People helping people. Powerful stuff.

Facebook - Not Originally Created To Be A Company…

Facebook recently filed an S-1 with the SEC to finally go public. Their IPO is one of the most anticipated public offerings in history. The filings show that they have extraordinary growth and are already very profitable. This is a very hard thing to do. (I will be talking about how FB’s IPO was so different from Zynga’s in a later post.)

FB’s financial disclosures were awesome. They provided great charts and statistics that helped substantiate their filing. Kudos to FB. However, the most interesting piece in the whole filing was Zuck’s letter to potential investors. This letter laid out Zuck’s views regarding FB’s roots, where FB is today, and where he believes FB is going. You can check it out here.

He opens up by saying, “Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected.” He goes on to explain how this “connectedness” is a good thing. And I agree (for the most part).

He later goes on to give his take on “money’s” role in accomplishing this goal… “Simply put: we don’t build services to make money; we make money to build better services.”

He later goes on to explain the “The Hacker Way” and about staying relevant in the social network. I first thought, “this sounds pretty awesome! It sounds like he genuinely cares about the “product” and about the goal of connecting people, not money! What a great guy!”

But wait a second… I am getting a fit of déjà vu. Rewind to 2004. There was a giant technology IPO who also filed a wonderful prospectus (S-1). In the filing, they stated:

DON’T BE EVIL

Don’t be evil. We believe strongly that in the long term, we will be better served-as shareholders and in all other ways-by a company that does good things for the world even if we forgo some short term gains. This is an important aspect of our culture and is broadly shared within the company.

Google users trust our systems to help them with important decisions: medical, financial and many others. Our search results are the best we know how to produce. They are unbiased and objective, and we do not accept payment for them or for inclusion or more frequent updating. We also display advertising, which we work hard to make relevant, and we label it clearly. This is similar to a well-run newspaper, where the advertisements are clear and the articles are not influenced by the advertisers’ payments. We believe it is important for everyone to have access to the best information and research, not only to the information people pay for you to see.

Google’s Founders’ Letter goes on to discuss their other goals as well (the very next section following the above passage is titled “Making the World a Better Place”). Fast forward to 2012. Google has recently come under fire (and rightly so) for compromising these principles by sacrificing objectivity in favor of pushing their own products and in turn revenue and profitability. They have come a long way since 2004… But at what cost?

Money does weird things to people (and companies). History has shown us that much. Zuck will be a multi billionaire once FB goes public (he’ll owe over $1B in taxes!). Despite all this, he has proven to be dedicated to fulfilling the “social mission”. I hope they continue to do great things. But it does not mean I am not weary of the effects this filing could have on the company.

So all in all, my message/challenge to FB. I hope you can look back to your filing 8-10 years from now and honestly say you have upheld the beliefs in your original filings. I have no doubt that if you do, you will continue to be a successful and profitable company.

What are your thoughts/opinions regarding FB’s letter to investors? Is it too much “pie in the sky”? Do you think they only view money as a means to an ends?

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Apple’s Cash Hoard

In case you don’t keep up with earnings reports, a few weeks ago Apple released their Q1 earnings (their fiscal year is 1 quarter off from the calendar year).

And of course, they blew it out of the water. They are now reporting more than DOUBLE the revenue of Microsoft ($46.0B vs $20.9B). And besides generating moreprofitthan Google reported inrevenue, they reported total cash (and cash equivalents) of$96.7BILLION.Yes, that’s with a big fat capital “B”.

So what does that mean? I took a challenge from my brother-in-law, to see how far $96.7B can take you. I immediately loved the idea of completing this exercise. I’m a numbers guy if you don’t know me very well. So we had to make it easy for the average person to interpret. I don’t do pretty charts very often. So Jeff’s friend, @radrice, put together my findings.

So how does one determine how long Apple could F-Around? As much as possible, I used Apple’s financial statements filed with the SEC to arrive at a conclusion:

  • First, I separated “Cost of Revenue” between “Hardware” and “Non-Hardware” expenses
  • "Non-Hardware" expenses were then added to R&D, Sales, and General & Administrative expenses to arrive at "Total People Costs"
  • Total People Costs are theoretically all costs excluding stock based compensation (salary, travel, meals, office supplies, internet costs etc)
  • Next I assumed (based on my own experience dealing with Fortune 100 companies) a certain % for marketing/advertising/fees to remove (roughly 2%-3% of Revenue or $600M/Qtr)
  • This total arrives at the total cost to simply “F-around” all the time
  • This would assume they keep spending what they normally spend i.e. Rent, Electricity but excludes Advertising, Marketing, etc.
  • Apple’s cash is the sum of Cash, Short-term, and Long-Term Securities. I did not assume any additional interest accumulation. (Let’s pretend they just cashed it all out)
  • Lastly, I took the average of “F-around” costs over Apple’s trailing 4 quarters and determined how long their $96B in cash would last…

There is obviously room for improvement in this analysis. What would you conclude if you attempted this exercise? How would your process differ?

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Dear AT&T, 

We need to have a serious chat about your coverage at my house. I’m beginning to “Rethink Possible” with a new carrier…

Dear AT&T,

We need to have a serious chat about your coverage at my house. I’m beginning to “Rethink Possible” with a new carrier…

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Success and Profit

I have a friend who sends me interesting articles from time to time. He is a pretty smart dude and you should check him out when you get a chance here. The blog post he sent me talked about Amazon and Apple’s earnings release (“A Tale Of Two Catalysts”).

I think you could honestly skip the whole post and read the last paragraph. More specifically, the last 2 sentences say it all. “But context is important. Right now, Apple probably makes more profit in a day than Amazon does in a quarter.” And he’s right.

I don’t care what any company creates or does. When you can create “something” that is better than anything else that currently exists AND your target market recognizes that value and pays the premium associated with your “something”, you’re gonna be successful and profitable.

I think it’s important to realize that you need both to be successful and profitable. This post about Amazon and Apple is a prime example of this (no pun intended). Amazon has been successful, but not wildly profitable (lately). 3.6% profit down to 1.3% is cruddy. Revenue was solid and one could argue they’re stealing market share. Also, they’re expanding and growing into other markets, which tends to hurt margins until they “figure it out”. That’s not to say Amazon has not been doing great things; it absolutely has. When Amazon puts pressure on every retail chain in America and Amazon is officially altering the way America goes shopping; you are officially doing some badass stuff. That’s pretty amazon, er, I mean amazing. Their “product” is better than all the alternatives out there. But what’s the price of being better? For Amazon, it’s margins.

With record revenue and profits last quarter, it’s easy to see Apple has been both successful and profitable (lately).  What Apple has done is absolutely remarkable. Apple is a hardware company. They design and build devices that are shipped all over the world. That is essentially what they do. Did I forget to mention, they compete in a consumer market, which traditional is synonymous with super high competition and typically equates to low prices/low margins? And their products command 38-45% margins?! Yes, read that sentence again. It says 38-45% That is absolutely INSANE. The majority of costs that actually go into those devices have been mostly commoditized (yes, I think I made that word up). Okay to be fair… yes they differentiate themselves because they’re technically an integrated hardware/software manufacturer. Without a doubt, some value has been created there. But seriously, does that value command an additional 20 more points of profit than other hardware manufacturers? No, it doesn’t. So why on earth are they getting away with PRINTING MONEY. It is because Apple makes amazing products that are arguably better than any alternative out there. Consumers recognize that Apple products are better AND agree to the premium sale price to get it. Absolutely stunning.

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