Thursday, October 19, 2006

Verizon's CEO Compensation Change

Wednesday's Wall Street Journal featured an article in the Money section about Verizon's CEO's new compensation package.

After reading what details are disclosed, I am left with a mixed view of Ivan Seidenberg's new compensation arrangement.As I understand it, the new arrangement ties Seidenberg's pay to both S&P-related return targets, over an undisclosed time period, as well as the phased implementation/rollout of Verizon's new fiber optic network. This use of the capital spending plan seems, to me, to be somewhat disingenuous.

Blogger is not being very cooperative today, so I am unable to paste a 5-year chart of the company's stock price, compared to the S&P. I will attempt to do so in the next day or so However, suffice to say, the S&P has performed significantly better than Seidenberg has over the past five years.

For instance, here is a quote in the article attributed to a Verizon spokesman,

"If Mr. Seidenberg's compensation were based solely on the stock performance, he would have a disincentive to make the investment that we believe is necessary...This is not a provision to make up for poor stock performance, itÂ’s a provision to make sure we do the right thing for the long-term health of the company."

Here's what I donÂ’t understand. If rolling out their fiber optic network results in a drop in the total return to shareholders, then perhaps it's not actually a good idea. If it were properly explained, and justified, would it not be seen as a positive attribute by investors?

To hide behind the excuse that Seidenberg could benefit more by giving the company's massive investment program short shrift is to suggest that it may not really be such a good idea, anyway.

By making it part of the CEO's compensation package,I wonder if this is management's way of shifting the responsibility for deciding to implement the project onto the board. This way, Seidenberg can always point to his board, and their compensation package for him, and say that they thought the project was the right thing to do, even if it turns out badly.

It sounds good to tie Seidenberg's compensation partly to the S&P500 return, but details are scarce as to over what timeframe. If it's too short, then beating the S&P becomes a much easier task than you might suspect.Basically, I think that, if the Verizon fiber project is a good investment, then, yes, the compensation changes are probably beneficial for shareholders. But why worry whether itÂ’s good or not? If it's not thought to be a wise move, why even do it?In the end, though, if the fiber investment is important, and investors don't think so, why should the CEO get paid for doing something that destroys existing shareholders' wealth? It sounds like more fuzzy thinking on corporate governance and commitment to wealth creation for 'every' prospective shareholder.

The WSJ piece quotes one Paul Hodgson, described as a compensation analyst at the Corporate Library, as saying, "It's what CEOs are paid to do- to damnlong-term bets and damned the stock price."

I would disagree emphatically with his statement. I believe that the job of a CEO is to provide consistently superior returns for shareholders, in order to do two things. First, to generate consistent performance, in order not to favor any particular group of shareholders with respect to their temporality. Second, to earn consistently superior returns so that shareholders have a reason to own shares of the company, rather than simply own shares of the S&P500.

While there seems to be some benefit to including the S&P metric in Seidenberg's compensation package, the inclusion of the implementation metric for the company's fiber optic project smacks of shifting the risk of, and justification for the project from the firm's management, to its board and shareholders.

Dick Wolf's Views on The Evolution of Television Programming

Wednesday's Wall Street Journal's Marketplace section featured an interesting interview with Dick Wolfe, the creator of the long (17 years) running TV series, Law and Order.

As a creator of video content for nearly two decades, it is instructive to read his thoughts on the imminent evolution of the medium. To that end, his first quote, regarding the future of network television, is,

"....Please, you think ringtones are going to be a major revenue stream for studios or networks?....Unfortunately, the business model is irreparably broken, and people are going to have to figure out something new...I'm 59 years old. I don't think the world is going to come crashing down in five to six years, but I guarantee you, if anyone tells you what the television business is going to look like a decade out, they are on drugs."

Well put. He further believes that the trend toward a single sponsor taking an entire show, and doing product placements as well, has limits. As well as marks a return to the original business model in place at the dawn of TV.

Perhaps the most interesting business comments he makes is regarding the value in syndication of current and future television content. Wolfe questions how valuable such video content will be anymore to networks such as USA or TNT, if the episodes have already been available on Netflix, DVDs, etc.

When asked how different TV series creation is now, from 17 years ago, Wolfe responded,

"The business has changed massively.....You will never have the market forces again that, how do I put this, that allow people to get rich....The reality is you will never have the licensing fees negotiated again that resulted in 'ER' getting [millions of dollars] an episode, and that's where a lot of people made what many would probably insist is an unconscionable amount of money...The upside home runs for shows have been sort of flattened out by the new economic models of how shows are produced."

While I understand and agree with Wolfe's remarks concerning predicting how the network television world will look in a decade, I was struck by his comments, and included them liberally in this post, because they seem to have a bearing on that future.

To wit, I think the same economic forces which are now limiting the profitability of series producers on network television, are driving those same people to online digital distribution. And, probably making the club far, far less exclusive.

Translation- don't try to own network distribution assets, which are, comparatively, narrow and lacking in bandwidth. Instead....own a well-regarded, popular piece of online real estate.

Would that, perhaps, be YouTube at present? Yes, I think it would. Maybe not in another 2, or 5 years. But for now, sites like YouTube seem to be creating value simply by being there, first.

Perhaps in years to come, networks will create their own stable of production talent, in order to own their video content, and regain control of the distribution of it. Maybe they'll join the growing ranks of online video sites, and, in the end, simply leave network TV to be something simple and barebones, with the real revenues coming from online distribution.

If that happens, then I guess you'll have the networks bidding against Google, cable companies, and perhaps private equity lenders and banks, to fund promising content producers.

Wolfe's right- it's impossible to forecast what that future will look like. Except that it won't look remotely like what it is now.

Floyd Morris' Recession Predictor

This morning, on CNBC, Floyd Morris a writer for "The People's Daily," a/k/a The New York Times, predicted that the US economy is now, or is about to be in, a recession.

Morris predicts recessions with a simple model. When total deflated sales, year over year, by US new car dealers, falls 2% or more, a recession has begun or is imminent.

On its face, Morris' method is both interesting and somewhat sensible. But so many signals point the other way right now, not to mention so many analysts and economists with more training and experience in macroeconomics than Morris seems to have.

Now, on one hand, I respect empirically-driven conclusions. And this has an 'Occam's razor' sort of simplicity to it, which is attractive.

On the other hand, it just seems to be such an isolated indicator/predictor.

So, rather than criticize it, I would, instead, be interested in considering how and why it might be wrong this time?

In effect, to engage in Popperian analysis, and ask, 'what would fool or confuse the indicator?' Can I find a reason which would render the predictive power of the simple method suspect?

Here are some ideas:

1. A 2% real decline in annual sales is pretty small, as triggers go. It wouldn't take much in terms of consumer behaviors, not recession-driven, to attain this result, and give a false positive.

2. The last forecast recession was 5 years ago. Could pricing pressures in the auto sector since then have resulted in non-recession behaviors that simply reduced total revenues to dealers? Morris uses no unit volume data, only total deflated sales.

3. Is it possible that combinations of higher crude oil and gasoline prices, combined with better substitution of online services for local travel, have diminished total consumer demand for cars from new car dealers?

4. Has the growth of online car buying services, with which to negotiate prices with new car dealers, possibly lowered the price/car at new car dealers since 2000, when Morris' method last forecast a recession?

5. Morris showed a graph of his data, and the entire curve seemed to attenuate over the timeframe he displayed- something like 20 years. Is it possible that, due to pricing and competitive pressures, overall auto sales growth, year to year, is simply slipping anyway? And that the relative rate of sales decline is really what matters, not the absolute rate of sales growth/decline? Could dealer sales simply be falling secularly, and some periods fall harder, due to recessions? So that, with time, a 2% decline may no longer be relevant or significant as a recession signal?

6. Are there more or fewer new car dealers than in the past? Does this matter? Does Morris control for the number of new car dealers? Should he control for this variable?

7. Is there a change in the mix of car sales from dealers of different brands, foreign or domestic, higher- vs. lower-priced models? Is it possible that more features are now found on lower-priced, foreign-owned brands, so that new car unit sales could be healthy, but the dollar values of the value embedded in those cars is lower because of productivity and competitiveness in the sector?

Empirical analysis is good. But when one strips away so much information, as Morris has, and forecasts recession based upon such a simple measure, such as Morris' total sales by new car dealers, you have to wonder if there are some complicated factors working beneath the surface, that could confound this recession predictor.

Put another way, if I, as a quantitative marketing analyst, which I have been in a past life, tried to predict business or marketing outcomes with such a simple model, I'd probably be ridiculed for failing to take into account many, if not all, of the factors I have listed above.

I wanted to write about Morris' prediction, and method, because so much has been spoken and written recently about the state of the US economy, now and for the next 18 months. The reality, though, is probably that Morris was on CNBC because he provided a quick, provocative sound bite of opinion, and, thus, entertainment.

And, once again, we see a ubiquitous business "news" source eschew careful, analytical rigor for ratings and the shock value of inadeqately-designed or explained forecasting methods.

Steve Jobs On Apple's iPod vs. Microsoft's Zune

My daily email from Charles Schwab recently contained a brief analysis of recent events affecting Apple's stock price. The text, which includes some quotes by Apple's CEO, Steve Jobs, read as follows,

"APPLE COMPUTER INC. doesn't expect the iPod media player to be hurt by MICROSOFT CORP.'s Zune, Chief Executive Steve Jobs said in a magazine interview. Microsoft has touted Zune, a portable media player due to be launched in the U.S. in time for the holiday shopping season, as a potential threat to the dominant iPod because of its ability to share music wirelessly. "It takes forever," Jobs told Newsweek in an interview posted on the magazine's Web site on Sunday. "By the time you've gone through all that, the girl's got up and left." Jobs was equally unconcerned about the prospect of the iPod losing its cool factor as it becomes increasingly ubiquitous. "That's like saying you don't want to kiss your lover's lips because everyone has lips. It doesn't make any sense," said Jobs."

These statements by Jobs display some of the characteristics which I believe have allowed him to be so successful as a businessman. In particular, I believe they offer some insight into why Jobs has been successful at a variety of businesses, whereas the man he is most-often compared with, Bill Gates, has had a very fortunate ride, for a brief period of time, with only one business.

The statements attributed to Jobs let us see his basic appreciation for human behavior, and his inherent common sense. While Gates projects an image of the geek who got lucky, Jobs, with each passing year and business success, comes across as more thoughtful, sensitive, open-minded, and in touch with consumer behavior.

For instance, his quote about sharing music with a Zune is just priceless. He cuts right to the heart of the matter, as it were, saying what everyone knows is probably true- that the most ',mission-critical' role for such music sharing is in ice-breaking moments for some boy, trying to impress a girl, such as Jobs off-handedly described.

I don't know about you, but the quote enables me to see a young Jobs trying to pick up an attractive girl, and understanding how some cool techno-toy would help. The image of Gates trying something similar can't quite get composed in my mind's eye.

Jobs' second statement is equally poignant and sensitive. What a nuanced and clever analogy. Leave it to Jobs to position the iPod media experience, even in a casual interview conversation, as emotive, rather than analytical or technical. He clearly evokes the sense of users bonding with the beauty of Jobs' products' designs and operation, rather than their technical specs. Then he appeals to the reader to confirm his own sensibility in making this emotional-based analogy.

Very noteworthy. He doesn't come across as manipulative, so much as just being his own, complex self. He doesn't seem to think of his business, so much as the uses for, and attitudes people have toward, his products.

Thinking back on Jobs' career, and the video clip my partner sent me of the former's recent commencement address at Stanford, I see a connection between the nature of the quotes cited in the passage above, and Jobs' business experiences.

He began with nothing, a few partners, and created Apple. The very nature of the machine was anti-thetical to the sparer, more utilitarian PC and its Microsoft operating systems. Jobs went on to grow his company, leave it, start another (Next), return to his baby, Apple, and revive it. In the meantime, he also started an unrelated company, Pixar, and grew it so successfully that Disney bought it. Now, he's on Disney's board, still runs Apple, and is probably the only, and most, trusted 'techie' able to move through the geographically proximal, but culturally alien world of old and new media. Jobs has always seemed to be moving on a path, chasing a vision of bringing technology to the masses in a way that he can clearly visualize, including the detailed experiences of those masses with his inventions. You can feel and see his passion in his interviews.

Gates, by contrast, founded Microsoft, cleverly arbitraged someone else's operating system into a quick fortune, then grew his company's dominant market position in operating systems and leveraged it into business application software. Basically a one-trick, but very, very large pony, Microsoft followed a familiar technology business growth trajectory, and has now become an aged, sluggish software vendor in a comparative backwater of the technology sector. Gates has run the company for all of its life, presided over its apogee and decline, and has now announced his retirement in less than two years, as he busies himself with philanthropic pursuits.

It's hard to fail at giving away money, isn't it?

Meanwhile, Jobs is still busy creating value for shareholders, and new products and services, using digital applications processors, content provision systems, and larger media distribution enterprises, for their ever-more-intertwined uses by common people.

It's somehow reassuring that, even in a few brief quotes from an interview, one can glimpse some of what has made Jobs so broadly successful.

Wednesday, October 18, 2006

Brian Wesbury: A Wise Pundit's Views on The Market & The Economy

Yesterday's Wall Street Journal carried an incredibly good editorial by Brian Wesbury, the chief economist for First Trust Advisors, L.P. Wesbury is a frequent guest on CNBC's early morning SquawkBox program, as well as Larry Kudlow's program.

I tend to listen to Wesbury very carefully, and with a good deal of confidence. His economic reasoning has been sound and sensible for as long as I can recall. His recent article is no different.

He mentions a crucial driver of the recent rise in equity market indices- the Bureau of Labor Statistics' annual recalibration of employment statistics. This time, the recalibration added 810,000 jobs to the previously-stated total for the US economy, or almost .5% of the available US labor force.

Added to this, last week the Treasury announced that the latest estimate of the country's budget deficit is roughly $248B, which is much less than the CBO's estimate of $337B, and the White House's $423B forecast.

These numbers both speak to how much stronger the US economy is, regarding employment, as well as fiscal rectitude, than seemed to have been, or still be, commonly realized among media sources.

Wesbury then goes on to write in the editorial,

"While cynicism and pessimism are part of human nature, handwringing based on out-of-date models and inaccurate data is unnecessary. Bad data and bad models are a dangerous combination that can bias political views and impact policy decisions. Recent revisions reflect the problem: the very data that caused so much indigestion previously now reveals a strong and resilient economy."

Is this not what Alan Greenspan has been saying for years? Stepping back from the various shocks to our economy over the past 24 months, is this not also rather obvious? Despite $3/gallon gasoline, the economy takes it in stride and continues to roar onward.

Yet many so-called economic pundits rush to opine immediately on data which, now revised, tells a completely different story about the US economy. Oh, my!

I won't discuss Wesbury's editorial in full- it's worth reading in its entirety. But there is one more point he makes that I would like to address, because it is an area of significant dis- and misinformation for many people.

He discusses the differences between two methods used to calculate employment: the BLS Establishment Survey, and the BLS jobs survey. The former was, to quote Wesbury, "designed in a paternalistic age of large businesses and time-clock punching." The latter report is the result of phone calls asking people if they are working.

His point is that, in our new economy, lots of people work, and make significant money, doing non-full-time-large-corporation work. One example that quickly comes to mind is the move by Wal-Mart to more part-time employees. Would that not reflect less 'establishment' full employment, even if the cash compensation earned by people working in Wal-Mart's was unchanged?

What I like about Brian Wesbury's expressed opinions is the depth of thought, and extent of knowledge he displays about key economic statistics, in relation to the real economic world in which we live.

From his editorial, and the recent corresponding equity market index gains, we see that, throughout this year, the economy has never been in as much trouble as many on-air and published pundits would have us believe. Notably among the former, I think, is CNBC's 'economic' reporters. It's fair to ask how much this type of disinformation, or misinformation, has affected investors during the last nine months.

By the way, buried in the first third of Wesbury's article is his own rough estimate that, using a capitalized business profits model, US equity markets are 35% undervalued.

Cause for reflection, is it not?

Tuesday, October 17, 2006

Wal-Mart Fashion Merchandise Disaster: "I Told You So"

Today's Wall Street Journal 'officially' reported what I have suspected for some time- Wal-Mart's attempted move upmarket into fashion merchandise has failed.

As long ago as last fall, in a post
here, I predicted this. I broadened my scope of analysis, but reiterated my view in a post here, last month.

The Journal article quotes one young shopper as not converting to the 'new' Wal-Mart, and shopping, instead, at Express, one of the Limited's chains. On a broader basis, the apparel segment had a banner month in September, measured by one analyst's index as being up 8.8%, while Wal-Mart's same-store sales only increased 1.3%.

Target, one of Wal-Mart's next-step-up competitors, had 6.7% more sales from same-stores last month. Clearly, something isn't working well at Wal-Mart, and the company is somewhat guardedly admitting this.

The article quotes Wal-Mart as saying that last month's clothing sales "failed to meet our expectations." Further on in the piece, it discusses how many store managers don't actually put the time or money into more upscale women's department's displays, and that "company merchandisers don't have much clout" to effect change out in the stores.

Perhaps the most damning evidence concerning Wal-Mart's failed move upmarket is this. In the WSJ piece, it quotes the founder of America's Research Group, a home polling research outfit, as saying, "I can't find any significant difference between a year ago, two years ago, and today among women." Further, he told them that the giant retailer "devoted a lot of energy to it, but it doesn't appear the consumer has had any positive response."

This doesn't surprise me at all. A company that built so strong a brand epitomizing low prices and cost cutting is hardly going to change its reputation in a matter of a few years to that of a high-fashion merchandiser. It just makes no sense, behaviorally, to expect Wal-Mart's old customers to want it, and it's new, target customer segments to believe or trust it. And, worse, to believe that the latter group will think other people will believe it when seeing Wal-Mart brands on them.

Let's see- in the past year, Wal-Mart has struck out on fashion merchandise upscaling, entering more urban target markets, reaching out to non-black minority communities, and burnishing its image regarding the treatment of its employees. On the plus side, however, it is threatening to wreck the retail pharmacy/drugstore sector.

However, I doubt that the latter success will offset the other gaffes. Guess it's back to the drawing board for Wal-Mart, to determine what will bring profitable growth and, ultimately, consistently superior total returns for its shareholders. Will Lee Scott weather the coming storm?

Monday, October 16, 2006

Remedial Sales & Marketing Management

Today's Wall Street Journal has an article in the "Theory & Practice" column of the Marketplace Section. Sadly, as I wrote about here back in December, the Journal seems to be dumbing down a fair number of its management pieces. Today's was no exception.

The big news in today's column is that sometimes, your sales people will attain their revenue quotas by selling to unprofitable customers. Stop the presses!

But, wait. It gets better. The column's author, Jaclyne Badal, cites extensively from Mercer Management Consulting, on its sales management assignments. Apparently, this rather basic sales and marketing management principle is news to quite a few of the firm's clients.

You'd think that, with today's modern cost accounting systems, and extensive IT support, there would be fairly pervasive customer P&L accounting at most large firms. It appears you, and I, would be wrong.

What I don't understand is how something that was a topic over twenty years ago, when I completed my business management degrees, today requires consultants to help company marketing and sales managers figure out which customers are profitable- or that it is even an important consideration.

No wonder why we see so few companies consistently earn superior total returns. If American business truly needs remedial marketing and sales management of this type to improve its profitability, where are all the well-educated, intelligent MBAs going? Aren't they supposed to know this sort of thing? Wouldn't the ones who graduated, say, a decade ago, be in positions to effect better customer profitability management by now?

Perhaps it demonstrates how little value the MBA actually seems to be contributing to business management. If simple issues like customer profitability require many companies to hire expensive management consultants, most of whose analysts graduated from the same schools as those of the companies' new management hires, how are they going to get the complicated things right? Like product/market segmentation, new product development, and channel management?

It seems like this WSJ column, Theory & Practice, documents that business is long on inept practices, but short on decent theory to underpin those practices.

Sunday, October 15, 2006

Integrating Banking and Brokerage....Again: BofA's "New" Tactic

An old holy grail of banking since the 1980s has been to offer retail brokerage to customers, and magically attract all of the rest of their assets. Nevermind that retail brokerage is a rather cheap, transaction-oriented business. How that would entice customers to behave in the way that banks have wanted them to, for decades, is unclear. It's never worked before.

No doubt my old colleague and friend, consultant B, is reading this and smiling broadly.

However, now Banc of America is now allegedly offering 'free' brokerage. The Wall Street Journal ran an excellent piece analyzing this yesterday, demonstrating that the BofA offer is almost never going to be a good deal for anyone. The $25,000 in assets that must be kept with the bank is exclusive of any brokerage/investment assets. They must be commercial banking balances. The article does the math to illustrate how the necessary foregone earnings on the bank balances will, in almost all cases, outweigh the 'free' trading benefits.

Of course, it's ironic that BofA is doing this now, because pure retail brokerage is in decline. And every financial institution which has taken the brokerage route has failed in its objective to add significant value by cross-selling brokerage customers with bank services.

Consider this- if the cross-sell were working, then BofA wouldn't have had to offer 'free' brokerage, would they?

From the time I was with Chase, and we bought, then sold, discount retail broker Rose & Co., banks have bought and sold retail brokerages with distressing frequency. BofA itself first bought, then sold, Charles Schwab. Then bought Quick & Reilly. American Express, under Jim Robinson, bought IDS, and later, spun it off. Citibank just swapped its asset management operations to Legg Mason for the latter's retail brokerage operations.

But people just don't behave the way banks want them to behave. The customers who trade frequently are, in all probability, to lack the large asset bases that banks desire. The private bank-type customers with trust accounts and large investment accounts know better than to leave them in the hands of middling retail brokers owned by a commercial bank.

It's truly a Catch-22 for banks. Anyone who would want them for retail brokerage, they don't really want to serve. Anyone they really want to serve with asset management, doesn't want the bank's retail brokerage services.

Now you have Prince, Dimon, and Lewis at the helms of the country's three large, financial utilities...excuse me....commercial banks. And they continue to make the same mistakes with brokerage businesses as their predecessors of twenty years ago.

Will commercial bankers ever learn?