Saturday, October 11, 2008

Jamie Dimon's Stupid Remarks on "Mark to Market"

I worked for the Chase Manhattan Bank in the late 1980s. During that time, while reporting to the company's chief planning officer, I was fortunate to be exposed to all the Vice-Chairmen, COOs, CEOs and Chairmen of the firm.

Thus, I had close contact with then-Chairman Bill Butcher and President Tom Labrecque. Particularly the latter, as a long-running project necessitated periodic contact with him over several years.

Between my personal interactions with the senior managers of the bank, and its performance during the period, I would say that these were not particularly effective managers. Nor, outside of their original respective areas of competence, did they give any evidence of being smart about managing a large company, let alone a bank.

Butcher had been a corporate lending officer. A salesman. He had no particular expertise in management.

Labrecque had been an accountant at the bank. Apparently judged unsuitable for credit training, he was never a line lending officer, but, rather, a bean counter in a then-obscure funding unit engaged in trading Treasuries. His rise had much to do with some accidents which left positions above him unexpectedly open. And the rise of importance of his unit, as Fed Chairman Paul Volcker took the lid off of interest rates during the Carter era.

My point is, just because a person is the CEO or Chairman of Chase (Manhattan) Bank, or its successor banks, is absolutely no reason, alone, to accord him credibility beyond his actual, original area of business training or practice. Neither Butcher, nor Labrecque were, in the event, smart men when it came to operating one of the nation's largest money center banks.
The nearby chart shows the equity prices of Chase, Citigroup, from where Dimon and his mentor, Sandy Weill, hailed, and the S&P500 Index since 1977.
In that time, neither bank has managed to outperform the index. So much for vaunted wisdom from the CEOs of these two financial giants. Why would you expect brilliance from CEOs of companies that can't manage to outperform the broad index over 30 years?
Especially Chase, which has never outperformed the index?
After many mergers and acquisitions involving more than half of the major banks which existed on the island of Manhattan in 1990, and several in the Midwest, we come to Chase's current CEO, Jamie Dimon. The latest in a line of undistinguished CEOs of the large US money center bank.
There's nothing to indicate he's any smarter than his predecessors, Butcher and Labrecque, or even the undistinguished, though workmanlike head of the Chemical Bank which took over Chase, Walter Shipley.

On Friday, I heard a news story on CNBC alleging that Jamie had come out explicitly in favor of 'mark to market' as a valuation methodology.

Many have claimed this approach, mandated, in its simplest sense, by the Sarbanes-Oxley bill, in a fit of post-Enron pique, is largely responsible for the rapid evaporation of value from the balance sheets of US financial institutions in the past 15 months. In various posts on this blog, I have argued as much, too.

Let's recall from whence Jamie hails, professionally. As I wrote in this post, nearly a year ago,

"If you are familiar with Dimon's mentor, Sandy Weill's origins, then none of this should surprise you. Weill was the original low-cost consolidator of the brokerage industry wire houses in the 1970s and '80s. He was never an investment banker. Rather, his specialty was combining commodity-like retail brokers, combining back offices, sometimes improving technology, and reaping the improved margins. Eventually, he ran out of wire houses to buy and consolidate, so he sold out to American Express.

By the time he was ousted from Citigroup, Weill had demonstrated that he had learned no new tricks since he lost control of ShearsonLehmanBrothers to Amex. Citi's topsy-turvy growth and increased complexity resulted in serious lapses in risk management and attention to business details. Significant growth was not something Citi achieved, sans acquisition, under Weill.

Personally, I doubt that Dimon knows much that he did not learn from Weill. His signal achievement since being tossed out of Citigroup consisted of giving BancOne the "Weill treatment." It is not yet clear he's done anything more at Chase, nor that he is capable of more, either."

Lofty current title notwithstanding, Dimon is, in reality, little more than a fixer's fixer. Sandy Weill's erstwhile young bagman/apprentice.

I believe no credibility whatsoever should be accorded Dimon's pronouncements about anything beyond Chase's next quarter's performance, if that.

He's no leading light of finance, much less business in general. There is absolutely nothing in Dimon's background to suggest or give evidence that he is capable of uttering any sensible words on the concept of valuation and 'mark to market' rules thereof.

Friday, October 10, 2008

Lessons From Barry Diller?

Tuesday's Wall Street Journal featured an interview with Barry Diller. While not intending to, I think Shira Ovide's reporting on Diller's pearls of wisdom- and I use the term loosely- provides some managerial insights.

First, Ovide gives us the familiar legend concerning Diller's career. How he rose from the mailroom of some entertainment-related firm to eventually run Paramount Pictures. Recently, he drew attention for his very public fight with investor John Malone, culminating in a law suit, over the management of IAC/InteractiveCorp, Diller's latest media-related creation.

In answer to the question, "Why did you decide to break up IAC?," Diller replied,

"Because I thought the company was overly complex and unmanageable. What I've learned over the years is that focus and singular purpose is the best approach for businesses. How can you function across 12 different businesses from financial services to dating?

If you're going to run a public company, be absolutely certain of what the parameters are, what the clarity is, that you can explain it to yourselves and explain it externally."

Pardon me for noticing, but I don't think Diller has any classical management training whatsoever. And it shows.

Did it really take Diller some 40 years to realize what financial research has known for at least the past 30? I guess the silver lining is that Diller is very explicit as an apparently newly-converted apostle of focus and simplicity in business endeavors.

The interviewer goes on to ask, "If, as you say, having operations across multiple businesses didn't work for IAC, why does it work for General Electric Co. or Walt Disney Co.?" To which Diller answered,

"Companies like GE and Procter & Gamble have been in business for a long time. Over decades or a century you're bound to figure out a management structure that works. Disney is a single brand in essence, but then you can say, wait a minute, what about ESPN? Tell me why ESPN belongs in Disney. I don't think it gives Disney anything. It gives Disney money, but I think that money is discounted. Its true value, I think Disney would say, is disguised.

I don't have answers for anybody else. What I know is that internal complexity makes for superficiality. There's never essentially a pure story unless there's a pure product line that has its own shining clarity."

It's noteworthy that the Journal writer and Diller both confuse the issue of which other companies are 'operating across multiple businesses.' GE, P&G and Disney are far from similar in their business mixes.

The nearby, Yahoo-sourced chart illustrates my point. Stretching back to roughly 1962, it compares equity value growth for Disney, P&G, GE, IAC/Interactive and the S&P500 Index.

Disney is the best of the lot, followed by P&G. IACI is above P&G, but given it's late start, it's not clear that the beginning point for it is correct.

In any case, leaving aside IACI for now, Disney has been mostly about entertainment with a theme. Only with the purchase of CapCities/ABC and ESPN did it extend that interest, but those are still media/entertainment properties.

P&G has always had a consumer retail food, beverage and, more recently, cosmetics focus. It's not a diversified conglomerate.

GE, as I have written frequently, is diversified and, thus, a good example of Diller's and the writer's intent to identify a company with unconnected businesses.

What I find extremely disappointing, and a little frightening, is that Diller, who has run large companies for years, cannot distinguish the obvious and crucial difference between the nature of P&G and GE.

I'm not saying that every trained CEO with an MBA practices good, enlightened or inspired management. But I am saying that, observing Diller's rather primitive views on business structure, after so many years in senior positions, it gives one pause to consider letting an uneducated person run a large company.

It's one thing to perhaps have a flair for creating entertainment programming. That doesn't make a person skilled in the arts of leading a company to consistently superior total return performance.

Thursday, October 09, 2008

Buybacks vs. Dividends: A Moot Point

Monday's Wall Street Journal contained an instructive article entitled "Corporate Buybacks Test Concept of Value," in its Heard On The Street column.

The proposition of the piece was that share buybacks, meant to boost earnings per share by cutting the denominator of shares outstanding, are merely a gaming tool for corporate executives to manage EPS.

The article's author, Liam Denning, then argues that dividend payments enforce better financial discipline.

To me, these points are moot.

Denning cites stock buybacks of $1.4 trillion among S&P500 companies between 2005 and 2007.

What this tells me is that these firms failed to find adequate investment opportunities. My proprietary performance research indicates that consistently superior firms add employees, capital and expenses over time. They don't shrink their capital base.

Perhaps it is my focus on fundamentals which leads me to ignore EPS. Years of corporate management positions taught me that what can be gamed, probably will be gamed. Thus, any performance measure with a controllable term in a ratio is suspect.

Total return is a ratio of two market values. EPS is the ratios of two controllable (by management) values- one from the income statement, the other from the balance sheet.

Among the companies Denning mentions in his piece are GE, Lehman Brothers, Exxon Mobil and AIG. None of which I have owned.

Back when I was in graduate school for business, we were taught that dividend policy didn't matter. If anything, as the Chicago School determined, taxes made dividends less preferable than leaving it on the firm's balance sheet, to be invested in operations.

To argue whether buybacks or dividends are better for 'financial discipline,' in my opinion, misses the point.

Why invest in a company that is signaling that it isn't growing? That is literally returning capital to owners and shrinking?

My original research further revealed that growing firms had a greater chance of consistently outperforming market average total returns, and by a greater margin, than slow- or non-growth firms.

Knowing that, why would an investor even want to own a firm that is publicly marking itself as a less-capable firm, in terms of market outperformance?

Wednesday, October 08, 2008

Nationalize Large US Commercial Banks?

My friend B's predictions from 1993 about the shape of banking have finally come true, as I noted in this recent post.

Not only did he correctly prophesy the consolidation of all publicly-held banking into 3 mega-utilities. He also opined that, in time, all of their activities would be so heavily regulated as to make them quasi-governmental entities.

In effect, B believed that the remaining commercial banks would become more tightly-leashed, duller, larger GSEs than the failed Fannie and Freddie.

Edmund Phelps' editorial in a recent edition of the Wall Street Journal contained a clue to this possibility. He argues for direct investment of US Treasury funds in commercial banks, in exchange for warrants.

What if, rather than this temporary investment, the US government simply funded basic consumer banking in this country?

By stripping large US commercial banks of any risk-taking businesses besides heavily quantifiable, easily-regulated activities such as mortgages, small business lending and credit cards- the government would effectively nationalize the basic consumer savings and lending activities of our economy.

Given the turmoil experienced by the financial sector over the past 50 years, this might not be a bad thing. The financial behemoths left standing- Chase, Wells, maybe Citigroup, and BofA- have equity that will most likely perform like a bond anyway. They are too large to consistently create value at an above-average rate.

Rather than allow these giants to be universal banks, including underwriting and securities trading, why not just go the other way, strip them of asset management, underwriting, trading and any esoteric lending businesses that can't be operated by rule-based procedures involving credit scores, down payments, balance sheets, etc?

By removing all scope for innovation in these banks, the bedrock deposit-taking, savings safekeeping and lending functions in America would be insured, protected, and firewalled from any other riskier financial activities.

As we observe Congressional reaction to its own seminal role in the current financial debacle, we can probably expect the same dimwitted approach to re-regulating financial services as we saw to their deregulation a decade ago. It's a fair bet that now Congress will legislate mortgage lending to a point of near-unprofitability. Perfect for a heavily-restricted and regulated financial utility to handle.

With the current Treasury purchases of mortgage-backed securities, including CDOs, you may as well just put the government explicitly in the mortgage lending business. They mandated the lending to poor credit risks that started the current financial situation. Why not just nationalize housing lending for home values below some multiple of the median US home price?

All of the other activities which have led to financial sector troubles- derivatives, swaps, asset-backed securities, trading, 'creative' mortgages, subprime credit cards, and the like- will be prohibited to commercial banks, but allowed for private financial institutions and non-bank, publicly-held entities. But even these latter institutions would have leverage restrictions. Plus, Federal agencies could, by setting down rules for counterparty dealings, limit the shape and leverage of unregulated entities by making them unsuitable counterparties for regulated ones.

I honestly believe we are heading toward this point. With such a major structural change in financial services providers in the past few months, it's clear that these recent events are spurring an oversized backlash. This will probably result in a replacement of Glass-Steagall with some assemblage of rules which will make commercial banking virtually publicly-owned. In order to avoid risky activities, banks which take consumer deposits, do basic secured or credit-score-based lending and transact financial transfers will be effectively government-guaranteed, and perhaps even owned.

This actually isn't such a bad idea, given the gradual concentration of crucial banking functions into so few, publicly-held companies. With such a dearth of diversity among financial institution options now, it may well be prudent for our society to simply nationalize basic banking functions.

Ironically, financial services has, by dint of technology, become so commoditized, yet able to destabilize our economy by taking undue, ill-advised risk, that basic financial services are, truly, a form of 'utility.' Like power and rail transport.

We seem to have arrived at a point where, truthfully, there's not a nickel's worth of difference between the surviving financial juggernauts. Citigroup, Chase, BofA, Wells Fargo- they all do the same core functions in the same way, using similar risk-scoring and processes.

They may as well become federally-guaranteed, heavily-restricted agents of the government, licensed to purvey basic, unspectacular financial services.

In another twist, this will return Glass-Steagall to our country's financial service sector, by simple, draconian government control of basic banking. Anything else will have to be done elsewhere. Probably, again, with heavy regulation, if publicly-held, on leverage, margin positions, and use of exchanges for allowed instruments.

Do I think this would be wise? Yes. And, I think, so does my friend, B, whose idea this originally was.

We've seen that financial institutions, when publicly-held, will test regulatory boundaries and ignore systemic effects of their actions. They are paid to enrich shareholders, not the public at large. So long as innovative, growth-oriented financial services are allowed to be pursued in conjunction with economically-sensitive businesses such as deposits, consumer loans, mortgages, and mutual funds, they will poison the entire system with the risks of their growth-oriented businesses.

And, eventually, as occurred in this latest round of financial mismanagement, they will even throw risk-management to the winds in basic, non-growth businesses like mortgage lending.

The only way to firmly stop this is to completely firewall those core financial functions.

It may take 5 years, or a decade, but we will probably get to that point eventually. And, in light of recent observations on human behavior for profit-making, but less acuity on risk management, in the financial sector, it's almost certainly a good thing.

Tuesday, October 07, 2008

Lehman's Choices

I've written 11 posts which include a "Lehman" label. The first was this one on April 7th of this year. In that piece, I wrote,

"Is it possible that only one, perhaps two investment banks- Goldman Sachs and Merrill Lynch- are now sufficiently diversely funded and large to avoid the ultimate negative consequence of their leverage- insolvency?

Maybe Lehman, for all its efforts, just still isn't sufficiently diverse, large, and long term funded. Maybe Morgan Stanley isn't, either.

You have to wonder if this is about to be an opportune time for Dick Fuld, Lehman's hardnosed CEO, to exit via a sale of his firm to a commercial bank.

Once Fed funding is off-limits again, what will Lehman's stock price do? For how long will investors really believe that an investment bank is safe, now that SEC Chairman Chris Cox noted that Bear Stearns lost slightly less than 90% of its liquid assets in one day last month?

Lehman still has significant exposure to mortgage loans. And Bear's experience demonstrates how quickly the loans from commercial banks, on which all brokers/investment banks depend, can be pulled.

Per my recent posts in the wake of the Fed's window opening to investment banks, I just don't see, long term, why any but perhaps the very best one or two investment banks can remain independent."

Fuld's claims that he never turned down an offer to buy Lehman are beside the point. Fuld should have been seeking a buyer by the Friday before the weekend that marked Bear Stearns' death.

How hard a knock on his noggin did Fuld require to see the end coming? In this post, written only a few weeks ago, I related John Gutfreund's comments on CNBC one mid-September morning. Significant among his remarks were these, which I reported in my post,

"Gutfreund was asked how Lehman's demise came about, and he said something to the effect,

"By the over-optimistic actions of the firm's CEO and his senior managers."

Pressed further, he allowed as how the firm was unrealistic, in this era and environment, to believe it could remain independent while grappling with its writedown problems. Gutfreund never used Fuld's name, but pointed out that Lehman had had months in which to gracefully sell itself before coming to Chapter 11.

It was refreshing to see a sensible, blunt Wall Street veteran avoid needless emotion and hysteria, while simply calling yesterday's events as he saw them. Nothing to be panicked about.

Rather, one company, Lehman, prolonging its own agony...."

Once again, I'm in good company. Gutfreund feels, as do I, that Fuld had plenty of time to see the end coming and sell Lehman to a commercial bank. He chose not to.

He now blames short sellers for destroying his firm. But, in truth, Fuld had at least a full month, post-Bear Stearns' demise, to arrange a sale of Lehman from a position of some strength.

Worse, he seems to have put his executives, especially Erin Callan, the short-timer Lehman CFO, up to allaying fears among counterparties and investors as to Lehman's solvency. While publicly proclaiming that Lehman had no need for more capital, privately, the firm's senior executives were constantly discussing plans to raise needed additional capital throughout this past summer.

Yes, Lehman, as run by Dick Fuld, had ample opportunity to end its life in a different manner than it did.

We'll never know for certain, but it's a fair bet that Dick Fuld's ego cost all Lehman's shareholders, including many then-current, and past employees a considerable chunk of their assets. How much might have a commercial bank- foreign or domestic- paid for a still-breathing Lehman in April of this year?

A lot more than the zero value remaining shareholders realized by the firm's bankruptcy. And, for that, you have to blame Dick Fuld.

Dick Fuld's Miserable Performance On Capitol Hill

I happened to see/hear the first twenty or so minutes of former Lehman CEO Dick Fuld's appearance before a House Committee yesterday morning.

It wasn't pretty.

What's worse, it was entirely preventable.

Think about it. Dick Fuld had been Lehman's CEO since 1994. He possesses a hulking, intimidating physique, along with the reputation for being a fairly demanding taskmaster. You just don't see him as a soft, cuddly, sensitive type of CEO.

In appearing before Henry Waxman's (D-CA) House committee, Fuld must have known he was to be the sacrificial offering from the capital markets to the US voting populace.

Despite losing a large percentage of his personal fortune as Lehman's stock declined in value, and, ultimately, became worthless, Fuld has enough assets to hire a public relations firm.

Didn't Fuld know, as everyone else did, that the lead questions would be about Fuld's multi-hundred-million dollar compensation, relative to wrecking the US capital markets and banking system?

An old friend of mine with some Army training once told me about how soldiers are trained to respond to an ambush.


The reasoning is, ambushed soldiers are probably going to die anyway. So they may as well immediately counter-attack the enemy, hoping for surprise, disorganized resistance, and confusion.

Fuld should have realized he was walking into an ambush. And, thus, attacked immediately.

Since Fuld had the initiative, because of his opening statement, he was in a perfect position to begin with something like these hypothetical remarks,

'Good morning Members.

I'm Richard Fuld, former CEO, since 1994, of now-defunct Lehman Brothers Holdings.

Rather than go into detail about my firm's role in the current financial markets turmoil, I want to address the issue which, I am quite sure, is on everyone's mind. And one with which you will, no doubt, wish to paint me as the lead villain in this drama.

"How can I justify my total compensation, while CEO of Lehman for 14 years, of nearly $500MM?"

I'm sure that to many Americans watching this hearing, I seem to be a prime example of what many call 'greed' and 'excess' in the US financial services sector. They, and you, will ask,

"How can anyone possibly be worth that much money? How could anyone do something that merits him earning nearly half a billion dollars over 14 years?"

Well, Members, and fellow Americans, let me start by saying I am not ashamed of earning that money. And I emphasize EARNING that compensation. I EARNED every penny of it.

I worked as CEO for Lehman Brothers Holdings. Not the Federal government, the Red Cross, or a small local retail shop in a neighborhood shopping mall.

Lehman Brothers was a publicly-traded company with many shareholders. A board of directors- not me- determined my level of compensation. The shareholders elected that board.

Over my term as CEO, I increased the value of Lehman shareholders' investment in my firm from $3/share in 1994 to, at its peak, $80/share last year. The market value of Lehman Brothers rose from $__B to $____B during that time.

The team I built at Lehman created that value for our shareholders. Much of my personal wealth was either paid in, and/or remained in Lehman stock.

On a percentage basis, of the $__B in shareholder value we created at Lehman, the total pool of bonuses over 14 years was $__MM. My own share of compensation, as a percentage of the increase in Lehman's market value, was __%.

In short, Lehman was in a business which allowed us to borrow money from banks and make a lot of money for people- institutions, pension funds of union workers, teachers, municipal workers, and others- who owned our stock. As such, our board of directors saw fit to pay us a small percentage, but, in actual dollar terms, large amounts of money, for doing so.

We, my team and I, and I, personally, were paid a small share of the value we created.

I feel very strongly that I, and my executive team and all the employees of Lehman Brothers, are a fine example of the American economic system. We were well-paid when we created value. We made money for those who invested in our company.

Does anyone begrudge a Hollywood director for making millions of dollars from a movie? Is Steven Spielberg here being cross-examined for making a huge fortune while directing and producing movies for which millions of people pay to see?

How about Steve Jobs, the CEO of Apple? Are you going to bring him in to face scrutiny for being a highly-paid CEO who created massive wealth for his shareholders?

I represent the successful pursuit of the American dream. I worked hard, built a good team, made money for my firm's owners, and was highly-paid for doing that.

That's supposed to be what a person with ambition, skill and luck can do in America.

I won't apologize for that.

Members, I made nearly half a billion dollars over 14 years because I worked hard and created value for others.

That is, I submit, much more than any of you have ever done in your jobs. I made more money than you do because I worked hard making money for others.

Who are you to judge, let alone ask, whether I made too much money? You are members of an institution- Congress- with an approval rating so low- 10%- as to be embarrassing to even BE a member.

Now, I will take your questions....."

In addition to this, were I Dick Fuld, I would have had my public relations consultant obtain whatever embarrassing and incriminating information available on Waxman and the other Democratic House members on the Committee. Republicans, too, for that matter.

Sadly, pathetically, Fuld began by reading from a dry, uninteresting history of his career with Lehman. He approached the Committee almost apologetically, meekly, and timidly.

Predictably, after his meandering opening statement, Waxman launched his first salvo in the form of a slide with Fuld's annual compensation, a recounting of the current situation, and the question,

"Is this fair?"

The video of this appears below.

What was Fuld thinking? He reduced himself to tentatively acquiesing to the correctness of the numbers, and argued that he had to exercise options. It looked bad. Really bad.

Granted, he made some of the points I make in my hypothetical speech. But it would have been so much more forceful had Fuld gotten there first with his own framework.

I don't particularly like Fuld. From yesterday's Wall Street Journal article detailing Lehman's summer activities- both public and hidden- it sure looks like Fuld and his team misled the investing public about Lehman's true health.

If it were up to me, Fuld and his senior managers would be charged with fraud, because they privately doubted their firm could survive, but publicly made statements otherwise.

But Dick Fuld's day in court is a different matter than his being lynched by innuendo in a televised House Committee hearing.

Fuld's performance- if you can call it that- was an embarrassment to himself, his firm and CEOs in general.

Monday, October 06, 2008

Highspeed Cable Cannabilizes Cable Television Sooner Than Expected

Back in August of 2006, I wrote this post regarding the potential for residential video viewers to begin disconnecting their cable television subscriptions. Instead, I suggested, they would make use of the soon-to-come boxes allowing wireless internet access from highspeed cable directly to their televisions.

That day seems to have arrived sooner than anyone expected for quite a few American viewers. Specifically, several friends, including a consultant, S, all warned me that I was overly optimistic in my belief that we were only a few years from the point at which fairly average people would begin to unplug their cable television service.

Friday's Wall Street Journal featured an article entitled, "Turn On, Tune Out, Click Here," in the Technology section. The piece begins with this passage,

"Kenny Johnson, a senior credit analyst for Fox Home Entertainment in Garden Grove, Calif., recently took a hard look at his finances -- and canceled his c-television subscription.
With a newborn child at home and growing household expenses, he says the decision saved him and his wife more than $40 a month -- or roughly the increase he is paying at the gas pump every month for his commute to work. The couple held onto their DSL Internet connection, which costs about $38 a month.

Now the Johnsons access most of their television shows online, through Web sites like, in addition to the free broadcasts they pick up over the airwaves. They also bought a set-top box that allows them to stream shows via to their television set, including episodes of NBC's "The Office" and Showtime's "Weeds."

"To me, it looks just like my cable," Mr. Johnson says.

In the past two years, nearly every major network show and many of the biggest cable programs have become available on the Internet. The virtual library of content includes everything from "Desperate Housewives" and "CSI" to "The Colbert Report" and "Mad Men.""

This last sentence is, of course, the key change in the past few years. I cannot say I foresaw this over two years ago, but I did envision something similar, but actually more costly. Rather than charging for this programming, networks are actually giving them away for free, with a smattering of advertising.

How lucky can viewers get? We might have had to pay by the view at individual network, program or producer websites. Instead, the same television executives who paid for their programming with ad revenues have graciously replicated that model online.

The piece further notes,

"Many shows can be viewed for free and are accompanied by a dollop of ads that's small when compared with the number of commercial breaks on television. As a result, some cost-conscious consumers are ditching their cable subscriptions altogether.

"I'm saving a lot of money," says Tony Leach, a product manager at an online stock brokerage firm in the Bay Area. Mr. Leach canceled his $60-a-month cable subscription two years ago and has watched all of his favorite television shows on the Internet ever since.

The online television bonanza reflects a scramble by networks and cable stations to avoid the fate of the music business, which is still reeling from the effects of piracy and early missed opportunities to capitalize on the Internet.

Complete episodes of about 90% of prime-time network television shows and roughly 20% of cable shows are now available online, according to Forrester Research analyst James McQuivey. There are still notable holdouts, such as Fox's "American Idol" and current seasons of HBO series like "Entourage."

The number of people watching all of their programs online is still small; some estimates put the number at just 1% of the total television audience. In part, that's because watching online isn't as easy as channel surfing on the couch, TV remote in hand. Viewers must either watch shows on their personal computers, or use a device like Apple TV, which allows them to download shows from the Internet onto their television sets.

Within the next several years, however, media and technology executives say that a host of new technologies will make television access to online video a mainstream phenomenon. Vudu Inc. already sells a $299 set-top box with a remote control that allows users to download television shows for $1.99 per episode. Microsoft and Sony both sell television shows that users of their Xbox 360 and PlayStation 3 videogame consoles can download over the Internet for viewing on television sets.

Netflix subscribers can buy a $99 set-top box from Roku Inc. that streams videos on their television sets. The service is included at no extra charge in the monthly Netflix fee for renting DVDs."

This, of course, is key. I have written a few posts about the set-top box issue in the past. Now, with more options than just AppleTV, it's a fair bet that in only a year or two, the current trend away from cable television subscriptions will increase markedly. For example, again, from the Journal article,

"Still, research firm Nielsen Online estimates that in June, 3.2 million Internet users watched more than 106 million video streams on, a site that wasn't available to the public until March. Walt Disney Co.'s delivered nearly 27 million streams to 2.9 million viewers that same month, according to Nielsen. The data include everything from behind-the-scenes clips and segments of shows to complete episodes.

Other research indicates that online video-watching is cannibalizing television audiences. According to a spring survey by Integrated Media Measurement Inc., a research firm that tracks media consumption, more than 20% of viewers in the firm's 3,200-person panel watched some prime-time network television online, up from roughly 6% in the fall. Half of those online viewers said they were no longer watching those shows on television.

"What this study is showing is that the long-vaunted convergence of the TV and the computer is happening faster than anybody thought it was happening," says Tom Zito, Integrated Media's company's CEO."

Eventually, one would conjecture that this will affect the economics of the current cable distribution system. And, on that topic, the article reports,

"Tensions are beginning to heat up between cable operators and cable channels over free Web video. Glenn Britt, CEO of Time Warner Cable Inc., has been one of the most outspoken people on the topic, telling cable program executives to not expect to continue sharing subscription revenue if they keep giving their top shows away for free online. When asked how programmers have been responding to such comments, Mr. Britt says, "Not well."

Executives at several cable channels were reluctant to discuss the topic, at the risk of further straining discussions about Internet television with their cable-operator partners. "We can't just cut the cable companies out," says one of those executives."

Meaning, as I understand it, that cable system operators intend to keep more money if their content suppliers continue to give that content away freely on their own websites.

"Last year, the average home received 118.6 cable channels but only tuned into about 16 of them, or 13% of the total available to them, according to the Nielsen Co."

This, too, is one of the reasons I predicted this effect a few years ago. I can personally attest to watching only about 5-8 channels, while my daughter uses perhaps an additional 3. She, too, has no compunction about watching video content on one of the two wireless laptops to which she has access on a regular basis.

Thus, the closing passage of the Journal piece is prophetic,

"Jeff Pulver, founder of Inc., which makes it easier to locate Web television shows, says he believes the Facebook and Google generation won't look askance at getting television shows from the Internet.

Still, adds Mr. Pulver, who also co-founded the Internet phone company Vonage, "Some people will [continue] to subscribe to cable, the way their grandparents did.""

That's pretty much how I feel, too.

Only this weekend, my daughter and I discussed buying a Tivo unit to secure better content access, as well as, of course, the digital recording capabilities which will restore my 'watch one record another' channel feature which I lost when Comcast insisted that I use their digital set top box. In fact, my daughter even counseled against going with the cable operator's digital video recorder, based on her knowledge of the units' flaws and failure statistics.

It won't be surprising to me at all if we unplug from Comcast's television services within two years. I'll save about $600/year, which means the most expensive of the new wireless internet-to-television boxes will have a 6 month payback. Schumpeterian dynamics are quickly moving internet-based video content, that is not business news, into a competitively-advantaged position relative to packaged video content services offered by cable operators.

I rather doubt I'm alone on this issue, as the Journal article notes.