Daily Tech Snippet: Wednesday, May 20

• Yahoo shares fall as Marissa Mayer’s plan to spin off Yahoo’s $34 billion stake in Alibaba tax-free could run into resistance from federal tax authorities. An official from the Internal Revenue Service told tax lawyers in Washington on Tuesday that the agency was weighing potential changes to how it treats some kinds of tax-free spinoffs. The I.R.S. is particularly concerned about spinoffs in which the operating business comprises only a small portion of the new publicly traded company, according to the official. That is exactly the type of spinoff that Ms. Mayer, chief executive of Yahoo, proposed in January. The Internet company intends to bundle its small-business services division with its 384 million shares of Alibaba into a new company and spin it off to Yahoo shareholders later this year. As reports of the I.R.S. review circulated on Tuesday in the last half-hour of trading, Yahoo shares plunged, closing at $40.98, down 7.6 percent. More than half of the company’s stock market valuation is based on its stake in Alibaba. Robert Peck, an Internet stock analyst with SunTrust Robinson Humphrey, said it was unclear whether any change in the government’s tax treatment of spinoffs would affect transactions already in the works, such as the Yahoo-Alibaba transaction. “It’s very ambiguous,” he said. “Does it apply to current deals they are looking at, or future deals only?” If Yahoo’s disposal of Alibaba were fully taxed, Mr. Peck estimated that the fair value for Yahoo’s stock would be about $40 a share, or roughly the current level. If the spinoff remains tax-free as Yahoo envisioned it, then Yahoo shares are worth closer to $55, he said. Currently, a spinoff must include an operating business, not just assets like stock, to qualify as a tax-free transaction. The I.R.S. has not established firm guidelines about how important the operating business must be to the spinoff company. Yahoo Small Business, the operating unit that Yahoo is proposing to include with the Alibaba stake, is a strong business that never fit well with the rest of Yahoo’s portfolio, according to Amit Kumar, who ran the unit until last November. “The profitability and revenue profile were surprisingly strong, compared to many other businesses at Yahoo,” he said. “But certainly by the fact that Yahoo chose Yahoo Small Business as the division to spin off, they don’t consider it a core business.”

• Google Search Now Shows Tweets, but Will It Help Twitter Get More Users? Tweets have begun to show up in Google search results, and Twitter's stock is up a bit. Probably not a coincidence. Investors hope this deal will help the company capture a broader audience, and turn the casual onlookers, who may stumble upon a tweet while browsing the Web, into active members. While Google is giving Twitter a nice billboard for its content, the experience leaves something to be desired. The full body of the tweet, including a photo if there is one, lives on the search page. Clicking one brings you to Twitter's site, which includes the same information, along with the number of retweets and favorites the post has received. (If you're not a Twitter user, do these numbers even mean anything to you?) Above that, for nonmembers, are giant buttons that say “Sign Up” and “Log In.” Hit just about any other button on the page, and you get a popup that implores you, again, to please, please sign up for Twitter. As the company struggles to add users at the rate it used to, a key part of Twitter's strategy involves drawing people in from around the Web. Twitter has been working on the experience for logged-out users on desktop computers, adding a new homepage that allows people to browse tweets about certain subjects, like Nascar or cute animals. James Cakmak, an analyst at Monness, Crespi, Hardt & Co., says the Google deal shows Twitter isn't there yet on mobile. With the current implementation, Twitter runs the risk of drawing people to click on tweets, only to repel them with desperate pleas to sign up or log in for more, he says. “The experience is pretty cool in the search results, but that does not necessarily correlate to engagement, monetization, and conversion,” Cakmak says. “There is nothing on mobile to drive eyeballs to. The logged-out experience is barely figured out on desktop, and they've been working on it since November.”

• Etsy Plunges 13% After Reporting Its First-Quarter Financial Performance: Shares of Etsy ,the online marketplace for handmade goods which IPO-ed in April, plunged today after the company reported roughly in-line revenue and a wider-than-expected loss. Etsy, a popular marketplace for handmade goods, reported top line of $58.5 million, ahead of expectations of $58 million. However, the company lost $36.6 million in the quarter, or $0.84 per share. In the year-ago quarter, Etsy had a far-smaller $463,000 loss. Etsy is off over 13 percent in after-hours trading as of the time of writing. The company’s revenue growth, compared to the year-ago quarter of 44.4 percent, greatly outpaces the expansion of sales on its platform, which posted a slimmer 28.2 percent rise. Investors may view that discrepancy as indicative of potentially deprecated revenue growth. Adding to the negative pressure is the company’s notes on its second — i.e. current — quarter, which indicated lower revenue growth, increased headcount and rising costs. Combined, you can spell that in the following way: margin pressure. Etsy’s operating expenses rose 72.6 percent compared to the year-ago quarter.

• Autodesk earnings: revenue $646M, +9.1% Y/Y; shares fall 8% in extended trading. Autodesk which makes computer-aided design software, forecast lower-than-expected profit and revenue for the second quarter, citing a stronger dollar. Autodesk, known for its AutoCAD software used by construction companies, engineers and manufacturers to design products and simulate real-world performance, now expects revenue growth of 2-4 percent for the year. The company had earlier forecast a 3-5 percent growth. Shares of the company, which also cut its profit and revenue forecast for the year, fell nearly 8 percent in extended trading on Tuesday. Autodesk, which gets nearly two-thirds of its revenue from outside the Americas, projected currency rate fluctuations to hit revenue growth by 5 percentage points for the year ending January 31. Revenue increased to 9.1 percent $646.5 million. The company, which is moving from a license-based business to a cloud-based subscription model, said subscription revenue rose 15.7 percent to $319.8 million. Subscriptions bring in less money upfront, as payment is spread over the entire period of use unlike traditional packaged software, but typically ensure more predictable recurring revenue. The switch to the new model increased Autodesk's costs. While total cost of revenue increased 16.6 percent, total operating expenses went up 13.1 percent. The company's net income fell to $19.1 million, or 8 cents per share, from $28.3 million, or 12 cents per share, a year earlier.

• No, Uber drivers can’t game the ‘surge pricing’ system as easily the way one driver claims: Uber's "surge pricing" algorithm is both critical to its success and a huge proverbial target on the company's back. It is, Uber says, supply and demand in its most basic form: When drivers are scarce, and demand is high, prices go up. That's good for drivers who are now being paid less on the Uber base rate since the company began dropping prices to beat the competition and generate demand. And it can be good for those who are desperate for a ride — and are willing to pay. Critics say that surge pricing can result in truly absurd fares at peak times, and the company admitted making a misstep by allowing surge pricing to go into effect in the middle a natural disaster. Recently, a video, purportedly from an Uber driver, was published online claiming to show a strategy that Uber drivers can use to manipulate the system by inducing higher and higher surge fares. There's no narration of what's happening, but over the course of about three minutes, the "driver" demonstrates how to do this by accepting rides, then immediately canceling them. The person does this several times, and by the end of the video, surge pricing increases to 2.1 times the normal fare in some areas. The video, titled "Driving for surge," was initially posted publicly in April but has now been made private. The video was also posted in a thread on a message board for ride-share drivers last week by a user who was labeled on the message board as a "well-known member." That person encouraged drivers to get "on the surge bus" and ride "to profits together." The person who shared the video on the ride-sharing forum claimed that he has been "doing this for months" without hearing anything from Uber. It is unclear whether that is true, and Uber would not comment on the individual driver, who included his first name and license plate number in the video. Even if the strategy was plausible, it probably won't work for long, as other drivers on the forum quickly pointed out. "This is a terrible strategy. You'll get deactivated within a week with that many trip cancellations," one driver commented. Surge pricing in an entire city, where there might be hundreds or thousands of drivers on the road, is unlikely to be affected by the actions of a single driver — or even a handful of drivers. Surge pricing kicks in when a lot of different users begin requesting rides and there aren't enough drivers. Sure-fire predictors for surge pricing: bad weather, rush hour or, perhaps, the time just before Sunday brunch. Because Uber monitors every ride, repeatedly canceling rides is really just a good way for a driver to trigger enhanced scrutiny.