After reading a piece in the Wall Street Journal yesterday concerning Google's $100MM bet on celebrity channels on YouTube. It reminded me of my old mentor, Gerry Weiss' insights into competition and colliding arenas.
Gerry and his colleagues developed the concept as strategic planners at GE under Jack McKittrick. Essentially, a technology that is at the core of one entity in one 'arena,' or business area, uses said technology to expand into a new business. The entity's technological and/or other business model attributes strike at a vulnerability of existing occupants of the new business, causing a radical upheaval.
That's what seems to be about to occur at Google/YouTube.
I've been writing about the disintermediation of cable television for a few years. Now I realize that Google's recent staking of various media celebrities to $100MM worth of channels for their own creative usage will only speed that disintermediation. The Journal article cites several actors having broken into work on cable television programs via viral YouTube videos.
I've contended for several years that a writer/producer like Larry David would be foolish to bother putting his next series on cable. He could easily go right to streaming video from a website.
Then Glenn Beck departed Fox News for his own website-based media empire.
The Journal piece ended on a cautionary tone, noting that Google isn't likely to be earning revenues from any of this YouTube effort anytime soon. But offered a silver lining that in just three years, its Android cell phone alternative has grown to take half of the smart phone market.
My own sense of Google and YouTube is that, in the simplest case, they get eyeballs on which to earn advertising revenues. Then, over time, as viewers are trained to watch streaming web videos as their natural way of viewing heretofore broadcast- and cable-only frequently-aired (i.e., weekly programs) content, the step to paying for new content from a bankable talent like David or some other writer will be simple.
At that point, it wouldn't be a stretch for Google to be straying into signing and backing new talent, would it?
Even if not, just by migrating more and more viewers to their streaming video, they'll drain the last drops of life from broadcast network television, while accelerating the problems at cable providers.
That's one of the hallmarks of arena competition. Whether it's smart or not, the new entrant can afford to subsidize its intrusion into the new business with profits from its existing businesses. In Google's case, they aren't unconnected. But its targets don't really have multiple revenue sources on which to rely in the coming video content sourcing battle.
Showing posts with label Schumpeterian Dynamics. Show all posts
Showing posts with label Schumpeterian Dynamics. Show all posts
Tuesday, November 22, 2011
Friday, August 19, 2011
HP To Dump PC Business
HP surprised the market with its CEO's announcement yesterday that it is planning to spin its PC operation off from the rest of the firm.
This morning I listened to one pundit attribute this to CEO Leo Apotheker's software background, i.e., he isn't a hardware guy, so, *poof* goes the hardware unit.
I doubt it was really that simple.
Take a look at the nearby five-year price chart for HP and the S&P500 Index. Mark Hurd, the prior CEO, left under an ethical cloud at the end of summer last year. Prior to that, he'd led the firm as it decisively outperformed the index in the four years to that point. Since then, it's been largely downhill, with a few positive reversals.
For the entire period, however, HP shareholders essentially took more risk than the index for no different performance.
One of today's Wall Street Journal pieces about the HP announcement observed that the then-defining deal Carly Fiorina completed- the merger with Compaq- was now being reversed. That's true enough. And to an extent is a commentary on HP from a longer perspective.
To me, it's no accident that HP's plan to separate from its PC unit comes within a week of this post from nearly a month ago, in which I wrote,
"Despite Intel's attempts to rebut the analysts' 'death of the laptop' theme this week, I believe the latter are correct. Schumpeterian dynamics are hitting laptops with a vengeance.
Just as lighter, cheaper and better laptops eventually made consumer desktop computers obsolete, so, too, are the many X-pads, particularly the iPad, rapidly cannibalizing laptop sales growth.
Yet another reason not to sell Apple short, literally, just yet. But I wouldn't want to be caught holding equity in HP or Dell."
Dell's quarterly results disappointed investors earlier this week. Intel has been attempting to reassure one and all that its chips are too still vital, even as it has missed most of the smartphone and tablet markets.
Now HP essentially throws in the towel on a unit that it bought, rather than grew organically, while also announcing the end of its tablet and smartphone ventures.
Would Mark Hurd have been capable of leading/managing HP to a different end? Would he have materially affected the firm's outlook in the past twelve months, so that its share price wouldn't have cratered? I doubt it. Hurd couldn't personally change market demand for smartphones and tablets which affected PCs. Perhaps he'd have developed a stronger tablet entry. Perhaps not.
I see little more here than conventional Schumpeterian dynamics finally catching up to HP. It bought into business services and servers. It bought a computer business. What still works is the printer business which it has grown for decades. Printing isn't likely to entirely disappear, while PCs are fast becoming a niche commodity market. And every company depending upon PCs is fighting a losing trend.
I doubt it was really that simple.
Take a look at the nearby five-year price chart for HP and the S&P500 Index. Mark Hurd, the prior CEO, left under an ethical cloud at the end of summer last year. Prior to that, he'd led the firm as it decisively outperformed the index in the four years to that point. Since then, it's been largely downhill, with a few positive reversals.
For the entire period, however, HP shareholders essentially took more risk than the index for no different performance.
One of today's Wall Street Journal pieces about the HP announcement observed that the then-defining deal Carly Fiorina completed- the merger with Compaq- was now being reversed. That's true enough. And to an extent is a commentary on HP from a longer perspective.
To me, it's no accident that HP's plan to separate from its PC unit comes within a week of this post from nearly a month ago, in which I wrote,
"Despite Intel's attempts to rebut the analysts' 'death of the laptop' theme this week, I believe the latter are correct. Schumpeterian dynamics are hitting laptops with a vengeance.
Just as lighter, cheaper and better laptops eventually made consumer desktop computers obsolete, so, too, are the many X-pads, particularly the iPad, rapidly cannibalizing laptop sales growth.
Yet another reason not to sell Apple short, literally, just yet. But I wouldn't want to be caught holding equity in HP or Dell."
Dell's quarterly results disappointed investors earlier this week. Intel has been attempting to reassure one and all that its chips are too still vital, even as it has missed most of the smartphone and tablet markets.
Now HP essentially throws in the towel on a unit that it bought, rather than grew organically, while also announcing the end of its tablet and smartphone ventures.
Would Mark Hurd have been capable of leading/managing HP to a different end? Would he have materially affected the firm's outlook in the past twelve months, so that its share price wouldn't have cratered? I doubt it. Hurd couldn't personally change market demand for smartphones and tablets which affected PCs. Perhaps he'd have developed a stronger tablet entry. Perhaps not.
I see little more here than conventional Schumpeterian dynamics finally catching up to HP. It bought into business services and servers. It bought a computer business. What still works is the printer business which it has grown for decades. Printing isn't likely to entirely disappear, while PCs are fast becoming a niche commodity market. And every company depending upon PCs is fighting a losing trend.
Wednesday, August 17, 2011
Microsoft's Operating System Headaches
I read with great interest a recent Wall Street Journal article which noted that Microsoft's Windows' market share of devices, when tablets are included with PCs, has fallen to 82%- the lowest in its history. And this year's expected sales and profits from Windows are lower than last year's.
Now there's even concern about how many third-party software writers will pay much attention to Windows 8, with so many apps to write for Apple and Android devices.
Of course, had Microsoft followed my advice and broken up its empire into operating systems, applications software, gaming and online, as I suggested years ago, this may not have occurred.
Freed from each other, operating systems and applications businesses could have each developed software not intended for use with the other. A Windows division could have expanded into developing operating systems for other devices, perhaps as an outsourced vendor. The Office group could have been freed to develop apps for any platform in which it saw profit.
Instead, now even David Einhorn is echoing my years-old call for Ballmer's replacement.
This is how companies become fodder via Schumpeterian dynamics. The growth of Microsoft's main platform, the PC, has finally given way to other devices- smart phones and tablets. And so its fortunes are probably on a monotonic downward trend after treading water for the past decade.
Now there's even concern about how many third-party software writers will pay much attention to Windows 8, with so many apps to write for Apple and Android devices.
Of course, had Microsoft followed my advice and broken up its empire into operating systems, applications software, gaming and online, as I suggested years ago, this may not have occurred.
Freed from each other, operating systems and applications businesses could have each developed software not intended for use with the other. A Windows division could have expanded into developing operating systems for other devices, perhaps as an outsourced vendor. The Office group could have been freed to develop apps for any platform in which it saw profit.
Instead, now even David Einhorn is echoing my years-old call for Ballmer's replacement.
This is how companies become fodder via Schumpeterian dynamics. The growth of Microsoft's main platform, the PC, has finally given way to other devices- smart phones and tablets. And so its fortunes are probably on a monotonic downward trend after treading water for the past decade.
Friday, August 12, 2011
Kodak: Patent vs. Market Value
I haven't written many posts involving Kodak. The first, in 2007, contended,
"The truth is, companies, like athletes, slow with age, then die. Aging may be prolonged. Death may come by acquisition, dissolution, or bankruptcy. But it inevitably comes. In the meantime, watching some companies is like going to a baseball game and seeing the 'oldtimers' play between halves of a doubleheader. I guess somebody has to be CEO of Kodak, IBM and Xerox, but does anyone really care anymore? Personally, I can no longer name those people off the top of my head, as I can with Google."
IBM seems to have averted death, although it's hardly a 'tech bellwether' anymore. But Kodak and Xerox are now just, well, also-rans in every sense.
The two posts I've written solely on Kodak, here and here, from late 2009, opined that the firm should just dissolve itself. In that second, most recent piece, I wrote,
"The article, and this morning's analysis, note that KKR has, predictably, feathered its nest on both the upside and downside. They get a hard 10% income stream and the best protection available on the balance sheet. If Kodak miraculously improves its condition, KKR then gets to convert warrants to own up to 20% of the company.
You have to ask, as I did this morning, reading that second piece, out of whose hide do these generous terms come?
Why, the Kodak shareholders', of course. And I didn't notice any changes in management compensation. You know, like tying bonuses or large parts of salaries to Kodak's total return."
Yesterday's Wall Street Journal featured the firm's failing fortunes on its front page. With the recent equity market gyrations, Kodak's market value has now fallen below what many observers believe is the value of its patent portfolio. Amazingly, that market value was now less than $500MM.
The nearby price chart for Kodak and the S&P500 Index over the past two years, just about when the KKR financing deal was struck, paint a catastrophic picture.
Despite CEO Perez' comments about remaking Kodak into a printing giant, the firm has lost half its value while the S&P posted modest gains. Meanwhile, KKR is sucking out those nice 10% interest payments.
I was shocked to read in the Journal piece that one of my most admired businesspeople, Rick Braddock, is an outside director at Kodak. At least he qualified his commitment to the firm's "turnaround" by adding,
"I am not going to rule anything out."
If that chart is Perez' idea of a turnaround, I'd hate to see his notion of failure.
According to the charts accompanying the Journal's article, sales at the firm have fallen from slightly over $10B in 2006 to an expected less than $3B this year. Kodak lost money in each of the past three years and is forecast to do so again this year.
Can there really be that much juice in a hoped-for dominance of printers to justify these losses? The PBGC will have to absorb what Kodak can't fund, Chapter 11 or not, so that's moot. The question has to be whether the present value of the still-to-turn-a-profit printer business really can exceed that of the firm's patent portfolio, assuming, of course, Kodak will have enough cash to make it that far.
As I did in 2009, after reading of Perez' sellout of shareholders to KKR, I continue to believe that Kodak's senior management and board are acting at cross purposes to their shareholders' interests.
"The truth is, companies, like athletes, slow with age, then die. Aging may be prolonged. Death may come by acquisition, dissolution, or bankruptcy. But it inevitably comes. In the meantime, watching some companies is like going to a baseball game and seeing the 'oldtimers' play between halves of a doubleheader. I guess somebody has to be CEO of Kodak, IBM and Xerox, but does anyone really care anymore? Personally, I can no longer name those people off the top of my head, as I can with Google."
IBM seems to have averted death, although it's hardly a 'tech bellwether' anymore. But Kodak and Xerox are now just, well, also-rans in every sense.
The two posts I've written solely on Kodak, here and here, from late 2009, opined that the firm should just dissolve itself. In that second, most recent piece, I wrote,
"The article, and this morning's analysis, note that KKR has, predictably, feathered its nest on both the upside and downside. They get a hard 10% income stream and the best protection available on the balance sheet. If Kodak miraculously improves its condition, KKR then gets to convert warrants to own up to 20% of the company.
You have to ask, as I did this morning, reading that second piece, out of whose hide do these generous terms come?
Why, the Kodak shareholders', of course. And I didn't notice any changes in management compensation. You know, like tying bonuses or large parts of salaries to Kodak's total return."
The nearby price chart for Kodak and the S&P500 Index over the past two years, just about when the KKR financing deal was struck, paint a catastrophic picture.
Despite CEO Perez' comments about remaking Kodak into a printing giant, the firm has lost half its value while the S&P posted modest gains. Meanwhile, KKR is sucking out those nice 10% interest payments.
I was shocked to read in the Journal piece that one of my most admired businesspeople, Rick Braddock, is an outside director at Kodak. At least he qualified his commitment to the firm's "turnaround" by adding,
"I am not going to rule anything out."
If that chart is Perez' idea of a turnaround, I'd hate to see his notion of failure.
According to the charts accompanying the Journal's article, sales at the firm have fallen from slightly over $10B in 2006 to an expected less than $3B this year. Kodak lost money in each of the past three years and is forecast to do so again this year.
Can there really be that much juice in a hoped-for dominance of printers to justify these losses? The PBGC will have to absorb what Kodak can't fund, Chapter 11 or not, so that's moot. The question has to be whether the present value of the still-to-turn-a-profit printer business really can exceed that of the firm's patent portfolio, assuming, of course, Kodak will have enough cash to make it that far.
As I did in 2009, after reading of Perez' sellout of shareholders to KKR, I continue to believe that Kodak's senior management and board are acting at cross purposes to their shareholders' interests.
Friday, July 22, 2011
The iPad, The Laptop & Schumpeterian Dynamics
This week has seen some interesting fireworks between Intel and various analysts concerning the future of personal computers and laptops.
Specifically, upon learning of Apple's blowout quarter and torrid pace of iPad2 sales, many pundits have pronounced he laptop effectively dead. With a generally-acknowledged 2% p.a. growth rate, the former desktop killer has been itself eclipsed by X-pads of several varieties.
I had the occasion recently to assist a friend in buying an iPad2. What I saw caused me, prior to the flurry of this week's analyst and pundit remarks, to conclude that the laptop as a home device has seen its best days.
It began with a visit to Barnes & Noble. My friend picked up a Nook, sneered and asked why she'd ever want to read books like that? A few minutes later, she wanted to buy one! When I saw the $249 price of a color screen Nook, I told her to wait and visit the nearby Apple store to check out an iPad.
Specifically, per my prior posts, I suggested that she buy a pad made by the firm selling it, and that she choose one with more applications than simply ebook reading. I had in mind that she could replace a laptop's functionality at a fraction of the price, with much greater ease of use.
How right I was.
She asked me to accompany her to the local Apple store a few days later. After steering the Apple rep to some specific topics of interest for my friend, we left the store and discussed what we'd heard. We returned about an hour later and she bought an iPad2 without the cellular modem.
As expected, the post-sale support to configure her iPad was superb. She left the store with iTunes, a web browser, text writing and ebook apps on her device, plus a few books to start. It took no effort for the iPad to recognize my friend's home wireless network and connect.
Since then, she's been attached to the device whenever possible.
And, just as I expected, she no longer needs to use a laptop, with its long bootup time, operating system and hard drive. Instead, the solid state, unbelievably small and thin iPad does everything she needs as a casual user who does not run a business on a laptop. Whatever questions she has can be answered during the store's afternoon workshops held, for free, just for that purpose.
It's no surprise to me that Apple is selling all the iPads it can assemble. And why laptop sales have faltered.
I doubt I'd buy another laptop, except for business purposes. For home use, traveling and general non-business daily use, it would be difficult to see why an expensive laptop would be necessary.
Despite Intel's attempts to rebut the analysts' 'death of the laptop' theme this week, I believe the latter are correct. Schumpeterian dynamics are hitting laptops with a vengeance.
Just as lighter, cheaper and better laptops eventually made consumer desktop computers obsolete, so, too, are the many X-pads, particularly the iPad, rapidly cannibalizing laptop sales growth.
Yet another reason not to sell Apple short, literally, just yet. But I wouldn't want to be caught holding equity in HP or Dell.
Specifically, upon learning of Apple's blowout quarter and torrid pace of iPad2 sales, many pundits have pronounced he laptop effectively dead. With a generally-acknowledged 2% p.a. growth rate, the former desktop killer has been itself eclipsed by X-pads of several varieties.
I had the occasion recently to assist a friend in buying an iPad2. What I saw caused me, prior to the flurry of this week's analyst and pundit remarks, to conclude that the laptop as a home device has seen its best days.
It began with a visit to Barnes & Noble. My friend picked up a Nook, sneered and asked why she'd ever want to read books like that? A few minutes later, she wanted to buy one! When I saw the $249 price of a color screen Nook, I told her to wait and visit the nearby Apple store to check out an iPad.
Specifically, per my prior posts, I suggested that she buy a pad made by the firm selling it, and that she choose one with more applications than simply ebook reading. I had in mind that she could replace a laptop's functionality at a fraction of the price, with much greater ease of use.
How right I was.
She asked me to accompany her to the local Apple store a few days later. After steering the Apple rep to some specific topics of interest for my friend, we left the store and discussed what we'd heard. We returned about an hour later and she bought an iPad2 without the cellular modem.
As expected, the post-sale support to configure her iPad was superb. She left the store with iTunes, a web browser, text writing and ebook apps on her device, plus a few books to start. It took no effort for the iPad to recognize my friend's home wireless network and connect.
Since then, she's been attached to the device whenever possible.
And, just as I expected, she no longer needs to use a laptop, with its long bootup time, operating system and hard drive. Instead, the solid state, unbelievably small and thin iPad does everything she needs as a casual user who does not run a business on a laptop. Whatever questions she has can be answered during the store's afternoon workshops held, for free, just for that purpose.
It's no surprise to me that Apple is selling all the iPads it can assemble. And why laptop sales have faltered.
I doubt I'd buy another laptop, except for business purposes. For home use, traveling and general non-business daily use, it would be difficult to see why an expensive laptop would be necessary.
Despite Intel's attempts to rebut the analysts' 'death of the laptop' theme this week, I believe the latter are correct. Schumpeterian dynamics are hitting laptops with a vengeance.
Just as lighter, cheaper and better laptops eventually made consumer desktop computers obsolete, so, too, are the many X-pads, particularly the iPad, rapidly cannibalizing laptop sales growth.
Yet another reason not to sell Apple short, literally, just yet. But I wouldn't want to be caught holding equity in HP or Dell.
Friday, June 24, 2011
The Perils of Technology Investing: RIM & Cisco
I'm always surprised when media pundits and analysts are surprised that one-time dominant technology firms exhibit flagging total returns. Consider two recent examples, RIM, the maker of the Blackberry, and Cisco.
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The nearby price chart for the two firms and the S&P500 Index for the past twelve years demonstrates several points.
The first is that buy-and-hold for technology stocks is very risky, even coming in different varieties of risk. For example, RIM rose, then fell precipitously in the early 2000s, only to rise stupendously by 2008, then stall and falter. Such volatility would have tried any shareholder's patience.
Meanwhile, Cisco entered its lost decade after the late-1990s technology stock bubble collapse. Both would have been good bets, in 2000, to hold, if you believed in long-cycle holding for technology issues.
However, of all the companies to experience Schumpeterian dynamics, I suspect technology firms are the most vulnerable.
Why?
Because, being at the cutting edge of technology probably attracts more smart, well-funded and motivated competition than being in, say, laundry detergent. The intricacies and dynamics of early-users and trend followers, plus the nature of technologically-based competition can cause market shares to plummet almost overnight.
Prior to the iPhone, who would have foreseen RIM's demise? But what was an interesting sideways expansion by Apple of its iPod vehicle into personal communications has essentially wrecked RIM, probably for good.
Technology companies seem to be especially vulnerable to what my old Chase Manhattan boss and mentor, Gerry Weiss, and his former GE colleagues Don Heaney and Jack Grossman, identified in the 1970s as competition from different arenas.
What they meant by the term and characterization is exemplified by Apple's iPhone. A company from one sector finds that its strengths and capabilities would completely undermine the business models of existing firms in another sector, creating a new competitive arena. The new entrant, Apple, rewrites the rules and redefines the nature of competitive offerings in the existing sector.
In contrast, Cisco seems to have succumbed to conventional competitive forces in its traditional product/markets while squandering resources on new products which didn't develop profitably. This is a more classic example of how technology firms age and die. Their original business segments become saturated or attract competition, while their new initiatives prove to be less successful than their original ones. Growth slows, spending on new products fails to ignite new profit streams, and the company's total returns stagnate as investors become disenchanted.
I read with some humor this morning's Wall Street Journal piece involving Ralph Nader. According to the article, Nader first bought Cisco shares in 1995, and, by 2000, his $1MM position constituted a third of his portfolio.
"At Thursday's closing price, his stake is valued at $278,460....."Just think of what people who have been loyal to them have endured (Nader) said. It's absurd." He said he didnt' sell his Cisco stake because he thought the shares would rebound."
I actually laughed when I read that quote of Nader's. Loyalty? To a technology company? What does Nader think equity invesetment is, a close friendship? Nader's experience demonstrates how not to approach investing in technology firms.
The only thing that's absurd is Nader's blind faith that a firm leading one of the hottest technology areas of the 1990s- network routers' would retain its dominance and relevance in the same manner for another decade.
Technology issues offer prospects of rapid gains, but rarely have successful second acts. My equity portfolio strategy profited nicely from owning Cisco at one time, but it never re-entered the portfolio after 2000.
Buy-and-hold investment styles in specific technology companies is risky and typically unsuccessful due to the dynamic and hyper-competitive nature of the segment.
The first is that buy-and-hold for technology stocks is very risky, even coming in different varieties of risk. For example, RIM rose, then fell precipitously in the early 2000s, only to rise stupendously by 2008, then stall and falter. Such volatility would have tried any shareholder's patience.
Meanwhile, Cisco entered its lost decade after the late-1990s technology stock bubble collapse. Both would have been good bets, in 2000, to hold, if you believed in long-cycle holding for technology issues.
However, of all the companies to experience Schumpeterian dynamics, I suspect technology firms are the most vulnerable.
Why?
Because, being at the cutting edge of technology probably attracts more smart, well-funded and motivated competition than being in, say, laundry detergent. The intricacies and dynamics of early-users and trend followers, plus the nature of technologically-based competition can cause market shares to plummet almost overnight.
Prior to the iPhone, who would have foreseen RIM's demise? But what was an interesting sideways expansion by Apple of its iPod vehicle into personal communications has essentially wrecked RIM, probably for good.
Technology companies seem to be especially vulnerable to what my old Chase Manhattan boss and mentor, Gerry Weiss, and his former GE colleagues Don Heaney and Jack Grossman, identified in the 1970s as competition from different arenas.
What they meant by the term and characterization is exemplified by Apple's iPhone. A company from one sector finds that its strengths and capabilities would completely undermine the business models of existing firms in another sector, creating a new competitive arena. The new entrant, Apple, rewrites the rules and redefines the nature of competitive offerings in the existing sector.
In contrast, Cisco seems to have succumbed to conventional competitive forces in its traditional product/markets while squandering resources on new products which didn't develop profitably. This is a more classic example of how technology firms age and die. Their original business segments become saturated or attract competition, while their new initiatives prove to be less successful than their original ones. Growth slows, spending on new products fails to ignite new profit streams, and the company's total returns stagnate as investors become disenchanted.
I read with some humor this morning's Wall Street Journal piece involving Ralph Nader. According to the article, Nader first bought Cisco shares in 1995, and, by 2000, his $1MM position constituted a third of his portfolio.
"At Thursday's closing price, his stake is valued at $278,460....."Just think of what people who have been loyal to them have endured (Nader) said. It's absurd." He said he didnt' sell his Cisco stake because he thought the shares would rebound."
I actually laughed when I read that quote of Nader's. Loyalty? To a technology company? What does Nader think equity invesetment is, a close friendship? Nader's experience demonstrates how not to approach investing in technology firms.
The only thing that's absurd is Nader's blind faith that a firm leading one of the hottest technology areas of the 1990s- network routers' would retain its dominance and relevance in the same manner for another decade.
Technology issues offer prospects of rapid gains, but rarely have successful second acts. My equity portfolio strategy profited nicely from owning Cisco at one time, but it never re-entered the portfolio after 2000.
Buy-and-hold investment styles in specific technology companies is risky and typically unsuccessful due to the dynamic and hyper-competitive nature of the segment.
Monday, June 13, 2011
Update On Bricks vs. Clicks 2011 Style
Last week I found myself in a discussion with another member of my fitness club after I finished my morning's mile swim. We had apparently spoken before, perhaps last summer, so he felt sufficiently uninhibited to inquire about my use of a heart rate monitor.
We had a lengthy conversation about training regimens, diet, the protein reduction to cut fat, and related topics.
He asked me several times which current model of Polar HRM I would recommend, and I reiterated what I last recall seeing as their lowest-level product with calorie burn estimation capabilities, noting that his local Sports Authority was sure to have them.
Being older than me, he astonished me by dismissively snorting,
'Oh, forget that. I'll just find it on Amazon and buy it there.'
Pretty interesting. He clearly already uses Amazon as his go-to general store, but doesn't believe he's paying much for the privilege.
On one hand, that's good for Amazon. On the other, though, the online retailing giant is one of those Schumpeterian forces that prospers by slitting the economic throat and gutting the profit model of existing 'bricks' retailers.
Growth has been and remains the key for Amazon. It took some time for the company to get its model right and profitable. Since then, it's latched onto some key growth categories- ebooks, DVD rentals, and, now cloud computing.
But a bit over ten years on from the first great internet binge, it's clear that online shopping has taken hold in a lasting manner. Thus, for many product categories, finally answering the 'clicks vs. bricks' argument decidedly in favor of the former.
We had a lengthy conversation about training regimens, diet, the protein reduction to cut fat, and related topics.
He asked me several times which current model of Polar HRM I would recommend, and I reiterated what I last recall seeing as their lowest-level product with calorie burn estimation capabilities, noting that his local Sports Authority was sure to have them.
Being older than me, he astonished me by dismissively snorting,
'Oh, forget that. I'll just find it on Amazon and buy it there.'
Pretty interesting. He clearly already uses Amazon as his go-to general store, but doesn't believe he's paying much for the privilege.
On one hand, that's good for Amazon. On the other, though, the online retailing giant is one of those Schumpeterian forces that prospers by slitting the economic throat and gutting the profit model of existing 'bricks' retailers.
Growth has been and remains the key for Amazon. It took some time for the company to get its model right and profitable. Since then, it's latched onto some key growth categories- ebooks, DVD rentals, and, now cloud computing.
But a bit over ten years on from the first great internet binge, it's clear that online shopping has taken hold in a lasting manner. Thus, for many product categories, finally answering the 'clicks vs. bricks' argument decidedly in favor of the former.
Friday, May 20, 2011
Citigroup's Board's Appalling Reward of Pandit
Color me stunned as I opened yesterday's Wall Street Journal to learn that Citigroup's board actually awarded its inept CEO, Vikram Pandit, a potentially lush compensation package worth as much as $23MM, so he won't leave!
I actually heard Dick Parsons, Citi's board chairman, say this with a straight face in a noontime interview on CNBC.
Before I go further, take a look at the nearby price chart of several large US financial firms, Citi and the S&P500 Index for the past five years.
Citi is by far the absolute worst performer. There is absolutely no surviving firm which did as poorly, although Morgan Stanley (Pandit's old firm) and BofA were in the running.
Chase, Goldman and Wells Fargo tracked the S&P, ending the period more or less flat.
Missing, of course, are Bear Stearns, Wachovia, WaMu and Merrill Lynch, all of which either failed or were bought as they became insolvent.
Citigroup should have been in this group, with or without Pandit. Since he was CEO when the financial panic hit in the fall of 2008, his naivete, inexperience and general cluelessness were all good reasons to simply put Citi into court-protected reorganization. Deep-pocketed competitors would have gladly scooped up various pieces of the firm, so it's not like it would have literally disappeared, or that all its employees would have been suddenly jobless.
In fact, by letting more experienced, surviving, better-heeled firms buy the remnants of a failed Citigroup, Schumpeterian dynamics would have been playing out along its natural lines.
Instead, we now have sanctimonious Citi chairman Parsons claiming that Pandit did a great job and the board is concerned with his retention. This despite the fact that Pandit and his team haven't yet been able to give the board a clear, firm picture of Citi's normal expected business performance and income statement in the years ahead.
Mike Mayo, a longtime bank analyst, echoed my thoughts when quoted in the Journal article casting doubt on,
"rewarding a CEO whose company's stock has significantly underperformed other large banks during his tenure, and who got an enormous payday with the acquisition of his hedge fund."
It's unclear, besides lots of platitudes, that Pandit has any idea what he's doing. The same goes for Parsons and his board. How can they, in good conscience, squander their shareholders' money like this? Either Parsons is a fool, delusional, or was just plain lying when he spun his fairy tale version of Citi's recent performance on CNBC yesterday afternoon. It's not like there are any firms left stupid enough to try to hire Pandit if he actually left Citicorp.
The Journal piece details that one of the elements of Pandit's compensation is participation in a profit-sharing plan which is cleverly based only on the "core banking unit, without counting the losses at Citi Holdings, the entity holding the assets earmarked for sale. The profit-sharing payments kick in once the core Citicorp banking unit tops $12 billion in pretax profit over the years 2011 and 2012- less than half the level recorded for 2010." That was $20B.
So Parsons' contention that Pandit 'has to perform' is disingenuous. He and his board cronies set the bar so low that a monkey could be in Pandit's job and Citi would still beat the profit-sharing targets. And the bananas would be much cheaper than what Pandit's going to receive for a bank that is essentially on autopilot.
Parsons also hastily put the past behind, probably because he doesn't want anyone to remember that Pandit was paid several hundred million dollars for a hedge fund that subsequently performed so badly that it had to be closed. Even with various stock options and lockups, it's pretty clear that Pandit made tens of millions free and clear from the deal.
From seeing Parsons' performance on CNBC and reading of Pandit's new compensation package, I can't imagine anyone other than market-timing institutional professional investors going near Citi's equity anytime soon.
I actually heard Dick Parsons, Citi's board chairman, say this with a straight face in a noontime interview on CNBC.
Before I go further, take a look at the nearby price chart of several large US financial firms, Citi and the S&P500 Index for the past five years.
Chase, Goldman and Wells Fargo tracked the S&P, ending the period more or less flat.
Missing, of course, are Bear Stearns, Wachovia, WaMu and Merrill Lynch, all of which either failed or were bought as they became insolvent.
Citigroup should have been in this group, with or without Pandit. Since he was CEO when the financial panic hit in the fall of 2008, his naivete, inexperience and general cluelessness were all good reasons to simply put Citi into court-protected reorganization. Deep-pocketed competitors would have gladly scooped up various pieces of the firm, so it's not like it would have literally disappeared, or that all its employees would have been suddenly jobless.
In fact, by letting more experienced, surviving, better-heeled firms buy the remnants of a failed Citigroup, Schumpeterian dynamics would have been playing out along its natural lines.
Instead, we now have sanctimonious Citi chairman Parsons claiming that Pandit did a great job and the board is concerned with his retention. This despite the fact that Pandit and his team haven't yet been able to give the board a clear, firm picture of Citi's normal expected business performance and income statement in the years ahead.
Mike Mayo, a longtime bank analyst, echoed my thoughts when quoted in the Journal article casting doubt on,
"rewarding a CEO whose company's stock has significantly underperformed other large banks during his tenure, and who got an enormous payday with the acquisition of his hedge fund."
It's unclear, besides lots of platitudes, that Pandit has any idea what he's doing. The same goes for Parsons and his board. How can they, in good conscience, squander their shareholders' money like this? Either Parsons is a fool, delusional, or was just plain lying when he spun his fairy tale version of Citi's recent performance on CNBC yesterday afternoon. It's not like there are any firms left stupid enough to try to hire Pandit if he actually left Citicorp.
The Journal piece details that one of the elements of Pandit's compensation is participation in a profit-sharing plan which is cleverly based only on the "core banking unit, without counting the losses at Citi Holdings, the entity holding the assets earmarked for sale. The profit-sharing payments kick in once the core Citicorp banking unit tops $12 billion in pretax profit over the years 2011 and 2012- less than half the level recorded for 2010." That was $20B.
So Parsons' contention that Pandit 'has to perform' is disingenuous. He and his board cronies set the bar so low that a monkey could be in Pandit's job and Citi would still beat the profit-sharing targets. And the bananas would be much cheaper than what Pandit's going to receive for a bank that is essentially on autopilot.
Parsons also hastily put the past behind, probably because he doesn't want anyone to remember that Pandit was paid several hundred million dollars for a hedge fund that subsequently performed so badly that it had to be closed. Even with various stock options and lockups, it's pretty clear that Pandit made tens of millions free and clear from the deal.
From seeing Parsons' performance on CNBC and reading of Pandit's new compensation package, I can't imagine anyone other than market-timing institutional professional investors going near Citi's equity anytime soon.
Thursday, May 12, 2011
A Cold-Eyed View of The ECB Intervention
Despite having occurred over two years ago, there is still quite a bit of denial and misinformation on the federal government bailouts and takeovers of late 2008.
Meanwhile, Europe, through it's central bank, engaged in similar bailouts of publicly-held banks.
Timo Soini, the chairman of the True Finn Party in Finland, recently wrote a Wall Street Journal editorial entitled Why I Don't Support Europe's Bailouts. Soini's party is Finland's left-wing populist party, so it's not surprising that it desires more state-directed economic investment and control. But Soini's sentiments regarding how the ECB's bailouts actually worked is rather refreshing.
Here's what he wrote.
When I had the honor of leading the True Finn Party to electoral victory in April, we made a solemn promise to oppose the bailouts of euro-zone member states. Europe is suffering from the economic gangrene of insolvency—both public and private. Unless we amputate that which cannot be saved, we risk poisoning the whole body.
To understand the real nature and purpose of the bailouts, we first have to understand who really benefits from them.
At the risk of being accused of populism, we'll begin with the obvious: It is not the little guy who benefits. He is being milked and lied to in order to keep the insolvent system running. He is paid less and taxed more to provide the money needed to keep this Ponzi scheme going. Meanwhile, a symbiosis has developed between politicians and banks: Our political leaders borrow ever more money to pay off the banks, which return the favor by lending ever more money back to our governments.
In a true market economy, bad choices get penalized. Instead of accepting losses on unsound investments—which would have led to the probable collapse of some banks—it was decided to transfer the losses to taxpayers via loans, guarantees and opaque constructs such as the European Financial Stability Fund.
The money did not go to help indebted economies. It flowed through the European Central Bank and recipient states to the coffers of big banks and investment funds.
Further contrary to the official wisdom, the recipient states did not want such "help," not this way. The natural option for them was to admit insolvency and let failed private lenders, wherever they were based, eat their losses.
That was not to be. Ireland was forced to take the money. The same happened to Portugal.
Why did the Brussels-Frankfurt extortion racket force these countries to accept the money along with "recovery" plans that would inevitably fail? Because they needed to please the tax-guzzling banks, which might otherwise refuse to turn up at the next Spanish, Belgian, Italian or even French bond auction.
Unfortunately for this financial and political cartel, their plan isn't working. Already under this scheme, Greece, Ireland and Portugal are ruined. They will never be able to save and grow fast enough to pay back the debts with which Brussels has saddled them in the name of saving them.
Setting up the European Stability Mechanism is no solution. It would institutionalize the system of wealth transfers from private citizens to compromised politicians and failed bankers, creating a huge moral hazard and destroying what remains of Europe's competitive banking landscape.
Fortunately, it is not too late to stop the rot. For the banks, we need honest, serious stress tests. Stop the current politically inspired farce. Instead, have parallel assessments done by regulators and independent groups including stakeholders and academics. Trust, but verify.
Insolvent banks and financial institutions must be shut down, purging insolvency from the system. We must restore the market principle of freedom to fail.
If some banks are recapitalized with taxpayer money, taxpayers should get ownership stakes in return, and the entire board should be kicked out. But before any such taxpayer participation can be contemplated, it is essential to first apply big haircuts to bondholders.
For sovereign debt, the freedom to fail is again key. Significant restructuring is needed for genuine recovery. Yes, markets will punish defaulting states, but they are also quick to forgive. Current plans are destroying the real economies of Europe through elevated taxes and transfers of wealth from ordinary families to the coffers of insolvent states and banks. A restructuring that left a country's debt burden at a manageable level and encouraged a return to growth-oriented policies could lead to a swift return to international debt markets.
This is not just about economics. People feel betrayed. In Ireland, the incoming parties to the new government promised to hold senior bondholders responsible, but under pressure they succumbed, leaving their voters with a sense of disenfranchisement. The elites in Brussels have said that Finland must honor its commitments to its European partners, but Brussels is silent on whether national politicians should honor their commitments to their own voters.
Say what one will about Soini's motives, it's clear that the crony capitalism of Europe's ECB, member country governments and large banks make for easy targets of his criticisms. And I don't think his analysis is flawed. In fact, his emphasis on identifying and closing insolvent institutions precisely echoes the comments of Anna Kagan Schwartz from 2008, on which I posted here.
Yes, his critics will claim, as did defenders of Bernanke's actions, that entire economies were at risk without such interventions.
But I don't believe that was ever true. In no case was a failing entity, whether it be Lehman, GM or Goldman Sachs, unable to be placed into Chapter 11, reorganized, and either spun back out or its remnants sold to surviving competitors or new entrants at market-clearing prices.
Soini is correct when he parrots the capitalist line that failed institutions must be allowed to fail and free up resources for others to use. But because, in Europe, an unholy alliance of banks and fiscally-vulnerable bond-issuing governments had developed, taxpayers were soaked to shore up the private, publicly-held financial sector entities.
While the specific mechanics of the ECB bailouts differ from those of the US due to the dollar being the world's current reserve currency, the basics are not dissimilar.
Entrenched managements were able to cash in on existing ties, business networks and fears of financial and economic turbulence in order to, in most cases, with very few exceptions (Bear Stearns, Lehman, AIG, Merrill Lynch, Wachovia) retain control of their companies and proceed to earn lush, post-bailout profits.
Managements like to identify themselves with the assets their companies control, in order to scare politicians into forgetting about Schumpeterian dynamics.
No matter what the event, when companies are found to have been managed badly, and succumb to some environmental or self-inflicted catastrophe, the valuable parts of such enterprises will still be desired and acquired by some other parties. The parts which failed should have been liquidated anyway. In America, there is a Constitutionally-assured method, bankruptcy, for orderly management of such changes in control and liquidations. Just because the Fed, FDIC and Treasury didn't engage in such invasive rescues did not mean that there were not more prudent and limited steps these various government entities could have taken to stabilize the financial sector and avoid economic depression.
Intervention of the sort conducted by the ECB and the Fed only serve to make ordinary voters and taxpayers sceptical of political-business alliances and cronyism. And create fertile ground in which socialists like Soini and the current US administration can flourish.
Meanwhile, Europe, through it's central bank, engaged in similar bailouts of publicly-held banks.
Timo Soini, the chairman of the True Finn Party in Finland, recently wrote a Wall Street Journal editorial entitled Why I Don't Support Europe's Bailouts. Soini's party is Finland's left-wing populist party, so it's not surprising that it desires more state-directed economic investment and control. But Soini's sentiments regarding how the ECB's bailouts actually worked is rather refreshing.
Here's what he wrote.
When I had the honor of leading the True Finn Party to electoral victory in April, we made a solemn promise to oppose the bailouts of euro-zone member states. Europe is suffering from the economic gangrene of insolvency—both public and private. Unless we amputate that which cannot be saved, we risk poisoning the whole body.
To understand the real nature and purpose of the bailouts, we first have to understand who really benefits from them.
At the risk of being accused of populism, we'll begin with the obvious: It is not the little guy who benefits. He is being milked and lied to in order to keep the insolvent system running. He is paid less and taxed more to provide the money needed to keep this Ponzi scheme going. Meanwhile, a symbiosis has developed between politicians and banks: Our political leaders borrow ever more money to pay off the banks, which return the favor by lending ever more money back to our governments.
In a true market economy, bad choices get penalized. Instead of accepting losses on unsound investments—which would have led to the probable collapse of some banks—it was decided to transfer the losses to taxpayers via loans, guarantees and opaque constructs such as the European Financial Stability Fund.
The money did not go to help indebted economies. It flowed through the European Central Bank and recipient states to the coffers of big banks and investment funds.
Further contrary to the official wisdom, the recipient states did not want such "help," not this way. The natural option for them was to admit insolvency and let failed private lenders, wherever they were based, eat their losses.
That was not to be. Ireland was forced to take the money. The same happened to Portugal.
Why did the Brussels-Frankfurt extortion racket force these countries to accept the money along with "recovery" plans that would inevitably fail? Because they needed to please the tax-guzzling banks, which might otherwise refuse to turn up at the next Spanish, Belgian, Italian or even French bond auction.
Unfortunately for this financial and political cartel, their plan isn't working. Already under this scheme, Greece, Ireland and Portugal are ruined. They will never be able to save and grow fast enough to pay back the debts with which Brussels has saddled them in the name of saving them.
Setting up the European Stability Mechanism is no solution. It would institutionalize the system of wealth transfers from private citizens to compromised politicians and failed bankers, creating a huge moral hazard and destroying what remains of Europe's competitive banking landscape.
Fortunately, it is not too late to stop the rot. For the banks, we need honest, serious stress tests. Stop the current politically inspired farce. Instead, have parallel assessments done by regulators and independent groups including stakeholders and academics. Trust, but verify.
Insolvent banks and financial institutions must be shut down, purging insolvency from the system. We must restore the market principle of freedom to fail.
If some banks are recapitalized with taxpayer money, taxpayers should get ownership stakes in return, and the entire board should be kicked out. But before any such taxpayer participation can be contemplated, it is essential to first apply big haircuts to bondholders.
For sovereign debt, the freedom to fail is again key. Significant restructuring is needed for genuine recovery. Yes, markets will punish defaulting states, but they are also quick to forgive. Current plans are destroying the real economies of Europe through elevated taxes and transfers of wealth from ordinary families to the coffers of insolvent states and banks. A restructuring that left a country's debt burden at a manageable level and encouraged a return to growth-oriented policies could lead to a swift return to international debt markets.
This is not just about economics. People feel betrayed. In Ireland, the incoming parties to the new government promised to hold senior bondholders responsible, but under pressure they succumbed, leaving their voters with a sense of disenfranchisement. The elites in Brussels have said that Finland must honor its commitments to its European partners, but Brussels is silent on whether national politicians should honor their commitments to their own voters.
Say what one will about Soini's motives, it's clear that the crony capitalism of Europe's ECB, member country governments and large banks make for easy targets of his criticisms. And I don't think his analysis is flawed. In fact, his emphasis on identifying and closing insolvent institutions precisely echoes the comments of Anna Kagan Schwartz from 2008, on which I posted here.
Yes, his critics will claim, as did defenders of Bernanke's actions, that entire economies were at risk without such interventions.
But I don't believe that was ever true. In no case was a failing entity, whether it be Lehman, GM or Goldman Sachs, unable to be placed into Chapter 11, reorganized, and either spun back out or its remnants sold to surviving competitors or new entrants at market-clearing prices.
Soini is correct when he parrots the capitalist line that failed institutions must be allowed to fail and free up resources for others to use. But because, in Europe, an unholy alliance of banks and fiscally-vulnerable bond-issuing governments had developed, taxpayers were soaked to shore up the private, publicly-held financial sector entities.
While the specific mechanics of the ECB bailouts differ from those of the US due to the dollar being the world's current reserve currency, the basics are not dissimilar.
Entrenched managements were able to cash in on existing ties, business networks and fears of financial and economic turbulence in order to, in most cases, with very few exceptions (Bear Stearns, Lehman, AIG, Merrill Lynch, Wachovia) retain control of their companies and proceed to earn lush, post-bailout profits.
Managements like to identify themselves with the assets their companies control, in order to scare politicians into forgetting about Schumpeterian dynamics.
No matter what the event, when companies are found to have been managed badly, and succumb to some environmental or self-inflicted catastrophe, the valuable parts of such enterprises will still be desired and acquired by some other parties. The parts which failed should have been liquidated anyway. In America, there is a Constitutionally-assured method, bankruptcy, for orderly management of such changes in control and liquidations. Just because the Fed, FDIC and Treasury didn't engage in such invasive rescues did not mean that there were not more prudent and limited steps these various government entities could have taken to stabilize the financial sector and avoid economic depression.
Intervention of the sort conducted by the ECB and the Fed only serve to make ordinary voters and taxpayers sceptical of political-business alliances and cronyism. And create fertile ground in which socialists like Soini and the current US administration can flourish.
Tuesday, March 29, 2011
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.
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.
Tuesday, March 22, 2011
ATT & T Mobile
My first inclination, to be blunt, was to check on the equity price moves of the major US telecoms for the past five years, and more.
It isn't pretty.
The first chart displays ATT, Verizon, Sprint and the S&P500 Index for the past five years. Sprint is clearly the big loser, but the other two could only manage to match the Index.
Think about that. In such a capital intensive, advanced technological business, Verizon and ATT can, at best, only manage to give you the equity market index return, with no premium for the risk of lack of diversification.
The next chart displays the long term price moves of the same series. Sprint, again, is the big loser. But the other two haven't even matched the S&P over the longer timeframe.
Conclusion?Before you get all amped up over this proposed deal, notice that the whole sector is an investment graveyard.
My hunch, born of my experiences with predecessor AT&T from 1979-82, was right. I can still recall, upon joining AT&T right out of graduate business school, seeing the single most riveting chart describing the company's situation. It was a Yankee Group chart showing the monotonically plunging free cash flow for AT&T. A trend that had begun a few years earlier, and was proceeding at breakneck speed. Everything about the business screamed 'value destruction,' in the classic Schumpeterian sense.
Existing prices and equipment were under attack. New products would provide incredible productivity increases for customers, while transitioning AT&T from the clunky, labor-intensive world of analog to the much more competitive, less-profitable digital world.
Everywhere I looked, I saw revenue forecasts failing to displace business lost to either competition or technology. People my age received a brutally quick introduction to deregulatory dynamics in telecommunications, airlines, and banking. It hasn't ceased yet.
Now, as to the strategies and tactics of the proposed deal.
T Mobile has the valued asset, with Sprint needing it to remain relevant. So ATT promised a $3B breakup fee just to keep Sprint's hands off of T Mobile while the proposed merger is vetted by DOJ and God knows who else.
If ATT gets its prize, albeit at a P/E exceeding its own, it immediately increases its physical network assets and, perhaps most importantly, gets its target's valuable spectrum slots, while denying Sprint a viable means to remain competitive. If not, it's at least tied up T Mobile for a while, thus starving Sprint a little longer.
Why the putative architect of this deal, some investment banker from Chase, is so lauded is beyond me. I mean, with so few players, was this really something for which ATT and T Mobile needed a banker? Maybe for the basic funding mechanics, but nothing else.
As for the hoopla involving Chase underwriting the proposed deal with $20B of credit, so what? They're underwriting the purchase of infrastructure and spectrum, more than anything else. Not so risky. Given consumer behavior, even if the oligopolistic aspects of the deal allow some price increases, people are still going to continue to use their smart phones for data- and video-heavy apps, which will ensure the debt being paid off.
Meanwhile, according to CNBC's pundits and the Wall Street Journal, the regulatory issues are hardly trivial. For precisely that oligopoly effect of taking out one of four providers in the sector.
But, to me, win or lose, ATT's CEO, in an interview on CNBC Monday morning, said something that really gave me pause. Something right in line with this recent post.
Jenkins wrote about cloud computing, and smart phones certainly are a major contributor to the phenomenon. Stephens, ATT's CEO, noted that the firm needs more network capacity muy pronto, as even cars are now bringing apps traffic to cell phones. He mentioned some growth figure which, while I forget what it was, stunned me. After all, I, like many people, have already seen the commercial wherein a guy remotely accesses his car for his teen-aged daughter and her friend, then starts it via his cell phone app.
Far more than the old land-line engineers at the old Bell Labs and Long Lines, today's ATT network engineers must be terrified at the expected smart-phone and related device-based traffic coming their way on wireless networks. Meanwhile, nobody wants to pay much more for these conveniences.
Regardless of whether this deal is approved, or not, I doubt it will really make ATT a more attractive equity investment. Take another look at that second chart. None of the three telecom companies has a higher price today than ten years ago. It's just a lousy sector for investment, no matter how much more concentrated it gets. At least barring radical changes in regulatory-driven economics which allow a telco to become a reasonably pure play on market-based pricing for wireless bandwidth. Even then, however, the infrastructure requirements may dampen investor enthusiasm.
But, for now, I'd be surprised if this deal, if consummated, really does a whole lot for ATT's ability to earn consistently superior total returns in the years just ahead.
Friday, March 18, 2011
Cloud Computing, Net Neutrality, Regulation & Economics
The Wall Street Journal columnist Holman Jenkins, Jr., wrote an interesting piece last week entitled What Price the Cloud?
In it, he reviewed the evolving situation regarding heavy internet capacity usage by firms like Netflix and Google, who, of course, want no pricing actions taken against them.
Jenkins wrote, in reference to "once-great firms like Digital Equipment and Wang Labs,"
"The scariest part: Even leaders who grasp what's happening to them often can't change cost structures and business models fast enough to survive."
That's actually a misunderstanding. DEC and Wang really never had a chance once the PC began to spread. No change in cost structure for producing a Wang system could save the company, because the product was just archaic in the face of a multi-functional PC of the late 1980s.
I'm rather surprised Jenkins made this mistake. Schumpeterian dynamics don't typically allow for accommodation by older firms to the newer trends which supplant them. There is little or no effective response. Rather, the older approaches simply disappear.
Still, the core of Jenkins' piece involves whether repricing of bandwidth will hurt companies like Netflix. Everyone's nightmare, of course, is that the cable companies begin to meter individual usage and charge for such usage volumes over a certain level. Jenkins notes how the introduction of ever lower-priced smart phones is driving up bandwidth demand from mobile sources.
He refers to an A.T. Kearney report which finds current economics of the internet unsustainable without some transfer of bandwidth costs to those that generate traffic. But for me, the key passage is this one,
"...but who's to say consumers can't judge for themselves if the restrictions are worth the price?"
Just the other day, I went online and selected three Netflix movies to view on my television. Into the instant queue they went, and I watched them, with no particular interruption, that afternoon (Although, I should note that Netflix has had some recent problems, disappearing from my Tivo unit for a day or so, and freezing up the system on occasion. I suspect usage overload).
What's that worth? For a flat monthly fee, I could watch 30 movies/month. I think that comes out to about 50 cents/film, and considerably less on a per/hour basis for entertainment.
If my cable bill rose by $10 for this level of service, will I really care? Is $10 so much that I'd revert to mailing discs back and forth to Netflix? Unlikely.
I saw the excellent movie Barney's Version in an art house theatre last weekend with a friend. It cost about $25 all in. The price differential between first-run movie experiences and arm-chair selection and viewing off of Netflix remains enormous. Temporarily raising the price of using bandwidth, until the traffic generators respond with more efficient delivery to economize on bandwidth usage, probably won't be crippling for most consumers.
What's really at issue here is this. Having learned the ability to buy, perhaps at artificially low prices, cloud-based experiences involving high-speed transfers of video and other high-volume communications applications, will consumers just return to old, pre-cloud habits, or will they willingly pay something for the ability to maintain their new levels of cloud-based information consumption?
But, in the short term, Jenkins is entirely correct when he writes of Apple, Netflix, Amazon and Google,
"All are betting heavily on the cloud. All need to start dealing realistically with the question of how the necessary bandwidth will be paid for."
Current enjoyment of on-demand, large swatches of bandwidth for free can't last much longer. The electronic highway is getting crowded, and sooner or later, tolls will have to be charged to allocate usage, or we'll all experience an inability to view full motion video in a manner that's appealing or worthwhile.
In it, he reviewed the evolving situation regarding heavy internet capacity usage by firms like Netflix and Google, who, of course, want no pricing actions taken against them.
Jenkins wrote, in reference to "once-great firms like Digital Equipment and Wang Labs,"
"The scariest part: Even leaders who grasp what's happening to them often can't change cost structures and business models fast enough to survive."
That's actually a misunderstanding. DEC and Wang really never had a chance once the PC began to spread. No change in cost structure for producing a Wang system could save the company, because the product was just archaic in the face of a multi-functional PC of the late 1980s.
I'm rather surprised Jenkins made this mistake. Schumpeterian dynamics don't typically allow for accommodation by older firms to the newer trends which supplant them. There is little or no effective response. Rather, the older approaches simply disappear.
Still, the core of Jenkins' piece involves whether repricing of bandwidth will hurt companies like Netflix. Everyone's nightmare, of course, is that the cable companies begin to meter individual usage and charge for such usage volumes over a certain level. Jenkins notes how the introduction of ever lower-priced smart phones is driving up bandwidth demand from mobile sources.
He refers to an A.T. Kearney report which finds current economics of the internet unsustainable without some transfer of bandwidth costs to those that generate traffic. But for me, the key passage is this one,
"...but who's to say consumers can't judge for themselves if the restrictions are worth the price?"
Just the other day, I went online and selected three Netflix movies to view on my television. Into the instant queue they went, and I watched them, with no particular interruption, that afternoon (Although, I should note that Netflix has had some recent problems, disappearing from my Tivo unit for a day or so, and freezing up the system on occasion. I suspect usage overload).
What's that worth? For a flat monthly fee, I could watch 30 movies/month. I think that comes out to about 50 cents/film, and considerably less on a per/hour basis for entertainment.
If my cable bill rose by $10 for this level of service, will I really care? Is $10 so much that I'd revert to mailing discs back and forth to Netflix? Unlikely.
I saw the excellent movie Barney's Version in an art house theatre last weekend with a friend. It cost about $25 all in. The price differential between first-run movie experiences and arm-chair selection and viewing off of Netflix remains enormous. Temporarily raising the price of using bandwidth, until the traffic generators respond with more efficient delivery to economize on bandwidth usage, probably won't be crippling for most consumers.
What's really at issue here is this. Having learned the ability to buy, perhaps at artificially low prices, cloud-based experiences involving high-speed transfers of video and other high-volume communications applications, will consumers just return to old, pre-cloud habits, or will they willingly pay something for the ability to maintain their new levels of cloud-based information consumption?
But, in the short term, Jenkins is entirely correct when he writes of Apple, Netflix, Amazon and Google,
"All are betting heavily on the cloud. All need to start dealing realistically with the question of how the necessary bandwidth will be paid for."
Current enjoyment of on-demand, large swatches of bandwidth for free can't last much longer. The electronic highway is getting crowded, and sooner or later, tolls will have to be charged to allocate usage, or we'll all experience an inability to view full motion video in a manner that's appealing or worthwhile.
Tuesday, March 08, 2011
Evolution of Equity Portfolio Selections
I recently had the opportunity to focus on how my quantitatively-driven portfolio selection process has captured current trends in business.
It began when I noticed a former business partner using selections from a prior month for which he had not compensated me. Without going into the details of the situation, suffice to say he continued to buy equities and options, in January, based upon two-month old portfolio selections.
With his old portfolios, and using only some of the prior selections, for comparison, I have noted how the February and March portfolio selections have, in just those several months, begun to shift into new areas.
For example, one new holding is a cloud computing firm. Another is in solar energy.
Since its inception in 1997, the selection process has included various energy firms- Royal Dutch Shell at the outset, and, over time, natural gas, oil exploration and service firms. Now, reflecting the economy and government subsidies to alternative energy production, a solar-related firm has performed well enough to become part of the portfolio.
Similarly, my very first portfolio included Intel and Microsoft. Over time, the selection process moved to PC manufacturers, other software providers, security firms, network gear providers, then online-oriented firms. Now, with so much content stored off-site and so many programs which are net-based, a cloud computing firm has demonstrated sufficient strength on the necessary attributes to be included in the latest portfolio.
I don't think I could ever make such changes subjectively. Just the other morning, on CNBC, I listened to a portfolio manager bemoan having owned Microsoft, instead of Apple, for several years. I suspect that when one subjectively analyzes forecasts, it becomes very difficult to reshuffle one's portfolio. So much of the decisions become based on quality of estimates or forecasts, or simply emotions concerning old favorites.
Along the lines of that last point, I found it hard to believe a conversation I heard last Friday on CNBC regarding Wal-Mart.
The hapless Maria Bartiromo was asking a guest- either a portfolio manager or buy-side analyst- why Wal-Mart's size and market shares didn't guarantee that it exhibit excellent equity price performance.
I don't really recall the guest's reply. I know what he didn't say. What Bartiromo, with all her presumed experience covering financial markets didn't already understand.
Simply put, Wal-Mart has lost its potential to surprise investors and markets.
Firms like Apple which design and manufacture products can develop radically new, innovative items- then enhance them. But retailers must typically on just store growth. Perhaps occasionally the addition of a new product line or fighting brand. But, for the most part, once they gain lots of attention, are followed by a hundred analysts, and saturate their primary markets, it's hard for them to surprise with results on a consistent basis.
Wal-Mart reach that point about a decade ago, as the nearby price chart indicates. After several decades of torrid total returns which massively outpaced the index, it has settled into maturity. Probably never to regain the performance characteristics of its earlier days. That's why the firm hasn't been among my portfolio selections for over a decade.
How is it that this fairly common phenomenon escaped the understanding of the veteran CNBC anchor and her presumably experienced guest?
It began when I noticed a former business partner using selections from a prior month for which he had not compensated me. Without going into the details of the situation, suffice to say he continued to buy equities and options, in January, based upon two-month old portfolio selections.
With his old portfolios, and using only some of the prior selections, for comparison, I have noted how the February and March portfolio selections have, in just those several months, begun to shift into new areas.
For example, one new holding is a cloud computing firm. Another is in solar energy.
Since its inception in 1997, the selection process has included various energy firms- Royal Dutch Shell at the outset, and, over time, natural gas, oil exploration and service firms. Now, reflecting the economy and government subsidies to alternative energy production, a solar-related firm has performed well enough to become part of the portfolio.
Similarly, my very first portfolio included Intel and Microsoft. Over time, the selection process moved to PC manufacturers, other software providers, security firms, network gear providers, then online-oriented firms. Now, with so much content stored off-site and so many programs which are net-based, a cloud computing firm has demonstrated sufficient strength on the necessary attributes to be included in the latest portfolio.
I don't think I could ever make such changes subjectively. Just the other morning, on CNBC, I listened to a portfolio manager bemoan having owned Microsoft, instead of Apple, for several years. I suspect that when one subjectively analyzes forecasts, it becomes very difficult to reshuffle one's portfolio. So much of the decisions become based on quality of estimates or forecasts, or simply emotions concerning old favorites.
Along the lines of that last point, I found it hard to believe a conversation I heard last Friday on CNBC regarding Wal-Mart.
I don't really recall the guest's reply. I know what he didn't say. What Bartiromo, with all her presumed experience covering financial markets didn't already understand.
Simply put, Wal-Mart has lost its potential to surprise investors and markets.
Firms like Apple which design and manufacture products can develop radically new, innovative items- then enhance them. But retailers must typically on just store growth. Perhaps occasionally the addition of a new product line or fighting brand. But, for the most part, once they gain lots of attention, are followed by a hundred analysts, and saturate their primary markets, it's hard for them to surprise with results on a consistent basis.
Wal-Mart reach that point about a decade ago, as the nearby price chart indicates. After several decades of torrid total returns which massively outpaced the index, it has settled into maturity. Probably never to regain the performance characteristics of its earlier days. That's why the firm hasn't been among my portfolio selections for over a decade.
How is it that this fairly common phenomenon escaped the understanding of the veteran CNBC anchor and her presumably experienced guest?
Monday, March 07, 2011
US Commercial Banking, Evolution & Commoditization
My years with the Chase Manhattan Bank were spent under the tutelage of Gerry Weiss, SVP of Corporate Planning & Development. It was a privilege to work for such a bright, secure and gifted strategist.
Gerry didn't win a lot of new friends among his senior executive colleagues at the bank for holding the view that banking was one of the most commodity-like businesses in existence. With a few exceptions, most of the businesses at Chase were extremely difficult to differentiate because, at the end of the day, you were either borrowing, lending or processing money. Not exactly a patentable good.
Further, as technology became more important in more banking businesses, any single bank's ability to maintain a competitive edge for very long became increasingly difficult.
With all this in mind, I read a piece in the Wall Street Journal last week regarding federal arm-twisting of the major US banks on mortgage foreclosures. Leaving aside the subject of that article, which was the unwise attempt to force banks to forgive negative equity for borrowers, I was struck by the pedigrees of the few banks mentioned- Chase, Wells Fargo and BofA, and the one absent bank- Citicorp.
I realized, as pondered these names, how few people today probably recall that these, including Citi, are no longer the banks which originally had those names.
For example, Wells Fargo is really just the name of a former San Francisco-based bank acquired by what was once a staid Midwestern outfit- Norwest Bank of Minnesota. If I'm not mistaken, Norwest itself was acquired by a one-time rival, First Bank System. Along the way, it hoovered up the crippled Wachovia during the recent financial crisis, giving it, ironically, the old Golden West S&L, too. That was a product of Ken Thompson's wrong-headed mortgage bank acquisition at the peak of the real estate bubble. It cost him his job.
Meanwhile, BofA is just the surviving name of another San Francisco-based bank that took too many risks and became the prey of another regional US bank- Nationsbank, the renamed North Carolina National Bank. Hugh McColl busily assembled a large group of basic banking franchises beginning in the 1980s. The drive to aggregate assets and relationships culminated in the takeover of the once-proud BofA. McColl's successor, Ken Lewis, overreached when he bought Countrywide and Merrill Lynch during the recent financial crisis. That latter deal's murky details sent Lewis packing early from his CEO job at BofA.
Chase, as we know it today, is simply the name hung on the agglomeration of assets of most of the old money center banks of New York City, except for Citi and Bankers Trust. Back when I worked for Gerry Weiss, he once referred to Chase Manhattan, Chemical and Manufacturers Hanover Trust as three fairly interchangeable, mediocre banks. When asked about merging them, he snorted derisively,
'All you'd get is a much bigger mediocre bank that would be even more difficult to manage than what we've already got.'
Never the less, Chemical took over MannyHanny, then the two picked off Chase after its CEO, Tom Labrecque, finally ran the latter into the ground and attracted the unwanted attentions of fund manager Michael Price. In time, the CEO job went to Jamie Dimon, who had fled New York City to run the remaining Midwest regional commercial bank, Banc One- by then a product of a merger of the Ohio company of that name and the old First Chicago.
Citicorp wasn't mentioned among those in the foreclosure-related article because it essentially died, only to be resuscitated as a ward of the federal government after 2008. Before that, however, it was taken over from outside banking, when Sandy Weill prevailed upon then-Treasury Secretary Bob Rubin to allow him to 'merge' with John Reed's Citibank. Weill then hip-checked Reed out of the C-suite, hired Bob Rubin, and proceeded to build the most unwieldy, unmanageable financial supermarket ever attempted in the US.
My point is that if you were to have surveyed the national and regional banking field in the mid-1980s, as my colleagues and I did as part of our jobs as corporate and business strategists at Chase Manhattan, you'd have classified BofA, Chase Manhattan and Citicorp as the nation's three most important international money center banks. Chicago had just lost Continental Bank, but still had First Chicago. Bankers Trust and JP Morgan were smaller, more focused money center banks. All of these had senior management which felt and behaved as if their banks were special, different, and able to take risks which other US banks couldn't handle.
Fast forward almost 30 years, and you can see how wrong they were. The three premier US money center banks all lost their managements via takeovers.
In truth, the managements of what we now know as the leading US banks are products of duller, less-ambitious banks. Less ambitious in terms of scope, though, rather than size. And the businesses which are now part of these banking companies which aren't historic mainline banking units- brokerage, underwriting and merger and acquisition advisory- have become, as my old boss Gerry Weiss predicted, less lucrative due to the commoditization of them by the large commercial bank entrants.
In true Schumpeterian form, most of large commercial banking has become commoditized amidst growing competition. Thus, their equity price performances are, for the most part, anemic. Only Wells Fargo has a 35-year price performance which eclipses the S&P500 Index. Chase, BofA and Citi all trail it substantially.
What's different about Wells? Notice, first, that its outperformance slackened significantly around 2000. So it's not a function of recent management skill.
More likely, its earlier outperforming of the S&P resulted from its having avoided combining with any of the leading money center banks- ever. A host of old mid-sized California banking franchises- First Interstate, Crocker, and Security Pacific- if I recall, comprised the Wells Fargo that Norwest snared. As such, while predecessor banks got into some troubles, they tended not to be on the gigantic scale of the messes into which the three largest US money centers stepped throughout the past three decades.
Of the other banks, Chase managed to about match the S&P, while the Citi and BofA plunged noticeably.
So, from a perspective of over thirty years of large US commercial bank performance, it's evident that the risk-taking of the old international money center banking companies didn't result in their consistently superior performance. Rather, to the contrary, that strategy failed, as evidenced by the managements of more cautious, smaller commercial banks ultimately owning the marquees previously associated with their larger one-time rivals.
Now, no matter what you hear on CNBC or read in the Wall Street Journal, for the most part, the four major US commercial banks have become financial utilities which will, for the most part, fail to consistently outperform the S&P500 for any significant period of time. They've become large, slow-moving purveyors of financial commodities.
Gerry didn't win a lot of new friends among his senior executive colleagues at the bank for holding the view that banking was one of the most commodity-like businesses in existence. With a few exceptions, most of the businesses at Chase were extremely difficult to differentiate because, at the end of the day, you were either borrowing, lending or processing money. Not exactly a patentable good.
Further, as technology became more important in more banking businesses, any single bank's ability to maintain a competitive edge for very long became increasingly difficult.
With all this in mind, I read a piece in the Wall Street Journal last week regarding federal arm-twisting of the major US banks on mortgage foreclosures. Leaving aside the subject of that article, which was the unwise attempt to force banks to forgive negative equity for borrowers, I was struck by the pedigrees of the few banks mentioned- Chase, Wells Fargo and BofA, and the one absent bank- Citicorp.
I realized, as pondered these names, how few people today probably recall that these, including Citi, are no longer the banks which originally had those names.
For example, Wells Fargo is really just the name of a former San Francisco-based bank acquired by what was once a staid Midwestern outfit- Norwest Bank of Minnesota. If I'm not mistaken, Norwest itself was acquired by a one-time rival, First Bank System. Along the way, it hoovered up the crippled Wachovia during the recent financial crisis, giving it, ironically, the old Golden West S&L, too. That was a product of Ken Thompson's wrong-headed mortgage bank acquisition at the peak of the real estate bubble. It cost him his job.
Meanwhile, BofA is just the surviving name of another San Francisco-based bank that took too many risks and became the prey of another regional US bank- Nationsbank, the renamed North Carolina National Bank. Hugh McColl busily assembled a large group of basic banking franchises beginning in the 1980s. The drive to aggregate assets and relationships culminated in the takeover of the once-proud BofA. McColl's successor, Ken Lewis, overreached when he bought Countrywide and Merrill Lynch during the recent financial crisis. That latter deal's murky details sent Lewis packing early from his CEO job at BofA.
Chase, as we know it today, is simply the name hung on the agglomeration of assets of most of the old money center banks of New York City, except for Citi and Bankers Trust. Back when I worked for Gerry Weiss, he once referred to Chase Manhattan, Chemical and Manufacturers Hanover Trust as three fairly interchangeable, mediocre banks. When asked about merging them, he snorted derisively,
'All you'd get is a much bigger mediocre bank that would be even more difficult to manage than what we've already got.'
Never the less, Chemical took over MannyHanny, then the two picked off Chase after its CEO, Tom Labrecque, finally ran the latter into the ground and attracted the unwanted attentions of fund manager Michael Price. In time, the CEO job went to Jamie Dimon, who had fled New York City to run the remaining Midwest regional commercial bank, Banc One- by then a product of a merger of the Ohio company of that name and the old First Chicago.
Citicorp wasn't mentioned among those in the foreclosure-related article because it essentially died, only to be resuscitated as a ward of the federal government after 2008. Before that, however, it was taken over from outside banking, when Sandy Weill prevailed upon then-Treasury Secretary Bob Rubin to allow him to 'merge' with John Reed's Citibank. Weill then hip-checked Reed out of the C-suite, hired Bob Rubin, and proceeded to build the most unwieldy, unmanageable financial supermarket ever attempted in the US.
My point is that if you were to have surveyed the national and regional banking field in the mid-1980s, as my colleagues and I did as part of our jobs as corporate and business strategists at Chase Manhattan, you'd have classified BofA, Chase Manhattan and Citicorp as the nation's three most important international money center banks. Chicago had just lost Continental Bank, but still had First Chicago. Bankers Trust and JP Morgan were smaller, more focused money center banks. All of these had senior management which felt and behaved as if their banks were special, different, and able to take risks which other US banks couldn't handle.
Fast forward almost 30 years, and you can see how wrong they were. The three premier US money center banks all lost their managements via takeovers.
In truth, the managements of what we now know as the leading US banks are products of duller, less-ambitious banks. Less ambitious in terms of scope, though, rather than size. And the businesses which are now part of these banking companies which aren't historic mainline banking units- brokerage, underwriting and merger and acquisition advisory- have become, as my old boss Gerry Weiss predicted, less lucrative due to the commoditization of them by the large commercial bank entrants.
What's different about Wells? Notice, first, that its outperformance slackened significantly around 2000. So it's not a function of recent management skill.
More likely, its earlier outperforming of the S&P resulted from its having avoided combining with any of the leading money center banks- ever. A host of old mid-sized California banking franchises- First Interstate, Crocker, and Security Pacific- if I recall, comprised the Wells Fargo that Norwest snared. As such, while predecessor banks got into some troubles, they tended not to be on the gigantic scale of the messes into which the three largest US money centers stepped throughout the past three decades.
Of the other banks, Chase managed to about match the S&P, while the Citi and BofA plunged noticeably.
So, from a perspective of over thirty years of large US commercial bank performance, it's evident that the risk-taking of the old international money center banking companies didn't result in their consistently superior performance. Rather, to the contrary, that strategy failed, as evidenced by the managements of more cautious, smaller commercial banks ultimately owning the marquees previously associated with their larger one-time rivals.
Now, no matter what you hear on CNBC or read in the Wall Street Journal, for the most part, the four major US commercial banks have become financial utilities which will, for the most part, fail to consistently outperform the S&P500 for any significant period of time. They've become large, slow-moving purveyors of financial commodities.
Friday, February 25, 2011
Amazon Enters Subscription Video On Demand To Challenge Netflix
"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.
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.
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,
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.
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.
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