Twitter's Blue Bird Has the Blues

I confess that I have a Twitter account, at the suggestion of a tech industry CEO/founder friend who said it is essential to life on earth, but I also confess to not using it at all. I acknowledge that without Twitter, mainstream and cable news shows would almost certainly have less to talk about and therefore less broadcast time during which they can generate ad revenue.  They owe Twitter a debt of thanks.

I really enjoyed Twitter co-founder Biz Stone's book, "Things A Little Bird Told Me," which is about startups, a personal odyssey, the founding and internal culture of Twitter, and about his ultimate separation.  I really don't like business books, but this one rang true for me and was a fun read.

I remember from Stone's book that he was really the co-founder who interacted with the Twitter user base who, he says, effectively told the company how they wanted to use a new feature the company introduced.  There was such a community among the users, Stone, and the rest of the executive team that in the midst of one of Twitter's frequent outages, some users sent pizzas to the development team and Stone whom they all knew were pulling all-nighters to get things up and running.  When the delivery of the pizzas went momentarily unacknowledged, a big user Tweeted, "Didn't you get the pizzas?"  Such was the level of community among the corporation and the user community.

Stone goes to great lengths to say how much the 140 character limit, an inadvertent limitation caused by the early technology base, forced people to edit themselves and to be creative in how they did this.
Fast forward to today, and things seem different and exactly the same.  Instead of listening and watching how the user community deploys a new tool or feature, the corporation now uses the traditional A/B testing methodology used by direct marketers and catalogers since time immemorial.

The small, understaffed startup described in Stone's book now looks like a very bureaucratic, overstaffed, top heavy organization. It superficially seems like Google, but it seems more sclerotic.  It competes with Facebook for investors hearts, but it doesn't seem to have Facebook's culture.

Finally, executive infighting and the clash of personalities among co-founders has been going on since Biz Stone's early days.  This is exactly what the company doesn't need.

As the Wall Street Journal points out, the company seems afraid to incur the wrath of their high volume users, i.e. those who have trouble editing themselves; now the company is doing away with the 140 character limit which will encourage the fill the news feeds with endless oceans of boring and self-indulgent text.  But alienating these folks might be fine, if the company can find features and capabilities that will generate a large stream of new, active users.

This all feels so familiar, but Twitter had better rid itself of its worst cultural and organizational  practices before it becomes yesterdays news.

Mickey Drexler's Outdated Playbook

Having been a retailing industry analyst on the equity side, I came across Mickey Drexler many times in my travels.  I know that I have visited many hundreds of stores all round the United States, looking at my companies, their competitors and emerging concepts.  I had a passion for what these businesses were doing, and the best place to learn is on the ground.  As Sam Zemerray's motto goes in "The Fish that Ate the Whale,"  "Go See for Yourself."

In Drexler's old modus operandi he and his family traveled on road trips during which he visited every store under his management umbrella, talking to store managers, coaching employees on how to restock the floor and keep displays clean, and generally introducing them to what otherwise is the remote, hierarchical, hands off management style of the typical chain.  I can speak to this from experience.

In fact, the Wall Street Journal's story on Mr. Drexler from 2010 calls him a "retail therapist," which is a clever moniker for the grinding, time intensive, heavy personal engagement style described above.  Of course, this style can't be sustained for many, many years and ultimately employees become inured to repeated CEO visits.

Subsequent to the huge success of the GAP, Mr. Drexler as CEO began a series of discussions with investors about taking the company private.  His behavior as CEO wouldn't win any corporate governance awards, to say the least.

Many fast growing retail concepts from the bygone era of the nineties floundered as their concepts stagnated, as they failed to stay ahead of emerging competition and changes in consumer demographics, income and tastes.  Abercrombie & Fitch, The Gap, and J. Crew are among the big ones.  The trends which launched these companies continued and even drew more customers into their ambits, e.g. adventure travel, classic but functional clothing and accessories, crossover between outdoor suppliers like REI and fashion, and completely new purveyors of fashion and function, like Nike and Under Armour.

All of these concepts missed the boat completely, and now Mr. Drexler has his hands all over every aspect of retail operations, including merchandising, which is where he started his career at low end department store Abraham and Strauss.  Making the success of J. Crew rely on one executive, no matter how much pixie dust he spread in the past, is foolish.

Apparel production, sales and merchandising are both commoditizing and breaking into finer and finer niches, in store and online, all the time. The field isn't just shifting, it's like trying to have an office on a water bed.

Even hot teen chains emerge and burn out faster than ever before.  I fear this playbook is badly outdated.

Engineers Are Often Too Smart for Our Own Good

Google's venture into what are now called "autonomous cars" seems yet another example of engineers being, in their own minds, smarter than everyone else.  What problem are these really smart, Googly folks addressing?

There are so many ways to make driving safer for everyone on the road, using technologies about which so much is already known.  A meaningful example would be the issue of glare from the headlights of oncoming cars on two-way, high speed turnpikes without medians.  Tall crossover sport utility vehicles with lights hitting the corneas of most drivers in low-profile sedans is a problem I struggle with, and I see lots of drivers experiencing hesitation, momentary loss of perspective, and just plain visual fatigue.  Semi headlights on trucks are just as bad.

In earlier times, headlights used to be aimed, and annual inspections used to check that lights were aimed at the road a fixed distance ahead.  With the advent of sealed beams, there is no such thing as alignment of the lights; if the car has a certain profile, the light unit is installed and the beam goes Hera knows only where.

How about a form of smarter glass, either in windshields or in optical glass that consumers could buy at their optical store?  This isn't a multi-billion dollar fix, and its an innovation from which many kinds of innovative companies might profit.

Instead, we have a solution in search of a problem.  Lowering highway fatalities?  Lowering insurance rates?  The easier solution would be to get the 25% of motorists who are uninsured off the road, thereby reducing rates for everybody who is insured.  No research and development expense required.

Google's CEO responded to questions about this giant boondoggle by saying that companies had to invest in technologies for the "next generation."  Why not work on food replicators to end hunger?  It works on "Star Trek: Next Generation," after all.

Corporate entities are not particularly adept at making huge investments out of their main areas of expertise and developing next generation products.  Engineers are even worse than marketers and futurologists at predicting cross-generational technology, particularly in the consumer area, like cars.

Look at the Edsel.  One of the great innovative features of that car, which I saw in our neighbor's vehicle was the push button transmission, a series of large buttons with definitive clicks in a panel that resembled what one might see unlocking a bank vault.  Great concept, and seemingly much easier than a stick and even a steering wheel mounted shifter.  There were a few problems, the first being that it didn't work.  Fast forward to today, and the desire to have automatics with a feel of a stick is what people want: push buttons were something that auto engineers wanted, but the public never have.

Google should start paying dividends with their monumental free cash flow, instead of indulging their founders in corporate whimsy.

T-Mobile and the Dish Network: Please Let It Happen!

The corporate merger dance can be a protracted one, with partners eyeing each other and making inviting gestures, before suddenly leaving the dance with another partner; or, it can be a case of eyeing each other and suddenly the suitor aggressively carries off the apple of his eye.

T-Mobile badly needs a merger partner, and more than that it BADLY needs spectrum, more towers and better service for its growing, but often poorly served customers.  Dish Network needs a merger partner, although their mercurial CEO isn't sure what he wants to merge and what industry he wants to dominate, e.g. wireless, home entertainment or content.  It has plenty of spectrum that is essentially sitting around like excess cash, it makes shareholders antsy.

Regulators, for some unknown reason want four strong wireless companies.  Right now the former Bell stepchildren, Verizon and ATT are the giants, and Sprint and T-Mobile the runts of the litter. Absorbing T-Mobile would give them a much stronger third player, and it would satisfy the long-held desire of Deutsche Telekom to divest its investment.

As a long-suffering T-Mobile customer, I am hopeful, but listening to the T-Mobile CFO talk about a potential deal or "partnership," I wonder if anything will come of this.  Watching for my text of the deal being done!

HP's 2Q FY 2015 Conference Call: Restructuring Fatigue

I listened to the entire conference call for HP's 2Q 2015, and it was all I could do to stay awake, and I have a huge appetite for these calls after twenty or more years doing them as the CFO/emcee or as the analyst/shareholder consumer.

Just for the context, here are the big numbers.  Revenue of $25.5 billion, down 7% year-over-year and down 2% in constant currency.  Nothing new here, the same quarterly profile and investors exhale that it wasn't as bad as the bears thought.  Diluted EPS of $0.87 were down 1%, better than expected I guess, but GAAP DEPS were down17% y/y at $0.55.

Cash flow from operations of $1.5 billion was down 51% over the anomalous prior-year.  $950 million was returned to shareholders. $950 million was returned to shareholders, of which $659 million were wasted on shareholder repurchases, but this was the same old song.

So, why I am I writing this post?  I honestly feel that everyone believes that there is a very weak case for splitting up the two companies, and you can hear it in the CEO's progress reports and in the tortured analysis of synergies and "dis-synergies," broken into one-time charges, general charges, and further amounts not suggested before.  It's too late now, everything has to go forward.

Really, what the split discloses is this: rationalizing the monster that is HP is akin to a neurosurgeon's separating Siamese twins joined at the brain.  Delicate, long, massively complicated, and the patients could die after a long effort.  No CEO or board has the stomach for this, and so split the company. It is disappointing, because there should be one customer-facing company, but there it is.

Nowhere was this feeling reflected more in the discussion of Enterprise Services: lousy results, changed management, business runoffs, executive changes, lots of new signings, but the same lousy results.

Enterprise was about 43% of quarterly revenue, and Printing about 21%. Personal Systems were 30% of revenue.  HP Enterprise will be a GARP stock according to the CEO, but Cathy Lesjak won't be the CFO, instead she will be going to the value stock, HP Printing.  It should be pretty restful for Cathy counting all that cash and perhaps consolidating some of that business over time.

It should be interesting, but the bear is in the details in this kind of split, as we said from the outset.The inter-company agreement is where things are really fought out, tooth and nail.

A Greek Exit May Be the Lesser of Two Evils

One of my favorite financial commentators, Professor John Cochrane of Chicago Booth pooh-poohs talk about a Greek exit from the euro, saying essentially that we are used to sovereign defaults and this issue is separate and distinct from a decision by Greece to exit the euro.  He writes,

"Greece no more needs to leave the euro zone than it needs to leave the meter zone and recalibrate all its rulers, or than it needs to leave the UTC+2 zone and reset all its clocks to Athens time. When large companies default, they do not need to leave the dollar zone. When cities and even US states default they do not need to leave the dollar zone. A common currency means that sovereigns default just like large financial companies."

But, unlike the U.S. dollar which gained wide acceptance after the detailed architecture of the United States of America had been put in place and operating, the euro was created as a common currency without a political union in place, so I would argue that John's comment misses an essential political difference. Finance, more often than not, turns on politics, which is logical since markets are themselves social constructs in which the rulers of the nation-state have an intense interest.

Going back to 2011, we wrote, "...a paralyzed Europe has to come to terms with the failure of the notion of their common currency union."  

In 2012, we wrote, "Meanwhile, the economic and social  costs of the adjustment to the weaker EU members will be genuinely painful."

I can't believe that it's taken four years for the financial press to wake up to the realities as opposed to covering EU press conferences. The Greek government played chicken with Germany, and Greece blinked. Cash was found, debt repayments were made, but they were made with prior loaned amounts found laying around, lent by the IMF/ECB. This was a cruel joke, and the charade continues, but at what cost?

Greece is a sovereign state, and it should have the freedom to make its own foolish economic decisions and to run itself into the ground, if there is no domestic political will.  Instead, its economy is chronically mismanaged, but more so than Italy or France?  And, though its electorate expressed revulsion at the euro scenario by bringing in a reform party, the people's will continues not to be carried out because of the eurozone's fiscal and economic reform requirements.  Sooner or later, this lack of political freedom is a genuine cost of belonging to the euro zone.  

The contagion issue is a technical red herring, in my opinion.  Policy pundits have argued about this before, to no real conclusion or benefit.  Greece needs to confront its own economic and social mismanagement and deal with monetary issues through its own elected representative government.  If Greece were to reissue the drachma, try to prohibit capital flight, and the drachma rose to 500 drachma/euro, then a rather painful adjustment process would begin and a new equilibrium found. But this process might be less destructive to the Greek polity than the slow bloodletting under the ECB/IMF/ESM, Whatever path chosen, it would be chosen by the Greek voters, without outside pressures, other than by market price signals. 

Greece would also being doing a favor for the rest of Europe by exposing the economic fraud which is the EU, that shouldn't have allowed most of the periphery to join the eurozone had it enforced its own rules.  

Is Uber Overvalued?

In a commentary on venture capital which I wrote as an Editor of the Schulze School of Entrepreneurship's EIX Exchange (University of St. Thomas), I made a reference to a yawning gap in valuations in the following paragraph:

"Uber is the example of a disruptive service that turns a large, existing market of cars-for-hire upside down.  Professor Aswath Damodoran of the Stern School of Business has estimated Uber's global TAM for taxi and car service at $100 billion.  Venture capitalist Bill Gurley of Benchmark Capital, an A Round investor in Uber, argues that over time network effects will expand the TAM to some 25 times Damodaran's estimate.  I inject this real-life example because it is the one I always have in mind when analysts talk about a "disruptive" service or product."

I studied Professor Damodoran's course material on valuation during some work at NYU and through the CFA review course books: he is unquestionably good at what he does, has applied his methods to hundreds of different kinds of companies, and has also consulted with number of big companies on the same issues.  I read his full analysis of Uber, and it is, as all his work, eminently reasonable.

Bill Gurley is a very smart investor and a very wealthy man, but he clearly has a promotional axe to grind with his valuation, since Benchmark is sitting pretty as an early investor in Uber.  "Network effects" are certainly real in particular cases, but they are widely used in this kind of patter as another form of hand waving.   Reading his article, Uber will eventually convince rational economic actors that it doesn't pay to own a car and the roads will be clogged with black Camrys providing transportation services to consumers like kids going to soccer games and grannies going to their medical appointment, even venture capitalists going up to their ski lodges.  Furthermore, it will do this in every country.  Take this fully network effected addressable market, give Uber a huge capture ratio, and you get this kind of 25x difference in valuation.   As the VCs like to say, it all scales.

But, like in every economic problem, there is at least one fixed factor, and that is time.  There are only 24 hours in a day.  Drivers can't drive 24 hours a day, and even the Uber drivers doing 8 hours a night for 5-7 days can't keep it up too long.  As Uber tweaks its model with fees and hurdles for drivers to achieve different payouts, it will run into the issue that drivers making $50,000 or so a year, probably not making their social security contributions and taking all the maintenance, debt service and insurance risk on their vehicles eventually will conclude that it's a great model for a company which is a piece of software, but not for them.  That labor force will churn, and no there's no more disruption: it's a rather typical management problem in lots of businesses.

As for taking over the world, Uber is having trouble in India, and it is using its cash hoard to take over competitors.  However, so are the local competitors doing the same things.  Software is ultimately a commodity, and Indian entrepreneurs are devising their own systems for fleet management and payments.  With all the traffic congestion in cities, owners, chauffeurs, auto rickshaws and Uber taxis are all limited in their ability to turn around rides.  No amount of cash in Uber's coffers can make this problem go away.

More up rounds have, are and will be done, but as Chuck Prince said, "As long as the music is playing, you better be dancing."