Wednesday, July 13, 2005

Eva's: Great Food, Even Better Discussion

Every night at 6 or 7, a gang of entrepreneurs, gym enthusuiasts, NYU Stern business students, and finance professionals collect in the back of Eva's on 8th street (between 5 and 6th Ave.) for a lively dinner conversation.

We did it all last summer and we're back at it this year.

Conversations revolve around business in general.

For example, on Monday, we discussed why it is Business schools offer joint degree programs like the MBA/JD.

We figured it was because the programs wanted to exploit the synergies between business and law -- and there are many.

In the end, business and law -- and politics -- converge upon one common denominator.

Decision making.

Let me be frank.

I dislike politics.

Its the same damn circus, just a different set of clowns every time.

But I also know that politics and fiscal policy go hand in hand -- there is no way a politician will ever get voted into office without first presenting a business forecast/plan to his constituents.

On Tuesday, we spoke about the software industry, Nike, and Blockbuster Video.

To tackle our first question, why is software such a high margin industry?

The answer is very simple.

More than anything, software is about brainpower.

Or, intellectual property/capital if you want to phrase it better.

Bill Gates and other software kings plow money back into R&D.

Being that software is less capital intensive, it can exploit scaled economies better than other industries.

Furthermore, software companies love to source.

By sourcing, the production process gets disaggregated so as to maximize productivity wherever that may be.

An engineer in Redmond, Washington can communicate to a co-worker in Bangalore through bandwith and create code without the two of them ever seeing each other face to face.

Sourcing saves money and sourcing saves time.

So once the actual software has been created, the actual cost of mass distributing it shaves little off total revenue.

And there you have it.

That's how software companies like Microsoft and Oracle enjoy steep margins.

Then we started talking about Nike as it related to entrepreneurial genius.

Bottom line: Nike was the first to position athletic footware as a species of technology.

Then they were able to recruit the best, most consistent atheletes to brand and promote their product line.

Sounds like a dynamite business plan to me.

Today, Nike is a $22 billion dollar corporation and its founder, Phil Knight, is worth a couple of billion dollars.

That's when I blurted out that entrpreneurs, by definition, have to take risks.

It's called creative destruction, as one famous economist put it.

Entrepreneurs have to destroy old paradigms so as to create value.

At first, Blockbuster Video's founders were lambasted for their innovative pitch on mass retailing movies.

Well, you know what happen.

Mom and Pop video stores were overthrown and Blockbuster swallowed the home rental market.

As new markets develop and growth slows, these same innovators are undermined by tomorrow's leaders.

Blockbuster rode the wave as long as they could, until Netflix arrived on the scene, ready & able to leverage and platform off the Internet.

We're back at Eva's tonight; anyone and everyone is welcome.

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