Facebook has removed access to legitimate applications such as Apply Magic Sauce due to the backlash from the Cambridge Analytica scandal. Unfortunately, when a negative event occurs the corporate response is typically one that overshoots and overcorrects, a ham-fisted approach (Hulk smash!) rather than a logical, methodical approach. Rather than take the time to educate the public, it’s less expensive and easier for companies to fold under pressure. Facebook will undoubtedly survive the public backlash. However, the backlash is not without casualties. Smaller companies that have built businesses on top of platforms like Facebook suffer.
Case in point, Apply Magic Sauce, which I considered embedding into our former insurtech product, “Identity Hub” (read about Apply Magic Sauce in today’s WSJ). I was fascinated by Apply Magic Sauce’s application which predicted certain personality attributes based upon one’s Facebook “likes”. Users were required to opt-in to Apply Magic Sauce. There was nothing nefarious about it. We decided to pass on integrating the application as the use case we envisioned (predictive fraud analytics) wasn’t one that was top-of-mind with P&C insurance companies.
Here’s to hoping that Facebook exercises precision in determining which third party applications to shut off.
The CEORater Technology Founder CEO Index returned 8.2% and 8.4% on a Weighted and Unweighted Return basis respectively (click here for detail) during the January 2nd 2018 – March 29th 2018 period.
The hallmark of a great company is not one that simply meets or beats consensus estimates with some regularity.
Imagine if Reed Hastings and Netflix chose not to pursue the company’s over-the-top (“OTT”) strategy when investors where hungry for DVD profits.
Imagine if Jeff Bezos and Amazon scaled back their ambitions when investors grew weary of further investments in distribution centers.
Imagine if Andy Florance and CoStar decided to stop investing for growth because investors wanted to see 30%+ operating margins.
The Right CEO at The Right Time
What is the cost of not having the right CEO in the chair?
What is the opportunity cost associated with CEOs and Boards who lack intellectual curiosity and the courage of their convictions?
What is the opportunity cost associated with CEOs and Executive teams who are wed to the status quo, who worship the cash cow even when the sacred cow is no longer growing or worse yet, in decline? (think Microsoft’s inability to launch itself into mobile some 10-15 years ago).
Corporate Strategy Matters
Investors place too much focus on immediate-term results. Reported results are a function of operating decisions made in the distant past.
Investors should weight reported results less and allocate more time and effort toward understanding a given company’s strategic drivers and operational execution. Hold management teams accountable to this end – particularly if your firm is a large shareholder.
If companies are unwilling to share their strategic rationale – trim or sell off your position.
CEOs and Board members that haven’t developed strategic plans that link to operating plans and operating budgets are unqualified to be CEOs and Board members.
Developing and refining corporate strategic plans and having the courage and will to execute them is not easy. However, a high degree of difficulty is insufficient reason for management teams to treat strategy as an afterthought.
The Facebook uproar – wow! I’m shocked that people are shocked. We put our lives online for the world to see – the temptation for nefarious actors to act is there. We can’t be surprised at the result.
What happened?Facebook and UK-based Cambridge Analytica (“CA”) are at the eye of the storm. What occurred was NOT a data breach. It was NOT a cyber-attack. It was a case of poor supervision on the part of Facebook with regard to how a 3rd party developer accessed and used Facebook member data.
Who is Cambridge Analytica? Other than dead in the water, CA is a data mining/data analytics firm. There are thousands of companies like CA that aggregate and analyze data for various purposes.
What did CA do wrong? CA’s sin was that the firm misrepresented itself and how it would access and use Facebook member data. CA positioned itself as a personality survey application. Approximately 300,000 Facebook members downloaded the app. CA designed the app to capture your data and that of your Facebook friends. So for every person that downloaded the application, CA captured data not only on the 300,000 people that downloaded the app, but also on an additional 166 people for every one person – or 50 million people in total. While you may have provided consent, your Facebook friends did not. That’s strike one against CA.
Second, CA used this data to inform the Trump campaign’s political targeting effort. The Facebook members who gave their consent did so never knowing that their data would be used for a political campaign, much less their friends whom never consented to anything.
By the way, the Obama campaign did something similar. It too created an app for political purposes. It too captured Facebook data not only for those members who provided consent, but also for Facebook members who were friends of those who consented but never provided content themselves. So CA and the Obama campaign had strike one in common.
What should Facebook do? I believe Facebook should create a sandbox environment where 3rd party applications are tested to see how they would behave on FB’s platform – a proving ground of sorts – where Facebook could compare 3rd party application behavior to Facebook’s usage terms. However, this won’t happen as Facebook is not commercially motivated to provide this type of expensive preventative measure. It would be a waste of time and taxpayer dollars for the Federal Government to mandate this type of measure as it would be ill-equipped to audit such a process.
A more practical approach for Facebook would be to make it easier for members to provision their personal data in terms of visibility and sharing with 3rd party developers. Second, Facebook should pursue legal action against developers who abuse Facebook’s Terms of Use. Do so loudly and with maximum visibility to deter would be bad actors.
What should you do? There is nothing you can do to remove your digital footprint from the world. At the extreme, delete your social media accounts after you have purged your data from the respective platforms. A more practical approach would be to set your privacy provisions to “closed” or “private” across all applications and Websites that you use. Don’t volunteer to share your personal data and that of your contacts when you download apps.
This Facebook CA scandal is hardly news. Guess who else knows much about who you are? Your bank. Visa. Amex. MasterCard. Your local supermarket. Your doctor. Other companies that know or can infer much of what makes you “you” are many. Here are a few:
Google: Google scans your email and knows what you store in the cloud. It knows your browsing history. Your search history.
Amazon: Your Amazon order history. Your Amazon search history. Your credit cards stored with Amazon. Amazon provides auto insurance in the UK. Amazon will soon provide healthcare in conjunction with JP Morgan and Berkshire. AmazonGo grocery stores.
LinkedIn/Microsoft: MSFT’s LinkedIn has your career history and professional network.
Twitter: TWTR knows your personal and professional interests and who/what you’re connected to.
Oracle: Oracle owns LiveRamp and other MarTech businesses that infer or know bits and pieces about who you are through deterministic and/or probabilistic analysis. Drawbridge also plays in this space. Acxiom. Experian. There are hundreds of these Analytics firms.
Apple: Apple knows much about who you are based upon how you use your phone – particularly if your privacy settings are set to “open”.
Travel & Hospitality: various airlines and airline reservation systems, hotel and restaurant reservation systems, rental car providers – all store personal data elements and preferences.
Communicating CEO succession plans to institutional investors does not have to be complicated. Generally speaking, transparency around your CEO succession process is a good thing. This should not be confused with providing investors with a play-by-play update (I would not recommend the latter). Here’s a high-level outline that may be useful for CEOs and Board members:
Define the Succession Process Timeline (share publicly): For example:
“John Doe, CEO of Company XYZ will become Executive Chairman on January 1st 2019. XYZ will name a new CEO during Q4 2018.”
We chose the word “during” as opposed to “by” because the latter is too open-ended and invites investors to repeatedly ask “when”. “During” provides a bit of air cover around the timing question. You can always move the date forward and name a CEO early. Don’t push the date back. Make sure to allow adequate time to run a thorough process.
In terms of public disclosure – an earnings call is best. Address the topic in the prepared remarks. Anticipate investor questions and proactively address in the prepared remarks. Repeat your selection process in the prepared remarks each EPS call until a new CEO is named.
Define CEO Selection Criteria (share publicly): For example:
“As CEO I will work with the Board to define the criteria by which XYZ will select its next CEO…”
“Myself and the Board have defined the CEO selection criteria…”
“We will consider both internal and external candidates…”
“We have a deep bench of qualified executives and therefore will limit the selection process to internal candidates…”
“We will select the best candidate that embodies our culture and core principles…”
“Our next CEO will have a core competency around new product development…”
“Our next CEO will have had a rich global operating experience including significant time operating across Asia…”
It Helps to Have A Strong Corporate Culture and Well-Defined Principles
Whatever the selection criteria and core CEO attributes may be, lay them out. Companies with strong corporate cultures and well-defined principles will have an easier time with CEO Succession and its external communication to investors. CEO Succession should not be an event-driven process but rather an operations-driven process where internal executives qualify themselves and audition for the next job every day.
We covered this topic in a recent CEORaterPodcast:
Crowdsourcing is more prevalent in society than one may initially think. Many are familiar with Amazon product reviews and Yelp restaurant reviews – both a form of crowdsourcing. Facebook, Instagram and Twitter are platforms where members may quickly assess which subjects are trending amongst friend groups and follower networks – also a form of crowdsourcing.
Crowdsourcing has Carved A Path into the Workplace
CEORater and Glassdoor (both crowdsourced platforms), enable users to anonymously review CEOs and companies in an effort to bring transparency to the workplace. Instagram has gained traction with a new use case – enabling users to visually assess corporate culture given the platform’s deep trove of image and video content.
Crowdsourcing use cases will become increasingly prevalent as the amount of crowdsourced data increases and commensurately the opportunity to gain insight through basic reporting tools and advanced analytics including Natural Language Processing (“NLP”). Job seekers, managers, senior leadership and corporate boards will have more data – including crowdsourced data – with which to make decisions.
Employees are the most valuable resource as it relates to crowdsourced platforms for prospective job seekers. Who better to post reviews related to corporate culture, career opportunities and senior leadership’s operating style than a company’s employees? Like any other data-related process, the more users that participate (i.e. employee written reviews), the better the quality of the aggregate data. For example, let us assume that “Company XYZ” has 5,000 employees located across offices in the U.S., Canada, Mexico, the U.K. and India. The greater the engagement level amongst XYZ’s employees in terms of posting anonymous reviews, the better the data quality for it will reflect diverse opinions from a variety of cultures, work experiences and functional disciplines. To encourage participation on HR-related crowdsourced platforms it is critical to gain trust amongst users – especially those whom publish to the platform. Therefore, enabling users to anonymously publish reviews is essential.
What may the future bring for HR-related crowdsourced platforms? We believe these platforms will increasingly focus on images and video-based reviews – practices that have become common on the leading social media platforms . In terms of how crowdsourced review data is used, we believe that amongst job seekers the use case will not materially change in the near-term other than user participation across platforms will increase. As the data sets grew they become increasingly attractive to machine-learning platforms which may run sophisticated multivariate unsupervised learning processes in an effort to gain actionable insight.
Amazon’sCore Services Portfolio drives the company’s macro strategy. AMZN’s more recent product and service offerings (both organic and acquired offerings) are covered in the “2nd Ring” and “3rd Ring” sections and serve to strengthen the Core portfolio.
Amazon Revenue Breakdown: Full Year 2015, 2016, 2017
Amazon.com: Amazon’s crown jewel. The world’s broadest and deepest ecommerce platform.
Amazon Web Services (AWS): The dominant cloud services platform. 2017 revenue of $17.5 billion, a 43% Y-O-Y increase. AWS is a sleeping CyberSecurity giant. The AMZN business unit had 62% market share as of Q4’17 and likely has a similar if not greater share of the technology startup community as customers. Thus, if tomorrow’s tech giants are built on top of AWS, it stands to reason that AWS ought to be well positioned to lead the CyberSecurity effort in instances where it owns the customer relationship. If one company is to become the dominant CyberSecurity vendor over the next decade we expect it to be AWS. Amazon’s more recent initiatives (Amazon Key, Amazon Ring, its AI effort, original video content production and music to name a few) all feed the cloud, creating new hooks into it while enhancing its utility and value.
Amazon Prime: a multi-billion dollar recurring revenue stream that provides long-term visibility and helps the company place long-term multi-decade strategic bets.Consumers were originally lured to prime via shipping discounts. Amazon has since extended those benefits to include various forms of digital content, its August 2017 Whole Foods acquisition and may be offered as an incentive to any Amazon service. Prime’s year-over-year subscriber growth and modest price increases helped contribute to Amazon’s subscription services revenue of $9.7 billion – 52% growth over 2016 revenue of $6.4 Billion. The takeaway here is that as AMZN’s recurring revenue base continues to scale and become a greater percentage of the revenue pie, it enables Amazon to outflank competitors across various industries. For this reason we would expect Amazon to win the day in the original content business when the dust settles. Not Netflix or Disney (too small in both cases), not YouTube/Google (not sure of where they want to play in terms of original content), not Apple (too slow, thanks in part to a CEO who made his chops in the supply chain, not as an entrepreneur) and not Facebook (too green in the Enterprise arena).
Amazon Alexa (AI): Google and Amazon lead the global machine-learning (“ML”)/ Artificial Intelligence (“AI”) effort in that order. Apple’s Siri is a clear laggard from a speed and accuracy standpoint (what matters). Alexa-powered Echo devices are market leaders. This is important as the more Echo devices, presumably the more Alexa-based queries. The greater the number of voice queries, the smarter Alexa becomes. We believe that Amazon’s integrated retail portfolio will help the company solidify a smart-speaker leadership position. By integrated we are referring to the fact that an entire transaction may occur on Amazon’s supply chain beginning with Alexa-powered devices to the Amazon goods and services available for sale to the Amazon warehouse where they are stored to potentially the Amazon truck (autonomous?) or drone that will deliver orders. Google on the other hand has a similar front-end experience but begins to differ on the purchase side. Google doesn’t have its own global warehouse/ inventory management/distribution system and instead partners with Wal-Mart and other retailers in what is known as Google Express. Amazon has essentially become the defacto product search engine, taking share from Google in search. The ancillary effect is that this search traffic makes Amazon’s search algorithms and Alexa smarter.
Amazon’s 2nd Ring
Amazon’s 2nd Ring
Amazon’s 2nd Ring consists of products and services that strengthen Amazon’s core product and services portfolio. This is largely achieved by removing friction from both ecommerce and brick-and-mortar transactions. Further, 2nd Ring products and services create “hooks” that enhance customer loyalty and drive additional purchases.
Amazon Echo: We touched on Echo in the 1st Ring section. The important item to note is that the more products and services that Amazon attaches to Alexa, the greater the probability that Alexa’s usage will increase. The more Alexa is used, the smarter it becomes. This is important as we expect for AI to be as commonplace as electricity in the not too distant future. At present Google is the undisputed ML and AI leader as a result of it being the dominant search provider. However, cracks have appeared in Google’s armour. Amazon has become the default “product” search destination and social media platforms such as Facebook, Instagram, Quora and Twitter have carved out their own search niches around friend reviews, photo search, expert opinions and news. Further, Alexa-based queries are stored in Amazon’s cloud which helps Amazon become smarter about you and your family’s behaviour and shopping preferences – predicting demand before you hit the re-order button or voice command. What will it be sir, Minority Report or 1984?
Amazon Go: Amazon Go is another add-on service that removes friction from the retail experience. The intellectual property deployed in Amazon Go stores allows for a cashierless retail experience as “purchased” items are accounted for the moment customers remove them from shelves. We do not expect for Amazon to license this technology but rather to keep in-house as a sustainable competitive advantage. Over time we expect for this technology to be rolled out widely across Whole Foods and any other “brick and mortar” retail operations that Amazon may acquire.
Amazon Key & Ring: launched in October 2017 for Prime members, AMZN Key is a service that allows couriers and other individuals whom you permission (friends and family members for example) to unlock your door and access the home. Amazon cameras record visitors while they are in the home (more intelligent data for the cloud). Amazon’s acquisition of Ring last week is another piece to the home delivery/ home security ecosystem. Key and Ring help close the retail circuit by extending AMZN’s footprint into the last mile of the retail transaction – home delivery.
Amazon Video: Amazon is investing both in original content production, live sports (NFL, UFC) and offering “channels” in conjunction with networks such as HBO. Prime members enjoy exclusive content for “free”. The company is expected to invest approximately $5 billion during 2018 in video content. We believe that in the end whomever owns Disney and its content libraries will be the clear global content leader. We advocate a position where Amazon, Apple, Facebook, Google and Microsoft all make a run at Disney. Apple has the edge in our view given that Disney CEO Bob Iger has a history with Apple that dates back to his friendship with the late great Steve Jobs.
Whole Foods (acquired)/AmazonFresh:Amazon recently announced that it is merging its PrimeNow and AmazonFresh services. The Whole Foods acquisition will provide Amazon with a treasure trove of offline customer point-of-sale data. Further, expect Amazon to leverage Whole Foods to attract more Prime subscribers while putting the hurt to the grocery food store industry. From an operational standpoint Amazon is already leveraging some of the inventory management expertise it has developed over the years in its warehouse operations.
Amazon’s 3rd Ring (click to expand).
Amazon’s 3rd Ring
The opportunity here is for AMZN to deliver goods and services to the home/consumer with increasing efficiency. “Efficiency” means at lower cost (drones/ Amazon Prime Air and self-service via Amazon Lockers) while increasing the number of customer touch points (Amazon Key couriers may leave Ads/coupons etc.). In terms of what may come – an Amazon rideshare service could make sense given Amazon’s entrenched customer relationships, built-in trust factor and focus on delivery. When autonomous vehicles are not deployed on deliveries they may be deployed in the field moving passengers from point A to B. Until then, Amazon will continue to swallow industries – until its inevitable break-up.
Square’s Jack Dorsey – Tech’s Best Value Over Past 14 Months
We dipped into our CEORater database as we regularly do and ran a query to return the Technology stocks with the greatest stock price appreciation over the period January 3rd 2017 through February 23rd 2018.
We then took the Top 20 Technology Companies as measured by stock price appreciation during the period and asked the question: “Which of the 20 Technology CEOs were the best value in terms of CEO Compensation required to generate each percentage point of stock price appreciation?” For example, in the case of Mr. Dorsey at Square (tkr: SQ, Dorsey is also CEO at Twitter tkr: TWTR) who finished first on our list, for every $7 dollars of CEO Compensation the Company generated one percentage point of stock price appreciation.
Second on the list was Take-Two Interactive’s (tkr: TTWO) Strauss Zelnick at $183 of CEO Compensation for every percentage point of stock price appreciation generated. The table below details the Top 20 CEOs. Further, below the table each CEO name is linked to his/her CEORater profile page where additional detail may be found.
Technology CEOs – Best Value Jan 3rd ’17 – Feb 23rd ’18. (Click to Expand View)
“It’s people! Soylent Green is people!” shouted Charlton Heston’s Robert Thorn in 1973’s Soylent Green. Fast forward 45 years and people remain central to the process. Although the process we refer to isn’t recycled human foodstuff but rather the global economy where Intellectual Capital provides economic sustenance and Human Capital is the key ingredient (Intellectual Capital = Human Capital + Structural Capital + Relationship Capital).
Grist for the Mill
It’s only a matter of time before Technology giants begin to reach into public schools in an effort to identify and recruit top-tier talent in an Intellectual Capital-driven global economy.
Technology’s Four Horsemen – Alphabet, Apple, Amazon and Facebook – hired 247,714 net new employees in 2017, up 89% from the previous year’s figure of 131,196. Amazon alone accounted for 91% of 2017’s total and 84% of 2016’s total (this makes sense given the nature of Amazon’s retail-centric, distribution-heavy business model).
Technology companies require an enormous amount of human capital and brainpower. This is especially true of large technology companies that work to define new market opportunities and use cases. Waiting for the U.S. K-12 public education and university systems to produce inadequately trained professionals is both a suboptimal outcome and supply chain bottleneck. Therefore, we expect for companies such as the Four Horsemen to become increasingly aggressive and systematic in their approach to training and recruiting young people.
Employee Counts: GOOG, AAPL, AMZN and FB for Years Ended 2015, 2016 and 2017 (click to expand)
We have experienced early green shoots of this phenomenon with Peter Thiel’s“Thiel Fellowship”a foundation that awards $100,000 grants to high potential young people. Those accepted (104 fellows and alumni, 2,800 application last year), to the two-year program learn how to write code and build companies. Young people skip or step out of college to become Thiel Fellows where in addition to grant proceeds, Fellows receive support from the foundation’s network of entrepreneurs, investors and operators.
Another example comes from my personal experience in China 2006-2011 where a number of the large China-based IT Services companies set up company-owned “universities” to train recent college graduates in an effort to better prepare them for the type of work that they would perform on behalf of clients. My view is that these companies will reach further back into the student supply chain and begin to recruit and train students during their junior high and high school years.
Reduce Time-to-Productivity
A misconception that many have is that an engineer fresh out of college can hit the ground running at optimal efficiency and drive massive value for companies. That’s hardly the case. Universities do a poor job of preparing students for life in the real world. It makes enormous sense for companies to actively invest in the U.S educational system both at the K-12 and university levels. Short-term operating profit margin dilution will pay dividends over the long-term in the form of new differentiated products and services. To ensure a worthwhile outcome it is paramount that companies take a systematic approach to execution. If nothing else Alphabet, Amazon, Apple and Facebook excel in measuring outcomes and re-calibrating where necessary.
No Teachers Required
Given what we have posited it would make sense for the Four Horsemen and others to get involved in public education early in students’ academic careers. Further, it would be logical for companies to seek to influence the academic experience as much as is necessary to maximize the probability of optimal outcomes for both students and companies. Therefore, it is not unreasonable to expect that the Four Horsemen and a few select others will eventually shape student curriculum — particularly in Math and Science. This may range from content creation to teaching methodologies to the act of teaching itself. Teachers’ Unions ought to be concerned. From a technology standpoint it would not be difficult to replace public school teachers nor college professors with machine learning platforms wrapped in friendly AI skins.AmazonGo is already doing this with retail checkout lines. It’s less a question of “how?” and more a question of public will.
Bezos is Top Tech CEO with a Total Stock Return of 83,639%
We recently queried our CEORater database to identify the Top Technology CEOs as measured by stock price performance during each CEO’s tenure. Amazon’s Jeff Bezos topped our list by a wide margin. For purposes of this exercise it helped to have been a CEO for an extended period of time. It is also interesting to note that 8 of the Top 10 and 14 of the Top 20 CEOs on our list are Founder CEOs. We define “Founder” CEOs as those CEOs who were present for the first dollar of revenue earned. Additional detail may be found at CEORater.com. Contact sales@ceorater.com for Excel spreadsheet detail.
Top Technology CEOs based upon Total Stock Return (“TSR”) as measured during the CEO’s tenure. BP = stock price on CEO start date or IPO date (if not public on CEO start date). EP = stock price on Feb. 16th 2018. Contact sales@ceorater.com for additional detail.AMZN’s Jeff Bezos. Click on the image to expand.
