Thoughts of The Day: Disney rolls out 'Lojack for kids'; TheFacebook on the block,

Disney is making waves in the mobile service arena today with the introduction of its Disney Mobile MVNO service. No news yet that I've found on who's software is powering the service (or if it was developed completely in-house). Whether or not this endeavor will prove profitable for the media and entertainment behemoth remains to be seen, but a look at the various features and goals of the service seems indicative that Disney might just have hit the proverbial nail on the head.

According to the President of Disney Online (the group responsible for Disney Mobile), the most attractive set of features the service offers revolve around giving parents more control over how their children use the phones/service. This presumably would include letting parents turn certain features like ring-tone, music, video, and game downloading on/off, as well as perhaps setting text messaging and voice minute limits on each phone.

While all of these features are impressive when taken together, the one single selling point which I think stands out above all the rest is the ability for parents to utilize the phones' on-board GPS systems to locate their children, ala Lojack for vehicles. In a modern world where children, tweens, etc. are all-the-more often left to their own devices/given more independence from their working parents, this feature gives parents a peace of mind not really otherwise available/attractive.

The only real barrier I can see that would keep families with younger children from opting for Disney Mobile would be their hesitation to switch over from their existing family plans with the major carriers. Remember most of these contracts include early opt-out clauses often charging upwards of $150 for early termination, so there is a timing cycle issue. Also, to what extent will adults be willing to themselves carry a Disney-branded cell phone is questionable. Assuming Disney gets the marketing, price points, and perhaps most important, incentive package right, I can see this service becoming fairly popular in the next 12-24 months.

In Other News...

TheFacebook (www.facebook.com), the social networking site popular amongst college students worldwide is said to be up for sale. Rumor has it that the company, started by Harvard undergrads and backed by Accel Partners has already turned down an offer for $750 million. For those who've read my post on MySpace, that company with more registered users, page views, etc fetched a relatively paltry $580 million from Rupert Murdoch's News Corp. back in 2005. Now there are rumors afloat that the company is asking for as much as $2 billion...yes that's Billion, with a "B".

Do I think, say, Viacom, owner of complementary media properties such as MTV, VH1, and Comedy Central will pony up that pricey premium? My guess is they likely will not, nor will any other likely bidder emerge at that valuation. So with less users, page views, etc, how do I figure TheFacebook will fetch a higher price than Myspace?

Firstly, for those otherwise unfamiliar with TheFacebook, it is similar to MySpace in that it allows individual users to create profiles, upload pictures, send messages/comments to other users, etc. The site was originally open only to students at U.S. colleges & universities but has since expanded to other countries and High Schools. Numbers I've seen estimate that 80% of students at supported schools are active Facebook members. The Site boasted some 6,000,000 student members as of 12/2005, adding another 20,000 on a daily basis. Yikes! Talk about penetration! Alexa ranks TheFacebook as the #56 most popular site worldwide and #26 English language, while MySpace ranks #8 and #5, respectively.

However, while it lacks the broad-based appeal of MySpace (as I pointed out in my criticism of the site a few posts ago), Facebook's interface, layout, and pretty much everything else about it is far cleaner, easier to use, and, not to over-generalize, far less annoying than MySpace (as seen in the above screenshot). Facebook allows users control of the content of their profiles, but does not allow rich media or customized layouts ala MySpace. This results in a globally consistent user experience.

MySpace also leaves something to be desired with its picture offering, limiting the amount of pictures a user can upload via an unsurprisingly awkward upload/captioning process. Facebook has designed and deployed a very clean, intuitive photo service allowing users to create an unlimited number of albums and likewise upload an unlimited number of photos. Not only is the interface and (as it often comes back to, the user experience) far superior than on MySpace, but Facebook also gives users the ability to "tag" their pictures by identifying other Facebook members which appear therein. This makes it easier to find pictures of oneself as well as one's friends.

Facebook also gives users a far better idea of their social network, letting users browse the profiles of all users at their school, as well as users in their classes, social groups, and the actual levels of separation between themselves and other users (through friends of friends, etc). Facebook also has a seldom-talked about graphical network feature, which displays all the connections between ones friends, etc. Again, this beats out MySpace which only really goes so far as to tell you there are somewhere around 29,470,239,508,230,954 people (give or take) in your 'social network', which as far as I can tell is just every registered MySpace user. I could go on and on here, but in general it comes down to design and planning. TheFacebook was clearly well-designed and planned-out every step of the way, whereas MySpace appears to have come to be without any formal system design initiatives being put into place at any step along the way.

Facebook also trounces MySpace when it comes to server/service reliability and latency. Seldom do users suffer from endless wait-times on Facebook and even far more seldom, if ever, does Facebook return 404 or other undeliverable errors. Also, while I don't have the hard statistics, I am certain that the average page file size (kb) on MySpace is far, far smaller than those on MySpace. This is one of the downfalls of MySpace giving end-users complete control over what media they place in their profiles.

Now (drum roll please...), the ultimate reason I think Facebook will fetch the prettier penny:

Data Mining!

That's right folks, TheFacebook is valuable just as much, if not more so for the data locked within its servers as it is for generating ad-based revenues. Because Facebook profiles are essentially records comprised of simple one-word/number or short phrase text strings (the content of which is highly similar across profiles/schools/the entire network), Facebook can easily track incidents of matching strings, as well as trend those incidents. As a matter of fact, every Facebook user has access to Pulse. As seen in the picture below, Pulse shows the most often found strings in each category at one's school (or at any school in the network) versus the entire network as a whole.

Facebook provides this for free to its members! Imagine though if they developed (or have developed) an application allowing marketers - and not just advertisers on the site - to mine this profile data to discover any trends, etc. We're not talking just trends common to all college students in general (although it would certainly be possible), but the ability to drill down to virtually demographic or combined demographic, to say, find differences in popularity of a movie or TV show by region, country, gender, age, or any other field (or combination thereof) in Facebook profiles.

One (or two) more thing(s). Every August, approximately 1,000,000 students begin their collegiate experience. If current penetration levels are any indication then Facebook will capture 800,000 of these students each and every year. Also, many, if not most Facebook users are extremely active. We're talking not only logging in regularly, but multiple times every day. Compare this to, as I again pointed out in a previous post, MySpace, where I'd venture to guess from my experience on that site that the majority of activity is generated by 50% or less of its registered users. So, add users or host billions of impressions or page views across a general and broad population, I see TheFacebook as being potentially far more attractive to not only advertisers, but marketers in general.

So there you have it. About 37 reasons why I would not be surprised to see TheFacebook fetch, oh, lets say somewhere between $900 million - $1.3 Billion. More on this story as it develops. Now stop messing around and get back to work!

Telecom and Tech Reminisce on the Good Ole' Days, (Part 1 of a few)

Valuations are getting very rich in the communications equipment area, reminiscent of the glory days of the tech bubble. My favorite example of of this is, no surprise, one of my favorite former high-flyers - JDS Uniphase. First of all, JDSU is net income and operating cash flow negative. All-in-all throughout this company's financial statements there is almost as much red ink as black, and in some cases more! JDSU currently trades at a forward P/e (Price to Earnings) multiple of roughly 85 (using the high end of fy 2006 estimates!), and a trailing P/e of 225. Yikes! So why is an unprofitable, non-growth trend company trading at such astronimical valuations, especially when the Communications Equipment index (yahoo! finance) trades at roughly 25 times earnings, and the larger Technology sector at a relatively reasonable multiple of only 31?

In the past six months, JDSU stock has skyrocketed roughly 168%. Yes, 168%!!!!! Talk about market myopia! Aparantly no one learned anything from the burst of the bubble back in 2001, when this stock traded as high as $140, and which has been relegated to the sub-$5 range ever since early 2002. JDSU should change its slogan to something like "JDSU: disproving efficient market theory since 1999".

Call me crazy, but I don't see the story here. Everyone and their mother has known about the major carriers' plans to build out their optical fiber networks for years, its old news, if news at all. The 'pickup' in spending by network operators, again, how long has it been talked about? The emergence of new bandwidth-intensive services, rich media, etc being deployed by providers and the cable/telecom/datacom companies will drive demand for JDSU's products, but again, this isn't news. Are we then seeing these recent gains as these new service roll-outs and network build-outs make the transition from hot air to actual progress? Perhaps, but I still maintain there is too much momentum and price run-up behind this stock for that to be the case. Is it a potential acquisition target then? Again, it could happen in the current environment of consolidation (Lucent-Alcatel come to mind), but I would be surprised to see any one step to buy a company with such heinous fundamentals, especially at these valuations. Honestly I actually winced in agony while examining JDSU's financial statements (cash flow and income), its that bad (although in fairness the balance sheet looks ok).

Shares of another optical play, Corning (NYSE: glw), have likewise jumped by about 150% over the past 12 months. But Corning is actually MAKING MONEY! Cash flow, net income, revenue all positive, as well as growth in each of those critical areas. It's a turnaround story, and while the valuation the firm has been rewarded with - trading at a multiple of about 72 - might still be a little high, continuing earnings growth should bring that number more into line.

But, back to JDSU.

In a recent report, CIBC WM has a sector overweight on JDSU (when it was trading around $3.70), but gives no 12-18 month price target. They also give the company's P/e for the next 2 years as NM (not meaningful). Hmmm...very interesting. While I'm not here to discredit any particular analyst or group thereof, this should at the very least raise a few questions as to how confident the authors of said report really are. I also view this as further proof that this is a crap shoot, so-to-speak.

However, the company has relocated most of its manufacturing to Shenzen, China or other lower cost facilities. They have also reduced headcount substantially even amidst increasing demand. These are admirable corporate actions, although a little late in coming. The benefits in margins and likely profitibility resulting from these decisions should materialize withing 12-24 months. That is of course iff JDSU can actually execute on these plans, as well as their larger restructuring efforts. And, as many of you well know, this is by no means an absolute certainty, so those benefits should be discounted accordingly.

Another issue which I would like to touch upon is the relative rash of acquisitions JDSU has made recently. According to their website, the company made four acquisitions in 2005 alone (including that of Acterna), two in 2004, and only one in 2003. Now insofar as a firm's M&A activity can be seen as a proxy for its health (the degree of which is of course questionable), JDSU seems to be moving in the right direction. I would expect these recent acquisitions to become accretive to the company's earnings within the next 12-18 months. However upon examinination of the financial statements, growth due to M&A, as well as organic growth has been supremely unimpressive thusfar, and hence I would not be jumping on that bandwagon.

While this is by no means a conclusive and all-encompassing analysis of the company's prospects, I think it points out several reasons why this company, and as I will start to discuss more and more about going forward, many other telecom equipment plays are overvalued.

As always, comments whether on here or via email, aim, etc are always appreciated.