Home Forum Research Chris Mouré’s “Soft-Wars”

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  • #247024

    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.


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    • #247027

      I think both Chris and I get that definition of ‘markup’ from Jonathan Nitzan’s class. We can quibble with names (some people call profit/sales the ‘profit margin’) but I think the metric itself is unquestioningly of value. That does not mean we shouldn’t explore other metrics.

      About the offset fiscal years, that does seem to raise issues, especially if you are interested in comparing data for a specific year. But as the time frame of analysis expands, I think these minor accounting differences are not that important.

      We are beholden to the data that is reported, and the accounting quirks on which it is based. But since you raise the question, now you make me think about how other databases treat fiscal years. I’ve never looked to see if Compustat reports the dates covered by each company’s fiscal year. Something to think about, especially when doing fine grain analysis.

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