Friday, February 09, 2007

Hedge Fund Going Public

Today's big financial news is the IPO of the Fortress hedge fund. Believe it or not, I believe this is a small piece of what will eventually prove to be the solution to what some see as a "corporate governance" problem.

In a lunch conversation with a retired Wall Street lawyer, I sketched out my thoughts on how the Fortress IPO may affect private equity, and my friend concurred. Fortress is but an early example of the eventual reincarnation of what I refer to as "corsair capitalism," in memory of J.P. Morgan. As I wrote recently, here, the original intent of the corporate form was liquidity for the "robber barons," which, as a side-benefit, provided a means by which less-wealthy people could benefit besides the titans of industry. Add in the SEC, and, eventually, you had a decent start to a modern capitalistic system.

However, the concept of "shareholder democracy" was never intended, from our current corporate form. The boards were supposed to be composed of successful business people, whose financial interests were materially entwined with the companies on whose boards they served.

Now, we are quite far removed from that day and practice. Thus, there is no modern-day equivalent among public companies for the corporate boards of eighty years ago, or even fifty years ago. Since markets tend to create solutions on their own, I view private equity as such a solution.

Private equity and hedge funds are probably now different only in term of investment. The effective structures are not all that dissimilar.

Thus, with Fortress' IPO, I think we are seeing a first step on the way to some form of equity-participation structures for the 'common' investor, by private equity firms. My lunch colleague agreed. Assuming tax considerations can be addressed, private equity firms can begin to bundle up their current holdings, monetize them as spin-offs of some type in the market, and redeploy the equity into more private deals. Everyone wins, at first.

The private equity partnerships unload and unlock the value of their earlier deals, receive fresh capital, and smaller investors are able to enjoy equity returns similar to those of the private partnerships. The only fly in the ointment will be when someone other than a Goldman Sachs, Texas Pacific or KKR does this and craters one of their equity vehicles.

It's quite a testament to the public's latent desire for 'corsair capitalism' that so many people would subscribe to the Fortress IPO, driving the price skyward, despite having essentially no control over the continued presence of the key principals, the nature of the business, risk levels, or even a knowledge of the nature of the deals underpinning the value of the equity. Nobody's screaming that there is too much risk, or insufficient disclosure, in the Fortress offering.

If that's not a market signal, what is? Barney Frank, please take note. We are witnessing the market-sourced 'reform' for currently-perceived "problems" with corporate governance. It's not about a need for "shareholder democracy," or shareholders voting on the CEO's compensation package, but, simply, the ability for shareholders, at a low-cost, to buy and sell shares, as their way of "voting." And they are "buying" little-understood Fortress, in droves.

Thursday, February 08, 2007

Steve Job's DRM Manifesto

Tuesday's release of Steve Job's essay on DRM (digital rights management) and digital music formats/downloading is yet another sign that Apple is running on all cylinders. To read the actual essay, go here.

Of course, it has become the grist of many business media articles. Even this blog.

The Wall Street Journal, a favorite topic and news source of mine, ran an article on Wednesday essentially reprising the situation, the essay, and possible results.

Give Jobs credit for sensing the changing winds, and now allying himself with consumers, against the very music publishing companies whose support enabled him to make Apple the 'first mover' in the digital music downloading and device product/service/market.

Perhaps the European regulators were posing too much of a threat for Apple recently. Certainly, Jobs' call to remove all copy protection can only benefit Apple, with its immense market share, in a freely-competitive market for digital music players and music downloads. With no bar to playing any site's downloads on any player, the battle will go to the better-designed sites, players notwithstanding. Jobs is clearly issuing a challenge, and betting on his own people, that both Apple's digital devices and its iTunes site can each best competition in their own space.

I've personally never seen much in the argument that, by buying an iPod, you could only buy music from iTunes. Or that iTunes songs couldn't play on devices from other companies. You knew that going in. It was part of the value proposition, and millions of people knowingly paid to take that proposition from Apple.

What I found stunning is the previously-unknown data that Jobs cited regarding the provenance of music found on the average iPod, and its status. I have to admit, it pretty much describes my own behavioral patterns. I've bought some music from iTunes, but most of the content on my fully-loaded Shuffle is songs I ripped from my own CDs using iTunes' ripping facility.

Jobs makes two very potent points in his essay. First, that if such a small amount ( just 3%) of each iPod's capacity is filled with iTunes-source music, how can copy protection on such a sliver of the music market matter? Second, that the big four music publishers sell far more unprotected CDs every year, injecting untold amounts of easily pirate-able music into consumers' hands. And, by the way, I have witnessed just this sort of behavior among my daughter and her friends, with their iPods.

Once again, we see why Jobs and Apple are in such a strong market position in their various product/market spaces. That short essay was an incredibly timed and aimed piece of marketing which will now cause uncertainty among competitors, and potentially unlock large new markets for both iPods and iTunes, at a single stroke. All while making the music publishers now the 'bad guys' on which regulators and consumers may vent their anger over digital music copy protection.

My guess is that this most recent competitive move by Jobs will increase the chances that Apple will continue its record of several years of consistently superior total return performance for its owners.

Wednesday, February 07, 2007

More Video Content Deals

Today's Wall Street Journal carried two stories concerning new media arrangements to distribute video content.

Comcast and Facebook are forming an alliance to allow videos created on Facebook to air on Comcast, prospectively on a television channel. According to the Journal article,

"....numerous links will be established between the social-networking site and Ziddio, a new Web site dedicated to "user generated content" that Comcast is developing. The best videos created by Facebook users as selected by a panel of judges will end up on Comcast's video-on-demand service and possibly on a new show that Facebook and Comcast hope will be aired by a television network."

As I recall, this summer Comcast was reported to have a fairly large staff ready to spend significant money to acquire video content for distribution from Comcast's own sites. I wrote a post about it, here. In that piece, I republished a quote from Comcast's CEO, Steve Burke, stating that he wants Comcast to be the megaportal on the net.

Frankly, this Facebook-Ziddio-Comcast deal underwhelms me. Facxebook seems to be one of those teen-twentysomething social-networking sites. It's not MySpace. Having some sort of filtering where themed video entries are judged, then packaged up for viewing, sounds a world different than just logging onto YouTube, opening an account, and uploading your video.

If this is Comcast's video content plan's best idea, I think they have trouble ahead. AppleTV is already going to threaten their television carriage revenue stream over time.

Then there's this little article from today's Journal, which will probably add to Comcast's coming difficulties. TiVo and Amazon are teaming up to offer content from the former on the latter's devices. So quiet was Amazon's Unbox service's debut that this article was the first I'd heard of it.

Apparently, Amazon allows users of its Unbox service to buy or rent, then download, video content from CBS and Paramount Pictures, a unit of Viacom, plus other sources.

TiVo, in order to attempt to reposition itself with value-added service, away from digital-on-demand cable TV, recently introduced new features that allow users to download content from the Internet, for viewing on a television.

As I look at these two articles, I see a confirmation of my sense that video content distribution is spreading with each passing month, and nobody will likely have a lock on exclusivity. The Amazon-TiVo alliance, coupled with the imminent AppleTV release, seems to put more long-term pressure on the viability of cable operator's television-service-based revenue stream. In time, ATT, Verizon, Comcast,, may be fighting over the 'double-play,' rather than the 'triple-play.'

Which comes back to my suspicion that, as investments, telecommunications and cable operators are long term risks if one desires consistently superior total returns. Both groups are faced with owning and managing expensive infrastructure, probably mispriced, and both hope that video content distribution will bail them out. However, as more and more content disintermediates to the internet, then hops back to the television screen, thanks to an emerging class of server-like accessories which wirelessly download from the home personal computer, I suspect those hopes will be dashed.

Tuesday, February 06, 2007

Network TV's Bright Spot: Charging Cable for "Free" Programming

Yesterday's Wall Street Journal featured a piece describing how broadcast television networks are charging cable systems for carriage of what the public may view for free on those networks and their affiliates.

It's a non-trivial issue, when a major cable system, such as Comcast, is faced with an ultimatum to pay, or be unable to deliver the Superbowl telecast to its viewers.

Will it matter in the long term? My guess is that it will not. Right now, many sources of video content come to the broadcast networks first. And events such as the Superbowl have been loathe to sell the rights to a cable-only network, thus freezing out 'free' viewers. Talk about bread and circuses.....

However, this describes the current state of affairs.

Won't cable look to new programming sources? Will production still go to network exclusively?

Is it not possible that, whenever the Superbowl carriage rights are up for renewal, the NFL might sell only the broadcast rights to CBS, ABC or NBC, and reserve direct cable carriage for a negotiated fee directly from each cable network?

Is that not disintermediation? The article mentions the growing power of broadcast networks, as groups of stations are now allowed to be owned by a single entity. Markets being what they are, would not content providers also feel some pinch from that, and seek wider distribution alternatives?

Could television-focused video content not go the route of the Hollywood studio distribution model, treating various markets- US cinemas, cable movie networks, overseas, DVDs- separately?

Seen in this light, we could well be seeing the common occurrence of vendors in a shrinking product/market raising prices as the category becomes extremely mature. Faced with fleeing consumers, demand is relatively inelastic, so raising prices is the theoretically 'correct' choice to maximize profits.

In this case, however, it could well accelerate the development of vibrant alternative distribution channels around broadcast television. The recent Viacom-YouTube non-agreement, leaving the former to demand removal of its content from the latter's site, only reinforces how broadcast is raising the drawbridges and hunkering down with its legacy content.

My consultant friend S opined last year that one of the best things to have happened to all this old video material, such as Viacom's content, was to be seen, for free, on YouTube, thus rekindling consumer interest, for no advertising expenditures, in old bands, television programs, movies, etc. There's bound to have been some uptick in demand for some of that content on a paying basis.

Google, of course, is perfectly familiar and comfortable with this revenue model. Give content away for free, and run the most efficient advertising program available around it. Old media can't quite get it's head around this, and, since it can't control the vehicle, is simply refusing to play by the new rules.

My sense is that this burst of network demands for fees to distribute "free" content will last only so long as the average life of the existing content's exclusivity to network distribution. Then, watch out. Disintermediation is bound to run rampant, with devices such as XBox and AppleTV to facilitate streaming bespoke video content right off your high-speed connection, through your video your wireless network, to a server (the Xbox, AppleTV, etc.) connected to your television.

Monday, February 05, 2007

Michael Dell's Return as CEO

I would be remiss if I did not remark on this past week's news concerning Michael Dell.

Dell fired Kevin Rollins, Michael Dell's replacement as CEO, and announced the return of its namesake founder.

Of course, the business media was awash in stories concerning whether Michael Dell is the right CEO for Dell, whether he can turn the company around, etc.

Frequent readers of this blog will not be surprised by my own opinion on this matter. In the many prior posts I have written (search on the word "Dell" to see some of them) about this company, I have expressed my belief that the firm's business model's best days are behind it.

Today's Wall Street Journal carries a piece in the Marketplace section, on page B4, by Joann Lublin & Erin White. Under the "Theory&Practice" column, they discuss Dell's return from the perspective of other founders returning to rescue their floundering companies.

Frankly, I find the piece to be of no value. Whether a lot of founders are returning to their companies or not, the high-profile cases are very few in number, and, thus, statistically meaningless.

My own opinion is that it's better to look at the type of product or service involved, rather than the class of phenomenon, i.e., "returning founders and their successes."

Consider, for example, Ted Waitt, of Gateway, Mark Eppley, of LapLink, and Charles Schwab, of the company that bears his name.

Waitt's company shares the same product space with Michael Dell's, and has had a similar fate. Perhaps more cataclysmic, and earlier, due to the differing sales models, but, still, it's clear the era of expensive, custom-build PCs delivering consistently superior total returns is behind us. In their prime, I owned both Gateway and Dell in my portfolio, so successful was each. But that was more than seven years ago now.

Eppley's product has been eclipsed by technology. Period. Who would even bother with a dedicated PC-to-PC cabled product anymore? I'm no expert, and even I plumped for a wireless network in my home last year. So Laplink's bankruptcy filing, as of 2003, did not surprise me.

Schwab's case is different, due to its being in the discount brokerage space. It was firmly glued to the rise, and subsequent fall, of market-bubble day-trading volumes by retail "investors" in the late '90s. True, Schwab has apparently refocused his firm on discount trading. However, as a customer, I have been the target of unwanted 'wealth management' advice which, honestly, I do not find credible, coming from Schwab. Looking at a price chart for Schwab and the S&P500, I can't help noticing that, once again, Schwab's total return performance is tied to market volumes and bull markets. Maybe "Chuck" has turned the firm around, secularly, maybe not. I don't think one could tell in the midst of this rising market.

But, back to Michael Dell. As wonderful and focused as his points were, in the leaked memo which was described in today's Journal, I don't think he'll make much of a difference in terms of returning his firm to consistently superior total returns.

Consider this. If it only takes one person to fix Dell, then how stable is the whole firm? How attractive and reliable should investors consider a firm which rises or falls on just one person, the CEO. And only the founder as CEO?

If, on the other hand, the fault lies with the markets and the business model, and not just the CEO, then what magic does Michael Dell possess that Kevin Rollins did not? Is it just personal magnetism, and pride in the company name? I think Michael Dell is a gifted and effective business leader. He absolutely earned his sizable fortune through smart business management and hard work. He may restore profit margins for Dell, and maybe some revenue growth, as well. However, the salad days of the product/market are simply gone.

As I wrote in this September 4th post last year, after shopping for a new laptop for my daughters, Dell simply missed the changes in consumer behavior with respect to requiring customization, hand-holding, and resisting instant gratification in the form of leaving a store with a PC or laptop that day.

So, while I personally wish Michael Dell success in his attempt to fix what's wrong with his company, I doubt his chances, and I don't think that, even if he enjoys some success, it will do much for long term consistent superior total returns for his shareholders.

Business Media Developments

Last week, I was poking around on blogs which discuss business media and various on-air personalities, such as Erin Burnett, Becky Quick, Maria Bartiromo, as the Citigroup-Maria Bartiromo-Todd Thomson-CNBC situation seemed to play out.

I guess I'm the last person on the planet to learn that Fox is reputed to be planning the launch of a business-only channel to compete with CNBC. Even my partner responded to my remark about this as 'old news.'

Several blogs discussed how Maria Bartiromo has besmirched the reputations of on-air female reporters and anchors with her activities, including her alleged, very public dating of the married former Citigroup exec, Todd Thomson. Additionally, one blog alleged Bartiromo is attempting, or did attempt, to trademark the phrase "money honey." Again, my partner confirmed this, saying he remembered reading some reference to it in the New York Times last month. So it's a very recent development, set in the current context, not some story from several years back, when Bartiromo was referred to via that phrase more commonly. That this trademark story is true makes you wonder what sort of undercurrents must be swirling among the on-air staff over at CNBC, with such a prima donna in their midst.

In any event, widely-held expectations appear to be that, should Fox be planning a new, competing business network, they would be obviously targeting any disgruntled, underrepresented CNBC anchors, such as Erin Burnett. This could become an interesting development in many ways.

If Fox takes its usual hard, analytic look at business, in contrast to CNBC's increasing focus on business and investing as entertainment, they could very well dent the current market leader's share. Not to mention give business leaders and pundits an alternative perch from which to speak, perhaps relaxing the choke-hold that CNBC currently seems to have on business interviews. Maybe Fox would even consider eschewing CNBC's format of digging up and presenting ever-more unknown "analysts" and "experts," and, instead, retain fewer, first-rate consultants to opine on important business news stories and developments.

It is, however, sad that so many observers feel that Fox needs to recruit its own attractive female on-air anchors to realistically compete with CNBC.