Thursday, January 26, 2006

Misunderstanding Consolidating Industries: A Lesson From Schumpeter

Two of our nation's large daily papers contained articles this week which shared a common misunderstanding of the implications of sector consolidation.

A friend sent me the New York Times piece on Les Moonves' newly hatched television network hookup with Time Warner's WB. The new network, a combination of CBS's UPN with WB, to be known as CW, should be somewhere south of the #3 broadcast network.

Meanwhile, Jesse Eissinger wrote about GM's woes, and some second-tier sell-side analyst's wacky scheme for giving the thing to the employees to run, in yesterday's Wall Street Journal.

Now, I will grant Mr. Moonves his "midas touch" with programming. However, sadly, that does not a CEO make. It's all well and good to stanch the bleeding fiscal wound that has been UPN, but it doesn't mean CBS is suddenly reinvigorated by this combination. I think, at best, it's triage.

So, is it me, or do the writers in the business section of the Times not understand what this consolidation really means? The Big 3 broadcasters are already worried about their survivability in current form. What do you think this means for the smaller broadcasters? In this case, consolidation means the entire sector is finally succumbing to competitive pressure from cable, satellite, and, yes, the internet. The last of these is now nearly indistinguishable from digital cable, in that both will allow users to watch what they want, when the want.

Presto....chango......and the broadcasters vanish! I'm not sure Harry Houdini would be able to make them reappear again, at least not in recognizable form.

Now to Mr Eissinger's handwringing about GM. He begins by noting that the firm is once again, with Ford, making huge capacity and employee cuts, while foreign-based auto manufacturers continue to put up more plants and hire more workers in the US. So far, so good. He understands that Ford and GM are poorly-run companies on their way into bankruptcy.

Then Mr. Eissinger loses his perspective, and begins to wail about how important it is for the US that GM be preserved.

First, let me say that this is his second really ill-conceived article in the Journal within a fairly short timespan. I can hardly wait for strike three. Frankly, I'm beginning to wonder why he is still on the paper's staff, unless it is to be their new "Al Hunt" in training.

Second, Eissinger, like the Times writer, has it all wrong.

Joseph Schumpeter first wrote about the (now overused to the point of naseau-induction) "gale of creative destruction" in the 1920s. That is what we are seeing in these two industries now.

Both sectors, broadcast television and automobile manufacturing, have become much less value-adding than they were as recently as a decade ago. So it is no wonder that resources are being pulled out of them, voluntarily or not, to feed new sectors. In this case, ironically, probably the same new one- online communications. It is clear that broadcast television is being devoured by cable and the internet. It may well be argued that these same advances have resulted in a lessening of primary demand for vehicles of the type Detroit-based manufacturers have produced, making them less important as well.

In any case, neither demise is by any means lethal for our Republic. Nor should they surprise us. If the largest phone company on earth, AT&T, could have vanished without a trace, why should the disappearance of broadcast networks and auto makers be any different? UPN's and WB's is a totally predictable, but not very important, event from an industrial structure viewpoint. GM's demise is actually a good thing. There is way too much capacity in that sector as it is, and the weakest firm is the one most likely to die first.

Do you really want to commit serious capital to an industry, such as auto making, where most of the value-adding is now done in the design function, whereas most of the components are produced by parts vendors? Vehicle production is more assembly than "manufacturing" nowadays. It's arguable that a billionaire could profitably hire a team to design cars, license dealers to sell them, and job out the actual assembly via competitive bidding to some current car "manufacturer."

When the provision of a service or product such as these companies offer becomes so commoditized that consolidation is necessary to achieve any semblance of profitability, that's a good thing for consumers in terms of living standards and quality of life. This is what Schumpeter saw before anyone else. The perennial gale of resource reuse among sectors is the hallmark of a successful, dynamic economy in which consumers continually enjoy increased living standards, while resources are productively recycled.

The UPN/WB merger is a good, but probably not very earthshaking development. Whether it marks Moonves as a great CEO is unclear at this time, but it does mark him as a pragmatic, informed one. And that alone may signal that he is on his way to success in the role. The GM crisis is, as Eissinger ruminated, the beginning of the end for the weakest player in an overcrowded global vehicle production sector.

The markets are working as intended. Here's to better living standards from the most productive resource "recycling" that our society ever does.

Wednesday, January 25, 2006

Ford's New Way Forward

It was with a fair degree of irony that I read in Monday's Wall Street Journal about Bill Ford's "way forward" on the very same page as an article about knowledge management and transfer.

Suffice to say that I think Ford is in far more serious trouble than it probably realizes, and more trouble than a few plant closings will solve.

When a CEO begins to tout his, and his company's, sudden embrace of basic marketing concepts taught to me, literally, in my introductory marketing course, MK100, 30 years ago, you know his company is in deep, deep trouble.

The salient strength of any company, and a salient measurement of my equity portfolio strategy's selection process, is success at identifying and selling to the right mix of segments in a company's market. If this is flawed, there is no basis for longterm consistently superior fundamental performance of the type that brings consistently superior total return performance over time, either.

What really struck me, however, is that this is at least the third time in 20 years that Ford has had to tout its (re) conversion to basic marketing. Is it not ironic that in the same issue of the Journal, on the same page, another article discusses how to recover important management and operations information within a company, and disseminate it among employees? When I was with Accenture, this was typically called "best practices". You would think that Bill Ford and his team might have invited Ford's erstwhile, successful Chairman/CEO team of Don Peterson and Harold "Red" Poling from the late '80s and early '90s, in for coffee, or more, to pick their brains.

From what I have read this morning in googled articles from that era, Poling had to do essentially what Bill Ford is attempting again. Maybe the latter has talked to the former, in private. For the shareholders' sakes, I hope so.

In the meantime, though, I wouldn't be buying Ford's stock. It may beat the odds and actually turn around in time, but it seems like an overly risky proposition to me. Any company that has to rediscover the sine qua non of a successful enterprise, which is great marketing and marketing strategy, is a poor bet for longterm consistently superior performance. In the auto sector, I'd even say it's more a question of survival, now, rather than longterm performance.

Tuesday, January 24, 2006

The Real Meaning of Disney's Acquisition of Pixar

Out of curiosity, I watched the CNBC coverage of the Iger-Jobs announcement of Disney's acquisition of Pixar this afternoon. To say it was anticlimactic is an understatement.

Of far more interest, I found, were the various pundits and analysts weighing in with opinions on the brewing deal throughout the day. My favorite is a guy whose name escapes me, but is a contributing editor to Vanity Fair.

He stated what I believe is the most lucid and informed view of the combination. A view which I share.

Basically, he felt that, had Michael Eisner spent more wisely over the past 5-10 years, Disney would have had a capable team of new animators to drive a more integrated, home-grown value-adding capability for more digitally animated movies.

Instead, Eisner skimped, and drove off other talented Disney senior managers, leaving the company to rely on an outsider, Pixar, for most of the value-added components to its animated features. The result is a $7B price tag for Disney's existing shareholders.

The commentator went on to note that Disney already owns the rights to distribute the current and next animated films from Pixar. Thus, the $7B is being paid for future efforts. A well-regarded senior Pixar employee, John Lasseter, director of animation, was mentioned as certainly costing much less than $7B to recruit to Disney.

Despite all the hoopla about this combination, and what it means for Apple, Disney and digital media content development and distribution, it really seems to be a very simple story.

Disney has been mismanaged for a decade, and lost control of the evolving digital animation components for its signature feature films. Steve Jobs, while wandering out in the wilderness during his exile from Apple, founded Pixar. The latter ultimately came to provide what Disney shortsightedly failed to develop- digital animated content creation. The result is a $7B tab presented today to Disney shareholders, further enriching Steve Jobs and partners.

Nevermind the nattering about Jobs and Iger, or Disney and Apple, or Pixar and Apple. Even your grandmother knows, at this point, that all the entertainment and other content shops are going to be looking to distribute digital media content onto every handheld, wireless, desktop and laptop device they can, anyway they can. Jobs and Apple, aside from their current lead in music, probably don't have that much of a conceptual advantage in this regard.

No, this story is solely about Disney's failure under Eisner to invest for the future, and Iger's need to purchase Pixar in order to gain control of the creative engine for digital animated feature-length films in the future.

Credit Iger with saying not a word about his predecessor's mistake. And with being able to get Jobs to the negotiating table. It's not Iger's fault that this was a necessary step for Disney. However, that said, I don't think it materially enhances Disney's value. It probably just keeps it from deteriorating in the near future. Marriages of creative functions and companies are fraught with peril.

Stay tuned to see if this one follows the usual script.....