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Don't Judge a Business by its Distribution

A folly of 1996-2000, which still doesn’t seem to be going away

Today, Red Herring’s “Catch of the Day” missive observed its latest trend. The main headline proclaims:

The once-hyped ASP business is wearing out its welcome, and may be in for a rough 2001.

It’s probably accurate. Which is pretty pathetic, since there’s no such thing as “ASP Business.” But Red Herring seems to think there is, and the professional investment community happily agrees. Three years ago, B2C was sexy. Then it was B2B. Next it was ASP(1).

But these will all fail for the same reason: they aren’t businesses. They aren’t business structures, nor are they even business models! They just describe a distribution channel. Do businesses that share a distribution channel have much in common? Fine diamonds and toilet paper both distribute through BJ’s Wholesale Club (a discount club), but few investors would consider them the same kind of business. It just doesn’t make sense.

When talking about groups like ”the B2B companies,” the group members need enough in common that we’d expect them to behave the same way. Think Biotech. Now that’s a real industry. Different biotech companies have similar characteristics. They sell to similar customer bases, they have similar business characteristics—including huge up-front R&D investment, FDA approval process, patent-protected monopoly for 17 years for successful drugs, the need for extreme chemical expertise, etc. There’s a case that there is a real sector there.

If you want to lump businesses together, many times you can group them sensibly: Lump businesses by customer base. Then the businesses will share the common problems of that customer base. Or group them by business model; the businesses will share financial characteristics over time. Or lump by the organizational capabilities they need—companies that all require top engineering talent will all be affected by talent availability.

But let me suggest a shocking idea: resist the urge to lump! That’s right, don’t lump. Learn about each business individually. Consider it on its own merits. Research its market and product. Does it have a product that its market wants that creates value well over the cost to deliver the product? Will the business model produce high profits that can be reinvested in the business? Is it backed by a management team that can successfully build an organization to deliver to that market? Does the company have patents or other barriers that make competition difficult? If the answers are “Yes,” it’s probably a business worth starting. So start it. Or invest in it. Or write about it. Because it’s a real business. And it doesn’t matter if it’s B2C, B2B, or ASP. What matters is the one thing it won’t end up being—an IOU.

(1) See asp-flame.htm for an April 2000 essay I wrote noting that ASPs were less than revolutionary. Maybe I should become a pundit. If I had $10,000,000 for every time I’ve predicted a trend correctly, I’d be rich! back

Tax cut obsession is absurd; vote for tax increases!

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Tax cut obsession is absurd; vote for tax increases!

The paper was full of Democrats promising middle-class tax cuts yesterday. I really don’t understand why the national obsession with tax cuts. People seem to think about taxes as if the government is stealing from them. As much as I believe the government does steal on occasion(1), mostly, the money is going to needed common goods and services.

We’d love to believe that cutting taxes makes the government efficient. Nonsense. If a simple lack of money could make an organization efficient, then increasing taxes would make all our families more efficient because we’d have less money. It doesn’t. It just means we feel more pain, can do less, save less, and live our lives at poorer quality.

Do we want an efficient government? If so, we need to train people how to be more efficient! Government employees have neither the training nor the incentive to streamline their operations. In fact, exactly the opposite: when running on less money this year means you get less next year (often the case in government), “lean and mean” becomes a recipe for waste. But money cuts without adequate training and reorganizing won’t do much except kill the quality of the services that remain.

Of course, it would sure help if those cutting the budget demonstrated some money-savvy themselves. They don’t. The Bush Administration granted Halliburton several billion dollars worth of contracts in a no-bid decision. Halliburton promptly spent an extra $61 million on gas, either through incompetence (paying a supplier twice the market rate) or through willfull overcharging. Either way, the message to the rest of the government employees is clear:cost-cutting and efficiency aren’t the measures that matter in doing a job.

And by the way, people, cutting your income taxes won’t even make a big dent in your tax bill. If you make less than about $200,000, your social security (FICA) taxes make up as much or more of your tax burden than your income taxes. And while your employer pays half of your FICA, it’s still taxes being paid that could have been money in your pocket instead if your employer didn’t have to pay Uncle Sam.

Your overall tax bill is probably higher after the tax cuts. Do you own your own home? The federal tax cut meant Massachusetts got less federal aid. The state promptly raised property taxes to help close the gap. My property taxes went up more than I saved on federal taxes, and we still laid off teachers and cut services like graffitti cleanup. And oh, yes, subway prices took a 25% hike as well. Nice. I’m now paying more in taxes overall and receiving fewer services.
(If you rent, don’t gloat too much. Your landlord will be passing through that tax increase momentarily.)

I’ve had fun with all this, of course. We’ve seen an unusually large number of teenagers begging for money for their sports teams, uniforms, etc. this year. I educate them. Their parents got a $300 tax refund. That’s the money that would have paid for their school programs. If their parents chose to blow the $300 on something else, rather than saving it to make up for the services their kids lost, then it’s kind of silly for me to show more care, love, and financial commitment to these kids than their parents showed. It’s a cold, cruel world out there. And taxes are how we join together as a community to make it a warmer, friendlier, and happier world for humans.

Let’s have clean streets. Let’s have decent schools that prepare our kids to succeed(2). Let’s have food inspection that can afford to use “healthy for you” as a standard! That all takes money, and that’s where our taxes go. Instead of blindly voting for tax cuts, think for a few minutes about which services you benefit from. Street cleaning, perhaps? Sewer systems? Water treatment? Toxic waste cleanup? Because when services get cut, the military and terror budgets stay steady and it’s the quality-of-life budgets that get decimated.

(1) See http://www.nytimes.com/reuters/news/news-iraq-halliburton.html?ex=1075349072&ei=1&en=763f8032abf2c364

(2) Except for graduates of 4-year colleges, the U.S. ranked near list in the world in terms of literacy. See the National Institute for Literacy resources: http://www.nifl.gov/nifl/facts/reference.html#sum2002