Henry Blodget, Silicon Alley Look for Resurgence

When I mentioned the name “Henry Blodget” to a friend from the old dot-com daze, she wrinkled her nose with disgust. “How can anyone trust what he has to say, when he was the one who caused the bubble in the first place!” she said. Blodget was a financial analyst who mightily predicted Amazon’s stock would hit $400 — and it did! He went on to get big bucks from Merrill Lynch, and eventually was snared in an SEC investigation that found he was touting stocks publicly while trashing them in private emails.

Blodget was fined $4 million and banned permanently from working in the securities industry — without having to admit or deny the charges against him. But that didn’t keep Blodget out of the spotlight. He continued to write about the financial and tech industry for Slate and wrote a book, “The Wall Street Self-Defense Manual” that was panned by the New York Times for being hypocritical in doling out financial advice after being so irresponsible in the past.

Can Blodget turn over a new leaf and repent for past misdeeds, and earn the public’s trust? Without saying so explicitly, that seems to be his aim on his blog, Internet Outsider and the new group blog he co-founded, Silicon Alley Insider. The latter is an interesting choice of venues for Blodget, who is part of a team of journalist/bloggers such as ex-Forbes reporter Peter Kafka who are covering the resurgence of New York’s startup scene, Silicon Alley.

Just as the Alley makes a comeback, so does Blodget. CNET reporter Caroline McCarthy recently was wowed by the new “street cred” of Silicon Alley, noting that startups are starting to flourish again, and new media outfits such as Gawker and Huffington Post are local stalwarts. This week is a breath-taking example of what Silicon Alley Insider will have to cover in events alone: Advertising Week; MIXX Expo, Digital Life Expo and much more.

The Insider — and Blodget — have been beating the drum hard on two stories that caught my attention: One is the doom they predict for newspaper companies, including running the numbers; the other is their alarm at the possible damage to online advertising if the mortgage credit crunch continues. Crying “downturn” in the crowded blogosphere is not what I’d expect from Blodget, who was an optimist in previous boom times.

While Silicon Alley Insider has taken a stand as a naysayer rather than cheerleader for the new media scene, it has also been criticized for doing more aggregation than original reporting. “This morning’s third-party, deriviative blogging link-out fest is representative of the non-original, news aggregation shotgun posts that comprise the Silicon Alley Insider, a.k.a. standard, run-of-the-mill, (almost) anyone can do it, blog fare,” writes Donna Bogatin on her blog.

While the Insider does cover the events happening locally in NYC, I wonder if it’s a good idea for Blodget & Co. to also blanket the over-reported stories and daily rumors about Silicon Valley companies such as Facebook, Yahoo and Google. It’s probably wise for them to stick to their bread-and-butter of Alley companies and people.

Adam Lashinsky, a senior writer for Fortune magazine, says he has always been a fan of Blodget’s writing, and thinks Blodget has been more even-handed in his analysis than given credit for in the past.

“I’m not going to condone his transgressions, whatever they were, during the bubble,” Lashinsky told me. “He wasn’t the only cynic on Wall Street, but he was one of the few cynics that got caught…I think that he was always insightful, analytical and entertaining. Like many people, he was also wrong sometimes. I distinctly remember him saying in his reports back then that he wasn’t discussing Internet stocks as accounting for a large portion of any investor’s portfolio. He always mentioned that they should be the ‘play money’ portion of a portfolio.”

In an email interview, Blodget explained to me that he wasn’t hoping for a return to the manic days of the dot-com boom, and defended his gloomy outlook for newspaper companies. The following is an edited transcript of that interview.

If you could rerun the ’90s again, what would you do differently?

Henry Blodget: I would give the same macro advice: boom would probably turn to bust and most of the early Internet companies would disappear — so even aggressive investors should limit Internet stocks to a small fraction of their portfolios.

That said, along with many other analysts, I thought I would be be able to call the top [of the market]. After going back and studying previous bubbles, I’ve learned that this is a common mistake. And the smart answer, it turns out, is just to avoid any form of market timing.

What was your thinking in co-founding Silicon Alley Insider? Was it to bring back that magic of the Alley days of yore?

Henry Blodget: We weren’t looking to bring anything back (and I’m not sure “magic” would be the word I would use — “manic” is closer). We just felt that most coverage and analysis of the digital business was the equivalent of “24/7 Silicon Valley.” We also felt that the vibrant New York digital community was being ignored.

New York is right at the center of the global collision of media, advertising, technology, and finance, and there are as many technology people here as there are in the Valley (it’s just that a lot of them work for Wall Street and traditional media, technology, and advertising companies). So we saw an opportunity to both give voice to the New York community, and — just as important — to analyze global digital business from a non-Valley perspective.

Why do you consider the site in beta? I’ve seen web services in beta but never published blogs. What still needs to be worked out?

Blodget: We wanted to get the site up fast and then learn as we go, the same way a lot of the companies we cover do (Google, for example). We continue to experiment with community features and coverage, and we’re still getting a lot of helpful feedback. So, it’s a work in progress.

In your About page you list some of the stocks you own but also leave it relatively vague: “…and other companies.” Why is that? Are you totally transparent when you write about companies where you own stock? How do you deal with those types of conflicts?

Blodget: We’ve tried to be as clear as possible about the conflicts we face as analysts — not just with regard to stock ownership but from the conflicts that arise from advisory relationships and having friends, colleagues, and sources within the community. In my experience, the latter can actually be more stressful for analysts and journalists than passive stock ownership. For example, I think Time Warner CEO Dick Parsons is a great guy, and I used to be very friendly with him. After the mud I’ve been throwing at Time Warner lately, however, I don’t think Dick will ever speak to me again.

(I own Time Warner [stock], by the way. Or should I say I own the bag of rocks that trades under the ticker symbol TWX).

In terms of stocks, I listed the ones I own that I thought we might someday write about. I trade extremely infrequently — the Time Warner position came from some AOL stock I bought in 1995 — and I mostly own mutual funds. If I were ever to sell or buy a stock that we were frequently writing about, I would certainly disclose that.

You’ve been playing up the meme of “newspapers are screwed.” However, you never run numbers on how much those companies would save by doing less distribution, printing and circulation costs in a more online-heavy world of the future. Why?

Blodget: The problem for newspapers is not actually the cost of ink, paper, distribution, and so forth. For newspaper customers who want to read a printed paper, those costs are actually more than covered by the subscription price and print ads (thus the fat newspaper profits for the past couple of centuries). The problem for newspapers is that 1) more and more newspaper readers are moving online and 2) the revenue that can be generated from each online reader is only a fraction of the revenue generated from each print reader.

For example, in rough numbers, the New York Times currently has about 1.2 million print readers who generate an average of about $125 of revenue per reader per month (combining both circulation and advertising revenue). The New York Times’ web properties, meanwhile — all of them — have about 45 million readers and generate total per-reader revenue of about 60 cents a month. So you can imagine what would happen if all those 1.2 million NY Times print readers suddenly decided to just read the paper online for free.

We have actually published some detailed numbers on this. And our conclusion is this: Even if newspapers completely eliminate their physical printing and distribution costs, most would not be able to support their newsrooms from the revenue they generate online.

As fewer and fewer readers want printed papers, this problem becomes more acute. The need for great journalism isn’t going to go away, but at some point, the only solution for most newspaper companies will be radical restructuring.

According to Steve Yelvington, you make your argument based on the New York Times, which is more of an international paper with inflated web visitors. He believes there are less valuable regular readers so revenue per reader should be higher. How do you respond to that?

Blodget: The difference between the value of a print reader and a web reader is so large that you can use almost any web-reader numbers and come to the same conclusion. Steve says the NY Times claims 13 million uniques for NYTimes.com, so let’s start with that. Are there international and “drive-by” readers in that 13 million? Of course. But it barely matters.

For example, to take Steve’s theory to an extreme, let’s assume that NYTimes.com has only 1.2 million “real” web readers — the same as the print publication (a ludicrous assumption). Once you subtract About.com, the NYT’s web properties — all of them, including Boston.com et al — generate revenue of about $20 million a month. So even in this extreme case, each web reader generates revenue of $17 a month — versus $125 per print sub. Is Steve really arguing that if those 1.2 million print subs all went from generating $125 of revenue per month to $17 the paper would be fine?

And it’s not just big national papers like the New York Times. Lee Enterprises, which owns mostly local papers, generates web-reader revenue of about $0.50 a month. It’s just a vastly different economic proposition.

Personally how do you feel about the future of print publications and newspapers? Do you read print publications regularly or not?

Blodget: I feel great about the future of professional journalism delivered electronically. There will always be a need for top-notch reporting and analysis, no matter how many amateur bloggers there are. What I don’t feel great about is the future of newspaper companies.

The problem for these companies, by the way, isn’t just that their economics are cratering. It’s that the product itself is obsolete. By the time the newspaper arrives in the morning, much of what’s in it is old news. Compared to other alternatives today, newspapers are even a lousy advertising vehicle: A single eBay listing can contain a hundred times more information than a newspaper classified and be searchable and readable from anywhere in the world. And then there is the horrific environmental waste: paper, gas, ink, pollution — the product of which often gets thrown out, unread, on the back stoop.

We 40-somethings may read and advertise in papers occasionally, out of habit and nostalgia. But if we’re still doing that in another 20 years, the next generation is going to regard us as wasteful and insane.

I’m really impressed with your coverage of the mortgage industry affecting online ads. Why do you think you’re the only ones really writing about that in depth so far? Personally do you think it will cause serious damage online?

Blodget: Thank you. Many of our readers think we’re nuts.

My experience in the last market cycle has definitely shaped my thinking here (hopefully for the better, but not necessarily). In 2000, I had a front-row seat to the peaking of the economic cycle. The downturn didn’t happen all at once. It happened gradually, over six to nine months, and the first signs were very subtle (a weak company or two reporting bad results, a troubled sector that everyone thought was “contained,” etc.). I saw the signs, but, that time around, I made many of the same arguments that the bulls are making today. So, in part, I’m trying to learn from that mistake.

Today’s situation is obviously very different from the one in 2000. And I agree with many of our readers that, if we are indeed headed into a recession, online advertising will be affected less than advertising in other media. I also agree that certain types of online advertising — paid search, for example — will be less affected than display advertising. What I don’t agree with is the idea that our economy and traditional advertising will go into the tank but online ads and Google will just cruise along unscathed.

Some people might find it hard to trust your views on the financial industry after your past pronouncements as an analyst during the boom time. How do you deal with that?

Blodget: Obviously, given what I was accused of after I left Wall Street (writing emails that were inconsistent with my research), some people are understandably wary…It was a huge privilege to have the reputation I did in the ’90s, and what happened later was devastating. Over the past few years, a lot of people have given me the chance to start earning back that trust, and I am grateful for that.

If what you were actually referring to was my being late to spot the downturn in the last cycle, I’m afraid that just goes with the territory. No one knows for sure what the economic future holds, and anyone who says he or she does is hallucinating (or worse). So let me state what I hope is obvious: I have been wrong before, and I will be wrong again.

*****

What do you think of Henry Blodget’s analysis of newspaper companies and a possible downturn for online advertising? Do you think Silicon Alley Insider will become a must-read online publication covering the New York scene? Share your thoughts in the comments below.

Additional research for this story by Jennifer Woodard Maderazo.