When Seemingly Long-Term Companies Don't Win

When companies make seemingly long-term decisions, we tend to praise their forward thinking. Why shouldn't Apple  (NASDAQ: AAPL  ) offer its newest operating system for free, along with its productivity suite, when it could book $400 million in revenue? Why shouldn't (NASDAQ: AMZN  ) sell its Kindle at a loss?

It's all about the long-term strategy. These policies can hurt immediate results, and may not make sense at the financial level for a while. But what happens when such policies never make sense, and continue to hurt the company indefinitely?

It's the rarely covered topic of the failure of long-term thinking. We can look back on a few decisions that, if successful, could have proven prime examples of planning for the future. But they were bad bets, and turned out poorly for the companies.

A bad bet on scale
Discount stores, like clothes-seller Syms, should have taken full advantage of the recession and cash-strapped consumers. Syms, with 25 stores, wanted to double down on its bet, and bought Filene's Basement's 23 stores in a bankruptcy auction in 2009 for $63 million. The thinking behind such a move was simple: the complementary businesses could realize efficiencies of scale, saving on costs while raking in more revenue.

But things didn't quite work out that way. Department store competitors took over Syms' market by offering the same brands at similar discounts, and managed their own inventories better, which crimped the supply of seconds and overstock that Syms sold. Doubling up on stores with the purchase of Filene's Basement just doubled the number of stores that the company had to worry about. Syms itself filed for bankruptcy in late 2011.

A bad bet on vertical integration
Back in 1998, 3Dfx Interactive led cutting-edge computer graphics with its Voodoo line of chips. The company acted as an OEM supplier, meaning it sold its chips to be placed on other companies' graphics cards -- that is, until it decided to purchase STB Systems and manufacture its own graphics cards while cutting its partnerships. By owning more of the value chain, 3Dfx could capture more profit and have greater control of its business. As the CEO said after the purchase, "Now we will be in charge of our own destiny." 

Unfortunately, just two years later, the company gave up manufacturing on its own after "numerous production delays and supply problems." It lost its technical advantage to NVIDIA, which ended up purchasing everything from 3Dfx except its graphics board business in 2001, as the rest of 3Dfx went bankrupt in 2002.

Potential bad moves in the present
What could go wrong with Apple's free OS strategy? It's known that consumers anchor perceived value with price, so making products free could hurt Apple's premium perception. Additionally, giving up $400 million in revenue is an incredibly bold move when critics complain of falling margins and little excitement for future products.

Amazon's success with its razor-and-blade model for the Kindle devices may never be confirmed, given the company's obfuscated financial reporting. But statistics show that Kindles are in second place in terms of tablet Internet usage -- 6%, compared to the iPad's 84%. And Kindle users on average buy more than three times as many books as they did before owning a Kindle.

Long-term is good, the right long-term is better
Making big bets on the future helps companies pull ahead of competitors, but it can also destroy company value at an accelerated pace. As investors, the fun comes in deciding who has made the right bets.

Figuring out who has the right long-term bets
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  • Report this Comment On October 29, 2013, at 11:58 PM, BenKeel wrote:

    Do the opposite of Motley Fool's reco's guys and you'll make a fortune!

    That's why I read their crap, so I can bet on the other side of what they recommend, like US Steel at $40 three years ago.

  • Report this Comment On October 30, 2013, at 5:46 AM, fauxscot wrote:

    Apple shot a $400 million arrow at MS. MS has a Surface 2 Pro, capable of running Office if you want to add $500 of software to the $1800 price of a tricked out S2Pro. You get tablet-sufficient software for FREE with an iPad, further distinguishing its dozen advantages over a Surface and making it an appealing alternative for folks considering an Android. Not sure you can call it a bad idea. Giving away decent, platform specific, ecosystem reinforcing software with the hardware that represents your major profit center seems like wise product extension to me, not flaky vertical integration crap.

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