Sunday, April 29, 2012

Cloud Computing and Unbilled Deferred Revenue: On the way to another bubble?

I was reading this report on the outlook cloud computing from GigaOm and came across an interesting accounting term:  "unbilled deferred revenue". When I googled the term, I came across the following explanation from "Unbilled deferred revenue, represent[s] business that is contracted but unbilled and off balance sheet". In other words, it is revenue that can't be recognized because it is not earned and it is off-balance sheet because it has been collected! Will such funky accounting terms be used to fuel a bubble vis-a-vis the cloud? It appears I am not the only one that saw the need to look into this a little deeper. This article actually analyzes the term and gives some rationalization to the concept: "[Subscription economy is] one way to make sense of cloud computing and the many new and very different ways of doing business on the Internet. We're most familiar with Software as a Service and how different it is from conventional licenses; so familiar, in fact, that I don't need to describe it for you here." 

One of the key factors in bubbles (based on a paper that Efrim and I wrote a few years ago) was "speculative valuation models".  So the next step is for some physicist to figure out how  "unbilled deferred revenue" can be put into a black-scholes type finance model -  and voila! -  we are are on our way to the next tech bubble. 

Of course there are other factors (see the paper for the list) that are necessary to inflate a bubble. The one to pay particular attention is to whether the credit is flowing freely. With the debts woes of Europe and people still stinging from the sub-prime crisis, this factor may inhibit the inflation of such a bubble. However, this assumes banks and traditional lenders will be the primary source of capital. The reality is that tech companies are awash in cash, and as evidenced by Facebook's acquisition of Instagram for a cool billion, they appear ready to step in and make the necessary deals to potentially fuel another tech bubble.  

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