How Amazon Whupped Facebook Last Week

by | Sep 10, 2012 | Current Affairs, In the Rapids, Innovation, Leadership, Web/Tech

It's been two very different stories for Amazon and Facebook this summer.  Amazon's market cap has risen about 20%, while Facebook lost about 50% of its market value. 
FB v AMZN 9.10.12

Chart source: Yahoo Finance

Why this has happened was somewhat encapsulated in each company's headlines last week.

Amazon announced it was releasing 2 new eReaders under the Paperwhite name requiring no external light source starting at $119.  Additionally, Kindles for $69 will be available this week.  These actions expand the market for eReaders, already dominated by Amazon, providing for additional growth and lowering a kaboom on the Barnes & Noble Nook which is partnered with Microsoft. 

Offering more functionality and lower prices gives Amazon an even larger lead in the ereader market while simultaneously expanding demand for digital reading giving Amazon more strength versus traditional publishers and the printed book market.  Despite a "nosebleed" high historical price/earnings multiple close to 300, investors, like customers, were charged up to see the opportunities for ongoing growth from new products.

On the other hand, Facebook spent last week explaining to investors a set of decisions being made to prop up the stock price.  The CEO promised not to sell any stock for several months, and explained that the company would not sell more stock to cover taxes on stock-based compensation – even though that was the original plan.  He even tried to promote the avoided transaction as some kind of stock buyback, although there was no stock buyback. 

Facebook was focused on financial machinations – which have nothing to do with growing the company's revenues or profits.  That the company avoided selling more stock at its deflated prices does help earnings per share, but what's more important is the fact that now $2B will be taken out of cash reserves to pay those taxes.  $2B which won't be spent on new product development, or other activities oriented toward growth. 

Although I am very bullish on Facebook, last week was not a good sign.  A young CEO is clearly feeling heat over the stock value, even though he has control of the company regardless of share price.  It gave the indication that he wanted to mollify investors rather than focus on producing better results – which is what Facebook has to do if it really wants to make investors happy.  Rather than doing what he always promised to do, which was make the world's best network offering users the best experience, his attention was diverted to issues that have absolutely no long-term value, and in the short term reduce resources for fulfilling the long-term mission.

Given the choice between

  1.  a company talking about how it plans to grow revenues and profits, and maintain market domination while outflanking the introduction of new Microsoft products, or
  2. a company apologetic about its IPO, fixated on its declining stock price and apparently diverting focus away from markets and solutions toward financial machinations

which would you choose?  Both may have gone up in value last week – but clearly Mr. Bezos showed he was leading his company, while Mr. Zuckerberg came off looking like he was floundering.

As you look at the announcements from your company, over the last year and anticipate going forward, what do you see?  Are there lots of announcements about new technology applications and product advancements that open new markets for growing revenue while warding off (and making outdated) competitors?  Or is more time spent talking about layoffs, cost cutting efforts, price adjustments to maintain market share, stock buybacks intended to prop up the value, stock (or company) splits, asset (or division) sales, expense reductions, reorganizations or adjustments intended to improve earnings per share? 

If its the former, congratulations! You're acting like Amazon.  You're talking about how you are whupping competitors and creating growth for investors, employees and suppliers.  But if it's the latter perhaps you understand why your equity value isn't rising, employees are disgruntled and suppliers are worried.

Management illusions – Brand management and MIT

by | Nov 20, 2009 | Current Affairs, General, Leadership, Lifecycle, Lock-in, Weblogs

"The Illusion of Brand Control" is a great article at Harvard Business Publishing. Andrew McAfee, who is a research scientist at the MIT Sloan school Center for Digital Business, offers the insight that in today's market it's not possible for a business to "control" its brand.  "New media" like the internet and Facebook are bi-directional.  People no longer just absorb a crafted message, they are able to push back.  Bloggers and internet commenters can have more influence on a brand than traditional advertising and PR.  As a result, a business's brand becomes the result of what others say about it – not just what the owner says.

And this mirrors what is happening across business today.  As we've moved from the industrial to the information economy, success is no longer about amassing and controlling assets.  Scale advantages have disappeared, with scale accessible to anyone who has a browser and a credit card.  Where the business leader of 1965 likely felt success required controlling everything from employees and facilities to the brand message, in 2015 success is about adapting to rapidly shifting market requirements.

If you want your brand, and your business, to grow and be profitable, you have to realize the dramatic limits of "command and control."  That approach works in very static, clearly defined environments.  Like the military.  Businesses today no longer operate in slow moving static environments with high levels of regulation and rigid business limits and significant entry barriers.  Businesses today operate in complex, highly adaptive systems.  Competitors can move fluidly, quickly, globally to offer new solutions and react to changes. 

Today's leaders have to recognize that many of the most important impacts on their business (or brand) come from outside their organization.  Completely out of management's control.  Being Locked-in on what you know how to do has less and less value when you might well have to react very quickly to an external event in an entirely new way in order to maintain product position and growth.  Just ask the leaders at Circuity City, who could not adapt quickly enough and saw their company fail.  Adaptability to shifting market requirements becomes key to sustaining growth.  Competitive advantage is not created by seeking entry barriers.  Rather, competitive advantage now comes from understanding market shifts, and moving rapidly to position yourself in the right place – over and over and over.

Executives who feel like they have "control" of their business are under an illusion in 2009.  And that has been demonstrated time and time again as this recession has driven home a plethora of market shifts.  There are many things managers can control.  But many of the most important things to success are completely out of management's hands.  Thus, the ones who succeed aren't trying to control their brand, or business.  Instead they are building organizations that have great market sensing and are quick to react.  Just compare GM to Google and you'll see the gap between what worked in 1965, and what works 45 years later.