Thursday, March 08, 2012

A Lawsuit for the (e)Books

This week, the United States Department of Justice sent a stern warning to Apple, Inc. and a number of large publishing houses – prepare to be sued. Apple and the publishers, which include big names like Simon & Schuster and Penguin Group, are accused of plotting to raise the price of electronic books across the industry. If the Justice Department is able to prove its claims, the suit could signal major changes across the still-burgeoning industry, and upset the delicate balance of power that has been in place for the past few years. So far, neither Apple nor the publishers have released any formal comments regarding the suit, but one can expect them to fight it tooth and nail in order to maintain the status quo.

The accusations stem from actions taken by the companies way back when Apple introduced the first iPad (and we discussed them here back in January of 2010). At the time, Amazon was the unquestioned king of e-books, having set a base price of $9.99 for all downloads. This led to major profits for Amazon, but generated fears within the publishing industry as a whole. Many saw it is reminiscent of Apple’s $.99 song sales on iTunes which upended the entire music industry over a decade ago. When Apple released the iPad, it was still questionable whether or not the product would succeed, and the company was unsure of what the main focus of its user base would be. Thus, it chose to make a push to market the iPad as an e-reader with its own online bookstore. In order to compete with Amazon’s dominance, it apparently colluded with the publishers to establish set prices for all e-books. In addition, different publishers could not choose to sell the same books at a lower price than their competitors, and so no one publisher could hold sway over the entire market. This had the desired effect of breaking Amazon’s monopoly, as it forced the company to raise prices. It also served to raise prices on all e-books across the board.

This “agency model” seems simple enough, and it was certainly effective, but was it legal? The Justice Department doesn’t seem to think so. The publishers have long denied that they worked together to set prices, but the clear evidence on the ground seems to indicate otherwise. In order to fight off these accusations, the publishers have pointed to Amazon’s dominance and claimed that their actions actually prevented a company from monopolizing the industry. This argument does have some validity, since, after all, Amazon’s initial head start in e-books led to its ability to set the tone of the industry itself, something that could have led to long-term dominance. But the real issue is not what could have happened, but what did, and in this case it’s fairly clear that a group of companies worked together to deliberately raise prices on products, and colluded to keep them high at all costs. As Steve Jobs is reported to have told the publishers, “We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway.”

In some sense, you have to feel for the publishers in this case. They saw themselves going the way of the record companies and did what they had to in order to prevent their own destruction. Less so for Apple, a company whose image as a scrappy underdog has long since vanished, replaced by a win-at-all-costs industry dominator. In either case, the companies are going to need to deal with the repercussions of their actions, and will most likely have to settle a potentially large federal lawsuit. Depending on the outcome of the suit, changes to the industry as a whole may occur that will lead to more competition and, perhaps, lower prices for consumers. This could also lead to major failures at some of America’s oldest publishing houses, a tale familiar to anyone following the fate of companies that are slow to adapt to the digital age.

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Thursday, February 23, 2012

Storm Clouds Gather at Dell

Investors in Dell Inc. have had to face some disappointing news this week. The world’s third-largest PC maker saw its stock drop 5.8 percent, its biggest loss in over eight months. The decline is based on projected first-quarter sales figures, and is particularly galling after the company’s shares gained 25 percent last year. That initial increase had led many analysts and investors to be optimistic about Dell’s potential to make a comeback in the highly competitive industry. Given the difficulties on the horizon, such hopefulness now seems to have been at best misguided, and at worst foolhardy.

                When Michael Dell retook control of the company in 2007, his long term plan involved major changes to the way Dell did business. By cutting costs across the board and initiating supply-chain improvements, Dell was able to return some profitability to the brand, leading to the jump in stock prices. Cost-cutting can only go so far, however, and Dell has since been hampered by problems stemming from forces outside of its control. The slow economic recovery has left the market for PCs softer than it has been since its inception. In addition, floods in Thailand last October nearly halted production of Dell disk drives, forcing the company to slightly raise prices at a most inopportune moment. This helped to place Dell’s products, once thought of us as the cheaper alternative to more expensive brands, at prices above those of PC competitors like Acer, Inc.

                Like most tech manufacturers, Dell’s main competition comes from the dominant Apple Inc., a company that is beating Dell on two important fronts. First, when it comes to high-end consumers, Apple’s sleek products are more expensive but have proven to be more desirable. Dell’s most expensive computers have seen sluggish sales when compared Apple’s pricier alternatives. On the low end, Dell has been hurt by the turn toward tablet computers, in particular Apple’s iPad. Many consumers looking to spend only a few hundred dollars on a device are opting for the portable and fashionable tablet as opposed to the PC, and Dell’s own portable devices have yet to make a splash as Apple’s have. Without these types of innovations, Dell is seen as looking like a brand of the past.

                With these major hurdles placed in his path, Michael Dell is turning to Microsoft for a miracle. The company is betting its profitability this year on the upcoming release of the Windows 8 operating system. At this point, most tablets have to run software provided by Google Inc. or Apple. With the introduction of Windows 8, tablets will be able to run on Microsoft software, a huge boon to a company like Dell. Michael Dell has expressed his confidence to investors that the introduction of Windows 8 will result in a major boost to PC sales across the board. Until then, Dell will have to deal with slowly losing ground to its competitors at both ends of the pricing spectrum, and will need to battle mightily for every quarter.

                While Michael Dell’s confidence may prove justified, to an outside observer it seems like more hot air. Microsoft, while having shown promise with Windows 7, has not been nearly as innovative as Google or Apple has been in the past few years. The company’s story bears similarities to Dell’s, which has likewise seen its once dominant market share erode in the face of stiff competition from more inventive companies. While Dell may indeed put up a fight over the coming year, it is becoming clear that last year’s jump in investor confidence was mostly smoke and mirrors. The days of Dell’s industry dominance are long gone and unlikely to return.

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Thursday, February 09, 2012

Nintendo Faces A Possible Game Over

Late last year, legendary Japanese gaming giant Nintendo made it clear to investors it expected to post its first annual loss ever in 2011. Sales of its flagship product, the Wii, had fallen off over the past two years and sales of the portable 3DS have been sluggish at best. Expectations had placed losses somewhere in the realm of 4.2 billion yen, or roughly 55 million dollars. So one can imagine how distraught employees and investors must have felt late last week, when Nintendo revealed the actual losses for 2011 at over 45 billion yen, or 575 million dollars. This is no trivial difference, and shows just how badly Nintendo has been hurt by the prevailing trends in the electronics market. The announcement has forced many to call into question a business model that has sustained the company for decades, and to speculate as to whether the era of the home video game console is at an end.

In the past, Nintendo’s major competition came from Sony, maker of the Playstation console, and Microsoft, maker of the XBox. So company executives can at least be somewhat forgiven for not having seen coming the massive change in fortunes the success of Apple would bring. Apple’s now ubiquitous iPhone and iPad devices quickly transformed gaming as well as communications. Suddenly, inexpensive and portable games like Angry Birds were catapulted into the limelight, leaving once dominant titles like Super Mario Bros seeming like a thing of the past. Gaming is no longer relegated to home consoles, with most games being played on mobile devices, or online on websites like Facebook. Coupled with the fact that the Wii is now over six years old, and does not offer high-definition graphics like many of its competitors, Nintendo suddenly seems far behind in the very industry it once dominated.

Nintendo executives are betting that rumors of the death of the console gaming system are greatly exaggerated. The company is placing the majority of its focus on preparing for the release of its Wii successor system, the Wii U, scheduled for the end of 2012. The Wii U will adopt many of the features of mobile gaming and combine them with the advantages of a home system. It will feature a touchscreen controller the size of a tablet computer, which gamers will be able to use to play games on the television, or play wirelessly from the controller itself. It will also contain a credit-card reader that will encourage users to shop for games and other products online, directly from the system itself. Nintendo is hoping the Wii U will become a focal point for household entertainment and return the company to the level of profitability it enjoyed during the height of the original Wii’s success.

More than one analyst is skeptical of Nintendo’s direction. From a technical standpoint, a wireless touchscreen controller is an interesting advancement, but not nearly as buzz-worthy as the motion-controller that the Wii popularized. Most of the features Nintendo is touting for the Wii U already exist on wireless devices like the iPad, which are not limited to solely Nintendo games, but instead have outside developers constantly making new games and apps. Nintendo also has to deal with a notoriously strong yen, which when combined with the fact that over 70% of its customers are in the U.S. and Europe, makes raising prices difficult and turning a profit even harder. Nintendo already had a more than disappointing 2011, with delays in 3DS game releases, consistent price drops and news of a massive annual loss. Now, it is betting big on the Wii U and will have to spend all of 2012 preparing for its release. In an industry changing as quickly as gaming, if the Wii U is not an immediate success, even a brand as strong as Nintendo may find itself too far behind to ever catch up.

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Thursday, February 02, 2012

Potential and Pitfalls Abound at Sony

There was a time when the word Sony was the definition of cutting-edge. Walkmen, CDs, video games, and television all displayed the influence of the Japanese giant, and the company had a stranglehold on the consumer electronics industry. It has been a long time since anyone thought of Sony in quite those terms. This week, Sony warned investors that it expected to post its fourth consecutive annual loss, this time totaling almost $3 billion. The company’s dominance in portable music players disappeared with advent of the iPod, and its once hugely profitable TV business is a shadow of its former self. President and CEO Howard Stringer began what has so far been a slow process of turning the company around, and is now turning to Kazuo Hirai, a longtime Sony director, to take his place at the helm and restore Sony to its former glory.

Mr. Hirai’s task is already complicated by a number of factors, many of which are beyond Sony’s control. First, the global economic meltdown of 2008 blocked Sony’s initial attempts at a comeback and caused a major recession in Japan. Mr. Stringer’s valiant attempts to ramp up production last year were put on hold due to the earthquake and tsunami, which halted production at a number of Sony’s major facilities, and flooding in Thailand had a similar effect on Sony’s interests there. Mr. Stringer stated that those woes alone account for two-thirds of Sony’s massive 2011 loses. Whether accurate or not, there is no question Sony is starting 2012 far behind where it had hoped it would be.

Mr. Stringer, who is now tapped to become chairman of the board, is obviously counting on a shift of responsibility at the very top to galvanize investor confidence for 2012. Mr. Hirai was the natural choice for the role and is not a controversial pick. He is largely credited with the success of Sony’s video game unit, and was instrumental in pushing the Playstation Network system online, where it has been both innovative and profitable. In a press conference earlier today, Mr. Hirai’s focus was on a speedy recovery. He acknowledged that the company was having what he called, “a severe sense of crisis,” but said that major changes were around the corner. He placated worried investors and assured them that “the worst is nearly over,” and “We are shifting gears, and when you shift gears, you can go faster.”

While his focus on speed is admirable and understandable, the worst may not be over for Sony. Sony has long been adamant about keeping manufacturing jobs in Japan, and this has made it extremely difficult for the company to compete at the speed Mr. Hirai is talking about, especially when major competitors like Apple make use of cheap labor in places like China. While under Mr. Stringer Sony began to rectify this shortcoming, Mr. Hirai will have to outsource his labor costs quite a bit more if he wants to turn a profit. The other, and perhaps more important, issue comes when trying to pinpoint exactly what direction Sony intends to go. The portable music player business that brought it such immense profits in the past is dead, and its late start into the flat-screen TV market left it way behind the competition. Last month, Sony sold its stake in a major flat-screen TV venture to Samsung, a move that made many analysts speculate Sony would be abandoning its TV efforts altogether, a move that Mr. Hirai has so far denied.

Video games still hold potential for Sony, as do other handheld products like digital cameras. But mobile technology has already begun to usurp that market, best exemplified by the success of another Apple product, the iPhone. Since the Sony brand still holds a commanding presence in the electronics market, Mr. Hirai still has a chance to turn the company’s fortunes around. In order to do so, however, he will need to supply a major and original innovation, and given the company’s recent track record, one shouldn’t hold out too much hope.

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Thursday, January 19, 2012

Apple Looks to Educate the Textbook Industry

Since its initial release in 2010, Apple Inc.’s iPad has not been marketed as a strictly recreational device. The tablet computer has sold heavily to students and has served to replace their bulky textbooks. At an event held today in New York City, Apple plans on doubling down on this strategy. It will be revealing a new set of tools that will make it simpler to both publish and purchase digital textbooks. In particular, the company is hoping to expand its reach into early childhood education, from elementary school through high school. The move is yet another shrewd decision by the already immensely profitable tech giant, as it will now attempt to gain a foothold in an industry that generates over $10 billion a year.

The company’s marketing strategy for the iPad will no doubt focus on the ease with which one can make the switch to digital textbooks. Print textbooks are bulky, expensive, and need to be constantly replaced, all of which are problems that can be solved with one initial purchase of the $499 product. Also, textbooks can be updated online with new information, just like an app from Apple’s App Store. This would end the practice of classes working for years with outdated materials due to lack of funds. Apple’s history in education dates back the company’s inception, when thousands of early Apple computers dominated classrooms in the 1980s. These contacts still exist, and Apple will be working hard to convince schools that the price of the iPad is justified given the benefit it will yield to students over the long term. Just as important is Apple’s push to create self-publishing software for the iPad that will allow authors to put out content without the need for a deal with a major textbook publisher. This would massively decrease the price of the materials and go a long way towards convincing schools that the tablet is the way of the future.

While the success of the iPad gives Apple a major advantage over its competitors, it is not the only company that sees potential in the textbook market. Chegg, an online startup that began as a textbook rental company, is releasing an online service this week that will allow students to read electronic textbooks from anywhere, be it mobile phone, tablet, or personal computer. The Chegg product contains many features meant to simulate the classroom experience; students can mark text in yellow highlighter, write in the margin of their pages and even submit questions via an online forum with other readers. Obviously Chegg is a far smaller company and represents no direct threat to Apple. But by being focused on one particular industry, Chegg may be able to jump out ahead of Apple technologically, particularly since its program is not meant to be limited to the iOS, and can be read anywhere by any user. If the digital textbook industry turns out to be as lucrative as many hope, it will also make Chegg a tempting company to purchase for any major competitor of Apple’s that wishes to quickly go on the offensive.

Before his death, Apple founder Steve Jobs was said to have turned his focus to the textbook industry, and committed Apple to the path of updating them for the 21^st century. The biggest problems for Apple will be selling a $499 per student device to schools on a mass scale, as well as dealing with teachers who wish to stick with the course material they have used for years. Any company hoping to completely revamp an industry as old as classroom textbooks is going to have to deal with setbacks and slow growth. But in almost every similar case in the past few years technology has trumped conventional wisdom and people have adapted quickly to new advances. If Apple, Chegg, or any of their competitors can succeed in getting today’s ninth grade students dependent on reading their texts digitally, those students will demand the same when they reach college age. If that occurs, a major shift in the way textbooks are used and classes are taught will become inevitable.

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Wednesday, January 04, 2012

Research in Slow Motion

Time is running out for co-Chairmen and CEOs of Research in Motion, Mike Lazaridis and Jim Balsillie. Last summer, major RIM shareholders angrily demanded that their leaders prove that they still deserved to hold the lofty dual position that they have enjoyed for so long, after watching from the sidelines as the company faltered from its once dominant position in the smartphone market. The pair claimed that by retaining both positions, they could more easily generate profit for the company. This claim led to an ultimatum from investors: they had six months to prove that this was indeed true, or face the consequences. As it currently stands, chances are Lazaridis and Balsillie will soon relinquish their roles as co-chairmen, as the past few months have yielded nothing but further disappointment for RIM and its shareholders.

The most damaging event occurred early last month, when RIM shocked the smartphone world by revealing it would not release its highly anticipated new line of Blackberry phones, the Blackberry 10, until the end of 2012. For a company whose reputation has already fallen so far, waiting a full year before breaking new ground might as well be an eternity. Lazardis and Balsillie claimed that the company was waiting for a new type of chip that will revolutionize the products, but that there had been an unavoidable delay in the chips production. While this may be the case, most analysts seem to think it is simply one of many issues facing the development of the Blackberry 10. Software delays, lack of basic infrastructure, and rumors of poor performance of prototype models were rampant in the weeks before the announcement. Even worse, RIM has refused to even identify what exactly the “new chip” is, leading to speculation that the claim itself is a smokescreen for far larger issues.

RIM’s leadership must have known for many months that there were unavoidable problems that would cause the Blackberry 10’s launch to be pushed back. The company may have held back on revealing this in hopes that its other flagship product, the Playbook tablet computer, would yield significant profits during the lucrative holiday season and help restore confidence in the RIM brand. While firm data on sales is not yet available, there can be no doubt that the Playbook did not perform as hoped. Just yesterday RIM announced it was slashing prices on the tablet, which debuted at $699, to $299 in an effort to relieve the burden of its unsold inventory. While the company had promised, when it announced the Blackberry 10 delay, that it would pursue a more aggressive strategy when it came to sales and promotions, slashing the price on its more expensive product to the point where profit becomes negligible is most likely not what RIM’s investors had been hoping for.

So, following a season where the company had hoped to be celebrating at least a slight return to profitability and gearing up for the release of its most eagerly awaited product in years, RIM is once again fighting for relevance. Leadership shake-ups at times like these are common enough, but in this case how Lazardis and Balsillie losing their co-chairmanships will change the company as a whole is up for debate. The two will almost certainly remain co-CEOs and continue influencing the overall direction of RIM, for better or for worse. At the very least, the news of the possible change at the top sent RIM stock shooting up over eight percent. While this is small consolation for weary stockholders who have watched their once hugely profitable company commit misstep after misstep, perhaps the change will signal an era of bold new ideas for RIM. If not, by the time the Blackberry 10 is finally ready for release it will be far too late to save the brand.

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Wednesday, December 14, 2011

Woodford Unreserved

Michael Woodford is a man on a mission. The British former Chief Executive of Japanese camera giant Olympus was dismissed from his post back in October. At the time, the board of directors stated that his western management style clashed with the way the company had traditionally been run. As it turns out, this was indeed the case, but it had nothing to do with Mr. Woodford’s nationality. Once fired, Woodford quickly blew the whistle on a decade old series of accounting cover-ups Olympus had been employing to make the company seem more profitable than it actually was. When the truth was laid bare, the board of directors was forced to admit that it had concealed the loss of billions of dollars over the course of the preceding ten years. As the company struggles to recover from this revelation, Woodford has returned to Japan from England to attempt a coup against the board and retake his position as CEO.

After numerous hearings on the issue, Olympus revised its financial results for the coming year and owned up to its billion dollar losses. It did so just in time to beat an essential market deadline, and avoid being delisted from the Tokyo Stock Exchange. Had the company been delisted there may have been no recovering from the fallout, and even after these efforts Olympus was granted only the lowest possible investment rating for inclusion. In the meantime, the company is being investigated by an independent probe which seeks to conclude if the corruption has spread to positions throughout the entire organization, or if it was confined to a select group of upper management. The panel already called three former Olympus chairmen “rotten to the core” in its earlier findings, and proclaimed that honest corporate culture was impossible as long as the current leadership remains.

Woodford, by first alerting authorities to the fraud, has managed to a certain extent to maintain his integrity. He claims he wants to rebuild investor confidence in the once dominant manufacturer by instating a new board and carrying out a full internal investigation that would purge the company of any remaining managers who were guilty in the cover-up. The board, for their part, has offered to stand down from their positions in February. However, they are insisting on choosing their replacements personally, a rather bold declaration given the circumstances. Woodford has returned to Japan to rally investors to fight the board on this major issue, and hopes to assert himself as the alternative to the obviously corrupt culture that had pervaded the company for so long.

Among Olympus’s shareholders are a number of large foreign investors, many of whom have expressed tacit support for Woodford’s efforts. Within Japan, however, reaction has been mixed. Large institutional investors who have held stake in the company for decades doubt whether an outsider like Woodford can lead the turnaround he is proposing. Further, there have been vocal fears that Woodford might, given the circumstances, attempt to assist in a sale of Olympus to overseas buyers. This is particularly unpopular in Japan, given the company’s status as one of the country’s oldest and biggest success stories. Woodford went so far as to appear on Japanese television this week in an attempt to dispel such rumors, and assured the viewers he intended to keep Olympus listed in Japan where it always has been.

By positioning himself as an innocent but charismatic outsider to a corrupt corporate culture, Woodford seems to be in a good position to succeed in his mission. The board of directors is obviously very reluctant to give up its power entirely, and would love at the very least to choose its successors so its legacy will not be totally thrown by the wayside. Unfortunately, this is something the board should have considered before knowingly participating in a decade long process of massive accounting fraud. What Olympus needs now is to show its employees, investors, and particularly the suspicious leadership of the Tokyo Stock Exchange that it is ready to turn the page to a more transparent future. Right now, Michael Woodford is the only person offering such an alternative.

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Wednesday, December 07, 2011

Do or Die for Yahoo

Yahoo Inc. has had a very bad year. As the company attempts to turn itself in a new direction after having ousted former CEO Carol Bartz in September, the options before it are numerous but none are without significant risk. Most analysts agree that the best Yahoo can now hope for is to be bought outright. This would result in a shareholder payoff, the appointment of a new chief executive, and the ability to start somewhat fresh after so many years of disappointment. This option should, in theory, seem very attractive to Yahoo’s board; a sale would allow the board to leave the heavy lifting of rebuilding the company to whoever purchases it. As it turns out, Yahoo’s board is being anything but open about the sales process and it appears to many, including irate investors, that its self-indulgent actions could lead the company down into further ruin.

The Yahoo board has refused to solicit outright bids for the company. More than likely, this has to do with the fact that Yahoo is simply not worth what it once was. In 2008, Microsoft offered to purchase Yahoo for $31 a share. The offer was rebuked by the board, and today Yahoo shares sit at $15.84. In no possible future can the board expect an offer as generous as Microsoft’s to come again, and it may be the inability to admit its mistake that is causing board members to act with such consternation at the offers presented to it today.

Instead of a full sale, the board has decided to offer only a minority stake in the company. While a few competing groups have indeed submitted bids, the move has drawn a swift reaction from Yahoo’s shareholders, who feel the board is not doing what is in theirs, or the company’s, best interests. This week, Investors filed suit against the board, charging that by denying buyers the right to bid for full control of Yahoo, they are eliminating the possibility of receiving the best possible price (and thus highest investor payout) for the company. It is hard to deny that the investors have a point, particularly when you look at the fact that if only a minority share is sold, the company’s board, including founder Jerry Yang, will be able to keep their current positions and remain in full control over Yahoo’s decision making process. To the investors, the board is putting its self-interest ahead of what is best for them, and it will be left to the courts to decide if offering only a minority bid for the company is even technically legal.

In the meantime, Yahoo continues a slow but steady downward spiral. Morale at the company has apparently reached all time lows, and many employees who once had confidence in its direction have begun to depart for greener pastures. The firing of Carol Bartz in September and her replacement by Tim Morse was, while only temporary, supposed to reignite competitiveness and innovation at the search giant. As of now, it is clear little has changed and the attitude of most analysts is fairly grim. Unless the board and investors can work out their differences soon, it may be too late save the company as potential buyers rethink their offers. The course seems clear enough: Yahoo’s board needs to come to terms with its mistakes, admit its own fault in declining Microsoft’s bid years ago, and allow the company to be bought out if any will have it. If the company’s leadership continues to bury its head in the sand and ignore what’s coming, one of the internet’s first success stories will soon be beyond saving.

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Thursday, November 17, 2011

Sleepy No More: The Fallout From MF Global

A few years ago, the news that $600 million could simply disappear without a trace would have come as a major shock to just about everyone. Today, the ongoing scandal regarding the now bankrupt MF Global firm just seems like another example of a truly rotten financial system. Three weeks ago, MF Global filed for bankruptcy and fired all of its employees, prompting a horde of federal investigators to descend upon the company’s headquarters in an attempt to find out what had happened. Since then, the investigation has seemed more like a movie than real life; lawyers sleeping at their desks day in and day out, poring over old data, former employees subpoenaed and questioned, congressional hearings scheduled, and MF Global’s offsite email storage facility seized by the government. Adding to the drama is the fate of MF Global’s former CEO (and former governor of New Jersey) Jon Corzine, who has managed to obliterate his reputation more thoroughly than one might have thought possible. Most interesting, and perhaps telling of all: after three weeks of nonstop investigation, no one seems to have the faintest idea of where that money has gone.

Bart Chilton, a Democratic member of the Commodity Futures Trading Commission, compares the lost money to a lost child, saying, “Every day that passes is more and more concerning, and there’s less and less hope.” While the analogy may seem fitting, the missing money is inspiring more anger and rage than sadness among the victims, particularly those former customers left totally in the dark about the status of their finances. The end of MF Global came as a shock to many in the financial industry, and in the weeks preceding the final firing of its employees, frantic trading and selling-off of assets took place. Throughout this messy scenario, MF Global failed to keep up proper records of who was making which transactions and when, leaving investigators with almost no information about what really happened in the final weeks. Piecing together what went down has been a grueling process that has up until now not met with any measurable success.

Most of the blame for this epic collapse is falling squarely on the shoulders of Corzine and those close to him. Corzine seems to have learned very little, if anything, from the collapse of giants like Lehman Brothers and Bear Stearns just three short years ago. Over the past year and a half, Corzine supervised a series of risky bets on (of all things) the credit quality of several European nations. As the debt crisis in Europe began to mount, Corzine doubled down on his wagers hoping to make a vast profit. Of course, he did all this using his customers’ money. When joining MF Global in 2010, Corzine was quoted as saying he felt the company was “sleepy” and “risk-averse” and hoped to change the culture to bring it to major profitability. In the end, it took less than twenty months for his new strategy to completely bankrupt the once successful firm.

While the story is indeed poetic in a morbid way, it is yet another example highlighting the dire need for true regulation of the financial industry. Where were Corzine’s employees during all of this? Obviously none of them either could or would stand up to him and question his decision making process. Most of all, where was the eight-member board of directors, who one would think would have the greatest stake in monitoring the actions of the new CEO? Amazingly, they granted Corzine a three year extension on his contract in early 2011, saying his “performance has been exemplary since joining the firm just over one year ago.” Asleep at the wheel would be an understatement. Only impartial federal regulators would have had the ability to see Corzine’s investments for what they were: the egotistic moves of a rogue trader hoping to redeem his reputation.

Now, with more jobs lost and another American company bankrupted, federal regulators are again left with the arduous task of picking up the pieces. In this case, the situation would be bad enough with just the knowledge that over half a billion dollars seems to have vanished into thin air. But worse still is that the MF Global scandal is another slap in the face to the American people. Once again we see that those who make decisions that affect the lives of millions of Americans do what they want, when they want, without a thought to the consequences. And once again we are faced with the troubling fact that there seems to be nothing the federal government can do other than clean up the mess.

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Wednesday, September 28, 2011

Amazon Lights the Fire

It has been a very, very big morning for Amazon Inc. The company unveiled numerous new products in its effort to solidify its dominance of the e-reader market, including the 3G version of its Kindle Touch, which utilizes touchscreen technology and features internet connectivity. The prices for Amazon’s products will remain among the most competitive in the market, with the aforementioned Kindle Touch 3G starting at $149 while the regular Kindle price has dropped to $79. The more explosive, though not unexpected, announcement came with the introduction of the new Kindle Fire, a tablet computer device capable of streaming movies and TV and featuring downloadable apps in addition to e-reader capabilities. While Amazon is far from the only major player to release a tablet in the last year, the Fire is nonetheless being seen as the first real competition to Apple’s iPad, which itself began the tablet craze and still owns two-thirds of the market share.

Amazon is in a unique position to challenge Apple. Unlike the other companies that have waded into the tablet market, such as Hewlett-Packard Co. and Samsung Electronics Co. Ltd., Amazon already possesses a vast network of millions of customers who visit its website regularly. This provides it with a perfect outlet for cost-free advertising and the ability to raise the profile of the Fire almost immediately. The Fire will run on a modified version of Google Inc.’s popular Android operating system and feature e-mail access, direct shipping links to Amazon’s many products, and easy access to books and magazine subscriptions. Amazon founder Jeff Bezos summed up the Fire succinctly, with the mission statement that this tablet was not to be thought of as a simple piece of hardware, but “as a service.” The company wants the Fire to be an addition to a customer’s daily routine; a place where they can shop, work, play games and get their entertainment and news directly from Amazon. Perhaps most importantly of all, as with the Kindle e-reader before it, Amazon will be selling the Fire at the extremely attractive price of $199. At less than half the price of a new iPad, Bezos is no doubt hoping to woo those customers who have hesitated on making the purchase of a tablet, and win their loyalty for the long run.

Despite this advantage, Amazon has quite a bit of ground to cover if it hopes to offer Apple any real competition. The iPad has been widely praised as revolutionary for both its elegant design and its general ease of use. The Fire is half the size of the iPad with a much smaller screen, making it generally less attractive, and it lacks a camera, a microphone, and numerous other features now standard on the Apple product. The iPad also offers, at this point, almost 100,000 Apple specific apps, a number Amazon will be hard pressed to match anytime soon. The Fire also lacks the all-important 3G connection, and can at this point only access the internet via Wi-Fi. This is a disadvantage that will need to be addressed quickly if it hopes to actually steal customers away from Apple.

Despite its initial limitations, the Fire is yet another example of Amazon’s remarkable ability to adapt itself to whatever challenges the market places in its path. For a company that is less than twenty years old, it has changed its business model significantly year after year and shown an amazing foresight that has kept it ahead of the times. When Amazon was founded, it had the simple but lofty goal of being the “Earth’s largest bookstore.” Over the years it has come to dominate much of online sales and boasts one of the most reliable shipping networks in the world. With the success of the original Kindle, it only makes sense for Amazon to dive into the mobile market, which has been growing exponentially of late and sees no signs of abating. This means that while Amazon has left some of its less advanced competition in the dust over the years, it is now entering territory dominated by some of the most innovative companies operating today. If Amazon can stick to the pricing model it has adopted that has made it such a success, while still quickly adapting their products and services to the ever-changing nature of the mobile market, it may indeed provide Apple with the first true competition it has seen in quite some time.

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Friday, August 12, 2011

Labor's Latest Battleground

The word that comes to mind when I think of labor unions these days is "embattled." Labor's latest defeat came this Tuesday, when Democrats failed to wrest control of the Wisconsin State Senate from the Republicans responsible for pushing through Governor Scott Walker's anti-collective bargaining bill. Public employee unions have dominated the headlines amid battles over state budgets. But now private sector unions are taking center stage, as 45,000 Verizon workers—made up of members of Communications Workers of America (CWA) and International Brotherhood of Electrical Workers (IBEW)—have gone on strike.

The strike centers around a long list of concessions that Verizon is demanding from its wireline division workers, including a steep rise in employee health care contributions, a pension freeze, and a cut in sick days. The CWA has denounced the company's demands as "Wisconsin-style tactics." Verizon maintains that it needs to cut labor costs in order to offset the decline in its landline business. The fading wireline problem is one that has been plaguing the telecommunications industry as a whole, with consumers abandoning traditional landline phones in favor of wireless, cable, or Internet options, like Skype.

It's certainly reasonable to expect labor unions to make painful concessions if a corporation is struggling badly, with its survival hanging in the balance. But Verizon's current predicament isn't exactly analogous to that of, say, General Motors in 2009. Verizon's wireless business is booming, with a reported operating income of $9 billion for the first six months of this year. Even its struggling wireline unit has been profitable, earning $606 million in income over the last two quarters. While it's true that Verizon has been losing landline customers, many of those customers are leaving for... Verizon Wireless.

This is a hugely profitable company—one that could afford to compensate its top five executives $258 million over the last four years. Verizon may very well be using the weak economy as an opportunity to gain big concessions from labor that it would have no chance of winning in a stronger economy. With the U.S. unemployment rate at 9.1 percent, generous benefits seem to be a virtual luxury these days. But for a company rolling in profits to claim that it needs to slash labor costs? That seems like a stretch.

With the balance of power shifting steadily towards corporations over the last few years, thanks in part to a series of corporate-friendly Supreme Court rulings, the labor movement needs a win very badly. The strike is less than a week old, and while it's tough to predict which side will give in first, in this instance, Verizon may have overplayed its hand.

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Thursday, July 28, 2011

Time to Make the… Coffee?

Earlier this week, Dunkin Brands Group Inc made clear its intensions to challenge some of this country’s biggest brand names for supremacy in the massively profitable business of waking America up in the morning. The company, which owns Dunkin Donuts and Baskin Robbins, had its initial public offering on Tuesday, bringing in over $400 million at a price that peaked at $26 per share. To those in the eastern U.S., the name Dunkin Donuts is a familiar one, with busy stores operating in some of the largest urban markets. Over the last few years Dunkin has seen its brand grow to greater heights, and not because Americans finally realized their love for Vanilla Kreme. Instead, the company has based its expansion on the backs of massive coffee sales, and with its IPO has signaled its plans to push itself into new territory. It will use most of the money to pay off its currents debts so that it will be free to open Dunkin Donuts shops in markets that had previously been closed to it.

Currently, Dunkin Donuts sells more regular and iced coffee than any other chain in America, including Starbucks, now one of the company’s principal rivals. This is a considerable feat, considering there are only 6,700 Dunkin Donuts chains operating in the U.S., as opposed to 17,000 Starbucks. Dunkin now plans to open at least 250 additional stores in western cities and other areas where its presence had been previously absent. While Starbucks certainly needs to be wary of this incursion, overall it seems rather unlikely that the two companies will have much impact on one another. The customer base for both is significantly different, if only from a pricing standpoint. Starbucks charges $2.25 for its basic, smallest cup of coffee while a much larger sized regular cup at Dunkin Donuts is only $1.05. Also, Dunkin prides itself on quick, no nonsense service while Starbucks is far more interested in selling itself as a “lifestyle choice” and a destination where people can sit, work, and enjoy their beverage. With a head start as large as Starbucks’, it’s doubtful a few new Dunkin chains will have an impact on their overall performance.

That being said, Dunkin does have another major competitor that operates in the same mold: McDonalds. McDonalds’ “McCafe” line of coffees has become a significant source of profit since its introduction three years ago, and coffee now accounts for over 6 percent of the company’s annual revenue. Dunkin and McDonalds offer similar fast-food service at prices that are almost identical, and the competition between the two in new markets is likely to be fierce. The problem for Dunkin is that no matter how quickly it expands by adding new locations, it will not come close to being as ubiquitous as McDonalds. If it truly wants to compete, it will need to find ways to draw in customers beyond the morning rush hour. Most analysts suggest that the most likely scenario involves Dunkin expanding its menu nationwide to include lunch items, but there has been no confirmation of this from anyone at the company.

At this point, it’s clear that coffee sales are big business. Plenty of Americans drink it daily, and many follow a morning routine that involves purchasing a coffee from one of these chains. By expanding into new markets and offering itself as an alternative to both the fast-food mentality of McDonalds and the pricey Starbucks, Dunkin hopes to drive a wedge through the middle and become the unlikely victor of the coffee wars. It’s certainly ironic that a company whose spokesman was for so many years a sleepy baker now hopes to stake its claim as the brand that keeps America awake.

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Wednesday, July 20, 2011

Goldman Losses Signal a Change in Strategy

It may seem hard to imagine a quarterly profit report of over a billion dollars being met with disappointment and skepticism, but it is simply a sign of the times. This week, Goldman Sachs posted a $1.05 billion profit, an enormous amount of money that by Goldman’s lofty standards is actually exceptionally weak, down a whopping 63 percent from the previous quarter. While the loss isn’t exactly shocking, its size is certainly a surprise coming from a company that was arguably one of the first to shed the negative effects of the recent financial crisis and return to massive profitability. The reason for the decline in profits, however, is perhaps even more interesting than the loss itself. Goldman Sachs, the company which has long led the way by going “all in” on big bets at any cost, seems to be afraid of taking risks.

The drop in earnings this quarter was based mainly on underperformance in Goldman’s fixed-income department. This is the branch of the company that handles currency, commodities, and other normally lucrative aspects of trading. The fixed-income unit is one of Goldman’s most profitable branches, but it is also known for doubling down on high-risk investments in order to generate massive windfalls. Instead, Goldman has adopted a surprisingly conservative approach in recent months, hedging its bets and choosing to pass on investments in some of the most money-making markets, like oil trading. “During the second quarter, the operating environment was more difficult given global macroeconomic concerns,” said Lloyd C. Blankfein, Goldman’s chairman and chief executive. In layman’s terms: it’s too risky to take risks.

Of course, Mr. Blankfein’s technical explanation notwithstanding, it is not just the overall economic conditions that have forced Goldman to take a step back. Given the Obama Administration’s penchant for regulation, Goldman executives are obviously feeling that now is not the time to be putting the company in front of the fire. Perhaps it is less a change in overall philosophy, and more an issue of biding its time. Goldman, a company whose profitability during the crisis has been unmatched, can certainly afford to suffer a few disappointing quarters. It is more likely that this change in behavior is not an example of a “new Wall Street,” as some analysts have brazenly predicted, but instead a short-term solution to today’s trying economic times. By taking less risks and posting less earth-shattering profits, Goldman may be doing what it feels is best to weather to storm and emerge stronger in the end.

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Thursday, June 30, 2011

Philosophical Battle Underpins Apple/Samsung Duel

Samsung Electronics Co. stepped up its attacks against Apple Inc. this week, filing countersuits against Apple’s initial lawsuit in six additional countries. Samsung has been attempting to break into the lucrative smartphone and tablet market for many months, and Apple has been challenging them at every turn. Apple’s initial suit claimed that Samsung’s products infringe on the patented designs the California based giant uses in its iPhones and iPads. By filing so many countersuits in different courts, Samsung is doubling down against Apple and showing just how much importance it places on gaining a foothold into the mobile technology sector.

While the lawsuits focus on patent infringement and technology copying, as always there is far more at stake beneath the surface. From a business standpoint, the suits show a tense relationship between two companies that are, essentially, partners. Apple is actually the single biggest buyer of Samsung’s microchips, and Samsung chips are found in nearly every Apple device currently marketed. There has been much speculation that the continued lawsuits could lead Apple to back out of this partnership, but analysts cannot even speculate from where Apple would be able to procure chips of such quality in abundance if it did try to punish Samsung by cutting off its business relationship. Regardless of this, the very idea of Apple leaving should be putting fear into the hearts of Samsung executives; Samsung’s chip business was the most profitable arm of the company by far in 2010, due in no small part to its lucrative contract with Apple. That Samsung is willing to lose that much profit to challenge Apple is certainly a risk, but one that Samsung obviously sees as necessary if it is going to continue to be a competitive force in the market.

Beyond the business end, the lawsuits also bring to light a major philosophical difference between the two companies. With its initial suit, Apple is asserting that design defines a product above all else. The fact that so many other companies have attempted to mimic the iPhone and iPad design certainly helps this argument, and by challenging Samsung’s products Apple is trying to prove that by being the most innovative designers initially, it should have control over the future of a product. Samsung takes the opposite, and perhaps more traditional, view. In its countersuits, it stresses the value of the actual technological components of the device (like microchips) over the design and functionality of that product. This philosophical gulf has brought Apple at odds with many companies over the years, but the scope of the Samsung feud is perhaps the most pronounced example in recent times.

Unfortunately for Samsung, Apple’s philosophy seems to be proving more viable, or at the very least more profitable. By focusing on innovative design and purchasing the technological components from other manufacturers, Apple has seen its sales, profit margins, and influence skyrocket over the course of a decade. Samsung, on the other hand, has dealt with steadily declining profits even as its business expanded. It is this fact that has led the company to so desperately try to break into the mobile technology market, even to the point of standing up to Apple on an international scale. The rewards may be great, but the risks are equally severe. When asked about the suits, Samsung Chairman Lee Kun-Hee alluded not so subtly to his competitor by saying that “when a nail sticks out, (people) try to pound it down.” A truly apt metaphor, given the size of the hammer that is Apple.

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Tuesday, April 26, 2011

Nintendo’s Major Play

After reasserting its dominance of the home gaming market with the Wii, Nintendo seemed poised to enter a new era of greatness. However, if the last few years have taught us anything, it is that fortune can change as quickly as a game of Mario Bros. Released in 2006 (if you can believe it), the Wii has sold over 85 million units to date. While that is indeed a staggering number, it does not tell the entire story. Wii sales have fallen dramatically—down 15.1 million in the last year alone—and Nintendo executives have stated that they expect sales of its flagship system to fall by yet another 20 million by year’s end. All told, Nintendo’s overall profits have dropped by an astounding 66 percent. If it wasn’t obvious before, it certainly is now: Nintendo needs to bet on a new horse.

The company’s “big change” is now on the way, and it should come as no surprise that it takes the form of a new home entertainment system, a successor to the Wii. Nintendo will preview the new, as yet unnamed, system at the Electronic Entertainment Expo in Los Angeles this June. The Wii, with its revolutionary motion-sensing controller, led Nintendo’s major rivals like Sony and Microsoft to introduce similar features to their own consoles. With that advantage now gone, the Wii’s weaknesses are all the more apparent: its graphics pale in comparison to those featured on the more advanced Playstation 3 and Xbox 360. To make matters worse, more discerning players have long viewed the Wii with scorn for its lack of challenging games and childish design. The Wii succeeded mainly due to its appeal across the spectrum of gamers, inspiring usage among older players and young children, who normally would have avoided using a home entertainment console. To succeed, Nintendo needs this new system to generate an equal amount of buzz among a variety of audiences, and create a new base of previously untapped supporters to combat its quickly fading relevancy.

Unfortunately, Nintendo faces competition on a far grander scale than it has ever seen before. Surely the pressure is on to appeal to gamers and draw sales away from Microsoft and Sony. Even more threatening to Nintendo, though, is the widespread popularity of app-driven games played on smartphones and tablet computers. These cheap, accessible games have become ubiquitous among users of all ages, with titles like Angry Birds and Fruit Ninja selling millions of copies.These games exemplify the very mentality cultivated by Nintendo with the Wii. They are easy to use, fun for people of all ages, and embody a hands-on approach to gaming. To make matters worse, they do not require the purchase of a new entertainment system. Most users already own a smartphone capable of supporting them, and the purchase of a tablet computer offers advantages beyond those available on a gaming platform.

Nintendo hopes that it can still offer an experience unique enough to attract millions of customers. The company is banking on the fact that its games are playable by many users at once in a comfortable, home environment. They are counting on this feature to help them outpace the growth of other, more solitary gaming platforms. But even if this new system shows advancements far beyond that of the current Wii, it is likely to operate along the same general principles. There is no sign from Nintendo that the successor system will utilize an equally groundbreaking, revolutionary interface, and this could spell serious trouble for the company. After all, it will take something truly fantastic to woo serious gamers from the Sony and Microsoft platforms they are loyal to—platforms that focus less on group interaction and continue to churn out inventive titles year after year. If the new system cannot make the same splash across all markets that the Wii made with average, everyday users, Nintendo could find itself falling behind as fast as it had originally jumped ahead.

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Thursday, February 10, 2011

Twitter Talks Turkey

After spending the past few years as one of the most desirable, if mysterious, social networking sites, Twitter Inc. may finally be ready to show its hand. This morning, The Wall Street Journal reported that Twitter has entered into low-level acquisition talks with multiple companies. Initial estimates put the price tag for the micro-blogging service somewhere in the realm of $8-10 billion. The usual suspects of Facebook Inc. and Google Inc. have been part of the talks, as well as other lesser-known companies, many of whom have so far remained anonymous. With over 200 million registered users, Twitter is a tempting target for any company looking to expand its web profile, or in the case of Facebook, corner the social media market. Despite these talks, the answer to the question that has defined Twitter for years is still unclear: just how much is the company really worth?

While in the post-bailout era $10 billion may not sound like a vast sum of money for a corporation to spend, one needs to consider Twitter’s current status. Not only was the company’s 2010 revenue a mere $45 million, but it actually posted a loss last year as it spent heavily to hire its new workforce and expand its data capabilities. Numbers like that do not exactly inspire confidence among investors. Luckily, Twitter is expecting to have a far more profitable 2011. The advertising services the company introduced last year, like Promoted Trends and Promoted Tweets, are selling extremely well. Current estimates have placed the probable 2011 profit for the company as high as $150 million. While these are not necessarily the numbers it needs to make itself worth an investment in the billions, the potential for growth is apparent.

Twitter also has a lot more going for it than simple numbers. The current market trends are extremely favorable towards social media and web companies. Groupon Inc. recently turned down a $6 billion takeover offer from Google, while AOL has agreed to buy the Huffington Post for over ten times that website’s 2010 revenue. Other start-ups, like Pandora Media Inc. and LinkedIn Corp., have used the current climate to explore public offerings of their own. With so many billions being tossed around for relatively unprofitable web-based companies, it’s not surprising to see Twitter demanding such an exorbitant sum, considering it is one of the few that is already a household name. After all, the talks themselves increase Twitter’s clout in the industry and if no sale goes through, the company is still in excellent shape to continue growing its business independently.

Twitter obviously saw all this coming last year and has made moves to prepare for it. The company hired over 200 new employees in 2010 and began building a solid executive team. This included hiring a former Google executive, Dick Costolo, as CEO. These moves were meant to change the image of Twitter from a scrappy start-up into an internet powerhouse. Given the state of the current talks, it seems to have succeeded. While these were major steps in the right direction, success is not totally assured. The “Promoted” product sales are not unlimited and their effectiveness has not been proven. While advertisers are currently buying in bulk, they are also still testing the waters to see if large-scale Twitter advertising is indeed as profitable as the company hopes it will be. While the independent minded executives at Twitter may be hoping for a major payday, they should be ready to accept a reasonable offer for their company. Despite all their confidence, Twitter has not yet proven it is really worth that $10 billion.

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Thursday, January 20, 2011

Apple Faces A Future Without Jobs

Steve Jobs, leader of the most influential technology company in the world, announced early this week he would be taking yet another leave of absence from his position as CEO at Apple, Inc. In 2004, Jobs was victorious in his battle with pancreatic cancer, but has experienced health problems ever since a subsequent liver transplant in 2009. Analysts have noted that Jobs has been absent from public events since October 2010, and those close to him say he has looked increasingly frail in recent weeks. In a brief statement, he revealed that current COO Timothy D. Cook would take over daily operations at the company. While this temporarily solves the problem of who will run the company, the statement failed to answer the most pressing question for employees and investors: just how sick is Steve Jobs?

Like anyone, Steve Jobs has a right to personal privacy and has exercised this right to great effectiveness over the years. However, his current break comes at a critical time for Apple. The company has spent the past few years beating its competitors to the punch with breakthroughs in smartphone and tablet technologies that remain leaps and bounds ahead of others. But companies like Google and Microsoft have not rested during this time and both have recently shown signs of becoming major threats to Apple’s dominance, particularly in the smartphone market where Google’s Android OS is quickly outpacing the iPhone. While most expect that Jobs has planned far ahead and must have major innovations in development, investor confidence will likely experience a particularly large drop-off without Jobs at the helm. No company’s success has so dramatically been linked to the intelligence and tenacity of its CEO as Apple’s.

Given the size of Steve Jobs’ personality and level of importance at the company, should his disclosure responsibilities to the company and its investors reflect that? Up to this point Jobs has been secretive regarding the extent of his health problems, although most experts admit that people who receive liver transplants are prone to numerous immune system deficiencies. If this turns out to be the case, and Jobs will be unable to remain at the helm at Apple much longer, the time may have come for him to admit it publicly. The CEO of any major public company has a duty to its investors. Jobs has experienced immense perks and earned worldwide fame and admiration in his role as CEO; with that comes the forfeiture of a certain level of privacy. Those who own Apple stock and tie their fates to the company—and Jobs—have a right to know whether or not the man they have counted on for so long can still perform the duties required of him, or if indeed the time has come to look elsewhere for leadership.

At this point, Jobs shows no signs of an intention to make the truth about his condition public knowledge. He will remain CEO in his absence, and the company will continue following his blueprint for future development. In the short term, the effect of his departure should be minimal; Apple shares have already rebounded from the drop after the initial public announcement. Long-term prospects for the company may be less certain. Apple’s now ubiquitous creations like MacBooks and iPods are almost single-handedly accredited to Jobs. Without him actively in charge, the company may continue to profit, but it will not have the outward appearance of near-invincibility it has achieved up to this point. Whether or not the world’s most innovative technology company can survive the absence of its shining star is a question Apple may need to face sooner than it expected.

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Friday, January 07, 2011

End of the Line for Borders?

The 2010 holiday season turned out to be a very happy one for Barnes & Noble, which reported its best holiday sales results in more than a decade. Comparable sales at Barnes & Noble.com shot up 78% from last year, and even old fashioned brick and mortar stores did relatively well, with an increase of nearly 10%. The news for rival bookstore chain Borders is far grimmer. In December, the company announced a loss of $74.4 million just in the third quarter. Borders hasn't reported its holiday sales data, but the results probably aren't great, judging by the company's announcement last week that it was delaying payments to publishers. Borders has been scrambling to meet with publishers this week, amid speculation that the bookstore chain is headed for bankruptcy.

What went wrong for Borders? The answer can partially be found in the question, What went right for Barnes & Noble? In a word: Nook. The company's investment in digital technology paid off this holiday season, as the introduction of its NOOKcolor e-reader proved to be popular with consumers, which in turn led to more e-book sales. Borders, on the other hand, has largely missed the digital boat. The company didn't get around to announcing the launch of its digital initiative until May 2010, when it said it would begin selling the Kobo e-reader, made by a third party. (As a point of comparison, Amazon released the first generation of the Kindle in November 2007, and Barnes & Noble came out with the original Nook in November 2009.) Borders more or less abandoned e-commerce between 2001 and 2008, allowing Amazon to run its website for seven years. It's little wonder, then, that the bookseller is struggling to catch up.

A radical turnaround for a once-moribund company isn't unheard of (see: Apple). But right now, Borders doesn't seem to have any answers, and its high CEO turnover rate, with the company on its third chief executive in as many years, hasn't inspired confidence. Many analysts believe that Borders's only chance for survival is to merge with Barnes & Noble – a strategy that wouldn't be a panacea, even if that were to happen.

The book retail industry as a whole faces enormous challenges. Great holiday sales aside, Barnes & Noble has had to fend off a proxy battle and consider putting itself up for sale. With the decline of print book sales, the bookseller has been forced to adopt novel strategies, like incorporating toy stores within its bookstores. There's also no guarantee of ongoing success in digital sales, with the looming presence of Amazon. And now that tech giants like Apple and Google have entered the picture, the e-book field is more crowded than ever.

Ultimately, the two groups with the most to lose, should Borders fail, are book publishers and distributors. The collapse of the second-largest bookstore chain in the U.S. would almost certainly hasten the decline of print book sales. Consumers will also have fewer options. Sure, readers can always turn to Amazon or Barnes & Noble, but publishers facing declining sales will be less likely to take a risk on publishing books that seem to lack blockbuster potential. That could change, as e-books begin to gain traction. But for now, the continuing survival and success of Borders is in the best interest of readers and publishers alike.

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Wednesday, December 22, 2010

Microsoft’s Plan for Windows Signals New Direction

The tech sphere is buzzing this week over plans by Microsoft to leap into the portable device world in 2011. The Windows Phone released earlier this year helped the company regain a bit of credibility, if only for the fact that along with the Windows 7 operating system, it was the second product of the year that has not been a total disaster for the company. There are numerous risks in jumping headfirst into the smartphone and tablet race, considering how far behind Microsoft stands when compared to Apple Inc. and Google Inc. That’s why the news this week of Microsoft’s upcoming alliance with ARM Holdings Plc generated so many headlines. For the first time in what feels like decades, Microsoft will partner with a chip manufacturing company other than Intel Corp. to create a new generation operating system meant to work primarily on tablets and other mobile devices.

Microsoft and Intel (often dubbed “Wintel” to accentuate the close ties to the Windows operating system) have worked together since the 1980’s. Intel’s chips have featured prominently in all of Microsoft’s PC’s and many Windows operating systems were designed with Intel products in mind. While the relationship has not been totally exclusive, this partnership with ARM signifies Microsoft’s first major step away from Intel. The reason why is clear enough: ARM’s products are superior in mobile devices. ARM’s chips are similar in design, but consume less power overall than its competitors. This makes them the overwhelming favorite for smartphone and tablet placement; most Android OS phones as well as Apple’s best-selling iPad use ARM chips. By signing on to release products with ARM technology, Microsoft has redoubled its efforts to become a player in the mobile device market and remain relevant in 2011.

It’s expected that Microsoft will announce exactly what its plans for the ARM products are in early January, but to most observers the goals are already clear. The company undoubtedly hopes to market a fast, scaled-down Windows OS for mobile, one which could be popular enough to be adopted across numerous devices, similar to the Android OS. The strategy bears a striking resemblance to that which Apple employed in its early forays into mobile. Back when the iPhone was first being developed, Apple shrunk its iOS into a lightweight system capable of operating on mobile devices. The speed and reliability of this operating system has been a major contributor to the success of Apple’s family of products.

While this is surely an important step for Microsoft, it is also, once again, less than timely. The past few years have been marked by Apple’s dominance and the rise of Android as its major competition. In order for Microsoft’s plan to succeed, it needs to create a product that is not only as good as those currently on the market, but has a “wow” factor that will dazzle the industry and keep the company on the tips of everyone’s tongues. Most analysts rightly point to the tablet market as the only logical place for the company to go. Even though the iPad is selling extremely well, no other companies have been able to release a tablet that truly competes. Given that Windows 7 received excellent reviews in 2010, building a tablet using ARM chips and a sleeker, modern Windows mobile operating system may be just what the company needs finally return to relevancy.

The risks for Microsoft are obviously huge and the eventual payoff is, at least for the moment, nowhere in sight. Company spokespeople, speaking on conditions of anonymity, have made it clear that this deal does not mean that Microsoft is breaking its relationship with Intel when it comes to building PC’s. In that case, one shouldn’t expect any major home computing innovations from the company in the coming year. With its next big release, Windows 8, not scheduled for release until 2012 at the earliest, Microsoft had better put its new partnership with ARM to work fast. If it waits until 2012 to release a competitive tablet, it may find that the mobile device market has left it behind forever.

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Friday, December 10, 2010

Pfizer's Succession Pains

Jeffrey Kindler’s resignation as Chairman and CEO of Pfizer this past Sunday, and the promotion of Ian Read to the chief executive role, caught nearly everyone off guard. It wasn’t the fact of Kindler’s resignation that was surprising so much as the timing – many industry analysts said that they saw this coming, just not quite so soon. When a company announces a CEO transition on a Sunday evening, usually one of the following is true: The change wasn’t planned, or something embarrassing or unsavory prompted a management shakeup. In Pfizer’s case, it was the former.

In a company statement, Kindler seemed to cite exhaustion as the reason behind his abrupt retirement, stating that “the combination of meeting the requirements of our many stakeholders around the world and the 24/7 nature of my responsibilities has made this period extremely demanding on me personally,” adding that he is “excited at the opportunity to recharge my batteries, spend some rare time with my family, and prepare for the next challenge in my career.” Leading one of the world’s biggest pharmaceutical companies is undoubtedly draining, but exhaustion typically isn’t mentioned as the reason why a CEO is stepping down (“spend time with my family,” on the other hand, is standard retirement-speak). He was also rewarded a generous $4.5 million severance package, covering a year's worth of salary, as well as a bonus. All of this raises the question of whether Kindler’s exit was his personal decision, or if he was pushed out by the board of directors.

Pfizer's board certainly had plenty of justification for showing Kindler the door. He oversaw Pfizer's blockbuster $68 billion acquisition of Wyeth last year, but his four and a half year tenure was plagued with disappointments, like the flops of the highly-anticipated drugs Exubera and Chantix, and the failure of Torcetrapib, a cholesterol treatment that was supposed to be the follow-up to the company's most profitable brand, Lipitor. In another setback, Pfizer was fined a record $2.3 billion last year for the illegal off-label marketing of several drugs, including the painkiller Bextra. And perhaps most importantly, to shareholders at least, Pfizer's stock performance has been dismal, with its share price declining 35 percent since Kindler was named CEO in 2006.

Barring a miraculous turnaround, Jeffrey Kindler's days at the helm of Pfizer were numbered. What surprised many industry analysts was the impression that Pfizer seemed to have no real succession plan in place, judging by the haphazard leadership transition to Ian Read. According to a report in Bloomberg Businessweek, Ian Read, viewed as a potential successor to Kindler, should have been appointed Chief Operating Officer in September – a move that Kindler never made. On Sunday, Kindler resigned unexpectedly, just hours before a special board meeting was scheduled to take place. The item at the top of the agenda? Kindler's future at Pfizer.

The market's initial reaction to Ian Read's promotion to CEO has been positive. Read's 32 years at Pfizer have given him a deep background in pharmaceutical business operations, unlike Kindler, who joined the company as General Counsel in 2002, after stints at General Electric, McDonald's, and Boston Market. As Ray Kerins, Pfizer's VP of External Affairs and Worldwide Communications, put it: “The good news is we’ve got a guy with experience. Ian Read basically has been running 85 percent of the company anyway.” Still, Read faces some daunting challenges, chief among them the expiration of Pfizer's U.S. patent for Lipitor in November 2011. The pharmaceutical giant desperately needs a new blockbuster drug to compensate for lost sales, once Lipitor becomes subject to competition from generics. However Ian Read's tenure as CEO turns out, let's hope that the transition to the next chief executive goes more smoothly.

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