A little while ago, I talked about how Nokia was struggling to keep up with rivals such as Samsung, LG, Sony Ericsson and Research in Motion. Nokia's poor second-quarter results suggest the Finnish giant has yet to get a handle on the reality its mobile devices just aren't cool as those made by competitors. It's as simple as that. What is Nokia's response?: They plan to lower prices. Sounds like a desperate move. Perhaps one of the most intriguing comments about Nokia was made to the New York Times by META Group analyst Peter Firstbrook, who said “I'm disappointed they still have not come up with a BlackBerry killer. They're not coming up with interesting high-end phones.”
For all the talk in North America these days about the downloading of free music, there has been little attention about how peer-to-peer technology is evolving and moving into new business markets.
Perhaps the most intriguing is the use of P2P networks in the online gambling industry. While online gambling is already a multi-billion dollar business — despite intense opposition from the U.S. government — it is beginning to adopt P2P technology to give gamblers even more tools to make “transactions”.
At the forefront of this emerging trend in North America is Toronto-based 1x Inc., which will launch new software called BetBug in the next few weeks.
Much like P2P software lets people exchange music online, BetBug will make it a snap for gamblers to connect with each other without using a middleman — otherwise known as a bookie.
Let's say, for example, an ardent Portuguese soccer fan wanted to place a bet on his team winning the recent European championship. Rather than use a bookie, the Portuguese fan could have used a service such as BetBug to find gamblers who wanted to back Greece. After finding the best price, the Portuguese fan could have made a P2P bet with the Greek backer.
When the game finished, the winning party would have paid a small commission to the e-commerce payment provider, which in turn, would have paid a royalty to the P2P exchange.
“This is a natural evolution for sports betting,” said Anthony Novac, 1x's president. “The interesting thing is the more tech-savvy people are fascinated with taking P2P to the next level, whereas gambling experts see it as a phenomenal product that adds value to the user; while legal experts say 'wow you have taken it around the [U.S.] Wire Act'.”
For online gambling houses, P2P technology is a threat and an opportunity. As middlemen, they do not want to see customers migrate to other services. At the same time, they will have to be flexible and offer P2P tools as complementary services.
Another benefit for gambling houses could be reduced expenses. Instead of having to handle transactions on their own or leased computer servers, they can simply provide branded payment services to generate commissions and build relationships.
This model that could also be adopted by auction giant eBay Inc., which has to operate and maintain large server farms to handle millions of transactions. If eBay decided to incorporate P2P technology, it could expand its offerings and lower costs.
In many respects, the gambling and pornography businesses are online vanguards that capitalize on new technology to bolster business. It was the pornography industry that jumped on the VCR, the Web, e-commerce and DVDs. As a result, it should not be a big surprise that it is the most profitable online sector.
Given how effectively the gambling and pornography industries have gravitated to the Web, there have to be important lessons for the music business. So far, P2P has savaged sales, while services such as Kazaa continue to thrive despite legal campaigns launched by groups such as Recording Industry Association of America.
Is there a way the music industry can take advantage of P2P technology rather than fall victim to it? This is a daunting question, given the music industry still has plenty of work to do when it comes to traditional e-commerce transactions. The simple fact a super site with millions of titles and an easy to remember name such as www.music.com has yet to materialize is evidence of the industry's inability to get its act together.
There are, however, indications P2P is gaining a little traction within the music business. Kazaalite.com, an off-shoot of Kazaa that became popular because it did not contain spyware, is offering a $5 a month service that gives subscribers unlimited access to music, movies, software and television programs, as well as unlimited technical support.
Kazaalite also has a premium version of its software for $25 that lets subscribers download and view DVD-quality movies. All of this downloading, Kazaalite offers, is apparently 100% legal.
Kazaalite is far from perfect and likely far from legal but Intercosmos Media Group Inc. does deserve credit for trying to create a P2P business model by setting itself up as a software middleman.
Perhaps the music industry could establish itself as the P2P clearinghouse for music by offering a service that ensures files are legitimate, high-quality and virus-free. Instead of fighting the P2P trend, the industry should try to exploit it, and find ways to encourage consumers to purchase other products, including CDs and DVDs.
Maybe this proposition is not doable and/or not viable, but it is time for the music industry to experiment with new tools and services to stem the P2P tsunami. Perhaps senior music executives should come to Toronto and spend some time with the 1x management team, which seems to have discovered a way to make P2P pay.
You've got to hand it to the U.S. Internal Revenue Service. In an attempt to tax the fledgling Internet telephony market, it is apparently planning to use an excise tax enacted in 1898 during the Spanish American War. The 3% federal tax could be applied to changes in technology used in “telephonic or telephonic quality communications”. This seems a strange approach given how the U.S. has bent over backwards to not tax e-commerce activities to encourage the industry's growth. You have to think there are just too many bean-counters in the IRS with too much time on their hands, or the major telecom carriers have got some pretty good lobbyists in Washington. If you take a step back, a 3% tax shouldn't scare the Internet telephony industry and new players such as Vonage Holdings and 8X8 because it seems to be a small cost to play in a fast-growing industry. What Vonage et al should really be concerned about is the aggressive strategies adopted by large telcos such as AT&T.
What's next for Research in Motion? What about the huge Chinese market? It seems it's only a matter of time before the folks of Beijing get addicted to the Crackberry amid reports RIM has been working with CSL and Hutchison Mobile about the launch of Chinese-based services soon. Here's an intriguing back of the envelope calculation: RIM has about 1.2 million subscribers. If it can capture just 1% of the Chinese market, that would give it another one million customers. Interesting…..
Mark Evans, Financial Post
So Nortel Networks Corp.'s books were apparently cooked after all. The burning questions are what exactly happened, who fudged the numbers and what were their motivations.
Until Nortel says otherwise, the responsibility for the accounting fiasco lies at the feet of the three executives fired “for cause” in April — chief executive Frank Dunn, chief financial officer Doug Beatty and controller Michael Gollogly.
According to unidentified sources cited by The Wall Street Journal, the company's board has “determined the company inaccurately employed an accounting manoeuvre to make it look profitable, when in fact it wasn't.”
The “manoeuvre” in question has to do with complex accounting rules involving things such as writedowns for assets and bad loans. Nortel had billions of dollars in play from acquisitions and equipment deals done during the telecom boom from 1997 to 2000.
If the Journal story is accurate, it confirms speculation that has been bandied about since Nortel's accounting problems evolved from a minor problem into a financial disaster in late-April.
So what prompted the financial massage? One argument is the short-tempered Mr. Dunn was hell-bent on wrapping up the company's extensive restructuring by returning the firm to profitability last year at a time when the telecom equipment industry was still in a deep slump.
Mr. Dunn could have made it clear to senior executives it was paramount Nortel post profits –the sooner, the better. With firm marching orders, these executives and their staffs may have decided to play it fast and loose with accounting rules, which can be more art than science. A few numbers get shuffled here and, voila, profits.
This, in turn, triggered a company-wide bonus plan in early 2003, and everyone went home happy. Mr. Dunn looked like a hero for nurturing Nortel back to health, while he and thousands of his employees received some major walking-around money.
If this scenario materializes, are Mr. Dunn, Mr. Beatty and Mr. Gollogly on the hook? Do they bear responsibility for ensuring the accuracy and legitimacy of the company's accounting systems? In a world obsessed with the Sarbanes-Oxley Act, they have to take the blame if they signed off on the books.
A more sinister prospect is Nortel's books were deliberately torqued — driven by a bonus scheme the board — which includes new CEO Bill Owens — put in place to motivate people who had watched tens of thousands of their co-workers eliminated through layoffs, office and plant closures and asset sales.
With more than $140-million of bonuses within reach — slightly more than what ex-CEO John Roth made in 2000 — it is easy to understand how avarice may have come into play. Given the enormous wealth that executives received during the dot-com and telecom booms, it is possible many people within Nortel believed their bonuses were entirely justified.
(Nortel said yesterday it intends to recover any bonuses paid to executives found guilty of wrongdoing.)
If all it took was a little number fudging here and there, who was really going to get hurt? Employees would be rewarded, while investors would be happy if Nortel shares bounced back a little bit. It seemed so simple and, more important, lucrative.
So far, Nortel is not providing specific details.
As investors showed yesterday, Nortel will — for the most part — be valued on its business prospects as the telecom equipment industry appears to have its first year of growth since 2000. Nortel is well positioned to capitalize on demand for equipment to run Internet and wireless networks.
This week, Nortel investors have been swamped with new information. They have been told: the company will provide an update next month on the impact of the restated results, which cover the periods between 2001 and 2003; preliminary first and second-quarter results will be disclosed in August; and the board will claw back unwarranted bonuses.
All of this suggests the investigation by the company's independent audit committee, which started its work in November with advice from a major law firm in Washington with connections to the U.S. Securities and Exchange Commission, is close to completing its work.
It may not have all the answers yet but the committee, headed by ex-Royal Bank of Canada chairman John Cleghorn, probably has enough information to ascertain what roughly happened.
What has become abundantly clear is the committee believes Mr. Dunn, Mr. Beatty and Mr. Gollogly had the ultimate responsibility for making sure Nortel's accounting systems were accurate. It may be they were ignorant of what was happening within the ranks but there are no excuses these days in the post-WorldCom/Enron world.
A major issue going forward that Nortel will have to address is the class-action lawsuits being launched. If the books were manipulated, some analysts believe the company could cough up as much as US$500-million in settlements. It is entirely possible Nortel may be making settlements or defending itself for the next two to three years.
As Mr. Owens battles to restore Nortel's credibility, he will also have to deal with the fact the fallout of the company's accounting problems will not vanish any time soon. It could be some time before Nortel can start with a clean slate but at least you get the feeling the healing process is underway — even if it is embarrassing, painful and expensive.
According to the Wall St. Journal, Nortel Networks' books were cooked by senior executives. If this is accurate, you'll see the class-action lawsuits coming from miles away. The big question is who perpetuated the financial massage and why did they do it. Are we talking about fraud and criminal deceit here, or well-intentioned but flawed interpretation of accounting rules so Nortel could return to profitability. One suspects the answers are not that far off.