Economic Illiteracy & Technological Luddites

Back in late August, I wrote a post discussing my initial thoughts about Michael Lewis' The Big Short. I began the piece with a nod to online shopping and economic efficiency by writing,


"I went ahead and bought two of his subsequent books, Moneyball and The Big Short. Incidentally, in keeping with the times, I ordered both as nearly-virgin, used copies from Amazon resellers for no more than $10 each, including shipping. The latter arrived looking every bit like a brand new, unopened book."


Imagine my surprise when a reader contacted me yesterday and wrote, among much, much more verbiage, most of it economically illiterate and whiny, in two emails,


"But this this email doesn't concern that--it's about your recommendation to buy Lewis's book used for 6 bucks. As an author, that suggestion is appalling to me and displays a profound lack of knowledge of what it means to be a writer in America or how the publishing world works, and how the writer gets screwed if you follow that advice.


Most of us, especially literary novelists, need other jobs. We need people to buy our books new. It means survival. It means getting published again. I sold about 3,500 copies of my first novel. But it is estimated I have sold more than twice that many "used."  Not only didn't I get a penny in royalties from those books, I didn't get credit when I went to sell my new novel. I happen to be in a rarefied position as a novelist with a great and sympathetic publisher. Had I chosen to try to go to a "big house" as many of the agents I spoke to urged me to do with my second book, the difference between selling 3,500 on a medium sized, if prestigious press vs. 7,000 is huge when asking for an advance. If I'd originally signed with a big house and sold three thousand copies, there's a good chance I wouldn't even have gotten a contract offer for a second book.


Of course, my primary aim is to have people read my work.

I've done scores of panels and readings over the years and I ask the audience to buy new books of living authors. Fine by me if you want to buy Gatsby used.

I work as a university professor teaching novel and short fiction to grads and undergrads-- 3/4 pay for full time schedule of teaching and I've been doing it for a decade. I edit a literary magazine for minimal pay because I love it. My choice.


When you buy a used book from a discount seller, I consider that piracy- you are getting my creation/work and I don't get a dime. Not my choice at all. I have done the work and I deserve to get paid for it. Those people making a living reselling books would have my respect and could resell all the books they want if they paid a rightful sum to the author. All I want is the 12- 15 % per cent of what they sell it for- what I'd get from a full price pb book. Unfortunately, there is no way to police this even if it were made legal.


By saving six bucks in paying a reseller you may think you're being smart and saving money (or as my mom would say "acting like a cheapskate.") That is short sighted and wrong headed. If you believe in the Social Darwinist concept of survival of the most amoral and selfish, with profit as the only consideration, then I understand your position and there is nothing to discuss."

A few passages from my replies to this teacher/editor/author were,


"What about all those people who now make a living recycling books people don't want and reselling them? And all those saved trees, heaven forbid, if you are a Greenie.

Sorry, but you sound like one of those people in Maine who used to wail about wanting the good old days of lush jobs making shoes so that Americans could pay twice as much for them, instead of realizing a higher standard of living from Asian-made footwear.


My advice is to rely less on printed material and figure out your pricing strategy for online copies.


I will continue, where appropriate, to remind people to buy excellent used copies, like new, for as little as $6, plus shipping.


Especially if they want the book, but loathe the author!


Totally understand your refusal to sign used books. Agree galleys are illegal.


Look, if you want to write, write. And accept that the market will pay you what your work is worth. Period. When someone like you begins to whine about 'art,' it usually means you want a subsidy to pursue you pet projects.

You missed you era- as a state-supported artist in the Soviet Union. I sense a kinship between you and that mindset.

I highlighted what I consider to be essential passages from the reader's and my emails in color (blue for him, red for me).
 
It's funny how some people want the laws of economics suspended for themselves. But not for others.
 
My reader assures me that his "primary aim is to have people read (his) work." But spends two emails griping that he can't get paid what he feels his work is worth.
 
Well, I'm a writer, too. I write this blog daily, and have done so since September 15, 2005. I've written almost 2,000 posts. Many are linked, reposted, cited, etc. on other media. I don't get a dime for most of it- just a measly $15 or so per month for a redistribution agreement which allows that distributor's customers to copy and use my (and other bloggers') content without copyright violation.

I write for several reasons. First, to anecdotally reinforce my proprietary research findings. Second, to maintain my strategy development and analytical capabilities. Third, to contribute my own insights to the general mix of business-oriented media. That I do so for free, of course, essentially aids in depressing the value of all such content.

Just over three years ago, my posts concerning GE and Jeff Immelt's mismanagement of the firm were noticed and read by the staff of Fox News' Bill O'Reilly's The Factor program. I subsequently appeared on an episode to discuss that situation. Such is the occasional influence of even a free blog like mine. I have about 50 readers who follow via RSS feeds and, depending upon the week, between 60 and 100 average daily visitors. Substantially more when I write a popular column which is found by readers searching on the topic.

The truth is, the combination of digital and online technology makes all content- video, text, audio- expensive and difficult to publish without losing control or accepting that copies may be resold with no more revenue accruing to the content creator.

I'll bet my whining reader thinks it's wrong and illegal for the buyer of a living artist's painting to resell it and keep all the money from that sale.

Here are my thoughts on the reader's arguments.

First, one's creative published work is worth what others will pay. Period. Not what you wish they would pay, or think they should pay in some other, ideal parallel universe.

Used books have been around, bought and sold, for hundreds of years. Moving it online to Amazon makes it far more efficient. And efficiency does matter. That's what economics does- finds efficient means of production of desired goods and services with fewer resources. In this case, the cost of finding and acquiring used books is much lower than in pre-Amazon times. And fewer trees are cut, energy used to acquire a used book.

Knowing this, an author has a choice regarding pricing. It is simply ludicrous for my reader to demand an ongoing royalty from each sale of a specific copy of his book. I suppose the only way to emulate that is to sell only to lending libraries, and at prices which capture the multiple-usage nature of that channel.

Or publish his works in the same manner as music services which only rent out the use of songs for a defined period of time. If rent isn't paid, the song's usage license expires. Same with downloadable video which expires after a specific time period has elapsed.

So my reader has choices. He just seems not to like them. Yet he chooses to continue to write and attempt to publish.

Second, he's a little late to the game in terms of even bothering with publishers. I recently read a Wall Street Journal piece which focused on an Amazon top ten-selling book which was self-published. There are now choices for how to electronically self-publish and distribute one's literary product. With the continuing demise of bookstore chains, it's debatable for how long conventional publishers will matter all that much to the average non-textbook author.

I had this very discussion with a friend who is a recently-retired English teacher. His wife is becoming an Amazon reseller in order to recycle my friend's extensive collection of used books. He agreed that self-publishing is the more sensible option for most individual authors of creative writing.

Third, whenever you read or hear someone complain about being treated unfairly when they freely enter the market to sell their labors, you should suspect their logic and/or motives. What we have in the case of the reader who emailed me is, I believe, the struggling/wounded artist who simply thinks that because he is an artist, he deserves the value he places on his work. That society should arrange things so he receives that.

Thus my remark about his missing his calling as a writer during the height of the Soviet era. Assuming he'd have accepted everything else about that era's Soviet system.

And, by the way, as an example of his lack of clear thinking, just because an author is dead does not mean my reader should condone buying that author's work as used. His position, to be consistent, should be that nobody should ever buy a used copy of any book not in the public domain if a single new, unpurchased copy exists somewhere. After all, the rights to royalties of such books are owned by someone, even if the author is dead.

I don't resent being told I'm a "cheapskate" for buying excellent, like-new used books. It's no different than buying something on eBay, at a consignment shop or estate sale. Or a house!

Recycling previously-owned goods is as old as humanity and trading. It's basic, sensible human economic behavior. To now rail against buying used books from Amazon, but not decry the purchase of any used item ever, is to be a technological Luddite. Which I believe my reader is.

I don't buy used clothing or cars. Everyone has their particular behavior process with respect to how they value various aspects of various goods. To me, a like-new copy of a book is well worth purchasing at a fraction of the list retail price. And I'll do it whenever possible.

It's just good economics. It effectively improves my standard of living.

If my reader doesn't like the fact that I, and, evidently, tens of thousands of other Americans put no psychic value, for which we will pay, on only buying unused, new books, well, I don't care.

It's not short-sighted. Most authors write because they want to write. They know, or can estimate, the economic value of their work beforehand. None to my knowledge expect to earn money from the resale of their used works.

The Panic Over Netflix

I'm frankly a bit surprised at the panic and anger following Netflix's recent pricing changes. Here's the email Netflix CEO Reed Hastings sent to customers the other day:


"Dear (Customer name)-

I messed up. I owe you an explanation.



It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming and the price changes. That was certainly not our intent, and I offer my sincere apology. Let me explain what we are doing.


For the past five years, my greatest fear at Netflix has been that we wouldn't make the leap from success in DVDs to success in streaming. Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us). So we moved quickly into streaming, but I should have personally given you a full explanation of why we are splitting the services and thereby increasing prices. It wouldn’t have changed the price increase, but it would have been the right thing to do.


So here is what we are doing and why.


Many members love our DVD service, as I do, because nearly every movie ever made is published on DVD. DVD is a great option for those who want the huge and comprehensive selection of movies.


I also love our streaming service because it is integrated into my TV, and I can watch anytime I want. The benefits of our streaming service are really quite different from the benefits of DVD by mail. We need to focus on rapid improvement as streaming technology and the market evolves, without maintaining compatibility with our DVD by mail service.


So we realized that streaming and DVD by mail are really becoming two different businesses, with very different cost structures, that need to be marketed differently, and we need to let each grow and operate independently.


It’s hard to write this after over 10 years of mailing DVDs with pride, but we think it is necessary: In a few weeks, we will rename our DVD by mail service to “Qwikster”. We chose the name Qwikster because it refers to quick delivery. We will keep the name “Netflix” for streaming.


Qwikster will be the same website and DVD service that everyone is used to. It is just a new name, and DVD members will go to qwikster.com to access their DVD queues and choose movies. One improvement we will make at launch is to add a video games upgrade option, similar to our upgrade option for Blu-ray, for those who want to rent Wii, PS3 and Xbox 360 games. Members have been asking for video games for many years, but now that DVD by mail has its own team, we are finally getting it done. Other improvements will follow. A negative of the renaming and separation is that the Qwikster.com and Netflix.com websites will not be integrated.


There are no pricing changes (we’re done with that!). If you subscribe to both services you will have two entries on your credit card statement, one for Qwikster and one for Netflix. The total will be the same as your current charges. We will let you know in a few weeks when the Qwikster.com website is up and ready.


For me the Netflix red envelope has always been a source of joy. The new envelope is still that lovely red, but now it will have a Qwikster logo. I know that logo will grow on me over time, but still, it is hard. I imagine it will be similar for many of you.


I want to acknowledge and thank you for sticking with us, and to apologize again to those members, both current and former, who felt we treated them thoughtlessly.


Both the Qwikster and Netflix teams will work hard to regain your trust. We know it will not be overnight. Actions speak louder than words. But words help people to understand actions.


Respectfully yours,


-Reed Hastings, Co-Founder and CEO, Netflix
p.s. I have a slightly longer explanation along with a video posted on our blog, where you can also post comments."
 
Punditry has come down on both sides of this issue. CNBC's Herb Greenberg renewed his customary energetic attack on the company, once more reminding one and all of the firm's balance sheet's store of unexpensed acquisition costs. And Greenberg asserts that providers like Netflix will become commodities, thus ruining the firm's business model.
 
Others, however, side with Netflix for sensibly now splitting two very different businesses. As well as prepare customers for the eventual arrival of bandwidth pricing, which will affect how they use online media.
 
As for me, I'm rather sick of the whining by pundits (like Greenberg) and customers who are shocked- SHOCKED!- that prices for the physical disc side of Netflix's business have risen.
 
They remind me of the people who are outraged that Social Security- correctly called a Ponzi scheme by Rick Perry- won't deliver on all of its phony, never-was-possible benefit promises.
 
In the case of Netflix, pricing was what it was while it was. Initially, they gave away metered online usage according to your pricing plan. Then it became unlimited, which of course encouraged migration to streaming.
 
But the streaming business has always had a distinctly smaller inventory of video to view. I don't know about other customers, but I viewed the two services- streaming and discs- as two separate vendors, anyway, because of the availability issue.
 
So it makes a lot of sense to me that Hastings & Co. have finally announced a formal split of what have been two different-looking businesses for at least a year.
 
Meanwhile, thanks to Tivo and Netflix streaming, I only need to have one disc available now. Much of my video consumption on Netflix is satisfied by selecting videos on the website for Tivo to access for my subsequent viewing on a television screen. My children preferred to view streaming material directly on their laptops.
 
My use of discs is for special material that is typically arcane, classic and/or no longer very popular, and, thus, not among the limited streaming inventory.
 
Hopefully, Hastings will go all the way and spin the two businesses- Qwikster and Netflix- into two separate public companies. The segmentation, costs and overall business dynamics are so different as to make that entirely sensible.
 
As for the anger some customers are experiencing? Get over it. Say goodbye to a business model that simply isn't viable at older price levels anymore.
 
As for the effect on Netflix's equity price, that's not entirely surprising, either. Thus the benefit of splitting the businesses, with either some sort of transfer price from one unit to the other for content, or a priori shared purchase of said content. In time, the two units should have dramatically different values and growth rates.

Will the streaming business recoup the recent equity price decline? I have no idea. Investor reactions will determine that. If not, then I can confidently predict that the equity representing that business won't be in my portfolio.
 
Regardless, those who've had Netflix in their portfolios for some time, as my selection process has, enjoyed substantial gains, and if they rebalanced consistently, this recent slide won't be the end of the world. It hasn't even had a drastic effect on my portfolios which include Netflix, as other firms, such as Apple, have continued to gain value, offsetting Netflix's stock price drubbing.

After all, no equity grows in value forever. Not even Apple.

LLBean Offers Permanent Free Shipping

I recently received an email from LLBean announcing the end of shipping charges. Permanently. No minimum order value.


Of course, the first thing which occurred to me was- will their prices now build in shipping costs? Or will they attempt to absorb them in margins? Or hope for growth to offset the shipping? From the outside, without examining a lot of prices before and after the offer, it's difficult to tell. However, I'm guessing it's perhaps modest relative price movements that will be stickier or higher than otherwise, combined with some margin loss.


That said, the change is an interesting commentary on at least two phenomena.


One, for competitive posturing, offering 'free' shipping may be a powerful inducement to buy. I don't follow other online retailers closely, but it's quite possible that economic pressures on the middle class are driving online retailing, generally, to absorb shipping. In either case, competitively, it certainly removes a potential negative for Bean.


Two, there's the consumer behavior aspect. Perhaps Bean is seeking to entice customers to buy more frequently, albeit in smaller quantities. Perhaps changing more purchases from planned to impulse? I know I have, in the past, typically tended to combine purchases in order to save on shipping. But I've bought on impulse more frequently when I've received notices of free shipping periods. Perhaps Bean has concluded, from comparative research on its credit card-holders, who receive free shipping, and others, controlled for income, etc., that free shipping is worth the investment in subsequent revenues.


You have to wonder how Bean will manage the extremes of this cost absorption. How long can they afford customers buying some low-priced miscellaneous items for $9 or $10 when the real shipping costs might equal the product price? I spoke with a friend who, while at BCG, did some consulting for the USPS. She informed me that when Bean uses UPS, it doesn't necessarily mean you'll receive your item from Big Brown. Depending upon where you live, UPS will simply bar code your parcel for USPS shipping and drop it in a box in that mailing zone. Typically that happens in rural areas where the costs of actually sending a UPS truck are prohibitive. Maybe that's how the smaller, cheaper items will be delivered.

Still, there's real cost involved in those.

Then again, giving credit to Bean for being pretty sharp, maybe their research shows that, even with free shipping, most people simply don't deluge them with orders for $7 items.

With oil prices surging again, and gasoline prices continuing to bounce between $3.50 and $4 on average, nationally, you have to reason that Bean knows some very revealing information about its customers that would result in offering free shipping as a move to increase profits.

Another Perspective On Facebook's non-IPO

I recently wrote this post in light of the publicity surrounding Facebook's recent private equity offering, ending with this passage,


"Facebook continues to confound. Is global social networking truly a value-added proposition and business model on a par with Google's search and related ad businesses? Is online gaming via social networking really so novel and profitable?

Or is Zuckerberg merely enjoying the latest, most profitable round of social networking hype?
One thing may be a positive, however. That is, Facebook, Twitter and Groupon, at present, are not public. So any frothiness that subsequently deflates, with concomitant value destruction, will be absorbed by wealthy, so-called 'sophisticated' investors, rather than the general public."
 
Then there's another side, presented in a Wall Street Journal editorial in Monday's edition. Gordon Crovitz asks if the real issue is that wealthy private investors who are clients of Goldman Sachs are getting the benefit of early price appreciation in Facebook, while the average investor has to wait for an IPO that will enrich those early private investors?

What Crovitz contends is that my last sentence needn't even be true, and, at least each investor should determine the suitability of a Facebook-like equity for her/himself.

On further reflection, I agree with him. Mostly because the current system results in the wealthy having access to so many issues which the average retail investor never sees. An example comes to mind: then-vibrant Microsoft.

And I suppose one can contend that retail investors don't need hot IPOs to lose money. They can do that in individual brokerage accounts already. But as Crovitz notes, issues like Facebook, regardless of their long term viability, tend to have short term gains which now belong exclusively to sophisticated, already-wealthy investors.

So I guess I don't mind that retail investors would be exposed to risks from investing in a less-mature Facebook's IPO. Because at least that company would have audited financial statements allowing investors to easily assess, for themselves, the wisdom of buying and/or holding the shares. But on the positive side, average investors would have the opportunity to participate in some of the genuinely value-adding investing successes much earlier, thus sharing much more of the early gains.

To be clear, I'm not advocating investing in Facebook, Groupon or Twitter. Certainly not Twitter. But I am in favor of the SEC putting these into public markets earlier, allowing for public availability of their financials in real time at a much earlier phase of their corporate life.

Is The Online Social Network Sector Another Investment Bubble?

You know a trend is becoming important when both the Wall Street Journal and the Economist mention it within the same month.

In this case, the trend is a resurgence of bubble-like valuations in online social networking companies.

Back in September of 2007, the Journal's Dennis Berman wrote an excellent piece concerning the online communities business, about which I posted here. Berman's piece covered a lot of territory, but my concluding observations and quotes from his piece (in blue) were,

"At some point, the questions about Facebook the business will eclipse the praise of Facebook the social phenomenon. And once that point hits, Mr. Zuckerberg will be less able to dictate the terms of how fresh capital is put to use."



Mr. Berman pulls no punches. From his initial description of the now-essentially-defunct GeoCities, to the likely fate of Facebook, his superb writing uncovers a wonderful, timeless story of business innovation, absorption, mismanagement, the rise of new competitors, and the continuing weakness of the underlying business model.


Aside from the marvelous business strategy expose, Mr. Berman makes it hard for the reader to avoid asking the question,


"If no other, larger firm, had bought, or bought stakes in, GeoCities, or was trying to buy or invest in Facebook, would Bohnett and Zuckerberger realize millions in wealth simply from the profitability of their businesses and business model? Or would they become, like Amazon, long on initial market value gains, but short on realized profits?"


That last passage came to mind immediately as I read the Economist's piece on the current frothiness of social networking site valuations. It referenced Groupon rebuffing a $6B offer from Google, Twitter being valued at $3.7B, and Facebook's private offerings valuations rising 77% in just three months. Of course, the big recent news is Goldman's funding a private offering for Facebook, with the shares to be allocated among its most-favored clientele.

Holman Jenkins, Jr., of the Journal, made the Facebook private offering the subject of his column last week, supporting Zuckerberg's choice to remain private and take time to mature before going public.

Perhaps Berman's observations of three years ago are outdated and no longer germane. Then, again, the collapse of the late 1990s technology valuation bubble came after many pundits disregarded the need for profits. Facebook is reputed to have annual revenue in the low billions thanks to ad revenue and a share of sales from games through its site. Still, I wonder if they really have solved the challenges about which Berman wrote so eloquently.

An older veteran CEO with whom I spoke recently was dismissive of Facebook and other online businesses as genuinely value-creating. I'm not quite so sweeping in my scepticism. For example, it's clear what value Amazon and Google have managed to create. I can sort of comprehend Groupon's appeal, although I continue to wonder how profitable it is, and/or what its growth prospects are, or what the long-run financial costs are to the businesses granting the discounts. Twitter doesn't seem to be a viable business.

Facebook continues to confound. Is global social networking truly a value-added proposition and business model on a par with Google's search and related ad businesses? Is online gaming via social networking really so novel and profitable?

Or is Zuckerberg merely enjoying the latest, most profitable round of social networking hype?

One thing may be a positive, however. That is, Facebook, Twitter and Groupon, at present, are not public. So any frothiness that subsequently deflates, with concomitant value destruction, will be absorbed by wealthy, so-called 'sophisticated' investors, rather than the general public.

Online Communities: The GeoCities Story

Today's Wall Street Journal featured, on the front page of its Money & Investing section, one of the best analytical, staff-written articles I've read in the paper in ages.

Dennis Berman provides a timely and fascinating look back at the very first, now almost-forgotten online social networking site, GeoCities. Back in 1994, before, as Berman reminds us, high-speed cable or DSL, full motion video, etc., GeoCities, created by David Bohnett, contained the essential elements which today characterize FaceBook, MySpace, et. al.

To summarize the GeoCities story, it rose rapidly among then-popular websites, becoming the "third most-visited site on the Web" in August, 1998. In early 2000, amidst the dot com craze, Yahoo paid $4.7B to buy GeoCities. Bohnett and his team received his payday, and, as Berman writes,

"...their creation would soon wither before their eyes."

He further describes the wrenching, profound changes for GeoCities under Yahoo,

"Life inside Yahoo was smothering for GeoCities, say a number of people familiar with the transition. Developing new technologies for GeoCities' communities slowed to a crawl, as its staff of 30 software developers was cut to a skeleton crew. Yahoo focused instead of building traffic, not necessarily on the programming for improving person-to-person interaction. "Had they done things right with GeoCities, there would be no Facebook, YouTube or MySpace," says one. "

With my own posts regarding Terry Semel's 'leadership' of Yahoo, as may be found by searching on that label on this blog, the following passage almost made me laugh,

"Yahoo's treatment of GeoCities is particularly relevant for Mr. Zuckerberg, who reportedly rebuffed a $1 billion buyout from former Yahoo CEO Terry Semel."

So, having bungled the purchase, integration and management of the internet's very first social networking site, Yahoo was going back for a second bite of this hideously expensive apple? Amazing!

What intrigued me about Berman's article, and the GeoCities/Facebook story, is how perfectly it showcases the basics of Joseph Schumpeter's now long-ago vision of the dynamics of industry and competition. Note that GeoCities was sold to the one firm, Yahoo, which, at the time, could have capitalized its new acquisition and buried all comers with innovation, expansion of services and scale, etc.

Instead, Yahoo thought small, cut costs, and opened itself up to competition, and mismanaged this expensive beachhead into what has become a very hot online business. Talking to Bohnett about this, Berman writes,

"But if he could give advice to Mr. Zuckerberg, he'd recommend heavy investment in new technology to "stay true to what the user experience is." And he stressed the importance of keeping a young audience: "Those kids tend to get older and maintain some connection with an online community. You've got to capture that early adopter, young audience." "

At this point, Mr. Berman had already written a great article. But, next, he further probed the Schumpeterian nature of this product/market space, without explicitly acknowledging the famed dynamic.

In the final paragraphs of his article, Berman reviews Zuckerberg's (Facebook's founder) options and risks,

"Mr. Zuckerberg is in an especially good place right now. His site has developed a patina of invincibility, which in 2006 enabled him to wrangle an especially good advertising deal with Microsoft. Ever the Net-laggard, Microsoft is now guaranteeing about $75 million in revenue this year, which could become as much as $300 million by 2011 if traffic grows rapidly.

Alas, advertisers have found Facebook users to be a huge audience -- that could care less about ads. The percentage of users clicking onto site advertisements on Facebook and MySpace are lower than typical Web sites. That means it's essentially sucking up a subsidy from Microsoft, which wants to get its hooks into Facebook the best it can."

Which leads Berman to what I feel makes this an outstanding article. Rather than stopping short with an excellent review of GeoCities, a comparison of it and its fate with today's Facebook, and leaving it at that, he goes one step further. Berman risks alienating the entire business, i.e., Facebook and MySpace, by noting how dependent it is upon advertising, and how horribly, traditionally difficult it has been to make this work,

""It's not that easy to monetize social media," says Eric Hippeau, a managing partner of Softbank Capital that made more than 20 times its investment in GeoCities. He also sits on Yahoo's board. "Once Microsoft's deal with Facebook expires, as does Google's deal with MySpace, they're going to have to sell advertising for themselves and it's going to be a challenge." So far, he says, "it's not that easy to match the right advertising with the right audience."

That squares with the experience of Thomas R. Evans, GeoCities' former chief executive. "When you're as successful as GeoCities, everyone tells you how wonderful you are. It causes you to miss opportunities." Now the CEO of Web site Bankrate.com, he added that, "People at the time were dismissive of old media experience. But it turned out looking exactly like the old media business. You have to execute and provide both the consumer and the advertiser with significant value."

At some point, the questions about Facebook the business will eclipse the praise of Facebook the social phenomenon. And once that point hits, Mr. Zuckerberg will be less able to dictate the terms of how fresh capital is put to use."

Mr. Berman pulls no punches. From his initial description of the now-essentially-defunct GeoCities, to the likely fate of Facebook, his superb writing uncovers a wonderful, timeless story of business innovation, absorption, mismanagement, the rise of new competitors, and the continuing weakness of the underlying business model.

Aside from the marvelous business strategy expose, Mr. Berman makes it hard for the reader to avoid asking the question,

"If no other, larger firm, had bought, or bought stakes in, GeoCities, or was trying to buy or invest in Facebook, would Bohnett and Zuckerberger realize millions in wealth simply from the profitability of their businesses and business model? Or would they become, like Amazon, long on initial market value gains, but short on realized profits?"

Thus, leading to the ultimate question,

"Were/are the acquiring giants of these online social networking businesses the greater fools?"