Coburn Ventures Conference Call:
"The Free World and Its Implications"

As the price of everything on the internet plummets towards zero, a pair of analysts discuss the passing of business empires.

by Alex Goldman ISP-Planet Managing Editor [February 23, 2006]

"… nothing is more difficult than to introduce a new order. Because the innovator has for enemies all those who have done well under the old conditions and lukewarm defenders in those who may do well under the new…"
—Niccolo Machiavelli

It certainly wasn't the usual topic for a Wall Street conference call, but Pip Coburn is an unusual Wall Street analyst. He founded Coburn Ventures when he left UBS in 2005, with his research team.

The promotional copy for his book, The Change Function: Why Some Technologies Take Off and Others Crash and Burn, to be published this summer, notes, "Pip Coburn became famous for writing some of the liveliest reports on Wall Street. He quoted everyone from Machiavelli to HAL, Anaïs Nin to Yoda, Einstein to Gandhi. But along with the quirky writing, he consistently delivered sharp insights into technology trends and helped investors pick stocks with long-term potential."

As part of the promotion of the book, Coburn hosted a conference call with research fellow Arnie Berman, also a Wall Street analyst, called The Free World and Its Implications.

The e-mail introducing the conference call said:

"Are we moving toward a world where the expectation is that everything is FREE? As the Digital Demographic Shift takes hold, we suspect more and more companies will have difficulty finding their cash registers. On the call, we'll dig deeper into this change, discuss who is at the wrong end of being "freed" by the market, and how much worse the whole mess can get..."

On the call Berman said he and Coburn approach research matters from slightly different points of view. "I'm more Wall Street," Berman said. "Pip is more digerati."

Coburn expressed his digital perspective at the start of the call. "Analogueists will have to migrate to the digital world. Society is changing. We look at 25 year olds, not 45 year olds, to forecast change. People in the financial world are both fascinated by and worried by the use of technology by young people. If you feel you do not need to master this change, you could find yourself reporting to a boss who's younger than you. If that happens, you had better master the technology that your boss has already mastered."

For established companies, the internet is a threat. "Look at the products and services that younger people are accustomed to not paying for," said Coburn. "They download King Kong the movie, read newspapers, and make phone calls for free. Just as an analogy, imagine if the oil company came into your office and said that people won't pay for oil anymore, but they'll watch ads while pumping gas. We'd sell their stock right away."

Coburn sees almost all content producers as threatened by the internet, but "newspapers are at the top of the list, especially those for whom online is a small percentage of revenue, with most of the revenue coming from circulation."

The obvious paradigm
Berman has a slightly different take on the way technology causes change. He said, "money tends to flow from the controversial to the obvious," meaning that when a new technology is introduced, it's not obviously the right thing to do, but the moment it becomes accepted wisdom that it works, the technology starts minting money.

Berman said that a tectonic change is occurring in technology, one that's been heralded for years, but has been controversial. Now, the revolution once called Application Service Providers (ASP), more recently called Software as a Service (SaaS), has arrived. The last major technology revolution, Berman said, happened in 1991 with the ability to network PCs. "The ability to have PC users working in close proximity to share files paved the way for SAP-style apps. Novell NetWare, in retrospect, is quaint," he said.

But today, as it becomes easier to deliver applications over the network, established players like SAP could be replaced by products that can be deployed more cheaply. "SAP is to this revolution as IBM was to the last one," said Berman. He implied that Salesforce.com is the way to the future, that it will replace SAP.

Coburn said that his company uses salesforce.com, and joked that the company's service is too good. "Sales, General, & Administrative expenses are at 70 percent," said Coburn. "What worries us about this company is the scalability. If SG&A stays at 70 percent, that's a problem."

Coburn said that a rule of thumb about change is, "change happens when the current pain is perceived as less than the pain of making a change," and argued that adopting an SaaS application is still seen as a challenge.

Berman said that Salesforce.com has received negative publicity from a recent outage, but that previous highly visible outages at eBay and AOL has resulted in investment in infrastructure. He predicted that the infrastructure that SaaS requires will be built, perhaps by the telecom sector.

"In the telecom sector, we're de-emphasizing consumer plays like Apple and Google," Berman said. Instead, the profits will be made in business services.

We at ISP-Planet are also seeing money move from investing in residential services to investing in business services.

Outsourcing
Coburn said that the wave of outsourcing is overstated. He did not say that outsourcing's power is overstated because of politics, but that seems a logical conclusion. Coburn stuck to the facts. "The six largest companies in India offering outsourcing did $9 billion worth of business last year. IBM generated $47 billion in consulting. The publicity surrounding outsourcing does not match the revenue stream."

He said that India's outsourcing business will be unable to grow as fast as the wildest predictions. "It's difficult to grow a headcount business without messing up. Infosys told us that they had seen a million applications in recent months. Execution is key. There could be short term problems."

The telcos
Coburn prefaced his first statement about the telcos with the boast that he was saying something no other Wall Street analyst would. "Their core asset is the ability to lobby. The top three spent over $2 billion in the last election cycle. I would not write off their ability to write favorable legislation."

Berman was more cautiously pessimistic. "The big hype out of CES is IPTV, so it's odd that the Street likes IPTV but is thumbs down about the money Verizon is spending on it. In fact, Verizon is not spending enough, but Wall Street is complaining about 'squandering shareholder assets.'"

Berman and Coburn agreed that SBC and Verizon will have a real opportunity to eliminate competition in the business Internet market.

In a dig at Qwest, Coburn concluded, "who would have thought a few years ago that we would go from seven providers to three or two?"

Conclusion
We'll review Coburn's book when it's published. As you can see from this brief discussion, Coburn always thinks about the big picture, and is willing to say exactly what's on his mind.

—End