I would be remiss if I did not comment on DaimlerChrysler's announcement, earlier this week, that it is embarking on a massive restructuring effort, laying off some 13,000 employees, and entertaining the option of selling or spinning off its American Chrysler unit.
The first thing I would note is that this supports my long-held contention, which I mentioned in a prior post, that no Big Three Detroit auto maker has ever really been "rescued" or "turned around," in the sense of being saved from imminent bankruptcy or serious ownership change, for a lengthy period. Iacoccoa may have fended off dissolution in the 1970s, but only with massive Federal assistance. Then again, he did set the company on the road to independence for another twenty years or so. Still, if not for government intervention, the industry would have probably taken some badly-needed capacity reduction medicine earlier, rather than later.
The 1998 merger of Daimler and Chrysler, only nine years ago, including the subsequent "turnaround" of Chrsyler by Dieter Zetsche earlier in this decade, now seems to have been a colossal mistake.
To provide a little incidental perspective on this story, Senator Tom Carper (how apt a name for a US Senator, eh?), recently-elected Democrat from Delaware, droned on for almost five minutes during Fed Chairman Ben Bernanke's Senate appearance this week about Delaware's Chrysler plant dilemmas. Among the more ill-informed comments he made was that he believed and hoped that we would keep more auto manufacturing (assembly, really) jobs in the US (read: his state), and that the workers at the Delaware Chrysler plants are good workers, and produce good cars.
These are nice sentiments, but indicate why US industrial "policy," such as it is, causes such trouble. Does anyone think Chrysler has much value anymore, or should be "saved?" Or that just because its employees work very hard producing mediocre and unwanted products, that they deserve special treatment?
Despite the many ideas floated about spinoffs, sale of the firm, or merging it with GM, who really would want the Chrysler division now? Is there more value to it than perhaps part of the legendary Jeep brand (oddly, an AMC relic), and perhaps some real estate? Are those two components possessed of sufficient value to offset the firm's pension and health care liabilities?
I don't see GM as being able to afford this one. Nor that it would help that firm. However, I think the very real question is whether any other firm would even bother to bid on Chrysler without Daimler having to pre-fund all the various employee-compensation-related liabilities. For that matter, we don't know what would be considered "safe," from a legal viewpoint, in spinning the unit off to existing DaimlerChrysler shareholders. If it isn't sufficiently capitalized, might the US come back after Daimler for 'looting' Chrysler by failing to sufficiently fund the pension liabilities?
But, back to this week's news. The job cuts will probably hasten the firm's shrinkage. Zetsche's reputation is now tarnished. This unit, and, indeed, the firm, seems somewhat stuck in neutral with a gigantic problem having resurfaced to impair its ability to compete in a sector in which fewer and fewer operational mistakes are being tolerated by the financial markets, and customers. Its hoped-for design integration turned out to be a non-starter. The Daimler engineers balked at it, and their luxury customers may be at risk if it is now intensified as a cost-cutting option.
Once again, inept marketing and a clear focus on customer behavior seems to have led an automotive manufacturer astray.
Thursday, February 15, 2007
Wednesday, February 14, 2007
Market Value: When and To Whom?
In his Tuesday piece in the Wall Street Journal, Dennis Berman refers to situations in which executives,
"were trying to use overpriced shares to buy other companies in stock deals before the market came to its senses....executives don't dare broach- that their shares might be overvalued."
What does it mean to simply state that a company is "overvalued?" By whom? Or that the market is not 'in its senses?' Over what timeframe? Do such an unconditioned terms or statements even make sense?
Can anything be "overvalued" today? I think not. As my wise old friend and colleague, B, noted some years ago,
"A model can tell you what X was worth yesterday, or what it may be worth tomorrow, but today, it is worth what I can sell it for in the market."
Just so.
And, further, today's market price, or value, for a company, is a function of many buyers and sellers, and non-buyers and non-sellers, whose various and varying expectations constitute the forces which drive the actual price of shares of a company.
In fact, there are so many conditions on the question of "value," much less "overvalue," that it boggles the mind to consider them all.
For example, if I sell one share of a stock I currently hold, Gilead Corporation, it is unlikely to affect the market value of the company. I am essentially a price-taker. However, suppose I own 4% of the firm- a level below that requiring certain SEC filings. Suppose I wish to sell all but one share of my 4% stake in Gilead, today. Would this action affect the company's value? Almost certainly. The flooding of nearly 4% of the ownership in a company into the market at once will change its value very quickly, indeed. It may result in a price decline sufficient to bring in more buyers, who now think the company is "undervalued," relative to their own expectations, and perhaps move the market value back up again.
Thus, the use of sloppy language, such as referring to a company, or its stock, as simply, unconditionally, "overvalued," or "undervalued," obscures clear understanding of the mechanics involved in the valuation of companies. In an open trading market, a company is always "fairly" valued at the moment. That value may appear to be too high, or low, to different investors, or potential investors.
To address Mr. Berman's point regarding "overvalued" companies, I would suggest that what is meant is that there are situations in which a company is "overvalued," in the opinion of some people, relative to some other company. In such cases, there may, indeed, be takeover activity.
But that's not to suggest that either company was "wrongly" valued that day. Or on any other trading day.
"Value" is what you can get for something in a market. Any other "value" ascribed to the item is only a relative estimate, which is itself a function of a particular investor's expectations. Nothing more, and nothing less.
"were trying to use overpriced shares to buy other companies in stock deals before the market came to its senses....executives don't dare broach- that their shares might be overvalued."
What does it mean to simply state that a company is "overvalued?" By whom? Or that the market is not 'in its senses?' Over what timeframe? Do such an unconditioned terms or statements even make sense?
Can anything be "overvalued" today? I think not. As my wise old friend and colleague, B, noted some years ago,
"A model can tell you what X was worth yesterday, or what it may be worth tomorrow, but today, it is worth what I can sell it for in the market."
Just so.
And, further, today's market price, or value, for a company, is a function of many buyers and sellers, and non-buyers and non-sellers, whose various and varying expectations constitute the forces which drive the actual price of shares of a company.
In fact, there are so many conditions on the question of "value," much less "overvalue," that it boggles the mind to consider them all.
For example, if I sell one share of a stock I currently hold, Gilead Corporation, it is unlikely to affect the market value of the company. I am essentially a price-taker. However, suppose I own 4% of the firm- a level below that requiring certain SEC filings. Suppose I wish to sell all but one share of my 4% stake in Gilead, today. Would this action affect the company's value? Almost certainly. The flooding of nearly 4% of the ownership in a company into the market at once will change its value very quickly, indeed. It may result in a price decline sufficient to bring in more buyers, who now think the company is "undervalued," relative to their own expectations, and perhaps move the market value back up again.
Thus, the use of sloppy language, such as referring to a company, or its stock, as simply, unconditionally, "overvalued," or "undervalued," obscures clear understanding of the mechanics involved in the valuation of companies. In an open trading market, a company is always "fairly" valued at the moment. That value may appear to be too high, or low, to different investors, or potential investors.
To address Mr. Berman's point regarding "overvalued" companies, I would suggest that what is meant is that there are situations in which a company is "overvalued," in the opinion of some people, relative to some other company. In such cases, there may, indeed, be takeover activity.
But that's not to suggest that either company was "wrongly" valued that day. Or on any other trading day.
"Value" is what you can get for something in a market. Any other "value" ascribed to the item is only a relative estimate, which is itself a function of a particular investor's expectations. Nothing more, and nothing less.
GM's New Shareholder: Goldman Sachs
Yesterday's Wall Street Journal noted that Goldman Sachs now holds a 5.2% stake in GM.
Are they betting on a takeover, or girding for the kind of shareholder activist campaign that Relational used to get a seat on Home Depot's board? Or of the type that Kirk Kerkorian failed with last year? Or, is Goldman simply being opportunistic, hoping for a quick "pop" in the stock price, before unloading their shares?
I haven't seen much discussion about this, for example, on CNBC. Isn't this surprising? When a noted equity house, asset manager, private equity funder and player, and M&A powerhouse takes such a large interest in an ailing company?
What's the likely implication for GM shareholders? I'd guess very good, since GS is comprised of a bunch of smart, tough financial sharks. I suppose the big question is whether Rick Wagoner is or would be more fearful of Goldman's no-nonsense bankers than he was (not) of Kirk Kerkorian.
Are they betting on a takeover, or girding for the kind of shareholder activist campaign that Relational used to get a seat on Home Depot's board? Or of the type that Kirk Kerkorian failed with last year? Or, is Goldman simply being opportunistic, hoping for a quick "pop" in the stock price, before unloading their shares?
I haven't seen much discussion about this, for example, on CNBC. Isn't this surprising? When a noted equity house, asset manager, private equity funder and player, and M&A powerhouse takes such a large interest in an ailing company?
What's the likely implication for GM shareholders? I'd guess very good, since GS is comprised of a bunch of smart, tough financial sharks. I suppose the big question is whether Rick Wagoner is or would be more fearful of Goldman's no-nonsense bankers than he was (not) of Kirk Kerkorian.
Tuesday, February 13, 2007
NBC's New Ad Sales Approach: What's Old Is New Again
Yesterday's Wall Street Journal carried an interesting piece in the Media&Marketing Section regarding advertising.
The piece, by Brian Steinberg, featured the changes in ad marketing and sales being wrought by NBC's new ad-sales chief, Michael Pilot, late of GE's Commercial Finance Group.
Apparently, Pilot has "a history of using sophisticated analytical methods to generate sales growth."
Twenty-odd years ago, when I was a graduate student at Penn, we learned these sorts of techniques from the then-resident expert Professors, Len Lodish and Jerry Wind. The use of prior sales data from which to build models of most-likely buyers, and more productive sales and marketing efforts, is hardly new.
I think it's wonderful that NBC is making use of someone with Mr. Pilot's tendencies. Beyond his focus on more analytical sales planning, Pilot is also redesigning the entire sales and fulfillment process, something consultants like my old outfit, Andersen cum Accenture, likes to call 'business process re-engineering,' to be more efficient, automated, and electronic.
All this is, frankly, pretty obvious, low-hanging fruit. The question you should have, that I have, is, what took GE, the parent of NBC Universal, so long to effect this change? As I've written in prior posts, GE is too large to be effectively managed anymore for consistently superior total returns to shareholders. This is an excellent example of why I believe this to be so.
How does one justify viewing GE as either visionary, or well-led, if something so large and prominent as the ad sales function in one of its six business groups, is so hopelessly antiquated and poorly-managed?
I think this also speaks to the reality of business education in America, and, possibly, the world. Michael Pilot is most certainly not the only business school graduate to have learned these techniques over the past thirty years. Where are all the other graduates with similar knowledge, and their successful sales management changes?
Where does all that learning, knowledge and skill go? Thousands of graduates from the top ten or so US business schools in the past few decades, and when one of them actually implements a decades-old idea, it's considered breaking news in the Wall Street Journal.
How sad.
The piece, by Brian Steinberg, featured the changes in ad marketing and sales being wrought by NBC's new ad-sales chief, Michael Pilot, late of GE's Commercial Finance Group.
Apparently, Pilot has "a history of using sophisticated analytical methods to generate sales growth."
Twenty-odd years ago, when I was a graduate student at Penn, we learned these sorts of techniques from the then-resident expert Professors, Len Lodish and Jerry Wind. The use of prior sales data from which to build models of most-likely buyers, and more productive sales and marketing efforts, is hardly new.
I think it's wonderful that NBC is making use of someone with Mr. Pilot's tendencies. Beyond his focus on more analytical sales planning, Pilot is also redesigning the entire sales and fulfillment process, something consultants like my old outfit, Andersen cum Accenture, likes to call 'business process re-engineering,' to be more efficient, automated, and electronic.
All this is, frankly, pretty obvious, low-hanging fruit. The question you should have, that I have, is, what took GE, the parent of NBC Universal, so long to effect this change? As I've written in prior posts, GE is too large to be effectively managed anymore for consistently superior total returns to shareholders. This is an excellent example of why I believe this to be so.
How does one justify viewing GE as either visionary, or well-led, if something so large and prominent as the ad sales function in one of its six business groups, is so hopelessly antiquated and poorly-managed?
I think this also speaks to the reality of business education in America, and, possibly, the world. Michael Pilot is most certainly not the only business school graduate to have learned these techniques over the past thirty years. Where are all the other graduates with similar knowledge, and their successful sales management changes?
Where does all that learning, knowledge and skill go? Thousands of graduates from the top ten or so US business schools in the past few decades, and when one of them actually implements a decades-old idea, it's considered breaking news in the Wall Street Journal.
How sad.
Monday, February 12, 2007
Detroit's Continuing Stupidity: The Inventory Dilemma
The Wall Street Journal featured a lead article Friday discussing the big three American auto maker's dilemma with unsold cars.
My favorite line in the piece is this quote from GM's head of North American sales and marketing, Mark LaNeve, "It's not like we have some crisis." Then there is this gem from his colleague, Troy Clarke, president of GM North America, "Today, we are much better in balancing production and demand than we were two years ago....If the trend continues, we will be right where we want to be."
Actually, they do. A crisis so bad that the CEO of AutoNation, Mike Jackson, routinely finds the wrong types of cars on the lots of his dealerships. According to the Journal article,
"AutoNation's Toyota and Honda stores typically carry enough cars to last 35 to 42 days. Its GM, Ford and Chrysler locations used to have 65 to 70 days of inventory. These days.....that number has climbed to between 80 and 120 days."
The other interesting item reported in article is that AutoNation hired McKinsey and several other consulting groups to perform some rather basic 20/80 rule analyses. That is, to identify the relatively few (usually around 20%) vehicle variations that account for most ( the 80%) sales. I'm not sure why AutoNation couldn't do this with its own marketing staff, but, for now, never mind that.
When Jackson approached GM about co-developing a predictive modeling system based upon this age-old 'wisdom,' Mr. LaNeve said GM was "seriously considering joining" the effort.
At least Alan Mulally, Ford's new CEO, said, of Jackson's idea, "He's absolutely right on. When you have big inventories, you get further and further away from that customer decision."
This is hilarious. The Journal piece, which is quite long, lavishes examples with lots of details, illustrating some howling mismatches of cars and US locations, thanks to GM's and Ford's insistence on guessing at consumer preferences, and then cranking out models according to those guesses.....ah...."forecasts."
This alone ought to tell you why you shouldn't be betting on either GM, or Ford, to return to a consistently superior total return performance path anytime soon. They may not even have sufficient funding to do so independently, at the rate their senior executives are moving on the inventory issue.
As I wrote in a post early on in this blog, the real question is why the manufacturers continue to use dealerships as they do at all. Why not simply establish kiosks or third-party locations, such as Wal-Mart, etc., to site sales offices with elaborate online 3D software programs to showcase their vehicles. Consumers could then order their cars, custom-made, on the spot, paying a deposit. The third-party location would accept the drop-shipped car, which could be built within weeks. And would this not eliminate much of the auto manufacturers' inventory and work-in-process financing issues?
There is another, related challenge which was mentioned in a glancing fashion in the article.
Right now, Detroit seems to need about 18 months, minimum, and often, up to 3 years, to adjust its product offerings to major changes in consumer behavior. I'm referring to, of course, what happens to demand for various product types every time gasoline prices either skyrocket or plummet. What to do? How do the auto manufacturers handle such volatility in the price of a major complementary good used by consumers of their product?
Actually, the answer already exists, in pieces. Shell pioneered scenario planning over forty years ago, and Detroit needs to implement that skill as well. The variability in consumer demand for vehicles can probably be reduced to a few major sources of discontinuous uncertainty and, thus, modeled as several most-probable scenarios.
Under each scenario, the auto producers could determine what sorts of models would be best-suited for the particular situation forecast. The manufacturers could then simply keep designs current for at least a few models under each scenario, and several factories ready to switch over production upon a few months' notice.
Does it not seem likely that the first producer to arrive in the market with vehicles tailored to something like a radical change in gasoline prices would be rewarded with increased market shares and pricing power, offsetting some of the costs of simply keeping designs current?
The truth is, today's global scope and volatile gasoline and oil prices make the auto industry a far from simple business to manage. Judging by the statements in the Journal's Friday article, and AutoNation's CEO, Mike Jackson's cool reception with some solutions, the current leaders of GM and Chrysler remain questionable as being up to that challenge. It also remains to be seen whether either Ford or GM have the financial staying power to continue to play a game in which the manufacturers remain so far from consumers' decisions points.
My favorite line in the piece is this quote from GM's head of North American sales and marketing, Mark LaNeve, "It's not like we have some crisis." Then there is this gem from his colleague, Troy Clarke, president of GM North America, "Today, we are much better in balancing production and demand than we were two years ago....If the trend continues, we will be right where we want to be."
Actually, they do. A crisis so bad that the CEO of AutoNation, Mike Jackson, routinely finds the wrong types of cars on the lots of his dealerships. According to the Journal article,
"AutoNation's Toyota and Honda stores typically carry enough cars to last 35 to 42 days. Its GM, Ford and Chrysler locations used to have 65 to 70 days of inventory. These days.....that number has climbed to between 80 and 120 days."
The other interesting item reported in article is that AutoNation hired McKinsey and several other consulting groups to perform some rather basic 20/80 rule analyses. That is, to identify the relatively few (usually around 20%) vehicle variations that account for most ( the 80%) sales. I'm not sure why AutoNation couldn't do this with its own marketing staff, but, for now, never mind that.
When Jackson approached GM about co-developing a predictive modeling system based upon this age-old 'wisdom,' Mr. LaNeve said GM was "seriously considering joining" the effort.
At least Alan Mulally, Ford's new CEO, said, of Jackson's idea, "He's absolutely right on. When you have big inventories, you get further and further away from that customer decision."
This is hilarious. The Journal piece, which is quite long, lavishes examples with lots of details, illustrating some howling mismatches of cars and US locations, thanks to GM's and Ford's insistence on guessing at consumer preferences, and then cranking out models according to those guesses.....ah...."forecasts."
This alone ought to tell you why you shouldn't be betting on either GM, or Ford, to return to a consistently superior total return performance path anytime soon. They may not even have sufficient funding to do so independently, at the rate their senior executives are moving on the inventory issue.
As I wrote in a post early on in this blog, the real question is why the manufacturers continue to use dealerships as they do at all. Why not simply establish kiosks or third-party locations, such as Wal-Mart, etc., to site sales offices with elaborate online 3D software programs to showcase their vehicles. Consumers could then order their cars, custom-made, on the spot, paying a deposit. The third-party location would accept the drop-shipped car, which could be built within weeks. And would this not eliminate much of the auto manufacturers' inventory and work-in-process financing issues?
There is another, related challenge which was mentioned in a glancing fashion in the article.
Right now, Detroit seems to need about 18 months, minimum, and often, up to 3 years, to adjust its product offerings to major changes in consumer behavior. I'm referring to, of course, what happens to demand for various product types every time gasoline prices either skyrocket or plummet. What to do? How do the auto manufacturers handle such volatility in the price of a major complementary good used by consumers of their product?
Actually, the answer already exists, in pieces. Shell pioneered scenario planning over forty years ago, and Detroit needs to implement that skill as well. The variability in consumer demand for vehicles can probably be reduced to a few major sources of discontinuous uncertainty and, thus, modeled as several most-probable scenarios.
Under each scenario, the auto producers could determine what sorts of models would be best-suited for the particular situation forecast. The manufacturers could then simply keep designs current for at least a few models under each scenario, and several factories ready to switch over production upon a few months' notice.
Does it not seem likely that the first producer to arrive in the market with vehicles tailored to something like a radical change in gasoline prices would be rewarded with increased market shares and pricing power, offsetting some of the costs of simply keeping designs current?
The truth is, today's global scope and volatile gasoline and oil prices make the auto industry a far from simple business to manage. Judging by the statements in the Journal's Friday article, and AutoNation's CEO, Mike Jackson's cool reception with some solutions, the current leaders of GM and Chrysler remain questionable as being up to that challenge. It also remains to be seen whether either Ford or GM have the financial staying power to continue to play a game in which the manufacturers remain so far from consumers' decisions points.
Friday, February 09, 2007
Hedge Fund Going Public
Today's big financial news is the IPO of the Fortress hedge fund. Believe it or not, I believe this is a small piece of what will eventually prove to be the solution to what some see as a "corporate governance" problem.
In a lunch conversation with a retired Wall Street lawyer, I sketched out my thoughts on how the Fortress IPO may affect private equity, and my friend concurred. Fortress is but an early example of the eventual reincarnation of what I refer to as "corsair capitalism," in memory of J.P. Morgan. As I wrote recently, here, the original intent of the corporate form was liquidity for the "robber barons," which, as a side-benefit, provided a means by which less-wealthy people could benefit besides the titans of industry. Add in the SEC, and, eventually, you had a decent start to a modern capitalistic system.
However, the concept of "shareholder democracy" was never intended, from our current corporate form. The boards were supposed to be composed of successful business people, whose financial interests were materially entwined with the companies on whose boards they served.
Now, we are quite far removed from that day and practice. Thus, there is no modern-day equivalent among public companies for the corporate boards of eighty years ago, or even fifty years ago. Since markets tend to create solutions on their own, I view private equity as such a solution.
Private equity and hedge funds are probably now different only in term of investment. The effective structures are not all that dissimilar.
Thus, with Fortress' IPO, I think we are seeing a first step on the way to some form of equity-participation structures for the 'common' investor, by private equity firms. My lunch colleague agreed. Assuming tax considerations can be addressed, private equity firms can begin to bundle up their current holdings, monetize them as spin-offs of some type in the market, and redeploy the equity into more private deals. Everyone wins, at first.
The private equity partnerships unload and unlock the value of their earlier deals, receive fresh capital, and smaller investors are able to enjoy equity returns similar to those of the private partnerships. The only fly in the ointment will be when someone other than a Goldman Sachs, Texas Pacific or KKR does this and craters one of their equity vehicles.
It's quite a testament to the public's latent desire for 'corsair capitalism' that so many people would subscribe to the Fortress IPO, driving the price skyward, despite having essentially no control over the continued presence of the key principals, the nature of the business, risk levels, or even a knowledge of the nature of the deals underpinning the value of the equity. Nobody's screaming that there is too much risk, or insufficient disclosure, in the Fortress offering.
If that's not a market signal, what is? Barney Frank, please take note. We are witnessing the market-sourced 'reform' for currently-perceived "problems" with corporate governance. It's not about a need for "shareholder democracy," or shareholders voting on the CEO's compensation package, but, simply, the ability for shareholders, at a low-cost, to buy and sell shares, as their way of "voting." And they are "buying" little-understood Fortress, in droves.
In a lunch conversation with a retired Wall Street lawyer, I sketched out my thoughts on how the Fortress IPO may affect private equity, and my friend concurred. Fortress is but an early example of the eventual reincarnation of what I refer to as "corsair capitalism," in memory of J.P. Morgan. As I wrote recently, here, the original intent of the corporate form was liquidity for the "robber barons," which, as a side-benefit, provided a means by which less-wealthy people could benefit besides the titans of industry. Add in the SEC, and, eventually, you had a decent start to a modern capitalistic system.
However, the concept of "shareholder democracy" was never intended, from our current corporate form. The boards were supposed to be composed of successful business people, whose financial interests were materially entwined with the companies on whose boards they served.
Now, we are quite far removed from that day and practice. Thus, there is no modern-day equivalent among public companies for the corporate boards of eighty years ago, or even fifty years ago. Since markets tend to create solutions on their own, I view private equity as such a solution.
Private equity and hedge funds are probably now different only in term of investment. The effective structures are not all that dissimilar.
Thus, with Fortress' IPO, I think we are seeing a first step on the way to some form of equity-participation structures for the 'common' investor, by private equity firms. My lunch colleague agreed. Assuming tax considerations can be addressed, private equity firms can begin to bundle up their current holdings, monetize them as spin-offs of some type in the market, and redeploy the equity into more private deals. Everyone wins, at first.
The private equity partnerships unload and unlock the value of their earlier deals, receive fresh capital, and smaller investors are able to enjoy equity returns similar to those of the private partnerships. The only fly in the ointment will be when someone other than a Goldman Sachs, Texas Pacific or KKR does this and craters one of their equity vehicles.
It's quite a testament to the public's latent desire for 'corsair capitalism' that so many people would subscribe to the Fortress IPO, driving the price skyward, despite having essentially no control over the continued presence of the key principals, the nature of the business, risk levels, or even a knowledge of the nature of the deals underpinning the value of the equity. Nobody's screaming that there is too much risk, or insufficient disclosure, in the Fortress offering.
If that's not a market signal, what is? Barney Frank, please take note. We are witnessing the market-sourced 'reform' for currently-perceived "problems" with corporate governance. It's not about a need for "shareholder democracy," or shareholders voting on the CEO's compensation package, but, simply, the ability for shareholders, at a low-cost, to buy and sell shares, as their way of "voting." And they are "buying" little-understood Fortress, in droves.
Thursday, February 08, 2007
Steve Job's DRM Manifesto
Tuesday's release of Steve Job's essay on DRM (digital rights management) and digital music formats/downloading is yet another sign that Apple is running on all cylinders. To read the actual essay, go here.
Of course, it has become the grist of many business media articles. Even this blog.
The Wall Street Journal, a favorite topic and news source of mine, ran an article on Wednesday essentially reprising the situation, the essay, and possible results.
Give Jobs credit for sensing the changing winds, and now allying himself with consumers, against the very music publishing companies whose support enabled him to make Apple the 'first mover' in the digital music downloading and device product/service/market.
Perhaps the European regulators were posing too much of a threat for Apple recently. Certainly, Jobs' call to remove all copy protection can only benefit Apple, with its immense market share, in a freely-competitive market for digital music players and music downloads. With no bar to playing any site's downloads on any player, the battle will go to the better-designed sites, players notwithstanding. Jobs is clearly issuing a challenge, and betting on his own people, that both Apple's digital devices and its iTunes site can each best competition in their own space.
I've personally never seen much in the argument that, by buying an iPod, you could only buy music from iTunes. Or that iTunes songs couldn't play on devices from other companies. You knew that going in. It was part of the value proposition, and millions of people knowingly paid to take that proposition from Apple.
What I found stunning is the previously-unknown data that Jobs cited regarding the provenance of music found on the average iPod, and its status. I have to admit, it pretty much describes my own behavioral patterns. I've bought some music from iTunes, but most of the content on my fully-loaded Shuffle is songs I ripped from my own CDs using iTunes' ripping facility.
Jobs makes two very potent points in his essay. First, that if such a small amount ( just 3%) of each iPod's capacity is filled with iTunes-source music, how can copy protection on such a sliver of the music market matter? Second, that the big four music publishers sell far more unprotected CDs every year, injecting untold amounts of easily pirate-able music into consumers' hands. And, by the way, I have witnessed just this sort of behavior among my daughter and her friends, with their iPods.
Once again, we see why Jobs and Apple are in such a strong market position in their various product/market spaces. That short essay was an incredibly timed and aimed piece of marketing which will now cause uncertainty among competitors, and potentially unlock large new markets for both iPods and iTunes, at a single stroke. All while making the music publishers now the 'bad guys' on which regulators and consumers may vent their anger over digital music copy protection.
My guess is that this most recent competitive move by Jobs will increase the chances that Apple will continue its record of several years of consistently superior total return performance for its owners.
Of course, it has become the grist of many business media articles. Even this blog.
The Wall Street Journal, a favorite topic and news source of mine, ran an article on Wednesday essentially reprising the situation, the essay, and possible results.
Give Jobs credit for sensing the changing winds, and now allying himself with consumers, against the very music publishing companies whose support enabled him to make Apple the 'first mover' in the digital music downloading and device product/service/market.
Perhaps the European regulators were posing too much of a threat for Apple recently. Certainly, Jobs' call to remove all copy protection can only benefit Apple, with its immense market share, in a freely-competitive market for digital music players and music downloads. With no bar to playing any site's downloads on any player, the battle will go to the better-designed sites, players notwithstanding. Jobs is clearly issuing a challenge, and betting on his own people, that both Apple's digital devices and its iTunes site can each best competition in their own space.
I've personally never seen much in the argument that, by buying an iPod, you could only buy music from iTunes. Or that iTunes songs couldn't play on devices from other companies. You knew that going in. It was part of the value proposition, and millions of people knowingly paid to take that proposition from Apple.
What I found stunning is the previously-unknown data that Jobs cited regarding the provenance of music found on the average iPod, and its status. I have to admit, it pretty much describes my own behavioral patterns. I've bought some music from iTunes, but most of the content on my fully-loaded Shuffle is songs I ripped from my own CDs using iTunes' ripping facility.
Jobs makes two very potent points in his essay. First, that if such a small amount ( just 3%) of each iPod's capacity is filled with iTunes-source music, how can copy protection on such a sliver of the music market matter? Second, that the big four music publishers sell far more unprotected CDs every year, injecting untold amounts of easily pirate-able music into consumers' hands. And, by the way, I have witnessed just this sort of behavior among my daughter and her friends, with their iPods.
Once again, we see why Jobs and Apple are in such a strong market position in their various product/market spaces. That short essay was an incredibly timed and aimed piece of marketing which will now cause uncertainty among competitors, and potentially unlock large new markets for both iPods and iTunes, at a single stroke. All while making the music publishers now the 'bad guys' on which regulators and consumers may vent their anger over digital music copy protection.
My guess is that this most recent competitive move by Jobs will increase the chances that Apple will continue its record of several years of consistently superior total return performance for its owners.
Wednesday, February 07, 2007
More Video Content Deals
Today's Wall Street Journal carried two stories concerning new media arrangements to distribute video content.
Comcast and Facebook are forming an alliance to allow videos created on Facebook to air on Comcast, prospectively on a television channel. According to the Journal article,
"....numerous links will be established between the social-networking site and Ziddio, a new Web site dedicated to "user generated content" that Comcast is developing. The best videos created by Facebook users as selected by a panel of judges will end up on Comcast's video-on-demand service and possibly on a new show that Facebook and Comcast hope will be aired by a television network."
As I recall, this summer Comcast was reported to have a fairly large staff ready to spend significant money to acquire video content for distribution from Comcast's own sites. I wrote a post about it, here. In that piece, I republished a quote from Comcast's CEO, Steve Burke, stating that he wants Comcast to be the megaportal on the net.
Frankly, this Facebook-Ziddio-Comcast deal underwhelms me. Facxebook seems to be one of those teen-twentysomething social-networking sites. It's not MySpace. Having some sort of filtering where themed video entries are judged, then packaged up for viewing, sounds a world different than just logging onto YouTube, opening an account, and uploading your video.
If this is Comcast's video content plan's best idea, I think they have trouble ahead. AppleTV is already going to threaten their television carriage revenue stream over time.
Then there's this little article from today's Journal, which will probably add to Comcast's coming difficulties. TiVo and Amazon are teaming up to offer content from the former on the latter's devices. So quiet was Amazon's Unbox service's debut that this article was the first I'd heard of it.
Apparently, Amazon allows users of its Unbox service to buy or rent, then download, video content from CBS and Paramount Pictures, a unit of Viacom, plus other sources.
TiVo, in order to attempt to reposition itself with value-added service, away from digital-on-demand cable TV, recently introduced new features that allow users to download content from the Internet, for viewing on a television.
As I look at these two articles, I see a confirmation of my sense that video content distribution is spreading with each passing month, and nobody will likely have a lock on exclusivity. The Amazon-TiVo alliance, coupled with the imminent AppleTV release, seems to put more long-term pressure on the viability of cable operator's television-service-based revenue stream. In time, ATT, Verizon, Comcast, et.al, may be fighting over the 'double-play,' rather than the 'triple-play.'
Which comes back to my suspicion that, as investments, telecommunications and cable operators are long term risks if one desires consistently superior total returns. Both groups are faced with owning and managing expensive infrastructure, probably mispriced, and both hope that video content distribution will bail them out. However, as more and more content disintermediates to the internet, then hops back to the television screen, thanks to an emerging class of server-like accessories which wirelessly download from the home personal computer, I suspect those hopes will be dashed.
Comcast and Facebook are forming an alliance to allow videos created on Facebook to air on Comcast, prospectively on a television channel. According to the Journal article,
"....numerous links will be established between the social-networking site and Ziddio, a new Web site dedicated to "user generated content" that Comcast is developing. The best videos created by Facebook users as selected by a panel of judges will end up on Comcast's video-on-demand service and possibly on a new show that Facebook and Comcast hope will be aired by a television network."
As I recall, this summer Comcast was reported to have a fairly large staff ready to spend significant money to acquire video content for distribution from Comcast's own sites. I wrote a post about it, here. In that piece, I republished a quote from Comcast's CEO, Steve Burke, stating that he wants Comcast to be the megaportal on the net.
Frankly, this Facebook-Ziddio-Comcast deal underwhelms me. Facxebook seems to be one of those teen-twentysomething social-networking sites. It's not MySpace. Having some sort of filtering where themed video entries are judged, then packaged up for viewing, sounds a world different than just logging onto YouTube, opening an account, and uploading your video.
If this is Comcast's video content plan's best idea, I think they have trouble ahead. AppleTV is already going to threaten their television carriage revenue stream over time.
Then there's this little article from today's Journal, which will probably add to Comcast's coming difficulties. TiVo and Amazon are teaming up to offer content from the former on the latter's devices. So quiet was Amazon's Unbox service's debut that this article was the first I'd heard of it.
Apparently, Amazon allows users of its Unbox service to buy or rent, then download, video content from CBS and Paramount Pictures, a unit of Viacom, plus other sources.
TiVo, in order to attempt to reposition itself with value-added service, away from digital-on-demand cable TV, recently introduced new features that allow users to download content from the Internet, for viewing on a television.
As I look at these two articles, I see a confirmation of my sense that video content distribution is spreading with each passing month, and nobody will likely have a lock on exclusivity. The Amazon-TiVo alliance, coupled with the imminent AppleTV release, seems to put more long-term pressure on the viability of cable operator's television-service-based revenue stream. In time, ATT, Verizon, Comcast, et.al, may be fighting over the 'double-play,' rather than the 'triple-play.'
Which comes back to my suspicion that, as investments, telecommunications and cable operators are long term risks if one desires consistently superior total returns. Both groups are faced with owning and managing expensive infrastructure, probably mispriced, and both hope that video content distribution will bail them out. However, as more and more content disintermediates to the internet, then hops back to the television screen, thanks to an emerging class of server-like accessories which wirelessly download from the home personal computer, I suspect those hopes will be dashed.
Tuesday, February 06, 2007
Network TV's Bright Spot: Charging Cable for "Free" Programming
Yesterday's Wall Street Journal featured a piece describing how broadcast television networks are charging cable systems for carriage of what the public may view for free on those networks and their affiliates.
It's a non-trivial issue, when a major cable system, such as Comcast, is faced with an ultimatum to pay, or be unable to deliver the Superbowl telecast to its viewers.
Will it matter in the long term? My guess is that it will not. Right now, many sources of video content come to the broadcast networks first. And events such as the Superbowl have been loathe to sell the rights to a cable-only network, thus freezing out 'free' viewers. Talk about bread and circuses.....
However, this describes the current state of affairs.
Won't cable look to new programming sources? Will production still go to network exclusively?
Is it not possible that, whenever the Superbowl carriage rights are up for renewal, the NFL might sell only the broadcast rights to CBS, ABC or NBC, and reserve direct cable carriage for a negotiated fee directly from each cable network?
Is that not disintermediation? The article mentions the growing power of broadcast networks, as groups of stations are now allowed to be owned by a single entity. Markets being what they are, would not content providers also feel some pinch from that, and seek wider distribution alternatives?
Could television-focused video content not go the route of the Hollywood studio distribution model, treating various markets- US cinemas, cable movie networks, overseas, DVDs- separately?
Seen in this light, we could well be seeing the common occurrence of vendors in a shrinking product/market raising prices as the category becomes extremely mature. Faced with fleeing consumers, demand is relatively inelastic, so raising prices is the theoretically 'correct' choice to maximize profits.
In this case, however, it could well accelerate the development of vibrant alternative distribution channels around broadcast television. The recent Viacom-YouTube non-agreement, leaving the former to demand removal of its content from the latter's site, only reinforces how broadcast is raising the drawbridges and hunkering down with its legacy content.
My consultant friend S opined last year that one of the best things to have happened to all this old video material, such as Viacom's content, was to be seen, for free, on YouTube, thus rekindling consumer interest, for no advertising expenditures, in old bands, television programs, movies, etc. There's bound to have been some uptick in demand for some of that content on a paying basis.
Google, of course, is perfectly familiar and comfortable with this revenue model. Give content away for free, and run the most efficient advertising program available around it. Old media can't quite get it's head around this, and, since it can't control the vehicle, is simply refusing to play by the new rules.
My sense is that this burst of network demands for fees to distribute "free" content will last only so long as the average life of the existing content's exclusivity to network distribution. Then, watch out. Disintermediation is bound to run rampant, with devices such as XBox and AppleTV to facilitate streaming bespoke video content right off your high-speed connection, through your video switch..ah...sorry.....computer...over your wireless network, to a server (the Xbox, AppleTV, etc.) connected to your television.
It's a non-trivial issue, when a major cable system, such as Comcast, is faced with an ultimatum to pay, or be unable to deliver the Superbowl telecast to its viewers.
Will it matter in the long term? My guess is that it will not. Right now, many sources of video content come to the broadcast networks first. And events such as the Superbowl have been loathe to sell the rights to a cable-only network, thus freezing out 'free' viewers. Talk about bread and circuses.....
However, this describes the current state of affairs.
Won't cable look to new programming sources? Will production still go to network exclusively?
Is it not possible that, whenever the Superbowl carriage rights are up for renewal, the NFL might sell only the broadcast rights to CBS, ABC or NBC, and reserve direct cable carriage for a negotiated fee directly from each cable network?
Is that not disintermediation? The article mentions the growing power of broadcast networks, as groups of stations are now allowed to be owned by a single entity. Markets being what they are, would not content providers also feel some pinch from that, and seek wider distribution alternatives?
Could television-focused video content not go the route of the Hollywood studio distribution model, treating various markets- US cinemas, cable movie networks, overseas, DVDs- separately?
Seen in this light, we could well be seeing the common occurrence of vendors in a shrinking product/market raising prices as the category becomes extremely mature. Faced with fleeing consumers, demand is relatively inelastic, so raising prices is the theoretically 'correct' choice to maximize profits.
In this case, however, it could well accelerate the development of vibrant alternative distribution channels around broadcast television. The recent Viacom-YouTube non-agreement, leaving the former to demand removal of its content from the latter's site, only reinforces how broadcast is raising the drawbridges and hunkering down with its legacy content.
My consultant friend S opined last year that one of the best things to have happened to all this old video material, such as Viacom's content, was to be seen, for free, on YouTube, thus rekindling consumer interest, for no advertising expenditures, in old bands, television programs, movies, etc. There's bound to have been some uptick in demand for some of that content on a paying basis.
Google, of course, is perfectly familiar and comfortable with this revenue model. Give content away for free, and run the most efficient advertising program available around it. Old media can't quite get it's head around this, and, since it can't control the vehicle, is simply refusing to play by the new rules.
My sense is that this burst of network demands for fees to distribute "free" content will last only so long as the average life of the existing content's exclusivity to network distribution. Then, watch out. Disintermediation is bound to run rampant, with devices such as XBox and AppleTV to facilitate streaming bespoke video content right off your high-speed connection, through your video switch..ah...sorry.....computer...over your wireless network, to a server (the Xbox, AppleTV, etc.) connected to your television.
Monday, February 05, 2007
Michael Dell's Return as CEO
I would be remiss if I did not remark on this past week's news concerning Michael Dell.
Dell fired Kevin Rollins, Michael Dell's replacement as CEO, and announced the return of its namesake founder.
Of course, the business media was awash in stories concerning whether Michael Dell is the right CEO for Dell, whether he can turn the company around, etc.
Frequent readers of this blog will not be surprised by my own opinion on this matter. In the many prior posts I have written (search on the word "Dell" to see some of them) about this company, I have expressed my belief that the firm's business model's best days are behind it.
Today's Wall Street Journal carries a piece in the Marketplace section, on page B4, by Joann Lublin & Erin White. Under the "Theory&Practice" column, they discuss Dell's return from the perspective of other founders returning to rescue their floundering companies.
Frankly, I find the piece to be of no value. Whether a lot of founders are returning to their companies or not, the high-profile cases are very few in number, and, thus, statistically meaningless.
My own opinion is that it's better to look at the type of product or service involved, rather than the class of phenomenon, i.e., "returning founders and their successes."
Consider, for example, Ted Waitt, of Gateway, Mark Eppley, of LapLink, and Charles Schwab, of the company that bears his name.
Waitt's company shares the same product space with Michael Dell's, and has had a similar fate. Perhaps more cataclysmic, and earlier, due to the differing sales models, but, still, it's clear the era of expensive, custom-build PCs delivering consistently superior total returns is behind us. In their prime, I owned both Gateway and Dell in my portfolio, so successful was each. But that was more than seven years ago now.
Eppley's product has been eclipsed by technology. Period. Who would even bother with a dedicated PC-to-PC cabled product anymore? I'm no expert, and even I plumped for a wireless network in my home last year. So Laplink's bankruptcy filing, as of 2003, did not surprise me.
Schwab's case is different, due to its being in the discount brokerage space. It was firmly glued to the rise, and subsequent fall, of market-bubble day-trading volumes by retail "investors" in the late '90s. True, Schwab has apparently refocused his firm on discount trading. However, as a customer, I have been the target of unwanted 'wealth management' advice which, honestly, I do not find credible, coming from Schwab. Looking at a price chart for Schwab and the S&P500, I can't help noticing that, once again, Schwab's total return performance is tied to market volumes and bull markets. Maybe "Chuck" has turned the firm around, secularly, maybe not. I don't think one could tell in the midst of this rising market.
But, back to Michael Dell. As wonderful and focused as his points were, in the leaked memo which was described in today's Journal, I don't think he'll make much of a difference in terms of returning his firm to consistently superior total returns.
Consider this. If it only takes one person to fix Dell, then how stable is the whole firm? How attractive and reliable should investors consider a firm which rises or falls on just one person, the CEO. And only the founder as CEO?
If, on the other hand, the fault lies with the markets and the business model, and not just the CEO, then what magic does Michael Dell possess that Kevin Rollins did not? Is it just personal magnetism, and pride in the company name? I think Michael Dell is a gifted and effective business leader. He absolutely earned his sizable fortune through smart business management and hard work. He may restore profit margins for Dell, and maybe some revenue growth, as well. However, the salad days of the product/market are simply gone.
As I wrote in this September 4th post last year, after shopping for a new laptop for my daughters, Dell simply missed the changes in consumer behavior with respect to requiring customization, hand-holding, and resisting instant gratification in the form of leaving a store with a PC or laptop that day.
So, while I personally wish Michael Dell success in his attempt to fix what's wrong with his company, I doubt his chances, and I don't think that, even if he enjoys some success, it will do much for long term consistent superior total returns for his shareholders.
Dell fired Kevin Rollins, Michael Dell's replacement as CEO, and announced the return of its namesake founder.
Of course, the business media was awash in stories concerning whether Michael Dell is the right CEO for Dell, whether he can turn the company around, etc.
Frequent readers of this blog will not be surprised by my own opinion on this matter. In the many prior posts I have written (search on the word "Dell" to see some of them) about this company, I have expressed my belief that the firm's business model's best days are behind it.
Today's Wall Street Journal carries a piece in the Marketplace section, on page B4, by Joann Lublin & Erin White. Under the "Theory&Practice" column, they discuss Dell's return from the perspective of other founders returning to rescue their floundering companies.
Frankly, I find the piece to be of no value. Whether a lot of founders are returning to their companies or not, the high-profile cases are very few in number, and, thus, statistically meaningless.
My own opinion is that it's better to look at the type of product or service involved, rather than the class of phenomenon, i.e., "returning founders and their successes."
Consider, for example, Ted Waitt, of Gateway, Mark Eppley, of LapLink, and Charles Schwab, of the company that bears his name.
Waitt's company shares the same product space with Michael Dell's, and has had a similar fate. Perhaps more cataclysmic, and earlier, due to the differing sales models, but, still, it's clear the era of expensive, custom-build PCs delivering consistently superior total returns is behind us. In their prime, I owned both Gateway and Dell in my portfolio, so successful was each. But that was more than seven years ago now.
Eppley's product has been eclipsed by technology. Period. Who would even bother with a dedicated PC-to-PC cabled product anymore? I'm no expert, and even I plumped for a wireless network in my home last year. So Laplink's bankruptcy filing, as of 2003, did not surprise me.
Schwab's case is different, due to its being in the discount brokerage space. It was firmly glued to the rise, and subsequent fall, of market-bubble day-trading volumes by retail "investors" in the late '90s. True, Schwab has apparently refocused his firm on discount trading. However, as a customer, I have been the target of unwanted 'wealth management' advice which, honestly, I do not find credible, coming from Schwab. Looking at a price chart for Schwab and the S&P500, I can't help noticing that, once again, Schwab's total return performance is tied to market volumes and bull markets. Maybe "Chuck" has turned the firm around, secularly, maybe not. I don't think one could tell in the midst of this rising market.
But, back to Michael Dell. As wonderful and focused as his points were, in the leaked memo which was described in today's Journal, I don't think he'll make much of a difference in terms of returning his firm to consistently superior total returns.
Consider this. If it only takes one person to fix Dell, then how stable is the whole firm? How attractive and reliable should investors consider a firm which rises or falls on just one person, the CEO. And only the founder as CEO?
If, on the other hand, the fault lies with the markets and the business model, and not just the CEO, then what magic does Michael Dell possess that Kevin Rollins did not? Is it just personal magnetism, and pride in the company name? I think Michael Dell is a gifted and effective business leader. He absolutely earned his sizable fortune through smart business management and hard work. He may restore profit margins for Dell, and maybe some revenue growth, as well. However, the salad days of the product/market are simply gone.
As I wrote in this September 4th post last year, after shopping for a new laptop for my daughters, Dell simply missed the changes in consumer behavior with respect to requiring customization, hand-holding, and resisting instant gratification in the form of leaving a store with a PC or laptop that day.
So, while I personally wish Michael Dell success in his attempt to fix what's wrong with his company, I doubt his chances, and I don't think that, even if he enjoys some success, it will do much for long term consistent superior total returns for his shareholders.
Business Media Developments
Last week, I was poking around on blogs which discuss business media and various on-air personalities, such as Erin Burnett, Becky Quick, Maria Bartiromo, as the Citigroup-Maria Bartiromo-Todd Thomson-CNBC situation seemed to play out.
I guess I'm the last person on the planet to learn that Fox is reputed to be planning the launch of a business-only channel to compete with CNBC. Even my partner responded to my remark about this as 'old news.'
Several blogs discussed how Maria Bartiromo has besmirched the reputations of on-air female reporters and anchors with her activities, including her alleged, very public dating of the married former Citigroup exec, Todd Thomson. Additionally, one blog alleged Bartiromo is attempting, or did attempt, to trademark the phrase "money honey." Again, my partner confirmed this, saying he remembered reading some reference to it in the New York Times last month. So it's a very recent development, set in the current context, not some story from several years back, when Bartiromo was referred to via that phrase more commonly. That this trademark story is true makes you wonder what sort of undercurrents must be swirling among the on-air staff over at CNBC, with such a prima donna in their midst.
In any event, widely-held expectations appear to be that, should Fox be planning a new, competing business network, they would be obviously targeting any disgruntled, underrepresented CNBC anchors, such as Erin Burnett. This could become an interesting development in many ways.
If Fox takes its usual hard, analytic look at business, in contrast to CNBC's increasing focus on business and investing as entertainment, they could very well dent the current market leader's share. Not to mention give business leaders and pundits an alternative perch from which to speak, perhaps relaxing the choke-hold that CNBC currently seems to have on business interviews. Maybe Fox would even consider eschewing CNBC's format of digging up and presenting ever-more unknown "analysts" and "experts," and, instead, retain fewer, first-rate consultants to opine on important business news stories and developments.
It is, however, sad that so many observers feel that Fox needs to recruit its own attractive female on-air anchors to realistically compete with CNBC.
I guess I'm the last person on the planet to learn that Fox is reputed to be planning the launch of a business-only channel to compete with CNBC. Even my partner responded to my remark about this as 'old news.'
Several blogs discussed how Maria Bartiromo has besmirched the reputations of on-air female reporters and anchors with her activities, including her alleged, very public dating of the married former Citigroup exec, Todd Thomson. Additionally, one blog alleged Bartiromo is attempting, or did attempt, to trademark the phrase "money honey." Again, my partner confirmed this, saying he remembered reading some reference to it in the New York Times last month. So it's a very recent development, set in the current context, not some story from several years back, when Bartiromo was referred to via that phrase more commonly. That this trademark story is true makes you wonder what sort of undercurrents must be swirling among the on-air staff over at CNBC, with such a prima donna in their midst.
In any event, widely-held expectations appear to be that, should Fox be planning a new, competing business network, they would be obviously targeting any disgruntled, underrepresented CNBC anchors, such as Erin Burnett. This could become an interesting development in many ways.
If Fox takes its usual hard, analytic look at business, in contrast to CNBC's increasing focus on business and investing as entertainment, they could very well dent the current market leader's share. Not to mention give business leaders and pundits an alternative perch from which to speak, perhaps relaxing the choke-hold that CNBC currently seems to have on business interviews. Maybe Fox would even consider eschewing CNBC's format of digging up and presenting ever-more unknown "analysts" and "experts," and, instead, retain fewer, first-rate consultants to opine on important business news stories and developments.
It is, however, sad that so many observers feel that Fox needs to recruit its own attractive female on-air anchors to realistically compete with CNBC.
Friday, February 02, 2007
Google's Recent Performance
Google's earnings announcement, which came after the close of the market on Wednesday, signaled that it continues to experience extremely high revenue and earnings growth.
However, in keeping with my proprietary research results, the company's performance is beginning to be better-anticipated by observers, resulting in the attenuation of its total returns in response to such stellar revenue growth.
Further, as happens with long-experienced, high revenue growth levels, and their attendant infrastructure growth, in people and expenses, profit margins are suspected, by analysts, of beginning to come under pressure.
I wouldn't say Google won't have great total returns anymore. I would suggest that its size and growth rate are beginning to affect its continued performance in ways that they have not prior to this. When I hear about expenses for large, new initiatives, such as their online payment system, creating significant expenses, I can't help but think that Google is becoming a 'normal 'company, at last.
Friday morning, Scott McNealy, of SunMicrosystems, was a guest host on CNBC. He opined on Google, and YouTube, marveling at how, since the days of Microsoft, Sun, Apple, Dell, Yahoo, AOL, et. al., it seems that the timeframe in which companies experience such spectacular growth, and the sizes to which they grow, keep getting, respectively, shorter, and larger.
What puzzled me is how McNealy failed to notice the significant differences between these various firms. The earlier examples tended to produce hardware, and software. The latter tended to be for a couple of specific applications- operating systems, Office, etc. AOL was more of a networking application itself, using hardware, but offering fairly rigid software for online activities. Yahoo was the first generation of 'informational' software, wherein the consumer could and can just use the service for free. It's a mile wide and an inch deep, as has been discussed in prior posts on this blog (search on "Yahoo" to read them).
Google is, in my opinion, quite different from all of these. It's primary application was a superior search engine, around which it clustered advertising, using another superior methodology. By offering something totally consumer-configurable, for free, it skyrocketed. Google requires hardware to support its users, but it offers an essentially unchanging service, search, then mapping, auctions, etc., for which users provide all the tailoring.
No wonder why it's grown faster and larger than its predecessors. It's the latest "perfect" combination of pure software usage, for free, requiring no hardware building, little software building of an individual-specific or application-specific nature, and the revenues come straight from user behavior, rather than explicit "selling" by Google. Probably more than most companies, Google has succeeded in making large parts of its business completely "virtual," yet generic, to its customers.
However, in keeping with my proprietary research results, the company's performance is beginning to be better-anticipated by observers, resulting in the attenuation of its total returns in response to such stellar revenue growth.
Further, as happens with long-experienced, high revenue growth levels, and their attendant infrastructure growth, in people and expenses, profit margins are suspected, by analysts, of beginning to come under pressure.
I wouldn't say Google won't have great total returns anymore. I would suggest that its size and growth rate are beginning to affect its continued performance in ways that they have not prior to this. When I hear about expenses for large, new initiatives, such as their online payment system, creating significant expenses, I can't help but think that Google is becoming a 'normal 'company, at last.
Friday morning, Scott McNealy, of SunMicrosystems, was a guest host on CNBC. He opined on Google, and YouTube, marveling at how, since the days of Microsoft, Sun, Apple, Dell, Yahoo, AOL, et. al., it seems that the timeframe in which companies experience such spectacular growth, and the sizes to which they grow, keep getting, respectively, shorter, and larger.
What puzzled me is how McNealy failed to notice the significant differences between these various firms. The earlier examples tended to produce hardware, and software. The latter tended to be for a couple of specific applications- operating systems, Office, etc. AOL was more of a networking application itself, using hardware, but offering fairly rigid software for online activities. Yahoo was the first generation of 'informational' software, wherein the consumer could and can just use the service for free. It's a mile wide and an inch deep, as has been discussed in prior posts on this blog (search on "Yahoo" to read them).
Google is, in my opinion, quite different from all of these. It's primary application was a superior search engine, around which it clustered advertising, using another superior methodology. By offering something totally consumer-configurable, for free, it skyrocketed. Google requires hardware to support its users, but it offers an essentially unchanging service, search, then mapping, auctions, etc., for which users provide all the tailoring.
No wonder why it's grown faster and larger than its predecessors. It's the latest "perfect" combination of pure software usage, for free, requiring no hardware building, little software building of an individual-specific or application-specific nature, and the revenues come straight from user behavior, rather than explicit "selling" by Google. Probably more than most companies, Google has succeeded in making large parts of its business completely "virtual," yet generic, to its customers.
Liquidity, Risk and Greed: Will The Private Equity Business Self-Destruct?
Monday's Wall Street Journal featured an article, positioned as "Financial Insight," on what is viewed as excessive private equity borrowing . Excessive risk is taken, passed off to banks, and greed rules. Liquidity everywhere, fueling ever more risky, leveraged deals.
Haven't we seen this before? According to Hugo Dixon, the author of the piece, heads of two leading private equity partnerships boasted recently, at the Davos Economic Forum, that they are cutting their risk exposure while increasing volumes, by requiring that the banks who wish to play must hold debt, or offer bridge financing. This begins to sound very much like Mike Milken's original LBO machine of the 1980s at Drexel Burnham. And recalls the ill-fated Ohio Mattress deal which drove First Boston into the arms of Credit Suisse after the 1989 imbroglio.
To be sure, it's likely that some private equity group will do one too many marginal deals, which will catch a large- or medium-sized bank off-guard, holding a sizable debt position, and it will either fold under the weight of the bad paper, or be driven to merge with another institution.
On one level, it's the same old, same old...every decade, it's a new financial product/market that melts down. Because, as my mentor, Gerry Weiss, taught me at Chase Manhattan Bank nearly twenty years ago, financial services firms tend to find growth most easily, in enlarging markets, by taking more risk. Especially when upfront fees are the revenue and profit source, but back-end loaded losses are the risk. The people deal, get paid fabulously, and walk, with the public or private institution owners hold the bag....er....risk......and take the losses.
When I first read Dixon's piece, I thought it pretty much does describe how the private equity craze will end. Then I read Alan Murray's piece in the Journal later in the week, and wrote this post. I now feel that several premium brand names in the private equity space- Texas Pacific, KKR, Silverlake Partners- may succeed in continuing to buy and improve the long-term value and returns of formerly-publicly-held companies without undue risk. I suspect that what Mr. Dixon envisions will occur among a second-tier group of private equity partnerships and banks dealing in more marginal "opportunities."
It might dent some of the frothier fringe deals but, like the mortgage banking market of the past year, won't adversely affect the better-positioned players doing higher-quality business.
Haven't we seen this before? According to Hugo Dixon, the author of the piece, heads of two leading private equity partnerships boasted recently, at the Davos Economic Forum, that they are cutting their risk exposure while increasing volumes, by requiring that the banks who wish to play must hold debt, or offer bridge financing. This begins to sound very much like Mike Milken's original LBO machine of the 1980s at Drexel Burnham. And recalls the ill-fated Ohio Mattress deal which drove First Boston into the arms of Credit Suisse after the 1989 imbroglio.
To be sure, it's likely that some private equity group will do one too many marginal deals, which will catch a large- or medium-sized bank off-guard, holding a sizable debt position, and it will either fold under the weight of the bad paper, or be driven to merge with another institution.
On one level, it's the same old, same old...every decade, it's a new financial product/market that melts down. Because, as my mentor, Gerry Weiss, taught me at Chase Manhattan Bank nearly twenty years ago, financial services firms tend to find growth most easily, in enlarging markets, by taking more risk. Especially when upfront fees are the revenue and profit source, but back-end loaded losses are the risk. The people deal, get paid fabulously, and walk, with the public or private institution owners hold the bag....er....risk......and take the losses.
When I first read Dixon's piece, I thought it pretty much does describe how the private equity craze will end. Then I read Alan Murray's piece in the Journal later in the week, and wrote this post. I now feel that several premium brand names in the private equity space- Texas Pacific, KKR, Silverlake Partners- may succeed in continuing to buy and improve the long-term value and returns of formerly-publicly-held companies without undue risk. I suspect that what Mr. Dixon envisions will occur among a second-tier group of private equity partnerships and banks dealing in more marginal "opportunities."
It might dent some of the frothier fringe deals but, like the mortgage banking market of the past year, won't adversely affect the better-positioned players doing higher-quality business.
Thursday, February 01, 2007
Private Equity As The Solution To Bad Corporate Governance
As a result of Alan Murray's Wall Street Journal column and appearance on CNBC yesterday morning, I have a developed, literally overnight, a different view of the private equity phenomenon. Alan is a managing editor of the paper, and a very shrewd, insightful writer with typically free market-leaning opinions, usually supported by evidence.
I've thought, for some time now, that the concept of shareholder 'democracy,' as currently bandied about, is wrong. For instance, I am listening to Congressman, Barney Frank, the new House Finance chairman with dubious credentials, on CNBC right now, as I write this. His verbiage is a good example of what I mean. Contrary to Frank, and others, I don't think the publicly-held company model was ever intended to raise the marginal shareholder to the level of voting on the CEO's compensation package, or similar "rights."
Previously, I've written in my blog that corporate structures of the 1890s were probably more effective than today's corporate model. Blogger is misbehaving this morning, so I cannot search for the post and link to it. In those days, however, a few men who actually knew how to create value and run a business, and make money. The public was allowed in because, ultimately, the barons needed more capital. With regulation of the capital markets over time, it worked. Boards were largely composed of wealthy, successful capitalists. The marginal public shareholder received the same financial benefit of ownership as the barons, without needing the skill or knowledge of the latter. A sort of asymmetric, one-way shareholder 'democracy.'
After some reflection, I realized that Murray's comments on private equity demonstrate that it is the new version of that old model. Successful businessmen use other's money, but now, in a smart twist, not for equity, but debt. So they don't give an unwanted vote/voice to the masses of small capitalists, or even concentration vehicles for funds, such as pension funds. Very astute, really. Take the public's money, but in a non-voting manner, without any reporting requirements.
Is this not new-style 1890s capitalism? I now think private equity is the, if not merely a, response to bad corporate governance.
In his excellent piece yesterday, Alan Murray wrote, in part,
"Increasingly, shareholders and directors are asking a fundamental question: If managers can create so much wealth for private owners, why can't they do the same for public shareholders?
Christobal Conde, chief executive officer of software company SunGard Data Systems, thinks he has an answer to that question. He was also in Davos last week and happy to tell his story to anyone who asked. As a public-company CEO, he was skeptical when Silver Lake's Mr. Hutchins first approached him two years ago about leading a buyout of his company. He thought private-equity firms made their money mostly through financial engineering, loading the target company with debt. But since then, he has learned otherwise. The buyout, he says, made SunGard a better company.
First, "it allowed us to push an enormous amount of change through the organization," Mr. Conde says. "It made everyone more receptive." That is particularly true of top managers, who were given twice the ownership stake in the company that they had when it was public. By boosting the company's debt, the buyout also ensured the value of those ownership stakes would skyrocket if the managers met their goals.
Second, he says his new private-equity partners -- which include Silver Lake, Blackstone, Bain Capital, Goldman Sachs Group, Kohlberg Kravis Roberts, Providence Equity and Texas Pacific Group -- have taught the company a great deal about improving the business in areas like purchasing.
"Like any company, we were very inbred," Mr. Conde says. But the private-equity partners operate across companies and industries, and were able to bring new knowledge to the firm "that has helped us enormously."
Finally, he says, his private-equity partners aren't obsessed with quarterly earnings. They understand a company's earnings may be volatile, and instead they focus on longer-term goals.
"I spend more time with my new private-equity shareholders than I did with the old ones," he says. "But I get so much more of it."
Mr. Conde says SunGard is still owned by many of the same pension funds that owned it before. That is the ultimate irony behind the new financial alchemy. Pension funds are paying hefty fees to private-equity firms -- which generally charge 2% of funds under management, plus 20% of the profit -- to make investments that the pension funds used to make by themselves.
Shareholders are right to be concerned about this trend. But the fault lies less with a private-equity market that is generating superior returns than with a public-company market that is generating lousy ones. Investors would be better off if public companies could clean up their own houses, and get rid of the high-priced middleman."
Look at what Mr. Conde is describing! Old-style, 'robber baron' capitalism. Isn't this what a board is supposed to do? In effect, these private equtiy titans buy choice, undervalued assets, and then reap equity rewards for overseeing their operations. They add as much value as the CEOs do, because they create the proper environment, goals, and long-term perspective for the eventual realization of the firm's value.
Is it not ironic that Conde points out how many pension funds invest in him via what Murray calls "middleman?" In fact, this is the answer to the claim that business doesn't care about the poor blue-collar worker, or compensation inequities. If the blue-collar worker's pension is invested with a fund that invests in private equity, then the lower-paid masses are, in fact, capable of reaping equity returns via the very deals which some feel disenfranchise or underpay them. Wages down, portfolio value up!
Here's another insight. If, as I wrote last summer as a solution to America's corporate governance problems, board members were required to "run" for the post, and invest significant assets of their own in the company, thus clearly aligning their financial interests with those of shareholders, it might improve corporate board oversight and involvement in the operation of companies.
Suppose private equity firm partners offered their services to a publicly-held company. Would they not, in effect, take board positions, in exchange for options to own much of the firm, or be paid a percentage of the value they created over, say, a function of the firm's prior total returns, relative to the S&P500? In effect, like my idea, they'd commit their financial fortunes to, and align them with those of the firm's. But what mechanism exists for shareholders to do this? None.
It would, in fact, be a sort of return to the days of the original form of shareholder capitalism. A few wealthy, skilled owners running the boards of large companies. Since, instead, many boards are infested with lesser lights, faded failures of other boards (look at Microsoft for a great example of this tendency), or "politically correct" members with absolutely no business skills, corporate performances are often appallingly bad, while CEOs and board members are still handsomely compensated.
Faced with this situation, private equity partners have followed Gresham's Law. They have, a la Ayn Rand, withheld their services from the poorly-paying public market for their services and, instead, gone private. In their private world, they are the new Morgans, Goulds and Schiffs. They invite investors to participate in a limited manner, with no vote. Just a financial reward.
Is this not the best solution smart, competent businessmen can effect in today's market? Since the publicly-held companies can't organize themselves to hire private equity partners as new, more-effective board members, these skilled operators simply created their own 'private' equity market, in which they can do the same job, for appropriate, risk-adjusted rewards.
Publicly-held company shareholders miss this source of premium returns because they are forced to invest via a broken, ineffective model which espouses "shareholder democracy," as if the marginal $10,000 investor in, say, Boeing, knows anything about how much the CEO should earn, or which board members, from a pre-selected slate, can properly and profitably oversee the firm's CEO and senior executive team.
Now, for a prediction as to a form of solution which may develop. What is to stop private equity firms from issuing securities of participation in their ventures, in small denominations, as limited equity partners? Would not brands such as Texas Pacific, KKR, and Silverlake command a premium in the market? By attracting investor capital to their privately-held efforts, these partnerships could effectively begin to drain capital from poorly-run public firms, and then slowly, inexorably, pull them into the private equity world, where the value they add would accrue to the small, limited partner.
Truth is, the worst part of the structure of today's publicly-traded firms is that the board-CEO governance mechanism mitigates against the effective management of the firm for consistently superior total returns. Read Murray's passage quoting Mr. Conde of Sungard. Conde essentially says that he could not run the company 'right' in the public markets. So the small investor has no chance, currently, to enjoy the fruits of really top-notch corporate management or governance.
Maybe they'll get a break, when some of the better private equity firms begin to add investment vehicles for the smaller investor.
I've thought, for some time now, that the concept of shareholder 'democracy,' as currently bandied about, is wrong. For instance, I am listening to Congressman, Barney Frank, the new House Finance chairman with dubious credentials, on CNBC right now, as I write this. His verbiage is a good example of what I mean. Contrary to Frank, and others, I don't think the publicly-held company model was ever intended to raise the marginal shareholder to the level of voting on the CEO's compensation package, or similar "rights."
Previously, I've written in my blog that corporate structures of the 1890s were probably more effective than today's corporate model. Blogger is misbehaving this morning, so I cannot search for the post and link to it. In those days, however, a few men who actually knew how to create value and run a business, and make money. The public was allowed in because, ultimately, the barons needed more capital. With regulation of the capital markets over time, it worked. Boards were largely composed of wealthy, successful capitalists. The marginal public shareholder received the same financial benefit of ownership as the barons, without needing the skill or knowledge of the latter. A sort of asymmetric, one-way shareholder 'democracy.'
After some reflection, I realized that Murray's comments on private equity demonstrate that it is the new version of that old model. Successful businessmen use other's money, but now, in a smart twist, not for equity, but debt. So they don't give an unwanted vote/voice to the masses of small capitalists, or even concentration vehicles for funds, such as pension funds. Very astute, really. Take the public's money, but in a non-voting manner, without any reporting requirements.
Is this not new-style 1890s capitalism? I now think private equity is the, if not merely a, response to bad corporate governance.
In his excellent piece yesterday, Alan Murray wrote, in part,
"Increasingly, shareholders and directors are asking a fundamental question: If managers can create so much wealth for private owners, why can't they do the same for public shareholders?
Christobal Conde, chief executive officer of software company SunGard Data Systems, thinks he has an answer to that question. He was also in Davos last week and happy to tell his story to anyone who asked. As a public-company CEO, he was skeptical when Silver Lake's Mr. Hutchins first approached him two years ago about leading a buyout of his company. He thought private-equity firms made their money mostly through financial engineering, loading the target company with debt. But since then, he has learned otherwise. The buyout, he says, made SunGard a better company.
First, "it allowed us to push an enormous amount of change through the organization," Mr. Conde says. "It made everyone more receptive." That is particularly true of top managers, who were given twice the ownership stake in the company that they had when it was public. By boosting the company's debt, the buyout also ensured the value of those ownership stakes would skyrocket if the managers met their goals.
Second, he says his new private-equity partners -- which include Silver Lake, Blackstone, Bain Capital, Goldman Sachs Group, Kohlberg Kravis Roberts, Providence Equity and Texas Pacific Group -- have taught the company a great deal about improving the business in areas like purchasing.
"Like any company, we were very inbred," Mr. Conde says. But the private-equity partners operate across companies and industries, and were able to bring new knowledge to the firm "that has helped us enormously."
Finally, he says, his private-equity partners aren't obsessed with quarterly earnings. They understand a company's earnings may be volatile, and instead they focus on longer-term goals.
"I spend more time with my new private-equity shareholders than I did with the old ones," he says. "But I get so much more of it."
Mr. Conde says SunGard is still owned by many of the same pension funds that owned it before. That is the ultimate irony behind the new financial alchemy. Pension funds are paying hefty fees to private-equity firms -- which generally charge 2% of funds under management, plus 20% of the profit -- to make investments that the pension funds used to make by themselves.
Shareholders are right to be concerned about this trend. But the fault lies less with a private-equity market that is generating superior returns than with a public-company market that is generating lousy ones. Investors would be better off if public companies could clean up their own houses, and get rid of the high-priced middleman."
Look at what Mr. Conde is describing! Old-style, 'robber baron' capitalism. Isn't this what a board is supposed to do? In effect, these private equtiy titans buy choice, undervalued assets, and then reap equity rewards for overseeing their operations. They add as much value as the CEOs do, because they create the proper environment, goals, and long-term perspective for the eventual realization of the firm's value.
Is it not ironic that Conde points out how many pension funds invest in him via what Murray calls "middleman?" In fact, this is the answer to the claim that business doesn't care about the poor blue-collar worker, or compensation inequities. If the blue-collar worker's pension is invested with a fund that invests in private equity, then the lower-paid masses are, in fact, capable of reaping equity returns via the very deals which some feel disenfranchise or underpay them. Wages down, portfolio value up!
Here's another insight. If, as I wrote last summer as a solution to America's corporate governance problems, board members were required to "run" for the post, and invest significant assets of their own in the company, thus clearly aligning their financial interests with those of shareholders, it might improve corporate board oversight and involvement in the operation of companies.
Suppose private equity firm partners offered their services to a publicly-held company. Would they not, in effect, take board positions, in exchange for options to own much of the firm, or be paid a percentage of the value they created over, say, a function of the firm's prior total returns, relative to the S&P500? In effect, like my idea, they'd commit their financial fortunes to, and align them with those of the firm's. But what mechanism exists for shareholders to do this? None.
It would, in fact, be a sort of return to the days of the original form of shareholder capitalism. A few wealthy, skilled owners running the boards of large companies. Since, instead, many boards are infested with lesser lights, faded failures of other boards (look at Microsoft for a great example of this tendency), or "politically correct" members with absolutely no business skills, corporate performances are often appallingly bad, while CEOs and board members are still handsomely compensated.
Faced with this situation, private equity partners have followed Gresham's Law. They have, a la Ayn Rand, withheld their services from the poorly-paying public market for their services and, instead, gone private. In their private world, they are the new Morgans, Goulds and Schiffs. They invite investors to participate in a limited manner, with no vote. Just a financial reward.
Is this not the best solution smart, competent businessmen can effect in today's market? Since the publicly-held companies can't organize themselves to hire private equity partners as new, more-effective board members, these skilled operators simply created their own 'private' equity market, in which they can do the same job, for appropriate, risk-adjusted rewards.
Publicly-held company shareholders miss this source of premium returns because they are forced to invest via a broken, ineffective model which espouses "shareholder democracy," as if the marginal $10,000 investor in, say, Boeing, knows anything about how much the CEO should earn, or which board members, from a pre-selected slate, can properly and profitably oversee the firm's CEO and senior executive team.
Now, for a prediction as to a form of solution which may develop. What is to stop private equity firms from issuing securities of participation in their ventures, in small denominations, as limited equity partners? Would not brands such as Texas Pacific, KKR, and Silverlake command a premium in the market? By attracting investor capital to their privately-held efforts, these partnerships could effectively begin to drain capital from poorly-run public firms, and then slowly, inexorably, pull them into the private equity world, where the value they add would accrue to the small, limited partner.
Truth is, the worst part of the structure of today's publicly-traded firms is that the board-CEO governance mechanism mitigates against the effective management of the firm for consistently superior total returns. Read Murray's passage quoting Mr. Conde of Sungard. Conde essentially says that he could not run the company 'right' in the public markets. So the small investor has no chance, currently, to enjoy the fruits of really top-notch corporate management or governance.
Maybe they'll get a break, when some of the better private equity firms begin to add investment vehicles for the smaller investor.
Wednesday, January 31, 2007
Unintended Consequences: Ethanol, Corn, Global Warming and Inflation
There have been several mentions in the media recently of the unintended consequences of rashly and reflexively moving from petroleum-based energy sources to those involving plants, specifically corn.
On Monday, the Wall Street Journal's Justin LaHart wrote a piece describing how the ethanol push is already driving up corn prices. Since the initial oil shock for the mid-1970s, US farm policy has induced the farm sector and the food processing industry to make heavy use of corn. According to LaHart's article, the price of corn, at the end of 2005, was "nearly 25% lower than it was 30 years earlier, even as food prices more than tripled." Corn is now a much larger component of our country's food production chain than it was in the 1970s.
This quote in the article, from Howard Simons of Bianco Research really says it all,
"If you look at cattle and hogs and chickens, what they really are, are devices for turning low-value corn into high-value meat."
So, ironically, to temper inflation from oil prices, and foreign control, we are foolishly choosing to substitute corn-based ethanol. The result is that we are now injecting a massive dose of input-sourced price inflation throughout the economy.
Could it be that, in our frantic, knee-jerk rush to wean ourselves from oil by substituting biomass-based energy sources, in the belief that it is the penultimate energy evil, we could cause ourselves significant costs far outweighing those attributable to oil, in terms of inflation, cropland usage, added greenhouse gas emissions, and distortion of resource allocations in our country in the long term?
Then there was this little item on CNBC's SquawkBox this morning, delivered by Joe Kernen. He read of the case of Indonesia switching heavily into palm oil for energy production. This resulted in the devastation of massive amounts of rain forest, to plant more palm, as well as the destruction of some environmentally-sensitive peat land. The burning of the rain forest resulted in carbon emissions that far outweighed those avoided by burning oil or coal in the first place. Finally, as a result of this, Indonesia catapulted from nowhere, to become the number three country on the list of global contributors to greenhouse gas emissions, just behind China and the US.
If that doesn't demonstrate the law of unintended consequences, what does?
Kernen went on to implore that the Congress and America, in general, seriously examine all plans for alternative energy, to more fully understand the likely (unintended) consequences of implementing such plans. Even one of the other on-air hosts of the program chimed in that he had seen reports showing that the average lifecycle energy consumption for a hybrid automobile is, in fact, greater than that for a conventional, gasoline-only vehicle.
The reason I raise this topic is to point out again, as in a recent prior post, here, that the rush of some large US companies to capitulate to unsoundly-based demands for 'green' energy 'solutions' may indeed saddle all of us, as consumers and investors, with some very nasty surprises in the coming years.
On Monday, the Wall Street Journal's Justin LaHart wrote a piece describing how the ethanol push is already driving up corn prices. Since the initial oil shock for the mid-1970s, US farm policy has induced the farm sector and the food processing industry to make heavy use of corn. According to LaHart's article, the price of corn, at the end of 2005, was "nearly 25% lower than it was 30 years earlier, even as food prices more than tripled." Corn is now a much larger component of our country's food production chain than it was in the 1970s.
This quote in the article, from Howard Simons of Bianco Research really says it all,
"If you look at cattle and hogs and chickens, what they really are, are devices for turning low-value corn into high-value meat."
So, ironically, to temper inflation from oil prices, and foreign control, we are foolishly choosing to substitute corn-based ethanol. The result is that we are now injecting a massive dose of input-sourced price inflation throughout the economy.
Could it be that, in our frantic, knee-jerk rush to wean ourselves from oil by substituting biomass-based energy sources, in the belief that it is the penultimate energy evil, we could cause ourselves significant costs far outweighing those attributable to oil, in terms of inflation, cropland usage, added greenhouse gas emissions, and distortion of resource allocations in our country in the long term?
Then there was this little item on CNBC's SquawkBox this morning, delivered by Joe Kernen. He read of the case of Indonesia switching heavily into palm oil for energy production. This resulted in the devastation of massive amounts of rain forest, to plant more palm, as well as the destruction of some environmentally-sensitive peat land. The burning of the rain forest resulted in carbon emissions that far outweighed those avoided by burning oil or coal in the first place. Finally, as a result of this, Indonesia catapulted from nowhere, to become the number three country on the list of global contributors to greenhouse gas emissions, just behind China and the US.
If that doesn't demonstrate the law of unintended consequences, what does?
Kernen went on to implore that the Congress and America, in general, seriously examine all plans for alternative energy, to more fully understand the likely (unintended) consequences of implementing such plans. Even one of the other on-air hosts of the program chimed in that he had seen reports showing that the average lifecycle energy consumption for a hybrid automobile is, in fact, greater than that for a conventional, gasoline-only vehicle.
The reason I raise this topic is to point out again, as in a recent prior post, here, that the rush of some large US companies to capitulate to unsoundly-based demands for 'green' energy 'solutions' may indeed saddle all of us, as consumers and investors, with some very nasty surprises in the coming years.
Tuesday, January 30, 2007
More on Fundamental Marketing: Still a Rare Skill
Yesterday morning's Wall Street Journal piece in the "Theory & Practice" column of its Marketplace Section was entitled, "Seeing Through Buyers' Eyes."
As do so many of this column's pieces, it rehashes an introductory marketing concept- understanding customer needs and potential uses of your product or service.
Will we never learn? This is such fundamental marketing, and, yet, it still gets coverage in a recurring column in the nation's most widely-disseminated business daily.
The article in question recounts various large companies' efforts to focus product development on how consumers would actually use their products, and what the needs of those consumers actually are, as they pertain to the companies' offerings. GM and P&G are mentioned.
As I have written before, perhaps it is a measure of overall management mediocrity that this sort of topic commands such attention. As someone who holds two marketing degrees, I can attest to the fact that the subject of this article is neither news, nor a recent finding. This sort of thing is literally the most fundamental marketing principle in existence.
Which leads me to once again, as in my prior post, be reassured by the mediocrity and lack of attention to fundamentals of most executives. This article probably is news to a lot of WSJ readers.
That just makes it easier to select the superior companies, which have superior-performing executives, in which to invest, for consistently superior total returns.
As do so many of this column's pieces, it rehashes an introductory marketing concept- understanding customer needs and potential uses of your product or service.
Will we never learn? This is such fundamental marketing, and, yet, it still gets coverage in a recurring column in the nation's most widely-disseminated business daily.
The article in question recounts various large companies' efforts to focus product development on how consumers would actually use their products, and what the needs of those consumers actually are, as they pertain to the companies' offerings. GM and P&G are mentioned.
As I have written before, perhaps it is a measure of overall management mediocrity that this sort of topic commands such attention. As someone who holds two marketing degrees, I can attest to the fact that the subject of this article is neither news, nor a recent finding. This sort of thing is literally the most fundamental marketing principle in existence.
Which leads me to once again, as in my prior post, be reassured by the mediocrity and lack of attention to fundamentals of most executives. This article probably is news to a lot of WSJ readers.
That just makes it easier to select the superior companies, which have superior-performing executives, in which to invest, for consistently superior total returns.
Socially Responsible Business and Investing
Friday's Wall Street Journal featured an editorial by Jon Entine, an adjunct fellow at the American Enterprise Institute who was recently asked by the Gates Foundation for research on "socially responsible" investing.
Mr. Entine's piece is relevant to me, and this blog, for several reasons. First, it so clearly demonstrates the degree to which commonly-held perceptions about businesses can be totally in error. Second, it focuses on the question of whether 'socially responsible investing,' whatever that might be, does, in fact, provide better returns than investing that does not strive to be 'socially responsible.' Third, it also provides perspective, via one brief sentence, on how out of touch so many pundits, observers and analysts are with reality.
Because I feel it is such an important, relevant, and interesting article, I have quoted from it below at length.
"It's January 2000. You manage a philanthropy that's decided to "do well by doing good." It bowed to advocacy groups and agreed to invest its endowment in only "good" companies.....
What companies do they recommend? Well, Enron has independent directors. Krispy Kreme gives tons of money to charity. Cendant is renowned for its diversity. HealthSouth is actively involved in communities. Check, check, check, check. The list goes on: Tyco, Adelphia, WorldCom, Rite Aid, Arthur Andersen, Qwest, Global Crossing, Martha Stewart, Bristol-Myers-Squibb, Lucent, Kmart.
Of course we know what happened. Every one of those "socially responsible" supernovas flamed out or are worth a fraction of what they once sold for, victims of self-inflicted ethical wounds. The big losers have been credulous pension funds, religious groups and liberal investors who put their hearts where their heads should have been.
Bill Gates might keep this history in mind today, when he meets with the media at the World Economic Summit in Davos and responds to a screed, masquerading as an investigation, directed at the $35 billion Bill and Melinda Gates Foundation portfolio. Three weeks ago the Los Angeles Times ran a series accusing the foundation of reaping "vast financial gains" from corporations with "environmental lapses, employment discrimination, disregard for worker rights, or unethical practices" that "contravene its good works."
U.S. stocks have an aggregate capitalization of $16 trillion. With all due respect to even the Gates Foundation's billions, its funds, spread over many hundreds of stocks, have no effect on the market value of any single stock. Selling a "bad" company would have no more impact than scooping a thimble full of water out of the deep end of the pool; it goes back in the shallow end when the person on the other side of that transaction buys it.
The social investing community also suffers from the hubris that it can separate the good guys from the bad guys. The Times report mentioned that half of the children attending a high school in South Africa suffer from asthma and other respiratory disorders that the Gates Foundation is committed to eradicating. It noted that a nearby refinery that spews out pollutants is owned in part by a foundation-held company, BP. Outrages like this would not happen, the Times suggested, if only the foundation would use socially responsible rating services of firms like the Calvert Group in Bethesda, Md. So much for investigative reporting. Calvert not only invests in BP, it praises the company as an environmental leader. For the record, Calvert added Enron to its approved list in March 2001, just as its ethical house of cards was collapsing, and also owned HealthSouth, ImClone and other ethically-challenged firms.
The dark secret of "social investing" is that it is neither art nor science: It's image and impulse. It reflects perceptions, not performance. Years ago I did a report on the Body Shop, the U.K.-based cosmetic company whose founder, Anita Roddick, was hailed as the Mother Teresa of Capitalism. In the early 1990s, the Body Shop was the world's most popular "socially responsible" investment. It was touted for its natural products, charity, fair trading and integrity. I discovered that Ms. Roddick had stolen the name, concept, product line and even its brochures from the San Francisco-based Body Shop that started seven years before she opened her copycat version. Ms. Roddick fabricated her history; she gave almost no money to charity over the company's first 11 years, and has given meagerly since. The Body Shop's products were made mostly from water and cheap petrochemicals; it had a record of exploiting poor Third World producers; and its franchise system was riddled with mismanagement, which eventually resulted in the company paying more than $500 million to buy out dissidents and diffuse fraud suits. My report sent the company's stock down by more than $600 million -- causing great anguish to social investors -- and contributed to a 10-year tailspin that resulted in its being sold.
The market has proved remarkably efficient in determining what marks a corporation as "good." Customers and investors vote on that every day. It should come as no surprise that a recent Wharton study calculated that funds that layer on ideological screens often perform worse than the general market by about 31 basis points a year, a huge discrepancy. Domini Social Equity Index, considered the gold standard of social index funds, rates a lackluster C- in Business Week's latest ratings. Calvert's Social Index Fund has lost 1.82% since its inception in 2000, ranking it in the bottom 15% of all funds. Now Bill and Melinda Gates are being asked to turn over investment for billions of dollars to these same social researchers?
For me, this is an eye-opening piece. Particularly the Body Shop story. I had an ex-sister-in-law who swore by that firm's products- its ethical treatment of animals, quality ingredients, etc., etc. All hokum, as Mr. Entine revealed. The Calvert Group story is also incredible, is it not? Complete with their money-losing 'Social Index Fund.'
Then there's the empirical evidence from the Wharton study, which revealed that adding such an arbitrary screen as 'socially responsible' decreased returns to funds that did so.
All of this gives me great reassurance that it is, indeed, enough just to earn a consistently superior return via shrewd investing. Never mind the ulterior agendas which seek to blur the sole function of institutional equity investing, which is to earn superior returns from one's equity selections and management. Which I've happily been able to accomplish.
Mr. Entine's piece is relevant to me, and this blog, for several reasons. First, it so clearly demonstrates the degree to which commonly-held perceptions about businesses can be totally in error. Second, it focuses on the question of whether 'socially responsible investing,' whatever that might be, does, in fact, provide better returns than investing that does not strive to be 'socially responsible.' Third, it also provides perspective, via one brief sentence, on how out of touch so many pundits, observers and analysts are with reality.
Because I feel it is such an important, relevant, and interesting article, I have quoted from it below at length.
"It's January 2000. You manage a philanthropy that's decided to "do well by doing good." It bowed to advocacy groups and agreed to invest its endowment in only "good" companies.....
What companies do they recommend? Well, Enron has independent directors. Krispy Kreme gives tons of money to charity. Cendant is renowned for its diversity. HealthSouth is actively involved in communities. Check, check, check, check. The list goes on: Tyco, Adelphia, WorldCom, Rite Aid, Arthur Andersen, Qwest, Global Crossing, Martha Stewart, Bristol-Myers-Squibb, Lucent, Kmart.
Of course we know what happened. Every one of those "socially responsible" supernovas flamed out or are worth a fraction of what they once sold for, victims of self-inflicted ethical wounds. The big losers have been credulous pension funds, religious groups and liberal investors who put their hearts where their heads should have been.
Bill Gates might keep this history in mind today, when he meets with the media at the World Economic Summit in Davos and responds to a screed, masquerading as an investigation, directed at the $35 billion Bill and Melinda Gates Foundation portfolio. Three weeks ago the Los Angeles Times ran a series accusing the foundation of reaping "vast financial gains" from corporations with "environmental lapses, employment discrimination, disregard for worker rights, or unethical practices" that "contravene its good works."
U.S. stocks have an aggregate capitalization of $16 trillion. With all due respect to even the Gates Foundation's billions, its funds, spread over many hundreds of stocks, have no effect on the market value of any single stock. Selling a "bad" company would have no more impact than scooping a thimble full of water out of the deep end of the pool; it goes back in the shallow end when the person on the other side of that transaction buys it.
The social investing community also suffers from the hubris that it can separate the good guys from the bad guys. The Times report mentioned that half of the children attending a high school in South Africa suffer from asthma and other respiratory disorders that the Gates Foundation is committed to eradicating. It noted that a nearby refinery that spews out pollutants is owned in part by a foundation-held company, BP. Outrages like this would not happen, the Times suggested, if only the foundation would use socially responsible rating services of firms like the Calvert Group in Bethesda, Md. So much for investigative reporting. Calvert not only invests in BP, it praises the company as an environmental leader. For the record, Calvert added Enron to its approved list in March 2001, just as its ethical house of cards was collapsing, and also owned HealthSouth, ImClone and other ethically-challenged firms.
The dark secret of "social investing" is that it is neither art nor science: It's image and impulse. It reflects perceptions, not performance. Years ago I did a report on the Body Shop, the U.K.-based cosmetic company whose founder, Anita Roddick, was hailed as the Mother Teresa of Capitalism. In the early 1990s, the Body Shop was the world's most popular "socially responsible" investment. It was touted for its natural products, charity, fair trading and integrity. I discovered that Ms. Roddick had stolen the name, concept, product line and even its brochures from the San Francisco-based Body Shop that started seven years before she opened her copycat version. Ms. Roddick fabricated her history; she gave almost no money to charity over the company's first 11 years, and has given meagerly since. The Body Shop's products were made mostly from water and cheap petrochemicals; it had a record of exploiting poor Third World producers; and its franchise system was riddled with mismanagement, which eventually resulted in the company paying more than $500 million to buy out dissidents and diffuse fraud suits. My report sent the company's stock down by more than $600 million -- causing great anguish to social investors -- and contributed to a 10-year tailspin that resulted in its being sold.
The market has proved remarkably efficient in determining what marks a corporation as "good." Customers and investors vote on that every day. It should come as no surprise that a recent Wharton study calculated that funds that layer on ideological screens often perform worse than the general market by about 31 basis points a year, a huge discrepancy. Domini Social Equity Index, considered the gold standard of social index funds, rates a lackluster C- in Business Week's latest ratings. Calvert's Social Index Fund has lost 1.82% since its inception in 2000, ranking it in the bottom 15% of all funds. Now Bill and Melinda Gates are being asked to turn over investment for billions of dollars to these same social researchers?
For me, this is an eye-opening piece. Particularly the Body Shop story. I had an ex-sister-in-law who swore by that firm's products- its ethical treatment of animals, quality ingredients, etc., etc. All hokum, as Mr. Entine revealed. The Calvert Group story is also incredible, is it not? Complete with their money-losing 'Social Index Fund.'
Then there's the empirical evidence from the Wharton study, which revealed that adding such an arbitrary screen as 'socially responsible' decreased returns to funds that did so.
All of this gives me great reassurance that it is, indeed, enough just to earn a consistently superior return via shrewd investing. Never mind the ulterior agendas which seek to blur the sole function of institutional equity investing, which is to earn superior returns from one's equity selections and management. Which I've happily been able to accomplish.
Monday, January 29, 2007
NetFlix Goes Online
My partner, knowing of my interest in the eventual disintermediation of network and, perhaps, cable television, by direct web access, sent me a recent piece from the New York Times, by columnist Dave Pogue.
In part, it read,
"Last week, a new contender entered the field with a radically different approach to Internet movies: Netflix.
Now, this isn’t the first time “radically different” was applied to a Netflix business model. Its main service, renting DVDs by mail, entails no per-movie fee, no late fees and no shipping fees.
Once again, Netflix has rewritten the rules — this time, of the online movie-rental game. The company has done away with expiration dates, copy protection and multi-megabyte downloads. That’s because you don’t actually download any of Netflix’s movies; instead, they “stream” in real time from the Internet to your computer.
Netflix has also done away with per-movie fees — in fact, there are no additional fees for watching movies online at all. Instead, the Netflix service is free if you’re already a Netflix DVD-by-mail subscriber. When you log in to Netflix.com, you see a new tab called Watch Now. It opens what looks like a duplicate set of the company’s usual excellent movie-finding and movie-recommending tools, except that you now see two buttons beneath each movie’s icon: Rent and Play.
The first time you click Play, you’re sent a tiny software blob that takes under a minute to install, and doesn’t require restarting your browser or PC. After that, when you click Play, the movie loads for a few seconds and then begins playing, right there in your Web browser. That’s it: one click. No special program, no confirmation boxes, no credit card charges, no copy-protection hassles. The movie just begins to play — full-screen, if you wish. You can jump to any spot in the movie, although the movie takes a few seconds to “catch up” each time you use the scroll bar.
Even more startling: Your movie watching is measured by time, not by individual movie title or by individual viewing.
The hours of movie watching you get each month depends on which DVD-by-mail plan you have. You get one hour of online movies per dollar of your monthly fee. So if you pay $6 a month (for the one-DVD-at-a-time plan), you can watch six hours of movies online; if you pay $18 (for the three-DVD plan), you can gorge yourself on 18 hours of online movies. And so on.
But the huge, mind-bending, game-changing advantage of this model is that you can channel-surf movies just the way you channel-surf TV. You can watch 15 minutes of “Single White Female,” decide you’re more in the mood for a documentary, and switch over to “Super Size Me.” When a buddy tells you that “Twister” is lame except for the climactic final sequence, you can fast-forward right to that part. You can watch the beginning of “Gladiator” tonight, and watch the rest of it a month later, without having to re-rent it or pay late fees.
Or you can casually sample one movie after another, looking for something that grabs you.
Movie surfing like this has never been possible before. All other movie delivery formats require you to make your movie choice based only on the box shot, the movie trailer and a synopsis.
(Starz’s Vongo service comes close; it offers unlimited movies for a flat $10 monthly. But you have to download a movie before you can watch it, which rules out this sort of casual real-time movie surfing.)
Netflix-by-Internet, in other words, is deliciously immediate, incredibly economical and, because it introduces movie surfing, impressively convention-shattering.
It will not, however, change the way most people watch movies in the short term, for many reasons.
First, it works only on Windows PCs at the moment; Second, only 1,000 movies and TV shows are on the Play list— but Netflix’s lawyers and movie-studio negotiators have a long way to go before the number of movies online equals the number of DVDs available from Netflix (70,000). Still, the company says that at least 5,000 movies will be on the list by year’s end. So far, the sole holdout among major movie studios is Disney, perhaps because of its partnership with Apple’s movie service.
Third, you generally get only the movie — not the DVD featurettes, alternate languages, subtitles, director’s commentary and so on.
Fourth, you can’t control the video quality you get. Your movies arrive in one of three resolutions, depending solely on the speed of your broadband Internet connection. A prominent speed meter on the Netflix page tells you which version you’ll get. Finally, remember the biggest drawback of Internet movie services: Only a nerd would gather the family around the PC to watch a movie.
The masses have yet to connect their computers to their TV sets. Only then will the decline of the DVD begin in earnest. Only then will the futurists’ fantasy of instant access to any movie, any time become a reality.
When that day arrives, Netflix, for one, will be ready."
I could not agree more. In fact, I think this marks a major shot across the networks' bows, because NetFlix also rents television series. It's not too hard to see how NetFlix sees this as breaking the ceiling to its current monthly fee structure, and leading to substantially increased revenues/account, as we begin to use NetFlix like a large-scale Tivo or DVR, without the bother of actually choosing what to record.
What interests me is the potential combination of this service with Apple's coming AppleTV. If this service can stream onto that device, or simply drive a second 'monitor' which happens to be your living room TV, the networks and cable companies have some serious problems ahead.
My friend S, in Connecticut, will, and has already, reminded me of how slow people will be to change. That Comcast and their ilk will punish any channels that move off of cable, to direct purchase from a website.
Still, this move by NetFlix may be the opening shot that begins to condition and teach the early adopters of video programming to turn to the web for their content. NetFlix is choosing the pay-for-time approach, rather than the pay-per-view model. However, they are clearly experimenting with how to reap gains from a whole new form of "on demand" video content provision.
It's unclear how long the revolution will take, or exactly how it will unfold. However, with AppleTV, the new NetFlix features, and dozens of hungry, innovative engineers, marketers and content producers out there, I believe we'll begin to see substantial new video viewing and delivery models gain size within only a few years. Even if the networks, a la CBS's Les Moonves, allege that they are talking to everyone and moving online, this new development still puts more pressure on them to attempt to seize, develop and protect key online real estate, before viewer habits get formed by someone else's delivery model.
In part, it read,
"Last week, a new contender entered the field with a radically different approach to Internet movies: Netflix.
Now, this isn’t the first time “radically different” was applied to a Netflix business model. Its main service, renting DVDs by mail, entails no per-movie fee, no late fees and no shipping fees.
Once again, Netflix has rewritten the rules — this time, of the online movie-rental game. The company has done away with expiration dates, copy protection and multi-megabyte downloads. That’s because you don’t actually download any of Netflix’s movies; instead, they “stream” in real time from the Internet to your computer.
Netflix has also done away with per-movie fees — in fact, there are no additional fees for watching movies online at all. Instead, the Netflix service is free if you’re already a Netflix DVD-by-mail subscriber. When you log in to Netflix.com, you see a new tab called Watch Now. It opens what looks like a duplicate set of the company’s usual excellent movie-finding and movie-recommending tools, except that you now see two buttons beneath each movie’s icon: Rent and Play.
The first time you click Play, you’re sent a tiny software blob that takes under a minute to install, and doesn’t require restarting your browser or PC. After that, when you click Play, the movie loads for a few seconds and then begins playing, right there in your Web browser. That’s it: one click. No special program, no confirmation boxes, no credit card charges, no copy-protection hassles. The movie just begins to play — full-screen, if you wish. You can jump to any spot in the movie, although the movie takes a few seconds to “catch up” each time you use the scroll bar.
Even more startling: Your movie watching is measured by time, not by individual movie title or by individual viewing.
The hours of movie watching you get each month depends on which DVD-by-mail plan you have. You get one hour of online movies per dollar of your monthly fee. So if you pay $6 a month (for the one-DVD-at-a-time plan), you can watch six hours of movies online; if you pay $18 (for the three-DVD plan), you can gorge yourself on 18 hours of online movies. And so on.
But the huge, mind-bending, game-changing advantage of this model is that you can channel-surf movies just the way you channel-surf TV. You can watch 15 minutes of “Single White Female,” decide you’re more in the mood for a documentary, and switch over to “Super Size Me.” When a buddy tells you that “Twister” is lame except for the climactic final sequence, you can fast-forward right to that part. You can watch the beginning of “Gladiator” tonight, and watch the rest of it a month later, without having to re-rent it or pay late fees.
Or you can casually sample one movie after another, looking for something that grabs you.
Movie surfing like this has never been possible before. All other movie delivery formats require you to make your movie choice based only on the box shot, the movie trailer and a synopsis.
(Starz’s Vongo service comes close; it offers unlimited movies for a flat $10 monthly. But you have to download a movie before you can watch it, which rules out this sort of casual real-time movie surfing.)
Netflix-by-Internet, in other words, is deliciously immediate, incredibly economical and, because it introduces movie surfing, impressively convention-shattering.
It will not, however, change the way most people watch movies in the short term, for many reasons.
First, it works only on Windows PCs at the moment; Second, only 1,000 movies and TV shows are on the Play list— but Netflix’s lawyers and movie-studio negotiators have a long way to go before the number of movies online equals the number of DVDs available from Netflix (70,000). Still, the company says that at least 5,000 movies will be on the list by year’s end. So far, the sole holdout among major movie studios is Disney, perhaps because of its partnership with Apple’s movie service.
Third, you generally get only the movie — not the DVD featurettes, alternate languages, subtitles, director’s commentary and so on.
Fourth, you can’t control the video quality you get. Your movies arrive in one of three resolutions, depending solely on the speed of your broadband Internet connection. A prominent speed meter on the Netflix page tells you which version you’ll get. Finally, remember the biggest drawback of Internet movie services: Only a nerd would gather the family around the PC to watch a movie.
The masses have yet to connect their computers to their TV sets. Only then will the decline of the DVD begin in earnest. Only then will the futurists’ fantasy of instant access to any movie, any time become a reality.
When that day arrives, Netflix, for one, will be ready."
I could not agree more. In fact, I think this marks a major shot across the networks' bows, because NetFlix also rents television series. It's not too hard to see how NetFlix sees this as breaking the ceiling to its current monthly fee structure, and leading to substantially increased revenues/account, as we begin to use NetFlix like a large-scale Tivo or DVR, without the bother of actually choosing what to record.
What interests me is the potential combination of this service with Apple's coming AppleTV. If this service can stream onto that device, or simply drive a second 'monitor' which happens to be your living room TV, the networks and cable companies have some serious problems ahead.
My friend S, in Connecticut, will, and has already, reminded me of how slow people will be to change. That Comcast and their ilk will punish any channels that move off of cable, to direct purchase from a website.
Still, this move by NetFlix may be the opening shot that begins to condition and teach the early adopters of video programming to turn to the web for their content. NetFlix is choosing the pay-for-time approach, rather than the pay-per-view model. However, they are clearly experimenting with how to reap gains from a whole new form of "on demand" video content provision.
It's unclear how long the revolution will take, or exactly how it will unfold. However, with AppleTV, the new NetFlix features, and dozens of hungry, innovative engineers, marketers and content producers out there, I believe we'll begin to see substantial new video viewing and delivery models gain size within only a few years. Even if the networks, a la CBS's Les Moonves, allege that they are talking to everyone and moving online, this new development still puts more pressure on them to attempt to seize, develop and protect key online real estate, before viewer habits get formed by someone else's delivery model.
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