Monday, July 25, 2016

Yahoo's last hurrah

Monday began the final act of Yahoo, as it announced the purchase by Verizon of its traditional business for $4.8 billion. The WSJ noted

The sale doesn’t include, among other things, Yahoo’s cash, its shares in Alibaba Group Holding Ltd., its shares in Yahoo Japan, and Yahoo’s noncore patents, called the Excalibur portfolio. These assets will continue to be held by Yahoo, which will change its name at closing and become a registered, publicly traded investment company.
Also excluded was the Excalibur patent portfolio (excluding patents purchased by Verizon) valued at $1 billion.

At the close of business Monday, Yahoo’s market cap was $36.4b, suggesting that these residual assets are worth about $32b — or 6.5x as much as Yahoo’s traditional businesses. (It seems misleading to call 13% of the company’s value “core”). TechCrunch values the Alibaba and Yahoo Japan shares at $31.2b and $8.3b so something doesn’t add up.

The bible of Silicon Valley, the San Jose Merc, says the market cap of Yahoo is about where it was before 2008 market crash. USA Today says that CEO Melissa Mayer had the best outcome (as measured by share price) of the six CEOs of Yahoo’s 20 years as a public company. Her 152% stock price increase made up about half of the stock value lost by (interim) CEO Jerry Yang, who held the reins during the heart of the stock market crash. The 152% increase compares to the 175% rise in the NASDAQ composite index during the same period.

Yang had a chance to sell the company to Microsoft in 2008 but refused to do so; in response, I said “Yahoo is toast.” As with other tech stocks, whether you made money over the past few years depends on whether you bought at the bottom or near the top.

Still, crediting Mayer with the stock price increase over the past four years seems somewhat generous, given that the “traditional” business continued to decline in value. Instead, (as predicted) the increase came from the two strategic investments by Yang in Alibaba and Yahoo Japan.

Under the circumstances, things turned out better than feared. Over the last four years, Yahoo was no Google, Apple or Microsoft — let alone Facebook — but at least it is a positive outcome during a period when other mature tech stocks declined.

Mayer will be moving on, but hopefully (as with Verizon’s acquisition of AOL) many of the Yahoo employees will keep their jobs. The Yahoo company (if not the brand) will be disappearing, but given its waning interest, the backing of America’s most profitable (and second most valuable) firm will provide reasons for potential partners to take it seriously again.

Friday, July 22, 2016

Innovation requires freedom

From the Wall Street Journal, July 22, 2016, p. A13:

The Closing of the American Mind
There are dangerous signs that the U.S. is turning its back on the principles of a free and open society that fostered the nation’s rise.

I was born in the midst of the Great Depression, when no one could imagine the revolutionary technological advances that we now take for granted. Innovations in countless fields have transformed society and radically improved individual well-being, especially for the least fortunate. Every American’s life is now immeasurably better than it was 80 years ago.

When I attended the Massachusetts Institute of Technology in the 1950s, I quickly came to appreciate that scientific and technological progress requires the free and open exchange of ideas. The same holds true for moral and social progress. I have spent more than a half-century trying to apply this lesson in business and my personal life.

It was once widely accepted that progress depends on people challenging and testing each other’s hypotheses. This leads to the creation of knowledge that, when shared, inspires others and spurs the innovation that moves society forward and improves lives. … Recall Sir Isaac Newton’s statement that he achieved so much by “standing on the shoulders of giants.”

Despite our enormous potential for further progress, a clear majority of Americans see a darker future. Some 56% believe their children’s lives will be worse off than their own … I empathize with this fear. The U.S. is already far down the path to becoming a less open and free society, and the current cultural and political atmosphere threatens to make the situation worse …

Education in America, and particularly higher education, has become increasingly hostile to the free exchange of ideas. On many campuses, a climate of intellectual conformity has replaced open debate and inquiry, stifling discussion on a host of topics ranging from history to science to economics. Dissenters are demonized, ostracized or otherwise treated with scorn and derision. This disrupts the process of discovery and challenge that is at the root of human progress. …

Similarly, in business the proliferation of corporate welfare wastes resources and closes off opportunity for newcomers. It takes many forms—direct subsidies, anticompetitive regulations, mandates, tax credits and carve-outs—all of which tip the scales in favor of established businesses and industries. The losers are invariably the new, disruptive and innovative entrepreneurs who drive progress, along with everyone who stands to benefit from their work. …

Government, which often has strong incentives to stifle the revolutionary advances that could transform lives, may be the most dangerous. The state often claims to keep its citizens safe, when it is actually inhibiting increased individual well-being. See, for example, the FDA’s astronomically expensive and time-consuming drug-approval process, which University of Chicago professor Sam Peltzman argues has caused “more sickness and death than it prevented.” …

Unleashing innovation, no matter what form it takes, is the essential component of truly helping people improve their lives. The material and social transformations in my own days have been nothing short of astonishing, with a marked improvement in well-being for all Americans. If the country can unite around a vision for a tolerant, free and open society, it can achieve even greater advances, and a brighter future for everyone, in the years ahead.

Mr. [Charles] Koch is chairman and CEO of Koch Industries and the author of “Good Profit: How Creating Value for Others Built One of the World’s Most Successful Companies” (Crown Business, 2015).

Wednesday, July 13, 2016

The future was never what it used to be

Companies like Garner and IDG were seen as essential when I was running a Mac software company in the 80s and 90s: we couldn’t afford their $3000-5000 forecasts, and so eagerly sought out insights when they were excerpted elsewhere. Then, after I became an academic, I researched platform standards wars — first in PCs and then in smartphones — I worked to reconstruct their market share statistics while looking cautiously at their forecasts.

Alas, 2016 showed that (as Yogi Berra famously said) the future ain’t what it use to be. As my Wall Street Journal proclaimed this morning:
CEOs Put Less Stock in Predictions
Executives’ faith in expert forecasts fades as uncertainty grows; Brexit is latest jolt.
By Rachel Emma Silverman, Joann S. Lublin and Rachel Feintzeig
Wall Street Journal, July 13, 2016, p. B6

The forecast for business predictions these days is cloudy.

Chief executives tap consultants, expert prognostications and polls about market and political conditions to help inform business decisions. But from the Brexit surprise to the rise of Donald Trump and the frequently revised U.S. job market numbers, expert analyses have been landing far off the mark—and executives are growing wary.

“The so-called experts and global economists are proven as often to be wrong as right these days,” says Scott Wine, chief executive of Polaris Industries Inc., a Medina, Minn., manufacturer of off-road vehicles and motorcycles.

Mr. Lamneck [CEO of Insight Enterprises] says he is more closely scrutinizing the research that the company buys from advisory firms like International Data Group and Gartner. “We’ll look at, ‘What’s the real value of these services that we’re paying for?’” he says, adding that the reports are more useful for strategy ideas than for market-growth forecasts
.
A study of about 28,000 expert geopolitical predictions over 20 years [from 1984-2003] found that most were only slightly better than chance, especially when predicting events more than a year off would or wouldn’t happen, according to Philip Tetlock, a professor at University of Pennsylvania’s Wharton School of Business who studies forecasting.
Dr. Tetlock suggests businesses carefully track both internal and external forecasts and keep score on who gets the important calls right—a step that few companies take.

[CEO Robert S. Miller] and fellow directors [of International Automotive Components Group] review corporate strategy quarterly, and Brexit’s effect will be on the agenda for their July 27 review. Mr. Miller says the referendum’s result will only add to the complexity his company faces.

Still stung from his experience in 2008 [as CEO of Delphi], the IAC leader says he places little stock in current economic predictions. He is equally skeptical about predictions describing future effects of the Brexit vote.

“You always have to take this stuff with a grain of salt,’’ Mr. Miller suggests.  “You can’t run your business with only one track in mind—which is the direction that forecasters and experts are telling you it will go.’’
Or as physics Nobelist Neils Bohr reportedly said: “It is difficult to predict, especially the future.”

Friday, June 24, 2016

When the Elites become tone deaf

Source: Daily Telegraph
The #Brexit vote will have a major impact on Britain, EU, NATO and the West more broadly. The 52-48 majority voting to leave the EU — like many recent US presidential elections — shows a country deeply divided.

The Telegraph’s map shows how London and a few other city centers voted strongly for the EU, while the rest of England voted decisively against the EU. (As the Guardian notes, Labour voters at the edges of London and Liverpool voted against the city center).

Before the results were in (HT: NY Times), pro-EU columnist John Harris wrote Thursday in the Guardian
The UK is now two nations, staring across a political chasm
Leave voters aren’t lemmings jumping off a cliff, and the left urgently needs to understand their choices.

Two nations, in short, are staring at each other across a political chasm.

Even those who understand that something seismic is afoot among predominantly working-class voters are still too keen on the idea that they are gullible enough to be led over a cliff by people with whom they would actually disagree, if only they knew the facts. But most people are not really being “led” by anyone. In my experience, Farage, Boris Johnson and Michael Gove et al are viewed by most people with as much cynicism as the people fronting the remain campaign. Moreover, this argument is dangerously redolent of that lousy old Marxist trope of “false consciousness”, whereby people enthusiastically following the supposedly wrong cause are only a speech or poster away from enlightenment, and a sharp left turn.

We need to face up to two things. First, a lot of people want out of the EU because they are worried and angry about the consequences of the free movement of people, and in that sense they have made their choice rationally. Second, even if Farage, Johnson and Gove would doubtless use Brexit as an opportunity to further our journey towards an essentially sink-or-swim society, there are plenty of working-class voters who would probably go along with that.
Meanwhile, pro-Brexit James Bartholomew made a similar point today in the Spectator
Britain’s great divide
The referendum has exposed a huge rift between the metropolitan elite and the rest

Every election is divisive, but none has pitted rich against poor like this one. The social divide has been far more dramatic than the divide between the two main political parties. In general elections, the professional and managerial classes favour the Tories by a margin of four to three. The difference is nothing like as marked as the social divide in the referendum vote. As a generalisation, the split has been between the educated ‘haves’ on one side and the working class on the other. The Remainers found ways of making this point — casting themselves as cosmopolitan and ‘open’ against the crude and (presumably) closed-minded Leavers.

I came across quite a bit of scornful self-righteousness among the rich Remainers. In one street of private houses, a woman repeatedly shouted at us: ‘You’re all bonkers! Get out! You are not wanted here!’ A prosperous-looking man at the doorway of his private house informed us that immigration was a good thing and was economically necessary: the implication being that those who seek controlled immigration are both anti-immigrant and ignorant of the economics of the matter. His irritated parting shot was: ‘I hope you lose!’

The divide shows how changes brought about by globalisation and large-scale immigration have affected different classes in contrasting ways. For the ‘haves’, it has been a boon. The Notting Hill crowd now has cheap, highly qualified Polish builders, well-educated Polish cleaners and perhaps a Romanian nanny for their children. They go to Caffè Nero and are served by polite Italians. They feel deliciously international and open-minded while enjoying cheaper, better services than they otherwise would.

At the other end of the spectrum was Gladys, who I met at the door of her council house on Monday. She was reluctant at first to say which way she was voting. She got her council house in 1975 after two years waiting for it. But now she worries for her sons and grandchildren. How are they going to afford somewhere to live? The cost of mortgages just goes up and up, she said.

Gladys was not xenophobic or racist. What bothers her isn’t immigration, as such, but the government’s inability to respond to immigration and the resulting shortage of housing and school and hospital places. The rich folk across the road could get round these problems. Hector and Harriet could go to a private school if necessary. If there was a two-week wait to see their NHS GP, they could go private. They have already got their own flat or house, which has gone up nicely in value, thank you very much.
Both reminded of whjat Peggy Noonan — a moderate Republican and former Reagan speechwriter — wrote in February:
Trump and the Rise of the Unprotected
Why political professionals are struggling to make sense of the world they created.

I keep thinking of how Donald Trump got to be the very likely Republican nominee. There are many answers and reasons, but my thoughts keep revolving around the idea of protection. It is a theme that has been something of a preoccupation in this space over the years, but I think I am seeing it now grow into an overall political dynamic throughout the West.

There are the protected and the unprotected. The protected make public policy. The unprotected live in it. The unprotected are starting to push back, powerfully.
The protected are the accomplished, the secure, the successful—those who have power or access to it. They are protected from much of the roughness of the world. More to the point, they are protected from the world they have created. Again, they make public policy and have for some time.

I want to call them the elite to load the rhetorical dice, but let’s stick with the protected.

They are figures in government, politics and media. They live in nice neighborhoods, safe ones. Their families function, their kids go to good schools, they’ve got some money. All of these things tend to isolate them, or provide buffers. Some of them—in Washington it is important officials in the executive branch or on the Hill; in Brussels, significant figures in the European Union—literally have their own security details.

Because they are protected they feel they can do pretty much anything, impose any reality. They’re insulated from many of the effects of their own decisions.

One issue obviously roiling the U.S. and western Europe is immigration. … It is of course the issue that made Donald Trump. Britain will probably leave the European Union over it.

If you are an unprotected American—one with limited resources and negligible access to power—you have absorbed some lessons from the past 20 years’ experience of illegal immigration. You know the Democrats won’t protect you and the Republicans won’t help you. Both parties refused to control the border.

Many Americans suffered from illegal immigration—its impact on labor markets, financial costs, crime, the sense that the rule of law was collapsing. But the protected did fine—more workers at lower wages. No effect of illegal immigration was likely to hurt them personally.

It was good for the protected. But the unprotected watched and saw. They realized the protected were not looking out for them, and they inferred that they were not looking out for the country, either.

The unprotected came to think they owed the establishment—another word for the protected—nothing, no particular loyalty, no old allegiance.

What marks this political moment, in Europe and the U.S., is the rise of the unprotected. It is the rise of people who don’t have all that much against those who’ve been given many blessings and seem to believe they have them not because they’re fortunate but because they’re better.

You see the dynamic in many spheres. In Hollywood, as we still call it, where they make our rough culture, they are careful to protect their own children from its ill effects. In places with failing schools, they choose not to help them through the school liberation movement— charter schools, choice, etc.—because they fear to go up against the most reactionary professional group in America, the teachers unions. They let the public schools flounder. But their children go to the best private schools.

This is a terrible feature of our age—that we are governed by protected people who don’t seem to care that much about their unprotected fellow citizens.

And a country really can’t continue this way.

In wise governments the top is attentive to the realities of the lives of normal people, and careful about their anxieties. That’s more or less how America used to be. There didn’t seem to be so much distance between the top and the bottom.
Now is seems the attitude of the top half is: You’re on your own. Get with the program, little racist.
My European history isn’t very good, but the French Revolution happened in part because the Elites became tone deaf. (IIRC it was also a factor in the Russian and Chinese revolutions, although both involved a well-organized grab for power by one faction against another). In a democracy, we get to have our elections via ballot box — as long as the system isn’t rigged. In that regard, such a vote is a triumph (and not a failure) of the system of democracy that England pioneered in the 2nd millenium.
Source: Financial Times

Monday, June 13, 2016

Understanding Apple's platform strategy: A little theory can help

Today is the first day of the Worldwide Developer’s Conference (WWDC), Apple’s annual effort to both inform and excite its ecosystem of third-party providers. As with any conference, it’s also a chance to get together with friends, old and new, particularly at parties thrown by companies that want to improve their visibility to the developer attendees.

I remember in 1988 going to my first WWDC in San Jose: our company was so poor that the two cofounders (Neil and I) had to split a single pass to be able to have any presence at all. My last WWDC was in 2003, as my company neared its end, and I went to meet with a former employee who was in town for the conference. The conference is capped at 5,000 developers, but rather than use price to discourage demand (as do most media companies), since 2014 Apple has used a lottery system to allocate seats to registered developers.

Since the early years of the Jobs II era (1997-2011), WWDC has been used to make important product and technology announcements for the broader public. As such, it also gives the business press to take another junket to San Francisco and write their annual (or quarterly) pontifications on the state of Apple, its products, market position, competitive advantage, business model, stock price or anything else.

One article caught my attention on Twitter this morning:

Apple's True Strengths Don't Lie in Innovation
By Christopher Mims
Wall Street Journal, 13 June 2016, p. B.1.
…Apple's normally festive Worldwide Developers Conference begins Monday under something of a pall. The company's first quarterly sales decline in 13 years has many people asking whether it will grow again. They also want to know how Apple, with its healthy supply of cash, could make that happen.

The conventional answer is "create a totally new product line," or its cousin, "unveil something no one has done before." That is, Apple should try to out-innovate its competitors.

That is a terrible idea. It runs counter to Apple's strengths, as well as its growth trajectory.

Here is why: Apple's core strengths are the scale of its ecosystem -- the company says it has more than one billion active devices world-wide -- and the spending power of their owners.
As someone who’s studied the theory of standards wars for two decades — and Apple’s practice of standards wars for three decades, and wrote the most-cited paper on Apple’s iPhone strategy — this seemed somewhere between foolish and idiotic.

But if you dig a little deeper, what the columnist (who seems prone to exaggerating for effect) really is doing is playing a semantic game. The language of "innovation is bad, no innovation is good” would be more accurately summarized as “risky radical innovation is bad, continuous incremental innovation is good.”

The author states
Apple is expert at offering a more polished, more accessible version of products and services that rivals have offered for years. And yet, it reaps over 90% of the smartphone industry's profit, and in 2015 its App Store delivered 75% more revenue to developers than Alphabet Inc.'s Google Play store.
If you look up “innovation” in the Oxford English Dictionary, the very first definition is:
1a. The action of innovating; the introduction of novelties; the alteration of what is established by the introduction of new elements or forms.
In other words, by offering a superior (and unique) version of a now standard product category, Apple is following the dictionary definition of “the introduction of new elements of forms.”

Meanwhile, any MBA who’s had a decent competitive strategy class can tell you that if you have a better product — and consistently superior profits — then you have successfully created some form of sustained competitive advantage that has survived efforts by your rivals to compete away that advantage and those superior margins.

Perhaps this confusion is because the author has an undergraduate neuroscience major but no business degree.

But once we get away from the terminology problems, I did find one paragraph that seemed both factual and prescient:
In any case, I think it will be many years before mobile is toppled as the dominant platform. The PC ruled for nearly 30 years, and we are less than a decade into the age of the iPhone.
I don’t agree with the conclusion that Apple (or Google or Facebook) shouldn’t pursue related diversification. However, I do agree that it must feed and harvest its mobile “cash cow” (as BCG defined it 45 years ago) while continuing to search for new growth opportunities.

As an Apple shareholder, I’m disappointed at the loss in price and market cap over the past year as it lost its growth multiple. But I still think there’s enough of the company’s DNA (even after the loss of its visionary founder) to propel it to new growth as it finds a way to meet needs unmet by its many competitors and imitators.