Lions and Tigers and Bears, Dubai!

Fresh off Thanksgiving, still stuffed with Butterball and Wild Turkey and familial angst, a ragged collection of hardcore traders shuffled into the shortened Friday session squeezing rubber balls and oozing tryptophan from their eyeballs. This mutant collection of veiny, red-faced Orcs, those who yell "Buy" and "Sell" in their sleep, were looking for a reason to belch reverberating echoes across the hallowed halls of the NYSE and they found one in the desert of Dubai.

Dubai World, a quasi state-owned investment entity, had asked its creditors for a moratorium on debt payments for six months - all $59 billion of its liabilities. When this news came across the wires, the flecks of spittle were flying as sell orders screeched like an osprey descending on a minnow in a tide pool. What started as beach break escalated into the north shore of Oahu as low volume combined with massive paranoia to drive the Dow onto the rocks. It would take a day or two for the Xanax, single malt, and Viagra to wear off, but when it did, a rational realization took hold of the situation by taking Dubai World (DW) in a proper perspective.

DW builds islands for the ultra-rich, erects hotels for the ultra-rich, invests in casinos for the ultra-rich, and operates ports for the goods being shipped by the ultra-rich. They financed all of this activity because Dubai doesn't have a lot of oil left; estimates are that it will run out in 20 years. So, in the midst of a global economic crisis, a company that caters to the ultra-rich and is built on a mountain of debt is having trouble? As the port operators in New Jersey would say, "fuggedaboutit."

Truly "Free Market" = Anarchy & Chaos

For those who believe that the "free market" is one without any government interference or pesky regulations, I'll let this AP story speak for itself:

LONDON -- Rogue employees at a major mobile phone company illegally sold millions of customer records to rival firms, Britain's information watchdog said Tuesday.

Christopher Graham, the information commissioner, said the case was a serious breach of data privacy, and he called for harsher punishments for offenders.

"The existing paltry fines ... are simply not enough to deter people from engaging in this lucrative criminal activity. The threat of jail, not fines, will prove a stronger deterrent," he said.

The mobile phone company -- which Mr. Graham said couldn't be identified because an investigation was ongoing -- alerted Mr. Graham's office after it found out about the suspected trade. Personal data, including customers' contract expiry dates, were sold to several rivals, which then used the material to cold-call customers to offer them an alternative deal, the office said.

"The number of records involved runs into the millions, and it appears that substantial amounts of money changed hands," the government body said in a document submitted to the Ministry of Justice.

Mr. Graham said his office was considering the evidence and preparing to prosecute those responsible.

The Data Protection Act prohibits the selling on of data without prior permission from the customer. Offenders could be fined thousands of pounds.

Copyright © 2009 Associated Press

Everything You Wanted To Know About CMBS

The history of mortgage-backed securities, from the RTC to the impending commercial real estate collapse, is available for reading online.

Rather than examine this uniquely detailed look at the commercial real estate market, I'll just put up a link instead.

The Lloyd's Prayer

Thanks to Richard Ambrose for this adaptation of the Lord's Prayer as spoken by the executives at Goldman Sachs. I found this at Barry Ritholtz's blog "The Big Picture," a site that every business student should bookmark immediately.

THE LLOYD’s Prayer

Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally’s Come. God’s Work Be Done
On Earth As There’s No Fear Of Correction.
Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman and Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate
Forever and Ever.
Goldman.

Darkness Before the Storm

David Rosenberg, ex-chief economist for Bank of America-Merrill Lynch, has made some dire predictions concerning the economic outlook. He believes that we are headed for an unemployment rate, the exclusive U3, between 12-13%. This would place the U6, consisting of people who have given up looking for work and those who have taken part-time jobs, at around 20%. Compounding this prediction is Edward Harrison's belief - whose "Credit Writedowns" website is considered one of the top financial sites on the Internet - that we are now headed into a real depression.

Harrison's view is that debt is the underlying feature of this downturn, which coincides with Yale economist John Geanakoplos theory of collateral and the lack thereof that led to this global meltdown.

Harrison wrote, "When debt is the real issue underlying an economic downturn, the result is a period of stagnation and short business cycles as we have seen in Japan over the last two decades. This is what a modern-day depression looks like – a series of W’s where uneven economic growth is punctuated by fits of recession. A recession is merely a period of recalibration after businesses get ahead of themselves by overestimating consumption demand and are then forced to cut back by making staff redundant, paring back inventories and cutting capacity."

We all know that the subprime mortgage market in conjunction with pyramidal layers of derivative gambles contributed to this monetary malaise, but it is only the precursor of two more real estate implosions: 1) the prime loans that were made with 'exotic' conditions - these reset next March - and 2) commercial real estate, which is already starting to crumble.

Lest you think that I'm here to incite suicidal thoughts, my motive is quite the contrary; there is money to be made during crises, but the businesses have to be carefully chosen. Here is a list of recession-proof business ideas, and here is a compendium of career choices from which to focus your MBA and skills during bad economic times.


"The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity."

John F. Kennedy, Speech in Indianapolis, April 12, 1959

Meet the New Boss, Same as the Old Boss

The Wall Street Journal published an article today about the pioneering work of Yale University economist John Geanakoplos. Working in the academic version of a rat-infested basement with sooty windows letting in streaks of dim light, he has toiled for years trying to redefine the nature of collateral in our modern economy. His ground-breaking work? That when investments contain overleveraged or synthetic collateral as backing, the efficient market hypothesis is no longer valid, i.e. investors no longer have access to all pertinent information, and the price will no longer reflect an accurate market assessment of value. Financial derivatives, collateralized debt obligations, and a whole odd-lot assortment of "casino" investments qualify, explaining in part the economic collapse. Wow, on the surface, this seems like big news.

According to Geanakoplos, when there is a margin call because of concern over future expectations and collateral is short, prices drop, which further exacerbate the situation. Mmmm, this sounds very familiar. In fact, this "new paradigm" seems to have its roots in the 1929 stock market collapse, which was triggered by margin calls because the collateral to cover didn't exist.

There's no "new thinking" here. Investments, whether in a Wall Street casino or a Main Street home, had no down payment, no collateral. This is nothing short of fraud. What he's really saying is that when you defraud investors, they get burned. And when you defraud an entire industry, the global economy gets burned. Yet, no one has been charged with this crime, a transgression that makes Bernie Madoff seem like he stole penny candy. Why?

Let's not forget the words of Jean Rostand, French experimental biologist and philosopher: "Kill a man and you're a murderer, kill many and you're a conqueror, kill them all and you're a god."

Insider Scathing

Galleon hedge fund founder, Raj Rajaratnam, has been in the news lately for operating a ring of hi-tech corporate insiders and analysts who willingly divulged nonpublic information, which in turn allowed Galleon to reap less-risk, mo'-money profits. In his case, the moniker "hedge fund" was used to describe a hedge against the efficient-market hypothesis by obtaining illegal information to consistently outperform the broader market through "sure bets."

There are a number of academics and pundits who believe that Rajaratnam's transgressions are in fact helpful to the markets; after all, it was he who first provided information that brought prices into equilibrium. Besides, he really wasn't an "insider," but an outsider who got insiders to talk freely by, in some cases, paying them tens of thousands of dollars. Of course, he made $8 million short-selling Google from this information, among many other prescient trades.

The Securities and Exchange Commission defines illegal insider trading as the "buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security." It seems that they are behind the times, outmoded, and anachronistic; they actually believe that insider trading "undermines investor confidence in the fairness and integrity of the securities markets." The SEC seems to be enamored with this thing called risk; they think that if risk is equally distributed, then the markets will operate as they should. But more advanced minds disagree, saying that if everyone traded on nonpublic information, then our markets would be absolutely lighting-fast and efficient. Or perhaps we wouldn't have markets at all because very few will buy shares for which a select few are guaranteed a risk-free profit.

Rajaratnam's public service by trading in advance of released news should be examined - perhaps we should all sell out our fiduciary responsibility in order to provide the fastest possible correction in the markets. Just imagine, every insider from every public company selling materially significant news to outsiders whose role is to provide rapid price equilibrium. But if the company is not making fraudulent representations of its financial performance, does it matter how quickly the news is acted upon? If everyone has the same information, a price correction that occurs next Tuesday will have exactly the same effect as one occurring this afternoon. Sure, someone could buy an equity 10 minutes before a catastrophic free fall, but they could also purchase 10 seconds before a huge uptick. Armed with identical information, everyone has a equal risk, the definition of a level playing field. Here's the difference: unless they're a small-time player, anyone acting with insider information will telegraph news through their large long-buy or short-sell orders. The market will then react to this risk-free adventurer with the timidity of having news in advance of its official release, dramatically increasing the buy or sell orders that would have occurred under normal circumstances, which then increase the volatility of the price swings.

In effect, insider trading increases beta for everyone but the insider, whose beta is almost zero.

The reason why we have so many commerce regulations is because most businesses want to manipulate risk, and many executives will do anything to lower their risk profile. Unfortunately for society, risk is a zero-sum game; when a single entity lowers their beta through illegal means, the risk goes up for everyone else.

Personally, I believe that insider trading should be treated the same way that old-school Las Vegas casinos handled card cheats, loaded dice, and rigged slots. If you've seen the movie "Casino," you'll know that the lucky ones got the hammer.

Microsoft's Brilliant Failure

The Microsoft Sidekick phone, which sports address book, photo storage, password, and to-do list services, became a member of Amnesiacs International today when a server crash caused every phone in every market to lose all of its data. Permanently. The phones are made by a MS subsidiary, aptly named Danger, and sold through T-Mobile, who is offering the princely sum of $20 for the inconvenience caused by this loss of mobile memory and function.

Microsoft is suitably apologetic, and their engineers are working feverishly trying to restore at least a few bits of the missing data, but I can't help thinking that this was a conspiracy on par with Roswell and the Kennedy assassination.

Everyone knows that Microsoft hates cloud computing; it's very existence decries the end of the licensed software model upon which Microsoft rests its gigantic carcass. And there is no doubt that this "outage" is causing many to reconsider hosting their data offsite and on the Net. And Microsoft has shown multiple ethical lapses in the past (antitrust violations and patent infringement, to name a two major areas). And doesn't Microsoft know about backing up data? After all, they built Windows.

At this point, the only thing I don't suspect Microsoft's involvement in is with the Unabomber - that's because he wrote everything with paper, pen and ink.

A Case of Irrational Diversification

It was reported this morning that InBev, the new owner of Anheuser-Busch, is selling the Busch theme park properties to the hedge fund Blackstone Group for $2.3 billion. Busch Entertainment, legal owner of the amusements, consists of Busch Gardens (Tampa, FL and Williamsburg, VA) and SeaWorld in San Diego, CA.

Getting beyond the fact that Shamu is now owned by a hedge fund, the question arises, "how did a beer company get into theme parks in the first place?" I think I have the answer.

There is an old story that was circulating years ago about how Walt Disney came to choose Orlando as the site for Walt Disney World. According to the tale, Disney's first choice was St. Louis because of its central location and ease of travel - a TWA hub as well as interstate highways - for the entire country. Disney went to meet with the city fathers and business potentates, which naturally included August "Gussie" Anheuser Busch, Jr., the man who built an empire out of beer.

It seems that Disney was absolutely adamant - there would be no alcohol sales on Disney properties, and certainly not within any Magic Kingdom. Apparently, Gussie took offense at this position and said something to the effect, "any man that doesn't serve Budweiser beer in his theme park is an idiot."

The story goes that on the plane back to California, Disney, recognizing the potential problems that Busch could create for him in St. Louis, told his assistants to, "make it Orlando," which was the second choice.

It would seem that Gussie's ego got the better of him and he decided to launch his own brand of theme parks, family-fun places where Budweiser beer would be flowing profusely. He would go mano-a-mano with Disney, and in the end, Disney did begin serving alcohol at Walt Disney World because prohibition just doesn't work in America.

This could be a case of unrelated diversification engaged in solely because of a single conversation, a slight against a beer man's product, in St. Louis so many years ago.

A Primer in Business Intelligence

As a member of several groups at LinkedIn, I regularly receive emails offering anything from resume writing assistance to executive positions in my old industry, operations support systems software (OSS) for telecommunications providers. Yesterday, an offer of the latter crept into my inbox; any opportunity to regain a vice presidency of marketing deserves a ROI review, and this is no exception.

The VP of global sales for RateIntegration, inc. is seeking a VP of marketing for North America. Among other things, the position description says, "Individual must be equipped for high activity marketing campaigns and work multiple simultaneous campaigns. 10-15 years of successful track record marketing telecom OSS/BSS solutions resulting in measureable improvement in sales results is required." Seems all very nice, but let's dig a little deeper.

First, the company name leaves me confused. On their website, they are "rateintegration," yet the position request has "RateIntegration." Which is it? Or do they not believe that a consistent spelling of the company name is important? Perhaps their venture capital partners, Dolphin Equity Partners and JT Venture Partners, felt that would be too intrusive to mandate a modicum of marketing. But do they really lack marketing skills or is this an ingenious plan?

Some research into the executive management team shows the following pedigrees:

CEO: Bachelor's in Electrical Engineering, Master's in Information Management
CTO: Ph.D. in Computer Science (Carnegie-Mellon, no less!)
VP, Engineering: Bachelor's in Math (Harvard, no less!), Ph.D. in Computer Science
EVP, Finance and Strategy: Bachelor's in Electrical Engineering, MBA
VP, Product Development: Ph.D. in Computer Science
VP, Global Sales: Bachelor's from UC Berkeley

There is certainly no lack of scientific intellect, and at the same time, there is almost no marketing expertise. This tells me that the company is engineering/product focused, almost ensuring marketing myopia (cool product, no market). But what exactly is the product?

rateintegration (or RateIntegration) has developed a neat pricing/rating engine that would allow a telecommunications operator to create a separate usage plan for each and every customer. Imagine "Friends & Family" on steroids and hallucinogens. But who would want to do that? Mass customization only works when you can achieve the efficiencies of mass production with individual customization. Think of the difficulties encountered by Customer Service if every customer had a different rate plan! Yet, the technology is slick and has been adopted by some big players.

Evaluating their customer base, it can be seen that most are large companies with a few million subscribers and all are outside of this hemisphere. While the size bodes well for the software's performance, how will it work in the North America? Based on what I've read, it is questionable as to whether this software is economically viable for Tier 3 operators, but even if it is, what does that business model look like and how many rural phone companies need a NASA-grade pricing and rating engine? As to the larger customers, for the past decade, consolidation in the telecommunications industry has been unprecedented. Most of the Tier 2 operators (1-10 million lines) have been swallowed up by the Tier 1 players. And those Tier 1 companies have established contracts with either AMDOCS, Convergys (the two largest OSS software houses on the planet), or a major systems integrator like Accenture. If you are not working with them, you won't gain entry to the Big Dogs. Which leads me to the next issue - rateintegration is also looking for a VP of channel development, separate from a VP of marketing.

Anyone who has taken an introductory marketing course can explain the 4 Ps of all marketing strategies - Product, Price, Place, and Promotion. In the case of rateintegration, make that 3 Ps because Place, or the supply chain, is separate from the marketing function. How successful will any VP of marketing be in an environment where 25% of your strategy is outside of your control?

To top it off, RateIntegration is also seeking agents and resellers in every major market area around the world simultaneously: NA, EU, EMEA, and Asia. So what does all this information mean? What is the final analysis?

Here's my interpretation of the situation:

1. rateintegration developed a very neat product using venture capital that has unbelievable capabilities, some of which are even desirable by the marketplace.

2. Being a product-focused company, they worked their Rolodexes and found some initial customers. Because the product exceeds requirements and expectations, they are referenceable accounts of good stature.

3. As a group of engineers, they hired a sales person to expand the business. He's hit a brick wall, so now he's trying to hire marketing, channels, agents, and resellers. I find it interesting that the marketing position description calls for the ability to manage multiple campaigns, even before there is a strategy in place. Or have they already developed a marketing plan for the VP of marketing to implement? Maybe they should just outsource the project, because marketing reporting to sales has "doomed to fail" written all over it anyway. Where else would a marketing VP's compensation plan have a large commission component? Of course, "commission plan" tells us that the time horizon for success is very short. Which leads me to the finale...

4. All of this is in response to the VCs reluctance to provide additional capital. Perhaps the worst recession in 70 years has something to do with this new direction for rateintegration? Maybe if they were a marketing-focused company at inception they would be able to weather this storm. But they weren't and based on what I've read and analyzed, taking a job with them would be like betting against the house in Vegas.

I guess I'll just have to finish my MBA.

Blue Ocean or Blue Sky? It's still the blues...

Recently I read "Blue Ocean Strategy," a purported solution to the age-old question of "how do I make a buck in this world?" The subtitle, "How to Create Uncontested Market Space and Make the Competition Irrelevant," promises the holy grail of psuedo-monopoly, giddy profits, and a captive customer base, so I was hooked. Tell me more...

Written by W. Chan Kim and Renee Mauborgne, the book was published by Harvard Business School press - a surefire ticket to management-consultant riches, and they do not disappoint from that perspective. Blue ocean strategy divides capitalism into two bodies of water, red oceans and blue oceans. The red oceans are where competition swims like a great white just offshore during the Fourth of July festival at Amity Island. On the other hand, blue oceans are devoid of life except your own private party; they are like a giant spa filled with dancers whose names are Bambi, Jade, and Sapphire, and ringed by bottles of Cristal. You just settle in to the warm, bubbling water and listen to the giggles while smearing some Ossetra on a piece of gold leaf. Apparently, many well-known innovations are the result of blue ocean strategy, even though the book was written decades after those goods and services came to market.

One of the strokes of genius discussed thoroughly in BOS is Cirque du Soleil, the entertainment brainchild of Guy Laliberte and Daniel Gauthier. These men came from the rough-and-tumble world of street performance art, and the "Circus of the Sun" was originally intended to run for 13 weeks in Quebec and then shut down. But according to BOS, it was Guy's plan to devise a circus that was different from Barnum and Baily or Ringling Bros.; in fact, Blue Ocean Strategy only shows the traditional American circus acts as the sole competitive landscape for Cirque du Soleil. It's almost as if Guy and Daniel were planning to deal with the prospect of setting up their tent in the same town at the same time as a conventional three-ringed event, an eventuality that never occurred.

Apparently, Lalibert and Gauthier used a "strategy canvas" in 1984 to determine the precise differentiation factors from elephants and lion tamers and to create a blue ocean experience. Never mind that they were street performers who wanted to bring street performance to a theater. Never mind that the strategy canvas wasn't invented until 2005, or that the Canadian government bailed them out when they went bankrupt, or that they hired Guy Caron in 1985 to incorporate elements from circuses around the world into their show. Those pesky facts would interfere with the premise that BOS is not a POS.

Another blue-ocean innovator is Herb Kelleher, the founder of Southwest Airlines. It seems that he and Rollin King used a strategy canvas in 1970 to define the role of Southwest in a soon-to-be deregulated air travel market. Apparently, he carefully plotted the points in the Eliminate-Reduce-Raise-Create grid and after careful implementation of the BOS, he started the most successful airline in U.S. history. Yet, if the authors had actually asked Kelleher about his reasoning, he would have told them that if you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make darn sure they have a good time doing it, people will fly your airline. He would have told them that he never used a blue ocean strategy; he just wanted to deliver a reliable, fun service to an under-served market - a traditional marketing strategy that wouldn't make a dime for a management consultant.

Blue Ocean Strategy tells us to avoid red oceans at all costs; the red ocean is hard work followed by a slow death. Yet, red oceans are the source of all incremental innovation. Red oceans are the reason we have iPhones & iPods, air conditioning, disc brakes, power steering, touch-tone telephones, ball point pens, sliced bread, frozen vegetables - this list could go on for miles and encompass millions of products and services that make the modern world more comfortable, safe, and enjoyable. This is not to discount the disruptive innovations that crawl out of blue oceans onto muddy shores, but at the same time, to recognize that blue oceans also spawn far more failures than red oceans. Remember the old adage, you can tell a pioneer because he's face down in the dirt and has arrows in his back.

Hindsight is 20/20, and I could find allegory in a phone book. What this means is that after examining successful products, anyone could devise a "strategy" that creates a common thread out of thin air, complete with charts and graphs that can be sold to desperate businesspeople seeking salvation in the global economy. But the reality of the matter is that innovation begins with someone wanting to deliver an outstanding customer experience, and each innovator is as different as a snowflake. There are no magic juju beans or secret sauces, just a desire to delight, amaze, or enthrall.

The true test of BOS is, since it was published, can the authors point to a single disruptive innovation that was created solely as the result of someone reading their book? Take your time, I've got all day...

Blue Ocean Strategy delivers a value not found on the bookstore shelves in the "Business" section or in an MBA program. Its appraisal is more akin to Moby Dick, a big fish story. As a work of fiction, it is priceless.

The Beauty of Finance

Sarah Palin, once mocked in the press and on television for her vacuum of foreign policy skills, her implosive domestic agenda, and her slippery-fingertip grasp of economics, has finally shown her true colors. She is a financial genius, on the same level as Jim Cramer, Richard Nixon, and Herbert Hoover.

Speaking in Hong Kong at an annual conference of investors, Palin has finally cracked the code that led to our current global economic malaise, an issue that has already been explored by dozens of books, magazine articles, and television documentaries, all helmed by leading pundits, regulators, economists, traders, banking experts, and financiers. Contrary to this treasure trove of insight, in her opinion the fault line lay in too much government regulation.

Alan Greenspan, the legendary head of the Federal Reserve, has said, "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms." He went on to admit, "“I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.” Under questioning by Rep. Henry Waxman at a congressional hearing, Greenspan even went to far as to agree that his world view, his entire ideology of deregulation was wrong. According to man who headed the most powerful financial institution in the world for 19 years, it was a lack of regulation that fomented the collapse. But from Palin's perspective, Greenspan is old and not very pretty, so he is not to be believed. Did Greenspan ever kill a wolf from a helicopter or put on hip waders for a news conference? I think I've made my point.

Numerous experts have pointed to the repeal of the Glass-Steagall Act with the Gramm-Leach-Bliley Act, a bill that removed the separation between commercial and investment banks, and the Commodities Futures Modernization Act, which eliminated penalties for outright gambling by investment houses, as key components of the meltdown. Further, a multitude of insiders point to a dysfunctional SEC as a contributing factor; this was an agency that for 16 years didn't notice the largest swindle in history, the Madoff scandal. Madoff's hedge fund was a Ponzi scheme, the oldest trick in the book and one that an MBA student could have uncovered, let alone the chief securities regulator.

Several investors walked out on her speech, but that only showed how their "reality-based" worldview will limit the possibilities for the future. Palin lives in a universe where Ayn Rand is the Supreme Creator, an alternate existence where the removal of all restraint will inspire trust and confidence in the markets. The French, the Russians, and the Iranians have already experienced this happy place of social Darwinism presided over by a discompassionate oligarchy, and as a result, the world received the benefits of the guillotine, Stalin's communism, and Islamic fundamentalism.

Perhaps this is Palin's strategy - we'll all have to buy lots of guns and move to Alaska while we await the apocalypse. Oh, joy!

"That Giant Sucking Sound"

Dell Computer is purchasing Perot Systems for a whopping $3.9 billion, a 68% premium over the pre-announcement share price. I'm glad that Michael Dell finally realized that hardware has been a commodity for some time now, unless you're Apple, which has created a unique experience with the combination of their hardware and software. If Dell had been paying attention, when Google started making their own servers (over 200,000 of them) of a proprietary design in order to reduce costs, the writing was on the wall. Years ago, IBM moved away from focusing on hardware and successfully transitioned itself to a global services company. Hewlett-Packard, with the exception of Carly Fiorina's ill-fated acquisition of Compaq, had been moving toward services. But then, Fiorina only made that acquisition to justify an increase in her compensation package - thankfully, her presence is no longer a blight on Silicon Valley. So Dell waited far too long, but did they pay too much for Perot Systems?



Consulting last year's 10-K report, it is apparent that $3.9 billion is quite a bit of money, considering the revenue and cash flow. Revenues top out at $2.7 billion, but at the bottom line, net profits are a mere $117 million. This is largely due to the fact that services incur heavy expenses and don't have software-like margins, such that operating costs for Perot Systems are a hefty $2.3 billion. On top of that, revenues are down in 2009, making this acquisition look even worse. But this is only a part of the picture, because Perot has very little long-term debt and it receives 47% of its revenue from the health care sector.

The American Recovery and Reinvestment Act of 2009 has set aside $59 billion toward health care and $19 billion just to create electronic medical records systems in hospitals and clinics across the country. Currently, less than 10% of doctors have access to electronic medical records, and that is about to change. Perot Systems is well positioned to capitalize on this tax-payer funded opportunity, so I think that 3 years from now, Dell will appear to be astute in paying such an egregious sum for a company founded by someone who, during his presidential campaign, talked about "crazy Aunt Hattie in the basement" as a reference to the economy, and "that giant sucking sound will be jobs going to Mexico" as his rebuttal to NAFTA.

Outsourcing Innovation

Disclosure: I am an ecstatic Netflix customer.

This morning, Netflix came through on their promise and awarded $1 million to the team that developed an algorithm for calculating viewing suggestions that substantially bested their in-house CineMatch system.

Three years ago, instead of expanding their staff of computer scientists and statisticians, Netflix offered a seven-figure prize to any person or team that could improve by a measurable margin, their CineMatch movie recommendation software. Initially, over 40,000 teams began work, ranging from groups of top-level scientists to individuals working from home. In fact, one person working alone, a statistician in England, was able to improve the algorithm by 5%. But the prize was only paid if the recommendations were 10% more accurate along with a speed increase. There were teams that topped the 8% mark, but as they approached 10%, it seemed an impossible task, in large part because the teams had to address a 100-million element dataset.

After two years of work, it was apparent that no single team had the requisite skills to win the award, so teams started merging spontaneously. The winning team, BellKor's Pragmatic Chaos, was a merger of tw separate groups and consisted of scientists, statisticians, and researchers from Australia, Canada, Israel, and the United States. The resulting algorithm, which Netflix now owns, offers a much better customer experience with regard to movie recommendations. A second team, Ensemble, was able to best the 10% mark within 30 days, which triggered an in-depth review of the algorithms. In the end, BellKor was declared the winner.

What does all this mean? First, Netflix was able to advance the science of recommendations research, which has tremendous potential to change the personalization experience of many companies doing business on the Internet. Second, it was able to do this without adding any corporate resources and for the paltry sum of $1 million - a bargain. The potential license revenues would pay for this many times over. Third, they have demonstrated just how important customer satisfaction is to it - and at a time when competition is heating up from numerous venues ranging from RedBox to Hulu. And finally, Netflix has shown that innovation can be outsourced successfully, thus changing the playing field for everyone.

Apple Stock Is Undervalued

The Financial Accounting Standards Board is about the change the way that some companies recognize revenue for the sale of hybrid products (story here). A hybrid product is one that is typically bundled with a service offering, and the old rules tied revenue recognition to the service instead of the product. A perfect example of this is the Apple iPhone, which is sold by AT&T as part of a two-year contract.

Under the current rules, Apple has to spread out the iPhone product revenue over eight quarters, the length of the AT&T subscriber contract. But the new rules, which are expected to affect Apple's financial statements in December, will permit immediate and total recognition of the product revenue at the time the subscriber contract is signed.

Had these new rules been in effect, Apple's recently disclosed third-quarter revenue would have increased by $1.4 billion and the commensurate net profit by over $700 million. The crowd in Cupertino will be sipping some well-deserved Cristal; it's not every day that you can grow revenues by almost 21% and earnings by 57%, all without hiring a single salesperson, placing a single ad, or increasing production by a single unit. Now that's paper money!

Nobel Season is Heating Up!

Stockholm is a-buzz with the latest dirt on the big brains who will be walking the red carpet in hopes of taking home a "dynamite" prize along with some cold cash from Scandinavia - 10 million kronor, to be exact. Or $1,438,712.53 if you haven't gotten hip to globalization yet. The odds makers in Las Vegas are going positively batty because of some real wild cards in the running this year, but that's what makes this the silly season north of "did my nose just fall off?"

Yes, I already have my fantasy Nobel team picked, and as you can imagine, Peter Higgs is tapped as my Don Quixote of Physics, jousting at bosons that could end my roller-coaster life of binge eating and purge dieting just by making my mass disappear. Yeah, Peter! You go guy!


Dr. Higgs has postulated the existence of the Higgs boson, conveniently named after him, a particle that not only explains how the Universe came into being, but also extends an olive branch between string theory and Standard Model particle physicists, long locked in a vicious struggle for dominance of high energy physics. Hey, maybe Higgs will win the Peace Prize too! (Here's Peter in his Edinburgh office, explaining how it's impossible to stay upright after drinking too much single malt).

The problem with Petey winning the Karolinska saucer is the fact that no one has found his boson yet. The Large Hadron Collider was supposed to do just that, but with liquid helium spills and vacuum leaks, it sounds more like my apartment after the Oscars. There is some evidence of the Higgs B, but it's not conclusive and the Nobel committee has a notorious reputation for having something called "a verified, proven result." Well, if they can't see fit to hang the dish around Dr. Pete's neck, then I swear I won't touch a little meatball for a year and I'll protest in front of the nearest IKEA, at least until I see a table that would just make the breakfast nook.

Stay tuned, Nobel nerds. This Prize fight has all the marks of a heavyweight bout, beginning October 5th with Medicine and finishing October 12th with Economics. And if you're still on speaking terms with your bookie, lay a couple of bucks on Higgs - he may be a long shot, but so was Milton Friedman.

Energy is the Answer

Dean Kamen, inventor of the Segway personal transporter as well as other, more important creations, has been trying to tackle one of the world's most pressing problems - a shortage of fresh, potable water. After 10 years of work, he has created the Slingshot, a vacuum compression distillation engine that uses only 2% of the usual electrical energy. The prototype costs $100,000 and Kamen hopes to get the price down to less than $2,000, which in his opinion would spark rural usage worldwide.

The process of vacuum compression distillation is not new; however, a decade of work was required to get the power consumption down to 500 watts, and that brings me to my point - the most pressing issue facing the planet isn't about clean water, arable land, pollution, or global warming; the most pressing issue is energy. With enough clean, renewable energy, every other problem becomes moot.

The energy consumption of the planet Earth is now increasing at a remarkable rate, largely due to the rapidly increasing standards of living in developing countries. For example, in 1985 the average person in China consumed 44 pounds of meat per year; by 2000 that figure had topped 110 pounds. High quality protein, such as meat, requires massive amounts of energy to produce, and with China showing such a dramatic change, you can only imagine the global impact to our energy picture.

A fews years ago, I had the good fortune to speak with Dr. Richard Smalley, winner of the 1996 Nobel prize in chemistry for his work on a new type of carbon, and it was he who convinced me that the solution for practically all human problems lay in energy. The entire economic notion of scarcity, which is responsible for both good and evil in the world (from entrepreneurship & innovation to wars, crime, and poverty), has its roots in a lack of energy.

The total worldwide demand for energy reached 14.5 terawatts per day in 2004, which is the equivalent of 220 million barrels of oil, and in fact, oil provides the largest share of our energy needs. But we all know that oil is finite, the very definition of scarcity. Not only is it becoming more difficult to find, extract, and provide, the process of making new oil is far too slow to compensate for our thirst (plankton + seabed + perfect rock formation + 150 million years). Coal has been proposed as a viable alternative, but there is no such thing as "clean coal," and even if carbon dioxide emissions could be stored in large underground reservoirs, coal mining still poses a serious health threat (graphs courtesy of Dr. Richard Smalley).

By 2050, we will consume 60 terawatts per day, or the equivalent of 900 million barrels of oil - oil that won't exist by mid-century. Nuclear power does play an important role, both today and into the future, but the problem of storing spent fuel rods is persistent and nagging. What happens when Yucca Mountain is filled to the brim? Fission and fusion are stopgaps, for the simple reason that they are not sustainable over the long-term. When it comes to energy, the picture isn't pretty, but are we truly condemned to a dystopian landscape? Not necessarily - the answer is hovering above us.

Amaterasu, Apollo, Freyr, Helios, Huitzilopochtli, Inti, Liza, Lugh, Ra, Sol Invictus, Surya, Tonatiuh, Utu - whatever you call it, the sun beams down to Earth 165,000 terawatts of energy each day. That is more than enough energy to provide health, wealth, and happiness for every person on the planet, and we don't even have to efficiently extract power from sunlight. All we have to do is efficiently transport the electricity from massive solar farms, which would be located in the ever-expanding desert regions of the world. Here's some food for thought - the future of our species is hinged upon developing a better copper wire.

Conflicting Information

The latest 30-year U.S. treasury bond auction has concluded, and it was a great success for the government and its insatiable thirst for borrowing. Demand was high, driving down the the yield to 4.268%, well below the expected range of 4.27-4.29%. Additionally, the bid to cover was, at 2.92, the highest since the 30 year was reintroduced in 2006.

All of this seems to conflict with the believed state of the economy. The stock markets are expected to recover, and in fact, have rebounded nicely off the lows and seem to be stabilized with moderate earnings growth forecasts for a limited but growing number of public companies. Gold bugs are betting on higher inflation and have backed those bets by driving the price of Au above $1000 per ounce. Existing home sales, while still a buyer's market, are bouncing back. The $USD is fairing poorly, and there is talk of creating a new global standard of monetization (ie. New Bretton Woods).

So, given all of that data, why were people gobbling up long-term Treasuries at discounted rates? Do they know something we don't, or are they just hedging their bets?

The Least Among Us

A new study has been released, developed in part with help from researchers at the University of Illinois, which documents the real plight of minimum wage workers in America. Titled "Broken Laws, Unprotected Workers," this research paints a grim picture of how the least among us are cheated out of money and time, and deprived of their rights, all illegal activities under federal and state law.

Based on interviews of over 4,000 low-income workers in New York, Chicago, and Los Angeles, this comprehensive peek into the bottom-rung of the working class shows widespread minimum wage, overtime, meal break, off-the-clock, tipped job, and employer retaliation violations. As an example of the severe impact to income, 60% of workers with minimum wage infractions were underpaid by greater than $1 per hour. Some were paid up to $4/hour less than the minimum wage.

Seriously injured workers were either threatened with firing or were actually dismissed for reporting the accident to their employer or contemplating worker's compensation. Of those sustaining serious injury, only 8% filed claims - the rest were either frightened or intimidated into taking no action.

As a professional businessperson, this information is both shocking and disgusting. If you can't operate a business without cheating and/or menacing the poorest, least advantaged people - people, by the way, who are willing to work for the absolute minimum pay and benefits under the law - then it would be wise for you to pursue your criminal career by first undertaking some advanced training. May I suggest the United States Penitentiary at Marion, Illinois?

We're Not A Gang - We're A Club!

To often, the general public places MBA graduates into the same category as sociopaths like motorcycle gangs, inner-city gangs, and Mexican drug gangs, but with a far greater ability to cause widespread destruction and mayhem. In short, we are the jackals feasting on the maggot-ridden portfolios of humble home-town investors; we are the puppetmasters and everyone else is a sucker on the midway, spending $5.00 to knock down the milk bottles for a $0.50 stuffed animal.

This is a vicious and fallacious misconception, because we are being taught that, in some cases, Art deserves more respect than Shareholder Value, and that winning the admiration of a clique of in-bred aesthetes is more important than making piles of ugly, ugly money.

The case in point concerns one Isaac Mizrahi, a fashion designer who, after failing on the Paris Haute Couture market, was relegated to delivering off-the-rack apparel to Target, a seedy American retailer catering to the unwashed masses across our uncouth country. Our professors have the courage to hold Mr. Mizrahi in disregard for his inability to create stunning, one-of-a-kind unwearable fashions as seen above; to teach that his mass-market appeal is inversely proportional to his artistic value and that his value as an artist is far more important than his skill at crafting a business out of his vision.

As the new generation of MBA students, we hold Mizrahi in contempt for the fact that he generated $1.0 billion in name-branded sales for Target; we snicker at his effeminate yet successful attempts to appear on television (in his own series), in movies, and on radio; we look down at his pathetic transformation as a Broadway costume designer (for which he won a Drama Desk Award for Outstanding Costume Design), and we chastise him for being selected as the creative director for Liz Claiborne Brand, a $5 billion apparel and accessories empire.

There is more to success than creating immense shareholder value and there is more to life than turning your name into a multi-billion dollar worldwide brand. We are not jackals - we like pretty things too. Welcome to the future of business schooling...

Welcome to the Zen MBA!

The Times, They Are A Changin'

As a student of media conglomerates from within the College of Mass Communications at Southern Illinois University Carbondale, I'm as concerned as anyone regarding the state of consolidation within the scope of traditional media. When only seven corporations control almost every newspaper, book publisher, radio station, television channel, movie production, magazine publication, and music label, one can easily interpret this as an assault on free speech. These mega-corporations have diversified their holdings across all media just enough to circumvent any anti-trust regulation, and yet they determine to a large extent what you watch, read, or hear. But they are facing an unprecedented attack by the Internet and, more than most industries, are experiencing upheaval among their ranks because of this electronic marketplace of ideas.

Newspaper circulation has been on the decline for twenty years, first because of changes in the population, and later because of the vast amount of news available on the Internet. Seven major newspapers have now filed for bankruptcy protection and more are on the way. Accelerating the demise are the cutbacks being executed within newsrooms; as revenues fall, so does reporting quality and coverage. Certainly, newspapers have turned to the Internet as a salvation, but instead of competing with a few other dailies on the news stand, they are now facing literally millions of sources for news and information. Given their anachronistic status within the modern world, I take great pleasure in reading about Rupert Murdoch's grand plans to open the world's largest printing plant outside of London. I'm sure that history will look kindly upon this move, as it did with Napoleon at Waterloo.

No one reads books in bound form any more. This is only the mildest of exaggerations - two years ago, there were 1.2 million different titles published in the United States, and less than 400 of them sold more than 100,000 copies. Every traditional book publisher is now operating under the Hollywood "blockbuster" model - secure a name-brand author, and publish only work that can be read by a sixth-grader. You see, reading skills have plummeted such that America is a dumbed-down country capable of taking the English language, now with over 1,000,000 words, and reducing it to a puerile compendium of colloquialisms, a minimalist street-wise lexicon for communicating base needs at the bottom of Maslow's hierarchy. For those who are still interested in reading more than a Twitter post, Google is scanning books into their database as fast as the light bars can move across the page, and even textbook companies are being forced into producing eBooks, which sell for a fraction of a bound or paperback version. Amazon's Kindle is also reshaping the landscape for digesting novellas, novels, and tomes. All of this spells trouble for the traditional book publishing industry model, and opportunity for new writers to become seen through the many avenues of self-publication that are available. Book publishers are approaching marginalization as marketing services only; the last line to cross are the brick-and-mortar stores such as Borders and Barnes & Noble. See, book publishers don't have very good record at recognizing valuable content - Gone With the Wind was rejected 38 times, Ray Bradbury was rejected 736 times, Harry Potter was rejected 16 times; all told, publishers have rejected now-famous works by authors such as Stephen King, John Le Carre, Joseph Heller, Oscar Wilde, George Orwell, Vladimir Nabokov, and even Anne Frank. Little Anne Frank was rejected with the words, "The girl doesn’t, it seems to me, have a special perception or feeling which would lift that book above the 'curiosity' level." They deserve whatever demise the Internet has in store for them.

Radio is now available on the Internet, and in the case of Pandora, each song is customized for your listening pleasure by isolating a "music genome" from the style or artist of your choice. If you haven't tried this, you must do it now - and be prepared to be amazed. Talk radio still has its adherents, but if the media empires are reducing to catering to "dittoheads," and brain-damaged shock-jock enthusiasts, then they will have hit rock bottom. You're only as respected as the customers you serve.

With 500 channels, modern television services are largely, but still only partially controlled by media giants, with each conglomerate owning a number of channels of either broadcast or cable-delivered. A&E Television Networks (AETN) is a joint venture of the Hearst Corporation, ABC/Disney and NBC whereas the Discovery Channel (including TLC, Animal Planet, Discovery Health, Science Channel, Planet Green, Discovery Kids, and the Military Channel) is an independent venture. And, as Comcast is discovering, subscribers are dropping cable service in favor of free TV shows on the Internet. In response, the largest cable company in America is launching fee-based Internet delivery of television programming. This will have an interesting effect - as more customers switch and become accustomed to using the Internet for their viewing pleasure, the door will open for more independent productions to reach eyes and ears. We will get more choice with less intrusive advertising and at the same time, the bony grip of the media conglomerates on our skulls will be weakened.

With the advent of digital editing on a Mac using Final Cut Pro and distribution of the finished product on the Internet using services such as Netflix Instant View, there are more movies available for viewing than any time in history. Independent filmmakers still have to work the ropes at Cannes and Sundance, but we are rapidly approaching a time when even this will be unnecessary. Using YouTube, Facebook, and Twitter, new films will be able to generate a cult following overnight, which can lead to mass market exposure through the word-of-mouth-at-the-speed-of-light presented by the Internet. The big studios are still needed for big-budget extravaganzas, but outstanding human drama doesn't require their oversight or money. Some of the best films of our time were independent productions whereas the major studios have been known to occasionally make a kind of movie affectionately known as a "flop or bomb." And some of those movies actually killed the studios that made them. All in all, the indie film community is thriving and we are better because of it.

The health of magazines can be measured by monitoring the number of advertising pages sold. And the latest data doesn't bode well for the glossy-cover crowd. Considering that there are 7,200 different magazines available to the general consumer, and 389 new titles appeared just this year, it seems that the publishers are doubling down on a dwindling market. Of the top 25 magazines by circulation, only AARP increased subscribership - yet another clear indication of the aging of America along with a barometer of magazine desirability. Once again, the Internet gives each person the information they want, when they want it and for the price they are willing to pay, and with minimal advertising intrusion. Why wait for a magazine when I can read reviews about a product, service, technique, or newsbite, check YouTube for someone using it, download the manual from the manufacturer, and post my own reviews when it doesn't work for me.

The music industry still has a stranglehold on musicians and listeners, but cracks are starting to appear in their bastion. First, MP3 downloads have collapsed revenues, and while I don't condone theft of any form, it allowed a company like Apple to negotiate a pay-by-the-song model for the iTunes Music Store, something the industry had rejected for decades as infringing on their right to sell CDs with 2 good songs and 11 pieces of trash. Second, with the iTunes Music Store in place, individual artists can now self-produce and distribute, and provided that they handle or outsource marketing and PR chores, they don't have to share with a major label who forces them to record two or three albums a year for five years or they get their asses sued off. In effect, because Distribution is Digital, the big record labels are nothing more than marketing agencies for artists, and if those artists find other sources for marketing services, the labels will become defunct. Given the sleazy way the music industry has acted toward their artists and their customers, this would be a fitting end.

I think we should set aside our fears of media consolidation and instead become active participants in using the Internet to bring them down.

Skype: Going, Going, 65% Gone

One of the more confounding business acquisitions of the last 10 years has been eBay's purchase of Swedish VoIP services provider Skype. eBay is in the business of online auctions and payment transactions, and Skype delivers low-cost IP telecommunications services - other than the Internet as a basic delivery mechanism, they are not related business models, except perhaps in the alternate universe known as "bizarro world." Adding insult to injury, eBay paid a total of $3.1 billion for Skype in 2005, when they were generating approximately $70 million in annual revenues. This equates to a premium of over 44x revenues, and while Skype's revenues have increased to $600 million, market valuations have dropped as well.

This means that even though Skype revenues have increased 8.6x, their market value has dropped by 11% since the eBay acquisition, at least according to the terms of the announced deal. Controlling 65% of Skype, the new majority shareholders, led in part by U of I alum Marc Andreesen, will not be burdened with an auction business as a distraction. Further, eBay can use the $1.9 billion to make intelligent acquisitions in the transaction processing and exchange segments.

But why did eBay purchase Skype in the first place? There are some who would argue that it was predicated on the agency problems associated with increased diversification - namely, the justification for additional compensation and heightened job security. But this argument is deflated in the face of CEO Meg Whitman's "retirement" in 2007, only two years after the acquisition. If the agency problems were evident, it is axiomatic that a longer term at the helm would occur. She did not resign in disgrace, and in fact is now running for governor of California.

Fortunately for you, dear reader, I possess inside information that may shed some light on the reason behind "the mistake that shall forever be known as Skype." In 2002, eBay was in the market for a new billing system. Their original system was a kluge of software that grew over time into a monolithic mess. In-house programmers kept adding features and functionality in response to immediate needs, and eventually a point was reached were it could not expand any more and would not accommodate eBay's plans for future rate schedules. Our company, a telecommunications billing vendor and systems integrator, made it past down-selection and was one of the two finalists. We didn't win the contract, but our competition was also a telecom billing vendor. Installation and testing took over a year, and eventually eBay went online with their new billing system in 2003-2004 timeframe, with a sequenced rollout to different segments of their customer base.

eBay had purchased a billing system that could not only handle their auction and PayPal traffic, but it could also support VoIP services as well. And sometimes companies get involved in new strategic ventures because they can, not because they should. Just imagine a meeting in the boardroom in San Jose, when the discussion turns to what possible new directions they can set forth. The head of IT says, "I don't know, but we have all the infrastructure in place to support a VoIP telephone company." The rest is history...

Team Rodent Eats Spidey!

Walt Disney Co. (aka Team Rodent) has announced its acquisition of Marvel Entertainment Inc. this morning in a deal that values the comic book powerhouse at $50 share, a 30% premium over Friday's close. After changing its Depends, CNBC has been streaming non-stop segments covering the purchase like Burma Shave billboards along the highway, and every talking head is providing perspective as if from the top of the Magic Castle in Anaheim. That is, the Disney View is the only view that offered to the public. A quick analysis of Disney's holdings and history would tell an eighth-grader why they wanted to buy. The more intelligent question is, "why did Marvel want to sell?" With the economy in rebound and consumer spending on the rise, a 30% premium seems downright cheap for MVL, so why bail out now?

I can think of four possible reasons:

Isaac ("Ike") Perlmutter, the CEO of Marvel, is ready to cash out and retire. He's 66 years old and been in business as a restructuring expert for decades. He acquired a bankrupt Marvel in 1998 and over 10 years, has increased share value from $7.69 to $33.87 - an increase of 440% ex-Disney (676% including the Mouse). Buying collapsed companies and bringing them back to life requires tremendous stamina, and he doesn't get much love from the board of directors. His base salary is a paltry $700,000 and he only get three weeks of vacation per annum. His wealth is solely wrapped up in MVL stock, and the best way to extract value from an equity is through acquisition. Insider selling only depresses the market value, either through a dropping bid price due to volume or through a decline in investor confidence. Perlmutter has 29 million shares of MVL, which is currently valued at $1.45 billion and enough to qualify for the Forbes 400 Richest Americans as well as their 500 Richest People. He'll have no problem making the transition from first-class confinement on United Airlines to a personal Gulfstream G-550 painted with "web juice." Yes, with that payday, he'll be running in the tall grass with the big dogs on Jupiter Island.

Another reason to sell may be the very thing that has propelled Marvel into a new (and very profitable) strategic line of business - movie production. Initially, MVL licensed its Spiderman intellectual property to Sony for the production of live-action films. But with the release of the shark-jumping Spiderman 3, Marvel decided to take the reins and produce movies in-house. They secured a $525 million credit facility, used the intellectual property of 12 characters pledged as content collateral, and became Hollywood producers. Except, unlike many Hollywood types, they actually made a great movie with the release of "Iron Man." Starring Robert Downey, Jr., this film generated $582 million in worldwide box office receipts, representing the second-best selling film of 2008. And that doesn't include revenues from lunch boxes, t-shirts, video games, etc. Sure, it cost more than $200 million to produce and promote, but it generated a 100% profit on the initial release ticket sales alone. But it does take a truckload of greenbacks to finance a movie and MVL's production credit line is fraught with conditions - namely, it requires them to use their own cash for 33% of the movies' budgets. Iron Man 2 is scheduled for release in May, 2010, but there are no Marvel movies being released in 2009. It could be that Marvel doesn't have the financial traction to become a movie factory (1-3 releases per year), but Disney certainly does. Provided that Disney does a Pixar with Marvel (i.e. no interference with day-to-day management), the home of the Hulk could ramp up faster than the Silver Surfer and pounce on its competitors like Wolverine. Or, if done improperly, like Hannah Montana and the Jonas Brothers...

On the dark side, there is a lawsuit winding its way through Federal Court in the Southern District of New York alleging that the characters created by Stan Lee actually belong to another company, Stan Lee Media. The plaintiff's lawyer is Martin Garbus, a larger-than-life trial lawyer - in other words, this is serious business. If true, Marvel would owe SLM 50% of all gross profits generated by any work involving a Stan Lee character (Spiderman, Fantastic Four, The Incredible Hulk, Iron Man, and many, many others) from 2004 and for 50 years into the future. Interestingly enough, Stan Lee is suing Stan Lee Media as an injured investor himself, but that's another story. Back when Marvel went bankrupt in 1997, apparently they canceled Stan Lee's contract. During the interregnum, a contract-less Lee was befriended by an alleged con man, Peter Paul, who formed Stan Lee Media (Paul was later charged by the SEC for securities fraud and accepted a 43-month time-served sentence; SLM went bankrupt in 1998 due to his looting, reemerging in 2006). Lee is reported to have transferred his intellectual property to SLM, and then later, when rehired by Marvel, also transferred his intellectual property to MVL. Therein lies the 50/50 split being asked for by SLM. What makes this more intriguing is that on January 27, 2009, Judge Stephen Wilson ruled in a California court that Lee and POW! Entertainment (Lee's new company) illegally transferred assets from SLM while it was in bankruptcy protection. If the assets that were illegally transferred include the X-Men, et. al. then Marvel is in deep trouble. Basically, this lawsuit is a dictionary-definition of FUBAR, and Disney has just the legal team to tie it up in court for 25 years or more. While this wouldn't be a sole reason to sell, it could be a mitigating factor.

Finally, perhaps the board and executive management of MVL truly believe that the Disney offer is the best and only way to generate shareholder value, and in a fit of altruism, are reluctantly parting with the company. Of course, Perlmutter is the largest single shareholder by far, so please return to Reason #1 and start over.

Maybe the reason to sell wasn't any one factor - it could be the conjunction of everything delineated above and then some.

The Mystery of Poor Customer Service Explained

In December 2008, the respected pundits at Forrester Research published a survey of customer satisfaction across 12 different industries. Of the various types of telecommunications service providers included in the study, the wireless faction came in first, followed by Internet service providers and then TV/cable companies - and all of them were ranked below "Airlines" for customer service quality. How does one make customers more dissatisfied than the airlines? Even worse, the only industry segment ranked below cable companies is the private health insurance cabal, where "death panels" really do exist.

From the perspective of consumer scales, the entire telecommunications arena scored from "Very Poor" all the way up to "Mediocre." Armed with this information, William Band, vice president and principal analyst for Forrester, interviewed 100 telecom operators worldwide to discover why they are so bad at servicing customers by asking these three questions:

1. What are your most important customer management goals?
2. What capabilities are included in your definition of customer management?
3. How strong are your current customer management capabilities?

The two most highly rated responses for Question #1 - almost evenly matched - are "keep customers" and "reduce costs." This seeming paradox is actually a Machiavellian strategy that will be explained shortly. The other questions elicited responses solely focused on software, specifically all software that is customer-facing. This includes call center customer care, online customer service, revenue management, service and support management, product and lifecycle management, marketing, sales and installation, and technical service and support. Band determined that the operators needed new, better software. Instead of the old concept of best-of-breed - the integration of packages from multiple vendors - they needed best-of-suite, an amalgam of code provided by a single developer. But there are dissenters to this idea.

Stanford's Jeffrey Pfeffer, in chapter two of his book "What Were They Thinking?," chastises companies who invest in customer relationship management software as the be-all, end-all for managing relationships with their revenue stream. Instead, he directs them toward purchasing human resource software that identifies the right people to hire, who will then in turn create a better customer experience. Pfeffer assumes that companies are deceived into believing that CRM software is a synonym for managing customer relationships, something that only another human can do effectively. He writes as if companies are stumbling around in the dark, investing huge sums into sophisticated software that is no replacement for the human touch. And with regard to telecom operators, he is wrong. They know precisely what they are doing, but they just haven't perfected it yet.

You see, I was a telecom CRM insider, someone who was in charge of the product management for a suite of software designed to integrate all customer-facing actions into a cohesive whole. I have presented to and spoken with wireline, wireless, cable, and Internet providers to learn their needs and strategies, something that Pfeffer can only guess. He is outside the veil looking in, and if he had asked me, he too would know the truth. In the interest of revisionist history, I'll recreate the "lost interview" with Professor Jeffrey Pfeffer.

Pfeffer: So, Mr. Guggenheim, if you say that operators know what they are doing, why are they investing so much money into CRM when it has not improved customer service?

Guggenheim: Hey, Jefferino, you're from Stanford and I'm from UIS, so as equals why don't we drop the honorifics and just get down to business? CRM covers a wide swath of software applications. That is, there is no "singular" CRM investment. The question you need to focus on is "what aspect of CRM is receiving large investments?" And the answer is artificial intelligence-driven customer analysis.

Pfeffer: My question still stands then, "why make the investment if it doesn't work?"

Guggenheim: Because the technology hasn't matured yet, and investing in Version 1.0 is a sure-fire means to accelerate research and development in achieving Version 2.0 - the version where the payoff occurs. As you saw earlier, operators are most concerned with both keeping customers and reducing costs, two seemingly paradoxical foci. But with enough intelligence in your software, you can do both.

Pfeffer: How's that possible? You have to spend money to keep customers happy.

Guggenheim: And there's the rub - operators are not concerned about keeping customers happy. In fact, they want to let a relationship degrade until just before a customer churns. At that point, they will offer a substantial promotion, which secures the customer for another subscription period. The key is that the promotion will cost far less than maintaining a happy customer over the same period of time.

Pfeffer: You mean the telecom operators want to let customer satisfaction erode?

Guggenheim: Absolutely. It's a basic actuarial analysis, and it's easy if the customer is on a subscription plan, but the trick is to recognize when the customer is about to churn from a month-to-month. Because most defections are not preceded by a complaint, it takes very elaborate artificial intelligence mechanisms to predict with certainty, say, one month before a customer opts for another provider, who, by the way, is just as bad as the one they left. At that moment, you offer two, three, or even four months of free service in exchange for a two year contract, and the cycle starts all over again. In this business, Jeffsky, maximum profitability is based on a saw-tooth wave of customer satisfaction.

Pfeffer: That's diabolical!

Guggenheim: Hey, Jeffo, you've been teaching business in the Ivy League for 30 years, did you think it was all touchy-feely? This is business-in-the-trenches, baby.

Pfeffer: Well, I guess I'll have to rewrite that chapter.

Guggenheim: And next time, do more research.

The HOG comes to India

Harley Davidson (ticker symbol HOG) announced that they will be selling their entire line of bikes - everything that roars, screeches, and screams - in India, the second largest motorcycle market in the world. I have traveled extensively throughout that country and at one time held an apartment in Kolkata (previously Calcutta), so I am no stranger to the vehicular situation. And it's important to note that most of the motorcycles in India seem to be pre-war 250cc Hondas and mopeds (WWII, that is).

Something tells me that the traffic is about to get much crazier than the current state of "Brownian motion with vehicles." How is something like this...



going to maneuver around traffic like this?



or this?



At least on a Sportster that sounds like the second coming of Vishnu you can outrun those black-smoke belching heavyweight trucks with I-beam front bumpers, emblazoned with the farewell "Tata" across the grill - an adieu to the afterlife if you've seen what happens when one of those lorries strikes a pedestrian. Actually, I predict that Harley Davidson will enjoy much success in India, provided that an aftermarket for custom accessories is in place shortly after the product line launch. Given the volume and variety of Indian symbolism, the Hogs sold on the sub-continent should be worthy of a show at the Guggenheim

Personally, I might return and buy a Sportster with a chrome statue of Ganesh residing above the headlight...

Reach Out And Touch Microsoft

Disclaimer: While I have done extensive coding for Windows machines (Visual Basic, ASP.NET, and Prolog AI language), I have personally used a Macintosh since 1986.


In July, Microsoft announced that it is building retail stores around the world, starting with Scottsdale, AZ and Mission Viejo, CA, which will be opening this fall. The behemoth from Redmond has stated that it will build stores close to Apple, and will incorporate such features as a Mac-like "Genius Bar" to provide expert support and advice. Which begs the question, will they provide video entertainment while you wait in line ala Disney World, or will they just let you fume and vent with your fellow travelers?

Unlike Apple, Microsoft doesn't produce its own platform, so how will they distribute table space to computer manufacturers? Strictly high bidder or will other "backroom" negotiations determine who gets to showcase their hardware running a crappy OS like Vista? And I defy anyone at a Microsoft store to demonstrate all 1500 features of Word! Of course, they could always get on the phone to tech support in India, if you don't mind the wait.

Is Microsoft ready for developers to show up in their stores, asking arcane questions about Visual Studio? The Microsoft Developers Network website is about as easy to navigate as a super-monster WalMart on Black Friday, and MS computer geeks are known to be confrontational heavyweights. Who can blame them - they are a product of their environment, just like inner-city crack dealers. Maybe that's why Microsoft calls their customers "users?"

Are they prepared for an Apple guerrilla marketing campaign? Because many of the stores will be in high-traffic malls, I would have a person sitting on a bench in front of the MS storefront, playing with her 17" MacBook Pro running the new Snow Leopard OS (7GB lighter and much, much faster than Leopard) and showing off some real whiz-bang applications. Then, I would have another person enjoying their iPod and another watching a WiFi-connected AppleTV on a portable video screen. The visuals should be antipodal - clean, fresh, and happy models cavorting with their Apple products compared with the depressed, irate, and hunched-over Microsofties trudging into the store as an endless stream with a litany of complaints.

Is a retail strategy a mistake for Microsoft? Even though they frame this push into the retail space as a challenge to Apple, that's a smokescreen. They're grasping at straws because Google is challenging them on all fronts: search, browser, applications, email, operating system, and development environment. All Google has to do is use a fraction of their $25 billion in cash and put up kiosks near MS stores with the sign "FREE SOFTWARE THAT WORKS."

Will the iPhone go the way of the Betamax dodo?

The iPhone has experienced extraordinary sales, even for a visionary product company like Apple. In only two years, and with only two models available, the iPhone has logged 17 million purchases. Translated to the latest quarter, Apple owns 10.8% of the worldwide sales of smartphones, a remarkable feat considering the limited product launch service availability: US (AT&T), UK (O2), Germany (T-Mobile), and France (Orange). With the availability of the iPhone 3GS, Apple's European market has driven into Italy, Spain, and Switzerland and, as of June 16, expanded into Asia with rolling country-by-country launch dates extending through August.

It's all very impressive, yet I wonder if the iPhone will ultimately become extinct? There was another product many years ago that generated a similar buzz, a product that heralded a new paradigm of entertainment - the Sony Betamax video cassette recorder.

The Betamax revolutionized video entertainment with high fidelity video quality, ease of use (if you don't try to program the record unit), and simple playback controls. And the Betamax died because it could not support a tape with more than two hours of content. If you wanted to watch a movie with 2:01 hours in length, you missed the last minute, and considering that VCR sales had a high correlation - suggesting causation - with the sales of prerecorded pornographic video tapes, missing the last minute was unacceptable to most connoisseurs of the medium. A competing tape format, VHS, could hold up to 6 hours on a single tape, admittedly grainy and of lesser quality overall, but perhaps that was part of its cachet. How long you can stay up is an important product attribute for VCRs, and phones for that matter.

Among all the problems plaguing the iPhone, none is more important than battery life. In the U.S., it's only available on the AT&T network, a service provider that is despised by millions. But this won't matter; the phone has been cracked and can operate on other networks. The iPhone is fragile; a short drop will result in a display that looks like it followed a Terex mining truck down a gravel road. But an entire industry in protective foam cases has arisen out of demand for Apple's consumer products. Some iPhones have exploded, but only in France. Stay out of France and you won't blow your head off while watching Lindsey Lohan puking on YouTube. Yet, the Betamax longevity issue remains.

The original iPhone had just enough juice to satisfy the innovators and early adopters who were willing to sacrifice basic survival for COOL. Then, Apple redesigned it for sleek lines and aerodynamic worthiness. In the process, they removed 15% of the battery volume and created a handset that must be recharged several times a day if you use the video screen, which is classified by experts as a "power hog." Another power sponge is any application that uses the 3G network, such as email, web surfing, texting, etc. The method to extend iPhone battery life is to disconnect from a 3G network and turn off the video display. Yes, if you turn your $600 iPhone into a $50 dumb phone, it will last all day.

The early majority market share must have a wireless device with sufficient battery life to accommodate being trapped in a 757 on the tarmac for 13 hours, give or take. Either battery technology must improve dramatically, which experts are not predicting, or battery recharging technology must accommodate super-fast charging cycles. If not, the iPhone may be next seen on "The Antiques Roadshow."