09 December 2011

Should Companies Be 'Good'?

I've written on several occasions about good companies(including Starbucks) and their leaders that have both built successful businesses and  spearheaded creative initiatives in the social arena.   This month, CEO Howard Schultz was awarded Fortune's Businessperson of the Year in part because of Starbucks' successful turnaround of the company but also because of his off the field contributions - from fighting Washington politics to building inner city programs.  There aren't too many examples of this kind of bilateral success in large companies; but is it their place?  Corporations are built with the sole purpose of maximizing shareholder value; Do companies have an obligation to improve society?

The argument is that for profit concerns should be focused on just that.  Boards and Management teams have very specific metrics in which they are measured - generally tied to sales, profits and returns.  While no one will argue that a certain level of ethical standards should be employed,  the notion of adding "higher purpose" objectives may cloud the company's vision and execution plan.  Moreover, it may lead it to choices down the road which no company would want to face (i.e. good for company vs. good for society). Corporations should focus on building wealth which will in turn empower their shareholders to thrive in philanthropic arenas;  Bill Gates is the classic example, right ?

I personally think its the wrong perspective.  First, I think companies that are so myopic to only their interests often get blindsided by changes in the market around them.  I think taking a look at the big picture, for example the impact of operations on its local footprint, allows for a broader vision that will help the company adapt to the fast pace changes of today's climate. Second, it can serve to build employee morale and social capital for the company.  Its hard to hate Starbucks when they buy fair trade beans and treat their employees right.  While some of these positives are hard to measure, I think these can be viewed as long-term investment in the business.  Maximizing profit and helping the world are not mutually exclusive.  It just takes a little more effort.

Companies have resources, people, and connections to make society better.  Given their reach and their business savvy, they are better positioned to do so efficiently and effectively compared to governments and individuals.  Given tax havens and huge benefits from global sourcing,  I think there are plenty of built-in subsidies that allow companies to do so without adversely impacting their bottom line.  Nonprofits definitely have a place, but don't have nearly the scope that corporations do.  You see time and time again that capitalistic solutions, such as microfinance and for-profit management techniques, achieve better results than traditional philanthropic models.

Its frankly a shame that you dont see more Starbucks in the big company world.  I like SalesForce's 1/1/1 model;  I have written about some other innovations in the tech space. But these are few and far between.  I wonder how many of the Fortune 500 can truly build sustainable companies while focusing solely on their own interests.  But more importantly, corporations are uniquely positioned to solve the world's problems.  If it were just money that was needed, I might think differently.  So as we sip our $4 Christmas flavored lattes this season, let's tip our hats to the companies that have achieved on both the profit and non-profit fronts.

09 November 2011

Will We Own Anything Ever Again?

With Amazon's announcement of its Kindle Lending Library this week, it got me thinking about the broader perspective of how we now  consume products and services.  Are the days of owning anything gone? We are moving towards a model where we license products at the time of usage instead of buying them.  I wrote about the end of the free business model a while ago; companies, particularly emerging ones, now charge us in new ways whereby we we will no longer own things that we used to.  That might not necessarily be a bad thing, but is that what consumers want in the long-term?  Or are we being forcefully led by businesses that favor recurring revenue streams over of one-time purchases?

Let's stop to think about some of the things we use on a daily basis.  We all hated to pay 15 bucks for a CD.  ITunes came around and offered us easier access to buying music.  Pandora and Spotify give you even more breadth.  Guess what, you stop subscribing, you lose access.  The streaming media trend for  movies, TV, and everything else is certainly the wave of the future will result in no ownership rights for consumers. There are certainly advantages to this distribution model, but it is also changing the game.  Fee for Service, not fee for product.  This might not be a big deal, but what if you want to dial up that old Milli Vanilli track that you thought you had ?   

Even our own stuff is in jeopardy.  For things like pictures and video, we used to just throw in new hardware to back up all of our files.  With files sizes getting increasingly larger, we now offload these services to Amazon Cloud and Mozy.  But what happens if they triple their rate and we stop subscribing ?  Will Mozy burn 150 DVDs of our pictures and send them back to us?  What about all of the content on our Facebook pages or our own blogs?  Do we get to keep it?  How? Aren't these our conversations and data?  Kind of scary to think we might lose all of those insightful AtmaBus articles, huh?  While these services are in their infancy, this is certainly where we are headed.  None of these sites (including this one) make it easy to back up.  Those photo albums don't seem so irrelevant anymore.

 Lets also look at our consumption in the physical world.  For the past decades, we've all lived under the guise of home "ownership."  The reality is that most of us owe more to the bank than we have equity into it.  Either way,  the trends point to a large movement towards renting.  Cars have generally been owned - but new services such as ZipCar may have some legs even outside of metro cities if they can get the logistics right.  We all like to own gadgets, but most of these have useful lives of under 2 years, so its not much of an ownership story.   Most everything else we consume are services that require replenishment after some time.

We're turning into an "asset-light" society in which we pay for things we want right now but end up not owning any of them in the end.  You see similar trends in the corporate world as companies with hoards of cash refuse to invest in the business and embrace outsourced services like SaaS.  Perhaps the era of tweets and a limited attention span has led us in this direction.  But I wonder if consumers will only notice this when its too late or when the switching costs are too high?  Philosophers often say that we are born with nothing and end with nothing, so perhaps we are moving towards a higher moral ground.  Maybe it's just the fading memories and the pictures that we no longer have access to that are all that matter anyway.

26 October 2011

Did Steve Jobs Change the World?

There will be many articles written about the legacy of Steve Jobs for years to come.  An innovator of his time, he will no doubt stand above the rest from many fronts.  Today, I pose a simple question:  Did Steve Jobs change the world? Did he make life better for the masses or was he merely a superior technologist ahead of his time?  Where does his contributions stack up against legacies of other non-business leaders?

As a premise, its hard to argue that Jobs hasn't conquered the business world.   Peers such as Ellison or even Iacocca can't compare to his accomplishments. Business management specialists such as Jack Welch were just that.  Jobs single-handedly disrupted three multi-billion dollar industries:  computing, telephony, and music.   More importantly, he changed the way the entire world lives.  If you look throughout history of business, perhaps a few industrialists such as Henry Ford or John Rockefeller have exerted this kind of influence on society.

Sure Jobs increased our quality of living, but has he provided clean water for the developing world or solved life-threatening problems?  I've written about the lack of tech philanthropists and Jobs is a prime example.  Not to spotlight Jobs' lack of giving, but he is an interesting contrast to Bill Gates who's done less in the business world but much more in the non-profit world.  Whose actions are more valuable?  And where does Jobs compare to other types of leaders such as Gandhi who brought significant social benefit?  

One can argue that Apple has enabled the very poor to participate in the world economy thanks to its devices.  The information gap between the poor and rich or educated and uneducated is virtually gone thanks to the ubiquity of  the internet  and information access.   Sure Apple only played a small role in the development of this ecosystem, but their products are the ones that people touch and know.  They certainly helped flatten the world.   But is this more significant than the Gates Foundation pledge to eradicate malaria?

Part of the answer is philosophical.  Given my Ayn Rand roots, I place greater weight on business accomplishments than most.  I simply think business is the most effective and efficient way to improve society (although I think more direct causes such as microfinance or social ventures are more impactful than traditional for-profits).   I don't suggest Jobs has done more for the world than people like MLK; but if any business leader should make the top 10 list of world changers it should be Steve Jobs. He was much more than an accomplished technologist - he changed the way people communicate, access information, and ultimately live.  Jobs' legacy in the business world will be talked about for centuries to come, but it will be more interesting to see how his accomplishments will be characterized in the history books of the future.

05 October 2011

Can New Companies Scale without Losing their Edge?

Everyone knows that big companies suck.  We hate to deal with them.   Once a company becomes a certain size, they layer on bureaucracy and inefficiency, lose their focus on customers, and fail to react to market demands as a result of things like the Innovator's Dilemma. At the same time, we like the fact that size brings ability to scale, reach a wider audience, and broaden a product portfolio. A topic for another day will address the optimal size of a business, but today I bring this discussion into the tech sector. Since companies today are built differently with a new DNA, will they be able to scale in size while overcoming the big company law of diminishing returns?

As an example, E-commerce is in its infancy right now (~8% of retail purchases) and poised to grow rapidly. Amazon rules this space both in terms of sales and customer service.  They've made it easy to purchase, easy to deal with, and profitable at the same time.  But what happens when Amazon triples in size? Or when they are forced to build brick and mortar stores (which i think they will in 5 years)?  Can they retain their competitive advantage or will they fall prey to the many retailers that lose their edge sauce in times of rapid expansion? 

There is a tipping point where companies start to decline.  A good metric used to be sales or employee counts, but not anymore.  A sheer growth in revenues used to automatically add layers of inefficiency to the process, but technology has changed that trend.  It doesn't matter how many users Facebook adds or how many songs you buy on ITunes because there is very little incremental cost to process and distribute.  Simply put, the internet has allowed businesses to scale much quicker (Amazon does so with 1/2 the employees of Best Buy).  While productivity gains have always occurred in the past, not at the level of today's pace.   Companies can ramp up sales and production in a matter of weeks, but they can fall just as fast.   Just look at the pressure on Netflix, which was Wall Street's darling just months ago.  Barriers to entry have dissipated, technology has leveled the playing field forcing big companies to remain on their toes.  Its good for customers, and ultimately good for companies themselves since they have to focus on competition despite significant growth. 

I also think the culture has changed in today's companies. Concepts such as hierarchy and process are seemingly outdated.  Perhaps its partly a generation shift in mentality from the Gen Y's or the fact that the new workforce is built to be flexible (gone are the 50 year careers at Ford).  Most of these new companies are founded by engineers not corporate folks.  They are more concerned with coming out the best product than the bottom line.  You've seen the perks at Valley companies like Google; tech companies seem to be more youthful and humble than their predecessors.  Sure deep pocketed VCs have funded their teenager portfolio company lifestyles on the backs of bubble valuations, but today's corporations feel different.  Working at Google or Apple will yield you a much different experience than General Electric or even the old tech companies like Dell.    

But like all teenagers, they eventually will have to grow up.  And to really take a bit out of the old world apple, these new concerns are going to have to move into areas where they struggle such as customer service, offline transactions, and enterprise sales. While Microsoft has robbed companies for years with their licensing fees for Office and Windows, for example, try to find an 800 number if you are struggling with your corporate Gmail account. These "freemium" business models most tech companies employ are good for certain niches but not on a large scale.  Its hard to balance a free/ad based offering with a fee-based one at the same time.  Companies like Amazon who have mastered old world logistics and new world technology have a better shot at managing growth without adding too much inefficiency.  Other companies will have to adapt and incorporate old world processes in order to expand beyond early adoption.  Lets hope the next generation of companies have a better shot at avoiding red tape as long as they maintain their focus on product and customers. 

09 September 2011

Is the Bandwidth Glut Over?

We all remember the internet revolution of the late 90's, but perhaps even bigger was the telecom boom.  Billions of dollars went into internet infrastructure companies that increased network capacity with hopes of trying to cash in on a Netscape-type exit.  Then, the bubble burst.  Fiber lay dormant in the ground.  Investment halted.  Demand didn't materialize fast enough as pundits called it a "glut."   But now, in the midst of internet 2.0, have we past that point and entered into an era of undercapacity?  Many of the projected growth levers of the 90's are finally starting to hit mass adoption in ways never imagined 15 years ago while investment in internet networks has slowed.  With the diverging demand and supply characteristics in play, is the bandwidth glut officially over? Is there a telecom boom 2.0 on the horizon?

The Telecom Act of 1996 helped drive the influx of competition and investment into the market shortly after it was passed. The timing could not have been more perfect as the internet hit the masses around the same time.  Deregulation, lofty projections, and loads of investor cash all created a perfect storm for a boom in capacity.  VCs threw money at companies involved in fiber deployment, electronics and software, and telecom-based real estate all in the haste of meeting forecasted demand.  Unfortunately for those investors, most of them failed. Most of them shut their doors, had their assets sold for pennies on the dollar, or got swallowed up by consolidators like Level 3.

The days of build it and they will come are over.  There are very few investments in pure infrastructure companies right now.  Incumbents such as Verizon and Sprint used to sell capacity through wholesale channels are now scaling back and using it for their own networks.  Once it becomes a cost center versus a revenue source, there is always a risk of underinvestment (remember the IPhone AT&T network fiasco?).  As everyone knows, the economic backdrop in which the current internet 2.0 is now flourishing is cautious at best.  Capital Expenditure budgets are being slashed and scrutinized much more than before.  All of these things are leading to a somewhat supply crunch or at least a lag in deployment.  This is at a time when demand is booming. And will continue to do so for years to come.

During the first wave, people were merely accessing web addresses and text files which required very small usage of bandwidth (excluding Napster and porn).  Now that is a fraction of what we are doing today.  Pictures, streaming video, video conferencing, peer to peer, Facebook, ftp sites like Dropbox are all contributing to a huge increase in bandwidth per user. Cloud computing, a concept that centered on demand forecasts in the late 90's, is finally here in a big way.  But this is just the start.

Nobody back then imagined the worldwide explosion of smartphones and tablets.  All of these users are mapping, chatting, downloading apps, and accessing multimedia via the net on their mobile devices. The problem is the internet networks from the 90's were not built for this demand.  There is a mass rush right now to scale wireless networks to keep pace with demand.  Back then traditional TV and telephone had separate distribution systems.  They have all converged onto IP-based platforms (or moving that way quickly).  Radio is next.  That's huge.  Other mediums and industries that we have not even contemplated are sure to follow further increasing demand for bandwidth.  Just look at the skyrocketing prices of data center stocks like Equinix or Digital Realty or the fact that Amazon's server business is approaching $1B in revenue.

Despite the fact that supply might not be keeping up with demand through traditional means such as fiber-based networks, innovation is on the rise.  Huge strides in wireless networks are being made, new mediums such  power and electricity are becoming more plausible, and component costs continue to drop allowing companies to light those late 90's networks cost effectively.  So while the bubble valuations are back in the web-based world, we haven't seen it in the infrastructure realm.  Since history tends to repeat itself, its only a matter of time before we see Telecom Bubble 2.0.

23 August 2011

Strategic Alternatives - A Corporate Exercise in Futility

When a publicly traded company announces that it is exploring "strategic alternatives" for a part of its business, something has gone terribly wrong.  In the short-term, it signals a failed strategy; more importantly, it is an indicator of a company with a lack of a good long-term strategy and management discipline.  There's nothing more destructive to shareholder value than a pattern of corporate restructurings, mergers, divestitures, and other "strategic alternative" type transactions.  They usually fail to deliver what they promise, cost the company tons of cash and lost focus, and generally result in a big waste of time.  

HP got trounced last week when it announced it was exploring strategic alternatives for its PC business, shutting down tablet/phones, and overpaying for a software company.  Huh?  They just bought Palm a year ago and made the blockbuster Compaq deal less than 5 years ago (they also dub the Autonomy deal as "transformative").  HP spent billions on these deals, incurred huge transaction and restructuring costs only to completely unwind them years later.  What was the point all this nonsense? HP shares are trading now below what they were prior to Compaq; wouldn't shareholders have been better off with cash dividends or stock buybacks rather than years of poor M&A and divestitures?  And think about all of the employee mindshare lost and customer confusion created during the decade long period of uncertainty.  Dell is licking their chops right now.

Companies try to get bigger for many reasons and use many business school terms to justify it.  Phillip Morris and PepsiCo did so to diversify away from their core businesses.  What happened years later?  Phillip Morris spun out its food business resulting in a standalone a cigarette company. PepsiCo sold its restaurant business and is under fire from shareholders to spinoff many of its non-core assets. More recently, Kraft announced it will split into two companies only months after it completed the Cadbury deal.  I thought bigger was better?  And think about it, can Phillip Morris ever diversify enough from being a cigarette company? 

Slow changing companies that seek growth around the trenches of its core generally are more sound for the long-term as they effectively look at the business beyond fiscal quarters.  Exxon, for years, has caught flack by analysts to invest in high-growth renewable energy and alternative sources; its response has always been: We're an oil and gas company, not a solar research company.  P&G has always stayed in the consumer staple business, only making acquisitions as product or geographic extensions.  They've rewarded shareholders well in the long-term; and further, they've created a culture of stability and a focused long-term vision along the way.

Besides the advisors, corporate executives and others that stand to gain from large scale corporate transactions, there is often very little value created besides a week of headlines. When companies listen to Wall Street more than its customers and employees, it usually leads to myopic thinking and superfluous deals.   Sometimes the best policy is to do nothing and focus on your core business.  So when a CEO wants to be transformative, he or she is basically telling you that they have no confidence in what they are doing and betting the farm on something they are even less certain about.

07 August 2011

Patent Lawyers Gone Wild!

The modern day patent system has no doubt provided substantial societal gain throughout the years.  Government grants of exclusivity arrangements have encouraged R&D, promoted invention, and protected new ideas.  As most things that have political fingerprints, however, it seems the very system that was supposed to keep the public from being held hostage by large corporations is now helping them create barriers to entry.   In the current mobile patent war, for example, its the richest companies that gobble up patents to stifle competition through through lawsuits (yes Apple I mean you).  Is innovation being left in the hands of the few with the largest war chests and most lawyers on the payroll? 

The patent infringrement assault on Android is bloody.  Apple is suing every handset manufacturer they can think of to essentially take the guts out of the free mobile OS.  HTC pays Microsoft $5 per handset sold (Microsoft makes more from HTC sales than their own Windows phones).  Samsung cannot sell their Galaxy tablet in Australia thanks to Mr. Jobs.   Mobile "patent troll" companies like Interdigital have tripled in price on speculation that they will get sold to the highest bidder.  Remember Motorola?  They are back from the dead sporting a 17,000 patent portfolio.  Some of these companies actually have more attorneys on their staff than any other discipline.  I've never seen a case when this is a good thing for the general public (read:  Congress).  Are these R&D havens or lawyers gone wild?

Its one thing if Apple had some sort of super patents that companies were blatantly stealing.  If this was the case, Apple wouldn't have the need to drop nearly $3B to purchase Nortel's patent assets (incidentally with other "consortium" monopolists like Microsoft) and continue their shopping spree.  They are filing claims for patents around the fringes, ones they acquire after the fact, or even ones they might not be using or so insignificant to the overall OS.  Apple just became the second most valuable company on the planet, why do they see the need to stoop to this level?

Simple.  The Iphone represents almost half of Apple's revenue.  Android is inching towards a 50% market share in smartphones.  What they spend on patents is a fraction of what they can defend by taking the largest competitor out.  And of course, consumers will suffer the most by reduced choice.  It is fortunate that Android is backed by deep pockets (Google) who can afford to fight back, but what if they weren't ?  How would they fight back against Apple's $80B cash balance? Why can't Apple just continue to disrupt the market through innovation instead of focusing on legal brinksmanship? 

We saw similar games in the pharmaceutical industry.  Most of the blockbuster drugs that came out were brought by a limited number of companies with vast resources.   And as the 17 year patent period would expire, they would work the system by making minor tweaks to their drugs to extend the patent life.  You saw very little innovation coming from smaller players who don't have the resources and knowledge of the system to compete.  There were rarely any development firms or smaller companies that could bring wide scale drugs to market in large part because of the muscle of the big boys.  And remember how much your prescriptions cost as a result?

I don't want to imagine a world where my only choice is Apple and Microsoft (didnt we have that in PC-land?) or where the only drugs being developed are by 3 or 4 firms.  I continue to hope the patent system will favor inventors like Robert Kearns in Flash of Genius who miraculously defeated the Detroit automakers that stole his design.  With patents being so easy to file for sophisticated lawyer groups, however, its the large companies with vast resources that are being aided the most.  But lets hope in the long run, things work out the way they should  A warning to Apple:  just look at Pfizer now -- they are nothing more than a large cash balance.

22 July 2011

Is there a Carnegie 2.0?

Self-made billionaires in the US have historically had a very strong track record of bringing significant societal change through philanthropy. The likes of the Carnegies and Rockefellers brought libraries, higher education, and public health to the masses. In recent years, the Gates family is not only eradicating diseases, but also more importantly convincing the uber-rich to take the Giving Pledge (1 year later ~70 have taken it). So what about now? With new billionaires created everyday through the monetization of internet-based ventures, are the new money kids filling in where they left off? Aren’t the Gen Y’ers more charitable than their money-centric predecessors?

While the next Vanderbilt has not yet emerged, I like how the youth are building charity into their businesses. Not as outright philanthropic concerns but through incorporating the values of “doing good” into everyday transactions. Tom’s Shoes and Warby Parker have brought the concept of Buy One, Give One into the mainstream. I wrote about large companies like Starbucks that employ higher purpose principals compared to its older rivals. For profit microfinance institutions and venture philanthropy, despite their problems, are expanding their reach. A pessimist may call these marketing strategies, but at the end of the day, they are helping others on a daily basis when other similar for-profit businesses are not. By leveraging traditional business channels, these efforts are frequent, efficient and effective.

Pure play charities such as Kiva or DonorsChose bring the sophistication of tech market exchanges into the non-profit sector. Others such as ConvergeUS and HistoryPin bring about change through social networks. Though I applaud these creative tech efforts, they are small in the grand scheme of the world problems. Certainly in the Valley, amidst of all of this new money, altruism, and technology, there would emerge the next Andrew Carnegie, right?

Not yet. Of Barron’s Top 25 Givers of 2010, only Ebay’s Pierre Omidyar could be considered a new tech entrepreneur. Since Bill Gates, no one from the next generation has taken the helm of leading world philanthropy. Perhaps we’re too early in the cycle (people are too busy filing for bubble IPOs). Perhaps Gates is enough for now (some estimates peg the pledge’s value to eventually exceed $600B). Perhaps a centralized institution is no longer required thanks to technology as individual efforts can yield substantial results. It will be interesting to see who, if anybody, succeeds Bill Gates.  Although I'm surprised at the unusually small number of headlines, perhaps even in philanthropy, the game has changed.  With the world flattenting at a quicker and quicker pace, buying shoes just might be enough.

01 July 2011

It's not a bubble

Its different this time aound. There's real revenue behind these companies with proven business models.  Social media, ecommerce, and advertising are now mainstream and have matured significantly from the late 90's.  Even if many of these points are true to a certain extent, none can justify the valuations that are currently in front of us.

LinkedIn is trading at about a $9B valuation, Zynga and Groupon both filed for IPOs as high as $20B.  The beauty of each of these (along with the others) is the fact that none are profitible yet.  Some like Pandora say they won't make any money in the "forseeable future."  Analysts, for example, justify LinkedIn's price target based on 65X 2014 EPS and the 100M users they currently have.  We're paying on eyeballs again; welcome to Netscape 2.0.

Why are investors making the same mistakes as they did in the late 90s?  We are not myopic enough to forget the worthless stock notifications (especially atmabus) from 15 years ago.  Even smart money is getting in at these lofty valuations; This week, Kleiner Perkins invested in Square at a $1B valuation.  Some of the first bubble carnage is still on the road (MySpace just sold for 1/16th of original price).

These companies are growing and showing relevant top lines now.  People do spend money on virtual tractors ($850M in 2010).  As i wrote about a year ago, the days of all things free on the net are no more as companies now monetize what they were afraid to in the past.  Management teams are more sophisticated and actually operate businesses for profit (except Twitter :).   At these valuations, however, one has to assume market transformative disruption.

Google killed newspapers and took a huge slice out of traditional ad dollars.  Amazon eliminated bookstores and cd shops.  These were huge industries that are no longer on the map.  Will Zynga kill off Electronic Arts or Playstation?  Groupon will take a google-sized cut from company ad spend?  Unfortunately, these days, the incumbents are much more savvy that they were before.

NBC/FOX (and others) established Hulu because they didnt know how to play in the nascent streaming space with little intention of making any money from it.  They now want to dispose of it so they can create their own meaningful net revenue streams.  They still own the content that everyone wants so they can charge what they want. Just ask Netflix.  Newly traded Homeway, despite its unique niche, will not replace hotels. Yet it trades at 1/3 of the value of Marriott and Starwood already. Cloud software packages might have interesting platforms but will not replace Oracle who is already embedded in most large corporations. 

Don't expect all of these high flying startups to take down established players to the extent their valuations imply.  Incumbents are not surprised anymore about people spending more time on the net or buying things recommended by Facebook friends. As i've always said before, the internet is merely a new distribution channel not a new business.  Although my demeanor would be different if I got in on the IPOs, i can't shake the time warp feeling of 1998.

16 June 2011

The Absurdity of Unions

I generally avoid politically-charged topics that don’t directly relate to business, but a recent Business Week article about the US Postal Service reminded me of a controversial topic that impacts all of us: organized unions. Although once essential to protect worker rights, modern day unions have become irrelevant, destructive, and a microcosm of all that’s wrong in the current debt laden climate.

The article talked about the imminent demise of the postal service system and how little can be done to stop the train wreck in large part because of the labor contracts with the union. It’s unusual for anything from Washington to done on time, but the report was released 18 months early because the situation had gotten so bad. As the walls of the post office are crumbling down, the unions have extracted more and more for themselves. They point to a “win-win” by their recent negotiation which yielded guaranteed raises for the next seven years and forbids any layoffs. Win win ?

The main reason the postal system is in shambles is precisely because it can’t right-size to current market conditions. For years, unions have negotiated to the point of an unsustainable cost structure which does not allow them to shed locations or any of its 500,000 FTEs.  Meanwhile, the demand for their services continues to decline.  The unions are well aware of the imminent demise and are angling for a taxpayer bailout. Given the government’s recent track record, I see this as an almost guaranteed outcome. It seems this may happen as early as 2012.

The frustrating thing is that there are solutions. The three year study explored countries throughout the world for ideas that worked. Most privatized, modernized, expanded digital services, and outsourced offices to third parties. In Germany, Deutsche Post has turned around so remarkably that it actually began making acquisitions (DHL). The irony is laughable – the US has now become the model of unsustainable socialism while Europe has taken a more capitalistic approach to solving real problems.

The auto bailouts were another sign of union carnage. From start to finish, the talks were tipped in the favor of politically powerful unions. The government threw out the bankruptcy rules and ultimately handed over controlling interest to the unions (they became the largest shareholder in Chrysler and second behind the federal government in GM). What happened to the Ma and Pa with GM bonds that were supposed to be first on the capital stack? Gone. And for what purpose? We actually rewarded those that caused the problem in the first place (too high labor costs compared to Japanese competitors). And the bankruptcy rules were completely ignored in the process? Welcome to the alternate universe.

The list goes on and on. State and local governments are in shambles thanks to unfunded liabilities negotiated by hard charging unions.   The paltry 401(k) company contributions will not make a dent in most retirement requirements – in large part because of the unfunded liabilities corporations continue to pay to retirees. The unions are simply too powerful to address the real problems we face. Instead, the Bidens of the world focus on immaterial items like website optimization (yes that was top of his list) which won’t solve our huge deficit gap. We all suffer as a result. Tax increases, cuts in services, debt for many generations to come.

When I think about how much damage has been caused by the short-sighted minds of the union, it takes me back to my free market roots. Capitalism is simply the most efficient allocation of resources unfettered by the cloud of politics, power, and gluttony. For all its shortcomings, the other side of the pendulum is far more grim. These golden packages negotiated by unions have no relation to market conditions and will ultimately be paid by all of us one way or the other.  We don't fix the problems, we just give in to those that are responsible.  Their solution to solving the postal service problems: stop the internet. I’m not kidding; just ask the postal employee whose only job is to convince large banks to continue sending out paper statements. Help. Someone please bring capitalism back.

29 May 2011

Mark Haines and Individual Contribution

I like to write about companies that bring disruptive innovation, societal value creation, and a new approach to the market in which it operates.  This week's sudden death of veteran CNBC anchor Mark Haines reminded me that this can also true of individuals.  Through his powerful on-air persona and singular fact-finding focus,  Haines brought the closed doors of wall street to main street and helped create the money-minting machine that is CNBC.

Certainly great timing helped Haines leave his important legacy.  When CNBC started 20 or so years ago, cable television was at its infancy and had yet to experience its explosive growth.  The stock market was at the start of the longest bull run in its history.  Thanks to technology and electronic exchanges such as NASDAQ, the barriers to entry for individual investors dissipated.  Game changing phenomenons always need a bit of luck and the success of the first 24 hour financial news channel was no exception.

Before CNBC and Haines, the business of investing was limited to the elite and wall-street insiders much like the hedge fund industry is today.  Mom and Dad in Kansas relied on their low-paid financial broker for information and advice as there were far fewer information outlets.   Not only did CNBC bring boardrooms and stock analysts into millions of US households, it also made it easy for main street to understand markets, business, and global economics.  Despite criticism that the network was an "extension of wall street" throughout the years, Haines was always the spokesman for the average investor.  He grilled CEOs and political figures to no end, repeated questions until a direct answer came out, and explained somewhat complex concepts in plain English.  And he was fun on the air - something very important to CNBC's growth.  Haines was also very well respected by the markets, somehow building a bridge between Wall Street and Main Street.  Upon news of his death, the NYSE held an impromptu moment of silence - something unheard of during the bustle of normal trading day.

Haines, among the other early anchors, built a cultural phenomenon that made financial information ubiquitous, entertaining, and accessible.  NBC has been handsomely rewarded for itt.  When acquired by Comcast last year, NBC had a ~$30B valuation.  It's hard to get detailed figures on what CNBC represented individually, but it has the second largest cable audience of the network.  Some reports pegged CNBC's value alone to be $6B-$7B.  Much like ESPN did with sports, CNBC has built a strong cable presence and unique market position that will be virtually impossible to match (just ask Fox). 

As companies build innovative concepts to market, its important to remind ourselves of the contributions of the individuals leading to that success.  Certainly there would be no Microsoft without Gates or Apple without Jobs.  In many instances, it is single individuals that create a disproportionate amount of value for companies.  It sometimes takes a tragic event, such as Haines' death, for us to step back and acknowledge this fact. 

19 May 2011

Google Deals - A case for and against M&A

The Microsoft-Skype announcement reminded of one of my first posts  in which I wrote about the perils of large scale M&A.  While big deals are value destroyers, there are some instances where transactions make sense. When can an acquisition create meaningful gains to both companies as well as consumers in general ?  Let's look at Google, a case study for everything these days, including the merits of dealmaking.

In 2005, Google made its first foray into mobile with the acquisition of a small startup called Android.  Fast forward six years later, Android has now become the top smartphone OS with a 30% market share.  There is no question Android could not have done this on its own.  The pie grew and we as consumers finally had a viable alternative to the closed- system Iphone.  Wins all around, right?

That same year, Google also invested in Dodgeball, a location-based social network.  Similar to Android, the founders were brought onboard to integrate the company into the Google ecosystem.  This time, the Google experiment flopped.  The company ultimately killed the service altogether; and in early 2009, the founders of Dodgeball left to create an exact replica company.  FourSquare, one of the hottest tech properties, now boasts a 7.5M userbase (and growing) and is frequently sited as a potential IPO candidate.  

How could the same company buy two different startups the same year, employ the same execution strategy, and have such divergent results?  One blossomed into a transformative software platform while the other quelched a new idea that ultimately thrived on its own.

With Android, there was a defined, specific goal in mind.  Google wanted to give away a mobile OS to layer in its search, so it bought Android.  There was no need to create some new product or capability that didn't exist.  There was very little execution risk- Google simply needed to throw more money at the nascent company, leave it alone, and take it to market.  As we all know, large companies don't accelerate innovation or product development  (not even Google), but they provide the thing that startups need the most -- money and distribution.  How else could Android have forged partnerships with all the major handset makers and carriers in such a short amount of time?  Given the size and savvy of its competitors (Microsoft, Blackbery, Apple), they might have missed the window of opportunity had it chose to go alone.

What was Google going to do with Dodgeball? They knew social networks were a threat but didn't know how to combat it (and still don't for that matter).  Buying Dodgeball got them "in the game", but there was no clear cut strategy for what to do with the company.  Dodgeball didn't need distribution the way Android did, they simply needed time to grow.  Android thrived not because of what Google did with it, rather what Google brought to the table.  The Dodgeball deal was an attempt to mask a larger company weakness with no real rationale for the deal itself.

Successful deals happen when there is a simple well defined strategy and a predetermined endgame.  It needs to be easy to execute and the expected value of the good needs to outweigh the negatives of big company inertia with little risk.  Distribution plays are the most common.   Kashi cereal is widely available  thanks to Kellogg.  I bought a Goose Island draft on my last trip to New York because of the deep pockets of Anheuser Busch.  Selling a new beer to a bar that is already a customer is not rocket science. 

If company executives can't explain why they are doing a deal and how they will execute it in 20 words or less, it's probably not one worth having.  Ballmer probably needs 12 Powerpoint slides to outline the Skype rationale, whereas its far more clear what Nestle plans to do with the Austin-based Sweet Leaf deal it announced last week (say it ain't so Leaf).

21 April 2011

The Franchise Misnomer

In the wake of the largest franchise IPO ever last week (Archos), I was reminded of a topic that I've pondered for quite some time. With franchise chains being the easiest way to get a business jumpstarted, it's no wonder that there are almost 1M locations representing $1T of sales in the US alone. No MBA required, no resume massaging; just a roll-up the sleeves attitude and a propensity to work hard is all you need to sign up. But are franchisees actually entrepreneurs? Do they run their own business or are they merely buying themselves a living?

Let's look at the dynamics of the largest franchisor on the planet, Subway, as an example. Subway makes it easy for new locations: a very small upfront fee ($10k or so), soup to nuts setup and management services, and a straightforward royalty model (take ~12% off the top). This looks great, right? If atmabus wanted to leave the corporate world for business-ownership, this seems to be a low risk option right? Let's look a bit closer of who would actually "own" this business.

Subway controls more aspects of this endeveour than atmabus would. In addition to the branding, Subway mandates your procurement for everything from napkins to lettuce (at a profit for corporate). They dictate how the store should look, how much you need to spend on improvements, and mandate computer and accounting systems. Margins and pricing is controlled at some levels -- most franchises actually lose money on the $5 footlong (but have limited say in what they can do). Sure Atmabus would manage some parts of the operations; but he would not control supply chain, advertising, pricing, and product offerings under this franchise agreement. So what's left?

When you think of entrepreneurship, you think of control and unlimited upside potential. Here you get neither. Given your sales are limited to your foot traffic in a specific geography, the only way to scale is to buy more franchises. Couldn't Subway technically "own" the stores and pay a management fee to operators and accomplish the same thing? This model feels more like a distributor relationship versus a B2B one as advertised by the franchisors. Remember the Coca-Cola bottlers? Look who owns them now.

Certainly new franchisors will command less control and costs than established players like Subway. But ultimately franchise models tilt in favor of the corporations. Incentives are misaligned; the $5 footlong promotion benefits franchisors (Subway sells the ingredients) at the expense of franchisees. Most hotel chains are moving away from ownership to franchise models because their is frankly more profit and less headache for them through the arrangement. As long as their are people willing to live on site and work 7 days a week, they can continue along this path.

Don't get me wrong - there is money to be had for franchisees. Many make a decent living doing them. You just have to do it in a big way since so much of the margin is taken by franchisors. If you get in on the ground floor of a bustling one, you might be able to negotiate a sweet deal. Plus just the mere fact that its considered a "business" gives owners a path to tax benefits associated with ownership. Given the limited control, upside, and autonomy for franchise owners, its hard to consider them entrepreneurial ventures.

05 April 2011

Are You Undervalued or Overvalued ?

There is a long standing debate about whether or not the stock market is 'efficient.' In a perfect world, forces such as the free market system, access to information, and the law of supply/demand would price stocks at their intrinsic value. But as we know, the world is not perfect; stocks tend to be either overvalued and undervalued. Can this same logic apply to jobs and compensation?

In a vacuum, the value created by an individual would guide his or her salary; but it doesn't happen like that in the real world. One's paycheck generally have very little to do with their societal worth or even the intersection of where supply meets demand. Further, similar to daytraders in the stock market, does this inefficiency create a business opportunity?

The most overvalued job that comes to mind is a real estate agent. If you strip it down to its basest level, a real estate broker gets 6% of the value of your home to open your front door. That's it - that's really all they do. Contracts are standardized by the states, risk is mitigated by escrow agents, and frankly the negotiations really lie in the hands of the buyer and seller. Real estate agents do not create demand for your house; they simply post it online to their proprietary MLS closed system. Because of this monopoly, they have been able to keep their fees artificially high. Sure sites like Zillow and FSBO have brought fees down slightly, but there is a opportunity to bring this function to its true intrinsic value. 6% of the housing market - pretty big market size for a hungry entrepreneur.

What about wall street bankers? Goldman Sachs gets gobs of money for advising companies such as AT&T on whether they should buy T-Mobile. Do bankers have more industry knowledge than the brain trust at AT&T? Has the AT&T CEO not heard about T-Mobile ? Is AT&T's legal staff and M&A teams incapable of leading a transaction of this magnitide? If the answer is no (which i think it is), how can the market allow such enormous fees? At least in this case, there is no 'closed' system, but certainly it leaves you to wonder. Don't get me wrong, I see a huge value in the investment banking/brokerage function; its just the value significantly diminishes as the sophistication of buyers and sellers increases. This is precisely why smaller investment banks (usually started from ex-bulge bracket folks) are growing at such a fast clip these days.

On the other side of the coin, what about undervalued jobs? Certainly folks such as policemen and teachers come to mind. The most underpaid job on this planet is a stay-at-home parent. They bring in a whopping $0 and have the uneviable task of shaping our children's future. America's CEO, Obama, only gets paid $400k for the most important position on the planet. Sure, budgetary constraints of government/non-profit limit salaries of high worth positions; but how sustainable is this in the long-run? There are also many instances of this in the for-profit world.

Accountants are underpaid, overworked, and are in short supply and high demand. Yet their salaries are the lowest in the business world. The Big 4 can't find enough talent to fill open positions (PwC spent millions in a desperate attempt on LinkedIn), yet they continue to underpay and experience high turnover. Another example is the primary care physician. Demand continues to soar, supply is falling, and wages are flat at best. Without accountants, we couldn't rely on financial statements; without PCP's, we wouldn't be healthy. Not exactly low value positions; These fields will either face a major restructuring, a significant drop in quality, or a healthy rise in fees.

You would think money always follows where the world is going and intersect at the point of equibrium. There seems to always be external factors that create a market imbalance between compensation and value creation. For example, the value of atmabus' business insight relative to how much he gets paid for it is grossly imbalanced. So are you undervalued or overvalued? Where else are there market inefficiencies to capitalize upon?

15 March 2011

Cheers to the great american startup

The American beer industry has long been known for its deep roots and rich history. From the Midwest boom years to the more recent ubiqitous TV brand building, the industry has long had visibility in most households. Despite all of this, it's ironic that in this current day, the largest American beer company is only 25 years old, founded by a Harvard MBA, and runs like a startup.

Boston Beer Company's (aka Sam Adams) roots dates back to an 1860s family recipe used in its most popular Boston Lager. It was founded by Jim Koch in 1984 with the simple goal of bringing quality craft brew to the American public. At the time, microbrews were non-existent, so it was virtually impossible for him to catch the attention of distributors and bar owners; Koch literally brewed the first batches at home and drove bar to bar with samples trying to convince establishments to serve the local beer on tap. Growing first in the Boston area, it gained national prominence by winning the top spot in the Great American Beer Festival just a few years later. The rest is history - it amassed $500M of revenue in 2010.

Despite having less than 1% of the US market, Sam Adams is the largest remaining American brewer. Budweiser sold to Inbev (Brazil/Belgium), Miller to SAB (South Africa), Coors to Molston (Canada). As these players commoditize the industry by getting bigger and bigger, Sam Adams takes the exact opposite approach. It remains very localized, differentiatied, independent, and driven by passion for quality. Annual trips to Germany are made for its premium raw materials; Sam Adams kept production local and acquired the brewery locations to ensure consistency (95% of the beer is brewed in its company-owned breweries in the US). Koch owns 100% of the voting stock and has somehow built a strong foundation in the midst of significant pressure from industry consolidation.

Sam Adams revolutionized the industry by its success. When Koch started, there were no US craft breweries. Now there are roughly 1600, representing almost 10% of the market. They frankly put quality beer on the map - No longer were tastings and premium ingredients reserved for wine aficianados. Koch also supports the industry despite potential negative impacts to his company. It sold 20,000 pounds of hops to competitive craft brewers at cost during a 2008 shortage; it funds new brewers (and other new businesses) through a partnership with a microfinance organization.

Its refreshing to see a successful American startup stay true to its roots despite its rapid growth. Sam Adams has successfully created a new concept in the midst of mass commoditization, led the industry in innovative products, remained independent, and kept production here in the US. So next time you are in an airport, have a cold Boston Lager in appreciation for the great American startup; its a shame that Obama chose a foreign beer (Bud) at his reconciliation "beer summit."

24 February 2011

Taxes and Entrepreneurship

I read an interesting article this week in Inc. magazine which suggests that there is no correlation between a country's tax environment and entrepreneurship. This theory runs counter to the common belief that profit incentives drive innovation and new enterprise. Isn't this the crux of capitalism - self-interest creates economic value?

Meet Norway - the exact opposite of the US. A country where there so many taxes that even Nancy Pelosi would say no: 50% on income, 3 times US payroll, 25% sales, and even a 1% "wealth tax" on total assets on people making more than $120k per year. Stifling for business, right? Apparantly not. Per capita, there are more entrepreneurs than there are stateside. The rate of startups exceeds the US and the gap continues to widen. Government programs seed startups in Norway because of its large coffers. And Norweigan entrepreneurs don't seem to mind paying the lion share of their profit to support the greater good.

There are many reasons why according to the article, but i'll discuss a couple relevant to this topic. For one, people don't worry about education, health care, and retirement. All bills paid by Uncle Sven. Think about the contrast in the US; most of us are tied to our corporate job specifically because of these things. We'll stay in suboptimal situations rather than launch a risky new venture where no health benefits exist for example. Also, entrepreneurs are not driven purely by money. They want to build businesses, their reputation, and make a mark on society. Sure money helps, but successful entrepreneurs have loftier goals in mind. Warren Buffett and Bill Gates didn't start businesses to make millions; it was the effect of them building great businesses.

Are we jeopardizing the long run for short-term wins? By not providing the necessities, are we incentivizing corporate drones at the expense of the next game changing industry? Is our money-centric culture preventing us from seeing the bigger picture of what business is designed to do (such as raise the standard of living for its residents)?

I'm not convinced that socialism is a business incubator at all. I think Norway has succeeded in spite of their tax code rather than because of it (due to factors such as its net exporter situation, small size, etc...). How many Googles or IBMs has Norway produced? The US simply has done it for a longer period of time and on a much greater scale than any other country in the world. And I do think free enterprise is the most efficient vehicle to change the world for the better. But it raises an interesting question, do we undermine the power of entrepreneurship by focusing only on the wallets of the entrepreneur ?

11 February 2011

The Innovator's Dilemma

With internet valuations back to the dizzying days of 1997, Huffington Post's sale to AOL this week for $315M actually seems reasonable. In justifying the deal to its audience, Arianna Huffington pointed to the "Innovators Dilemma" theory which states that large companies, no matter how successful, generally fail to adapt to the ever-changing business landscape and market trends. The primary reason stems from the fact that incumbents tend to focus on defensive tactics as they do not want to cannibalize existing sales by investing in areas that threaten their market position. In this case, AOL and HuffPost seek to change the face of news distribution by aggressively growing a free, open network-based media model where established players like WSJ or NYT, who are aggressively charging for access, will not.

In the internet age, its easy to see the Innovators Dilemma in play. Blockbuster filed for bankruptcy given the rise of Netflix and Redbox. Newspapers and magazines faced a quick, violent death. Bookstores and CD shops are no more thanks to e-commerce. Do you think all of these big companies failed to see the rise of the internet ? Its one thing for mom and pops to fail to adapt to the new Walmart in their locale given their limited resources, but how could Blockbuster not become the first streaming movie company? Did the handsomely paid executives miss what everyone else in the world saw ? Not at all. Their myopia handcuffed them from changing their distribution model, pricing, and cost structure. With quarterly pressure to prop up earnings, they failed to react to the bigger picture at hand. Instead of embracing change, they tried and failed to put up artificial borders around their existing business models. As they ultimately tried to cope, they were too little too late.

Long before the internet, this trend existed. American car companies almost went belly up (well 2 of the 3 did) with the Japanese invasion in the 1980s. Rather than focusing on fixing their business model, American Airlines tried to prevent Southwest from entering Dallas (but the Wright Amendment failed to stop Southwest from becoming the largest market-cap airliner). Macy's and other department stores, comfortable with their fat profit margins, failed to adapt to consumer's desire for lower priced apparel. Target was happy to oblige.

Its hard to blame the large companies from doing this. The emerging trend may not pan out. They might not execute as effectively as their competition. They are making good money, so why rock the boat? Thousands of reasons to look the other way and most of them justify it to themselves. This is why most innovation and true breakthroughs come from new players who have nothing to lose. So who's next? Cable television? PC companies like Dell ? Microsoft? Oil companies ? It's definitely an interesting question - one that will be answered by disruptive ideas and successful entrepreneurs.

What's ironic about HuffPost's argument for the deal is that AOL itself failed to adapt to the death of dial-up. It's easy to "reinvent" your business when its already in a downward spiral. I would have loved it if she was just honest and said "would you say no to $315M ?"

28 January 2011

Goldman's Heart

It's easy and perhaps popular to deride Goldman Sachs for its role in the financial crisis, excessive employee compensation, and its overall Gordon Gecko style of arrogance. Besides peddling M&A advice and Facebook stock, however, they do some pretty noble things that most don't see. Their program, 10,000 Small Businesses, is a commendable effort that just completed its first year anniversary. It's part microfinance, part philanthropy, part business consulting; all methods that I passionately believe capitalism should be deployed to make the world a better place. Sure, there's a PR element to this that Goldman stands to gain, but for $500 million, there are better ways to attain that if that was their only endgame.

I've written about Endevour's VC- style approach and the limited microfinance efforts in the US; Goldman's 10,000 Small Businesses addresses both of these areas in a much bigger way. The goal of the program is to grow small business ($150k - $4M in revenue) into sustainable concerns with the ultimate goal of growing employee bases. They look at scalability, ability to gain from the program (ie. people with limited business background), desire to hire, and difficulty in capital raising. They're committing $200M to education and supporting community colleges and other institutions and $300M in capital through loans and grants.

Through partnerhips, they've built a whole ecosystem to do this. Entrepreneurs go through a 20 week crash MBA course designed by schools such as Wharton at their local community colleges. Grants and micro loans come primarily through non-profit local institutions. They partner with local nonprofits to provide support throughout the process. Their advisory panel, led by Warren Buffett, reads like a Who's Who in business, provides unrivaled guidance to small businesses. Goldman has built an infrastructure that leverages its national reach while customizing each effort to the local community affected. They target areas where they can make the most impact as evidenced by their recently announced $20M effort in the New Orleans area. Where else can the owner of Mel's Chicken Shack get access to capital, a Wall Street education, and local support to grow their business?

So the first year has yielded modest results. According to a recent Fortune article, they've invested in 50 businesses and educated 100 business owners, and spent $60M so far. They've kept their eligibility standards high to ensure yielding the desired results (scalable companies that grow employee bases). It will be interesting to see how the program matures and how successful these small businesses ultimately become.

I love to see capitalistic-based companies deploy their know-how into the non-profit space. Let's hope 10,000 Small Businesses is a wild success and dramatically strengthens the small business community in the US. And who knows, perhaps they may see a good opportunity to invest in a small opinion-based business blog (just need $150k more revenue to qualify).

17 January 2011

the new new walmart

Everyone knows about the impact of Walmart on our daily lives. They've built the worlds' largest retailer by cutting out middlemen, building the smartest logistics system on the planet, and giving people what they want in a one-stop shop. They're the largest private employer in the US, and have lowered the cost of living for everyone. Certainly there have been many small businesses adversely impacted along the way, and there's probably an "atma-esque" debate on whether the net impact on society has been positive. I do have an opinion, but perhaps for another day.

For the first time, I feel the Walton clan faces a strong threat to its business model. It's not from anyone obvious; rather I see true competition from the company that I love to write about, Amazon.com. They're positioned for growth at the expense of traditional retailers like Walmart; but more importantly, they've built up their operations to take advantage of moving consumer trends while leveraging retailer best practices.

For one, e-commerce is booming. While only representing 5% of total consumer spend today, its growing at 15% per year. Walmart's only growth options is to build stores and take share away from competitors; Amazon doesn't necessarily have to do that to grow. But they are. Amazon's growth rates have been around 30%, which means they are not only taking their fair share from the Walmarts of the world, but from other ecommerce companies as well.

Walmart grew their business by increasing categories and products. Their fledgling grocery business now represents more than half of their US revenue. Similarly, Amazon continues to expand their product base every day (through acquisitions and on its own) to capture more share points. In the last couple of weeks alone, I bought diapers, high-end electronics, and air filters -- all delivered within 2 days, and all priced below every online and offline competitor i could find. Low cost, numerous offerings. Definitely the walmart way. What's even more remarkable is that they are not limited by shelf space like Walmart is; they already offer thousands of more products that Sam Walton does.

Third, and probably most important, is they've build a world class distribution system that rivals (and in some cases beats) Walmart. They've devised a clever hybrid distribution model that allows them to stock the most sold products and tightly control their third party delivered products to ensure delivery times and good in-stock ratios. Their server farms are so good that they lease space to smaller tech companies. At one point, Toys R Us and other retailers used Amazon to process and deliver their ecommerce sales (i'm not sure if they still do). They're better at brick-and-mortar style operations than most people give them credit for. This will help as they continue to scale.

Amazon has built a Walmart type back end, a front-end platform worthy of the #1 e-tailer status, world-class customer service, and prices that competitors can't match. They continue to grow fast without having to invest in traditional retail infrastructure and are taking a greater share of household purchases much like Walmart did during their growth years. And in the coming years, as ecommerce growth rates slow, don't be surprised to see Amazon.com stores in a city near you. While e-tailing is still in its infancy, there is no need to. But to me, this is a long-term growth strategy. It's easy to move into bricks and mortar when you have Amazon's infrastructure. It's more difficult to become a real e-commerce player if its not in your company DNA.

It's hard to crack into mass merchandising. I applaud Jeff Bezos for looking ahead many years out when building Amazon. He didn't want to just succeed in e-commerce; he wanted to build the next world-class retailer. Even though Amazon's $25B pales in comparison to Walmart's $400B of revenue, Mr. Bezos' company is poised to make a stronger and stronger noise in retailing, one that will eventually be heard in the tiny town of Bentonville Arkansas.