Valuation Based on…Value?


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I’m not an economist…in fact, the events of the past few months have taught me that I basically know very little about how the world economy actually works. All the classes I took in school about economics and market theory were way too logical to prepare me for the kind of shocking discoveries I’d make researching (for my own twisted pleasure) the events that would lead up to the global credit mess in which we are now all finding ourselves, in some form or another.

An associate sent me this link – an article written by Michael Lewis, the author of Liar’s Poker and someone with an understandable pessimism if not skepticism when it comes to all things Wall Street. I read the article with great interest – mainly because it talks about the deferment of valuations away from actual sub-prime loans, towards an “idea” of sub-prime loans. It is a deconstructionist financial theory that can make ones head spin.

But the end takeaway for me, after short panicy feelings of uncertainty, was that hopefully, finally, value will come back in to the equation. And by “the equation.” I mean – life as we know it. Not to sound too proto-Marxist, but the concept of surplus value, derivatives markets, or deleveraged asset value (or something like that) is all too much of a cop out to actually working hard, proving and providing value.

I think we’re already seeing that in the software world. Beyond open source (which I argue is inherently value-based) we are seeing software giants move towards freemium models, become more price elastic in a good way, and in essence utilize distributed computing (now the cloud) concepts to provide processing, application and data service power on a more value-based delivery and pricing model.

We are not yet at a true utility model for cloud and related concepts like SaaS, but I think that we are moving towards that type of scenario. The subscription model is inherently value-based: if you don’t think you’re getting your money’s worth, stop paying. And I think the providers that master the subscription model and/or utility models and can execute with consistency and agility will be the next IPO darlings when that market starts up again. And hopefully, the price tags on these equities will be more soundly valued this time around.