Friday, April 06, 2007

Potpourri: Schumpeter & Leon Black's Apollo Group

As expected from the recent quasi-public offering of Blackstone Group shares, its competitors are lining up to cash in on the current premiums for private equity firms.

According to yesterday's Wall Street Journal, the latest private equity shop approaching the market valuation trough is Leon Black's Apollo Group. Apollo has done some indirect public issuances in smaller ways over the last few years, but, now, it is rumored to be in its main operations.

Allegedly, Leon Black doesn't want to jeopardize his company's valuation by mimicking Blackstone, so he is reported to be leaning to selling unregistered shares to institutional investors. This provides some time for the market to forget about Blackstone before the Apollo Group shares could be registered and traded. Meanwhile, Leon & Co. would be counting the cash from the sale of 10% of their firm.

The land rush is on! Of course, as is typical with financial services trends, need we be reminded by something other than the current sub-prime lending debacle, most trends end in underpriced risk for assets. It's likely that private equity IPOs will be no different.

Come a year or so hence, one of the lower-tiered private equity firms will probably issue public shares and promptly tank, sparking immediate and huffy calls from Congress for "an investigation."

On a more upbeat topic, today's Journal featured an interesting profile of Joseph Schumpeter, one of my personal favorites among economists. Much of my own proprietary work is based upon my readings of, and insights gained from his early work in the 1920s. While the review of Thomas McGraw's book discussed both the professional and personal aspects of his life, I particularly enjoyed the author's focus on Schumpter's beliefs on the ultimate fate of free-market capitalism.

Briefly, Schumpeter felt that, in time, capitalism's superb ability to create societal wealth would be overtaken by its effects on those creatively 'destroyed' in the process. Much like an Ayn Rand novel, he foresaw ungrateful, misunderstanding pseudo-intellectuals, many of whom owe their wealth to his principles, attacking the system for its very successes.

Of equal interest to me was Schumpeter's prescience with respect to monopoly power. He correctly predicted, a la AT&T, Xerox, and Microsoft, that monopoly power did not need to be regulated, because it would tend to die of its own weight, under the attack of new, more technologically-adept competitors. Considering the now laughable concern over Microsoft's browser antics, Schumpeter's clarity of vision on this topic is remarkable.

Even today, a good 80 years after some of his most important work, Schumpeter is still over the heads of most of our politicians, legislators, and regulators.

Thursday, April 05, 2007

More On Starbuck's Expansion

Tuesday's Wall Street Journal featured a very good piece describing the tactical considerations involving how Starbucks sites new stores.

As with most business operations, the details of each site's size, funding, and expectations paint a picture of how the company uses its knowledge of consumer behavior to capitalize on its brand, and drive growth.

Thus, one observes the phenomenon, written about in the story, of as many as three out of four corners of an urban intersection sporting a Starbucks coffee store, of one size and ownership or another.

This reminds me of nothing so much as the late-1980's growth of another fast-service, convenience-oriented purveyor of morning comestibles- Au Bon Pain. Many years ago, the Journal featured a similar article on that older chain. At the time, I traveled to Boston frequently on business, and noticed the saturation of the Downtown Crossing area with Au Bon Pain stores.

If I recollect, the chain found pretty much the same behavioral information on its customers as Starbucks has on theirs. For many urban areas, total sales actually rose with a saturation of stores, rather than splintering a seemingly-fixed demand among more outlets. Traffic patterns and purpose-specific visits allowed for more sales as the brand was more conveniently placed in the paths of more consumers.

Even Coke knows this, as its CEO has recently articulated a goal of putting a Coke within some very short distance or time period from every thirsty consumer on the globe.
It's hard to say whether or not this type of attention to operational detail and consumer behavior will result in Starbucks' total return reversing its recent stall, as depicted in the Yahoo-sourced chart (click on the chart to view a larger version) at the beginning of this post. I wrote much the same in my piece on Schultz's now-infamous memo, back in February of this year, here.
So, while I applaud Schultz's honesty about the changing nature of his brand's face, and his minion's careful study of consumer behaviors in their siting and expansion of outlets, I remain sceptical (hey, I am "the reasoned sceptic") that these well-intentioned efforts will reverse the firm's fortunes, and its senescence, on behalf of its shareholders.

Wednesday, April 04, 2007

The New Anti-YouTube Consortium

The recent alliance of MySpace (NewsCorp), NBC, AOL, Microsoft and Yahoo for video clip distribution, obviously presents a competitive presence to Google's YouTube unit.

The Wall Street Journal article on the subject, from 23 March, included this passage,

"This is a game changer for Internet video," said News Corp. President Peter Chernin in a statement announcing the deal. "We'll have access to just about the entire U.S. Internet audience at launch." News Corp. and NBC said the four portals account for 96% of the monthly U.S. unique users on the Web.

In the past, I have found Peter Chernin to be distinctly "old media" in his outlook, and I believe that continues here. Despite Chernin's rather pompous statement, I'm not at all sure the alliance is a "game changer."

If anything, YouTube was and is the "game changer." Does anyone seriously think this recently-announced alliance would have occurred, but for the competitive pressure and observed consumer behaviors brought about by YouTube's popularity? When Google bought it, that only added to the sense of urgency on the part of old media interests who own old content. My prior posts about this, found by clicking on the labels for "old media" and "new media," discuss some of these issues. Older, as-yet unlabeled posts, do so as well. Of the newer ones, this one, here, perhaps best reflects my thinking.

That is, this alliance reflects a broad "hunkering down" of old media behind its own walls, hoping to stave off the inevitable move by consumers to view short, compressed video clips of its own choosing. Paul Kedrovsky has likened this to the Napster-originated trends that have eviscerated the music business sector of late.

So, if anything has been game changing, it would seem to be YouTube's allowing consumers to expect short clips to be viewable for free.

However, take a step back, and ask yourself, 'what do the alliance partners stand to gain by their rejection of YouTube, that they could not have had through an alliance with YouTube?'

It seems to me that it is simply advertising revenues. Pure and simple.

Like Amazon, or eBay, YouTube has staked out, developed, and established a single, highly-visible, valuable piece of online real estate. For all Chernin's puffery, consumers go to YouTube for video. They go to the other sites for a plethora of needs, but it's unclear that video is one of them, or a salient one. Visits to the various sites are not all 'equal,' in this sense.

More to the point, do I, or most consumers, really want to have to guess, or try to keep straight, which sites have which content? When visiting YouTube, I just search, and view. Pretty much any significant, recent news clip will be there. Plus much entertainment, as well. How do I determine, in advance, the URLs and specific content type of each of the 'alliance' sites?

I still contend that the networks', and all video library owners,' best alternative was and is to revenue share with YouTube and distribute on that site. It's unclear that the financial economics of all these other video distribution sites will pan out, whereas, when they are concentrated on a provider's site, the content owners simply collect a payment for their share of ad revenue, plus any sales revenues from consumers who choose to buy the clip they are watching on YouTube.

So, in conclusion, I think that I am underwhelmed by the NewsCorp-Yahoo-NBC-MSN-AOL alliance. It smacks, to me, of old media trying, once more, to lasso a consumer behavior trend that is already out of the gate and roaming far afield from the old consumption models for video content.

Tuesday, April 03, 2007

The Street.Com On Dell: 'Who Cares?'

I admit, it's not something I ever thought I'd be doing. But I have to write a post to compliment The

Finally, someone there said something with which I can strongly identify. Not that I ever expected it from staffers at firm, founded by Jim Cramer. But one of their number spoke truth to power last week on CNBC, boldly contending, about Dell's recent malaise and accounting troubles,

'who cares? it's an old tech has been,' or words to that effect.

When the CNBC on-air anchor/interviewer sputtered unbelievingly, and stated that many people have a lot of money in Dell, and it's a big company, the Street guy retorted something like,

'so is Xerox. How big is its market cap? Does anyone think it is a leading tech firm anymore?'

Very well put. Big does by no means equal important. Often, it simply means 'still bloated and primed to collapse like a souffle' when sufficient technological change finally sweeps away the last of its ancient underpinnings. Like Kodak. A victim of corporate senescence. Its best days of profitable growth are in the rear view mirror. Consistently superior returns, if they ever happened at Kodak, are a thing long past.

This is yet another example of Schumpeterian dynamics in action. Dell's model went out of fashion some years ago. The guy from the Street echoed my own analysis, noting that Dell hasn't been an outperformer in many years- nearly a decade. It's not just 'having a few bad years.' It's history, as an outperforming company. So are Xerox, Kodak, IBM, and Microsoft. Their earlier technological breakthroughs are now parts of the fabric of our current world, and no longer offer the potential for consistently profitable growth that distinguishes a consistently superior company in terms of total returns.

The truth is, companies, like athletes, slow with age, then die. Aging may be prolonged. Death may come by acquisition, dissolution, or bankruptcy. But it inevitably comes. In the meantime, watching some companies is like going to a baseball game and seeing the 'oldtimers' play between halves of a doubleheader. I guess somebody has to be CEO of Kodak, IBM and Xerox, but does anyone really care anymore? Personally, I can no longer name those people off the top of my head, as I can with Google.

The guy from The has it right. These firms may once have been fast-growing, leading tech icons. But now, they are just old, large, slow tech has-beens.

Monday, April 02, 2007

Richard Breeden's New Career: Interventionist Hedge Fund Manager

The weekend's Wall Street Journal carried a piece describing former SEC Chairman Richard Breeden's new career. He runs nine-month old hedge fund which actively harangues the management of its holdings to "improve strategy and governance."

OK, other hedge fund managers spout off about this a lot these days. And I'm on record as thinking that, unless, like Eddie Lampert, you actually buy the company, who cares what some shareholder thinks about corporate strategy? As Holman Jenkins noted, in agreement with me, in an article about which I wrote recently, here, there are plenty of other types of companies to buy, rather than become an activist outside shareholder.

According to the article, Calpers has invested $400MM with Breeden's fund. Yet, Breeden is a novice at this. Reading further, the Journal piece states,

"(Breeden's) basic idea is to take modest stakes in smaller companies whose stocks have been lagging due to strategic missteps, out-of-whack compensation structures or other problems, and then advise management on how to get back on track."

Allegedly, Breeden's efforts at strategy advisory led Alexander & Baldwin, one of his holdings, to listen to him, and the stock price rose 18%.

However, I Googled Breeden's bio, and found that he has essentially no business background whatsoever, save for a brief stint as a legal beagle at the resuscitated WorldCom. And some unspecified work in 'his own turnaround and workout' firm. No strategy consulting stretches at McKinsey or Bain. No tenure as Chief Strategy Officer at some large-cap companies. Nada.

Calpers & company are betting hundreds of millions of dollars on the strategic insights of a non-practicing lawyer.

Breeden has certainly cashed in on the current rage among institutional investors for "relational" fund management. Whether he can actually maintain a healthy margin over the S&P500 returns for more than his first year of management remains to be seen. Given how hard it is for seasoned managers to outperform the S&P, you'd think Breeden has to do more than just run around waving the ethics flag and shouting, in effect, 'listen to me!'

Had I known it would be that easy, and could have gotten tens of millions in client money myself, I guess I could have saved a lot of time and trouble actually researching what corporate performance patterns tend to consistently outperform the index.

Sunday, April 01, 2007

Corn Farming, Ethanol. and Innovation

Normally, I read stories about midwestern farmers being myopic or whiny, grasping, transfer-payment-consuming small businessmen. However, the one in Thursday's Wall Street Journal was different.

Instead of the typical subsidy theme, this one featured a dynamic, heads-up Iowa farmer, Mr. Nelson, who epitomizes how innovation can occur, even in something as commoditized as corn farming.

He has already forward-integrated into ethanol production, capturing value with production plants. Additionally, he uses financial futures aggressively to hedge his production income.

To me, this is real progress. An operating farmer who is able to respond to market dynamics, move to add more value than simply growing crops, and use available derivatives and insurance vehicles to manage his income more smoothly.

If someone can do this in corn, and move from being a victim-like farmer, to one who takes advantage of market changes to add more value, then I believe it demonstrates that such behavior is inherently achievable in any product/market.