Big pay-offs in innovation take time and have confounding finances

A nice way of explaining Amazon’s success in charts, e.g., as compare to Wal-Mart:


Just thinking aloud without any analysis, it seems liken Amazon is an example of how difficult, long, and confounding  doing continual innovation as your business is. Many companies claim to be innovation-driven, but most can just eek out those “incremental innovations” and basic Porterian strategy: they improve costs, enter adjacent marketers, and grow their share of existing TAMs, all the while fending off competitors.

Amazon, on the other hand, has had decades of trying new business models mostly in existing businesses (retail), but also plenty of new business models (most notably public cloud, smart phones and tablets, streaming video and music, and whatever voice + machine learning is).

All that said, to avoid the Halo Effect, it’s important to admit that many companies tried and died here…not to mention many of the retailers who Amazon is troubcibg – Wal-Mart has had several goes at “digital” and is in the midst of another transformation-by-acquisitions. Amazon, no doubt, has had many lucky-breaks.

This isn’t to dismisss any lessons learned from Amazon. There’s one main conclusion, thought: any large organization that hopes to live a long time needs to first continually figure out if they’re in a innovation/disrupting market and, if they are, buckle up and get ready for a few decades of running in an innovation mode instead of a steady-state/profit reaping mode. 

Another lesson is that the finances of innovation make little sense and will always be weird: you have to just hustle away those nattering whatnots who want to apply steady-state financial analysis to your efforts. 

You can throw out the cashflow-model chaff, but really, you just have to get the financial analysis to put down their pivot tables and have faith that you’ll figure it out. You’re going to be loosing lots of money and likely fail. You’ll be doing those anti-Buffet moves that confound normals.
In this second mode you’re guided by an innovation mindset: you have to be parnoid, you have to learn everyday what your customers and competitors are doing, and do new things that bring in new cash. You have to try.

Print media doesn’t translate well to online, still – a travel magazine case study

After all these years, print media still struggles versus the Internet. This long piece on how the travel magazine industry has been suffering covers many great topics. I suspect much of the analysis is the same for all of print media.

One of the problems is the new set of demands on writers in that field:

There is the pain point of figuring out an internal work flow that functions across platforms. Journalists, writers, and content creators often have specialized skillsets, so asking one to write a story, create a listicle, take photos, and film compelling videos about a trip is a major challenge.

“We just started working more efficiently that way and it really, it’s painful to integrate digital and print,” said Guzmán. “The plays are different, the workloads are different, the story ideation is different. In doing this, there’s this huge cultural shift that is exciting and difficult.”

And, then, even after suffering through all that “cultural shift,” the results are often disappointing:

“The iPad was just going to be this Jesus of magazines and I never really quite believed that because I knew how challenging it was was to rejigger the content to fit that format,” said Frank, who oversaw Travel + Leisure’s digital strategy in the early 2010s. “Having just gone through the process of signing up and downloading a magazine, it took forever and was buggy and it just wasn’t necessarily a great solution. I was never really bought the gospel that the tablet was going to be our savior. But we did it. I mean, we created a great app and it was beautiful. It won awards, but that was knowing what the usership was is a little disheartening.”

And, as ever, there’s the tense line between blaming “most reader are dumb” and “rivals are evil” when it comes to what’s to blame:

“I could have written the greatest travel story ever known, and it would not have gotten on the cover of the traffic oriented site because a Swedish bikini teen saved a kitten from a tree; which is going to be more popular?”

Let them watch cats.

Still, as the article opens up with, it’s the old Curse of Web 2.0 – former readers, now just travelers – writing the useful content in the form of reviews on TripAdvisor and such:

“In general, people don’t read a review and make a decision,” said Barbara Messing, chief marketing officer of TripAdvisor. “Consumers will read six to eight reviews. They might dig in a certain characteristic that they are interested in, maybe they really are interested in what the quality of the beach is, or maybe they are really interested in whether it’s kid friendly or not kid friendly. In general, people will hone in on the characteristics of something that’s most important to them, find that answer on TripAdvisor, get that most recent insights, check out the photos, check the forums, and really be able to make an informed decision of whether something is right for them. I think that the notion that people could rely on the wisdom of the crowd and the wisdom of individuals to their detriment, I just think that’s false, and I don’t think the reality is that is going to happen.”

There’s also some M&A history of trading various assets like Lonely Planet, Zagat, and Frommer’s back and forth as different management figures out what to do with them.

As ever, I’m no expert on the media industry. It seems like the core issue is that “the Internet” is so much more efficient at the Job to be Done for travel (as outlined by the TripAdvisor exec above) that the cost structure and business process from print magazines is not only inefficient, but unneeded. Those magazines are now over-serving (and thus, over-spending) with a worse product. 

While the quality of TripAdvisor (and Yelp, for example) reviews is infinitely worse than glossy magazines, since there’s an infinite amount of more crappy reviews, with the occasional helpful ones…it sort of more than evens out in favor of Sweedish bikini cat rescuers. Plus, digital advertising has so much more spend (and overall, industry profit, if only by sheer volume if not margin) – it must be because it’s better at making the advertisers money and because it creates a larger market:

Link

Banks are handling disruption well – Highlights

Thus far, it seems like the large banks are fending off digital disruption, perhaps embracing some of it on their own. The Economist takes a look:

  • “Peer-to-peer lending, for instance, has grown rapidly, but still amounted to just $19bn on America’s biggest platforms and £3.8bn in Britain last year”
  • “last year JPMorgan Chase spent over $9.5bn on technology, including $3bn on new initiatives”
  • From a similar piece in the NY Times: “The consulting firm McKinsey estimated in a report last month that digital disruption could put $90 billion, or 25 percent of bank profits, at risk over the next three years as services become more automated and more tellers are replaced by chatbots.”
  • But: “Much of this change, however, is now expected to come from the banks themselves as they absorb new ideas from the technology world and shrink their own operations, without necessarily losing significant numbers of customers to start-ups.”
  • Back to The Economist piece: “As well as economies of scale, they enjoy the advantage of incumbency in a heavily regulated industry. Entrants have to apply for banking licences, hire compliance staff and so forth, the costs of which weigh more heavily on smaller firms.”
  • Regulations and customer loyalty are less in China, resulting in more investment in new financial tech in Asia: 
  • As another article puts it: “China has four of the five most valuable financial technology start-ups in the world, according to CB Insights, with Ant Financial leading the way at $60 billion. And investments in financial technology rose 64 percent in China last year, while they were falling 29 percent in the United States, according to CB Insights.”
  • Why? “The obvious reason that financial start-ups have not achieved the same level of growth in the United States is that most Americans already have access to a relatively functional set of financial products, unlike in Africa and China.”
  • There’s some commentary on the speed of sharing blockchain updates can reduce multi-day bank transfers (and payments) to, I assume, minutes. Thus: ‘“Blockchain reduces the cost of trust,” says Mr Lubin of ConsenSys.’

Fixing legacy problems with new platforms, not easy

  • The idea of building banking platforms to clean up the decades of legacy integration problems.
  • Mainframes are a problem, as a Gartner report from last year puts it: “The challenge for many of today’s modernization projects is not simply a change in technology, but often a fundamental restructuring of application architectures and deployment models. Mainframe hardware and software architectures have defined the structure of applications built on this platform for the last 50 years. Tending toward large-scale, monolithic systems that are predominantly customized, they represent the ultimate in size, complexity, reliability and availability.”
  • But, unless/until there’s a crisis, changes won’t be funded: “Banks need to be able to justify the cost and risk of any modernization project. This can be difficult in the face of a well-proven, time-tested portfolio that has represented the needs of the banking system for decades.”
  • Sort of in the “but wasn’t that always the goal, but from that same article, Gartner suggests the vision for new fintech: ‘Gartner, Hype Cycle for Digital Banking Transformation, 2015, says, “To be truly digital, banks must pair an emphasis on customer-facing capabilities with investment in the technical, architectural, analytic and organizational foundations that enable participation in the financial services ecosystem.”’
  • BCG has a prescriptive piece for setting the strategy for all this, from Nov. 2015.

Case studies

  • A bit correlation-y, but still useful, from that BCG piece: “While past performance is no guarantee of future results, and even though all the company’s results cannot be entirely attributed to BBVA’s digital transformation plan, so far many signs are encouraging. The number of BBVA’s digital customers increased by 68% from 2011 to 2014, reaching 8.4 million in mid-2014, of which 3.6 million were active mobile users. Because of the increasing use of digital channels and efforts to reconfigure the bank’s branch network—creating smaller branches that emphasize customer self-service and larger branches that provide higher levels of personalized advice through a remote cross-selling support system—BBVA achieved a reduction in costs of 8% in 2014, or €340 million, in the core business in Spain. Meanwhile, the bank’s net profits increased by 26% in 2014, reaching €2.6 billion.”
  • And a more recent write-up of JPMC’s cloud-native programs, e.g.: ‘“We aren’t looking to decrease the amount of money the firm is spending on technology. We’re looking to change the mix between run-the-bank costs versus innovation investment,” he said. “We’ve got to continue to be really aggressive in reducing the run-the bank costs and do it in a very thoughtful way to maintain the existing technology base in the most efficient way possible.” …Dollars saved by using lower-cost cloud infrastructure and platforms will be reinvested in technology, he said.’ JPMC, of course, is a member of the Cloud Foundry Foundation which means, you know, they’re into that kind of thing.

PE tech acquisitions rising, while corporate deals slow

The dramatic surge in PE activity is primarily due to the ever-deepening pool of financial buyers. In the history of the industry, there have never been more tech-focused buyout shops that have had access to more capital, collectively, than right now. New firms have popped up while existing ones have put even more money to work in the tech industry, which is becoming even more ‘target rich’ as it ages. For instance, both Clearlake Capital and TA Associates announced as many deals in Q1 2017 as each of the firms would typically print in an entire year. Additionally, both Vista Equity Partners and Thoma Bravo averaged almost two transactions per month in Q1, if we include deals done by their portfolio companies as well.

From Brenon at 451, and with some charts too:


Link

At $3.7bn, AppDynamics sells to Cisco at 17.3x, estimated

Based on the S-1 filings from the business, a $3.7B price implies a 17.3x enterprise value/trailing twelve month revenue multiple, which is 41% higher than the next nearest acquisition, Salesforce/Demandware. There’s no comparable pricing event in the M&A market in the last 10 years.

And, from Simon at The Register:

The Borg’s plucked the company mere days before it was expected to float on the stock market, an event expected to raise around US$1.4bn for a portion of the company.

While AppDynamics could point to over 2,000 customers and nine-figure revenues, it also had rather a lot of red ink to deal with. That’s Cisco’s problem now, as it will make AppDynamics a software business unit in its internet of things and applications business.

Source: The Biggest M&A Multiple in Software History

Cash repatriation could inject $850bn, post-tax

If Congress enacted such a deal, of course, only a fraction of the $2.6 trillion would reach shareholders. It’s important to note that much of the UFE is not actually in cash; it’s invested in overseas plants or provides working capital for foreign subsidiaries. At press time, specifics of a plan hadn’t emerged, and figuring out which assets will ultimately get taxed, and at what rate, will be thorny. But based on Trump’s earlier proposal and on past holidays, investing pros estimate that about 40% of the UFE, or around $1 trillion, will come back to the U.S.—and that companies would net at least $850 billion after taxes.

Tech and health care companies would get most of that.


I think most people believe that cash would be used in stock buybacks and dividend to raise share prices and give cash to investors. Trump would probably want it for creating new jobs, and it could be used for domestic acquisitions.

See the rest from Shawn Tully at Fortune.

TheNewStack: Gartner Purchase of Corporate Executive Board Would Address Changes in IT Advisory Market

Lawrence Hecht has some brief commentary on Gartner buying CEB for $2.6bn – Lawrence takes out the $700m in debt from the actual deal value of $3.3bn. I don’t really know CEB too well.

He also covered some recent analysis of the analyst industry, including the post I did on the topic and podcast at KEA on the idea with other analyst-types, both back in 2015.

All seethe official press release.

Here’s some share price performance, snipping out the time around the acquisition announcement (it goes up, of course):
screenshot-2017-01-17-19-07-24

Link

Five years of declining PC sales

For the year, Gartner estimated shipments at 269.717 million, down 6.2 per cent year-on-year, with each of the major manufacturers except Dell reporting falling sales.

Gartner says high-end PCs are doing well, but of course, are a smaller market:

There have been innovative form factors, like 2-in-1s and thin and light notebooks, as well as technology improvements, such as longer battery life. This high end of the market has grown fast, led by engaged PC users who put high priority on PCs. However, the market driven by PC enthusiasts is not big enough to drive overall market growth.

There may less volume, but it’d be nice to know how that effects profits in the notoriously slim margin PC business.

Meanwhile, on overall, global IT spend:

Companies are due to splash $3.5tr (£2.87tr) on IT this year, globally, although that is down from its previous projection of three per cent.

See some more commentary of that forecast.

Link