When you’re worth $17bn, you can afford to be misunderstood.
Not that Jeff Bezos, chief executive of Amazon, felt constrained about thumbing his nose at Wall Street even before his personal stake in the company came to be valued that highly. From the time of the dotcom bust – when his company was chastised for spending excessively on a reckless dash for growth – to the more recent move into cloud computing, Mr Bezos has taken his knocks.
In response to a question at his annual shareholder meeting this month, this is how he summed up his philosophy: “We are willing to be misunderstood for long periods of time.” What matters, he said, is not to be knocked off track by critics: “A big piece of the story we tell ourselves about who we are is that we are willing to invent. We are willing to think long term.”
That’s easier to say when you’re riding high. Just ask Mike Lazaridis and Jim Balsillie, co-chief executives of BlackBerry maker Research in Motion. They tried a similar “just trust us” defence last week when announcing their latest poor results, and were slapped down with a 21 per cent hit to the company’s share price.
Mr Bezos’s comments touch on a big conundrum for investors in technology companies. How do you identify the ones with real vision and long-term staying power to find new markets?
That question assumes added urgency with the arrival of a new set of tech companies on the public markets, each of them with big ambitions and, in some cases, big losses. Consider the parallels between Amazon in its early days and Groupon. Starting with books, Amazon built an online platform and expensive distribution system with the aim of spreading across the waterfront. That strategy would bring “substantial operating losses” that would “increase significantly from current levels”, the company warned at the time of its stock market listing.
It wasn’t kidding. By 2000, three years later, it notched up a loss of $1.4bn on revenues of $2.76bn. After stretching the patience of some investors to breaking point, it finally turned a profit in 2003.
Groupon, beginning with selling its online “daily deals”, is on a similar path as it builds an equally ambitious online platform. Costs will “increase substantially” as it broadens its range of products, the scale of its technology platform and its salesforce, it warns in its IPO prospectus. Given that it is starting from a loss last year of nearly $400m, one shudders to think what kind of red ink it might spill in future.
So how do you distinguish a company that is set on a course of value destruction from one that has both the vision and the discipline to pull through? And, given the obvious temptations to cash in when times are good, how do you separate the executives bent on self-enrichment from those with the staying power to be around for the long term?
Executive compensation is only part of the picture, but it can tell a lot. Amazon claims that making executives take 95 per cent of their pay in stock encourages them to focus on long-term shareholder value.
That argument is not accepted universally. Roger Martin, dean of the Rotman School of Management at the University of Toronto, argues in his latest book, Fixing the Game, that stock-based compensation has given executives too much incentive to game the system by puffing up expectations rather than creating real value.
But much depends on how it is done. Mr Bezos himself has never been given any stock-based compensation by Amazon, and since the dotcom bust the company has only given its other executives restricted shares, not the stock options that can seem like a leveraged bet on the upside. Mr Bezos has sold a large number of shares – but, in keeping with his long-termist approach, it has taken him a dozen years to bring his stake down from 41 per cent to under 20 per cent.
Groupon, on the other hand, starts with one black mark against it before it even makes it to the Wall Street. Some $942m of the $1.1bn it has raised privately has already been used to reward early investors – and that for a company that has only been operating for two years.
The money, of course, is only part of it. The culture a chief executive such as Mr Bezos creates is the thing that ultimately determines whether others in the company will truly be focused on the long term, and that is something that it is notoriously difficult for outsiders to assess.
As Mr Bezos told his shareholders: tech companies that fail to position themselves for new markets are forced to make risky gambles to catch up.
For the co-chief executives of Research in Motion, who did much to jump-start the smartphone revolution but are now rushing belatedly to catch up with the latest technology transition, that must feel uncomfortably close to the truth.
Richard Waters is the FT’s West Coast Editor