Wednesday, November 22, 2006

Comcast To Distribute Disney Video Content

Yesterday's Wall Street Journal announced the pending deal between Comcast and Disney, in which the former would distribute the latter's video content.

In this prior
post, I've opined that Comcast is aiming for a very narrow window with this online content distribution strategy. Overall, I think it's a mistake.

Now, with my recent posts about
Yahoo, management buyouts and pension plans recently echoed and supported by major media pundits, and my year-old warnings about GM and Ford now routinely substantiated, perhaps Comcast is my one forecasting mistake. It's too early to tell yet.

In discussing this with my partner, I asked, what would have to happen for Comcast's move to be correct, profitable, and lead to consistently superior total returns over the next few years.

Blogger is not cooperating with my attempt to paste a stock price chart for the past 5 years for Comcast and the S&P500. It would show that Comcast has been up and down, with a net performance that is essentially flat, and below the S&P.

My guess is that viewers would not look directly to content producers on the web, and content producers, or the various existing 'channels' on cable, would not open up shop with URLS on the web to sell programming directly to viewers.

Comcast does seem to have scored a coup in getting Disney content for its on demand services. But isn't some of that already available, 'on demand,' on Disney's own site, or iTunes? Note that no part of this deal with Disney is "exclusive." And it is purported to be worth $1B to Disney.

For just a moment, let's stop and give Bob Iger yet more credit for being a very astute CEO. I think I am hoping Disney enters my portfolio selections soon. Iger just got a cable company to pay him for content that, when it appears on a cable channel, he has to pay them to take. And he didn't even have to agree to anything exclusive.

OK, back to Comcast. With iTV scheduled to arrive in the late Spring, it should be technically feasible for viewers and content producers to use the internet as it is best used- a direct, totally-disintermediating approach that allows the viewer and content producer to do business with each other. There will probably also be software vendors offering easy-to-use, web-based products which coordinate the viewer's preference, online availability of content, and the programming of iTV and whatever competitor products meet it in the marketplace.

The question is, how many people will be very late adopters, even with such tools available, and look to Comcast for their total viewing needs? And, moreover, switch to Comcast digital on-demand to get these programs?

Would it not seem reasonable to assume that most people for whom this would be attractive either already have digital on-demand, or buy premium channels from Comcast? Doesn't this new supply of Disney content in some sense constitute free new offerings for existing digital customers? How many people will actually buy Comcast digital just for these new Disney offerings?

If this were an exclusive distribution deal, I'd be a whole lot more inclined to believe it will make a huge difference for Comcast. As it is, I believe there are enough other distribution outlets from which to view much of this content, as to make this Comcast deal far less than one which will materially contribute to its ability to earn consistently superior returns for its shareholders.

Tuesday, November 21, 2006

Yahoo Insiders Confirm My Suspicions

It seems to be the week for the business media reporting stories that I wrote about far in advance.

This time, it's a leaked memo from a Yahoo SVP regarding the company's inability to dominate any of the many areas in which it has invested over time. I wrote about that in several posts, most notably here. I wrote, "Yahoo blasted onto the scene with a dizzying variety of services, but no clear focus. It seems to offer a bit of everything, and the best of nothing."

This is essentially the thrust of the now-famous "Peanut Butter Manifesto," written by Brad Garlinghouse, and reported in Saturday's edition of the Wall Street Journal. It echoes almost exactly my sentiments in the linked post.

There's not a lot new to say about the issue, except that Google's stock price broke above $500/share today, which marks a significant P/e multiple for that company.

Suffice to say, reading the WSJ story gave me renewed confidence in my strategic diagnostic skills and instincts.

A third story ran today, though, in the Journal, that is a bit different, and the subject of the next post.

The NYTimes Confirms My Views on Pensions and Private Equity Management Buyouts

In prior posts, here and here, I have written about the mistakes unions made years ago with pensions, and the conflicts of interest of managements as they lead buyouts of public companies. Recently, the New York Times has published pieces echoing my thoughts from months ago- September of 2005 for healthcare, which is similar to the pension debacle, and August of this year for buyouts.

It gives me a very good feeling to know I called these issues far in advance of one of the nation's leading newspapers. It's even better to know I have an even simpler solution than the one proposed by the NYTimes writer concerning buyouts.

Joe Nocera wrote "Resolving to Reimagine Health Costs," which focuses on the third-party payer health care mess. My contention is that pensions are essentially the same thing, in terms of accepting promises to pay from a company which is, typically, an adversary of the worker's union. Similar to accepting non-cash value from a company for health care, accepting promises in lieu of cash for pensions also makes for distorted decision-making.

Two days ago, Andrew Ross Sorkin wrote "Rewriting the Rules for Buyouts," recommending a complicated process by which a majority of minority shareholders should have final say in the approval of a management-led buyout. I believe my idea, expressed in the second linked piece above, is both simpler and allows for greater shareholder choice. Simply allow any shareholders to be part of the buyout, if they so choose, on the terms of the offer. This would insulated them from any supposed bad effects of being forced to sell out to the going-private group.

Given this past week's flurry of ever-increasingly large buyouts, such as Clear Channel and a large REIT, the issue is still relevant.

Since I hope to identify trends and challenges which are developing in business, and affect companies' abilities to earn consistently superior total returns, it's very gratifying to know I identified these issues long before a major news and opinion organization like the Times got around to them.

Monday, November 20, 2006

Online Banking

Saturday's Wall Street Journal featured an article on the current generation of online banking. It brought back memories from my days at Chase Manhattan Bank in the 1980s.

To be sure, twenty years is a virtual eternity in a technology area like this. When I arrived at Chase, Citibank had recently discontinued its own home banking project, which included script that one would print out as "money" on a home printer. Back then, the biggest obstacle to "home banking," as it was then known, was the inability to simply use a personal computer as an ATM.

Chase had two separate electronic banking groups operating in the mid-1980s. Believe it or not, we lost money on every customer in the "online bill paying" product. That was because the customer entered the electronic bill payment, but Chase had a roomful of low-level employees writing checks on a Chase account to physically send, for the customer, to the payee.

Oh, how times have changed!

The WSJ piece rightly points out that online, home or electronic banking- choose your preferred name for the service- tends to wrap you up in the bank's clutches in a rather irreversible manner. As such, by making you captive, their economic propositions, in terms of loan rates, terms, deposit rates, etc., will tend to get a little worse, since you can't easily leave the relationship.

This is one reason I don't personally participate in online banking. Although, I admit, the potential to manage cash disbursements to the day is vaguely appealing. Then again, I have worked at a bank, and am aware of the culture of finger-pointing and unaccountability when an error is made. Heaven help the poor customer who tries to manage cash flow by timing payments closely, and ends up late on the mortgage or utility accounts, thanks to uncontrollable network problems.

I was also struck by the popularity of third-party, omnibus account aggregator services, which allow all ones disparate financial institutional relationships to be presented, online, in one place. On the plus side, this keeps each institution at arms length. On the minus side, you risk a lot of security with an essentially unregulated, reporting and processing vendor.

According to the article, electronic customers are 27% more profitable, and online bill paying has now risen to a 15% market share, from just 4.8% in 2001. As many as 40% of US households now do some online banking.

Which brings me to the point of this post. As the piece suggested, online banking is now moving into the phase of differentiation. Banks need to provide distinctive assortments of offerings online, in order to gain some advantage from it.

Does this not begin to resemble the earlier eras? More technology expenditures to gain new users and share, moving the user base from early adopters to late adopters? Will these later users, perhaps including me, open more accounts and provide more profits due to online usage?

It's an interesting intellectual and business question. Investments are made on the profitability and usage data of current online banking customers, but the eventual drivers of such numbers will be the masses of customers which banks hope will migrate out of branches and onto cyber connections.

Granted, there is a likely cost saving in servicing accounts online. With ATMs probably accounting for most cash transactions, online banking offers the promise of dispensing with an avalanche of paper check processing for large banks. But will these profits be offset by communications and technology expenditures? Will the online services be free? My guess is, eventually, "yes."

All of which confirms my continuing view of these mega-banks as the financial super-utilities that my friend, B, foresaw in 1996. I would not bet that any one bank will see its total returns rise over time on the back of online banking. They might not fall too far, due to the cost savings, but I'm guessing that significant revenue gains won't come from this area. And, in the end, the easiest way to earn consistently superior total returns is to engineer consistently superior revenue growth.