Business, Technology, Innovation

Pointing out the Obvious

2008-03-22T15:54:00.000-07:00

I wrote this for the 1-2 Knockout blog, but it is reposted here, enjoy:

Pointing out the Obvious

Over the course of the past year, I've spoken with a large number for brokers/financial advisors at my firm, and while I attempt to give them the benefit of the doubt, often I am left disappointed by their ignorance of most things finance (especially things that don't add to their bottom line). Just the other day, I spoke to a financial advisor (intentionally lower-case, btw) who asked if I knew if we published any research on Bear Stearns, so he could read it and advise his client(s). Besides the fact that this genius lacked the ambition to literally make 4 mouse clicks to navigate the intranet site to exactly where he wanted to be, I found this situation to be exemplar of far larger issues at hand. On the surface, this points out what for many in the Financial community is already a foregone conclusion, that retail brokers are wholly unqualified to offer any sort of financial advise.

Historically, financial advisors and brokers have offered various investment products such as equities, 'straight' fixed-income (corporate, preferred, muni, etc), annuities, and insurance. While I strongly doubt the ability of any financial advisor to value such a simple product as an annuity, Brokerage firms generally provide various planning tools allowing their advisors to simplify this process and explain returns, risks, etc to their clients when selling these traditional products. However, today (and this is not new, by any means), advisors routinely sell clients on various structured equity and fixed-income products that are far more complicated to value and understand than traditional investment products. Somehow (and this is another issue altogether) advisors are able to pass their NASD (FINRA) licensing exams, yet in my experience more often than not, do not understand these structured products in which they are investing their clients money. How many brokers and advisors are going to read a prospectus for a leveraged principle-protected structured note tied to the value of a basket of currencies with an embedded call option on them? Further, how many could say, model the cash flows or even sketch a chart of the payoff profile of such a security, let alone discuss the specific economic conditions which could affect such an investment?

I'm curious as to what liability a Firm has in such cases. Admittedly, I'm no Lawyer, but it seems to be the case that arguably the only protection Brokerage Firms have in this respect is the ignorance and indifference of their clients. Essentially, Brokers are playing the waiting game, betting on the probability that clients won't lose enough money due to (or at least in part to) 'bad' advice (in quotes, as that is clearly a relative term) so as to compel clients to take legal action. Its a liability management policy based almost solely on a hope and a prayer, that future returns will be similar to historic performance, and that nothing 'really bad' will happen.

What we're seeing now though is this lax liability management coming back to hurt the Brokers. Recently, UBS was served with a class-action lawsuit over the marketing of Auction Rate Securities (see WSJ: UBS Sued over ARS). A detailed explanation of these securities is beyond the scope of this post, but essentially they were sold to clients as almost-cash investments which could be redeemed for cash on a weekly (although monthly, and longer-term reset periods exist) basis, while earning an attractive return relative to other liquid cash-like investments (e.g. money market funds). I'm sure the fine print somewhere includes language that the selling Firm in no way guarantees the success of the auctions (i.e. no guaranteed liquidity), but when considered with the actual pitch these products were sold upon, I doubt that this will offer Firms much protection against lawsuits.

What we see now is that for some years, the success of these auctions and the liquidity they enabled - a critical selling point for ARS - was due to the underwriting/offering Banks and Brokerages propping up the auctions on their own account. In the past few months, as these same Banks/Brokers have reallocated capital due to credit market conditions and losses, they have ceased to support many, if not all of these periodic auctions for their clients. Thus, clients who were essentially promised liquidity have none (or some, if they're lucky) and their 'cash' is completely useless to them. As if this wasn't bad enough, Brokers are adding insult to injury and, in their great benevolence, charging clients interest to take out loans using the ARS as collateral. This seems to be the epitome of usurious, bullying behavior and breach of fiduciary duty at best, and criminal at worst (although thats a claim for the ~~lawyers~~ er, courts to decide).

Only time will tell how this class action and subsequent ones that are sure to be filed against other Brokers will play out, but I imagine that it will not work out very well for the Brokers/Banks. I also don't want to focus solely on this issue, since it is simply one example which shines light on the potentially enormous legal liability of ignorant and unqualified brokers and sales policies/procedures/literature which do not accurately explain investment products in their entirety.

Taken further, one could even question why in this day and age, what purpose brokers and financial advisors actually serve, when one could just as easily open an Ameritrade/etrade/etc account and do the work oneself. The reason for the continued existence of the profession though is not due to their specilization and expertise in providing financial advise, but for the same reasons why virtually every other brokerage type business (e.g. realty) exist: laziness and indifference. People don't want to be bothered with the minutiae of managing their finances, of doing due diligence and research on their investments and potential investments. The problem though, is if the advisor can't do that, then why are they trusted to do so, and so handsomely remunerated for services not performed?

Lichtenstein vs. Germany: Slippery Slopes Abound

2008-02-26T20:45:00.000-08:00

So for those of you who (apparently, like most of the blogosphere) have glazed over this little fiasco, check out the WSJ's solid summary of the situation here.

While the Journal does a very good job explaining the facts surrounding the controversy, they don't take it out a step further to consider the implications of, and myriad questions raised by German investigators' actions.

Is it now not only commonplace, but a widespread and acceptable method of obtaining information in an investigation to blatantly pay employees to steal from their employers? Are the tactics employed by German investigators against firms essentially owned by another sovereign nation right, in the legal, ethical, or even pragmatic sense of the word? Taking this one step further, I cannot help but wonder as to how widespread such practices are, and to what extent or magnitude they are practiced. The next question really though, is where does it end? One could very easily make the argument that such tactics amount to the very same espionage practiced by the KGB or CIA during the cold war, if not worse, since the perpetrators are open about their espionage, and yet still completely unapologetic, as if Germans are rubbing it in Lichtenstein's face.

I'm not exactly an expert in Euro-zone or Lichtenstein law, but there are many things going on here that suggests the truth of the matter might be more complicated than it seems on the surface. If all is as the Journal would have us believe, one might imagine Lichtenstein banks having more recourse against the employees who stole client data and attempted (sometimes successfully) to blackmail the Banks.

Any readers out there familiar with extradition or employment law in Eastern Europe?

Welcome Back to the Blog!

2008-02-06T20:09:00.000-08:00

So, admittedly its been quite a while since my last post (although I've racked up quite an impressive inventory of drafts), but I'm back, rip roarin' and ready to go!

A Few things you'll be seeing in greater detail in the near future:

My reaction to the WSJ article today (2/6/08) mentioning Disney's relatively miserable quarterly results, buoyed by solid results in the Cable & Networks division. While I haven't read through the 10-q, I expect ESPN (and its sub networks) had ALOT to do with it. I still have more research to do, but lets just say I am OFFICIALLY calling for Disney to investigate a carve-out or spin off ESPN from the rest of the Company.

A discussion of human nature in corporate environments, namely (mid-level) managers' propensity to act not in the best interests of the company or its shareholders, but in such ways that actually damage those interests. Lets just say I've spent some time 'in the trenches' this past year, and its given me the opportunity to see dysfunction the likes of which I had previously thought impossible. I will also seek to discuss methods of dealing with this.

Many of my reactions to the undulations of the Equity and Credit markets, and the Economy in general, with special focus on the underlying causes of our current predicament.

Various investing strategies , some relatively original, others not so much.

Aaaaand, last but certainly not least, my reaction to news, events, and the writings and rantings of others (especially so-called "experts").

So, I look forward to hearing from you, engaging in (semi) intelligent debate, and of course, bringing you new and unique perspectives in Business, Technology, and Innovation!

Getting Real with Hedge Fund Regulation

2006-12-21T14:44:00.000-08:00

For the Government to get in the ring and try to further regulate hedge funds would be like me trying to referee a Cricket game. I could probably go in there and just assume this and that is right or wrong, but I'd be interefering with the game, with the competition. And just as in Cricket, that is how the free market operates. Sometimes you win, sometimes you lose, but you'll never be punished by the Ref changing the rules in the middle of the game.

Ok so here's the deal:

Hedge Funds, PE, and other alternative investment pools SHOULD NOT be subject to increased public regulation and disclosure requirements, especially now that the minimum requirements for investment in these funds has increased. The main concern raised by politicians and other would-be intervention artists seems to be the risk exposure these funds bring to public capital, namely in the form of pension and endowments, both of which have been and continue to be major investors in these funds.

Assuming this is the true reason these politicos are pushing for increased regulation, to me, is absolutely ridiculous. If the real concern is that public pension, etc money is exposed to "risky" investments such as hedge funds, than the obvious conclusion is that the pension and endowments themselves should be limited in the amount (or more accurately proportion) of their capital they allocate to such investments. Such an approach precisely attacks the apparent problem (to what extent alternative investments are any more/less risky than any other class is beyond the scope of this post), and is in-line with the free market philosophy implicit to functional and efficient markets.

Generally speaking, do I believe that hedge funds should be further regulated? Not necessarily. While assets in hedge funds and other alternative investments has reached incredible highs, and the number of failed hedge funds continues to increase, I don't believe that increasing the regulatory burden on these funds will have any meaningful positive impact on the economy, their investors, or any other significant constituency (besides maybe self-serving government types perhaps). If an investor, whether individual or instutitional decides to invest in a particular asset, in this case hedge funds, the critical fact to remember is caveat emptor, buyer beware. Just as with investing in any asset, solid dilligence should be conducted, and a portfolio should be sufficiently diversified according to the investment vehicle's/individual's risk profile. Right now, there is a staggering amount of money searching market-beating returns, and I believe that some otherwise intelligent managers and investors have been increasingly jumping into investments without their usual dilligence and caution. In such a scenario, you can't feel sorry for sophisticated investors getting the short end of the stick because of their short-sightedness.

I can't stress enough the fact that investors need to be vigilant when investing in hedge funds. Ask questions. Demand transparancy and accountability. (Some) hedge funds take on substantial amounts of risk. Uncooperative management simply won't help the matter, and could even be taken as a sign that the investment strategy(ies) employed wouldn't stand up to scrutiny if they were shared with investors.

The fact of the matter is, that it is up to investors to manage their risk, not the government. Blowups, crashes, and unexpected events happen, but with a well-diversified portfolio and other risk-management techniques, investors in hedge funds and other alternative assets do not need the government to get involved, at least not by regulating the funds themselves. If public money is the concern, restrict the public pension/endowment pools, attack the problem at its source. End of story.

Strategy Session: Preemptive Solution to a Potential MySpace Mistake

2006-11-13T15:19:00.000-08:00

After my last post (which you probably should read before continuing here) I realized that while I pointed out a very relevant issue which could determine the future of social networking, I didn't do much to point out anything even resembling a solution.

Firstly, lets assume that MySpace fully executes its announced plan to rid profile pages of copy-protected music (no plans yet to systematically remove other media, "yet" being the operative word). As I pointed out, this action will not be without consequence, as a significant percentage of users currently have such music embedded in their profiles. With that in mind, I think the key strategy issue for MySpace is to limit this fallout, and the best way of going about doing that is to provide users with an alternative.

And, lucky for MySpace, the best alternative not only serves to keep the users happy, but could substantially boost profits in the process.

Ideally MySpace will arrange a deal with at least one major record company (or, dare I suggest, ITunes) to provide users with a pre-selected, and targeted choice of music which could be legally embedded into profile pages. Depending on how the deal is structured, this could be a potentially lucrative strategy. The record companies would likely pay a pretty penny to get exclusive access to provide the soundtrack to the lives of the massive MySpace population. A population which, I should point out, is extremely important to the record companies' continued existence.

Imagine the promotional and marketing opportunities such an arrangement would present, for example, allowing MySpace users to embed yet-to-be released or remixed songs in their profile before the album is available for sale to the general public. This would also be an incredibly savvy means to promote new or up-and-coming artists to a massive audience. These promotions could and would likely also be coupled with strategically placed banner ads (i.e. that display in the profiles of users who chose to embed the song). This is just one example of a strategy record companies could use in my proposed scheme, and there are numerous others that could be adopted. One thing to keep in mind though, is that the arrangement would have to give the users (at least the perception) that they have a large and broad enough library from which to chose songs. Arrogantly assuming users will simply take whatever song(s) a label is pushing upon them would be a very ineffective move.

As I've laid this out, I think it is clear that MySpace is at a fork in road, with one path leading to virtually assured disaster, and the other to the land of milk & honey (and profits). Only time will tell which one they choose, but unless they plan on bringing me on as a consultant, don't be surprised if they go after copy-protected music without much thought as to the consequences of their actions (or equally as likely, grossly underestimating the reaction to their actions).

Biting the Hand That Feeds You - Misadventures with Myspace

2006-11-02T09:46:00.000-08:00

This week, News Corp's MySpace unit revealed plans to implement an "audio-fingerprinting" technology developed by Gracenote (venerable keeper of the Compact Disc Database aka CDDB) in an effort to block users from uploading copyrighted material. see article in NY Times

My first reaction was to applaud MySpace's adoption of a potentially great technology which I first started followin a few years back.

However, my second was one of astonishment.

For those of you who've been able to avoid MySpace or who are otherwise clueless about the company/website, check out the picture below:

The above is a screenshot of the profile page that a friend of mine's band maintains. You'll notice about 1/2 way down the page on the right side the little media player feature. Take a good look at it, because a large number of MySpace's members use the same (or similar) tool to insert music and movies into their profile pages. What kind of music and movies do you think these millions of members are putting in their profiles?

Yup, the copyrighted kind!

While I don't have access to MySpace's data, conducting a quick informal ad-hoc survey of a number of friends profiles I visited, more than a few of them have music or some other form of copyrighted media in their profile pages. Most of the time users simply embed a popular song(s) or video in their profile using MySpace's media player or a 3rd party tool.

Now with this copyright vigilantism, MySpace risks alienating (read: really pissing off) the same users who made MySpace the premier social networking site it is today. One would think that MySpace would learn from the Facebook faux pas earlier this year when the rival social networking site opened up its doors to basically anyone. Clearly, the installed base of these sites is not to be messed with.

While only the future will tell, I predict a significant protest to come from the MySpace membership, and possibly (although inprobable) a relatively large fallout from this disruptive decision.

Lack of Posts, Facebook still in Play

2006-09-21T11:49:00.000-07:00

I'd like to appologize to all those normally enlightened by the Blog for not having posted or anything since June.

For compliance reasons, my job more-or-less prohibits me from commenting on any company, regardless of whether I have any material non-public knowledge.

Likely this will be my last post in which I mention a specific company for some time, so here goes:

Facebook's still in play, as I had originally suggested back in April (see the "Disney's LoJack for Kids" post), and all signs point to them getting a price well within my estimated range of $900-$1,300 million. I am fairly certain also that one of the commonly suggested "strategic" buyers will step up to the plate if for no other reason than being left behind while a competitor swoops in for the kill.

Fear is one helluva motivator.

Response to Comment on 90 Years of progress post

2006-06-10T13:15:00.000-07:00

One of my friends made an interesting comment on my "90 years of progress" post. I thought he had some good things to say, and of course, I had some more good things to say in response. Here is the discussion, thus far, for your enjoyment:

Bigchinko said...

Production costs of alcohol have always been substantially higher then the costs of surveying and subsequent drilling for oil. When oil was 10$ a barrel, no one was going to go out and refine corn into ethynol for 50$ a barrel. Right now the only reason theres such a tumult about oil is because of the political climate--oh, we rely on unstable countries to fulfill a vital part of our economic supply chain. In other words, blah blah blah. There will always be that.

Once Oil goes below 30$ a barrel, you'll see your oil stocks take a real hit in the groin, and your green companies phase out into another 90 year hibernation. Just this past week oil went sub 70$, whose to say what it will be in three years?

Hind sight is 20/20, if you were to bring up that henry ford quote only 8 years ago, people would have thought you were mildly retarded. All it comes down to is that trends are unpredictable, and when you try to ride them you're doomed to get in too late and leave after they've crumbled. Of course now green is trendy, and your right, that it should have been trendy a while ago--but it wasn't and you shouldn't be surprised. Theres always greed and industrial momentum, no one will change anything if the current system is profitable and works.

5:12 AM

Jordan said...

All good and valid points. Producing ethanol is not exactly a very low-cost alternative, however again it does reduce our dependence upon what is a very finite resource which we procure from unstable areas. The adoption of ethanol/gasoline hybrid fuel is not so much an attempt to reduce the cost to consumers, but to decrease our dependence on foreign oil. As far as that goes, only time will tell, but I highly doubt the price of oil will ever dip below $40/barrel. New technologies are constantly improving the oil companies' ability to find, extract, and refine black gold, but it is extremely unlikely that global demand will wane anytime soon. At the same time, economies of scale and technological innovations are likely to also reduce the cost of producing ethanol, making it more of an economically viable additive to gasoline.

The real monemaker/driver of change will be the development and widespread adoption of the hydrogen fuel cell for vehicles. Actually the real important piece`of the puzzle is figuring out how to efficiently and cost-effectively produce and distribute hydrogen fuel. Currently we lack the infrastructure and capability to profitably produce the quantities of hydrogen necessary to lessen our dependence on oil.

Effects of IPTV on Internet Ad Spending

2006-06-02T13:09:00.000-07:00

This just came to me today while watching CNBC, where an analyst from Pacific Crest Securities spoke about businesses increased ad spend on internet ads as a proportion of total spending. He mentioned the fact that since the internet enables targeted, focused, and measurable (etc.) advertising it is increasingly more attractive than traditional television advertising. One question here comes to mind though is how, if at all, will the increased deployment and subsequent customer adoption of IP based TV systems will affect businesses decision to increases internet advertising spending. Conceptually there is no reason why advertisers could not acheive the same levels of focus and measurability with IPTV as they could with internet spending, especially so with what will likely end up resembling ala' carte programming in the next few years.

I'll have to do a little reserach, but it is an interesting question, especially given the relatively lofty valuations the titans of internet advertising (google, yahoo, doubleclick, etc.) have reached.

90 Years of Progress?

2006-05-19T10:46:00.000-07:00

I really don't enjoy ripping on the Big 3 domestic automakers, but come on folks, sometimes its just too easy. The following quote was pulled from the Ford website:

"There's simply no two ways about this fuel question. Gasoline is going - alcohol is coming. It's coming to stay, too, for it's in unlimited supply. And we might as well get ready for it now. All the world is waiting for a substitute to gasoline. When that is gone, there will be no more gasoline, and long before that time, the price of gasoline will have risen to a point where it will be too expensive to burn as a motor fuel. The day is not far distant when, for every one of those barrels of gasoline, a barrel of alcohol must be substituted."

Now for those at home, you're probably thinking this is some politically correct rhetoric spat out by current chairman Bill Clay Ford.

However, you'd also be wrong.

The above statement was quoted by Henry Ford, thats right, the Henry Ford, in the December, 1916 issue of The Detroit News.

Yup, 90 years ago it was no mystery that we'd be in our current prediciment. In the mean time, minus the past 3 or 4 years, we've barely made even a dent in our reliance on oil and gasoline. Pathetic.

How to Kill Two Birds With One Stone

2006-05-18T16:14:00.000-07:00

Two issues are alive and well in America today:

1) Immigration

2) Outsourcing

Now I am just wondering why I have not heard a single pundit or politician mention these two issues in the same speech. It seems so blatnetly simple to me, well, maybe that's why the politicians haven't figured it out.

Why are we outsourcing everything to India, on the opposite side of the Earth, when we could just outsource to Mexico, our next-door neighbor? Subsidize a few initial corporations to go down there and start operations, start english-language and computer education (like that in India), and bam! No more illegal immigrants (since the jobs would be in Mexico), and no more higher costs of outsourcing to a country 7800 miles away! (New York to Bombay).

This of course, like any plan, is not without fault, however compared to the current proposals circulating around Washington, I think I just might be on to something. Feedback appreciated.
Thanks.

Tooting My Own Horn

2006-05-12T04:19:00.000-07:00

Not to brag, but a month ago when I wrote about how Telecom, etc was overvalued, JDS Uniphase specifically, I was really playing the lone wolf role and getting out ahead of the pack.

Since then however, JDSU's stock has plummetted from ~$4.20 to $3.03. For those playing the home game, that'd be a 27.9% drop.

I'm not 100% right 100% of the time...

...but I'm damn good (and humble!)

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

2006-04-05T14:45:00.000-07:00

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)

2006-04-03T04:00:00.000-07:00

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.

George Carlin, Circa 1978...

2006-03-29T01:45:00.000-08:00

Disclaimer: This post is just a reaction to something I was not nearly expecting to see on HBO in the year 2006....a George Carlin Comedy Special from Phoenix, recorded the seemingly ancient year of 1978...A.D. for those smartasses out there. Whilist I might be a great fan of Mr. Carlin, I could not help but think how cumbersome it would be to perform comedy in the round tethered down to a wired microphone.

Putting myself in the shoes of the layman, or even in what I can best describe as "my" shoes in that time period, I ask myself, "would I, or would anyone at that time be able to even conceive of a time, an era, when thoughts of being bound by mere physical wires are but a fleeting, if even, a thought?"

What I surmise, is that in the late 1970's, besides the more visionary Electrical and Electronic Engineers, the so-called "futurists" (and Trekkies, self-admittedly), and their ilk, very few people in modern society could fathom such a reality. While most everyone in such society knew about radio, few, I presume ventured so far as to imagine that such technology could eliminate the wire between tv and cable jack, handset and phone jack, etc, and even go so far as to conclude that one day human communication, whether voice, video, and/or data would be almost completely unbound by the physical wires of the day.

Fast forward thirty years.

Who amongst us can imagine the unimaginable technological advances that will inevitably alter not only the technological landscape, but also the fundamental way that humankind goes about its every day life. Such mental exercizes are likely to perplex even the most educated and experienced mind, as, amongst other obstacles, efficient market theory tells us, even predicting the near, or immediate future with much accuracy is, over time, a futile endeavor.

So what's next? What will be the 'wireless revolution' of our time? What is going to be the next great, revloutionary technology of our generation? And, furthermore, how are we to identify this next killer app? This post is not meant to be definitive, nor explicitely clear, but more philosophical in nature. The nature of innovation is no certain nature at all. As technology and our technological capacities and understanding increase over time at a near exponential rate, increasingly approaching the bounds of current understanding (e.g. the upper limit of Moore's Law), how are we to manage the way we approach even greater innovation. While this might seem like a veritable Catch-22, and in truth it may be, I am confident that humankind will continue, given a relatively stable set of geopolitical/economic variables, to push the proverbial envelope.

The salient question at this point however should be clear, and that is HOW we are to continue our upward momentum. Tonight though, I'm not going to say anything more than, that I am confident that as always, time, will tell.

MySpace's Achilles Heel(s)

2006-02-20T16:02:00.000-08:00

There are very few computer-savvy individuals out there today that have yet to hear (let alone join) MySpace, the most popular social networking (and also roughly 10th most popular) site in the entire World, as per Alexa's Global Top 500 today. Throughout the business world, social networking has been on the rise for years, but it has only been in the past year or two that the 'MySpace phenomena" has skyrocketed straight to the top of the "it" charts. Yes, MySpace has tremendous appeal, which by sheer page views alone makes it an extremely valuable internet property, as evidenced for example, by the $580 million or so Rupert Murdoch's News Corp ponied up for it last year.

So what then, if anything, could possibly topple this mighty beast? The answer is that there likely isn't any one thing that could stop this new media powerhouse in its tracks. However there are several things which many observers and likely analysts as well might have missed.

I have been a member of MySpace personally for about a year or two, but in the past few months I've really been exploring everything the service has to offer. I have a few observations as to why MySpace is, and is not at the same time an amazing idea, for example:

Part of the allure of MySpace is the widespread availability of page-editing software, which lets users construct relatively complex profile pages without having to know a shred of HTML, flash, java, etc. The beauty of this is that giving users control over the design, display, as well as simply content of their 'myspaces', so-to-speak, brings users closer to the service, and it brings those users' "friends" on the site even closer to each other. To clarify, what I mean is that the way the site is designed allows/results in not just more active users, but users who are ever-more active, more of the time. Just to note, I'm not aware of any published numbers on click-through rates or other metrics for said ads, so simply using page-views, MySpace is definitely on the right track. On the other hand, as a MySpace member, and as a member of the target demographic of many internet advertisers, I can attest to the fact that a significant portion of my generation (at least the internet savvy ones) are often unresponsive to many (not all) web advertisements. With MySpace, this is especially true I'd imagine, since after a short while you know exactly when and where ads will appear, and basically ignore them almost subconsciously. It is partly a result of how MySpace is designed, that you almost ignore the ads, because you are so preoccupied with all of the content and interaction which the site enables and provides. I'm not at all saying internet advertising is a waste, the truth is after all quite the contrary, I’m just trying to point out something that perhaps might be lost amidst all the hype and hoopla.
While MySpace may be thriving the site does in fact have some shortcomings which I fear might be widely ignored. For example, by ceding so much control over personal profiles to individual users, MySpace has lost the ability to consistently deliver a quality user experience. Now I've only tried this using my 15" widescreen laptop monitor, but many users' pages are too wide to be fit the browser window. Also, many users choose to place rich media, such as mp3 audio, mpeg/QuickTime video, or flash animations in their profiles. This, when taken together with the extreme latency and pathetic server reliability (we're talking NOWHERE close to five 9's) results in what is often an annoying user experience, to say the least. The fundamental issue at hand then for MySpace management is to find a balance between giving users the control they want and the quality experience that keeps them coming back. Also, as I just noted, MySpace DESPERATELY needs to upgrade its servers to accommodate demand. Few firms have developed a successful web presence without designing robust, scalable systems from day one. Now I may not be peering into a crystal ball or able to read the stars, but I'm going to go out on a limb and say that MySpace might not have what it takes to prove that trend wrong.
In my experiences, it seems that perhaps a majority of activity on MySpace is generated by a relative minority of users. I have several 'friends' who post bulletins, blog posts, photos, comments on other user's photos/pages, etc on a daily basis. (While it is beyond the scope or intent of this blog, some people I've met both in person and on MySpace sometimes seem to have more of a social life online than in reality, but I digress...) These people collectively also represent probably no more than 30% of my friends. While I'm sure this sample might not present an accurate representation of the greater MySpace population, I think it is still indicative of a larger trend none-the-less. If such is the case, then the value of each incremental user, on the average is less than perhaps previously thought.
A few short weeks ago I began getting inundated with spam messages in my MySpace inbox. Some messages appear to be from legitimate people, but attempt to convince the recipient to go to some other site, or even worse, informing you that that you have been pre-approved for a large low-rate loan and should click on a hyperlink to receive their money. Upon further investigation, I've determined that, just as with email, anonymous users are able to create what are basically fake profiles. Then, because of the extreme ease of finding targets for their spam, they represent themselves as legitimate people trying to often do you a favor or tell you about this great other website. As far as I know, MySpace uses no verification during the profile/account set-up process. This could potentially allow users with slightly less than honorable intentions to overrun (in the most extreme case) the site. Another possibility about which I've just today been informed is that unscrupulous users are using MySpace to deliver viruses and other malware. I have yet to confirm (I started this post 40 minutes after reading about this!) but my first inclination is that the distribution of such malware through MySpace is similar to the spoofing, phishing, etc which has become so widespread with regular email. In much the same way some viruses or Trojans, once they've infected your machine, spread to everyone in your contacts list, the same thing is at least theoretically possible with MySpace. Once one 'friend' gets infected, hackers and other malcontents could use the social network to distribute malicious code to unknown numbers. Perhaps I may be overstating the problem here, but until I'm proven wrong, I'll maintain the above as a legitimate possibility.

While this post might present a seriously cynical view of the leader in social networking, I'll be the first to admit that barring some heinous viral outbreak or something in the immediate future, MySpace is not going away anytime soon.

Broadband over Power Lines (BPL) and Utilities Were Born to Be Together....So Why Aren't They?

2006-02-07T12:05:00.000-08:00

Few people outside the Telecom world have any idea what broadband over power line (BPL) communication technology is. Since I'm not going to write an entire thesis here, I'll keep it simple (better explanation is available here how-stuff-works BPL page) BPL involves using existing power lines to carry data, in much the same way (conceptually) as dsl uses existing copper phone lines.

The primary reason though why so few people are aware of BPL, let alone know anything about the business case (or lack thereof) for its development is that simply for residential/business broadband service, BPL really lacks the economic advantage to give it the edge over dsl and cable. And that is without even acknowledging the ever-increasing popularity of wireless broadband access such as WiFi, ev-do/hsdpa/other cellular, and eventually, WiMAX. At least that has been the case up until the past year or so. This past summer, Google, Goldman Sachs, and Hearst Media poured $100 million into BPL play Current Communications, a move some analysts, in my opinion, never saw comming.

I'm not going to focus here on BPL however for residental/commercal service, as I'll leave that for another post. In my opinion/analysis the real value in BPL technology exists in the realm of the many benefits it stands to deliver for electric utilities in various applications like SCADA (Supervisory Control & Data Acquisition) for load balancing, real-time distribution/transmission network monitoring, real-time demand management, outage monitoring, and the like. Basically, the utilities already own/have access to the wires, and the capex needed to implement the software and minor system upgrades necessary for BPL should definetly be offset by decreased truck-rolls and efficiency improvements, which in the end, boil down to, you guessed it, increased profitibality!

(Side Note: Many utilities margins' are capped by state regulations, however if they were implementing a system which would provide better QoS so-to-speak, its likely these margin limits would be increased accordingly.)

Why then have the big operators shyed away from adopting such a potentially beneficial technology? Well for anyone who's the least famaliar with the Utility industry well knows, Utilities are about as fast-moving as blob of molasses at the north pole. A bit of complacency here? You bet. And what eventually happens to complacent businesses, when, inevitably the market obeys the rules of survival of the fittest (and that darwin guy never even stood on the floor of the NYSE!)? Companies that are complacent, that for whatever set of reasons become stagnant will eventually loose out to faster-moving competitors.

Look at the airlines for example. United is coming out of bankruptcy for the what, second time in three years? The domestic carriers are getting slaughtered by faster moving, more nimble competitors with better business plans such as Southwest, who embrace innovation, who are constantly striving for operational and financial performance.

I'm not saying that the Utilities are in any grave danger of getting burned anytime in the near future. I'm merely pointing out the necessity for businesses, in all industries, to embrace innovation and change as a fundamental driver of increased profitability. Seldom, if ever in history has a firm thrived in the long-term without doing so and there is no evidence to suggest that this trend is likely to change.

Now more than ever it is absolutely imperitive for a company to be ever more nimble than its competitors. Those that aren't consistently and consciously trying to do everything in their power to improve efficiency and increase sales, while simultaneously reducing costs (among other actions/subactions obviously) are sheep, and sheep, as we all know, get slaughtered.

let me clarify...

2006-02-07T10:42:00.000-08:00

Just to clarify the position I took in the previous post (Rescind Tracinda).

I was writing the article for the individual investor. The point was that for said Joe and Jane Investorr, there are better risk adjusted returns out there today, not that Kerkorian has absolutely no chance. In fact, if (by some act of god) Jerry York and Kerkorian are able to turn the General around, they stand to make an absolute killing. And, when you're playing with as much $ as Kerkorian is, its alot harder to realize 100%+ gains.
Since information on Tracinda is pretty sparce I'm not exactly certain, but I'd go out on a limb that a good portion of Tracinda's capitalization comes from Kerkorian's personal wealth. In general, however, investors in private equity/VC funds have different risk profiles than most individuals. Alternatively, private equity investors have similar risk/reward profiles as individual investors, just far larger piggy banks. For example, conventional wisdom for the individual investor often suggests individuals allocate roughtly 10% or so of their portfolio to risky plays, e.g. small tech companies, similar (although not exactly) to those in which VC funds typcally invest. CalPERS (the largest pension fund in the Country) similarly might have only 10% of its $200 billion portfolio allocated to VC funds. It would not be prudent though for CalPERS to throw $2 billion into small-cap stocks with capitalizations of only 50 million dollars now would it? From this perspective, its more a matter of asset class than of risk/reward combination. It is worth note that another major(if not the main) reason individual investors typically are shut-out of private equity assets is the relatively lofty minimum investments most PE/VC funds require, often in the ballpark of 7 or 8 figures.

Rescind Tracinda

2006-01-20T14:58:00.000-08:00

For the past year or so, I've been puzzled as to why Kirk Kerkorian (through his investment firm, Tracinda Corp) has continued to waste both his time and investors' money on GM (NYSE: GM) stock. Over the past 5 years, GM plunged in value by about 20% per year, compared with gains of 5% and 23% per year for Toyota (NYSE: TM) and Nissan (NasdaqSC: NSANY), respectively.

I understand Kerkorian had some success as an activist investor in the past, namely with DaimlerChrysler. Another thing to keep in mind is that Kerkorian’s investors, diversified financial institutions, private banks, wealthy families and individuals have vastly different risk/reward profiles than Joe and Jane Investor, and can afford to have some money in such risky assets as GM stock. So unless your one of the lucky few who happened to inherit things like yachts or a classic car collection, its important to realize that today, there’s far easier money to be made, with substantially less risk.

Thus far, Kerkorian has taken a loss of roughly $200 million on his GM stock, some of which Tracinda sold, for "tax-loss" benefits in December. In a speech delivered two weeks ago in Detroit, Jerome York, advisor to Tracinda and Kerkorian explained this move, and went so far as to state that Tracinda would not only be interested at repurchasing the twelve million shares it sold, but would also consider picking up an additional twelve million shares under the right set of circumstances. Kerkorian is likely a far smarter (and wealthier) man than I, but for the life of me, I cannot imagine what sort of return he expects to get out of the General, and lest we forget the concept of opportunity cost here. For example, if Tracinda had invested the $870 million it initially offered for GM shares in May, 2005 in risk-free Treasury 10-year bonds yielding 4.3% he would now find himself more than $37 million richer on an accounting basis, and more than $200 million on an economic basis! 10-year bonds also have the edge in that, unlike GM, they lack massive pension liabilities, spiraling health-care costs, or ever-increasing threat of cutthroat foreign competition.

While some of GM's brands are making a comeback with more inspired design and better marketing campaigns, General Motors has routinely proven its uncanny ability to deliver disappointing financial and operational performance. All things considered, most individual investors would best be served to bet against Kerkorian, at least until, as Mr. York pointed out, GM management accepts the dire situation at hand and establishes an all-encompassing restructuring plan.

Under Armour Analysis

2006-01-20T14:53:00.000-08:00

This is an article/sample I wrote while applying for an analyst/writer position @ The Motley Fool, originally written, as mentioned in the article a week or so before the Under Armour IPO, when at the time, not a single analyst or journalist I found had written any commentary/analysis...

Enough About Me, Let’s Talk About U(ARM)

With the announcement last week of a proposed IPO this week, there has been increased speculation amongst stock pickers and pundits (ahem, Cramer – more on this later) alike on the outlook for maverick sports-apparel maker Under Armour, however general consensus appears to be almost exclusively positive. Considering I own a few of their products, fall smack-dab within their target-market, and as always am looking for high-growth money-making opportunities, I decided to tackle the issues at hand.

First, a little about the company. Under Armour was founded by former University of Maryland Football player Kevin Plank in 1996 with the intent to create a line of microfiber clothing that wicks perspiration away from the skin, keeping athletes cool, dry, and light during activity. Today, the company has expanded into a multinational success, with offices in the US, Canada, Hong Kong, and London, at over 8,000 retail locations including Dick’s Sporting Goods, The Sports Authority, Modell’s, and even the Army and Air Force Exchange Service.

I’ll make it abundantly clear so as to avoid any confusion, I am also quite bullish on UARM, however unlike most of the already sparse analysis out there right now, I’ll also identify and acknowledge some of the contrarian arguments. Let there be no mistake though, Under Armour Management takes a few hundred pages to discuss their company in its s-1 registration statement so this discussion is by no means all-encompassing, so just a little caveat.
Statistically speaking, UARM has 90% market share of the performance apparel market, that is to say that 9 times out of 10 when a customer walks into a Dick’s or Sports Authority looking for such apparel, they’re walking out with the Under Armour, even though Nike, RBK, and others offer almost identical products. This is a testament to the enormous brand value/equity that UARM has been able to develop. As the aforementioned Mr. Jim Cramer, host of CNBC’s “Mad Money” pointed out last week, UARM’s advertising campaign has attained tremendous success WITHOUT the use of a single professional athlete in ANY promotional material. Lets look at what this means: These days, virtually all sports marketing, and more broadly speaking, advertising towards the 18-35 crowd almost always includes some sort of celebrity or professional athlete endorsing the product. If UARM has been able to attain such success and growth without resorting to such practices, does that not speak volumes for the allure of the brand, and thereby the company? Think about it this way, if sales growth does in fact start to level off anytime in the future, they can always go out and find some pro athletes to endorse their products, and boost sales that way.

Under Armour’s business performance is no slouch either, and it’s not a surprise that its fundamentals reflect the power, toughness and absolute performance image its brand exudes to consumers. Revenue has grown over the past 5 years (2000-2004) at what I calculate as 107% and change CAGR, with net income to diluted shares increasing over 67% over that same time horizon, so the company is doing a pretty solid job at driving this massive revenue growth through to the bottom line. On the balance sheet side, total assets have increased, according to my calculations, a cool 99.5% from 2000 through the first 3 quarters of 2005 (for those playing the home game, that’s an increase from a little over $2 million to over $144 million). This appears to be a well run company, dare I say even a Foolish one.
For a little insanity check, I brought up some of these arguments for UARM in a conversation last week with one of my brightest, and generally more conservative friends, lets call him Bob, who brought up a few good points. First, he noted that the apparel/fashion sector tends to be more fickle than the general market as a whole, trends come and pass, but only a select few continue into perpetuity, and even fewer continue to record industry-leading performance each successive year. As I noted above, UARM has made itself into an extremely popular brand/image, yet Bob questioned how much of this short-term performance will be reflected in repeat-customers and long-term success. It seems to me this is a valid point, since Under Armour really does not have significant product differentiation compared to the similar products on the market, it follows then, that consumer’s decisions to purchase UARM products must be due in some large part to their first-mover advantage for one, but more importantly by the image associated with its products, which others like Nike for example, have been unable to cement in consumer’s minds. With their expansion beyond their historical market of younger male performance athletes, Under Armour has recently released a complete line of performance wear for women, as well as children. If, and I believe most factors point to this being the case, Under Armour can transfer the premier image it has achieved with the 18-35 year old male athlete to these new areas, it should maintain and strengthen its dominance in performance apparel.
As far as I know, as of today, Monday 11 November 2005, this is one of the most focused analyses on the company. I’m sure as the week progresses and the IPO date approaches you’ll see a flood of analysts reports and morning notes out there.

While it is still early in the Under Armour story, and the jury may still be out, I believe given the information available at the moment, UARM appears to be a well-run company, dare I even say, a Foolish one.

An Example of Product-Push vs. Market Pull Commercialization: Smirnoff Twisted

2005-12-12T22:48:00.000-08:00

In what is arguably the most pathetic demographic targeting/marketing campaign/etc. I can immediately recall (its 2am give me a break), Smirnoff (known for their vodka, for those of us sober to need a reminder), has rolled out a TV, etc advertising campaign for Smirnoff Twisted beverage freaturing "Ari", who is as far as I can tell, an unemployed eastern-european/Russian who somehow attends chic events and makes what I'm sure were intended to be witty, whimsical remarks. Now, run-on-sentences aside, lemme break down why this is a dissapointment. Smirnoff Twisted is a line of fruit-flavoured malt beverages, comparable to Zima or whatever other concoctions are in that category. [Originally beverage marketing of this particular type of libation are, and have been aimed at women, and amazingly, most of these drinks are bought - yup, you guessed it - by women.]
The point is, that I don't know, because what virtually anyone in the male, 18-34 (give or take) demographic will blatently tell you, is that no self-respecting man would even consider drinking a "fruit flavoured malt beverage" instead of a beer while out at a bar, club, etc (or else risk eternal damnation by his chums).

Now, in my never-ending quest for eternal objectivety, I conducted an informal, ad-hoc survey of some friends, acquaintances, etc (that majority of which, admittedly are between 18-24, in the interest of full disclosure), and the overwhelming response seemed to be, as one individual so politically-incorrectly put it, no young man in the aforementioned demographic would voluntarily ever drink Smirnoff Twisted, etc, in his words "at least not one that likes women..." Another, when prompted with the question "If we were at a bar and I asked you if you'd like a Smirnoff Twisted instead of a beer/shot/other drink?", replied with "i'd probably laugh, and after realizing your were serious call you a faggot...because of the feminish persona they have." Before you go out calling me or anyone quoted a homophobe or a stereotype-monger, understand that these are the actual opinions of most young men!

Now, judgements aside, and without first-hand knowledge of the situation (you're all welcome to refute this if you can back it up), lets look at whats going on here. This appears to be a case of a bunch of executives/managers getting together and saying something like "Ok well we need to boost sales/profits/etc, so what do we have laying around that we can repurpose/remarket/rebrand/etc (i.e. spend the least effort to reach our goal)?" The problem with this sort of decision making is that it is simply pushing a product/service onto some arbitrary consumer group/demographic. In this case, the decision likely went something like, "Well we have this drink, but only 1/2 of people (women and a few men?) drink it. We can double our sales if we just convince men that its cool!"
This is an example of a Product-Push approach (the more generic classification of Technology-Push), where in this case, to oversimplify, they had a product aimed at one demographic, and decided to thrust this product upon a completely different demographic, without acknowledging the fact that perhaps, just perhaps, this other demographic has COMPLETELY different characteristics/ideas/opinions/etc.
Contrast this approach to what we refer to as Market-Pull commercialization, in which the 1st steps in product development involve thorough analyses of demographic, market, and industry trends. The product or service is then developed from initial conception to address the specific niche, demographic, need, etc, which was uncovered in the prior analyses. As any Joe Schmo can see, whenever possible (deciding when is a complex and contested discussion), Market-Pull is the way to go! (hey that rhymed, aren't I the cunning linguist)
So I realize an hour after I began this post, and it is in no way, shape, or form, a "quickie", so I'll just summarize what we've learned:
Just because managers and executives get paid thick salaries does not necessarily mean they are good business people (you'd think it would though...). [I'll avoid for the moment my more general belief that eventually, and inevitably, investor activism will result in the elimination of inefficiencies and poor management in all firms, or else those firms will eventually fail (we'll save this discussion for another time folks, dont' worry).] Investors, etc need to be wary of this potential pitfal, and allocate their hard-earned $ accordingly.
I could go on and on here, but its 3:30am, and i've got 12hrs of studying tommorrow (oh hell, thats today, boo). Comments, etc appreciated as always. Party on!

What Happens When Managers Sell Their Textbooks Back...

2005-12-12T16:02:00.000-08:00

For those who aren't aware of current trends in the collegiate textbook industry, there is an increasing propensity for students to not only attempt to purchase as many of their textbooks used, but also to sell as many books as they can back to the bookstores (or conceivably to other students if that option exists) to get some quick cash. Personally, I've sold back the vast majority of my books which, even under the most random circumstances, I could not ever see myself opening after the last day of class. On the other hand, most of my legitimate business/finance books and a few others have made the cut and are currently resting peacefully (if not a little dusty) on a shelf in my basement at home. While I think I have only gone back to these books on maybe a handful of occassions (my first inclination is usually to just 'google' stuff I don't remember, obviously), I'm almost certain at some point in the future I'll need to go back and re-read/learn some material.
Getting to my point, just today, while studying for a Multinational Financial Management final later in the week, I came upon alot of interesting discourse in the textbook. One section, however, drew my particular attention, specifically Chapter 17 ("Capital Budgeting for the Multinational Corporation"), heading #8 ("Getting the Base Case Right"). Without overcomplicating the matter, the Author (Alan C. Shapiro if anyone is that intrigued) says:

"To come up with a realistic base case, and thus a reasonable estimate of the incremental cash flows, managers must ask the key question, 'What will happen if we don't make this investment?'"

He goes on to cite General Motors' decision in the 1970's to forgo investment in smaller cars which were, at the time, less profitable than GM's current stable of gas guzzlers and land-yachts (which I think were also referred to as "sedans" at the time, but given their proportions, handling, etc, Land-Yacht seems much more appropriate). As anyone who's laid rubber on any road in this country in the last 20+ years can attest, this decision has clearly hurt the financial health of what was once the largest, most influential company in America in ways from which it may never recover, all while Toyota, Honda, etc have thrived at their expense. I could not agree more with Shapiro when he asserts that the critical error made by GM (and others) is to ignore competitor behavior and assume that the base case is the status quo. GM, in opting not to come out with new products for fear that they will cannibalize its existing product line left a profitable niche for the Japanese automakes to exploit and profit from. They failed to realize that sales would be lost regardless, and for their arrogance we'll call it, those sales were given up to a competitor.
Not every American company has faltered thusly, however. Take the recent revival and success of Apple with their iPod line. A few months ago some analysts were mind-boggled by the company's decision to cease production of its most popular product - the iPod Mini - and to replace it with the liliputian iPod Nano. Looking back on Apple's decision, anyone who's walked into a Best Buy or even browsed the virtual aisles of ebay has witnessed the enormous customer reception the Nano (as well as Video) has encountered. That is not to say I agree with their decison, but consider a line from my finance textbook which I think makes a very important point (one that is occassionally lost on managers):

"In a competitive market, the rule is simple, if you must be the victim of a cannibal, make sure the cannibal is a member of your family."

If we examine the situation with Apple thusly, the decision to launch the Nano and cannibalize Mini sales seems to make alot more sense. With Flash-memory prices dropping steadily, it was only a matter of time before someone else introduced/marketed a product that had the right combinition of characteristics (form factor, price, usability, etc) to lure would-be iPod Mini buyers away, perhaps bringing the profit machine that has recently been Apple to a grinding halt. I just did a quick search for flash-memory based mp3 players, and lo-and-behold, C|Net has a review of their editors top picks (accessable here: http://reviews.cnet.com/Music/4521-6532_7-5021434-2.html), which indicates that every major competitor (Samsung, iRiver, Creative, Sony, to name a few) already has a competing product on the market, some of which garnered equal praise as the nano, for almost 1/2 the price! While we can never be 100% certain what would have become of the iPod Mini had Apple been complacent to rest on its laurels, it is more or less certain that, at least for the forseable future that Apple will continue to be a force to be rekoned with in the consumer technology (and now music and video distribution) arena.

While I haven't spoken with Mr. Jobs since running into him @ Macworld NYC a few years back, I'm gonna go out on a limb and guess that someone at Apple, if not Jobs, still has a few old college textbooks laying around somewhere...

Welcome to the Blog

2005-12-11T20:46:00.000-08:00

Ok folks, so here it goes, this grand experiement of mine...

Business.Technology.Innovation.

These are a few of my favorite things, and these, my friends, are the issues about which I am very passionate. Hence, it is here then, that you will be able to find my thoughts on a wide variety of sub- and related topics. In case you were wondering (come on, you knew you were), I do not confine myself to any one sector, industry, or vertical, so pharma, financials, telecom, new media, defense, you name it and chances are I know something, so bring it on!

Some posts you might see alot of:

What is BTI?
Why BTI?
Examples of BTI as strategic drivers of success across the board
Reactions/commentary to news/current events as they pertain to BTI
Random stuff that doesn't fit into the above 4 categories...

I'd like this to be a very interactive blog, so comments, discussions, etc are all encouraged, so don't take everything I say as ipso facto, argue your point if you disagree (but you better come ready to support your argument!). Hopefully, we'll eventually get this thing popular enough so that people are coming to me with questions and I can address them in kind, sort of what Jim Cramer does on Mad Money on CNBC.
I'm very interested in developing some thought leadership, establishing best practices, etc as far as BTI go, so somewhere along the line my writings might drift towards those ends, so don't be surprised if you see it kiddies.