The Boys in the Bubble
"Do a search, for example, of the word
"Enron" in the databases of those publications
prior to 2000 and you'll find little but praise
for its market innovations."
The New York Times
January 2, 2003
By JAMES LEDBETTER
LONDON
The year that just ended will be remembered as
a year when the failures of America's corporate
governance and accounting procedures became
widely apparent. But a full reckoning of the
Enron-WorldCom era must also take into
consideration the ways in which the business
press failed, too.
The late 1990's witnessed an explosion of business
media. CNBC became the most profitable cable
channel in America. New magazines and Web
sites sprang up: Business 2.0, Red Herring,
The Street.com and the publication I worked for,
The Industry Standard. All purported to untangle the
mysteries of the burgeoning Internet economy.
Yet for all that increased attention, it's difficult
to say that the enlarged business media played
a decisive role in exposing the shortcomings of
American corporate practices. Indeed, too often
the new magazines and Web sites acted as
incurious cheerleaders, championing executives and
innovative companies without questioning their
books. Do a search, for example, of the word
"Enron" in the databases of those publications
prior to 2000 and you'll find little but praise
for its market innovations.
The mainstream media, too, did its share of hyping
the technology boom, but no one did as much
evangelizing as the so-called new economy publications.
They preached about how technology created new
paradigms. But they were frequently slow to note
when technology didn't work, or
markets didn't exist, and they relied far too much on
a handful of self-interested bankers for information.
The billions that poured into Internet companies
in the late 1990's usually came through the hands
of venture capital firms or large Wall Street
brokerage houses, each of whom had a vested interest
in the company's success, or at least its rapid growth.
But they were often among the only
people who had studied the industry closely
enough to have an informed opinion, and so
they were the ones we called. With the benefit of
hindsight, it's now clear that I and others were wrong
to rely so heavily on sources who had so much at stake.
I had begun to get an inkling of this in early 1999: while
writing about the merger of two large Internet music
retailers, I sought a comment from one of the bankers
following the stock of the newly formed entity.
Yes, he acknowledged, the merger had taken
too long to complete, and in the meantime Amazon.com
had taken the lead in online compact disc sales. But,
he insisted, the management team was solid and the
company was on track. I was impressed, and put his
endorsement in my story.
In a matter of weeks, I noticed, the bank had dumped all
its stock in the merged retailer. I resolved never
again to rely on analysts, but I confess that I didn't
bring this epiphany to the attention
of my colleagues or my readers.
Another part of the problem was that our own businesses were too
far inside the beast we were covering. The Industry Standard, which began
publishing in 1998, had the same start-up mentality as many of the
companies it covered. Inevitably, some of their worldview rubbed off on us.
At exotic conferences in Aspen and Barcelona, our management mingled
with the leaders of high-flying tech firms, some of whom were
simultaneously advertising in the magazine, sponsoring a section
of our Web site, speaking at magazine-sponsored conferences they had helped pay
for, selling us software and giving colorful quotes to our reporters. This
was not a formula for sustained independence.
As we grew - The Industry Standard sold more advertising pages
in the year 2000 than any magazine in America - we inherited some of the
dot-com hubris as well. We spent millions on television advertisements,
without being able to track whether they actually brought in subscriptions.
The magazine's very success was sometimes a distraction that blurred
the difference between us and our sources. Our competitors, too, acted
brashly; both Red Herring and Business 2.0 had so many pages of
advertising that in order to publish a respectable amount of editorial content in
certain issues they simply reproduced articles they had already published.
(One editor went so far as to defend the practice, arguing that his
magazine had acquired lots of new readers since the articles had
first been published.)
The storm of information surrounding the Internet boom was blinding.
So many words and press releases were swirling around that it was
impossible to know if anything anyone said made a difference.
This depressing suspicion was made real for me one morning, when I appeared on
CNNfn, the cable network's financial channel, to discuss the state
of the market for initial public offerings. I had specifically told the producer that
while I could discuss some Internet offerings, I was not an expert on the
market for I.P.O.'s. No matter: when I turned up on the screen, the words
"I.P.O. analyst" showed up beneath my head.
As if that wasn't bad enough, the anchor then asked me a question
about a company called Bamboo.com that was scheduled to issue
stock later that week. Unfortunately, I had never heard of Bamboo.com,
so I found myself improvising.
Here's what I said, warts and all: "Bamboo.com is a specialized
technology and Internet company that does certain kinds of currency exchanges.
Internet currency exchanges, I should say, come up with a specialized
currency just for the Internet and it's one that people are looking at. I'm not
convinced that's an absolute winner."
It's not just the grammar that was off. Bamboo.com was an online
real-estate company that specialized in a technology that allowed for 360-degree
images on the computer screen. Could I have said no comment?
Sure, I suppose, and I was furious with myself.
Equally disturbing, though, was the fact that it just didn't matter.
The stock doubled in value on its first day of trading, and no one from the
company ever bothered to contact me to correct my error. The froth
of stock trading during that period obscured the facts and, it seemed, even the
need for facts.
It would be wrong to blame the news media alone for the business debacle.
If a company sets out to mislead regulators and investors, and finds a
prestigious accounting firm willing to sign off on baked books, it's extremely
difficult for an outside reporter to uncover the truth, especially on
deadline. And there were plenty of occasions when The Industry Standard
and others did diligently expose practices of tech and financial
companies that seemed less than above-board; we wrote about questionable
sales tactics at America Online and tried to curb enthusiasm for
Priceline's discount grocery service, which has since failed.
But on balance I think even the best new economy journalists could not
shout down the hype coming from the bankers and public relations
machines. (And when the banking and advertising money stopped flowing,
journalism was not enough to keep us alive.) I'd like to believe that those
of us who witnessed the tech bubble will be smart enough to prick the next
bubble that comes along before too many investors get duped.
Encouragingly, some improvements have been made; CNBC now usually
identifies whether a banker it is interviewing owns stock in or does
business with the companies being discussed on the air.
But in more skeptical moments, I fear that the rise of any boom sector
in the American markets will bring with it an attending press that is at least
compliant, if not out-and-out boosterish. Editors and reporters need to be
able to resist the notion that any single development in technology or
business creates a new economy that defies traditional laws of business.
That's not a problem that the Securities and Exchange Commission and
Congress can solve.
James Ledbetter, business editor of Time Europe, is author of the
forthcoming "Starving to Death on $200 Million: The Short, Absurd Life of
The Industry Standard."
nytimes.com
Copyright 2003 The New York Times Company |
