amazon

Amazon and Apple Business Models

 

Amazon “loses” money, Apple makes tons if it. And yet, Wall Street prefers Jeff Bezos’s losses to Tim Cook’s. A look at the two very different cash machines will help dispel the false paradox.

The words above were spoken by an old friend and Amazon veteran, as three French émigrés talked shop at a Palo Alto watering hole. The riposte would fit as the epigraph for The Amazon Money Pump For Dummies, an explanation of Amazon’s ever-ascending stock price while the company keeps “losing money”.

(I don’t like the term Business Model, and Bizmodel even less so. I prefer Money Pump with its lively evocations: attach the hose, adjust the valves, prime the mechanism, and then watch the flow of money from the customer’s pocket to the investor’s purse).

Last quarter, Amazon’s revenue grew by 24% year-on-year, and lost about 1% of its net sales of $17B. This strong but profitless revenue growth follows an established pattern:

AMZN No Profit Growth copy
Despite the company’s flat-lined profits, Wall Street loves Amazon and keeps sending its shares to new heights. Since its 1997 IP0, AMZN has gone from $23 to $369/share:

298 share 21x
How come?

[Professional accountants: Avert your eyes; the following simplification could hurt.

Profit isn't cash, it's merely an increase in the value of your assets. Such increase can be illiquid. Profit is an accountant's opinion. Cash is a fact.]

Amazon uses its e-commerce genius to prime the money pump. The company seduces customers through low prices, prompt delivery, an ever-expanding array of services and products, and exemplary customer attention. What keeps the pump going is the lag between the moment they ding my credit card and the time that they pay Samsung for the Galaxy Note tablet I ordered. Last quarter, Amazon’s daily revenue was about $200M ($17B divided by 90 days). If it waits just 24 hours to pay its suppliers, the company has $200M to play with. If it delays payment for a month, that’s $6B it can use to invest in developing the business. Delay an entire quarter…the numbers become dizzying.

But, you’ll say, there’s nothing profoundly original there. All businesses play this game, retail chains depend on it. Definitely — but what sets Amazon apart is what it does with that flow of free cash. The company is relentless in building the best services and logistics machine on Earth. Just this week, we read that Amazon has hired the US Post Office to deliver Amazon packages (only) on Sundays.

Amazon uses cash to build a better Amazon that keeps bringing in more cash.

Why do suppliers “loan” Amazon such enormous amounts of cash? Why do they let the company grow on their backs? Because, just like Wall Street, they trust that the company will keep growing and give them ever more business. Amazon might be a hard taskmaster, but it can be trusted to pay its bills (eventually) — the same cannot be said of some other retail organizations.

Amazon doesn’t care that it doesn’t make a “profit” on the sale of a box of Uni-Ball pens that it ships for free. Rather, it focuses on pumping enormous amounts of cash into the virtuous spiral of an ever-expanding business. Wall Street rewards the company with an equally expanding market cap.

How long can Amazon’s expansion last? Will the tree grow to the sky? If we consider a single line of business — books, for example — saturation will inevitably set in. But one of the many facets of Bezos’ genius is that he’s always been able to find new territories. Amazon Web Services is one area where the company is now larger than all of its competitors combined, and shows no sign of slowing down or of approaching saturation.

In the end, we mustn’t be fooled by the simplicity of Amazon’s money pump. Bezos’ genius is in the implementation, in the details. Like a chef who’s not afraid to disclose his recipes, Bezos writes to his shareholders every year — his missives are all here — And he always appends his first 1997 letter, thus reminding everyone that he’s not about to lose the plot.

The other friend in this conversation, an old Apple hand, happily nodded along as our ex-Amazon compatriot told stories from his years in the Seattle trenches. When asked about the Apple money pump and why Wall Street didn’t seem to respect Apple’s huge profits, he started with an epigraph of his own:

The simplest encapsulation of Apple’s business model is the iPod.

To paraphrase: The iPod is the movie star, it brings the audience flocking to the theatre; iTunes is the supporting cast.

iTunes was initially perceived as a money-losing operation, but without it the iPod would have been a good-looking but not terribly useful piece of hardware. iTunes propelled iPod volumes and margin by providing an ecosystem that comprised two innovations: “music by the slice” (vs. albums,) and a truly new micro-payment system (99 cents charged to a credit card).

That model is what powers the Apple money pump today. The company’s personal computers — smartphones, tablets, and laptops/desktops — are the movie stars. Everything else exists to make these lead products more useful and pleasant. Operating systems, applications, stores, Apple TV, the putative iWatch…they’re all part of the supporting cast.

Our Apple friend offered another thought: The iPod marked the beginning of the Post-PC era. By 2006 — a year before the introduction of the iPhone — iPod sales had exceeded Mac revenue.

Speaking of cash, Apple doesn’t need to play Amazon’s timing games. Product margins range from 20-25% for desktops and laptops (compared to HP’s 3-5%), to 65% or more for iPhones. With cash reserves reaching $147B at the end of September 2013, Apple has had to buy shares back and pay dividends to bleed off the excess.

Far from needing a “loan” from its suppliers, Apple heads in exactly the opposite direction. On page 37 of the company’s 2013 10-K (annual) filing, you’ll find a note referring to “third-party manufacturing commitments and component purchase commitments of $18.6 billion“. This is a serious cash outlay, an advance to suppliers to secure components and manufacturing capacity that works out to $50 for every person in the US…

Wall Street’s cautious regard for Apple seems ill-advised given Apple’s ability to generate cash in embarrassing amounts. As the graph below shows, after following a trajectory superficially similar to Amazon’s, Apple apparently “fell from grace” in 2012:

298 fall from grace
I can think of two explanations, the first one local, the other global.

During Fiscal 2012, ending in September of that year, Apple’s Gross Margins reached an unprecedented high of 43.9%. By all standards, this was extremely unusual for a hardware company and, as it turned out, it was unsustainable. In 2013, Apple Gross Margin dropped by more than 6 percentage points (630 basis points in McKinsey-speak), an enormous amount. Wall Street felt the feast was over.

Also, Fiscal 2013 was seen as a drought year. There were no substantial new products beyond the iPhone 5 and the iPad mini announced in September and October 2012, and there was trouble getting the new iMacs into customers’ hands during the Holiday season.

More globally important is the feeling that Apple has become a “hits” business. iPhones now represent 53% of Apple’s revenue, and much more (70%?) of its profits. They sell well, everything looks rosy…until the next season, or the next round of competitive announcements.

This is what makes Wall Street nervous: To some, Apple now looks like a movie studio that’s too dependent on the popularity of its small stable of stars.

We hear that history will repeat itself, that the iPhone/iPad will lose the battle to Android, just as the Mac “lost” to Windows in the last century.

Our ex-Apple friend prefers an automotive analogy. Audi, Tim Cook’s preferred brand, owns a small portion of the luxury car market (about 7.5%), but it constantly posts increasing profits — and shows no sign of slacking off. Similarly, today’s $21B Mac business holds a mere 10% of the PC market, but Apple “uses” that small share to command 45% of market profits. The formula is no secret but, as with Amazon’s logistics and service, the payoff is in the implementation, how the chef combines the ingredients. It’s the “mere matter of implementation” that eluded Steve Ballmer’s comprehension when he called the MacBook an Intel laptop with an Apple logo slapped on it. Why wouldn’t the Mac recipe also work for smartphones and tablets?

JLG@mondaynote.com

 

Memo #1 to Jeff Bezos: Try Washington Post Prime

 

We can be sure Jeff Bezos will try many things with the Washington Post. One could be drawing inspiration from Amazon’s fabulously successful Prime service. (First article in a series) 

Changes at The Washington Post’s will be the most watched media story of the coming months and, perhaps, years. Why? First of all, with the iconic Watergate saga, The Post epitomized a historic high in print journalism. The episode combined the fierce independence of a great media company, the courage of two people — namely Katherine Graham, the paper’s proprietor, and editor-in-chief Ben Bradlee — who together bet on the tenacity and energy of two young reporters, Bob Woodward and Carl Bernstein. For my generation, these times are part of the mystique of great journalism.

wpost_watergate
The grand old days (credit: Washington Post, Watergate Files)

Second, The Washington Post was sold (for cheap, only $250M) because it faced a certain death. Its weekday circulation fell by 60% since 2003 (still 472,000 copies today), and the advertising-loaded Sunday issue lost more than half of its audience (more details in Alan Mutter’s coverage). As for digital advertising, The Post has been unable to compensate for the in print advertising hemorrhage, gaining only $1 in digital while at the same time the print ads were losing $16 — similar to everyone else in the business.

Like most of its peers, The Post was far too slow in its shift to digital journalism, leaving an open field to new, more agile ventures such as Politico, a pure digital player that even managed to snare talent form the historic newsroom. Eventually, management got around to adjust all dials in the best possible manner (see a previous Monday Note on the subject) — alas without inverting the trend.

But the main reasons to watch Bezos’ next moves remain his appetite and proven ability to reinvent aging business models. He did so with the retail business, energized by two of the celebrated obsessions that became religion in his company: maximum efficiency applied down to the minutest of details, and an unprecedented care for the customer.

Can these two ingredients apply to the  news business?

As for customer care, in general, the press has a long way to go. As both a heavy consumer (my many digital subscriptions) and a long time media professional, I can offer many sorry testimonials to the media industry’s backward customer service. From order fulfillment (weeks in some cases) to client-support, media lies at the polar opposite of the digital industry, especially Amazon. From day one, I’ve been a paid subscriber to the Wall Street Journal and an Amazon customer. After gross overcharges for my subscriptions to the Journal, its customer service repeatedly failed to even to grant me an explanation. I finally gave up: As soon as my subscription is over, I’ll walk. Fortune Magazine has been landing in my physical mailbox for many years; sadly, it is apparently unable to provide the codes required to enjoy my subscription on Apple’s Newsstand. Again, I gave up. Another example outside the news sector: Canal+, one of the largest paid-for TV network in the world (I’m not a customer): according to several customers and two consultants I spoke with, the network’s main strategy to retain subscribers is the use every possible trick to prevent them for terminating their subscription. “Even death might not be enough to exit the service”, joked a media professional…

If Amazon had behaved like that, it would have never become the retail behemoth it is today. It started in 1995 with no credibility — actually, it even had a negative image stemming from the suspicion surrounding online shopping at the time. Like others, Amazon had to build its reputation one customer at a time. I was an early adopter and, today, my reliance on Amazon keeps growing steadily (there were a few glitches along the way, quickly fixed.)

Why mention customer service? Evidently not by reason of the need to take good care of a digital or print subscriber — that should be the bare minimum. But because a media outlet such as the Post will eventually sell many other products and services beyond news; therefore, instilling a strong customer service mentality will be a prerequisite to expanding its business into other areas. Also, the move to digital raises the customer care standards bar. More for the Post than for any other media company, customers will use Amazon services as the benchmark of quality.

My bet is Jeff Bezos will use lessons from Amazon’s Prime service. For Monday Note readers outside the United States, Amazon Prime is a special service from which, for an annual fee of $79 (€60), you get free two-days shipping, free video streaming and the right to borrow Kindle titles in a catalog of 350,000 (I can hear writers and bookstore owners faint…) The least we can say is that it worked: more than 10m people joined the Prime program (including a couple of friends of mine who quickly dumped their cable subscription — call it collateral damage…) And that’s just the beginning: Amazon expects to reach 25m Prime customers by 2017. Even more interesting: when you cough up eighty bucks a year to use the service, you also tend to buy more, that’s the juiciest psychological facet of the Prime program. See how it works for the famous tech writer Farhad Manjoo (who wrote an interesting piece in Slate If Anyone Can Save theWashington Post, It’s Jeff Bezos

 I was recently looking back at my Amazon order history. Before 2006, the year I first signed up for Prime, I placed less than 10 orders per year at the site. Prime completely changed my shopping habits. In my first year with the service, I placed 46 orders. This year my household is on track to quadruple that.

These macro level numbers confirm the success: the Amazon Prime customer spends much more than a regular one: $1224 (€930) vs. $524 (€400) per year. Furthermore, Prime accounts for one third of Amazon’profits (see a detailed story by FastCompany on the matter). In short, an immense product line, served by a near-perfect execution (an Amazon order is shipped about 2.5 hours after you clicked the “Place your  order” button), augmented by a psychological incentive smelling of free, fast and convenient all conspire to generate both high ARPU and loyalty — two outcomes newspapers economics are starving for. How can such reasoning apply to our industry? Can the antique “bundling” systems benefit from it and, as an example, open the way to new super-subscriptions? What tools can Jeff Bezos leverage to pull this off?

We’ll explore answers in further columns.

frederic.filloux@mondaynote.com

The Release Windows Archaism

 

Television and media industry are stuck in a wasteful rear-guard fight for the preservation of an analog era relic: the Release Windows system. Designed to avoid destructive competition among media, it ends up boosting piracy while frustrating honest viewers willing to pay.  

A couple of months ago, I purchased the first season of the TV series Homeland from the iTunes Store. I paid $32 for 12 episodes that all landed seamlessly in my iPad. I gulped them in a few days and was left in a state of withdrawal. Then, on September 30th, when season 2 started over, I would have had no alternative to downloading free but illegal torrent files. Hundreds of thousands of people anxious to find out the whereabouts of the Marine turncoat pursued by the bi-polar CIA operative were in the same quandary (go to the dedicated Guardian blog for more on the series).

In the process, the three losers are:
– The Fox 21 production company that carries the risk of putting the show together (which costs about $36m per season, $3m per episode)
– Apple which takes its usual cut. (The net loss for both will actually be $64 since the show has been signed up for a third season by the paid-for Showtime channel and I wonder if I’ll have the patience to wait months for its availability on iTunes.)
– And me, as I would have to go through the painstaking task of finding the right torrent file, hoping that it is not bogus, corrupted, or worse, infected by a virus.

Here, we put our finger on the stupidity of the Release Windows system, a relic of the VHS era. To make a long story short, the idea goes back to the 80′s when the industry devised a system to prevent different media — at the time, movie theaters, TV networks, cable TV and VHS — from cannibalizing each other. In the case of a motion picture, the Release Windows mechanism called for a 4 months delay before its release on DVD, additional months for the release on Pay-TV, Video-On-Demand, and a couple of years before showing up on mainstream broadcast networks (where the film is heavily edited, laced with commercial, dubbed, etc.)

The Western world was not the only one to adopt the Release Window system. At the last Forum d’Avignon cultural event a couple of weeks ago, Ernst & Young presented a survey titled  Mastering tempo: creating long-term value amidst accelerating demand (PDF in English here and in French here).

The graph below shows the state of the windows mechanism in various countries:

Europe should be happy when comparing its situation to India’s. There, it takes half a year to see a movie in DVD while the box-office contributes to 75% of a film’s revenue. Ernst & Young expects this number to drop only slightly, to 69%, in 2015 (by comparison, the rate is only 28% in the UK). Even though things are changing fast in India, internet penetration is a mere 11.4% of the population and movie going still is a great popular entertainment occasion.

In the United States, by comparison, despite a large adoption of cable TV, Blue-Ray or VOD, and a 78% penetration rate for the internet (84% in the UK and higher in Northern Europe), the Release Windows system shows little change: again, according to the E&R survey, it went from 166 days in 2000 to 125 days in 2011:

Does it makes sense to preserve a system roughly comparable to the one in India for the US or Europe where the connected digital equipment rate is seven times higher?

Motion pictures should probably be granted a short head start in the release process. But it should coincide with the theatrical lifetime of a production that is about 3-4 weeks. Even better, it should be adjusted to the box-office life — if a movie performs so well that people keep flocking to theaters, DVDs should wait. On the contrary, if the movie bombs, it should be given a chance to resurrect online, quickly, sustained by a cheaper but better targeted marketing campaign mostly powered by social networks.

Similarly, movie releases should be simultaneous and global. I see no reason why Apple or Microsoft are able to make their products available worldwide almost at the same time while a moviegoer has to wait three weeks here or two months there. As for the DVD Release Windows, it  should go along with the complete availability of a movie for all possible audiences, worldwide and on every medium.  Why? Because the release on DVD systematically opens piracy floodgates (but not for the legitimate purchase on Netflix, Amazon Prime or iTunes).

As for the TV shows such as Homeland and others hits, there is not justification whatsoever to preserve this calendar archaism. They should be made universally available from the day when they are aired on TV, period. Or customers will vote with their mouse anyway and find the right file-sharing sites.

The “Industry” fails to assess three shifts here.

–The first one is the globalization of audiences. Worldwide, about 360m people are native English speakers; for an additional 375m, it is the second language, and 750m more picked English as an foreign language at school. That’s about 1.5 billion people likely to be interested in English-speaking culture. As a result, a growing proportion of teenagers watch their pirated series without subtitles — or scruples.

–Then, the “spread factor”: Once a show becomes a hit in the United States, it becomes widely commented in Europe and elsewhere, not only because a large number of people speak serviceable English, but also because many national websites propagate the US buzz. Hollywood execs would be surprised to see how well young (potential) audiences abroad know about their productions months before seeing them.

–And finally, technology is definitely on the side of the foreign consumer: Better connectivity (expect 5 minutes to download an episode), high definition image, great sound… And mobility (just take a high-speed train in Europe and see how many are watching videos on their tablets).

To conclude, let’s have a quick look at the numbers. Say a full season of Homeland costs $40m to produce. Let’s assume the first release is supposed to cover 40% of the costs, that is $16m. Homeland is said to gather 2 million viewers. Each viewer will therefore contribute for $8 to the program’s economics. Compare to what I paid through iTunes: my $32 probably leave about half to the producers; or compare to the DVD, initially sold for $60 for the season, now discounted at $20. You get my point. Even if the producer nets on average $15 per online viewer, it would need only 1.6 million paid-for viewers worldwide to break-even (much less when counting foreign syndication.) Even taking in account the unavoidable piracy (which also acts as a powerful promotional channel), with two billion people connected to the internet outside the US, the math heavily favors the end of the counter-productive and honest-viewer-hostile Release Windows archaism.

–frederic.filloux@mondaynote.com

Decoding Share Prices: Amazon, Apple and Facebook

There are many religions when it comes to calculating the “right” price for the shares of a publicly traded company. At a basic level, buying a share is an act of faith in the company’s future earnings. The strength of this belief manifests itself in the company’s P/E (Price/Earnings) ratio. The stronger the faith, the higher the P/E, an expectation of increased profit.

Sometimes, an extreme P/E number beggars belief, it invites a deeper look into the thoughts and emotions that drive prices.

One such example is Amazon. On the Nasdaq stock market, AMZN trades at more than 174 times its most recent earnings. By comparison, Google’s P/E hovers around 17, Apple and Walmart are a mere 14, Microsoft is a measly 11.

This is so spectacular that many think it doesn’t make sense, especially when looking at Amazon’s falling profit margin (from this Seeking Alpha post):

Why do traders bid AMZN so high in the face of a declining .5% profit margin?

In his May 5th PandoDaily piece, “Nobody Seems to Understand What Jeff Bezos is Doing. Does He?”, Farhad Manjoo questions Jeff Bezos’s strategy and Amazon’s taste for obfuscating statements:

“Amazon is not merely “willing” to be misunderstood, it often tries to actively sow widespread misunderstanding. This works [to] its advantage; if competitors don’t know what Amazon is up to, if they can’t even figure out where and how it aims to make money, they’ll have a harder time beating it.”

…and he concludes:

“Is Bezos crazy like a fox? Or is he just plain crazy? We have no idea.”

He’s not alone: Year after year, critics have challenged Bezos’ business acumen, criticizing his grandiose views and worrying about the company’s bottom line. But the top line, revenue, keeps rising. See this chart from a Seeking Alpha article by Richard Bloch:

The answer to Farhad’s question, the cold logic behind the seemingly irrational share price is clear: Amazon sacrifices profits in order to gain size and, in the process, kill competitors.

That’s step one.

Step two: After having cleared the field, Amazon will take advantage of what is delicately called “pricing power”. As the Last Man Standing, they will raise prices at will and regain profitability. This isn’t Amazon’s only game. The breadth of their offering, their superior customer service and awesome logistics, make life difficult for poorly managed competitors such as Best Buy, or the undead Circuit City, to name but a few companies whose weaknesses where exposed by Amazon’s superbly efficient machine.

But traders recognize the wink and the nod behind today’s numbers, they are willing to pay a high price for a share of Amazon’s future dominant position.

Apple’s share price sits at the other end of the P/E spectrum. Revenue and profits grow rapidly: + 58% profit year-to-year, + 94% net income. “Normal” companies in their league are supposed to fall to the Law of Large Numbers: High percentage growth becomes well-nigh impossible when a company achieves Apple’s gigantic size. A $100B business needs to dig up $25B in new business to grow 25%. $25B is roughly half the size of Dell. When Apple’s revenue grows 58%, that’s more than one Dell on top of last year’s business.

Apple is the nonpareil of fast-growing, prosperous companies. They’re in a young market: smartphones and tablets. They can easily break the Law. With only 8% of the mobile phone market, the iPhone enjoys considerable headroom. And the iPad’s +151% year/year unit growth shows even greater potential.

So why isn’t Wall Street buying? Why do they think Apple has so much less room to grow than Amazon?

First, a big difference: Apple’s founder is no longer with us while Bezos is very much in command. This is no criticism of Tim Cook, Apple’s new CEO. A long-time Jobs lieutenant, the architect of Apple’s supremely effective Supply Chain, a soberly determined man, well liked, respected and healthily feared inside the company, Tim Cook is eminently credible. But traders are cautious; they want to see if the Cook regime will be as innovative, as uncompromisingly focused on style and substance as before.

Second, the much talked-about iPhone subsidy “problem”. The accepted notion is that Apple has strong-armed carriers into paying “excessive” subsidies for the iPhone, some say as much as $200 more than carriers pay other handset makers. (See “Carriers Whine: We Wuz Robbed!” of March 11, 2012.) Carriers rattle their sabers, they let everyone know they’re looking forward to the day when they will no longer be fleeced by the Cupertino boys.

The numbers are impressive. Take about 150 million iPhones this calendar year (37M units in the last quarter of 2011); assume that 80% of these iPhones are subsidized by carriers…that’s $24B in subsidies. For people who are betting on Apple’s future profits, these are big numbers that could go either way: Straight to Apple’s bottom line as they do today, or back to the carriers’ coffers “where they belong”. For Apple, with today’s P/E of 14, a swing of $24B in profits would result in a change of $336B in market cap. (Today Wall Street pegs AAPL at $525B.)

I’m not saying such a shift is likely, or that it would happen in one fell swoop. I use this admittedly caricatural computation to make a point: Carrier subsidies have a huge impact on Apple’s bottom line, and the perceived uncertainty over their future gives traders pause.

I’ll now take the opposite tack with this Horace Dediu tweet:

In my venture investing experience, it sometimes happens that the top salesperson makes more money than the CEO. In most instances the exec is happy to see big revenue come in and doesn’t begrudge the correspondingly large commissions. But, in the rare case of the CEO turning purple because a lowly peddler makes more money than him (it’s a male problem), we take the gent aside and gently let him know what will happen to him if he does it again.

Carriers sound like the bad CEO complaining about excessive sales commissions racked up by their star revenue maker. Carriers are contractually obligated to keep iPhone figures confidential so we can’t make a direct ARPU comparison — but we have anonymous leaks and research-for-hire firms, they’re curiously silent on the question of actual ARPU by handset. In the absence of a clear case made to the contrary, we’ll have to assume that the iPhone is the carriers’ top revenue generator, and that the subsidies will continue.

This said, if Apple comes out with a mediocre iPhone, or if Samsung produces a distinctly more attractive handset, the salesman’s commission will disappear, Apple’s revenue per iPhone (about $650 in Q1 2012) will drop precipitously, and so will profits.

That’s the scenario that makes traders cautious: Large amounts of profit are at risk, tied to carrier subsidies. They wonder if Apple’s lofty premium is sustainable and, as a result, they assign AAPL a lower P/E.

But “caution” may be too weak a word. In a May 7th 2012 Asymco post, Horace Dediu plots Apple’s share price as a function of cash:

This is troubling. It implies that cash is the only determinant of Apple’s share price.

Put another way, and recalling that share prices are supposed to reflect earnings expectations, it appears Wall Street puts little faith in the future of Apple’s earnings [emphasis mine]:

“Given this disconnect from the income statement, the pricing by balance sheet multiple seems to be a symptom of something deeper. Reasons vary with the seasons, but the company is not perceived to have sustainable growth.

Fascinating. The collective wisdom of Wall Street is that one of the most successful high-tech companies of all times, with three healthy product lines, strong management, generally happy customers and employees is not perceived to have sustainable growth.

We’ll see.

(In the interest of full disclosure, I’ll repeat something I’ve stated here before: I don’t own publicly-traded stocks, Google, Microsoft, Apple or any other. I consider the stock market a dangerous place where, across the table, I see people with bigger brains, bigger computers, and bigger wallets than mine. I can’t win. The casino always does…unless you don’t trade but, instead, invest–that is buy shares and keep them for years, the way Warren Buffet does.)

And Facebook?

I’ll wait for the dust of this botched IPO to settle before I try to figure out what Facebook’s share price reflects. I agree with Ronal Barusch in his WSJ blog piece: I’m not convinced that Facebook or its bankers will suffer irreparable damage.

Still, rumors and accusations are flying. Following Nasdaq’s disastrous handling of Facebook’s opening trades, we hear that the New York Stock Exchange is discreetly suggesting that the company move to a more sophisticated trading platform. This is a great opportunity for Facebook to change its FB stock trading symbol and adopt one that more accurately reflects its opinion of Wall Street.

I have a suggestion: FU.

JLG@mondaynote.com

Negative-sum games

As if current economic conditions weren’t dire enough, several forces conspire to push the media sector’s financial performance further downward. These factors are an obsession with market share, price wars, and first movers’ ability to set the tone, often for the worse.

Take the iPhone application market as an example. At first, publishers were elated: at last, a content distribution platform with an embedded transaction system. They saw it as the first step to make customers pay for content. Then, another idea took over: market share. Like “eyeballs”, the old Internet Bubble de rigueur metric, market share is today’s mirage: once you get it, profit is (almost) sure to follow. Never mind there are zillions of companies that have once and for all severed the connection between market share and profit (Apple for computers, BMW in the auto industry, Nucor in steel production, name but a few).

Unfortunately, the first one who shoots for market share sets the standard, sometimes with surprising twists and turns. Take the Wall Street Journal: first-rate web site, highly successful business-wise with one million paid subscriptions (about $100/yr). When it came to the iPhone opportunity, guess what: they went for a free application loaded with pathetic ads — apparently locked on the saturation mode, the same banner kept showing endlessly. Just a few weeks ago, seeing a steep drop in profits, the WSJ.com reversed itself and restricted access to its app. More

Honesty at the D6 Schmooze fest

A word (or two, or three) of explanation is in order. D6 is a conference organized by the Walt Mossberg, the personal technology guru of the Wall Street Journal. Over the years, Walt’s finely tuned columns earned him the position of high tech kingmaker. From there, a conference was born for his subjects to meet once a year near San Diego, California.

Second, “schmooze” , evolved from its Yiddish origin to designate an social networking activity. Sorry, for our younger readers, we’re referring to the BFB (Before Facebook) version of networking. There, we smell each other’s pheromones, make small talk, pin decorations on each other’s chest, discreetly but feverishly check we’re not missing the next Big Idea or slipping down the pecking order.

Third, Honesty. At such an event? With speakers ranging from Bill Gates and Steve Ballmer to Michael Dell, Jeff Bewkes (TimeWarner’s CEO) and Kevin Martin (Chairman of the FCC), there risk of honesty is infinitesimal. And that’s part of the fun. In the audience you have entrepreneurs, corpocrats, journalists, bloggers, investment bankers and venture capitalists. On stage, Walt Mossberg and Kara Swisher, his associate, pretend to interview the magnate of the moment. The fun is trained bullshit artists in the audience watching fellow artists prevaricating on stage. We admire the high wire act or lament the lame obvious “misstatement”.

The Gates & Ballmer show was highly professional, a testament to their experience, focus and preparation. We were first treated to the mollifying bit of schmaltz, how the love story between the two of them started at Harvard. Thus supposedly oiled, we got into more scabrous topics: Vista and Yahoo! No problem, we sold a lot of Vista, it’s been massively well received and, as always, we look forward to make our product even better. And, you know what, here is a quick taste of the even more wonderful Windows 7, available in 18 months or so, with our new invention: Multi-touch. And the coda: We avoid monopolies, we love to compete. The connoisseurs in the room nodded their appreciation: impeccable, first-class chutzpah, not a single hairline crack in the dam. Moving to Yahoo! things got a little less polished, a whiteboard was brought out and Ballmer did his Scale number: We need Scale in advertising, we’re still talking to Yahoo! about ways to gain Scale while not buying the company. But we’ll gain Scale by ourselves anyway because we never give up, we keep coming back, and coming back and coming back. The pros thought this was protesting a little too much.

But, Yahoo’s Jerry Yang and Sue Decker, the next day, made the Micro-couple look like the consummate fabulists that they are. Jerry Yang went through a “he said – she said” recount of the aborted deal and was caught flat-footed when asked to define Yahoo’s business. His minder, Sued Decker, regurgitated the party line but the damage was done, we were looking at a future has-been.

Jeff Bezos, his usual happy smart self unfortunately couldn’t resist bullshitting the bullshitters and danced clumsily around his refusal to release Kindle statistics. Too bad because the rest of his act was pitch perfect. He is loved and respected for all the right reasons: vision, execution and culture of the great Amazon.

Mark Zuckerberg brought his new adult guardian with him, the terrifying Sheryl Sandberg. Terrifying? See here quasi-Hillary résumé here. Unfortunately, her professional supervision didn’t spare us a dozen Zuckerberg robotic repetitions of the We help people share information and share themselves. Possibly a good company but definitely bad BS.

I saved the best for last. There was one straight shooter: Rupert Murdoch, the head of News Corp, owner of MySpace, a flock of TV and newspaper properties such as the Times of London, the tabloid New York Post and… the Wall Street Journal. Walt and Kara were interviewing their new master. Everyone in the room was paying attention, wondering who was on the high wire, Murdoch or his hosts. The boss doesn’t miss a beat, didn’t worry about admitting misfires or slow progress in places like MySpace, changing his mind a bit about the strategy – not the goal, depose the New York Times – for the WSJ. The man was speaking honestly, holding forth about media, newspapers – not the news – in trouble, the economy, in recession. And then came the moment: Who caused his New York Post to endorse Obama? Me. What? You support Obama? Well, I need to meet him but if he his the way he looks like, I might. Not a word of Clinton. We knew we were in the presence of a 78 years-old man who had reached a position of power without fear. No wonder the next day 23andMe, the personal genomics company (co-founded by Ann Wojcicki, Sergey Brin’s wife) asked for a sample of Rupert… More artful use of the American-English language here. –JLG