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Victor Cook

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  • Margin Myopia [View article]
    In smart-tech companies nothing is typical, especially the revenues from R&D spend.
    Mar 28 01:39 PM | Likes Like |Link to Comment
  • Margin Myopia [View article]
    Exactly. But not "of course." “Best in class” depends on the companies included in the analysis. In Gerstner's “Who Says Elephants Can’t Dance?” the best in class was DELL with a SG&A cost per dollar revenue of around 32 cents. That was in 1993. IBM's cost per dollar revenue was 43 cents. You're right, 11 cents does not seem like a lot until you multiply it by the company's $62.7b in revenues. That was reason for what Gerstner called IBM’s $7 billion expense problem. By 2000 he had cut IBM’s cost per dollar to 24 cents but still fell short of DELL's 17 cents per dollar revenue.
    Mar 26 01:02 PM | Likes Like |Link to Comment
  • When Art Informs Science: Three Of Facebook's Optimal Revenue Plays [View article]
    Aug 21 11:41 AM | Likes Like |Link to Comment
  • When Art Informs Science: Three Of Facebook's Optimal Revenue Plays [View article]
    Dec. 9, 2010
    Aug 21 11:33 AM | Likes Like |Link to Comment
  • What's Facebook Worth? [View article]
    A footnote on “What’s Facebook Worth?”

    On October 11, 2010 I calculated the chance Facebook’s market cap would reach $50 billion January 2012 was around 1 in 20. The chance it would top $56b was about 1 in 33.

    On May 18, 2012 (the first day of trading) FB peaked at $45.00 a share. With 2.14b shares outstanding its market cap was $96.3b. On June 1, 2012 FB closed at $27.72 a share with a corresponding market cap of $59.3b. That’s a loss of $37b after two weeks.

    What’s next? Does anyone still see $104b in Facebook's future?
    Jun 3 12:57 PM | Likes Like |Link to Comment
  • Physics Of Market Share: The Little Guy Has More To Gain [View article]
    You sure have a right to quibble about the title of my article. On the one hand it doesn’t fit Merriam-Webster’s first definition physics as "... a science that deals with matter and energy and their interactions." On the other, it does fit neatly into the second definition as "... the physical processes and phenomena of a particular system."

    I question your conclusion that LUV’s move into Tampa presents a “… public interest in preventing any one carrier to buy up gates the way it appears LUV did in Tampa.” In my opinion the public interest should not extend into micro-regulating strategic distribution decisions like buying up gates, or contracting for shelf space, or winning more patents and copyrights, or more buying more time for ads than any other company on the Superbowl. Especially if these decisions increase the level of public service offered.

    On a personal note, I’ve been flying from MSY to PBI for many years. And I noted in my article that before LUV moved into Tampa the other carriers charged too much and took too long to make the trip. Clearly, management's move into improved the level of service dramatically.

    Semantics aside, thank you for your thoughtful comments.
    Feb 10 12:21 PM | Likes Like |Link to Comment
  • Physics Of Market Share: The Little Guy Has More To Gain [View article]

    I'll have to think about the answer to your question. That curve first appeared in a working paper I wrote at Chicago Booth in 1971. I've still got a copy of that paper in my office at school. I'll see if I can find the seed there.

    Meanwhile, your conclusion "that the size of a company eventually
    stands in the way of its growth" is brilliant. It suggests another take on the curve: the cost of monopoly is infinite.

    Thank you!
    Feb 9 06:19 PM | Likes Like |Link to Comment
  • What's Facebook Worth? [View article]

    Thanks for your comments. Here are my replies by number:

    1) Z stats are calculated, not “observed” in the data set.

    2) Since the VRR has a lower limit of zero, you cannot “get to …a negative market cap.”

    3) The histogram of the VRR looks normal, though it’s truncated in this application.

    4) The distribution of market cap looks like an extreme exponential. If I remove GOOG (value = $197b) and YHOO (value = $23.6b) the mean and sigma fall to $0.7b and $1.2b respectively. Deleting these outliers hides the extreme risk inherent in this market. Normalizing with 20 sampling distributions removes this inherent risk entirely and greatly narrows the range of Facebook’s possible valuations.

    If you haven’t already done so you might want to read Nicholas Taleb’s “Fooled by Randomness:” … “Outside of textbooks and casinos, probability almost never presents itself as a mathematical problem or a brain teaser.”
    Oct 23 07:04 PM | Likes Like |Link to Comment
  • What's Facebook Worth? [View article]

    Your conclusion that “…from the mean and standard deviation it is clear that the distro is not normal” is almost correct.

    What is clear from a distribution with mean 2.7 and standard deviation 3.5 is that it is not standard normal. A standard normal distribution is a normal distribution with zero mean and unit variance. There are an infinite number of normal distributions, each based on as many combinations of means and standard deviations. The stanard normal is one of these.

    Your comment that my “z-scores and p-values are all very wrong” is incorrect. I would not have used the Z statistic if my sample did not satisfy the 68-95-99.7% empirical rule.

    Thank you for the opportunity to clear up a common misconception.
    Oct 12 07:09 PM | Likes Like |Link to Comment
  • Why Airline Mergers Don't Work: Scale Is Not A Blessing [View article]

    Your comment that airline management should try “… to figure out how to be more customer friendly and attract more air travelers and revenue” cuts right to the core of the problem. If mergers don't work, what's an airline CEO to do?

    While my article defines the problem, it doesn't offer a solution. For a road map on how to find a way out of this dilemma I recommend airline CEOs read J.C. Larreche's book "The Momentum Effect: How to Ignite Exceptional Growth." Here's what Sir Richard Branson, who knows a thing or two about the airline business, says on the cover:

    "This book shows you how to build momentum and leave your competitors trailing in your wake."

    What might airline CEOs learn from it? One example of the insight that jumps from the pages of Larreche's book is that the relationship most air carriers have with their passengers never develops beyond their online booking, ticket purchases, onboard experiences and baggage handling. As JC says on page 154:

    "There is no emotional connection. To generate the momentum effect requires a much deeper and more committed relationship than that offered by passive customers who just don't complain. Companies should measure their success by the number of delighted customers they have--people so thrilled with a product or service that they can't help but tell others about it."

    We often hear the idea that "less is more." But that concept always is expressed in terms of money. The following comment in JC's book (page 27) explains when less is more from the airline passenger's point of view:

    "... less should mean that they get exactly what they need and nothing more, with no superfluous elements that create complexity and could destroy value."

    Reading this sentence started me thinking: are there any airline services that create complexity and destroy value? Yes. Baggage handling. This conclusion led me to write a series of articles exploring ways to “… be more customer friendly and attract more air travelers and revenue.” In the last article in that series I proposed a radical solution to the baggage handling problem: remove baggage from the passenger air transport system and shift it to the cargo air transport system. If you’re interested in the pros and cons of this idea start with

    Thanks for the opportunity to put this idea back on the table.


    On Sep 28 06:32 AM Tack wrote:

    > The fundamental problem with almost all airlines (here again, Southwest
    > "gets it" the most) is that they so utterly misunderstand their own
    > businesses and have developed near-suicidal marketing and pricing
    > approaches that unless they wake up to new realities, most will fail,
    > whether merged or unmerged.
    > As an executive (now retired) in capitally-intensive, fixed-cost
    > industries during my career, one thing I learned very quickly is
    > that volume is everything. When fixed costs comprise a huge segment
    > of a business, it's never possible to achieve a positive result by
    > adopting any program that reduces volume and gross revenues. Whatever
    > savings may be attached to associated variable costs will be outweighed
    > by the fixed costs, now allocated over a smaller base.
    > So, on the surface, a merger would seem to make sense, i.e., expand
    > volume faster than the expansion of fixed costs. The problem remains,
    > however, that the airlines have totally forgotten how they generate
    > revenue and how to grow that revenue. Consequently, they are seeing
    > fewer and fewer passengers who wish or need to partake of their "services"
    > (I use that term euphemistically).
    > Think about it for a minute. Is anybody attracted to being humiliated
    > at airport check-ins? to being financially punished for not "planning"
    > a trip in advance? to getting penalized for changing or canceling
    > a trip? or how about paying absurd fees to bring along your luggage?
    > or paying 2-3 times as much to go 500 miles as 5000 miles?
    > This is a mentality associated with arrogance and would work more
    > "perfectly" in mandated-as-compulsory products, like health or auto
    > insurance, but, it's insanity in a business where people make discretionary
    > decisions. And, that's what the airline business has increasingly
    > become, a business where the need and/or desire to use the product
    > has become optional.
    > Now, businesses have access to worldwide, instantaneous Internet
    > communications and teleconferencing. The absolute need to send somebody
    > at exorbitant cost to a meeting is greatly reduced. The greater competition
    > in almost all world business segments also dictates that companies
    > manage their finances, not just pay whatever the airlines wish to
    > charge, as if there were no alternatives.
    > And, consumers are finding that they can enjoy life just fine without
    > flying around the world, or even around the country. It used to be
    > that a trip was something exciting to look forward to, a special
    > event. Now, the very thought of getting one's pockets picked and
    > treated like some sucker to be exploited makes travel unappealing,
    > and that's before we even get to the hassle, disrespect and humiliation
    > that passes for "airport security." (I think the shoe bomber did
    > more to damage the American economy that any other terrorist act,
    > but that's another thread.)
    > Airline executives seem utterly oblivious to the changed rules of
    > the game of air travel and its increasingly optional nature. At a
    > time when they should be turning themselves into pretzels trying
    > to figure out how to be more customer friendly and attract more air
    > travelers and revenue (not by nickle-and-dime fees, either), they
    > are engaged in a nihilist race with each other to see who can drive
    > passengers away the fastest. It's insanity, no less.
    > For a very long time, I've thought there would be a huge opportunity
    > for an airline to come into being, whose operating plan included
    > no fees or penalties of any kind and had a simple revenue plan: all
    > seats would be priced on a base fee to cover fixed business costs,
    > plus a mileage add-on to cover the distance traveled. Ergo, the price
    > all of travel would be proportional to the distance one goes. <br/>
    > Such a plan is too simple, of course, for the convoluted thinking
    > of the airline executives, although Southwest probably comes the
    > closest. But, for the others --merged or not-- who keep seeing travelers
    > as cattle marching inexorably up the chutes of the slaughterhouse,
    > their days are increasing numbered.
    Oct 5 04:30 PM | Likes Like |Link to Comment
  • Why Airline Mergers Don't Work: Scale Is Not A Blessing [View article]
    Fat Panda,

    You're right. I am comparing apples and oranges; and different markets; and different levels of competition; and different fleets; and different fuel hedging bets; and different cultures; and so on. That’s the whole point.

    I designed the risk-adjusted differential to standardize the outcomes of these and many other strategic choices in order to inform investors about managements’ overall value-revenue orientation. If these differences didn’t exist the risk-adjusted differential would be zero for all companies all the time!

    Thanks for giving me the opportunity to clarify this important issue.

    Oct 2 06:05 PM | Likes Like |Link to Comment
  • Why Airline Mergers Don't Work: Scale Is Not A Blessing [View article]

    Your conclusion would hold water except for one thing: Southwest has held the same lofty position on the value creation scale since Q1 ’93. That makes it 37 years of value leadership, most of the time without the need for fuel hedges.

    You can verify this result in the 18 minute audio slide show “Y’all Buckle That Seat Belt” based on Chapter 2 of my book “Competing for Customers and Capital. Here’s a link to that presentation:

    Thanks for the opportunity to clear up this commonly held misconception.

    Oct 2 10:32 AM | Likes Like |Link to Comment
  • Why Airline Mergers Don't Work: Scale Is Not A Blessing [View article]
    Change is the Only Constant,
    Better strategic alternatives do exist.

    For example, see my Seeking Alpha article “General Motors’ Natural Share Level: Can GM Be Like IBM?” (December 15, 2008).

    A company’s “natural share level” occurs when the incremental cost of the next revenue share point equals the incremental earnings from acquiring that share point. In my book -- “Competing for Customers and Capital” -- I ran these numbers for Southwest Airlines in a similar peer group for Q1’03 on page 126. LUV’s actual share level was 7.6%. That share level produced an actual EBITDA of $139 million. At that time LUV’s “natural share level” was 13.6% with a theoretical maximum EBITDA of $176 million.

    By Q2’09 LUV’s actual share level had increased to 10.0%. I haven’t had reason to run the company’s natural share level or maximum EBITDA for the most recent quarter. I guess you’ve given me one!

    If you’re interested in how “natural” or “maximum earnings” market share is determined check out my 14 minute audio slide show on “The Rule of Maximum Earnings” from chapter 5 of my book. Here’s a direct link:

    Thanks for your thoughtful comment.

    Sep 26 06:22 PM | Likes Like |Link to Comment
  • Why Airline Mergers Don't Work: Scale Is Not A Blessing [View article]
    User 457816,
    You overlooked the last sentence of my article:

    “If you want to understand the details behind this analysis, review my 18 minute audio slide show Y’all Buckle That Seat Belt.”

    Clicking on the hyperlink at the end of this sentence you will find these results are based on a set of objective rules using audited financial data. You also will find the results are basically unchanged since Q1’93 for a comparable peer group of U.S. airlines.

    Thanks for the heads-up.

    Sep 26 06:09 PM | Likes Like |Link to Comment
  • Stress Test Results: AQ Chances Vs. SCAP Buffers [View article]

    Yes, of course I remember your comment. Unfortunately, I did not follow up on ways to combine Wachovia’s pre-merger numbers with Wells Fargo’s. I wish I had done as you suggested.

    It would have been a simple thing to combine the two if WB were included in my 32 quarter analysis of the 92 public US bank and thrift holding companies with the most deposits. But it wasn’t. That’s because WB was not on the list I got from American Banker. Apparently their data supplier (SNL) removed WB since the merger had gone through when they compiled the list on March 11, 2009. So, rather than redo the analysis I let it ride.

    I just checked WB’s 9/30/08 financials. At that time its price had dropped to around $3.50 destroying its market cap, while the merger would have doubled WFC revenues. The combination would have pushed Wells Fargo’s AQ score back far below zero. Then I wouldn’t have been nailed by Connell in my interview! Sigh…

    May 13 06:19 PM | Likes Like |Link to Comment