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By Tai, June 12, 2010 2:00 am

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Microsoft (MSFT) has held the tradition of capitalizing only a very small portion of its software research and development costs.

The amount it is conservatively understate approximates US$10b, which translates to US$6.5b shareholder value. Calculation below.

If this adjustment is done, MSFT market capitalization would be US$229b, higher than that of Apple (AAPL) which amounts $227. This has not even inusual market overreaction to good information.

In sum, with only a slight legal and reasonable accounting adjustment, Microsoft can easily come back to be world’s most valuable technology company. Issue is: is the status quo really important besides media coverage?

Detail accounting adjustment and calculation is below:

Assumptions

• R&D is capitalized using straight-line depreciation over expected life of the software which approximates three years
• Amortization is taken from half a year’s spending

Capitalization

Adjustment

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By Tai, June 10, 2010 12:34 am

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Amazon positions itself as a technology company, not a retailer

1. Target the long-tail with million titles, while the largest physical book store may only store 400,000
2. Intensive investment in technology
3. Location: Seattle, near computer talents
4. Product search, data mining, personalized shopping
5. In-house software systems
6. Leader in cloud computing
7. Supplementary product: Kindle
8. Scalability
9. B2C to C2C

Jeff Bezos’s vision and financial expertise

1. Prior to Amazon: Princeton Computer Science & Electrical Engineering graduate, 2 years in Commercial Banking and 4 years in NY Investment Banking
2. Focus on customer service, avoid price war
3. Started with books then diversified
4. Act like a Venture Capitalist to other younger e-commerce firms then get advertising fees from these partners
5. Lock out competition with this partnership network
6. Use sophisticated financial structure including:
   • Private equity (only $1m in 1994)
   • Convertible preferred shares ($8m in 1996)
   • $326m 10% senior discount notes mature in 10 years
   • Debt repurchase
   • $1.25b 4.75% convertible subordinated notes mature in 10 years
   • $680m 6.875% euro-denominated subordinated notes mature in 10 years
   • Live many years on credit rating CCC but the company has had enough cash to spend. Good governance!
7. Good accounting compliance

Operations

1. Revenue sources: commission, advertising, affiliate marketing, cloud computing leasing
2. Order from suppliers after customer has made an order
3. Weathered the dot-com bubble and GFC well

Reference

Cott J., Palepu K., ‘Amazon.com’

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By Tai, June 8, 2010 9:10 pm

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By Tai,

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I’ve always been keen on explaining the Why of things. This entry is about Why I chose to use the local product LinkHay, a Vietnamese social news service, over

1. Relevant community: while Digg clearly has a wider range of influencers, the local community gives me networking opportunities much more relevant to what I’m working on
2. Relevant contents: contents relevant to the environment I’m working and living in
3. Good product: fast, fairly good usability and a pleasant enough design
4. Higher buyer bargaining power: I clearly have more bargaining power in giving feedback, suggestions and requests for a product that has 50,000 users (as of June 2010) compared to 3 million of Digg

LinkHay doesn’t only kill Digg in my online usage, but eats up Twitter as a information gathering tool.

In sum, the ingredients to build a local product to compete with global giants are: a good niché, good product/service and relevance.

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By Tai, June 6, 2010 6:15 pm

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The SecondMarket private equity website values Facebook at $25b.

Here is a little perspective

In the private equity market, supply can’t possibly meet demand thus the illiquidity creates the self-fulfilling prophecy of a Hype.