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Monday, October 13, 2003

the light gets hotter on sunncomm

someone who occasionally drops into this blog (and someone on whom i’ve commented both in agreement and disagreement, which is a good thing) – left me a little teaser (see comments) in one of my posts on sunncomm.

sunncomm, you might recall was defeated by a shift key and got a bit indignant about being exposed in the light.

normally, i wouldn’t get too involved in such things, but the implications – legal, ethical, and business practice – seem to me to make a wonderful set of object lessons in how dangerous it is to depend on darkness in the modern world. these lesson i pretty much left unspoken in my previous comments on sunncomm, so i’ll spell them out for you now.

lesson, the first

banking on stupidity and ignorance is a bad idea. sunncomm’s business model (at least as far as mediamax cd3 audio cd copy protection is concerned) was obviously to bank on the stupidity of the music listening public. since the music listening public isn’t sunncomm’s customer (directly), i can’t legitimately get on my soapbox and scream “don’t count on a stupid customer!” but wait….

the record labels were sunncomm’s customers. as reported earlier, there was a bit of spin at the beginning of this fiasco from at least one label (bmg) – one of those “oh yeah. we knew that.” statements that just screams for a rebuttal. well, anyway. sunncomm either sold bmg their widget based on its [easily defeated] capabilities, or bmg banked on the music listening public’s stupidity. so, that’s at least one strike, maybe two. let me say this again. banking on stupidity and ignorance is a bad idea.

lesson, the second

at this point, your widget is in deep trouble, quite probably unrecoverable trouble. even if you can still find stupid cd purchasers, the labels know that they were had, so it’s going to be very hard to get enough credibility back to keep any deal alive. you can let it fade into oblivion, or you can call the lawyers. lawyers are trained to solve problems. and you have a big problem. fortunately, there are laws for just this sort of situation, and while i may personally question the wisdom of these laws, the sad truth is that they exist. so a lawyer is going to suggest you use them.

our next object lesson, lawyers make bad policymakers (and this was a policy, not a legal decision point). i’ve hinted at this before, but the short version is that sunncomm picked the wrong tool for this problem.

so sunncomm’s next mistake was pouring gasoline on the fire with a knee-jerk “call the fbi! sue the bastard!” reaction. regardless of the merits of the case, a wise person might notice the potential repercussions here. all over the web, in a matter of hours, sprouted the posts and articles on “every keyboard violates the dmca” and such. now i’m sure it’s not this simple, and i don’t want to get too boring with this post, but the net result is that the world had turned its light onto sunncomm…

lesson, the third

one of those lights was barry ritholtz, who has an economic and market perspective that he shares with the world. armed with a company name and a buzzing story on the web, this kind of person does a little homework. sure. i commented on the drop in value of the stock – and i even included a chart, but analysis – not my bag.

i was ready to let sunncomm off the hook. they did a 180, decided lawsuits and lawyers were a bad idea in this situation, and i was done with them. i’d learned a few lessons and maybe made a point or two. and here’s an important lesson for modern business – it may not be my thing, but if you get enough people’s attention, it’s gonna be someone’s thing.

it’s on the record

barry dug a little deeper (and got prettier charts, too – you should check them out). and in that digging, he raised some interesting questions about the behavior of the stock, a major buyback, and some unexplained major moves in the price. i wouldn’t call this a conclusion, but, in barry’s own words:

If any purchases were made in anticipation of material non public information, than who ever did so has much bigger problems than some grad student’s paper . . .

so a few strange things happen in a microcap stock, and i still don’t care too much. interesting, sure, but having basically washed my hands of the whole sunncomm business with my own lessons learned… this is an issue for regulators and shareholders. besides, i’m busy 🙂

someone remembers

but the light is on, and an anonymous internet entity appears with a very long comment to barry’s post.

you can’t take such an anonymous post seriously. really, you can’t. this is like triple-hearsay, unadmissable and generally on the quality-of-information spectrum somewhere around the level of seeing “peter jacobs blows goats! i have proof!” scrawled on a bathroom wall. the problem is that this particular bit of graffiti has sources that someone could check out. and, unfortunately for sunncomm, you can’t get back a secret.

like i said, i’m busy. and i wouldn’t even know whom to call to prompt an investigation of such material. but what we seem to have here, ladies and gentlemen, is an itty-bitty corporate scandal. i don’t have a whole lot of faith in the current administration’s record for bringing white collar criminals to justice (after all, we’re busy hunting down the terrorists), but maybe something will happen. maybe.

and if i hear about it, you can bet i’ll have some snide comment.

so the new problem for sunncomm is that a couple years ago, a few people probably got screwed on the stock. and they remember. and now there’s blood in the water, and the lawyers are circling.

update: i rushed through this, and totally screwed up the section breaks. they make more sense now, and i fixed a few redundancies.

posted by roj at 3:29 am