential candidate. While winning network and press plaudits for his stand on Kosovo (Kosova to Albanians), McCain is also running in the GOP's money primary. In that race he's chair of the Senate subcommittee on telecommunications, and the people with the big bucks in that business don't like what's going on with the Internet.

What's happening is that Competitive Local Exchange Carriers (CLECs) and Internet Service Providers (ISPs) are eating the cheese of the big long distance providers and Bell companies. They're doing it by providing better service at competitive prices. Despite the fact that ISPs and CLECs are earning their money in consumer and business markets both, the Bellheads and Cable head-ends cry "cream-skimming" because the smaller outfits don't run the wires they're serving customers from. 

The Bells have been so slow to open their networks to competitors that the biggest of them, AT&T, has gotten its own monopoly. In terms of the Internet and current law that's what broadband cable represents - a monopoly - and AT&T insists it should stay that way. 

After all, it's investing billions to compete with phone monopolies on Internet access over cable - why should it share? So far the Federal Communications Commission has bought this argument. Never mind that these are franchises granted by local governments, monopolies designed to be regulated. Cable profits today are not regulated, so franchises now change hands based on their potential value as phone competitors and Internet monopolies that can track and control users.

McCain's idea is that one good monopoly deserves another. Under his "Internet Regulatory Freedom Act of 1999," Bell companies would no longer have to let competitors into their upgraded networks. The relevant clause is obscure (it prohibits FCC mandates on "wholesale discount obligations on bulk offerings of advanced services") but one of the committee's staffers Clued me in on it (the staffer agrees with the proposal). "The idea is to provide telephone companies with an incentive they don't have to make the upgrades so they can provide those services," I was told.

Yeah, right. Phone and cable networks represent basic, necessary infrastructure on which tomorrow's competition must ride. Most of us can get 8 Mbps ADSL service with no upgrade to the infrastructure - just plug new line cards into existing phone switches. Unless both phone and cable networks are opened to competition, we could move from today's 7,000 ISPs and 100 CLECs to maybe 5 of each in the next five years. (In terms of basic access, you'll have a choice of just two - the cable and phone monopoly in your neighborhood.) The duopoly will charge higher prices and make higher profits than anyone in the business can dream of today. But, as I said, Sen. McCain is running for President. When you're running for office you follow the Golden Rule. He who has the gold makes the rules.

There's a hearing scheduled on this bill April 13, in the Senate's Russell Office Building. My Clue to you is, make it interesting.

Shameless Promotion (Our New Department)

Wanna win a book? Jaclyn Easton and her publisher, McGraw-Hill, are offering a contest to A-Clue.Com readers in which you can win a copy of her book, "StrikingItRich.com: Profiles of 23 Incredibly Successful Websites That You've Probably Never Heard Of." (Sample chapters and additional background are available at http://www.strikingitrich.com.

Jaclyn Easton is a Los Angeles Times Columnist and CBS' on-air Internet expert. Her book features 23 little known sites; web enterprises started by ordinary folks who have parlayed as little as $30 into sites now worth millions. Every type of web enterprise is featured including retailing to consumers, business-to-business sales and content/information sites that rely on advertising. It's everywhere, even at Amazon.Com

To enter the contest just send e-mail to our ActiveName, +A_Clue  or to Dana.Blankenhorn@att.net. We will randomly pick two winners.

Good luck!

SSP (Shameless Self-Promotion)

Welcome the Salon-istas! (They're going to like reading that.) We now have a link directly from Salon Magazine to each weekly issue of A-Clue.Com on the Web.

The work done at A-Clue.com becomes the basis for a host of real columns in real publications real editors pay me real money for. They include EcommerceTimes, for which I write a daily "viewpoint," as well as monthly columns for NetMarketing, Datamation, Boardwatch, and  Intellectual Capital. A-Clue.Com is also the Monday e-commerce column of Andover.News. Buy my book now. Subscription instructions are at the bottom of each issue.

Remember that it's still journalism -- checking the news, calling people, listening carefully and writing on deadline -- which keeps the Clues coming. If you're looking for excellent work, give me a call at 404-373-7634. Now back to the show...

Chain Letter Marketing

I have some friends and family members who are new to the Net. They like to forward me things they think I'll like. Sometimes they send jokes, sometimes they seek to enlist me in causes, and sometimes they send marketing pitches. They've discovered the cc: commands in their e-mail programs. They've built little mailing lists, so I always know whom else they're favoring. (They haven't figured out the bc: command yet.)

You don't think this is a marketing channel? It's one of the best.

Michael Tchong calls it "multi-connected marketing." John Audette  calls it "propagation marketing". I'm calling it chain letter marketing - you'll remember it better that way. Or you can call it word of mouse.

Warner Brothers Online President Jim Moloshok doesn't understand it. He sees fans on GeoCities putting up sites praising his products, which GeoCities then sells ads on. As reported by Ann Handley of ClickZ at last month's Variety Summit in Palm Springs, Moloshok thinks GeoCities is stealing from him.

Actually, as anyone with a Clue knows, GeoCities is selling for Warner Brothers. All Warner's losing is the incremental revenue of advertising on the posters. Moloshok is now trying to capture some of that revenue by offering free home pages and the art that goes with them on Warners' sites. (It won't work - do you care if someone on the Warner site likes Warner stuff?)

Other marketers are also trying to turn this democratic impulse into dollars . Virtual Inventions is one such firm. They call it "viral" marketing, but it's just a variation on what shareware outfits have done for years. They write games with ads in them, and people can e-mail the games to friends. While shareware authors start with software, then look for advertisers, Virtual Inventions starts with advertisers, then writes the software.

There's a fine line you have to walk, however, to make this work. Politicians have known about that line for years. They disparage moves like Moloshok's with the name "Astroturf politics." You see, voters in the "grass roots" may write their Congressman long letters about an issue, but when political action committees try to simulate the effect all the letters sound alike. The politicians know it's fake grass roots - Astroturf. (And you thought politicians weren't funny people.)

Chain letter marketers need to walk the same line. It's a line Clued-in marketers have known about for years. If you offer real value up-front, people will be happy to pass it along, even if it's ad-supported, even if it's essentially a pitch. If you're more interested in the pitch than the value, people will see right through it. Moloshok will find he gets more value from GeoCities' users than from his own.

A Tale of Two Strategies

What's more important, traffic or sales? The answer may lie in the strategies of Yahoo and Amazon.

Yahoo stands for traffic. They bought GeoCities, and they're buying Broadcast.Com, mainly to get the hours. Pressed by Disney, General Electric, America Online and Microsoft, Yahoo must maintain its position as the leading Internet service and have a story it can tell regarding the coming broadband revolution. So its Broadcast.com deal wasn't Clued-in, it was essential. Never mind the numbers. Yahoo had a market cap of $36 billion on sales of $200 million. Now it will have a cap of $42 billion (or more) on trailing revenues of $220 million. To stay a player Yahoo has to keep selling that exponential growth story. This deal lets it do that.

The risk is that the story is mostly air. Yahoo's position depends on the continual growth of the Internet stock bubble. People buy Yahoo because they figure someone else will take them out for more later. When that assumption comes under question the bubble bursts, and when you fall there is no bottom because there is no conventional valuation. (Figure a multiple of 30 for Yahoo's $25 million in earnings and you get a market cap of $750 million, not $36 billion.)

Amazon is all about sales growth, not just in absolute dollars but in its potential market. Taking multiple niches is essential for it to keep selling tomorrow. Amazon's sales for its last fiscal year totaled $610 million (nearly three times Yahoo's), up 400% from a year earlier. Its stock price is based on the assumption it can keep that going, which would mean sales of nearly $10 billion in two years. So Amazon must buy to grow. Last year it bought PlanetAll and Junglee. This year (so far) it's gotten controlling interest in Pets.Com and Drugstore.Com. Amazon must also grow internally, and thus its auctions (which hope to steal from eBay).

Amazon has won significant share in CDs and videos, but the only mention of those businesses in its SEC filings is a note that they have low margins. There's no mention of Amazon's share in those markets, but the untold fact is its share is much lower than in the Internet book business. The key point is that Amazon can't expect a slam-dunk in any of its new markets. Videos and CDs were basic line extensions, but the big bucks of vets (and pharmacists) come from selling medicine, and it's far from certain that regulators (or rivals) will let Amazon into either business. Both are based on contracts with drug companies and hospitals that Drugstore.Com has yet to negotiate. Government intrusion into the Internet pharmacy is bound to grow, and since animals take many of the same drugs as people, it will grow in that area as well.

So what about auctions? Amazon's current businesses give it real goodwill in that area, as Sean Cafferky (who hosts a-clue.com at http://www.ppn.org/clue) has pointed out. But anyone can run an auction, as I've pointed out, and there's a lot of infrastructure needed to run auctions honestly (and profitably).

Here's the bottom line. The awesome growth of both Yahoo and Amazon has come in a vacuum. But nature abhors a vacuum. It's why lightning is followed by thunder. The thunder Yahoo hears consists of Disney, GE, Microsoft and AOL stealing its audience. The thunder Amazon hears comes not just from meat space competitors, but regulators looking to police its markets. (And we haven't even talked about sales taxes yet.) Investors are buying these stocks based on 400% sales growth rates that won't continue simply due to the law of numbers. I personally think the management of both Yahoo and Amazon are doing all they can to build their businesses while they can. The fact is they won't be able to do those things much longer, and I think they're Clued-in enough to know it.

Clues for the Cluetrain

The launch of Cluetrain caused me some soul-searching before I decided against climbing on board.

The site's white, male (I'm one, too) thinkers nailed "95 Theses" to the Web (should Lutherans sue for copyright infringement?) describing a world of autonomous beings whose markets consist of conversations and who refuse to be herded. Who could be against it? Not me, certainly.

Where I differ is in the idea that bureaucracy is rendered obsolete by all this. Bureaucracies let us organize great works. As soon as you hire an office manager, you have a bureaucracy. There's nothing wrong with bureaucracies per se. They're your organization's skeleton and circulatory system. America makes the greatest bureaucracies in the world. Gen. Colin Powell headed a bureaucracy, so did Dwight D. Eisenhower.

Business bureaucrats are directed inward. Good managers minimize the power and influence of their bureaucrats, giving them just enough resources to do their jobs. They have incentives that measure bureaucrats like other workers, based on the goals of the organization (and not the bureaucracy). Bad managers become bureaucrats, good ones rule bureaucrats, and good bureaucrats are worth their weight in gold.

Government administration is a bureaucratic process, which doesn't mean government is bad. Police departments and armies are also bureaucracies. NASA is a bureaucracy. Government can also force the creation of bureaucracies to control monopolies or hobble those acting like monopolies. (See Microsoft for an example.) The best bureaucracies present reasonable choices and effectively implement the leaders' decisions. (Until the government got involved, Microsoft had a wonderful bureaucracy.)

The Cluetrain is a fun ride for those of us who are self-directed and highly intelligent. My Clue for it is this. Not everyone wants to be that way.


As you may have noticed in our "Shameless Self Promotion" section, I recently got the ActiveName  of +A_Clue . In a way, this Israeli-developed technology is related to Centraal's RealNames, used at AltaVista (except it doesn't send messages through a separate server). The question before the house is, will this work? You be the judge, and let me know. I could use a Clue on this one.

Clued-in, Clueless

Clued-in this week is The Economist , which not only knows who's running Microsoft but understands the strategy, and what's wrong with it. They even got the history right.

Clueless is AOL's CompuServe  unit, for making its $9.95/month access plan deliberately obscure. The plan is very hard to find on the site, (thanks go to reader Andrew Green for confirming this and making the nomination) and I'll add that the TV ads are very misleading. The fact that the $9.95/month price is for a maximum of 20 hours via modem each month is mouseprint. This "bargain" is neither new nor a bargain.

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