Friday, February 25, 2011

GM's Misleading Results

I read this headline, GM Rebounds With Best Year Since 1999, in a section of this morning's Wall Street Journal, with great amusement.

Does anyone really believe the concept implied by this headline? That it's the same GM? Or that, if you think it is the same company, these results are either comparable or real, in the sense of being the result of completely normal business and accounting practices?

Because of course, they are not.

First, this GM exited a federally-distorted bankruptcy. It's not relevant to compare any of this GM's performances to the company with that name which existed prior to 2009.

Second, this GM is the beneficiary of some significant liability restructuring, as well as purchasing preferences by the federal government. From union concessions, related capital structure changes, and federally-mandated dealership closings to atypical tax loss carry-forwards, this bankruptcy was one for the record books. In an ideal capitalist world, GM wouldn't even exist anymore, unless someone bought the right to use the name again. Which would be unlikely, since it had become a symbol of corporate ineptitude, failure, and union excess.

Third, one year does not a turnaround make. Even the Journal article disclosed that the fourth quarter performance was relatively weak.

Sadly, the new GM seems to be just the latest example of the concept that everybody wins. Even a bankrupt corporate failure like GM is given special dispensations, favors and a tilted playing field so that its latest results may be celebrated as a record.

Don't be confused by this accounting magic and think it portends a healthy future in which GM earns consistently superior total returns for years to come.

Amazon Enters Subscription Video On Demand To Challenge Netflix

This post from last December concerning Netflix. In it, I wrote,

"For example, HBO, according to Faber, has recently lost more than one million subscribers to Netflix's instant video content viewing. With so many titles available to stream to computers and/or download to DVRs, HBO's value as a separate paid service is dimming.

Netflix is reputed to be responsible for as much as 25% of web traffic during prime hours, as vast amounts of video content is viewed via streaming.

I'm guessing that, if Netflix were part of the S&P500, It would have made appearances in my equity portfolios by now."

Earlier this week, Amazon announced a subscription service for video on demand for its best customers.

This is not surprising. I find that successful firms which earn consistently superior total returns for a certain periods tend to fail to do so anymore for one or more of three reasons: competitive reactions, inability to continue to surprise investors, or regulatory reactions.

In Netflix's case, it's the first. Amazon has seen the effects of Netflix on Blockbuster, HBO, and probably Amazon's own business of selling DVDs. After arranging the logistics of offering a similar service to their best customers, Amazon is now moving to limit Netflix' inroads into its business.

It's a natural response to a very successful business model. Just like we see competing tablet products coming forth to compete with the iPad.

I'll watch with interest to see if Amazon can actually dent Netflix' volumes, profits and stock price. Chances are, it can. Plus there are some critics of Netflix' accounting, including CNBC contributor Herb Greenberg. The details escape me, but he disagrees with the firm's capitalizing some expenses. If their growth rate falters due to Amazon's moves, and profits are squeezed, then we might see an even faster decline due to an inability to continue whatever aggressive accounting practices are in place.

Thursday, February 24, 2011

Regarding Endangered Jobs

Andy Kessler wrote another one of his quirky, mostly off-target editorials in the Wall Street Journal last Thursday, entitled Is Your Job an Endangered Species? Once again, I'm left wondering why the Journal gives this guy so much space so frequently? Compromising pictures of whom does he have?

Kessler began well enough, observing,

"Technology is eating jobs- and not just obvious ones like toll takers. Tellers, phone operators, stock brokers, stock traders: These jobs are nearly extinct. Since 2007, the New York Stock Exchange has eliminated 1,000 jobs. And when was the last time you spoke to a travel agent?"

It's hardly a novel observation, but a fair way to commence discussing the topic. But then he veers into the surreal with the following nonsequitor,

"So which jobs will be destroyed next? Figure that out and you'll solve the puzzle of where new jobs will appear."

Kessler goes on to sensibly divide jobs into "creators and servers." The latter basically do the non-intellectual things that implement innovators' (sorry- creators') solutions. Then he goes off the rails and sub-divides the servers into sloppers, sponges, supersloppers, slimers and thieves.

Supersloppers, by the way, are marketers who offer consumers features which may carry no economic value, but appeal to psychological or other bases of desire. Slimers are financial sector workers.

Then Kessler returns to his trademark of (re)stating the obvious,

"Like it or not, we are at the beginning of a decades-long trend."

Really? Beginning? How about, oh, 110 years into it? Ask buggy whip manufacturers.

"Watch the divergence in stock performance between companies that actually create and those that are in transition- just look at Apple, Netflix and Google over the last five years as compared to retailers and media."

Fair enough- there you have it in the nearby chart. Along with the S&P500 Index and online retailer Amazon.

Wait, how'd Amazon get in there? It's supposed to be tanking. And, for what it's worth, Andy, Netflix is an online and direct retailer, too.

So much for rigid, mutually exclusive taxonomies. Kessler seems better at selective recall and comparison, the better to make his narrow, but unfortunately for him, indefensible point.

You see, Netflix and Amazon have done well for the past five years, and they are retailers.

Google is the worst of the bunch, underrun only by the Index. Truth is, as Amazon and Netflix demonstrate, there are times when distribution of goods or services is valuable. It's not always just about production or even design.

Kessler finishes his perplexing piece with this passage,

"But be warned that this economy is incredibly dynamic, and there is no quick fix for job creation when so much technology-driven job destruction is taking place. Ultimately the economic growth created by new jobs always overwhelms the drag from jobs destroyed- if policy makers let it happen."

Kessler offers no statistics or empirical evidence of that last, bold assertion. I'm not at all sure it's even true.

That's the real point of this post. Not just to critique Kessler's weak, obvious and otherwise wrong-headed editorial. But to use it to make the following point.

It does little good to simply add up jobs lost and jobs created, and assume all is well when the latter is larger than the former. Wouldn't it be more informative to understand the life-cycle earnings and job types of workers from several different strata of US businesses over the past century? To have a set of benchmarks of life-cycle earnings relative to each worker's average? To see what normative patterns were, by era and job type, education, over the past century or more?

We don't know if Kessler's contentions are true without empirical data.

But I do think this much is true. There is a stronger, multi-lateral global economic competitiveness at higher levels of value-added now than for probably the last 90 years. As such, economies with, on balance, better-educated work forces will probably be able to create higher value-added goods and services. Certainly design them. Maybe produce them.

However, since populations are stratified by intellect and education, this means the US will continue to experience the challenge of employing the lower echelons of its labor force, by skill and education, as more of these jobs go overseas to more productive, cheaper workers in other countries.

Hopefully, America's entrepreneurs and innovators will create business ideas, solutions to consumer needs and wants, which also, with growth, create jobs that can be filled by not only well-educated, highly-skilled people, but the lower rungs of the US labor force, as well.

Wednesday, February 23, 2011

What Is Productivity? What Is Efficiency?

Back in 1997, I wrote a 15-page white paper synthesizing concepts I'd read in various publications on economics, including some of Joseph Schumpeter's seminal papers from the 1920s. The short version of the paper enabled my mentor, Gerry Weiss, to get me a meeting with an influential, well-known former money center bank CEO to discuss the concepts and my resulting research as it applied to corporate performance, both internally for resource allocation, and externally for equity portfolio management.

I found that prior economic literature had, for the most part, failed to distinguish between productivity and efficiency. So I wrote, in part,

"The critical difference between efficiency measures (called “volume efficiencies” in this paper instead of the popular term “productivity”) and productivity measures (called “resource value productivities” in this paper) is that the numerator of the latter are value-denominated, whereas the former are unit-denominated. Thus, volume efficiency measures can’t provide any information regarding the value of what was done more or less efficiently. By splitting what has come to be misnamed productivity into two properly different concepts, some of the confusion regarding the modern behavior of volume efficiency can be better understood."

Imagine my surprise, therefore, that 12 years later, the Wall Street Journal published an editorial in last Wednesday's edition by two McKinsey consultants addressing some of the same concepts. Except that they still didn't get it quite right.

Here's what James Manyika and Vikram Malhotra wrote in their editorial Productivity and Growth: The Enduring Connection,

"Productivity can come either from efficiency gains (i.e., reducing inputs for given output) or by increasing the volume and value of outputs for any given input (for which innovation is a vital driver.)"

The McKinsey guys are close to getting it right, but they still fail to properly split volume efficiency phenomena from the very different notion of creating more value for a level of output.

Further, from reading their article, it's clear that they still mistakenly deal in averages across an economy. They also misleadingly connect productivity and growth, as if one will drive the other.

Truth is, as I found in my proprietary research over a decade ago, the highest resource productivity gains aren't typically associated with raw growth in value for shareholders.

The actual relationships are much more complicated, but I can't discuss them here. It's proprietary.

But I can tell you this. McKinsey's contention that productivity is some amorphous concept which can be grown or driven higher across an economy to spur economic growth is wrong. That's not how Schumpeterian dynamics works. It has more to do with higher value-added solutions displacing older ones in an economy, not simply flogging older competitors' operations to somehow run leaner and faster. Those activities won't create more consumer value.

You might be able to measure these concepts across an economy. But that doesn't mean they are managed or occur at that level.

However, I'm quite sure Manyika's and Malhotra's puff piece in the Journal is just the public facet of a well-orchestrated push, complete with Powerpoint presentations, that's being delivered to every potential client. It makes for good face time and high-spot meetings with CEOs to suggest some new project for, naturally, McKinsey, to measure various aspects of the firm's efficiency and productivity.

For those CEOs and senior executives who can't think for themselves, it will sound very seductive. It reminds me of something Bob Gach, a partner at Andersen Consulting years ago when I worked there, used to say. He didn't like Morgan Stanley, his lead client, very much. He said they were a bad client because they knew too much. Ideally, he contended, a client had to be smart enough to know they needed help, but, unlike the old Salomon, Goldman or Morgan Stanley, not so smart as to know they could do most of the job themselves. That probably also describes the ideal McKinsey client.

From that perspective, this new spin on productivity sounds good, doesn't it? Won't actually help the companies, but it should help the McKinsey partners.

Tuesday, February 22, 2011

Wither Yahoo Now?

This past Tuesday's edition of the Wall Street Journal contained a long piece on Yahoo's coming to terms, as it were, with Facebook, entitled Yahoo Decides to Friend Facebook.

The piece chronicled the firm's changing attitudes toward it's most recent nemesis, Facebook. Nothing has changed since my last Yahoo post only a few weeks ago.
The first nearby, two-year price chart, compares Yahoo, Google, Microsoft and the S&P500 Index.
Begun near the market's spring lows of 2009, shortly after Carol Bartz took the helm at Yahoo, it depicts just how badly Yahoo has lagged even the moribund Microsoft. Both trail the Index by significant margins.

Here's another view. Since the late 1990s, Yahoo's absolute stock price peaked, as expected, during the bubble, then collapsed. But what's more interesting is that it was already flat to down by 2005, well before the latest equity market crisis.

Reading that Yahoo is now desperately trying to put links to Facebook on its own pages seems rather pathetic. Thanks to Terry Semel's inept choices while CEO of the firm, and Jerry Yang's subsequent incompetence in the role after Semel's departure, Yahoo just marked time with no particular strategy or mission in sight.

Now, it's too late. Even the typically-competent Bartz can't seem to do more than get a few dollars for using Bing and doing an ad deal with Microsoft. But Yahoo isn't lighting the world on fire with free content anymore, and missed its chance, long ago, to be a profitable, earlier version of Facebook.

To have seen its stock price fall from over $100 to under $18 in 11 years makes me wonder just who still owns this turkey? Back in mid-2008, Carl Icahn briefly ignited interest, amidst Microsoft's attempt to do some sort of deal with the firm. In retrospect, Yang missed a chance to let Ballmer make a huge blunder and give his own shareholders a way out of Yahoo's long, slow decline.

Where to now? With no clear mission for the firm going forward, what would a current investor do? I'd say sell. The risks of further erosion are probably at least as great, if not moreso, than Bartz magically getting a higher value now for selling the firm to someone who would, by some stretch, need whatever it is of value that Yahoo still offers.

There seems to be no solo act for Bartz at Yahoo which will do shareholders any good. Continuing to operate the firm will probably just result in a declining share price. Shutting it down would destroy value. I suppose, at some price above zero, some other tech firm will see some kind of value in the firm's assets, if only its internet traffic.

It's truly been sad watching the firm manage to evade natural exit strategies over the past few years, now to languish behind even the moribund Microsoft, watching upstart Facebook move on without even noticing Yahoo in the same general product/market space.

Monday, February 21, 2011

What Lesson Did the Phone Wars Provide for Energy Policy?

Holman Jenkins, Jr. in last Wednesday's edition of the Wall Street Journal, provided a very concise view of the evolution of mobile telephony in the US and Europe. He discussed how the US eschewed the unified, monolithic European GSM mobile standard. And how Nokia, one of the originators of that standard, is nearly dead, while Apple and Google, thanks to the US indecision on such a standard, flourished with new approaches.

Isn't this a commentary on government's unwanted, unnecessary intrusion in sectors where competing private solutions drive better ultimate solutions?

Jenkins describes the process as messy and inefficient, but, in the end, delivering superior results. Nokia has run into the arms of Microsoft, having fallen on hard times after initially leading in the GSM standards setting process. Jenkins ended his piece,

"The lesson for the new Nokia and everyone else is an old one: Nobody knows anything, and there's no substitute for messy, wasteful competition as a finder of solutions to problems we didn't even kow we needed solutions for. Whether the mobile world will settle into one proprietary or many proprietary ecosystems is far from decided."

Interestingly, from my reading of Amity Schlaes' The Forgotten Man several summers ago, those cries of how competition is so messy and wasteful are the very same arguments that FDR and his minions used to seize control of so much of American business. They decried the waste and inefficiency of free market competition, only to stifle innovation and mismanage the economy for most of the 1930s.

There's a larger lesson here. Right now, and in a technologically intensive sector- energy.

Doesn't Jenkins' illustrative tale of the mobile phone sector over the past few years suggest that we are making a horrific mistake by acceding to demands for monolithic, command-economy directives to subsidize and produce certain energy- wind, solar, ethanol- without subjecting them all to real, fair economic forces?

What ever happened to price as a market signal? As gasoline prices rise, largely silently, above $3/gallon, pundits predict a weakening of the US economy. So be it.

I wrote this post back in the summer of 2008 after reading a WSJ piece on Air Force experimentation with synfuel for jet aircraft. We have lots of coal and a known, reliable process to liquify that energy source to burn instead of gasoline or jet fuel.

If you worry about sending dollars abroad to buy oil, then promote synfuels. If you're simply worried about carbon emissions, then admit that you want to turn the US standard of living back about 110 years.

But this government system of choosing energy source winners is going to end badly. Market forces may entail some initial waste and inefficiency, but the result is the best solution, with much less long term waste and inefficiency, while satisfying consumer needs and desires. The latter of which is the point.

Not to have government dictate what consumers want, and how they'll get it.