Amazon vs Hachette: And Why An Axe May Beat A Hammer

For those not up to speed on the war of words (quite literally) between Amazon™ and Hachette™, it basically revolves around one central theme: Amazon believes a price should be X, and Hachette believes it should be Y. So the question everyone is asking is, “Who’s right?” In my view that’s the wrong question to even begin with.

The reason being is this (and I’m not trying to be coy) both are correct if you understand what the real question and answer should be, and that is: Whomever owns the product owns the right to price. Whomever owns the distribution point (or the store) owns the right to carry it or not. Period.

For those who want to disagree you need look no further for a clear example of this than Apple™.

A distributor and a producer can agree to disagree on what their respective businesses should make in profit, but a distributor is in the distribution business, not the creation of product business. (Regardless if they create their own product within that very same business.) Their models, their strategies, their world view as distributors is not the same as what the producer or creator of a said products business model or priorities are – no matter how much they say, nor how broken they believe them to be.

There also lies within this great debate one of the greatest conundrums that no one (and I mean no one) is addressing. As broken as the publishing business model is debated and pointed to as the broken model of models, I ask: and Amazon’s model is perfection? Hardly.

I’ll follow that statement with this: It might be even more broken and in need of restructure more than the publishing industry. (Yes, I did just make that statement.)

Why would I say such a thing you’re asking? Easy: Let’s not forget Amazon has still yet to prove it can make or turn a profit worthy of its stock valuation. And that question is still up for grabs even though it just celebrated its 20th year since founded.

Some are asking why is this happening to begin with, along with why now? Many thought or believed Amazon was the greatest friend of book publishers, authors and more.

Yes they were, but as I alluded to earlier I believe something has changed in Amazon’s business model that now needs correcting. Something most just turned a blind eye towards as if it would never need to be addressed in the future. i.e., Amazon needs to start turning real profits in order to convince Wall Street that their investment in this retail experiment can actually pay dividends or profits which can be returned to share holders in the future. That future – is now here.

In my view this is just another one of the realizations I’ve warned about rearing its ugly head: Without the Federal Reserves QE pumping and the spigot almost closed, the once hot money now chases cold hard facts. i.e., “Show us the money!” If not – the hot stories will begin to get the cold shoulder, and the once darlings of Wall Street are not only far from immune –  they may have bulls-eyes painted on their backs. (Do you stay in Amazon? Or, do you move to let’s say the next greatest of the same story as in Alibaba’s IPO?)

For all intents and purposes Amazon is still “an experiment” in online retailing. And Wall Street is becoming increasingly incessant on wanting many of the “old” questions answered since the Federal Reserve has been turning off the spigot of free speculation money.

And the question that hangs over Amazon like the sword of Damocles is: Will they ever make money? Or, is this the best it gets?

One needs only look at a stock chart and notice the eery timing coincidence of its descending share price and the announcement that the Federal Reserve was actually serious in reducing the QE flow of free cash.

Remember, for as large and encompassing as Amazon is with all the wonderful things it can and has done to make shopping better; it can only last so long before selling at a loss catches up with it. And that has only been made possible as Wall Street stays committed to the story that “someday” Amazon will make money to justify their investment.

Without that narrative in place and believed, Amazon as we know it changes. Again getting back to “why this is all happening” my view and belief is that the real issue here for Amazon is: Many (including possibly Amazon itself) have forgotten it’s not 1999 anymore.

Just a scant 15 years ago the internet and everything we now take for granted was almost unimaginable. If you were placed in hibernation then only to wake now it would be the equivalent of being a Quaker suddenly transported to the deck of the Enterprise.

Smart phones alone are only 8 years old and the Blackberry™ (a what?) was at the time a marvel of marvels. Today? What is the same is Amazon’s business model. i.e., Sell at break even if not a loss, for as long as it can till they are the dominant (if not only) choice.

The “for as long as it can” part of that statement is what I believe is now jeopardizing that model. Amazon is still if not more convenient as ever as a first go to place to check prices and more. But (and it’s a very big but) it is far from the absolute price dominator on all items it was in respect to just 4 or 5 years ago.

You can buy securely, and find alternatives in about 2 keystrokes today from some of the very retailers Amazon was handily decimating earlier. Many have adjusted their own strategies and are actually beating them at their own game. Not on everything, but in enough places and in enough volume to cause significant concern for the once unquestioned king of margin reduction.

So in getting back to this debate let’s focus and use what’s being argued that currently has to do with eBooks and authors. (putting aside the ever-growing Disney® contention)

Authors create the content to be sold. Amazon distributes that content. But without Amazon authors can still create, still make product available, still have fans, still have sought after products. Amazon? Without authors – they are empty shelves whether tangible or virtual.

Adding more confusion to the mix is the cohort of authors demanding theirs, as well as other publishers, “should just suck it up and stop being greedy.” I can’t help but wonder: Where was the outcry when the price of Prime™ membership increased?

For all intents and purposes, that increase on a customer that only purchased eBooks and didn’t use any other service or purchased an item (for what ever the reason) over a year would be a 100% windfall of net profit to Amazon – not to any authors.

Would it have been “fair” for the publishing industry to argue that increase in price and profit should be distributed how they saw fit? How about the same argument reversed? i.e., The increase in your Prime membership is too much and will drive down customer participation getting less eBooks into customers hands.

Based on Amazon’s own argument – they had every right (if not even more so) to make it. For after all – they actually represented the product and authors.

What is also quite instructive (and much to my amazement) is the very public dealing with customers, authors, and the publishing industry. Not only is this in full view, but rather the distributor is inviting public participation into what is truly a pure business/profit argument.

Even more amazing to me is the lack of, if not deafening silence of what should be the very loudest vocal group of all: The competition!

This alone shows me how hunkered down, scared, lack of strategic vision (just to name a few) many of the businesses that were decimated by the Amazon model have become.

If I were the CEO or the head of sales/marketing let’s say of Barnes and Noble™, I would have a team of the best in advertising whether within my structure or hired out and making ad buys hand over fist and more using this public discourse as fuel why customers could get what they need right where they used to get it – with me or my store.

I also would have my purchasing, author relations, and other departments (as well as myself) on the phones, on planes, on what ever it took and start making deals. And I mean deals using this as a vehicle to cut once unimaginable deals where before they might have never been listened to. But now? All ears would be open.

However, what has been the response? (Insert chirping cricket sound here)

Personally these once formidable competitors are acting like the sheep they’ve become. (i.e., Book retailers of any sort, but not limited to them in isolation either.)

What an opportunity being lost for businesses that relish competition seriously. Here they have an opportunity to push back being handed to them on a silver platter by the very competitor they see as a nemesis, free of charge and – with free shipping. Absolutely amazing to anyone with business sense.

Remember: For as large, dominating, along with great service and free shipping. If you want let’s say Malcolm Gladwell’s latest work you’re not going to go to an empty slot and say, “Oh well, I’ll just buy Michael Sadwell’s latest. They’re probably the same seeing they’re in the same section.” Same thing for a Steven King novel.

Yet, the way this argument is playing out by both Amazon as well as the authors siding with them, one would think Amazon was “the only” place where one could by them.

As I alluded to earlier, if you listened to the deafening silence coming from Amazon’s competitors, it’s easy to believe that to be true. (Again just on the sole issue in a lack of a cohesive, strategic response that has been afforded them via this fight, I am still in absolute total amazement and bewilderment.)

The internet and buying via retail through it too say “has changed” since 1999 is of course an understatement. But, what seems oblivious to all players is Amazon today is more in the camp of “habitual” or “convenience” purchasing rather than what it was back in the early ’00’s where it was truly – in a league of its own with nearly no alternative.

Today there is not the hesitancy to purchase online at other places. As a matter of fact, you can find many items cheaper than Amazon with just as good of an experience from online retailers that have upped their games and learned how to use e-commerce far more effectively than they were just 5 years ago.

Credit card processing, checkout, customer service, and yes – prices can be found that are rivaling Amazon at their own game in many areas.

What might be more at stake and where I feel is the most important area to watch is if in fact Hachette holds firm, refuses to capitulate, and pulls its products or services out from Amazon. As I’ve said over, and over, Whether you agree with one side or the other, the fact remains – Hachette, and their respective authors own the material.

If they decide to pull while at the same time have the guts to increase the retail price of their offerings and distributing them via a more friendly vendor: it may be the first crack in the armor that Amazon has yet to ever face.

Remember: A customer not only can, but will go somewhere else and actually pay more because: The product has value, is worth it, and they want it. Now.

This is the true model that many have forgotten. And no one has forgotten it more than the publishing industry itself. If they can get back to understanding and relating to that basic fundamental principle – the publishing industry model can fix itself.

The reason they’re both in such straits is one forgot, while the other is forgetting exactly what business they are truly in. One business creates the product, the other distributes. The cost and business of creation is not the same as the cost of distribution. For if that were the case, why is there such a thing as copyright?

© 2014 Mark St.Cyr

A Passage From The Upcoming Book: The Business Of I

This is a passage we thought we’d share from Mark’s upcoming book. It’s not in its fully edited form but we thought readers of the blog would like to see parts in the process.
V.V. StreetCry Media

From the chapter with the working title “You Think You’ve Been Screwed!”

Many entrepreneurs as well as C-level executives believe (fool heartily) that once the formality of a signed agreement is completed that both sides are now in agreement. Nothing could be further from the truth.

Many times signed agreements to the unethical or ruthless are nothing more than an opportunity to exploit business laws through the court processes (and more) that the counter party never dreamed of.

When entering any agreement regardless of how ironclad one believes the contract to be one must remember: When money is involved, only money is worth the paper it’s written on. All else is subject to negotiations at any time during the so-called “under contract” time provisions.

Non-payment, delay of payment, circumventing supply requirements, project funding support rescinding, and much, much, more can be used by an offending counterpart to bring one side to their knees paving the way for “renegotiation.” And those newer terms might be far removed from your first agreement.

You may think you have a bulletproof document protecting you from harm. The unethical or ruthless see your belief as folly and may use it against you knowing full well it will never stand up to their Howitzer.

Contracts should be viewed as tools to help both sides remember past agreements however, just like tools – they can break under strain. Believing you had a tool that shouldn’t fail means nothing if that “tool” represented plugging a dike which then suddenly broke under pressure at the most inopportune time.

Let me illustrate this point using myself as the example.

I was involved in a leverage buyout of a prominent specialty manufacturer. My tenure began when this company was in dire straights and I was hired as the person to turn it around. Subsequently within a year not only did the company return to profit, it had its best sales year to date. During this demanding time it was insinuated by the owner that he should sell me the company. For it was obvious (he insisted) I was the guy that could move the company forward, and he just didn’t have the fight for it any longer.

Once the company had turned around and I had revamped the management and other particulars where the company seemed on sure footing an offer was presented for me to purchase the company as to pave way for the current owner to retire. Everything seemed to be going according to everything the owner insinuated. There was no reason to doubt his sincerity. I would later learn to regret that last line.

An agreement was made, preliminary paperwork signed with formalization of the remaining documentation residing between both law firms. Bank approval was in the final stages and we were in the proverbial, “hurry up and wait” stages of the process. Then, out of the blue, things changed. Light-speed might be an understatement.

Suddenly the owner became uncharacteristically hostile in his demeanor with me. Sharp outbursts out of nowhere, arguing points just recently agreed to as if I were lying or making things up. His tone and posture around me turned from one of “best friends for life” to outright disdain. I was not only left perplexed, I was genuinely wondering: “Did I insult his mother or something?” The change was that dramatic.

During this period I genuinely believed the owner must be experiencing something within his family life I was not privy to was the cause. Delays in paperwork from his attorneys were making it obvious something just wasn’t right.

Finally in desperation (for things were nearing madness in my view) I made an offer to end the purchase of the company if that was putting pressure on his family, and since it would be in both our interests to go our separate ways I made an offer to stay on in a lower position with differing terms (that were beneficial to him more than myself for I really was concerned about his mental well-being) till he found a replacement. For if I was no longer going to buy, there really was no reason to stay.

He heralded me as the best person in the world. Told me he was, “So happy for someone with my insights and character.” Then asked if I could write down what we just discussed in simple terms and sign off on it and he would do the same later. I agreed feeling relieved that maybe this was the best and we both could get on with our lives.

In less than 15 minutes I wrote out the simple points, signed it, and handed it to him. He replied, “Great! Let me give it a once over first and I’ll give you it back later today or tomorrow morning.” Feeling relief this was now moving in the right direction I reluctantly agreed. Boy, will I learn a life lesson from this.

The next morning when I drove into the parking lot I noticed the owner’s car. For nearly a year he never arrived before me. I was always first. Something in my gut said somethings wrong but I had no idea what I was about to witness.

Upon entering the building I was greeted by him at the door as he sat in waiting. Abruptly he notified me to, “Pack your things, you’re done.” Then escorted me where I haphazardly threw my belongings into a box and left the building. No explanation forthcoming, no response to questions. Dead silence.

In utter disbelief I drove home questioning whether or not I was hallucinating within some form of dream/nightmare. Once I regained my composure I immediately drove to my lawyer’s office and told him the news. He himself was left dumbstruck.

I asked what were my options and discussions of legal suit were contemplated since the buy out proceedings were still ongoing from a legal stand point. We decided we would both think more on the issue but first off, I needed some time to digest everything that just happened and make arrangements for I was now suddenly – unemployed.

I was entitled to file for unemployment insurance since I was an employee during this process not an owner, so as anyone would I filed my claim. And it was here during this process where it became vividly clear exactly what had been transpiring and why. During this process it was revealed becoming quite apparent, I had been nothing more than an unsuspecting “fly” caught in a trail leading to a spider’s web.

I was notified my claim came back denied. The reason given “why” I was let go was pure fiction, and I decided even though I didn’t want to set eyes on this person again, I would not let this stand regardless how inconsequential the money was. So, I asked for the adjudication process where both sides are heard with the ability to counter any assertions. What happened in that room still leaves me shaking my head on the boldness and outright contempt of decency.

Being the aggrieved party I was told to state my case first with no interruptions from him. Once I made my case he would be allowed to counter any point he disagreed with. So, with that, I went about describing what had taken place.

He sat there listening seemingly uninterested in anything I was saying. Although he looked at me as I was speaking, I could tell there was something wrong. He just seemed to not care as if what I said he didn’t need to counter, or prove wrong. I found it a little surreal only for the fact that I was making a very logical, step by step case and outlining the process in a very detailed manner. If you wanted to take issue with anything of what I was saying, it would be hard to remember every point by memory alone. Unless – you didn’t care. And when I finished, I found out exactly why.

When I finished giving him his turn, he stated, (I’m paraphrasing but I’m not far off, this is near verbatim as I remember it)
“I have no idea what he’s talking about. This is absolute fiction, made up. I’ve been in business for over 20 years. I own a well-respected business, a leader in my market. I would never make agreements or such as he’s stating. Look, to prove what I’m saying here’s a list of demands he gave me the day before I let him go stating if I don’t sign this he was leaving me flat, leaving both my business as well as my livelihood at risk. (Then he produced the agreement he asked me to make.) I’m not going to be held hostage by anyone! If what he says is true, why in the world would this be needed?”

I was shell-shocked. I could feel the blood running out of my face by the sheer witnessing of pure unadulterated ruthlessness. I turned to the adjudicator and simply said, “I’m finished here, I have nothing more to say.” Packed up my notes, and left the building. I was the walking equivalent of an android. Emotionless, walking via autopilot only. Even driving back I was an automaton. I don’t remember anything till nearly the next day at my lawyer’s office.

I told him what happened and once again we both sat there dumbfounded by the sheer ability for deceit. When I asked if we should pursue any legal actions any further he said something that has stuck with me to this day. “Well, you do have options however, this guy your dealing with is not a businessman. You’re asking him to be something he’s not. He’s just a guy in a business. He wont make decisions or actions based on business principles. He’s unprincipled to begin with. You could spend a fortune proving you are right, but in the end, guy’s like him don’t care. His actions already proves that. He’ll make you spend a fortune. Chalk it up as experience, and move on is my best advice.”

On aside note. My lawyer is also a personal friend and one of the best in business law in New England having argued cases in front of the Supreme Court so it’s not as if he wouldn’t like the fight and spend my money doing it like most others would. That’s the importance of having true, authentic, counsel.

Suffice to say years have gone by. In retrospect it’s funny how life turns things in ways where at the time, you think they’re absolute calamities. Yet, in the end, the door that closes needs to be slammed shut so the door that needs to be opened gets unlocked.

I wanted to purchase this company as to build for retirement in later years. The owner wanted to sell it to me as to retire early. As of this writing, I’ve been retired for nearly a decade. He is still there working.

To this day I still laugh when someone states “Yeah, but they signed a contract.” as if they are guaranteed. Nothing is guaranteed, only the guarantee of arguing your case may be guaranteed. Winning a legal battle regardless of how iron clad one believes their argument to be: is quite another.

© 2014 Mark St.Cyr

Will Facebook Like The New Reality?

Within days Facebook™ will announce their earnings report. However, since their last reporting a new reality has appeared and many of its investors may require a pair of those new virtual reality headsets to parse what Facebook believes is reality: and the reality Wall Street wants. i.e., Where’s the money?

Wall Street (or the markets in general) is notorious for turning once heralded “wonder boy’s” during the IPO process – into just plain “boy’s”

One thing is very different for Zuck and crew this earnings cycle than any previous reports. With the departure of Ben Bernanke and his steady hand at the bubblicious printing press, along with a market currently left confused on whether Janet Yellen will indeed ever turn back on the bubble machine. It’s quite possible many of today’s “disruptive agents” will have more gum on the soles of their shoes than they’ll find readily available via QE to repair bubbled market caps.

When earnings begin missing, or lose their former narrative against earlier business projections, all hell can break loose. Regardless if one can manufacture a “beat” via non GAAP or not.

When money tightens clarity of vision becomes acute. And it’s becomes quite apparent that a bubble has, or is about to burst when, “Hey that sounds great!” is incessantly followed with “But where’s my money?” In bubble times you only hear the former. When the bubble breaks: you can’t get away from the latter.

Remember when it was touted not that long ago (is 24 months too long? but I digress) that Facebook was the “only” place to be for users around the world? The domination for interactions amongst teens would not only build its user base, but solidify long-term loyalty to the platform for years to come. Until they didn’t.

It’s been widely reported teens (once a heralded metric of eyeballs to sell advertisers) were leaving Facebook in droves. So what’s a company to do? Well, buy the company they’re all leaving you for of course. Regardless if its profitable. For in an age of hot money seeking anything, and everything: profits be damned.

Much can be explained away with a growth narrative. Again: You buy the narrative and real profits be damned. Leave the pesky detail of making money to the spin doctors. (otherwise known as financial media.)

So with the user narrative seemingly in place (a metric for many that can make or break the story line) one just can’t help but wonder why during the most recent earnings call this metric wouldn’t be shouted from the rooftops. For as reported in the Washington Post: “Executives on the earnings call didn’t offer specifics about how young people are using the networks — in fact, the company said there was no new data to report.”

Really? I thought this was a growth company, not a legacy. I would expect that from the likes of Cisco™, Microsoft™, or wait…..AOL™? Maybe their new user “likes” are in the “mail?” Too soon for such comparisons? I don’t, but I do have a habit of being early.

Follow this with the stunning purchase price awarded to acquire WhatsApp™.

Remember that little gotta have company Zuck and crew shelled out some $16 BILLION dollars for in a near overnight decision and execution? I guess when you gotta have something, you gotta have it. Regardless if its making a profit to warrant such an acquisition, For again, we’re talking narrative here.

And in a world dominated by free money via the Federal Reserve: a virtual reality can trump true reality anytime, anywhere. No special headset required.

But they should have everything integrated, assessed, and running like a Swiss clock by now correct? I mean that was way back, we’re talking February of this year. That’s nearly 90 days. Well, at least they have the excuse of “the weather” for any missed expectations. Everyone else used it – why not them?

The funny thing is one would think there’s enough there alone to give any investor the jitters as to wonder, “What is going on in there?” But (and it’s a very big but) the hits just keep coming. Like a teenager that stole their parents credit cards, this buying spree I contend can make most Millennial hackers blush.

Forget WhatsApp and the exorbitant price tag paid. Forget Instagram™ and the need to fence in user abandonment. At least for good or ill the business narrative one could put into context. (even as far as one had to stretch their imagination to do so)

However, how in the world does the board along with Zuck himself conclude it’s a good idea before they get even one – just 1 – earnings report under their belt to help alleviate and answer concerns about the decision process of spending over $16 BILLION dollars on a company most investors outside of Silicon Valley knew even existed, to spend and acquire even more?

I’ll wager many investors didn’t respond with, “WhatsApp? What’s that?” It was probably much more in line with, “$16 BILLION?  WTF is up with that?!”

Then, just weeks later, Facebook announced it had purchased the maker of a virtual reality headset maker known as Oculus VR Inc. for a neat $2 BILLION.

What’s $2 billion anyways when you’re talking about the future of the next big thing for social as reported by The Guardian™,  “Mark Zuckerberg says Facebook is getting ready for the platforms of tomorrow – and that virtual reality will be the next social communications platform”

That’s fine I guess, unless you have yet to prove and answer why the $16 Billion you just spent on the social platform of today is working out and generating profits. Profits that can be dispersed as rewards to deserving investors. Or is this why a new reality appendage was really needed? i.e., For the conference call participants.

What just might be more troubling that puzzling is the near immediate purchase of yet another company seemingly unrelated to “social.” The purchase of a drone company named Titan Aerospace.

It’s reported this purchase was only $60 Million dollars. Mere chump change to today’s Silicon Valley hacker elite. (probably found between the cushions in the employee lounge)

It is said this technology is to be at the forefront of providing internet connectivity around the globe to places currently inaccessible. Call me crazy, but when I hear the word “drone” the first thing that comes to mind isn’t: people helping people. It’s more in lines with: people helping to paint bulls-eyes on people.

If I were on a conference call, and I heard the company I was analyzing state, “Oh and by the way – we now have drones.” My next thoughts just might be, “Do I really want to put this company into a Sell recommendation today? But that’s just me.

Then on April 1st, what do I see flash across the financial media? Facebook buying another seemingly unrelated, unprofitable company at a price tag that would shock even a Pentagon procurement agent? Nope.

Just 22 days prior to Facebook’s earnings report (you know, the one where they have to justify all the above for the first time ever!) none other that the COO of the company Sheryl Sandberg sold half, yes – half of her shares in the company she runs.

Not 10%, not 15%, no not even an amount usually used to quell naysayers or skittish investors followed with the much maligned anecdotal “for the sake of paying taxes.” Nope, half.

Now what does that say for a supposedly purported growth company where the upper management is selling? One would think the exponential growth opportunity all the other investors are urged to patiently wait for that they themselves would be waiting for also. You know like that old saying: “In for the long haul.” Well I guess 2 years is an eternity in today’s Silicon Valley elite.

I don’t know about you, but when I see the top brass seemingly implementing their exit strategies, I’m looking for mine. And anyone with any business acumen will tell you, when people within the management are selling – you had better be selling also.

For Ms. Sandberg to sell at such a time, and in such an amount, knowing full well the innuendo and the appearance something like this has along with all the trappings such a move would bring, (again, with the timing) one can’t help but think if the April fools joke is going to be on those left holding their investment.

It may become more clear that the virtual reality coming over the horizon, looks a whole lot more like true reality for anyone who dares to look.

Without the need of any special appendage.

© 2014 Mark St. Cyr

Watching For The Goldman Ticket

In a world filled with innuendo, false flags, and more one thing remains constant: What is Goldman Sachs (GS) up to and more importantly – why?

No matter what one “thinks” about this firm one thing is incontrovertible: they didn’t get where they are because they’re stupid. Far from it.

There’s probably no other company on the world stage that has had more influence in financial matters than GS. Love them or hate them, it doesn’t matter. Yet, to ignore them or to take your eyes off as to discount even their smallest moves as “irrelevant” is at one’s own peril. For GS doesn’t make any move (even taking out the trash) without first considering all the ramifications or exploitations that can come of it first. Period.

Over the last few years to say things in the financial markets have changed would be an understatement. People, technology, regulations, and more have morphed for even the people who once were considered brilliant.

Even those amongst the financial media are now appearing to be scratching their heads more as the markets morph into something unrecognizable to a veteran market maven just 5 short years ago. And the one who seems to be quietly morphing and making moves uncharacteristically associated with Wall Street as one previously imagined is none other than GS itself.

Just the mere mention of GS conjures up conspiracy theories of puppet masters, influence peddling and more. It’s almost as if one is venturing down the path of an old-time parlor game of charades when trying to discuss or comprehend their financial implications or moves. However, the best way around all this is to employ a prism brought forward years ago by the late  Andrew Carnegie (I’m paraphrasing) : “The older I get the less I listen to what people say and the more I pay attention to what they do.” And GS is doing quite a few very interesting things that just leaves one thinking: Hmmmmmm.

When it comes to business, finance, or even politics one thing is certain: you need to look past the notion of impossible or improbable and contemplate that might be exactly why they’ll do.  For no one thinks they will – giving them the edge. And to forget GS is always in search of an edge is to do so at one’s own peril. (e.g., Genghis Kahn ordered his tribes to scale seemingly impossible mountains to attack his enemies precisely for those reasons – and he won)

What might seem as improbable or impossible at first blush just might be the determining factor for producing a profiting reality: no matter how far-reaching it seems. So with that in mind let’s hypothesize regardless how far-fetched or conspiratorial it may seem. And again, the why.

Over the past weeks HFT and all its effects were brought front and center via Michael Lewis’ book, Flash Boys (2014 W. W. Norton & Company). What it also brought attention to if one stepped back taking in a broader view, was the possibly of seeing the missing puzzle piece that helps explain GS’ moves over the past few years, possibly clarifying what too many looked more like a Rorschach test, rather than an unfinished puzzle it just might be.

Remember back in 2012 Reuters™ wrote an article: “Special report: Goldman’s promised land: Salt Lake City” (original article here)

Many were left thinking, “Yeah, OK big deal a new office closer to the west coast. So what?” However, it just struck me a little strange, Utah? As opposed to California, or anywhere else? Why would a company that has always been in the absolute middle of where people, business, and more move there?

Unless that’s exactly what they now want: to be away from the very aspects they once coveted, for those very aspects have shown they may now have possibly become threatening liabilities to both infrastructure as well as staff. Let me explain…

Back in 2009 GS was wooed into choosing Salt Lake City with special tax breaks and incentives to open additional operations there. Probably these decisions were more in line with coming operations under the new regulations and more since it had now become a bank after the 2008 financial crisis, rather than just the investment firm it was known as. But then something interesting happened: The Occupy Wall Street (OWS) movement.

Suddenly the once heralded upper echelon of world financiers were thrown into a media stew of  “destroyers of the universe” rather than the “masters” they once embraced.

Since then operations and hiring has picked up at a pace more resembling a growing thriving industry rather than the downsizing, melee currently taking place in New York. Another thing you have far fewer of in Salt Lake than in NY is the amount of people locally to protest your industry and commandeer valuable infrastructure and most of all – the people themselves.

Salt Lake City has a growing, thriving population, but it aint no NYC by any means. However, the make up of business culture, and the sheer fewer amount of people to organize into protesters can be quite enticing to an industry that watched thousands parade banners, effigies, and more outside one’s place of work. Let alone when it seemed there were a complicit press more preoccupied with covering the story of an occupy mob on a bankers lawn, rather than worrying about whether the occupants or children inside were safe or not.

Then in 2012 Hurricane Sandy hit the east coast sending the region into total disarray. One of the things we learned during this storm is just how intertwined HFT is to the markets and quite possibly now dictates whether or not the markets will open unless HFT approves – first. (If one remembers the markets were closed two days by what was reported as HFT influence over the exchanges.)

One thing GS doesn’t like being is #2 in anything, and HFT seemed to be making that more of a reality. In a game where the arms race is merely speed: All that money, time, and effort put into people or the obtaining of people in positions of power as to benefit from such cultivation, becomes nearly null and void when your competitor only needs a faster computer to front run your own organic “front running” infrastructure.

There is no other choice than to either – you yourself re-arm and redeploy, or – decide you no longer will fight or play on that battlefield. Hence, the implications of that decision with the following ZH article: Triple Whammy Shocker: Goldman Shutting Down Sigma X? (Link here)

Put this into the context of where it’s now widely reported that GS has become a client of the HFT debilitating exchange IEX Group Inc. headed by CEO Brad Katsuyama featured in Mr. Lewis’ book where GS now seems to be back on (at the least) a level playing field for order execution. And the advantage pendulum once again swings back to GS’.

Not only is their human capital once again returned to Mt. Olympus status, but they get to tear up that page of the ledger dedicated to infrastructure spending on HFT ancillary items. What’s that worth? Millions? Billions? I’ll bet its enough to effect an earnings report that would make a non-GAAP social darling blush.

Throw in the newest mayoral election that installed what many deem as an anti-Wall Street, tax everything that moves or stands still legislature, and you not only get people looking for greener pastures, you bring back to the front of mind that just maybe they no longer need to “look”: they can grow their own even in the desert next to a lake of salt.

Maybe proximity isn’t worth as much as it once was. And quite possibly getting away from that once coveted proximity could be the new edge for the new “Wall Street.”

Imagine you are renowned for hiring the best and brightest for they flock to your doors because they can earn money in amounts unfathomable to middle America. But the “price” for those people trying to earn is also unfathomable once they fully understand a million dollars really doesn’t get you much in NYC after taxes and expenses. And both of those are on the rise seemingly faster there than anywhere else in the country.

But half of that gets you a whole lot more in middle America does it not? I’ll bet it goes more than double that in NYC. And the best and brightest might want to beat an even greater path to GS’ new front door if they don’t have to live in NY or NJ. It’s not like they are moving there in droves, quite the opposite, the exodus has already begun.

Move to Florida, California, Texas, or somewhere else you say? At least you have scenery, cityscape, and all the other attributes at least similar (although not exactly) as NY. But you would be forgetting that first item I stated earlier: A large population base where an OWS inspired group could easily (easily is the operative word) form and wreak havoc.

In Utah? Sure, but I’ll bet dollars to doughnuts far fewer in numbers. Plus, the culture doesn’t seem to lend itself easily for that styled or formed outrage. I could be wrong, but it’s something I would fit into my decision process if safety in another financial calamity happened again. Especially if I thought it could be even worse next time.

A few years back I wrote an article: A “Flick of the Switch”…could this be the next Nightmare on Main St.? In it I posited:

“A flick of the switch means if I have a business in location X, I can just flick a switch and operate in location Y. In years past most companies needed some sort of brick and mortar facility to conduct meaningful trade. That is no longer the norm. As a matter of fact, most of the newer successful businesses of the last decade have been ones that can operate anywhere.”  Followed with:

“…all of Wall St, all Insurance Companies, all Banks, all Online Retailers, all Accounting Firms, all _________ ( you fill in the blank). All of these fall into the “flick of the switch”  type of businesses. They can relocate anywhere in the world in the equivalent of a New York minute. I’m just scratching the surface.”

If we sat down over coffee and I asked your opinion on what you would make of quite possibly the worlds most influential wheelhouse of both political and financial headquarters opening a secondary office in a place many see as the antithesis of NYC and its financial centers. Along with the near sudden shift not only to disengage from former revenue streams but rather jettison them for pennies on the dollar, just at the time when Wall Street is once again being cast in a light of “rigged.”

Adding to that the demonstrated proof that the Federal Reserve as of now is still holding tight to the roll down of QE, and the markets are seemingly showing signs of stress. While at the same time the very firm that quite possibly has an insider edge and view unrivaled amongst its peers is calling or signaling the need for great caution. What would you think?

I know what I’d be thinking…

Who’s in charge of booking executive travel for GS? And has the term Sigma X changed to “Golden ticket?” For just like in the movie 2012 (Centropolis Entertainment 2009) the protagonist was only saved when he knew the type and color of the top 1% tickets.

And Goldman’s I would presume, just like their parachutes – are golden.

© 2014 Mark St.Cyr

Stuck In A Psycho Babble Rut

For years many (and maybe more still) embraced the dribble that was touted as “defining characteristics” of what type of person one was. e.g., “If you were a tree, what type of tree would you be?” Absolute nonsense and irrelevant I have stated many times.

However, that didn’t stop it from being pushed through nearly every Human Resource (HR) department where one was instructed to use such qualifiers to gauge both prospective, as well as hired personnel to predetermine whether or not someone should be hired or promoted.

Personally I believe this has probably hurt or held back more qualified candidates from positions they may have been perfect for by affixing some “label” of: “This person picked the wrong tree so we cut them down.”

This type of thinking only needs to take hold in one HR office to then be spread throughout the corporate world propagating in a manner and form that would make a virus blush for its tenacity.

The other issue that I believe is hurting more companies than actually helping is this mindset and set of qualifiers seems to never evolve nor is back tested by the very people promoting it to see if the damn process is valid or even works!

I will bet dollars to doughnuts what never gets discussed in an exit meeting whether for voluntary separation or mandatory is the discussion of…

“Well, they weren’t right for that position because as it’s written here, for what tree they answered:  Ailanthus altissima. It’s so obvious. Quick, get our resident botanist in here and demand they answer why they didn’t catch this mismatch!”

Sounds foolish and it is. Yet, asking in the first place and giving the “correct” answer can make, break, or chainsaw one’s chances. And it’s still being perpetuated today. Why? Because it just seems so damn compelling regardless if it can pass the scientific method.

Can you imagine if you walked into an interview and were asked: What astrological sign are you? Most (I would hope all) would be appalled with good reason. However, the “what tree” hypothesis is pretty much the same is it not? e.g., “We really need an Aries for this job. Sorry, but Gemini’s are just too spooky with that mirror image thing for this company. Again sorry. Next!”

I’ve also written and spoke on one of my pet peeves, the “right brain – left brain” argument or qualifier. I’ve stated many times I believe this subject has been brain-dead for years. But again. you’ll hear it used near everywhere even though it’s now been proven via the scientific method (the only true standard that means anything) it was junk as in pseudoscience.

Its been debunked. (you can read more here) Yet, how often do you yourself still hear or read this theory as if it is now proven fact? I’ll bet you don’t have to think that hard, which gives weight to my point all the more.

In the mid 80’s when this form of psychometric was in its infancy as a prerequisite for hiring at larger companies, I came face to face with a near booklet resembling War and Peace in thickness of psyche styled questions that needed to be answered first as to move me to the next stage of the interview process. I indignantly refused to a then aghast HR director.

I shot back this question as I leafed through the pages: “Who evaluates my answers to these questions?” The reply?” Well  I do.” Then I followed with: “Where is your degree in psychology? I don’t see it hanging next to any other certification you have hanging on your wall. I don’t care what this job pays if this what it takes to be hired at this company – forget it!”

Believe it or not, I won that argument with some give and take on their part. I agreed to answer what I thought was appropriate – they agreed what ever I left blank was fine. I left nearly 80% blank. It seemed all they cared about was they could check off on a list I “filled” it out. This is why HR has so many issues that need to be addressed. They are more concerned with process rather than outcome. But that’s for another column.

After approximately 90 days on the job I was causing quite a ruckus. As a manager I shook up my department (I was in charge of the cook operation for a national roast-beef company.) The department was a mess. The staff was frustrated with other departments treating them like broken toys. Requests for needed upgrades and more fell on deaf ears. They were working long hours with mandatory overtime to keep up production and a whole lot of other issues too numerous to mention. I thought it was deplorable for a company of this stature. It was unnecessary and I decided to do something about it. For after all, this was now “my baby.”

I demanded needed or upgraded items. When I felt was being blown off, I put on a vivid demonstration that would make P.T.Barnum proud.

After the crew complaining for nearly a year about a problem maintenance would not solve with the ovens I shut everything down, taped 100’s of strips of paper inside the ovens as to show the issues with air flow, called the head of quality control, and the senior management to the cook room. Then as if I was on stage I told everyone to focus on the oven windows, hit the switch and let the little strips of paper speak for me. Then I said…

“How do you expect this department to put out a quality product to meet our schedule and customers demands when I can’t get these ovens not only adjusted: But even looked at?  And people want to hold this department accountable for low production numbers as if it’s our fault? I’ll stand here as long as it takes till someone wants to explain it too me.”

The problem was rectified 48 hours later. Our production went through the roof. So much so overtime dropped to near zero, and although I made a difference it also seemed I made some very jealous and angry coworkers. i.e., other department managers.

After about a month of smooth sailing I was called for a meeting with HR. The topic? Why wasn’t I coming in on Saturdays or only working 40 hours unlike the other departments that are running overtime? My response? “Because we don’t need to. Production is ahead of schedule, the staff is clearly now in control of the cook facility, and as you can see by our metrics we’re kicking butt against all other department. I really don’t fully understand the questioning. Am I missing something?”

Apparently I was, for it became abundantly clear they were thrilled with my turn around of the department however, the other managers were complaining that if they needed to be there late at night or on Saturdays that I should be compelled to do the same. Regardless if I was needed or not.

I was appalled (yes this does seem to be a recurring thing for me) the insinuation was clear, to quell the childlike behavior it was implied I needed to come in as to make the others “happy.” I would have none of it.

I shot back: “You mean to tell me that rather than use me as an example for them to get their departments in order so that they too can stop all the overtime issues they are facing as well as the company, you want to punish me for doing the right things so that people incapable of doing their own jobs get the satisfaction of seeing me held hostage as some form of compensation for their incompetence? Am I hearing this all correctly?”

After hemming and hawing it was finally admitted that that was exactly what they were implying. So, I did what seemed like my only true option: I quit. (They also had a policy where the management hierarchy would wear different colored hats to signify rank. Gold, then blue, then green, and so forth. When I started it was decided to not hurt anyone’s self-esteem and that everyone would now wear the same color regardless which became blue. I still have this hard hat some 30 years later for I saved it to remind me of the ridiculous thought processes displayed within a once very cutting edge company. For this thinking went hand in hand with the “what tree” philosophy.)

That company only a few short years later would close putting hundreds out of work. Personally as many of you know I did quite well over the years. I wonder still to this day what trees the other managers gave as answers on their questionnaires.

Again, I would bet dollars to doughnuts if I was able to view them I would read: Mighty Oak, Douglas Fir, Aspen, Ash, and so on. What I’ll bet you wouldn’t read was: Weeping Willow. At least then it might have a chance of having some validity for which has been proved, it does not. The only thing left to ponder on this whole notion in my view is: If a tree falls in a bankruptcy court, does it affect the judgement of the judge? But I digress.

Maybe you think I’m coming down hard on this topic for who am I to question psychological markers or traits that can be beneficial to the hiring process. It’s not like I have a degree or something. I mean, I didn’t even graduate from high school. (actually I have a GED from the University of Southern Maine. How many have a high school diploma from a University? Huh? Huh? Although that’s true I am trying to be funny for people get sooooo uptight about degrees or alphabet soup suffixes) However as it be, I think it’s a fair question so I’ll end with this:

I had been asked my opinion on a psychological evaluation form a person I’m close to received. As I went over it I was left slack-jawed that it was basically the same formulation of questions that I knew were garbage 30 years ago! Yet, there they were as if this were some revelation process that would tell HR or other management clues as to this persons makeup or more.

In what turned into a quest I decided to look into this further for I really couldn’t believe a major company of this size and scale would even be remotely affiliated using this criteria. (this is a publicly held company with Billions in market cap)

I looked back through my library and I found one of my books written by one of the top consultants in the country. He has worked not only for, but has provided one on one leadership counseling and developed strategies for some of the Fortune 50™ let alone 500.

In one of his books written back in the time period (the mid 80’s) of where much of this had originated. He himself had conducted and implemented proprietary metrics that seemed truly note worthy.

They were serious questions and criteria to be filled out with plotting, diagrams, and formulations that helped round out one category from another and so forth. The work and its implications even to a skeptic like myself were compelling. I knew this author and have admired his work for many years so I reached out to him and asked a simple question. (The conversation was private and I didn’t ask if I could share his name so I’m not being coy it’s in respect of inferred confidentiality. However what I can state, is this person does have a Ph.D in psychology, and at one time was the president of a company that specialized in psychometric analyzing tests. So it’s not as if this person doesn’t have standing on this very subject.)

I asked:

“Two quick questions to ask. Both pertain to the same book.

In your book XXXXX you illustrate many samplings of where one would enter numbers and answers then plot these within a system that produces lines or symbols that one can then visually reference to behavior patterns and so forth.

Would you (or do you) still use these as they stand today?

I am only asking because the book is now 25 years old. And sometimes what we once thought as gospel we later find wasn’t as relevant as we first thought.
Personally I find it fascinating and if I was ever to cite or demonstrate it, I want to make sure I give credit where credit is due properly.”

The response:

“I do not use this today. I no longer believe in “labeling” of any kind.

The material is not validated and is way out of date. I would discourage any use of it today.”

(There was a bit more but that’s all that’s needed to make the point)

That is exactly what people on the top of their game do. Even if they may have developed what they thought or considered cutting edge at the time. If it’s proven to not be what they first thought: they move on to better strategies or tactics. Even if it means calling their own past work irrelevant for today’s business world. That’s why I personally consider him a valuable resource.

Too few have the self-confidence and introspective to question themselves or their work and state openly their opinions even if it means calling themselves or their past work out of date or worse, possibly wrong. His candor was a breath of fresh air. So many others (others I know personally) would have went around and jawbone this or that in some dazzling display of trying to baffle with BS as they tried to do anything and everything not to contradict their own work regardless.

Which is probably the reason why we’ll find many of them still trying to convince any and all HR departments that their “New and Improved” version of psycho babble is different from the last.

Problem for the great majority…Some are still buying it.

© 2014 Mark St.Cyr