Saturday, January 14, 2006

Dot.Bomb scenario for Google ?

Another book : Dot.Bomb by David Kuo

Not a great book, basically because it provides no insights at all. It just tells you a simple story of a company called Value America which promised to change the e-commerce landscape, but ends up bankrupt.

But it gives you a picture of how a whole industry gets into a bubble.

Value America promised the world this :
  1. An inventoriless e-commerce architecture which would sell everything from a Colgate toothbrush to an iMac on its website.
  2. No inventory will mean low costs resulting in lowest prices
  3. The e-commerce architecture will be built in such that it will be portable and potentially will run all shopping sites in the world
  4. With more and more people becoming netizens, Value America will get to be bigger than WalMart one day.

When someone pitches you such a proposal and you happen to have a million dollars in your bank, it is a no-brainer. And when a born salesman like Craig Winn sold such an idea, people like
Paul Allen were ready to put in their millions. But things could go wrong and how:

  1. You have to execute it well. When people dont get what they pay for or when they get the wrong product, they are not going to come back again
  2. Agency costs of Free Cash Flows is to be expected. Dont freak out !! Once in a while, I have to remind people I am an MBA. What that means is, when you have cash and lot of it, you dont necessarily have to spend it on the most productive stuff
  3. One crazy leader/visionary, who has dreams of the White House, cannot have a free run investing people's hard earned money.
  4. You cannot buy a jet for a company which making losses
  5. Using revenue growth as the only signal to showcase the company's future is dangerous. After all, you can buy sales. VUSA was buying just 1% Gross Margin (The difference between what you charge the customer for a product and what you paid for the product) !!
The dream that Value America sold is still alive. The problem was not with the logic of the idea : It was too convincing that everyone wanted to bet his money on it !!

Can Google do a Value America ? Some people seem to believe so !!

But as I see it there are some similarities and differences :

  1. Google too is promising something inventoriless and no marginal costs
  2. Post IPO, GOOG has had a dream run
  3. But, Google is showing good profits, and growing at a mind blowing pace
  4. It is run by arrogant (?!) visionaries
  5. It is spending money on stuff like 5 Star Chefs and of course, jets

For press coverage of the Value America Story:

4 comments:

Lumbergh-in-training said...

dei did yo look at the results of google? i think they have already started to bomb!

Anonymous said...

machaan, i didnt understand half your article dah. is it written for MBA's?
-sorry abt that

Anonymous said...

Anand, are you from secunderabad?

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