Is Yahoo Doomed?  Probably

Is Yahoo Doomed? Probably

Marissa Mayer’s reign as head of Yahoo looks to be ending like her predecessors.  With a serious flop.  Only this may well be the last flop – and the end of the internet pioneer.

It didn’t have to happen this way, but an inability to manage Status Quo Risk doomed Ms. Mayer’s leadership – as it has too many others.  And once again bad leadership will see a lot of people – investors, employees and even customers – pay the price.

Yahoo was in big trouble when Ms. Mayer arrived.  Growth had stalled, and its market was being chopped up by Google and Facebook.  It’s very relevancy was questionable as people no longer needed news consolidation sites – which had ended AOL, for example – and search had long gone to Google.  The intense internet users were already clearly mobile social media fans, and Yahoo simply did not compete in that space.

In other words, Yahoo desperately needed a change of direction and an entirely new strategy the day Ms. Mayer showed up.  Only, unfortunately, she didn’t provide either.  Instead Ms. Meyer offered, at best, a series of fairly meaningless tactical actions.  Changing Yahoo’s home page layout, cancelling the company’s work-from-home policy and hiring Katie Couric, amidst a string of small and meaningless acquisitions, were the business equivalent of fiddling while Rome burned.  Tinkering with the tactics of an outdated success formula simply ignored the fact that Yahoo was already well on the road to irrelevancy and needed to change, dramatically, quickly.

The saving grace for Yahoo was when Alibaba went public.  Suddenly a long-ago decision to invest in the Chinese company created a vast valuation increase for Yahoo.  This was the opportunity of a lifetime to shift the business fast and hard into something new, different and much more relevant than the worn out Yahoo strategy.  But, unfortunately, Ms. Mayer used this as a curtain to hide the crumbling former internet leader.  She did nothing to make Yahoo relevant, as fights erupted over how to carve up the Alibaba windfall.

When it became public that Ms. Mayer had hired famed strategy firm McKinsey & Co. to decide what businesses to close in its next “restructuring” it lit up the internet with cries to possibly just get rid of the whole thing! After 3 years, and more than one layoff, it now appears that Ms. Mayer has no better idea for creating value out of Yahoo than doing another big layoff to, once again, improve “focus on core offerings.”  Additional layoffs, after 3 years of declining sales, is not the way to grow and increase shareholder value.

Analysts are pointing out that Yahoo’s core business today is valueless.  The company is valued at less than its remaining Alibaba stake.  And this is not outrageous, since in the ad world Yahoo has become close to irrelevant.  Nobody would build an on-line ad campaign ignoring Google or Facebook, and several other internet leaders.  But ignoring Yahoo as a media option is increasingly common.

Investors are rightly worried that the IRS will take much of the remaining Alibaba value as taxes in any spinoff, leaving them with far less money.  Giving up on the CEO, and its increasingly irrelevant “core business” they are asking if it wouldn’t be smarter to sell what we think of as Yahoo to Softbank so the Japanese company can obtain the rest of Yahoo Japan it does not already own.  Ostensibly then Yahoo as it is known in the USA could simply start to disappear – like AOL and all the other on-line news consolidators.

PirateMarissaMayerIt really did not have to happen this way.  Yahoo’s troubles were clearly visible, and addressable.  But CEO Mayer simply chose to keep doing more of the same, making small improvements to Yahoo’s site and search tool.  By keeping Yahoo aligned with its historical Status Quo risk of irrelevance, obsolescence and failure grew quarter-by-quarter.

Now Status Quo Risk (the risk created by not adapting to shifting market needs) has most likely doomed Yahoo.  Investors are no longer interested in waiting for a turn-around.  They want their Alibaba valuation, and they could care less about Yahoo’s CEO, employees or customers.  Many have given up on Ms. Mayer, and simply want an exit strategy so they can move on.

Ms. Mayer’s leadership has shown us some important leadership lessons:

  • Hiring an executive from Google (or another tech company) does not magically mean success will emerge.  Like Ron Johnson from Apple to JCP, Ms. Mayer showed that even tech execs often lack an ability to understand market trends and the skills to adapt an organization.
  • It is incredibly easy for a new leader to buy into an historical success formula and keep tweaking it, rather than doing the hard work of creating a new strategy and adapting.  The lure of focusing on tactics and hoping the strategy will take care of itself is remarkably easy fall into.  But investors need to realize that tactics do not fix an outdated success formula.
  • Youth is not the answer.  Ms. Mayer was young, and identified with the youthfulness of Google and internet users.  But, in the end, she woefully lacked the strategy and leadership skills necessary to turn around the deeply troubled Yahoo.  Young, new and fresh is no substitute for critical thinking and knowing how to lead.
  • Boards give CEOs too much time to fail.  It was clear within months Ms. Mayer had no strategy for making Yahoo relevant.  Yet, the Board did not recognize its mistake and replace the CEOs.  There still are not sufficient safeguards to make sure Boards act when CEOs fail to lead effectively.
  • CEOs too often have too much hubris.  Ms. Mayer went from college to a rapid career acceleration in largely staff positions to CEO of Yahoo and a Board member of Wal-Mart.  It is easy to develop hubris, and an over-abundance of self-confidence.  Then it is easy to require your staff agree with you, and pledge so support you (as Ms. Mayer recently did.)  All of this indicates a leader running on hubris rather than critical thinking, open discourse and effective decision-making.  Hubris is not just a weakness of white male leaders.

Could there have been a different outcome.  Of course.  But for Yahoo’s employees, suppliers, customers and investors the company hired a string of CEOs that simply were not up to the job of redirecting the company into competitiveness.  Each one fell victim to trying to maintain the Status Quo. And, unfortunately, Ms. Mayer will be seen as the most recent – and possibly last – CEO to lead Yahoo into failure.  Ms. Mayer simply was not up to the job – and now a lot of people will pay the price.

 

Three Leadership Lessons From Tree Climbing Goats

Three Leadership Lessons From Tree Climbing Goats

Tree climbing goatsNo. You’re not seeing things. These are goats in trees.

These goats love the fruit growing on argon trees west of Marrakesh, Morocco. They don’t care so much for the nut inside, so they spit it out.  People gather those nuts and make them into argon oil highly valued for food and in beauty products.

I was startled by these goats.  It was, at the very least, mentally disruptive.   As I thought about the experience, I realized there were leadership lessons to be learned from these tree climbing goats:

  1.  These goats don’t chase low hanging fruit. What they want is up in the trees, and the challenge did not stop them. It takes extraordinary measures to accomplish what they want, but they invested in the effort to be extraordinary.  Once they learned to climb trees, something they easily could say was “not their core strength,” they left behind what was on the ground for the riches of success.  These goats prove that if what you want is in the trees, you have to go for it.  One should not settle for less.  No leader should stay so focused on the past that they can’t figure out new ways to compete, and succeed.
  2. Once they became known for doing extraordinary things, people flocked to be next to these goats.  People want to be near goats that are unusual, and in some way better than other goats.  By seeking the extraordinary, and accomplishing the extraordinary, these goats merely need to “do their thing” and people are attracted to them.  People will feed these goats, and even pay their shepherds to be next to them and take photos.  Being extraordinary creates a winning situation that feeds on itself, creating additional wins – including attracting people to you.
  3. Because of their willingness to do something extraordinary, these goats have control over their shepherds.  In a real way, the shepherds need the goats much more than the goats need the shepherds.  The power wielded by tree climbing goats is not from being brutal, or micromanaging, or being “charismatic.”  They simply developed their power via their willingness to do something extraordinary — something their shepherds will not do.  Something most people will not do.  Simultaneously, the goats share their wealth with the shepherds.  While they receive lots of their favorite foods, the shepherds receive payments.  The goats have a symbiotic, sharing relationship with their handlers, and the people who visit and feed them, where everyone wins.

Here’s the bottom line:

No matter what you are doing, strive for the extraordinary.  You are not limited by “core strengths,” nor your past.  If you can visualize a goal you can seek that goal and you can work to accomplish that goal.  You can be extraordinary if you are willing to break out of your old self-definition and try.  These goats didn’t become successful tree climbers in one day, but by accomplishing their goal over time they became quite extraordinary.

It is good to be extraordinary.  Don’t just go for the low-hanging fruit, or what is easy.  Innovate.  Be disruptive.  The path may not be easy, or obvious, but the payoff can be as extraordinary as the accomplishment.

So what’s stopping you from being extraordinary?  What locks you in to your definition of your old “self?”  What goal can you set, and work to accomplish, that will set you apart and demonstrate you are extraordinary, and a leader someone should admire?

Poor Microsoft – How Good Decisions, Made Too Late, Bode Poorly for the Future

Poor Microsoft – How Good Decisions, Made Too Late, Bode Poorly for the Future

Microsoft recently announced it was offering Windows 10 on xBox, thus unifying all its hardware products on a single operating system – PCs, mobile devices, gaming devices and 3D devices.  This means that application developers can create solutions that can run on all devices, with extensions that can take advantage of inherent special capabilities of each device.  Given the enormous base of PCs and xBox machines, plus sales of mobile devices, this is a great move that expands the Windows 10 platform.

Only it is probably too late to make much difference.  PC sales continue falling – quickly. Q3 PC sales were down over 10% versus a year ago. Q2 saw an 11% decline vs year ago. The PC market has been steadily shrinking since 2012In Q2 there were 68M PCs sold, and 66M iPhones.  Hope springs eternal for a PC turnaround – but that would seem increasingly unrealistic.

BallmerThe big market shift to mobile devices started back in 2007 when the iPhone began challenging Blackberry.  By 2010 when the iPad launched, the shift was in full swing.  And that’s when Microsoft’s current problems really began.  Previous CEO Steve Ballmer went “all-in” on trying to defend and extend the PC platform with Windows 8 which began development in 2010.  But by October, 2012 it was clear the design had so many trade-offs that it was destined to be an Edsel-like flop – a compromised product unable to please anyone.

By January, 2013 sales results were showing the abysmal failure of Windows 8 to slow the wholesale shift into mobile devices.  Ballmer had played “bet the company” on Windows 8 and the returns were not good.  It was the failure of Windows 8, and the ill-fated Surface tablet which became a notorious billion dollar write-off, that set the stage for the rapid demise of PCs.

And that demise is clear in the ecosystem.  Microsoft has long depended on OEM manufacturers selling PCs as the driver of most sales.  But now Lenovo, formerly the #1 PC manufacturer, is losing money – lots of money – putting its future in jeopardy.  And Dell, one of the other top 3 manufacturers, recently pivoted from being a PC manufacturer into becoming a supplier of cloud storage by spending $67B to buy EMC. The other big PC manufacturer, HP, spun off its PC business so it could focus on non-PC growth markets.

Windows deadAnd, worse, the entire OEM market is collapsing.  For the largest 4 PC manufacturers sales last quarter were down 4.5%, while sales for the remaining smaller manufacturers dropped over 20%!  With fewer and fewer sales, consolidation is wiping out many companies, and leaving those remaining in margin killing to-the-death competition.

Which means for Microsoft to grow it desperately needs Windows 10 to succeed on devices other than PCs.  But here Microsoft struggles, because it long eschewed its “channel suppliers,” who create vertical market applications, as it relied on OEM box sales for revenue growth.  Microsoft did little to spur app development, and rather wanted its developers to focus on installing standard PC units with minor tweaks to fit vertical needs.

Today Apple and Google have both built very large, profitable developer networks.  Thus iOS offers 1.5M apps, and Google offers 1.6M. But Microsoft only has 500K apps largely because it entered the world of mobile too late, and without a commitment to success as it tried to defend and extend the PC.  Worse, Microsoft has quietly delayed Project Astoria which was to offer tools for easily porting Android apps into the Windows 10 market.

Microsoft realized it needed more developers all the way back in 2013 when it began offering bonuses of $100,000 and more to developers who would write for Windows.  But that had little success as developers were more keen to achieve long-term sales by building apps for all those iOS and Android devices now outselling PCs.  Today the situation is only exacerbated.

By summer of 2014 it was clear that leadership in the developer world was clearly not Microsoft.  Apple and IBM joined forces to build mobile enterprise apps on iOS, and eventually IBM shifted all its internal PCs from Windows to Macintosh.  Lacking a strong installed base of Windows mobile devices, Microsoft was without the cavalry to mount a strong fight for building a developer community.

In January, 2015 Microsoft started its release of Windows 10 – the product to unify all devices in one O/S.  But, largely, nobody cared.  Windows 10 is lots better than Win8, it has a great virtual assistant called Cortana, and it now links all those Microsoft devices.  But it is so incredibly late to market that there is little interest.

Although people keep talking about the huge installed base of PCs as some sort of valuable asset for Microsoft, it is clear that those are unlikely to be replaced by more PCs.  And in other devices, Microsoft’s decisions made years ago to put all its investment into Windows 8 are now showing up in complete apathy for Windows 10 – and the new hybrid devices being launched.

AM Multigraphics and ABDick once had printing presses in every company in America, and much of the world.  But when Xerox taught people how to “one click” print on a copier, the market for presses began to die.  Many people thought the installed base would keep these press companies profitable forever.  And it took 30 years for those machines to eventually disappear.  But by 2000 both companies went bankrupt and the market disappeared.

Those who focus on Windows 10 and “universal windows apps” are correct in their assessment of product features, functions and benefits.  But, it probably doesn’t matter.  When Microsoft’s leadership missed the mobile market a decade ago it set the stage for a long-term demise. Now that Apple dominates the platform space with its phones and tablets, followed by a group of manufacturers selling Android devices, developers see that future sales rely on having apps for those products.  And Windows 10 is not much more relevant than Blackberry.

How the NFL and NBA Corrupted American Universities

How the NFL and NBA Corrupted American Universities

This week saw two big stories develop around the big money in college sports.  It makes one wonder, when did sports become more important than academics in American universities – and why?

The first story was how the football team at the University of Missouri was able to fire the university President.  Ongoing racial tensions, and some horrible acts of aggression, had been problematic at Mizzou, leading to a student hunger strike.  But the President remained uninvolved and taciturn on the topic.

Until the football team threatened to strike.  Within 48 hours the President was booted out, allowing the team to play this Saturday and keep the big money flowing.

Separately, the NCAA shut down a web site set up by the family of LSU running back Leonard Fournette to sell merchandise plugging his catch phrase.  The concern was ostensibly whether the family received discounted services in creating the site due to the player’s popularity.  But more important was whether anyone other than LSU and the NCAA was going to make any money off a college football player.

ncaa_coachesv4The USA is the only country where university coaches make multi-million dollar salaries.  Elsewhere, one must coach a professional team to earn such sums. And the USA is the only country where alumni donations for sports are greater than alumni donations for academics.  And the USA is the only country where college sport venues (coliseums nonetheless) consume as much, or more, capital budget than the entire balance of the university.  And the USA is the only place where more money is spent to recruit and retain athletes than the brightest academic minds.

The United States is the only country where sports have become more important than academics at many (most?) major universities.  Around the world, colleges are about education first, foremost and pretty much entirely.  Sports are left to professionals.  How did Americans turn their universities into sports leagues rather than institutions for research and learning?

Blame it on the NFL and the NBA.

Prior to the rise of both major sports leagues, college athletics were not that important.  Sure there were teams, but they were very clearly for fun.  Players had to take a full regimen of classes, and they were expected to pass those classes.  Players were students first, and athletes just for the pleasure.  Athletes were expected to obtain a degree in 4 years, then move on to professional lives.  Sure, there were alumni booster clubs supporting athletes, and some schools (especially in the south) were notoriously crazy routing for their home teams, but the school was more about education than playing ball.

Years ago professional sports was dominated by baseball in America and soccer pretty much everywhere else.  Baseball and soccer both developed “farm systems” by which the professional teams created other teams that recruited and trained young players. And in northern climates hockey developed similar farm systems.

Often starting well before players finished high school (or its equivalent outside the USA) recruiters would approach athletes and their parents to ask if they could place the youth into their training program.  Players would improve their skills level by level, moving up through different teams until they reached the top level of performance.  In American baseball, for example, these “farm teams” run 4 levels deep, and when a player makes it to the top it’s called “reaching the show.”

The cost of identifying, recruiting and training athletes for baseball, and soccer, has always been carried by the professional franchises.

But the rise of the NFL and the NBA changed this dramatically.  By relying on colleges to do the recruiting and first level of training, they could avoid an incredible amount of cost.  An “unholy alliance” was born between the NCAA and the professional leagues.  The professionals would not create “farm systems.”

Instead, universities would act as the recruiters and developers of “pre-professional” athletes.  These athletes would be called “amateurs” and thus receive no compensation for playing, nor would they receive compensation for promoting the school, nor would they be able to receive compensation for using their likeness, personality or any individually created brand elements.  The schools would receive 100% of any revenues related to the athletes and other branded elements of college sports.

collegefootballteamsIt did not take long for colleges to realize there is BIG MONEY in fan-crazed athletics.  Just like the NFL and NBA, colleges could create brand franchises around their athletic programs, and top players. The value of a top athlete to the university could be measured in millions of dollars, far more than the grant raising ability of top research professors with long-standing academic programs tied to industry.

Suddenly, it was worth great value to a college to recruit a “student” who possibly could barely read and write.  Who cared if that student ever graduated?  That wasn’t his purpose.  Who cared if this “student” had limited respect for women’s rights, or otherwise struggled to behave like a “gentleman and a scholar”  What mattered was whether he could play ball – whether he could bring in the fans and all those merchandise dollars.

For many university leaders the allure of the BIG MONEY was simply too hard to ignore. The BIG MONEY for the university was by building a brand around semi-professional athletics.  Not academics.  The old non-profit approach of running a school was replaced by the very much for-profit business of college athletics. Winning ball games replaced winning research grants, or even Nobel prizes, as the measure of a successful university.

And that is what we’re now seeing in the news.  The Mizzou trustees weren’t all that concerned about swastika’s made of feces, nor student hunger strikes, or name calling of professors.  That was just “campus life.”  But if the football team doesn’t play – OMG, that’s a crisis!!  The former has little impact on university economics, the latter could be catastrophic.

It is doubtful anyone is willing to separate athletics out of America’s universities.  But not recognizing the corruption this has done to the original academic purpose of these institutions is turning a blind eye to the obvious.  For far too many universities job #1 is about running a sports franchise.  And oh, by the way, there are faculty and students and all that other stuff out there – but that’s for the academics to worry about.  We’re here to make money off sports teams.

And the biggest winners of all are the owners of NFL and NBA franchises, who get a farm system at no cost.  Thanks to the financial corruption of modern university leadership.  More is the sadness for America, when ball teams matter more than great research and education.

 

 

Do Not Follow the Herd – Sell McDonald’s and Microsoft

Do Not Follow the Herd – Sell McDonald’s and Microsoft

This week McDonald’s and Microsoft both reported earnings that were higher than analysts expected. After these surprise announcements, the equities of both companies had big jumps.  But, unfortunately, both companies are in a Growth Stall and unlikely to sustain higher valuations.

Growth Stall primary slide

McDonald’s profits rose 23%.  But revenues were down 5.3%.  Leadership touted a higher same store sales number, but that is completely misleading.

McDonald’s leadership has undertaken a back to basics program.  This has been used to eliminate menu items and close “underperforming stores.”  With fewer stores, loyal customers were forced to eat in nearby stores – something not hard to do given the proliferation of McDonald’s sites.  But some customers will go to competitors. By cutting stores and products from the menu McDonald’s may lower cost, but it also lowers the available revenue capacity.   This means that stores open a year or longer could increase revenue, even though total revenues are going down.

Profits can go up for a raft of reasons having nothing to do with long-term growth and sustainability.  Changing accounting for depreciation, inventory, real estate holdings, revenue recognition, new product launches, product cancellations, marketing investments — the list is endless.  Further, charges in a previous quarter (or previous year) could have brought forward costs into an earlier report, making the comparative quarter look worse while making the current quarter look better.

Confusing?  That’s why accounting changes are often called “financial machinations.”  Lots of moving numbers around, but not necessarily indicating the direction of the business.

McDonald’s asked its “core” customers what they wanted, and based on their responses began offering all-day breakfast.  Interpretation – because they can’t attract new customers, McDonald’s wants to obtain more revenue from existing customers by selling them more of an existing product; specifically breakfast items later in the day.

Sounds smart, but in reality McDonald’s is admitting it is not finding new ways to grow its customer base, or sales.  The old products weren’t bringing in new customers, and new products weren’t either.  As customer counts are declining, leadership is trying to pull more money out of its declining “core.”  This can work short-term, but not long-term.  Long-term growth requires expanding the sales base with new products and new customers.

Perhaps there is future value in spinning off McDonald’s real estate holdings in a REIT.  At best this would be a one-time value improvement for investors, at the cost of another long-term revenue stream. (Sort of like Chicago selling all its future parking meter revenues for a one-time payment to bail out its bankrupt school system.)  But if we look at the Sears Holdings REIT spin-off, which ostensibly was going to create enormous value for investors, we can see there were serious limits on the effectiveness of that tactic as well.

MIcrosoft also beat analysts quarterly earnings estimate.  But it’s profits were up a mere 2%.  And revenues declined 12% versus a year ago – proving its Growth Stall continues as well.  Although leadership trumpeted an increase in cloud-based revenue, that was only an 8% improvement and obviously not enough to offset significant weakness in other markets:

It is a struggle to see the good news here.  Office 365 revenues were up, but they are cannibalizing traditional Office revenues – and not fast enough to replace customers being lost to competitive products like Google OfficeSuite, etc.

Azure sales were up, but not fast enough to replace declining Windows sales.  Further, Azure competes with Amazon AWS, which had remarkable results in the latest quarter.  After adding 530 new features, AWS sales increased 15% vs. the previous quarter, and 78% versus the previous year.  Margins also increased from 21.4% to 25% over the last year.  Azure is in a growth market, but it faces very stiff competition from market leader Amazon.

We build our companies, jobs and lives around successful products and services.  We want these providers to succeed because it makes our lives much easier.  We don’t like to hear about large market leaders losing their strength, because it signals potentially difficult change.  We want these companies to improve, and we will clutch at any sign of improvement.

As investors we behave similarly.  We were told large companies have vast customer bases, strong asset bases, well known brands, high switching costs,  deep pockets – all things Michael Porter told us in the 1980s created “moats” protecting the business, keeping it protected from market shifts that could hurt sales and profits.  As investors we want to believe that even though the giant company may slip, it won’t fall.  Time and size is on its side we choose to believe, so we should simply “hang on” and “ride it out.”  In the future, the company will do better and value will rise.

As a result we see that Growth Stall companies show a common valuation pattern.  After achieving high valuation, their equity value stagnates.  Then, hopes for a turn-around and recovery to new growth is stimulated by a few pieces of good news and the value jumps again.  Only after a few years the short-term tactics are used up and the underlying business weakness is fully exposed.  Then value crumbles, frequently faster than remaining investors anticipated.

McDonald’s valuation rose from $62/share in 2008 to reach record $100/share highs in 2011.  But valuation then stagnated.  It is only this last jump that has caused it to reach new highs.  But realize, this is on a smaller number of stores, fewer products and declining revenues.  These are not factors justifying sustainable value improvement.

Microsoft traded around $25/share from March, 2003 through November, 2011 – 8.5 years.  When the CEO was changed value jumped to $48/share by October, 2014.  After dipping, now, a year later Microsoft stock is again reaching that previous valuation ($50/share).  Microsoft is now valued where it was in December, 2002 (which is half its all-time high.)

The jump in value of McDonald’s and Microsoft happened on short-term news regarding beating analysts earnings expectations for one quarter.  The underlying businesses, however, are still suffering declining revenue.  They remain in Growth Stalls, and the odds are overwhelming that their values will decline, rather than continue increasing.

 

 

Will Jack Dorsey “Get It” At Twitter?

Will Jack Dorsey “Get It” At Twitter?

Twitter’s Board decided in July to oust the CEO, Dick Costolo, due to frustration over company profits.  As I wrote at the time, Twitter had continued to add members, at a rate comparable to its social media competition.  And it had grown revenues, while remaining the industry leader in revenue per active user.

But the concern was a lack of profits.  Oh my, if rapid revenue growth but weak profits were a reason to fire a CEO, how does Jeff Bezos keep his job?

Twitter DorseyAnyway, Mr. Costolo was replaced by an original founder and former Twitter CEO Jack Dorsey on an interim basis.  Four months later, after failing in its effort to find a suitable full-time CEO, the Board has made Mr. Dorsey the permanent CEO.  While he simultaneously remains full time CEO of Square, a mobile payments processing company.

As I said in my last column on this subject, investors better beware.

Facebook is tearing up the social media market.  It has grown to be not only #1 in active monthly users, but at 1.5B monthly active users (MSUs) the site has 5 times the number of users that Twitter has.  By adding a slew of new features and functions Facebook has become more valuable to its users – and advertisers.

According to Statista, simultaneously Facebook has grown Facebook Messenger to 700M MSUs, acquired WhatsApp with 800M MSUs and Instagram with 400M MSUs.  By constantly expanding the ecosphere Facebook now has 3.4B MSUs – over 10 times the number of Twitter.  Facebook is so dominant that even muscular Google, with all its resources, abandoned its efforts to compete with the juggernaut by killing Google+ (which had 300M MSUs) earlier in 2015.

Twitter had great organic growth numbers, but unlike competitors it does not dominate any particular category of social media.  Linked in, with only 100M MSUs dominates business networking, and bosts a user base that skews older and more professional.  Pinterest and Instagram are battling it out for leadership in photo sharing.  But it is unclear how one would describe a social growth category that Twitter dominates.

I actively use Twitter.  But among my peers I am the exception.  When I ask people over 40 if they use Twitter I regularly hear “I don’t get it.  It all looks completely chaotic.  Why would I want to follow people on Twitter, and why would I want to post.”  This sounds a lot like what people said of Facebook and Linked in 5 years ago.  But those companies found their connection with users and people now “get it.”

So the question is whether Mr. Dorsey will make Twitter into a site that is ubiquitous, at least for one category.  Can he make the product so useful that users can’t live without it, and that continues drawing in massive new numbers of users?

Twitter has not changed much at all since it was founded.  It still depends on users to sign on, start tweeting, and search out others a user wants to follow.  And that means follow for some reason other than that person is a celebrity or politician that simply can’t stop spouting off.  The Twitter user has to hunt for like minded individuals, find a way to connect with folks who are informative to their needs and then create a dialogue — and all with pretty much the same character limits and shrunken link technology available many years ago.

Apple floundered as a manufacturer of niche PCs.  The returning CEO, Steve Jobs, resurrected the company by putting all his money on mobile.  It wasn’t an improved Mac that turned around Apple, but rather the launch of the iPod and iTunes, followed by the iPhone and the iPad. The way Apple stole the thunder from previously dominant Microsoft was by creating new products built on the mobile trend that led to explosive growth.

Mr. Costolo left Twitter in far better shape than Apple was in when Mr. Jobs retook the reins.  But will Mr. Dorsey be able to launch a series of new products that can create an Apple-like growth explosion?

Square, where Mr. Dorsey ostensibly spends half his time, is preparing to go public.  But, even though it is currently considered by many the leader in its marketplace, Square is looking down the barrel of ApplePay – a technology on every iPhone that could make it obsolete.  Then there’s also Google Wallet that is on all the other smartphones.  Plus well funded outfits like PayPal and Mastercard.  Square will need a very competent, capable and visionary CEO to guide its development competing with these – and other – well funded and powerful companies.  Square will need to add features, functions and benefits if it is create long-term value.

A lot of new products are needed by two relatively small companies in short order if they are to survive.  Success will not happen by cutting costs in either.  It will require intensive product development with very rapid product cycles that bring in millions upon millions of new users.

Twitter was once a disruptive innovator.  Now it is hard to recognize any innovation at Twitter.  Does Mr. Dorsey get it?  And if he does, can he do it?  And do it twice, simultaneously?

 

Report: Boards Should Re-apply Focus on Long-term Value Creation

Report: Boards Should Re-apply Focus on Long-term Value Creation

The stock market is incredibly fickle.  In the short term, stock prices can swing significantly on such short-term news as:

  • What are reviewers saying about the newest, yet-to-be released iPhone?
  • Will Amazon use drones for shipping?
  • How many people in Latin America signed up for Netflix?

You get the drift. But for long-term investors there is quite a bit more to creating long-term, sustainable shareholder value than short-term news.  If you’re not a short-term trader, standing back and taking the long-term view is important for deciding where to invest your hard-earned savings.

The National Association of Corporate Directors (NACD) has over 17,000 members that serve on Boards of publicly traded, for-profit private and non-profit organizations.  It is the world’s leading association studying regulations and how they are applied, and recommending best practices for Boards of Directors to apply corporate governance.

At their annual meeting this week NACD released its newest report The Board and Long-Term Value Creation created by its Blue Ribbon Commission of leading Directors.  Succinctly, the report calls on all Boards to help management overcome myopia around short-term results, and increase attention on creating long-term value.

Board LeadershipMost metrics used in business are very short-term, including sales, volume, costs and margin.  The report points out that at most companies long-term compensation is defined as 3 years or less — shorter than most new product development programs or even new branding or image creation programs.  Unfortunately, this can lead to spending too much time on tactics and machinations to drive short-term reporting, hoping that the long-term will simply take care of itself.

“Instead of viewing short-term results and long-term strategy as mutually exclusive, boards and executives should view them in terms of degrees of alignment,” said Karen Horn, co-chair of the NACD Blue Ribbon Commission; vice chair of the NACD board; and director of Eli Lilly & Co., Norfolk Southern Corp., Simon Property Group, and T. Rowe Price Mutual Funds. “It should be possible to draw a clear line from the company’s day-to-day activities to its long-term objectives.”

“Board agendas need to accommodate sufficient time for substantive discussions about long-term opportunities and risks, rather than being dominated by backward-looking reviews of past performance,” said Bill McCracken, co-chair of the NACD Blue Ribbon Commission, former CEO of CA Technologies, and director of MDU Resources and NACD.

The report notes that short-term pressures on management are greater than ever.  But Boards can take measures to bring the focus back on long-term value creation by actively engaging in various activities, such as:

  • developing long-term strategy,
  • reviewing capital allocation process and where money is invested,
  • careful consideration of management incentives including compensation,
  • applying oversight to corporate culture,
  • participating in communications with analysts, investors, and other constituencies.
“The Commission believes that directors need to be active students of the business, seeking out information from multiple sources in preparation for boardroom discussions rather than being passive recipients of data from management. And rather than being dominated by retrospective analysis of past performance, board agendas should provide adequate time for substantive discussion of long-term strategic choices, risks, and opportunities.”
From great minds come great reads.  NACD membership is growing at double digit rates, at a time when many associations struggle to maintain membership.  As regulations on officers and directors grow, NACD’s active development of programs and reports providing guidance to Directors on how they can meet ever increasing demands to provide effective, active governance is providing great value to those leading America’s organizations. This Blue Ribbon Commission report is another example of forward-thinking guidance that all corporate directors and officers (and investors) should read.
Smisek’s United Ouster – Were You Really Surprised?

Smisek’s United Ouster – Were You Really Surprised?

Jeff Smisek, CEO of United Continental Holdings, was fired this week. It appears he was making deals with public officials (specifically the Chairman of the Port Authority of New York and New Jersey) to keep personally favored flights of politicians in the air, even when unprofitable, in a quid-pro-quo exchange for government subsidies to move a taxiway and better airport transit.

Wow, horse-trading of the kind that put the governor of Illinois in the penitentiary.

United-Jeff-Smisek-FiredBut you have to ask yourself, couldn’t you see it coming?  Or are we just so used to lousy leadership that we think there’s no end to it?

United has been beset with a number of problems.  Since Mr. Smisek organized the merger of Continental (his former employer) with United, creating the world’s largest airline at the time, things have not gone well.  Since announcing the merger in 2010, more has gone wrong than right at United:

The merged airline didn’t start in a great position.  It was in 2009 that a budding musician watched United baggage handlers destroy his guitar, leading to a series of videos on bad customer service that took to the top of YouTube and iTunes and his book on the culture of customer abuse at United underscored a major PR nightmare.

How could things seem to constantly become worse?  It was clear that at the top, United’s leadership cared only about cost control (ironically code named Project Quality.) Operational efficiency was seen as the only strategy, and it did not matter how much this strategy disaffected employees, suppliers or customers.  In 2013 United ranked dead last in the quality ranking of all airlines by Wichita State University, and the airline replied by saying it really didn’t care.

The power of thinking that if you focus on pennies and nickels the quarters and dollars will take care of themselves is strong.  It encourages you be very focused on details, even myopic, and operate your business very narrowly.  And it can set you up to make really dumb mistakes, like possibly trading airline flights for construction subsidies.

Focus, focus, focus often leads to being blind, blind, blind to the world around you.

There were ample signs of all the things going wrong at United, and the need for a change. The open question is why it took a criminal investigation into bribing government officials for the airline’s Board to fire the CEO?  Bad performance apparently didn’t matter?  Do you have to be an accused lawbreaker to be shown the door?

The story broke in February, so the Board has had a few months to find a replacement CEO.  Mr. Oscar Munoz will now take the reigns.  But one has to wonder if he is up for the challenges.  As a former railroad President, his world of relationships was much smaller than the millions of customers and 84,000 employees at United.

United’s top brass has a serious need “to get over itself.”  United’s internal focus, driven by costs, has disenfranchised its brand embassadors, its customer base, and many industry analysts.

United needs to become a lot clearer about what customers really need and want. Years of overly simplistic “all customers care about is price” has commoditized United’s approach to air travel.  Customers have been smart enough to see through lower seat prices, only to be stuck with seat assignment and baggage fees raising total trip cost.  And charging for everything on the plane, including cheesy TV shows, has customers wondering just how far from Spirit Airlines’ approach United would drift before someone reminded leadership what their customers want and why they used to choose United.

Unfortunately, it is a bit unsettling that CEO Munoz said his first action will be to take 90 days “traveling the system and listening and talking to our people and working with our management team.”  Sounds like a lot more internal focus.  Spending more time talking to customers at United’s hubs, and seeing how they are treated from check-in to baggage, might do him a lot more good.

United became big via acquisition.  That is much different than building an airline, like say Southwest did.  Growth via purchase is not the same as growth via loyal customers and an attractive brand proposition.  United has clearly lost its way.  It has a lot of problems to solve, but first among them should be understanding what customers want.  Then designing the model to profitably deliver it.

Why Tom Brady’s Deflategate Win is Bad for Leadership

Why Tom Brady’s Deflategate Win is Bad for Leadership

Tom Brady’s lawyers convinced a judge this week (9/3/15) to over-rule his four game suspension for using under-inflated footballs in playoff games.  This could seem like making a mountain out of a molehill, if it wasn’t so important a statement about bad leadership.

In 1925 golf legend Bobby Jones was playing the U.S. Open when he called a penalty on himself.  He claimed that as he moved his club near the ball during his set up he “felt the ball move.”  The judges asked the other players if they saw anything which should cause a penalty, and they said no.  The judges asked the spectators if they say the ball move, and unanimously everyone said no.  So the judges told Mr. Bobby Jones that he need not call a penalty, and he should play on.  But Mr. Jones said that he was sure, so he called the penalty on himself.

He lost the U.S. Open by 1 stroke.  Had he not called that penalty he would have been in a playoff and may well  have won.  And that is the kind of thing which creates a legend.  Leadership based on honor and ability.

DeflategateIt strains credulity to think Mr. Brady did not know he was playing with under-inflated footballs.  This man has won four Superbowls, and been named most valuable player (MVP) 3 times.  He is an athlete in the top 1% of professional football players.  He touches the football on every play he is in the game, and he has thrown millions of passes in games and practices over his long career.  Yet we are to believe he could not feel that these balls were somehow different?

I am a lousy golfer, not nearly good enough to play in amateur, much less professional, tournaments.  Yet even I can tell the difference in a golf ball, which I hit with a 3 foot long stick that has a mallet on the end.  Professional golfers can talk eloquently about the feel of a golf ball and how it shapes their shots.

Yet we are to believe that Mr. Brady does not have enough sense of feel in his multi-million dollar hands to notice these balls were under-inflated and thereby easier to control?  Few professionals believe he did not know.

Tom Brady had his opportunity to call a penalty on himself, and he did not do it.  He could have told his coaches, management or officials that the balls felt soft and this should be checked.  But his desire to win kept him from pointing out something minor – but something upon which winning or losing could have turned. Then, when he was caught and it was proven he used under-inflated balls, he had the opportunity to say “this was wrong, and I will accept whatever penalty in hopes that this never happens in professional football again.”  But instead he refused to accept his penalty and sued the league.

This is NOT the stuff upon which legends are made.

Mr. Brady is a role model for thousands, possibly millions, of football fans and young aspiring athletes.  He had the opportunity to show great leadership.  Whether Mr. Jones would have won that U.S. Open or not, he forever showed that athletic leaders should never stoop to cheating.  No matter how small.  Not only by winning golf tournaments did Mr. Jones become a leader, but by his behavior he demonstrated leadership requires honesty, integrity and trust.

As head of the NFL, Mr. Roger Goodell has used this experience to reinforce the better parts of athletic competition.  He tried to demonstrate a commitment to athletic leadership and fairness.  He did not ban Mr. Brady from the sport, but rather told him he must sit out 4 games for his error in judgement as a leader.  This is not unreasonable, and Mr. Goodell gave Mr. Brady an opportunity to demonstrate leadership, and his own commitment to the principles of good leadership.

Mr. Brady could have used this opportunity to help himself, his teammates, his coaches and everyone who watches sports understand the role of a leader.  But instead, he chose to argue for the concept of win at any cost.  He will forever be remembered as someone who probably cheated, when perhaps cheating was not even necessary to win.  And he will be remembered for promoting to millions of fans and followers that winning at any cost – even if you have to go to court – is more important than demonstrating good leadership.

When leaders think they are beyond punishment, bad things happen.  Look at Bernie Ebbers of Worldcom, Dennis Koslowski at Tyco and Jeffrey Skilling at Enron.  To them winning was all that mattered.  They hurt millions of employees, customers, suppliers and investors with such hubris.  They were bad leaders, and bad role models.  While Mr. Brady will not go to jail, his role in teaching bad leadership principles is fully entrenched – and likely will affect many more future leaders than the worst American business has thus far produced.

 

 

F.A.N.G Investing Makes Sense – Facebook, Amazon, Netflix, Google

As market volatility reached new highs this week, CNBC began talking about something called “FANG Investing.”  Most commentators showed great displeasure in the fact that prior to the recent downturn high growth companies such as Facebook, Amazon, Netflix and Google (FANG) had performed much better than all the major market indices.  And, in the short burst of recent recovery these companies again seemed to be doing much better.

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tesla-facebook-netflix-amazon-google-twitter100-_pd-1414591845697_v-z-a-par-a-lCoined by “CNBC Mad Money” host Jim Cramer, he felt that FANG investing was bad for investors.  He said he preferred seeing a much larger group of companies would go up in value, thus representing a much more stable marketplace.

Sound like Wall Street gobblygook?  Good.  Because as an individual investor why should you care about a stable market?  What you should care about is your individual investments going up in value. And if yours go up and all others go down what difference does it make?

Most financial advisers today actually confuse investors much more than help them.  And nowhere is this more true than when discussing risk.  All financial advisers (brokers in the old days) ask how much risk you want as an investor.  If you’re smart you say “none.”  Why would you want any risk?  You want to make money.

Only this is the wrong answer, because most investors don’t understand the question – because the financial adviser’s definition of risk is nothing like yours.

To a broker investment risk is this bizarre term called “beta,” created by economists.  They defined risk as the degree to which a stock does not move with the market index.  If the S&P down 5%, and the stock goes down 5%, then they see no difference between the stock and the “market” so they say it has no risk.  If the S&P goes up 3% and the stock goes up 3%, again, no risk.

But if a stock trades based on its own investor expectation, and does not track the market index, then it is considered “high beta” and your broker will say it is “high risk.”  So let’s look at Apple the last 5 years.  If you had put all your money into Apple 5 years ago you would be up over 200% – over 4x.  Had you bought the S&P 500 Index you would be up 80%.  Clearly, investing in Apple would have been better.  But your adviser would say that is “high risk.”  Why?  Because Apple did not move with the S&P. It did much better.  It is therefore considered high beta, and high risk.

You buy that?

Thus, brokers keep advising investors buy funds of various kinds.  Because the investors says she wants low risk, they try to make sure her returns mirror the indices.  But it begs the question, why don’t you just buy an electronic traded fund (ETF) that mirrors the S&P or Dow, and quit paying those fund fees and broker fees?  If their approach is designed to have you do no better than the average, why not stop the fees and invest in those things which will exactly give you the average?

Anyway, what individual investors want is high returns.  And that has nothing to do with market indices or how a stock moves compares to an index.  It has to do with growth.

Growth is a wonderful thing.  When a company grows it can write off big mistakes and nobody cares.  It can overpay employees, give them free massages and lunches, and nobody cares.  It can trade some of its stock for a tiny company, implying that company is worth a vast amount, in order to obtain new products it can push to its customers, and nobody cares.  Growth hides a multitude of sins, and provides investors with the opportunity for higher valuations.

On the other hand, nobody ever cost cut a company into prosperity.  Layoffs, killing products, shutting down businesses and selling assets does not create revenue growth.  It causes the company to shrink, and the valuation to decline.

That’s why it is lower risk to invest in FANG stocks than those so-called low-risk portfolios.  Companies like Facebook, Amazon, Netflix, Google — and Apple, EMC, Ultimate Software, Tesla and Qualcomm just to name a few others — are growing.  They are firmly tied to technologies and products that are meeting emerging needs, and they know their customers.  They are doing things that increase long-term value.

McDonald’s was a big winner for investors in the 1960s and 1970s as fast food exploded with the baby boomer generation.  But as the market shifted McDonald’s sold off its investments in trend-linked brands Boston Market and Chipotle.  Now its revenue has stalled, and its value is in decline as it shuts stores and lays off employees.

Thirty years ago GE tied its plans to trends in medical technology, financial services and media, and it grew tremendously making fortunes for its investors.  In the last decade it has made massive layoffs, shut down businesses and sold off its appliance, financial services and media businesses.  It is now smaller, and its valuation is smaller.

Caterpillar tied itself to the massive infrastructure growth in Asia and India, and it grew.  But as that growth slowed it did not move into new businesses, so its revenues stalled.  Now its value is declining as it lays off employees and shuts down business units.

Risk is tied to the business and its future expectations.  Not how a stock moves compared to an index.  That’s why investing in high growth companies tied to trends is actually lower risk than buying a basket of stocks — even when that basket is an index like DIA or SPY.  Why should you own the low-or no-growth dogs when you don’t have to?  How is it lower risk to invest in a struggling McDonald’s, GE or Caterpillar or some basket that contains them than investing in companies demonstrating tremendous revenue growth?

Good fishermen go where the fish are.  Literally.  Anybody can cast out a line and hope.  But good fisherman know where the fish are, and that’s where they invest their bait.  As an investor, don’t try to fish the ocean (the index.)  Be smart, and put your money where the fish are.  Invest in companies that leverage trends, and you’ll lower your risk of investment failure while opening the door to superior returns.

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