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You just can't make this stuff up:

[Source: CBS.]

Marc Canter titles a new blog post, calling for revolution in the virtual streets, "The people united will never be defeated."

Which presents a great opportunity for a late Saturday night music recommendation.

The phrase "The people united will never be defeated" is a translation of "El pueblo unido jamás será vencido", originally from mid-century Colombian politician Jorge Gaitán, who was, inevitably, assassinated. It later became a song written by Sergio Ortega and performed by the Chilean group Quilapayún, and was used in various political protest movements in South America.

But that's not why I'm writing about it.

In 1975, the great contemporary American composer Frederic Rzewski composed a set of 36 variations for solo piano under the name "The people united will never be defeated." His composition is probably the preeminent American work for solo piano in the 20th century, and is likely to stand over time as a peer to Beethoven's similar "Diabelli Variations".

Since we are currently -- despite everything you hear -- in the golden age of classical music, there are several modern and complete recordings of Rzewski's work available on CD. The two I recommend are:

Both are recorded in fully modern sound and are recommended for anyone who likes music, even if you don't think you like modern classical music. Just sit back with a glass of your favorite wine or Scotch, and enjoy.

Happy listening!

[Background information drawn from Wikipedia.]

First, I'm very happy to say that Ning will be rolling out our formal production support for Open Social in June.

In case you missed the news at the time, Open Social is a standard way, sponsored by Google, to build new features ("gadgets") and/or plug those features into social networks all over the web, including social networks on Ning.

Ning has had beta versions of Open Social running for six months now so we're excited to be able to now provide Open Social in production to all of our Network Creators and users. Open Social will be available within all 265,490 social networks already running on Ning, as well as the 10,000+ new social networks being created on Ning every week now.

Second, I'd like to discuss Google's new Friend Connect initiative and how we plan to support it at Ning.

We at Ning think that Friend Connect is a great idea, and has huge potential to make Open Social even more functional and widely available for a broad swath of our users and Network Creators on Ning and throughout the web.

However, in the last couple days, there's been some confusion around the idea that perhaps Friend Connect is somehow competitive with Ning -- which is odd, because we don't think so and because we think it's obvious that it's not. So let me start by first explaining what Friend Connect is, and then how Ning is going to implement it.

Friend Connect is a mechanism by which Open Social gadgets can be published and used not just within a social network but also beyond that social network. When an Open Social gadget shows up elsewhere on the web, via Friend Connect, the friend data and social context comes with the Open Social gadget from its origin social network -- and that origin social network might be a network on Ning or a large walled garden network like MySpace or Orkut, and that Open Social gadget might be embedded on any page anywhere on the web.

In a sense, Friend Connect one-ups Flash widgets. Many social networks and other content hubs today publish Flash widgets like video players and music players that get embedded in pages all over the web. Friend Connect is a mechanism that provides the embedding capability for Open Social gadgets to be used all throughout the web -- with the added benefit that with a Friend Connect-enabled Open Social gadget, the user gets her social context anywhere she goes, which isn't the case with a typical Flash widget.

Now, as you are hopefully aware, Ning is a service for creating your own social network for anything -- with your choice of features, your design, and your members, customized however you want it.

From a strategy standpoint, we want to enable maximum flow both into and out of Ning networks and the rest of the web. It should be as easy as possible for users to get from elsewhere on the web into a Ning network, and likewise as easy as possible to flow from a Ning network to anywhere else on the web -- and ideally, while taking their social context with them. We think this makes strategic sense for two key reasons:

As a result, we have from the start published Flash widgets and more recently Facebook apps that any Ning user can embed elsewhere on the web or out to their Facebook page -- to extend content and functions from a Ning network out onto the web. This has obviously been a good thing to do because users love it, and because those widgets and Facebook apps link right back to their origin Ning networks and drive traffic back in even while propagating content and functionality out.

For Ning, Friend Connect is simply a new and better way to do the same thing with Open Social gadgets -- in both directions: out and in.

We will support Friend Connect in two ways:

Ning's role remains the same -- to be the easiest, most powerful, and most widely used way for anyone to create your own social network for anything. Friend Connect then makes social networks on Ning more powerful and more relevant for a larger base of users to do more on the web, to flow out and to flow in -- a good thing for those users and a good thing for us.

A dual-class stock structure means that a company has two different classes of common stock. Each class of stock has the same economic ownership of the company, yet different voting rights.

In a typical scenario, Class A shares have a single vote per share, whereas Class B shares have 10 votes per share, for any shareholder vote.

Using this mechanism, for example, the Class B shareholders might only own 20% of the company in economic terms but have a clear majority voting position relative to the Class A shareholders.

In short, Class A shareholders have shares labeled with the earlier letter in the alphabet, but Class B shareholders control the company -- in stark contrast to the more normal single-class stock structure which is more classically democratic: "one share, one vote". Since Class B shareholders will typically be some set of founding management or founding investors in the company, in practice the presence of a dual-class stock structure means that the founders control the company and can overrule all other shareholders on a wide range of issues, including if and when to sell the company.

Both public and private companies can have dual-class stock structures, but the controversy around dual-class stock structures is usually confined to public companies, due to the presence of public shareholders. And so I will focus purely on public companies.

I used to be an absolutist against dual-class stock structures -- I used to believe that dual-class stock structures were obviously a bad idea, that the democratic single-class approach of "one share, one vote" was more fair to public investors and more likely to lead to a healthy company in the long run, since total founder control of a public company can allow the founders to overrule normal market forces and the interests of their public shareholders.

And in fact, practically all investor advocates and shareholder activists agree with that stance -- dual-class stock structures are at the top of the list of techniques that entrenched managers can use to foil the normal market discipline of a public stock, and to frustrate outside public shareholders who can easily become disenfranchised even when they have majority ownership of a company... with a long-run outcome similar to the kind of insularity and inbreeding you find in royal families. These days, the New York Times Company has of course become the poster child for entrenched bad management operating against the interests of their public shareholders due to its dual-class stock structure -- how could anyone possibly be in favor of that?

And on the face of it, a dual-class stock structure simply seems unfair -- how can someone own part of something but have a tenth of the rights of someone else who owns the same amount?

After 15 years in the technology industry, though, I have done a complete 180-degree turn on the topic -- with some caveats.

I come not to bury dual-class stock structures, but to praise them.

I now believe that dual-class stock structures are a great idea for a technology company that is in the process of going public, under the following conditions:

The key to the whole thing is shared goals -- particularly the shared goal of long-term value creation, particularly the creation of a long-term franchise, the kind of franchise that can require 10 years or longer to build.

With such goals, I now believe the interests of public shareholders will often be better served by ceding voting control to the founders and key leaders of the company.

This is a provocative statement, so let me back it up.

In practice, the world at large, the markets in which companies operate, and Wall Street in particular, throw up all kinds of short- and medium-term noise in the face of every public company, all the time.

And in fact, my sense is that the level of such noise is steadily increasing for about a dozen different reasons, including but not limited to the proliferation of hedge funds, buyout funds, arbitrage funds, corporate raiders, shareholder activists, shareholder representation firms like ISS, sell-side analysts, cable television financial news, financial web sites, Internet message boards, online stock trading, increased consumer interest in stocks and markets, and visibly shortening investor time horizons across the entire landscape.

When you are running a public company, here are some of the things that get routinely thrown at you that have practically nothing to do with building a long-term franchise:

All of these things can meaningfully interfere with long-term value creation, particularly if you are trying to build a long-term franchise.

The huge advantage of a dual-class stock structure is that it lets the company's core management simply ignore most of this stuff and stay focused on the long-term goal.

What's the ideal situation for a public shareholder with a long-term time horizon? To invest in a company whose leaders are highly motivated to build long-term value -- to grow the value of the company 10x or 100x or 1,000x -- not flip it to the first interested acquirer for a quick pop, or even the fifth, or the tenth. And therefore to invest in a company whose leaders have the ability to pursue building for the long term, versus getting constantly compromised by short-term market noise.

At this point, if you listen closely, you can hear the howls of outrage. They are saying, how can shareholders expect to countenance being effectively powerless?

And of course the answer is alignment of goals.

Investors that have short-term goals, or even medium-term goals, shouldn't invest in public companies with dual-class stock structures. Remember, I'm presuming no bait and switch. You are always free to not invest in any company for any reason, including this reason.

But, if you're an investor with a long-term time horizon, you will, I believe, be best served investing in companies with a similar long-term time horizon.

The best part of taking this position is that I get to roll out the big gun: Warren Buffett similarly advocates dual-class stock structures for precisely this reason, and puts his money where his mouth is -- he famously has been a long-term investor in the Washington Post Company, for example, which has a dual-class stock structure that gives the Graham family total control, and which has been a stellar long-term investment for Berkshire Hathaway.

Now, dual-class stock structures have been customary in the media industry for a long time, but are relatively new to the technology industry. The most prominent example of a public technology company with a dual-class stock structure is of course Google, whose structure puts total voting control of the company in the hands of Larry Page, Sergey Brin, and Eric Schmidt. Corresponding to that, Larry, Sergey, and Eric have made a 20-year commitment to Google, and are clearly pursuing the goal of building a long-term franchise.

As far as I can tell, shareholders haven't exactly been scared off from investing in Google as a result.

If anything -- and I haven't done a statistical analysis of this, but just look at the charts and the stock prices of this decade -- Google may actually be getting a premium in the market due to its dual-class share structure, as investors are able to make a clean bet on long-term value creation, and they know that the core team can just put their heads down and power through any short-term nonsense.

I think Google has changed the rules on this topic -- I think many technology companies, certainly the ones with high potential, that go public over the next decade will have dual-class stock structures, due in part to the Google precedent.

On to some practical questions:

Don't companies with dual-class stock structures risk limiting their access to capital if they are only attracting long-term investors?

Perhaps, but again, Google is a clear counterexample. You can hardly say it's been starved for capital.

More generally, I would say that this question reflects the fact that companies with dual-class stock structures are still subject to market discipline. If the market overall doesn't like the dual-stock structure, it can refuse to provide capital to those companies, and instead provide that capital to companies with shorter-term objectives and more outside shareholder control. But I don't predict that will happen, and I would be willing to bet my own company on that.

Viewed systemically, dual-class stock structures are an alternative governance model that can compete in the open market for capital with other governance models. Capital will flow appropriately. All is good.

How would you apply this to the drama unfolding around Microsoft and Yahoo?

Well, clearly, if Jerry Yang and David Filo had dual-class-powered voting control of Yahoo, the whole situation there would be playing out very differently.

Microsoft would have been forced to negotiate a purely friendly deal from the very start, and at a price that would have caught Jerry and David's attention from the start. Hostile threats would have been meaningless. Had a deal gone down, it would have been on Jerry and David's terms, and the premium might have been even higher than a normal process would generate, since Jerry and David would have had the perfect walkaway option: we're not selling, and there is no appeal -- pay up or shut up. And the company could have been entirely focused on current operations the whole time -- no distraction.

But what about the outside shareholders? Several of Yahoo's largest outside shareholders -- including one who owns 16% of the company, four times the amount Jerry himself owns -- are in the national press tonight saying, we are furious Yahoo didn't sell for $34/share when Microsoft was already offering $33/share.

The obvious answer: in the alternate scenario with a dual-stock structure and founder control, those outside shareholders would not have invested in Yahoo in the first place, unless they believed Yahoo had a valid plan for long-term value creation and building a franchise.

If, in that alternate scenario, investors didn't believe Yahoo had a valid plan for long-term value creation, then that's another matter. There would be no excuse for that. But that would be a very different problem that would apply regardless of stock structure.

In point of fact, many of Yahoo's largest shareholders today are also, or have been in the past, major Google shareholders. Clearly Google's dual-class structure didn't scare them or their peers off at any point I could see -- instead, Google shareholders seem delighted to be aligned with a core team that has the control to execute a long-term plan.

And here's the kicker: it's not like outside shareholders in Yahoo, even though they own over 70% economic and voting control in the company, can just make the company do whatever they want -- as you can see from all their frustration in the press tonight. Sure, the outside shareholders as a group will ultimately get whatever they want, up to and including a sale to Microsoft, but they may have to put up a significant fight to do so, and that fight may require a significant amount of time and effort, with significant opportunity cost. And along the way, the process has been and will be characterized by confusion, ambiguity, and uncertainty. The whole thing is clearly a massive distraction to any form of long-term value creation to the point where even Microsoft believes Yahoo is risking damaging its long-term prospects by reacting to Microsoft's hostile public bid. So it's hard for me to see how a single-class share structure is nirvana for anyone in a situation like this.

So what about the New York Times Company?

Well, it is true that the New York Times Company and similar failing newspaper companies -- most of them, except for the Washington Post Company with its superior diversification -- with dual-class stock structures are not exactly good investments today, since their entrenched management teams can fight off shareholder activists and hostile takeovers indefinitely while riding their declining franchises straight into the ground.

But on the other hand, it's not like you couldn't have seen it coming. Every investor in any declining dual-stock media company today knew they were buying into that stock structure and did it with their eyes open. And any investor still holding stock in such a company has been aware of the Internet for 15 years and has been able to track the performance of the company's management team in dealing with the Internet over that entire time. Certainly it's possible to be delusional about your investment and think that recovery is right around the corner, but you can't blame the stock structure for that delusion.

And remember, the New York Times Company had its dual-class stock structure for decades, and for much of that time, ordinary investors would have done very well to own its shares. It just so happens that the wrenching technology shift that is causing so much trouble coincided with a generation of managers who are unprepared to deal with it. That's life.

So I think the fate of the dual-stock media companies has a lot more to do with the "media company" part of it and a lot less to do with the "dual-stock" part of it. The only investors mad about the dual-stock part -- well, the non-delusional ones -- are the ones who want the short-term stock pop from a sale to Rupert Murdoch. And those are not the investors you want if you are trying to build a franchise.

What's your recommendation to technology companies that are going public?

Strongly consider implementing a dual-class stock structure, but only under the following conditions:

Under these conditions, a dual-class stock structure is not only an outstanding idea -- I think, for our industry, it may be the future.

In this post, I discuss what I believe are some unspoken concerns that weigh on the decisions both Microsoft and Yahoo are making during this very exciting takeover battle.

Quick status update, largely derived from the excellent Wall Street Journal and its role as official public go-between:

Now, reading a lot of the press coverage, you would think that the current standoff is all about Yahoo's desire to stay independent, plus price. I think that misses the unspoken and quite complex issues that are likely bedeviling the boards of both companies as they wargame the various scenarios that could play out from here.

First, I think there is a very big and very real nonobvious concern that is a major roadblock to Yahoo accepting a Microsoft offer at almost any price:

A deal could be negotiated and announced and then fail to close.

The consequences of this scenario to Yahoo would be devastating, and it very well might happen.

Big mergers and acquisitions, particularly among public companies, particularly among public companies that have large shares of their respective markets, can take a year or more between the day the deal is signed and announced, to the day the deal is actually executed and closed.

During that year plus, all kinds of things can happen that could cause the deal to fall apart.

Microsoft and Yahoo will have to get approval from various US regulatory agencies, including some combination of the Federal Trade Commission and the Department of Justice. This approval process will likely be rigorous, due to both companies' large market shares and because of Microsoft's historical antitrust issues. The US government could disallow the merger entirely, like when Microsoft tried to buy Intuit in the 1990's, or impose conditions on the merger that would render it infeasible, and the deal could collapse.

Microsoft and Yahoo will also, as global companies, presumably need to get approval in other jurisdictions -- certainly the European Union. The EU is currently harsher on these issues, and on Microsoft in particular, than the US government. If the EU refuses to approve the merger, or imposes various adverse conditions on it, the deal could collapse.

Microsoft shareholders could revolt. Opinions among the Microsoft employee ranks, executive team, and shareholder base vary wildly on the pros and cons of this takeover. Microsoft stock has been flat for years. A shareholder revolt could cause all kinds of changes at Microsoft, and the deal could collapse.

The broader economy could cave in and we could enter a serious recession. Some people think that's fairly likely. If that happens, it could significantly change all kinds of assumptions that are built into the business rationale for this takeover, and the deal could collapse.

Microsoft could simply get cold feet for its own reasons. Perhaps during the closing process it discovers new information about Yahoo and decides the deal is a really bad idea. A conspiracy theorist might even say that Microsoft could choose to walk away at the last minute in order to permanently and deliberately cripple Yahoo -- and such a conspiracy theorist could point to a few almost-mergers in Microsoft's history that could justify such a fear. I am not saying that I am such a conspiracy theorist, but in all seriousness I bet there are at least a couple of them on Yahoo's board right now. In such scenarios, the deal could collapse.

Typically, an acquisition target tries to wrap the merger agreement as tightly as possible to prevent any scenario where the deal collapses. For example, one can specify a large breakup fee, which the acquiror would have to pay to the target. In a merger like this, the breakup fee could be in the billions of dollars. And of course litigation is reasonably likely in the wake of a deal collapse, especially if one side believes the other side has explicitly violated a binding contract.

However, none of those protections actually protect Yahoo all that well in the event that the deal collapses because it is disallowed by a government. And further, none of those protections actually do that much to protect Yahoo all that well even if the deal collapses for other reasons. Here's why:

The minute a merger agreement is signed, an enormous amount of focus, time, and effort at the target company is redirected towards the implications of the merger. Legally both companies are supposed to continue to operate as fully independent companies with independent strategies until the merger closes, but in practice, a lot of people in the target company are going to be highly preoccupied -- whether with formal roles in integration planning, or just due to the general distraction and anxiety that would be prompted in the halls at Yahoo at the prospect of actually being merged into Microsoft. It is extraordinarily difficult for a management team at such a time to keep an employee base focused on the standalone business -- in fact, I think it's basically impossible.

So imagine what happens if the deal is signed, a significant percentage of Yahoo's internal bandwidth over the next 12 months refocuses onto the implications of the merger, and the deal collapses. Yahoo would be simultaneously behind in many of the key initiatives it would have normally pursued to be competitive as a standalone company, and highly disorganized, fragmented, and demoralized for the Microsoft-less road ahead.

Suppose the deal collapse triggers a big breakup fee -- suppose $3 billion in breakup fee cash drops into Yahoo's lap. So what? A traumatized corporate victim of merger interruptus is going to have far larger problems than cash, even a large amount of cash, can fix. Same with a lawsuit.

There are other things that Microsoft could do to offset these concerns.

The most obvious thing Microsoft could do is execute a commercial agreement with Yahoo simultaneous with a merger agreement. The commercial agreement would require Microsoft to shut down its own Internet efforts and instead use Yahoo's -- completely independent of the merger. Microsoft Search would shut down and Microsoft would point all of its users at Yahoo Search, and so on for all of the various overlapping product lines. Yahoo would of course share revenue with Microsoft in return.

This would almost completely protect Yahoo from all of the collapsed deal scenarios. Even if the deal collapses, Yahoo still has an enormously valuable commercial contract to be Microsoft's de facto Internet arm -- in essence, that contract is Yahoo's compensation for taking on the risk of the merger going through.

You can also see why Microsoft wouldn't want to agree to this.

Other than that, the Yahoo board may be simply trying to get Microsoft to pay a higher price than even Yahoo thinks their company is worth, in order to offset this risk. There obviously would be a price that would be so good that the merger close risk would be worth taking. I'm not sure what that price is, I'm not sure whether Yahoo's institutional shareholders are willing to hold out for it, and I'm not sure whether Microsoft will be willing to pay it.

But we're probably going to find out.

There is another, related, enormous issue in Microsoft's mind.

That is the issue of timing of the regulatory approval process.

If the entire merger could be approved and closed before the new US president takes office in January 2009, that would be wonderful for Microsoft.

I think that's one of the reasons why Microsoft made their offer when they did -- in January 2008, a full year before the US presidential handover.

I also think that's one of the reasons Microsoft is so frustrated with Yahoo's apparent sluggishness -- dragging this into May at the very earliest for a negotiated deal.

I also think that's one of the reasons why Yahoo has been so apparently sluggish -- Yahoo is probably thinking that the longer this gets dragged out, the less likely the deal could be approved before the US presidential handover, and therefore the less likely Microsoft is going to consider it a clean deal, and the less likely Microsoft is going to want to go through with it.

Because just like Yahoo is worried about the consequences if the deal falls through -- so is Microsoft, one would imagine, for many of the same reasons. Merger interruptus bites both ways.

What's the big deal with the US presidential handover? The Bush administration is known to be quite friendly to large companies, large mergers, and Microsoft. Any Democratic administration would probably be notably more hostile to this kind of merger than the current regime. And even a McCain administration might have different views from the current government -- who knows? That very uncertainty is the issue.

The most likely outcome of the arrival of a new US administration is that a merger like this certainly won't become more likely to be approved, and will possibly, or probably, become less likely to succeed.

There are a few other implications one can draw from this.

One is that Microsoft probably would have been willing to pay more for a friendly deal early in this process, when there was more time to get the deal closed before January 2009.

Yahoo may have operated against its own best interest in getting the optimum friendly price by delaying so long.

On the other hand, Yahoo may be pushing the timing out so far that Microsoft will become increasingly disincented to proceed.

Or, perhaps this is why Microsoft hasn't yet gone fully hostile -- they don't want to risk prolonging the approval process, and a hostile takeover will certainly take longer than a friendly one.

And, correspondingly, if Microsoft does go hostile, it will be a very real expression of Microsoft's need to do this deal despite considerable risk that a new US administration, particularly a Democratic one, would not permit it to proceed.

More to come!