Monday, January 30, 2012

Is Facebook Killing Google? No, But…

 When a few weeks back my friend and occasional interviewer, Henry Blodget, the CEO of Business Insider, tweeted word of a new BI piece defending Google (with the characteristically understated headline, “Like Hell Facebook is Killing Google”), I tweeted back to Henry that I’d be happy to take the other side of that argument.
 “Awesome!” he responded, “Would love to hear details.”
 It’s been a month, but with quarterly earnings report season winding down, the daily torture of listening to so-called analysts pestering men and women busy running billion-dollar global enterprises in a time of unprecedented volatility and competitiveness with questions no deeper than “how should we think about your tax rate?” and “how should we think about sales this month?” and “how should we think about margins this week?” is almost over, and the hype about Facebook’s impending IPO is heating up…so here goes.

 In “Like Hell etc etc,” which you can read here, Henry correctly points out that Google is currently 10-times larger than Facebook, revenue-wise, and then argues Facebook won’t be able to close the gap as quickly as Facebook fans presume, for a very simple and logical reason:
 Because as the current revenue levels for both companies are demonstrating, search is a vastly better advertising product than social networking.
 Vastly better.
 So much better, in fact, that, when it comes to head-to-head business competition, the two companies aren't yet even in the same league.
 And why is search such a better business than social networking?
 Because search is the best advertising product in the history of the world….it is advertising space that can capture the consumer's attention at the exact moment that the consumer is looking for something to buy.

As for the advertising potential of Facebook’s social networking structure, Henry likens it to “hanging signs on the wall of a house during a party and sending sales reps to mingle with the crowd”:
 Yes, you can target which parties you pay to hang your signs on the walls of.
 Yes, you can make those signs appealing to those at the party.
 But the fact remains that the people at the party, who are sharing stories and photos and news and gossip, are not at the party because they want to buy something.
 They're at the party because they want to socialize.
 And any time you do more than passively hang in the background at the party, they will likely be annoyed by your intrusion. And, annoyed or not, when they do notice your ads, their reaction will most likely be,  "Cool--if I ever decide to buy a car/boat/stereo/meal/flowers/bull-whip, maybe I'll look at that kind." Then they'll go right back to their party.

 Henry’s argument has crisp logic to it—as you would expect from a guy who was one of the very first to recognize the ultimate potential of Amazon.com at a time when that potential was not obvious to many.
 Still, I’ll take the other side of it, with just as simple an analogy: Facebook is the Cable Television of the Internet.
 To put this is terms of Henry’s “house party” analogy, television is akin to “hanging signs in rooms” where people are doing something that has nothing to do with buying something: they are simply watching the signs, i.e. the TV sets.
 Moreover, television advertisers—especially cable television advertisers—know precisely which room will be occupied by which type of people, and will happily pay to advertise in one room or another, regardless of whether the party-goers are thinking of actually buying something at that moment, because, eventually, they will.
 After all, young men don’t watch TV thinking, “I need to watch this football game to determine which beer will make me attractive to women,” but the fact is that young men with a surplus of testosterone tend to be watching those games, so Budweiser showers cash on ESPN.
 And nobody watches “Top Chef” thinking “I need to determine which food processor they use so I can buy one,” but the food processor company knows that “Top Chef” viewers tend to be the ones who buy that stuff.
  And while Google search is, indeed, as Henry points out, immensely effective when it comes to advertising products and services to people who are looking for something, the fact is that only a very tiny percentage of people doing searches on Google are looking for anything other than how to spell a word, or get directions somewhere, or look up a crossword puzzle answer, or finish their history paper with the help of Wikipedia, or check a restaurant menu…none of which has anything to do with ordering something online.
 So, while Google is a company I’ve admired from Day One for many of the reasons Wall Street distained it early on (including a management team totally focused on the long run, paying almost no attention to quarterly earnings), Facebook will, absolutely, hurt Google.
 In fact, it already has, if my own experience advertising a similar product using both Google AdWords and Facebook is any indication.
The product advertised is “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2011).  My publisher advertised the earlier, print version on Google, and the more recent e-book on Facebook.
 And while both Google’s and Facebook’s platforms are similar in form, ease of use and detailed statistical reports, Facebook created demand I could monitor on Amazon.com in near-real-time, while Google’s impact was hard to see and impossible to value.
 In short, Facebook proved far better than Google AdWords.
 Here’s how they work.
 Google Adwords is elegantly simple: you write a headline, a brief description, and copy-and-paste the URL you want the ad to click through to.  Then you tell Google which words you want your ad to appear with, pick a country or city or town where you want the ad to be triggered, and Google suggests a price-per-click to pay, which you can accept or not.  (Google’s algorithms know what they’re doing so it’s easiest to go along with them.)
 Obviously, I picked words like “Warren Buffett,” “Buffett” and “Berkshire Hathaway” for my “AdWords.”  When those words were searched for, our ad would appear—assuming our price-per-click was in the range.  If somebody clicked through, we’d get billed.
 Sounds logical, and it is.  But there was a glitch: it turns out most people don’t know that “Buffett” is spelled with two “Ts”—so Google suggests you buy other words. “Buffet,” for example.  And “Warren” with one “N.”  And phrases that wouldn’t necessarily cross your mind, such as the following, none of which I am making up (including the spelling):
“What is warren buffet buying” [he never discusses what he’s buying]
“Books by warren buffet” [he has never written a book]
“Autobiography of warren buffet” [there is no such thing, but people search for it anyway]
“Where does warren buffet live” [this is where it gets creepy…]
 So you add more words and phrases to your list than you might think, to cover all the bases, and provide a credit card and a daily dollar limit or time limit or both for the campaign.  Google takes care of the rest, allowing you to monitor the results on your AdWords page with slick charts and tables showing all kinds of statistics—the main one being how many people actually click on your ad.
 The problem is, while you can and will initially see a lift from folks who “click-through” your Google ads, the odds over time run against a small advertiser, because, unless you're a bottom-feeding trial lawyer looking for "mesothelioma" clients, click-through rates can be pathetically low.
 After all, people looking for a Buffett book will simply get on Amazon and search for “Buffett” (or “Buffet,” but not, likely, “where does warren buffet live”…) there.  And people searching Google to figure out where Warren Buffett lives aren’t necessarily interested in buying a book about him—nor would I want them to buy my book.
 The result, in any event, was no discernible sustained benefit to book sales.

 Facebook’s advertising platform, meanwhile, proved very similar to Google’s, mechanics-wise: you create a brief headline, a brief description, select a picture or a graphic, select your parameters, and name your price.
 But it is those parameters that make Facebook geometrically more useful than Google.
 For while Google allows you to narrow down the geographic territory in which your ad will appear, Facebook allows you to pick the type of person who will see your ad.
 And that is why I think of Facebook as the Cable TV of the Internet.
 Right now, for example, “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett” (eBooks on Investing, 2011) is being advertised to college graduates in India, Dubai and Israel, which possess a growing base of investors who admire Warren Buffett.  
 Since Secrets was and remains the only Buffett book to not only spell out how truly extraordinary Buffett's investing track record is, but also to dispassionately point out certain blind spots in Buffett's world-view, we’re also advertising to college graduates in the United States who identify themselves as “liberals” or “conservatives” now that Buffett has interjected himself into the U.S. Presidential campaign in a way that has made him a hero to the left and a self-loathing billionaire to the right.
 The benefits—unlike Google AdWords—are discernable: “Secrets…” is regularly one of the two most-downloaded Kindle books on Warren Buffett, alternating in the top slot with “Snowball,” which has rather a fancier advertising budget than yours truly.
  But the magic of Facebook’s targeting doesn’t stop with countries or education.  If I wanted to, I could advertise to all 10,141,480 Facebook users with birthdays that happen in a week or less.
 Think about that.
 And if you really want your head to spin, think about this: according to a friend in retailing, the average Facebook woman updates her relationship status to “Engaged” within two hours of the guy actually proposing…so Facebook sells that relationship status information to retailers who have bridal registries.
 As my pal told me, “We’ve been looking for this for fifty years.”

 Now, for the record, I have no investment in Facebook shares, and this blog is not a recommendation or endorsement of, in ANY way, Facebook stock, which may turn out to be the biggest disaster since eToys.  It is, merely, one individual’s view of Facebook’s business model based on real-world experience.
 Indeed, to the question, “Is Facebook going to kill Google?”
 I’d say, “No.”
 But, to the question, “Is Facebook the next Google”?
 I’d say, “Almost certainly.”


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com

© 2012 NotMakingThisUp, LLC
                                   
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.

NOTE ON COMMENTS: We abide by one rule on the comment pages here, and that is NO “Yahoo Message Board-Type Language.”  So whatever you write and whether or not you agree or disagree with something, spell it correctly and keep it clean, and no personal stuff.  And if you think we won’t enforce that, well, we have over 300 comments that never appeared because they were sloppy, obscene, or personal. —The Management

Tuesday, January 17, 2012

The Sears Collapse: Conspiracy or Cluelessness…or Worse?

Since “Hellhound on His Trail” came out in the spring of 2010, I’ve had occasion to think anew about the many conspiracy theories that swirl around the story of the King assassination…a lot of perfectly sane people believe that Martin Luther King was killed as a result of a vast, shadowy conspiracy.
—Hampton Sides, author, “Hellhound on His Trail.”

 This being the weekend America honored MLK, we’re recalling that lament of the above-quoted author Hampton Sides—whose excellent, compelling account of the largest manhunt in FBI history is worth buying, right now, on your Kindle or iPad—about the persistence of weird conspiracy theories surrounding what was, in fact, the well-documented assassination of one civil rights leader by one sorry but clever-enough jailbird, as we consider the persistence of a weird conspiracy theory about a once-proud retailer brought low by one genius of a hedge-fund manager.
 We speak, of course, about Sears.
 The conspiracy theory, lately making the rounds on Wall Street, stems from the fact that the hedge-fund genius, Eddie Lampert, who also happens to be Sears’ board chairman, recently purchased nearly 5 million shares of Sears, mostly from his own hedge fund, at a price of close to $30 per share.
 The conspiracy theory hinges on three verifiable facts: 1) Eddie Lampert is an extremely smart guy with a terrific track record; 2) Sears under Lampert has become even more of a basket case than it was before he took control; and 3) despite the obvious collapse in Sears’ business model, Lampert had been using Sears’ own coffers to buy up stock in the open market at absurd prices that were far higher than what he just paid for the stock, rather than invest in the business itself.
 And on all three facts, the conspiracy theorists are correct.  Lampert is smart—witness his success with AutoZone.  And he has been using Sears’ own cash to buy stock in the open market at absurd prices, in hindsight:

Fiscal Year      $MM Bt    # MM Shares Bt    Average Px
2010                $394                5.5                               $72
2009                $424                7.1                               $60
2008                $678                10.3                             $66
2007                $2,900             21.7                             $135
2006                $816                6                                  $136
2005                $590                5                                  $125
Total               $5.8 Billion     55.6 million shares     

 Average price: $104/share. Last trade: $33.56 per share. Value destroyed: $3.9 billion. 
 As for the notion that Sears has become a retail basket-case, look no further than the credit default swap market in Sears Acceptance Corp—the Sears financing arm—and you’ll see they have blown out to levels that even the calculator-impaired credit monitors at S&P would recognize as, er, stressed.
 “Why then,” the conspiracy theorists ask rhetorically, “would Eddie have bought back all that stock for the company at stupid prices before buying stock for himself cheap?”  Their answer—and while we’re paraphrasing what we’ve heard, we’re not making up the gist of it—is this:
 “Eddie wants Sears to go bankrupt so he can take control of the real estate and make a ton of money.”
 And while the conspiracy theory seems to wrap up a lot of loose ends, it does not take into account the most obvious notion, which is that Eddie got Sears wrong.
 By way of demonstrating just how wrong he may have gotten it, we herewith present a sample of howlers from various Sears filings over the years: 
[Sears] completed development of new Internet technologies and migrated our selling websites to an improved e-commerce platform. This new platform positions us to attract and retain customers using a multichannel service approach to create a consistent experience across the channels and enhance the offerings and the shopping experience where channels intersect. Examples include store-to-Web, Web-to-store, special order catalogs and the sales hotline. Multichannel represents the potential for a sustainable growth vehicle for our company and represents an opportunity for us to unify and integrate the customer’s experience.
…in August 2007 we introduced the Ultimate Appliance Promise campaign. The purpose of this campaign is to show our customers that we are uniquely positioned to meet their appliance needs by offering the largest selection of appliances, a price guarantee, one year of free service and support, and next day delivery and installation in many markets across the U.S.
[Sears] remodeled approximately 30 Kmart stores to include Sears-brand products. We intend to continue our rollout of home appliances, including Sears Kenmore-brand products, into Kmart locations over the next several years as a means of expanding our points of distribution in response to competitor store growth. As of February 2, 2008, approximately 280 Kmart stores, including certain of the remodeled locations, offered broad assortments of home appliances.
MyGofer expanded its fulfillment options in a variety of ways, as well as serving as the engine behind additional integrated retail efforts. MyGofer.com provides features and benefits designed to create a one-stop shopping experience, offering a range of quality products including groceries, prescriptions, health and beauty products, and electronics. MyGofer was created to provide our customers with speed and convenience – the same day a customer places an order, it is ready within hours, with pickup now available in over 600 stores.

And, our favorite: 
With regards to social media, we deployed a variety of campaigns and applications to make our experiences more engaging and “sticky,” both on sites like Facebook and Twitter, as well as on sears.com. 

 Maybe—just maybe—like when a loser from a broken home of whom nobody had ever heard managed to kill the leading civil rights leader of his times and almost get away with it, the facts are just the facts.
 To support this perspective, we now harken back to an early report on Sears that spookily heralded everything that came afterwards: a 2006 Fortune Magazine piece in which Lampert is called “The Steve Jobs of the investing world,” yet contains enough evidence of the penny-pinching narrow-mindedness that destroyed Sears to be almost prescient:

 The mood was tense at the Bel Age Hotel in West Hollywood, Calif., early last year. The top two dozen executives of Sears Roebuck & Co. were gathering for a strategy session with Eddie Lampert, then 42, the billionaire hedge fund manager who had just engineered an unlikely takeover of their venerable but struggling company. The fact that the vehicle of his acquisition was discounter Kmart--which Lampert had come out of nowhere to snatch control of during bankruptcy--was only one source of unease. Once their presentations started, Lampert also began poking holes in virtually every idea. "What's the benefit of that?" he asked again and again. "What's the value?" He shot down a modest $2 million proposal to improve lighting in the stores. "Why invest in that?" He skewered a plan to sell DVDs at a discounted price to better compete with Target and Wal-Mart. "It doesn't matter what Target and Wal-Mart do," he declared.
 Eyes began rolling…
—Patricia Sellers, Fortune Magazine, February 8, 2006

 And the eyes should have rolled.  Because, as it turns out, it does matter what Target and Wal-Mart do, just as improved lighting does matter in stores where women bring children to shop for clothes.
 How much such things matter is evident in the numbers ever since Eddie began second-guessing the expenditure of cash on anything, it would seem, excepting high-priced stock.
 From 2006 to 2010, Target and Wal-Mart together spent $16 billion and $33 billion, respectively, on capital upgrades to their businesses (we’ve arbitrarily cut Wal-Mart’s actual capital expenditures of $67 billion in half, to account for the company’s international spending).  Sears, meantime, spent a miniscule $1.4 billion, or about 3% of Target and Wal-Mart combined—and less than a quarter of the share repurchase cost—on silly things like “improved lighting.”
 The result?  While Target’s annual cash flow from operations grew from $4.9 billion to $5.3 billion in that time, and Wal-Mart’s grew from $10 billion to $12 billion (again dividing that company’s total figure in half), Sears was watching cash flow from operations drop 90%, from $1.4 billion—almost 10% of Target’s and Wal-Mart’s combined cash flow—to a nail-biting $130 million…which is less than 1% of its rivals.
 And Sears has done that while generating over $40 billion in annual sales—not easy to manage, negatively-speaking-wise.

 None of this, of course, is new-news.  The 2011 numbers, previewed last month, were even bleaker for Sears.
 But beyond the obvious value destruction and the conspiracy theorist-like attempt to reconcile conflicting facts, the company’s recent performance and its chairman’s ensuing share purchase in January raise a rather obvious question that doesn’t appear to have crossed any minds in the press corps: why is it that Eddie Lampert, who directed Sears Holdings’ share repurchases of 55.6 million shares at an average of $104 over the 2006-2010 period, bought for himself rather than for Sears Holdings those 4.8 million shares at around $30 a share (technically the 'purchase' was likely an allocation of his annual performance fee in stock, but still...)?
 After all, a company that had spent nearly $6 billion on its stock at an average price of $104 would presumably have found the shares even more attractive at $30.
 Wouldn’t Sears Holdings have liked to average down?
 To the conspiracy theorists, the answer is self-evident: it clinches their view that Eddie has purposely been buying back stock at silly prices in order to shrink the share base and drive up his personal percentage of the remainder, while simultaneously disinvesting in the stores so aggressively that the Sears parking lot is the only place to find a space at the mall during the holidays, making it worth more to Eddie dead than alive.
 But we don’t buy it.
 We think Eddie’s mother, quoted in the above Fortune article, had it right:
 “I never thought he would go into retail,” Dolores Lampert says. “It's a very hard business. But it's a challenge, and Eddie likes a challenge.”

 Still, if Warren Buffett is looking for scapegoats on Wall Street, he might want to direct some attention to Sears.  Unlike Staples, for example, which private equity nurtured and grew into an industry-creating powerhouse, here’s a business that was an industry-creating powerhouse that has, pretty systematically, been destroyed by private equity.
 Retail is indeed a very hard business.


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2011)    Available now at Amazon.com

© 2012 NotMakingThisUp, LLC
                                   
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  The content herein is intended solely for the entertainment of the reader, and the author.

NOTE ON COMMENTS: We abide by one rule on the comment pages here, and that is NO “Yahoo Message Board-Type Language.”  So whatever you write and whether or not you agree or disagree with something, spell it correctly and keep it clean, and no personal stuff.  And if you think we won’t enforce that, well, we have over 300 comments that never appeared because they were sloppy, obscene, or personal. —The Management