Chris Mouré’s “Soft-Wars”

I read “Soft-Wars” today, and I have a couple of quick comments regarding the essay.

First, I note that MSFT’s fiscal year ends on June 30 and GOOG’s ends on December 31, but the figures seem to assume their fiscal years end on the same date. That six month shift may not seem like much, but new laws and regulations (e.g., tax laws and GAAP rules) go into effect on January 1, so there could be material consequences to financial reporting due to that six month shift.  Assuming I am not mistaken about the apparent mismatch in timing, it should be easy to “normalize” everything  to calendar year by using MSFT’s quarterly financial data to determine if the mismatch matters at all.

Second, I question whether Chris defines “mark-up” correctly, at least as it relates to pricing power. Chris (and Blair Fix, as well) define mark-up as net income divided by gross revenue. While that will certainly tell us something, it does not tell us the mark-up because net income is calculated after interest, tax, depreciation, amortization and other income (i.e., income that falls below the operating profit line because it does not arise from the main business of the company, e.g., capital gains on stock sales)  have been included. My preference for the “mark-up” metric would be to either (1) use the operating margin (operating profit divided by gross revenue) or (2) subtract “other income” from net income before dividing it by gross revenue.  While stupid accounting tricks and tax dodges are ways to add some extra “juice” to earnings, they don’t reflect pricing power, which is what I think of when I use/hear the term “mark-up.”  Again, this could be a distinction that reveals no real differences, but precision can matter.

In closing, I do have some concerns about the utility of CasP analysis in studying/explaining/understanding business strategy as well as disagreements with many of the assertions/conclusions made in “Soft-Wars,” but I will post my detailed thoughts at a later date.

–Scot