Posts filed under “Corporate Management”
One of the most common errors investors make is going back to their list of old favorites: These typically include the former superstars of the last bull market. Prior luminaries include Microsoft, EMC, Dell, Intel, Cisco, eBay, etc.
It’s a function of their comfort levels, a bit of rosy nostalgia for the good old days when everything you bought went up, and money was falling from the sky like raindrops.
It has long been a general rule of markets that new bulls require new leadership. Numerous reasons for this exist, but three stand out in particular:
-Prior leaders fastest growth phase are behind them.
New technologies, products and markets came online; By the time the next Bull market started – usually after a few years of a bear market – those industries and products became mature. PCs are a perfect example; They are like dishwashers or refrigerators that get replaced only when they die. The old 286/386/486/586 upgrade cycle has long been consigned to the dust bin of technology history.
-Success invites competition.
Yahoo begat Google, Intel begat AMD, Dow Jones/ NYT Company begat Typepad and Blogger. This is as it always has been and always will. What are the odds that lightning strikes twice at the same firm?
-Excesses of one era set the stage for success stories of the next.
Following the great crash of 2000 (primarily in tech/telecom/internet), the economy flat-lined, leading the Fed to cut interest rates to 46 year lows. Out of those ashes came tremendous activity in Housing and Home Builders, Transportation and Materials, Mortgage Financing and Cash Out Equity Loans – and of course flat panel HDTVs for everyone! These low rates even led to more importing of Chinese goods, which further stimulated their demand for energy and industrial metals. Once this cycle collapses, an entirely different set of leaders are likely to emerge.
The classic example of this phenomenon is the red hot tech stocks of the 1960s bull market. Nearly all of them are out of business today. That period saw big conglomerates ramping up (See Gulf & Western, ITT); The surviving tech names like Xerox and Polaroid and Kodak are now shells of their former selves. This happens with every major advance in technology, from railroads to telegraphs to automobiles to TV/radio to electronics to PCs to . . .
There were many parallels between the late 1990s and the 1960s – at least from a broad technical view. The overall advance in the 1960s got increasingly narrow in its leadership, as investors focused on the Nifty Fifty. In the 1990s, it was the 40 biggest capitalized stocks that were in the mack daddy index of the day, the S&P500. We assume you recall how that ended.
If only it were as easy as simply buying the former fallen stars: Then, everyone would be a stock market genius.
UPDATE June 20, 2006 3:51 pm
Perfect example is Dell, which hit a new 52 week lows today at $23.53.
UPDATE June 21, 2006 5:32 pm
Some people are excited that Dell Chairman Michael Dell, (who presumably knows his business better
than anyone else) has been buying Dell shares (down 43%). Dell bought $70 million worth of stock at $23.99. Remarkably, this was his first
purchase ever, following steady selling every year since 1988,
according to Thomson Financial.
Michael Dell has a net worth of about $13 billion. This "big buy" represented a purchase equivalent less than 1/2of a % of his wealth.
To put this into context of an average person making $100k, owning a home, and a tidy sum of stock in their retirement accounts, its the equivalent of the purchase of 100 shares of Dell stock.
I frequently discuss Microsoft, and for many many reasons: They are a tech bellwether, a huge part of the S&P and Nasdaq 100 (and a smaller part of the Dow). They have also been a thorn in the side of new technology development and innovation, but now that so much of it has moved to the web, its gotten away from them.
This is a good thing.
One of the commenters said some time ago that I was "irrational in my hatred for Microsoft." That’s hardly the case; Microsoft has put a lot of cash in my pocket, so at worst, I should be grateful to them for the windfall.
However, I am still an objective observer, and I believe that Mister Softee is not what most investors think it is: They are hardly innovators; rather, they copy other people’s work relentlessly, until by default they own the standard. Their products are kludgy, bloated and anti-instinctive; They are hardly the elegant, easy to use software first dreampt up by science fiction writers decades ago.
From an investing standpoint, their fastest growth days are behind
them, yet they are hardly a value stock — yet. (Cody and I have disagreed about this for some time). The leaders of the last bull Market are rarely the leaders of the next. Despite this, Wall Street still loves
them, with 28 of
are widely owned by active mutual fund managers and closet Indexers.
Many people think of them as this well run money machine; In reality, they are very poorly managed by a group of techno-nerds with very little in the way of management skills. Even their vaunted money making abilities are profoundly misunderstood: Its primarily their monopolies in Operating Systems (Windows) and Productivity Software (Office) that generates the vast majority of their revenue and profits. Their Server software and SQL Database make money, but hardly the big bucks of Windows or Office. MSN is a loser, MSNBC is a dud, their Windows CE is hardly a barn burner — even X-Box has cost them billions more than it is likely to generate in profits over the next 5 years.
Lest you think its just me who thinks this way, consider no less an authority than Robert X. Cringely. He is the author of the best-selling book Accidental Empires (How the Boys of Silicon Valley Make Their Millions, Battle Foreign Competition, and Still Can’t Get a Date). He has starred in several PBS specials, including Triumph of the Nerds: A history of the PC industry.
After Gates resignation, Cringely wrote this:
"Microsoft is in crisis, and crises sometimes demand bold action. The company is demoralized, and most assuredly HAS seen its best days in terms of market
dominance. In short, being Microsoft isn’t fun anymore, which probably means that being Bill Gates isn’t fun anymore, either. But that, alone, is not reason enough for Gates to leave. Whether he instigated the change or someone else did, Gates had no choice but to take this action to support the value of his own Microsoft shares.
Let me explain through an illustration. Here’s how Jeff Angus described Microsoft in an earlier age in his brilliant business book, Managing by Baseball:
"When I worked for a few years at Microsoft Corporation in the early ’80s, the company had no decision-making rules whatsoever. Almost none of its managers had management training, and few had even a shred of management aptitude. When it came to what looked like less important decisions, most just guessed. When it came to the more important ones, they typically tried to model their choices on powerful people above them in the hierarchy. Almost nothing operational was written down…The tragedy wasn’t that so many poor decisions got made — as a functional monopoly, Microsoft had the cash flow to insulate itself from the most severe consequences — but that no one cared to track and codify past failures as a way to help managers create guidelines of paths to follow and avoid."
Fine, you say, but that was Microsoft more than 20 years ago. How about today?
Nothing has changed except that the company is 10 times bigger, which means it is 10 times more screwed-up.
Over a year ago, I noted the decaying customer service quality in a few companies: In particular, Dell got named as a significant offender. (More recently, I complained about obnoxious Dell preinstalls).
I collected a ton of emails from readers about consumer complaints (mostly from January 2005).
I should have paid closer attention. Although I did not have a position in Dell, I missed the opportunity to short it.
Since that deluge of criticism in January 2005 the stock has underperformed dramatically, down 35% from over $41 to under $27. The stock was recently downgraded to a SELL at Citigroup — see that red bar down towards the far right on big volume? That’s the downgrade. The sell rating was due in part to customer service complaints.
The XM chart shows that I am already late to this kvetch-fest — it looks like XM may already have had their Dell moment — the stock is down even more — a 50% haircut from $40 to $20. Ouch!
There’s only so much any company can cut their "basic business concept" before they start causing a problem with their consumers. That obviously happened at Dell, via the degradation of their "vaunted customer service" and it appears to be going on at XMSR.
Quite bluntly, if your business model is based on a specific concept, you screw around with that at your own risk. For Dell, it was cheap and direct sales coupled with great customer service; Saving a few pennies by outsourcing/cutting back on support, and/or switching to cheaper components (as some readers have complained about with Dell) seems to be corporate suicide.
For XM, it may be that cutting the variety of their offerings will be their Waterloo. Their raison d’etre seems to be a broad and deep variety of eclectic channels. But as Chrissy Hyndes sang so long ago: But you mess with the goods doll, honey, you gotta pay. *
Here’s the post that started the calvalcade of complaints:
"I keep getting e-mail from disgruntled XM subscribers. That their favorite channel, #51, Music Lab, has bitten the dust. I’ll print one below.
This is totally fucked up. The promise of satellite radio was to go deep, to provide something for EVERYONE! But the new regime at XM, the Infinity assholes, are turning XM into the bullshit terrestrial radio that they came from. And this makes me CRAZY!
First came channel 49, Big Tracks. With the INANE tagline "Our Classic Rock". This is just the kind of b.s. unlistenable terrestrial classic rock stations use. And the station’s got no DEPTH! Just the same fucking tracks over and over again. With no surprises.
But now it’s worse. Music Lab was booted and what did we get? MORE HITS CHANNELS!!!
We’ve got XM 17, U.S. Country, Country Superstars of the 80s and 90s.
How about XM 26, Flight 26, Modern Hits 90s and Now.
Or XM 30. Hitlist. TODAY’S Hit Music.
Or 68, The Heat, RHYTHMIC HITS!
Or 91, Viva, Latin Pop Hits.
Oh, they brought back Liquid Metal, which had been banished before, but what we’ve now got is endless b.s. hits stations, replicating what is ALREADY AVAILABLE ON XM, their only saving grace being no commercials.
This is a big deal. This is like the death of free-format FM radio, but WORSE! The golden era is OVER!
And what about the people who subscribed to XM ONLY for Music Lab? People like Craig Anderton, the electronic music and instrument GURU! Who signed up for two years, EXPECTING he’d be able to listen to his kind of music. Which he could get nowhere else, which is why he subscribed to XM.
The lunatics have taken over the asylum. DO NOT SUBSCRIBE TO XM! They don’t have Howard, and the people now running the place have their heads up their ass."
Reader responses follow . . .
UPDATE: May 23, 2006 8:21am
Nice mention of this post in Wes Phillips’s Stereophile Column this week
All of XM’s Trials
Stereophile, May 21, 2006
UPDATE: May 24, 2006 5:21pm
Geesh! The stock got shellacked today on a downgrade on subscriber expectations:
XM, the nation’s largest satellite radio provider, lowered its subscriber forecast, citing unexpected weakness in demand for its satellite radio service as well as potential legal pitfalls from a recording industry lawsuit.
It now expects to reach 8.5 million subscribers by the end of 2006, lower than its previous guidance for nine million customers by year’s end. The company had 6.5 million subscribers at the end of the first quarter.
Shares tumbled on the news, losing 11%, or $1.76, to $13.75 at 4 p.m. on the Nasdaq Stock Market.