Wednesday, December 05, 2012

Jeffrey B. quoted in Fortune magazine's "CEO of the Year" profile: "Your margin is my opportunity."

Well, maybe.  Definitely true if margin equals profit.  But margin actually equals gross, not net, profit.  So out of margin comes every possible kind of expense: Xmas decorations for the front window, new sign, cloud computing facilities, trash bags, courier charges, conveyer belts for the warehouse, etc.  These expenses don't go away, and they scale over time, especially if building a national or international brand.  The bigger the enterprise gets, the bigger its investments in, for example, cloud computing and warehousing.

Capex has to be paid somehow.  You can either do it out of margin or you can do it with cheques written by venture capitalists.  As Fortune's article makes clear, Jeffrey's disruptive/transformative seat at the prom has been paid by two sources: vendors (who are now fed up with their position as parents endlessly doling out money for their ungainly offspring's whims; the Random/Penguin merger is a late, and in my view long overdue attempt to create an entity big enough to dictate terms (discounts, dating of invoices, returnability) to Jeffrey, instead of the other way around), and VC funding.

Some questions.  The buy side guys think I'm doomed, but I've spent my whole life being misunderestimated by almost every condescending "professional" I've ever met.  So, in order:

1.  What return do VCs typically require from a technology investment?

2.  What timeframe do VCs typically require for payback?

3.  How long will this payback take with a 1.8% net margin?  (Jeffrey's statistic, plucked from his 10Ks, not mine).

4.  What is's current PE?  (again, derived from the 10K and public sources like Yahoo & Google Finance).

5.  Has any company in the history of finance and investment sustained a triple-digit PE over the medium- to long-term?

5a.  Is there money in the bank?

5b.  How much of it belongs to suppliers?

6.  What will happen when (not if) generous vendor terms and VC funding decouple from the train?

Food for thought for Mr. CEO of the Year.  And an interesting forensic accounting problem/thought experiment for the rest of us.

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