My partner and I had a long discussion last week about the recent scuffle between NTP and Research In Motion. RIM, as the latter is better known, produces and markets the ubiquitous Blackberry.
As I understand it, the major interests in this debacle have staked out two, opposing positions. On one hand, you have large corporations, such as Intel, RIM, and others, who feel that ownership of patents which they require for their own products and services, when in the possession of a company which does not itself market a competing service, is moot. If a company does not market a product, then it is viewed as a "patent troller" which has scooped up a valuable patent solely to impede, and extract a financial windfall from, a larger company that markets an affected product or service.
The general counsel of Intel wrote an editorial in the Wall Street Journal this week protesting that NTP had 'played chicken' with RIM, threatening to shut down its Blackberry service.
On the other hand, you have the patent owners. They feel that the US legal system, and patent law, entitles them to non-infringement of their patent, on penalty of the offending party being directed to cease violating the patent, or come to a settlement.
This seems very clear to me. Intel and its ilk are attempting to use their size and power to unlawfully take what patents are in their way. If you have ever dealt with a large corporation, then you know that their financial staying power, their "deep pockets," can fend off a smaller patent holder for decades without restitution.
Does anyone else recall the infamous case of the inventor of the variable-speed car windshield wiper? He sued Ford for infringement. It took many years, while Ford callously dismissed his attempts to protect his patent rights. As I recall, he won damages from Ford and the other major auto makers who had purloined his invention.
So, in my opinion, RIM and Intel are spouting an entirely self-serving line of reasoning. They claim that they give inventors a "fair royalty" for their patent interests. But is it not true that each case is different? Who can say whether RIM adds more value to a Blackberry if it does not own a key patent for the service? It's entirely up to the two parties to determine what the relative values are, or if there will be a Blackberry. Too bad RIM's management was so sloppy as to let the matter get to this point.
Why does it matter whether the patent holder is the actual inventor, or a purchaser of the patent from the inventor? If it is the latter, does this not indicate that the large corporation in question pursued a flawed product strategy by neglecting to either secure the patent itself, or buy the rights before marketing the affected product? It seems obvious to me that if you market a product and don't control a key patent, then you have found yourself a new partner, or you don't have a product.
It's not like the RIM decision will squelch innovation. Far from it. Now, small inventors everywhere know that their patent rights are less liable to be taken illegally by larger companies. I think it is shameful that a company like Intel allows its general counsel to write an article like the one published in this week's Wall Street Journal decrying the RIM settlement.
Thursday, March 09, 2006
The "New" AT&T Part 3 : Innovation
There is one other personal experienced-based observation I'd like to add in this series of posts. It concerns the old AT&T, and innovation.
The AT&T that I joined in 1979 was a very effective hindrance to telecommunication innovation. There is no doubt in my mind that, without the breakup of the firm in 1983, we would not be enjoying much of the information revolution that has occurred since then.
What most people probably do not recall is that the DOJ's requested remedy for AT&T's alleged monopolistic practices was the divestiture of the equipment design and manufacture business units. These were key to AT&T's profitability and control over the market.
By using creative and aggressive transfer pricing when "selling" equipment manufactured by AT&T's Western Electric unit to the wholly-owned operating telephone companies, AT&T boosted the fixed asset base on which it was allowed to collect a rate of return by the various regulatory authorities. The company zealously guarded this equipment monopoly by delaying the vetting of "foreign" equipment for safe connection to "the network." Thus, both price and non-price means assured AT&T of many years of control over its marketplace.
Thanks to this type of management, end users of telephones in the US saw, in the 1960s, the introduction of the Princess phone, with a lighted dial. That was about it. A decade later, you got a push-button phone, to replace the dial. That was because it was cheaper to produce and maintain the telephone you were forced to lease, rather than allowed to buy. It wasn't to give you more features.
I can attest, from my experience in the Business Marketing group of AT&T's premises equipment business, that we were seriously hampered in our plans to address the future without end-to-end control of information management. Of particular concern was our need to interface, and exchange and store content with and from, computers.
The mere lack of a single network management entity in the US post-1983 contributed a great deal to the growth in creative uses of information, if for no other reason than the removal of a skilled, experienced and monolithic influence on telecommunications policy and legislation- the old AT&T.
So, while it may appear that the 1980s era breakup of AT&T has now been substantially nullified, I don't think that's true. We are experiencing communications technology change and benefits at heretofore unheard of rates, and I believe that is the direct result of the demise of the "old" AT&T.
The AT&T that I joined in 1979 was a very effective hindrance to telecommunication innovation. There is no doubt in my mind that, without the breakup of the firm in 1983, we would not be enjoying much of the information revolution that has occurred since then.
What most people probably do not recall is that the DOJ's requested remedy for AT&T's alleged monopolistic practices was the divestiture of the equipment design and manufacture business units. These were key to AT&T's profitability and control over the market.
By using creative and aggressive transfer pricing when "selling" equipment manufactured by AT&T's Western Electric unit to the wholly-owned operating telephone companies, AT&T boosted the fixed asset base on which it was allowed to collect a rate of return by the various regulatory authorities. The company zealously guarded this equipment monopoly by delaying the vetting of "foreign" equipment for safe connection to "the network." Thus, both price and non-price means assured AT&T of many years of control over its marketplace.
Thanks to this type of management, end users of telephones in the US saw, in the 1960s, the introduction of the Princess phone, with a lighted dial. That was about it. A decade later, you got a push-button phone, to replace the dial. That was because it was cheaper to produce and maintain the telephone you were forced to lease, rather than allowed to buy. It wasn't to give you more features.
I can attest, from my experience in the Business Marketing group of AT&T's premises equipment business, that we were seriously hampered in our plans to address the future without end-to-end control of information management. Of particular concern was our need to interface, and exchange and store content with and from, computers.
The mere lack of a single network management entity in the US post-1983 contributed a great deal to the growth in creative uses of information, if for no other reason than the removal of a skilled, experienced and monolithic influence on telecommunications policy and legislation- the old AT&T.
So, while it may appear that the 1980s era breakup of AT&T has now been substantially nullified, I don't think that's true. We are experiencing communications technology change and benefits at heretofore unheard of rates, and I believe that is the direct result of the demise of the "old" AT&T.
The "New" AT&T Part 2 : Content vs. Delivery
It strikes me as odd that most, if not all of the commentators and analysts addressing the AT&T-BellSouth merger focus on an apparent future of content over digital wideband loops, without coldly assessing the skills of the company's to do so.
For example, I asked my partner today at lunch if he thought it would be reasonable for GM to enter the online video content business. He replied he thought not, because it's not something they have ever done before, and there is already competent competition. Just so.
Thus, I can't understand why anyone would think a phone company could enter the content business, either. Phone companies are the ultimate delivery business. Since inception, they have focused purely on connectivity, being a "pipe," not on the content over the pipe. Why would anyone think they have any relevant expertise in the hoped-for revenue-growth enhancing areas of video and other content-on-demand?
What is more likely, per Holman Jenkins' WSJ piece yesterday, is that AT&T, Verizon, which is spending like crazy on fiber, and the cable companies will all see the value of their physical high-speed connectivity assets fall with the coming of ubiquitous, high-speed wireless wideband access.
The game, for Verizon and AT&T, seems to be to add high-speed access revenues before the declining landline business forces them to the brink of insolvency. Cable companies are likely to be reduced to carriage, too, as much of their television content revenues become priced per-usage as online access consumption.
To me, this is appropriately Schumpterian. As Jenkins wrote yesterday, these investments are not guaranteed- they are, whether realized or not, just attempts at survival in a very uncertain competitive environment.
One thing continues to stick out in my mind this week, as I continue to reflect on the merger. Lately, I have reconnected with one of my earliest, post-graduate school supervisors for whom I worked at AT&T over 25 years ago. He's still in the area, with a telecom consulting firm. At the time he and I worked together, a then-upstart consulting firm, The Yankee Group, would publish regular pieces on AT&T and its premises equipment business efforts. However, the image I still recall is a chart showing net positive cashflow over time, beginning in about 1975. The line was headed solidly downward even then. AT&T was pouring cash into its efforts to fend off competition and prepare for some sort of deregulated environment. It was obvious to me, as I contemplated that macro view with my growing knowledge of our competitive positions in various product markets, that the entire business was headed for greater customer features, functions and services, at ever-shrinking margins and price levels.
I don't think that has ever stopped. This week's merger is really just a continuation, punctuated temporarily by Judge Greene's mistaken ruling, of that trend. The combination will help lessen some of the operating costs for AT&T, but it can't affect the continuing downward pressure on its revenues.
As I sit here writing these two posts, I sit only ten miles from the headquarters of the "old" AT&T, where I once worked. Mapquest tells me it is eighteen hundred miles from here to the "new" AT&T headquarters in San Antonio. It sure doesn't feel that the company has moved very far, or that very much has changed in terms of its fortunes.
For example, I asked my partner today at lunch if he thought it would be reasonable for GM to enter the online video content business. He replied he thought not, because it's not something they have ever done before, and there is already competent competition. Just so.
Thus, I can't understand why anyone would think a phone company could enter the content business, either. Phone companies are the ultimate delivery business. Since inception, they have focused purely on connectivity, being a "pipe," not on the content over the pipe. Why would anyone think they have any relevant expertise in the hoped-for revenue-growth enhancing areas of video and other content-on-demand?
What is more likely, per Holman Jenkins' WSJ piece yesterday, is that AT&T, Verizon, which is spending like crazy on fiber, and the cable companies will all see the value of their physical high-speed connectivity assets fall with the coming of ubiquitous, high-speed wireless wideband access.
The game, for Verizon and AT&T, seems to be to add high-speed access revenues before the declining landline business forces them to the brink of insolvency. Cable companies are likely to be reduced to carriage, too, as much of their television content revenues become priced per-usage as online access consumption.
To me, this is appropriately Schumpterian. As Jenkins wrote yesterday, these investments are not guaranteed- they are, whether realized or not, just attempts at survival in a very uncertain competitive environment.
One thing continues to stick out in my mind this week, as I continue to reflect on the merger. Lately, I have reconnected with one of my earliest, post-graduate school supervisors for whom I worked at AT&T over 25 years ago. He's still in the area, with a telecom consulting firm. At the time he and I worked together, a then-upstart consulting firm, The Yankee Group, would publish regular pieces on AT&T and its premises equipment business efforts. However, the image I still recall is a chart showing net positive cashflow over time, beginning in about 1975. The line was headed solidly downward even then. AT&T was pouring cash into its efforts to fend off competition and prepare for some sort of deregulated environment. It was obvious to me, as I contemplated that macro view with my growing knowledge of our competitive positions in various product markets, that the entire business was headed for greater customer features, functions and services, at ever-shrinking margins and price levels.
I don't think that has ever stopped. This week's merger is really just a continuation, punctuated temporarily by Judge Greene's mistaken ruling, of that trend. The combination will help lessen some of the operating costs for AT&T, but it can't affect the continuing downward pressure on its revenues.
As I sit here writing these two posts, I sit only ten miles from the headquarters of the "old" AT&T, where I once worked. Mapquest tells me it is eighteen hundred miles from here to the "new" AT&T headquarters in San Antonio. It sure doesn't feel that the company has moved very far, or that very much has changed in terms of its fortunes.
The "New" AT&T Part 1
It has taken me all week to reflect on the news this past Monday that the "new" AT&T now includes BellSouth.
While others, with shorter memories and less visceral experience in the matter than me, have quickly analyzed the event in terms of current market opportunities, I take a different, multi-faceted approach in my response.
First, I must credit Alan Murray and Holman Jenkins, Jr., both of the Wall Street Journal, for their excellent written and spoken pieces this week regarding the ATT-BellSouth merger. In email exchanges with both of them, I confirmed that, beyond agreeing with their thoughts and insights, they also largely agree with my own further musings.
As both of them wrote, this is primarily a defensive move on the part of two aging CEOs who hail from the days of the original MFJ- the Modified Final Judgement which split the old AT&T into the various parts, including the seven regional bell holding companies. Despite Judge Greene's animosity toward AT&T, stemming from his involvement in an earlier antitrust case, as part of the DOJ, and his consequent decision to split the company up, much of AT&T's structure was always a necessity of minimum economic size in the telecommunications industry.
The problem was never with the monopoly on local, or even long-distance, services. It was with the cross-subsidization of equipment design and manufacture by local and toll call revenues. In fact, this was the actual relief sought by the DOJ when they brought the case. And, in the end, it probably would have been better for everyone had Charlie Brown, then-CEO of AT&T, simply acceded to the DOJ's wishes.
So, this week's reunification of more pieces of the old local service monopoly simply demonstrates that even Judge Greene's venom could not overwhelm the longer-term economic laws of costs and revenues in this sector. The purveyors of old, landline-based telecommunications are in a bad spot now. This merger may stave off economic hardship for the two companies, but it in no way has anything to do with their future growth.
Holman Jenkins, Jr.'s piece provided detail on this point. I will go further. Cellular and broadband internet access are already destroying the remaining landline telephonic revenue streams of Verizon, AT&T, and Qwest. They are fervently hoping to somehow play in the new world of broadband content before they implode with the unplugging of the last landline phone. Mr. Jenkins pointed to the arrival of WiMax as causing the ultimate collapse of even the cable monopolies. He is right.
The key point about this entire situation is that it is, as Mr. Jenkins ends his piece, "far from over." Telephone companies must, to merely survive, migrate from copper wires, but even this massively expensive move doesn't guarantee them anything. Ask Mike Armstrong, one-time CEO of the failed "old" AT&T's similar strategy. By the way, I stand by my remarks of a few months ago, that the AT&T name should be retired, in order not to make it endure the same failure, twice, by different inept managers.
To Be Continued in Part 2- Content vs. Delivery
While others, with shorter memories and less visceral experience in the matter than me, have quickly analyzed the event in terms of current market opportunities, I take a different, multi-faceted approach in my response.
First, I must credit Alan Murray and Holman Jenkins, Jr., both of the Wall Street Journal, for their excellent written and spoken pieces this week regarding the ATT-BellSouth merger. In email exchanges with both of them, I confirmed that, beyond agreeing with their thoughts and insights, they also largely agree with my own further musings.
As both of them wrote, this is primarily a defensive move on the part of two aging CEOs who hail from the days of the original MFJ- the Modified Final Judgement which split the old AT&T into the various parts, including the seven regional bell holding companies. Despite Judge Greene's animosity toward AT&T, stemming from his involvement in an earlier antitrust case, as part of the DOJ, and his consequent decision to split the company up, much of AT&T's structure was always a necessity of minimum economic size in the telecommunications industry.
The problem was never with the monopoly on local, or even long-distance, services. It was with the cross-subsidization of equipment design and manufacture by local and toll call revenues. In fact, this was the actual relief sought by the DOJ when they brought the case. And, in the end, it probably would have been better for everyone had Charlie Brown, then-CEO of AT&T, simply acceded to the DOJ's wishes.
So, this week's reunification of more pieces of the old local service monopoly simply demonstrates that even Judge Greene's venom could not overwhelm the longer-term economic laws of costs and revenues in this sector. The purveyors of old, landline-based telecommunications are in a bad spot now. This merger may stave off economic hardship for the two companies, but it in no way has anything to do with their future growth.
Holman Jenkins, Jr.'s piece provided detail on this point. I will go further. Cellular and broadband internet access are already destroying the remaining landline telephonic revenue streams of Verizon, AT&T, and Qwest. They are fervently hoping to somehow play in the new world of broadband content before they implode with the unplugging of the last landline phone. Mr. Jenkins pointed to the arrival of WiMax as causing the ultimate collapse of even the cable monopolies. He is right.
The key point about this entire situation is that it is, as Mr. Jenkins ends his piece, "far from over." Telephone companies must, to merely survive, migrate from copper wires, but even this massively expensive move doesn't guarantee them anything. Ask Mike Armstrong, one-time CEO of the failed "old" AT&T's similar strategy. By the way, I stand by my remarks of a few months ago, that the AT&T name should be retired, in order not to make it endure the same failure, twice, by different inept managers.
To Be Continued in Part 2- Content vs. Delivery
Sunday, March 05, 2006
Rewarding Losers: GE
It was only last Tuesday that I wrote of my reaction to Fortune Magazine's recent "most admired companies" survey.
At that time, I discussed GE CEO Jeff Immelt's inferior record of shareholder wealth creation, in comparison to the S&P500 index, over the past 5 years. Yesterday's Wall Street Journal provided the particulars.
In a piece buried inside the lead section, Immelt's 2005 compensation is described, along GE's continued lackluster performance. Let me get right to the heart of this piece. The WSJ piece states that Immelt owns just "...800,000 shares of his company's stock, valued at $29.1 million based on GE's $33.06 share price......Mr. Immelt receives quarterly dividends on his performance shares; he received $1 million in cash dividends in 2005, the company said."
What did not surprise me is that Immelt's 2005 salary was $3.2 million, and this year's is set at $3.3 million. He also received a cash bonus of $5.3 million in 2004.
The article goes on to detail Immelt's "request" that various performance, or bonus, shares of GE stock awarded to him be "totally aligned" with shareholders. Measures used are to include revenue, cash flow, earnings/share, and return on capital. Oh, and Immelt said he will not keep half of a 180,000 share bonus grant if total returns on GE stock don't beat those of the S&P500 over a two-year period.
Thus, despite Immelt's apparent concern with his company's shares, and their performance relative to the S&P, we see that Immelt is already a very wealthy man, any GE performance notwithstanding. At roughly $3.2 million per year since 2001, plus the $5.3 million 2004 bonus, he's already cleared at least $21 million pre-tax for heading up GE in the wake of Welch's departure. This is for running the company so that it underperforms the S&P500.
That's right. Some guy down at Vanguard in Philadelphia is getting paid probably no more than hald a million dollars a year, tops, for running a bare-bones index fund that gives its shareholders a better annual return over five years than Immelt has gotten for his shareholders. I'f I'm wrong on the Vanguard manager's compensation by a factor of 2, he's still only getting paid a tenth of Immelt's largesse, although he has outperformed the latter.
This, I maintain, is the real problem with US CEO compensation. Immelt has already "won" the compensation game. He can mouth platitudes about beating the S&P all he wants- it doesn't really matter now. Unless he has gambling, alcohol, or drug addictions, he's pretty much financially set for life right now. Think what you will, it must be hard to actually spend the roughly $15 million after-tax salary he's received, not to mention the upcoming bonuses, special share grants, and lush retirement compensation.
There is no way Immelt is going to take the risks needed to truly turn GE into a market-return-beating large-cap company anytime soon. It didn't do it under Welch over several decades. What makes you think it will happen under a guy who doesn't need the added compensation that would come from outperforming the index? A measly $3 million extra for actually beating the S&P? And, if he risks GE's current business mix to do so and fails, what does he incur? Ignominy, possible dismissal, and a fall from grace. Hardly worth risking those public humiliations for less than a quarter of his cumulative after-tax salary to date as CEO of the company.
I feel sorry for GE's shareholders. They are saddled with a board that is rewarding a loser as CEO, and have little prospect of things improving anytime soon.
What would get my respect and attention? If Immelt had taken the CEO job for $500,000 in annual salary, with the prospect of, say, $10 million of GE stock awarded annually and retroactively, for consistently beating the S&P500 over a five year period, I'd say he was putting his money where his mouth was.
By the way, beating the S&P over a two-year period is, according to my proprietary research, far easier than doing it over five years. The probability of beating the S&P over a two-year period is roughly five times greater than the likelihood of doing it over five years. And consistently outperforming the index for five years requires a much different approach by a CEO and his company's management team than simply aiming for a two-year sprint past the index's return.
As it now stands, Immelt has set a relatively modest performance target, the compensation for which will pale beside his other annual compensation. Some risk taking board and CEO.
It brings to mind Carl Icahn's comment of last summer, when interviewed on the subject of TimeWarner's CEO, and American CEOs in general. Icahn astutely opined that we are in danger of losing our global competitive edge at the CEO level as a result of lush, no-risk compensation packages. How right he is.
At that time, I discussed GE CEO Jeff Immelt's inferior record of shareholder wealth creation, in comparison to the S&P500 index, over the past 5 years. Yesterday's Wall Street Journal provided the particulars.
In a piece buried inside the lead section, Immelt's 2005 compensation is described, along GE's continued lackluster performance. Let me get right to the heart of this piece. The WSJ piece states that Immelt owns just "...800,000 shares of his company's stock, valued at $29.1 million based on GE's $33.06 share price......Mr. Immelt receives quarterly dividends on his performance shares; he received $1 million in cash dividends in 2005, the company said."
What did not surprise me is that Immelt's 2005 salary was $3.2 million, and this year's is set at $3.3 million. He also received a cash bonus of $5.3 million in 2004.
The article goes on to detail Immelt's "request" that various performance, or bonus, shares of GE stock awarded to him be "totally aligned" with shareholders. Measures used are to include revenue, cash flow, earnings/share, and return on capital. Oh, and Immelt said he will not keep half of a 180,000 share bonus grant if total returns on GE stock don't beat those of the S&P500 over a two-year period.
Thus, despite Immelt's apparent concern with his company's shares, and their performance relative to the S&P, we see that Immelt is already a very wealthy man, any GE performance notwithstanding. At roughly $3.2 million per year since 2001, plus the $5.3 million 2004 bonus, he's already cleared at least $21 million pre-tax for heading up GE in the wake of Welch's departure. This is for running the company so that it underperforms the S&P500.
That's right. Some guy down at Vanguard in Philadelphia is getting paid probably no more than hald a million dollars a year, tops, for running a bare-bones index fund that gives its shareholders a better annual return over five years than Immelt has gotten for his shareholders. I'f I'm wrong on the Vanguard manager's compensation by a factor of 2, he's still only getting paid a tenth of Immelt's largesse, although he has outperformed the latter.
This, I maintain, is the real problem with US CEO compensation. Immelt has already "won" the compensation game. He can mouth platitudes about beating the S&P all he wants- it doesn't really matter now. Unless he has gambling, alcohol, or drug addictions, he's pretty much financially set for life right now. Think what you will, it must be hard to actually spend the roughly $15 million after-tax salary he's received, not to mention the upcoming bonuses, special share grants, and lush retirement compensation.
There is no way Immelt is going to take the risks needed to truly turn GE into a market-return-beating large-cap company anytime soon. It didn't do it under Welch over several decades. What makes you think it will happen under a guy who doesn't need the added compensation that would come from outperforming the index? A measly $3 million extra for actually beating the S&P? And, if he risks GE's current business mix to do so and fails, what does he incur? Ignominy, possible dismissal, and a fall from grace. Hardly worth risking those public humiliations for less than a quarter of his cumulative after-tax salary to date as CEO of the company.
I feel sorry for GE's shareholders. They are saddled with a board that is rewarding a loser as CEO, and have little prospect of things improving anytime soon.
What would get my respect and attention? If Immelt had taken the CEO job for $500,000 in annual salary, with the prospect of, say, $10 million of GE stock awarded annually and retroactively, for consistently beating the S&P500 over a five year period, I'd say he was putting his money where his mouth was.
By the way, beating the S&P over a two-year period is, according to my proprietary research, far easier than doing it over five years. The probability of beating the S&P over a two-year period is roughly five times greater than the likelihood of doing it over five years. And consistently outperforming the index for five years requires a much different approach by a CEO and his company's management team than simply aiming for a two-year sprint past the index's return.
As it now stands, Immelt has set a relatively modest performance target, the compensation for which will pale beside his other annual compensation. Some risk taking board and CEO.
It brings to mind Carl Icahn's comment of last summer, when interviewed on the subject of TimeWarner's CEO, and American CEOs in general. Icahn astutely opined that we are in danger of losing our global competitive edge at the CEO level as a result of lush, no-risk compensation packages. How right he is.
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