Can one person move a stock? The answer depends on the person, the message, and the stock. In the case of Blinkx, a British online video and advertising company, the answer is Yes.
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For Blinkx, a professor published an analysis that raised serious questions about the company’s revenue reporting and business model. And Blinkx’s response — based largely on an attack on the professor’s professionalism — did not counter the effect of his message. On January 30, the blog was published and Blinkx’s stock fell 31% while recovering about 9% of its value in February 3 trading in London.
The professor is Harvard Business School Associate Professor, Benjamin Edelman, whom I have interviewed regarding Groupon, Facebook and Google. Interestingly, none of those columns seem to have had a negative effect on those companies’ stock prices.
But Edelman’s January 30 blog, The Darker Side of Blinkx, appears to have slammed Blinkx’s stock price. In that post, Edelman argued that Blinkx acquired two companies — Zango and AdOn – that generate adware revenues by doing things like “defrauding advertisers” in a variety of ways such as billing them for “tainted traffic.”
Edelman’s blog provides a detailed argument about how “ex-Zango adware is still sneaking onto users’ computers and still defrauding advertisers. I show the ex-AdOn traffic broker is still sending invisible, popup, and other tainted traffic. I show Blinkx’ namesake site, Blinkx.com, leading users through a maze of low-content pages, while charging advertisers for video ads systematically not visible to users.”
Edelman — a graduate of Harvard’s law school and its economics PhD program — also claimed in the blog that a client who he refused to name, paid him to do the analysis.
Blinkx issued a statement on January 30. First it attacked Edelman. The statement noted, “As a matter of course, the Company does not normally comment on such matters. However, blinkx has noted a recent blog post by a Consultant paid by unnamed third parties, in which he discloses, ‘I prepared a portion of this article at the request of a client that prefers not to be listed by name.’ blinkx strongly refutes the assertions made and conclusions drawn in the blog post.”
The statement went on to say that everything in its recent financial statements and forecast is fine. “The Company confirms there has been no material change to the operational and financial performance or outlook for the business, and that Fiscal Q3 trading was in line with management expectations,” noted the statement.
I asked Blinkx to comment on the following questions:
- What are Blinkx’s revenues by product line?
- What percentage of Blinkx’s revenues come from its legacy Zango and AdOn businesses?
- Why are Blinkx’s revenues per employee so much higher than those of competitors such as Tremor, YuMe, and RocketFuel?
- Since Blinkx CEO, Suranga Chandratillake, worked at Autonomy, is there any chance that Blinkx shares the accounting challenges that led to HP’s $8.8 billion write-down after its $11 billion purchase of Autonomy?
Blinkx did not respond to my request on the record. However, on February 3, a source close to Blinkx who did not want to go on the record so as not to “embroil himself personally” did respond to the questions.
The source said that Blinkx’s revenue accounting is accurate — split as reported between ad hoc (premium) and conventional (commodity). He said that Blinkx did not buy revenues when it made those acquisitions – just people and technology. And Blinkx has filters to keep those legacy ads from appearing.
He said he would send me a paragraph explaining the filters and I will post it as soon as I get it from him.
He said that Blinkx earns higher revenues per employee — $927 compared to $440 for YuMe, according to Edelman — for three reasons:
- Blinkx spun out of Autonomy in 2007 as a “dividend in specie to Autonomy shareholders” so it did not need to make investments to build its technology – he estimated the value of Blinkx’s intellectual property at $50 million;
- These competitors had to hire developers and marketers to build the business and Blinkx’s has a direct sales business and does not have to hire more bodies as they do; and
- Blinkx’s has been around for longer and unlike these Silicon Valley competitors is run for profit and has a four year head start.
Finally the source told me that Autonomy’s accounting issue with HP is a completely separate from Blinkx. He noted that HP sold its remaining Blinkx shares in the third quarter of 2013.
In a February 2 interview, Edelman offered his views on Blinkx and its official statement in response to his blog. He argued that Blinkx is still not being upfront about how it generates revenue; that Blinkx’s adware violates FTC standards; that he did not do anything wrong; and that there may be a fundamental similarity between Autonomy’s accounting issues and Blinkx’s reporting.
Edelman thinks that Blinkx does not acknowledge its adware revenues. He told me, “I don’t think we really know how Blinkx makes most of its money. We know the businesses Blinkx likes to talk about. But then my article points out that Blinkx is in the adware business too. You’d never know that from Blinkx’s web site or statements to investors.”
Edelman is concerned about Blinkx’s financial disclosure. He said, ”It seems to me that this omission in Blinkx’s financial statements is one key problem – failure to accurately characterize what Blinkx actually does, or how much of the business comes from the various components.”
He argues that Blinkx’s adware installation violates FTC standards. He noted, “The adware installation I demonstrated falls short of FTC’s unfair and deceptive standards for bundled advertising software – standards the FTC first articulated in a settlement with Zango, which Blinkx later acquired!”
Edelman defended his conduct. “My client requested that I research what Blinkx does and how. I insisted on the right to tell others, on my web site and otherwise. The client agreed to that. I was not obliged to do so. There’s nothing improper about this, and it’s entirely consistent with work I’ve done for many companies. Information is fundamentally non-rivalrous – I can tell other people what I’ve learned and the client still has the benefit of those learnings,” argued Edelman.
Edelman believes that Blinkx is attacking him and his client instead of commenting on the substance of his allegations. According to Edelman “What’s most notable, in my view, is that Blinkx tries to make this research about me personally and about my client, rather than discussing the serious allegations and compelling proof. I’d rather focus on substance. Tellingly, Blinkx has not denied the allegations in specificity.”
Edelman believes that Blinkx’s stock fell because his argument persuaded investors. Said Edelman, “I gather Blinkx’s stock dropped because investors saw my evidence and shared my concern that Blinkx’s business is less robust and less secure than they had previously thought.”
Edelman thinks that Autonomy and Blinkx’s share a failure to be completely forthright about their businesses. Explained Edelman, “I’m not an expert on the prior Autonomy practices that led to HP’s litigation. But there is a fundamental similarity – being less than forthright about what a company does, how, and with what financial results.”
And he believes that Blinkx’s stock should move on what he sees as shaky merits. “Nonetheless, I think Blinkx deserves to rise or fall on its own merits, not the prior businesses of some managers or even its founder. Problem is, Blinkx’s merits are themselves looking pretty shaky,” concluded Edelman.
What happened here? I would guess that Edelman’s client is a hedge fund that got together with some others to short its stock before he posted his blog. Statistics from British financial regulators suggest that “several hedge funds had built sizable [short] minority stakes in Blinkx” before January 30, according to the New York Times.
I’d guess that Blinkx’s share price was overwhelmed by the power of those short sellers. And if Edelman is right that there is nothing improper in what he did — I would like him to at least disclose whether his client is a hedge fund — those hedge funds may have identified a way to beat the market: Hire Edelman to research nefarious online marketing practices of relatively-thinly-traded public companies and short their shares before Edelman publishes his findings.
Meanwhile, Blinkx’s off-the-record responses to Edelman’s substantive questions about its business model and reporting strike me as somewhat vague. Will British regulators investigate further?