Indie Bands, Music Piracy and the Internet

Two recent articles in the Wall Street Journal paint an interesting picture of the evolving digital music industry.

The second one ran in yesterday's edition, and dealt with, ironically, how easy it now is for independent bands to become successful with little or no money, no traditional record label and, thus, no old media agent. Some indie bands do retain what one might call eagents, such as NetWerk Records, a combination indie label and artist management firm. This seems to support my contention that agents, as we have known them, will also be unnecessary for the coming era of online digital video content production, found here.

What's interesting is that established bands are also exploiting digital downloads, in order to capture immediate interest by fans. Rather than expect, or let, prospective buyers go to iTunes to buy and download music, they are embedding a MySpace MP3 player on their MySpace sites.

This article followed one a week earlier, discussing how artists are now combatting piracy with their own 'viral' digital countermeasures. What some artists and (gasp) record executives are beginning to realize is that "piracy" is actually the behavior of enthusiastic fans who represent, in the longer term, a very lucrative potential market. Essentially, these record labels and artists are exploiting peer-to-peer sites by placing files with music and/or video content on them, often including special offers that result in feedback information from consumers who downloaded the files.

Finally, an entertainment medium, this time music, as opposed to film or TV, is realizing that forgoing some near-term revenues may result in stoking long-term demand by consumers, especially for older material that it no longer pays to promote. This is one of the odd by-products of allowing YouTube to feature copyrighted performances of older bands or TV programs. By reminding older consumers of their existence, and, in some cases, introducing them to younger consumers, the copyright owners actually receive free marketing exposure for something they would never pay to market in the first place.

It's rather exciting to watch the upending of older marketing models, as essentially free, consumer-driven promotional models appear, primarily on free distribution networks. Suddenly, the marginal cost of promoting quite a bit of video and audio content is nearly free.

My guess is that this will accelerate the decline of broadcast and other 'old' media, as yet another benefit of new media becomes clear and economically useful.

This may, quite possibly, make Google's recent purchase of YouTube, and NewsCorp's acquisition of MySpace, look prescient and cheap in the long run.

CNBC CEO Interviews: Must They All Be Puff Pieces Now?

This week, CNBC has provided us with a number of "puff piece" interviews of various business and governmental leaders.

The network's Chicago correspondent, Phil lebeau, met with Alan Mulally, new CEO of Ford, and Rick Wagoner, embattled CEO of GM. Maria Bartiromo, meanwhile, was given access to President Bush, as part of the pre-election publicity campaign by the White House.

Just what is the value of these talking heads lobbing softballs at these CEOs and politicians? We all know that if the network interviewers ask a hard or embarrassing question, a) they won't get a straight answer, and b) they won't ever get another interview with that exec, or any other senior exec.

LeBeau didn't ask any penetrating questions of Mulally or Wagoner. I'd be surprised if Bartiromo did not have to provide a list of her questions prior to the session.

So, what is the value of these interviews? Isn't it just like the sell-side analysts who get pressured, and sometimes fired by their employers, for being too candid about badly-managed firms or potential fraud, etc? The presumption is that a carefully staged game of mis- or dis-information is being played in front of the camera.

I put much more trust in the writing or reporting of someone who simply deals with publicly-available information, and their own logic, without resorting to a staged interview. If anything, I find that the latter causes me to view the reporter/writer as compromised.

Thus, I put a lot more stock in, say, Alan Murray or Holman Jenkins, Jr., of the WSJ, than I ever will in Phil Lebeau or Maria Bartiromo of CNBC. Somewhere in the middle are Joe Kernan and Becky Quick of CNBC, who don't arrange the interviews, but frequently fire hardball questions at tele-interviewees, such as CEOs of firms reporting earnings.

If anything, I see the CEO interviews as simply giving more opportunities for them to obfuscate, or simply deny reality. Who is this serving? Especially in the cases of GM and Ford, which are in real trouble. In neither interview did LeBeau get even close to pressing the subject to acknowledge their difficulties, and what they might do if worst came to worst.

Granted, these CEOs don't want to be on camera doing that. So why give the interview in the first place? Personally, I think they are a waste of everyone's time.

Finding Talent in the New Digital Online Era

As I drove my daughter to school this morning, I heard a brief business news story describing how several Hollywood talent agencies have signed arrangements with several prominent internet content firms. The implication is that the latter firms are looking to the former to scout, find and sign video-related talent for subsequent video content creation and distribution.

I must say, this surprises me. If anything, I would have expected the rise of online video content firms, such as Google, its new division, YouTube, or even Yahoo, to work directly with individual content providers. Agency firms seems, at least to me, decidedly "old media."

Further, why would an individual want to surrender at least 10% of their future revenues to someone, when people can easily find the large, online content distributors? I did some rough math as I drove around this morning, and found it hard to see why a promising video producer would have to spend more than $5,000 to acquire the necessary hardware and websites with which to launch their own online production firm and site. I think we're talking about a laptop or desktop PC, digital camera, some editing software, and a website. That's it.

Once in business, they can submit their content directly to YouTube, Yahoo, Google, et al, free of charge. Where does a talent scout/agent add value to this process?

Unless, of course, one or more of these online companies loses their collective intelligence, and decides to limit their intake of new content to people or firms who approach them through an agency.

But, isn't the point of the evolving digital online media era that consumers can vote directly, via their 'views,' on new content? That there is no need for some agent or media exec, in the mold of the old-time recording artist talent scouts, to "find" the next big artist? Now, the artist will find the market, directly, and the distributors are providing the pipes and stage, earning ad revenues for their trouble.

Am I missing something here? I would have thought talent agencies were, if anything, headed for smaller roles, confined to "old media," at best. In fact, it begs an interesting question.

Suppose two friends shoot a digital video, upload it onto YouTube, and it becomes popular. Steven Spielberg sees the clip, and wants to work with the pair. Do they need to become SAG union members, or can Spielberg simply film and distribute a digital film without ever involving the old media production empire?

I haven't read much about this topic, but I did discuss it earlier this year with a set designer who works at one of the broadcast networks. While a union employee, she struck me as having a strange mix of management perspective and education on her craft, combined with a somewhat antiquated view of her internal workplace, due to her union membership. On the side, however, she was busy developing and burnishing her cyber-set design skills.

Which leads me to believe that, in time, the value of the internet in allowing for direct, one-to-one contact between people involved in almost any enterprise, will eventually limit, then shrink, the role of talent agencies and artistic-related craft unions. When access becomes a function of people directly displaying their wares online, so that distributors can find and enter into business arrangements with them, what will be the added value, to anyone, of old media talent agencies and craft unions?

D'Agostino's Scores Hit with New Meat & Poultry Products

This morning, while driving to a meeting, I heard a great marketing story reported on WQXR, the radio station of the New York Times.

It seems that some grocers are improving sales and margins by marketing meat which may fit some or all of the following descriptions: humanely raised, humanely butchered, free range, unfenced, organic, drug-free.

According to the report, D'Agostinos, the venerable NYC grocery chain, has seen sales of meat increase 25% by unit volume, at prices that are 40% higher than similar cuts of meat that are not so described as above.

This may well be one of the best examples of Schumpeterian innovative behavior I have seen or read about in the past year. It reminds me of Frank Perdue's original, and successful, efforts to brand and differentiate his chickens from the rest of the poultry sold by grocers.

In this case, grocers have identified a psychological preference among their customer groups, and actively provided products which satisfy those preferences. Whether or not the meat and poultry taste different, clearly, some consumers will buy those products which they believe have resulted from animals which were treated in ways that they feel are important.

What's more, they will still buy those cuts of meat or poultry at prices far in excess of similar cuts without the humane or organic labels. So the grocer enjoys increased sales of a much higher margin product.

So much for food price inflation. These shoppers are, in one fell swoop, increasing their food spending by far more than inflation can.

Once again, we see how basic marketing pays off in tangible, financial results. By discovering consumer tastes and preferences, for which they will pay more, grocers marketing these new types of meat and poultry have increased the revenues and profits of their butcher's department.

Corporate Governance & AIG's New Director Requirement: Is It Enough?

Yesterday, CNBC reported that AIG is now requiring its directors to own at a minimum of $100,000 of the company's stock.

On one hand, it's good to see a company move in this direction, as I have written a prior post on this topic.

However, one has to wonder, do these men and women even notice $100K? If you'd like to see who is on the AIG board, go here. While a few of the board members are from nonprofits, several of them clearly have significant wealth, which makes the minimum stock ownership, frankly, a joke.

Isn't something like owning stock equal to 2-5% of one's net worth more compelling? Were I a shareholder, to tell me that a multi-millionaire director has $100,000 of AIG stock in her or his own name would mean nothing to me.

So, to tell me that Richard Holbrooke, Stephen Hammerman, or Virginia Rometty each have less than 2% of their net worth in AIG, on whose board they sit, is to tell me that they really have little personal stake in the result of their efforts on that board.

I believe it's changes like this, by AIG, that make a joke out of the concept of improving corporate governance.

NBC's Big Budget and Programming Changes: Is The End In Sight?

Last week's news that GE's NBC unit is cutting back on providing programming in the 8-9PM time slot, and engaging in large-scale cost-cutting as well, seems to be a confirmation that network media companies are in serious trouble.

It appears now that GE's Bob Wright, the executive in charge of NBC and Universal, is presiding over the network's shrinkage, including its news department. While these moves may eventually boost profitability, they seem to be doing so by reducing revenues. My research found that one of the keys to a company's ability to consistently outperform the market, in terms of total return, is to consistently grow revenues at consistently superior rates.

With its entertainment unit retrenching and cutting costs and programming, it would seem to be a drag on GE's ability to grow revenues at consistently superior rates into the near future.

That's the financial aspect of the changes occurring now at NBC.

The behavioral dimension gets to the larger issues of a network's future in the evolving world of multiple, digital channels and applications devices for media consumption. I recently wrote about this here.

By abdicating an hour of prime time to reality shows, to save money, while cable networks like Fox produce quality drama series such as "House," NBC is, in effect, signaling that, as an old media network, it simply can't afford to compete in that product/market space anymore.

In a recent post here, I discussed the content/distribution issue for the evolving media sector. In some ways, I think GE/NBC-Universal may now be the most disadvantaged of all of the media properties.

Disney, ABC's parent, is a media/entertainment company. At least their funding and strategic tradeoffs all involve the same type of 'product.' CBS is now a standalone firm again, and what was left with Viacom is, like Disney, an all-media firm. Again, like products among which to make strategic decisions.

The various cable media, such as TW, Fox, and the new hybrid WB-UPN, are all media enterprises.

GE refits locomotives, makes white goods, jet engines, and, oh yes, owns media properties- a broadcast network and some related cable programs, and a movie studio with theme parks .

Can you imagine trying to set budgetary and strategic guidance among that mess? As I wrote here recently, I think it's simply a mistake for GE to continue its existence.

If I had to guess, I'd say that NBC/Universal is perhaps one of the most hindered units among GE's portfolio, when it comes to laboring under financial and operating constraints as part of the parent firm. It has to compete internally for capital, while competing externally with a fair number of pure media companies run by fairly talented, motivated indivduals.

That's why I see last week's announced cutbacks at NBC a harbinger of its eventual impairment, due to being a part of a non-media conglomerate. If I'm correct, more shrinkage will follow, perhaps, eventually, mercifully, by a spinoff or sale of the unit to another media concern.

Boeing's 737 Replacement Opportunity: Schumpeter's Theories In Action

This past Wednesday's Wall Street Journal featured Holman Jenkins' weekly column, this time focusing on Boeing's opportunities, as Airbus self-destructs.

The Journal carried a noteworthy article back in June, about which I wrote here. It emphasized how Boeing had done the basic work of determining customer needs, and designing, then building, the Dreamliner 787.

Now, we learn that Airbus' replacement CEO of this past summer is already out. Jenkins does an excellent job describing that firm's self-inflicted wounds of the past few years, and the resultant disasters in the A380 and A350 programs.

What particularly drew my attention, however, was the last third of Jenkins' piece. He wrote of Boeing's alternatives, in the face of the Airbus meltdown. How, despite the former's incredible luck of its competitor's travails, combined with its own successes, it still faces significant risk.

This is Schumpeterian thinking in its sparest, clearest setting. A capital good manufacturer/marketer, who must make each large, long-term product development decision reasonably well, or risk failure and bankruptcy. Boeing began its jet era by betting the company on the 707. It continued this process with the 747, 757 and 767.

Now, as Jenkins depicts the competitive landscape facing Boeing, one sees that they are, at last, moving to replace the venerable short-haul 737. The article mentions Southwest Airlines clamoring for the replacement, and potential engine provider Pratt & Whitney perfecting the "geared turbofan" jet to achieve the kind of leap in operating efficiency Boeing is said to require in any 737 successor.

Jenkins concludes his article by opining that, as Airbus goes to the sovereign-funding well once more, to bail itself out, Boeing may have to live with a non-decision by the WTO, and, thus, provide its own response to Airbus in the form of a new jet to replace the 737.

This is very appropriate, as Schumpeter would easily see the need for Boeing to cannibalize its own installed base of jets, before another competitor, perhaps from China, does so first. Just because Airbus is faltering in no way means Boeing is about to experience its own version of Rome's infamous "Punic Curse." It's likely that, with the severe consolidation in global commercial aircraft production and marketing, Airbus' demise or crippling will simply provide an entry point for some up and coming third-world or Far Eastern country to step in and selectively begin to challenge Boeing's dominance.

Thus, Jenkins is correct to predict that Boeing should continue on with its product development as if Airbus is still a viable and threatening competitor. Because, as Schumpeter clearly explained, once a company stops innovating to stay ahead of existing or potential competitive offerings, it has, in effect, resigned itself to being swept away by a real competitor in the near future.

A corporate mindset of comfort and complacency in a competitive product/market sector, whether merely national, or truly global in scope, typically leads to the firm's unanticipatedly acclerated decline. An attitude of fear and the need to lead in innovation are vital if a company like Boeing is to retain its recently-attained consistently superior total return and revenue growth performance in the years to come.

Verizon's CEO Compensation Change

Wednesday's Wall Street Journal featured an article in the Money section about Verizon's CEO's new compensation package.

After reading what details are disclosed, I am left with a mixed view of Ivan Seidenberg's new compensation arrangement.As I understand it, the new arrangement ties Seidenberg's pay to both S&P-related return targets, over an undisclosed time period, as well as the phased implementation/rollout of Verizon's new fiber optic network. This use of the capital spending plan seems, to me, to be somewhat disingenuous.

Blogger is not being very cooperative today, so I am unable to paste a 5-year chart of the company's stock price, compared to the S&P. I will attempt to do so in the next day or so However, suffice to say, the S&P has performed significantly better than Seidenberg has over the past five years.

For instance, here is a quote in the article attributed to a Verizon spokesman,

"If Mr. Seidenberg's compensation were based solely on the stock performance, he would have a disincentive to make the investment that we believe is necessary...This is not a provision to make up for poor stock performance, itÂ’s a provision to make sure we do the right thing for the long-term health of the company."

Here's what I donÂ’t understand. If rolling out their fiber optic network results in a drop in the total return to shareholders, then perhaps it's not actually a good idea. If it were properly explained, and justified, would it not be seen as a positive attribute by investors?

To hide behind the excuse that Seidenberg could benefit more by giving the company's massive investment program short shrift is to suggest that it may not really be such a good idea, anyway.

By making it part of the CEO's compensation package,I wonder if this is management's way of shifting the responsibility for deciding to implement the project onto the board. This way, Seidenberg can always point to his board, and their compensation package for him, and say that they thought the project was the right thing to do, even if it turns out badly.

It sounds good to tie Seidenberg's compensation partly to the S&P500 return, but details are scarce as to over what timeframe. If it's too short, then beating the S&P becomes a much easier task than you might suspect.Basically, I think that, if the Verizon fiber project is a good investment, then, yes, the compensation changes are probably beneficial for shareholders. But why worry whether itÂ’s good or not? If it's not thought to be a wise move, why even do it?In the end, though, if the fiber investment is important, and investors don't think so, why should the CEO get paid for doing something that destroys existing shareholders' wealth? It sounds like more fuzzy thinking on corporate governance and commitment to wealth creation for 'every' prospective shareholder.

The WSJ piece quotes one Paul Hodgson, described as a compensation analyst at the Corporate Library, as saying, "It's what CEOs are paid to do- to damnlong-term bets and damned the stock price."

I would disagree emphatically with his statement. I believe that the job of a CEO is to provide consistently superior returns for shareholders, in order to do two things. First, to generate consistent performance, in order not to favor any particular group of shareholders with respect to their temporality. Second, to earn consistently superior returns so that shareholders have a reason to own shares of the company, rather than simply own shares of the S&P500.

While there seems to be some benefit to including the S&P metric in Seidenberg's compensation package, the inclusion of the implementation metric for the company's fiber optic project smacks of shifting the risk of, and justification for the project from the firm's management, to its board and shareholders.

Dick Wolf's Views on The Evolution of Television Programming

Wednesday's Wall Street Journal's Marketplace section featured an interesting interview with Dick Wolfe, the creator of the long (17 years) running TV series, Law and Order.

As a creator of video content for nearly two decades, it is instructive to read his thoughts on the imminent evolution of the medium. To that end, his first quote, regarding the future of network television, is,

"....Please, you think ringtones are going to be a major revenue stream for studios or networks?....Unfortunately, the business model is irreparably broken, and people are going to have to figure out something new...I'm 59 years old. I don't think the world is going to come crashing down in five to six years, but I guarantee you, if anyone tells you what the television business is going to look like a decade out, they are on drugs."

Well put. He further believes that the trend toward a single sponsor taking an entire show, and doing product placements as well, has limits. As well as marks a return to the original business model in place at the dawn of TV.

Perhaps the most interesting business comments he makes is regarding the value in syndication of current and future television content. Wolfe questions how valuable such video content will be anymore to networks such as USA or TNT, if the episodes have already been available on Netflix, DVDs, etc.

When asked how different TV series creation is now, from 17 years ago, Wolfe responded,

"The business has changed massively.....You will never have the market forces again that, how do I put this, that allow people to get rich....The reality is you will never have the licensing fees negotiated again that resulted in 'ER' getting [millions of dollars] an episode, and that's where a lot of people made what many would probably insist is an unconscionable amount of money...The upside home runs for shows have been sort of flattened out by the new economic models of how shows are produced."

While I understand and agree with Wolfe's remarks concerning predicting how the network television world will look in a decade, I was struck by his comments, and included them liberally in this post, because they seem to have a bearing on that future.

To wit, I think the same economic forces which are now limiting the profitability of series producers on network television, are driving those same people to online digital distribution. And, probably making the club far, far less exclusive.

Translation- don't try to own network distribution assets, which are, comparatively, narrow and lacking in bandwidth. Instead....own a well-regarded, popular piece of online real estate.

Would that, perhaps, be YouTube at present? Yes, I think it would. Maybe not in another 2, or 5 years. But for now, sites like YouTube seem to be creating value simply by being there, first.

Perhaps in years to come, networks will create their own stable of production talent, in order to own their video content, and regain control of the distribution of it. Maybe they'll join the growing ranks of online video sites, and, in the end, simply leave network TV to be something simple and barebones, with the real revenues coming from online distribution.

If that happens, then I guess you'll have the networks bidding against Google, cable companies, and perhaps private equity lenders and banks, to fund promising content producers.

Wolfe's right- it's impossible to forecast what that future will look like. Except that it won't look remotely like what it is now.

Floyd Morris' Recession Predictor

This morning, on CNBC, Floyd Morris a writer for "The People's Daily," a/k/a The New York Times, predicted that the US economy is now, or is about to be in, a recession.

Morris predicts recessions with a simple model. When total deflated sales, year over year, by US new car dealers, falls 2% or more, a recession has begun or is imminent.

On its face, Morris' method is both interesting and somewhat sensible. But so many signals point the other way right now, not to mention so many analysts and economists with more training and experience in macroeconomics than Morris seems to have.

Now, on one hand, I respect empirically-driven conclusions. And this has an 'Occam's razor' sort of simplicity to it, which is attractive.

On the other hand, it just seems to be such an isolated indicator/predictor.

So, rather than criticize it, I would, instead, be interested in considering how and why it might be wrong this time?

In effect, to engage in Popperian analysis, and ask, 'what would fool or confuse the indicator?' Can I find a reason which would render the predictive power of the simple method suspect?

Here are some ideas:

1. A 2% real decline in annual sales is pretty small, as triggers go. It wouldn't take much in terms of consumer behaviors, not recession-driven, to attain this result, and give a false positive.

2. The last forecast recession was 5 years ago. Could pricing pressures in the auto sector since then have resulted in non-recession behaviors that simply reduced total revenues to dealers? Morris uses no unit volume data, only total deflated sales.

3. Is it possible that combinations of higher crude oil and gasoline prices, combined with better substitution of online services for local travel, have diminished total consumer demand for cars from new car dealers?

4. Has the growth of online car buying services, with which to negotiate prices with new car dealers, possibly lowered the price/car at new car dealers since 2000, when Morris' method last forecast a recession?

5. Morris showed a graph of his data, and the entire curve seemed to attenuate over the timeframe he displayed- something like 20 years. Is it possible that, due to pricing and competitive pressures, overall auto sales growth, year to year, is simply slipping anyway? And that the relative rate of sales decline is really what matters, not the absolute rate of sales growth/decline? Could dealer sales simply be falling secularly, and some periods fall harder, due to recessions? So that, with time, a 2% decline may no longer be relevant or significant as a recession signal?

6. Are there more or fewer new car dealers than in the past? Does this matter? Does Morris control for the number of new car dealers? Should he control for this variable?

7. Is there a change in the mix of car sales from dealers of different brands, foreign or domestic, higher- vs. lower-priced models? Is it possible that more features are now found on lower-priced, foreign-owned brands, so that new car unit sales could be healthy, but the dollar values of the value embedded in those cars is lower because of productivity and competitiveness in the sector?

Empirical analysis is good. But when one strips away so much information, as Morris has, and forecasts recession based upon such a simple measure, such as Morris' total sales by new car dealers, you have to wonder if there are some complicated factors working beneath the surface, that could confound this recession predictor.

Put another way, if I, as a quantitative marketing analyst, which I have been in a past life, tried to predict business or marketing outcomes with such a simple model, I'd probably be ridiculed for failing to take into account many, if not all, of the factors I have listed above.

I wanted to write about Morris' prediction, and method, because so much has been spoken and written recently about the state of the US economy, now and for the next 18 months. The reality, though, is probably that Morris was on CNBC because he provided a quick, provocative sound bite of opinion, and, thus, entertainment.

And, once again, we see a ubiquitous business "news" source eschew careful, analytical rigor for ratings and the shock value of inadeqately-designed or explained forecasting methods.

Steve Jobs On Apple's iPod vs. Microsoft's Zune

My daily email from Charles Schwab recently contained a brief analysis of recent events affecting Apple's stock price. The text, which includes some quotes by Apple's CEO, Steve Jobs, read as follows,

"APPLE COMPUTER INC. doesn't expect the iPod media player to be hurt by MICROSOFT CORP.'s Zune, Chief Executive Steve Jobs said in a magazine interview. Microsoft has touted Zune, a portable media player due to be launched in the U.S. in time for the holiday shopping season, as a potential threat to the dominant iPod because of its ability to share music wirelessly. "It takes forever," Jobs told Newsweek in an interview posted on the magazine's Web site on Sunday. "By the time you've gone through all that, the girl's got up and left." Jobs was equally unconcerned about the prospect of the iPod losing its cool factor as it becomes increasingly ubiquitous. "That's like saying you don't want to kiss your lover's lips because everyone has lips. It doesn't make any sense," said Jobs."

These statements by Jobs display some of the characteristics which I believe have allowed him to be so successful as a businessman. In particular, I believe they offer some insight into why Jobs has been successful at a variety of businesses, whereas the man he is most-often compared with, Bill Gates, has had a very fortunate ride, for a brief period of time, with only one business.

The statements attributed to Jobs let us see his basic appreciation for human behavior, and his inherent common sense. While Gates projects an image of the geek who got lucky, Jobs, with each passing year and business success, comes across as more thoughtful, sensitive, open-minded, and in touch with consumer behavior.

For instance, his quote about sharing music with a Zune is just priceless. He cuts right to the heart of the matter, as it were, saying what everyone knows is probably true- that the most ',mission-critical' role for such music sharing is in ice-breaking moments for some boy, trying to impress a girl, such as Jobs off-handedly described.

I don't know about you, but the quote enables me to see a young Jobs trying to pick up an attractive girl, and understanding how some cool techno-toy would help. The image of Gates trying something similar can't quite get composed in my mind's eye.

Jobs' second statement is equally poignant and sensitive. What a nuanced and clever analogy. Leave it to Jobs to position the iPod media experience, even in a casual interview conversation, as emotive, rather than analytical or technical. He clearly evokes the sense of users bonding with the beauty of Jobs' products' designs and operation, rather than their technical specs. Then he appeals to the reader to confirm his own sensibility in making this emotional-based analogy.

Very noteworthy. He doesn't come across as manipulative, so much as just being his own, complex self. He doesn't seem to think of his business, so much as the uses for, and attitudes people have toward, his products.

Thinking back on Jobs' career, and the video clip my partner sent me of the former's recent commencement address at Stanford, I see a connection between the nature of the quotes cited in the passage above, and Jobs' business experiences.

He began with nothing, a few partners, and created Apple. The very nature of the machine was anti-thetical to the sparer, more utilitarian PC and its Microsoft operating systems. Jobs went on to grow his company, leave it, start another (Next), return to his baby, Apple, and revive it. In the meantime, he also started an unrelated company, Pixar, and grew it so successfully that Disney bought it. Now, he's on Disney's board, still runs Apple, and is probably the only, and most, trusted 'techie' able to move through the geographically proximal, but culturally alien world of old and new media. Jobs has always seemed to be moving on a path, chasing a vision of bringing technology to the masses in a way that he can clearly visualize, including the detailed experiences of those masses with his inventions. You can feel and see his passion in his interviews.

Gates, by contrast, founded Microsoft, cleverly arbitraged someone else's operating system into a quick fortune, then grew his company's dominant market position in operating systems and leveraged it into business application software. Basically a one-trick, but very, very large pony, Microsoft followed a familiar technology business growth trajectory, and has now become an aged, sluggish software vendor in a comparative backwater of the technology sector. Gates has run the company for all of its life, presided over its apogee and decline, and has now announced his retirement in less than two years, as he busies himself with philanthropic pursuits.

It's hard to fail at giving away money, isn't it?

Meanwhile, Jobs is still busy creating value for shareholders, and new products and services, using digital applications processors, content provision systems, and larger media distribution enterprises, for their ever-more-intertwined uses by common people.

It's somehow reassuring that, even in a few brief quotes from an interview, one can glimpse some of what has made Jobs so broadly successful.

Brian Wesbury: A Wise Pundit's Views on The Market & The Economy

Yesterday's Wall Street Journal carried an incredibly good editorial by Brian Wesbury, the chief economist for First Trust Advisors, L.P. Wesbury is a frequent guest on CNBC's early morning SquawkBox program, as well as Larry Kudlow's program.

I tend to listen to Wesbury very carefully, and with a good deal of confidence. His economic reasoning has been sound and sensible for as long as I can recall. His recent article is no different.

He mentions a crucial driver of the recent rise in equity market indices- the Bureau of Labor Statistics' annual recalibration of employment statistics. This time, the recalibration added 810,000 jobs to the previously-stated total for the US economy, or almost .5% of the available US labor force.

Added to this, last week the Treasury announced that the latest estimate of the country's budget deficit is roughly $248B, which is much less than the CBO's estimate of $337B, and the White House's $423B forecast.

These numbers both speak to how much stronger the US economy is, regarding employment, as well as fiscal rectitude, than seemed to have been, or still be, commonly realized among media sources.

Wesbury then goes on to write in the editorial,

"While cynicism and pessimism are part of human nature, handwringing based on out-of-date models and inaccurate data is unnecessary. Bad data and bad models are a dangerous combination that can bias political views and impact policy decisions. Recent revisions reflect the problem: the very data that caused so much indigestion previously now reveals a strong and resilient economy."

Is this not what Alan Greenspan has been saying for years? Stepping back from the various shocks to our economy over the past 24 months, is this not also rather obvious? Despite $3/gallon gasoline, the economy takes it in stride and continues to roar onward.

Yet many so-called economic pundits rush to opine immediately on data which, now revised, tells a completely different story about the US economy. Oh, my!

I won't discuss Wesbury's editorial in full- it's worth reading in its entirety. But there is one more point he makes that I would like to address, because it is an area of significant dis- and misinformation for many people.

He discusses the differences between two methods used to calculate employment: the BLS Establishment Survey, and the BLS jobs survey. The former was, to quote Wesbury, "designed in a paternalistic age of large businesses and time-clock punching." The latter report is the result of phone calls asking people if they are working.

His point is that, in our new economy, lots of people work, and make significant money, doing non-full-time-large-corporation work. One example that quickly comes to mind is the move by Wal-Mart to more part-time employees. Would that not reflect less 'establishment' full employment, even if the cash compensation earned by people working in Wal-Mart's was unchanged?

What I like about Brian Wesbury's expressed opinions is the depth of thought, and extent of knowledge he displays about key economic statistics, in relation to the real economic world in which we live.

From his editorial, and the recent corresponding equity market index gains, we see that, throughout this year, the economy has never been in as much trouble as many on-air and published pundits would have us believe. Notably among the former, I think, is CNBC's 'economic' reporters. It's fair to ask how much this type of disinformation, or misinformation, has affected investors during the last nine months.

By the way, buried in the first third of Wesbury's article is his own rough estimate that, using a capitalized business profits model, US equity markets are 35% undervalued.

Cause for reflection, is it not?

Wal-Mart Fashion Merchandise Disaster: "I Told You So"

Today's Wall Street Journal 'officially' reported what I have suspected for some time- Wal-Mart's attempted move upmarket into fashion merchandise has failed.

As long ago as last fall, in a post here, I predicted this. I broadened my scope of analysis, but reiterated my view in a post here, last month.

The Journal article quotes one young shopper as not converting to the 'new' Wal-Mart, and shopping, instead, at Express, one of the Limited's chains. On a broader basis, the apparel segment had a banner month in September, measured by one analyst's index as being up 8.8%, while Wal-Mart's same-store sales only increased 1.3%.

Target, one of Wal-Mart's next-step-up competitors, had 6.7% more sales from same-stores last month. Clearly, something isn't working well at Wal-Mart, and the company is somewhat guardedly admitting this.

The article quotes Wal-Mart as saying that last month's clothing sales "failed to meet our expectations." Further on in the piece, it discusses how many store managers don't actually put the time or money into more upscale women's department's displays, and that "company merchandisers don't have much clout" to effect change out in the stores.

Perhaps the most damning evidence concerning Wal-Mart's failed move upmarket is this. In the WSJ piece, it quotes the founder of America's Research Group, a home polling research outfit, as saying, "I can't find any significant difference between a year ago, two years ago, and today among women." Further, he told them that the giant retailer "devoted a lot of energy to it, but it doesn't appear the consumer has had any positive response."

This doesn't surprise me at all. A company that built so strong a brand epitomizing low prices and cost cutting is hardly going to change its reputation in a matter of a few years to that of a high-fashion merchandiser. It just makes no sense, behaviorally, to expect Wal-Mart's old customers to want it, and it's new, target customer segments to believe or trust it. And, worse, to believe that the latter group will think other people will believe it when seeing Wal-Mart brands on them.

Let's see- in the past year, Wal-Mart has struck out on fashion merchandise upscaling, entering more urban target markets, reaching out to non-black minority communities, and burnishing its image regarding the treatment of its employees. On the plus side, however, it is threatening to wreck the retail pharmacy/drugstore sector.

However, I doubt that the latter success will offset the other gaffes. Guess it's back to the drawing board for Wal-Mart, to determine what will bring profitable growth and, ultimately, consistently superior total returns for its shareholders. Will Lee Scott weather the coming storm?

Remedial Sales & Marketing Management

Today's Wall Street Journal has an article in the "Theory & Practice" column of the Marketplace Section. Sadly, as I wrote about here back in December, the Journal seems to be dumbing down a fair number of its management pieces. Today's was no exception.

The big news in today's column is that sometimes, your sales people will attain their revenue quotas by selling to unprofitable customers. Stop the presses!

But, wait. It gets better. The column's author, Jaclyne Badal, cites extensively from Mercer Management Consulting, on its sales management assignments. Apparently, this rather basic sales and marketing management principle is news to quite a few of the firm's clients.

You'd think that, with today's modern cost accounting systems, and extensive IT support, there would be fairly pervasive customer P&L accounting at most large firms. It appears you, and I, would be wrong.

What I don't understand is how something that was a topic over twenty years ago, when I completed my business management degrees, today requires consultants to help company marketing and sales managers figure out which customers are profitable- or that it is even an important consideration.

No wonder why we see so few companies consistently earn superior total returns. If American business truly needs remedial marketing and sales management of this type to improve its profitability, where are all the well-educated, intelligent MBAs going? Aren't they supposed to know this sort of thing? Wouldn't the ones who graduated, say, a decade ago, be in positions to effect better customer profitability management by now?

Perhaps it demonstrates how little value the MBA actually seems to be contributing to business management. If simple issues like customer profitability require many companies to hire expensive management consultants, most of whose analysts graduated from the same schools as those of the companies' new management hires, how are they going to get the complicated things right? Like product/market segmentation, new product development, and channel management?

It seems like this WSJ column, Theory & Practice, documents that business is long on inept practices, but short on decent theory to underpin those practices.

Integrating Banking and Brokerage....Again: BofA's "New" Tactic

An old holy grail of banking since the 1980s has been to offer retail brokerage to customers, and magically attract all of the rest of their assets. Nevermind that retail brokerage is a rather cheap, transaction-oriented business. How that would entice customers to behave in the way that banks have wanted them to, for decades, is unclear. It's never worked before.

No doubt my old colleague and friend, consultant B, is reading this and smiling broadly.

However, now Banc of America is now allegedly offering 'free' brokerage. The Wall Street Journal ran an excellent piece analyzing this yesterday, demonstrating that the BofA offer is almost never going to be a good deal for anyone. The $25,000 in assets that must be kept with the bank is exclusive of any brokerage/investment assets. They must be commercial banking balances. The article does the math to illustrate how the necessary foregone earnings on the bank balances will, in almost all cases, outweigh the 'free' trading benefits.

Of course, it's ironic that BofA is doing this now, because pure retail brokerage is in decline. And every financial institution which has taken the brokerage route has failed in its objective to add significant value by cross-selling brokerage customers with bank services.

Consider this- if the cross-sell were working, then BofA wouldn't have had to offer 'free' brokerage, would they?

From the time I was with Chase, and we bought, then sold, discount retail broker Rose & Co., banks have bought and sold retail brokerages with distressing frequency. BofA itself first bought, then sold, Charles Schwab. Then bought Quick & Reilly. American Express, under Jim Robinson, bought IDS, and later, spun it off. Citibank just swapped its asset management operations to Legg Mason for the latter's retail brokerage operations.

But people just don't behave the way banks want them to behave. The customers who trade frequently are, in all probability, to lack the large asset bases that banks desire. The private bank-type customers with trust accounts and large investment accounts know better than to leave them in the hands of middling retail brokers owned by a commercial bank.

It's truly a Catch-22 for banks. Anyone who would want them for retail brokerage, they don't really want to serve. Anyone they really want to serve with asset management, doesn't want the bank's retail brokerage services.

Now you have Prince, Dimon, and Lewis at the helms of the country's three large, financial utilities...excuse me....commercial banks. And they continue to make the same mistakes with brokerage businesses as their predecessors of twenty years ago.

Will commercial bankers ever learn?

Motivational Speakers for Business

Today's Wall Street Journal featured an article in the first column on page one, concerning the newest trend in corporate motivational speakers- disabled people who survived personal trauma.

I won't go into details regarding the various people with physical or other handicaps who are making substantial amounts of money on the speaking circuit. And I don't wish to make light of their very real infirmities, disabilities, etc.

However, I'd like to focus on what the employment of these people by corporate leaders, for motivational purposes, implies.

To me, it's essentially saying to a company's workforce,

'Dear employees...we've dealt you a sorry corporate hand....live with it..no, wait, better yet, let's get someone in here with a personal tragedy which they had to overcome....now, maybe you will feel that the situation in which we pay you to be, is, in fact, your own personal life tragedy, and you'll move heaven and earth, for no more money, to make our corporate objectives feel like your own personal life struggles.'

If this were done to me, I'd be furious.

Coming from senior managment, it would further make me feel that they were, in effect, delivering this message, too,

'Never mind the options and terrific pay we, your senior management, receive as compensation. You should feel personally challenged to meet the unreasonable goals we've set for you with too-little support, mediocre strategies, and/or products and/or services with no competitive advantage. Never mind the promotion of politically-motivated colleagues above you, or the niggardly compensation increases we give you. Instead, please try to place yourself in the position of this person with a genuine, unavoidable personal handicap, learn from her or his life story, and then treat your employment situation with the same kind of gravity as this person handled her or his life.'

How cynical is that?

Hopefully, this is one of those trends, like "team building," which turn out to be just a passing fad. It seems to shift the focus for corporate performance from a realistic appraisal of a company's or business unit's situation, goals, resources, etc., to a campaign that simply instructs employees to forget all of that, and behave like the only thing that matters is personal motivation.

It reminds me of the real activities of the Soviet Army's NKVD squads in WWII. They would liberally dispense vodka to the infantry troops the night before a mass human wave attack upon German positions. Sober troops might think twice about attacking fortified lines with light infantry arms, but drunken troops could be motivated to make the ultimate sacrifice for the Motherland.

Unfortunately, corporate employment isn't combat, and it's also not a fight for one's homeland. Instead, using handicapped motivational speakers to inspire employees who have been, over the past decade, down-sized, right-sized, sigma-sixed, etc., and had their compensation squeezed as well, is misplacing the responsibility for corporate performance.

If a company is doing well, one would hope these tricks would be unnecessary. If it's doing poorly, should the CEO and his management team not analyze their strategic situation, competitive position, etc, before simply assuming the problem is insufficiently motivated shock troops?

Is it really necessary, as the WSJ piece mentions in one example, to 'inspire' internal finance managers by one handicapped person's personal story of overcoming adversity? How much adversity can there be in a finance function?

When I read this story, I was reminded of a comment made to me by my very first manager at AT&T, over twenty years ago,

"Sometimes I don't know whether to laugh or cry. But I laugh, because it hurts less than crying."

After reading this article, I found myself laughing, because it hurt less. And resolving to read Dilbert, which was motivated by this sort of corporate managerial nonsense, a lot more often.

EBay and China Again: More Troubling Signs

The Wall Street Journal's Money and Investing section carried a piece about EBay's recent troubles in China. That is to say, it was an 'investing' story, not a 'strategy' story. However, it reminded me of a similar story about Amazon in the WSJ in August, about which I wrote a piece, here.

EBay is now in trouble in both China and Korea. Although the EBay spokesman attempts to paint a rosy picture, in this case, I think one should trust the numbers, not the PR prouncements.

For instance, according to the Journal piece, EBay's market share in China is 29%, a distant second to market leader TaoBao, with 67%. And the former's listings growth has slowed from 300% year-to-year, to a much lower 127% in the recent period.

Here's EBay's spin on the Asian situation. Regarding China, they are “very happy” with business there and are “well positioned” to succeed there over a 5-10 years period. Their spokesman, Mr. Durzy, further says that their Chinese site “is comparable- if not better than- rivals’ sites, because eBay offers communications tools such as Skype and PayPal.” Quotes are of the WSJ article.

The reason for the piece is the 30% decline in EBay's stock price this year, and longer-term decline as well.

In this case, I'd go with the market share and market price numbers. EBay is clearly in trouble in both China and Korea, and the anemic growth in those markets has affected its total returns to shareholders.

As I discussed this piece today over lunch with my partner, he asked if I had reflected this in my recent piece on female CEOs. I had not, since I was focusing that post on Carol Bartz.

However, upon further reflection of EBay's performance since it went public, and this WSJ article, I am beginning to wonder if EBay's early total return performance was not almost pre-ordained, given the environment of that era. It was a new issue, in a hot product/market space. Could it really have taken all that much to simply maintain the early momentum when online auction sites were so new?

Well, we shall soon see. Because it looks like it's crunch time for Meg Whitman and her team now.

I used ebay. I’ve never used skype. I think ebay is probably in serious trouble, because what they offer, and think matters, does not matter to customers.

Female CEOs: The Unheralded Carol Bartz of Autodesk

Alan Murray of the Wall Street Journal wrote a fine article in today's edition, discussing the behaviors of HP's two most recent, most senior female officers, Carly Fiorina and Patty Dunn.

His point is that both women did their gender a disservice by ducking for cover and choosing to be victims in their individual stories of strife and loss at the computer and printer manufacturing company.

Mr. Murray is, I think, entirely correct in noting that both women protest that nothing was their fault, and that they bore no responsibility for anything that happened to them. And HP certainly has suffered for their actions, inactions, and failures while they were affiliated with it.

What I don't understand is why more attention isn't showered on at least two more successful and stable female CEOs: Meg Whitman of eBay, and Carol Bartz of Autodesk.

The chart at the top of this piece displays the stock price performances of four companies that have been led by women for at least several years. Jill Barad was CEO at Mattel during 1997-2000. Meg Whitman has headed eBay since 1998, while Carly Fiorina was CEO of HP during the period 1999-2005. Carol Bartz has been CEO of Autodesk since 1992, only stepping down from active leadership of the firm earlier this year.

While Barad and Fiorina destroyed value at their companies during their tenure, Whitman and Bartz have had longer tenures and presided over significant wealth creation for their shareholders. Although Whitman's eBay has slumped recently, it still has an enviable record during her tenure, roughly equaling that of Autodesk for the period in which eBay has been public.

In my opinion, however, Carol Bartz is the class of the class. She has created value consistently at Autodesk for 14 years, with the exception of some rough years in the late '90s. Even then, however, the company tended to tread water, and not lose substantial value for long time periods.

I think it does seem unfair that Bartz is not accorded the type of press that GE's Jack Welch received for his long-term performance. Blogger is not cooperating with the uploading of a price chart comparing GE and Autodesk over many years, but suffice to say, Bartz looks as good as Welch, when the two companies' performances are compared for the years in which they both were CEOs of their respective companies.

If Bartz is being ignored because of her gender, then that's even more bad news to add to Alan Murray's contentions. Not only do poorly performing female CEOs, like Jill Barad, get spotlighted, but the rare excellent performers, like Bartz, are conveniently forgotten.

Personally, I believe that good leaders of either gender are more like each other, than they are like non-leaders of their own gender. Bartz is a great CEO who happens to be a woman, not vice versa. In this case, I'd like to learn more about how Bartz ran Autodesk so well in a tough, single market business. Welch had the luxury of multiple businesses driving GE. I think we all lose a lot when successful CEOs like Carol Bartz go unstudied and unrecognized.

YouTube & Google

Well, it's official. Does any business pundit, media personality, or publication not have an opinion on this recent tie-up?

Probably not. So here's mine.

I think the most unique value I can add to assess Google's purchase, for $1.65B of stock, of YouTube, is to suggest that the value to Google of YouTube is a binary proposition. Either the online ad business is stable and continuing to grow, does not collapse as Net Bubble II, and YouTube is a smart move, or, we are living amidst the second internet bubble, it will "pop," and Google's purchase of a profitless online company with virtually no proprietary content, will look silly.

I doubt the result will be anything in between.

The CNBC pundits, and their guests, pretty much shake out into the two camps you'd expect.

On one hand, you have those who (correctly, I believe) see this as Google paying $1.65B to deny Microsoft, Amazon, Yahoo, News Corp, TimeWarner, Comcast, et.al., the hottest, largest video content destination in the online world at present.

Given Google's current $130B market capitalization, YouTube cost barely over 1% of their value. And latter's stock rose $4 yesterday, on the acquisition news, or roughly $1.2B. Yes, if you're waggish, you can say, "look, the damn thing almost paid for itself in one day!"

But, seriously, if we are all drinking the Kool-Aid, this deal made sense. It is Google's wise use of its almost untouchable market value to pay up for a unique online asset, and also deny it to any potential competitor. Very shrewd. Very aggressive, using one of their unique advantages, the ability to fund large acquisitions, and outspend, outmaneuver, any would-be challengers to Google's ability to blanket everything online with ads.

In a way, it meshes with my thoughts about Google from last year, as well as earlier this summer, found here. Basically, Google's leaders know they can no longer re-Google their own firm. They are simply already to large. But they do own market value. And they have made so much money, that they can literally afford to begin to spread that largesse around, forward, to new challengers who might unravel Google's carefully-sewn blanketing of the online market for ads and searches. By not being too greedy, and seeing their incredible market cap as a piggy bank sort of found in the brush, to be shared with deserving other innovators, Google may well extend and expand its market dominance for some time to come.

On the other hand, many analysts note that YouTube has no profits. It is a total hedge purchase by Google, and will never justify its price.

As I noted up in the early paragraphs of this post, I think it's an either/or sort of situation. Either Google, in general, is valuable, and, thus, by extension, so is YouTube. Or it's a blip, another AOL, and when it dissolves in one, huge online bubble-burst, YouTube will look like a foolish move.

By the way, in that regard, consider this, if you will. YouTube has fewer than 70 employees. Suppose the two founders only keep half of the $1.65B in stock, and give the rest, net of Sequoia Capital's 30%, to their employees. With $825MM left, Google's value could plummet by 99%, and the founders would still enjoy a payoff of $8.25MM, or over $4MM apiece. Is that so bad for a year's hard work and a little imagination?

However, back to the pessimistic view. Back in the late '90s, when clicks were supposed to replace bricks (and mortar), the items in question were physical goods. Online pet stores, etc, could not, in the end, sustain sufficient sales volumes to justify their market values.

Now, however, the material in question is entertainment. Digital entertainment, to be specific. It's all over the place, so finding one place where millions of people concentrate to find and view the digital video entertainment is extremely valuable.

Nevermind CNBC's Bob Griffith's inane question, something like 'couldn't I start a video website with $1.65B?' Sure he could, and so could I, and so could you.

But it wouldn't be YouTube, now, would it? It might look the same, but if people don't put up their video content, you're just not "there."

True, YouTube owns virtually none of the content it hosts. Now...wait a minute...let me think.... That reminds me of....eBay! They don't own the merchandise they intermediate, either, do they? Their best days might be over, but they, too, had a good run at the top, when online auction was a fresh business model.

I think the bottom line this time is that the acquisition of YouTube by Google, in the competitive context of today's online digital content business, is a cheap defensive tactic, and perhaps a profitable offensive strategy, as well. Old media is going to have to continue to use new media as its distribution channel onto the internet. They just don't have the mindset to invent or grow their own YouTube, Bob Griffith's opinion notwithstanding.

GM & Nissan's Failed Alliance Talks: Wagoner Wins Round 1

This weekend saw the further development of two major business news stories. One culminated this afternoon, but the other will probably run for months, if not years.

On Friday, Jerry York, Kirk Kerkorian's agent on the GM board, announced his resignation from said position. Round one has clearly gone to Wagoner, but I suspect, in the end, that it will be a pyrrhic victory.

Now that York has left GM's board, Kerkorian has withdrawn his offer/plan to raise his stake in the company. Upon learning that, investors sent GM's shares down sharply Friday afternoon.

At this point, many are speculating on Kerkorian's next moves, and the timing thereof. CNBC's official "car guy," Phil Lebeau, preaches that Kerkorian will now sit back and wait, as he and York did with Chrysler.

However, that was then. "Now" is different. I don't think so much of the American auto sector was in such dire straits back then, as it is now. Ford, and even GM, probably don't have as much time as Chrysler did, with guaranteed funding, to regain their health and competitive strength.

My own guess is that Kerkorian, who, in my memory, has not lost money on a major investment since at least 1979, will move to take over the GM board in the spring, and then move quickly. Personally, I think he and York plan to emulate the late, great, J.P. Morgan, and single-handedly restructure the remaining US auto makers into one firm, allied with Nissan/Renault.

One thing Kerkorian and York are not is sentimental. They realize that, regardless of the brand names, Ford and GM essentially still, for a little while longer, have some residual market share and loyalty on which to build. This needs to be cut loose from moronic, myopic management, and inefficient production modes, in order to be served by the better management of Nissan. I think the two takeover veterans have more than just GM in their sights. After they unseat Wagoner, they can approach Ford, regardless of whether it has joined up with Ghosn and Nissan.

I would not bet on this, yet, per se. But neither would I be at all surprised. Ford clearly has to have a partner now. Kerkorian wants Ghosn to manage GM's assets. If all three, or four, with Renault, can play, so much the better. Kerkorian and York understand that scale and depth of talent will be needed to prosper, let alone survive, competing with Toyota in the years ahead.

Friday's events did not surprise me. It just demonstrates how insecure and small-minded Rick Wagoner really is. And how dismissive he is of, and insensitive to, the needs and obligations of his shareholders. These days, that is probably a terminal mistake for a CEO to make, especially on the scale Wagoner has made it.

Patricia Dunn's "In"credible Testimony

Here's the YouTube video clip of a part of HP's former Chairwoman, Patty Dunn's, testimony before Congress a few weeks ago.

I love how incredulous Greg Walden, the Rep. from Oregon, is, when Dunn asserts that she thought anyone can just call up the local phone company, request, and receive, anybody else's detailed message unit call information.

It is truly hard to believe that someone who could qualify as the Chairwoman of a major US company would be this gullible or naive.

The Wall Street Journal ran a piece yesterday discussing how Dunn's testimony has already "boxed her in," regarding her recent felony indictment over this case, in California. With this video available, what judge or jury is going to believe Dunn wasn't either lying under Congressional oath, or is lying in court if she testifies and reaffirms her belief about the availability of such private, detailed phone records?

Let's not even get into what happens if she changes her sworn testimony in subsequent legal proceedings.

It's just a very sad commentary on the caliber of senior leadership in large US companies, that Patty Dunn is either without scruples, and lying to cover up her knowledge of the use of questionable tactics by HP to find the board-level leaks, or she is truly so naive as to think your and my detailed phone records can be had for the price of a local call to our landline phone service provider.

Apple's iPod & iTunes Overhauls: Schumpeter Would Be Proud

Walt Mossberg of the Wall Street Journal reviewed the new lineup of Apple's iProducts and Services in Wednesday's edition of the paper. He notes that, with the advent of Microsoft's Zune, and RealNetwork's Rhapsody, Apple has completely overhauled it's offerings.

Even if I did not own Apple's stock in my strategy's portfolio, I would appreciate the company's very aggressive product/market management.

Given the quickly-shifting sands of competition in this arena, Joseph Schumpeter would be very proud to see how Apple has rapidly cannibalized its own product line, in order to meet new competitive threats.

For instance, they have redesigned the low-end Shuffle, and pared the number of now mid-range offerings of the original iPod, and eliminated the iPod Mini altogether. Through a combination of pricing and product repositioning, the company has made room for new, higher-functionality entries in its iPod line.

It has also upgraded iTunes, the online entertainment content management system which is the companion to its iPod line, in time for the entry of the two new competitors' products.

The vagaries of consumer tastes may result in the loss of significant market share for Apple's products. Or it may result in the firm's continued dominance of the product/market. Either way, Apple won't lose share and growth because it stood still, became complacent, or milked the business.

It's a pleasure to see a leading company, like Apple, do such an admirable job in a key business, such as digital entertainment content, of moving ahead to change the competitive environment while it still can significantly effect that environment, rather than rest, and let new competitors control the terms on which competition will play out over the next few years.

New Pension Liability Effects: Bracing for Negative Shareholders Equity

In a story with potentially large effects on the financial services sector, the FASB recently ruled to require the charging of pension obligations directly to equity. This is, according to observers of the situation, going to result in some major companies having negative equity.

To read more about the changes, you can go here. To quote from that site's article,

"That means huge liabilities could suddenly drop like a bomb onto balance sheets, putting any deficits squarely in the public view and possibly throwing some lending agreements into question because it may lead to sharp drops in corporate net worth.

Figuring out if any maneuvering is going on won't be an easy task. Investors will have to closely watch companies' assumptions for such things as health care and wage inflation that are used to determine the costs of defined benefit plans, which promise retirees a monthly check and often medical coverage.

For years, companies have gotten off easy by agreeing to such benefits without having to immediately set aside ample assets to cover them. Standard & Poor's estimates that the companies in its benchmark index offering such benefits held assets worth only $1.409 trillion in 2005 to cover $1.870 trillion in pension and other retiree-benefit obligations, resulting in a record deficit of $461 billion."

A Reuters article further noted,

"Investors may see some of the biggest changes in the balance sheets of companies like General Motors Corp., Ford Motor Co., Goodyear Tire & Rubber Co. and Exxon Mobil Corp., which maintain some of the largest U.S. pension and other post-retirement benefit plans.
Automakers, airlines, steelmakers and other manufacturing companies are likely to face the biggest obligations because of histories with unions and legacy costs, according to accounting analysts at Bear Stearns."

Let me note that all of this harks back to one of my earliest posts, from last September, about the long-lasting effects of the mutually-flawed bargains struck beginning 50+ years ago between American corporate and labor union leaders.

If the companies in question see their stock prices change materially from this FASB decision, then it suggests that the analyst corps was never doing an adequate job of understanding the true financial positions of these companies. If, on the other hand, the stock prices do not change materially, then it suggests that the existing measures weren't really all that useful to begin with, because they were in error, yet still in cited.

Analysts can't have it both ways, can they?

Late last week on CNBC, in an interview with an equity analyst, the first effect mentioned was that of screwing up traditional stock evaluation measures.

My own early work on valuation taught me about the inadequacy of measures such as Price/Earnings and Market/Book ratios, and other point-in-time balance sheet or income statement measures.

Now, it appears that those measures will have a permanently disjointed history that cannot be smoothed or calculated away. Furthermore, their future behaviors may now result in calculation-inhibiting values. This was always the case with using earnings, which can dip below zero, making growth calculations effectively insoluble. Now, even some balance sheet staples like basic Shareholder Equity will be unusable.

This is why I use simpler scalers with a time dimension in my analysis of companies' performances. Specifically, revenue growth and total return. No ratios.

I learned years ago, grappling with the more conventional ratios and snapshot measures, that they are subject to incomprehensible results, and, sometimes, literally incalculable ones.

By focusing on the quantitative expressions of a company's ability to consistently acquire and retain customers, at appropriate prices for the products and services they sell, i.e., revenue growth, and matching these values with investors' judgments on the adequacy of the resulting financial results, i.e., consistently superior total returns, my methods free me from the risk of accounting distortions.

Rick Santelli of CNBC Gets Even Smarter: The Impact of Derivatives On Spreads

This morning, as I was reading the Wall Street Journal and watching CNBC's Squawkbox, Rick Santelli was debating the recent confusion in the debt markets regarding inflation, interest rates, and economic growth.

Joining the debate were Joe Kernan, Steve Leisman, the show's under-educated 'senior economic reporter,' and a guest host.

Kernan is always a level-headed, sensible, and smart commentator. Leisman is typically self-impressed, and blind to his own lack of basic economic education.

Santelli, the network's Chicago-based reporter from the options pits at the CBOT, is among the most intelligent, informed, educated, and plain-spoken bond market reporters that I have ever seen on television. Bar none.

This morning, Rick gave the most lucid example I've ever heard of how the existence of credit derivatives affects, and has permanently affected, bond market spreads. He explained how, when one can buy protection for the drop in value of a bond, it necessarily puts upward pressure on the price, because the lowest value it can now attain is much higher than it otherwise would be.

He then went on to note that many people have missed this important development in the bond markets. And that even Fed officials might be misinterpreting the meaning of the now-closer spread relationships, versus their historic wider margins.

Leisman asked, to paraphrase,

"can it now be that, and I don't really understand this, that the bond markets are existing on one plane, setting rates, and the Fed is on another plane, or level, with its rate setting views?"

Santelli responded that, yes, the two might not agree contemporaneously, but in time, would gravitate to the bond market's view. Kernan laughed, and Leisman sort of looked puzzled, which was to be expected. But Santelli clearly meant that, over time, the closer spreads for yields between various debt instruments are here to stay, and the Fed will have to adjust to this. The money markets will overwhelm the Fed's interest rate manipulations every time, until the Fed takes the market's judgments into account.

What really impressed me is Santelli's matter-of-fact command of bond market reality, and its impact on economic theories that others believe are governing that reality.

He is one CNBC correspondent who I could watch all day, and probably never feel I'd learned everything I could by listening to him.

Monday on CNBC: The Conflicted Trader

I saw interviews with two 'traders' on CNBC Monday morning which yielded diametrically opposite views

First, Art Cashen, the florid-looking mossback from UBS, said that interest rates and Bernanke govern the market now. Period. Nothing else mattered.

Then a trader for another large broker was similarly questioned. He waffled on every question, giving no solid opinions whatsoever, except to say 'it all comes down to earnings'

So, there you have it. It's all about interest rates. Well, except when it's all about earnings.

Gee- thanks guys. I didn't think about either of these.

Once again, this anecdote of the conflicted floor traders shows how inane talking to brokers is. For the most part, they trade for clients- insitutional managers, other houses, and large private accounts. For the most part, all the brokers really 'know' is instantaneous order behavior.

Of course, they like to personify the 'market' because it adds presumed value and glamor to a business going totally electronic. Seriously, how can "the market" really know or care about the level of a single composit index, and truly behave differently as that level's old, nominally-valued maximum is exceeded?

One thing the piece did demonstrate- it takes different views to make a market, and even interviewing only two brokers already did that.

Professional Fund Manager's Erratic Behaviors

Saturday's Wall Street Journal featured an article about a Lehman fund manager, Jon Brorson, fretting over the recently monthly performances of the market indices, his fund, and what can be gleaned of US economic activity.

The article states, in part,

"Mr. Brorson's worries served him in May. Then, he shifted toward "defensive" companies whose sales tend to hold up in all kinds of economies, such as drug makers, food producers and electric utilities. His May move was gutsy -- and right. The Dow got to within 81 points of its record and then fell 8% into July.....Now, as it rises, he's fighting the trend again. .... His travails over the past two months show just how hard it is even for dedicated pros to call the turns. It's especially hard at times like these when investors are debating whether a shifting economy will change stocks' direction."

I see in this echoes of 'the broad market has it wrong' attitude, as he holds and waits. In fact, I can identify with the sentiment.

However, I also note how Brorson makes snap calls on fuzzy, unclear economic information. In effect, betting on the come. Then people judge his guess for the month.

If this is really the stock in trade of the average fund manager, I wonder how any of them develop consistent track records.

Wait! They don't, for the most part! The number of public fund managers who consistently beat the S&P is incredibly small. Forget doing it every year- even most years, it's unattainable on a consistent basis. Maybe this monthly micro-managing suggests why that is the case?

I would imagine that the kind of guesswork, based upon shifting, often wrong economic insights and confusing data, cannot be sustained for more than, say, a year. That is, if it is just a string of lucky guesses.

For instance, recently, many investors seemed to be worried that softening home prices will drag the economy into recession. However, just a few days ago, the Wall Street Journal carried an article by one of its reporters, Greg Ip, which noted the following,

"The overwhelming majority of mortgage debt and home-equity loans are held by Americans in the upper half of the income range. Households in the top 10% of income hold 42% of the value of home-equity lines of credit."

Thus, much of the risk of real-estate-related bad debt is overstated. This is the type of economic information that seems to go unnoticed or misinterpreted.

It's one of the reasons I don't buy and sell portfolio positions every month. Even supposedly firm economic data can mislead, e.g., the infamous, but nonexistent, spring 2005 "softening." Now, it is the 'recession,' or imminent 'soft landing,' in the face of continued economic data suggesting continued healthy growth.

Jon Brorson's concerns are ones I share. But I just don't see how changing one's strategy and spontaneously attempting to take advantage of a short-term economic will o'the wisp can lead to consistently superior total return performance over the long term.

The Rush By "Old Media" To Offer Online Video

Recently, I wrote, here, about Apple's iTV announcement, and its probably effect on cable TV providers going forward. Subsequently, I wrote about the recent Goldman Sachs media conference, here, discussing the rush of existing content library owners to dump....er......make deals for the distribution of their libraries to any and all digital channels while they still have value.

Then, last week, the Wall Street Journal ran an article in the back pages of the second section discussing the rush by all sorts of companies to offer online digital video now. The piece was entitled, "As Internet TV Gains Popularity, Cable Firms Bulk Up Offerings."

A nice idea, but a little late, as indicated by this line in the article,

"Video Web sites now draw users in numbers that rival those of cable or satellite companies. YouTube, the country's No. 1 online-video site, had more than 34 million unique visitors in August, according to Nielsen/NetRatings. MySpace was second with 17.9 million unique visitors. In comparison, Comcast, the country's largest cable company, has 24 million subscribers, and DirectTV, the largest satellite-TV provider that is owned by News Corp., has 15.5 million U.S. subscribers."

So the hi-speed access that came along with cable-TV has now grown to undercut the latter by allowing free, independent production and distribution of video content which is growing to rival the paid content on the original cable pay-TV systems.

If this situation doesn't demonstrate Schumpeter's visions of creative destruction at the extreme, where a firm's own success creates the undercurrent that hollows out its competitive position's strength, what does?

In this case, though, I think cable companies are myopic. Consider this closing quote from the WSJ article. The source of the quote, Steve Burke, CEO of Comcast, said, in reference to his own idea of

"creating an extensive viewing guide that would aggregate Comcast's TV schedule with online clips and video-on-demand options, giving people a mega portal for one-stop viewing shopping,"

"We're not alone in our aspiration to be that one place."

Now, I think that's the problem with old media's viewpoint.

There is, in my opinion, no "one place."

YouTube is 'one place,' alright, but hardly the "one place." It may not even be king of the hill in another year. That, of course, is the risk a potential acquirer will have to take.

The essential concept of internet-based, free video content sites almost guarantees no single site will be "the" site. Wherever a critical mass of video content may be gathered and offered, a viable site may be created. The company that has really missed the boat on this is, of course, Amazon.

Amazon, with its broad array of storefronts for independent book sellers/shippers, could easily have offered the same type of home to indie video producers, becoming the internet's video 'general store.'

Not anymore. That opportunity is gone, and, with it, Amazon's ability to capture anything beyond "me too" traffic and revenues.

It's simply incomprehensible to me how, having seen the future, a la YouTube, the CEO of Comcast still doesn't "get it," and is throwing money at an attempt to create, much further down the road, an omnibus, ostensibly partially-paid video site, to challenge a free one. Between Comcast and TimeWarner, one wonders if any old media companies will be worth more than a fraction of their current market values in a few year's time.

Kerkorian's Bold GM Gambit

You can't say Kirk Kerkorian isn't a bold poker player.

Friday's Wall Street Journal details his bid to buy an additional six million shares of GM, and plans to perhaps buy another six million. These stakes, if purchased, according to the Journal article, would make Kerkorian the second-largest GM shareholder, with a 12% position.

Although it looked like a losing position this summer, Kerkorian's original investment has now gained about 14%, thanks to GM's recent stock price rebound, on the basis of cutting deals with its unions over buyouts and layoffs.

The Journal piece characterizes the GM situation as becoming a sort of show down between CEO Rick Wagoner, who wants to slowly rebuild the company, if there's time, and Kerkorian, who wants a much faster, thorough restructuring, including a three-way alliance between GM, Renault and Nissan.

My recent thoughts on the GM situation can be found here. Suffice to say, I don't think GM is a viable performer, in terms of consistently superior total returns, without some sort of outside help or alliance.

Kerkorian is certainly playing a bold game, though. He could take his winnings off the table at this point, and have outperformed the S&P for the period. However, he chose instead to double-up, indicating he's after a much bigger gain, and prepared to invest the time and effort to secure it.

By moving to take a larger position, the betting is that, in the language of his SEC filing, "there should be strong GM board involvement" in assessing potential alliances. Meaning Kerkorian wants to outmaneuver Wagoner's internal attempts to scuttle the alliance, and get it approved by the board, out of Wagoner's direct reach and control.

It's hard to guess what the outcome will be in this case. There are so many options for Kerkorian, and the rest of the GM board. However, I don't recall Kerkorian leaving a situation like this with a loss. If he's prepared to add to his GM stake, then he must feel very confident that he can force the alliance, and reap the gains he expects from a resultant higher GM stock price.

In a sense, he can't lose, in the long term. If Wagoner's alleged "turnaround" really is more than short-term cost cutting, then the shares will rise, and Kerkorian makes more money. If Wagoner is wrong, Kerkorian, as the second-largest shareholder, through his employee, Jerry York, can probably force Wagoner's departure, and proceed with an alliance for GM. The only question at that point is whether or not Ghosn's Nissan is still open to the alliance, or has already tied up with Ford.

Could it be that Ghosn, watching from outside, could now hold off from a Ford alliance, and simply wait Wagoner out, knowing that Kerkorian will eagerly come calling, with less onerous terms than Wagoner has demanded?

It continues to be a phenomenonally interesting end-game for GM and Kerkorian, as the time to demonstrate a believable, lasting reversal of GM's fortunes grows shorter.