Tag Archives: Opinion

Iterations: How Tech Hedge Funds And Investment Banks Make Sense Of Apple’s Share Buybacks

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Apple Hand

Editor’s Note: Semil Shah is a contributor to TechCrunch. You can follow him on Twitter at @semil.

Apple has a good deal of cash. And, in the Valley, the startup ecosystem — for many reasons — wants to see Apple spend that cash. As their cash pile continued to grow as their stock price and market cap soared, Apple’s inability to provide robust software services combined with opportunities to expand their reach through acquisitions has become a fancy parlor game which includes every stripe of public and private investor imaginable. On top of this, pumping even a small percentage of cash pile into acquisitions could provide another pool of much-needed liquidity for founders and investors alike. While it all makes sense on paper, part of what makes Apple “Apple” is that they operate how they want to — not how the market wants them to. Recently, in response to a variety of pressures to do something, to do anything, Apple announced a two-part share buyback. There are many explanations for this financial strategy, and while the Valley may have their own armchair financial analysts with a Twitter account, I reached out to some friends who actually work in technology banking or at techonology-focused hedge funds and asked them to send me a paragraph on their perception of the move. Because of the world these folks work in, I’ve reproduced their answers below anonymously, as they are not permitted to publicly share their opinions on such matters:

Technology Investment Banker: With the amount of cash stock piled by Apple, and mainly overseas, it was only a matter of time until the water would break, especially with activist investor David Einhorn ruffling feathers. Apple did something very standard and not uncommon, but on a large scale the way Apple likes to do things. At the end of the day I feel Apple’s actions represent the following four points: (1) Increased Shareholder Value: There are many ways to value a profitable company but the most common measurement is Earnings Per Share (EPS). If earnings are flat but the number of outstanding shares decreases. . Voila! . . A magical increase in period-to-period EPS will result; (2) Higher Stock Prices: An increase in EPS will often alert investors that a stock is undervalued or has the potential for increasing in value. The most common result is an increase in demand and an upward movement in the price of a stock; (3) Increased Float – As the number of outstanding shares decreases, the shares remaining represent a larger percentage of the float. If demand increases and there is less supply, then fuel is added to a potential upward movement in the price of a stock; and (4) Excess Cash: Companies usually buy back their stock with excess cash. If a company has excess cash, then at a minimum you can bank that it doesn’t have a cash flow problem. More importantly, it signals that executives feel that cash re-invested in the corporation will get a better return than alternative investments. This is definitely a positive sign for the company going forward. Customers and investors should feel confident with these events transpiring that Apple will continue to deliver value to both parties respectively.

Technology Hedge Fund Principal: Since Apple has around $150B cash on the books (70% of which is foreign), it’s clear they need to do something with this cash because it’s just wasted sitting on the balance sheet earning low interest rates. People have assumed the market would respond well to Apple making acquisitions, especially in software and services, particularly in cloud and mobile software. While they have reaped the benefits of profits in mobile hardware, the value going forward is at the application and services layer. Other hardware manufacturers are catching up, if they haven’t caught up already. Unfortunately, Apple doesn’t seem to have an appetite for these types of acquisitions. Another option is to buy back shares, a proven way to deploy cash, though doing so sends a signal that they are a mature (read: not growth) company. Tactically, buybacks can decouple EPS growth from new product lines, and Apple could see 2x its buyback investment in earnings growth as a result. Ultimately, Apple has withstood significant pressure from the investment community to do something with the cash, especially as growth has slowed. (Venture arms, since you asked, are not an effective use of capital for a corporate player; I see the share repurchase as a much more responsible use of proceeds.

Hedge Fund Partner #2: Apple had four basic choices of what to do with their cash, remembering that apple has a duty to its shareholders: (1)  Do nothing (status quo), which makes zero sense. given that they have ~$145Bn in cash and are adding ~ $40Bn in cash annually assuming zero growth earnings earning; (2) Strategic acquisition or expansion, though Apple will be hard pushed to effectively put either their cash hoard or future cash flows to use to do this; (3) a one-time special dividend and increased annual dividend; or (4) a share buyback (or various form of it). Only options #3 or #4 made any sense to me and I assumed it was only a matter of time before they did something. #1 is out as they are would not be meeting their shareholder responsibility and #2 is out simply because of scale.

I see the share buyback as positive for three key reasons: (1) Apple stock is currently very cheap. My back of the envelope calculations conservatively value them at $500-$550/share, so they are effectively leveraging and creating additional shareholder value here until the multiple recovers to fair value. What’s more is that management knows a lot more than what we all do, so they should be able to calculate their own value in two to three years fairly well, and I assume they saw this as a positive. (2) Because Apple issued bonds to finance the deal rather than using cash, this way they will not need to repatriate taxable offshore cash to perform the buyback and they will likely get a bond rate the crazy low prices. Bottom line, they are saving shareholders cash, although at some point they will need to find a way to address the offshore cash, so perhaps they are waiting for another tax holiday. And (3), assuming the market reacts rationally, a buy back signals that managements believes in stock and the story and believes that this will generate returns that will outperform for long-term investors, something that a cash hoard did not address at any level and effectively generate returns far in excess of what could be achieved in any other safe manner.

More often than not I do not like share buybacks. often management does this to boost their own salary bonuses (EPS biased etc) or simply follow bad advice and follow the investment banking herd, but this time I liked Apple’s share buyback at this share price and multiple and applaud the debt financing way of doing it, I would have applauded it more if they had also issued a $40 special dividend.

Hedge Fund Partner #3: The view is Apple has stopped being an innovator. While they were at the forefront of technology, people bugged them to use their cash for a dividend or buyback and they could say “no” because the stock price was going up on leading edge innovation. Once Jobs passed away, Tim Cook hasn’t been able to keep that going, and if anything they are now playing catch-up to Samsung or even Google. When you aren’t innovating and you have $150B in cash, a board has to find ways to keep investors happy and one tactic is to conduct a massive buyback. Showing they are returning money to shareholders, creating a new base if “capital return” investors rather than growth investors. It’s all a game to prop up the stock price, money is cheap because of Bernanke, so it’s an easy way for them to please shareholders without much cost to the business. In general, I think that Apple is falling behind and trying to figure out how to regain their lead, and I’m not sure if its possible any time soon.

Technology Stock Investor: They’re doing the buyback because: 1) they have an unprecedented amount of cash ($140+ billion) that’s earning nearly nothing; 2) the stock is down nearly 40% from its high and shareholders are angry; 3) the stock is cheap on every financial metric, signaling that buying shares is a good use of cash if you believe in the long-term growth of the company.  The company does not appear to want to do a large acquisition or massively increase its capital expenditures.  They don’t “need” to hold that much cash. So the company had a very inefficient capital structure ($140+ billion of cash and no debt). Equity investors (who, in the end, own the company) sooner or later demand to get returns on their companies’ cash. Capital markets are competitive, and if management doesn’t give investors great reasons to own their stock, investors will go somewhere else. AAPL is facing slowing revenue growth, margin pressure, and uncertainty about their next major product line. A management team that is perceived as unfriendly to shareholders is another reason for investors to sell the stock. The buyback is a big gesture by management that they understand their shareholders’ concerns, in addition to likely being a good investment.

Photo Credit: Eddi 07 / Flickr Creative Commons

The Time Has Come For Chrome In The Home

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I’ve spent the last two weeks wandering around London, Paris, and Istanbul (not Constantinople.) As an experiment, I left my trusty MacBook Pro behind and brought only the $199 Chromebook on which I type this. And to my considerable surprise it has served admirably. So admirably, in fact, that I believe ChromeOS is only one or two iterations away from being the right choice for many-if not most–homes.

I was skeptical to begin with: after all, I thought, Chrome is acceptable when you’re online, but I’ll be spending much of my travel time offline, which probably makes it a non-starter, right? — So I devoted most of my Chromebook’s (bizarrely spacious) 320GB hard drive to an install of Ubuntu. Which I then never used even once.

I suppose I would have if some kind of critical work emergency had come up: after all, I’m (mostly) a software developer by trade, and ChromeOS isn’t much of a developer platform. But that didn’t happen. Good thing, too, because Linux-on-the-desktop seems as ugly and frustrating as ever for someone, even a deeply techie someone, who just wants to get things done.

ChromeOS, though, is both very pretty and almost painless. Its biggest problem is that out of the box it naively insists that you’ll be online all the time–even though it can be perfectly serviceable while disconnected. You may not have known that nowadays both GMail and (most) Google Docs can work just fine offlne.

And if you didn’t, well, Google sure isn’t about to proactively tell you. You actually have to make a point of seeking out, installing, and then activating Offline Gmail and Offline Google Docs from the Chrome Web Store. Why ChromeOS doesn’t prompt you with this option as part of the onboarding process is truly beyond me. Similarly, why on Earth are “Gmail’ and “Offline Gmail” two separate apps? Google may be full of incredibly smart people, but they can also be insanely myopic when it comes to end users.

Once those were up and running, though, my Chromebook was a charm to use under almost all circumstances. Offline, I could write documents, check old email, and even play a few free games from the Chrome Web Store, although most Chrome games still seem to require an initial server connection to start up. And online, of course, the world was my oyster.

Did I have access to all the features of, say, Word or Excel? Hell, no. (You still can’t create a Google Docs spreadsheet when offline, either.) Was it an all-guns-blazing gaming experience? Again, no, although Chrome’s rapidly evolving Native Client ought to keep matters improving here. What I could do, though, was email, play a few games, surf the Net, communicate (via GChat or Google Hangouts, which worked excellently), and write documents — which unless I’m much mistaken is pretty much everything that most people use their computers for at home.

ChromeOS still needs better, and simpler, offline support; and I’d like to see more diversity of available hardware; but once those two things are addressed, which shouldn’t take long, I would happily recommend a Chromebook to my parents the next time they upgrade. In fact I’d happily recommend one to anyone who wants a small second laptop for travel, or who doesn’t need to do serious work on their home computer.

Long ago Neal Stephenson, when comparing operating systems to vehicles, described MacOS as a hermetically sealed day-glo VW Beetle; MS Windows as a clunky two-tone station wagon; and Linux as the product of a horde of dreadlocked hippies who spent their time building M1 battle tanks and giving them away for free. Which sounds great at first, but who actually wants to drive a tank?

Well, if I may extend that a little, ChromeOS is like a sleek, shiny Airstream trailer built around that same M1 engine. There are many things it can’t do, and a bunch more at which it’s very clumsy, but within its bailiwick, casual exploring, it’s both very attractive and awfully comfortable.

I don’t think Stephenson’s original analogies quite hold any more, though. Nowadays OS X is more like a Porsche…and Windows is a gas-guzzling pickup truck, or a cube van that makes disturbing noises whenever it corners. Still suitable for work, but not particularly great for either road trips or sub/urban living — and nowadays looking nervously over its metaphorical shoulder at the flotilla of drones and self-driving cars on the horizon.

Image credit: Dan McCullough, Flickr.

Google’s Products Are Just By-Products Of Its Quest For Tomorrow

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Google's Future

Google isn’t about search, apps or devices. Those are just vehicles, and there’s no destination. That’s because Larry Page’s Google is on an unending pursuit of the future, not just next quarter’s earnings. The scattershot of projects Google revealed today at I/O had just one unifying factor: They further that pursuit, or empower the curiosity of others.

Google is lucky. It takes a lot of fuel to shoot for the moon. Fuel that most tech companies don’t have or are unwilling to burn. But Google has ads that pay for everything the company does. The armies of employees, the seas of servers, and the laboratories for experimenting in both the digital and physical worlds.

I talked to a Google Chrome engineer the other night. He described his job as almost academic. No one ever talks about money — how much things cost or how much they would make. His job is simply to let people access information as quickly and efficiently as possible. That’s the future, and a browser is just the by-product.

Google didn’t launch its new on-demand subscription service Google Play Music All Access just because it wanted to get into music; Android is Google’s push to see the potential of our phones. Music is a fundamental companion to being on the go, so why not let people listen to any song they want? All Access was just something Google had to do to see our lifestyles merge with mobile computing.

Digital communication shouldn’t just be a degraded version of talking with someone in person. When we can share, emote and collaborate seamlessly no matter where we are or what device we’re on, brilliant things will happen. So out springs a new cross-platform messaging version of Hangouts. Google isn’t trying to desperately win market share and engagement with today’s big revamp of Google Maps, it’s just another step towards the future of navigation.

Google also wants to accelerate other intrepid explorers chasing what’s next. Today it gave developers new cloud messaging capabilities, Android Studio for testing apps, extra location APIs, and an easy app translation service. It knows it can’t unlock the future by itself, so it lets others forge their own keys.

Compare all this to the other tech giants who seem myopically focused on today’s wars for display ad and mobile hardware dollars. Apple and Samsung seem busy with another iteration of their latest smartphone, or linear innovation for watches and TVs. Even if Apple is secretly concocting wetware computers that go inside our bodies, it still seems to be in service of building “beautiful” products and making money. Facebook has its hands full with mobile with projects like Home, and Amazon is making TV shows.

They all seem vulnerable. One or two flops away from fading. A crummy iPhone, a hip new social app, and suddenly the tides could turn. Meanwhile, Google has leapfrogged into the next decade with exponential innovation.

And that’s the plan. Google’s CEO Larry Page said on stage “we should be building things that don’t exist.” {Update: After the keynote I talked with co-founder Sergey Brin who explained “It’s important to be willing to take risks, and we do take risks, I’m very excited about these [tapping the Google Glass he was currently wearing]. We’re willing to make bets. Some of them pan out, some of them don’t. But I think there are a lot of companies that as they grow they become more conservative.”}

Google doesn’t have to be conservative. Search, maps, Android — they aren’t going to disappear. And with that foundation, Google is free to try, tinker and even fail. But when it fails, it learns, and for Google, that’s the whole point.

America’s Carriers Are Terrible. It’s Probably Your Fault.

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A few days ago I landed in England and, expecting little, slipped an old UK SIM card into my phone. I’d bought it when living in London five years ago, and hadn’t used it in more than a year. But to my amazement it was still active — as was the money I’d added to its pay-as-you-go account 16 months earlier…and then I received a friendly text message informing me that my data costs were now £1 per 100MB. Another SMS popped up when I emerged from the Channel Tunnel in France a few days later, informing me it would cost me 8p to send texts and 7p per minute to receive calls.

Can you imagine any of that happening with an American phone company? Or Canadian? North American carriers generally expire pay-as-you-go accounts after 90 days of inactivity, and it’s at best a struggle to get them to support data at all, much less seamlessly, much much less at that price. (Which isn’t even that great, by global standards; in India two years ago I was charged $1 for a full gigabyte.)

As for roaming, you’re very lucky to get American or Canadian pay-as-you-go accounts that can roam across that vast undefended border at all, and if you do, they’ll charge the proverbial arm and a leg. That same UK SIM card worked just fine in Kenya last year, and as I type this I’m about to land in Turkey, where I expect to receive another text informing me that my UK pay-as-you-go number continues to work just fine outside the EU, albeit more expensively. (Update: yep.)

What’s wrong with this picture? Why are America and Canada so unbelievably awful? Yeah, I’m being anecdotal, but there is all kinds of data to support the notion that cell service there is outlandishly expensive compared to almost all of the rest of the developed world. (And worse than a lot of the developing world, too.)

Part of it is laissez-faire capitalism run amok. Don’t get me wrong. I’m a staunch defender of capitalism…that is, well-regulated capitalism. Until 2008 that was a hard row to hoe among many of my friends, but that recent embarrassing spate of financial cataclysms have made it much easer. Why is my UK SIM card relatively cheap to use in France? Because EU regulators insisted on it. Why are America’s carriers so parasitical, predatory, gouging and user-hostile? Because they can be, which in large part means because their regulators (including, alas, Canada’s CRTC) don’t insist on much of anything.

Oh, sorry, no, my mistake. They do insist on perpetuating this state of affairs. Consider the recent breathtakingly wrong decision to make it illegal under the DMCA to unlock your phone. This was one of those classic bureaucratic catastrophes: every individual step that led to it doubtless made sense to the people involved, who were too close to their system to take a step back and notice that its actual outcome was complete insanity. If anything it should should be illegal to lock phones, not unlock them. This is regulatory capture taken to new heights of Stockholm-Syndrome madness.

And yet. At the end of the day the true power lies not with the carriers, but with their customers. Alas, American and Canadian customers seem to have been hypnotized into a kind of learned helplessness where they just sit there and silently accept locked phones, bloated Kafkaesque pricing plans, insane roaming charges, Android phones stuffed with crapware, and two- or even three-year locked-in contracts.

But they don’t have to. That’s what’s so infuriating. You too could buy an unlocked phone — an unlocked Nexus 4, which is a terrific phone, costs all of $299! (And I have high hopes that Google’s rumored new X Phone initiative will be even cheaper.) You too could switch to T-Mobile’s monthly pricing plan, or Straight Talk’s, instead of signing a contract. You’d more than make back the upfront costs of the unlocked phone in less than a year. And if enough people did it, the carriers would be forced to compete on quality and improve their pricing, rather than rely on their customers’ passive despair.

The logical conclusion is that if your phone is locked, or if you’re on a multi-year contract, then you have no right to complain about your terrible carrier — because you’re part of the problem. “The fault, dear Brutus, lies not in our stars, but in ourselves, that we are underlings.” In fact, you’re ruining it for the rest of us. Thanks.

But it’s not too late for redemption. Just repeat after me: “I solemnly swear that I will never buy a locked phone or sign a multi-year phone contract again.” And when your current contract expires, do just that. Maybe, just maybe, with your help, we can finally defeat these gargantuan economic tapeworms called AT&T, Verizon, Rogers and Bell — and finally catch up with the civilized world.

Image credit: Tapeworm, by Rhys Ormond, on Flickr.

As Tech Giants Scramble For Talent, It’s Buy Or Die

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The writing’s on the wall. Mobile is the future, and it requires different skill than the web. Entrepreneurship is more fetishized than ever, making standard hiring tough. The result is days like today where Yahoo, Twitter, Salesforce, and Box all bought startups, and Facebook and Microsoft were reported to be in talks for major acquisitions. Big is a scary thing to be right now.

The tech giant story goes something like this. You start as a visionary founder with a crazy dream. You recruit your friends to give it a shot. Suddenly there’s a breakthrough or some traction, and everyone wants to work for you. You’re small and nimble. Employees are trusted to make quick decisions, and the whole company can pivot on a dime to pursue a new opportunity.

But to beat competitors to the punch with the muscle to accomplish your dreams, you have to get bigger. Bureaucracy sets in and decisions take longer. You have too much momentum to shift directions. Allocating resources to chase a hunch gets tougher. You’re no longer the startup; you’re the giant. Despite your perks and hefty paychecks, no one wants to work for the giant. They want an adventure. The adventure you already had.

Then some punk kids come out of nowhere with the company you would have founded if you started five years later. You could try to build it now, but that’s too slow and they’re already winning. Or you could try to partner with them or someone else, but that’s messy and unreliable. You end up with a choice: They either eat your lunch or you buy their lunch. They disrupt you, or you acquire them.

So you buy them. Then you either keep their product running and reap the benefits while knowing they’re not a real danger to you anymore like Facebook did with Instagram. Or you shut down their product, fold their team in, and have them keep your core products relevant and evolving, like Box did today buying Adobe Acrobat-killer Crocodoc.

This same story has played out over and over again throughout the lifespan of Silicon Valley. But there are new factors putting even more pressure on the big guys to swallow up the little guys.

Mobile Design

On the web, you threw everything at the wall, and anything that stuck even a little got left in the product. With plenty of screen real estate and instant rollouts of changes, you could afford to do too much. But mobile is minimalist. People want one app to nail one use case. It has to work in bite-size sessions. Bloat is painfully apparent.

You need not just mobile designers, or even mobile-first designers. You need mobile-best designers. The advent of the web happened slowly, and several generations of startups were built on it. A star product lead from a few years ago could work magic again. But mobile came on fast. Not necessarily in the advances in technology, but in adoption. Even just a year ago, mobile was thought of as an option. Now some giants like Facebook have more users on mobile than the web. You either “get” mobile, or you’re doomed. If you can’t build it, and you can’t hire it, you’re pretty much forced to buy it. Yahoo didn’t buy GoPollGo to concentrate on polling. It did it because the startup was mobile in its heart.

Sexed-Up Startups

Blame it on the finance sector’s collapse, the seed funding explosion, Y Combinator, Instagram, and tech blogs like us. Chalk it up to an entitled generation where everyone wants to be their own boss, not a loyal soldier. Or say it’s mobile and the cloud’s fault for making it so easy to get a business to market. But whatever the cause, great tech talent is fragmenting. People are willing to gamble on the chance of having a huge impact on the world and getting rich at the same time. The people you want to hire aren’t applying and interviewing, they’re running their own companies.

Meanwhile for VCs, everyone wants to be the toast of the town by being the seed investor in a hot startup. That means anyone with a good idea, or some combination of an okay idea and a good track record/connections/academic pedigree can raise money and take a swing. And why not? Best-case scenario: You change the world, grow into one of the new power-players of Silicon Valley, and maybe sell or IPO for a boat-load of money. Worst-case scenario: You fail and lose (mostly) someone else’s money. You end up with a fundamental learning experience that will build character, maybe make you a better person, and quiet your professional wanderlust forever.

Plus now, thanks to the old giants’ scrambling to stay young, there’s a mediocre-case scenario: You sell while you’re still small, take a cushy job at a big company, work on something making a difference, and learn skills while you bide your time for your “next adventure.”

A Comfy Bed To Dream In

You could argue that all these acquisitions and acqui-hires are kneecapping innovation. That they’re preventing potential giants from ever hitting their stride. But few people are fighting for the abstract cause of “Innnovation” with a capital I.

Thanks to disruption insurance through acquisitions, it could be hard to truly kill Yahoo — a company many thought was marked for death years ago. Mark Zuckerberg disrupted Myspace in a blink of the Internet’s eye. But if he keeps buying talented teams and phenonema like Instagram rather than letting them mature into real threats, it could take a lot longer to displace Facebook.

Giants want to keep their dreams alive. Founders want to chase them. Acquisitions make both less likely to wake up to a nightmare.

Tumblr’s Teenaged, Double-Edged Sword

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“im ddeleting the internet [sic]“: A telling re-blog from a teenaged girl on the blogging platform turned social networking site Tumblr, in a chain of re-postings that had her pondering Tumblr’s impact on her life twenty years from now, when her passing, immature thoughts become fodder for a discussion among her boss and colleagues at some imagined future workplace.

The fact that Tumblr speaks to this younger demographic, and in particular teenage girls slightly more so than boys, is known. Why that is the case is something which many are still scratching their heads over, even as Tumblr begins to focus on generating revenue from this very audience, whose online behavior makes it tricky for advertisers who want to connect.

“How do teenagers waste hours upon hours consuming Tumblr?“, a confused parent once asked on another time-wasting site, the Q&A resource known as Quora. The top answer, posted by “Anonymous,” claims to be from a teenaged user of Tumblr, though it could just as easily be a sneaky marketing ploy from the startup itself. But it speaks some truths nonetheless.

Tumblr, wrote the poster, “seems like a freedom, as weird as that may sound.”

“Unlike Facebook, I have a clean slate,” this person explained. ”I really have found myself starting to have my own opinions. These, in some cases, greatly differ from relatives or friends, people who used to greatly influence my opinions.”

Whether or not “anon” was a real Tumblr user, or even a real teenager, it’s an apt enough explanation as to why the site has found footing among the young and hormonal. Though worries that a boss might peruse online indiscretions may one day come to pass, Tumblr users often use pseudonyms or only first names, making their blogs harder to find by the prying eyes of parents or HR, for that matter.

Tumblr doesn’t owe its success among teens solely because of its pseudonymous qualities. That helps, but, more simply, it has become the digital upgrade to that demographic’s earlier tools for cut-and-pasted self-discovery: the repurposing of media and content to reflect their interests and fandoms, likes and hates, newly forming opinions, and more.

Read through teenaged Tumblrdom as a grown-up, and you’ll soon feel very, very old.

“i haven’t had my phone on ring for like 3 years,” muses ”Aubrey,” who also once reblogged “what the frick is friendster.”

Don’t worry, Aubrey, you don’t need to know.

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The real answer to the surging teenaged use of the site lies not in the lengthy Quora explanations, but in the examples of the odd, offbeat, and yes, sometimes inappropriate content kids are sharing.

Tumblr blogs tend to lack the glossy, professional, high-minded design of other social networking sites, including the behemoth that is Facebook and the SMS-inspired Twitter. If anything, these teenaged Tumblrs harken back to earlier web days where users built their own pages on AngelFire and Geocities, with atrocious backgrounds, upgraded cursors, and dancing GIF images galore. GIFs, in fact, are so hugely popular on Tumblr that the company even began experimenting with GIF-based ads.

The teen blogs are also reminiscent of MySpace, featuring often same general gaudiness, and the spewing of content on top of content, like the layers of photos and other decorations teens used to tack up on cork bulletin boards and bedroom walls.

Tumblr now serves that purpose, and more.

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At the risk of dating myself, I’ll reveal that I was teenaged in the pre-Web era. We didn’t have Tumblr then, but rather composition notebooks, glossy magazines, and scissors. We had mean girl-like cliques to rebel against, passions, complaints, and in-jokes. We liked boys. We worried about our looks and clothing and hairstyles. We dissed our teachers and our parents. We wrote short stories. And we expressed ourselves on paper with scrapbooks, torn magazine collages, and shared notes in passed around “slam books.” (To be fair, we weren’t writing truly awful things, really – that’s just what these books were called.)

Now children have the Internet. And Tumblr has become their platform for those universal, familiar urges at self-expression falling somewhere in between the diary, the slam book and the cork board. Notes on Tumblr blogs range from mundane (“ive been telling myself ill start my homework soon for the last 4 hours,”) to the confessional (“a cute necklace for school tomorrow” which accompanies a picture of a noose – a note whose message would terrify parents and other adults, but appears to only be commentary on the horrors of high school life).

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According to Pew Internet’s study from earlier this year, 13 percent of Internet users ages 18-29 use Tumblr, while only 5 percent of those 30-49 do, 3 percent of those 50-64, and a (surprising) 1 percent of those 65 and older do.

Demographic data from Quantcast further drives home just how youthful a site Tumblr has become. 21 percent of its audience is under 18, 30 percent is 18 to 24, and 22 percent is 25 to 34. Then the numbers taper off. Site users don’t tend to have kids of their own, make somewhere between $0 and $50,000 (66 percent do), have either no college (41 percent) or college backgrounds (48 percent), and tend to reflect an ethnically diverse makeup, where there are more non-white users. (Hispanics, Asians, African-Americans, and “other” all beat out the Caucasian segment.)

Now Tumblr is seriously looking to monetize this audience, proffering a platform for brand advertising which CEO David Karp last week explained is meant to be a place for advertisers to “build amazing, interactive ads.”

“We have a story that really, truly stands apart from the other big networks right now,” he said. Other networks are harnessing user intent, then pointing users to little blue links. “Creative brand advertising has had nowhere to live on the web,” he said. Ten out of the ten top Hollywood studios advertise on Tumblr now, Karp also noted, while speaking, too, of ads that inspire people to go out and purchase, designed by imaginative types who went into advertising because of their “Mad Men-like aspirations.”

He may have played down the demographics’ role in Tumblr’s advertising equation during this discussion, but the site’s teen audience is too powerful to ignore: there are some 30 million U.S. teens with over $200 billion in buying power. They might not all be on Tumblr, of course, but if brands can reach a portion of this group, they have the potential to tap into a non-trivial source of disposable income from heavy-duty consumers. After all, the U.S. is Tumblr’s top traffic source.

Tumblr’s future, for now, seems to be closely tied to its young adult demographic, their whims, and perhaps even their historical aversion to online ads. This audience has grown up connected, is often skeptical and cynical when it comes to brand advertising, and tends to toe a fine line between wanting to express their individuality and wanting to fit in.

It’s not an easy group to reach, which makes Tumblr’s revenue potential tricky to pin down. Too much or the wrong kind of advertising, and a fickle teen audience may find a new home elsewhere. Though Tumblr is now home to over 100 million blogs, if a good chunk belong to teens, it’s difficult to count that as serious traction –  today’s teens are less committed to their digital creations than adults, having already invented methods like “whitewalling” and “super-logoff” to erase and hide their Facebook pages, and are now turning to “ephemeral” messaging apps like Snapchat, which delete their communications upon viewing.

They understand just how easy it is to deactivate an account, walk away and begin again. Content is disposable, and the web is an impermanent platform to build upon, they’ve found. These are decidedly radical views.

For Tumblr, the shiftiness of the very group it has found a home among is one of the riskier aspects of what appears to otherwise be a strong, fast-growing and potentially very valuable service. Its revenue plan is to provide a blank slate to its users and advertisers alike (“…we want to give [advertisers] the space to do anything – a four-second loop, an hour and a half video, a high-res panorama,” Karp explained last week.).

But Tumblr will need to be careful with the results of those advertisers’ efforts. Overdone marketing messages could sour Tumblr’s most engaged users on their online hangout. Done well, however, Tumblr could endear itself to its reblog-happy user base even more, connecting aspirational imagery and content with those who are still young enough to dream they can spend their way into new feelings. Whether they’ll eventually end up “ddeleting” those feelings or not.

(Image credit, top: kootation.com; edited version)

Iterations: A Youthful Rebellion Against The Permanence Of Facebook’s Walled Garden

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Editor’s Note: Semil Shah is a contributor to TechCrunch. You can follow him on Twitter at @semil.

Facebook’s mission is to make the world more open and connected. Indeed, great things can come from this, and for many of its one billion users, Facebook isn’t just on the web — it is the web. It is where images, biographical data, and every speck of a connection to a person, place, or thing lives, both the dream of a doting family spread miles apart and a marketer close by. It is a place where generations of people now reside, hang out, fawn over public statuses and peek into the lives of others. Ironically, while Facebook’s aim is to make the world more open, they themselves are building a new web within their own closed garden, inaccessible and (mostly) unexportable to all. As the saying states, “what goes on the Internet is written in ink,” so what goes onto Facebook is etched in stone walls.

Yes, much of Facebook’s traffic comes from mobile now, too. For most people who don’t care about all the latest and greatest apps, Facebook works splendidly for them, simply yet powerfully connecting them to exercise the habits they’ve picked up on the web version. Yet, at the same time, mobile platforms (phones and tablets) have presented newer and younger audiences with new graphs of people, folks whose first computing device may have been of the latest iPod touches (complete with Facetime), folks who live in other countries with exploding mobile growth adoption curves. As working professionals have come to use the Internet to help define, cement, and reinforce their perceptions of their own identities, younger generations in search of their own identity can use a battery of new services and mobile apps which containerize their activities, isolating them from the permanence of the web, a permanence embodied by the likes of Facebook and Google+.

These ascendent generations may have a Facebook account for the web and to use Messenger, but they seem to be disinterested in a network where everyone hangs out, where their parents or schoolteachers may be lurking. (To be fair to Facebook, Google seems to invoke similar fears of permanence given all the apps data they have on us, combined with their integration of Google+.) The emergence of this trend isn’t an implicit criticism of Facebook, though the company sure does push its users to adopt certain behaviors — rather, this trend is merely the world evolving alongside the rapid spread of personalized computing interfaces, giving rise to services which snap, share, and explode digital pictures (SnapChat), allow users to buy disposable phone numbers (Burner), or to assume various pseudonyms and tag pictures associated with negative, potentially shameful, or embarrassing feelings to an audience who will empathize with them (Whisper) — and pay a monthly membership fee for the right to send private messages. (There are services which go steps further, encrypting information — such as Bitcoin or Wickr — allowing people to move without a trace.)

What I’m writing about here is not new or original. I have read a lot about this and have simply grown fascinated by the trend itself, the trend whereby more and more people enjoy the ease and shelter provided by lightweight mobile applications, ones that seemingly never touch the web and spread like a Facebook share. For a brief selection of items I’ve read on the topic, I’d suggest: PandaWhale’s Adam Rifkin on why teens are flocking to Tumblr over Facebook; TechCrunch’s Billy Gallagher on the “impermanence” of new mobile apps; Branch’s Josh Miller’s look into technology trends among teens; and USV’s Andy Weissman’s personal essay about how he doesn’t want to bring video memories from another era on to YouTube.

All in all, the questions this trend trigger are equally fascinating: Is this just the beginning of a big wave, or this simply a trendy byproduct of a world obsessed with social networking? If this is a trend, does it have the legs to provide the foundation for a company or set of companies to form around this organizing principle? What does this mean for the future of the Facebook newsfeed and its relevance to users? Will Facebook be reduced to a utility for public sharing backed by real identity, but miss out on all the texts, snaps, and other bits of mobile messaging exploding these days? Is this a new type of movement, or simply the ebb and flow of behavior as generations pass? And, as the trend continues, will the younger generation of users who grow up “app-first” seek to bypass the web and explicit social networks altogether, or will they join the masses as they mature?

I’ve been talking about this trend with knowledgeable folks for a few months now, and everyone has a different, interesting point of view. I certainly don’t know the answers to any of these questions, but questions themselves are undeniably fascinating. It’s not even been an entire year that Facebook has been a public company, and they are on track to make lots of money (especially on mobile), but there’s no denying that despite their growing mobile metrics and revenues, mobile apps that provide all varieties of private messaging seem to challenge Facebook’s immediate relevance. As these mobile apps grow, and as Facebook approach’s it’s 10th birthday next year, the next 10 years will likely be defined by a whole new set of what is considered “social networking” — and that might already be the new reality today. What is clear, however, is that while on the web, Facebook’s walled garden enjoys a captive audience already trained to do what it wants — on mobile, that walled garden is relegated to the size of an app icon alongside a sea of competing icons with very different or non-existant “sharing models,” and if today’s currents provide any trustworthy bellwether, the next 10 years for Facebook could present quiet a thorny challenge.

Photo Credit: gemsling / Creative Commons Flickr

Napster For Pirated 3D Printing Templates?

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Buy it in a store, laser-scan it at home, upload it to the web, print it anywhere. 3D printing is poised for the mainstream, but what happens when one person’s finely hand-crafted designs can be pirated and reproduced by anyone? Will 3D-printing-piracy social networks arise? And how will manufacturers lobby to stop them?

The ideas came out of my conversation at TechCrunch Disrupt NY with Alex Winter, director of the new documentary about Napster called “Downloaded”. While The Economist pondered these questions last year, and The Pirate Bay has coined the term “physibles” for 3D-printed objects, Winter takes the next step. He suggests a Napster for 3D printing models is inevitable.

I believe it. The way the music industry was unprepared for the mp3 revolution, the manufacturing industry seems similarly behind the curve. It might even be worse off. At least the record companies had the Digital Millennium Copyright Act to fall back on. As of now, physible designs could be interpreted as falling into a gray area between art and media protected by the DMCA, and what can be patented. 3D printing template marketplaces like 3DLT could also get sideswiped by piracy.

I imagine this situation will lead to the rise of a Napster for 3D printing models along with websites like The Pirate Bay’s physibles section. People will build up curated collections of designs, pass them back and forth, and you’ll be able to print cheap versions of expensive objects from tools to jewelry, furniture to toys, and even guns. The idea of people being able to download an array of weapon designs could be terrifying or liberating depending on your perspective.

Eventually, the old manufacturing industry will wise up, and independent designers will band together to try to thwart physible piracy. They might aim for changes to the laws to make this kind of piracy more clearly illegal with stiff penalties. They might also aim for some sort of digital rights management standard. Imagine if pirated designs could be added to a blacklist and the most popular 3D printers like Makerbots, Printrbots, and Cubes wouldn’t allow you to print them.

However it all plays out, it’s sure to be exciting. It’d be a shame to see piracy erode the livelihood of craftsmen and women the way some believe it does for musicians and game designers. As amateur 3D printing turns from science fiction to destiny to reality, a new set of challenges will emerge for meatspace artists whose work can be boiled down to ones and zeros.

[Image Credit: The 7 Stars]