The Seven Trends of the Current Economic Storm

1. Recognition by everyone that this is a severe economic crisis.
   We are experiencing a massive economic disruption. The mortgage meltdown, the credit default swap market meltdown, and the freezing of the commercial credit markets are causing massive turmoil in the financial markets. It’s driving a self reinforcing cycle of fear and chaos. Jobs are being cut, consumer credit is maxing out, foreclosures are accelerating, pension plans devastated. This is a bad, bad, bad situation and people everywhere are going to know and feel its impact.
2. Consumers will/have started making cost cutting a priority.
   We will be buying Mac and Cheese from Wal-Mart, instead of eating out. Discretionary cash will be in very short supply. They will spend even more time looking for bargains.
3. Demand has stalled for high end purchases by the mass market.
   The auto market is down by 30+%. That’s a huge drop. I was speaking with someone from a major car company earlier this week and he described how $10 billion in revenue just disappeared. Factories that were working hard are coming to a screeching halt. This will mean even more job loss and consumer distress.
4. Businesses are making cost reduction an urgent priority.
   Layoffs are beginning to gain momentum and will continue. Discretionary projects will be put on hold. The cost pressure will be so severe that we will see some radical, but very disruptive innovation.
5. Businesses will slow/put the brakes on capital spending and payables.
   Hording cash will be a key to survival. Businesses will react by slowing and cutting the spending on capital projects, and like consumers they will stretch out their payables as long as possible.
6. People and organizations with cash to invest will buy distressed assets at bargain prices
   Just look at Warren Buffet and his actions recently. He knows that when times are bad, it’s time to get greedy. There will be lots of cash strapped asset owners desperate enough to cut really attractive deals for investors. This will shift money from investment in new growth opportunities to investment in cash producing assets. This is really bad for start ups and anyone who needs venture capital. There will be very little money going to new things in the next 12 months.
7. The government reaction will increase substantially
   The problems we are facing will require even more government action.  There will be increased government deficit spending, cuts to interest rates, stimulus checks to the mass market, big government infrastructure projects and maybe even broad tax cuts. Given the current political trends, friends of Democrats (unions, trial lawyers, Hollywood, etc) are likely see more money coming their way and friends of Republicans (oil, pharma, Halliburton, etc) are likely to be punished as being the bad guys. As the government settles down, they will start putting in incentives to get businesses to invest and spend cash. 

Some preliminary thoughts on what this means

I think that these trends will definitely sway the financial rebound of different companies.

It is clear to me that delays and cut backs in discretionary, high end purchases are bad for the auto, consumer electronics, consumer durables, restaurants and other sectors that depend on these types of purchases. It is time to stay away from this stuff until consumers catch their breath and start feeling some job/financial security.

Companies that can help us cut costs, work out our debt, shop more effectively and help us get credit should be advantaged in this market. Experian looks like a company that should be able to take advantage of this. This is also an attractive potential area for social networking and media to the extent it can help people work out their problems together.

Companies that offer the ability to get results at much lower costs will rebound much more quickly. For example, the extraordinary cost effectiveness of search and online advertising will accelerate the share shift from offline to online. We may not see huge growth online, but offline advertising will get hammered, especially given the importance of the financial and automotive industries to ad spending. Stay away from offline publishers. On the flip side, this makes Google look more interesting and maybe even Yahoo.

This need for much lower costs will also accelerate share shift from costly physical channels to internet based channels.  This may be good for eBay and Amazon, but I’m interested in finding companies that are earlier in the process.  I’m not sure who to look at here.

Given the extraordinary cost cutting we will see in businesses, they will need ways to keep their businesses running with many fewer employees. This is probably good for effective productivity tools and outsource service providers. I think this is particualarly good for collaborative communication tools that really work, like Go To Meeting.  Companies that have cash will spend it very strategically and if you can get in front of  that trend it could be a good thing.

If you have cash to invest, it also makes sense to keep some dry powder waiting for opportunistic investment opportunities in distressed assets.

On the government front, it’s less clear to me which investment opportunities are worth exploring. I need to see the outcome of the election to really know who the winners and losers will be. I think I’m going to take a look at donations to each party to see who looks interesting.

Lastly, for those of you looking for venture capital, it is going to be a serious dry spell. It is time to hunker down hard.

My caveat on all this is that I’m not a stock picker. I think good investments are as much about buying at the right valuation as they are about picking the right areas. I have no perspective on whether or not the companies I’ve talked about have attractive valuations or not. At the time I write this, I don’t own stock in any of the companies I’ve written about, but that may change by the end of the day.

I would love to hear you’re thoughts on other major trends that are in play right now and what it all means. Leave a comment.

I was quite skeptical that this deal wood be good for Microsoft or Yahoo, and believe the major beneficiary of it would have been Google. Neither Microsoft or Yahoo has a product that effectively competes with Google’s search and advertising products. Combining two huge computer systems or choosing between the two would have tied them up in knots for years.

Yahoo has some great potential if they can truly integrate their social assets and open them up as a new type of application platform. Perhaps the Microsoft bid was the spur that Yahoo needed to get it’s act together.

Yahoo’s shares will drop on Monday and Yahoo will be sued by shareholders who are frustrated by their inability to close a deal. It will be interesting to see if Yahoo continues to pursue the Google deal and if Microsoft emerges as competition for an AOL deal.

If Yahoo doesn’t take this chance and start delivering performance, then Microsoft or someone else will be back and buy them for much less than the $37 per share Yahoo wanted to agree to the deal.

[tags]Microsoft, Yahoo[/tags]

He says that Yahoo has been open for a long time. They have lots of open API’s. Flickr is the second largest of these.

He wants to take “open” to a whole new place. He wants to open up all the assets to developers. They want to open up the social network that is Yahoo. It sounds like they have been learning from Facebook and OpenSocial. They seem to recognize that they have the ability to be the worlds largest social platform if they can get this right.

He announced the opening of the beta for search monkey. He says that Yahoo’s open strategy is not just about opening up the search page, but opening up all the aspects of Yahoo.

They will have an application platform and a social platform. They are going to unify profiles across Yahoo go make social possible. The third element is to re-wire all the properties of Yahoo so that there is a consistent API across the different experiences.

They want to rewire the entire Yahoo experience to be social. They don’t view social as a destination. He provides an example of social being used to highlight mail in email system, highlight what’s important to friends in My Yahoo or on the sports page.

Y! OS (open strategy)

• Rewiring Yahoo
• Open Yahoo to developers like never before
• Making Yahoo more social
• Making Yahoo portable.

Search Monkey now, much more later this year. The overall process will unfold over time. Look for releases over this year and next.

UPDATE: Here’s the video of the presentation:

[tags]Yahoo, Open Strategy, Web20Expo[/tags]

If Yahoo wants to survive here are five things that would make some sense:

1) Either announce some grand social strategy that takes advantage of things like flickr or announce that that all these money losers are up for sale/spin off/close down.

2) Start thinking of advertisers as customers and make employees understand they are at Yahoo to make $$ for shareholders.

3) Hire someone who knows how to manage a sales force for sell through. Yahoo has way too much remnant inventory and sell through will all drop to the bottom line and be good.

4) Decide it’s ok to be a really successful media company and get rid of the Google envy.

5) Fire the Panama team and announce that they will partner with best bidder.

[tags]Yahoo, Microsoft[/tags]

Combining two companies that DO NOT GET IT is NOT a recipe for competing with one that does. So let me get specific about what I mean by NOT GETTING IT as it relates to Microsoft and Yahoo. Anyone who has used Google Adwords as an advertiser and Google Adsense as a publisher and done the tests on the competitive products from Microsoft and Yahoo knows what I’m about to describe.

When I set up a campaign at Google Adwords, it is an automated process that is rich with interaction and feedback. I can test a campaign, keywords and ads in a very responsive manner that allows me to set it up, test it and optimize it quickly. Yahoo’s equivalent service was a captive to the belief that permeated Overture/Goto that only human editors could screen ads to make sure that they were relevant. It would take days under that process to do what Google did in minutes As a result, I advertise at Google and do so with Yahoo when I get around to it, if ever. (BTW I told this to the senior team at Yahoo’s search marketing group, but they either didn’t want to hear it or could not change the business process that had been set in place 4-5 years before) Since then, Yahoo has tried to reinvent its ad platform and Microsoft has launched their own version, but both still lag way, way behind Google.

How will Microsoft be able to merge two hugely expensive computer platforms when neither is yet good enough to compete with Google’s ad platform? And the same problem exists when you look at it from the publisher side. Google’s Adsense delivers better ads than does the equivalent Yahoo product despite huge investment by Yahoo. What will Microsoft do, scrap one deficient set of systems for another or try to make both work? Either way, the path leads to doom and gloom for both Microsoft and Yahoo.

There is obviously much more to both Microsoft and Yahoo than search and search advertising, but let’s be clear. Search based advertising is the engine that powers Google and everything it does. Social networking/media, a la MySpace and Facebook, has huge potential and Yahoo should have been the king of that domain given all their acquisitions in that arena over the years, but if Yahoo can’t turn My Yahoo, Flickr, GeoCities, De.licio.us etc. into a Social Media powerhouse how can we expect Microsoft to do so.

I can only hope Yahoo turns down Microsoft and they come to their senses. Yahoo can still do great things with the audience and assets it owns by changing its focus to become the queen of social, instead of the king of search. Microsoft should stop listening to bankers and get back to making products that work well and can out perform the competition.

[tags]Yahoo, Microsoft, Google, social networking, social media, search[/tags]