The New Wall Street: Yahoo! to Buy Tumblr for Over $1B

Internet giant Yahoo! announced on Sunday that it would buy blogging service Tumblr for $1.1B in cash.  Just last year, Facebook purchased Instagram for $1B.

These expensive Internet company acquisitions have made headlines, largely because among traditional Wall Street investors, there remains a nagging, unanswered question:  How on earth will any of these new Internet companies actually make any money?

Yahoo's Marissa Mayer promised investors that she would not "screw up" the deal.  But is the billion dollar-plus Tumblr deal already doomed from the start?

It is clear that popular free Internet services like Google, Yahoo, Bing, Facebook, Instagram and Tumblr are first intent on building strong brand loyalty among their respective users. Once that brand awareness and loyalty exists, the somewhat more challenging task is left to others to figure out how to monetize this intangible asset into a profitable venture. "Turning eyeballs into dollars," some consultants call it.

And it is no easy task:  Ask Mark Zuckerberg.  Facebook's Initial Public Offering raised $16B, but most of Facebook's revenue still comes from advertising, not membership/usage fees.


Sarah Smith, who was Facebook's Online Sales Operations Manager, reported that successful advertising campaigns on the site can have clickthrough rates as low as 0.05% to 0.04%.  That means that Facebook generally has a lower clickthrough rate for its advertisements than most major websites.

In fact, according to BusinessWeek.com, banner advertisements on Facebook have generally receive one-fifth the number of clicks compared to those on the Web as a whole, although specific comparisons can reveal a much larger disparity.

Therefore, even Facebook, with massive brand awareness and loyalty, has struggled with monetizing these assets.  Best of luck to Yahoo, Tumblr and Marissa Mayer.

America: Made in China

This image was taken from a real label that was found on the streets of New York.

The economic value of China's annual exports to the United States is estimated to be $417 billion, and growing each year. The number of American jobs lost to Chinese imports each year is likely in the hundreds of thousands. This data may help to explain why the Obama administration has struggled with a nagging unemployment rate of approximately 8%, even as the stock market reaches record highs.

It is no surprise to the consumer that very little furniture, electronics, toys or apparel are manufactured in the U.S. any longer, as these items are increasingly imported from China and other developing nations.

The Wall Street Journal has reported that the negative impact of cheap Chinese imports on the American economy is far greater than previously thought.

Similarly, a Wall Street Journal report in April 2012 found that America’s largest multinational corporations outsourced more than 2.4 million jobs over the last decade, even as they cut their overall workforces by 2.9 million. 

Outsourcing jobs to a cheaper foreign labor pool, and increasing the number of cheaply made products from China makes perfectly sound business sense at the microcosmic level in the short-term. Indeed, Wal-Mart has generated billions of dollars in profits derived virtually entirely from this very business model.

However, as a long-term matter, this strategy has the potential to tarnish brands, lower quality, encourage counterfeiting, and even destroy entire industries.

For example, in Deluxe: How Luxury Lost Its Luster, author Dana Thomas chronicles how some luxury brands have resorted to cheap, Chinese mass-market production methods, and how doing so has risked their previously sterling reputations.

No industry is immune from the effects of globalization, cheap imports and job outsourcing. Ironically, even U.S. patent lawyers have seen previously high-paying jobs outsourced overseas.

Should Government Really Be Run Like a Business?

In a previous post, we noted that, from an Intellectual Property and legal perspective, American voters are treated as consumers, and politicians can become trademarks.

We were sent a thought-provoking and interesting video by OnlineMBA.com, which creatively argues that government should not be run like a business:

This video advances a few arguments comparing businesses and governments generally.

First, it notes that the core purpose of government is fundamentally different from that of a corporation.  For example, it argues that the U.S. federal government is responsible for managing the divergent, competing priorities of over 300 million Americans, and it alone must secure the general welfare by building and maintaining roads and bridges, providing for the common defense, and the like. The video contends that voters are "people," which are more important than "profits."

If a government becomes profitable, it argues, that government is probably hording tax dollars for no good reason. In contrast, a corporation is legally bound to advance one goal: amass profits, and a massive cash reserve can promote its positive fiscal growth.

While it is generally true that government serves a different legal and social purpose than a corporation, this video misses the mark.

First, it ignores the reality that the U.S. federal government has clearly become a major player in the commercial sphere, in its own right. The U.S. Treasury Department reports that current federal expenditures affect huge swaths of the private, domestic economy with trillions of dollars spent each year by the federal government on private defense contracts, the post office, as well as social program spending.

The Treasury Department also notes that federal spending is anticipated to exponentially increase in the decades ahead, mostly to service interest on the debt, to pay for existing expenditures.

Therefore, the video's general proposition that the federal government should not be concerned about amassing profits is not a realistic assessment of the current situation anyway.  The government's budget should at least be solvent, if not profitable.

It is worth noting that the U.S. federal government's budget is currently much larger than that of dozens of mega corporations combined, and its decisions have major fiscal as well as political consequences.

Indeed, a recent story on NBC News noted that the federal government is better at creating low-paying jobs than Wal-Mart.

Therefore, the government MUST be run like a mega corporation, if it is going to act like one.

Further, another argument that the video advances is that shareholders and citizens have fundamentally different "rights" within their respective systems.  A minority shareholder in a corporation, for example, has no meaningful say in whether to remove a failing CEO, the video argues.  

This analogy is weak and imperfect.  Within a larger framework of a properly functioning stock market, a shareholder can always choose to "vote with his feet," and sell his share in the corporation to someone else.  Therefore, his potential impact is greater in affecting change in that manner in that particular corporation, than his shareholder proxy "vote."

If such an aggrieved minority shareholder, along with thousands of other shareholders, chooses to dump and sell his stock, presumably the failing CEO will be fired or forced to resign.  Consequently, the value of a single share in that company will decrease if the CEO is doing a poor job at managing it.

In comparison, an American citizen cannot "sell his vote" in quite the same way, since he has limited options.  Because the federal goverment holds a constititional monopoly on power, there is no competition with it.  Ironically, the aggrieved American voter is in an actually weaker position than a minority shareholder in a corporation, at least in comparison.

Finally, at least with respect to presidential elections, it is worth noting that a large segment of the American populace is effectively disenfranchised because of the Electoral College.  Democratic voters in "red states" and Republican voters in "blue states," have effectively no vote in the Presidential election.

In summary, the debate will continue to rage on as to what extent government should emulate private industry, and vice-versa.

Will Bitcoins Spur Even More Online Lawlessness?

Much has already been written about the rise of a new digital currency, the Bitcoin. To some commentators, the Bitcoin is a new type of gold, representing the emergence of a borderless online world, free of annoying governmental interference and ridding the world of obsolete local currencies. To others, the Bitcoin represents just another bubble, or at worst, is the latest shift to a lawless, online "wild west."

But what is Bitcoin exactly? The Bitcoin is a digital currency based on an open source cryptographic protocol and not managed by any central governmental or financial authority. Bitcoins can be transferred through a computer or smartphone without any intermediate financial institution.

The value of a Bitcoin has fluctuated wildly, leading some to speculate that it is the conceptual equivalent of tulip bulbs in Holland in the seventeenth century, which witnessed the absurd valuation of the flowers' roots.

Apart from its sheer novelty, one part of the allure of the Bitcoin is that it can be used in transactions on the black market for all manner of contraband such as drugs and weapons. Another "benefit" to the Bitcoin is its ability to avoid governmental regulations. Consequently, it has become a hacker's dream come true.

Since each Bitcoin transaction is largely independent of any financial institution's intermediary involvement, it becomes difficult if not impossible for governments to restrict or regulate Bitcoin trade as they would traditional currency flow. 

Recently, the U.S. Financial Crimes Enforcement Network (FinCen) issued a formal statement clarifying the scope of various recordkeeping requirements in the Bank Secrecy Act to different types of Bitcoin transactions.

One relevant question raised by some Intellectual Property owners is to what extent an increase in online Bitcoin transactions will even further complicate current efforts to regulate online commerce.

The answer is uncertain. However, given the challenges already involved in ensuring international banking compliance comports with intellectual property rights, the Bitcoin promises only more headaches ahead.

Ironically, the Bitcoin itself is already reportedly being counterfeited, and hackers are stealing them from online "wallets," raising questions about how realistic expectations are that it could possibly function as an actual currency.

Pfizer to Sell Viagra Direct to Consumers Online, Blames Counterfeiting

Pfizer, Inc. is reportedly preparing to sell Viagra-brand sildenafil citrate tablets online directly to consumers, without the need for a pharmacist.

A prescription from a licensed medical doctor is still required. CVS Caremark Corp. will fill the orders made on the company's website, Pfizer said.

Pfizer attributes the unusual move to the prevalence of online counterfeiting, according to a recent story in the L.A. Times.

Online pharmacies have proliferated in recent years, selling fake versions of Viagra and other brand-name drugs at low prices and with no prescription needed.

Viagra has become one of the most popular drug products to counterfeit given its high price and the embarrassment some men experience ordering the drug from a local pharmacy.  

When announcing its move to include online sales, Pfizer cited a recent study that found as few as 3% of websites selling prescription drugs were legitimate pharmacies selling genuine goods.

Viagra is one of Pfizer's top drugs, posting $2 billion in worldwide revenue last year.