MediaFile

from Paul Smalera:

In Amazon, Wall Street worships a disruptive god

Why does Amazon please Wall Street so much? The company treats shareholders with a disregard that borders on contempt. (CEO Jeff Bezos is "willing to be misunderstood" which means he really doesn't care if investors understand the business, as we'll see.) Yet when it announced that profits last quarter fell 45% year-over-year, the stock price saw a healthy bump. Meanwhile, many tech companies, like Apple, which had a high-profit, high-margin quarter, found their stocks punished. Perhaps this is a sign that Wall Street is finally embracing the idea that, for tech companies, growth comes first, even at the expense of profit.

If that’s what’s going on then the Street has started to adopt the ethos of the Valley, specifically of one its most prominent sages: Harvard Business School professor Clay Christensen. The godfather of disruptive innovation, Christensen is often quoted chapter and verse by technology company founders and venture capitalists alike. Christensen studies how established, high-flying technology companies like Amazon and Apple conduct business, to determine if they are ripe for attack from low-margin, startup competitors. His thinking can help shed light on why the market loves Amazon, which is, after all, a barely profitable conglomerate of loosely related businesses that is growing at a bonkers rate. But basically, his theories all comes down to profit margins, and how companies spend their money.

Amazon’s razor-thin margins -- just 1.9% for all of 2012 -- are, according to Christensen’s theories (and some other Amazon watchers), the company’s key weapon defense against disruptive competition. Not just in defending itself from whatever competitors exist today, but also from competitors that might exist tomorrow. Christensen writes in his seminal book, The Innovator’s Dilemma, that disruptive companies generally start at the low-end of the market, serving customers with cheap, low-margin products that established companies have neglected, in their endless quest to move upmarket, increase profit margins, and please investors.

Despite years of massive growth, Amazon seems to have decided that, in order to remain alive, it must remain a permanent disruptor. In fact, Amazon, it seems, may never optimize for profits over growth. It would surely be tempting for CEO Jeff Bezos to reward himself and shareholders with a couple of blowout profit quarters. A few tweaks in the CFO’s office, and that is probably an achievable goal, and one that would press firmly on Wall Street’s Pavlovian lever of reward. But by taking that tack, Bezos would be forsaking two values he built the business on: a customer-first mentality, and an ethic of permanent disruption. And, to keep its stock healthy, Amazon would have to exceed each blowout quarter with another. And another. Why would Bezos ever play that game?

Instead, the company looks well beyond the short term. On the surface, It made no sense for the world’s largest bookseller to cannibalize its business by promoting ebooks, let alone to build an entire software and hardware platform for them, but that’s what Amazon did with Kindle several years ago. This allowed Amazon strengthen its already huge advantage over traditional retail booksellers -- today it's got a sleek $99 Kindle that might just be the epitome of the form, something unthinkable when it released its first slow, expensive readers years ago. And as overall print book sales keep falling, Amazon continues to grab a larger and larger share of the ebook pie.

Wall Street needs to shed Facebook’s shroud

As Facebook continues its search for a bottom after only eight trading days as a public company, there’s a much bigger problem than the $40 billion in market cap it has lost. The people behind Facebook’s dubious $100 billion-plus self-valuation were apparently as doubtful as the rest of us. At stake is the fate of Wall Street’s soul. To paraphrase Sir Thomas More’s line in A Man For All Seasons: “It profits a man nothing to give his soul for the whole world…” – but for Facebook?

Facebook’s interests are no more aligned with The Street’s than with its members‘. Wall Street needs to take the offense, see the handwriting on the wall and project itself as the ultimate defender of transparent, market principles, which is the only asset it has.

Facebook’s much-anticipated public launch has gone from bad to worse. It priced itself at the high range of $38 and opened 30 minutes late – some 20 of those with traders completely in the dark. Nasdaq has egg on its face and a possible liability in the tens of millions of dollars. Retail investors who bought into the hype are still losing money. Days after the May 18 launch, the tangled mess of positions that may or may not have been taken were still being unwound.

Live coverage: Google’s Q2 results

The investor spotlight will land on Google’s profit margins and newly released social networking service Google+ on Thursday afternoon when the world’s No.1 search company reports its second-quarter financial results.

Rising expenses and a steady stream of acquisitions in recent months have eaten into the company’s margins, but the recent launch of Google+ may help take some of the pressure off the company for its spending and help Wall Street warm to CEO Larry Page, who took over at the helm in April. Check in Thursday at 1:00 p.m. Pacific Time (4:00 p.m. ET) for live coverage of the company’s results and conference call.

CIA + Wall Street + Reuters = Daily Show gold

With a disputed election in Iran and a coup in Honduras, Jon Stewart wants to know: Where is the CIA?******He finds his answer in a Reuters Video segment by Fred Katayama, who reported earlier this month that the spy agency is recruiting Wall Street’s finest. ************You can view our original segment here:******

Tech earnings: Up, down and all around

This is turning out to be an earnings season when all bets are off on how technology giants will perform. With tech earnings taking the market on a roller-coaster ride, it wouldn’t be surprising if investors are a little sick in the stomach already. 

The hits and misses so far among the biggest and brightest:

Intel: Missed expectations, profit fell 90 percent and they said they wouldn’t give a detailed quarterly forecast due to the economic uncertainty.

IBM: Beat expectations and gave an outlook above Wall Street estimates. Not only did IBM shares surge on the news, it even lifted major U.S. indexes.

Nokia: A $500,000 Exit to Brooklyn?

Hours after it issued its second warning in three weeks, forecast shrinking cell phone sales for 2009 and promised to reduce expenses, Nokia held an investor meeting in Brooklyn, New York. Most analyst meetings take place in Manhattan, and Chief Financial Officer Rick Simonson told the audience on Thursday that he’d been asked why the company chose the Marriott at the Brooklyn Bridge.  Brooklynites are very accommodating, Simonson said — adding that Nokia saved money by moving the meeting from the heaving center that never sleeps.  Simonson didn’t give a figure, but JPMorgan said in a note that Nokia saved as much as $500,000 by simply making Wall Streeters cross to the other side of the Brooklyn Bridge.  It’s hardly enough to counter a 5 percent cut in cell phone sales volume next year and probably not even a fraction of the cost of putting Nokia’s latest multi-media phone, the N-97 on the market, but it is a good start. Maybe other conference organizations will take its cue, and this reporter will have a shorter commute more often.

(Photo:Reuters)

Dude, you are so Bear Stearned

If you want to know the latest developments in the shredding of Bear Stearns, you turn to breaking news sites. If you want to know the wider cultural implications of what’s happening on Wall Street, check the Urban Dictionary.

One of the most recent entries, less than a week after Bear’s problems were reported in the press, is “Bear Stearned .”

Definition:

to crash, to collapse, to plummit, to fail

1. I can’t believe it, I completely bear stearned that test.

2. For the third time this week, my computer bear stearned on me.

I plan to use this term at least 50 times this weekend.