Stephen’s Posterous

Amazon.com Watches Start-Up Investment Portfolio Sink in Value by Tomio Geron, WSJ.com

Venture capital firms aren’t the only investors watching their start-up portfolios plummet in value. Amazon.com Inc. today showed how some large companies are facing the volatility that comes with investing in start-up companies.

Amazon.com disclosed in its 10-Q report that the value of its equity investments was $89 million as of March 31, down 64% from the $248 million reported just six months earlier.

“We review our investments for impairment when events and circumstances indicate that the decline in fair value of such assets below the carrying value is other-than-temporary. Our analysis includes review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data,” Amazon wrote in explaining the value.

“Impairment” is a nice way to describe what’s happening to start-ups as they raise new rounds of funding at lower valuations in today’s tough fund-raising environment. Amazon did have a stake in online payments company Bill Me Later Inc., which was acquired in November 2008 by eBay Inc. for $945 million, which could account for some decline in the value of its investments.

But Amazon still held stakes in a number of start-ups, including Yieldex Inc., a provider of advertising inventory management and forecasting technology, that raised an $8.5 million Series B round in February 2009 led by Amazon. In August 2008, Amazon co-led a $12 million Series B in Elastra Corp. a provider of software to manage applications hosted on Amazon’s Web platform.

Amazon has also invested in Engine Yard Inc., which helps companies host and manage Ruby on Rails applications and Talk Market Inc., a video shopping Web site.  More recently, the retailing giant seed invested in two companies, Foodista and Booktour, according to TechFlash.

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The Twitter Revolution by Michael S. Malone, WSJ.com

"Twitter is the side project that took," says company co-founder Biz Stone, 35. "Now it's our chance to do something transformative."

When I arrive at Twitter's headquarters on a recent morning, Jerry Brown is waiting in the lobby, just another day at the world's hottest high-tech company. "It's pretty bizarre," says co-founder Evan Williams, 37. "At least once per day we look at each and say, 'What the hell?' It's like we're living out the script of the ultimate start-up company story."

But other than the familiar face of California's attorney general standing near the steel front door, you would hardly know that this little company of about 30 employees is the epicenter of the Web, used by an estimated 20 million Americans on a daily, even minute-by-minute, basis. Just how fast Twitter is growing is a company secret, but its traffic appears to be more than doubling every month.

The company itself seems calm and casual. The employees drift in, grab some free food and eventually make their way to their desks. It's located in an anonymous warehouse just a couple blocks from South Park, the once-frenzied environs of the dot-com companies of the first Internet boom.

In his sports shirt and slacks, sipping a bottle of apple juice, Mr. Williams exhibits indifference to the trappings of success. So does Mr. Stone, who last year won an Oxford Union debate wearing a borrowed bow tie and a pair of black sneakers.

The company is hiring like crazy, it expects to double its size in the next month or two, and is also adding a senior management, notably new vice-president of global operations Santosh Jayaram, hired away from Google. "We've never had a company that grew past 15 to 20 people," says Mr. Stone, "We're kind of excited about that."

Even faster than Google, Amazon and eBay in their days, the three-year-old Twitter has become deeply embedded in the culture. President Barack Obama twittered the words, "We just made history," on the night of his election. It was a twittered image that first captured the forced landing of US Airways Flight 1549 in the Hudson River.

Scores of people trapped in the Mumbai terrorist attack twittered desperately for help. And in a much discussed event, a San Francisco technology writer twittered his surprise to discover his home was being broken into.

Strictly speaking, Twitter is a social networking application that enables users to post short text messages,  called tweets, of no more than 140 characters on their personal feed. These real-time diary entries can then be read by other users, called "followers," who have subscribed to that page.

Twitter is much more than a novel way to share updates of one's daily life with friends. It's now evolved into a powerful new marketing and communications tool. Regional emergency preparedness organizations are looking at Twitter as a way to reach millions of people during a disaster.

NASA is using it to regularly update interested parties about the status of space shuttle flights. And one journalist solicited help from fellow Twitterers to get himself out of an Egyptian jail. It worked.

The real Twitter revolution may prove to be much more everyday. When I stop for a latte at Peet's Coffee on the way to the interview, the manager tells me that he plans to start sending out tweets to let regular customers know when a table is open. He isn't alone.

A Manhattan bakery twitters when warm cookies come out of the oven. "It's those small stories that really inspire us," says Mr. Stone. "Those are the things that transform people's lives."

Mr. Stone vividly remembers the first time he appreciated the power of Twitter. He and his now-wife had just bought a house in Berkeley and, having spent the day scraping up carpet and painting walls, he was tired and sweaty. "That's when I got a twitter from Evan saying, 'Up in Sonoma drinking pinot noir after a massage.' I just started laughing. That's when I realized that this technology could be entertaining too," as opposed to a basic communications tool, he says.

"It took us a while to figure out that it really was a big deal," says Mr. Williams. It was at the annual South by Southwest tech conference/music festival in Austin, Texas, in March 2008, that the social power of Twitter came home to the co-founders. "I found myself watching groups of people twittering each other to coordinate their actions, which bar to go to, which speech to attend, and it was like seeing a flock of birds in motion," says Mr. Stone.

As with many Web entrepreneurs, Messrs. Williams and Stone took unconventional paths to success.

Mr. Williams was born on a soybean, corn and cattle farm near Clarks, Neb., pop. 361, where he attended the single public school there. In a class of just 14, he took part in everything from sports to band. "In a school that small, everyone does it all," he says.

But he was an indifferent student and felt like a black sheep at home, too. His father and brother loved to farm and hunt, while Evan, a vegetarian, preferred to read and ponder schemes for building enterprises.

Eventually he made it to the University of Nebraska, but he never declared a major, took as few classes as possible, and eventually dropped out. In the years that followed, Mr. Williams drifted around the country, Key West, Dallas, Austin, working various technology jobs and trying to pursue start-ups.

But every time he got started on one idea, some new idea would pop into his head, luring him away and preventing him from ever following through on a project. "It was turning into a constant pattern," Mr. Williams recalls.

By 1996, Mr. Williams found himself back on the family farm, with little money and few prospects. "I was in the dumps," he recalls. He had long worshipped California's Silicon Valley from afar, and now, with nothing to lose, he decided to move there. "Unfortunately, my aim was a little off," he says, since he landed in the farming town of Sebastopol in Marin County, working for the old-guard media/conference firm O'Reilly Inc.

In the end, that proved fortuitous. What began as a marketing job ended up as an independent contractor job writing computer code, and in short order, Mr. Williams parlayed that into freelance work with legendary Valley companies like Intel and Hewlett-Packard. "For the first time, I learned what it was like to work in an office and have a normal career. To be in real meetings. I also learned that I didn't want to do that."

Did Mr. Williams ever feel that there was something wrong with his inability to hold a traditional job? "No," he says. "I always figured there was something wrong with everybody else."

In 1999, Mr. Williams teamed up with another contractor, Meg Hourihan, and founded Pyra Labs to make management software. A much admired product which allowed managers to handle complex projects online, Pyra earned him a reputation as a brilliant entrepreneur who didn't know how to make money.

"The truth is," Mr. Williams protests, "we had revenues from the first day . . . there just wasn't enough of them." It should have ended in yet another business failure -- but in computer parlance, Mr. Williams decided to 'turn a bug into a feature.' This meant taking one of his distracting brainstorms and turning it into a company.

The new company, called Blogger.com -- Mr. Williams invented the term -- which was developed from a note-taking application on Pyra, was the original blog prototype. It proved to be one of the few successes of the era. Better yet, Mr. Williams even managed to nail down some real venture investment just as the bubble burst.

Mr. Williams finally had a real company and real money. Now he needed a team.

Enter Christopher Isaac "Biz" Stone. Raised in Wellesley, Mass., Mr. Stone had an early love for graphic arts and theater. But at the University of Massachusetts, he too had proven to be a distracted student, and when a job at publisher Little, Brown evolved from moving boxes to designing book covers, Mr. Stone dropped out of college.

In the years that followed, he, like Mr. Williams, discovered a natural gift for Web design and programming. In fact, the two young men had admired each other's work from opposite coasts.

So when Evan invited Biz to join Blogger, Biz moved West. He arrived just in time to get the news that Google decided to acquire Blogger. Messrs. Williams and Mr. Stone, neither of whom technically qualified for the CV-obsessed company, were suddenly Google employees.

The gig lasted 20 months and both men say they thoroughly enjoyed it. Mr. Williams even met his future wife at the firm. But the entrepreneurship gene couldn't be denied forever. And in 2005, both men decided to strike out on their own. "It was about the toughest decision I ever made," recalls Mr. Stone, "and if I'd known how high Google stock would go, I'm not sure I would have made it."

Once out of Google, Mr. Williams teamed with another entrepreneur, Noah Glass, to found Odeo, a podcasting company. It was a brilliant plan, until Apple decided to offer its own podcasting application in iTunes. Says Biz, who had also joined the firm, "I remember asking Evan, 'Do you really want to be the King of Podcasting?' And he said, 'No.' And that was it." Looking back, Mr. Williams says, "I didn't follow my gut. I intellectualized myself into Odeo."

Mr. Williams had taken venture capital money to build Odeo and to change its business model, and he had to buy out those investors with a big chunk of his Blogger cash. Once again abandoning the main idea for a sidelight, he transformed Odeo into Twitter by stripping down and selling off the podcasting component and keeping the social-networking tool, the last a concept proposed by Jack Dorsey, now Twitter chairman.

Under the guise of a fun communications tool, Twitter is building one of the world's most valuable real-time information caches. And as Twitter's profile continues to explode, Oprah just sent her first tweet on yesterday's show, many wonder whether the company will ever find a revenue model.

Others speculate about who will buy the young company. Google seems to be the leading candidate. "We know there are a lot of people looking at Twitter right now," says Mr. Stone.

For now, Messrs. Williams and Stone are keeping their plans secret. With patient investors who just put in $35 million in third-round funding, the company is in no hurry. Mr. Stone will only say that "we are enamored with the idea of going all the way." Adds Mr. Williams: "We want to have as large an impact as possible."

Mr. Williams says that the amount of money it would take to buy Twitter right now is more than any company could justify to its shareholders, but suggests three other possible scenarios.

First, that Twitter could go public, probably without him, as he has little interest in running a public company. Second, Twitter could remain private and somehow buy out its investors. Or third, they discover some other option no one has thought of yet.

Of course, there's still one more possibility: Yet another one of Mr. Williams's obsessive distractions, as he calls them. Lately, he's been pondering a way to revolutionize email.

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The Wall Street Journal's Heard on the Street column says that eBay's statement that Skype can maximize its potential as a stand-alone company sounds dubious.

Although growing at a rapid rate with 405 millions registered users and a 44% boost in revenue to $551 million, the Skype's free calls between Skype users will limit revenue growth. Isn't the reason people use Skype is because it's free?

Analyst Jim Friedland at Cowen & Co. points out that the more people register to use Skype, the bigger the pool of people who can communicate for free by calling each other.

eBay may already know what a strategic buyer would pay. Its decision to announce a public offering for Skype, weeks after hinting it was willing to sell, suggests no one offered the price it wanted. Source.

Breakingviews.com thinks that while spinning off Skype is a good idea, why not also set PayPal free. The potential $2bn in cash from the Skype IPO would be nice for eBay shareholders who have suffered a 50% fall in the price of its stock price within the last year.

While Ebay’s auction business saw its revenues grow only 1% last year, Paypal’s jumped by 26%, and it expects Paypal’s revenues to double over the next three years to $5bn, with operating profit margins of 20%.

PayPal could be worth $15bn based on using rival payment processor Visa’s 2011 estimated earnings multiple. As an independent company, PayPal could be worth even more since it will no longer be part of a conglomerate discount and it get potentially more business from current eBay competitors like Google and Amazon since it would no longer be part of a rival. Source.

A quartet of private-equity firms have joined forces for a leveraged buyout of a global telecommunications firm with hundreds of millions of users. And no, this isn’t a blog post from 2006.

A group including KKR, Warburg Pincus, Providence and Elevation Partners recently teamed up to back the founders of Skype in an attempt to buy back their free Internet calling service from Ebay, according to people familiar with the bid.

Founders Niklas Zennstrom and Janus Friis originally approached Ebay about repurchasing Skype, which acquired the service for $2.6 billion in 2005. Ebay encouraged them to make an offer, and the Scandinavian billionaires rounded up a group of private-equity firms to back them, the person familiar with the bid said. News of the Skype’s founders’ offer was earlier reported in the New York Times, but names of the private-equity firms have not yet been reported.

The proposal involved private-equity firms contributing some $1 billion to the deal, according to people familiar with the situation, though a full deal price could not be learned. The transaction also involved Ebay providing financing for the deal.

The founders’ offer fell on deaf ears, as it was well below the price at which Ebay was willing to sell the business. The two sides are far apart and at this stage a deal involving the private-equity firms is unlikely to be completed, said people familiar with the matter.

With traditional bank financing unavailable, seller-financed deals have emerged as a trend in recent weeks. Barclays recently announced it would finance buyout shop CVC’s purchase of Barclays’ iShares unit, and Fifth Third is providing loans to private-equity firm Advent International, which is buying the Ohio bank’s payment-processing business.

The offer also underscores how the financial crisis has hobbled the largest private-equity firms. During the credit bubble these shops would join forces to cobble together enough equity so they could pay large premiums for companies. But these days a “club deal” of this sort has more to do with private-equity firms wanting to limit their risk and reduce the size of their equity checks rather than make such a big bet on a risky asset.

Ebay’s largest-ever acquisition has proven a disappointment for the e-commerce company. In 2007 it took a $1.4 billion writedown on the asset, and has acknowledged it would sell the Skype business for the right price.

A Warburg spokeswoman and a KKR spokesman declined to comment. Spokespersons for Providence and Elevation did not immediately respond to requests for comment. An EBay spokesman did not return an immediate request for comment.

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Two years after eBay Inc. purchased online recommendation service StumbleUpon for $75 million, the founders and an investor who sold the start-up have bought it back with the help of two venture capital firms.

The acquisition or should it be called a reverse exit or an un-acquisition, brings the company back to its founders, Garrett Camp and Geoff Smith, as well as original investor Ram Shriram of Sherpalo Ventures. Venture firms Accel Partners and August Capital helped fund the deal, whose terms weren’t disclosed.

StumbleUpon, which helps people discover and share online content, never fully connected with eBay since its May 2007 acquisition. The same could also be said about Ebay’s Internet telephony company Skype Technologies, whose founders are reportedly interested in buying it back after selling it to eBay for $2.6 billion in 2005.

Key to the StumbleUpon deal for investors was that the company had operated relatively independent of eBay and thus remained essentially a start-up, according to David Hornik, partner at August Capital, an early-stage technology investor.

“The operations of the company remained independent and continued to be run by the original founders and managed as a start-up,” Hornik said. “So when there was an opportunity to spin the company back out and give it an opportunity to continue to innovate and grow, it struck me as a great early-stage investment. It had the opportunity to stay in ‘suspended animation’ and now we’re able to pull it out and be able to get back to the basics of building a company.”

Founded in 2001, Stumbleupon raised just $1.5 million from original investors, who made out with a major multiple in the company’s original exit.

Those shareholders included Shriram, a former Google Inc. executive, and other investors who did not participate in the latest deals: First Round Capital and angels including Mitch Kapor, founder of Lotus Development Corp. For First Round, that deal generated a return of more than 10 times First Round’s undisclosed investment, the firm previously told VentureWire.

Hornik believes there will be a number of these types of spin-outs or buybacks to come.

“In economic times like these companies have to rationalize all sorts of opportunities where they acquired a company and it appeared to make sense at the time, but in retrospect it didn’t,” Hornik said. “There are opportunities then to spin those companies out. I suspect there will be plenty of other larger companies that have smaller divisions or business lines that no longer make sense to their core businesses. Investors will be smart to take a look at those.”

Hornik, who declined to say whether eBay is retaining a stake in the company, said he believes StumbleUpon has a number of growth opportunities, and described it as one of the “handful of really interesting companies that brought energy and excitement of consumers back during the rebirth of the Internet.”

StumbleUpon says in that in recent months it has more than 7.4 million users per month delivering 425 million recommendations to the Web site per month. Founded in 2001 in Calgary, StumbleUpon had about 2.3 million users who delivered about 5 million new recommendations at the time of the eBay acquisition.

Now that StumbleUpon is once again independent, the question for investors is who will eventually buy the company down the road. Google Inc. was rumored to also have been interested in acquiring the company in 2007.

But just before the StumbleUpon acquisition by eBay was announced, Google released a feature on its Google Toolbar that took users directly to a recommended site when they clicked an icon with dice on it. That feature is similar to StumbleUpon’s functionality, though unlike StumbleUpon it isn’t known as a standalone application with its own independent following.

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This may be a great time to add shares of Amazon.com to your shopping cart and proceed to checkout.

The stock makes sense because the retailer itself makes sense to smart shoppers. They don't waste valuable gas fighting for a parking space in a massive mall parking lot; they find prices that compete with Wal-Mart's and flirt with the Web's biggest bargains; and they can easily peruse a vast array of merchandise, ranging from gigantic TVs to Elmore Leonard novels to disposable razors. What's more, their purchases tend to get delivered as promised.

The many benefits of the e-tailer's business model are even more apparent in tough times. Amazon's highly automated and centralized operations run at a lower cost than those of traditional retailers, allowing the Seattle company to pass on significant savings to its customers. Rather than truck merchandise to thousands of stores from myriad distribution centers, Amazon picks and packs its items from computerized warehouses where they are shipped direct to a customer's house, just the way founder Jeff Bezos envisioned.

No stores means fewer layers of expense for real estate, employees, inventory and utilities. While traditional outfits like Circuit City and Linens 'N Things have gone belly up, and speculation mounts about the staying power of household names like Sears (ticker: SHLD), among many others, Amazon.com (AMZN) had a strong Christmas season and free cash flow that rose 16% for 2008.

"A lot of consumers are migrating to Amazon," says Walter Price, a veteran technology investor from Allianz Global Investors. "It simply has a better retail model, and it is only getting better," and Bezos has added a couple of kickers, which Price views as options on two nascent Amazon businesses that aren't reflected in the share price.

The e-commerce pioneer always has been pragmatic in finding ways to leverage its operations by running portions of other companies' businesses, from Website check-out services to logistics.

Now, Amazon is taking that a step further by providing Web services, better known these days as "cloud computing." What is cloud computing? It is the outsourcing of information-technology and data-center operations to third parties, mostly by small- and medium-sized companies that choose not to spend their resources to deal with these tasks themselves.

The name cloud derives from the remote ether-like computer space where the outsourced operations take place. Amazon, which has spent more than $2 billion on its systems in the last decade, has divided these services into several parts, including: Amazon Simple DB (databases), Amazon Elastic Compute Cloud (computing capacity) and Amazon Simple Storage (data storage).

Price believes these services could eventually generate hundreds of millions of dollars annually and investors are getting them for almost nothing.

The second kicker is Kindle, a digital-reading device. Its original version was generally well received, but its recently released 2.0 edition has become a hit with consumers. Wall Street analysts estimate the company has sold 350,000 of the devices, which got a plug from Oprah Winfrey last fall. A Kindle runs $359, and it not only generates revenue but protects and promotes Amazon's original business of selling books.

Of course, Amazon's financial performance hasn't gone unnoticed. With a forward-looking price/earnings ratio of 39, you may feel as though you are paying retail for the shares. But valuing them on a cash-flow basis is a more accurate gauge because it takes into account the company's unusually long float period, which allows it to use the cash as working capital.

At a price of 70 on Friday, March 27, 2009, the shares sell at roughly 20 times the company's free cash flow of $1.36 billion, or $3.18 per share, in 2008. That is less than Wal-Mart 's (WMT) free cash flow multiple of 22.6 and Costco 's (COST) 25.4.

Allianz's Price expects free cash flow to grow about 20% annually going forward, without taking potential revenue growth from Kindle or Web services into account. He believes the shares could crack 100 in two to three years, while Piper Jaffray research analyst Gene Munster has a more modest 12-month target of 81 for the stock.

Amazon's business model for billing, inventory and delivery gives the company some unique financial advantages over other retailers. It can carry customer payments on the balance sheet for up to 26 days before it must pay suppliers. The float on that money can help to lower pricing and gives Amazon still more power to grab market share.

"We have a negative operating cycle," Chief Financial Officer Tom Szkutak told investors at a recent Morgan Stanley conference. "So, as we grew, we generated cash from working capital. And we are all about maximizing profit dollars, not individual margins," he said.

"It isn't unreasonable to expect that revenue could double over the next three years," says Price, barring a complete collapse of the economy. Amazon reported 2008 profit of $1.49 a diluted share or $645 million, up 36% from the prior year on $19.17 billion in revenue for fiscal 2008, which was up 28% from 2007.

Because of its other advantages, the e-commerce company tends to follow others' prices without necessarily trying to beat them. "We really want to offer low prices every day...[but breadth of] selection is very key to growth," Szkutak told the conference. Not only does Amazon carry more product categories than ever either through its own e-tail operations or third-party retailers on the site, it also offers more brands and styles per category.

Amazon's strong balance sheet and wide selection stand out even more in this wretched retailing environment, where malls find themselves losing tenants, and tenants find themselves with less and less inventory. Retail sales generally stagnated in 2008 and have dropped nearly 10% for the period December 2008 through February 2009 over the same period a year earlier. With the exception of Wal-Mart, drugstores and warehouse clubs, just about every retail business is off.

That leaves Amazon to pick up the slack. More and more consumers turn to the Web for shopping, with Amazon often the first destination. After a decade of starting their online purchases by searching on Google (GOOG), cybershoppers now make Amazon their default page, knowing that its bots are crawling the Web to identify the lowest prices.

Even e-Bay (EBAY), which tried to compete, recently shifted its focus back toward selling used merchandise. And with less than 10% of all retail sales done over the Internet, there's loads of upside. Price contends that U.S. online sales will account for as much as 20% of total retail sales within the next 10 years.

On top of that, Amazon is grabbing a greater share of online commerce as consumers realize that it is routinely price-competitive, delivers in a timely fashion, and now has arguably the greatest selection of merchandise assembled in one place, albeit in cyberspace, including Wal-Mart.

"E-commerce now starts and ends with Amazon, and eventually it will show up with higher sales," Price says. "As they get more volume, their costs relative to their prices should come down, which should improve their profits over time," he says.

Amazon is also growing overseas. It now ships in six foreign countries, including Germany, Japan and China. For the fourth quarter, international sales of $3.07 billion were 46% of total revenue.

Lower shipping costs also improve the customer's experience. In the early days, Bezos would goose sales with free-shipping promotions. Now he has implemented a "Prime Program" designed to keep shipping costs down while spurring more sales.

For $79 a year, Amazon customers get guaranteed "all-you-can-eat" free shipping on two-day deliveries for most merchandise, excluding bulky items like furniture. Or they can pay $3.99 extra for one-day delivery. Only Amazon can afford to offer those terms and still make a profit because of its huge volume and efficient inventory and shipping operations." Amazon's logistics is its secret sauce," Price says.

One of the reasons Piper's Munster upgraded Amazon to a Buy in early March was a survey his firm conducted that showed 81% of Amazon's customers are satisfied with the retailer, compared to 71% for eBay.

More important, 94% of the respondents said they would recommend the e-tailer to a friend. That score, he says, is reminiscent of Apple 's (AAPL) tally earlier this decade before the iPod, as well as Netflix 's (NFLX) rating prior to its breakthrough. In both cases the scores presaged big runs in the stocks to record highs.

"It's a leading indicator," says Munster. Goldman Sachs analyst James Mitchell was impressed by Amazon's 15% increase in year-over-year gross profit and 9% jump year-over-year in operating profit. The fact that it could grow profitably during one of the worst holiday shopping seasons ever meant Amazon wasn't just "buying" revenue via discounted pricing, noted Mitchell.

Majestic Research predicts Amazon is on track to at least meet expectations on revenue for its first quarter ending March 31, 2009, adding that sales have begun to accelerate and could actually exceed Street estimates for the quarter.

After spending billions to build the technology that drives its retail operation, Amazon, at its heart, is a tech company. As a result, it is always looking for ways to leverage operations, which is why it is pioneering areas like cloud computing. Tech researcher Gartner Research forecasts that, industry wide, this category will reach $56.3 billion in revenue in 2009, a 21.3% gain over 2008. The market is projected to reach $150 billion in 2013.

The notion of trusting your entire enterprise-computing needs to someone else is controversial and meets with resistance by big corporations. But small- to medium-sized companies, especially start-up software developers, embrace the trend. Adam Selipsky, a vice president of Web Services at Amazon, told trade publication Intelligent Enterprise that there are three reasons for companies to switch to its cloud: efficiency, economics and performance.

Start-up software companies are among Amazon's biggest Web-services clients. They can develop code and deliver software using Amazon's delivery infrastructure, paying only for the computing power they use and leaving the data center headaches to Amazon. This allows start-ups to build their businesses without a lot of upfront cost, which is especially attractive during this period of tight capital.

Amazon isn't competing with Nordstrom (JWN) or Sears in this marketplace. It's going up against the likes of IBM (IBM), Google, and Microsoft (MSFT). But Price thinks Amazon has an edge over Google, because Amazon's systems use computer languages that are more open and flexible. Plus, the company is already geared toward handling outsourcing in other parts of its operations, so adding data-center services is just a natural extension, Price argues.

Tech Crunch, an online-technology publication, estimates that 60,000 corporate customers are using Amazon Web Services. Amazon wouldn't confirm that number.

Kindle is another example of Amazon's technology prowess. The electronic book reader is arguably superior to a similar gadget developed by Japanese consumer-electronics giant Sony (SNE). It even has prompted comparisons to Apple's iPod and iTunes. Kindle allows people to carry entire libraries of digital books on one device, and it focuses their selections on Amazon's list of offerings.

It also provides potential growth from the device itself. That won't provide a huge boost to sales in the short term, but the Kindle could improve margins, says JPMorgan Chase analyst Imran Khan. For the iPod, Apple has to pay for intellectual-property rights on songs and movies; and Amazon must pay book publishers for its digital content. But both "playback"devices are proprietary.

According to some analysts, it isn't a stretch to see Kindle's estimated 350,000 unit sales hitting one million this year. Goldman's Mitchell, for one, predicts Amazon may double or triple Kindle sales in 2009 based on demand built not only by the Oprah endorsement, but by an increasingly broad range of book titles, and sales to overseas markets such as Germany and Japan.

If Amazon can build a big Kindle user base, it could raise barriers to entry in the eBook market, lower per-book marketing costs, reduce fulfillment costs, and increase revenue , all of which would lead to higher margins, Khan argues.

Needless to say, fulfillment costs on a digital download are a lot lower than those on a book delivered via an overnight shipper. Fulfillment costs took an 8.3% bite out of Amazon's revenue last fiscal year, whereas the cost of delivering an eBook would account for about 2% to 3% of total revenue.

Khan more conservatively forecasts Amazon to sell another 500,000 Kindles in 2009, adding $63 million in fiscal 2009 revenue, or two cents earnings per share. He predicts Amazon will sell 12 million eBook downloads during the fiscal year. Every two million book downloads equals about a penny a share in annual earnings, Khan says.

There is more than a comparison with Apple; there is compatibility. The Kindle reader application is now available for the Apple iPhone, which will expand Kindle's reach beyond avid book readers. Another potential boon: schools and colleges, if Amazon successfully taps the textbook market.

Of course, there are risks. Just last week the company said it would close three distribution centers, laying off or transferring 210 workers, to fine-tune its business. And whenever investors pay up for growth, there is always the chance that revenue can disappoint.

Amazon is hardly immune from the crash in consumer spending. If it gets much worse, the company will surely suffer. As it becomes a more global entity, foreign-currency swings can have a negative impact on revenue, too.

During the dot-com boom, shopping over the Internet was an exotic experiment. Today, Bezos' Amazon has created an experience that is often more satisfying than shopping at an understaffed mall store with depleted inventories. With more selection, less hassle and faster checkout, and with competitive pricing thrown in, you have the world's best retailer, albeit one whose shares trade at a technology multiple.

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The top 10 stocks of the Yacktman Focused Fund (YAFFX) comprise nearly 70% of total assets. "We feel like we ought to focus our money on our best ideas," Yacktman says, rather than take "a Noah's Ark approach with two of every kind."

That approach has helped consistently put the fund at the top of its category. Based on annual returns, the fund ranks among the top five large value funds for the most recent one, three and 10-year periods, according to Morningstar.

Over the last 10 years, Yacktman's fund has produced an annualized total return of 2.5%, six points better than the Standard & Poor's 500.

The current climate now has Yacktman putting any leftover cash to work in names you might not consider. The fund's top holding is AmeriCredit (ACF), an auto-financing company that now trades at a 64% discount to its book value. The fund manager has also made a big bet in media stocks, such as Viacom (VIAB) and Liberty Media (LINTA).

We recently asked Yacktman about his investing strategies:

Barrons.com: As a value investor, has your investment criteria changed in the current climate?

A: No. We've done the same thing for years. There may be slight nuances hopefully improving the process, but it's the same basic process. When the market is up we tend to start having a harder time finding things to buy. We end up owning fewer stocks, and you'll find there is a component of cash in there. Going into last year, I think we had close to 30% in cash.

Now my feeling is if you are a value investor and you're not fully invested, then there is a disconnect because there are plenty of things out there to justify buying in this environment at low prices.

Q: So is this something of a dream market for value investors?

A: Sure. These are the kind of times where you may say, I wish I waited a little longer. We tend to be early on average. But you feel very comfortable on a long-term basis. And we have a 10-year horizon time. So we just don't think in terms of 10 days or 10 weeks or 10 months. An investor who thinks in those terms is going to be frustrated and whipsawed potentially. But somebody who can have that long horizon time will have a high-comfort index in this market.

Q: How do you pick stocks in this environment?

A: You stick to objectivity, and you should look at the long term. When I hear somebody talk about 15% growth rates indefinitely, I think that's just not realistic. So you come up with some realistic normalized numbers. Most of the companies we have tend not to be wildly cyclical. Their earnings aren't as gyrating as say an auto company or an airline.

In the fourth quarter and the last few months we have honed in on sectors like media, health care and insurance. So that has some cyclicality but they're low capital requirements.

Q: What are some of your favorite stocks right now?

A: You look at the largest holdings in our top 10 and the top three would be Coca-Cola (KO), AmeriCredit and Viacom. But if you look at the top 10 you will notice there is Viacom, eBay (EBAY), News Corp. (NWSA) and Liberty Media (LINTA), [which includes the QVC retail channel. News Corp, (parent of Dow Jones, the publisher of Barrons.com) cracks the top 10 of Yacktman's flagship fund (YACKX) but wasn't a top holding in the focused fund, as of Dec. 31, 2008.]

So there's a lot of media in there and the theme is very similar in a lot of ways in that they tend to use TV or media; they're heavily TV oriented. What has killed them is the advertising has just dried up dramatically in this environment. Yet they are very good businesses, and, long term, I think they will make very nice returns.

Q: So on the media side, are you particularly interested in the TV business?

A: I just think they are good businesses, and they are cheap. If you look at the list of properties that Viacom has, it's things like MTV, Nickelodeon and Comedy Central, but the stock has been under pressure.

Q: Do you think the advertising on television will come back?

A: To some degree. One of the problems is virtually every consumer company is trying to find where they can get eyeballs. It's tougher and tougher. The media world is more diversified, and it is much more difficult to hit [consumers] than it was 10 or 20 years ago when you had just a few networks.

Q: That said, with 20% of your fund currently invested in media do you think these companies are the ones that will or can figure it out?

A: I think they are some of the best ones. Part of the problem with Viacom was they were under tremendous pressure because National Amusements owns a lot of their stock and had some leverage, and I think people were nervous about it.

Q: Are those the kind of events that scare a lot of investors that you are willing to look past in finding value?

A: We view the market as kind of a manic depressant. We are constantly looking at news events, and when companies hit the headlines with negative news, that is usually the time to start sifting through and looking at the numbers. We do our own research. We aren't relying on somebody else for making decisions. But what happens is a lot of the other research may accelerate our learning curve, so that's why we have it available to us. But I think that's what separates the men from the boys.

Q: What else is on your mind in picking stocks right now?

A: I really don't like to spend a lot of time on macro issues, because the reality is that it is the specific investment choices that really make the money. Fortunately there are plenty of good opportunities out there. But I would be very concerned about holding a lot of cash, and that's where people are moving toward. I think that's just the wrong place because when the economy does turn and things improve, it looks like there is going to be an awful lot of inflationary pressure.

Q: So do you guys have a position in gold?

A: No gold. I would rather have Coca-Cola than gold any day of the week. The ability [for them] to raise prices is like a machine that prints money.

Q: Thanks for your time.

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The recession’s damage to Silicon Valley goes beyond falling stock prices and depressed profits. The downturn has renewed attempts to restrict visas for skilled immigrants. If anything, the US should consider slackening its rules instead.

Granting more visas for high-tech immigrant workers, known as H-1Bs, was a hot topic before the economy went into reverse. Now they’re perfect political toast. The US stimulus bill included an amendment forbidding any institution receiving Tarp money from hiring H-1B workers. Senator Chuck Grassley, one of the amendment’s authors, sent a letter to Microsoft telling the company to fire foreign workers before American citizens.

Now Grassley and Senator Dick Durbin want to add further restrictions to the H-1B visa programme. Their legislation aims to limit the number of workers that outsource companies, such as India’s Infosys, bring to the US. If passed, the provision would make it harder for all companies to hire foreign workers.

The legislation would be particularly toxic for Silicon Valley. H-1B visas may be temporary and forbid holders from working in self-employment, but the benefits to the US are still high. A 1% rise in the share of immigrant college graduates in the population increases the total number of new patents by 6%, according to a study by Jennifer Hunt of McGill University and Marjolaine Gauthier-Loiselle of Princeton University. The benefits are long-lasting too. Many visa holders eventually settle permanently in the US, make money and pay lots of taxes.

Indeed, foreign workers found 52% of all technology startups, according to Duke University professor Vivek Wadha. Some of them, or their offspring, have even created giants. Google co-founder Sergey Brin is a native of Russia. Andy Grove, a Hungarian-American, was Intel’s third employee. And Ebay was started by French-born Iranian-American Pierre Omidyar.

If the US wants more Silicon Valley powerhouses, loosening the H-1B rules would be a good place to start. True, only 65,000 visas are issued each year. And hard times reduce immigration, so the damage might not be immediately felt. But placing artificial constraints on the flow of highly educated and skilled workers is short-sighted. When the global economy recovers, the US should want the best minds available to capitalise on it.

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