Tuesday, October 31, 2006

Getting “Disappeared” in Redmond


Quick—what company just reported a decline in internet revenues last quarter?

If you guessed “Microsoft,” you would be a winner.

That's right: of all the businesses at Microsoft, from video game boxes to operating systems, the one business that actually saw its revenues decline was that which serves the future of Western, and Eastern, Civilization.

How did they do that?, you might ask.

How, indeed, did the world's largest, most successful, most cash-rich software company manage to get lower revenues this year than last year out of a business whose inherent growth rate is higher than the year-to-year increase in the New York Yankees' payroll?

The answer lies in Hotmail and the fast-aging internet access business whose bleeding Microsoft has been no more able to staunch than AOL.

Long-time readers know I’ve groused about Microsoft’s Hotmail product for some time—at least until Google Mail came along. After hesitating like Alex Rodriguez staring at called third strike with two outs and the bases loaded, I finally switched.

The good news is that by switching to Google Mail I now avoid the near-daily aggravation that came with being a Hotmail user. The bad news is I eliminated good material for some posts here.

And that’s why I’m happy to report the receipt of an email, forwarded by a friend at a New England-based company still clinging to Hotmail.

The email in question alerts the company's employees that some tweaks to the Hotmail system by the folks in Redmond is causing emails sent from one Hotmail user to another Hotmail user to suffer the same fate as dissidents under Salvador Allende.

Which is to say, they are disappeared.

That is, as anybody who runs a business might gather, a problem. Readers of this blog will not be surprised to hear that, thus far, it appears the Hotmail folks haven’t come up with a solution, let alone respond to the poor company’s calls for help.

In the meantime, the 'workaround,' as IT guys like to say, is that anybody in the company who needs to send an email to a Hotmail account is advised to use a non-Hotmail account to send it.

Otherwise, the email will get disappeared.

Just like the users of Hotmail have been disappearing lately.



Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Wednesday, October 25, 2006

Feed the Ducks When They’re Quacking

.

“Insider Sales Rise, but Not to Worry.”

.

.

Thus today’s Wall Street Journal blandly describes a “sharply” increased rate of stock selling by corporate insiders in the last two months.

.

"What you have to remember is that all selling is not bad," a fellow who studies these things tells the Journal, which then explains as follows:

.

While open-market sales compared with purchases by insiders have increased significantly in September and October, that increase is the predictable result of the rise in the stock market…

.

So, if I am grasping the logic correctly, “sharply” increased sales of stock by corporate insiders are apparently bad only if they occur when the stock market is going down.

.

Well, that’s a relief!

.

I guess you can’t blame the Journal for downplaying an indicator that tends to have a pretty good track record for marking sentiment extremes on both the bull and bear sides of the market: after all, the Dow Jones Industrial Average, as even my dog Lucy now knows, just broke through 12,000.

.

Who wants to rain on that parade?

.

Besides, insider sales are not by any means a perfect leading indicator of impending trouble—CEOs and CFOs and other Corporate Bigs sell stock all the time, what with taxes to pay and G-IVs to buy and second wives to impress and options-granted-miraculously-at-the-lowest-price-of-the-year to exercise.

.

And even if those sales do indicate signs of worry among the men and women who run American businesses, and are, therefore, thought to possess foresight into future economic trends, there’s no telling when the prevailing sentiment mood will shift back to “fear” from “greed.” I mean, after all—to borrow a line from “Hot Shots!”—what could go wrong?

.

Still, why wouldn’t insiders sell?

.

Why not take advantage of all the hoopla over that magical 12,000 figure, which anybody inside a corporation knows is entirely meaningless; yet which is terrifically meaningful for the investment professionals whose business depends on “beating the market” even if that “market” is deemed to consist of 30 random stocks whose aggregate theoretical index value just reached 12,000?

.

Why, with the bond market, along with cyclical stocks and “Dr. Copper” sniffing no let-up in worldwide growth despite the U.S. homebuilding crash, wouldn’t insiders arbitrage the higher price/earnings ratio of stocks on the one hand and the higher yield on the no-risk 10-Year on the other?

.

Why with companies like Whirlpool and Kimberly Clark and Caterpillar Tractor missing numbers thanks not to weak demand but to higher input costs—a 25% higher increase in the raw material bill than previously expected, in the case of Whirlpool—wouldn’t a savvy insider let some go?

.

Why not, in short, feed the ducks when they’re quacking?

.

As for what could possibly go wrong—what might lurk on the horizon that could trigger an end to, or at least a pause in, the euphoria sweeping the market (a euphoria almost as palpable as the gloom two months ago, before the insider selling picked up “sharply”)— I have a thought.

.

How about this: how about two weeks from now when Wall Street wakes up and finds Charlie Rangel has become chairman of the House Ways and Means Committee and Barney Frank is now in charge of overseeing Wall Street for the financial illiterates—Republicans and Democrats alike—in Congress?

.

Whoops, I forgot: this is the stock market! What could go wrong?

.

.

Jeff Matthews

I Am Not Making This Up

.

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Sunday, October 22, 2006

When Not to Listen to Consultants


Apple Should License the Mac to Dell


That’s the headline in an email which recently hit my inbox, and I am not making it up.

The email came from a consulting firm (Gartner Invest) that provides its insights, at a price, to the outside world.

The purported logic behind this notion—that the world’s foremost consumer-empowering computer maker on the planet (to whit, Apple) should let the world’s foremost shover-of-cheap-boxes-out-the-door (to whit, Dell) slap its now-sorry name on a box filled with the former’s crown jewels—is summarized in the email as follows:

We [Gartner Invest] do not think that AAPL can significantly increase market share with the current retail distribution and product pricing strategy. However, with the right partner, we think AAPL could grow Macintosh market share to 10%, 15% or even 20%. DELL makes sense as… a distributor of technology largely created by INTC. In many ways, DELL exists to sell INTC's ideas, and today, INTC's best idea is AAPL’s Macintosh.


For what it’s worth, I happen to think Gartner Invest’s basic idea does—in theory—make a modest theoretical amount of theoretical sense.

The basic idea being that if Apple really wants its slick, user-friendly, digitally-fluent operating system to take its rightful place alongside the non-slick, user-defying, digitally-deficient-but-monopoly-enjoying counterpart provided by Microsoft, Apple can jump-start the market-share gains by shucking the Apple-Only manufacturing model and licensing the operating system to a third-party—in this case Dell—that could churn out low-cost “Apple Inside” boxes to the masses who otherwise can't afford the extra bucks Apple’s tightly integrated, lower-volume, higher-cost model now requires.

In theory, what Dell brings to the table is a low-cost manufacturing and distribution system that would vastly accelerate what appears to some observers—myself included—to be an unstoppable gain in market share Apple will enjoy at Microsoft’s expense as the iPod generation matures into Mac-buying college students, engineers, artists, businesspersons, entrepreneurs, housewives, househusbands, and just general digitally-oriented human beings.

Of course, this is a “theory,” and the chief problem with “theories” is they are frequently put forth by people whose well-being does not depend on the actual real-world success of those theories.

I’m sure there’s a Warren Buffett maxim covering this topic, but what instead comes to mind is a book title once proposed by Comedian Steven Wright:

“Freud: The story of insane old man with way too much influence.”

Now, the theory in this case comes not from Sigmund Freud but from a special breed of theoreticians—technology consultants—whose specialty is something called “White Papers.”

For those not familiar with “White Papers,” they are grand, future-looking, acronym-crammed, flight-of-fancy strategy pieces that excite people whose job it is to read them but otherwise cause the casual reader’s eyes to roll up into the back of the head moments before he or she swallows his or her tongue and passes out on the floor.

In fact, I have argued before (see Bill's Hideaway at
http://jeffmatthewsisnotmakingthisup.blogspot.com/2005/03/bills-hideaway.html) that the main source of Microsoft’s current problems stem from the fact that Bill Gates spends two weeks each year reading White Papers alone in a cabin by a lake thinking great thoughts about technology instead of hanging around a Starbucks watching how people actually use technology.

Since it is entrepreneurs—Gates included, at least during the early days of the PC—who actually accomplish things such as, oh, say, Google or the iPod or YouTube, as opposed to theoreticians; and since entrepreneurs are therefore by definition always—without exception—too busy actually accomplishing things to be writing “White Papers” about what other people should be doing, the value of “White Papers” has never been entirely clear to me.

Microsoft has, in the course of the last decade, accomplished (in the realm of cool new technology) the following:

1. Acquired (for $400 million) Hotmail, the pioneering free email service now dying a slow death at the hands of competing free email services that actually work well, such as Google Mail, which cost—I’m guessing—maybe a couple million bucks worth of programmers’ time to create.

2. Acquired (for $425 million) Web TV Networks, which according to a press release at the time “delivers the Net to ordinary TVs.” Unfortunately, the world almost immediately went precisely 180 degrees the opposite way—seeking delivery of ordinary TV to the Net. Which is precisely why Google bought YouTube for $1.6 billion this month.

3. Lost the paid-search market to Google and Yahoo! by letting Yahoo! buy paid-search pioneer Overture out from under its nose. Overture’s largest customer at the time was none other than…Microsoft.

4. Missed out on downloadable music—this is not a flourish or exaggeration—almost entirely.

Whether or not each of these four major failures are due strictly to White Papers alone, I think it's fair to conclude the following:


White Papers = Bad Ideas. Case closed.

Now, consultants as a class are not entirely to blame here.

First of all, the “White Papers” Gates reads are actually prepared by Microsoft people, not outside consultants.

Second, there are cases in which consultants have in fact added tremendous value to a company—and no, I am not making that up.

The example that comes most readily to mind is when Best Buy turned from a typical commission-driven electronics retailer into a Wall Street Fave some years back after bringing in some smart-alecks from McKinsey & Company (or maybe it was Bain), whose first piece of advice was to stop using music compact disks as a loss-leader, which helped boost margins overnight, and otherwise re-engineered the company into the Best Buy that dominates electronics retailing today.

In fact, consultants exist for the good and for the bad, and in this case what we are considering is a recommendation that Apple start licensing Mac hardware to other computer companies—specifically Dell. So let's consider it.

For starters, this is not a new idea. Wall Street’s Finest have been calling on Apple to “open” the Mac system for years, particularly throughout Microsoft’s ascent to the top of the computer software pyramid thanks to its own hardware-free model.

Furthermore, Apple tried it already, and Steve Jobs—like a nervous parent who instantly regrets dropping off an only child at a child care center run by ex-cons—quickly backed out of the program.

Also, and not for nothing, Apple is the leader in bringing digital computing tools to regular consumers—just in time for the digital revolution now upending analog business models from medical radiology to movie distribution. It doesn’t, in my view, need to do anything different to achieve a much bigger share of the PC market than it had during the era of self-contained, spreadsheet-laden desktops besides keep innovating.

Another thing the consultants may have forgotten: Apple doesn’t manufacture its own gear in the first place. Order an iPod from the Apple online store and it comes straight from the Chinese contract manufacturer via Federal Express, not from a distribution center in Cupertino.

Thus, the advantage of sticking another brand name on the theoretically cheaper box isn’t entirely clear: Dell’s operating margin would become Apple’s cost of goods sold.

Finally, even assuming Apple changed its mind about licensing software and decided to partner with a hardware maker like Dell who could, theoretically, get a lower-cost version of the Mac out into the world, why would Steve Jobs want to let Dell’s own deteriorating product quality and no-longer-award-winning customer service turn off as many potential Mac users as it might add?


After all, even if Toyota could sell more cars by licensing the Lexus brand to Chevy, would it ever?


Jeff Matthews
I Am Not Making This Up



P.S. For some laugh-out-loud commentary on the same topic, see Eric Savitz's excellent "Tech Trader" blog in Barron's Online:

http://blogs.barrons.com/techtraderdaily/2006/10/20/gartner-apple-should-license-hardware-to-dell-stick-to-software/

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Thursday, October 19, 2006

Baby Boomers Remembering When


“Ebay’s profit jumped 10% and revenue soared 31%, but concerns remain about growth in its main U.S. auction marketplace.”

—Wall Street Journal


The single most depressing thing on TV has got to be those Public Television fund raising concerts featuring flabby, ancient, gray-haired singers or vocal groups or bands from the 1950’s or 1960’s or 1970’s playing their one or two or three hit songs to an audience of uniformly Middle-Aged White People sitting politely in their seats while cameras rove the theater for soft-focus close-ups of glassy-eyed individuals, their faces uplifted towards the stage, who are either singing along with the song (which is generally an exact duplication of the original recording) like a five-year-old at a Raffi concert, or mouthing the words silently, as if these were ancient biblical texts about the Sermon on the Mount as opposed to three-minute pop tunes about Big Girls who Don’t Cry or Puff the Magic Dragon.

This sounds harsher than I mean it, but what I see in those shows is not an uplifting mass rejuvenation thanks to the life-lessons of “little Jackie Paper” who “loved that rascal Puff.”

What I see in those shows are people from my demographic who’ve woken up suddenly to find themselves unequivocally old and are wondering where the time went, which is why they’re in a crowd of other 50 year-olds singing along to songs that were popular when they were young and vigorous instead of somewhere else experiencing something a little more current.

In short, they depress the hell out of me.

And not for nothing, but since I’d rather watch Alex Rodriguez stare at a called third strike and end yet another Yankees rally than witness a bunch of Baby Boomers re-experiencing their lost youth in order to replenish the coffers of Public Television, I never stick around long enough to write down the 1-800 Number.

I thought of the hidden message which, to me, lurks behind those televised fund-raisers after reading about eBay’s earnings in today’s Wall Street Journal—how else to account for the use of an active verb like “jump” to describe what was, after all, a measly 10% increase in earnings, than to attribute it to the good memories of what eBay used to be, rather than what it has become?


eBay is, after all, no longer the strapping youth of its glory days, when revenue growth was 100% a year and operating margins were in the mid-30% range. In fact, revenue growth has been cut by two-thirds since then, while operating margins are down one-third.

Furthermore, the “earnings” which “jumped” 10% this quarter were not technically earnings according to Generally Accepted Accounting Principles, in the sense of being revenues less costs.

They were, rather, “adjusted earnings”—earnings adjusted for various items deemed not relevant to the core business and therefore summarily excluded by management—which is a hangover from the Dot-Com Bubble days that many observers thought we had slept off.

In fact, according to my Bloomberg, eBay’s operating income under GAAP actually declined this quarter, from $356 million last year to $339 million this year.

But by using what I call “Earnings Adjusted for Yadda Yadda Yadda,” or “EAFYYY,” eBay was able to report that 10% “jump” lauded by the Journal and by investors bidding up the stock this morning, apparently relieved the news wasn’t worse.

Like the aging Boomers funding Public Television, however, eBay is no longer the revolutionary, anti-establishment entity it used to be, thanks to free and fast-growing alternative sales platforms such as Craig’s List and Google Base, not to mention the rise of paid search by which anybody with something to sell can reach a potential customer for pennies per click, without having to auction if off on eBay.

Still, floating through the mystic chords of memory among Wall Street’s Finest and their clients, there are, no doubt, understandably fond reminiscences of days gone by.


The good news, as I see it, is that the YES Network replays all those Yankees games that Rodriguez cost us practically 24/7.




Jeff Matthews
I Am Not Making This Up


© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Saturday, October 14, 2006

Visualize the World’s Largest Virtual Parking Lot


Yahoo Feels Breath on Neck
It’s Still the No.1 Portal, But Rivals Are Closing In

—New York Times?

So said last week’s New York Times? in a fascinating look behind the curtain at the formerly hot internet property whose official name is “Yahoo!” but which the Times? has unilaterally changed to “Yahoo,” without the exclamation point.

Perhaps this insouciant act by the editors of the Times? is a sign of Yahoo!’s declining importance. Or perhaps it reflects the massive cost-cuts rippling through the ranks of “Old Media” properties—no more fact-checkers, for example. Or perhaps it is simply because the fact-checkers at the Times? are over the age of fifty and thus do not know the correct spelling of the internet’s “No. 1 Portal.”

Whatever the reason, I’m going to use the actual name of the firm in question, which is “Yahoo!,” not “Yahoo.”

And I’m going to call the newspaper whose article triggered this piece the “New York Times?” instead of the “New York Times.” After all, if the editors of the world’s most self-important newspaper can be indifferent to getting the name of a major corporation right, why should they mind if I don’t bother?

In any event, the Times? article got right to the heart of the matter in the second paragraph, summarizing what appear to be Yahoo!’s major strengths:

Yahoo would seem to have a strong hand. It is the world’s most popular Web site, with more than 400 million monthly users…. It has top Web properties in areas like e-mail and music. And its management team, led by Terry S. Semel, a former Hollywood executive, is well regarded for its skill and financial rigor.

And, on the surface, all those points are more or less correct.

Mr. Semel certainly did a terrific job steering the company out of the Internet Bubble collapse, turning Yahoo! into a profitable and important franchise. And while Yahoo! does have widely used email and music platforms, I don’t know anybody with a “yahoo.com” email address. Nevertheless, 400 million monthly users is indeed a heck of a lot of “users.”

So why is Yahoo! flailing around?


Why, as I write this, is the online Wall Street Journal reporting that the world’s “No. 1 Portal” is having trouble closing a deal to buy Facebook—the only decent social networking site available, now that YouTube is owned by Google and MySpace is safely ensconced within the corporate umbrella of News Corp, whose crafty CEO, Rupert Murdoch, acquired that social networking website a year and a half before Viacom Chief Sumner Redstone learned what a “social networking” website was and began flailing around, King Lear-like, exiling poor Tom Freston from his increasingly irrelevant Old-Media kingdom?

Why, in short, with all the advantages of having been the “first mover” in Internet-land, is Yahoo! so publicly failing to get with the program?

Perhaps it is because what Yahoo! really is is this: the world’s biggest virtual parking lot.

Let me explain.


Right now, on the Yahoo! front page, I can click on buttons for mail, messenger, radio, horoscopes, weather, “local” (whatever that means), autos, finance, games, GeoCities, groups (whatever that means), HotJobs, Maps, Movies, and yadda yadda yadda (figuratively speaking).

Not only that, but there’s a news story headlined “Why did giant camels die off?” as well as an ad for the new Robins Williams movie.

Meanwhile, on the front page of Google, there's a handful of catagories (such as maps and video) above the simple search box. And that's it.

Compared to sleek, simple Google, the front page of Yahoo! reminds me of one of those cars—generally an old Volvo—going 40 miles an hour in the middle lane during rush hour that has so many bumper stickers covering every square inch of available space that you can’t actually read any of the individual bumper stickers except the green and blue one that says “Visualize World Peace.”

Which is ironic because what you tend to be visualizing when you see that bumper sticker is not how beautiful it would be if Arabs and Israelis could only find common ground in their struggle for human self-actualization by having a giant reconciliation ceremony in a field of day lillies above the Gaza Strip.

No, what you tend to be visualizing at that moment is this:

How cool would it be if my car had a machine gun in the muffler like James Bond's Aston-Martin so I could blow away the scumbag in that souped-up red Acura flashing his lights and tailgating even though it's bumper-to-bumper traffic?

But I digress.


Like that old Volvo and its confusing mass of bumper stickers, the front page of Yahoo! probably turns off as many people as it attracts. Me, I check the weather on Yahoo! and then go to the nice, simple Google page to do search.

And I suspect that I am not alone.

The Times? story gets this, noting:

Yahoo may well be slipping because of the sheer scope of its ambitions. It competes in news with CNN, in sports with ESPN, in e-mail with Microsoft, in instant messaging with AOL, in social networking with MySpace, and of course in searching with Google.

To the Times?’ brew of skeptical inquiry, a Yahoo spokeswoman sniffs, “Of course growth will slow when you already reach one out of two people on the internet.”


Yes, and growth will also slow when those people you’re reaching are, for the most part, using the parking lot for free. N
ot going inside the store.



Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.




Thursday, October 12, 2006

Making Payroll in the Real World


Finally, the Contractor Will Take Your Calls

Housing Slump Frees Up Builders and Lowers Cost Of Materials for Remodeling

—Wall Street Journal


Wall Street is a manic-depressive beast.

One moment the housing stocks are the poster-children of the trees-grow-to-the-sky brand of momentum investing, defying the skeptics, most especially Alan Abelson and his almost-weekly wolf-crying column in the front pages of Barron’s about the perils of…well, everything, it seems, but especially housing stocks, by hitting the new high list every day.

The next day housing stocks are all on the new-low list and Wall Street's Finest are busily slashing estimates and scratching their heads over what could possibly have gone wrong with trees-growing-to-the-skies euphoria, despite the fact that housing has, over the last 150 years, been a rather cyclical business.

Then, the day after the analysts have finally thrown in the towel and downgraded the stocks, the Fed decides to stop raising interest rates, and suddenly the housing stocks are all “breaking out,” as the chartists say, triggering the following type of commentary which I am not making up:


Home Builders confirm some positive tendencies that have been brewing over the past few months. The chart pattern of the HGX [home building stock index] completed a 4-month bottoming formation yesterday with a break through a key line of resistance around the 217 area. Over the past month, we have seen a consistently positive volume profile as volume spikes accompanied up moves on the price pattern, indicating accumulation of stock. Some positive follow-through beyond yesterday’s high at HGX-220 will confirm this bottoming formation. We believe that this is an intermediate, if not longer-term upside trend change for the group. We will be looking at resistance areas coming up around 226, 233 and then 250.

How that helps anybody decide how to invest their money is beyond me, but it’s the kind of minute-by-minute stuff that makes traders’ fingers get itchy for the kind of manic-depressive action that increasingly dominates the markets.

Thus, a bunch of guys spend their days watching green lines and red lines and blue lines on a computer screen, making buy or sell decisions on the basis of what those green lines and red lines and blue lines are doing at any second of any minute of any hour of any trading day.

And that's how Wall Street makes its payroll.

Somehow I doubt the individuals who, to paraphrase Jimmy Stewart’s impassioned speech to the cynical Mr. Potter in “It’s A Wonderful Life,” actually do most of the building and painting and landscaping in the housing industry, particularly care about what the green and red and blue lines are doing on some trader’s screen on Greenwich Avenue.

Their concern, in these fallow days for new housing construction, is to meet payroll. And that's not just because the Wall Street Journal headline quoted above says so.

It's what I'm hearing at the Greek diner, too.

The setting was a table in the corner with two guys, one a builder and the other a subcontractor who, as far as I could tell, was not getting his end of the work done to the satisfaction of the builder.

The key part of the conversation, as I heard it in bits and pieces above the general noise level, came after the subcontractor had been blustering and whining, in between phone calls on his Nextel push-to-talk that everybody in the place could hear, until the builder pressed him for details.


And this is what the subcontractor said:

“There’s nothing in the account. I mean, every week I’m struggling to make payroll. Seventeen thousand, eighteen thousand a week I’m trying to make.”

The builder, unnervingly, listened without saying a word. The sub went on:

“There’s nothing in the account. My guy’s pullin’ his hair out—the last hair he has he’s pullin’ out.”


Which may be why, as the Wall Street Journal reports, “the contractor will take your call”: whatever those red and green and blue lines are doing on that trader's screen on Greenwich Avenue, he needs the money.



Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.



Sunday, October 08, 2006

What Google Wants is What Rupert Has: Next TV


Google in Talks To Buy YouTube For $1.6 Billion


That’s the front-page story in the Wall Street Journal, which broke the story Friday afternoon during an otherwise relatively quiet day.

Quiet, that is, if you don’t count Jerry York flipping his chin at the General Motors Board of So-Called Directors and resigning from that august collection of individuals who, it should be noted, have overseen General Motors’ decline and fall at the hands of CEO Rick Wagoner.

Seems those same So-Called Directors were more interested in preserving Mr. Wagoner’s tenure than with exploring what Nissan savior Carlos Ghosn might have brought to the table by hooking up Nissan and Renault to GM. Hard to imagine a Nissan/Renault/GM merger could result in anything worse than what Wagoner’s done so far.

Nevertheless, by keeping the Board of So-Called Directors from engaging outside advisors to explore an opportunity which would have almost certainly cost him his job, Wagoner shut down the threat as easily as the Detroit Tigers shut down the $200 million New York Yankees and simultaneously belied the predictions of certain outside observers—including yours truly—that GM would find no better alternative (see “Sonny Makes the Deal,” July 3, 2006) to a deal with Ghosn.

Which is why I hesitate to make any such forecast about the ultimate outcome of the Google-for-YouTube merger discussions whose disclosure swept Wall Street and Silicon Valley late Friday afternoon.

But I will take issue with a central tenet of the Wall Street Journal’s take on the rationale behind the merger, as summed up in the second headline of the story:

Deal Could Put Search Giant In Top Spot for Online Video; A Front Door for Web Visits

The issue I take is this: YouTube is no mere “front door for web visits” by teenagers surfing the web.

Rather, YouTube is the Next TV.

Before you spit out your coffee, or Jamba Juice, or chai tea, or soy latte at that grand statement, consider for a moment what is happening here.

People watch more than one hundred million videos on YouTube every day. Since YouTube accounted for just under half of all visits to U.S. online video sites in September, more than two hundred million videos are viewed every day on U.S. video sites, including YouTube, MySpace, Google and others.

Keep that number—two hundred million a day—in mind.

Now, consider that of the nearly 300 million Americans alive at this moment, roughly 15% are below the age of 10 and roughly 50% are 35 or older, which leaves some 35% of those 300 million within the prime online-video-watching age range of 10-to-35. That is something close to 100 million pairs of “eyeballs,” as they used to say during the Dot-Com Bubble.

But let’s assume that at least two-thirds of those 100 million 10-to-35 year olds have better things to do than watch a video of some poor loner lip-synching “Stop! In the Name of Love” to his pet iguana. If my math is close to reality, then about one-third of those 100 million likely viewers, or 35 million, are watching those two hundred million videos a day.

Which amounts to approximately seven videos per person per day.

Keep in mind these videos aren't all made by lip-synching losers: there are old Jerry Seinfeld nightclub shows and home-made videos of early Beatles concerts; there are television shows both pirated and, thanks to Fox, which announced last week that it would put shows on MySpace, legit, not to mention stupid "Jack-Ass" type stunts and almost anything else you can think to look for.


And that is why I call YouTube and its ilk the Next TV.

Yes, I know the mantra from the not-dead-yet TV and Movie Establishment—“Who wants to watch a movie or a TV show on their computer?”


Unfortunately, that’s almost exactly what their friends at EMI and Warner Music asked when the iPod came along: “Who wants to listen to music on a computer?”

This notion that people need to sit in a living room to watch moving images is, I think, the opiate of the network TV bosses. If they asked me, I’d tell them precisely who wants to watch television and movies and sports on their computers: my daughters and all their friends and all their friends' friends.


About 35 million of 'em, for now.

Which is why it makes all the sense in the world to me that the Google guys—whose video service hasn’t gained much traction whatsoever—are looking to buy YouTube (founded February 2005) even though my friend Mark Cuban famously predicted YouTube will get “crushed” owing to the same type of commercial copyright issues that brought down Napster.

In fact, it makes all the sense in the world to me that Rupert Murdoch, the canny Old Media Mogul who saw what was happening and bought MySpace a year before poor old Sumner Redstone realized what was going on, is reported to be in the hunt for YouTube as well.


Because what Rupert knows is this: Cable TV is dead: long live Next TV.

Coming soon to a URL near you.



Jeff Matthews
I Am Not Making This Up

"Next TV" © 2006 Jeff Matthews


© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Thursday, October 05, 2006

Hedge Funds: Game Over, Part II…When “It” Girls Don’t Read the Fine Print



There’s a company with which I’m familiar that’s been around a long time. It has good management and a nice portfolio of products generating reasonable sales growth at healthy margins, year after year.

On top of that, the business throws off more cash than it requires for plant and equipment, so the management team does what it has been doing for decades: it finds businesses or individual product lines that fit the existing franchise, and buys them at prices which make sense. And if the company can’t find the right fit at the right price, the company doesn’t buy.

Since the stock of this company is owned by the founding family as well as public shareholders, management isn't pressured to do the wrong thing for a short-term pop in the stock: instead, it has the leisure to think about, and act on, the company’s long-term interest.

So it was a bit of a head-scratcher when a hedge fund showed up a couple of quarters ago suddenly owning almost 10% of the company’s stock and presenting itself as one of those ‘activist’ shareholders who stirs things up by prodding management into making stock-moving business decisions for the benefit of public shareholders.

After all, ‘activist’ hedge funds tend to target woefully mismanaged companies whose executives spend money egregiously on themselves or their own pet projects at the expense of public shareholders. They don't tend to go after good companies with happy shareholders.

My own view of ‘activist’ hedge funds is that they are—aside from a handful that have been doing it very well for many years (my old pal at Third Point, Dan Loeb, comes to mind on that score)—the “It” Girls of Finance in the Year 2006.

Seems anybody with a billion dollars of nervous, we-will-withdraw-in-a-heartbeat-if-you-have-two-bad-days-in-a-row money, a Bloomberg terminal and a publicist can be an activist hedge fund nowadays.

And, indeed, the shallowness behind the bluster of the activists agitating for change at the company in question was amply demonstrated on the company’s very next earnings call, when the “It” Girl’s Chief Activist queried management what it planned to do about the company’s “incredibly unleveraged” balance sheet.

For those of you not fluent in the code of activist phraseology, “incredibly unleveraged” means the balance sheet is simply too healthy.

The most obvious way to fix this apparent deficiency, in most activists' playbooks, would be for the company to act like a private equity owner by loading the balance sheet with debt in order to return cash to the shareholders via a share buyback at a fancy price well above the activist’s cost, leaving the company with a crippled balance sheet and reduced growth prospects while the “It” Girl moves on to the next “incredibly unleveraged” target.

Sort of like being a Miami condo flipper, until that game ended last fall.

The only problem in this particular “It” Girl’s case is that the company in question has a Class A/B stock, in which one class of shares has voting power while the other class does not.

Guess which stock the founding family controls? That’s right: the voting shares.

Apparently our “It” Girl activist friends never read the fine print. Or, if they did, they decided that the current environment is so activist-friendly that their powers of persuasion and displays of righteous indignation would cause management to throw forty years of careful stewardship out the window for the sake of a brief pop in the stock and the opportunity for the knuckleheads in question to sell out and move on to the next “incredibly unleveraged”—i.e. healthy—company.

They were wrong.

And having been proved wrong, they are, according to my Bloomberg, selling.

Maybe they'll read the fine print next time.


Jeff Matthews
I Am Not Making This Up


© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Monday, October 02, 2006

Hedge Funds: Game Over



Hedge-Fund Managers Make Midair Pitches

Small-Fry Firms' Hopes Take Off On Eos Flight of Captive Investors Amid Delicate Time for Industry

Wall Street Journal


There was an interview in, I believe, Barron’s several years ago, consisting of a roundtable discussion among some of the smartest minds in technology investing.

When the subject came to microprocessors—the chips that drive the computers we all use—and whether to invest in market-leader Intel or perennial Number Two AMD, one of the smartest of the smartest minds at the table said this:
.
“It’s game over—Intel won.”

Unfortunately for the magazine's readers, AMD stock proceeded to triple while Intel languished. In hindsight, his words had been spoken at or near the absolute bottom in AMD’s stock price, precisely because all the bad news about AMD that made it such an easily dismissed company in the pages of a financial magazine had already been reflected in the stock price.

Things could only get better for AMD, and they did, thanks to a new CEO and a new generation of microprocessors that caught Intel flat-footed, making AMD—not Intel—the microprocessor stock to own at the very moment it was declared “game over.”

Which is why I hesitate to declare anything so bold as “game over” for anything but, say, the Red Sox without Manny Ramirez.

Still, once in a while, things get so out of hand—such as last summer’s Time Magazine cover article about “Why We Love Our Homes,” which marked the absolute top in the U.S. Housing Bubble—that the phrase comes to mind and refuses to leave.

And Friday’s Wall Street Journal article about hedge fund managers pitching their funds on New York-to-London flights is about as obvious a sign of a top as I have seen since, well, “Why We Love Our Homes.”

I have tried to figure out how to excerpt the article, with appropriate comments, as I did the housing story last summer, but I find the hedge fund article is so full of fin-de-siecle whoppers that commentary merely detracts from the entire experience.

It begins thusly:

As Eos Airlines Flight 2 lurched amid heavy turbulence on Saturday night, hedge-fund manager Kurt Hovan tried to stay on course, making his pitch to a prospective investor.

The 25-minute sales job by Mr. Hovan, manager of a $21 million health-care fund, fell flat. The investor didn't bite -- he said the fund was too tiny and its investment team too green.

Mr. Hovan was one of a handful of small-fry hedge-fund managers whose hopes took off with the Eos flight. Each paid $3,900 for a round-trip seat on the New York-London trip. The draw: to mingle with captive big-time investors and make sales pitches over champagne and canapes. Investors rode free of charge.

"It's speed dating for hedge funds," says Bartt Kellermann of Global Capital Acquisition, which raises money for hedge funds. If investors express interest, Mr. Kellermann arranges follow-up in-flight dinner dates.

For the rest of it, including the hedge fund manager who believes he deserves a 2-and-20 fee structure because of his returns since inception all of 18 months ago, I will only suggest you dig up Friday’s newspaper or, more realistically, check it out online and read it from beginning to end.

As Time Magazine’s everybody-in-the-housing-pool cover story last summer proved, the smart money does not invest in a trend when it is front-page news—especially not when cracks in the foundation, such as the Miami condo market back then, and the Amaranth fiasco today, are visible.

Which is why I’m calling “game over” in hedge fund land. Buyers on the New York-to-London flights, beware...or at least insist on a longer track record than Britney Spears' latest marriage, which, for the record, will be two years in November.


Jeff Matthews
I Am Not Making This Up


© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.