Friday, April 01, 2011

EBay's Belated Challenge To Amazon

I read with some small interest that EBay bought GSI Commerce earlier this week. The title of one Wall Street Journal piece on the acquisition was entitled EBay Buys Allies For Amazon War.

If only. Didn't that ship sail years ago?

As I noted on a recent Groupon post, EBay has a particular market segment. It's good if you find what you are looking for, but it's not a good place to simply buy what you may need, because there's no guarantee that you'll find it.

Granted, Amazon's book selling facility has lots of used book merchants to fill demand, but, beyond that, I can't personally vouch for product availability across a wide spectrum.

From what I read about GSI, EBay seems to be committing the old sin of buying something to which it adds little or no value with its own business. Take a look at the nearby five year price chart for EBay and the S&P500 Index. EBay has been stalled for the past five years, unable to out-perform the index. So why is it now going to ignite shareholder value by buying a business it isn't actually already in? Especially when it's paying a 51% premium for the privilege?

Will the amateurs who make a living selling chachkas and other assorted items actually process orders and ship via GSI? Well, wouldn't that mean they'd have to send all their merchandise there? It's simply not the same model.

 Meanwhile, here's a picture of the same five years, with Amazon added. EBay and Amazon aren't remotely in the same performance league.  So there's the added problem for EBay of taking on a more successful, well-capitalized competitor.

Put another way, this isn't like Apple or Google is coming into a new product space. EBay has had problems for years, including the over-priced Skype acquisition. I reread my posts under the "EBay" label, and they weren't good omens for EBay's success with this acquisition.

I would bet it's another case of a CEO and his senior management hanging on for dear life to high-paying jobs at a has-been company. Well, hanging on by using shareholder equity to overpay for an acquisition that isn't going to change the true owners' fortunes very much at all.

Post Script: Here's a very interesting blog post that my reader and commenter, Henrietta, sent me regarding Meg Whitman's early blunders, both pre- and while at EBay. Worth following the link.

More On Groupon

I wrote this initial post regarding Groupon early in March. From a marketing perspective, I observed,

"What struck me about this was just how low the barriers to entry may well be in this product/market. I hadn't really given the business a whole lot of thought until I read this piece. Frankly, it just seems to be a tactic- couponing- that no business can afford to do too much of, without suffering serious pricing policy challenges for the long term. There's something about teaching customers to expect discounts that becomes corrosive over time."

My subsequent joining of the service didn't result in any particularly positive added information or experiences.

It was then with some relish I read another Wall Street Journal article last week reinforcing my observations about Groupon in that first linked post.

Specifically, the piece more fully divulged the deal economics. It was worse than I'd imagined. A typical Groupon deal has the retailer giving customers a half-price deal, from which Groupon then receives half of the actual revenue. That means the retailer is giving a 75% discount off of list price for the Groupon customers.

Furthermore, many of the anecdotes related in the article portrayed the couponing services, not necessarily Groupon, as offering deals with fine print or overlooked details which cost the retailers dearly.

Finally, in the last story in the Journal piece, a retailer contrasted her experience with two different online networking-related couponing services. In one, the customers were very narrowly chosen and proved to be repeat customers. In the other, a horde of discount-seeking buyers took the deal, with very few returning for full price products.

About the same time as the article appeared, there was a rash of stories reported on CNBC of various institutional investors and pundits worrying that another internet business bubble is building. Twitter and Groupon are among the businesses cited as having valuations that seem unsubstantiated by long term profitability dynamics.

Groupon and its ilk just aren't businesses which I see as capable of delivering long term consistently superior shareholder returns, when they are public. There seem too few barriers to entry, too little in the way of proprietary, defensible competitive advantages, and an evolving sense by many customers, i.e., retail merchants, that what these services provide is, in the end, not really all that different than conventional couponing, and not necessarily loyal, full-price customers, either.

Thursday, March 31, 2011

Sokol, Buffett & Becky Quick

By now you've probably read, heard or seen more about David Sokol's conflict of interest investment in Lubrizol, ahead of his recommending it to Warren Buffett for Berkshire Hathaway to buy, then you wanted to. It's been all over CNBC throughout the day.

That written, I won't add my own view about the propriety of Sokol's actions. He spent about ten minutes on CNBC this morning attempting to defend his actions as above question. The network had panels of various people appear on almost every program to debate Sokol's actions and defense.

But to me, there's a single glaring question you should ask, in light of Buffett's lavish, frequent use of CNBC when it suits him:

Where is Becky Quick's in-person investigative interview with the so-called Oracle of Omaha on this one?

Sure, Quick accompanies Buffett on those photo- and video-op tours of China, India, and Korea. She's with him before every annual meeting, and several more times per year. All good press for Buffett- on his terms.

What about now? Because everyone agrees that Buffett sent Sokol out to do damage control on his own. Many is the pundit who contends that Buffett is worried that this incident might finally pierce his folksy, aw shucks veil of privacy and land him in front of an SEC inquiry.

I've written many posts suggesting that Buffett's recent performance hasn't been nearly as good in recent years as it was a decade ago. Buffett gets a pass on borderline unethical or illegal takeover moves, such as Burlington Northern, that would raise eyebrows were others to attempt to use the same tactics.

Don't you wonder why, with her tight connection to Buffett, CNBC's producers didn't have Becky Quick on the line to Buffett this morning, or explaining why not?

Well, okay, that's a rhetorical question. The reason why not is that Warren obviously didn't want to be spotlighted on the Sokol-Lubrizol front-running scandal. And if Becky Quick had pushed on this, it likely would have been the last time her call would be taken or returned by Buffett.

So much for hard-hitting, investigative business news on CNBC, huh? Better to preserve marquee relationships, avoid asking embarrassing questions, and leave Buffett alone when viewers would have liked to know what he knew, what he said, etc.

That's why CNBC is a business entertainment network, not a business news network.

The True Costs of TARP

Yesterday afternoon, just before the close of the market, CNBC gave itself over to propaganda by allowing a Treasury official to appear and declare that TARP had officially been repaid more than it lent, allegedly making it profitable.

I write allegedly because of the following editorial from the March 17, 2011 edition of the Wall Street Journal, entitled TARP Was No Win for the Taxpayers. Subtitled "Treasury's claim that the bank bailouts will return a profit ignores the other, more costly programs enabling the banks to repay their TARP funds," it was co-written by Paul Atkins, Mark McWatters and Kenneth Troske. Regarding their credentials, Mr. Atkins was a member of the Congressional Oversight Panel from 2009-2010. Messrs. McWatters and Troske are current members of the panel.

I made a reference to it in this post last week,

"...then moved on to exhibit his complete misunderstanding of a recent Wall Street Journal editorial which ingeniously put the lie to Treasury Secretary Geithner's claim that TARP had 'made money' for taxpayers. The Journal piece provided the broader context of various Fed asset purchases, GSE takeovers, etc., which allowed bank-held structured finance assets to be valued at higher levels than they would have otherwise been, thus allowing them to repay TARP funds. In short, the editorial correctly noted that TARP was simply the named tip of a very large federal iceberg of self-dealing and non-market-based asset valuations calculated to let banks appear solvent and, thus, capable of repaying government funds. Liesman apparently failed to understand the article, gasping and sputtering that the authors, and anyone who believed them, were just ungrateful for the federal government's profitable rescue of the banking system."

Here's the editorial in its entirety, so you may follow all the numeric trails within it,
Today the Senate Banking Committee will explore the Troubled Asset Relief Program (TARP). Almost 30 months after its birth, TARP is far from dead. More than 550 banks, AIG, GM, Chrysler and others still have approximately $160 billion of taxpayer money outstanding.

Even so, the administration would have us believe that TARP has been a success because it supposedly alleviated the financial crisis and is (so far) being paid back at an apparent profit for taxpayers. Perhaps because he helped invent TARP before he joined the Obama administration, Treasury Secretary Timothy Geithner has called TARP the "most effective government program in recent memory."

Treasury's view is misleading. First, it hides the full story of the government's financial crisis effort, of which TARP is but a minor part. Moreover, Treasury has not been content using rhetoric alone to try to put TARP in the best light. The Special Inspector General for TARP criticized Treasury in October for inadequately disclosing a change in its valuation methodology that reduced a $45 billion loss in AIG to $5 billion, making TARP losses appear smaller than they really are. This data manipulation is only part of a much larger problem with Treasury's representations regarding the supposed success of the bank bailout payments that lie at the heart of TARP.

The focus on repayment fails to consider the huge taxpayer costs from non-TARP programs that directly and indirectly enabled many of the large banks to repay their TARP funds. These intertwined programs, operated by the Treasury and the Federal Reserve, dwarf the size of TARP and lack its accountability.

The financial crisis was born in the housing bubble caused by the policies of Fannie Mae and Freddie Mac, the two bankrupt government-sponsored entities (GSEs) charged with buying and packaging mortgages into mortgage-backed securities (MBS). TARP banks own billions of dollars worth of MBS and have remained liquid in part because the Federal Reserve has bought more than $1.1 trillion of these GSE-guaranteed MBS in the securities markets—all outside TARP.

The Fed purchased the MBS at fair market value, but this value reflects Treasury's bailout and continued support of the GSEs—also done outside of TARP with taxpayer money. Had the GSEs failed, TARP recipients probably would have been stuck with these MBS, writing them down at significant loss. Their ability to pay back TARP funding would have been hurt, and they might have had to obtain more TARP funds or go bust.

So the taxpayer-backed GSE guarantee enables the Fed to prop up the market with taxpayer funds, in turn allowing the TARP banks to "repay" their TARP funds. The bailout of the GSEs by Treasury thus shifts potential losses from TARP to other programs that have less oversight and public scrutiny. Any evaluation of TARP's success must take into account the interaction among all government programs designed to prop-up the financial system, and the shifting of costs among these programs.

The Congressional Budget Office estimates that Treasury's bailout of the GSEs will cost the taxpayers approximately $380 billion through fiscal year 2021. If only one-fourth of CBO's estimate ultimately benefits TARP recipients and other financial institutions, taxpayers will have provided a subsidy to these institutions of approximately $100 billion, which is not accounted for under TARP.

Also seldom mentioned are future costs resulting from using TARP funds to rescue "systemically important" financial and other firms. TARP exacerbates the "too big to fail" phenomenon by targeting much of its funding toward large banks and automobile firms, solidifying the market's belief in an implicit guarantee from the government for these firms. As credit-rating agencies have recognized, these large firms can borrow much more cheaply than their small-enough-to-fail competitors, which will lead to less competition, a more concentrated financial sector, and higher prices paid by consumers.

In addition, creating larger, more systemically important financial firms increases the likelihood of future financial crises because these firms have an incentive to invest in riskier projects as a result of the implicit government guarantee. The additional costs borne by consumers in the form of higher prices for financial services and the additional costs that result from future financial crises need to be included in any accounting of the costs of the TARP.

TARP was never where the real action was happening. In fact, other Fed and FDIC programs added another $2 trillion of taxpayer money at risk to the 19 stress-tested banks alone, on top of the $1.1 trillion of MBS purchased by the Fed. TARP is but one-eighth of that total.

The government's efforts inside and outside of TARP have sown the seeds for the next crisis and, unfortunately, last year's 2,319-page Dodd-Frank Act does nothing to fix these problems. Treasury must be more transparent regarding TARP. The real myth that the Treasury secretary should dispel is that TARP is a big win for the taxpayer.

So there you have it. Whether TARP is notionally repaid, or not, and whether correct accounting for the funds was performed, or not, it really doesn't matter. As the editorial's authors convincingly demonstrate, "other Fed and FDIC programs added another $2 trillion of taxpayer money at risk...on top of the $1.1 trillion of MBS purchased by the Fed. TARP is but one-eighth of that total."

Too bad CNBC didn't have anyone challenge the gloating Treasury official yesterday afternoon, and, instead, behaved like the government lapdog it has become.

Wednesday, March 30, 2011

Larry Page's New, Speedier, Leaner Google- Will It Really Recapture The Old Magic?

This past weekend Wall Street Journal edition had a page-one article concerning Lary Page, Google co-founder's aim "to clear red tape." Good luck with that!

Will Google return to the good old days? For some perspective, take a look at the firm's equity price history as compared to the S&P500 Index.

Google, according to the Journal article, had 200 employees in 2001, when Eric Schmidt became CEO. Ten years later, it employs some 24,000, or two orders of magnitude greater.

No, Larry, you're not in Kansas anymore. And trying to get an idea-themed internet sofware and services behemoth to be as prolific and successful a decade and so many more employees later is, truthfully, likely to be a futile task.

Page is doing what sound like sensible things, i.e., requiring short project descriptions from each manager, making himself and other senior managers physically available during afternoons "on small couches outside a board room in Building 43 at Google's headquarters."

However, a member of a leadership consulting firm is cited in the Journal piece observing that Page is attempting to foster more innovation by adding controlling processes to a very large organization. She describes it as "antithetical."

I agree.

In terms of the average amount of time during which companies' total returns can consistently outperform the S&P, Google may well have already seen its time in the sun come to an end. Let's be candid. Page and Brin are late 30-something engineers who, as far as I'm aware, have zero managerial education or background. Originally exploiting some technological search innovations and combining them with ad sales, the two spawned a successful startup and profited handsomely.

Now, however, Google is in a very different place as a company. The firm's ability to succeed, as evidenced by its recruiting Eric Schmidt ten years ago, will be more a function of management than sheer innovation. Its size dictates that, because the sheer weight of people and activity means that the few breakthrough ideas which occur at Google may not be seen in time to matter or, if they are, may not be capable of carrying the overhead of the rest of the firm.

Management is as much art as it is a discipline or science. That a 37-year-old software engineer, albeit a billionaire, now thinks he can, without any training in the field, simply step in and recreate Google's early days of success is sort of laughable. Chances are better the firm has simply grown and morphed into something that's never going to be capable of recapturing the early days and successes which made it into what it now is.

Tuesday, March 29, 2011

Breaking News: Maria Bartiromo's Stupid Comment of the Day

As I was working and listening to CNBC just before the 4PM close, I heard Maria Bartiromo making a hash out of an interview with some trader or fund manager.

The guy was talking about volatility, and how he was hoping to make money selling volatility as it fell.

Bartiromo, grasping at straws and, as usual, having no sensible follow-up question prepared blurted out a question paraphrased as,

'So can viewers use that declining volatility to bet on market direction?'

Just read that line again.

With all the smart hedge fund quants beavering away around the US, do you- does anyone....even Maria Bartiromo- really think that such a simple relationship could actually work?

How dense can someone be to ask such a pointless and obviously silly question?

Dense enough to be featured on CNBC commercials claiming that the network's being 'first to report from the floor of the NYSE' had anything to do with reporting from 'where decisions are made?'

Last I looked, the trading floor is empty now, because trading is electronic. Decisions were always made in trading rooms of investment banks and fund management firms.

But, then, someone who thinks volatility alone predicts market direction might also think that traders make decisions for their clients from the floor of the NYSE.

LLBean Offers Permanent Free Shipping

I recently received an email from LLBean announcing the end of shipping charges. Permanently. No minimum order value.

Of course, the first thing which occurred to me was- will their prices now build in shipping costs? Or will they attempt to absorb them in margins? Or hope for growth to offset the shipping? From the outside, without examining a lot of prices before and after the offer, it's difficult to tell. However, I'm guessing it's perhaps modest relative price movements that will be stickier or higher than otherwise, combined with some margin loss.

That said, the change is an interesting commentary on at least two phenomena.

One, for competitive posturing, offering 'free' shipping may be a powerful inducement to buy. I don't follow other online retailers closely, but it's quite possible that economic pressures on the middle class are driving online retailing, generally, to absorb shipping. In either case, competitively, it certainly removes a potential negative for Bean.

Two, there's the consumer behavior aspect. Perhaps Bean is seeking to entice customers to buy more frequently, albeit in smaller quantities. Perhaps changing more purchases from planned to impulse? I know I have, in the past, typically tended to combine purchases in order to save on shipping. But I've bought on impulse more frequently when I've received notices of free shipping periods. Perhaps Bean has concluded, from comparative research on its credit card-holders, who receive free shipping, and others, controlled for income, etc., that free shipping is worth the investment in subsequent revenues.

You have to wonder how Bean will manage the extremes of this cost absorption. How long can they afford customers buying some low-priced miscellaneous items for $9 or $10 when the real shipping costs might equal the product price? I spoke with a friend who, while at BCG, did some consulting for the USPS. She informed me that when Bean uses UPS, it doesn't necessarily mean you'll receive your item from Big Brown. Depending upon where you live, UPS will simply bar code your parcel for USPS shipping and drop it in a box in that mailing zone. Typically that happens in rural areas where the costs of actually sending a UPS truck are prohibitive. Maybe that's how the smaller, cheaper items will be delivered.

Still, there's real cost involved in those.

Then again, giving credit to Bean for being pretty sharp, maybe their research shows that, even with free shipping, most people simply don't deluge them with orders for $7 items.

With oil prices surging again, and gasoline prices continuing to bounce between $3.50 and $4 on average, nationally, you have to reason that Bean knows some very revealing information about its customers that would result in offering free shipping as a move to increase profits.

Monday, March 28, 2011

Carlos Slim's Track Phones: Marketing In Action

Last week's post on ATT's proposal to buy T-Mobile focused mostly on the market concentration among the top three wireless firms.

In subsequent discussion of the proposed deal, Michelle Caruso-Cabrera, a co-anchor and reporter on CNBC, made a very interesting point. Rather than focus on the two major wireless firms, ATT and Verizon, she noted that Mexican billionaire Carlos Slim's Track Phone pre-paid wireless business had the highest growth of any wireless firm.

I can't vouch for exactness, but I believe the data she cited showed Slim's firm adding more subscribers in some recent multi-year period than all three competitors who weren't ATT or Verizon. I believe MetroPCS was one of the firms, and T-Mobile may have been another.

In any case, it got me thinking about segmentation and consumer behavior, always favored topics due to my academic roots in marketing theory and practice.

I'm aware of how differently P&G and Colgate-Palmolive market in third-world countries, as opposed to higher per capita income European and US markets. Specifically, much of their volume moves through neighborhood bodegas with little product display capacity, selling to consumers with little disposable income. Thus, package quantities tend to be much smaller. Detergent might be sold by the envelope, rather than, as in the US, in a money-saving giant bottle.

That said, it makes sense to me that someone with business and cultural roots in a country like Mexico would naturally see the value of pre-paid wireless phones. Rather than take the American vendor route of replacing large monthly landline phone bills with similar-sized, or larger ones for much more feature-rich, multi-functional smart cell phones, Slim chose to offer smaller-sized bites of valuable wireless service to poorer consumers.

The result? Faster subscriber growth in a simpler market. You can bet that Slim's customers probably aren't constantly watching videos or netsurfing on their phones. They're probably happy to have such a powerful, yet inexpensive communications tool on their limited budgets.

When asked, an ATT official made some mention of possible interest in the pre-paid market. And, of course, it's no shock to observers that, for purposes of the proposed acquisition, ATT seeks to define the wireless market to include pre-paid, thus lowering the effective market share of the combined firms.

However, to me, Caruso-Cabrera's comment was eye-opening. Recalling the unsatisfying, mediocre total equity price performances of ATT and Verizon, relative to the S&P500, which appeared in last week's linked post, I can only imagine how Track Phone would look if it were public and standalone.

Just because a product aims at a lower-priced segment doesn't always mean it's lower-quality. That characteristic is, ideally, in the mind of the consumer. And Carlos Slim's people have apparently hit a very good sweet spot, offering affordable doses of a very desirable, powerful service, wireless, to lower-income consumers.

A great marketing story. I love it.