I don’t mean that the internet isn’t important. I was already wrong about that in 1991. It’s that the internet is so unbelievably important that every single person who wants to accomplish anything consequential knows they have to figure out how they can use the technologies, behaviors, data and models developed online to do it. It’s not cool to have an online strategy–it’s conventional wisdom.

Thanks to Web 2.0, it’s also not very hard or expensive to start an online company. That was true five years ago and at this point the gee-whiz of being able to hack together in a weekend something inconceivable at 100x the price 10 years ago is a yawn.

All this means that if you’re starting a company now you don’t get credit just because you’re a web-based business or for cleverly using what’s now off-the-shelf open source tools to hack together something. The cool kids who were early (and right, and hard working) have grown up into powerful businesses and the professionals are moving to fill in the easy white space. The table stakes now are not cool features, but a product that solves real problems and a business model that gets paid for doing so.

That’s the disconnect I saw for so many of the companies competing at Disrupt. Most of the pitches sounded like they were either “me too” interations (track your spending, but mobile), addressed trivial problems (“let’s plan to meet, maybe, when I show up”) or looked like a consultant’s view of a problem (“you know what’s huge? subgroups. With social.).

I don’t mean to disparage other entrepreneurs. It’s hard to start a business and I root for everybody to make it. But the world has moved on past most of these companies and they don’t even know it. TechCrunch doesn’t know it, either: they cover the idea of these startups–the simple premise–breathlessly and uncritically whether it makes sense or not. However, some of the panel judges definitely know that the world has moved on from cool ideas to real businesses, which is why the presenters looked like deer in the headlights when asked about things like market size and fit (“who buys this and why”) sales and marketing (“how to you get people to buy it”), and competition (“why won’t they buy from someone else”).

Just as in life, in business the definition of cool changes as industries grow and evolve. Rehashing the Web 2.0 fashions of the past few years is not just uncool, it’s naive.

For years, I refused to get an EZ-Pass that would let me go through toll booths without having to wait in line to pay with cash. I commute on the highway a lot and the EZ Pass would save me a ton of time and effort (I live in a place that gets tons of tourist traffic in the summer, and the toll lanes can get backed up for 10 minutes or more). But I didn’t want to have “someone” be able to track my comings and goings–that’s how they always catch the bad guys in Law & Order.  Well, I finally broke down because I figured there’s not THAT much data on the transponder, it’s extremely limited about what it can say about my activities, and it’s hard information to get to.

Cut to Facebook. I don’t use Facebook that much, but it still has FAR more information about me than an EZ Pass transponder, that information is more personal, it’s now much more widely distributed, and frankly I don’t trust Facebook even when they don’t mean to screw up. Plus I’m stuck reading tons of boring crap in my News Feed. Like Betty White said on SNL the other night, “back in my day seeing pictures of people’s vacations was considered a punishment.”

Both EZ Pass and Facebook offer some benefit at the cost of privacy and anonymity. The hangups about EZ Pass are trivial compared to Facebook and the benefits are real. So while I’m keeping my transponder, I’m ditching Facebook.

For me, this comes down to the realities of the news business these days. Like Robert Niles said, there are no new revenue models in journalism: the only place to move the needle anymore is on the cost of producing news content. Demand Media, Associated Content, and now AOL’s new Seed platform are all leaders in producing content at disruptively low prices, but both Demand and AC have forsworn applying their methods to covering or generating “news” or journalism. Seed is different: it has explicitly said that it’s part of AOL’s mission to “redefine journalism for the Internet age.”

But based on the way it decided to cover the bands playing at South by Southwest–paying an army of freelancers $50 per article for every band they covered–I don’t think Seed was thinking radically enough, and I believe what’s holding them back is the same journalists’ gag reflex around any content that smells like PR.

Rather than get hundreds of freelance reporters to interview and profile 2,000 bands in two weeks–from a standing start–why didn’t AOL simply tell all of the bands that they’d publish a band-written profile, and give them some helpful guidelines (not requirements) for what to write? I’ll bet they didn’t do the latter because it would have been “promotional” or “PR” rather than “reporting,” but who cares? What’s the goal of the project? Presumably it’s to have informative content on Spinner.com for readers to find out about all of the new bands they’d see at SXSW. And who do you think is more motivated to provide the content–a freelancer getting paid 20 bucks/piece or the band itself?

Seed.com’s strategy is a wasteful as a way of doing business in the new news world. Let’s say that some percentage of self-published content from the bands was crap. We should also agree that some percentage from the freelancers is just as bad. Even if the bands produced more junk, at least AOL would have gotten that junk for free, instead of paying $100,000 for it. But I don’t think the band-produced content would be junk–I’ll bet it would have been idiosyncratic, well informed, passionate, and fun. It would have been user-generated content, for crying out loud. And yes, promotional–but none of the Seed freelancers was going to treat these bands like they were covering Watergate.

Radical transformation in the news business is going to include awesome technology platforms, for sure. But it’s also going to require questioning all of the assumptions about how a news business should function. Seed took those assumptions as a given, and just tried to do the old way on the cheap.

Let’s leave aside their methodology, their definitions, and the fact that they say, “PR driven” rather than simply “PR” and accept Crikey’s claim at face value. Let’s grant that much of the news that shows up in a daily newspaper or broadcast news originates from the public relations function of something that’s being covered by the newsroom.

Here’s my question: why are people so stupid about how the news works? I don’t simply mean uninformed. I mean willfully, stubbornly, self-righteously self-deluded and stupid.

Crikey should know better: their brief claims to know what’s “really going on” in media. But it’s not just Crikey. New media guru Jeff Jarvis retweeted the link with a knowing/scolding comment, “Spin Zone.” Reporters and editors at all levels of the media–from the local weekly up through the New York Times–pontificate on panels about how useless PR is to them, and how press releases go into their circular file.

Where do these people think news comes from? I don’t mean the sexy investigative journalism and enterprise reporting most people think of when they walk about “news,” I mean the day in, day out happenings around town. That kind of news originates from the people who make it. When soldiers return from a deployment in Afganistan, how do you think the news media finds out about it? The National Guard tells them. When some local dude gets busted for workers’ comp fraud, how does that get into the newspaper? The Tax Department issues a press release.  When the most awesome moving company in the Northeast opens a big new warehouse in town, it may not be the Pentagon Papers but it sure is interesting to the local community, and they find out when Gentle Giant announces it.

I mean, employees who write stories for newspapers are called reporters, for crying out loud. They report news that’s interesting and useful to their audience. So when they get a press release that’s clearly newsworthy, they can and should report that news to their readers.

This relationship between the news media and its sources is eternal, and frankly it works just fine. What’s surprising (and a little galling) to me is the denial that exists among news mavens about how this all works. Reporters, editors and news pundits treat PR like a regular booty call that they don’t want their friends to know about.

The problem with this shame and denial by the news media is that it’s leading them to make stupid, wasteful decisions about how to run their businesses. And not just the old media: new media suffer from the same assumptions and delusions.

Take Jeff Jarvis. He clearly disdains PR and press releases as “spin” and worse. Yet the core of his link economy philosophy is, “cover what you do best and link to the rest.” Don’t replicate coverage elsewhere, he says to the mainstream media (and its new media heirs): focus on your core expertise and link to what’s already been created if it’s valuable to your audience.  So why not embrace the fact that local news is being made and written about constantly by members of the community and link to their press releases (maybe with some commentary or context) rather than making a fetish of rewriting it for the sake of journalism? The “new news ecosystem” could run much leaner and put its efforts toward enterprise journalism and original reporting if it isn’t rewriting good, relevant press releases.

I think this same fetish for “original reporting” hurt Aol’s Seed.com reporting project at South by Southwest. Rather than get hundreds of freelance reporters to interview and profile 2,000 bands in two weeks–from a standing start–why didn’t Aol simply tell all of the bands that they’d publish a band-written profile, and give them some helpful guidelines (not requirements) for what to write? I’ll bet they didn’t do the latter because it would have been “promotional” or “PR” rather than “reporting,” but who cares? What’s the goal of the project? Presumably it’s to have informative content on Spinner.com for readers to find out about all of the new bands they’d see at SXSW. And who do you think is more motivated to provide the content–a freelancer getting paid 20 bucks/piece or the band itself?

Seed.com’s strategy was also wasteful as a way of doing business in the new news world. Let’s say that some percentage of self-published content from the bands was crap. We should also agree that some percentage from the freelancers is just as bad. Even if the bands produced more junk, at least Aol would have gotten that junk for free, instead of paying $40,000 for it.

It’s time for the news media to be honest with themselves and their readers about how news gets made, and embrace the “professional user generated content” that organizations produce. It’s the right thing to do because it’s transparent, and it makes good business sense.

The problems come down to agency theory, the idea that CEOs and managers (as agents) have the incentive and ability to look after themselves at the expense of the principals (you, me and everyone else who owns stock or invests in a mutual fund). Basically, it’s much easier for a CEO to convince the Board of Directors to pay him a bunch of money from the company coffers than it is for shareholders to act together to stop it.

Stock options and restricted stock grants are two solutions that are supposed to align the interests of managers and shareholders. In theory, making the management an equity holder in the business drives them to seek long-term stock appreciation, which is what shareholders want, too. But there are two big flaws in this theory:

• Managers game the system by focusing on short-term appreciation and cashing in options based on those gains, getting in-the-money option grants, repricing out-of-the-money options (among other shenanigans); and
• Option and restricted-stock grants are asymmetrical rewards, meaning that the managers have a lot more to gain from the grant they they stand to lose from this equity stake.

The first point is the one that people generally focus on: back-dating option “scandals,” new option grants, CEOs who take bundles of money off the table by selling options are all standard business-section features. I think the second point is the more important one.

CEOs, asset managers, traders and other “agents” don’t have real skin in the game. Option and restricted stock grants are all gravy on top of their base comp and bonuses. If they pay off–kaboom! Massive, often dynastic wealth follows. If they don’t, then in the worst case the options expire un-exercised or the restricted stock declines in value reducing the upside that the manager hoped for, but otherwise not changing the managers’ status quo ante wealth. And let’s face it, these guys get plenty wealthy from pay that is completely decoupled from the performance of their company or fund. (That’s for another post.)

So, how do you get skin in the game? The way company founders, entrepreneurs and old-style banking partnerships do: require a big investment from the manager if they want equity.

In my last post on conservative entrepreneurs, I talked about how risk averse true entrepreneurs are. That’s because they stand a lot to lose if they screw up: most entrepreneurs have almost all of their net work tied up in their companies. That means that they gain a lot if the company does well, but get wiped out–comprehensively, “lose-the-kids-college-money” wiped out. That kind of risk focuses the mind like nothing else, so that entrepreneurs tend to carefully manage their downside while looking for the opportunity to maximize their wealth.

It’s that kind of entrepreneur we want running companies and managing funds: not swashbuckling CEOs who bet the farm and rake in millions in salary and bonuses even when shareholders see their portfolios decimated, or traders who lever up 30-to-1 on a derivatives bet because they get massive gains on the upside and a government bailout if the trade goes to hell.

So here’s my prescription for turning the business and financial leadership of the country into true entrepreneurs, with all of the risk and reward that entails:

1. Award no stock-based compensation as a grant.
2. Any equity participation must be in the form of an investment by the manager of his or her personal wealth. No stock purchases funded by company loans, unless they are full-recourse loans with personal guarantees by the manager. (To soften the blow, the personal guarantee can exclude the primary residence and maybe some minimum asset threshold–like $100,000.)
3. All management equity positions must be disclosed at least quarterly. I’d like to see the stake as a % of the manager’s total net worth as long as I’m asking.
4. To sweeten the deal, the Board could offer 100% warrant coverage of any investment made by the manager.
5. There should be a lockup period (6 – 12 months) after the manager leaves the company before he or she can sell the equity stake.

I’d also like to see a requirement that senior management invest a significant (50%+) portion of their personal wealth in whatever company they lead, but I’d settle for very full and rapid disclosure of how much they invest and how big a chunk of their wealth it represents.

This is what old investment banking partnerships looked like: to become a partner (and thereby receive equity participation in the profits) you had to put real skin in the game. When business was good, you made a lot of money. When it was bad, you tightened your belt. And if you let your partners get careless with their trading bets, you got wiped out. There was no agency risk because the managers were as focused on shareholder wealth and profits as any investor.

I’d like to hear what you think.

Practically, I think all three companies–particularly Demand and AC–could have bigger problems with their models that I haven’t seen anybody write about yet. These companies get their content from freelancers who write on topics posted by each company. These huge freelancer networks make it possible to deliver huge volumes of content; in Demand’s case, more than 4,000 stories and videos per day. What struck me, though, is how rigidly controlled the freelancers’ work is by the mother-ship media companies. That level of control is going to invite big tax and labor problems for Demand Media and Associated Content.

Here’s the problem: the IRS and state labor departments want company labor payments on payroll, and are constantly on the hunt for businesses that put employee costs under 1099 filings, rather than W2. Why? Because W2 payments include payroll tax withholding (like Social Security and Medicare) and ensure that businesses are contributing to workers’ comp and state unemployment funds. 1099s put the reporting and withholding burden on the employees and generally lower labor costs for a business.

So what does the level of control over the freelancers have to do with whether Demand and AC pay people via W2 or 1099? Over the past several years, the IRS and labor law have steadily tightened the requirements for who is an independent consultant or freelancer and who is not. Current tax regulations weigh 20 factors to determine if someone is an employee, and each one is subject to interpretation by the IRS. My non-legal, non-accounting sense of the relevant ones for the “content farms” are:

• (1) Instructions and (2) Training: Demand and AC provide extensive support and instructions for how to create their content and carry out assignments.
• (3) Integration and (10) Order or sequence set: These guys are content factories–the whole business is built on the integration of the content creators (i.e. freelance writers and editors) in an algorithmically optimized, tightly controlled assembly line. Take away the freelancers and there’s nothing there.
• (4) Services rendered personally and (6) Continuing relationship: Demand and AC have lots of repeat submissions and even spotlight particularly successful contributors.
• (17) Working for more than one firm at a time and (18) Making services available to the general public: I think Demand and AC have good ground to stand on here, but the IRS might not see it that way. While most contributors likely don’t make much money, and likely must work for someone else. I’ll bet that many of the contributors do neither–they’re either unemployed or not employable as writers and editors (yes, I know that many are talented consultants and freelancers).

Now, I think that Demand Media and Associated Content have defensible claims for their hiring practices–to me, the people banging out copyedits at $3.50 a story in their spare time are not generally employees–but the IRS is not going to look at the business model, they’re going to look at whether a company is avoiding tax payments. And given the recession, the IRS is going to try to get every dime it can from businesses.

Demand certainly doesn’t help its case by having both an application to become a freelancer that describes “your coworkers.” If I were a case manager at an IRS office, or an auditor at a state Labor department, I’d certainly make a run at both of these guys to get a few more dollars for the state coffers.

So, any bets on when this happens? Or has it already?

One of the holes opening up in the news business is bread-and-butter local news reporting. Local newsgathering is pretty expensive, but until recently it was paid for by the local media monopoly on advertising (before the internet, where could car dealers and local retailers reach buyers? Before craigslist, where could you sell your junk?). Without that monopoly, the relatively big news staffs at mid-tier dailies and local TV affiliates start to look pretty fat, so the bosses have been trimming newsrooms to the bone.

So the casualty is the kind of “who, what and when” news that helps local communities stay informed about their neighborhood, town or city. You know, about a brownfield site cleanup in the South Bronx, or your neighbor in Tonawonda busted for tax fraud, or even just a guy down the street getting a promotion in the National Guard. Who’s going to write and report on this news?

You should. Organizations have to take responsibility for getting the word out to their audiences, especially local ones. You’ve got to be your own newsmaker–your own beat reporter. And you’ve got to publish that news so people can find it.

The good news is, most organizations already do this by sending out news releases, event announcements and other newsy tidbits all of the time. They’re already covering their own news. And the dirty little secret of the newspaper business is how much of this organizationally produced content they use already. Now that the news business doesn’t have the cash flow to pay a $50,000-a-year reporter to rewrite a vanilla news release, why not just print the release and add some quick context?

I think this is a huge opportunity for local organizations and the media (old and new) that cover them. Let’s dispense with the fiction that back in the good ol’ days reporters and editors ferreted out every interesting news item on their own and recognize the critical role local businesses, state and local government, non-profits, and even political and advocacy groups play in the news ecosystem. Let’s stop acting like publishing a press release–especially a really juicy piece of news–compromises journalism and instead treat it as another piece of relevant local content in the new news business.