Saturday, January 20, 2007

GE's CEO Immelt's Arrogance in CNBC Interview

Here is a link to a video clip of yesterday's CNBC interview by Erin Burnett of her boss, GE CEO Jeff Immelt. While it is the fourth part of a longer interview played on the network throughout Friday, the juicy parts of this segment begin about midway through the clip.

Let me state what I feel is the problem with Immelt's attitude in the interview segment. As I wrote
here, last March, Immelt has already been paid roughly $15MM in cash salary and bonuses. This does not even counting his deferred and retirement compensation, which, according to Forbes, as of 2005, was already totaling some $53MM. In the latter part of this interview segment, he casually dismisses discussion of his pay, insisting he is not in it for the money. Yet Immelt has failed to even keep GE's total return on a par with the S&P500 Index during his 5+ years at the helm of the firm. Taken in total, the interview depicts him as effectively ignoring his lavish overcompensation, and his underperformance, and, instead, focusing on how much fun he's having just meeting folks, facilitating the work of GE staff everywhere, and having a swell time.

Well, of course he's not in it for the money. Not now. I guarantee you, he was sure fixated on the money six years ago, when he took over the reins from Jack Welch.

How arrogant for Immelt to have failed to even keep pace with the S&P500 Index for over five years, as depicted in the Yahoo-sourced chart on the left (please click on the chart to view an enlarged version), and be lavishly compensated. Then airily wave off any thoughts that he should be criticized for his pay level.

To see GE's stock price over Immelt's entire tenure, here's a longer-term view of GE and the S&P500. As can be seen from late 2001 onward, the index ended the period up, while GE is down. Need one say more?

I won't try to quote his alleged motivations for running GE- you can hear them yourself in the video clip. Suffice to say, they are all of the motherhood and apple-pie variety. It's sickening. Having grabbed the gold, if not platinum, ring, Immelt now deflects any suggestion that he's overpaid. In fact, when Erin Burnett brings the subject up, Immelt sort of bridled at 'defending' or 'justifying' his pay, saying something like,

'If I have to spend a third of my time justifying my compensation, I'll quit and go do something else.'

That's not the exact quote, but it's close. And this, on the heels of his recounting what a merry, fun-loving, joy-producing time he's having as he reduces the value of GE's shareholder's equity.

On the subject of Bob Nardelli's exit package from Home Depot, Immelt wisely kept silent. You can see where he's going with that. If he says Nardelli deserves all of the money, Immelt looks like the arrogant, insensitive, greedy CEO that he is. If, on the other hand, he says Nardelli should give some of the package back, he needs to offer a reason. And then he's on record with the comment, would definitely be used against him, should he finally be shown the door by GE's board for continual failure to earn shareholders the market rate of total return over six years.

Honestly, I think Immelt is preparing for a quick, painless exit. It's almost as if he is saying,

"C'mon, I dare you. Pester me. So I can look noble and harried, and then get the hell out of Dodge while the gettin's good."

Sort of the B'rer Rabbit approach. Please don't hound me into quitting, 'cause I will. I really will. I'll take my total compensation that's north of $50MM since I became CEO and skulk off.


Such drama. He's probably secretly envious of Nardelli. That stiff got off lucky. He was handed a headache known as Home Depot, screwed it up some more, and got paid to leave. Poor Jeff has to stay and try to clean up his mess! His old pal Bobby is out on the playground, being looked over by the Private Equity Gang for possible membership.

On this point, Burnett coyly hinted that maybe Jeff could duck the entire Congressional witch hunt on executive compensation that is coming, and simply join the private equity world, where, she solemnly intoned, he'd probably be paid hundreds of millions of dollars. Immelt could barely contain his grin at that point. But he pretended not to know or care what he'd be "worth." Question is, though, given Nardelli's and Immelt's failures to even match the S&P as CEOs, who'd actually pay them to underperform in the private equity world?

I suspect the only way those two will actually get jobs in that sector is to pay to play. You know, put their sizable compensation kitties up as a stake, to be allowed into any deals. Nobody has actually saying they could do better elsewhere than their miserable records running publicly-held companies.

Meanwhile, Jeff has to try to get GE running in some semblance of mediocrity, if not better. Sadly, given how forgiving and supine the company's board has been, mediocrity would probably be sufficient for that group.

It is truly a sad day for publicly-held firms. No wonder private equity is hunting with such abandon. With guys like Immelt sporting such an arrogant attitude while mismanaging GE, can you blame the private equity guys for offering low-ball premiums to victimized shareholders? Not to mention the media, especially Immelt's own captive network, CNBC, lobbing softballs at him, and joining him in denial about how he's overpaid for failing to deliver even average market value to his shareholders for over more than half a decade now.

Friday, January 19, 2007

Productivity vs. Wage Levels & Manufacturing Jobs

A week or more ago, CNBC featured one of their occasional guests, Dr. John Rutledge. Rutledge is a man of impressive credentials as an economist, academic, and businessman.

Amidst a debate with other economists, Rutledge reminded everyone of reminder of an old conundrum. To wit, wage growth moderation translates into productivity, which fosters economic growth. Thus, if you measure an economy via value growth, and productivity, not the level or growth of one input's incomes, i.e., wages paid to labor, then you put inputs in their proper perspective.

However, if your first, and primary measure of economic health is simply wage levels and growth, you will probably miss the big picture of productivity growth and overall healthy economic growth.

This echos discussions I had years ago with a then-partner about consumer benefits of productivity vs. their effects on incomes. Lower wage growth, via higher productivity, means less-expensive goods and services, and, thus, effectively higher productivity-adjusted incomes.

Then there is the question of compensation packages. The old method of measuring bi-weekly paychecks to estimate national incomes is surely outdated. How does a Wall Street bonus get counted? Or equity participation by workers in the profits of the firm?

Lastly, there's the question of type of business to which an economy allocates its resources. Do we really want our economy putting hefty resource allocations into rather plain, undifferentiated jobs which are low-skill assembly-line or metal-bashing?

Yesterday's exchange, on this point, between Fed Chairman Ben Bernanke and Vermont Socialist Senator Bernie Sanders was priceless. Sanders tried his best to maneuver Bernanke into agreeing that we need to preserve old-line, low-paying manufacturing jobs, at the expense of a growing, productive economy. Ben didn't bite, and, instead, tossed Sanders a couple of curve balls.

First, he directly contradicted Sanders, and stated that, on balance, despite some marginal job losses, the overall economy benefits from free trade. Second, he asserted that our trade deficit is caused, not by our trade policies, but by our savings and investment policies. That is, we attract capital by not providing sufficient resources ourselves, thus, creating a deficit, not by just buying too much as imports.

For a discussion of why this is not, however, all bad, see my post here, from January 1st, on the recent WSJ article by Edward Prescott.

What was troubling, however, was Bernanke's agreement with other Senators, that our overall deficit, which has actually been shrinking, and our 'savings rate,' are worrisome.

These are important points, because flawed governmental tampering with our macroeconomic framework could derail the productive, profitable use of our capital to drive economic growth with low inflation. If the economic framework becomes distorted, it will be all the more difficult for our publicly-held, private enterprises to create the value our society needs, as capital, to continue investing, creating innovation, and providing for retirement assets for the aging members of our society.

Paradoxically, as Prescott points out, we need more debt and capital, if necessary, from abroad, not less, to feed the unique, premier value-creation engine that is our US capitalistic economy.

Thursday, January 18, 2007

Apple & Microsoft: Recent Developments

Much has been made of the recent surge in Apple's stock price since the unveiling of the iPhone and AppleTV last week. Similarly, pundits are now noting Microsoft's recent stock price resurgence of the past six months.

For my own portfolio, Apple did not make the list for January's selections. Thus, I sold my position the day before the MacWorld announcements regarding the new products.
Is either Apple or Microsoft now a "buy?" Has either company altered its long-term fortunes recently?
For comparison, I've downloaded four Yahoo-sourced charts (larger versions may be seen by clicking on each chart) displaying stock prices for Microsoft, Apple, and the S&P500 Index level for the past six months, one, two and five years.
Surprising as it may be, over the last six months, Apple is actually the best performer. Both companies easily beat the S&P, but Apple also handily beat Microsoft.

Apple's price increase reflected, in part, its resurgence from a horrible drop in the first half of 2006, illustrated in the next chart.
Notice, too, how both companies' stock prices fell at about the time in the spring when economic pundits wrongly believed that the US economy was heading for a recession.

Looking at the past two years, we see that Apple again significantly outperforms Microsoft, which is essentially tied with the S&P. The latter two barely eked out a gain, while Apple rose handsomely.
The last chart, below, shows the five year price histories. Once again, the magnitude of Apple's outperformance, relative to Microsoft and the index, are apparent. It's not even remotely close.
My point is, when viewed over any period substantially longer than just the last six months, Microsoft is really not looking all that remarkable. My proprietary research shows that it takes at least three years to really sort out the merely temporarily lucky firms from the truly consistently excellent ones. Apple has done this, but Microsoft is very far from doing so.
This makes Microsoft essentially a timing stock. It may continue rising. Then again, it may not. How many people do you think actually bought Microsoft last July, expecting a 50% rise? Probably not too many.
Of course, some analysts argue that the XBox is for Microsoft what the iPod was for Apple. That it will transform the software titan. Well, it is, but with one important difference. The iPod saved and dramatically reconfigured Apple. Microsoft is so much larger, with so much more mass in its computer software operations, that the XBox's effect on the company can't be as large as the iPod's was on Apple. So, it's unlikely that Microsoft has sufficient arrows in its quiver right now to continue anything resembling its recent stock price run up. So, in the long run, I doubt that the XBox can 'save' or 'turnaround' Microsoft. To do that, it would have to be spun out, off, or out to shareholders. Then, of course, it wouldn't 'save' Microsoft, but simply benefit the shareholders who paid for XBox's development.
Why did my portfolio selection process not include Apple, after holding it these past six months? Well, the one-year price chart explains why. Over the past year, Apple's return was not all that much better than the index's. And that simply doesn't provide enough margin for error in my selection process. It's quite possible that Apple may be selected again in the coming months. But for now, it's just not quite 'superior' enough, recently, to merit inclusion.
For what it's worth, I saw Steve Ballmer mock and insult the iPhone this week in a CNBC interview. He was, I believe, appearing with Verizon personnel to attempt to demonstrate Microsoft's presence in the corporate communications market. While many of Ballmer's comments are probably correct regarding the iPhone, his company hardly has a presence on its own, and the existing phone-based services are not all that good. But what was very revealing was Ballmer alleging that he really doesn't focus that much on his company's stock price. No kidding. When you are now independently wealthy, why should you? Your best friend is chairman, and you are financially secure.

Of course, it's not Steve Ballmer's company, or Bill Gates' company. It's the woefully-under-represented shareholders' company. And it performs like one, doesn't it?
So, my expectation for the coming months is: no 'buy' signal from my selection process for Microsoft, but maybe for Apple.

Wednesday, January 17, 2007

Apple Corp: Devil or Angel?

My partner sent me a recent article from the New York Times written by Randall Stross, entitled, "Want an iPhone? Beware the iHandcuffs."

The essence of the article is that Apple (Computer) Corporation has behaved insensitively and arrogantly in its design of the iPod product line, and its iTunes online music store. At issue is the management of copyrights, use of purchased music by the user, and the copying of music tracks.

Within days, ironically, Alan Murray, managing editor of the Wall Street Journal, weighed in, both on CNBC and in print, on the personal arrogance of Apple's CEO, Steve Jobs.

My partner went so far as to suggest, as we discussed the article, and this post, that Apple is guilty of a Robinson-Patman and/or Clayton Act violation on the basis of "tying."

I may be in the minority here, but I don't really believe Apple has: a) done anything illegal; b) done anything inherently wrong, and/or; c) behaved in some 'evil' manner.

My contention is that those who would substantially innovate existing products, or bring to market large-scale new products, of necessity, must make provisions for entire systems of products and services. As such, in order to even offer the products or services, they must design and be responsible for, at least initially, the provision of all the components for the system. In order to make this profitable, the innovating company will appear to be overly-concerned with control of the components of the system, and will also appear to not care about its interoperability with other systems, without which, the innovative system may function effectively.

Let me mention a few other examples of this phenomenon: Edison's electric power system, Westinghouse's competing alternating current electrical power system, General David Sarnoff's RCA Corporation television broadcasting and viewing system, and Phillips' audio cassette technology.

In all of these prior examples, an innovative company had to provide for a complete system in order to offer a sensible value proposition to multiple user classes.

Take television, for example. To market television, RCA had to design, produce, test and manage the input devices- cameras, amplifiers, processors, broadcasting equipment- network equipment, and receiving devices- televisions. The company had to design, sell and operate a standardized system of equipment, in order for television stations and viewers to be assured that their products would work correctly as part of the heretofore nonexistent system.

Apple did something similar for music some six years ago. Prior to iPods, we bought music at $14-18/disc, as an entire album. If you wanted one or two songs on an album, tough luck. You had to buy the whole thing, to buy it legally.

Then along came Apple's iPod and iTunes online music store. Mind you, prior to that, nobody could figure out how to shake the music industry out of its lethargy, as technology seemed poised to illegally 'solve' the music purchase problem that users had- how to buy individual tracks of music.

Do Apple's products use a different, proprietary encoding process for its iTunes music? Yes. Are Apple's products the only choices for playing digitally-encoded music? No.

Microsoft, Sandisk, and several other vendors also offer MP3 digital music players. And, hey, you can always dust off your CD player. Nobody's putting a gun to anyone's head to force them to buy an iPod. Or use iTunes.

Even when you buy an iPod, there is no "tying" arrangement which forces you to buy anything on iTunes. Unlike the original "TBA" (for tires, batteries and accessories) tying cases, for which the Clayton Act was used to halt the practice, Apple requires no purchase from or of one product, in order to use another. iTunes may be used to buy music, by the song, and play it on your PC. Or to record it onto a CD. You needn't have an iPod to use iTunes. Similarly, you may rip your existing CDs, using iTunes, into tracks to store on your iPod. But no 'purchase' is required to do this, aside from the original iPod purchase.

This system has been so successful that Microsoft, RealNetworks, and eMusic all now compete to offer online music. The consumer has choices.

In fact, the closing paragraph of Mr. Stross' article reads thusly,

"Pointing to South Korea, where copy protection has disappeared, Mr. Goldberg invoked the pithy aphorism attributed to the author William Gibson: “The future is here; it’s just not widely distributed yet.” "

I contend that, without its closed system, Apple would have had little economic reason to innovate with its iPod/iTunes system in the first place. Is it really bad for innovation to be restrictive and controlled at first, if, without such restrictions, the innovation never occurs?

This is the central argument in patent policy and law. How much protection is sufficient to produce innovation and growth, societal advancement, and how much is too much, which strangles emerging technologies.

Closed systems initially assure revenue and profit for the innovator. In time, if the innovation is useful, but deemed too restrictive, others will typically get around the technology issues.

Or, if the technological barriers are too heavily relied upon, they may be simply leapfrogged. Landline telephony's stranglehold on the communications network was eventually supplanted by wireless technology, resulting in the value of those landline telephone companies plummeting far more rapidly than was imagined. The entire anti-trust efforts against the industry during the 1980s and 1990s has all been for naught, as AT&T has now been reassembled, albeit with far less monopoly power than it had twenty years ago.

Music and entertainment is far less concentrated, as an industry sector. Already, other product solutions for listening to music are available which do not involve Apple's products. Therefore, for people to continue to complain about Apple's product strategy, vis a vis its copy management aspects, suggests that Apple's offerings still retain certain unique features, but these complainers do not wish to accept the terms of purchase and use of an iPod or iTunes.

Maybe it's me, but I simply see nothing illegal in Apple's actions. It's smart product management policy. They have constructed a legal, technological barrier which provides them with price maintenance benefits, but stops far short of being an illegal monopoly.

It may be argued that iPod profits funded the iPhone and AppleTV. Both are likely to influence and affect, respectively, communications and video entertainment. Does anyone think that an iPhone will only call other iPhones?

Over the long term, closed systems either prove their worth, or become susceptible to competition. Even when the first option seems to occur, as in telephony, over a sufficiently long term, even it becomes an example of the second option.

Monday, January 15, 2007

EBay and StubHub

An article in last week's Wall Street Journal detailed the acquisition of StubHub by EBay. I wrote about StubHub in a post here, last September.

In my earlier piece, I asked why TicketMaster and its clients didn't accept the responsibility for doing a poor job of ticket pricing, in order to get guaranteed, although lower, upfront revenues across their many venues.

In this piece, discussing the upstart's acquisition by the online auction giant, the focus is missed opportunities. Doesn't EBay's purchase of the ticket reseller sort of indict their own business development model? StubHub is only six years old. If this doesn't demonstrate EBay's paucity of ideas now, what does?

As an online resale venture, EBay should have owned this market. Instead, it had to cough up $310MM for it. And we're not talking about buying a corporate titan. StubHub is a shoestring operation, compared to either TicketMaster or EBay.

As with many other businesses which have outgrown their initial, value-adding concept, EBay now seems to have to grow revenues at much lower margins than in the past. In this case, paying upfront to secure access to a business they missed starting themselves earlier in this decade.

Dell, Home Depot, Wal-Mart, Microsoft.....these are all companies whose core value-adding breakthrough eventually exhausted itself. As the Yahoo-sourced chart on the left demonstrates (please click on the chart to view the enlarged version), now EBay is joining them. The firm outperformed the S&P500 during 2002-04, and then began to slide. Since 2004, it has actually declined in value, while the index has continued its steady, gentle rise. So, while EBay has outperformed the S&P over the entire period, it has not consistently, nor recently, outperformed it.

It's not wrong, per se, for EBay to be buying StubHub. However, I think it's a sign that you won't be seeing the firm return to earning consistently superior total returns for its shareholders anytime soon. If they can't grow profitably and organically in their own product/market space, what do they possess with which to add superior value for their customers and, thus, indirectly, their shareholders?

More Business Holiday Wal-Mart Bashing on CNBC

Today is a Federal holiday, so the equity markets are closed. There is no Wall Street Journal. And CNBC has 'alternative' programming running.

As it so typically does on days like this, CNBC trotted out its apparently award-winning video piece, by on-air analyst and commentator David Faber, which spotlights Wal-Mart.

I admit to never having sat throught the whole production at one go. I've seen quite a bit of it in segments, though. It's fair to say that it highlights both good, and bad, facets of the company, and features extensive interview footage with the current CEO, Lee Scott, as well as some time with retired CEO David Glass.

However, my point in this brief post is to suggest that maybe CNBC is stoking the anti-Wal-Mart fires merely by running this thing every business holiday. I swear that this is at least the third time in twelve months that they have done this.

If you search this blog for the term "Wal-Mart," you'll recover 20 articles which mention the company. If you read this column regularly, then you know I am not exactly a fan of Wal-Mart's CEO, management team, or performance. But I bear absolutely no animosity toward the firm, per se. It's a matter of poor performance, not a personal grudge.

With CNBC, I am beginning to wonder if they simply want to hurt Wal-Mart as much as possible, until, I don't know....the company fires Lee Scott? Closes its last American store?

With so many thousands of hours of video footage, why must CNBC resort so frequently to just one, long video production about one harried company, nearly each business/Federal holiday?

Sunday, January 14, 2007

Validation and Echoes of My Video Distribution Prediction

The Wall Street Journal ran a piece detailing some of the new deals being cut to mainstream video content straight onto Internet TV. The Journal's article concludes, as I did last fall, here, and here, that these deals

"could undercut the role of cable and satellite companies."

Apparently, we now have Starz and Showtime distributing their content to the web for TV viewing. Nickelodeon is doing the same. Vehicles such as the Microsoft XBox 360 can be the terminus for the program, from which it will be fed to the user's television.

a Forrester Research source pronounced that,

"if you're a cable operator, this is very disturbing."

Indeed, it is. While, as the article points out, the move may not occur overnight, the die is definitely cast.

In a related article in the Journal, two days later, CBS is reported to be plunging headlong into this model, under the aegis of Leslie Moonves. As the owner of old media 'assets,' such as network television, print publishers, and outdoor media, CBS was more or less left holding the bag, when Sumner Redstone split Viacom from CBS.

Although Moonves denied that recent ratings softness was related to the also-recent, bold moves into the digital world, one cannot be so naive as to believe this. Moonves just saw his boss fire Tom Freston, at Viacom, for being too slow to move his businesses to the internet.

In fact, the title of the Journal piece about CBS is "CBS Ties Its Future to Internet Efforts."

Despite the reluctance of many, including my consulting friend, S, to believe that a video content disintermediation from network, via the internet, to television, could be so soon in coming, apparently I am not the only one who sees things this way. Not only are others seeing the implications, but major old-media companies are already throwing in the towel and heading for what they hope are choice pieces of 'real estate' in the new, online content world.

With Apple's recently-announced 'AppleTV' initiative, and Microsoft's XBox360, the wireless links from PC to TV accessory are now in place. All that remains is for prices to begin to slide, and consumers will be capable of controlling the when, from where, and how of their video content consumption, via the internet.

Look for broadcast networks to offer less new or premium content, and, as I wrote in some of the above-linked pieces, producers to vend their content directly from their own websites to consumers, completely bypassing anything but the iTunes "general store," or similar content aggregation websites.