In Friday’s Wall Street Journal, Matthew Karnitschnig profiles Richard Parsons, Chairman and CEO of Time Warner, as part of the newspaper’s regular “Boss Talk” series. Now that the barbarians (i.e. Carl Icahn and his horde of hedge fund troublemakers) are no longer at the wall, Parsons takes some time to ruminate on what’s next for Time Warner and to talk about some of the challenges of growing the company’s diverse media holdings. (full disclosure: FORTUNE is part of the Time Warner family) Along the way, he shares five tips for managing an organization during a period of change:

Rule #3 (”Don’t treat creative types like they are just cogs in a machine”) is particularly interesting. During the Wall Street Journal interview (“Defending Time Warner”), Parsons explains exactly what he means:

“We are cranking on cost right now. But here is where guys like Carl [Icahn] don’t get the joke. In a creative enterprise, you can’t treat people like they are just cogs in a machine. They have to feel like they want to be where they are. They have to feel like they have license to be creative, which means to hit the mark sometimes, not hit the mark sometimes. It is not just a process of, as Carl says, I talked to some consultant and they told me that they could come in and take $1.5 billion out of your thing. A $1.5 billion cost program. Well, hello! It doesn’t quite work that way.”

Tags: TimeWarner strategy RichardParsons

Barron’s is running an online open house this week, and it’s worth checking out some of the free features (all of which are typically hidden behind a paid subscription wall), especially the cover story on Google. According to Jacqueline Doherty of Barron’s, Google’s stock price could become unexpectedly volatile on the downside over the near-term future:

“Investors have been fixated on Google the past few weeks, as its shares have tumbled nearly 25% from a peak of $475 — and the fact is, there could be a lot more tumbling ahead. The share price could well be cut in half over the next year as the Internet giant grapples with growing competition from Microsoft and Yahoo!, increased pricing pressures in its online ad sales and mounting concern about what’s known as click fraud…

The list of challenges the company faces is nothing short of mind-googling. As if Microsoft weren’t enough, the search concern is headed for brawls with content providers like newspaper and book publishers. Phone and cable firms may also join the fray. Google’s cost structure, meanwhile, is ballooning, with the company hiring thousands of new workers and mulling projects as far afield as space travel. If Google trips on even a few of the challenges, its earnings could easily disappoint.”

I’ve actually been working on a similar type of investment thesis for Google in 2006. In an article called “Is Google Too Innovative?” (written right before the Chinese censorship scandal broke), I suggested that Google might be building earnings castles in the sky with its long list of innovative projects that attempt to beguile investors with dreams of future riches. (After all, investors value companies on the strength of FUTURE earnings, not current earnings) Some of these “innovative” projects from Google go too far — the creation of a worldwide Wi-Fi hotspot? a Napster-like music subscription offering to compete with iTunes? a collaboration with NASA research scientists? Riiiiggght.

Every month, like clockwork, Google seems to announce a new world-changing innovation worth potentially billions of dollars. Over the past six months, the number of innovative market moves emanating from the Googleplex has been mind-boggling: Google Video (January), a $1 billion strategic partnership with AOL (December), Google Base (November), Google Reader (October), Google Blog Search (September), Google Talk (August), and a new Google R&D facility in China (July). Most recently, it was Google’s acquisition of California-based dMarc Broadcasting for $100 million in cash - a deal which requires Google to pay up to an additional $1.1 billion in cash if the company’s plans to dominate the radio advertising market play out as expected over the next three years. Is it possible, though, that Google has become too innovative for its own good?

Certainly, Google should be applauded for its innovative search technology. There is no doubt that Google is one of the most innovative companies in America and that the company’s founders have some truly visionary plans for the future. However, one has to question whether the company is stretching too far, too fast. After all, each new innovation from the Googleplex is positioned as a potential billion-dollar market opportunity. According to Google watchers, these are intended as disruptive, market-changing innovations, not as ho-hum incremental innovations. Google Video is a direct response to Apple’s iTunes Video, intended to position Google as the leader in the video download market. Google Base has been portrayed as anything from a Craigslist clone to an eBay-killer. Google Talk could be a way to capitalize on the success of VOIP companies like Skype and push Google into the communications market. Then, there are the quixotic Google offerings that materialize every now and then - like the plan announced in September to build a free Wi-Fi network for San Francisco.

As every investor knows (or should know), the classic way to value a company is using a model of discounted cash flows. The greater the projected future earnings, the higher the likelihood of future positive cash flow, and hence, the greater the valuation in today’s terms. Taken in this light, the huge run-up in the stock price of Google (from $85 at its IPO to a skyscraping $475 on January 11) represents unflinching investor faith in the future earnings potential of Google. Broadly speaking, to keep the stock price inching ever skyward, Google must continually roll out new initiatives to enter new markets, claim additional market share in old markets, or transform old markets into new markets. As long as investors buy into the “innovation = growth” story, the stock price should increase.

However, as even America’s most beloved companies find out sooner or later, Wall Street has the capacity to punish swiftly and surely any publicly-traded company that fails to meet its expectations. There is no better example of this mindset than the obsessive focus on the quarterly earnings number reported by each public company. Make that number and Wall Street leaves you alone (maybe). Recognizing that fact, companies work hard to smooth out the earnings number each quarter. Some allegedly manage their earnings by keeping a number of one-time earnings events in their back pockets, just to be safe.

So what happens when Google fails to meet the expectations of its investors? Does Wall Street forgive Google, citing a spectacular 18-month run of creating wealth, or does it punish its new favorite son? After hitting a high of $475.11 in January, Google’s stock recently fell below the $400 mark, largely on fears of a legal dust-up between Google and the U.S. Justice Department. In its own way, Wall Street has already punished Google for its hubris in daring to take on the U.S. government.

In a worst case scenario, of course, Google could be pushed into deals that it has no real business pursuing. Consider the latest deal involving dMarc Broadcasting. The idea of dominating the radio advertising market is interesting, to be sure, but isn’t Google all about New Media and not Old Media? Why isn’t Google investing in satellite radio? Or in Internet radio? Or even podcasting? Doesn’t boring old terrestrial radio seem like an unlikely endeavor for Google?

It is, perhaps, until you consider the money involved. According to the Wall Street Journal, the estimated U.S. spending for terrestrial radio advertising in 2005 was $20.6 billion - more than twice the size of the relatively undeveloped Internet advertising market ($10.0 billion). The Wall Street Journal even speculated that the television advertising market could be next as Google prowls for innovative ways of applying its Internet advertising technology to existing media markets. After all, total U.S. spending on TV in 2005 was a whopping $55.4 billion! The idea is not so far-fetched, considering Google’s $1 billion strategic alliance with AOL.

In business, as in life, it’s best to under-promise and over-deliver. Let’s just hope that the Google guys (Sergey Brin and Larry Page) don’t over-promise and under-deliver.

Tags: Google innovation

[image: Barron’s]

David Kirkpatrick of FORTUNE magazine describes why Slashdot just may be the future of media:

“Two things distinguish it — it’s the most popular news and information site with the tech cognoscenti, particularly programmers and engineers. And all of its content is created by its users. They submit about 700 stories per day, which staff editors vet and reduce down to the 30-35 that get published. Of the site’s 5.5 million unique visitors per month, about 25% post comments about those stories.”

Kirkpatrick goes on to call Slashdot “among the most important and emblematic Internet businesses of our age.” Take a loyal and far-flung user community, high participation rates (i.e. lots of comments and article submissions), a quirky metric called “karma” that appeals to the human ego, and a vast reserve of knowledge about a particular niche - and you have the formula for success for any user-generated media company:

“As a journalist [Slashdot] especially fascinates me. What it seems to represent is essentially open-source journalism. People fight to make their submission the one out of those 700 each day that will make it to the front page with a byline. “The ego value of that is huge,” says Jeff Bates, OSTG’s vice president of editorial operations and one of Slashdot’s two co-founders.

Creating something of tremendous widespread utility for the ego value is a new phenomenon in contemporary business. It’s part of what motivates open-source software programmers. As a well-paid professional journalist, when I hear that ego alone motivates contributors to a news site with 5.5 million unique visitors a month, I find it a bit unnerving, but unquestionably exciting.”

While Slashdot appeals primarily to the science & tech crowd (the site’s byline is “News for nerds”), there are a host of other similar community sites that are springing up to fill other niches. At the Innovation Insider, for example, we’re turning into huge fans of Digg. Similar to Slashdot, Digg is a community site in which users submit stories each day in a number of different verticals, like technology and design. By submitting votes on these stories (called “diggs”), users can quickly move an article onto the front page of Digg. Once the article hits the front page of Digg, watch out! Huge traffic spikes are possible. Instead of one human editor attempting to categorize hundreds of stories each day, Digg users do the bulk of the editorial work for free.

Anyway, at the bottom of this story, you’ll notice a small link called +digg. This link allows any reader of this site to submit a story directly to Digg. Try it - it’s pretty cool once you get the hang of it.

Tags: Slashdot Digg innovation

[image: the Slashdot guys, via ThinkGeek.com]

In an article for Brand Week, Nintendo’s Reggie Fils-Aime (the company’s EVP of sales and marketing for America) reflects on the pace of disruptive change in three different industries (the Hollywood movie business, the consumer electronics industry, and the videogaming business) before offering a final takeaway lesson: “Disrupt before you’re disrupted.” Pointing to other companies which failed to anticipate seismic changes within their respective industries, Fils-Aime explains why Nintendo has embraced a corporate strategy based on disruption and innovation:

“Twenty years ago, [the videogame industry] was almost exclusively the province of 12-year-old boys. Many of those same players who grew up playing games with our Mario character retain their appetite for games today, even if their preferred adventure now is darker, deeper and increasingly complex. Still, the performance vector is unchanged: make it look better on screen, make it even harder to win, and players will be happy.

But a funny thing happened on the way to the future. Mounting evidence shows that we may well have overshot our own market. Our games grew so complex they became intimidating, further polarizing players and non-players. Market revenues have sagged in the U.S. for the last two years, and in Japan for six of the last seven. The industry just endured a disappointing holiday season and studies show that non-hard-core gamers are playing less frequently[…]

Nintendo’s counterpunch is disruption. We’ve determined that the videogame market is ripe for revival—and we’re looking to make it happen by reaching out to the millions of players still on the sidelines, including those over the age of 35. Early moves have been promising. Nintendogs, a game that allows people to train virtual puppies, has doubled the typical percentage of female purchasers, selling 1.5 million copies in about four months… We’re expanding our market by disrupting it.

Yes, it’s a daunting idea. Small companies often think they don’t have the resources to change an industry, no matter how novel their approach. Larger ones frequently maintain a built-in antipathy to undoing what seems to be working. But we agree with the admonition of Jack Welch: “Change—before you have to.”

This is more than just corporate bravado and bluster, as Joystiq seems to suggest. Nintendo consistently develops some of the most innovative games around - just last week, Nintendo picked up a handful of awards for its Nintendogs game. (Instead of being a shoot-’em-up game, Nintendogs allows gamers to train virtual puppies) At the Academy of Interactive Arts & Sciences’ D.I.C.E. Summit, Nintendogs won two distinctions: “hand-held game of the year” and “achievement in game play engineering.” At Ziff Davis Media Game Group’s 1UP awards, Nintendogs was honored as the most innovative game of 2005. As GamerSurvival points out, these awards help to confirm “Nintendo’s role as an industry disruptor and innovator.”

Tags: Nintendogs innovation videogames