Matthew Yglesias explains how Facebook’s ownership structure insures that if he so chooses, Mark Zuckerberg will have complete control over Facebook for the rest of his life. I find that fascinating:
To purchase a share in Facebook is to bet that at some future point some future person will want to take it off your hands for more money. You’re not getting even a notional slice of control in the company. There are no limits on the CEO’s ability to channel Facebook’s profits directly into his own pocket rather than yours. There’s not even a cheap-talk promise that he’s going to try to maximize the value of your investment. He created the company, he controls the company, he will always control the company, and he’s graciously allowing you to turn some of your working capital over to him.
This article (link via Daring Fireball) makes a sound argument against the concept of “maximizing shareholder value,” a concept which has struck me as pretty stupid from the first moment that I heard it. It’s one of those things that makes sense as an abstraction, but no sense as a way to run a business on a day to day basis. Given that shareholders are the owners of a company, it theoretically makes sense to focus on making sure their investments pay off, but in practice, the approaches managers take to doing so are just disastrous.
As the article points out, what it comes down to is management focused on the expectations market rather than the real market. The article reviews Roger L. Martin’s book Fixing the Game, and quotes Martin thusly:
What would lead [a CEO] to do the hard, long-term work of substantially improving real-market performance when she can choose to work on simply raising expectations instead? Even if she has a performance bonus tied to real-market metrics, the size of that bonus now typically pales in comparison with the size of her stock-based incentives. Expectations are where the money is. And of course, improving real-market performance is the hardest and slowest way to increase expectations from the existing level.
I see the stock market as a game that exists almost entirely separately from the businesses upon which it is theoretically based. This article goes a long way toward validating those thoughts.
Teresa Nielsen Hayden runs down the debacle of PayPal shutting down Regretsy’s toys-for-kids drive on utterly ludicrous grounds. PayPal works fairly well for most people most of the time, but every once in awhile we get these kinds of reminders of how much power PayPal has over your money if you choose to use them to process payments. There is a very troubling lack of accountability here.
I’m already convinced that America’s growing income gap and out of control executive pay are real problems that are getting worse. If you are not convinced, this article on executive pay may change your mind. Don’t miss the visual aids. (Via James Fallows.)
David Heinemeier Hansson takes a look at the numbers behind the Groupon IPO:
At the moment, it’s costing them $1.43 to make $1, and it doesn’t look like it’s getting any cheaper. They’re already projected to make close to three billion dollars in revenues this year. If you can’t figure out how to make money on three billion in revenue, when exactly will the profit magic be found? Ten billion? Fifty billion?
On the other hand, Matthew Yglesias says that Groupon is an example of how to achieve growth through aggressive deficit spending:
Maybe this will work out, or maybe it will be a disaster. But it’s worth noting that absolutely nobody thinks it’s categorically absurd to think that what a firm needs to do to maximize long-term profits is boost spending over revenues.
It’s an interesting way to take a jab at critics of economic stimulus.
Update: Jason Kottke points out that Amazon.com operated at a loss for a long time before becoming the profit-generating machine that they are today.
Horace Dediu on acquiring companies:
Clayton Christensen succinctly defined the value in any company as the sum of three constituent parts: resources, processes or business models. Market value can be nothing more and nothing less than these three things.
An acquisition has to be positioned on one of these targets just like a product is positioned on a specific market. The problem with being deliberate about where the value lies is that once positioned a certain way, the integration team will begin to execute on that plan. This means that the thing you decided was worth most (e.g. resources) gets all the attention and the other potential sources of value (processes or profit models) are discarded.
This argument reduces to there being three separate companies being available. The buyer pays for all but gets to keep only one.
When you look at it this way you realize that the reason most acquisitions fail is because the buyer throws away most of the real value in the company.
He goes on to analyze the acquisition of Skype by Microsoft by these criteria. I’d like to see other acquisitions that occurred further back in the past analyzed in this way. My gut feeling is that nearly all acquisitions focus on resources, since they’re the most obvious repository of value and the easiest (relatively speaking) thing to integrate into the acquiring company. It’s very hard to merge the processes of two different companies together, or for an acquiring company to support new business models that didn’t develop organically.
I have never started a company, but Chris Dixon’s paean to entrepreneurs makes me want to.
Yesterday I linked to Scott Rosenberg’s pessimistic take on the AOL purchase of the Huffington Post. Felix Salmon is, on the other hand, optimistic about the deal. His argument is that the venture capitalists funding the Huffington Post and the CEO that they chose did a lot more to stifle the creativity of Arianna Huffington and the writers at the Huffington Post than AOL will.
Today, he follows in by comparing an originally reported blog post from the New York Times to a Huffington Post item linking to that post and argues that the chaos of the Huffington Post will beat out the New York Times over time. Of course, to me, the Huffington Post page is Hell on the Web, but to each their own.
If Arianna Huffington is a major strategic asset in the realm of Web publishing, his take on the deal is probably correct. I do not see Arianna Huffington as a major strategic asset.
Scott Rosenberg’s simple explanation of the AOL-Huffington Post deal:
The other, more likely possibility is that this whole thing is about the money, the investors needed to cash out, HuffPo’s numbers weren’t looking good enough for an IPO, and Huffington is basically improvising. She’ll spend a couple years at AOL and then move on. This means that, in 2011, Huffington Post will be playing the same role in relation to AOL that AOL played in relation to Time Warner back in 2000: selling itself at the top of a market bubble, pocketing the profit from a sale that couldn’t be earned from customers, and leaving a bigger, older company with all the headaches.
Nailed it.
This weekend I read a restaurant owner’s perspective on OpenTable. In short, he feels like OpenTable charges to much to arrange reservations, but that most restaurants feel like they must use it if they want to be competitive. In other words, that OpenTable has captured such a large portion of the online restaurant reservations market that they are able to extract monopoly profits.
Here’s how he breaks down the numbers:
One independent study estimates that OpenTable’s fees (comprised of startup fees, fixed monthly fees, and per-person reservation fees) translate to a cost of roughly $10.40 for each “incremental” 4-top booked through OpenTable.com. To put that in perspective, consider that the average profit margin, before taxes, for a U.S. restaurant is roughly 5%. This means that a table of 4 spending $200 on dinner would generate a $10 profit. In this example, all of that profit would then go to OpenTable fees for having delivered the reservation, leaving the restaurant with nothing other than the hope that that customer would come back (and hopefully book by telephone the next time).
What this looks like to me is a great opportunity for someone to build and launch an OpenTable competitor. I think the key would be to charge less than OpenTable, and make sure that restaurants could stay on OpenTable and book reservations through the competing site as well. Restaurants aren’t going to dump OpenTable since it is omnipresent, but I think most would gladly link from their own sites to a competitor if it would save them money and they still booked the reservation.
The catch is that OpenTable is good at what they do. They have a fully integrated solution where they provide a computer to use to book reservations. They offer a solution that enables restaurants to book reservations through OpenTable their own Web site. And, most importantly, people can find restaurants through the OpenTable Web site and mobile apps. That said, if OpenTable is really overpriced, the opportunity exists to take them on. After reading the article, I’d love to see someone give it a shot.
For what it’s worth, I could see Yelp going into the reservations business. Is there any reason the detail pages at Yelp don’t have a “make a reservation” link for restaurants that accept them? The opportunity is there.
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