Wal-Mart’s “Shoot Yourself in the Head” Strategy

For the last decade, Wal-Mart has been "dead money" in investor parlance.  After a big jump between 1995 and 2000, the stock today is still worth less than it was in 2000.  There has been volatility, which might have benefited some traders.  But for most of the decade Wal-Mart's price has been lower.  There has been excitement because recently the price has been catching up with where it was in 2002, even though there have been no real gains for long term investors.

Source: YahooFinance 1/30/12

What happened to Wal-Mart was the market shifted.  For many years being the market leader with every day low pricing was a winning strategy.  Wal-Mart was able to expand from town to town opening new stores, all pretty much alike, doing the same thing and making really good money.

Then competitors took aim at Wal-Mart, and found out they could beat the giant.

Eventually the number of towns that both needed, and justified, a new Wal-Mart (or Sam's Club) dried up.  Wal-Mart reacted by expanding many stores, making them "bigger and better," even adding groceries to some.  But that added only marginally to revenue, and even less marginally to profits. 

And Wal-Mart tried exporting its stores internationally, but that flopped as local market competitors found ways to better attract local customers than Wal-Mart's success formula offered.

Other U.S. discounters, like Target and Kohl's, offered nicer stores with more varieties or classier merchandise – and often their pricing was not much higher, or even the same.  And a new category of retailer, called "dollar stores" emerged that beat Wal-Mart's price on almost everything for the true price shopper.  These 99 cent stores became really popular, and the fastest growing traditional retail concept in America. Simultaneously, big box retailers like Best Buy expanded their merchandise and footprint into more locations, dramatically increasing the competition against local Wal-Mart's stores. 

But, even more dramatically, the whole retail market began shifting on-line. 

Amazon, and its brethren, kept selling more and more products.  And at prices even lower than Wal-Mart.  And again, for price shoppers, the growth of eBay, Craigslist and vertical market sites made it possible for shoppers to find slightly used, or even new, products at prices lower than Wal-Mart, and shipped right into the customer's home.  With each year, people found less need to buy at Wal-Mart as the on-line options exploded.

More recently, traditional price-focused retailers have been attacked by mobile devices.  Firstly, there's the new Kindle Fire.  In just one quarter it has gone from nowhere to tied as the #1 Android tablet

Source: BusinessInsider.com

The Kindle Fire is squarely targeted at growing retail sales for Amazon, making it easier than ever for customers to ignore the brick-and-mortar store in favor of on-line retailers. 

On top of this, according to Pew Research 52% of in-store shoppers now use a mobile device to check price and availability on-line of products as they look in the store.  Thus a customer can look at products in Wal-Mart, and while standing in the aisle look for that same product, or comparable, in another store on-line.  They can decide they like the work boots at Wal-Mart, and even try them on for size. Then they can order from Zappos or another on-line retailer to have those boots shipped to their home at an even lower price, or better warranty, even before leaving the Wal-Mart store.

It's no wonder then that Wal-Mart has struggled to grow its revenues.  Wal-Mart has been a victim of intense competition that found ways to attack its success formula effectively. 

Then Wal-Mart implemented its "Shoot Yourself in the Head" strategy

What did Wal-Mart recently do?  According to Reuters Wal-Mart decided to transfer its entire marketing department to work for merchandising.  Marketing was moved from reporting to the CEO, to reporting into Sales.  The objective was to put all the energy of marketing into trying to further defend the Wal-Mart business, and drive up same-store sales.  In other words, to make sure marketing was fully focused on better executing the old, struggling success formula.

The marketing department at Wal-Mart does all the market research on customers, trends and advertising – traditional and on-line.  Marketing is the organization charged with looking outside, learning and adapting the organization to any market shifts. In this role marketing is expected to identify new competitors, new market solutions that are working better, and adapt the organization to shifting market needs.  It is responsible to be the eyes and ears of the organization, and then think up new solutions addressing these external inputs.  That's why it needs to report to the CEO, so it can drive toward new solutions that can revitalize the organization and keep it growing with new market trends.

But now, it's been shot.  Reporting to sales, marketing's role directed at driving same store sales is purely limiting the function to defending and extending the success formula that has produced lackluster results for 12 years.  Marketing is no longer in a position to adapt Wal-Mart.  Instead, it is tasked to find ways to do more, better, faster, cheaper under the leadership of the sales organization.

When faced with market shifts, winning companies adapt.  Look at how skillfully Amazon has moved from book seller to general merchandise seller to offering a consumer electronic device. 

Unfortunately, too many businesses react to market shifts like Wal-Mart.  They hunker down, do more of the same and re-organize to "increase focus" on the traditional business as results suffer.  Instead of adapting the company hopes more focus on execution will somehow improve results.

Not likely.  Expect results to go the other direction.  There might be a short-term improvement from the massive influx of resource, but long term the trends are taking customers to new solutions.  Regardless of the industry leader's size.  Don't expect Wal-Mart to be a long-term winner.  Better to invest in competitors taking advantage of trends.

 

 

Who’s CEO of the Year? Bezo’s (Amazon) or Page (Google)?

Turning over a new year inevitably leads to selections for "CEO of the Year."  Investor Business Daily selected Larry Page of Google 3 weeks ago, and last week Marketwatch.com selected Jeff Bezos of Amazon.  Comparing the two is worthwhile, because there is almost nothing similar about what the two have done – and one is almost sure to dramatically outperform the other.

Focusing on the Future

What both share is a willingness to focus their companies on the future.  Both have introduced major new products, targeted at developing new markets and entirely new revenue streams for their companies.  Both have significantly sacrificed short-term profits seeking long-term strategic positioning for sustainable, higher future returns.  Both have, and continue to, spend vast sums of money in search of competitive advantage for their organizations.

And both have seen their stock value clobbered.  In 2011 Amazon rose from $150/share low to almost $250 before collapsing at year's end to about $175 – actually lower than it started the calendar year.  Google's stock dropped from $625/share to below $475 before recovering all the way to $670 – only to crater all the way to $585 last week.  Clearly the analysts awarding these CEOs were looking way beyond short-term investor returns when making their selections.  So it is more important than ever we understand what both have done, and are planning to do in the future, if we are to support either, or both, as award winners.  Or buy their stock.

Google participates in great growth markets

The good news for Google is its participation in high growth markets.  Search ads continue growing, supplying the bulk of revenues and profits for the company.  Its Android product gives Google great position in mobile devices, and supporting Chrome applications help clients move from traditional architectures and applications to cloud-based solutions at lower cost and frequently higher user satisfaction.  Additionally, Google is growing internet display ad sales, a fast growing market, by increasing participation in social networks. 

Because Google is in high growth markets, its revenues keep growing healthily.  But CEO Page's "focus" leadership has led to the killing of several products, retrenching from several markets, and remarkably huge bets in 2 markets where Google's revenues and profits lag dramatically – mobile devices and search.

Because Android produces no revenue Google bought near-bankrupt Motorola to enter the hardware and applications business becoming similar to Apple – a big bet using some old technology against what is the #1 technology company on the planet.  Whether this will be a market share winner for Google, and whether it will make or lose money, is far from certain. 

Simultaneously, the Google+ launch is an attempt to take on the King Kong of social – Facebook – which has 800million users and remarkable success.  The Google+ effort has been (and will continue to be) very expensive and far from convincing.  Its product efforts have even angered some people as Google tried steering social networkers rather heavy-handidly toward Google products – as it did with "Search plus Your World" recently.

Mr. Page has positioned Google as a gladiator in some serious "battles to the death" that are investment intensive.  Google must keep fighting the wounded, hurting and desperate Microsoft in search against Bing+Yahoo.  While Google is the clear winner, desperate but well funded competitors are known to behave suicidally, and Google will find the competition intensive.  Meanwhile, its offerings in mobile and social are not unique.  Google is going toe-to-toe with Apple and Facebook with products which show no great superiority.  And the market leaders are wildly profitable while continuously introducing new innovations.  It will be tough fighting in these markets, consuming lots of resources. 

Entering 3 gladiator battles simultaneously is ambitious, to say the least.  Whether Google can afford the cost, and can win, is debatable.  As a result it only takes a small miss, comparing actual results to analyst expectations, for investors to run – as they did last week.

 Amazon redefines competition in its markets

CEO Bezos' leadership at Amazon is very different.  Rather than gladiator wars, Amazon brings out products that are very different and avoids head-to-head competition.  Amazon expands new markets by meeting under- or unserved needs with products that change the way customers behave – and keeps competitors from attacking Amazon head-on:

• Amazon moved from simply selling books to selling a vast array of products on the web.  It changed retail buying not by competing directly with traditional retailers, but by offering better (and different) on-line solutions which traditional retailers ignored or adopted far too slowly.  Amazon was very early to offer web solutions for independent retailers to use the Amazon site, and was very early to offer a mobile interface making shopping from smartphones fast and easy.  Because it wasn't trying to defend and extend a traditional brick-and-mortar retail model, like Wal-Mart, Amazon has redefined retail and dramatically expanded shopping on-line.
• Amazon changed the book market with Kindle.  It utilized new technology to do what publishers, locked into traditional mindsets (and business models) would not do.  As the print market struggled, Amazon moved fast to take the lead in digital publishing and media sales, something nobody else was doing, producing fast revenue growth with higher margins.
• When retailers were loath to adopt tablets as a primary interface for shoppers, Amazon brought out Kindle Fire.  Cleverly the Kindle Fire is not directly positioned against the king of all tablets – iPad – but rather as a product that does less, but does things like published media and retail very well — and at a significantly lower price.  It brings the new user on-line fast, if they've been an Amazon customer, and makes life simple and easy for them.  Perhaps even easier than the famously easy Apple products.

In all markets Amazon moves early and deftly to fulfill unmet needs at a very good price.  And then it captures more and more customers as the solution becomes more powerful.  Amazon finds ways to compete with giants, but not head-on, and thus rapidly grow revenues and market position while positioning itself as the long term winner.  Amazon has destroyed all the big booksellers – with the exception of Barnes & Noble which doesn't look too great – and one can only wonder what its impact in 5 years will be on traditional retailers like Kohl's, Penney's and even Wal-Mart.  Amazon doesn't have to "win" a battle with Apple's iPad to have a wildly successful, and profitable, Kindle offering.

The successful CEO's role is different than many expect

A recent RHR International poll of 83 mid-tier company CEOs (reported at Business Insider) discovered that while most felt prepared for the job, most simultaneously discovered the requirements were not what they expected.  In the past we used to think of a CEO as a steward, someone to be very careful with investor money.  And someone expected to know the business' core strengths, then be very selective to constantly reinforce those strengths without venturing into unknown businesses.

But today markets shift quickly.  Technology and global competition means all businesses are subject to market changes, with big moves in pricing, costs and customer expectations, very fast.  Caretaker CEOs are being crushed – look at Kodak, Hostess and Sears.  Successful CEOs have to guide their businesses away from investing in money-losing businesses, even if they are part of the company's history, and toward rapidly growing opportunities created by being part of the shift.  Disruptors are now leading the success curve, while followers are often sucking up a lot of profit-killing dust.

Amazon bears similarities to the Apple of a decade ago.  Introducing new products that are very different, and changing markets.  It is competing against traditional giants, but with very untraditional solutions.  It finds unmet needs, and fills them in unique ways to capture new customers – and creates market shifts.

Google, on the other hand, looks a lot like the lumbering Microsoft.  It has a near monopoly in a growing market, but its investments in new markets come late, and don't offer a lot of innovation.  Google's products end up competing directly, somewhat like xBox did with other game consoles, in very, very expensive – usually money-losing – competition that can go on for years. Google looks like a company trying to use money rather than innovation to topple an existing market leader, and killing a lot of good product ideas to keep pouring money into markets where it is late and not terribly creative.

Which CEO do you think will be the winner in 2015?  Into which company are you prepared to invest?  Both are in high growth markets, but they are being led very, very differently.  And their strategies could not be more different.  Which one you choose to own – as a product customer or investor – will have significant consequences for you (and them) in 3 years. 

It's worth taking the time to decide which you think is the right leadership today.  And be sure you know what leadership principles you are adopting, and following in your organization.

Creative Destruction is not inevitable – Kodak, Hostess, Microsoft

A lot of excitement was generated this week when Mitt Romney said the words "I like to fire people."  I'm sure he wishes he could rephrase his comment, as he easily could have made his point about changing service providers without those words.  Nonetheless, the aftermath turned to a discussion of job losses, and why Bain Capital has eliminated jobs while simultaneously creating some. 

Surprisingly, a number of economists suddenly started saying that firms like Bain Capital are justified in their job eliminations because they are merely implementing "creative destruction."  Although the leap is not obvious, the argument goes that some businesses are made inefficient and unprofitable by new technologies or business processes – so buyers (like Bain Capital) of hurting businesses often cannot "fix" the situation and have no choice but to close them.  Bain Capital inevitably will be stuck with losers it has no choice but to shutter – eliminating the jobs with the company.

Unfortunately, that argument is simply not true. The only thing that allows "creative destruction" to kill a company is a lack of good leadership.  Any company can find a growth path if its leaders are willing to learn from trends and steer in the growing direction.

Start by looking at recent events surrounding Kodak and Hostess, both quickly heading for Chapter 11.  Neither needed to fail. Management made the decisions which steered them into the whirlpool of failure. 

Kodak watched the market for amateur photography shrink for 30 years – drying up profits for film and paper.  Yet, management consistently – quarter after quarter and year after year – made the decision to try defending and extending the historical market rather than move the company into faster growing, more profitable opportunities.  Kodak even invented much of the technology for digital photography, but chose to license it to others rather than develop the market because Kodak feared cannibalizing existing sales – as they became increasingly at risk! 

Hostess is making a return trip to Chapter 11 this decade.  But it's not like the trend away from highly processed, shelf stable white bread and sugary pastry snacks is anything new.  While 1960s parents and youth might have enjoyed the vitamin enriched Wonder Bread "helping grow bodies 12 ways" the trend toward fresher, and healthier, staples has been happening for 40 years.  In the 1980s when the company was known as Continental Baking profits were problematic, and it was clear that to keep what was then the nation's largest truck fleet profitable required new products as consumers were shifting to fresher "bake off" goods in the grocery store as well as brands promising more fiber and taste.  But despite these obvious trends, leadership continued trying to defend and extend the business rather than shift it.

These stories weren't "creative destruction."  They were simply bad leadership.  Decisions were made to do more of the same, when clearly something desperately different was needed! At the Harvard Business School Working Knowledge web site famed strategiest Michael Porter states "the granddaddy of all mistakes is competing to be the best, going down the same path as everybody else and thinking that somehow you can achieve better results."  Failure happened because the leaders were so internally focused they chose to ignore external inputs, trends, which would have driven better decisions!

In the 1980s Singer realized that the sewing machine market was destined to decline as women left homemaking for paying jobs, and as textile industry advances made purchased clothing cheaper than self-made.  Over a few years the company transitioned out of the traditional, but dying, business and became a very successful defense industry contractor!  Rather than letting itself be "creatively destroyed" Singer identified the market trends and moved from decline to growth!

Similarly, IBM almost failed as the computer market shifted from mainframes to PCs, but before all was lost (including jobs as well as investor value) leaders changed company focus from hardware to services and vertical market solutions allowing IBM to grow and thrive. 

The failure of Digital Equipment (DEC) at the same time was not "creative destruction" but company leadership unwillingness to shift from declining mini-computer and high priced workstation sales into new businesses.

More recently, over the last decade a nearly dead Apple resurrected itself by tying into the large trend for mobility, rather than focusing on its niche Mac product sales.  Company leaders took the company into consumer electronics (ipod, ipod touch,) tablet computing and cloud-based solutions (iPad) and mobile telephony with digital apps (iPhone.)  Apple had no legacy in any of these markets, but by linking to trends rather than fixating on past businesses "creative destruction" was avoided.

There are many businesses today that are in trouble because leaders simply won't pay attention to trends.  Avon, Sears and Barnes & Noble are three companies with limited futures simply because leaders seem unable to pull their heads out of the internal strategic planning sand and look at environmental trends in order to shift.

My favorite target is, of course, Microsoft.  Nobody thinks we will be carrying laptop PCs around in 5 years.  Yet, Microsoft has been unable to recognize the trend away from PCs and do anything effective.  Its efforts in music (Zune) and mobile handsets have been indifferent, insufficiently supported and mostly dropped.  Mr. Ballmer continues to speak about a long future for PC sales even as Q4 volume dropped 1.4% according to IDC and Gartner.  Even though everyone knows this trend is due to limited PC innovation and rapidly accelerating mobile-based solutions, Microsoft blamed the problem on, of all things, floods in Thailand that restricted manufacturing output.  Really.

We'll learn soon enough just how many jobs Bain Capital created, and killed.  But those lost were not due to "creative destruction."  They were due to leadership decisions to discontinue the business rather than invest in trends and transitioning to new markets.  Creative destruction is an easy excuse to avoid blaming leaders for failures caused by their unwillingness to recognize trends and take actions to invest in them which will create winning businesses.

Drop 2011 Dogs for 2012’s Stars – Avoid Kodak, Sears, Nokia, RIMM, HP, Sony – Buy Apple, Amazon, Google, Netflix

The S&P 500 ended 2011 almost exactly where it started.  If ever there was a year when being invested in the right companies, and selling the dogs, mattered for higher portfolio returns it was 2011.  The good news is that many of the 2011 dogs were easy to spot, and easy to sell before ruining your portfolio. 

There were many bad performers.  However, there was a common theme.  Most simply did not adjust to market shifts.  Environmental changes, from technology to regulations, made them less competitive thus producing declining returns as newer competitors benefitted.  Additionally, these companies chose – often over the course of several years – to eschew innovation and new product launches.  They chose to keep investing in efforts to defend and extend historical, but troubled, businesses rather than innovate toward a more successful future.

Looking at the trends that put these companies into trouble we can recognize the need to continue avoiding these companies, even though many analysts are starting to say they may be "value stocks." Instead we can invest in the trends by buying companies likely to grow and increase portfolio returns in 2012.

Avoid Kodak – Buy Apple or Google

Few companies are as iconic as Eastman Kodak, inventor of amateur photography and creator of the star product in the hit 1973 Paul Simon song "Kodachrome." However, it was clear in the late 1980s that digital cameras were going to change photography.  Kodak itself was one of the primary inventors of the core technology, but licensed it to others in order to generate cash it invested trying to defend and extend photographic film and paper sales.  In my 2008 book "Create Marketplace Disruption" I highlighted Kodak as a company so locked-in to film sales that it was unwilling to even consider moving into new markets.

In 2011 EK lost almost all its value, falling from $3.85 share to about 60 cents.  The whole company is now worth only $175M as it rapidly moves toward NYSE delisting and bankruptcy, and complete failure.  The trend that doomed EK has been 2 decades in the making, yet like an ocean freighter collision management simply let momentum kill the company.  The long slide has gone on for years, and will not reverse.  If you want to invest in photography your best plays are smart phone suppliers Apple, and Google for not only the Android software but the Chrome apps that are being used to photoshop images right inside browser windows.

Avoid Sears – Buy Amazon

When hedge fund manager Ed Lampert took over KMart by buying their bonds in bankruptcy, then used that platform to buy Sears back in 2006 the Wall Street folks hailed him as a genius. "Mad Money" Jim Cramer said "Fast Eddie" Lampert was his former college roommate, and that was all he needed to recommend buying the stock.  On the strength of such spurrious recommendations, Sears Holdings initially did quite well.

However, I was quoted in The Chicago Tribune the day of the Sears acquisition announcement saying the merged company was doomed – because the trends were clear.  Wal-Mart was in pitched battle with Target to "own" the discount market which had crushed KMart.  Sears was pinched by them on the low end, and by better operators of vertically focused companies such as Kohl's for clothing, Best Buy for appliances and Home Depot for repair and landscape tools.  Sears was swimming against the trends, and Ed Lampert had no plans to re-invent the company.  What lay ahead was cost-cutting and store closings which would kill both brands in a market already overly saturated with traditional brick-and-mortar retailers as long-term more sales moved on-line.

Now Sears Holdings has gone full circle.  In the last 12 months the stock has dropped from $95 to $31.50 – a decline of more than two thirds (a loss of over $7B in investor value.)  Sears and KMart have no future, nor do the Craftsman or Kenmore brands.  After Christmas management announced a new round of store closings as same stores sales continues its never-ending slide, and finally most industry analysts are saying Sears has nowhere to go but down. 

The retail future belongs to Amazon.com – which is where you should invest if you want to grow portfolio value in 2012.  Look to Kindle Fire and other tablets to accelerate the retail movement on-line, while out-of-date Sears becomes even less relevant and of lower value.

Stay out of Nokia and Research in Motion – Buy Apple

On February 15 I wrote that Nokia had made a horrible CEO selection, and was a stock to avoid.  Nokia invesors lost about $18B of value in 2001 as the stock lost  50% of its market cap in 2011 (62% peak to trough.) May 20 I pounded the table to sell RIMM, which lost nearly 80% of its investor value in 2011 – nearly $60B! 

Both companies simply missed the market shift in smart phones.  Nokia did its best Motorola imitation, which missed the shift from analog to digital cell phones – and then completely missed the shift to smart phones – driving the company to near bankruptcy and acquisition by Google for its patent library.  With no game at all, the Nokia Board hired a former Microsoft executive to arrange a shotgun wedding for launching a new platform – 3 years too late.  Now Apple and Android have over 400,000 apps each, growing weekly, while Microsoft is struggling with 50k apps, no compelling reason to switch and struggles to build a developer network.  Nokia's road to oblivion appears clear.

RIM was first to the smartphone market, and had it locked up for years.  Unfortunately, top management and many investors felt that the huge installed base of corporate accounts, using Blackberry secure servers, would protect the company from competition.  Now the New York Times has reported RIM leadership as one of the worst in 2011, because an installed base is no longer the competitive entry barrier Michael Porter waxed about in the early 1980s.  Corporations are following their users to better productivty by moving fast as possible to the iOS and Android worlds. 

RIM's doomed effort to launch an ill-devised, weakly performing tablet against the Apple iPod juggernaut only served to embarrass the company, at great expense.  At this point, there's little reason to think RIM will do any better than Palm did when the technology shifted, and anyone holding RIMM will likely end up with nothing (as did holders of PALM.)  If you want to be in mobile your best pick is market leading and profitably growing Apple, with a second position in Google as it builds up ancillary products like Chrome to leverage its growing Android base.

 Avoid HP and Sony – Buy Apple

Speaking of Palm, to paraphrase Senator Dirkson "that billion here, a billion there" that added up to some real money lost for HP.  Mark Hurd consolidated HP into a company focused on building volume largely in other people's technology – otherwise known as PCs.  As printing declines, and people shift to tablets and cloud apps, HP has less and less ability to build its profit base. The trends were all going in the wrong direction as market shifts make HP less and less relevant to consumer and corporate customers. 

Selecting Mr. Apotheker was a disastrous choice, and I called for investors to dump the stock when he was hired in January.  An ERP executive, he was firmly planted in the technology of the 1990s.  With a diminished R&D, and an atrophied new product development organization HP is nothing like the organization of its founders, and the newest CEO has offered no clear path for finding the trends and re-igniting growth at HP.  If you want to grow in what we used to call the PC business you need to be in tablets now – and that gets you back, once again, to Apple first, and Google second.

Which opens the door for discussing what in the 1960s through 1980s was the most innovative of all consumer electronics companies, Sony.  But when Mr. Morita was replaced by an MBA CEO that began focusing the company on the bottom line, instead of new gadgets, the pipeline rapidly dried.  Acquisitions, such as a music label, replaced R&D and new product development.  Allegiance to protecting the CD and DVD business, and the players Sony made – along with traditional TVs and PCs – meant Sony missed the wave to MP3, to mobile digital entertainment devices, to DVRs and the emerging market for interactive TV.  What was once a leader is now a follower. 

As a result Sony has lost $4.5B in investor value the last 3 year, and in 2011 lost half its value falling from $37 to $18/share.  As Apple emerges as the top consumer electronics technology leader and profit creator, closely chased by Google, it is unlikely Sony will ever recover that lost value. 

Buying Apple, Amazon, Google and Netflix

This column has already made the case for Apple.  It is almost incomprehensible how far a lead Apple has over its competition, causing investors to fear for its revenue growth prospects.  As a result, the companies P/E multiple is a remarkably low single-digit number, even though its growth is well into the double digits!  But its existing position in growth markets, technology leadership and well oiled new product development capability nearly assures continued profitbale growth for at least 5 years.  Even though the stock, which I recommended as my number 1 buy in January, 2011, has risen some 30% maintaining a big position is remains an investors best portfolio enhancer.

Amazon was a wild ride in 2011, and today is worth almost the same as it was one year ago.  Given that the company is now larger, has a more dominant position in publishing and is the world leader on the trend to on-line retail it is a very good stock to own.  The choice to think long-term and build its user links through sales of Kindle Fire at cost has limited short-term profits, but every action Amazon has taken to grow has paid off handsomely because they accelerate the natural trends and position Amazon as the leader.  Remaining with the trends, and the growth, offers the potential for big payoff this year and for years to come.

Google remains #2 in most markets, but remains aligned with the trends.  It was disappointing that the company cancelled so many great products in 2011 – such as Gear and Wave. And it faces stiff competition in its historical ad markets from the shift toward social media and Facebook's emergence.  However, Google is the best positioned company to displace Microsoft on all those tablets out there with its Chrome apps, and it still is a competitor with the potential for long-term value creation.  It's just hard to be as excited about Google as Apple and Amazon. 

Netflix started 2011 great, but then stumbled.  Starting the year at $190, Netflix rose to $305 before falling to $75.  Investors have seen an 80% decline from the peak, and a 60% decline from beginning of the year.  But this was notably not because company revenues or profits fell, because they didn't.  Rather concerns about price changes and long-term competition caused the stock to drop.  And that's why I remain bullish for owning Netflix in 2012.

Growth can hide a multitude of sins, as I pointed out when making the case to buy in October.  And Netflix has done a spectacular job of preparing itself to transition from physical DVDs to video downloads.  The "game" is not over, and there is a lot of content warring left.  But Netflix was first, and has the largest user base.  Techcrunch recently reported on a Citi survey that found Netflix still has nearly twice the viewership of #2 Hulu (27% vs. 15%.) 

Those who worry about Amazon, Google or Apple taking the Netflix position forget that those companies are making huge bets to compete in other markets and have shown less interest in making the big investments to compete on the content that is critical in the download market.  AOL and Yahoo are also bound up trying to define new strategies, and look unlikely to ever be the content companies they once were.

For those who are banking on competitive war with Comcast and other cable companies to kill off Netflix look no further than how they define themselves (cable operators,) and their horrific customer relationship scores to realize that they are more interested in trying to preserve their old business than rapidly enter a new one.  Perhaps one will try to buy Netflix, but they don't have the management teams or organization to compete effectively.

The fact is that Netflix still has the best strategy for its market, which is still growing exponentially, has the best pricing and is rapidly growing its content to remain in the top position.  That makes it a likely pick for "turnaround of the year" by end of 2012 (at least in the tech/media industry) – even as investments rise over the next 12 months.