Main Street versus Wall Street

Posted in business, digital, retail by thenextwavefutures on 24 September, 2017

The abrupt decision by Toys R Us—the biggest toy retailer in N. America and Europe—to file for financial protection for its north American stores under America’s Chapter 11 provisions needs a second look. It sounds technical, but there’s more going on here than meets the eye.

Chapter 11 allows companies a breathing space in which they get some protection from creditors while they restructure their finances. It’s usually about sorting out debt.

Christmas cashflow

For retailers, this is exactly the wrong time of year to have a credit crunch: most of your sales and almost all of your profits come in the last 60 days of the year, but that means that you have to push the boat out to pay for stock at the beginning of the final quarter. Most retail businesses know the day or the week of the year that their cashflow hits its worst point, because it’s a similar pattern every year. It wouldn’t surprise me if the company’s CFO has been forecasting this issue for most of the year.

Commentators were quick to point to the difficulties of competing with Amazon and Walmart—who increasingly start to look like mirrors of each other as Amazon moves into the world of physical stores and Walmart sharpens up its digital operations. Others saw it as further evidence for the continuing decline of the American mall.

“Trading profitably”

But the CEO and Chairman, Dave Brandon, didn’t mention these in his statement. What he actually said was that “the vast majority” of the stores were trading profitably.

British journalists who asked were told that the company was proceeding with new store openings in the UK and refurbishment of some existing stores. Toys R Us’ international businesses are not part of the Chapter 11 move.

I was once a financial journalist, and when you see apparently contradictory statements in the same place, it is an invitation for more research. If most of the stores are trading profitably, where had the $5 billion of debt come from?

Ah: someone at Bloomberg had the same question.

The bankruptcy filing in Richmond, Virginia, estimated the company has more than $5 billion in debt, which it pays around $400 million a year to service. Much of that is the legacy of a $7.5 billion leveraged buyout in 2005 in which Bain Capital, KKR & Co. and Vornado Realty Trust loaded the company with debt to take it private. Since then, the Wayne, New Jersey-based chain has struggled to dig itself out.

Vampire capitalism

So this is actually vampire capitalism at work. It doesn’t make anything itself, it simply attaches itself to productive businesses and sucks the profits and the value out of them.

Since this takes us into the slightly arcane world of investment finance and the murkier world of mergers and acquisitions, it is worth spending a paragraph or so on the world of the leveraged buyout. It is a classic example of the locust and the bee.    

What happens in a leveraged buyout like this is that as soon as the deal is completed, the guys (yes, they mostly are) who have done the deal then finance it by borrowing the money from the company they have just bought.

You might want to read that again: the guys who have done the deal then finance it by borrowing the money from the company they have just bought.

Financial engineering

It is pure financial engineering. What it means for the business that’s just been acquired is that as well as paying its staff, for its premises, for its overheads, and so on, it also has to find a whole lot more money to pay the interest costs on the debt the new owners have used to buy the business. In the case of Toys R Us this ran at $400 million dollars a year.

Often, the cost-cutting that has to be done to service such loans wrecks the financial and operational health of the business, as the Telegraph noted. 

Its stores have been in desperate need of modernisation, the chain has been woefully unprepared for the rampant rise of online shopping, and it has failed to meet a growing demand for subscription services for baby items, which the supermarkets and other rivals now deliver.

The investment guys don’t mind so much; they still have control of the underlying assets—property, brands etc—whether the business sinks or swims.

It may sound complicated, but it happens all the time, though less so post crisis. The Glazer family used exactly the same method to gain control of Manchester United, which is why many United fans have no time for the Glazers, or for the former chairman, Martin Edwards, who agreed to the deal.

Of course, it’s also true that it’s tough competing with Amazon and Walmart, and that there are new retail models out there that more traditional retailers such as Toys R Us need to evolve towards. Yes, these things are true. It’s just that when most of your stores are trading profitably, those aren’t the elephant in the room.  

Pointing the finger

In fact, when you read Brandon’s statement, he more or less points the finger at the way the debt is crippling the business. The company, it says, plans

to restructure its outstanding debt and establish a sustainable capital structure that will enable it to invest in long-term growth and fuel its aspirations to bring play to kids everywhere.

Of course, he could have gone further than this. He could have said:

Unfortunately the big bet made on our business by the leeches who acquired our business in 2007 hasn’t worked out so well, and now we’re creaking under a mountain of debt that isn’t in our employees’ interests, our suppliers’ interests, or our customers’ interests. But it suited the financial guys just fine. The good news: some of those investors are going to have to take some losses, and about time too.

I don’t have any inside knowledge here, but analysts were surprised by the timing of the announcement. Reading between the lines, it’s possible to believe that in timing the announcement for when they did, the management of Toys R Us were playing a high stakes game of poker with the holders of the debt. If the restructuring goes wrong at this moment in the retail cycle, the losses they’ll take will be at their highest. Main Street sees Wall Street—and raises?

The image at the top of the post is via Wikimedia Commons. It was taken by Raysonho and is published here, with thanks, under a Creative Commons licence. 

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Chaos in the Valley

Posted in advertising, business, digital, Uncategorized by thenextwavefutures on 20 September, 2017

On the strength of a long review of several recent tech books by John Lanchester in the London Review of Books, I read Antonio Garcia Martinez book Chaos Monkeys, which is mostly about his time as a willing hand in Silicon Valley, first in a startup and then as a product manager in Facebook’s ad department. 

Chaos Monkeys takes us from Goldman Sachs to Facebook, and out the other side, via a digital ad business called Adchemy,  the start-up ‘school’ Y Combinator, and the startup, AdGrok. Mostly Martinez is a good guide; especially to the world of venture capital and startups. Martinez persuades a couple of engineer colleagues at Adchemy, which is clearly struggling, to pitch to Y Combinator, the start-up hothouse then run by Paul Graham. Going in, they have a product concept that probably isn’t going to work, but that doesn’t matter because Y Combinator, like much of the rest of Silicon Valley, is as interested in teams as it is in products. 


Why isn’t their product going to work? This is a flash of innovation insight that’s worth the price of the book and quite a lot more.

When confronted with any startup idea, ask yourself one simple question: How many miracles have to happen for it to succeed? 

If the answer is zero, you’re not looking at a startup, you’re just dealing with a regular business… To be a startup, miracles need to happen. But a precise number of miracles.

Most successful startups depend on one miracle only. For Airbnb, it was getting people to let stragers into their spare bedrooms and weekend cottages. This was a user behavior miracle. For Google it was creating an exponentially better search sevice than anything that had existed to date. This was atechnical miracle. For Uber or Instacart, it was getting people to book and pay for real-world services via wesites or phones. This was a consumer-workflow miracle… 

The classic sign of a shitty startup is that it requires at least two (or more!) miracles to succeed. (P50-51)

Y Combinator is particularly good at getting its progeny in front of investors, but even allowing for that the commitment, rat-like cunning and persistence needed to get it across the line with investors and an eventual acquisition is more or less complete. As he says when he has the chance to pitch to a potential buyer and has a computer glitch, rule #1 of the start-up is “Always be closing”. 

VCs at work

The history of AdGrok, and its eventual acquisition following some initial investment, is almost a case study in VCs at work, and Martinez is pretty good at explaining the mechanics of how the VC business works (and the different and sometimes conflicting things that different types of VCs want from the eventual deal), even if you sometimes have to go back and check on some of the technicalities. This focus on the mechanics of the start-up reminded me of Jerry Kaplan’s 1990s classic Startup.

I hadn’t realised before I read the book of the extent to which the big Silicon Valley companies use startup acquisitions as a way of acquiring talent rather than software or patents. The rationale is that acquiring good product managers and engineers is difficult, and they come expensive, so using discussions about their product is a good way of assessing cultural fit. And bringing in people who have been through the startup mix, rather than looking first for a long-run career at a big company, injects some energy into the culture, and that energy is worth paying a premium for.  

Breakfast, lunch and dinner

In the end (spoiler!) Martinez has the chance to go to Twitter or Facebook. He chooses Facebook because of the full-on nature of the demands that the business makes of its staff, compared to Twitter, and this was partly learned from a casual remark from a Twitter engineer, when Martinez asked him what he liked most about Twitter.

“Well, you know, in companies like Facebook and Google, they serve you breakfast, lunch and dinner. Here at Twitter, they only serve you breakfast and lunch.”

I cringed inwardly. So the big selling point was that nobody worked late into the night…? (P237)

And after two years (more spoilers) after his live adserving product FBX loses out in an internal power struggle, he’s gone again:

I could barely remember what my life was like before Facebook, and there was a trail of destruction I had caused by spending m entire life there: two children neglected, two different women whose worthy love I’d spurned, two boats rotting in neglect, and anything like an intellect or a life outside campus rotting in neglect due to indifference and my dedication to the Facebook cause. (P458)  

If he’d stayed with the rest of the AdGrok team and gone to Twitter, he’d also have been about $1m better off and would not have burned his bridges irrevocably with one of his investors.       

And no: nowhere in the book does he make the connection between these outcomes and his disdain for Twitter’s failure, at the time, to serve dinner.

If he were chocolate

There are things not to like about Chaos Monkeys. It’s readable, but it’s too long; a competent editor could have taken 80 pages out of it without blinking, and improved it a lot. For example, I didn’t need to know about an inconsequential fling with a Facebook colleague in a company stationery cupboard, nor his streetrace in a carshare Tesla; I already knew he was reckless and competitive by then. He tries not to be, but he’s too pleased with himself a lot of the time. The lawyer who bailed AdGrok out of a hole may have agreed to a terrible deal (he accepted equity in the startup with no risk premium) but I’m not sure why Martinez needs to rub his face in it. 

There are too many footnotes, all too long. He tips his hat in a look-at-me sort of way to Michael Lewis’ Liar’s Poker without really understanding what made that such a fine book (well written, aware of his own shortcomings as a bond salesman, telling anecdotes, watching the start of deep transformation in the way investment banks work.) Martinez is a good observer, but if he were chocolate he would eat himself.

Saving Facebook

The reason that the advertising market and its monetisation became so important to Facebook in that period was because of its IPO–its revenues were flat and it needed to show growth to its new shareholders. The solutions that were attempted were basically a develop of Facebook’s existing, but closed, ad platform, and FBX, Martinez’ project, which was an open platform. Facebook’s culture and model is about closed systems, and that approach commanded most of the resources. The FBX platform, with its small team and limited resources, was essentially an insurance policy, although Martinez, for all his smarts, never seems to realise this. 

But the thing that saved Facebook’s financial position was neither of these things. It was the rapid shift in 2013 towards mobile and device use. If the shift was expected, its timing and speed were not. This allowed Facebook to insert ads profitably into user feeds on mobile.

News Feed Ads rode to success atop a tsunami-esque wave nobody had predicted, or at least hadn’t predicted to arrive right then and so quickly. In this case, that wave was mobile, which in the space of a few months in 2013 suddenly constituted the majoriy of Facebook usage… [D]ata and high quality formats and placements, meant that Facebook dominated mobile like few oter incumbents had managed to. (P483, 487-8)

Carthage must be destroyed

Despite being fired by them, Martinez clearly remains a fan of Facebook. He defends its position on privacy vociferously (they’re not a threat to your privacy, he says) and he admires the focus that Zuckerberg has on avoiding complacency. When Facebook moves into Sun’s former buildings in Menlo Park, Zuckerberg left some of the old Sun signs up, as a reminder, as it were, that this too could pass. When Google launched Google Plus, a clear bid for Facebook’s market space, the phrase Carthage delenda est (“Carthage must be destroyed”) became a company catchphrase.

John Lanchester, on the other hand, is not such a fan. He sees Facebook as the exemplar of a new form of surveillance capitalism. More on that in the next blog post. 

The future of platform capitalism

Posted in business, digital by thenextwavefutures on 26 August, 2017

I have been meaning to write about Nick Srnicek’s book Platform Capitalism for a few months now. As you’d expect from his book Inventing the Future, co-written with Alex Williams, he tries to place the phenomenon of platform capitalism in the overall context of 21st century capitalism. This is a good thing, since there has been a lot of breathless over-excited stuff written in the past months on platforms, and indeed their place in the future of capitalism, for example by McKinsey. Or Wharton. Or Forbes.

The short book falls into three parts. There is a context-setting chapter on ‘The long downturn,’ which will surprise no-one who has read, for example, Wolfgang Streeck’s book and articles on the end of capitalism. The second chapter analyses different types of platforms and their strengths and weaknesses. A final chapter, ‘Great platform wars’, looks at the prospects.


Unpeeling the city

Posted in cities, culture, digital by thenextwavefutures on 3 October, 2016

Starting out

The first modern theorist of the city, Henri Lefebvre, said a couple of things about the city that seem relevant here. I found these in the anthology Restless Cities. First, that to understand the city one must “situate oneself simultaneously inside and outside of it.” And second, that to understand the rhythms of the street, “it is necessary to get outside them, but not completely; be it through illness or a technique.”

A technique, perhaps, like Remote London, an experiential artwork that journeys through the city, and which sets out to unpeel layers of the city by making the familiar strange. It is the latest of a number of “Remote X” events held in different cities in Europe.


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Handing knowledge down the years

Posted in digital, history, innovation, technology by thenextwavefutures on 13 June, 2016


Cambridge University Library has a small but perfectly formed exhibition called Lines of Thought running until September to mark the 600th anniversary of its founding in 1416. (The longevity does make you pause a moment.) It draws on elements of their fine collection of books and papers, and is built around six themes: communication, literature, faith, gravity, anatomy and genetics. (There’s a short video explaining more.)

The first books in the library were deposited as security in exchange for loans, underlining how expensive books were in the 15th century.

Walking around the collection was a reminder of how effective books, and paper, have been as a way of transmitting knowledge. Tyndale had to leave the country to get printed his translation of the Bible into English, then an infinitely radical act. The first attempt, in Koln, was raided by the authorities, but he succeed in publishing it in the Netherlands in 1534, and copies were smuggled to England. Tyndale was executed for heresy in 1536, but copies survived–Anne Boleyn owned one. When King James I/VIth commissioned his official translation 70 years later, much of it was taken from Tyndale’s version.


The End of Absence: review

Posted in digital, reviews, technology by thenextwavefutures on 13 February, 2015

TheEndofAbsence_300A guest review by Nick Wray

Michael Harris’ The End of Absence is a smart, funny and timely meditation on the differences wrought by digital on how we live and work today, and a world remembered “by those born before 1985, before the surfacing of the Internet.”

Over 10 chapters and 260 pages, 34-year old Canadian journalist Harris (DOB 1981) reflects intriguingly, wittily and sometimes poignantly on his theme. He casts his gaze over the impact of e-mail and digital text, multi-tasking, smart phones, information-overload, public opinion and ‘truth’ online (using illustrations of the plasticity and mutation of ‘facts’ on Wiki), to online bullying (based around the cause, and reaction to, the death of teenager Amanda Todd). There’s also a fascinating chapter on dating and sex sites on a journey that whilst expansive never feels disjointed.


A bill of digital rights

Posted in digital, politics, technology by thenextwavefutures on 15 February, 2014

gchq-bude-sianberry-cc-byIt’s taken some time – a surprisingly long time – but at last we’re seeing a political reaction from Britain’s civil society organisation’s to Edward Snowden’s revelations. Six organisations have launched a campaign that our security laws should be governed by six principles that are closely linked to the principles that underpin our notions of democratic government.


The curse of the invisible interface

Posted in design, digital, technology by thenextwavefutures on 9 May, 2013

Here’s a second post on digital technology from my contributions to Ogilvy Do.

 The revolving door that takes you into my office in London has just been replaced after five months out of action. You needed to push the old doors; the new ones are automatic (and stop the instant you touch them). Sometimes, watching people trying to unlearn their old behaviours and apply new ones, I’ve been wondering if someone in the building is carrying out an experiment to see how quickly people are able to change learned habits in the absence of visual cues.

And this thought was partly prompted by a recent post by Alex Pang on the fad on the invisible interface. As Alex writes:

I think that, when it comes to interacting with the world or with information at a level above randomly waving your arms and legs around, there’s no such thing as an intuitive gesture that could be used by digital devices or wearables to trigger some action.

And he quotes the director and designer Timo Arnall, who has amassed a splendid collection of faddish cuttings on the notion that “the best design is invisible”.  (more…)

Losin’ the kids

Posted in digital, technology by thenextwavefutures on 5 May, 2013

I’ve been contributing some posts on a digital theme, through The Futures Company, to the Ogilvy.Do blog. Here’s the first of them, on Facebook Home.

There’s an interview in Fast Company with the former CEO of Groupon,Andrew Morton, who was forced out of the company after some disastrous results. About halfway through he tells his interviewer, “the moment a company goes public the conversation shifts from how they’re trying to change the world and the product they’re building to how they’re making money.” Of course: we all want to change the world, but that’s not the reason investors put money into an IPO

But it’s maybe a thought that should be on Mark Zuckerberg’s mind as well these days. Zuckerberg holds onto his belief that Facebook is on a mission to change the world, but the numbers aren’t looking good. It’s hard to avoid the notion that the company’s IPO caught the peak of Facebook sentiment, and the only way is down. The company’s problem is exemplified by its Home phone, previewed this month, and summarised by my Futures Company colleague Chloe Cook as “Essentially, Facebook gets wallpapered over the inside of your phone.” It effectively locks its users in to Facebook, which led the British commentator John Naughton to describe the company as a “pathogen”. (more…)

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Last man standing (part 2)

Posted in business, digital, retail by thenextwavefutures on 11 March, 2013

In the first part of this post, I looked at the impact of the economy, and its business history, on HMV’s collapse. In this second part, I’m going to turn my attention to changes in the music market, the impact of the internet (there’s two stories here, not one), and the business’ strategic reponse.