Posted tagged ‘growth’

How We Got a Corporatocracy

November 17, 2008

With all these bailout (banks, A.I.G., Bear Stearns, and, coming soon, autos!) it’s a wonder how we got to this point. Well, I found an interesting statistic. Taken from the history of the S&P 500’s top components and G.D.P. data we find out that the growth rate of the largest companies (A.I.G. and Citi were part of this group in 2006) has outpaced our economy by 6% annually. Stated another way, the market cap of the top 10 components of the S&P 500 has grown by, on average, 9.4% per year and the economy, as measured by G.D.P., has grown by around 3% per year. This data covers 27 years.

Now, I’m no math genius, but when you have a subset of the economy growing much faster than the economy, it points to a super-concentration of risk. Especially when the system is so inter-connected, perhaps the issue is that some companies became too big, ya think?

This sort of growth is a perfectly natural as a corollary to pay issues and other things. If I’m an executive, and I make money based on earnings, and I get paid in stock, then why not buy my competitors to enlarge my company and increase earnings, eliminate competition to expand margins and create more room for error in execution of business strategies, and use my newly-created larger company to invest even more in the business lines that are producing the best quarterly results? Well, I would! And they did.

But, if we are looking for stability in the system, and we really want the market to work wonders, then we want something different. We want lots of smaller, nimble competing businesses that are constantly keeping margins low and product innovations high. We do not want two or three super-sized businesses that are stable in their market share and merely looking to increase earnings through incremental improvements, and not innovation (G.M.? Ford? Chrysler? I’m looking at you). We don’t want an entire industry to consolidate to the point where they all start following each others innovations so that they can all go down with the ship if any one of them is wrong (Investment banks? Bear? Lehman? I’m looking at you now). And, as a taxpayer, I wouldn’t want a decline in the economy, when all businesses suffer, to jeopardize a set of companies that are too big to fail and not drag the economic state down with them–I would have to bail them out when I’m hurting most.

Those of you that are math geniuses know what comes next …  “=><=” (or “⊥”).

I guess we know who won out now. Maybe our leaders should figure out how to prevent this kind of consolidation. They do it with banks (obviously they took a very narrow view there).

Visit Craigslist Much? Well, Now it’ll be $5!

April 9, 2008

Henry Blodget seems to be getting a lot of flack over his valuation of Craiglist. Honestly, he engages in some logical conjecture, but it’s so assumption-laden as to be useless for too much. Let’s see what he says:

Let’s assume that, instead of charging for job ads in only 11 cities, Craigslist charged for all job ads (currently 2 million a month). Let’s assume that it also charged for another 5 million of the 30 million ads on the site each month. Let’s assume that Craigslist users were so horrified by the outrage of being charged even a de minimus listing fee that two thirds of these listers stormed off in a huff so that the 7 million of paid listings dropped to, say, 2.5 million a month. And let’s assume that Craigslist charged its standard $25 job listing fee for all of them.

(emphasis mine)

See the pitfall there? Further handwaving is done for actual valuations, but do you really think that a site like Craigslist would still be, even similiar, to its original spirit and size if you changed it from a 99% free site to a pay site? I don’t. It changes the character of the community overall.

Well, Equity Private doesn’t either. Her thoughts (from a comment she left, after I “kind of” prodded her):

You also have forgotten what CL _IS_. It’s a community in the spirit of file sharing. It has a very anti-capitalist flair. (They hate me there, no one will even buy me a drink anymore). Just look at “missed connections” section if you like. That’s about as French Existentialist as one gets. Charging to read that section but making it free to write for would STILL piss off the mournful contributors enough to cause a mass exodus. (This is a pity, because subscription revenue for the section might actually be worth something). Strip that stuff away and you’ve just got online classifieds. That’s a bust of a business for anyone else who’s tried it.

This is an awesome example of why logical numbers an seemingly severe assmuptions are a slippery slope. EP also mentions Napster. Online community? Check. From free to paid? Check. Completely failed? Check. Now, the impetus for that change was different, but still, not an unrealistic comparable. What falls out of all this? Well, EP delivers the death blow:

[Your valuation] implies a perpetual growth rate in the business of around 14.625%. (And I haven’t accounted at all for the amount of reinvestment required to maintain that growth rate- but it’s really silly to bother, it’s just not sustainable- eventually it is going to fall to about the risk-free rate… 3.5% right now if we use the 10 year treasury).

14.625% implies the already-huge CL would double in 5 years and be three times as large in 10 years! Really? I’ll take the under. Excel is dangerous sometimes…

Oh, and I suppose this is a good a time as any to bring this to people’s attention. Fascinating!