Why Jamie Dimon Told Us To Not Own JPMorganChase (or any other “money center” bank)

Most investors shouldn't be.  Given demands of work and family, there is almost no time to study companies, markets and select investments.  So smaller investors rely on 3rd parties, who rarely perform better than the most common indeces, such as the S&P 500 or Dow Jones Industrial Average.  For that reason, few small investors make more than 5-10% per year on their money, and since 2000 many would beg for that much return! 

Most investors would make more money with their available time by studying prices on the web and simply buying bargains where they could save more than 10% on their purchase. The satisfaction of a well priced computer, piece of furniture, nice suit or pair of shoes is far more gratifying than earning 2-4% on your investment, while worrying about whether you might LOSE 10-20-30%, or more!

And that's why you don't want to own JPMorganChase (JPMC.)  Last week's earning's call was a remarkable example of boredom.  Yes, Chairman and CEO Jamie Dimon and his team spent considerable time explaining how the London investment office lost $6B, and why they felt it was an "accident" that would not happen again.  But the truth is that this $6B "mistake" wasn't really all that big a deal, compared to the  $100B in mortgage and credit card losses since the financial crisis started!

Perhaps Mr. Dimon was right, given JPMC's size, that the whole experience was mostly "a tempest in a teapot."  Throughout the call the CEO kept emphasizing that JPMC was "going to go about the business of deposits and lending that is the 'core' business for the bank." Although known for outspokenness, Mr. Dimon sounded like any other bank CEO saying "things happen, but trust us. We really are conservative." 

So if a $6B surprise loss isn't that big a deal, what is important to shareholders of JPMC? 

How about the unlikelihood of JPMC earning any sort of decent return for the next decade, or two? 

The world has changed.  But this call, and the mountain of powerpoint slides and documents put out with it, reiterated just how little JPMC (and most of its competition, honestly) has not.  In this global world of network relationships, digital transactions, struggling home values and upside down mortgages, and very slow economic growth in developed countries, JPMC has no idea what "the next big thing" will be that could make its investors a 20-30% rate of return. 

Yes, in many traditional product lines return-on-equity is in the upper teens or even over 20%.  But, then there are losses in others.  So lots of trade-offs.  Ho-hum.  To seek growth JPMC is opening more branches (ho-hum). And trying to sign up more credit card customers (ho-hum) and make more smalll-business loans (ho-hum) while running ads and hoping to accumulate more deposit acounts (ho-hum.)  And they have cut compensation and other non-interest costs 12% (ho-hum.)

You could have listened to this call in the 1980s, or 1990s, and it would have sounded the same.

Only the world isn't at all the same.

And Mr. Dimon, and his team, knew this.  That's why JPMC created the Chief Investment Office (CIO) in London, and the synthetic credit portfolio that has caused such a stir.  The old success formula, despite the bailout which created these highly concentrated, huge banks, simply doesn't have much growth – in revenues or profits.  So to jack up returns the bank created an extremely complex business unit that made bets – big bets – sometimes HUGE bets – on interest rates and securities it did not own. 

These bets allowed small sums (like, say, $1B) to potentially earn multiples on the investment.   Or, lose multiples.  And the bets were all based on forecasts about future events – using a computer model created by the CIO's office.  As Mr. Dimon's team eloquently pointed out, this model became very complicated, and as reality varied from forecast nobody at JPMC was all that clear why the losses started to happen.  As they kept using the model, losses mounted.  Oops.

But now, we are to be very assured that JPMC's leaders are paying a lot more attention to the model, and thus JPMC isn't going to have such variations between forecast and reality. So this event won't happen again.

Right. 

If JPMC didn't need to use the highly complicated world of derivatives to potentially jack up its returns it would have closed the CIO before these losses happened.  Now they claim to have closed the synthetic trading portfolio, but not the CIO.  Think about that, if you had a unit operated by one of your very top leaders that "made a mistake" and lost $6B wouldn't you closing it?  You would only keep it open if you felt like you had to.  

Anybody out there remember the failure of Long Term Capital Management (LTCM?)  Certainly Mr. Dimon does. In the 1990s LTCM was the most famous "hedge fund" of its day.  The "model" used at Long Term Capital supposedly had zero risk, but extremely high returns.  Until a $4B loss created by the default of Russion bonds wiped out all the bank's reserves and capital.

Let's see, what's the big news these days?  Oh yeah, possible bond defaults in Greece, Portugal, Spain, Ireland……

The recent "crisis" at JPMC reflects a company locked-in to an antiquated business model which has no growth and declining returns.  In order to prop up returns the bank took on almost unquantifiable additional risk, through its hedging operation. Even though hedging long had a risky history, and some spectacular failures. 

But this was the only way JPMC knew how to boost returns, so it did it anyway. In an almost off-hand comment Mr. Dimon remarked a capable executive fired CIO Ina Drew was.  And that she was credited with "saving the bank" by some of Mr. Dimon's fellow executives. Most likely her money-losing, high risk efforts were another attempt by Ms. Drew to "save the bank's returns" and thus why she was lauded even after losing $6B.

But no more.  Now the bank is just going to slog it out being the boring bank it used to be.  Amidst all the slides and documents there was NO explanation of what JPMC was going to do next to create growth.  So JPMC is still susceptible to crisis – from debt defaults, Euro crisis, no growth economies, etc. – but shows little, if any, upside growth.

And that's why you don't want to invest in JPMC.  For the last 3 years the stock has swung wildly.  Big swings are loved by betting stock traders.  But quarter to quarter vicissitudes are not helpful for investors who need growth so they can generate a 50% gain in 5 years when they need the money for junior's college tuition. 

For that matter, I can't think of any "money center" bank worth investing. All of them have the same problem. After being "saved" they are less likely to behave differently than ever before.   At JPMC leadership took bets in derivatives trying to jack up returns.  At Barclay's Bank it appears leadership manipulated a key lending rate (LIBOR.)  All actions typical of executives that are stuck in a lousy market, that is shifting away from them, and feeling it necessary to push the envelope in an effort to squeek out higher returns.

If you feel compelled to invest in financial services, look outside the traditional institutions.  Consider Virgin, where Virgin Money is behaving uniquely – and could create incredible growth with very high returns.  In a business no "traditional" bank is pursuing.  Or Discover Financial Services which is using a unique on-line approach to deposits and lending.  Although these are nothing like JPMC, they offer opportunity for growth with probably less risk of another future crisis.

 

 

 

Why Tesla is Right, and GM and Ford are Not

The news is not good for U.S. auto companies.  Automakers are resorting to fairly radical promotional programs to spur sales.  Chevrolet is offering a 60-day money back guarantee.  And Chrysler is offering 90 day delayed financing.  Incentives designed to make you want to buy a car, when you really don't want to buy a car.  At least, not the cars they are selling.

On the other hand, the barely known, small and far from mainstream Tesla motors gave one of its new Model S cars to Wall Street Journal reviewer Dan Neil, and he gave it a glowing testimonial.  He went so far as to compare this 4-door all electric sedan's performance with the Lamborghini and Ford GT supercars.  And its design with the Jaguar.  And he spent several paragraphs on its comfort, quiet, seating and storage – much more aligned with a Mercedes S series.

There are no manufacturer incentives currently offered on the Tesla Model S.

What's so different about Tesla and GM or Ford?  Well, everything.  Tesla is a classic case of a disruptive innovator, and GM/Ford are classic examples of old-guard competitors locked into sustaining innovation.  While the former is changing the market – like, say Amazon is doing in retail – the latter keeps laughing at them – like, say Wal-Mart, Best Buy, Circuit City and Barnes & Noble have been laughing at Amazon.

Tesla did not set out to be a car company, making a slightly better car.  Or a cheaper car.  Or an alternative car.  Instead it set out to make a superior car. 

Its initial approach was a car that offered remarkable 0-60 speed performance, top end speed around 150mph and superior handling.  Additionally it looked great in a 2-door European style roadster package. Simply, a wildly better sports car.  Oh, and to make this happen they chose to make it all-electric, as well. 

It was easy for Detroit automakers to scoff at this effort – and they did.  In 2009, while Detroit was reeling and cutting costs – as GM killed off Pontiac, Hummer, Saab and Saturn – the famous Bob Lutz of GM laughed at Tesla and said it really wasn't a car company.  Tesla would never really matter because as it grew up it would never compete effectively. According to Mr. Lutz, nobody really wanted an electric car, because it didn't go far enough, it cost too much and the speed/range trade-off made them impractical.  Especially at the price Tesla was selling them. 

Meanwhile, in 2009 Tesla sold 100% of its production.  And opened its second dealership. As manufacturing plants, and dealerships, for the big brands were being closed around the world.

Like all disruptive innovators, Tesla did not make a car for the "mass market."  Tesla made a great car, that used a different technology, and met different needs.  It was designed for people who wanted a great looking roadster, that handled really well, had really good fuel economy and was quiet.  All conditions the electric Tesla met in spades.  It wasn't for everyone, but it wasn't designed to be.  It was meant to demonstrate a really good car could be made without the traditional trade-offs people like Mr. Lutz said were impossible to overcome.

Now Tesla has a car that is much more aligned with what most people buy.  A sedan.  But it's nothing like any gasoline (or diesel) powered sedan you could buy.  It is much faster, it handles much better, is much roomier, is far quieter, offers an interface more like your tablet and is network connected.  It has a range of distance options, from 160 to 300 miles, depending up on buyer preferences and affordability.  In short, it is nothing like anything from any traditional car maker – in USA, Japan or Korea. 

Again, it is easy for GM to scoff.  After all, at $97,000 (for the top-end model) it is a lot more expensive than a gasoline powered Malibu. Or Ford Taurus. 

But, it's a fraction of the price of a supercar Ferrari – or even a Porsche Panamera, Mercedes S550, Audi A8, BMW 7 Series, or Jaguar XF or XJ -  which are the cars most closely matching size, roominess and performance. 

And, it's only about twice as expensive as a loaded Chevy Volt – but with a LOT more advantages.  The Model S starts at just over $57,000, which isn't that much more expensive than a $40,000 Volt.

In short, Tesla is demonstrating it CAN change the game in automobiles.  While not everybody is ready to spend $100k on a car, and not everyone wants an electric car, Tesla is showing that it can meet unmet needs, emerging needs and expand into more traditional markets with a superior solution for those looking for a new solution.  The way, say, Apple did in smartphones compared to RIM.

Why didn't, and can't, GM or Ford do this?

Simply put, they aren't even trying. They are so locked-in to their traditional ideas about what a car should be that they reject the very premise of Tesla.  Their assumptions keep them from really trying to do what Tesla has done – and will keep improving – while they keep trying to make the kind of cars, according to all the old specs, they have always done.

Rather than build an electric car, traditionalists denounce the technology.  Toyota pioneered the idea of extending a gas car into electric with hybrids – the Prius – which has both a gasoline and an electric engine. 

Hmm, no wonder that's more expensive than a similar sized (and performing) gasoline (or diesel) car.   And, like most "hybrid" ideas it ends up being a compromise on all accounts.  It isn't fast, it doesn't handle particularly well, it isn't all that stylish, or roomy.  And there's a debate as to whether the hybrid even recovers its price premium in less than, say, 4 years.  And that is all dependent upon gasoline prices.

Ford's approach was so clearly to defend and extend its traditional business that its hybrid line didn't even have its own name!  Ford took the existing cars, and reformatted them as hybrids, with the Focus Hybrid, Escape Hybrid and Fusion Hybrid.  How is any customer supposed to be excited about a new concept when it is clearly displayed as a trade-off; "gasoline or hybrid, you choose."  Hard to have faith in that as a technological leap forward.

And GM gave the market Volt.  Although billed as an electric car, it still has a gasoline engine.  And again, it has all the traditional trade-offs.  High initial price, poor 0-60 performance, poor high-end speed performance, doesn't handle all that well, isn't very stylish and isn't too roomy.  The car Tesla-hating Bob Lutz put his personal stamp on.  It does achieve high mpg – compared to a gasoline car – if that is your one and only criteria. 

Investors are starting to "get it."

There was lots of excitement about auto stocks as 2010 ended.  People thought the recession was ending, and auto sales were improving.  GM went public at $34/share and rose to about $39.  Ford, which cratered to $6/share in July, 2010 tripled to $19 as 2011 started. 

But since then, investor enthusiasm has clearly dropped, realizing things haven't changed much in Detroit – if at all.  GM and Ford are both down about 50% – roughly $20/share for GM and $9.50/share for Ford.

Meanwhile, in July of 2010 Tesla was about $16/share and has slowly doubled to about $31.50. Why?  Because it isn't trying to be Ford, or GM, Toyota, Honda or any other car company.  It is emerging as a disruptive alternative that could change customer perspective on what they should expect from their personal transportation. 

Like Apple changed perspectives on cell phones.  And Amazon did about retail shopping. 

Tesla set out to make a better car.  It is electric, because the company believes that's how to make a better car.  And it is changing the metrics people use when evaluating cars. 

Meanwhile, it is practically being unchallenged as the existing competitors – all of which are multiples bigger in revenue, employees, dealers and market cap of Tesla – keep trying to defend their existing business while seeking a low-cost, simple way to extend their product lines.  They largely ignore Tesla's Roadster and Model S because those cars don't fit their historical success formula of how you win in automobile competition. 

The exact behavior of disruptors, and sustainers likely to fail, as described in The Innovator's Dilemma (Clayton Christensen, HBS Press.)

Choosing to be ignorant is likely to prove very expensive for the shareholders and employees of the traditional auto companies. Why would anybody would ever buy shares in GM or Ford?  One went bankrupt, and the other barely avoided it.  Like airlines, neither has any idea of how their industry, or their companies, will create long-term growth, or increase shareholder value.  For them innovation is defined today like it was in 1960 – by adding "fins" to the old technology.  And fins went out of style in the 1960s – about when the value of these companies peaked.

Why Cost Cutting Never Works – Ignore Hillshire Brands (Sara Lee)

Cost cutting never improves a company.  Period.

We've become so used to reading about reorganizations, layoffs and cost cutting that most people just accept such leadership decisions as "best practice."  No matter the company, or industry, it has become conventional wisdom to believe cost cutting is a good thing.

As a reporter recently asked me regarding about layoffs at Yahoo, "Isn't it always smart to cut heads when your profits fall?"  Of course not.  Have the layoffs at Yahoo in any way made it a better, more successful company able to compete with Google, Microsoft, Facebook and Apple?  Given the radical need for innovation, layoffs have only hurt Yahoo more – and made it more likely to end up like RIM (Research in Motion.)

But like believing in a flat world, blood letting to cure disease and that meteorites are spit up out of the ground – this is just another conventional wisdom that is untrue; and desperately needs to be challenged.  Cost reductions are killing most companies, not helping them.

Take for example Sara Lee.  Sara Lee was once a great, growing company.  Its consumer brands were well known, considered premium products and commanded a price premium at retail.  

The death spiral at Sara Lee began in 2006.  "Professional managers" from top-ranked MBA schools started "improving earnings" with an ongoing program of reorganizations and cost reductions.  Largely under the leadership of the much-vaunted Brenda Barnes, none of these cost reductions improved revenues.  And the stock price went nowhere. 

With each passing year Sara Lee sold parts of the business, such as Hanes, under the disguise of "seeking focus."  With each sale a one-time gain was booked, and more people were laid off as the reorganizations continued.  Profits remained OK, but the company was actually shrinking – rather than growing. 

To prop up the stock price all avaiable cash was used to buy back stock, which helped maximize executive compensation but really did nothing for investors.  R&D was eliminated, as was new product development and any new product launches.  Instead Sara Lee kept selling more businesses, reorganizing, cutting costs — and buying its own shares.  Until finally, after Ms. Barnes left due to an unfortunate stroke, Sara Lee was so small it had nothing left to sell.

So the company decided to split into two parts!  Magically, it's like pushing the reset button.  What was Sara Lee is now an even smaller Hillshire Brands.  All that poor track record of sales, profits and equity value goes POOF as the symbol SLE disappears, and investors are left following HSH – which has only traded for about 2 days! No more looking at that long history of bad performance, it isn't on Bloomberg or Marketwatch or Yahoo.  Like the name Sara Lee, the history vanishes.

Well, "if you can't dazzle 'em with brilliance you baffle 'em with bull**it" W.C. Fields once said.

Cost cuts don't work because they don't compound.  If I lay off the head of Brand Marketing this year I promise to save $300,000 and improve the Profit & Loss Statement (P&L) by that amount.  So a one time improvement.  Now – ignoring the fact that the head of branding probably did a number of things to grow revenue – the problem becomes, what do you do the next year?  You can't lay off the Brand V.P. again to save that $300,000 twice.  Further, if you want to improve the P&L by $450,000 this time you actually have to find 2 Directors to lay off! 

Shooting your own troops in order to manage a smaller army rarely wins battles. 

Cost cuts are one-time, and are impossible to duplicate. Following this route leads any company toward being much smaller.  Like Sara Lee.  From a once great company with revenues in the $10s of billions, the new Hillshire Brands isn't even an S&P 500 company (it was replaced by Monster Beverage.)  And how can any investor obtain a great return on investment from a company that's shrinking?

What does create a great company? Growth!  Unlike cost cutting, if a company launches a new product it can sell $300,000 the first year.  If it meets unmet needs, and is a more effective solution, then the product can attract new customers and sell $600,000 the second year.  And then $900,000 or maybe $1.2M the third year.  (And even add jobs!)

If you are very good at creating and launching products that meet needs, you can create billions of dollars in new revenue.  Like Apple with the iPhone and iPad.  Or Facebook.  Or Groupon.  These companies are growing revenues extremely fast because they have products that meet needs.   They aren't trying to "save the P&L."

And revenue growth creates "compound returns."  Unlike the cost savings which are one time, each dollar of revenue produces cash flow which can be invested in more sales and delivery which can generate even more cash flow.  So if growth is 20% and you invest $1,000 in year one, that can become $1,200 in year two, then $1,440 in year three, $1,728 in year four and $2,070 in year five. Each year you receive 20% not only on the $1,000 you invested, but on returns from the previous years!

By compounding year after year, at20% investor money doubles in 5 years.  That's why the most important term for investing is CAGR – Compound Annual Growth Rate.  Even a small improvement in this number, from say 9% to 11%, has very important meaning.  Because it "compounds" year after year.  You don't have to add to your investment – merely allowing it to support growth produces very, very handsome returns.  The higher the CAGR the better.

Something no cost cutting program can possibly due.  Ever.

So, what is the future of Hillshire Brands?  According to the CEO, interviewed Sunday for the Chicago Tribune, the company's historically poor performance could be blamed on —– wait —– insufficient focus.  Alas, Sara Lee's problem was obviously too much sales!  Well, good thing they've been solving that problem. 

Of course, having too many brands led to too much lateral thinking and not enough really deep focus on meat.  So now that all they need to think about is meat, he expects innovation will be much improved.  Right. Now that HSH is a "meat focused meals" company, and the objective is to add innovation to meat, they are considering such radical dietary improvements for our fat-laden, overcaloried American society as adding curry powder to the frozen meatloaf. 

Not exactly the iPhone.

To create future growth the first act the new CEO took to push growth was —- wait —– cutting staff by $100million over the next 3 years.  Really.  He will solve the "analysis paralysis" which seems to concern him as head of this much smaller company because there won't be anyone around to do the analysis, nor to discuss it and certainly not to disagree with the CEO's decisions.  Perhaps meat loaf egg rolls will be next.

All reorganizations and cost reductions point to leadership's failure to create growth.  Every time.  Staff reductions say to investors, employees, suppliers and customers "I have no idea how to add profitable revenue to this company.  I really have no clue how to put these people to work productively – even if they are really good people.  I have no choice but to cut these jobs, because we desperately need to make the profits look better in order to prop up the stock price short term; even if it kills our chances of developing new products, creating new markets and making superior rates of return for investors long term."

Hillshire's CEO may do very well for himself, and his fellow executives. Assuredly they have compensation plans tied to stock price, and golden parachutes if they leave.  HSH is now so small that it is a likely purchase by a more successful company.  By further gutting the organization Hillshire's CEO can reduce staff to a minimum, making the acquisition appear easier for a large company.  This would allow a premium payment upon acquisition, providing millions to the executives as options pay out and golden parachutes enact. 

And it might give a return to the shareholders.  If the ongoing slaughter finds a buyer.  Otherwise investors will see the stock crater as it heads to bankruptcy.  Like RIM and Yahoo.  So flip a coin.  But that's called gambling, not investing.

What investors need is CAGR.  Not cost cutting and reorganizations.  And as I've said since 2006 – you don't want to own Sara Lee; even if it's now called Hillshire Brands.

 

Microsoft Win8 Tablet Is Not a Game Changer

While there is an appropriately high interest in the Win8 Tablet announcement from Microsoft today, there is no way it is going to be a game changer.  Simply because it was never intended to be.

Game changers meet newly emerging, unmet needs, in new ways.  People are usually happy enough, until they see the new product/solution and realize "hey, this helps me do something I couldn't do before" or "this helps me solve my problem a lot better."  Game changers aren't a simple improvement, they allow customers to do something radically different.  And although at first they may well appear to not work too well, or appear too expensive, they meet needs so uniquely, and better, that they cause people to change their behavior.

Motorola invented the smart phone.  But Motorola thought it was too expensive to be a cell phone, and not powerful enough to be a PC.  Believing it didn't fit existing markets well, Motorola shelved the product.

Apple realized people wanted to be mobile.  Cell phones did talk and text OK – and RIM had pretty good email.  But it was limited use.  Laptops had great use, but were too big, heavy and cumbersome to be really mobile.  So Apple figured out how to add apps to the phone, and use cloud services support, in order to make the smart phone fill some pretty useful needs – like navigation, being a flashlight, picking up tweets – and a few hundred thousand other things – like doctors checking x-rays or MRI results.  Not as good as a PC, and somewhat on the expensive side for the device and the AT&T connection, but a whole lot more convenient.  And that was a game changer.

From the beginning, Windows 8 has been – by design – intended to defend and extend the Windows product line. Rather than designed to resolve unmet needs, or do things nobody else could do, or dramatically improve productivity over all other possible solutions, Windows 8 was designed to simply extend Windows so (hopefully) people would not shift to the game changer technology offered by Apple and later Google. 

The problem with trying to extend old products into new markets is it rarely works.  Take for example Windows 7.  It was designed to replace Windows Vista, which was quite unpopular as an upgrade from Windows XP.  By most accounts, Windows 7 is a lot better.  But, it didn't offer users anything that that made them excited to buy Windows 7.  It didn't solve any unmet needs, or offer any radically better solutions.  It was just Windows better and faster (some just said "fixed.")

Nothing wrong with that, except Windows 7 did not address the most critical issue in the personal technology marketplace.  Windows 7 did not stop the transition from using PCs to using mobile devices.  As a result, while sales of app-enabled smartphones and tablets exploded, sales of PCs stalled:

PC shipments stalled 6-2012
Chart reproduced with permission of Business Insider Intelligence 6/12/12 courtesy of Alex Cocotas

People are moving to the mobility provided by apps, cloud services and the really easy to use interface on modern mobile devices.  Market leading cell phone maker, Nokia, decided it needed to enter smartphones, and did so by wholesale committing to Windows7.  But now the CEO, Mr. Elop (formerly a Microsoft executive,) is admitting Windows phones simply don't sell well.  Nobody cares about Microsoft, or Windows, now that the game has changed to mobility – and Windows 7 simply doesn't offer the solutions that Apple and Android does.  Not even Nokia's massive brand image, distribution or ad spending can help when a product is late, and doesn't greatly exceed the market leader's performance.  Just last week Nokia announced it was laying off another 10,000 employees.

Reviews of Win8 have been mixed.  And that should not be surprising.  Microsoft has made the mistake of trying to make Win8 something nobody really wants.  On the one hand it has a new interface called Metro that is supposed to be more iOS/Android "like" by using tiles, touch screen, etc.  But it's not a breakthrough, just an effort to be like the existing competition.  Maybe a little better, but everyone believes the leaders will be better still with new updates soon.  By definition, that is not game changing.

Simultaneously, with Win8 users can find their way into a more historical Windows inteface.  But this is not obvious, or intuitive.  And it has some pretty "clunky" features for those who like Windows.  So it's not a "great" Windows solution that would attract developers today focused on other platforms.

Win8 tries to be the old, and the new, without being great at either, and without offering anything that solves new problems, or creates breakthroughs in simplicity or performance.

Do you know the story about the Ford Edsel?

By focusing on playing catch up, and trying to defend & extend the Windows history, Microsoft missed what was most important about mobility – and that is the thousands of apps.  The product line is years late to market, short on apps, short on app developers and short on giving anyone a reason to really create apps for Win8.

Some think it is good if Microsoft makes its own tablet – like it has done with xBox.  But that really doesn't matter.  What matters is whether Microsoft gives users and developers something that causes them to really, really want a new platform that is late and doesn't have the app base, or the app store, or the interfaces to social media or all the other great thinks they already have come to expect and like about their tablet (or smartphone.) 

When iOS came out it was new, unique and had people flocking to buy it.  Developers could only be mobile by joining with Apple, and users could only be mobile by buying Apple.  That made it a game changer by leading the trend toward mobility. 

Google soon joined the competition, built a very large, respectable following by chasing Apple and offering manufacturers an option for competing with Apple. 

But Microsoft's new entry gives nobody a reason to develop for, or buy, a Win8 tablet – regardless of who manufactures it.  Microsoft does not deliver a huge, untapped market.  Microsoft doesn't solve some large, unmet need.  Microsoft doesn't promise to change the game to some new, major trend that would drive early adopters to change platforms and bring along the rest of the market. 

And making a deal so a dying company, on the edge of bankruptcy – Barnes & Noble – uses your technology is not a "big win."  Amazon is killing Barnes & Noble, and Microsoft Windows 8 won't change that.  No more than the Nook is going to take out Kindle, Kindle Fire, Galaxy Tab or the iPad.  Microsoft can throw away $300million trying to convince people Win8 has value, but spending investor money on a dying businesses as a PR ploy is just stupid.

Microsoft is playing catch up.  Catch up with the user interface.  Catch up with the format.  Catch up with the device size and portability.  Catch up with the usability (apps).  Just catch up. 

Microsoft's problem is that it did not accept the PC market was going to stall back in 2008 or 2009.  When it should have seen that mobility was a game changing trend, and required retooling the Microsoft solution suite.  Microsoft dabbled with music mobility with Zune, but quickly dropped the effort as it refocused on its "core" Windows.  Microsoft dabbled with mobile phones across different solutions including Kin – which it dropped along with Microsoft Mobility.  Back again to focusing on operating systems.  By maintaining its focus on Windows Microsoft hoped it could stop the trend, and refused to accept the market shift that was destined to stall its sales.

Microsoft stock has been flat for a decade.  It's recent value improvement as Win8 approaches launch indicates that hope beats eternally in some investors' breasts for a return of Microsoft software dominance.  But those days are long past.  PC sales have stalled, and Windows is a product headed toward obsolescence as competitors make ever better, more powerful mobile platforms and ecosystems.  If you haven't sold Microsoft yet, this may well be your last chance above $30.  Ever.

Buy Facebook Now – Catch a lucky break!

On May 18 Facebook went public with an opening price of $38/share.  Now, after just 2 weeks, it's more like $28.  Ouch – a 25%+ drop in such a short time makes nobody happy.  Except buyers.  And if you are interested in capturing a high rate of return with little risk, this is your lucky break!

The values of publicly traded companies change, often dramatically, based upon changes in performance and investor expectations about the future.  Trying to profit off fast price changes is the world of traders – and the vast majority of them lose fortunes rather than create them.  Knowing how to ignore whipsaw events, and invest in good companies when they are out of favor is important to long-term wealth creation. 

Investors make money by understanding product markets and the companies supplying them, then investing in companies that build upon trends to create revenue growth with high rates of return over several years.  In the forgettable 1999 movie "Blast from the Past" (Brendan Fraser, Christopher Walken, Sissy Spacek) a family moves into its nuclear blast shelter in 1960 during a panic, and doesn't come out for 35 years.  Fortunately, the father had bought shares of AT&T and other companies aligned with 1960 trends, and the family discovers upon re-emergence it is quite wealthy. 

Creating investment wealth means acting like them, buying shares in companies building on trends so you can hold shares for years without much worry.

If ever there was a company aligned with trends, it is Facebook.  The company did not create 900million users in 8 years by being lucky.  Facebook is the ultimate information era company.  Facebook is not a fad – any more than television or telephones were fads in 1960.  Just like they provided fundamental new ways of acquiring and disseminating information Facebook is the newest, most efficient and effective way for connecting and communicating in 2012.

When television appeared the mass population said "why?" There was radio, which was cheap, and older users said TV reduced the use of imagination.  And television was not available many hours per day.  But it didn't take long for CBS and its brethren to prove it could attract eyeballs, and soon Proctor & Gamble started paying for programming so it could promote its soaps (remember "soap operas?") Soon other companies developed programs strictly so they could promote their products. The "Ted Mack Amateur Hour" was sponsored by Geritol, and viewers were reminded of that over and over for 30 minutes every week.  Eventually the TV ad model changed, but the lesson is clear -  when you can attract eyeballs it has value and there will be businesses creative enough to take advantage.

Now television watching is declining.  Instead, people are spending more time on the internet – including via mobile devices.  And the location attracting the most people, and by far for the most minutes per day, is Facebook.  Facebook's access to so many people, so often, creates an audience many businesses and non-profits want to tap. 

Further, in the networked world Facebook not only has eyeballs, it delivers up to those eyeballs some 9 million apps, and knows what everyone wants, where they come from and where they go next.  Beyond the industrial-era business of selling ads (like Google,) Facebook's information business has significant value for anyone trying to promote or sell a solution.  Facebook is a repository of information about people, and their behavior, never before seen, understood or developed for use.

Around the IPO, General Motors decided to drop its  Facebook advertising.  That freaked some investors.  Cries arose that social media is somehow broken, and unable to develop a business model. 

Let's keep in mind who we're talking about here – GM.  Not the most innovative, forward thinking company, to put it mildly.  GM, like a lot of other plodding, but big spending, large companies has approached social media like it is just television on the web – and would prefer to simply put up a television ad on a Facebook like link.  Whoa! That would be akin to a 1960s TV ad that was simply the text from a newspaper ad.  Nobody would read it, and it simply wouldn't work. 

Television required a new kind of communication to reach customers – and social media does as well.  TV required the ad be entertaining, with movement, product use demonstrations, and video plus audio to go with the words.  Connecting with users was harder, but the message (and connection) could be far more robust.  And that is what advertisers are being forced to learn about Facebook/Social.  It has new requirements, but once understood companies can be remarkably successful at connecting with potential customers – far more than the traditional one-way approach of historical advertising.

Paid promotion on Facebook is just the tip of the iceberg – a one-way approach to advertising sure to create short-term revenue but not terribly robust.  Beyond that, social media changes everything. Retail, for example, is fast shifting from pushing inventory to being all about understanding the customer and offering them what they need in an anticipatory way (think Amazon rather than Best Buy.)  And nowhere can you better understand customer needs than by social media participation.  By being an information company, rather than an industrial company, FB is remarkably well positioned to create growth – for everybody that figures out how to use this remarkable platform.

As Facebook's shares kept falling this week, more attention was paid to whether traditional advertisers would buy FB.  And much was made about whether the "metrics" were there to justify social media investments.  This micro-management approach clearly misses the main point.  People are already on Facebook, their numbers are growing, their uses are growing, their time on the site is growing, and the benefits of using Facebook are growing.  Trying to measure Facebook use the way you would measure a print ad – or even a Google Adword buy – is simply using the wrong tool.

When P&G first started producing television "soaps" their competition sat back and said "look at what television advertising costs, compared to print and compared to pushing products into the local stores.  What is the return for each of those television shows?  Can it be justified? I think it is smarter to keep doing what we've done while P&G throws money at ads you can't measure."  By moving beyond the historically myopic view of trying to find returns at the micro level P&G quickly became (at the time) the world's largest consumer goods company.  Early TV advertisers followed the trend, knowing their participation would create returns far in excess of doing more of the old thing. And that is the direction of social media.

There was a lot of anticipatory excitement for the Facebook IPO.  Lots of people wanted shares, and couldn't buy them in advance.  The public, and the Morgan Stanley investment bankers, clearly thought the shares would go up.  Oops.  But that's a lucky thing for investors. Especially small investors, usually unable to participate in a "hot" IPO.  Now anybody can buy FB shares at a 25% discount to the offering price – a better deal than the institutional buyers that usually get the "sweet" deal little guys never see. 

If you are an employee, short term you might be unhappy.  But if you are an investor, be happy that worries about Greece, the Euro's future, domestic politics, a lousy jobs report and simple myths like  "sell in May and go away" have been a drag on equities this month – and diminished interest in Facebook. 

Buy FB shares, then forget about them for a while.  What you care about isn't the value of FB shares in 4 days, 4 weeks or 4 months – you care about 4 years.  If you missed the chance to buy Microsoft in 1986, or Amazon in 1997, or Apple in 2000, or Google in 2004 then don't miss this one.  There will be volatility, but the trends are all in your favor.

Will Meg Whitman’s Layoffs Turn Around HP? Nope

Things are bad at HP these days.  CEO and Board changes have confused the management team and investors alike.  Despite a heritage based on innovation, the company is now mired in low-growth PC markets with little differentiation.  Investors have dumped the stock, dropping company value some 60% over two years, from $52/share to $22 – a loss of about $60billion. 

Reacting to the lousy revenue growth prospects as customers shift from PCs to tablets and smartphones, CEO Meg Whitman announced plans to eliminate 27,000 jobs; about 8% of the workforce.  This is supposedly the first step in a turnaround of the company that has flailed ever since buying Compaq and changing the company course into head-to-head PC competition a decade ago.  But, will it work? 

Not a chance.

Fixing HP requires understanding what went wrong at HP.  Simply, Carly Fiorina took a company long on innovation and new product development and turned it into the most industrial-era sort of company.  Rather than having HP pursue new technologies and products in the development of new markets, like the company had done since its founding creating the market for electronic testing equipment, she plunged HP into a generic manufacturing war.

Pursuing the PC business Ms. Fiorina gave up R&D in favor of adopting the R&D of Microsoft, Intel and others while spending management resources, and money, on cost management.  PCs offered no differentiation, and HP was plunged into a gladiator war with Dell, Lenovo and others to make ever cheaper, undifferentiated machines.  The strategy was entirely based upon obtaining volume to make money, at a time when anyone could buy manufacturing scale with a phone call to a plethora of Asian suppliers.

Quickly the Board realized this was a cutthroat business primarily requiring supply chain skills, so they dumped Ms. Fiorina in favor of Mr. Hurd.  He was relentless in his ability to apply industrial-era tactics at HP, drastically cutting R&D, new product development, marketing and sales as well as fixating on matching the supply chain savings of companies like Dell in manufacturing, and WalMart in retail distribution. 

Unfortunately, this strategy was out of date before Ms. Fiorina ever set it in motion.  And all Mr. Hurd accomplished was short-term cuts that shored up immediate earnings while sacrificing any opportunities for creating long-term profitable new market development.  By the time he was forced out HP had no growth direction.  It's PC business fortunes are controlled by its suppliers, and the PC-based printer business is dying.  Both primary markets are the victim of a major market shift away from PC use toward mobile devices, where HP has nothing.

HPs commitment to an outdated industrial era supply-side manufacturing strategy can be seen in its acquisitions.  What was once the world's leading IT services company, EDS, was bought in 2008 after falling into financial disarray as that market shifted offshore.  After HP spent nearly $14B on the purchase, HP used that business to try defending and extending PC product sales, but to little avail.  The services group has been downsized regularly as growth evaporated in the face of global trends toward services offshoring and mobile use.

In 2009 HP spent almost $3B on networking gear manufacturer 3Com.  But this was after the market had already started shifting to mobile devices and common carriers, leaving a very tough business that even market-leading Cisco has struggled to maintain.  Growth again stagnated, and profits evaporated as HP was unable to bring any innovation to the solution set and unable to create any new markets.

In 2010 HP spent $1B on the company that created the hand-held PDA (personal digital assistant) market – the forerunner of our wirelessly connected smartphones – Palm.  But that became an enormous fiasco as its WebOS products were late to market, didn't work well and were wholly uncompetitive with superior solutions from Apple and Android suppliers.  Again, the industrial-era strategy left HP short on innovation, long on supply chain, and resulted in big write-offs.

Clearly what HP needs is a new strategy.  One aligned with the information era in which we live.  Think like Apple, which instead of chasing Macs a decade ago shifted into new markets.  By creating new products that enhanced mobility Apple came back from the brink of complete failure to spectacular highs.  HP needs to learn from this, and pursue an entirely new direction.

But, Meg Whitman is certainly no Steve Jobs.  Her career at eBay was far from that of an innovator.  eBay rode the growth of internet retailing, but was not Amazon.  Rather, instead of focusing on buyers, and what they want, eBay focused on sellers – a classic industrial-era approach.  eBay has not been a leader in launching any new technologies (such as Kindle or Fire at Amazon) and has not even been a leader in mobile applications or mobile retail. 

While CEO at eBay Ms. Whitman purchased PayPal.  But rather than build that platform into the next generation transaction system for web or mobile use, Paypal was used to defend and extend the eBay seller platform.  Even though PayPal was the first leader in on-line payments, the market is now crowded with solutions like Google Wallets (Google,) Square (from a Twitter co-founder,) GoPayment (Intuit) and Isis (collection of mobile companies.) 

Had Ms. Whitman applied an information-era strategy Paypal could have been a global platform changing the way payment processing is handled.  Instead its use and growth has been limited to supporting an historical on-line retail platform.  This does not bode well for the future of HP.

HP cannot save its way to prosperity.  That never works.  Try to think of one turnaround where it did – GM? Tribune Corp? Circuit City? Sears?  Best Buy? Kodak?  To successfully turn around HP must move – FAST – to innovate new solutions and enter new markets.  It must change its strategy to behave a lot more like the company that created the oscilliscope and usher in the electronics age, and a lot less like the industrial-era company it has become – destroying shareholder value along the way.

Is HP so cheap that it's a safe bet.  Not hardly.  HP is on the same road as DEC, Wang, Lanier, Gateway Computers, Sun Microsystems and Silicon Graphics right now.  And that's lousy for investors and employees alike.

OOPS! 5 CEOs that Should Have Already Been Fired (Cisco, GE, WalMart, Sears, Microsoft)

This has been quite the week for CEO mistakes.  First was all the hubbub about Scott Thompson, CEO of Yahoo, inflating his resume to include a computer science degree he did not actually receive.  According to Mr. Thompson someone at a recruiting firm added that degree claim in 2005, he didn't know it and he's never read his bio since.  A simple oversight, if you can believe he hasn't once read his bio in 7 years, and he didn't think it was ever important to correct someone who introduced him or mentioned it.  OOPS – the easy answer for someone making several million dollars per year, and trying to guide a very troubled company from the brink of failure. Hopefully he is more persistent about checking company facts.

But luckily for him, his errors were trumped on Thursday when Jamie Dimon, CEO of J.P.MorganChase notified the world that the bank's hedging operation messed up and lost $2B!!  OOPS!  According to Mr. Dimon this is really no big deal. Which reminded me of the apocryphal Senator Everett Dirksen statement "a billion here, a billion there and pretty soon it all adds up to real money!" 

Interesting "little" mistake from a guy who paid himself some $50M a few years ago, and benefitted greatly from the government TARP program.  He said this would be "fodder for pundits," as if we all should simply overlook losing $2B?  He also said this was "unfortunate timing."  As if there's a good time to lose $2B? 

But neither of these problems will likely result in the CEOs losing their jobs.  As obviously damaging as both mistakes are, which would naturally have caused us mere employees to instantly lose our jobs – and potentially be prosecuted – CEOs are a rare breed who are allowed wide lattitude  in their behavior.  These are "one off" events that gain a lot of attention, but the media will have forgotten within a few days, and everyone else within a few months.

By comparison, there are at least 5 CEOs that make these 2 mistakes appear pretty small.  For these 5, frequently honored for their position, control of resources and personal wealth, they are doing horrific damage to their companies, hurting investors, employees, suppliers and the communities that rely on their organizations.  They should have been fired long before this week.

#5 – John Chambers, Cisco Systems.  Mr. Chambers is the longest serving CEO on this list, having led Cisco since 1995 and championed much of its rapid growth as corporations around the world began installing networks.  Cisco's stock reached $70/share in 2001.  But since then a combination of recessions that cut corporate IT budgets and a market shift to cloud computing has left Cisco scrambling for a strategy, and growth.

Mr. Chambers appears to have been great at operating Cisco as long as he was in a growth market.  But since customers turned to cloud computing and greater use of mobile telephony networks Cisco has been unable to innovate, launch and grow new markets for cloud storage, services or applications.  Mr. Chambers has reorganized the company 3 times – but it has been much like rearranging the deck chairs on the Titanic.  Lots of confusion, but no improvement in results.

Between 2001 and 2007 the stock lost half its value, falling to $35.  Continuing its slide, since 2007 the stock has halved again, now trading around $17.  And there is no sign of new life for Cisco – as each earnings call reinforces a company lacking a strategy in a shifting market.  If ever there was a need for replacing a stayed-in-the-job too long CEO it would be Cisco.

#4 – Jeffrey Immelt, General Electric (GE).  GE has only had 9 CEOs in its 100+ year life.  But this last one has been a doozy.  After more than a decade of rapid growth in revenue, profits and valuation under the disruptive "neutron" Jack Welch, GE stock reached $60 in 2000.  Which turns out to have been the peak, as GE's value has gone nowhere but down since Mr. Immelt took the top job.

GE was once known for entering and changing markets, unafraid to disrupt how the market performed with innovation in products, supply chain and operations.  There was no market too distant, or too locked-in for GE to not find a way to change to its advantage – and profit.  But what was the last market we saw GE develop?  What has Mr. Immelt, in his decade at the top of GE, done to keep GE as one of the world's most innovative, high growth companies?  He has steered the ship away from trouble, but it's only gone in circles as it's used up fuel. 

From that high in 2001, GE fell to a low of $8 in 2009 as the financial crisis revealed that under Mr. Immelt GE had largely transitioned from a manufacturing and products company into a financial house.  He had taken what was then the easy road to managing money, rather than managing a products and services company.  Saved from bankruptcy by a lucrative Berkshire Hathaway, GE lived on.  But it's stock is still only $19, down 2/3 from when Mr. Immelt took the CEO position. 

"Stewardship" is insufficient leadership in 2012.  Today markets shift rapidly, incur intensive global competition and require constant innovation.  Mr. Immelt has no vision to propel GE's growth, and should have been gone by 2010, rather than allowed to muddle along with middling performance.

#3 – Mike Duke, WalMart.  Mr. Duke has been CEO since 2009, but prior to that he was head of WalMart International.  We now know Mr. Duke's business unit saw no problems with bribing foreign officials to grow its business.  Just on the basis of knowing about illegal activity, not doing anything about it (and probably condoning and recommending more,) and then trying to change U.S. law to diminish the legal repurcussions, Mr. Duke should have long ago been fired. 

It's clear that internally the company and its Board new Mr. Duke was willing to do anything to try and grow WalMart, even if unethical and potentially illegal.  Recollections of Enron's Jeff Skilling, Worldcom's Bernie Ebbers and Hollinger's Conrdad Black should be in our heads.  How far do we allow leaders to go before holding them accountable?

But worse, not even bribes will save WalMart as Mr. Duke follows a worn-out strategy unfit for competition in 2012.  The entire retail market is shifting, with much lower cost on-line companies offering more selection at lower prices.  And increasingly these companies are pioneering new technologies to accelerate on-line shopping with easy to use mobile devices, and new apps that make shopping, paying and tracking deliveries easier all the time.  But WalMart has largely eschewed the on-line world as its CEO has doggedly sticks with WalMart doing more of the same.  That pursuit has limited WalMart's growth, and margins, while the company files further behind competitively. 

Unfortunately, WalMart peaked at about $70 in 2000, and has been flat ever since.  Investors have gained nothing from this strategy, while employees often work for wages that leave them on the poverty line and without benefits.  Scandals across all management layers are embarrassing. Communities find Walmart a mixed bag, initially lowering prices on some goods, but inevitably gutting the local retailers and leaving the community with no local market suppliers.  WalMart needs an entirely new strategy to remain viable – and that will not come from Mr. Duke.  He should have been gone long before the recent scandal, and surely now.

#2 Edward Lampert, Sears Holdings.  OK, Mr. Lampert is the Chairman and not the CEO – but there is no doubt who calls the shots at Sears.  And as Mr. Lampert has called the shots, nobody has gained.

Once the most critical force in retailing, since Mr. Lampert took over Sears has become wholly irrelevant.  Hoping that Mr. Lampert could make hay out of the vast real estate holdings, and once glorious brands Craftsman, Kenmore and Diehard to turn around the struggling giant, the stock initially took off rising from $30 in 2004 to $170 in 2007 as Jim Cramer of "Mad Money" fame flogged the stock over and over on his rant-a-thon show.  But when it was clear results were constantly worsening, as revenues and same-store-sales kept declining, the stock fell out of bed dropping into the $30s in 2009 and again in 2012. 

Hope springs eternal in the micro-managing Mr. Lampert.  Everyone knows of his personal fortune (#367 on Forbes list of billionaires.)  But Mr. Lampert has destroyed Sears.  The company may already be so far gone as to be unsavable.  The stock price is based upon speculation of asset sales.  Mr. Lampert had no idea, from the beginning, how to create value from Sears and he surely should have been gone many months ago as the hyped expectations demonstrably never happened.

#1 – Steve Ballmer, Microsoft.  Without a doubt, Mr. Ballmer is the worst CEO of a large publicly traded American company.  Not only has he singlehandedly steered Microsoft out of some of the fastest growing and most lucrative tech markets (mobile music, handsets and tablets) but in the process he has sacrificed the growth and profits of not only his company but "ecosystem" companies such as Dell, Hewlett Packard and even Nokia.  The reach of his bad leadership has extended far beyond Microsoft when it comes to destroying shareholder value – and jobs.

Microsoft peaked at $60/share in 2000, just as Mr. Ballmer took the reigns.  By 2002 it had fallen into the $20s, and has only rarely made it back to its current low $30s value.  And no wonder, since execution of new rollouts were constantly delayed, and ended up with products so lacking in any enhanced value that they left customers scrambling to find ways to avoid upgrades.  By Mr. Ballmer's own admission Vista had over 200 man-years too much cost, and its launch still, years late, has users avoiding upgrades.  Microsoft 7 and Office 2012 did nothing to excite tech users, in corporations or at home, as Apple took the leadership position in personal technology.

So today Microsoft, after dumping Zune, dumping its tablet, dumping Windows CE and other mobile products, is still the same company Mr. Ballmer took control over a decade ago.  Microsoft is  PC company, nothing more, as demand for PCs shifts to mobile.  Years late to market, he has bet the company on Windows 8 – as well as the future of Dell, HP, Nokia and others.  An insane bet for any CEO – and one that would have been avoided entirely had the Microsoft Board replaced Mr. Ballmer years ago with a CEO that understands the fast pace of technology shifts and would have kept Microsoft current with market trends. 

Although he's #19 on Forbes list of billionaires, Mr. Ballmer should not be allowed to take such incredible risks with investor money and employee jobs.  Best he be retired to enjoy his fortune rather than deprive investors and employees of building theirs.

There were a lot of notable CEO changes already in 2012.  Research in Motion, Best Buy and American Airlines are just three examples.  But the 5 CEOs in this column are well on the way to leading their companies into the kind of problems those 3 have already discovered.  Hopefully the Boards will start to pay closer attention, and take action before things worsen.

 

Sell Google – Lot of Heat, Not Much Light

With revenues up 39% last quarter, it's far too soon to declare the death of Google.  Even in techville, where things happen quickly, the multi-year string of double-digit higher revenues insures survival – at least for a while. 

However, there are a lot of problems at Google which indicate it is not a good long-term hold for investors.  For traders there is probably money to be made, as this long-term chart indicates:

Google long term chart 5-3.12
Source: Yahoo Finance May 3, 2012

While there has been enormous volatility, Google has yet to return to its 2007 highs and struggles to climb out of the low $600/share price range.  And there's good reason, because Google management has done more to circle the wagons in self-defense than it has done to create new product markets.

What was the last exciting product you can think of from Google?  Something that was truly new, innovative and being developed into a market changer?  Most likely, whatever you named is something that has recently been killed, or receiving precious little management attention.  For a company that prided itself on innovation – even reportedly giving all employees 20% of their time to do whatever they wanted – we see management actions that are decidedly not about promoting innovation into the market, or making sustainable efforts to create new markets:

  • killed Google Powermeter, a project that could have redefined how we buy and use electricity
  • killed Google Wave, a product that offered considerable group productivity improvement
  • killed Google Flu Vaccine Finder offering new insights for health care from data analysis
  • killed Google Related which could have helped all of us search beyond keywords
  • killed Google synch for Blackberry as it focuses on selling Android
  • killed Google Talk mobile app
  • killed the OnePass Google payment platform for publishers
  • killed Google Labs – once its innovation engine
  • and there are rumors it is going to kill Google Finance

All of these had opportunities to redefine markets.  So what did Google do with these redeployed resources:

  • Bought Motorola for $12.5billion, which it hopes to take toe-to-toe with Apple's market leading iPhone, and possibly the iPad.  And in the process has aggravated all the companies who licensed Android and developed products which will now compete with Google's own products.  Like the #1 global handset manufacturer Samsung.  And which offers no clear advantage to the Apple products, but is being offered at a lower price.
  • Google+, which has become an internal obsession – and according to employees consumes far more resources than anyone outside Google knows.  Google+ is a product going toe-to-toe with Facebook, only with no clear advantages. Despite all the investment, Google continues refusing to publish any statistics indicating that Google+ is growing substantially, or producing any profits, in its catch-up competition with Facebook.

In both markets, mobile phones and social media, Google has acted very unlike the Google of 2000 that innovated its way to the top of web revenues, and profits. Instead of developing new markets, Google has chosen to undertaking 2 Goliath battles with enormously successful market leaders, but without any real advantage.

Google has actually proven, since peaking in 2007, that its leadership is remarkably old-fashioned, in the worst kind of way.  Instead of focusing on developing new markets and opportunities, management keeps focusing on defending and extending its traditional search business – and has proven completely inept at developing any new revenue streams.  Google bought both YouTube and Blogger, which have enormous user bases and attract incredible volumes of page views – but has yet to figure out how to monetize either, after several years.

For its new market innovations, rather than setting up teams dedicated to turning its innovations into profitable revenue growth engines Google leadership keeps making binary decisions.  Messrs. Page and Brin either decide the product and market aren't self-developing, and kill the products, or simply ignore the business opportunity and lets it drift.  Much like Microsoft – which has remained focused on Windows and Office while letting its Zune, mobile and other products drift into oblivion – or lose huge amounts of money like Bing and for years XBox.

I personalized that last comment onto the Google founders intentionally.  The biggest news out of Google lately has been a pure financial machination done for purely political reasons.  Announcing a stock dividend that effectively creates a 2-for-1 split, only creating a new class of non-voting "C" stock to make sure the founders never lose voting control.  This was adding belt to suspenders, because the founders already own the Class B stock giving them 66% voting control.  The purpose was purely to make sure nobody every tries to buy, or otherwise take over Google, because the founders will always have enough votes to make such an action impossible.

The founders explained this as necessary so they could retain control and make "big bets."  If "big bets" means dumping billions into also-ran products as late entrants, then they have good reason to fear losing company control.  Making big bets isn't how you win in the information technology industry.  You win by creating new markets, with new solutions, before the competition does it. 

Apple's huge wins in iPod, iTouch, iTunes, iPhone and iPad weren't "big bets."  The Apple R&D budget is 1/8 Microsoft's.  It's not big bets that win, its developing innovation, putting it into the market, shepharding it through a series of learning cycles to make it better and better and meeting previously unmet – often unidentified – needs.  And that's not what the enormous investments in mobile handsets and Google+ are about.

Although this stock split has no real impact on Google today, it is a signal.  A signal of a leadership team more obsessed with their own control than doing good for investors.  It is clearly a diversion from creating new products, and opening new markets.  But it was the centerpiece of communication at the last earnings call.  And that is a avery bad signal for investors.  A signal that the leaders see things likely to become much worse, with cash going out and revenue struggling, before too long.  So they are acting now to protect themselves.

Meanwhile, even as revenues grew 39% last quarter, there are signs of problems in Google's "core" market leadership is so fixated on defending.  As this chart shows, while volume of paid ads is going up, the price is now going down. Google price per click 4-2012

Source: Silicon Alley Insider

Prices go down when your product loses value.  You have to chase revenue.  Remember Proctor & Gamble's "Basics" product line launch?  Chasing revenue by cutting price.  In the short-term it can be helpful, but long-term it is not in your best interest.  Google isn't just cutting price on its incremental sales, but on all sales.  Increasingly advertisers are becoming savvy about what they can expect from search ads, and what they can expect from other venues – like Facebook – and the prices are reflecting expectations.  In a recent Strata survey the top 2 focus for ad executives were "social" (69%) and "display" (71%) – categories where Facebook leads – and both are ahead of "search."

At Facebook, we know the user base is around 800million.  We also know it's now the #1 site on the internet – more hits than Google.  And Facebook has much longer average user times on site.  All things attractive to advertisers.  Facebook is acquiring Instagram, which positions it much stronger on mobile devices, thus growing its market.  And while Google was talking about share splits, Facebook recently announced it was making Facebook email integrated into the Facebook platform much easier to use (which is a threat to Gmail) and it was adding a new analytics suite to help advertisers understand ad performance – like they are accustomed to at Google.  All of which increases Facebook's competitiveness with Google, as customers shift increasingly to social platforms.

As said at the top of this article, Google won't be gone soon.  But all signs point to a rough road for investors.  The company is ditching its game changing products and dumping enormous sums into me-too efforts trying to catch well healed and well managed market leaders.  The company has not created an ability to take new innovations to market, and remains stuck defending and extending its existing business lines.  And the top leaders just signaled that they weren't comfortable they could lead the company successfully, so they implemented new programs to make sure nobody could challenge their leadership. 

There are big fires burning at Google.  Unfortunately, burning those resources is producing a lot of heat – but not much light on a successful future.  It's time to sell Google.

WalMart’s the Titanic, and Mexican Bribery is its Iceberg – JUMP SHIP

WalMart's been accused of bribing officials in Mexico to grow its business.  But by and large, few in America seem to care.  The stock fell only modestly from its highs of last week, and today the stock recovered from the drop off to the lows of February. 

But WalMart is going to fail.  WalMart is trying to defend and extend a horribly outdated industrial strategy.

Sam Walton opened his original five and dime stores in the rural countryside, and competed just like small retailers had done for decades.  But quickly he recognized that industrialization offered the opportunity to shift the retail market.  By applying industrial concepts like scale, automation and volume buying he could do for retailing what Ford and GM had done for auto manufacturing.  And his strategy, designed for an industrial marketplace, worked extremely well.  Like it or not, WalMart outperformed retailers still trying to compete like they had in the 1800s, and WalMart was spectacularly successful.

But today, the world has shifted again.  Only WalMart is putting all its resources into trying to defend and extend its industrial era strategy, rather than modify to compete in the information age.  Because its strategy doesn't work, the company keeps wandering into spectacular failures, and horrible leadership problems.

  • In 2005 WalMart's Vice Chairman and a corporate Vice President tried to use the company's size to wring more out of gift card and merchandise suppliers.  Both were caught and fired for fraud. 
  • In 2006 WalMart hired a new head of marketing to update the strategy, and improve the stores and merchandise.  But upon realizing her recommendations violated the existing WalMart industrial strategy the company fired her after only a few months, and went public with character besmirching allegations that she and an ad agency executive were having an affair.  Like that (even if true, which is hotly disputed) somehow mattered to the changes WalMart needed.  Changes which were abruptly terminated upon firing her.
  • In 2008 a WalMart employee became an invalid in a truck accident.  When the employee won a lawsuit related to the accident, WalMart sued the invalid employee to return $470,000 in insurance payments made by WalMart.  As if WalMart's future depended on the return of that money.
  • In a cost saving move, WalMart moved its marketing group under merchandising, in order to reduce employees and the breadth of merchandise, as well as keep the company more tightly focused on its strategy.

All 3 of these incidents show a leadership team that is so entrenched in history it will do anything – anything – to keep from evolving forward.  And sd that history developed it paved a pathway where it was only a very small step to paying bribes in order to open more stores in Mexico.  Such bribes could easily be seen as just doing "whatever it takes" to keep defending the existing business model, extending it into new markets, even though it is at the end of its life.

It has come to light that after paying the bribes, the leadership team did about everything it could to cover them up.  And that included spending millions on lobbying efforts to hopefully change the laws before anyone was caught, and possibly prosecuted.  The goal was to keep the stores open, and open more.  If that meant a little bribing went on, then it was best to not let people know.  And instead of saying what WalMart did was wrong, change the rules so it doesn't look like it was wrong. 

At WalMart right and wrong are no longer based on societal norms, they are based on whether or not it lets WalMart defend its existing business by doing more of what it wants to do.

WalMart's industrial strategy is similar to the Titanic strategy.  Build a boat so big it can't sink.  And if any retailer could be that big, then WalMart was it.  But these scandals keep showing us that the water is increasingly full of icebergs.  Each scandal points out that WalMart's strategy is harder to navigate, and is running into big problems.  Even though the damage isn't visible to most of us, it is nonetheless clear to WalMart executives that doing more of the same is leading to less good results.  WalMart is taking on water, and it has no solution.  In their effort to prop up results executives keep doing things that are less and less ethical – sometimes even illegal – and guiding people down through all levels of management and employment to do the same.

WalMart's problems aren't unions, or city zoning councils, or women's rights and fair pay organizations.  WalMart's problem is an out of date retail strategy.  Consumers have a lot of options besides going to stores that look like airplane hangers, and frequently without paying a premium.  There is wider selection, in attractive stores, with better quality and a better shopping experience.   And beyond traditional retail, consumers can now buy almost anything 24×7 on-line, frequently at a better price than WalMart – despite its enormous and automated distribution centers and stores, with tight inventory and expense control.

But WalMart is completely unable to admit its strategy is outdated, and unwilling to make any changes.  This week, amidst the scandal, WalMart rolled out its latest and greatest innovation for on-line shopping.  WalMart will now allow an on-line customer to pay with cash.  After placing an order on-line they can trot down to the store and pay the cash, then WalMart will recognize the order and ship the product.

Really.  Now, if this is targeted at customers that are so out of the modern loop that they have no credit card, no debit card, no on-line checking capability and no Paypal account tied to checking – do you think they have a PC to place an online order?  And if they did go to the local library to use a computer, why would they go pay at the store only to have the item shipped – rather than simply buy it in the store and take it home immediately? 

Clearly, once again, WalMart isn't trying to change its strategy.  This is an effort to extend the old WalMart, in a bizarre way, online.  The company keeps trying to keep people coming into the store. 

Amazingly, despite the fact that there's a 50/50 (or better) chance that the CEO and a number of WalMart execs will have to be removed from their position – and could well go to jail for Foreign Corrupt Practice Act violations – most people are unmoved.  The stock has barely flinched, and option traders see the stock remaining at 55 or higher out into September.  Nobody seems to believe that all these hits WalMart is taking really matters.

A famous Titanic line is "and the band played on."   This refers to the band continuing to play song after song, oblivious to disaster, until the ship suddenly broke, heaved up and dove into the ocean leaving only those in life boats to survive.  As the Titanic was taking on water not the captain, the officers, the crew, the passengers or those listening over the airwaves wanted to accept that the Titanic would sink.

But it did.

So how long will you hold onto WalMart shares?  WalMarts growth has been declining for a decade, and even went negative in 2009.  Same store sales have declined for 2 years.  Scandals are now commonplace.  Online retailers such as Amazon and Overstock.com are stripping out all the retail growth, leaving traditionalists in decline.  WalMart may be doing better than Sears, or Best Buy, but for how long? 

WalMart has no ability to stop the economic shift from an industrial to an information age.  It could choose to adapt, but instead its leaders have done the opposite.  The retailers now succeeding are those eschewing almost all the WalMart practices in favor of using customer information to offer what people want (out of their much wider selection) when customers want it, often at surprisingly good prices.  This is the current carrying emerging retailers to better profitability – and it is the current WalMart remains intent on fighting.  Even as its executives face prison.

Why EVERY Company Must Be a Tech Company – Apple, Amazon, Facebook, Instagram Lessons

Apple's amazing increase in value is more than just a "rah-rah" story for a turnaround.  Fundamentally, Apple is telling everyone – globally – that there has been a tectonic shift in markets.  And if leaders don't understand this shift, and incorporate it into their strategy and tactics, their organizations are going to have a very difficult future.

Recently Apple's value peaked at $600B.  Yes, that is an astounding number, for it reflects not only 50% greater value than the oil giant Exxon/Mobil (~$390B), but more than the entire value of the stock markets in Spain, Greece and Portugal combined!

Apple Mkt Cap v Spain-Portugal-Greece
Source: Business Insider.com

This astounding valuation causes many to be reticent about owning Apple shares, for it seems implausible that any one company – especially a tech company with so few employees – could be worth so much.

Unless we look at this information in the context of a major, global economic shift.  That what the world values has changed dramatically.  And that what investors are telling business (and government) leaders is that in a globalized, fast paced world value is based upon what you know, when you know it – in other words information.  Not land, buildings or the ability to make things.

Three hundred years ago the wealthiest people in the world owned land.  Wars were fought for centuries to control land.  Kings owned land, and controlled everything on the land while capturing the value of everything produced on that land.  As changes came along, reducing the role of kings, land barons became the wealthiest people in the world.  In an agrarian economy, where most human resources (and all others for that matter) were deployed in food production owning land was the most valuable thing on the planet.

But then some 120 years ago, along came the industrial reveolution.  Suddenly, productivity rose dramatically by applying new machines to jobs formerly performed by humans.  With this shift, value changed.  The great industrialists were able to capture the value of greater productivity – making people like Cyrus McCormick, Henry Ford and Andrew Carnegie the wealthiest of the wealthy.  Worth more than most states, and many foreign countries. 

The age of manufacturing was based upon the productivity of machines and the application of industrial processes to what formerly was hand labor.  Creating tools – from entignes to automobiles to airplanes – created great wealth.  Knowing how to make these machines, and making them, created enormous value.  And companies like General Motors, General Dynamics and General Electric were worth much more than the land upon which food was produced.  And the commodity suppliers, like Exxon/Mobil, feeding industrial companies captured huge value as well. 

By the middle 1900s America's farmers were forced to create ever larger farms to remain in business, and were constantly begging for government subsidies to stay alive via price controls (parity programs) and land "set-asides" run by the Agriculture Department.  By the 1980s family farms going broke by the thousands, agricultural land values plummeted and the ability to create value by growing or processing food was a struggle.  Across the developed world, wealth shifted into the hands of industrial companies from landowners.

Sometime in the 1990s the world shifted again, and that's what the chart above shows us.  Countries with little or no technology companies – no information economy – cannot create value.  On the other hand, companies that can drive new levels of productivity via the creation, management, use and sale of information can create enormous value. 

Think about the incredible shift that has happened in retail.  America's largest and most successful retailer from the 1900 turn of the century well into the 1960s was Sears.  In an industry that long equated success with "location, location, location" Sears has had, and continues to control, enormous amounts of land and buildings.  But the value of Sears has declined like a stone pitched off a bridge, now worth only $6B (1% the Apple value) despite all that real estate!

Simultaneously, America's largest retailer Wal-Mart has seen its value go nowhere for over a decade, despite its thousands of locations that span every state.  Even though Wal-Mart keeps adding stores, and enlarging stores, adding more and more land and buildings to its "asset" base the company's customer base, sales and value are mired, unable to rise.

Yet, Amazon – which has no land, and almost no buildings – has used the last 20 years to go from start up to an $86B valuation – doing much better for shareholders than its traditional, industrial thinking competitors.  In the last 5 years, Amazon's value has roughly quadrupled!

AMZN v WMT v SHLD chart 4.13.12
Source: Yahoo Finance

Yes, Amazon is a retailer.  But the company has learned that applying an industrial strategy is far less valuable than applying an information strategy.  As an internet leader, first with most browser formats on PCs and smartphones, Amazon has reached far more new customers than any traditional real-estate focused company.  By launching Kindle Amazon focused on the information in books, rather than the format (print) revolutionizing the market and capturing enormous value.

By launching Kindle Fire Amazon takes information one step further, making it possible for customers to access new products faster, order faster and build their own retail world without ever going to a building.  By becoming a tech company, Amazon is clearly well on the way to dominating retail, as Sears falls into irrelevancy and almost surely bankruptcy, and Wal-Mart stalls under the overhead of all that land, buildings and vast number of minimum-wage, uninsured employees.

We now must realize that value is not created by what accountants have long called "hard assets" – land, buildings and equipment.  In fact, the 2 great U.S. recessions since 2000 have demonstrated to everyone that there is no security in these – the value can decline, decline fast, and decline far.  Just because these things are easy to see and count does not insure value.  They can easily be worth less than they cost to make – or own.

Successful competition in 2012 (and going forward) requires businesses know about customers, products and have the ability to supply solutions fast with great reach.  Winning is about what you know, knowing it early, acting upon the information and then being able to disseminate that solution fast to those who have emerging needs. 

Which is why you have to be excited about the brilliant move Facebook made to acquire Instagram last week.  In one fast, quick step Facebook bought the ability to easily and effectively provide mobile image solutions – across any application – to millions of existing users. Something that every single person, and business, on the planet is either doing now, or will be doing very soon.

Instagram price per user from Wired
Source:  Wired

On a cost-per-existing-customer basis, Facebook stole Instagram.  And that's before Facebook spreads out the solution to the rest of its 780million users!  Forget about how many employees Instagram has, or its historical revenues or its assets.  In an innovation economy, if you have a product that 35million people hear about and start using in less than a year, you have something very valuable!

Kudos go to Mark Zuckerberg as CEO, and his team, for making this acquisition so quickly.  Before Instagram had a chance to hire bankers, market itself and probably raise its value 10x.  That's why Mr. Zuckerberg was Time Magazine's "Man of the Year" at the start of 2011 – and why he's been able to create so much more value for his shareholders than the CEOs of industrial companies – like say GE.

Going forward, no company can plan to survive with an industrial strategy.  That approach, and those rules, simply don't create high returns.  To be successful you MUST become a tech company.  And while this may not feel comfortable, it is reality.  Every business must shift, or die.