Andy Kessler nyt
April 9, 2007, 5:53 pm
A Fork in the Road for Google
Whenever companies sue each other, my ears perk up. Not that I really care who wins, but lawsuits often showcase hidden vulnerabilities. Inevitably, as the fight plays out, the market thinks a lot differently about the long-term prospects of both parties, and money often sloshes away to play elsewhere.
The Internet has been all cute and cuddly throughout its childhood, given a pass for youthful indiscretions like stealing music and video clips. That just ended with Viacom’s copyright infringement suit against Google. By the time this lawsuit and others are finished, Google may have to change its way of doing business. That would be a shock.
Viacom, which owns cable channels like MTV and Comedy Central, recently charged Google with blatant copyright infringement for hosting 160,000 clips of Viacom shows and then having the audacity to allow bored workers and kids at home to be view them 1.5 billion times. Viacom had to sue to protect itself because, well, beneath the surface, Viacom and Google are both in the same business, selling ads. For all Google’s claims to be a technology company, 99 percent of its business is ads — for essentials like megapixel cameras, poker sites and ambulance-chasing asbestos lawyers.
TV attracts huge audiences with Orange County teens and Dr. McDreamies and, once our eyeballs are locked in, advertisers sell us things we’re not even sure we need. Like Budweiser Select, Dove Regenerating Hand Cream Night Care With Shea Butter and ever-less-desirable GM cars. Some $70 billion in TV advertising drives a $7 trillion consumer economy.
But TV is expensive. Shows that cost millions per week to produce may not turn profitable until they are syndicated for late-night reruns or DVD sales. It’s a tired business model ripe for change.
Megabit Internet access changes the rules by making videos available away from the controlled conduits of network TV and cable. This is scary for Viacom, because why would advertisers pay to run commercials on “The Daily Show with Jon Stewart” if folks can watch the show on YouTube? Proponents of YouTube claim Viacom should be happy about getting free publicity for “The Daily Show.” YouTube has a 10-minute limit on video length and claims it’s not copyright infringement, but fair use (a fuzzy loophole in copyright law). This may sound compelling, but it is nothing more than a fig leaf on piracy. Why? Because Viacom owns its programming and should get to pick where and when the shows are shown.
To remain viable, Viacom had to have its clips taken down from YouTube. In fact, all broadcasters must limit the reuse of their expensive material or their business model will implode. They must build and control their own Internet ad networks or risk going the way of trolley cars.
And Google? Internet advertising is growing like a weed. Google makes profits large enough to make Tony Soprano blush simply by scanning all the Internet pages the rest of us put up (which costs them very little), and returning the results with ads. The ads are meant to encourage impluse shopping: see it, want it, buy it, click and ship. So we click on 25-word text ads, and Google becomes a $140 billion valued behemoth. More valuable than Viacom or CBS. Hey, no one said life was fair.
But now suddenly video is cool. Sensing opportunity, the Google geek squad tried to build its own video-delivery service. It was put to shame by an 18-month-old company, YouTube, which Google then bought for $1.65 billion in shares of Google stock. By the way, in the terms of the deal, Google also set aside several hundred million dollars for potential lawsuits. Not enough as it turns out.
The success of YouTube has been nothing short of stunning. More than 100 million videos are watched every day, and probably 100,000 new clips are uploaded. So what if many of them have been highlights of “The Colbert Report” and “The Family Guy,” copyrighted material to which YouTube has no rights.
Suing YouTube as a private company only would have ruined a few venture capitalists’ tee times. Once Google, with pockets as deep as the Mariana Trench, bought YouTube, lawyers from coast to coast started salivating. Viacom is the first of many. I hear talk of giant class-action suits, for billions and billions. Maybe Viacom is thinking too small.
But here is Google’s dilemma. The company’s huge margins are the reason why it is valued at $140 billion on the stock market. If Google suddenly finds itself in a less profitable business because it has to pay for content, instead of just sponging off of SpongeBob, it could see its stock price fall faster than Katie Couric’s ratings.
Don’t get me wrong. The Internet will soon deliver all our video clips — sitcoms, sports, the whole shebang. But whoever creates and controls this content is who will make the big returns from it. Google is tops at search. It’s not yet obvious it will be tops in video. The game of lifting video clips made by others is almost over. If Google wants to stay in the game, it will need to ramp up its spending on video big time.
As consumers, I suspect, we’ll win, because we’ll have better shows delivered in new ways. But when companies start suing each other, investors should be careful. It usually means the game has changed for both sides.
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April 4, 2007, 4:57 pm
Sloshing
Left to their own devices, and couches, humans instinctively resist change. Kings and C.E.O.s like it at the top. Workers don’t volunteer to give up their jobs in the name of progress. Profits and productivity may create wealth, but how it gets into the right hands is another matter. Money doesn’t flow — that sounds so planned. It sloshes. There’s a difference. As scary as it sounds, it’s the chaos of markets that keeps us well fed and out of trouble.
You work, you get money. Congratulations. After covering bare essentials like food, shelter and a high-definition plasma TV, you save the rest. You can shove it in your mattress, but central bankers like our Federal Reserve, who haven’t the foggiest clue how much money is needed to run our economy, print more money every year. They target 2 percent inflation, which is another way of saying that they overprint dollars by 2 percent, diluting your worth. How rude. A 2-percent haircut by your very own government. Annoying, but it’s been going on forever. The Roman Emperors debased their coins from 4.5 grams of pure silver to less than a 10th of a gram over a few centuries. Stored wealth is an oxymoron.
Money wants to be invested, to generate returns. It not only wants to keep up with inflation so it doesn’t lose ground, it wants to help create wealth by funding the means of creating profits and then own a piece of those profits.
Liza Minelli insisted that money makes the world go around (along with that whole “life is a cabaret” nonsense), but it’s really the opposite: money goes around the world looking for profits — peeking in skyscrapers, factories, alleys, even gutters. Money sloshes around the globe seeking its highest returns, on a risk adjusted basis.
Money’s been sloshing around since creation (what’ll you give me for a rib?) in the form of gold and paper and now the online dollars and euros and yen of today that can make it from New York to Caracas in the blink of an eye.
You may not put your money to work, but someone else certainly will. Floors the size of football fields at brokerage firms and hedge funds are filled with traders and computer monitors blinking rapidly, sending money scurrying to the four corners looking for productive wealth-creating profits.
Chemicals in Copenhagen, a refinery in Russia and shoes in Shanghai all will attract capital if they can generate returns. No borders, no politics, no personalities; the only governor on funding is risk. Something may be rotten in Denmark, Putin may nationalize all energy companies, and maybe China’s baby teeth haven’t yet fallen out. Money may still slosh to these places, but it will fund only the very, very highest-return businesses. It’s why very little investment money ends up in Africa — the risks of poor infrastructure, undereducated workforces, corruption and a history of nationalization are so high that money just sloshes somewhere else. Lowering the risks is the only solution, or else money will stay away and not bother telling you why.
So here’s the dilemma for the United States. We all want money to stay local, to hire our workers and to invest in our own ideas and great companies. The trick is to have the best-looking prospects for profits along with the lowest risks. That’s what the stock market is for.
While money is a unit of work, a stock is nothing more than the sum of all future profits of a company (discounted back to the present for you persnickety sticklers). To raise money, you sell a share of those profits. You could convince your Uncle Ira to pony up some dough to help expand your ink company in Indiana or India. That counts as sloshing, sure. But how much of the company does he get, and how will he ever get his money back out? Not so obvious. Markets do this, for big enough companies anyway.
A stock exchange is nothing more than a busy room (or servers in Prague) that swaps shares around so that they end up in the right hands at the right price. The market values companies by valuing those future profits.
Markets put banks to shame — helping raise money in exchange for a share of the profits, rather than lending against some piece of collateral. Because it’s not only a company’s prospects that drives this action — the market changes its mind by the minute, worrying about economic growth, global stability, competition, technological change, politicians and every other worry you can imagine.
The stock market is the sum of what every investor in the world thinks. It doesn’t just listen to companies, it scours around for any information it can get to predict the future of profits — who is making them, how much, how good management is, and on and on. It’s daytime soap opera writ large. That’s why when Ben S. Bernanke, the Federal Reserve chairman, belches, markets erupt. The stock market allocates capital to companies that have what it believes are great prospects and starves those it no longer believes in.
There was once a great minicomputer company with Digital in its name. It was the leader in its field and had huge profit margins, was hiring people like crazy and in 1987 even hired the QE2 for a $20 million sales event in Boston. But over time, its stock kept going down. Wall Street analysts kept pounding the table, telling their clients to buy more shares. “The stock is cheap,” they repeated, “and profits are great.” The future was so bright they had to wear shades. There was no plausible explanation on why the stock was going down even though the outlook was so good.
What happened next was a decade-long decline, a drip, drip, drip of cutbacks and layoffs and plant closings and division sales as profits eroded. The C.E.O. was rightfully sacked. Minicomputers were slowly being displaced by workstations from Sun Microsystems and personal computers like Compaq’s, powered by Intel processors. In 1998, the once-pipsqueak PC maker Compaq used its highflying stock and cash to buy this company out, putting it out of its misery.
So it turned out the future wasn’t bright: The company was wearing blinders instead of shades. The stock market not only figured this out, but stopped the company from becoming an even bigger disaster. As money sloshed away and the stock declined, the market starved it of capital for growth, because better prospects were elsewhere.
No government bureaucrat had to raid that computer company’s offices and tell it to quit hiring and throwing lavish parties. The stock market did this. In Japan, where the stock market was rigged in the 1980s by cross ownership, and brokerage firms kept stock prices artificially high, operating losses at many Japanese companies were hidden under an accountant’s rug. The party went on and on until in 1991 it collapsed under its own weight, and Japan tread water through 15 years of turmoil and little growth.
We are lucky that Enron was not located in Tokyo, where it might have been deemed too big to fail. Good money might have been pumped in after bad to help Ken Lay-san stay afloat. Chrysler’s 1980 government bailout meant the stock market couldn’t do its job of starving a company that in retrospect should have been, as my veterinarian would say, put to sleep. GM and Ford would be in better shape today. Ditto airlines. Politics get in the way. What a shame.
O.K., enough of that. Want to find stocks that go up, that money will slosh towards? Me too! Here’s what works for me: Figure out what everyone else believes and then why they are wrong. Works every time. That should keep me and you busy for the rest of the month.
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April 2, 2007, 6:03 pm
It’s a Profit Deal
Needing relief from medieval churches and cutesy cafes on a trip to Prague a few years back (O.K., and a tax break), I paid a call on the Prague Stock Exchange, tucked in a blocky, Soviet-style building off the main drag. I climbed a few flights of poorly lit stairs and entered a dour, dusty-musty office. I didn’t expect John Thain clapping with happy C.E.O.s at the opening bell, but heck, this place might as well have been a D.M.V. I started pining for stained-glass windows again. Nonetheless, I learned more in the next 20 minutes about how the world works than I had in the last 20 years sweating on Wall Street as an analyst and running a hedge fund.
Back home, everything on Wall Street is beyond complex: Men in funny sports coats grunting and littering the floor of the New York Stock Exchange. Dow Jones industrial averages rising and falling in seeming random correlations to sunspots or something. Million-dollar bonuses to traders younger than that Rolling Stones T-shirt in the back of your closet. Derivatives. Rate hikes. Credit swaps. Sub-prime loans. Discounted free cash flow. Man, this stuff is harder than Chinese arithmetic. I craved for a simple explanation on what it all meant. It was right in front of me.
There in the Prague office I spoke with a nice chain-smoking gentleman in an ill-fitting suit who was no doubt a district member of the Party a decade earlier. I quickly learned that, duh, there is no Prague Stock Exchange, not physically anyway. It’s just a bunch of computer servers sitting in a backroom that match trades all day. O.K., I get that. But how is it that the Czech Republic has stocks to trade in the first place? One day the government owns every business, bloated with beer-breath bureaucrats, and bleeding money if they ever bothered to check. And then one day, boom, the Berlin Wall falls, Prague is wrapped in Velvet, and the next, you have capitalism? Tricky transition.
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