Good investments in social networking?...We think so...

Blogs are a phenomenon, there can be no doubt about it. These along with other crowd powered media, such as Myspace, Facebook, YouTube and Now Public (which I found the other day and is definitely worth a visit) are a socially and economically as important as the industrial revolution.

This may be a bold statement but sites such as these, I believe, are the foundations for the next wave of technological development on the Internet. Why do I believe this? I was having a conversation recently with a client who asked why sites such as those mentioned are valued so highly. The simple answer that anyone had given him up that point is ‘advertising’. Yes this is very important and certainly the engine for revenue for these businesses, however, as we have moved from ugly banners to RSS feeds and flash these sites represent a whole new world in advertising capabilities.

These sites are slowly cataloging and listing people in a way never seen before. When a company runs a campaign for the new Honda, for example, in the middle of the Grand Prix, they are assuming that those watching are interested in cars and Honda will build their brand name and maybe sell a few cars on the basis of their association with the race. The fact is, however, that it is really just a guess, an educated guess yes, but a guess nevertheless. I watch every single Grand Prix and am a huge fan of anything Formula One.. would I ever by a Honda.. no, and I bet I am not the only one.

However, lets say I am on MySpace and I have all my favourite things on there including my liking of Range Rovers, lets say that recently I have been searching on Google for suitable Range Rovers in the area where I live and let’s say, for now, that this information is available to advertisers. This is extremely powerful. Let’s imagine also that there is a Range River dealer in my area who has put together a short advert for not much money and they can buy a pay per show advert on the television when their criteria is hit.

Boom! The adverts come on during the Grand Prix and what do I see an advert for Honda..no, an advert for a Range Rover garage 10 miles away from where I live. And this has been possible from search information, Myspace and other media sites that have logged my interest.

This is the power of the information that is swilling around the world at the moment. It seems, to us of a certain age, quite sinister, as would the Internet to someone from the 1950's but like we got used to the Internet, you can bet that our kids will see this kind of advertising as a labour saving way of getting the information that they need now and this is why the 23 year old guy at FaceBook is looking for $10bn for his company. He knows, as well as I do, that information gathering and targeted advertising in the manner which I have outline is very, very big business.

Worldwide ad spending in 2007 is approaching $500bn. Now imagine that your business could specifically target users who are searching out your product, it would make sense for even the smallest businesses to enter this market and thus explode the advertising revenues available.

To get back to the point of this Blog.. what’s in it for investors? We all know that if we had backed Google we would be zillionares, same with YouTube and Myspace and now the market is so crowded with imitators that that the space is difficult to trawl through for investors.

We believe that we have come across (and backed) a company that has the right ideas and with development could be something for the future. Logica Holdings (OTCBB:LGHL) is a technology business that, essentially, buys early stage Internet business that are working towards the personal powered advertising space, or are involved in the peripherals of this new wave of industry.

One of the subsidiaries that we are most interested in is http://www.annesdiary.com/. This is a blog, chat room and shopping site for young girls. Now this in itself doesn't shout large investment, but the site ‘ClubPenguin.com’ recently sold for $350mn (some reports say $700mn) to Disney. Disney know, as an outlet for targeted advertising this site is great, hence the price tag.

The thing with social networks, as we have seen with Myspace, is that the world is not a safe place, even on an anonymous vehicle like the net. MySpace got rid of 29,000 profiles of people on the sex offenders register and has an ongoing battle to provide safety to its users. The standard answer is that this is a technology too far and these sites can’t implement it, because its a) not available b) too expensive c) limiting for signing up users. Operating a site for young girls, you would imagine, would present all sorts of nightmarish scenarios for safety from predators. Anne’s Diary have taken this problem and, we believe, created a powerful, functional weapon which could revolutionize social sites and in itself force them to face the issue of safety.

The site itself is, essentially, a closed off world for its users. For a monthly subscription, children are given a fingerprint reader and a blue tooth necklace that detects when a child has left the area of the computer and logs it off. To become a member of the site a child must have their application signed off by a local schoolmaster, police officer or some identifiable responsible member of the community, thus creating a flow of information on exactly who the user is, a verifiable young girl.

The child then logs onto the computer and into Anne’s Diary via the finger print software and the parent knows that everyone she talks to will be verifiable as another young girl. Should a predator get onto the system by manipulating a child, then there is a verifiable and reportable trail of evidence to the person who signed off and who the user is. Even the most stupid of pedophiles would not venture into such a situation and would, more than likely, move on to sites that weren't protected.

And therein lies the rub. Sooner or later sites that do not have the protection offered by Anne’s Diary will begin to suffer. Why? Simple economics. We all know the litigious nature of the US (not a criticism, just an observation). Take the example of the MacDonald’s 'Coffee Case':

Stella Liebeck, 79 years old, was sitting in the passenger seat of her grandson’s car having purchased a cup of McDonald’s coffee. After the car stopped, she tried to hold the cup securely between her knees while removing the lid. However, the cup tipped over, pouring scalding hot coffee onto her. She received third-degree burns over 16 percent of her body, necessitating hospitalization for eight days, whirlpool treatment for debridgement of her wounds, skin grafting, scarring, and disability for more than two years. Despite these extensive injuries, she offered to settle with McDonald’s for $20,000. However, McDonald’s refused to settle. The jury awarded Liebeck $200,000 in compensatory damages -- reduced to $160,000 because the jury found her 20 percent at fault -- and $2.7 million in punitive damages for McDonald’s callous conduct. (To put this in perspective, McDonald's revenue from coffee sales alone is in excess of $1.3 million a day.) The trial judge reduced the punitive damages to $480,000.

Now MacDonald’s serve coffee at a lower temperature and put warnings all over their cups. What happens when a social networking site is sued for abuses that have happened to children and users, that then make the excuse that the technology is not available to filter out abusers?

You know as well as I do that this day is coming and someone, somewhere will be sued for a lot of money, and if this technology is available excuses won't wash. The simple fact that some of these social networking sites are worth billions will, in our opinion, produce massive punitive damages and thus drive the need for better protection.

Fujitsu and Novell have partnered with Logica and, although they haven't come right out and said it, I am sure they recognise this potential all too well.

If you would like to have a look go to http://www.otcbb.com/ (LGHL) and the demonstration of annesdiary at http://www.annesdiary.com/diary/demos/

...........UPDATE..........................................

This is an excerpt from a Fujitsu press release

"Ingram Micro currently plans to begin distribution of the Fujitsu biometric login products in fall 2007. One application for these products for Novell eDirectory and Novell Access Manager is for use with Anne's Diary, a new secure virtual community developed for children based on the world-famous novel, "Anne of Green Gables." The Fujitsu biometric sensor is part of the solution that provides optimal security for users in accessing Anne's Diary. Users will be able to easily authenticate themselves and communicate with their peers and friends around the world."