How Amazon Whupped Facebook

How Amazon Whupped Facebook

It’s been two very different stories for Amazon and Facebook this summer.  Amazon’s market cap has risen about 20%, while Facebook lost about 50% of its market value.

How Amazon Whupped Facebook

Chart source: Yahoo Finance

Why this happened can be seen in each company’s recent headlines.

Amazon announced it was releasing 2 new eReaders under the Paperwhite name that require no external light source and start at just $119.  Additionally, original Kindles are now available for just $69 (money quickly recouped on the first few digital book purchases.)  These actions expand the market for eReaders, already dominated by Amazon, providing additional growth and lowering a kaboom on the Barnes & Noble Nook, which is partnered with Microsoft.

Offering more functionality and lower prices gives Amazon an even larger competitive lead in the eReader market while simultaneously expanding demand for digital publications.  The latter further disrupts the traditional printed book market, giving Amazon more strength versus old line publishers and more market control (interpret that as pricing power.)  Despite a “nosebleed” high price/earnings multiple close to 300, investors, like customers, have been charged up to see the opportunities for ongoing growth from new products.

Amazon’s suite of digital products are simultaneously changing not only publishing, but all of retailing.  Kindle Fire is a low-cost tablet that not only supports reading but browsing – and is pre-equipped for shopping on Amazon.  It is one of the cheapest tablets, and comes with Wi-Fi service.  Target and Walmart both finally realized that Kindle Fire was designed to put them out of business, causing both to drop the product in a tiff this summer.  Yet, sales keep growing as reviews keep saying it is a good product for the money, and Amazon keeps taking revenue from the big-box discounters as convenience and price on-line are unbeatable.

On the other side of the coin, Facebook spent the summer defending itself to investors unhappy about the company’s inability to prop up the stock price.

The CEO promised not to sell any stock for several months, and explained that the company would not sell more stock to cover taxes on stock-based compensation – even though that was the original plan.  He even promoted the avoided transaction as some kind of stock buyback, although there was no stock buyback. Facebook has been focused on financial machinations – which have nothing to do with growing the company’s revenues or profits.

That the company avoided selling more stock at its deflated prices does help earnings per share, but what’s more important is the fact that now $2B will be taken out of cash reserves to pay those taxes.  $2B which won’t be spent on new product development, or other activities oriented toward growth.

Although I am very bullish on Facebook, this behavior was not a good signal.  The young CEO is clearly feeling heat over the stock value, even though he has control of the company regardless of share price.  His communications indicated he was more intent on mollifying investors than producing better results – which is what Facebook has to do if it really wants to make investors happy.  Rather than doing what he always promised to do, which was make the world’s best network offering users the best experience, his attention was diverted to issues that have absolutely no long-term value, and in the short term reduce resources for fulfilling the long-term mission.

Given the choice between:

1. A company talking about how it plans to grow revenues and profits, and maintain market domination while outflanking the introduction of new Microsoft products, or

2. A company apologetic about its IPO, fixated on its declining stock price and apparently diverting focus away from markets and solutions toward financial machinations

Which would you choose?  Clearly Mr. Bezos showed he was leading his company, while Mr. Zuckerberg came off looking like he was floundering.

As you look at the announcements from your company, over the last year and anticipate going forward, what do you see?  Are there lots of announcements about new technology applications and product advancements that open new markets for growing revenue while warding off (and making outdated) competitors?  Or is more time spent talking about layoffs, cost cutting efforts, price adjustments to maintain market share, stock buybacks intended to prop up the value, stock (or company) splits, asset (or division) sales, expense reductions, reorganizations or adjustments intended to improve earnings per share?

If it’s the former, congratulations! You’re acting like Amazon.  You’re talking about how you are whupping competitors and creating growth for investors, employees and suppliers.  But if it’s the latter, perhaps now you understand why your equity value isn’t rising, employees are disgruntled and suppliers are worried.

image credit: tough image from bigstock

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Adam HartungAdam Hartung, author of Create Marketplace Disruption, is a Faculty and Board member of the Lake Forest Graduate School of Management, Managing Partner of Spark Partners, and writes for Forbes and the Journal for Innovation Science.

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4 Responses to How Amazon Whupped Facebook

  1. Pingback: How Amazon Whupped Facebook – Innovation Excellence (blog)

  2. Pingback: How Amazon Whupped Facebook

  3. Adam, exceptional post – isn’t it amazing how business comes down to the two questions that you asked? Growth or Defending, basic!
    Looking forward to seeing more,
    LeAnna J. Carey
    @thehealthmaven

  4. Fantastic post however , I was wanting to know if you could write a
    litte more on this subject? I’d be very grateful if you could elaborate a little bit more. Cheers!

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