The following revision in the Project Network format incorporates suggestions from the thread. If points have been misinterpreted or diluted, blame it on faltering synapses here and holler. Mike, Kat and I want to thank everyone for their close attention and generous suggestions.
Project Network
Focus companies:
Siebel--Mike Buckley
I2--Bruce Brown
NTAP--Down South
JDSU--pending
WIND--Don Mosher
GLBX--Don Mosher
QCOM--Eric L. (potential draftee)
YHOO--Don Mosher (first report expected)
PROJECT NETWORK FORMAT
Objective: There are few true networks, but their effects are powerful, becoming stronger as the network increases. A company that dominates or controls a network can realize geometric returns. Project Network aims to explore the sustainable competitive advantage that can be gained through network effects by identifying and studying companies that exploit them in various markets or are positioned to exploit them in the future.
I. Basic Facts
Gross Margin
Net Margin (excluding one-time gains or charges)
Cash* Minus Debt**
Convertible Debt (if any) as a Percentage of Total Debt
Flow Ratio (current assets-cash*)/(current liabilities-st debt); this metric may be less relevant for young companies
Cash King Margin (operating cash flow-capital expenditures)/sales
Revenue Growth
ROIC(return on invested capital)
WACC(weighted average cost of capital)
If ROIC is greater than WACC, the company is a value creator. (For calculation and concept, see Andrew Chan fool.com
Market Cap
Markets and Share
Competitor's Markets and Share
*Cash means cash assets, short-term liquid investments, and all other liquid investments, excluding accounts receivable
**Debt includes all debt--short term and long term
If possible or enlightening on trends, it would be helpful to give YOY and QOQ figures.
II. Knowledge/Intangible Assets
Intellectual Property
Human Resources (compensation, training, acquisitions)
Customers (brands, trademarks, cost advantage, focus)
Organization Designs (process-based advantages, management)
III. Investment in Intangible Assets
Intangible/knowledge assets don't always come through on income statements and balance sheets at their full strength.
What are the core knowledge assets, where has management placed its bets? Quantify, if possible, particularly with respect to r&d and sales development, retention and/or acquisition of necessary skill sets/technologies.
IV. Networks in which the Company Participates or Controls
Description
What aspects of the business model can create network effects?
To what degree has management recognized potential network effects and funded the network's expansion?
How is the company leveraging its tangible and knowledge assets to increase network effects?
Effects
Direct: When the value of a good changes as more agents consume that good.
Indirect: When the value of a good increases as the number or variety of complimentary products expands.
V. Interactivity of the Networks
The more contact among end users, the stronger the potential network effects. The S-curve of product adoption is much steeper for an interactive network than a noninteractive one. How interactive is the network?
VI. Compatibility within the Network
Transactional Compatibility: where compatibility derives from creating a forum for exchange. As the exchange captures the majority of buyers and sellers in a particular space, competing exchanges lose or never reach critical mass.
Community Compatibility: In networks with direct interaction among members, links among members are strong and value grows as more participants join the community.
Compatibility from Devices: As the function of ancillary devices, services and software increases, the value of the device increases.
VII. Adoption Potential
Networks must achieve critical mass for expansive growth. There is often a "delayed gratification principle" at work as a value chain develops that may initially inhibit a network's growth and, hence, network effects. Who were key additions to the network in the past, who are key prospective targets? What threshold, event, or other members will be necessary to draw a given individual/group into the network? What can be done to create additional clusters and connectors?
Clustering: the degree to which the connectors to one node in the network also connect to another.
Long-range Connectors: Are local clusters connected by multiple long-range connectors or more isolated? How dense is the network?
Although calculation of potential network size is subject to great miscalculation, can the network reasonably be expected to reach critical mass and achieve a size that can generate meaningful, sustainable business opportunities or is it too niche constrained?
VIII. Assessing Growth
Demand or Supply-Side Driven:
Are the network effects demand-side driven with a best-of- breed service or dominant product or, as in manufacturing companies that enjoy economies of scale, is it supply-side driven?
Are most costs incremental or fixed? Value creation that comes from surging sales driven by demand-side effects when coupled with negligible incremental costs outstrips that produced when supply drives and fixed costs are high.
GG Criteria: Are the switching costs high? What are a competitor's barriers to entry? Has a strong value chain formed? Do these factors--barriers to entry, high switching costs, strong value chain--coalesce (or can they in the future) to create network effects and unleash rapid widespread adoption?
Critical Mass: If it has not been achieved, when will it be achieved? Critical mass occurs at the start of the tornado. All issues about the constraints to the formation of a tornado are critical to discussion of achieving critical mass.
Natural Monopoly: IP-based networks garner huge market share in a winner-takes-almost-all situation. Does a natural monopoly exist?
IX. Revenue Sources from the Network and Their Potential
Commerce/transactional revenue
Advertising revenue
Subscription revenue
Data-base revenue
Royalty revenue
Incubation revenue from investments in related companies
X. Threats to the Network
Internal
External (technological disruption, antitrust action, etc.)
Competition |
