22 December 2010

is Netflix sustainable ?

Several people have recently asked me if I thought Netflix had a viable business model. To be honest, I never thought much about that question until this month when Fortune magazine annointed Reid Hastings CEO of the year. The stock has been on a tear in 2010 – so it got me thinking, is Netfix sustainable?

Netflix is type of company I love to root for. It’s the nimble smart company that takes market share from slow incumbents despite all the odds stacked against them. Blockbuster, Walmart, and Amazon all went after the fledgling company. Coinstar’s Redbox inked deals with all of the chain stores to put their DVD kiosks in their establishments. Netflix was no match for these industry insiders and deep pockets. But they all pulled back or lost the battle to the startup (blockbuster = ch. 11). Kudos Mr. Hastings.

Now they are at it again. They are completely revamping their business model to lead the charge to real-time streaming content. 2/3 of Netflix subscribers already use streaming - a figure expected to rise rapidly. It’s a risky bet to gamble their entire DVD business, but probably a smart one. Like DVD’s in the mail, they are moving aggressively hoping to gain a critical mass of content and subscribers to give them a sustainable first mover advantage. So the question is can they beat the odds again ?

At first blush, it seems like they can. They inked deals with many of the movie and TV studios such as Disney. They cornered the hardware providers like blue-ray, smart phone, and the numerous media center offerings with “Netflix inside”. Like they did with DVDs, they no doubt have the widest array of streaming content compared to their competitors like Apple TV. Unlike the first time around however, the price to play has gone up considerably.

Netflix claims that they only need $9 / subscriber to make a profit. In a world of cheap or free content, I tend to agree. But that’s not the case anymore. They paid $1B over 5 years to MGM and other movie studios for their content. Sure they are padding their libraries with cheap second tier content online such as ABC family, but the good stuff costs a lot more now. The “28 day” delay rule is still in effect in which they can’t offer premium content from the top movie studios. HBO and the other premium providers still refuse to work with them. Bottom line, content costs are going up not down. $9 per subscriber works great in a cheap acquisition cost model but not when the big boys start charging real dollars.

It all comes down to bargaining power (remember Porter’s 5 forces?). Netflix has distribution and a growing customer base. Warner Brothers and NBC have the content that people want. Disney embraces Netflix. Warner despises them. How much is an “entourage” show or “harry potter” movie worth? That’s the million dollar question. How much can a distributor command versus the manufacturer (studios)?

How much would you pay for entertainment content? That’s the key to Netflix. In a $9/month world, Netflix wins. That means the content is more commodity priced which tips the scale to Netflix who has established strong distribution. If it’s more along the lines of your $50/month traditional cable bill, then the content guys win.

Times are different now. Back when music was free (Napster), Apple was successful in convincing all the studios to allow them to charge 99c per song in its Itunes store. They all feel robbed now – they will never get to the levels of sales as they did during the peak of compact discs. Bestselling Ebooks go for $20; not much cheaper than their hardback predecessors. The NY times and WSJ charge monthly subscription fees now to access their website. Content providers are no longer timid to charge as they once were in the net infancy days.

There are many parallels going on right now in business, particularly with this week's net neutrality ruling. How will YouTube and Pandora fare in negotiations with Comcast and AT&T? What about mobile content providers as they wrestle for airtime on Verizon and AT&T's networks (surprisingly the net neutrality compromise excluded wireless networks since that't the wave of the future)?

I'm still rooting for the boys in red. As respectful as I am of what Netflix has accomplished over the years, I think that online content distribution becomes ubiquitous over time (much like the movie houses which all filed for bankruptcy in the 90s while the studios thrived). Netflix will definitely survive; I just don’t think their $9 nut will net them as much as they think it will in the future.

14 December 2010

The upcoming tax hike no one is talking about

There's heated debate going on right now about the compromise bill on what taxes are fair and what groups should (or should not) be subject to tax hikes if the Bush cuts are rolled back. There's another tax creeping up on us that will hit each of our pocketbooks more directly since it's tied to consumption.... the internet commerce tax. As much I hate giving more money to the government, I think its fair, especially if you take into consideration the hidden economic costs of the status quo. And get ready for it folks, its coming soon to a computer near you.

Consider this situation - Atmabus is looking to buy a Dyson vacuum for $399. It's the same price at both Best Buy and Amazon. At a 9% sales tax rate, my purchase is roughly $36 higher if i patron my local Best Buy - a no brainer for me. The way the tax rules work - internet commerce is not taxed, historically because its been difficult to establish jurisdiction. These sales have been viewed as interstate commerce; sales tax is governed by state and local authorities. Advantage: Amazon. Just today, Best Buy announced terrible earnings citing market share losses. Certainly their offline and online competitors are running faster than them; but the tax arbitrage situation has added fuel to the fire.

All things being equal, we're dissuading people from shopping at their local stores - a big economic cost to cities. It's one less sale to justify a new employee for Best Buy, and one less sale that circulates money locally (real estate, restaraunts, etc...). Also - the likes of Best Buy create more jobs than Amazon since their retail model is more labor intensive than ecommerce companies. So what is the cost ?

Amazon had sales of $25B last fiscal year (and growing), much of which had no sales tax applied to it. Assuming 90% of their sales were untaxed a 9% average sales tax rate, that would have generated $2B for state economies. Not enough to plug the CA budget hole, but not pocket change either. And this is just one ecommerce company, imagine applying this logic to all online sales.

Best Buy generated $50B last year. They employeed 180,000 full time employees. Amazon, which had half of Best Buy's revenue, employed a meager 25,000. For every dollar of revenue created by Amazon, it translated into 1/4 of the jobs than it did at Best Buy. Applying this ratio to Amazon's sales, this means 65,000 less jobs created. 65,000 less people with disposable income, paying payroll taxes, and circulating money locally. I know this is a bit of a generalization, but you get the point. Again, this is one example, imagine if you apply it more broadly.

I'm not saying that we should end ecommerce and source everything locally, but it doesn't make sense to give Amazon a competitive advantage when they clearly do not need one. Why should i have to pay $36 to my local Best Buy who employs people versus Amazon which does not ? Given the pressure on local government agencies to find new sources of revenue, they will no doubt jump at ecommerce. Many states have already done so and many are planning on it.

So as i blogged about earlier, i told everyone to take advantage of the short-lived free services the net currently affords due to its nascency. I'd now also load up on all your christmas gifts for the next several years to save another 9% that will hit in the years to come.

07 December 2010

Endeavor - update to microfinance

A quick update to my MicroFinance in Marco Economies article -- I read an article in the WSJ this weekend that chronicled 13 year old non-profit Endeavor, which provides VC-like services to entrepreneurs in poor countries and communities. They leverage their Ivy league educations, business connections, and savvy to incubate successful businesses. They focus on building larger, scalable entities (as opposed to microfinance which focuses on the $1/day market) such as the "Latin America etrade" and a Turkish version of Cisco. They've had IPOs, and their entrepreneurs accounted for 135,000 jobs and $3.5B in sales last year (the bulk in Argentina).

Kudos to Linda Rottenberg and her team. This is a great effort that leverages capitalistic methods to complex societal problems. It also illustrates that free market philanthropy doesn't only work on the "bottom of the pyramid", but can work to build large startups and could even work in mature economies like the US.

03 December 2010

America the Oligopoly

One of the things most concerning in the business landscape is the rise of big business and the fall of choice in America. I’m the biggest free market capitalist out there, but I don’t like the trend of the fat getting fatter and barriers to entry rising. We're inundated with chain restaurants, box retailers, and product differentiation based only on price. While conglomerates give us some advantage in terms of reach, they tend to focus on defending their market positions instead of creating value and providing customers what they want. Defense is not a great offense.

Every industry you look at is primarily dominated by one or two players. Consumer staples like diapers and razors – Kimberly Clark and P&G; Our services at home – one electric provider, 1 cable, 1 telephone, 1 gas company. Banking has become Chase or B of A. Even the next generation tech industries are now ruled by the chosen few – Oracle and Microsoft with enterprise software, Cisco with networking, Google and Facebook rule online eyeballs. America has done a great job of building scalability, consolidating industries, and homogenizing society. You can't blame Cisco for their aggressive acquisition strategy and monopolistic-like market share. But is this good for the US in the long run?

Not in my opinion. Big business creates fewer jobs than smaller companies (in aggregate), capture less of people’s talents, and reduce the workforce to merely caretakers versus innovators. I also think there is a societal cost of less worth to individuals who merely punch in and punch out. So how do we buck this trend? Not through regulation which creates artificial winners and losers (and unintended consequences). But there are ways that I see we can bring local business back.

-VCs: I gave them a hard time in an earlier post for not being innovation centers, but they have the deep pockets and smarts to level the playing field against the oligarchs. They can give new businesses scale, bring new ideas to market, and love to find “white space” opportunities that displace incumbents. Groupon (a huge payday as Google reportedly is paying $6B for them) is competing head on with NBC and Mint.com provides an alternative to high priced financial advisors.

-Keep our borders open for business: Toyota and Honda brought true value to consumers by giving quality at a better price. We should force the oligarchs to compete not only with the small businesses at home, but the big businesses abroad. Open markets force big business to remain honest and focus on consumer needs. This also opens market opportunity for small business (with the rise of the internet) in which entrepreneurs will find a niche. Four Hands has proven to be a formidable competitor against the big North Carolina boys by leveraging open markets.

-End government tax breaks: The richest companies hire the best tax firms to get them out of paying taxes. There’s a reason why Singapore is becoming a business hub – 5% corporate tax rate. Multinationals can park profits there. We need to simplify the tax code and end tax breaks. Small business is at a disadvantage in this area.

-Teach business in Schools: We need to teach students basic finance, marketing, and accounting just as we do basic science and English. Last week I heard a terrible stat – 70% of doctors ten years ago were non-employees (ie. entrepreneurs in their own private practice), now its 30%. It’s gotten so complicated to open a business now that doctors, auto repair shops, and other generally local business providers are falling to prey to becoming franchise employees. There would be no Monarch Dental or NTB if local experts were better educated in business.

-Make the patent process more accessible: I love the James Dyson story of how he tried to sell his unique designs to the large vacuum companies. They basically said no and tried to copy him. Dyson spent all of his life savings in the courts against the big guns (experienced personal bankruptcy, but eventually won). Most people don’t have the will, money or time to fight the battle that Dyson did. And let’s face it – nothing beats the suction and ball technology of a Dyson vacuum.

I like that Walmart has added more dollars to everyone's pocketbook by passing their significant cost advantages to the masses. There is certainly a place for this level of efficiency (and I'm glad walmart actually passes their cost savings to the public versus other big boys), but I don't think that should be the face of US business. Small businesses create better jobs, more choice, and a level of diversity that equals the US population. I think if small businesses get can better organized, tap into resources that create efficiencies, they will be well poised to give us the next bagless vaccum.

18 November 2010

four hands for a purpose

Encouraged by its market share of my personal collection, I thought i'd write about Austin-based Four Hands, a great business grounded by a higher purpose. Inspired by their travels in India and Pakistan, Brett Hatton and his wife founded the stylistic furniture concern in 1996 with the notion of importing eastern designs to the west while maintaining each piece's unique history by touching each one with their "four hands". They either manufacture, finish, or hand pick all of the furniture that they sell. They visit with specific artisans that craft the items all over the world, built manufacturing sites in India and elsewhere, and have paid great attention to supporting the communities that they affect in a positive way.

By any definition, Four Hands has been a commercial success. I estimate their sales are approaching $100M given what i've read (although its hard to say since they are private) and they seem to have a deployed a sound strategy of distribution deals and acquisitions to fuel their growth. Just over the past several months, they announced two acquisitions (a lighting designer and a specialty distributor of Hondurian artisan crafted items) and a partnership with an eco-friendly furntiture designer. They started by selling pieces to the likes of Neiman and Crate & Barrell, but hit the trade shows in a very big way to diversify its customer base and add to its chicqeness. Whats more amazing is that for such a highly complex, capital-intensive business, it does not appear they've incurred any debt or equity offerings. I'm sure it will be difficult to keep their uniqueness while continuing to expand so rapidly.

What's more compelling is that English-born Hatton has taken it upon himself to better the areas, particularly India, where most of Four Hands' pieces originate. In addition to the international charities the company supports such as UNICEF, Hatton has co-founded Miracle Foundation, a non-profit that builds and supports children orphanages, and Learn to Live, which educates young women in India. They also try to cut out middlemen importers by going straight to artisans and the source of their products (although not sure how scalable this is as they continue to grow). Four Hands also been listed in Business Week's listings of top companies that promote job growth in inner city communities (South Austin). I think this attention to a somewhat loftier goal has propelled the company through its profitable first 15 years. Close attention to the details, including the environment in which you operate, I feel is a recipe for great success in business.

I like to see good companies with innovative offerings, solid business strategy, and a 'good heart' enjoy growth and success. Its sort of the win win that helps fill unmet consumer demand while enhancing society overall. So I raise my (two) hands in approval for the company that has taken prominence in my living room.

02 November 2010

microfinance in macro economies

Microfinance works. But can it in the US?

First off, I've always felt business-based principles are the best way to solve the world's problems in the long-term, and certainly microfinance has done its part. Bangladeshi economist Muhummad Yunnis revolutioned how we alleviate poverty by bringing microfinance to the masses in 2006 with the launch of the Grameen Bank (and he won the Nobel Peace Prize too). He created a system that provided loans to the poorest of the poor who had no access to capital, built sustainable small businesses around the world, facilitated oppressed women to gain financial freedom, and allowed financial instititutions to at least break even if not turn a profit. The net impact has been a self-sustaining model that has lifted millions of people out of poverty through a free enterprise, non-entitlement based system. People pay interest, face default penalties, but more incredibly, actually pay their loans off at a higher rate than traditional borrowers.

Despite the negative things you hear (ie. last week's news that the Indian state Andhra Pradesh's government placed a moratorium on repayments), by and large it has worked. The biggest drawback has been its reach. In emerging countries like India or Brazil which are capitalistic-centric, politically stable, and possess a self-contained economy, it has worked quite well. India itself is on pace to see $4B this year in microloans. That is alot when you consider most loans are less than $200. Culturally, the concepts of loan repayments are not novel and small businesses are the norm not an exception. In other places, it has been harder and less effective. Particularly in Europe and the US where the economics have just not worked out on a large scale.

I was happy to see last week one of my favorite microfinance efforts Kiva, announce two new microfinance initiatives in the US. For those that dont know Kiva, it is the ebay of microfinance (founded by former paypal execs): it allows anyone to make a loan around the world via an easy online transaction, track an entrepreneur's progress, and offers more visibility than has ever been offered through its rating system and grass roots due diligence. Transparancy and ease, my two favorite pillars.

But can microfinance work in the US? Kiva and Accion are offering microloans to fisherman and others affected by the BP spill. Is big business too prevalant for it to work on a large scale? How is a small loan going to really help someone in the long-term (versus a simple charitable donation) ? Does the math of a $200 loan just not work in high cost of living jurisdictions? Do we need specialty microfinance institutions from abroad who have the expertise to make it work at home ? I'm not sure what the answer is - but surely if it can work in poor areas of Asia that we have enough creativity to make it work in poor areas of the US. With the US economy facing a prolonged downturn, perhaps what we need most is for small, innovative businesses to grow and thrive when government and corporations cannot fill the gaps.

20 October 2010

ted's talks and next gen education

I am definitely late to the TED party, but i think it's worth discussing since I think it seems to be a proxy of what our education will (or should) look like in the years to come.

Originally an annual technology conference, TED only recently came into the mainstream conversation when it began to post some of the best talks online. Hosted by the non-profit Sapling Foundation, TED hosts annual conferences where the best and brightest give presentations on innovation, science and technology, philosophy, and other trends that can make the world a better place ($100k prizes are given in a contest for entrepreneurs to launch ideas that can change the world) . The who's who in every major field of study has presented, and the site has been viewed almost 300M times since 2007. Major publications like Forbes opine that TED is more important than Harvard.

While I doubt i'll ever get invited to participate, I do enjoy its robust library. It's truly amazing the perspectives and content available from so many thought leaders for free. One talk that intrigued me was creativity expert Sir Ken Robinson's talk on how our current education system kills creativity. He discusses how we put kids in boxes based on what educators value today, the paradox of having such a rigid formal education system lasting 18 years when we cannot even fathom what the world will look like in five. It used to be a degree would insure a job; but thanks to technology and globalization, that's just not the case.

Alot of what Sir Robinson's diatrage makes sense. How can the static system of education address internet time? The bigger question is how is the system going to adapt to the new world? I'm not talking about Ipads for 10 year olds, rather how more fundamentally can we adapt our deeply rooted system into something that addresses what the future really holds. Literacy and basic math skills are just not going to be enough anymore. Creativity and cognitive thinking will prevail over memorization and standarized tests.

You already see glimpses of the change. Former hedge fund manager and MIT grad Salman Khan established Khan Academy in which he posts tutorials on basically everything kids learn (that he himself writes) in an easily digestable and available format. John Doerr and every VC has been chomping at the bit to invest in Khan Academy, but they've been limited to becoming donors (since its non-profit). By reviewing some of the lessons, its clear to me how textbooks will ultimately fade over time just as the bookhouses that sell them are today. Kids now learn in small doses and in different mediums. Goodbye Moby Dick, hello wikipedia.

Other less altruistic initiatives are also becoming more pervasive. Vocational schools, free or subsidized university offerings, for-profit education concerns, Kumon and other learning centers, and of course online degrees and education. These are all big business right now. Some, in my opinion, are just a fad; but others will continue to thrive.

The world is changing quickly and so should our education system if our children are to thrive. TED and Khan are great examples of education initiatives that the more fortunate can give to the masses. Their content is not just the plain "how to" stuff you find, but the type of content had been reserved to the elite and well educated in the past. It will take alot more these great ideas to help the next generation to compete, adapt, and of course, change the world.


07 October 2010

UPDATE: FB, Google, and monetization

A very interesting techcrunch article touches many of the questions I've raised here at atma. It debunks how Facebook will make gobs of money - a question I pondered in my new favorite business model post. It's very interesting - they hypothesize that it will primarily come out of the $60B advertisers spend on TV and not at the expense of google (another topic I discussed in my groupon post). They think brand advertisers will flock by the thousands since there is no good way to target demographic-based audiences online (text search by google is an agnostic algorithm at this point). Some good points they raise; I'm not sure if they are drinking the cool-aid after the new FB movie, or if in fact, the seismological shift from traditional media will happen as rapidly as they predict.

I think they are being a bit optimistic. Google basically came out of nowhere and swallowed billions of ad dollars. The market was not ready for search, particularly the quality of Google's engine. Do you think NBC doesn't know about Facebook? FB has been amassing over a half billion users over the years with more buzz than a reggae cafe. Don't get me wrong, I think they can win. There will be a lot more competition in its way which is why i think the shift will be far more gradual than the article predicts. I also don't think it will be the end of groupon or paypal the way they anticipate. Either way - FB just might be able to outmonetize its hype. And get an academy award while they are at it....

29 September 2010

Southwest's Expansion M&A

M&A can work, just not for the elephants in the room. This week, I intertwine two topics I've discussed before in light of major events announced last week in the airline industry.

First, the good. I like to write about admirable companies; those that are profitable, well run, culturally hip, and leave a positive footprint on society. I wrote about Starbucks in great detail; and certainly Southwest Airlines is one that tops my list.

I've always had a soft spot for Southwest Airlines. They are the only airliner that hasn't lost money, filed bankruptcy, or use that awful hub and spoke model. They've posted profit every year of their existence, never had a single layoff (they didn't use their employees as pawns during the 9/11 crisis as others did), and still let your bags fly for free. Sure they make you find your own seat and sing showtunes every now and then. But its their playbook, and it works well. And they've done right to all of us. Have you ever priced out fares in markets that Southwest is in versus ones they aren't?

Southwest announced last week its buying Airtran for $1.4B. Its the largest risk in the company's history. They plan on eliminating many of Airtran's ancillary fees, increase flight routes, and adding 2,000 jobs over the next two years. The merger is predicated on growth and achieving greater scale. I think its smart. It's not too big that it's unmanageable, they can pool their plane orders, and Airtran's cost structure is actually almost comparable to Southwest. Despite my skepticism of large scale M&A, I think Southwest is looking at this as expansion M&A. An area that has at least has a chance to succeed.

Now the bad. They are the legacy, inefficient companies that look at M&A differently. They do deals despite the pitfalls I outlined in a prior post mostly for defensive measures. In this case, I'm referring to the United and Continental's $3B merger closing announced last week.

These companies, on the other hand, use lots of red ink (lost a combined $7B in 2008 and 2009), filed for bankruptcy 3 times, offer a customer experience that rivals governmental agencies, and require a 10 page manual to decipher all their fees. With their merger, they plan to cut heads, rationalize routes (i.e. delete), and try to somehow squeak out a profit in an obvious business model that doesn't work. Eliminating peanuts was the answer to your financial woes? Really ?

Who will prevail in the airline wars? I believe that the faster, nimbler horse will stay on top. Southwest has a sustainable business model based on efficiency, giving customers what they want, and treating their employees better than their executives. Southwest is looking to grow while UA/Continental is looking to retrench. Cutting costs is not a gateway to success, building a sustainable business model is. The basic rationale behind a deal will generally dictate whether they will work or not; Ones that attempt to defend market share, generally don't. Ones that are more offensive minded have a shot, in my opinion, if executed by a quality company.

21 September 2010

do VC's make the world go 'round ?

I've often wondered how much value VC's really create. Not for the few that are allowed in, but for society as a whole. Are they the innovation engines as advertised, or merely savvy investors that realize above average returns ? Day traders or world changers?

First, I am surprised at how young the industry is. The first VC's started in 1972 with the founding of 2 of the marquee names even today, Kleiner Perkins and Sequoia Capital. Institutional funding didn't come in until the late 70's. The first home runs were with Apple and Genentech's IPOs in 1980. So we're really talking only 30 or so years. The 80s were a bust for VC's, so now we're down to 20 years.

The industrial revolution brought America to dominance with the byproduct being new industries and jobs. Let's assume for a moment that the VC/internet era (ie. the last 20 years) has had that same kind of impact. The internet has changed everything everywhere and created a better way of life for most. More importantly, it kept us ahead of the competitiveness curve (many US jobs created out of the internet revolution). One would think that VC's played a significant part in that correct?

The goal of VCs is to bring new ideas, technologies and innovation to the masses (and get paid handsomely to do it). They partner with entrepreneurs (sometimes with only an idea in hand), take a significant equity stake, and help them grow towards an IPO or sale five years later. They only look for visionary companies because they have to pay for the 9 other investments in their fund that went bust and still yield a 25% return to their limited partners after fees. Most of us remember the mayhem of the Netscape IPO in 1995; almost every household tech company you can think of (google, amazon, ebay,etc..) have VC fingerprints all over them. At the surface, it seems like they've been the thought leaders they're supposed to be.

But are they? An article written by 2 insiders argues that VC funding actually thwarts innovation. They point to, among many factors, the short life cycle of funds (usually 5 years), aversion to unproven companies, and the fact that there are more MBA's (64%) than there are Master-level engineers (29%) at the top funds. Not the usual source of technological breakthroughs (present company excluded of course).

Just think about it. Ebay was not the first auction website, just the first successful one. Google came out of Stanford's lab, the internet roots were from the US military (and Al Gore). VC's didn't only invest in Google and Yahoo, they invested in 100s of search engines (don't get me started on my infoseek investment). How many biotech companies are they now investing in? How many will even survive much less cure diseases? They tend to invest in clusters; a sign of "me too" investing, not extreme innovation.

But they've monetized it. Have they ever. Sequoia turned $12M into almost $5B with Google. Not too bad, eh? But lets face it, without VC's, these emerging companies would not have reached the masses as quickly and deeply as they have. Google, and the many others, have brought information and commerce to the masses and completely changed the world for the better.

So mad scientists they are not. Mad capitalists they are. It's just too bad that my address is not on sand hill road.

15 September 2010

woot and amazon

I dont usually comment on an individual news event unless it has a broader meaning, but i could not help to do so with the acquisition of woot by amazon a few months ago for a reported $110M. especially since we were on the grouponomics topic anyway.

For one - i love woot. I bought my first digital camera from them years ago ("you've seen the best, now try the rest" was the product description). They are a much hipper, quirkier, less sexy version of groupon that pioneered the deal of the day concept. If you have the time, you should read CEO Matt Rutledge's view on the Amazon purchase. Among other things they did the deal "every company that becomes a subsidiary gets two free downloads until the end of July" and that Woot's employees are partnering with Amazon, the "billion-dollar company that could buy and sell each and every one of you like you were office furniture." They headquarter a few miles my place (another plus), and mastered the art of selling junk and "over-witting" most other sites with their beat writing skills. Its too bad groupon built a better business model, but I don't expect the wooters to care too much. They expect to be profitabile in 2043.

But Amazon certainly will. It's early to tell, but i like Amazon's acquisition strategy so far. They are gobbling up highly unique companies with extremely loyal customers (they bought Zappos for $1B and Audible.com for $300M recently). Amazon has mastered the logistics of online commerce - I for one was a huge doubter when they spent hundreds of millions in the early 00s to build distribution centers. But it worked, they executed well. And I think they see the marriage between their operating excellence with great online sales models of the companies they are acquiring.

So i'll give Amazon a "woot" for their strategy - let's see how it plays out. As for woot fans like myself, don't fret about upcoming changes. The site will "continue to be an independently operated company full of horrible, useless products and an untalented jerkface writing staff, same as it ever was."

03 September 2010

grouponomics - is the search over ?

Its no secret that the advertising landscape is changing. Newspapers are folding one by one. TV content and advertising is moving online. I just got an ESPN magazine offer for 96% off the cover price, and it's still 4% too high for me to pull the trigger. We know where the lion share of the shift is going. Google's run-rate revenue based on its last quarter is a whopping $24B. But has Google's core business peaked ? Is paid search advertising dead ? Already ?

A few weeks ago Groupon featured a fairly innocous deal of the day : "Gap $50 certificate for $25." It got almost 500,000 purchases, before they had to literally turn down the site. Nice way to reach a targeted audience (young, affluent, savvy) for Gap eh? Groupon's take: roughly $7.5M.

Groupon, a primarily local-advertising "deal of the day" website (and others like it) have become increasingly relevant. It charges anywhere from 30-50% of the advertised value per purchaser, with no upfront fees. Smart in my opinion - its the broker's model. Take nothing upfront and charge more than your service is worth on the backend for a product you know will move. It's a work of art - it's simple, scalable, and has tremendous upside when you take into consideration campaigns such as Gap. A pure money grab for Groupon if you ask me.

So was it worth it for Gap ? It cost them $40 a pop or ~$20M when you take into account the 50% discount they offered. Its debatable. Were these existing customers? Either way it came out of their fixed marketing budget. They took it out of tv, print, and perhaps Google search.

Others also see this shift in online advertising. Social marketing sites such as FB or Groupon have more captive eyeballs, higher conversion rates, and are cheaper (right now) than Google's PPC. In the case of Gap, they were guaranteed business (they paid per customer). I personally don't know if i'd trust a friend over google, but the number of users are startling -- FB is at 500 million; even Groupon is at 3M in just a few short years. Yahoo and AOL's search businesses are down sequentially, and Google's growth rates have slowed - so it's still unclear if paid search has already declined. Google could answer that question definitively for us as they use an auction model to price their search ads. If prices came down, so did demand.

I like Groupon's model than others because its easy for traditional advertisers to understand and its far more lucrative per user. Also, its a direct solicitation model (people know they are going to be "sold" something) versus companies like FB, where you have to trick people into being advertised. I read somewhere that a blueberry company paid Zynga to use their brand of blueberries in their Farmville game. That's ridiculous. And more importantly, harder to monetize.

I'll miss the kids jumping in Denim on TV, and i'm certainly not predicting the demise of Google. But Groupon just got $20M of Gap's budget in one day. So perhaps tomorrow's deal might be 50% off Google Ad Words for Organic Blueberries ?

24 August 2010

the rise of starbucks and its business philosophy

One of my primary goals on Atma is to write about the intersection of sound philosophical principles with successful emerging business models. Its my core belief that business, grounded by moral values, is the most efficient way to improve society.

Starbucks is prime model of this philosophy. With the rise of the gen-y (and beyond) generation into the business world, you see profit as not the sole motive behind corporate actions (this could also be a cause of the free business model trend). Starbucks has taken the lead in many of the arenas - and they did it earlier than others and in a very old distribution medium.

First - let's commend starbucks on creating an innovative fast food concept. In a world of value menus and homogenous offerings, Starbucks brought the cafes of Verona to Hillsboro, TX (and even adopted it for drive-thrus). Somehow they were able to create a brand new successful fast casual concept that convinced the masses of the "third" place after work and home. Since perhaps Subway or some of the other sandwich chains, many have tried and few have been successful creating a large-scale sustainable business in this arena. They also taught us that a "tall" is really a "small".

Second - They did it right (see caveat below). They kept an uber-focus on quality from raw material sourcing to the end to end customer experience. They successfully balanced an offering that could be replicated throughout the country with an individual customer experience. They didn't compete on price, they made coffee shops cool everywhere, and grew the entire industry. Indepedent coffee shops actually grew 40 percent during 2000-2005 (the starbucks boom period). They never franchised (which would have helped profit), used only cash from operations to open new stores, and grew solely through word of mouth (didn't spend a dime on advertising until recently).

Third - They did good. They instilled the NW vibe throughout their business. They were the first company to offer health care to all employees (including part-time). Although expensive (particularly starting out, VCs didnt like it), they never wavered on this point. All of their beans are bought at prices HIGHER than commodity rates through fair trade (and generally direct from producers); they spend alot of time and effort to help the small plantations throughout the world. They have a foundation thats fairly large in helping the communities they impact.

Overall - I think Howard Schultz did good job of taking care of their employees, community and building a game changing business. CAVEAT: Sure there were issues that people can point to during their expansion years (reports of predatory pricing,etc..), but by in large, the benefits they created far outweigh the negatives. And I know that in the present, from a business standpoint, they face tremendous challenges (over expansion, increased competition). But at the end of the day - they built the business soundly from a business and cultural standpoint, and I think they will endure.

Let's hope Google truly "does no evil" and the next generation of big business embraces the Starbucks way. I think its a model that can work and hope its the rule and not the exception.

06 August 2010

my favorite emerging business model......free

LinkedIn and Facebook are the next blockbuster IPO candidates. LinkedIn's recent equity investment valued them somewhere around $2B an (on reported revenues of $200M). Facebook is worth around $35B based on a recent private transaction on revenues less than $750M. So with eyepopping valuations resembling the late 90's, guess what is most startling to me ?

The fact that LinkedIn has $200M of revenues. Or Facebook makes a dime on the topline. How ? Where does linkedin make money? It's not from me. I dont know anyone that has a premium membership or even knows what services it provides. How many web marketing people that you know pay for advertising on Facebook ? Profiles and chats and most of the useful marketing tools are free. Even for corporations. Really ? $200M?

As i've watched web businesses mature and the market move from internet bubble to web 2.0, i've wondered how all of the things we use most are..well free. As a consumer, its great. Ten years ago, i could never have imagined all of the information and services I have at my fingertips -- all real-time, and all free.

GPS? No need to attach one to your car thanks to Google. Mail ? Gmail and FTP sites. TV ? Justintv. Product Reviews? C-Net. Stock quotes? Name your site. Found my house on zillow. Movies and Music ? Uh - my attorney won't let me answer that one :). Just think of all the tools you use on a recurring basis and how much money you spend on these items. My guess is that you won't need both your hands to count the outflows.

Craigslist was the first to puzzle me. How in the world could they displace the entire classified ad industry (which was actually the only place newspapers made money) for free ? It took down most of the local newspapers and really got nothing in return. Ebay bought a stake years ago, tried to make money, and Craig and company sued them. They actually sued them for trying to make money! EBay backed off.

Wikipedia. I have no idea the level of accuracy that Wiki offers, but I don't think it matters. It's the most used reference source in the world. No need for encyclopedias. No reason to pay for some specialized website to attain what you are looking for.

I love it. It still never ceases to amaze me. But to all my readers out there (because i have so many), this is the best its going to get. Get ready to reach for your wallets. NBC, part-owner of Hulu.com, implied they are going to start charging for content. Google and Verizon are in talks on how to priortize net traffic (see my post on net neutrality). Facebook and LinkedIn will get some serious pressure from either private or public investors to monetize their huge membership base. Google will start charging for some of its services once their near-monoplistic search ad rates come down.

But until then, let's consume as much free content and services we can. If only there were a free site that turned my stock portfolio into something recession-proof...

22 July 2010

The changing of the guard -- Music for the Masses ?

Old problem, but worth analyzing in the context of today's business climate.

Remember when people used to work for IBM for 30 years and get a pension and stability for life. Even before that, during the days of henry ford and standard oil, sons and fathers worked side by side providing sanctuary for multiple generations. But that's all changed now. 401(k)s aren't even matched at most companies now. The US is not even the undisputed economic powerhouse anymore.

Google IPO'd about 5 years ago, and wasn't even around 10 years ago. Now they are the biggest name on the planet. Just as everyone's darling Apple surpassed Microsoft as the world's most valuable tech company, they are falling behind in the mobile and tv content markets. E-books passed hardback sales last quarter for the first time. There are no safe havens anymore. No time clocks.

As a free market technologist - I love it. Big companies must stay on their toes. Thanks to technology, barriers of entry are dissipating. Fledgling startups can transform markets, give consumers what they actually want, and create meaningful jobs in their own right. There are so many david vs. goliath stories that it makes you feel warm inside and it feels like a tribute to what this country was built on. Hard work, entrepreneurism, and a true meritocracy.

The game has changed though. The level of sophistication required to play is so high, that most are kept out. These startups provide good jobs and have great cultures - but have you seen the profiles of who they hire ? High-level, educated engineers, marketeers, and product development guys (i think everyone has heard about google's grueling interview process).

So what about the folks in Detroit that lost their jobs ? Or even the lower to middle class folks that get a decent education, but not a top-notch one? You see this trend highlighted now in an era of ~10% unemployment. There are jobs to be had right now -- its just that most people don't qualify. And companies (rightly so) will not hire suboptimal candidates. They'd rather wait for the perfect one. Unfortunately - this creates a larger divide between the people that have access to education and techonology and those that don't. I believe this trend helps the wealthy and privileged at the expense of the poor and those without access to opportunities.

Also, the uber-Technology and automation today's society demands creates the kind of operating leverage for corporations that require less jobs. The assembly lines are obviously disappearing, but even more so, much of the heavy lifting is done by software/hardware platforms. Especially back office functions like processing, payroll, even picking and delivery in some cases. Just by sheer numbers, the Googles and Facebooks of the world will require less employees than IBM or Standard Oil back in the days. Sure, the US can compete for foreign business - but its just a first mover advantage. Other countries will surely follow suit and look for business here in the US.

So the trend is that the US requires less jobs and are now raising the bar on quality jobs to the elite or those with access. Who's going to fill the void? Obamacare? I want to see the middle class thrive not divide. From a jobs standpoint, isn't technology creating more "have-nots" versus "haves"?

So what's the solution? I want to see upstarts thrive. I hate beauracracy and inefficiency more than most people. But how can these upstarts create the breadth of jobs that fit the demographics of the US population? How will they help the millions that are having difficulty transitioning from the old guard to the new guard?

08 July 2010

Keep Fair Trade Fair.

I've always been a huge proponent of capital-based social ventures. Since free-market systems generally result in more efficient allocation of resources, it only makes sense that the same principals would extend to the non-profit/community realm. For years, self-made billionaires have used market based strategies to combat poverty, eradicate diseases, and create world class educational institutions. The Gates Foundation is a perfect example as their lofty goals are being realized utilizing a rigid, corporate-based approach to management (They are also quietly building an elite club to encourage the wealthy to give away their billions). The hope is that business rigor will result in superior results versus traditional non-profit entities.

For years I've been tracking microfinance, social VC's, nonprofits and other social ventures. Something i've been hearing about recently are so-called Fair Trade companies. There are national and international standards that ensure compliance to ensure the production of goods are fair-wage, eco friendly, and a whole host of other goals. There's one I really like called the world of good that recently sold to ebay; the founders spent most of their time traveling the world to buy products directly from local artisans. They helped the poor of the poor with access to worldwide consumers while ensuring the artisan the lion's share of the profit on a sale. From a consumer standpoint, it gives them a clear alternative to mass-produced, homogenized goods.
A win win win.

But i get a bit skeptical when i hear new buzzwords being quoted everywhere. And "fair trade" seems to be the mot du jour. Just this morning I heard a story on NPR about an African born, US raised man go back to Africa to build a factory and sell "fair-trade" t-shirts. Is this becoming just a marketing ploy (vis-a-vis "green" technology) ? Has it become merely a new entrepreneurial opportunity? Will the altruistic focus lose out to an extra $1 of profit per product?? Let's hope not. For the artisan's sake. And for the sake of poverty alleviation.

You are already starting to see this in other social entrepreneurial realms. You hear about usury interest rates and unfair lending practices in microfinance. This sector has now become so profitable, that all big banks are jumping into the fray. The first microfinance IPO took place with SKS in India. When push comes to shove, will a publicly traded company succumb to the demannds of investors or of the small business owners ? I think the answer is obvious.

Let's be optimistic and hope that Fair Trade blows up just like microfinance did. Let's hope millions of small artisans and entrepreneurs around the world gain access to the worldwide consumer. And let's hope the flailing Fair Trade companies do not think profit first, fair trade second. Let's hope they keep Fair Trade Fair. The beauty is the consumer ultimately decides. It should continually demand transparency and rigorous standards.

11 June 2010

Neutral on Net Neutrality

As detailed in my previous entry, I’m an open source guy. I argued that it was the right approach for consumers overall as well as a long-term strategy to maximize profits. It would be logical for me to also support net neutrality. Placing a toll on certain internet traffic (or at a minimum prioritization) seems heavy handed. Particularly since so few companies would benefit (ATT, Comcast) in relation to the thousands that could be adversely impacted.

I worked several years at a competitive telecom service provider, so this issue was always front and center. This hurts smaller companies (particularly service providers) so it was a no brainer. It seems the latest ruling in DC was a big blow for net neutrality supporters, but I think the debate will continue for at least a few more years. Unfortunately, I think the law of deep pockets will probably prevail as they generally do when Washington and politics are involved.

For those that are not familiar with the issue at hand: AT&T and others want to have the right to optimize their networks by potentially reducing speeds and priority on bandwidth-intensive traffic. Opponents think traffic should not be regulated -- They say it’s a moral issue. But lets face it, for people like google, its more than just “do no evil.” Imagine a scenario where the few gatekeepers to the consumer’s internet access (ie. your internet service provider) could actually prioritize traffic, charge users for accessing certain content, or in an extreme situation, filter traffic. Hulu or YouTube would need to forge partnerships (read: pay) the likes of AT&T and Comcast to keep their traffic on par with other traffic. This would be fine for companies like Google or Apple that can afford to do so, but what about the millions of upstarts that don’t have that luxury ? Would users be now charged to access Facebook for example? Does this now seem to sound like that red far east country that the US reprimands for filtering internet traffic?

This puts more power in the hands of fewer companies as consolidation has hit the telecom providers (Ma Bell is back). What’s even worse is that these oligarchs are buying content providers which gives a greater incentive to censor traffic (Comcast is buying NBC). Do you think ESPN.com will be placed in the same light as say MSNBC ? Is that right ? No. We as consumers should choose our content, not our ISPs. The ISP should just be the “dumb” pipes that we pay for to access the internet. Sure they would make ESPN available, but it would be as difficult as using Google on new laptops. You have to go out of your way to disable the “ask” or “bing” toolbar and install the google one. It’s not terribly easy and people really don’t “opt-in” when that is their option. Something about this large telco utopia just doesn’t seem right.

But, from an Atma standpoint, is this the right position to take ? From an ISP perpsective, they have a decent gripe about net neutrality. They are spending billions of dollars upgrading their networks and have the right to optimize their networks since they own them. It would be one thing if the internet pipes were the legacy networks that were laid by the US government, but they are not. Building “always on” robust internet networks to fulfill the needs of our ever increasing bandwidth demands are not cheap. Our $50/mo hardly covers the cost of these capital expenditures.

And they are not getting subsidized by anyone. Why shouldn’t they be allowed to charge what they want? If applications like Napster are putting such a strain on their networks, why can’t they route that traffic differently in order to optimize their network performance?

Moreover, what happened to all the alternative internet sources that were supposed to compete with ATT ? Wireless? Ethernet over power? To a certain extent, wireless (over 3G/4G networks) has become a viable alternative, but this factor hasn’t increased competition. The same companies that provide internet to your home also do so over your mobile (ATT, Verizon). My point is, although I don’t like the idea of having a few providers with this potential power to control our internet experience, they are the ones with skin in the game. Other competitiors have not been viable – why hasn’t any true alternatives surfaced? In a free market system, you follow the flow of money. And unfortunately, the money, in this case, has come from the companies we love to hate.

So where do you stand on net neutrality and why? I’ve been so trained to believe that it is of utter importance for the US to maintain its neutrality stance, but I’m wondering if this has the effect of enabling freeloaders to benefit from others’ investments. I don’t think there is an easy answer. My sense is the optimal position would be that net neutrality be maintained but that the large telcos are allowed to charge more based on bandwidth usage versus a flat fee we enjoy now (ATT just enacted this for thier wireless networks). In the end, I think it will cost us as consumers a bit more, but the current subsidized pricing model is just not sustainable in the long-term anyway. I’m quite surprised that I actually see myself siding with the ATTs of the world a little bit, but perhaps that’s what happens when you stay away too long from an entrepreneurial environment.

18 May 2010

closed systems - bad for us and bad for profits

As a free market technology enthusiast, the concept of closed systems is in simple terms, evil. I’m all for protecting intellectual property, but companies that try to force its customers to buy inferior products through its market dominance disgust me. If you sell widgets, don’t make me buy your screws. They don’t embrace uniform standards, and focus more on competition squishing rather than creating quality products. They stifle innovation, leave consumers with fewer alternatives, and create far less value for society as a whole as they are no better at making screws than I am. The good news, however, is that these strategies generally fail in the long term. Some instances require more patience than others.

Sony tried to do this in the early 90’s. They had the first mover advantage with digital cameras. The early adopters adopted. They proceeded to create a proprietary-based system where a Sony customer was forced to buy closed memory cards, batteries, and parts for their camera. I’m not sure about you, but Sony doesn’t come to mind when I think batteries. The Nikon’s and Canons of the world adopted more open standards (USB, SD, etc.) and crushed Sony. Trying to make a few extra bucks on something they had no competitive advantage in cost Sony a multi-billion dollar market opportunity (and their shareholders dearly).

Microsoft. The company everyone loves to hate. They tried bundling a much inferior IE web browser using their Windows platform. They were a bit more successful, primarily because of their near 100% PC market share. Talk about lack of innovation though. How about the 5 year project known as Vista? Microsoft is closed-source, restricts the number of 3rd party apps, and has no real incentive in giving the consumer what they wanted. It merely became a product one was forced to use when you bought a computer. And that’s the reputation they carry today.

But watch out. The desktop is dead. The laptop is aging rapidly. Sure, Microsoft 7 is supposed to be better (or a rip-off of Mac). As the devices change, so will the operating system. Microsoft failed in its attempt of cornering the mobile OS market, and is behind in the new generation of IP-based smart devices. Internet-based technologies struck straight through the heart of Microsoft. Google made search, just that. A simple, user friendly task. Linux and other open source platforms came back to life. Programmers were willing to share their talents to make the world a better place. Companies like Warner Brothers cringed (and almost died) when their world of $15 CDs came to a grinding halt. Although Microsoft has more money than god right now, their success is not assured. Their cash generation may have covered many bad bets in the past (can you say XBOX or Zune?), but the game, thanks to open technology, is changing.

There are hundreds of other examples. I can’t wait until 2014 until the Wright Amendment finally relieves Southwest Airlines from the illogical DFW Airport monopoly. Can you believe it’s the only major airport with no public transportation access to it? Although the $17/day parking looks juicy right now, it won’t survive in the long-term.

I love companies that create markets, products, and innovation that we as consumers embrace. Not because we are forced into it, rather its’ because the product is better than what’s currently available in the market. This not only benefits society as a whole, but it also forces companies to constantly adapt, and stay abreast of its customer needs. Sounds like a winning long-term business plan to me. Companies like Apple and AT&T have learned this and moved from restricted to more open distribution models. Perhaps this free “Office” online is the start of Microsoft’s changing ways, but somehow I doubt they get it. Steve Ballmer was the one that exclaimed the IPhone would never “make it” at one of the CES shows a few years ago.

02 May 2010

Greedy Goldman

I havent been following the Goldman scandal particularly closely - because i generally think government tends to overreact as they look for scapegoats for their failings (lets give cheap money to everyone to buy houses whether they can afford it or not!) or after a large crisis (remember Sarbanes Oxley?). So please don't ask me to define "Abacus" or whiteboard the flow of money of the Goldman transactions. I'm also going under the assumption that Goldman didn't break the law. If they did end up doing so, then its a different post.

But as I see it - here's the crux of the issue at hand. Goldman brokered the buying of securities by their clients. Either as solely a market making intermediary, but in other instances as an advisior. And quite an expensive advisor - we're not talking about $8.95 online trades. On the other hand, they were using their own money to "short" many of these same investments they were recommending & brokering. Thus, as their clients were taking it in the shorts, Goldman was raking in lots of money through their short positions. A conflict of interest ? Absolutely. But should the government intervene ? Absolutely not (unless they truly have a case that executives broke the law).

I'd be pretty pissed if I was a Goldman client. I'd leave and go to one of the many other wall street firms that would chomp at the bit for a chance for my millions of investment dollars. Despite Goldman making all this money for me in the past, they betrayed their fiduciary obligation. Have all of their clients left ? No, not yet anyway. Goldman's stock has always outperformed its peers during the crisis (and actually stayed pretty firm during the investigation until the government announced a criminal investigation).

To me, its merely a question of channel conflict. Every industry has this conflict, and customers are always angry about it. But if they like the product or service, they seem to bite their tongue and continue as a client. Every large corporoation, for example, sells through distibutors in addition to directly to consumers. This happens everywhere, successful corporations hit a ceiling in their profit-making ability, so they go and try to capture some of their customer's profits. There was good ol' channel conflict at Goldman here. They have one side of the house trying to serve institutional clients. And the other that is trying to make a return on their own money. Neither side talks to each other, and neither side shares information with the other. Even though the two divisions rollup into corporate, they act as two separate entities. Sometimes one side does better, sometimes the other does well. Rarely do they move in the same direction. At least that's what is supposed to happen in theory.

Where was the government when my 1000 shares of CDNow.com went to $0? What about when my Citigroup preferred stopped paying dividends and fell by 98%? Why aren't they suing Al Gore and the internet for not making my investments viable ? If they are looking out for the multi-zillionaires that were betrayed as Goldman clients, what about the regular investors like you and me ? Presumably, we need the protection far more thang Goldman's informed institutional investors.

Everyone's pissed at Goldman. They made a ton of money, while the taxpayers bailed out subpar banks. Goldman didn't get the country in this mess. They didn't underwrite and package worthless residential mortgages, nor do they even loan money to homebuyers. They didn't need bailout money, rather they were forced to take it by the government. Guess who paid it back first ? So the bonuses and expontential stock grants should be meaningless to taxpayers or shareholders of other companies as long as they don't create harm to society. Is this right ? Am i missing something here ? If i'm not an investor in Goldman or I didn't have to backstop this company, why should i care how much their employees make ? Jealous, of course. A right to be? Probably not.

So let's lynch them. Its popular and easy. We as the government are highly unpopular right now with our ballooning of the entitilement system and taxes. Let's go after the bad boys that are easy to hate. Let's take away their millions of bonuses. That will show them. Show them what exactly ? You think these greedy bankers will stop being greedy. No. They'll just find another sandbox.

Why are we attacking successful corporations for being too successful ? Financial innovation (although I agree that all of this should be regulated) has kept the US as the financial center of the world. This has attracted jobs, international money, and a core strength that other countries have had a hard time replicating. By turning wall street into the EU, i don't think we're helping the country out in the long run.

If Goldman did break the law - they should be punished. Enron and Worldcom should be punished (and were). But from what I have read so far, this investigation seems like a witchhunt. If it proves to be just that, we will have tarnished the most reputed financial institution in the world. But my concern is not for Goldman, rather more about if the government goes too far and tarnishes one of the few industrial advantages that this country still maintains. Let's see how the story plays out....

27 April 2010

M&A - good or evil ?

Hertz announced today its acquiring Dollar/Thrifty for $1.2B. My initial reaction was "Great, rates are going to go up." And they will. I was also reminded of how I really never understood a rental car company's business model. I was in philly a few weeks ago and rented a midsize car for $40 for three days. And that was after $15 of airport fees. No advance reservation required, no cancellation fees (you can just not show up and you won't be billed). How does this business make money? I heard its on insurance (vis -a vis-the Circuit City "warranty" model) - we know how that generally works out in the long-run.
It may be at the business-customer level. But I digress.

It got me thinking about something very personal. Is M&A good or evil ? Is it a net gain or loss for society as a whole ? Being a corporate M&A guy, it behooves me to think the former, otherwise it's like I'm working for Microsoft :). But looking at it from a purely long-term, Atma standpoint, i'm not so sure. Just to clarify, i'm talking about mega-mergers such as the Hertz/Thrifty deal.

First - lets look at it from a shareholder point of view. Everyone's heard the old adage that at least 80% of all mergers fail to create shareholder value. The hedge funds have this right - buy the acquiree, short the acquiror. Synergies are never fully realized, but more often than not, it comes down to simply overpaying. So why does EVERY corporation try to beat the odds? The quick answer is that Management is incentivized to do so. It's much easier to do one big acquisition then try year over year, quarter over quarter, to churn out consistent growth. But in the end, shareholders always lose.

Now - the employees. Initial view is that layoffs are always part of a megadeal. "Cost synergies", while I argue should be last on the list of benefits, are always the first to be announced. It's almost as important as the deal itself. Although short-term, this looks like a negative, it may not be in the long-run. If the company being acquired is poorly run or not competitive, a merger may actually save more jobs than the failing company could do on its own. Its sort of like the concept of "outsourcing". Even though its a net gain to the US (US multi-nationals realize the biggest returns on outsourcing), people are a bit myopic and see the short-term cuts as bad. So my vote here is that its "too close to call."

Now us as consumers. We ALWAYS lose. Even if some synergies are realized, those profits stay within the companies (look at the massive cash balances on most large company's books) or show up as bonuses to executives. Plain and simple - there is one less competitor in the marketplace. The impact varies from case to case. If #1 buys #2, forget about any consumer benefits. If #1 buys #10, it may have a much lesser impact. But the impact will generally be negative nonetheless. Prices generally rise (after an initial integration period where companies change as little as possible so they don't frighten away customers and other stakeholders), and selection generally drops. With Hertz, you're going to get increased pricing all around. Has anyone bought a razor blade under $20 bucks these days? Gilette (now P&G) did a great job of swallowing its peers. Look at consolidating markets; it's hard to find true competition in those arenas. The good news is technology and internet are game-changers that will impact even the most monopolistic industries.

So what about the historical strategic deals ? You know those instances where 1 + 1 = 3 ? The ones that the thought leaders describe as brilliant, or light years ahead of its time ? AOL + Time Warner. Sprint + Nextel. Can anyone name any of these that fit this category ? Any ideas ? I can't think of one.

So who wins? Well, for one, its the bankers and attorneys. The fees generated are sick. I'm all for the market dictating the price for goods and services - but even a free market capitalist like me has a hard time justifying the excessive advisor fees. For two, its management. I alluded to this earlier, they all have employment agreements which pay huge sums of money (in the form of cash, unrestricted stock, in the money options, etc..) for a "change in control." Huge. All in, these fees can easily total 10 -15% of the overall deal size (depending on circumstance of course). Hard to find synergies to compensate for that ? So are they acting in the best interest of sharholders or themselves ?

So all signs point to Evil ? We'll i hate to sound like a cynic, but generally on the mega deals, I think its true. There is so much execution risk and so many wrong incentives by executives trying to "push" deals through that shareholders, employees (maybe), and consumers are generally worse off.

So where is the good ? I think its in upstarts. In new ideas not acquired ones. Businesses built from the ground up, not from the top of the ivory tower. It's the Buffets, and Rockfellers, yes and even the Gates of the world that become respected industrialists by just that. They weren't "Barbarians at the Gate" or financial engineers, or even people that buy companies for a living (present company excluded). So in my opinion, business is good if it creates a tangible benefit to consumers, not just recycled through retained earnings.

So you tell me, is this post good or evil ? Right or Wrong ?

25 April 2010

tea parties and obama-nomics

So despite being a self-proclaimed liberatarian, I haven't quite yet joined the ranks of the tea partiers. Less is more when it comes to government, but there are too many scary people involved in the latest fad (read: palin).

I'll admit, i was charmed by the spell of Obama in 2008. He was so pragmatic, technologically savvy (I was impressed by his grassroots online platform), and seemed to "get" the new world from a new generation's perspective. As small government minded as I am, I thought he would take a practical approach to healthcare, world politics, and the new economy. Plus, I think everyone, including myself, was still reeling from the bluderous Bush years from ill-fated wars to the distarous "relief" in my homebase of Lousiana after Katrina.

A year or so later, I am disappointed in how foolish I was. I feel like a grandma who just bought some magazines in hopes of winning the $1M sweepstakes. Turns out, not only was Omama a Pelosi-esque "tax and spend" extremist liberal, he possessed the dangerous charisma and political knowhow to get bad legistlation passed. And the next generation will be left to suffer the consquences.

I, like most people, think universal healthcare is a good thing. I think all people (not just americans) have the inalienable rights of adequate health and education. Everyone deserves this much. But strong-arming a bill that makes no systemic changes to our broken system and doing so with outright misrepresentations (10 years of revenue and only 6 years of costs in their $1T 10 year estimated costs).

Who will be hurt the most ? In reality, all of us. Small businesses will employ less people or face stiff penalties. Everyone get ready for queues to your internist. Taxes will now see the same hockey stick growth unseen since the dot-com growth projections. Does everyone know that a VAT tax is not optional but imminent? This will happen. Can you believe it ? Obama actually sees Europe as a model for America. Has anyone looked at unemployment, prosperity, and GDP growth historically in the US compared to Europe ? There is no comparison.

Don't believe me that it doesn't work? Compare Texas to California. California is riddled with red tape, beauracracies, and a tax and spend governmental DNA so deep that even the "Terminator" could not change the state of affairs. Where are they now? Businesses can't find exits quick enough. The government is issuing "IOUs" because they are near bankrupt. Nice job Pelosi. Texas, on the other hand, is business friendly, has no income tax, and a free market system. How are they doing in the downturn ? Unemployment 2-3% less than the overall nation. 4 of the Top 6 growing cities last year. For the first time this year, Texas tied California for tops in the number of Fortune 500 companies headquartered in a state (guess at who's expense!). Look at the Austin real estate market; Its propped up by all of the Californians planning their move. The only downside is that the recession highlighted the sucesses of Texas and now people are flocking in huge numbers. Stay out! Collect your IOUs and continue to tax others for your never-ending entitlements.

So Bush doesn't look so bad after all ? No, he still does. I can't put the federal deficit on just Obama. I think Bill Clinton had it right. I know he was fortunate that he governed during the boom times so had a big pile of tax revenues at his disposal. But he did good things in the right way. He protected the integrity of free markets, opened international trade, reduced spending, created welfare reform, and did generally "moral" things with respect to social issues. And never mischeviously or through brute political force that Obama and Bush did. I never thought I would say this, but perhaps we all should have voted for Hilary....Or maybe Ron Paul.

intro to atma

There are many places that detail the philosophy of Ayn Rand and its current day relevance. While her writings have built the foundation of my views, particularly as it applies to the "morality" of business; this is not what Atma attempts to do in its blog.

Here is where I rant. About what I enjoy the most. Business, strategy, the philosphical underpinnings of current events within the context of my core beliefs. What I envision is a southern style gumbo of wsj, unapologetic capitlism, and modern day hinduism. Only you can tell me if this needs slightly more cayenne or that we should just start over from scratch.

How do disruptive concepts and innovative companies such as google or starbucks preach the Rand way of life ? Why do rackets such as the mls and real estate agents need to face real competition like newspapers have ? What is fine line between free market and "american greed" ? These are just a few of my ideas...

John Galt turned his back to society when the unrelenting demands of an entitlement-driven society asked for more. While I generally agree, I take a more balanced approach. Like Alan Greenspan recently said during the aftermath of the financial crisis, he was shocked that his core belief of "free markets" failed for the first time. It seems like they do from time to time (albeit very rarely), and I want to contemplate why.

Hopefully for the few that will read this, atma will lead to open, balanced discussions, new approaches to business, and thought-provoking, philosophical-driven debates about the current market headlines. Hope you enjoy.