We all remember the internet revolution of the late 90's, but perhaps even bigger was the telecom boom. Billions of dollars went into internet infrastructure companies that increased network capacity with hopes of trying to cash in on a Netscape-type exit. Then, the bubble burst. Fiber lay dormant in the ground. Investment halted. Demand didn't materialize fast enough as pundits called it a "glut." But now, in the midst of internet 2.0, have we past that point and entered into an era of undercapacity? Many of the projected growth levers of the 90's are finally starting to hit mass adoption in ways never imagined 15 years ago while investment in internet networks has slowed. With the diverging demand and supply characteristics in play, is the bandwidth glut officially over? Is there a telecom boom 2.0 on the horizon?
The Telecom Act of 1996 helped drive the influx of competition and investment into the market shortly after it was passed. The timing could not have been more perfect as the internet hit the masses around the same time. Deregulation, lofty projections, and loads of investor cash all created a perfect storm for a boom in capacity. VCs threw money at companies involved in fiber deployment, electronics and software, and telecom-based real estate all in the haste of meeting forecasted demand. Unfortunately for those investors, most of them failed. Most of them shut their doors, had their assets sold for pennies on the dollar, or got swallowed up by consolidators like Level 3.
The days of build it and they will come are over. There are very few investments in pure infrastructure companies right now. Incumbents such as Verizon and Sprint used to sell capacity through wholesale channels are now scaling back and using it for their own networks. Once it becomes a cost center versus a revenue source, there is always a risk of underinvestment (remember the IPhone AT&T network fiasco?). As everyone knows, the economic backdrop in which the current internet 2.0 is now flourishing is cautious at best. Capital Expenditure budgets are being slashed and scrutinized much more than before. All of these things are leading to a somewhat supply crunch or at least a lag in deployment. This is at a time when demand is booming. And will continue to do so for years to come.
During the first wave, people were merely accessing web addresses and text files which required very small usage of bandwidth (excluding Napster and porn). Now that is a fraction of what we are doing today. Pictures, streaming video, video conferencing, peer to peer, Facebook, ftp sites like Dropbox are all contributing to a huge increase in bandwidth per user. Cloud computing, a concept that centered on demand forecasts in the late 90's, is finally here in a big way. But this is just the start.
Nobody back then imagined the worldwide explosion of smartphones and tablets. All of these users are mapping, chatting, downloading apps, and accessing multimedia via the net on their mobile devices. The problem is the internet networks from the 90's were not built for this demand. There is a mass rush right now to scale wireless networks to keep pace with demand. Back then traditional TV and telephone had separate distribution systems. They have all converged onto IP-based platforms (or moving that way quickly). Radio is next. That's huge. Other mediums and industries that we have not even contemplated are sure to follow further increasing demand for bandwidth. Just look at the skyrocketing prices of data center stocks like Equinix or Digital Realty or the fact that Amazon's server business is approaching $1B in revenue.
Despite the fact that supply might not be keeping up with demand through traditional means such as fiber-based networks, innovation is on the rise. Huge strides in wireless networks are being made, new mediums such power and electricity are becoming more plausible, and component costs continue to drop allowing companies to light those late 90's networks cost effectively. So while the bubble valuations are back in the web-based world, we haven't seen it in the infrastructure realm. Since history tends to repeat itself, its only a matter of time before we see Telecom Bubble 2.0.
09 September 2011
23 August 2011
Strategic Alternatives - A Corporate Exercise in Futility
When a publicly traded company announces that it is exploring "strategic alternatives" for a part of its business, something has gone terribly wrong. In the short-term, it signals a failed strategy; more importantly, it is an indicator of a company with a lack of a good long-term strategy and management discipline. There's nothing more destructive to shareholder value than a pattern of corporate restructurings, mergers, divestitures, and other "strategic alternative" type transactions. They usually fail to deliver what they promise, cost the company tons of cash and lost focus, and generally result in a big waste of time.
HP got trounced last week when it announced it was exploring strategic alternatives for its PC business, shutting down tablet/phones, and overpaying for a software company. Huh? They just bought Palm a year ago and made the blockbuster Compaq deal less than 5 years ago (they also dub the Autonomy deal as "transformative"). HP spent billions on these deals, incurred huge transaction and restructuring costs only to completely unwind them years later. What was the point all this nonsense? HP shares are trading now below what they were prior to Compaq; wouldn't shareholders have been better off with cash dividends or stock buybacks rather than years of poor M&A and divestitures? And think about all of the employee mindshare lost and customer confusion created during the decade long period of uncertainty. Dell is licking their chops right now.
Companies try to get bigger for many reasons and use many business school terms to justify it. Phillip Morris and PepsiCo did so to diversify away from their core businesses. What happened years later? Phillip Morris spun out its food business resulting in a standalone a cigarette company. PepsiCo sold its restaurant business and is under fire from shareholders to spinoff many of its non-core assets. More recently, Kraft announced it will split into two companies only months after it completed the Cadbury deal. I thought bigger was better? And think about it, can Phillip Morris ever diversify enough from being a cigarette company?
Slow changing companies that seek growth around the trenches of its core generally are more sound for the long-term as they effectively look at the business beyond fiscal quarters. Exxon, for years, has caught flack by analysts to invest in high-growth renewable energy and alternative sources; its response has always been: We're an oil and gas company, not a solar research company. P&G has always stayed in the consumer staple business, only making acquisitions as product or geographic extensions. They've rewarded shareholders well in the long-term; and further, they've created a culture of stability and a focused long-term vision along the way.
Besides the advisors, corporate executives and others that stand to gain from large scale corporate transactions, there is often very little value created besides a week of headlines. When companies listen to Wall Street more than its customers and employees, it usually leads to myopic thinking and superfluous deals. Sometimes the best policy is to do nothing and focus on your core business. So when a CEO wants to be transformative, he or she is basically telling you that they have no confidence in what they are doing and betting the farm on something they are even less certain about.
HP got trounced last week when it announced it was exploring strategic alternatives for its PC business, shutting down tablet/phones, and overpaying for a software company. Huh? They just bought Palm a year ago and made the blockbuster Compaq deal less than 5 years ago (they also dub the Autonomy deal as "transformative"). HP spent billions on these deals, incurred huge transaction and restructuring costs only to completely unwind them years later. What was the point all this nonsense? HP shares are trading now below what they were prior to Compaq; wouldn't shareholders have been better off with cash dividends or stock buybacks rather than years of poor M&A and divestitures? And think about all of the employee mindshare lost and customer confusion created during the decade long period of uncertainty. Dell is licking their chops right now.
Companies try to get bigger for many reasons and use many business school terms to justify it. Phillip Morris and PepsiCo did so to diversify away from their core businesses. What happened years later? Phillip Morris spun out its food business resulting in a standalone a cigarette company. PepsiCo sold its restaurant business and is under fire from shareholders to spinoff many of its non-core assets. More recently, Kraft announced it will split into two companies only months after it completed the Cadbury deal. I thought bigger was better? And think about it, can Phillip Morris ever diversify enough from being a cigarette company?
Slow changing companies that seek growth around the trenches of its core generally are more sound for the long-term as they effectively look at the business beyond fiscal quarters. Exxon, for years, has caught flack by analysts to invest in high-growth renewable energy and alternative sources; its response has always been: We're an oil and gas company, not a solar research company. P&G has always stayed in the consumer staple business, only making acquisitions as product or geographic extensions. They've rewarded shareholders well in the long-term; and further, they've created a culture of stability and a focused long-term vision along the way.
Besides the advisors, corporate executives and others that stand to gain from large scale corporate transactions, there is often very little value created besides a week of headlines. When companies listen to Wall Street more than its customers and employees, it usually leads to myopic thinking and superfluous deals. Sometimes the best policy is to do nothing and focus on your core business. So when a CEO wants to be transformative, he or she is basically telling you that they have no confidence in what they are doing and betting the farm on something they are even less certain about.
07 August 2011
Patent Lawyers Gone Wild!
The modern day patent system has no doubt provided substantial societal gain throughout the years. Government grants of exclusivity arrangements have encouraged R&D, promoted invention, and protected new ideas. As most things that have political fingerprints, however, it seems the very system that was supposed to keep the public from being held hostage by large corporations is now helping them create barriers to entry. In the current mobile patent war, for example, its the richest companies that gobble up patents to stifle competition through through lawsuits (yes Apple I mean you). Is innovation being left in the hands of the few with the largest war chests and most lawyers on the payroll?
The patent infringrement assault on Android is bloody. Apple is suing every handset manufacturer they can think of to essentially take the guts out of the free mobile OS. HTC pays Microsoft $5 per handset sold (Microsoft makes more from HTC sales than their own Windows phones). Samsung cannot sell their Galaxy tablet in Australia thanks to Mr. Jobs. Mobile "patent troll" companies like Interdigital have tripled in price on speculation that they will get sold to the highest bidder. Remember Motorola? They are back from the dead sporting a 17,000 patent portfolio. Some of these companies actually have more attorneys on their staff than any other discipline. I've never seen a case when this is a good thing for the general public (read: Congress). Are these R&D havens or lawyers gone wild?
Its one thing if Apple had some sort of super patents that companies were blatantly stealing. If this was the case, Apple wouldn't have the need to drop nearly $3B to purchase Nortel's patent assets (incidentally with other "consortium" monopolists like Microsoft) and continue their shopping spree. They are filing claims for patents around the fringes, ones they acquire after the fact, or even ones they might not be using or so insignificant to the overall OS. Apple just became the second most valuable company on the planet, why do they see the need to stoop to this level?
Simple. The Iphone represents almost half of Apple's revenue. Android is inching towards a 50% market share in smartphones. What they spend on patents is a fraction of what they can defend by taking the largest competitor out. And of course, consumers will suffer the most by reduced choice. It is fortunate that Android is backed by deep pockets (Google) who can afford to fight back, but what if they weren't ? How would they fight back against Apple's $80B cash balance? Why can't Apple just continue to disrupt the market through innovation instead of focusing on legal brinksmanship?
We saw similar games in the pharmaceutical industry. Most of the blockbuster drugs that came out were brought by a limited number of companies with vast resources. And as the 17 year patent period would expire, they would work the system by making minor tweaks to their drugs to extend the patent life. You saw very little innovation coming from smaller players who don't have the resources and knowledge of the system to compete. There were rarely any development firms or smaller companies that could bring wide scale drugs to market in large part because of the muscle of the big boys. And remember how much your prescriptions cost as a result?
I don't want to imagine a world where my only choice is Apple and Microsoft (didnt we have that in PC-land?) or where the only drugs being developed are by 3 or 4 firms. I continue to hope the patent system will favor inventors like Robert Kearns in Flash of Genius who miraculously defeated the Detroit automakers that stole his design. With patents being so easy to file for sophisticated lawyer groups, however, its the large companies with vast resources that are being aided the most. But lets hope in the long run, things work out the way they should A warning to Apple: just look at Pfizer now -- they are nothing more than a large cash balance.
The patent infringrement assault on Android is bloody. Apple is suing every handset manufacturer they can think of to essentially take the guts out of the free mobile OS. HTC pays Microsoft $5 per handset sold (Microsoft makes more from HTC sales than their own Windows phones). Samsung cannot sell their Galaxy tablet in Australia thanks to Mr. Jobs. Mobile "patent troll" companies like Interdigital have tripled in price on speculation that they will get sold to the highest bidder. Remember Motorola? They are back from the dead sporting a 17,000 patent portfolio. Some of these companies actually have more attorneys on their staff than any other discipline. I've never seen a case when this is a good thing for the general public (read: Congress). Are these R&D havens or lawyers gone wild?
Its one thing if Apple had some sort of super patents that companies were blatantly stealing. If this was the case, Apple wouldn't have the need to drop nearly $3B to purchase Nortel's patent assets (incidentally with other "consortium" monopolists like Microsoft) and continue their shopping spree. They are filing claims for patents around the fringes, ones they acquire after the fact, or even ones they might not be using or so insignificant to the overall OS. Apple just became the second most valuable company on the planet, why do they see the need to stoop to this level?
Simple. The Iphone represents almost half of Apple's revenue. Android is inching towards a 50% market share in smartphones. What they spend on patents is a fraction of what they can defend by taking the largest competitor out. And of course, consumers will suffer the most by reduced choice. It is fortunate that Android is backed by deep pockets (Google) who can afford to fight back, but what if they weren't ? How would they fight back against Apple's $80B cash balance? Why can't Apple just continue to disrupt the market through innovation instead of focusing on legal brinksmanship?
We saw similar games in the pharmaceutical industry. Most of the blockbuster drugs that came out were brought by a limited number of companies with vast resources. And as the 17 year patent period would expire, they would work the system by making minor tweaks to their drugs to extend the patent life. You saw very little innovation coming from smaller players who don't have the resources and knowledge of the system to compete. There were rarely any development firms or smaller companies that could bring wide scale drugs to market in large part because of the muscle of the big boys. And remember how much your prescriptions cost as a result?
I don't want to imagine a world where my only choice is Apple and Microsoft (didnt we have that in PC-land?) or where the only drugs being developed are by 3 or 4 firms. I continue to hope the patent system will favor inventors like Robert Kearns in Flash of Genius who miraculously defeated the Detroit automakers that stole his design. With patents being so easy to file for sophisticated lawyer groups, however, its the large companies with vast resources that are being aided the most. But lets hope in the long run, things work out the way they should A warning to Apple: just look at Pfizer now -- they are nothing more than a large cash balance.
22 July 2011
Is there a Carnegie 2.0?
Self-made billionaires in the US have historically had a very strong track record of bringing significant societal change through philanthropy. The likes of the Carnegies and Rockefellers brought libraries, higher education, and public health to the masses. In recent years, the Gates family is not only eradicating diseases, but also more importantly convincing the uber-rich to take the Giving Pledge (1 year later ~70 have taken it). So what about now? With new billionaires created everyday through the monetization of internet-based ventures, are the new money kids filling in where they left off? Aren’t the Gen Y’ers more charitable than their money-centric predecessors?
While the next Vanderbilt has not yet emerged, I like how the youth are building charity into their businesses. Not as outright philanthropic concerns but through incorporating the values of “doing good” into everyday transactions. Tom’s Shoes and Warby Parker have brought the concept of Buy One, Give One into the mainstream. I wrote about large companies like Starbucks that employ higher purpose principals compared to its older rivals. For profit microfinance institutions and venture philanthropy, despite their problems, are expanding their reach. A pessimist may call these marketing strategies, but at the end of the day, they are helping others on a daily basis when other similar for-profit businesses are not. By leveraging traditional business channels, these efforts are frequent, efficient and effective.
Pure play charities such as Kiva or DonorsChose bring the sophistication of tech market exchanges into the non-profit sector. Others such as ConvergeUS and HistoryPin bring about change through social networks. Though I applaud these creative tech efforts, they are small in the grand scheme of the world problems. Certainly in the Valley, amidst of all of this new money, altruism, and technology, there would emerge the next Andrew Carnegie, right?
Not yet. Of Barron’s Top 25 Givers of 2010, only Ebay’s Pierre Omidyar could be considered a new tech entrepreneur. Since Bill Gates, no one from the next generation has taken the helm of leading world philanthropy. Perhaps we’re too early in the cycle (people are too busy filing for bubble IPOs). Perhaps Gates is enough for now (some estimates peg the pledge’s value to eventually exceed $600B). Perhaps a centralized institution is no longer required thanks to technology as individual efforts can yield substantial results. It will be interesting to see who, if anybody, succeeds Bill Gates. Although I'm surprised at the unusually small number of headlines, perhaps even in philanthropy, the game has changed. With the world flattenting at a quicker and quicker pace, buying shoes just might be enough.
While the next Vanderbilt has not yet emerged, I like how the youth are building charity into their businesses. Not as outright philanthropic concerns but through incorporating the values of “doing good” into everyday transactions. Tom’s Shoes and Warby Parker have brought the concept of Buy One, Give One into the mainstream. I wrote about large companies like Starbucks that employ higher purpose principals compared to its older rivals. For profit microfinance institutions and venture philanthropy, despite their problems, are expanding their reach. A pessimist may call these marketing strategies, but at the end of the day, they are helping others on a daily basis when other similar for-profit businesses are not. By leveraging traditional business channels, these efforts are frequent, efficient and effective.
Pure play charities such as Kiva or DonorsChose bring the sophistication of tech market exchanges into the non-profit sector. Others such as ConvergeUS and HistoryPin bring about change through social networks. Though I applaud these creative tech efforts, they are small in the grand scheme of the world problems. Certainly in the Valley, amidst of all of this new money, altruism, and technology, there would emerge the next Andrew Carnegie, right?
Not yet. Of Barron’s Top 25 Givers of 2010, only Ebay’s Pierre Omidyar could be considered a new tech entrepreneur. Since Bill Gates, no one from the next generation has taken the helm of leading world philanthropy. Perhaps we’re too early in the cycle (people are too busy filing for bubble IPOs). Perhaps Gates is enough for now (some estimates peg the pledge’s value to eventually exceed $600B). Perhaps a centralized institution is no longer required thanks to technology as individual efforts can yield substantial results. It will be interesting to see who, if anybody, succeeds Bill Gates. Although I'm surprised at the unusually small number of headlines, perhaps even in philanthropy, the game has changed. With the world flattenting at a quicker and quicker pace, buying shoes just might be enough.
01 July 2011
It's not a bubble
Its different this time aound. There's real revenue behind these companies with proven business models. Social media, ecommerce, and advertising are now mainstream and have matured significantly from the late 90's. Even if many of these points are true to a certain extent, none can justify the valuations that are currently in front of us.
LinkedIn is trading at about a $9B valuation, Zynga and Groupon both filed for IPOs as high as $20B. The beauty of each of these (along with the others) is the fact that none are profitible yet. Some like Pandora say they won't make any money in the "forseeable future." Analysts, for example, justify LinkedIn's price target based on 65X 2014 EPS and the 100M users they currently have. We're paying on eyeballs again; welcome to Netscape 2.0.
Why are investors making the same mistakes as they did in the late 90s? We are not myopic enough to forget the worthless stock notifications (especially atmabus) from 15 years ago. Even smart money is getting in at these lofty valuations; This week, Kleiner Perkins invested in Square at a $1B valuation. Some of the first bubble carnage is still on the road (MySpace just sold for 1/16th of original price).
These companies are growing and showing relevant top lines now. People do spend money on virtual tractors ($850M in 2010). As i wrote about a year ago, the days of all things free on the net are no more as companies now monetize what they were afraid to in the past. Management teams are more sophisticated and actually operate businesses for profit (except Twitter :). At these valuations, however, one has to assume market transformative disruption.
Google killed newspapers and took a huge slice out of traditional ad dollars. Amazon eliminated bookstores and cd shops. These were huge industries that are no longer on the map. Will Zynga kill off Electronic Arts or Playstation? Groupon will take a google-sized cut from company ad spend? Unfortunately, these days, the incumbents are much more savvy that they were before.
NBC/FOX (and others) established Hulu because they didnt know how to play in the nascent streaming space with little intention of making any money from it. They now want to dispose of it so they can create their own meaningful net revenue streams. They still own the content that everyone wants so they can charge what they want. Just ask Netflix. Newly traded Homeway, despite its unique niche, will not replace hotels. Yet it trades at 1/3 of the value of Marriott and Starwood already. Cloud software packages might have interesting platforms but will not replace Oracle who is already embedded in most large corporations.
Don't expect all of these high flying startups to take down established players to the extent their valuations imply. Incumbents are not surprised anymore about people spending more time on the net or buying things recommended by Facebook friends. As i've always said before, the internet is merely a new distribution channel not a new business. Although my demeanor would be different if I got in on the IPOs, i can't shake the time warp feeling of 1998.
LinkedIn is trading at about a $9B valuation, Zynga and Groupon both filed for IPOs as high as $20B. The beauty of each of these (along with the others) is the fact that none are profitible yet. Some like Pandora say they won't make any money in the "forseeable future." Analysts, for example, justify LinkedIn's price target based on 65X 2014 EPS and the 100M users they currently have. We're paying on eyeballs again; welcome to Netscape 2.0.
Why are investors making the same mistakes as they did in the late 90s? We are not myopic enough to forget the worthless stock notifications (especially atmabus) from 15 years ago. Even smart money is getting in at these lofty valuations; This week, Kleiner Perkins invested in Square at a $1B valuation. Some of the first bubble carnage is still on the road (MySpace just sold for 1/16th of original price).
These companies are growing and showing relevant top lines now. People do spend money on virtual tractors ($850M in 2010). As i wrote about a year ago, the days of all things free on the net are no more as companies now monetize what they were afraid to in the past. Management teams are more sophisticated and actually operate businesses for profit (except Twitter :). At these valuations, however, one has to assume market transformative disruption.
Google killed newspapers and took a huge slice out of traditional ad dollars. Amazon eliminated bookstores and cd shops. These were huge industries that are no longer on the map. Will Zynga kill off Electronic Arts or Playstation? Groupon will take a google-sized cut from company ad spend? Unfortunately, these days, the incumbents are much more savvy that they were before.
NBC/FOX (and others) established Hulu because they didnt know how to play in the nascent streaming space with little intention of making any money from it. They now want to dispose of it so they can create their own meaningful net revenue streams. They still own the content that everyone wants so they can charge what they want. Just ask Netflix. Newly traded Homeway, despite its unique niche, will not replace hotels. Yet it trades at 1/3 of the value of Marriott and Starwood already. Cloud software packages might have interesting platforms but will not replace Oracle who is already embedded in most large corporations.
Don't expect all of these high flying startups to take down established players to the extent their valuations imply. Incumbents are not surprised anymore about people spending more time on the net or buying things recommended by Facebook friends. As i've always said before, the internet is merely a new distribution channel not a new business. Although my demeanor would be different if I got in on the IPOs, i can't shake the time warp feeling of 1998.
16 June 2011
The Absurdity of Unions
I generally avoid politically-charged topics that don’t directly relate to business, but a recent Business Week article about the US Postal Service reminded me of a controversial topic that impacts all of us: organized unions. Although once essential to protect worker rights, modern day unions have become irrelevant, destructive, and a microcosm of all that’s wrong in the current debt laden climate.
The article talked about the imminent demise of the postal service system and how little can be done to stop the train wreck in large part because of the labor contracts with the union. It’s unusual for anything from Washington to done on time, but the report was released 18 months early because the situation had gotten so bad. As the walls of the post office are crumbling down, the unions have extracted more and more for themselves. They point to a “win-win” by their recent negotiation which yielded guaranteed raises for the next seven years and forbids any layoffs. Win win ?
The main reason the postal system is in shambles is precisely because it can’t right-size to current market conditions. For years, unions have negotiated to the point of an unsustainable cost structure which does not allow them to shed locations or any of its 500,000 FTEs. Meanwhile, the demand for their services continues to decline. The unions are well aware of the imminent demise and are angling for a taxpayer bailout. Given the government’s recent track record, I see this as an almost guaranteed outcome. It seems this may happen as early as 2012.
The frustrating thing is that there are solutions. The three year study explored countries throughout the world for ideas that worked. Most privatized, modernized, expanded digital services, and outsourced offices to third parties. In Germany, Deutsche Post has turned around so remarkably that it actually began making acquisitions (DHL). The irony is laughable – the US has now become the model of unsustainable socialism while Europe has taken a more capitalistic approach to solving real problems.
The auto bailouts were another sign of union carnage. From start to finish, the talks were tipped in the favor of politically powerful unions. The government threw out the bankruptcy rules and ultimately handed over controlling interest to the unions (they became the largest shareholder in Chrysler and second behind the federal government in GM). What happened to the Ma and Pa with GM bonds that were supposed to be first on the capital stack? Gone. And for what purpose? We actually rewarded those that caused the problem in the first place (too high labor costs compared to Japanese competitors). And the bankruptcy rules were completely ignored in the process? Welcome to the alternate universe.
The list goes on and on. State and local governments are in shambles thanks to unfunded liabilities negotiated by hard charging unions. The paltry 401(k) company contributions will not make a dent in most retirement requirements – in large part because of the unfunded liabilities corporations continue to pay to retirees. The unions are simply too powerful to address the real problems we face. Instead, the Bidens of the world focus on immaterial items like website optimization (yes that was top of his list) which won’t solve our huge deficit gap. We all suffer as a result. Tax increases, cuts in services, debt for many generations to come.
When I think about how much damage has been caused by the short-sighted minds of the union, it takes me back to my free market roots. Capitalism is simply the most efficient allocation of resources unfettered by the cloud of politics, power, and gluttony. For all its shortcomings, the other side of the pendulum is far more grim. These golden packages negotiated by unions have no relation to market conditions and will ultimately be paid by all of us one way or the other. We don't fix the problems, we just give in to those that are responsible. Their solution to solving the postal service problems: stop the internet. I’m not kidding; just ask the postal employee whose only job is to convince large banks to continue sending out paper statements. Help. Someone please bring capitalism back.
The article talked about the imminent demise of the postal service system and how little can be done to stop the train wreck in large part because of the labor contracts with the union. It’s unusual for anything from Washington to done on time, but the report was released 18 months early because the situation had gotten so bad. As the walls of the post office are crumbling down, the unions have extracted more and more for themselves. They point to a “win-win” by their recent negotiation which yielded guaranteed raises for the next seven years and forbids any layoffs. Win win ?
The main reason the postal system is in shambles is precisely because it can’t right-size to current market conditions. For years, unions have negotiated to the point of an unsustainable cost structure which does not allow them to shed locations or any of its 500,000 FTEs. Meanwhile, the demand for their services continues to decline. The unions are well aware of the imminent demise and are angling for a taxpayer bailout. Given the government’s recent track record, I see this as an almost guaranteed outcome. It seems this may happen as early as 2012.
The frustrating thing is that there are solutions. The three year study explored countries throughout the world for ideas that worked. Most privatized, modernized, expanded digital services, and outsourced offices to third parties. In Germany, Deutsche Post has turned around so remarkably that it actually began making acquisitions (DHL). The irony is laughable – the US has now become the model of unsustainable socialism while Europe has taken a more capitalistic approach to solving real problems.
The auto bailouts were another sign of union carnage. From start to finish, the talks were tipped in the favor of politically powerful unions. The government threw out the bankruptcy rules and ultimately handed over controlling interest to the unions (they became the largest shareholder in Chrysler and second behind the federal government in GM). What happened to the Ma and Pa with GM bonds that were supposed to be first on the capital stack? Gone. And for what purpose? We actually rewarded those that caused the problem in the first place (too high labor costs compared to Japanese competitors). And the bankruptcy rules were completely ignored in the process? Welcome to the alternate universe.
The list goes on and on. State and local governments are in shambles thanks to unfunded liabilities negotiated by hard charging unions. The paltry 401(k) company contributions will not make a dent in most retirement requirements – in large part because of the unfunded liabilities corporations continue to pay to retirees. The unions are simply too powerful to address the real problems we face. Instead, the Bidens of the world focus on immaterial items like website optimization (yes that was top of his list) which won’t solve our huge deficit gap. We all suffer as a result. Tax increases, cuts in services, debt for many generations to come.
When I think about how much damage has been caused by the short-sighted minds of the union, it takes me back to my free market roots. Capitalism is simply the most efficient allocation of resources unfettered by the cloud of politics, power, and gluttony. For all its shortcomings, the other side of the pendulum is far more grim. These golden packages negotiated by unions have no relation to market conditions and will ultimately be paid by all of us one way or the other. We don't fix the problems, we just give in to those that are responsible. Their solution to solving the postal service problems: stop the internet. I’m not kidding; just ask the postal employee whose only job is to convince large banks to continue sending out paper statements. Help. Someone please bring capitalism back.
29 May 2011
Mark Haines and Individual Contribution
I like to write about companies that bring disruptive innovation, societal value creation, and a new approach to the market in which it operates. This week's sudden death of veteran CNBC anchor Mark Haines reminded me that this can also true of individuals. Through his powerful on-air persona and singular fact-finding focus, Haines brought the closed doors of wall street to main street and helped create the money-minting machine that is CNBC.
Certainly great timing helped Haines leave his important legacy. When CNBC started 20 or so years ago, cable television was at its infancy and had yet to experience its explosive growth. The stock market was at the start of the longest bull run in its history. Thanks to technology and electronic exchanges such as NASDAQ, the barriers to entry for individual investors dissipated. Game changing phenomenons always need a bit of luck and the success of the first 24 hour financial news channel was no exception.
Before CNBC and Haines, the business of investing was limited to the elite and wall-street insiders much like the hedge fund industry is today. Mom and Dad in Kansas relied on their low-paid financial broker for information and advice as there were far fewer information outlets. Not only did CNBC bring boardrooms and stock analysts into millions of US households, it also made it easy for main street to understand markets, business, and global economics. Despite criticism that the network was an "extension of wall street" throughout the years, Haines was always the spokesman for the average investor. He grilled CEOs and political figures to no end, repeated questions until a direct answer came out, and explained somewhat complex concepts in plain English. And he was fun on the air - something very important to CNBC's growth. Haines was also very well respected by the markets, somehow building a bridge between Wall Street and Main Street. Upon news of his death, the NYSE held an impromptu moment of silence - something unheard of during the bustle of normal trading day.
Haines, among the other early anchors, built a cultural phenomenon that made financial information ubiquitous, entertaining, and accessible. NBC has been handsomely rewarded for itt. When acquired by Comcast last year, NBC had a ~$30B valuation. It's hard to get detailed figures on what CNBC represented individually, but it has the second largest cable audience of the network. Some reports pegged CNBC's value alone to be $6B-$7B. Much like ESPN did with sports, CNBC has built a strong cable presence and unique market position that will be virtually impossible to match (just ask Fox).
As companies build innovative concepts to market, its important to remind ourselves of the contributions of the individuals leading to that success. Certainly there would be no Microsoft without Gates or Apple without Jobs. In many instances, it is single individuals that create a disproportionate amount of value for companies. It sometimes takes a tragic event, such as Haines' death, for us to step back and acknowledge this fact.
Certainly great timing helped Haines leave his important legacy. When CNBC started 20 or so years ago, cable television was at its infancy and had yet to experience its explosive growth. The stock market was at the start of the longest bull run in its history. Thanks to technology and electronic exchanges such as NASDAQ, the barriers to entry for individual investors dissipated. Game changing phenomenons always need a bit of luck and the success of the first 24 hour financial news channel was no exception.
Before CNBC and Haines, the business of investing was limited to the elite and wall-street insiders much like the hedge fund industry is today. Mom and Dad in Kansas relied on their low-paid financial broker for information and advice as there were far fewer information outlets. Not only did CNBC bring boardrooms and stock analysts into millions of US households, it also made it easy for main street to understand markets, business, and global economics. Despite criticism that the network was an "extension of wall street" throughout the years, Haines was always the spokesman for the average investor. He grilled CEOs and political figures to no end, repeated questions until a direct answer came out, and explained somewhat complex concepts in plain English. And he was fun on the air - something very important to CNBC's growth. Haines was also very well respected by the markets, somehow building a bridge between Wall Street and Main Street. Upon news of his death, the NYSE held an impromptu moment of silence - something unheard of during the bustle of normal trading day.
Haines, among the other early anchors, built a cultural phenomenon that made financial information ubiquitous, entertaining, and accessible. NBC has been handsomely rewarded for itt. When acquired by Comcast last year, NBC had a ~$30B valuation. It's hard to get detailed figures on what CNBC represented individually, but it has the second largest cable audience of the network. Some reports pegged CNBC's value alone to be $6B-$7B. Much like ESPN did with sports, CNBC has built a strong cable presence and unique market position that will be virtually impossible to match (just ask Fox).
As companies build innovative concepts to market, its important to remind ourselves of the contributions of the individuals leading to that success. Certainly there would be no Microsoft without Gates or Apple without Jobs. In many instances, it is single individuals that create a disproportionate amount of value for companies. It sometimes takes a tragic event, such as Haines' death, for us to step back and acknowledge this fact.
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