You can say a lot of things about Madonna, but you cannot call her an inept businesswoman.
As Michael Wolfe, of Vanity Fair, opined on CNBC this morning, the one-time Material Girl has made a beautiful timing move, playing off two entertainment distributors and hedging her risk for the next, probably last decade of her career.
In an industry in which music album sales are declining swiftly, Madonna has forsaken a conventional distributor, Warner Music, to sign with Live Nation, a concert promoter, for $120MM.
The singer's advance is $17.5MM for the 10 year pact, which weighs in at a nice million dollar-plus annual compensation. Madonna then receives 90% of concert admission, 50% of licensing revenues, and 70% of merchandising revenues.
In some ways, this deal reminds me of Howard Stern's contract with Sirius. The talent ends up taking more risk then the distributor, because a failure of the latter to perform leaves the former short of promised revenues and having nobody to make good on the contract.
Nobody seems to think Warner is making a mistake letting Live Nation take this deal. Madonna is, at best, a matured entertainer. Never exactly a signature voice to begin with, she's extended her career with ever more risque acts in which to position her rather uninteresting voice and commonplace songs.
Whether she will pay off for the concert promoter is anybody's guess, but Madonna certainly seems to have paid off for Madonna.
No matter how quickly recorded music continues to fade as a revenue source, she's locked in a rich price for Live Nation's right to present her artistic efforts for the next ten years.
If only the CEOs at some of our larger companies, like GM, GE and Ford, had the Midas touch that Madonna has.
Some things just aren't taught in school, are they? Or, evidently, by Jack Welch.
Friday, October 12, 2007
Thursday, October 11, 2007
Auto Makers, The UAW & CAFE
Holman Jenkins wrote a superb editorial in yesterday's Wall Street Journal on this topic.
In his piece, Jenkins points out the forgotten burden still bedeviling Detroit's auto makers- government-mandated CAFE standards.
Much as I argued in my post yesterday, here, that government works best when it simply sets minimal standards and allows people to create value, I feel, like Jenkins, that the CAFE concept is an abomination which violates this idea.
In an ideal world, people would be free to choose whatever mix of automobile features they wished, including the vehicle's gas mileage. Each person's individual weighting of this feature would be their own.
Not so in our real world. In our world, do-gooding legislators have decided what the range of fuel economies will be among vehicles you will be allowed to purchase.
As Jenkins so elegantly puts it,
"One analyst shop, Global Insight Inc., reckons that under a realistic CAFE scenario, by 2020 one-third of the new car fleet would have to be diesel-powered and half would have to consist of diesel- or gasoline-electric hybrids. This implies massive investments on which the auto makers would not earn a decent return. Why not? Because consumers do not value these improvements highly enough to pay the price for delivering them.
How do we know? Because car makers would be delivering the prescribed mileage improvements already if there were profits in it. Cars that get 50 mpg-plus are a snap, going back to the 1954 Nash Metropolitan and 1990 Geo Metro XFi. But consumers have shown over and over that they value energy-efficiency gains (which auto makers have duly delivered) not to maximize miles per gallon in absolute terms, but to afford heavier, roomier, more comfortable cars, with more horsepower, at any given gasoline price."
See the point? If you just leave the manufacturers to figure out what makes money, they'll supply fuel economy when it pays. And not, when it doesn't.
As it is, Jenkins writes elsewhere in his column,
"Detroit is making genuine headway on one of its perverse burdens -- wage contracts that turned labor into a "fixed cost," requiring the Big Three for decades to churn out cars at a loss to meet "job security" commitments. But the other stanchion of perversity -- CAFE, which has exactly the same effect -- remains in place and will likely become more perverse.
Ford's new CEO Alan Mulally, recently arrived from Boeing, described for Barron's his astonishment upon discovering this reality: "For all you read about it, it was difficult to understand the degree to which the CAFE regulations distort the market . . . Ford had to put out two small cars and discount their prices to get people to take them, so that we could also make and sell cars customers really wanted."
Can it be any clearer than that?
And, while you can blame auto executives stretching back to the 1950s for making boneheaded choices regarding non-cash benefit promises to union employees, CAFE is not their direct fault.
No, this is something created by the gang that's now trying to criminalize buying incandescent lightbulbs.So, as the nearby, Yahoo-sourced chart indicates, the remaining two publicly-held US auto makers, GM and Ford, have been declining or stuck in neutral since the end of 2003.
Or, in Holman Jenkins' words,
"If the restructuring of Detroit's costs now underway is so epoch-making, why haven't the stock prices of the two remaining publicly traded auto makers noticed?
Maybe because investors recognize the elephant in the room, one whose presence has been a central preoccupation of the UAW and the auto makers, even if ignored in media reports. That pachyderm is known as CAFE, aka the government's Corporate Average Fuel Economy rulebook. How could pending congressional changes in the mileage rules blow sky-high the labor concessions being negotiated by the Big Three? Let us count the ways."
To which I would add Detroit's continuing demonstration of inept basic design and marketing of vehicles. Put it all together, and it spells continued dark days for anyone foolish enough to be the last person stuck holding Ford or GM equity.
I'm gratified that someone else, notably Mr. Jenkins, has identified some of the other reasons why, the recent UAW pacts at GM and Chrysler notwithstanding, American auto makers are still in deep trouble for the long term.
Wednesday, October 10, 2007
Honda, The UAW & The Republican Presidential Candidates' Economic Debate
Today's Wall Street Journal features a page one article discussing the clash between Honda and the UAW over the former's hiring practices at its new plant in Greensburg, Indiana.
Having just watched the Republican Presidential candidates' economic "debate," and I use the term very loosely, on CNBC yesterday afternoon, I couldn't help but frame my reactions to the article in light of that candidate debate. I'll be writing a related post over on my 'Conservative Insights' blog, found on my link list on the right, later today. Be sure to check there for more on this topic.
The central issue in the Honda case is that the state of Indiana, when it extended certain tax preference to Honda for locating its new plant there, did not choose to stipulate that hiring must be open to all state residents. Therefore, Honda chose to limit its employment offers to current residents within an hour's drive of the new plant site.
You can read the article to learn the particulars. Basically, the UAW feels that Honda is unfairly limiting employment to a largely white, rural area which will tend toward a non-union shop.
Honda alleges that they want employees living close to the factory, so that weather is not a factor in having workers show up for their jobs in the winter. It's simply coincidental, Honda says, that this limits employees to largely non-UAW applicants.
Predictably, there is a hue and cry, as one Indiana town, Anderson, recently lost the last of three GM factories, idling 1,500 people. All of whom are ineligible for the Honda employment offer.
If you need to see a clear example of capitalism, governmental support, investment and employment opportunities which showcases the existing divide between Democrats and quasi-socialists, versus Republicans and conservatives, regarding economics, this is one.
For whatever reason, the Governor of Indiana, a Republican, chose to extend to Honda conditions of tax preferences devoid of conditions requiring statewide worker applications. It doesn't take a genius to figure out that the Governor, Mitch Daniels, calculated what he'd have to offer, on behalf of his state, to get the Honda jobs, payroll and business tax revenues. To beat out Ohio, he must have realized he had to allow Honda to avoid paying UAW-mandated wages.
Fair enough. If Indianans don't like this, they'll toss Daniels out at the next election.
Meanwhile, Honda is bringing 2,000 jobs to Indiana. Nobody is holding a gun to the applicants to force them to work at Honda. In just three weeks, Honda closed applications for the plant, having sufficient workers available for their needs.
Sounds like an economic success story, doesn't it? It does, and it is, if you accept individual responsibility and the historic economically-driven mobility of the US population.
And yesterday, Senator Fred Thompson noted this, when, in response to a question, replied that nobody guarantees Americans that they will have their job, in perpetuity, in their current location.
I think this, frankly, is the central economic issue of the day.
Government does not plan the economy. We don't, by and large, run a socialist or fascist economic system in America.
Instead, the idea is that government sets certain conditions of law, safety, taxation, etc., then lets individuals, either solely or collectively, decide how to operate within those parameters to pursue their dreams and achieve economic prosperity.
This has resulted in several characteristic American trends. For one, our being a nation of immigrants. The ultimate 'mobility' is to leave your country to enter America, destination probably little-known, in order to simply participate in its prosperity. Having crossed oceans to arrive here, it's unlikely this population pool will really care to which state they must move to realize their economic dreams.
Second, even within the country, as far back as the 1700s, we've been a nation of economic pioneers. Being born in Illinois, I am familiar with the migration of farmers from the played-out fields of New England to the Midwest, and beyond. For decades, people simply moved west when the local conditions left them economically disappointed.
This is, quite simply, our heritage. Nobody guaranteed the early Dakota farmers unemployment insurance, social security, or health insurance. They'd have laughed at the very idea!
Instead, they were more than willing to measure and take their risks, in exchange for homesteading, in order to work and acquire their land.
Where did we suddenly get the idea that being an American entitles you to remain in situ, and simply have an adequate job delivered to you?
This is where the other side of the economic issue is found. Democrats, or liberal Republicans, like, sadly, Mitt Romney, some of the time, will be found here.
Romney, in response to the employment/recession question in yesterday's debate, right after Thompson, said something like,
'We can't let Michigan be in a one-state recession. This is personal for me. We've all got to get together and work to come up with a solution for this state.'
No, Mitt, actually, we don't.
That would be the job of the Governor of Michigan, and her tax-raising colleagues in the state legislature. Unfortunately for the citizens of the state of Michigan, they've unwisely concentrated their industry in the automotive sector, allowed the UAW to price their workers too expensively, and ignored the inept management of the three large auto makers located in Detroit.
Together, these trends have resulted in an economically troubled state.
Oh, well. Luckily, for Michiganders, there's a little economic zone known as the United States of America, of which they are a part. Forty-nine other states are available, sans passport or governmental permission, to which residents of Michigan are free to move to find better economic prospects.
See the parallel with our economic history? And Indiana's competitive economic attitude?
The only problem with Michigan right now is that too few of it's citizens take individual responsibility for their own economic welfare. They sit on their asses, waiting for a union, a large employer, or 'the state' to take care of them.
To listen to the Democrats, you'd think that we are in a recession, and all need governmental planning to rescue us. Two CNBC-chosen questioners at yesterday's debate, Bartiromo and Matthews, who are pretty much already self-identified liberals, kept pressing the candidates to admit that the US is, or shortly will be, in a recession.
But we're not. Thompson didn't take the bait. Instead, he noted that our government fosters opportunity, but it doesn't guarantee employment.
You need look no further than Indiana, per the Journal piece, to see that there are ways to foster growth, even in the Midwest, at auto plants.
Of course, the jobs may not be UAW-sanctioned. So what?
In a topic discussed at the end of the debate yesterday, unions were described by the candidates as being,
'some good, and some bad.'
Just so. Nobody wanted to name any 'bad' unions, for obvious reasons of vote-getting and fund-raising. However, again, it doesn't take a genius to note the shrinkage in working UAW membership over the past decade, and realize they have ineptly managed their members' situations.
Is Indiana doing something bad to foster non-union employment at Honda in Greensburg? Evidently, not according to the Governor.
Until our politicians become humbler, and return to the roots of America's economic success and vitality, which is based on mobility, we are probably cursed with a continuation of this needless hand-wringing about union jobs in states like Michigan and Indiana, rather than the celebration of new jobs in Indiana.
Having just watched the Republican Presidential candidates' economic "debate," and I use the term very loosely, on CNBC yesterday afternoon, I couldn't help but frame my reactions to the article in light of that candidate debate. I'll be writing a related post over on my 'Conservative Insights' blog, found on my link list on the right, later today. Be sure to check there for more on this topic.
The central issue in the Honda case is that the state of Indiana, when it extended certain tax preference to Honda for locating its new plant there, did not choose to stipulate that hiring must be open to all state residents. Therefore, Honda chose to limit its employment offers to current residents within an hour's drive of the new plant site.
You can read the article to learn the particulars. Basically, the UAW feels that Honda is unfairly limiting employment to a largely white, rural area which will tend toward a non-union shop.
Honda alleges that they want employees living close to the factory, so that weather is not a factor in having workers show up for their jobs in the winter. It's simply coincidental, Honda says, that this limits employees to largely non-UAW applicants.
Predictably, there is a hue and cry, as one Indiana town, Anderson, recently lost the last of three GM factories, idling 1,500 people. All of whom are ineligible for the Honda employment offer.
If you need to see a clear example of capitalism, governmental support, investment and employment opportunities which showcases the existing divide between Democrats and quasi-socialists, versus Republicans and conservatives, regarding economics, this is one.
For whatever reason, the Governor of Indiana, a Republican, chose to extend to Honda conditions of tax preferences devoid of conditions requiring statewide worker applications. It doesn't take a genius to figure out that the Governor, Mitch Daniels, calculated what he'd have to offer, on behalf of his state, to get the Honda jobs, payroll and business tax revenues. To beat out Ohio, he must have realized he had to allow Honda to avoid paying UAW-mandated wages.
Fair enough. If Indianans don't like this, they'll toss Daniels out at the next election.
Meanwhile, Honda is bringing 2,000 jobs to Indiana. Nobody is holding a gun to the applicants to force them to work at Honda. In just three weeks, Honda closed applications for the plant, having sufficient workers available for their needs.
Sounds like an economic success story, doesn't it? It does, and it is, if you accept individual responsibility and the historic economically-driven mobility of the US population.
And yesterday, Senator Fred Thompson noted this, when, in response to a question, replied that nobody guarantees Americans that they will have their job, in perpetuity, in their current location.
I think this, frankly, is the central economic issue of the day.
Government does not plan the economy. We don't, by and large, run a socialist or fascist economic system in America.
Instead, the idea is that government sets certain conditions of law, safety, taxation, etc., then lets individuals, either solely or collectively, decide how to operate within those parameters to pursue their dreams and achieve economic prosperity.
This has resulted in several characteristic American trends. For one, our being a nation of immigrants. The ultimate 'mobility' is to leave your country to enter America, destination probably little-known, in order to simply participate in its prosperity. Having crossed oceans to arrive here, it's unlikely this population pool will really care to which state they must move to realize their economic dreams.
Second, even within the country, as far back as the 1700s, we've been a nation of economic pioneers. Being born in Illinois, I am familiar with the migration of farmers from the played-out fields of New England to the Midwest, and beyond. For decades, people simply moved west when the local conditions left them economically disappointed.
This is, quite simply, our heritage. Nobody guaranteed the early Dakota farmers unemployment insurance, social security, or health insurance. They'd have laughed at the very idea!
Instead, they were more than willing to measure and take their risks, in exchange for homesteading, in order to work and acquire their land.
Where did we suddenly get the idea that being an American entitles you to remain in situ, and simply have an adequate job delivered to you?
This is where the other side of the economic issue is found. Democrats, or liberal Republicans, like, sadly, Mitt Romney, some of the time, will be found here.
Romney, in response to the employment/recession question in yesterday's debate, right after Thompson, said something like,
'We can't let Michigan be in a one-state recession. This is personal for me. We've all got to get together and work to come up with a solution for this state.'
No, Mitt, actually, we don't.
That would be the job of the Governor of Michigan, and her tax-raising colleagues in the state legislature. Unfortunately for the citizens of the state of Michigan, they've unwisely concentrated their industry in the automotive sector, allowed the UAW to price their workers too expensively, and ignored the inept management of the three large auto makers located in Detroit.
Together, these trends have resulted in an economically troubled state.
Oh, well. Luckily, for Michiganders, there's a little economic zone known as the United States of America, of which they are a part. Forty-nine other states are available, sans passport or governmental permission, to which residents of Michigan are free to move to find better economic prospects.
See the parallel with our economic history? And Indiana's competitive economic attitude?
The only problem with Michigan right now is that too few of it's citizens take individual responsibility for their own economic welfare. They sit on their asses, waiting for a union, a large employer, or 'the state' to take care of them.
To listen to the Democrats, you'd think that we are in a recession, and all need governmental planning to rescue us. Two CNBC-chosen questioners at yesterday's debate, Bartiromo and Matthews, who are pretty much already self-identified liberals, kept pressing the candidates to admit that the US is, or shortly will be, in a recession.
But we're not. Thompson didn't take the bait. Instead, he noted that our government fosters opportunity, but it doesn't guarantee employment.
You need look no further than Indiana, per the Journal piece, to see that there are ways to foster growth, even in the Midwest, at auto plants.
Of course, the jobs may not be UAW-sanctioned. So what?
In a topic discussed at the end of the debate yesterday, unions were described by the candidates as being,
'some good, and some bad.'
Just so. Nobody wanted to name any 'bad' unions, for obvious reasons of vote-getting and fund-raising. However, again, it doesn't take a genius to note the shrinkage in working UAW membership over the past decade, and realize they have ineptly managed their members' situations.
Is Indiana doing something bad to foster non-union employment at Honda in Greensburg? Evidently, not according to the Governor.
Until our politicians become humbler, and return to the roots of America's economic success and vitality, which is based on mobility, we are probably cursed with a continuation of this needless hand-wringing about union jobs in states like Michigan and Indiana, rather than the celebration of new jobs in Indiana.
Tuesday, October 09, 2007
Some Thoughts On Fox's New Business Channel
Last Friday, the idea for this post sort of popped into my head. While cycling, I think. While cranking out the miles on my faithful Giordana Columbus, it suddenly occurred to me how easy and natural the Fox Business News Channel's positions will probably be.
Then, yesterday, I read a Wall Street Journal interview with Roger Ailes, Rupert Murdoch's go-to guy and architect of the new Fox network debuting next Monday.
If my interpretation of the Ailes interview is correct, then I'm not far off with my view of how Fox Business News plans to compete in the cable business news product/market. All Fox has to do is repeat it's Fox News Channel approach- news with a balanced/optimistic outlook- and it should have CNBC running for cover in short order.
To start with, you need to realize that CNBC is very, very liberal, even as a (financial) business news channel. You'd think there isn't all that much wiggle room to inject politics into financial news, but you'd be wrong. After all, the parent is NBC, one of the most politicized networks, with left-leaning Tim Russert and now-retired lefty Tom Brokaw. Both the kind of up-from-the-people sort of anchors that instinctively distrust conservatism, with its message of self-reliance, even though they are examples of the latter.
You can count the non-liberal CNBC anchors/on-air staff on the fingers of one hand- Larry Kudlow, Joe Kernen, Becky Quick, and Erin Burnett. Possibly Michele Caruso-Cabrera.
Among guests, it's basically John Rutledge, Brian Wesbury, and Alan Murray, of the WSJ. After that, whichever guests and staff are not neutral, are heavily biased to the liberal side.
In this group are prominently counted on-air anchors Mark Haines and Carlos Quintanilla, with David Faber a close third, and Washington political correspondent John Harwood bringing up the rear. Long ago, prior to Squawkbox's, CNBC's morning news show, reshuffling, Haines, Joe Kernen and Faber used to comprise the anchor team, and Kernen was heavily out-weighed by his two liberal colleagues. When Becky Quick was added to the team, the balanced got a little better, but was offset by having Haines dominate the next two hours of air time after the morning show ended.
Friday morning, for example, the Friday Labor Dept. jobs number came out. It was 110,000. Much better than expected, especially following the prior month's dismal value. The result?
CNBC guest Robert Reich, former Clinton Secretary of Labor, found much wrong and engaged in massive, 'the economy is in the toilet....again...' hand-wringing. Rather than accept the topline number, he dug until he found one weak entry somewhere in the bowels of the jobs report, and pounded away on this one factoid.
Then resident economically-challenged 'chief economic reporter' Steve Liesman, who has no economics nor business degrees, by the way, weighed in with his worries. The camera cut to one guest who, at that point, solemnly intoned that the US is headed for recession, and this report is error-prone anyway.
After President Bush's speech noting the positive economic expansion evidenced by the job growth numbers, anchor Mark Haines promptly shook his jowly face in a worried frown, solemnly intoning something like,
"Well, I guess he has to try to sound upbeat when the news is good, eh?"
John Harwood, the liberal CNBC Washington political correspondent, then chimed in that, despite Bush's budgets including fighting a shooting war, he spent too much in the past, so he has no credibility now. And that he's simply taking cheap shots at the Democrats now running the Congress.
What I realized during this barrage of gloomy interpretation of upbeat job numbers was that, nearly uniformly, the anchors, reporters and guests on CNBC look for the cloud on the horizon. Forecast the rain squall. Hunt diligently for the worst spin and implication of any economic or business news.
Meanwhile, the equity markets took off like a rocket, with the S&P500 ending the day up nearly one percentage point. Our equity portfolio doubled that Friday.
On CNBC, the US is in a perpetual economic night of crushing debt, both public and private, near-recession, income-inequality of stupefying and near-revolution-inducing scale, and on the brink of economic peril.
Not to mention that with Larry Kudlow being dumped into the deadly 7-8PM time slot on CNBC, the network is sending the signal that he and his economic optimism must be shoved to a slot where it can wither and die in peace. Maybe Kudlow will be available to join a network that actually shares his values- Fox Business News?
All Rupert Murdoch will need to do is hire staff that is willing to look at positive implications of economic news. Not such a hard thing.
And, when you think about it, precisely for which the Wall Street Journal's editorial page is famous. Rather than affecting, or damaging, the great business paper's "objectivity," Murdoch's ace in the hole is, I think, to simply unleash economic realists and market-oriented people like Alan Murray to speak honestly, balanced and maybe even optimistically about the US economy and business affairs.
Which is what they've always done. Now, however, they'll have an entire global video business news channel on which to do it.
I don't know why it took me this long to realize how simple Murdoch's task will be. In a sense, he and his new channel's staff will be shooting fish in a barrel. CNBC is so liberal/negative in its political economic bias that I really think it cannot change. It is, after all, the child of a rather liberally-oriented network, NBC.
Even this summer's programmatic reshuffling on CNBC only resulted in busier, more frenetic information feeds and on-air shouting matches among multi-windowed talking heads. The overt negative, liberal economic biases remain prominent.
Then, I read yesterday's Ailes interview in the Journal. And all my thoughts seemed to coalesce in his responses to Rebecca Dana's questions. It's worth reading the entire piece, but some quotes are:
"...We compete with everybody who has a television on in the sense that we're trying to get more viewers. So I think the CNBC Fox Business Network so-called rivalry could be overblown. It certainly has been in their minds because they've spent an enormous amount of money putting on the screen what they think I'm gonna do. I just think we're gonna launch a very credible business network and I will call a lot of audibles at the line once the play starts. I will not stand around the sidelines with a gamebook and a set of plays that I'll stick to. I'll change many things in the first year I'm sure.
WSJ: What specific things has CNBC done in anticipation of Fox Business? Did they make any programming changes?
MR. AILES: They did that last week in anticipation of our schedule which we haven't put out yet.
They reached out to talent to give it a fresher look. They're still living on shows that in many cases I oversaw the development of 12 years ago when I was there. You know, Squawk Box and Power Lunch. I even built them their set before I left. Their newsroom. Now they've changed it because they went to the new building. They've embraced capitalism suddenly. They've put on shows: what? Capitalism's good! What a plan.
I've made them extremely uncomfortable because they used to just be uncomfortable with corporations and profits because they always only wanted to embrace capitalism on the day they negotiated their own contracts, and they've been forced now to see that it's probably a good idea over all and it creates a lot of charity and a lot of jobs for people and is a good thing. So, if nothing else, it's dragged some of them kicking and screaming toward reality.
WSJ: Has the perspective of the network changed?
MR. AILES: They are, let's be honest, there aren't a lot of. They probably don't reflect the business community in terms of their own economic and political views in many cases. Not that they should, but they should be able to report on it accurately and I think that they've you know, look, they got burned. They rode the bubble up. They flogged the bubble. They got burned. They got tied to a sort of day traders and good market information and it blew up on them and they didn't know quite how to scramble out of that. And rather than come up with a new way of covering it, they blamed the economy and the bubble and all of that for their woes.
I mean, there are some very good individual reporters, anchors and talent at CNBC. I found that when I went there. Everybody thought I would go in there and fire everybody and clean house. It turned out there were a lot of good people there. They lacked a mission and a focus and leadership. Oftentimes that's the case. I think they've improved. They're better. They've certainly had two years to figure out what we might do.
They've had The Wall Street Journal for seven, eight years. So I'm expecting them to come out of the gate the day we launch with some brilliant programming based on The Wall Street Journal. They've been holding it in reserve I think and they're gonna flood me with a tsunami of brilliant ideas and programming on Day One.
We're not particularly targeting CNBC. CNBC does a narrow kind of programming. Unless they do what they could do which is jump us with a whole lot of Wall Street Journal stuff, programming. If they do that, the good stuff will eventually become mine. Cause they're my R and D department.
WSJ: What will become of the WSJ-CNBC deal?
MR. AILES: Unclear. I think that's being sorted out right now. Clearly we're being blocked from using it, but they've enforced that so strongly in the last seven years that they haven't even used it. So, it must be a real tough enforcement.
WSJ: The Fox New Channel reported a 41% rise in operating income in the fourth quarter from higher affiliate fees and advertising growth. How did you accomplish that at a time when viewership is off and ratings are waning for cable news?
MR. AILES: Well, the ratings aren't off much. If you look at Bill O'Reilly the other night. He beat the other prime-time networks five and six to one. He had a one in the demo if you count his two shows. Our morning shows are starting to show growth after a dip last year. We accomplished it by getting our cable deals done, by having a good sales force, by blocking and tackling every day and by having more compelling television than our competitors. That's how it is. A lot of people like to come to Fox News. You'd be surprised. I get hundreds of emails a day from American people saying, "God, you're the only thing we watch." So, we feel a real responsibility to get the story straight and balance the story in some ways. If you watch some news -- I always say to my people, when I see something particularly horrible about America that I think is a little out of proportion to what is actually going on, I call up the desk and say, "Do you have any pictures of people lined up at the border trying to get out?" They say, "What do you mean?" I say, "I just watched that and hell, we've got to get out of here, America's a terrible place. We need to get out fast. There must be guys stacked up at the airport trying to get out of here." No. It turns out everybody's trying to get in, and nobody's trying to get out. We've got to keep that perspective in mind when you cover the news. It doesn't mean you don't cover the bad news about America. You do. It means you don't get up in the morning hating your country. And so, until somebody shows me lines at the border trying to get out, I think there's some good news.
...kids come out of journalism school, some nitwit professor who never had to earn a living and hates capitalism, and he's a jerk, and he grades papers according to his own personal philosophy. People get addicted to that crap, then they have to turn around someday and say, "Hey, it's not that bad. I like my paycheck. What a great country."
WSJ: What do you think of Alan Greenspan's recent criticisms of President Bush?
MR. AILES: You can't sell a book in America if you don't dump on Bush. That's the cheapest shot in the world. You cannot get an advance, and you can't sell a book because the publishers are all people who hate Bush and hate Republicans. The quickest way to get an advance and to get a lot of money. Once he did it -- I know Alan. Here's a guy who's worked for Republicans all his life, but he couldn't get a book deal, so he said, "Hey, Bush'll understand. I'm gonna make several million dollars here; I gotta get the dough." Alan understands money, and therefore, I don't, you know, look -- everybody's gotta do their thing. For the next 50 years, anybody who dumps on Bush will get a higher advance.
WSJ: What do you think about the state of the Democratic Party right now?
MR. AILES: I don't have a view of politics. The only thing I would say is that we've had the Whig Party and the Know-Nothing Party and a lot of different parties in America, and you've got to be very careful or you could turn into the moveon.org party. If you're going to take orders from them, that's who you will become.
WSJ: What do you think of the state of the Republican Party?
MR. AILES: I don't think they have any chance of losing their name or their compass. As you know, politics is split on both sides: economic, socials, that kind of stuff. Any time you come to the end of two terms of any party, there's a certain period of running out of gas and revival and so on, and those are cyclical changes that in my judgment are good for the country because they strengthen the two-party system. It gives everybody a chance to strengthen their ideas and move on themselves."
It's now apparent to me that the new Fox business channel, due on the air at the beginning of next week, is likely to simply share its sister News Channel's approach of fair, but positive and optimistic reporting.
What could be simpler than that? People like to hear the truth about good economic news. Despite what the heads of CNBC and NBC may believe.
And that is why I believe that Murdoch's/Ailes' new Fox Business News Network will, in time, eclipse CNBC, perhaps even raiding some of the better, more balanced/conservative talent, too.
Then, yesterday, I read a Wall Street Journal interview with Roger Ailes, Rupert Murdoch's go-to guy and architect of the new Fox network debuting next Monday.
If my interpretation of the Ailes interview is correct, then I'm not far off with my view of how Fox Business News plans to compete in the cable business news product/market. All Fox has to do is repeat it's Fox News Channel approach- news with a balanced/optimistic outlook- and it should have CNBC running for cover in short order.
To start with, you need to realize that CNBC is very, very liberal, even as a (financial) business news channel. You'd think there isn't all that much wiggle room to inject politics into financial news, but you'd be wrong. After all, the parent is NBC, one of the most politicized networks, with left-leaning Tim Russert and now-retired lefty Tom Brokaw. Both the kind of up-from-the-people sort of anchors that instinctively distrust conservatism, with its message of self-reliance, even though they are examples of the latter.
You can count the non-liberal CNBC anchors/on-air staff on the fingers of one hand- Larry Kudlow, Joe Kernen, Becky Quick, and Erin Burnett. Possibly Michele Caruso-Cabrera.
Among guests, it's basically John Rutledge, Brian Wesbury, and Alan Murray, of the WSJ. After that, whichever guests and staff are not neutral, are heavily biased to the liberal side.
In this group are prominently counted on-air anchors Mark Haines and Carlos Quintanilla, with David Faber a close third, and Washington political correspondent John Harwood bringing up the rear. Long ago, prior to Squawkbox's, CNBC's morning news show, reshuffling, Haines, Joe Kernen and Faber used to comprise the anchor team, and Kernen was heavily out-weighed by his two liberal colleagues. When Becky Quick was added to the team, the balanced got a little better, but was offset by having Haines dominate the next two hours of air time after the morning show ended.
Friday morning, for example, the Friday Labor Dept. jobs number came out. It was 110,000. Much better than expected, especially following the prior month's dismal value. The result?
CNBC guest Robert Reich, former Clinton Secretary of Labor, found much wrong and engaged in massive, 'the economy is in the toilet....again...' hand-wringing. Rather than accept the topline number, he dug until he found one weak entry somewhere in the bowels of the jobs report, and pounded away on this one factoid.
Then resident economically-challenged 'chief economic reporter' Steve Liesman, who has no economics nor business degrees, by the way, weighed in with his worries. The camera cut to one guest who, at that point, solemnly intoned that the US is headed for recession, and this report is error-prone anyway.
After President Bush's speech noting the positive economic expansion evidenced by the job growth numbers, anchor Mark Haines promptly shook his jowly face in a worried frown, solemnly intoning something like,
"Well, I guess he has to try to sound upbeat when the news is good, eh?"
John Harwood, the liberal CNBC Washington political correspondent, then chimed in that, despite Bush's budgets including fighting a shooting war, he spent too much in the past, so he has no credibility now. And that he's simply taking cheap shots at the Democrats now running the Congress.
What I realized during this barrage of gloomy interpretation of upbeat job numbers was that, nearly uniformly, the anchors, reporters and guests on CNBC look for the cloud on the horizon. Forecast the rain squall. Hunt diligently for the worst spin and implication of any economic or business news.
Meanwhile, the equity markets took off like a rocket, with the S&P500 ending the day up nearly one percentage point. Our equity portfolio doubled that Friday.
On CNBC, the US is in a perpetual economic night of crushing debt, both public and private, near-recession, income-inequality of stupefying and near-revolution-inducing scale, and on the brink of economic peril.
Not to mention that with Larry Kudlow being dumped into the deadly 7-8PM time slot on CNBC, the network is sending the signal that he and his economic optimism must be shoved to a slot where it can wither and die in peace. Maybe Kudlow will be available to join a network that actually shares his values- Fox Business News?
All Rupert Murdoch will need to do is hire staff that is willing to look at positive implications of economic news. Not such a hard thing.
And, when you think about it, precisely for which the Wall Street Journal's editorial page is famous. Rather than affecting, or damaging, the great business paper's "objectivity," Murdoch's ace in the hole is, I think, to simply unleash economic realists and market-oriented people like Alan Murray to speak honestly, balanced and maybe even optimistically about the US economy and business affairs.
Which is what they've always done. Now, however, they'll have an entire global video business news channel on which to do it.
I don't know why it took me this long to realize how simple Murdoch's task will be. In a sense, he and his new channel's staff will be shooting fish in a barrel. CNBC is so liberal/negative in its political economic bias that I really think it cannot change. It is, after all, the child of a rather liberally-oriented network, NBC.
Even this summer's programmatic reshuffling on CNBC only resulted in busier, more frenetic information feeds and on-air shouting matches among multi-windowed talking heads. The overt negative, liberal economic biases remain prominent.
Then, I read yesterday's Ailes interview in the Journal. And all my thoughts seemed to coalesce in his responses to Rebecca Dana's questions. It's worth reading the entire piece, but some quotes are:
"...We compete with everybody who has a television on in the sense that we're trying to get more viewers. So I think the CNBC Fox Business Network so-called rivalry could be overblown. It certainly has been in their minds because they've spent an enormous amount of money putting on the screen what they think I'm gonna do. I just think we're gonna launch a very credible business network and I will call a lot of audibles at the line once the play starts. I will not stand around the sidelines with a gamebook and a set of plays that I'll stick to. I'll change many things in the first year I'm sure.
WSJ: What specific things has CNBC done in anticipation of Fox Business? Did they make any programming changes?
MR. AILES: They did that last week in anticipation of our schedule which we haven't put out yet.
They reached out to talent to give it a fresher look. They're still living on shows that in many cases I oversaw the development of 12 years ago when I was there. You know, Squawk Box and Power Lunch. I even built them their set before I left. Their newsroom. Now they've changed it because they went to the new building. They've embraced capitalism suddenly. They've put on shows: what? Capitalism's good! What a plan.
I've made them extremely uncomfortable because they used to just be uncomfortable with corporations and profits because they always only wanted to embrace capitalism on the day they negotiated their own contracts, and they've been forced now to see that it's probably a good idea over all and it creates a lot of charity and a lot of jobs for people and is a good thing. So, if nothing else, it's dragged some of them kicking and screaming toward reality.
WSJ: Has the perspective of the network changed?
MR. AILES: They are, let's be honest, there aren't a lot of. They probably don't reflect the business community in terms of their own economic and political views in many cases. Not that they should, but they should be able to report on it accurately and I think that they've you know, look, they got burned. They rode the bubble up. They flogged the bubble. They got burned. They got tied to a sort of day traders and good market information and it blew up on them and they didn't know quite how to scramble out of that. And rather than come up with a new way of covering it, they blamed the economy and the bubble and all of that for their woes.
I mean, there are some very good individual reporters, anchors and talent at CNBC. I found that when I went there. Everybody thought I would go in there and fire everybody and clean house. It turned out there were a lot of good people there. They lacked a mission and a focus and leadership. Oftentimes that's the case. I think they've improved. They're better. They've certainly had two years to figure out what we might do.
They've had The Wall Street Journal for seven, eight years. So I'm expecting them to come out of the gate the day we launch with some brilliant programming based on The Wall Street Journal. They've been holding it in reserve I think and they're gonna flood me with a tsunami of brilliant ideas and programming on Day One.
We're not particularly targeting CNBC. CNBC does a narrow kind of programming. Unless they do what they could do which is jump us with a whole lot of Wall Street Journal stuff, programming. If they do that, the good stuff will eventually become mine. Cause they're my R and D department.
WSJ: What will become of the WSJ-CNBC deal?
MR. AILES: Unclear. I think that's being sorted out right now. Clearly we're being blocked from using it, but they've enforced that so strongly in the last seven years that they haven't even used it. So, it must be a real tough enforcement.
WSJ: The Fox New Channel reported a 41% rise in operating income in the fourth quarter from higher affiliate fees and advertising growth. How did you accomplish that at a time when viewership is off and ratings are waning for cable news?
MR. AILES: Well, the ratings aren't off much. If you look at Bill O'Reilly the other night. He beat the other prime-time networks five and six to one. He had a one in the demo if you count his two shows. Our morning shows are starting to show growth after a dip last year. We accomplished it by getting our cable deals done, by having a good sales force, by blocking and tackling every day and by having more compelling television than our competitors. That's how it is. A lot of people like to come to Fox News. You'd be surprised. I get hundreds of emails a day from American people saying, "God, you're the only thing we watch." So, we feel a real responsibility to get the story straight and balance the story in some ways. If you watch some news -- I always say to my people, when I see something particularly horrible about America that I think is a little out of proportion to what is actually going on, I call up the desk and say, "Do you have any pictures of people lined up at the border trying to get out?" They say, "What do you mean?" I say, "I just watched that and hell, we've got to get out of here, America's a terrible place. We need to get out fast. There must be guys stacked up at the airport trying to get out of here." No. It turns out everybody's trying to get in, and nobody's trying to get out. We've got to keep that perspective in mind when you cover the news. It doesn't mean you don't cover the bad news about America. You do. It means you don't get up in the morning hating your country. And so, until somebody shows me lines at the border trying to get out, I think there's some good news.
...kids come out of journalism school, some nitwit professor who never had to earn a living and hates capitalism, and he's a jerk, and he grades papers according to his own personal philosophy. People get addicted to that crap, then they have to turn around someday and say, "Hey, it's not that bad. I like my paycheck. What a great country."
WSJ: What do you think of Alan Greenspan's recent criticisms of President Bush?
MR. AILES: You can't sell a book in America if you don't dump on Bush. That's the cheapest shot in the world. You cannot get an advance, and you can't sell a book because the publishers are all people who hate Bush and hate Republicans. The quickest way to get an advance and to get a lot of money. Once he did it -- I know Alan. Here's a guy who's worked for Republicans all his life, but he couldn't get a book deal, so he said, "Hey, Bush'll understand. I'm gonna make several million dollars here; I gotta get the dough." Alan understands money, and therefore, I don't, you know, look -- everybody's gotta do their thing. For the next 50 years, anybody who dumps on Bush will get a higher advance.
WSJ: What do you think about the state of the Democratic Party right now?
MR. AILES: I don't have a view of politics. The only thing I would say is that we've had the Whig Party and the Know-Nothing Party and a lot of different parties in America, and you've got to be very careful or you could turn into the moveon.org party. If you're going to take orders from them, that's who you will become.
WSJ: What do you think of the state of the Republican Party?
MR. AILES: I don't think they have any chance of losing their name or their compass. As you know, politics is split on both sides: economic, socials, that kind of stuff. Any time you come to the end of two terms of any party, there's a certain period of running out of gas and revival and so on, and those are cyclical changes that in my judgment are good for the country because they strengthen the two-party system. It gives everybody a chance to strengthen their ideas and move on themselves."
It's now apparent to me that the new Fox business channel, due on the air at the beginning of next week, is likely to simply share its sister News Channel's approach of fair, but positive and optimistic reporting.
What could be simpler than that? People like to hear the truth about good economic news. Despite what the heads of CNBC and NBC may believe.
And that is why I believe that Murdoch's/Ailes' new Fox Business News Network will, in time, eclipse CNBC, perhaps even raiding some of the better, more balanced/conservative talent, too.
Monday, October 08, 2007
Alcatel's Failed Acquisition of Lucent
The Wall Street Journal published a critical review of Alcatel's acquisition of Lucent last Thursday. As I read the piece, I looked at my own prior posts on this bad idea last Spring, here, and here.
Sadly, it appears that another of my dismal predictions has come true. The acquisition has failed to produce a firm that can create superior shareholder returns. And the CEO, Pat Russo, who led Lucent into this situation, is foundering, as expected.
Russo is reputed to be just steps away from the axe. The 'merger', as it was billed, but was, in reality, an acquisition of Lucent by the French telecom company, Alcatel, has failed. Falling margins, from sales bought at too low a price, are now crippling the sales the firm has managed to win.
The Journal's Thursday article lays out in detail how things have gone from bad to worse for the combined telecommunications giant. How one major competitor, Sweden's Ericsson, took advantage of the period of transition and turmoil at Alcatel to press customers and win accounts from the newly-combining firm.
The Alcatel situation highlights a fundamental reality of the marketplace. Two mediocre firms with struggling product lines cannot, by combination, magically fix their problems and become an excellent firm. Instead, they become one, larger, usually confused mediocre firm.
Sector excess capacity usually results, over the long term, in the better players taking share, while the losing players consolidate and shrink. Alcatel has done the first part of that already, and Russo seems to be presiding over the second step.
Sadly, it appears that another of my dismal predictions has come true. The acquisition has failed to produce a firm that can create superior shareholder returns. And the CEO, Pat Russo, who led Lucent into this situation, is foundering, as expected.
Russo is reputed to be just steps away from the axe. The 'merger', as it was billed, but was, in reality, an acquisition of Lucent by the French telecom company, Alcatel, has failed. Falling margins, from sales bought at too low a price, are now crippling the sales the firm has managed to win.
The Journal's Thursday article lays out in detail how things have gone from bad to worse for the combined telecommunications giant. How one major competitor, Sweden's Ericsson, took advantage of the period of transition and turmoil at Alcatel to press customers and win accounts from the newly-combining firm.
The Alcatel situation highlights a fundamental reality of the marketplace. Two mediocre firms with struggling product lines cannot, by combination, magically fix their problems and become an excellent firm. Instead, they become one, larger, usually confused mediocre firm.
Sector excess capacity usually results, over the long term, in the better players taking share, while the losing players consolidate and shrink. Alcatel has done the first part of that already, and Russo seems to be presiding over the second step.
Friday, October 05, 2007
Growth, Risk Management, & Attendant Excesses in Financial Service Firms: The Merrill Lynch Case
As I read yesterday's Wall Street Journal, it occurred to me how Merrill Lynch's recent firings, sub-prime experience, and diversification are a textbook example of why large financial service firms almost never provide consistently superior total returns for shareholders.
In case you missed the piece, or other news stories about it, Merrill fired its global head of fixed income, his deputy, the co-head of fixed income for the Americas, and the former co-head of institutional securities. According to the article, an unnamed analyst estimated that Merrill will be writing off nearly $4B in losses from its sub-prime mortgage holdings.
While other firms, such as Bear Stearns and UBS, have also ejected senior executives, I want to examine the Merrill situation in more detail, because of its size and business scope.
Mr Kim, Merrill's recently-fired co-head of institutional securities, had led the team and area which bought First Franklin Corporation, a subprime mortgage originator, for $1.3B.
A dissenting executive, Jeff Kronthal, was fired as the team bought the sub-prime firm.
Once purchased, of course, First Franklin became a machine with which this fixed income team churned out lots of CDOs, becoming the #1 underwriter of the instruments since 2004.
According to the Journal article, the former global head of fixed income, Mr. Semerci,
"and Mr. Kim were known for putting a greater priority on expanding market share than on risk controls."
And there you have the crux of the phenomenon.
At diversified financial service firms, managers compete for promotions, compensation and control. In order to win these, they must out-grow their peers.
So they take excessive risks in the mid-cycle of a business, riding high growth and turning it into more explosive, riskier growth.
Sometimes, this approach works and the executives involved rise to lead the firm. If not, they still get compensated well, and the firm takes the hit to its balance sheet when the risk catches up with the earnings.
When I was at Chase Manhattan Bank in the early 1990s, the Real Estate division pushed for high, risky growth via construction lending in Manhattan. Eventually, that bubble burst, leaving the bank to take several hundred million dollars in writedowns in 1990. Meanwhile, the executives who made the loans, often found, upon later auditing, to be improperly documented, if documented at all, received large bonuses for making loan origination quotas.
In a large, diversified financial services firm, this drama plays continuously. That is why some element of a diversified financial conglomerate like BofA, Citi, Chase, Merrill, et.al., seems to explode in fantastic losses every few years.
So long as these giants incent managers to get ahead by growing their businesses, which, in financial services, must, to sustain growth over time, lead to riskier business, this will be a permanent feature of the sector.
That's why my equity selections process never identifies a non-acquisitive diversified financial conglomerate as an investment. Sans acquisitions, which prop up revenue growth artificially for a time, these giants are continually prone to the sort of losses being recorded at Chase, Citi, Merrill, Bear Stearns, and UBS this year.
Merrill can axe three highly-ranked fixed income executives, but that won't stop this from happening to the firm again. The story is as old as Lehman's original fist fight in the partner's board room that saw Lew Glucksman, the firm's one-time trading titan, oust Pete Petersen, who went on to co-found the now-famous private equity BlackStone Group.
In short, it's risk management that brings down large, diversified financial service firms every time. More than anemic growth, excessive growth in one or two businesses inevitably leads to excessive risks, which are typically hidden from the credit and audit functions, as well as senior management. After all, the executives are playing with the firm's money, so it's a win/win or lose/win proposition for them. Either way, their firm takes any losses.
The days of smallish Wall Street partnerships in which risks were well-understood, acknowledged, and managed, because the partners owned the risk, are long gone now. Instead, diversified financial mega-firms such as Merrill and BofA own many business units, in which managers play a risky game to advance their careers.
Thus, the entire complexion of financial service businesses, markets, and the risks inherent in them, have changed irrevocably, as a function of the sector's current organization. That's why you can expect something like the current Merrill writedowns and firings every few years at one or more diversified financial giants.
In case you missed the piece, or other news stories about it, Merrill fired its global head of fixed income, his deputy, the co-head of fixed income for the Americas, and the former co-head of institutional securities. According to the article, an unnamed analyst estimated that Merrill will be writing off nearly $4B in losses from its sub-prime mortgage holdings.
While other firms, such as Bear Stearns and UBS, have also ejected senior executives, I want to examine the Merrill situation in more detail, because of its size and business scope.
Mr Kim, Merrill's recently-fired co-head of institutional securities, had led the team and area which bought First Franklin Corporation, a subprime mortgage originator, for $1.3B.
A dissenting executive, Jeff Kronthal, was fired as the team bought the sub-prime firm.
Once purchased, of course, First Franklin became a machine with which this fixed income team churned out lots of CDOs, becoming the #1 underwriter of the instruments since 2004.
According to the Journal article, the former global head of fixed income, Mr. Semerci,
"and Mr. Kim were known for putting a greater priority on expanding market share than on risk controls."
And there you have the crux of the phenomenon.
At diversified financial service firms, managers compete for promotions, compensation and control. In order to win these, they must out-grow their peers.
So they take excessive risks in the mid-cycle of a business, riding high growth and turning it into more explosive, riskier growth.
Sometimes, this approach works and the executives involved rise to lead the firm. If not, they still get compensated well, and the firm takes the hit to its balance sheet when the risk catches up with the earnings.
When I was at Chase Manhattan Bank in the early 1990s, the Real Estate division pushed for high, risky growth via construction lending in Manhattan. Eventually, that bubble burst, leaving the bank to take several hundred million dollars in writedowns in 1990. Meanwhile, the executives who made the loans, often found, upon later auditing, to be improperly documented, if documented at all, received large bonuses for making loan origination quotas.
In a large, diversified financial services firm, this drama plays continuously. That is why some element of a diversified financial conglomerate like BofA, Citi, Chase, Merrill, et.al., seems to explode in fantastic losses every few years.
So long as these giants incent managers to get ahead by growing their businesses, which, in financial services, must, to sustain growth over time, lead to riskier business, this will be a permanent feature of the sector.
That's why my equity selections process never identifies a non-acquisitive diversified financial conglomerate as an investment. Sans acquisitions, which prop up revenue growth artificially for a time, these giants are continually prone to the sort of losses being recorded at Chase, Citi, Merrill, Bear Stearns, and UBS this year.
Merrill can axe three highly-ranked fixed income executives, but that won't stop this from happening to the firm again. The story is as old as Lehman's original fist fight in the partner's board room that saw Lew Glucksman, the firm's one-time trading titan, oust Pete Petersen, who went on to co-found the now-famous private equity BlackStone Group.
Glucksman went on to binge on trading and, subsequently, trading losses, in the next few years, leading the firm to fall into the lap of American Express.
Only the faces will change. The culture and internal climate of any diversified financial services firm will guarantee repetitions of the recent Merrill experience for years to come.
When financial service firms rely on one, or, at most, a very few businesses to fuel their value creation, and manage risk accordingly, only then will they avoid these recurring risk-management failures.In short, it's risk management that brings down large, diversified financial service firms every time. More than anemic growth, excessive growth in one or two businesses inevitably leads to excessive risks, which are typically hidden from the credit and audit functions, as well as senior management. After all, the executives are playing with the firm's money, so it's a win/win or lose/win proposition for them. Either way, their firm takes any losses.
The days of smallish Wall Street partnerships in which risks were well-understood, acknowledged, and managed, because the partners owned the risk, are long gone now. Instead, diversified financial mega-firms such as Merrill and BofA own many business units, in which managers play a risky game to advance their careers.
Thus, the entire complexion of financial service businesses, markets, and the risks inherent in them, have changed irrevocably, as a function of the sector's current organization. That's why you can expect something like the current Merrill writedowns and firings every few years at one or more diversified financial giants.
Thursday, October 04, 2007
Vindication: The Wall Street Journal Officially Buries "Wal-Mart Era"
Yesterday's Wall Street Journal featured a prominent, front page piece entitled, "Wal-Mart Era Wanes Amid Big Shifts in Retail."
As such, I'm going to declare yet another of my predictions vindicated. I wrote pieces on this blog, here, and here, as long ago as September of 2005, when I began writing this blog.
Among the quotes from my earlier posts are these from April of this year,
"Friday's Wall Street Journal ran a piece in their Money & Investing section on what ails Wal-Mart, and how to fix it. Trouble is, they mostly asked a group of money managers. Why they think those guys would have a lock on such knowledge is beyond me.
In my opinion, most of them are barking up the wrong tree. Wal-Mart isn't 'coming back' as they knew it. It's big, sluggish, and hard to manage with its saturated markets.
Rather, Wal-Mart is likely at a crossroads. If it desires to regain consistently superior total return performance via growth, then it needs to do a better job identifying those markets which will sustain its traditional, logistics-dependent strategy for dominating the low end of retail merchandising. Whether this means staying or leaving Japan, I don't know. But Wal-Mart's management should.
My own view is that it's unlikely that Wal-Mart will regain its former consistently superior outperformance record. Its size, need to be in multiple countries and exposed to radically varying cultures and logistics environments probably presents the firm's management with too many challenges to overcome simultaneously.
But, since I'm neither a broker, nor a current investor in Wal-Mart, I don't have a stake in convincing others to either buy, or sell the firm's stock based upon expectations. I'm just writing what I have observed, from both my proprietary research, track record of portfolio selections, and the recent media coverage of Wal-Mart's performance."
And these sentiments, from September, 2005,
"Back when I was earning my degrees in Marketing, there was a theory which was taught that went by the name of “the wheel of retailing.” It essentially observed that every so often, a new, low-cost retailer will arise that rips through the existing sector structure like a hot knife through butter, growing at the expense of outmoded, expensive older giants.
That said, the Wal-Mart saga since the 1980s is both remarkable, yet not surprising. What the company did is not all that new. It upended several existing chains of general merchandisers who had grown inefficient, insensitive to consumer needs and wants, and basically moribund. How it did it was with the latest version of what the lowest entrants on the wheel of retailing always use- low-cost supply of large volumes of goods. It looks glitzier now, with integrated IT functions shared among vendors. But if you go back to the architect of Sears’ great transformation, you will find that Robert Wood, the creator of that transformation, learned his supply skills as quartermaster on the Panama Canal, one of the more challenging logistical projects of that era.
What is puzzling me is why there is all this attention paid to the mid-late life growth pangs of a retail success. Retailers who began life at the bottom always try to extend growth, once they saturate the market with stores, by moving up-market. And they nearly always fail in doing so.So will Wal-Mart. The company appeared briefly as a selection in the large-cap equity portfolio I manage. That was back in the 90s. But it hasn’t performed in a consistently superior fashion in over a decade."
I'm quite proud of the fact that I called the demise of the "Wal-Mart era" two years ago. It's sort of sad that as fine a business newspaper as the Wall Street Journal both missed the boat for this long and, even now, in their comprehensive article yesterday, can't come up with a reporter who is familiar with the 'wheel of retailing' concept. Or Schumpeterian dyanmics. Because both figure in this story.
The 'wheel of retailing' is an old, but still valid, marketing concept which observes that, over time, low-end retailers eventually attempt to move upmarket, making way for new entrants, while tending to stall in their new product/markets. This is Wal-Mart, to a "T." Schumpeterian dynamics explains, additionally, why, over time, Wal-Mart sowed the seeds of its own competition, as well as became a target for regulatory and social activist forces, sapping its energy and tarnishing its reputation.
As it is, the article thoroughly documents Wal-Mart's troubles amidst shifting consumer values which place style and convenience above price. Further, having dominated their product/market spaces for so long, they became the target at which to shoot. Consequentially, the article mentions that many competitors, such as the drugstore chains, Walgreens and CVS, simply redefine their offerings to avoid head-to-head competition with the retailing giant. Krogers does the same in food, offering semi- and fully-cooked meals to differentiate itself from Wal-Mart's grocery stores. Tesco, the British food retailer, is about to enter the Western US market with a portfolio of store types, taking on Wal-Mart in this large product/market.
The Yahoo-sourced price chart in this post demonstrates, compares Wal-Mart's performance since the early 1970s with the S&P500. It's clear that, except for a brief 2-3 year period in the late 1990s, Wal-Mart's market performance has been stalled since 1992, i.e., for 15 years!
That's an awfully long time to be waiting for a turnaround, isn't it? That's why I called the company dead as a consistently superior total return performer. The Wall Street Journal article echoes my own research findings and observations about the retailer- it's simply grown too large and stable to respond with alacrity anymore to changes in consumer tastes. Further, with such a large, inertial sales volume, significant growth is no longer easy. Wal-Mart's ventures abroad have disappointed, suggesting their management style is not transferring well or easily to China, Europe, et. al.
As the chart above shows, if you had bought Wal-Mart stock over 30 years ago, and simply held, you'd still have outperformed the S&P for the period by a stunning margin. But you'd have to have sat and watched it tread water for this entire decade. Simply put, Wal-Mart's best days are behind it in terms of consistently superior shareholder return performance.
And you read it here first. Two years ago.
As such, I'm going to declare yet another of my predictions vindicated. I wrote pieces on this blog, here, and here, as long ago as September of 2005, when I began writing this blog.
Among the quotes from my earlier posts are these from April of this year,
"Friday's Wall Street Journal ran a piece in their Money & Investing section on what ails Wal-Mart, and how to fix it. Trouble is, they mostly asked a group of money managers. Why they think those guys would have a lock on such knowledge is beyond me.
In my opinion, most of them are barking up the wrong tree. Wal-Mart isn't 'coming back' as they knew it. It's big, sluggish, and hard to manage with its saturated markets.
Rather, Wal-Mart is likely at a crossroads. If it desires to regain consistently superior total return performance via growth, then it needs to do a better job identifying those markets which will sustain its traditional, logistics-dependent strategy for dominating the low end of retail merchandising. Whether this means staying or leaving Japan, I don't know. But Wal-Mart's management should.
My own view is that it's unlikely that Wal-Mart will regain its former consistently superior outperformance record. Its size, need to be in multiple countries and exposed to radically varying cultures and logistics environments probably presents the firm's management with too many challenges to overcome simultaneously.But, since I'm neither a broker, nor a current investor in Wal-Mart, I don't have a stake in convincing others to either buy, or sell the firm's stock based upon expectations. I'm just writing what I have observed, from both my proprietary research, track record of portfolio selections, and the recent media coverage of Wal-Mart's performance."
And these sentiments, from September, 2005,
"Back when I was earning my degrees in Marketing, there was a theory which was taught that went by the name of “the wheel of retailing.” It essentially observed that every so often, a new, low-cost retailer will arise that rips through the existing sector structure like a hot knife through butter, growing at the expense of outmoded, expensive older giants.
That said, the Wal-Mart saga since the 1980s is both remarkable, yet not surprising. What the company did is not all that new. It upended several existing chains of general merchandisers who had grown inefficient, insensitive to consumer needs and wants, and basically moribund. How it did it was with the latest version of what the lowest entrants on the wheel of retailing always use- low-cost supply of large volumes of goods. It looks glitzier now, with integrated IT functions shared among vendors. But if you go back to the architect of Sears’ great transformation, you will find that Robert Wood, the creator of that transformation, learned his supply skills as quartermaster on the Panama Canal, one of the more challenging logistical projects of that era.
What is puzzling me is why there is all this attention paid to the mid-late life growth pangs of a retail success. Retailers who began life at the bottom always try to extend growth, once they saturate the market with stores, by moving up-market. And they nearly always fail in doing so.So will Wal-Mart. The company appeared briefly as a selection in the large-cap equity portfolio I manage. That was back in the 90s. But it hasn’t performed in a consistently superior fashion in over a decade."
I'm quite proud of the fact that I called the demise of the "Wal-Mart era" two years ago. It's sort of sad that as fine a business newspaper as the Wall Street Journal both missed the boat for this long and, even now, in their comprehensive article yesterday, can't come up with a reporter who is familiar with the 'wheel of retailing' concept. Or Schumpeterian dyanmics. Because both figure in this story.
The 'wheel of retailing' is an old, but still valid, marketing concept which observes that, over time, low-end retailers eventually attempt to move upmarket, making way for new entrants, while tending to stall in their new product/markets. This is Wal-Mart, to a "T." Schumpeterian dynamics explains, additionally, why, over time, Wal-Mart sowed the seeds of its own competition, as well as became a target for regulatory and social activist forces, sapping its energy and tarnishing its reputation.
As it is, the article thoroughly documents Wal-Mart's troubles amidst shifting consumer values which place style and convenience above price. Further, having dominated their product/market spaces for so long, they became the target at which to shoot. Consequentially, the article mentions that many competitors, such as the drugstore chains, Walgreens and CVS, simply redefine their offerings to avoid head-to-head competition with the retailing giant. Krogers does the same in food, offering semi- and fully-cooked meals to differentiate itself from Wal-Mart's grocery stores. Tesco, the British food retailer, is about to enter the Western US market with a portfolio of store types, taking on Wal-Mart in this large product/market.
The Yahoo-sourced price chart in this post demonstrates, compares Wal-Mart's performance since the early 1970s with the S&P500. It's clear that, except for a brief 2-3 year period in the late 1990s, Wal-Mart's market performance has been stalled since 1992, i.e., for 15 years!
That's an awfully long time to be waiting for a turnaround, isn't it? That's why I called the company dead as a consistently superior total return performer. The Wall Street Journal article echoes my own research findings and observations about the retailer- it's simply grown too large and stable to respond with alacrity anymore to changes in consumer tastes. Further, with such a large, inertial sales volume, significant growth is no longer easy. Wal-Mart's ventures abroad have disappointed, suggesting their management style is not transferring well or easily to China, Europe, et. al.
As the chart above shows, if you had bought Wal-Mart stock over 30 years ago, and simply held, you'd still have outperformed the S&P for the period by a stunning margin. But you'd have to have sat and watched it tread water for this entire decade. Simply put, Wal-Mart's best days are behind it in terms of consistently superior shareholder return performance.
And you read it here first. Two years ago.
Wednesday, October 03, 2007
Chuck Prince's Nine Lives
I'm beginning to think Citigroup CEO Chuck Prince is some sort of shape-change artist out of Harry Potter, who is, in reality, a cat. A nine-lived cat, to be precise.
How many mistakes can a CEO make and still keep his job? Perhaps due to Prince's example, GE CEO Jeff Immelt figures he has lots of time left to continue to mismanage his firm.
But, back to Citigroup. Having taken the helm from Sandy Weill in 2003, after the latter's excesses of merger-mania, Prince has presided over a performance that underruns the S&P for the timeframe.
As observed in the nearby Yahoo-sourced chart of stock prices for Citigroup and the S&P500 Index for the last five years, Prince has led the banking firm to a clear underperformance during his tenure.
Despite the company's major shareholder, Saudi Prince Alaweed bin Talal, commenting,
"No financial institution is immune from the financial turmoil in global markets....It's a hiccup in our journey to reach normalization at Citibank,"
Prince never seems to do more than 'normalize' mediocrity. As the two-year price chart nearby shows, even before this summer's fixed income markets crises, which have led to Citigroup posting third-quarter earnings that are 60% below last year's similar quarter, Citi was already lagging the index, suffering a plunging stock price since early this year.
As I wrote in these posts, here and here, in May and January of this year, Prince has been mismanaging Citigroup for quite some time. It has nothing to do with the market troubles of this summer.
Here's what continues to confound me. Prince would probably not suffer performance like his own in a lieutenant for as long as his board has suffered his own mediocre performance, without firing them.
Why is Prince still CEO? As I have written in prior posts, he's out of his depth trying to run the overly-diversified Citigroup. And financial service firms so diversified almost never manage to post consistently superior total returns.
As I wrote in my last (linked) post,
"Ideally, Citi needs to be split up into more easily led and managed, standalone units which may more nimbly respond to market and competitive forces in their particular financial service sectors. As a financial supertanker, Citi has proven unmanageable in a manner that performs consistently better than the markt for its owners. Can it really do worse as a number of smaller, more responsive entities?"
And Prince should go- break up, or not. He is simply overmatched by the firm's and market's complexity. It would be nice if the Saudi Prince considered other shareholders, and voted to boot the American Prince.
How many mistakes can a CEO make and still keep his job? Perhaps due to Prince's example, GE CEO Jeff Immelt figures he has lots of time left to continue to mismanage his firm.
But, back to Citigroup. Having taken the helm from Sandy Weill in 2003, after the latter's excesses of merger-mania, Prince has presided over a performance that underruns the S&P for the timeframe.
As observed in the nearby Yahoo-sourced chart of stock prices for Citigroup and the S&P500 Index for the last five years, Prince has led the banking firm to a clear underperformance during his tenure.Despite the company's major shareholder, Saudi Prince Alaweed bin Talal, commenting,
"No financial institution is immune from the financial turmoil in global markets....It's a hiccup in our journey to reach normalization at Citibank,"
Prince never seems to do more than 'normalize' mediocrity. As the two-year price chart nearby shows, even before this summer's fixed income markets crises, which have led to Citigroup posting third-quarter earnings that are 60% below last year's similar quarter, Citi was already lagging the index, suffering a plunging stock price since early this year.As I wrote in these posts, here and here, in May and January of this year, Prince has been mismanaging Citigroup for quite some time. It has nothing to do with the market troubles of this summer.
Here's what continues to confound me. Prince would probably not suffer performance like his own in a lieutenant for as long as his board has suffered his own mediocre performance, without firing them.
Why is Prince still CEO? As I have written in prior posts, he's out of his depth trying to run the overly-diversified Citigroup. And financial service firms so diversified almost never manage to post consistently superior total returns.
As I wrote in my last (linked) post,
"Ideally, Citi needs to be split up into more easily led and managed, standalone units which may more nimbly respond to market and competitive forces in their particular financial service sectors. As a financial supertanker, Citi has proven unmanageable in a manner that performs consistently better than the markt for its owners. Can it really do worse as a number of smaller, more responsive entities?"
And Prince should go- break up, or not. He is simply overmatched by the firm's and market's complexity. It would be nice if the Saudi Prince considered other shareholders, and voted to boot the American Prince.
Tuesday, October 02, 2007
American Century Investments & Lance Armstrong
This past weekend's edition of the Wall Street Journal featured an article on the recent management turmoil at American Century Investments. I last wrote a post about the firm here, in February of 2006, when I noticed that Lance Armstrong had formed a relationship with the firm.
As I mused in that post, it seemed odd that Armstrong would represent a service like mutual fund management, which is so prone to changes in fortunes.
And, as it happens, that's exactly what is occurring at American Century now. According to the Journal article, it has a number of poorly performing funds which have had management shake ups.
Meanwhile, the article tells us, the founding family of American Century, the Stowers, have moved on to endowing a medical research institution nearby to help cure the cancers with which both elder Stowers have diagnosed.
Between the family's focus on the medical institute, and Kansas City's declining attraction for many of the investment firm's managers, the talent drain began recently, seeing 20 or more managers and senior executives leave the firm. Some complained that the benefit to the institute of a rise in the price of American Century shares had eclipsed their use as long term incentive compensation for fund managers at the firm.
As for Armstrong, his own foundation receives more money from American Century when the investment firm's results exceed a certain threshold. The former cyclist is quoted as saying that he thinks people "want to be involved with a company that's put themselves out there on such a human level."
Personally, I think the average retail investor simply wants better returns. Institutional investors, which are a new focus of the investment management firm, are even more focused on returns, and less on social issues.
One of American Century's funds, Ultra, seems to be moving in the right direction this year, with its performance back up to 15%. However, it seems to me that the entire episode of wholesale management changeover, and a drop in returns of many of the firm's funds, until recently, demonstrate how risky it may be for someone of Armstrong's ilk to tie his fortunes to such a financial services vendor.
As I mused in that post, it seemed odd that Armstrong would represent a service like mutual fund management, which is so prone to changes in fortunes.
And, as it happens, that's exactly what is occurring at American Century now. According to the Journal article, it has a number of poorly performing funds which have had management shake ups.
Meanwhile, the article tells us, the founding family of American Century, the Stowers, have moved on to endowing a medical research institution nearby to help cure the cancers with which both elder Stowers have diagnosed.
Between the family's focus on the medical institute, and Kansas City's declining attraction for many of the investment firm's managers, the talent drain began recently, seeing 20 or more managers and senior executives leave the firm. Some complained that the benefit to the institute of a rise in the price of American Century shares had eclipsed their use as long term incentive compensation for fund managers at the firm.
As for Armstrong, his own foundation receives more money from American Century when the investment firm's results exceed a certain threshold. The former cyclist is quoted as saying that he thinks people "want to be involved with a company that's put themselves out there on such a human level."
Personally, I think the average retail investor simply wants better returns. Institutional investors, which are a new focus of the investment management firm, are even more focused on returns, and less on social issues.
One of American Century's funds, Ultra, seems to be moving in the right direction this year, with its performance back up to 15%. However, it seems to me that the entire episode of wholesale management changeover, and a drop in returns of many of the firm's funds, until recently, demonstrate how risky it may be for someone of Armstrong's ilk to tie his fortunes to such a financial services vendor.
Monday, October 01, 2007
Home Depot Again: Stories from the Front Lines
This weekend, I had the pleasure of seeing old friends who are the parents of one of my daughter's friends. Having moved about an hour away, several years ago, my visits with Jon and his wife are now, though less frequent, longer and more involved.
Jon has had success in startup ventures in the past, and is currently busy with another one. An engineer by training, he fills a number of roles in the venture, including that of supply officer for the firm's various hardware, testing and building materials needs.
This was news to me. Jon related how he has become a regular at the Home Depot located within a few miles of his firm's offices in Northern New Jersey. Typically not that observant of details at stores, such as Home Depot, so Jon says, he has noticed a number of things this summer that corroborate my many posts describing the building supply chain's woes.
For example, he cited the many times he wanders the aisles, while knots of orange-aproned employees are busy talking among themselves, leaving him to fend for himself.
The aisles, he says, are far from presentable. I think he described them as cluttered and messy, when the shelves weren't empty.
But the best story he told involved product mix changes. Specifically, a ban saw.
His group does lots of research and experimentation, so they need power tools for building things on their test benches. Jon had recently bought a ban saw. Within a few weeks, they'd worn the blade out, and he returned to Home Depot for replacement blades.
No luck. It seems that the supply chain had switched product lines, and now markets, as Jon puts it, a decidedly cheaper ban saw.
Well, he was there for blades, not another saw, right? So, no problem.
Ooops! Home Depot told him they don't carry legacy parts for the old saws- meaning spare blades. None. Nada. Zippo.
So they sell him a fairly expensive power tool one month, only to drop support of the consumable blades the next month. No offers to search other stores, or order the blades, or even provide contact with the manufacturer.
My friend was both displeased, as well as bewildered as to how a major chain such as Home Depot could engage in such dysfunctional and unsupportive behavior.
At least when Apple dropped the price of its iPhones, the old ones still worked. In this case, Home Depot simply drops support for their customers who are foolish enough to buy a fairly expensive tool which requires spare parts support.
The nearby Yahoo-sourced chart displays prices for Home Depot, Lowes, and the S&P500 Index, for the past two years. While HD and LOW have moved very similarly over the period, there's no mistaking that HD has diverged very sharply from the index in 2007.
Lowes seems to have popped up a bit more from its recent bottom, coincident with the summer mortgage-based woes, than has Home Depot. Looking more closely, Lowes was back to a positive return when the housing finance crunch hit, whereas Home Depot was in the red. Then it appears that market forces hit Lowes, as well, from which it rebounded a bit better than Home Depot.
What really struck me, of course, was that my friend could instantly detect serious failings in Home Depot, from his perspective as a customer. It echoed what I have seen in the performance data for Home Depot for at least the past year.
I have a feeling that the firm's troubles now run deeper than simply an arrogant, overpaid, now-departed CEO. And that it may be a while before Home Depot is back on track, both with consumers, as well as investors.
Jon has had success in startup ventures in the past, and is currently busy with another one. An engineer by training, he fills a number of roles in the venture, including that of supply officer for the firm's various hardware, testing and building materials needs.
This was news to me. Jon related how he has become a regular at the Home Depot located within a few miles of his firm's offices in Northern New Jersey. Typically not that observant of details at stores, such as Home Depot, so Jon says, he has noticed a number of things this summer that corroborate my many posts describing the building supply chain's woes.
For example, he cited the many times he wanders the aisles, while knots of orange-aproned employees are busy talking among themselves, leaving him to fend for himself.
The aisles, he says, are far from presentable. I think he described them as cluttered and messy, when the shelves weren't empty.
But the best story he told involved product mix changes. Specifically, a ban saw.
His group does lots of research and experimentation, so they need power tools for building things on their test benches. Jon had recently bought a ban saw. Within a few weeks, they'd worn the blade out, and he returned to Home Depot for replacement blades.
No luck. It seems that the supply chain had switched product lines, and now markets, as Jon puts it, a decidedly cheaper ban saw.
Well, he was there for blades, not another saw, right? So, no problem.
Ooops! Home Depot told him they don't carry legacy parts for the old saws- meaning spare blades. None. Nada. Zippo.
So they sell him a fairly expensive power tool one month, only to drop support of the consumable blades the next month. No offers to search other stores, or order the blades, or even provide contact with the manufacturer.
My friend was both displeased, as well as bewildered as to how a major chain such as Home Depot could engage in such dysfunctional and unsupportive behavior.
At least when Apple dropped the price of its iPhones, the old ones still worked. In this case, Home Depot simply drops support for their customers who are foolish enough to buy a fairly expensive tool which requires spare parts support.The nearby Yahoo-sourced chart displays prices for Home Depot, Lowes, and the S&P500 Index, for the past two years. While HD and LOW have moved very similarly over the period, there's no mistaking that HD has diverged very sharply from the index in 2007.
Lowes seems to have popped up a bit more from its recent bottom, coincident with the summer mortgage-based woes, than has Home Depot. Looking more closely, Lowes was back to a positive return when the housing finance crunch hit, whereas Home Depot was in the red. Then it appears that market forces hit Lowes, as well, from which it rebounded a bit better than Home Depot.
What really struck me, of course, was that my friend could instantly detect serious failings in Home Depot, from his perspective as a customer. It echoed what I have seen in the performance data for Home Depot for at least the past year.
I have a feeling that the firm's troubles now run deeper than simply an arrogant, overpaid, now-departed CEO. And that it may be a while before Home Depot is back on track, both with consumers, as well as investors.
Friday, September 28, 2007
More on GM's & The UAW's Recent Settlement
In my very first post on this blog, roughly two years ago, I suggested that unions had committed a grievous error back in the 1950s by agreeing to accept corporate financial promises, in lieu of cash on the barrelhead.
As I reflect further on this week's GM-UAW settlement, featuring the transfer of the former's healthcare liabilities to the former, in the shape of a $51B trust fund, described here, I believe that, once again, one of my contentions is being proven correct by realities of the marketplace.
As I reread yesterday's Wall Street Journal articles on the tentative pact, still to be approved by the UAW membership, I noticed a brief description of the failure of a similar provision, established between Caterpillar and the very same UAW in a recent contract. The healthcare trust fund is already bankrupt, and the union and Caterpillar are now locked in a legal battle over it.
Frankly, I'm surprised by three things. First, that Gettelfinger would resurrect this approach after it failed at Cat. Second, that Gettelfinger would try to somehow justify how the GM trust fund will be different, and not fail, where the Caterpillar one did, i.e., what has changed in two years? Third, that the UAW-Cat healthcare trust fund debacle was not a page one story on the day of the GM-UAW pact, as well as the featured story on CNBC.
Instead, I read it in the latter part of the Journal's long piece on the strike and pact, buried in the final columns of an inside page.
The more I think about this GM-UAW settlement, and the apparently-failed Cat-UAW 2005 settlement, of a similar nature, the more I see big labor slowly being forced to move in the direction of my post of two years ago- take cash, not promises.
Sure, right now, it's a lump sum, special/single-purpose trust fund. But how long is it until the companies lobby to give individuals a tax deduction on healthcare, and simply execute a one-time swap of policies for dollars, thus safely exiting the health insurance business?
With one fell swoop, they can argue for consistency, i.e., why pay today's employee's healthcare, when we just offloaded yesterday's to you in a trust fund? Let us just pay you what we pay for your healthcare, and you, the interested party, can, say, band together with your union buddies and all present as a single group to some insurer.
It's funny how policy sometimes occurs from the strangest sources. After all, our current third-party payer medical insurance is the unanticipated result of Harry Truman's Senate Committee freezing wages during WWII. This necessitated non-cash compensation competition by firms, in the form of 'fringe benefit,' i.e., non-cash promises- pensions, medical care, vacations, etc.
Who knew that this sort of wacky compensation would take root and completely warp American usage of healthcare, not to mention taking responsibility for their own health to begin with?
If for no other reason than perhaps sparking a trend that will make HillaryCare 2.0 irrelevant, the GM-UAW tentative agreement might just be a landmark deal, and we don't even know it yet. Would it not be ironic if, twenty years on, both the company and the union are shrunken remnants of their former selves, but the revolution in healthcare insurance payment arrangements they forged near the end of their influential phases becomes the legacy for which they are best known?
As I reflect further on this week's GM-UAW settlement, featuring the transfer of the former's healthcare liabilities to the former, in the shape of a $51B trust fund, described here, I believe that, once again, one of my contentions is being proven correct by realities of the marketplace.
As I reread yesterday's Wall Street Journal articles on the tentative pact, still to be approved by the UAW membership, I noticed a brief description of the failure of a similar provision, established between Caterpillar and the very same UAW in a recent contract. The healthcare trust fund is already bankrupt, and the union and Caterpillar are now locked in a legal battle over it.
Frankly, I'm surprised by three things. First, that Gettelfinger would resurrect this approach after it failed at Cat. Second, that Gettelfinger would try to somehow justify how the GM trust fund will be different, and not fail, where the Caterpillar one did, i.e., what has changed in two years? Third, that the UAW-Cat healthcare trust fund debacle was not a page one story on the day of the GM-UAW pact, as well as the featured story on CNBC.
Instead, I read it in the latter part of the Journal's long piece on the strike and pact, buried in the final columns of an inside page.
The more I think about this GM-UAW settlement, and the apparently-failed Cat-UAW 2005 settlement, of a similar nature, the more I see big labor slowly being forced to move in the direction of my post of two years ago- take cash, not promises.
Sure, right now, it's a lump sum, special/single-purpose trust fund. But how long is it until the companies lobby to give individuals a tax deduction on healthcare, and simply execute a one-time swap of policies for dollars, thus safely exiting the health insurance business?
With one fell swoop, they can argue for consistency, i.e., why pay today's employee's healthcare, when we just offloaded yesterday's to you in a trust fund? Let us just pay you what we pay for your healthcare, and you, the interested party, can, say, band together with your union buddies and all present as a single group to some insurer.
It's funny how policy sometimes occurs from the strangest sources. After all, our current third-party payer medical insurance is the unanticipated result of Harry Truman's Senate Committee freezing wages during WWII. This necessitated non-cash compensation competition by firms, in the form of 'fringe benefit,' i.e., non-cash promises- pensions, medical care, vacations, etc.
Who knew that this sort of wacky compensation would take root and completely warp American usage of healthcare, not to mention taking responsibility for their own health to begin with?
If for no other reason than perhaps sparking a trend that will make HillaryCare 2.0 irrelevant, the GM-UAW tentative agreement might just be a landmark deal, and we don't even know it yet. Would it not be ironic if, twenty years on, both the company and the union are shrunken remnants of their former selves, but the revolution in healthcare insurance payment arrangements they forged near the end of their influential phases becomes the legacy for which they are best known?
Thursday, September 27, 2007
GM: The Strike and The Settlement
I would be remiss if I let the week pass without commenting on one of the biggest news stories about corporate America- the GM-UAW strike and subsequent contract.
A few weeks ago, I wrote about GM's stock price surge, here, suggesting that it is the product of speculation, rather than consistently excellent performance.
As the nearby Yahoo-sourced price chart of GM and the S&P500 for the last three months clearly shows, even the recent spike in GM's price, due to the UAW contract, only brings it to rough parity with the Index. For much longer periods, such as more than 2 years, the picture still looks even worse, as in that prior post.
However, leaving aside the immediate ramifications of the contract on GM's market value, there are two other aspects to this deal I wish to discuss.
The first comes by way of Wall Street Journal editorialist Holman Jenkin's excellent piece in yesterday's edition. He notes that the brief strike of the UAW GM workers called by Ron Gettelfinger may well have been so he could get them in the right head space regarding the sacrifices they are going to be asked to make in the new contract. Rather than it being a product of the negotiations, Jenkins reasonably theorizes that Gettelfinger, presiding over an ever-shrinking, less-important union, is worried that they won't accept the new contract, sending the near-term status and health of the union, with GM, into free fall.
That alone tells you something about the severity of the situation in Detroit right now.
But there's so much more to it. Many articles and pundits are trumpeting the new pact as a sea change in the American worker's situation.
This is because of the key element of the new contract, wherein GM finally exits the employee medical care guarantee business, in which it, and other firms, have been since WWII, by way of a $51B payout to a new union healthcare trust find.
Sure, GM is out of the business of yet another benefit provision. Along with defined contribution plans, rather than the older, now nearly-extinct defined benefit pension plans, healthcare is returning to its rightful place- as the province of the worker, paid for with cash from his own pocket.
However, given the context of the GM deal, instead of going right to the worker, the UAW-administered trust fund idea was used. It's necessary because of the mixed durations of claims by so many former and current GM workers on the company for healthcare.
Look at what this does. It now makes the workers' own union, the UAW, responsible for any healthcare shortfalls, service gaps, funding shortages, etc. Responsibility has hit the union movement at last. It's as if they returned to an ancient medieval guild structure, wherein they have provided in common for their retirement and healthcare.
I have several observations on this. First, the $51B number seems suspect to me. If the same minds that usually mess up healthcare cost management and estimation were involved, and it's hard to imagine who else would have been, it stands to reason that this amount will, ultimately, prove unequal to the claims made on it. Look out if you happen to succeed Ron Gettelfinger as UAW chief.
Second, there's a subtle, but important, aspect to the timing of this change. Right in the middle of a Presidential campaign featuring many Democratic candidates calling for more government-run universal healthcare, you have the major US union, the UAW, reverse course and take on the responsibility for its own healthcare insurance provision.
Will a major, blue-collar Democratic voting bloc now get a taste of individual control of their own health insurance, and lose their appetites for HillaryCare 2.0, as well as other Democratic health insurance plans which promote socialism?
It's an interesting thought.
Jenkins mentioned another interesting aspect of the deal. By moving the union's healthcare administration to .....the union.....the UAW has assured its existence and relevance for a little while longer, assuming they can get the contract passed by the membership. Because, now, the union has to exist to administer the healthcare benefits.
Otherwise, the UAW was in danger of simply being outsourced out of existence, as GM, Ford and Chrysler slowly lose market share and jobs in the US.
Finally, there's GM itself. What does this UAW pact do for it? Is it now going to soar like an eagle, with the dreaded healthcare burden about which Rick Wagoner has complained for his entire tenure as CEO finally lifted?
Well, first, as some have pointed out, GM has to actually fund the new UAW healthcare trust fund. Then there's the sad fact that being quit of some legacy expense base bears no relationship to an inability of GM to design and build cars which sell at prices for which a sufficient number of people will pay the sticker, in order to make the necessary profit per vehicle to stay in business for the long run.
Like draining a swamp, and still having to wrestle the alligators, this healthcare trust fund deal may simplify matters for GM, but it by no means solves its toughest market-related survival issues.
It will still take several years of consistently superior total return performance for me to judge GM as having "turned around." And, frankly, I just don't see that coming down the road for many years- UAW contract, or not.
Wednesday, September 26, 2007
Microsoft Tries New Online/Ad Strategies- Again
Yesterday, I wrote this post regarding a Wall Street Journal article which harkened back to GeoCities, the very first online networking site, and discussed today's landscape in that product space.
I suppose the timing of Dennis Berman's piece was no accident, appearing, as it did, as Microsoft is in talks to buy up to 5% of Facebook for a reported $300-500MM.
Tuesday's Journal carried a front-page article describing Microsoft's many, failed attempts to break into online businesses, from browsers to ad placement businesses. As I wrote here, in May of last year, I think the only way Microsoft will realize consistently superior returns for its shareholders is to break itself up into three pieces, each focusing on one business: applications software, operating software, and internet-related businesses. As it stands now, and for some years, Microsoft's diversified structure has simply led the software giant to become a veritable Gulliver, tied down in competition with many, more nimble adversaries in each of the niches in which it does business.
According to the Journal article, this time around, Microsoft is pinning everything on one Brian McAndrews, an executive whom it acquired in the deal to buy aQuantive, Inc., an online ad company, for $6B.
Of course, as the article also details,
"Just 17 months ago Microsoft hired Steve Berkowitz, from Internet search company Ask.com, as a vice president in its online group. Much as Mr. McAndrews is seen today, Mr. Berkowitz was positioned as the outsider needed to lead a cultural change at a company strong on technology but short on experience in the advertising industry.
A lack of political chops in working within the huge company and a clash with a highly respected engineering manager have hampered Mr. Berkowitz, say people familiar with the matter. Several of Mr. Berkowitz's duties were recently ceded to Mr. McAndrews."
So, once more, Microsoft has thrown money at a business in which it lags, without really re-orienting the company to address the fundamental strategic shift such actions implicitly acknowledge.
As I've written before, I don't think Microsoft truly understands, nor is currently capable, of competing totally all-out to win in the online business arena. It's still a software company trying to re-ignite growth by viewing online as a distribution platform, rather than a do-or-die business.
It seems to me, per Mr. Berman's article, that Facebook is the big winner here. Microsoft will, as usual, pay up but cede control. It won't seriously change to address the new business. And Facebook will reap a huge payday simply for carrying Microsoft ads.
If there's any downside for Facebook, it would be these: it's not selling enough of itself while the premium is stratospheric, and; it may, as Yahoo did with its payments from ATT years ago, grow fat and lazy on the passive revenue stream, only to wake up in a few years behind its competitors.
Time will tell. However, I cannot help but think that, once again, Microsoft's unfocused, half-hearted attempts to 'beat Google,' simply to do so, will enrich third parties, further impoverish its own shareholders, and continue the software giant's slide into relative unimportance as a leader in the technology product/market.
I suppose the timing of Dennis Berman's piece was no accident, appearing, as it did, as Microsoft is in talks to buy up to 5% of Facebook for a reported $300-500MM.
Tuesday's Journal carried a front-page article describing Microsoft's many, failed attempts to break into online businesses, from browsers to ad placement businesses. As I wrote here, in May of last year, I think the only way Microsoft will realize consistently superior returns for its shareholders is to break itself up into three pieces, each focusing on one business: applications software, operating software, and internet-related businesses. As it stands now, and for some years, Microsoft's diversified structure has simply led the software giant to become a veritable Gulliver, tied down in competition with many, more nimble adversaries in each of the niches in which it does business.
According to the Journal article, this time around, Microsoft is pinning everything on one Brian McAndrews, an executive whom it acquired in the deal to buy aQuantive, Inc., an online ad company, for $6B.
Of course, as the article also details,
"Just 17 months ago Microsoft hired Steve Berkowitz, from Internet search company Ask.com, as a vice president in its online group. Much as Mr. McAndrews is seen today, Mr. Berkowitz was positioned as the outsider needed to lead a cultural change at a company strong on technology but short on experience in the advertising industry.
A lack of political chops in working within the huge company and a clash with a highly respected engineering manager have hampered Mr. Berkowitz, say people familiar with the matter. Several of Mr. Berkowitz's duties were recently ceded to Mr. McAndrews."
So, once more, Microsoft has thrown money at a business in which it lags, without really re-orienting the company to address the fundamental strategic shift such actions implicitly acknowledge.
As I've written before, I don't think Microsoft truly understands, nor is currently capable, of competing totally all-out to win in the online business arena. It's still a software company trying to re-ignite growth by viewing online as a distribution platform, rather than a do-or-die business.
It seems to me, per Mr. Berman's article, that Facebook is the big winner here. Microsoft will, as usual, pay up but cede control. It won't seriously change to address the new business. And Facebook will reap a huge payday simply for carrying Microsoft ads.
If there's any downside for Facebook, it would be these: it's not selling enough of itself while the premium is stratospheric, and; it may, as Yahoo did with its payments from ATT years ago, grow fat and lazy on the passive revenue stream, only to wake up in a few years behind its competitors.
Time will tell. However, I cannot help but think that, once again, Microsoft's unfocused, half-hearted attempts to 'beat Google,' simply to do so, will enrich third parties, further impoverish its own shareholders, and continue the software giant's slide into relative unimportance as a leader in the technology product/market.
Tuesday, September 25, 2007
Online Communities: The GeoCities Story
Today's Wall Street Journal featured, on the front page of its Money & Investing section, one of the best analytical, staff-written articles I've read in the paper in ages.
Dennis Berman provides a timely and fascinating look back at the very first, now almost-forgotten online social networking site, GeoCities. Back in 1994, before, as Berman reminds us, high-speed cable or DSL, full motion video, etc., GeoCities, created by David Bohnett, contained the essential elements which today characterize FaceBook, MySpace, et. al.
To summarize the GeoCities story, it rose rapidly among then-popular websites, becoming the "third most-visited site on the Web" in August, 1998. In early 2000, amidst the dot com craze, Yahoo paid $4.7B to buy GeoCities. Bohnett and his team received his payday, and, as Berman writes,
"...their creation would soon wither before their eyes."
He further describes the wrenching, profound changes for GeoCities under Yahoo,
"Life inside Yahoo was smothering for GeoCities, say a number of people familiar with the transition. Developing new technologies for GeoCities' communities slowed to a crawl, as its staff of 30 software developers was cut to a skeleton crew. Yahoo focused instead of building traffic, not necessarily on the programming for improving person-to-person interaction. "Had they done things right with GeoCities, there would be no Facebook, YouTube or MySpace," says one. "
With my own posts regarding Terry Semel's 'leadership' of Yahoo, as may be found by searching on that label on this blog, the following passage almost made me laugh,
"Yahoo's treatment of GeoCities is particularly relevant for Mr. Zuckerberg, who reportedly rebuffed a $1 billion buyout from former Yahoo CEO Terry Semel."
So, having bungled the purchase, integration and management of the internet's very first social networking site, Yahoo was going back for a second bite of this hideously expensive apple? Amazing!
What intrigued me about Berman's article, and the GeoCities/Facebook story, is how perfectly it showcases the basics of Joseph Schumpeter's now long-ago vision of the dynamics of industry and competition. Note that GeoCities was sold to the one firm, Yahoo, which, at the time, could have capitalized its new acquisition and buried all comers with innovation, expansion of services and scale, etc.
Instead, Yahoo thought small, cut costs, and opened itself up to competition, and mismanaged this expensive beachhead into what has become a very hot online business. Talking to Bohnett about this, Berman writes,
"But if he could give advice to Mr. Zuckerberg, he'd recommend heavy investment in new technology to "stay true to what the user experience is." And he stressed the importance of keeping a young audience: "Those kids tend to get older and maintain some connection with an online community. You've got to capture that early adopter, young audience." "
At this point, Mr. Berman had already written a great article. But, next, he further probed the Schumpeterian nature of this product/market space, without explicitly acknowledging the famed dynamic.
In the final paragraphs of his article, Berman reviews Zuckerberg's (Facebook's founder) options and risks,
"Mr. Zuckerberg is in an especially good place right now. His site has developed a patina of invincibility, which in 2006 enabled him to wrangle an especially good advertising deal with Microsoft. Ever the Net-laggard, Microsoft is now guaranteeing about $75 million in revenue this year, which could become as much as $300 million by 2011 if traffic grows rapidly.
Alas, advertisers have found Facebook users to be a huge audience -- that could care less about ads. The percentage of users clicking onto site advertisements on Facebook and MySpace are lower than typical Web sites. That means it's essentially sucking up a subsidy from Microsoft, which wants to get its hooks into Facebook the best it can."
Which leads Berman to what I feel makes this an outstanding article. Rather than stopping short with an excellent review of GeoCities, a comparison of it and its fate with today's Facebook, and leaving it at that, he goes one step further. Berman risks alienating the entire business, i.e., Facebook and MySpace, by noting how dependent it is upon advertising, and how horribly, traditionally difficult it has been to make this work,
""It's not that easy to monetize social media," says Eric Hippeau, a managing partner of Softbank Capital that made more than 20 times its investment in GeoCities. He also sits on Yahoo's board. "Once Microsoft's deal with Facebook expires, as does Google's deal with MySpace, they're going to have to sell advertising for themselves and it's going to be a challenge." So far, he says, "it's not that easy to match the right advertising with the right audience."
That squares with the experience of Thomas R. Evans, GeoCities' former chief executive. "When you're as successful as GeoCities, everyone tells you how wonderful you are. It causes you to miss opportunities." Now the CEO of Web site Bankrate.com, he added that, "People at the time were dismissive of old media experience. But it turned out looking exactly like the old media business. You have to execute and provide both the consumer and the advertiser with significant value."
At some point, the questions about Facebook the business will eclipse the praise of Facebook the social phenomenon. And once that point hits, Mr. Zuckerberg will be less able to dictate the terms of how fresh capital is put to use."
Mr. Berman pulls no punches. From his initial description of the now-essentially-defunct GeoCities, to the likely fate of Facebook, his superb writing uncovers a wonderful, timeless story of business innovation, absorption, mismanagement, the rise of new competitors, and the continuing weakness of the underlying business model.
Aside from the marvelous business strategy expose, Mr. Berman makes it hard for the reader to avoid asking the question,
"If no other, larger firm, had bought, or bought stakes in, GeoCities, or was trying to buy or invest in Facebook, would Bohnett and Zuckerberger realize millions in wealth simply from the profitability of their businesses and business model? Or would they become, like Amazon, long on initial market value gains, but short on realized profits?"
Thus, leading to the ultimate question,
"Were/are the acquiring giants of these online social networking businesses the greater fools?"
Dennis Berman provides a timely and fascinating look back at the very first, now almost-forgotten online social networking site, GeoCities. Back in 1994, before, as Berman reminds us, high-speed cable or DSL, full motion video, etc., GeoCities, created by David Bohnett, contained the essential elements which today characterize FaceBook, MySpace, et. al.
To summarize the GeoCities story, it rose rapidly among then-popular websites, becoming the "third most-visited site on the Web" in August, 1998. In early 2000, amidst the dot com craze, Yahoo paid $4.7B to buy GeoCities. Bohnett and his team received his payday, and, as Berman writes,
"...their creation would soon wither before their eyes."
He further describes the wrenching, profound changes for GeoCities under Yahoo,
"Life inside Yahoo was smothering for GeoCities, say a number of people familiar with the transition. Developing new technologies for GeoCities' communities slowed to a crawl, as its staff of 30 software developers was cut to a skeleton crew. Yahoo focused instead of building traffic, not necessarily on the programming for improving person-to-person interaction. "Had they done things right with GeoCities, there would be no Facebook, YouTube or MySpace," says one. "
With my own posts regarding Terry Semel's 'leadership' of Yahoo, as may be found by searching on that label on this blog, the following passage almost made me laugh,
"Yahoo's treatment of GeoCities is particularly relevant for Mr. Zuckerberg, who reportedly rebuffed a $1 billion buyout from former Yahoo CEO Terry Semel."
So, having bungled the purchase, integration and management of the internet's very first social networking site, Yahoo was going back for a second bite of this hideously expensive apple? Amazing!
What intrigued me about Berman's article, and the GeoCities/Facebook story, is how perfectly it showcases the basics of Joseph Schumpeter's now long-ago vision of the dynamics of industry and competition. Note that GeoCities was sold to the one firm, Yahoo, which, at the time, could have capitalized its new acquisition and buried all comers with innovation, expansion of services and scale, etc.
Instead, Yahoo thought small, cut costs, and opened itself up to competition, and mismanaged this expensive beachhead into what has become a very hot online business. Talking to Bohnett about this, Berman writes,
"But if he could give advice to Mr. Zuckerberg, he'd recommend heavy investment in new technology to "stay true to what the user experience is." And he stressed the importance of keeping a young audience: "Those kids tend to get older and maintain some connection with an online community. You've got to capture that early adopter, young audience." "
At this point, Mr. Berman had already written a great article. But, next, he further probed the Schumpeterian nature of this product/market space, without explicitly acknowledging the famed dynamic.
In the final paragraphs of his article, Berman reviews Zuckerberg's (Facebook's founder) options and risks,
"Mr. Zuckerberg is in an especially good place right now. His site has developed a patina of invincibility, which in 2006 enabled him to wrangle an especially good advertising deal with Microsoft. Ever the Net-laggard, Microsoft is now guaranteeing about $75 million in revenue this year, which could become as much as $300 million by 2011 if traffic grows rapidly.
Alas, advertisers have found Facebook users to be a huge audience -- that could care less about ads. The percentage of users clicking onto site advertisements on Facebook and MySpace are lower than typical Web sites. That means it's essentially sucking up a subsidy from Microsoft, which wants to get its hooks into Facebook the best it can."
Which leads Berman to what I feel makes this an outstanding article. Rather than stopping short with an excellent review of GeoCities, a comparison of it and its fate with today's Facebook, and leaving it at that, he goes one step further. Berman risks alienating the entire business, i.e., Facebook and MySpace, by noting how dependent it is upon advertising, and how horribly, traditionally difficult it has been to make this work,
""It's not that easy to monetize social media," says Eric Hippeau, a managing partner of Softbank Capital that made more than 20 times its investment in GeoCities. He also sits on Yahoo's board. "Once Microsoft's deal with Facebook expires, as does Google's deal with MySpace, they're going to have to sell advertising for themselves and it's going to be a challenge." So far, he says, "it's not that easy to match the right advertising with the right audience."
That squares with the experience of Thomas R. Evans, GeoCities' former chief executive. "When you're as successful as GeoCities, everyone tells you how wonderful you are. It causes you to miss opportunities." Now the CEO of Web site Bankrate.com, he added that, "People at the time were dismissive of old media experience. But it turned out looking exactly like the old media business. You have to execute and provide both the consumer and the advertiser with significant value."
At some point, the questions about Facebook the business will eclipse the praise of Facebook the social phenomenon. And once that point hits, Mr. Zuckerberg will be less able to dictate the terms of how fresh capital is put to use."
Mr. Berman pulls no punches. From his initial description of the now-essentially-defunct GeoCities, to the likely fate of Facebook, his superb writing uncovers a wonderful, timeless story of business innovation, absorption, mismanagement, the rise of new competitors, and the continuing weakness of the underlying business model.
Aside from the marvelous business strategy expose, Mr. Berman makes it hard for the reader to avoid asking the question,
"If no other, larger firm, had bought, or bought stakes in, GeoCities, or was trying to buy or invest in Facebook, would Bohnett and Zuckerberger realize millions in wealth simply from the profitability of their businesses and business model? Or would they become, like Amazon, long on initial market value gains, but short on realized profits?"
Thus, leading to the ultimate question,
"Were/are the acquiring giants of these online social networking businesses the greater fools?"
Subscribe to:
Posts (Atom)
