Business Week followup: Valuing assets

Following up on Business Week’s bubble-logic cover story on Digg, Techdirt offers a good roundup, suggesting that the $60 million figure was the last-minute work of “higher-up” editors, and noting that it does not appear in the text of the print edition, only on the Web (suggesting a late edit).

That’s certainly possible. When I was Salon’s technology editor I had to do my share of reality-checking the direction that “higher-up” editors wanted to take when promoting my stories on the cover. If this is what happened at Business Week, though, it’s really no defense; it’s a sign of organizational dysfunction. Either the “not-so-higher-up” editor of the piece didn’t object to the misleading headline, in which case he is complicit, or he did object and was overruled by “higher-ups” who showed they don’t trust their own people. Neither scenario is to the publication’s credit.

Then there’s a half-hearted effort on the part of Business Week blogger Stephen Baker to defend the $60-million-out-of-a-hat headline itself. My mistaken idea, Baker writes, “shared by many, is that money is not ‘made’ until an asset is sold in one marketplace or another. But if you look at the rankings of everything from executive compensation to individual wealth, they’re based on valuations of diverse assets. Many are open to question and just as tenuous as the valuation of this New Jersey bubble-inflated split-level I’m typing in at this very moment.”

By that logic, then, Business Week is abandoning any attempt at mooring valuation to the reality of market exchange. Companies are worth whatever anyone says they’re worth so long as there is some fig-leaf of math involved. I can say that every visitor to my site is worth X, multiply X by my traffic, and — hooray! — I’ve “made” that amount of money. Why? Because I — excuse me, the phrase from the BW article is “people in the know” — said so. This is how the original Web bubble got blown up, and that’s why so many people who lived through it are appalled at Business Week’s gaffe.

Sober-minded businesspeople, analysts and journalists rely on more stringent standards of valuation. Baker and I might each own a “diverse” asset in our homes, but the bank will give us a loan based on that ownership, because there is a reasonable market for homes, even though it may greatly fluctuate. Stock options vary in actual value depending on the ups and downs of a stock price, and executives’ opportunity to exercise them is constrained in various ways, but they bear some relationship to an active equity market, so they’re not entirely vaporous. But an ownership stake in a small private company that’s had great success building Web traffic but little or no record of profitability doesn’t meet the “collateral” test; it’s certainly not something you can count on to buy a house or send kids to college (I don’t think Rose is worrying about that one yet).

Digg is a great site and a great service, and someday it may be worth a big pile of actual dollars, and many of those dollars may end up in Kevin Rose’s pocket. But until then he has simply not “made” millions of dollars. Until then, his share of the company is an asset, certainly, but not one anyone should hang a dollar figure on, and Business Week should never have tried, or taken a wild speculative guess and turned it into a sure-thing headline.

Now the magazine can either publish a correction, which I doubt it will ever do, or live with the diminished credibility it deserves. Ed Cone agrees: “BusinessWeek’s best bet is to say, ‘We goofed. We wrote an interesting article about an interesting subject, but we made a pretty bad mistake in the way we headlined the story.’ ” Let’s see if they really understand anything about “Web 2.0.”

UPDATE: At a different Business Week blog, Rob Hof takes a more nuanced stance: “Now, reasonable minds can disagree on the meaning of ‘made.’ …But unlike my colleague Steve Baker and some others on the magazine, I think the fact that a lot of intelligent people read ‘made’ to mean something different [from] what the magazine intended to convey is prima facie evidence that the cover language didn’t hit the mark… We hear the criticisms, even if not everyone here agrees with them. I also know that, contrary to the beliefs of some critics, the words on the cover are something that folks here take very seriously and debate vociferously.” Hof’s entry is a good example of how someone blogging from within an institution can tactfully criticize it without getting (figuratively) beheaded.
[tags]Digg, Web 2.0, bubble, businessweek[/tags]

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