Friday, October 12, 2007

Madonna's New Music Deal

You can say a lot of things about Madonna, but you cannot call her an inept businesswoman.

As Michael Wolfe, of Vanity Fair, opined on CNBC this morning, the one-time Material Girl has made a beautiful timing move, playing off two entertainment distributors and hedging her risk for the next, probably last decade of her career.

In an industry in which music album sales are declining swiftly, Madonna has forsaken a conventional distributor, Warner Music, to sign with Live Nation, a concert promoter, for $120MM.

The singer's advance is $17.5MM for the 10 year pact, which weighs in at a nice million dollar-plus annual compensation. Madonna then receives 90% of concert admission, 50% of licensing revenues, and 70% of merchandising revenues.

In some ways, this deal reminds me of Howard Stern's contract with Sirius. The talent ends up taking more risk then the distributor, because a failure of the latter to perform leaves the former short of promised revenues and having nobody to make good on the contract.

Nobody seems to think Warner is making a mistake letting Live Nation take this deal. Madonna is, at best, a matured entertainer. Never exactly a signature voice to begin with, she's extended her career with ever more risque acts in which to position her rather uninteresting voice and commonplace songs.

Whether she will pay off for the concert promoter is anybody's guess, but Madonna certainly seems to have paid off for Madonna.

No matter how quickly recorded music continues to fade as a revenue source, she's locked in a rich price for Live Nation's right to present her artistic efforts for the next ten years.

If only the CEOs at some of our larger companies, like GM, GE and Ford, had the Midas touch that Madonna has.

Some things just aren't taught in school, are they? Or, evidently, by Jack Welch.

Thursday, October 11, 2007

Auto Makers, The UAW & CAFE

Holman Jenkins wrote a superb editorial in yesterday's Wall Street Journal on this topic.

In his piece, Jenkins points out the forgotten burden still bedeviling Detroit's auto makers- government-mandated CAFE standards.

Much as I argued in my post yesterday, here, that government works best when it simply sets minimal standards and allows people to create value, I feel, like Jenkins, that the CAFE concept is an abomination which violates this idea.

In an ideal world, people would be free to choose whatever mix of automobile features they wished, including the vehicle's gas mileage. Each person's individual weighting of this feature would be their own.

Not so in our real world. In our world, do-gooding legislators have decided what the range of fuel economies will be among vehicles you will be allowed to purchase.

As Jenkins so elegantly puts it,

"One analyst shop, Global Insight Inc., reckons that under a realistic CAFE scenario, by 2020 one-third of the new car fleet would have to be diesel-powered and half would have to consist of diesel- or gasoline-electric hybrids. This implies massive investments on which the auto makers would not earn a decent return. Why not? Because consumers do not value these improvements highly enough to pay the price for delivering them.

How do we know? Because car makers would be delivering the prescribed mileage improvements already if there were profits in it. Cars that get 50 mpg-plus are a snap, going back to the 1954 Nash Metropolitan and 1990 Geo Metro XFi. But consumers have shown over and over that they value energy-efficiency gains (which auto makers have duly delivered) not to maximize miles per gallon in absolute terms, but to afford heavier, roomier, more comfortable cars, with more horsepower, at any given gasoline price."

See the point? If you just leave the manufacturers to figure out what makes money, they'll supply fuel economy when it pays. And not, when it doesn't.

As it is, Jenkins writes elsewhere in his column,

"Detroit is making genuine headway on one of its perverse burdens -- wage contracts that turned labor into a "fixed cost," requiring the Big Three for decades to churn out cars at a loss to meet "job security" commitments. But the other stanchion of perversity -- CAFE, which has exactly the same effect -- remains in place and will likely become more perverse.

Ford's new CEO Alan Mulally, recently arrived from Boeing, described for Barron's his astonishment upon discovering this reality: "For all you read about it, it was difficult to understand the degree to which the CAFE regulations distort the market . . . Ford had to put out two small cars and discount their prices to get people to take them, so that we could also make and sell cars customers really wanted."

Can it be any clearer than that?

And, while you can blame auto executives stretching back to the 1950s for making boneheaded choices regarding non-cash benefit promises to union employees, CAFE is not their direct fault.

No, this is something created by the gang that's now trying to criminalize buying incandescent lightbulbs.
So, as the nearby, Yahoo-sourced chart indicates, the remaining two publicly-held US auto makers, GM and Ford, have been declining or stuck in neutral since the end of 2003.
Or, in Holman Jenkins' words,
"If the restructuring of Detroit's costs now underway is so epoch-making, why haven't the stock prices of the two remaining publicly traded auto makers noticed?

Maybe because investors recognize the elephant in the room, one whose presence has been a central preoccupation of the UAW and the auto makers, even if ignored in media reports. That pachyderm is known as CAFE, aka the government's Corporate Average Fuel Economy rulebook. How could pending congressional changes in the mileage rules blow sky-high the labor concessions being negotiated by the Big Three? Let us count the ways."
To which I would add Detroit's continuing demonstration of inept basic design and marketing of vehicles. Put it all together, and it spells continued dark days for anyone foolish enough to be the last person stuck holding Ford or GM equity.
I'm gratified that someone else, notably Mr. Jenkins, has identified some of the other reasons why, the recent UAW pacts at GM and Chrysler notwithstanding, American auto makers are still in deep trouble for the long term.

Wednesday, October 10, 2007

Honda, The UAW & The Republican Presidential Candidates' Economic Debate

Today's Wall Street Journal features a page one article discussing the clash between Honda and the UAW over the former's hiring practices at its new plant in Greensburg, Indiana.

Having just watched the Republican Presidential candidates' economic "debate," and I use the term very loosely, on CNBC yesterday afternoon, I couldn't help but frame my reactions to the article in light of that candidate debate. I'll be writing a related post over on my 'Conservative Insights' blog, found on my link list on the right, later today. Be sure to check there for more on this topic.

The central issue in the Honda case is that the state of Indiana, when it extended certain tax preference to Honda for locating its new plant there, did not choose to stipulate that hiring must be open to all state residents. Therefore, Honda chose to limit its employment offers to current residents within an hour's drive of the new plant site.

You can read the article to learn the particulars. Basically, the UAW feels that Honda is unfairly limiting employment to a largely white, rural area which will tend toward a non-union shop.

Honda alleges that they want employees living close to the factory, so that weather is not a factor in having workers show up for their jobs in the winter. It's simply coincidental, Honda says, that this limits employees to largely non-UAW applicants.

Predictably, there is a hue and cry, as one Indiana town, Anderson, recently lost the last of three GM factories, idling 1,500 people. All of whom are ineligible for the Honda employment offer.

If you need to see a clear example of capitalism, governmental support, investment and employment opportunities which showcases the existing divide between Democrats and quasi-socialists, versus Republicans and conservatives, regarding economics, this is one.

For whatever reason, the Governor of Indiana, a Republican, chose to extend to Honda conditions of tax preferences devoid of conditions requiring statewide worker applications. It doesn't take a genius to figure out that the Governor, Mitch Daniels, calculated what he'd have to offer, on behalf of his state, to get the Honda jobs, payroll and business tax revenues. To beat out Ohio, he must have realized he had to allow Honda to avoid paying UAW-mandated wages.

Fair enough. If Indianans don't like this, they'll toss Daniels out at the next election.

Meanwhile, Honda is bringing 2,000 jobs to Indiana. Nobody is holding a gun to the applicants to force them to work at Honda. In just three weeks, Honda closed applications for the plant, having sufficient workers available for their needs.

Sounds like an economic success story, doesn't it? It does, and it is, if you accept individual responsibility and the historic economically-driven mobility of the US population.

And yesterday, Senator Fred Thompson noted this, when, in response to a question, replied that nobody guarantees Americans that they will have their job, in perpetuity, in their current location.

I think this, frankly, is the central economic issue of the day.

Government does not plan the economy. We don't, by and large, run a socialist or fascist economic system in America.

Instead, the idea is that government sets certain conditions of law, safety, taxation, etc., then lets individuals, either solely or collectively, decide how to operate within those parameters to pursue their dreams and achieve economic prosperity.

This has resulted in several characteristic American trends. For one, our being a nation of immigrants. The ultimate 'mobility' is to leave your country to enter America, destination probably little-known, in order to simply participate in its prosperity. Having crossed oceans to arrive here, it's unlikely this population pool will really care to which state they must move to realize their economic dreams.

Second, even within the country, as far back as the 1700s, we've been a nation of economic pioneers. Being born in Illinois, I am familiar with the migration of farmers from the played-out fields of New England to the Midwest, and beyond. For decades, people simply moved west when the local conditions left them economically disappointed.

This is, quite simply, our heritage. Nobody guaranteed the early Dakota farmers unemployment insurance, social security, or health insurance. They'd have laughed at the very idea!

Instead, they were more than willing to measure and take their risks, in exchange for homesteading, in order to work and acquire their land.

Where did we suddenly get the idea that being an American entitles you to remain in situ, and simply have an adequate job delivered to you?

This is where the other side of the economic issue is found. Democrats, or liberal Republicans, like, sadly, Mitt Romney, some of the time, will be found here.

Romney, in response to the employment/recession question in yesterday's debate, right after Thompson, said something like,

'We can't let Michigan be in a one-state recession. This is personal for me. We've all got to get together and work to come up with a solution for this state.'

No, Mitt, actually, we don't.

That would be the job of the Governor of Michigan, and her tax-raising colleagues in the state legislature. Unfortunately for the citizens of the state of Michigan, they've unwisely concentrated their industry in the automotive sector, allowed the UAW to price their workers too expensively, and ignored the inept management of the three large auto makers located in Detroit.

Together, these trends have resulted in an economically troubled state.

Oh, well. Luckily, for Michiganders, there's a little economic zone known as the United States of America, of which they are a part. Forty-nine other states are available, sans passport or governmental permission, to which residents of Michigan are free to move to find better economic prospects.

See the parallel with our economic history? And Indiana's competitive economic attitude?

The only problem with Michigan right now is that too few of it's citizens take individual responsibility for their own economic welfare. They sit on their asses, waiting for a union, a large employer, or 'the state' to take care of them.

To listen to the Democrats, you'd think that we are in a recession, and all need governmental planning to rescue us. Two CNBC-chosen questioners at yesterday's debate, Bartiromo and Matthews, who are pretty much already self-identified liberals, kept pressing the candidates to admit that the US is, or shortly will be, in a recession.

But we're not. Thompson didn't take the bait. Instead, he noted that our government fosters opportunity, but it doesn't guarantee employment.

You need look no further than Indiana, per the Journal piece, to see that there are ways to foster growth, even in the Midwest, at auto plants.

Of course, the jobs may not be UAW-sanctioned. So what?

In a topic discussed at the end of the debate yesterday, unions were described by the candidates as being,

'some good, and some bad.'

Just so. Nobody wanted to name any 'bad' unions, for obvious reasons of vote-getting and fund-raising. However, again, it doesn't take a genius to note the shrinkage in working UAW membership over the past decade, and realize they have ineptly managed their members' situations.

Is Indiana doing something bad to foster non-union employment at Honda in Greensburg? Evidently, not according to the Governor.

Until our politicians become humbler, and return to the roots of America's economic success and vitality, which is based on mobility, we are probably cursed with a continuation of this needless hand-wringing about union jobs in states like Michigan and Indiana, rather than the celebration of new jobs in Indiana.

Tuesday, October 09, 2007

Some Thoughts On Fox's New Business Channel

Last Friday, the idea for this post sort of popped into my head. While cycling, I think. While cranking out the miles on my faithful Giordana Columbus, it suddenly occurred to me how easy and natural the Fox Business News Channel's positions will probably be.

Then, yesterday, I read a Wall Street Journal interview with Roger Ailes, Rupert Murdoch's go-to guy and architect of the new Fox network debuting next Monday.

If my interpretation of the Ailes interview is correct, then I'm not far off with my view of how Fox Business News plans to compete in the cable business news product/market. All Fox has to do is repeat it's Fox News Channel approach- news with a balanced/optimistic outlook- and it should have CNBC running for cover in short order.

To start with, you need to realize that CNBC is very, very liberal, even as a (financial) business news channel. You'd think there isn't all that much wiggle room to inject politics into financial news, but you'd be wrong. After all, the parent is NBC, one of the most politicized networks, with left-leaning Tim Russert and now-retired lefty Tom Brokaw. Both the kind of up-from-the-people sort of anchors that instinctively distrust conservatism, with its message of self-reliance, even though they are examples of the latter.

You can count the non-liberal CNBC anchors/on-air staff on the fingers of one hand- Larry Kudlow, Joe Kernen, Becky Quick, and Erin Burnett. Possibly Michele Caruso-Cabrera.

Among guests, it's basically John Rutledge, Brian Wesbury, and Alan Murray, of the WSJ. After that, whichever guests and staff are not neutral, are heavily biased to the liberal side.

In this group are prominently counted on-air anchors Mark Haines and Carlos Quintanilla, with David Faber a close third, and Washington political correspondent John Harwood bringing up the rear. Long ago, prior to Squawkbox's, CNBC's morning news show, reshuffling, Haines, Joe Kernen and Faber used to comprise the anchor team, and Kernen was heavily out-weighed by his two liberal colleagues. When Becky Quick was added to the team, the balanced got a little better, but was offset by having Haines dominate the next two hours of air time after the morning show ended.

Friday morning, for example, the Friday Labor Dept. jobs number came out. It was 110,000. Much better than expected, especially following the prior month's dismal value. The result?

CNBC guest Robert Reich, former Clinton Secretary of Labor, found much wrong and engaged in massive, 'the economy is in the toilet....again...' hand-wringing. Rather than accept the topline number, he dug until he found one weak entry somewhere in the bowels of the jobs report, and pounded away on this one factoid.

Then resident economically-challenged 'chief economic reporter' Steve Liesman, who has no economics nor business degrees, by the way, weighed in with his worries. The camera cut to one guest who, at that point, solemnly intoned that the US is headed for recession, and this report is error-prone anyway.

After President Bush's speech noting the positive economic expansion evidenced by the job growth numbers, anchor Mark Haines promptly shook his jowly face in a worried frown, solemnly intoning something like,

"Well, I guess he has to try to sound upbeat when the news is good, eh?"

John Harwood, the liberal CNBC Washington political correspondent, then chimed in that, despite Bush's budgets including fighting a shooting war, he spent too much in the past, so he has no credibility now. And that he's simply taking cheap shots at the Democrats now running the Congress.

What I realized during this barrage of gloomy interpretation of upbeat job numbers was that, nearly uniformly, the anchors, reporters and guests on CNBC look for the cloud on the horizon. Forecast the rain squall. Hunt diligently for the worst spin and implication of any economic or business news.

Meanwhile, the equity markets took off like a rocket, with the S&P500 ending the day up nearly one percentage point. Our equity portfolio doubled that Friday.

On CNBC, the US is in a perpetual economic night of crushing debt, both public and private, near-recession, income-inequality of stupefying and near-revolution-inducing scale, and on the brink of economic peril.

Not to mention that with Larry Kudlow being dumped into the deadly 7-8PM time slot on CNBC, the network is sending the signal that he and his economic optimism must be shoved to a slot where it can wither and die in peace. Maybe Kudlow will be available to join a network that actually shares his values- Fox Business News?

All Rupert Murdoch will need to do is hire staff that is willing to look at positive implications of economic news. Not such a hard thing.

And, when you think about it, precisely for which the Wall Street Journal's editorial page is famous. Rather than affecting, or damaging, the great business paper's "objectivity," Murdoch's ace in the hole is, I think, to simply unleash economic realists and market-oriented people like Alan Murray to speak honestly, balanced and maybe even optimistically about the US economy and business affairs.

Which is what they've always done. Now, however, they'll have an entire global video business news channel on which to do it.

I don't know why it took me this long to realize how simple Murdoch's task will be. In a sense, he and his new channel's staff will be shooting fish in a barrel. CNBC is so liberal/negative in its political economic bias that I really think it cannot change. It is, after all, the child of a rather liberally-oriented network, NBC.

Even this summer's programmatic reshuffling on CNBC only resulted in busier, more frenetic information feeds and on-air shouting matches among multi-windowed talking heads. The overt negative, liberal economic biases remain prominent.

Then, I read yesterday's Ailes interview in the Journal. And all my thoughts seemed to coalesce in his responses to Rebecca Dana's questions. It's worth reading the entire piece, but some quotes are:

"...We compete with everybody who has a television on in the sense that we're trying to get more viewers. So I think the CNBC Fox Business Network so-called rivalry could be overblown. It certainly has been in their minds because they've spent an enormous amount of money putting on the screen what they think I'm gonna do. I just think we're gonna launch a very credible business network and I will call a lot of audibles at the line once the play starts. I will not stand around the sidelines with a gamebook and a set of plays that I'll stick to. I'll change many things in the first year I'm sure.

WSJ: What specific things has CNBC done in anticipation of Fox Business? Did they make any programming changes?

MR. AILES: They did that last week in anticipation of our schedule which we haven't put out yet.
They reached out to talent to give it a fresher look. They're still living on shows that in many cases I oversaw the development of 12 years ago when I was there. You know, Squawk Box and Power Lunch. I even built them their set before I left. Their newsroom. Now they've changed it because they went to the new building. They've embraced capitalism suddenly. They've put on shows: what? Capitalism's good! What a plan.

I've made them extremely uncomfortable because they used to just be uncomfortable with corporations and profits because they always only wanted to embrace capitalism on the day they negotiated their own contracts, and they've been forced now to see that it's probably a good idea over all and it creates a lot of charity and a lot of jobs for people and is a good thing. So, if nothing else, it's dragged some of them kicking and screaming toward reality.

WSJ: Has the perspective of the network changed?

MR. AILES: They are, let's be honest, there aren't a lot of. They probably don't reflect the business community in terms of their own economic and political views in many cases. Not that they should, but they should be able to report on it accurately and I think that they've you know, look, they got burned. They rode the bubble up. They flogged the bubble. They got burned. They got tied to a sort of day traders and good market information and it blew up on them and they didn't know quite how to scramble out of that. And rather than come up with a new way of covering it, they blamed the economy and the bubble and all of that for their woes.

I mean, there are some very good individual reporters, anchors and talent at CNBC. I found that when I went there. Everybody thought I would go in there and fire everybody and clean house. It turned out there were a lot of good people there. They lacked a mission and a focus and leadership. Oftentimes that's the case. I think they've improved. They're better. They've certainly had two years to figure out what we might do.

They've had The Wall Street Journal for seven, eight years. So I'm expecting them to come out of the gate the day we launch with some brilliant programming based on The Wall Street Journal. They've been holding it in reserve I think and they're gonna flood me with a tsunami of brilliant ideas and programming on Day One.

We're not particularly targeting CNBC. CNBC does a narrow kind of programming. Unless they do what they could do which is jump us with a whole lot of Wall Street Journal stuff, programming. If they do that, the good stuff will eventually become mine. Cause they're my R and D department.

WSJ: What will become of the WSJ-CNBC deal?

MR. AILES: Unclear. I think that's being sorted out right now. Clearly we're being blocked from using it, but they've enforced that so strongly in the last seven years that they haven't even used it. So, it must be a real tough enforcement.

WSJ: The Fox New Channel reported a 41% rise in operating income in the fourth quarter from higher affiliate fees and advertising growth. How did you accomplish that at a time when viewership is off and ratings are waning for cable news?

MR. AILES: Well, the ratings aren't off much. If you look at Bill O'Reilly the other night. He beat the other prime-time networks five and six to one. He had a one in the demo if you count his two shows. Our morning shows are starting to show growth after a dip last year. We accomplished it by getting our cable deals done, by having a good sales force, by blocking and tackling every day and by having more compelling television than our competitors. That's how it is. A lot of people like to come to Fox News. You'd be surprised. I get hundreds of emails a day from American people saying, "God, you're the only thing we watch." So, we feel a real responsibility to get the story straight and balance the story in some ways. If you watch some news -- I always say to my people, when I see something particularly horrible about America that I think is a little out of proportion to what is actually going on, I call up the desk and say, "Do you have any pictures of people lined up at the border trying to get out?" They say, "What do you mean?" I say, "I just watched that and hell, we've got to get out of here, America's a terrible place. We need to get out fast. There must be guys stacked up at the airport trying to get out of here." No. It turns out everybody's trying to get in, and nobody's trying to get out. We've got to keep that perspective in mind when you cover the news. It doesn't mean you don't cover the bad news about America. You do. It means you don't get up in the morning hating your country. And so, until somebody shows me lines at the border trying to get out, I think there's some good news. come out of journalism school, some nitwit professor who never had to earn a living and hates capitalism, and he's a jerk, and he grades papers according to his own personal philosophy. People get addicted to that crap, then they have to turn around someday and say, "Hey, it's not that bad. I like my paycheck. What a great country."

WSJ: What do you think of Alan Greenspan's recent criticisms of President Bush?

MR. AILES: You can't sell a book in America if you don't dump on Bush. That's the cheapest shot in the world. You cannot get an advance, and you can't sell a book because the publishers are all people who hate Bush and hate Republicans. The quickest way to get an advance and to get a lot of money. Once he did it -- I know Alan. Here's a guy who's worked for Republicans all his life, but he couldn't get a book deal, so he said, "Hey, Bush'll understand. I'm gonna make several million dollars here; I gotta get the dough." Alan understands money, and therefore, I don't, you know, look -- everybody's gotta do their thing. For the next 50 years, anybody who dumps on Bush will get a higher advance.

WSJ: What do you think about the state of the Democratic Party right now?

MR. AILES: I don't have a view of politics. The only thing I would say is that we've had the Whig Party and the Know-Nothing Party and a lot of different parties in America, and you've got to be very careful or you could turn into the party. If you're going to take orders from them, that's who you will become.

WSJ: What do you think of the state of the Republican Party?

MR. AILES: I don't think they have any chance of losing their name or their compass. As you know, politics is split on both sides: economic, socials, that kind of stuff. Any time you come to the end of two terms of any party, there's a certain period of running out of gas and revival and so on, and those are cyclical changes that in my judgment are good for the country because they strengthen the two-party system. It gives everybody a chance to strengthen their ideas and move on themselves."

It's now apparent to me that the new Fox business channel, due on the air at the beginning of next week, is likely to simply share its sister News Channel's approach of fair, but positive and optimistic reporting.

What could be simpler than that? People like to hear the truth about good economic news. Despite what the heads of CNBC and NBC may believe.

And that is why I believe that Murdoch's/Ailes' new Fox Business News Network will, in time, eclipse CNBC, perhaps even raiding some of the better, more balanced/conservative talent, too.

Monday, October 08, 2007

Alcatel's Failed Acquisition of Lucent

The Wall Street Journal published a critical review of Alcatel's acquisition of Lucent last Thursday. As I read the piece, I looked at my own prior posts on this bad idea last Spring, here, and here.

Sadly, it appears that another of my dismal predictions has come true. The acquisition has failed to produce a firm that can create superior shareholder returns. And the CEO, Pat Russo, who led Lucent into this situation, is foundering, as expected.

Russo is reputed to be just steps away from the axe. The 'merger', as it was billed, but was, in reality, an acquisition of Lucent by the French telecom company, Alcatel, has failed. Falling margins, from sales bought at too low a price, are now crippling the sales the firm has managed to win.

The Journal's Thursday article lays out in detail how things have gone from bad to worse for the combined telecommunications giant. How one major competitor, Sweden's Ericsson, took advantage of the period of transition and turmoil at Alcatel to press customers and win accounts from the newly-combining firm.

The Alcatel situation highlights a fundamental reality of the marketplace. Two mediocre firms with struggling product lines cannot, by combination, magically fix their problems and become an excellent firm. Instead, they become one, larger, usually confused mediocre firm.

Sector excess capacity usually results, over the long term, in the better players taking share, while the losing players consolidate and shrink. Alcatel has done the first part of that already, and Russo seems to be presiding over the second step.