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Every fire spawns new growth.

Seminal events. Moments that matter. Going against the “conventional
wisdom”.

The few days following Sept. 11, 2001 most investors panicked and went
to cash. My advice in those days was buy security stocks. Stocks like
InVision (xray at airports) and others. Some went on to spectacular
gains — more than 500% — once chicken little was done yelling the sky
was falling. Or rather, people finally realized chicken little was just
that, chicken.

A little while after that I began to focus on Chinese web stocks. Sina,
Sohu, Netease, Chinadotcom. Some of them traded below cash value. This
was a time when nobody wanted anything to do with “Internet” and even
less to do with “China”.

Of course, Chinese web stocks went on to soar in the next few years as
China’s economy blossomed, Olympic spirit kicked in, and Shanghai gave
Tokyo a run for its money.

Fast forward to today’s economy. A blanket clusterflub. Mortgage
meltdown. Banks acting like consumers (overextending themselves). How
ironic. Overpriced wars (they ain’t as cheap as they used to be). Stock
market more volatile than Sarah Palin in a moose hunt with her Saks
Fifth Avenue gear on.

From 2004-2008 the stock market had a run. It got ahead of itself in
many ways. Private equity shops borrowed money they didn’t have (yours),
acquired assets they couldn’t manage, speculated on mortgages nobody
owned.

Meanwhile, over-regulation of the stock market killed the IPO prospects
for many, strengthened the incumbents (eBay, Google, Yahoo).

That run is over.

The next step I believe could be expanding margins at large companies.
When companies such as Circuit City fail, Mervyns fail, and others in
retail may follow suit, it may point to mismanagement. But the
underlying cause is a lack of efficiency internally.

Walmart has 100 million customers a week come through its doors. It
displays every item in the store based on whether or not customers buy
it. It knows to a thumbtack what its expenses are. It negotiates with
vendors to get best prices. Some may say ruthless but the key point I
want to make is it’s technology behind the success. Walmart’s supply
chain should be standard educational procedure for every retailer
worldwide. Why do you think Amazon hired Walmart’s tech geniuses away
from Walmart a few years ago?

You’re going to see companies such as Sun, HP and others layoff people.
Overstaffing isn’t the problem with them, it’s lack of products people
want to buy. Overpriced servers. Overpriced service contracts. What Sun
could have done was say to its employees: “we’ll give you office space,
you make a business in networking that Sun will get behind”. In one move
it could have had 1,000 people unleashing creative juice into its
stagnant, fetid blenders, the ones that have asked “will it blend?” on
the same Solaris carrot for 25 years.

Ditto for Yahoo. Unleash 1,000 engineers to launch new services on Yahoo
and they will come up with a new Yahoo better than anything seen yet.
Open it up to the public. You would have a Yahoo that’s grassroots
driven, the only way to beat Google ever.

So as we read the repeated headlines about banks, bonuses, homes, keep
in mind that every turning point, every seminal moment, opens up
opportunities for those that tune out the noise of naysayers and focus
on value that exists everywhere.

Things born of fire tend to endure.

Game changers. It’s the key to any new business. It’s the key to economic growth. It’s the core of digital business.

Some quick thoughts on changing the game for:

Microsoft- Are you a Windows company or an operating system company? What’s stopping Microsoft from creating its own flavor of Linux? Baskin-Robbins sells 31 flavors; Microsoft sells one.

MSN- Forget trying to be AOL or Yahoo, those horses have left the gates and the model they were built on is waning, the generic Internet. Ditto for the name “MSN”, it connotes “cable TV” acronyms. The original name for MSN was “Marvel”, a much better name. Although the Spider-Man folks didn’t allow it. In terms of “digital”, Microsoft needs to create game changers, because the old games are dead and they lost those battles (portal, news, video, search). Google won because it made browsing archaic and ranking #1, a direct hit on Yahoo (AOL, MSN, Excite, Lycos, Alta Vista) as a result.

AOL- Buried in Time Warner, a merger I disagreed with originally. AOL was a platform, it became a destination which was a mistake to marry content with distribution. It’s why DirecTV has HBO and not its own home-made programming. AOL needs to focus on AIM and IQC and advertising.com. ICQ was a game changer that became commoditized. What can AOL do that’s new?

Yahoo- Like a foraging squirrel, gathering content. However, it’s bloated and jammed with too many ads, too many places. The homepage is half ads that nobody wants, and certainly doesn’t need. Aside from web email and Yahoo Finance nothing here looks compelling, and those have lost their edge in 10 years of serving them up. Where’s the must-have experience at Yahoo? It missed YouTube, Doubleclick, Skype. The M&A team needs to find compelling apps. Yahoo has too long relied on its “brand” and today it’s just not as strong as 1995 when the name was cute. Yahoo needs a direction and clear “must have” experience.

eBay- The auction model is dying. Nobody wants to babysit auctions, buyers or sellers. Skype made no sense as part of eBay, spin it out to Tim Draper as a tracking stock. Skype is a major game changer that is undervalued and lost amid the auction clutter. Ditto for PayPal, it’s the real money maker, spin it out, release the value.

Skype- probably worth $10 billion, even today. It’s the world’s only global telecom with more than 200 million users.

Facebook- As the heir to the Six Degrees, Friendster, legacy, you are trying to make a social network something it’s inherently not, an ad network. Like mixing milk and tequila. Find the value in the network, not the ad route.

Myspace- I said long before News Corp. bought it that the value was in distribution of music. Music was how Myspace got its footing in the first place. Now it’s very cluttered and overcome with ads/spam. To those that remember the interactive TV trials in the early 1990s, Myspace is a precursor to interactive TV. But News Corp. may mess that track up.

Expedia- Booking online travel is now commonplace. What’s the game changer for you? Acquire Tripadvisor and a handful of others, valuations are good now.

In every business the first question that should be asked is “how do we win?” you win by changing the game. The old economy and ways of business are not efficient. Tremendous waste exists at every level. Compete with rivals but also compete with yourself to be lean, mean and solve practical problems in fresh ways.

These are the times when game changing will be rewarded greatly.

Factor ‘e’.

The biggest movement right now is not green, clean, political or tabloidential (candidates tabloid drooling news). The biggest movement is much larger: efficiency. What I call the Efficiency Factor, or Factor E.

Factor E drives businesses with profits. Look at any dozen publicly-traded companies’ balance sheets. The efficiently-run companies will be full of Factor E; the ones with huge losses will be Factor E deficient.

The energy industry is a prime example. Adjusted for inflation, oil at $100 per barrel is effectively the same as it was 25 years ago.

Wind, solar, ocean, hydro energy all are attractive only when the Factor E becomes an attractive alternative in terms of cost.

Being efficient for the sake of being efficient is not yet the way of life of 6 billion people.

Green energy only looks attractive in relation to how wasteful the current methods are. But that doesn’t make so-called green energy the “most-efficient” energy. Companies trying to sell “green” do so by describing how much better their solution is versus the status quo. They don’t compare it to a better scale of how efficient overall.

Let me explain a little. Wind farms. Yes, some winds farms may be better than oil or coal energy but that doesn’t mean wind is the most efficient energy method.

You see this relative thinking also in business. XXX Company reported earnings that were XX% better/worse than the same period last year. Earnings are a proxy for efficiency (sometimes), but tell nothing about how well the company could have been managed, or how efficient on an objective scale the company could have performed.

On a simpler example take the newspaper industry. It is not efficient at all these days to cut trees, make, bleach, press, dry, sell, distribute, print paper pulp…and finally print, market, sell, truck, rack, deliver a newspaper.

Think of the gas wasted. Water wasted. And it gets tossed out the next day, perhaps recycled. Most likely, not.

The newspaper industry is oblivious to Factor E, in denial, because it wants to continue to profit from inefficiency.

The movie industry is another example. Every week new films are ‘released’ and movie goers drive to the theater, spend $15 on popcorn, sit and watch the movie. Or try to. There’s always someone opening their cell phone and texting or talking during the movie. Always. ADD at the movies.

If the movie industry was efficient it could triple its revenues from new movies in one simple step: go pay per view on demand.

I’m willing to bet that at least half of movie lovers would pay to watch the new releases at home for a price that equalled theater rates. Let’s say $25 to $40 a film, with some coupons for popcorn and soda at the local store the next time they grocery shop.

The home theater industry would boom. 50-inch and larger TVs would be the norm (Sony and LG would like that).

Instead of having a few hundred thousand people at best slog off to the theater in their cars, several million would likely pay on demand.

We can literally dissect every industry into how efficient it really is versus what it actually does now. The biggest opportunities are in the Efficiency Factor. Greener than green and cleaner than clean.

Factor e. How does your business stack up?

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Digital GDP.

In my 14 years of building digital companies it’s interesting to see how the value of digital resources out paces those of any other industry, dinosaur goo included (oil).

It’s a concept I coined called ‘digital GDP’. Digital resources are unique in that they are not constrained by geologic assets. Most countries consider geologic GDP as their true asset.

The interesting thing is that very few countries understand or embrace Digital GDP. In some ways Japan was an early convert given that as an island it had little or no natural assets to exploit.

India in the 1990s began to embrace the idea of software production andsoftware outsourcing, both parts of a Digital GDP strategy. Today, India’s economy is rapidly growing as a result.

China is trying to get into the Digital GDP business also with software outsourcing. It has a more difficult route based on language but nonetheless, China is making inroads into becoming a more Digital GDP exporter.

The US has long exported ‘cultural GDP’ (movies, music) and Silicon Valley has been a leader in truly digital export: eBay, Google and Yahoo among them.

To me, the Digital GDP began in earnest 30 years ago when Microsoft’s Bill Gates was one of the first to understand the value of software. One lone voice charging for software back in the 1970s when most software was hobbyist made and pirated (click to read Bill’s letter here).

Microsoft’s $25 billion in cash is more than most nation’s have in their treasury. Why? Digital GDP is the world’s only renewable asset.

For many countries natural resource GDP keeps them in the debt cycle. This is what has hampered Latin America and African nations in particular. Debt servicing with only geologic assets to back it up. And they are dependent on four seasons and something as basic as rain (water).

Digital assets, however, multiply in a digital environment based on a different set of ‘seasons’. These seasons I would call: concept, launch, adoption, proliferation. In general, this cycle depends on biological assets (us) interfacing with the digital platform and not geologic ones (oil, water, earth).

The cycle for a company is contingent on adoption, not time, parallel growth, not linear. Like growing one apple tree 12 ways instead of one.

Countries that want to create long-term value for the next 10 or 100 years will need to focus on digital GDP and not geologic. Companies that can create valuable digital assets will far outpace those that introduce assets based on geologically-limited ones.

It’s why after 30 years Bill Gates retires the world’s wealthiest person, give or take a few hamburgers.

How many politicians and governments understand the Digital GDP notion? Their country’s future is at stake if they don’t, they will forever be constrained by the whims of commodities markets.

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