Just One Banker Officiated At Yahoo’s Tumblr Acquisition

That’s what Michael J De La Merced is saying in one of his columns today, at the NYT’s DealBook.

So how did the $1.1B deal come to be?

Leading the talks for Yahoo were Ms. Mayer and Jackie Reses, the executive in charge of development, with some assistance from the chief financial officer, Ken Goldman, this person said.

The only bankers on the deal were on Tumblr’s side. Its board retained Qatalyst Partners, the boutique investment bank run by Frank P. Quattrone. The deal team included Mr. Quattrone and Jonathan Turner, a co-founder who specializes in Internet and mobility companies.

The dearth of investment bankers echoes the last big deal in the social media space, Facebook’s takeover of Instagram. That deal was largely hashed out by the companies’ two founders, Mark Zuckerberg and Kevin Systrom, over a weekend last year – one that included a viewing party for the HBO series “Game of Thrones,” according to Vanity Fair.

I wonder why, though.

Some theories:

1. Yahoo knew Tumblr’s worth. So the discussion was not really about the valuation and terms (it’s supposed to be an all-cash deal, so that makes it simple). Instead, it was about convincing Tumblr’s founder that his/their independence would be preserved, post-acquisition. Not something you need bankers for…

2. Tumblr is not public. So I would assume that there aren’t a lot of regulations, policies and processes that require bankers’ expert assistance or advice. 

3. Ms Mayer and Ms Reses wanted to keep things simple, communicate clearly and move quickly – so why use bankers as intermediaries, potentially slow things down and add complexity? [Also, this reveals to the world that Ms Mayer is a highly hands-on executive, exactly the kind of CEO that Yahoo needs]

Anyone with more insights into the roles of bankers in M&A have a  better explanation?

Marissa Mayer’s Post About Tumblr, On Tumblr

Journalists were in a tizzy yesterday about Yahoo’s $1.1B Tumblr acquisition. Did Yahoo’s board, meeting and approving the deal on a Sunday, enliven their (the journos’) otherwise dull weekend?

Anyway, as my readers know, as a long-time Yahoo user, I have been rooting for Yahoo and Marissa Mayer for a while. So, good luck to Yahoo and congratulations to Tumblr’s management and employees. 

Ms Mayer announced the deal on Tumblr (where else?) about the acquisition in a charming post that is well worth reading (I’m a huge fan of charming, folksy CEO communiques, as you guys also know).

An excerpt:

I’m delighted to announce that we’ve reached an agreement to acquire Tumblr!

We promise not to screw it up.

You can read the rest of it here. 

Warby Parker, Wharton, Pricing and Strategy

Warby Parker, as hipsters and others know, is disrupting the “luxury” eyewear market. While “disruption” is a buzzword indiscriminately applied to many things these days, that’s not the case here. 

Coming into an industry that enjoyed near-monopoly concentration of market power (translation: consumers were paying a lot!), Warby Parker is taking on Luxxotica (proprietary brands here + licensed brands here = pretty much a who’s who in this industry) successfully, but still in a small way. 

A very interesting article from Knowledge@Wharton describes various aspects of the Warby Parker story. Students of business will find it especially appealing, because it touches on various elements of marketing, pricing and strategy.

Two excerpts (if you are in a rush) that I really liked from the piece.

1. Before founding the company

Before co-founding Warby Parker, Blumenthal directed VisionSpring, a group that trains women in developing countries to sell affordable glasses in their communities. The job left an impression. “It helped me recognize the power of a pair of glasses to change someone’s life,” he notes. Research conducted by the University of Michigan demonstrated that users of VisionSpring eyeglasses experienced a 35% increase in productivity and a 20% increase in monthly income, Blumenthal points out. “In international development terms, that is a miracle.”

2. Why $95 and not $45

The decision to price glasses at $95 comes with a back story. Wharton marketing professor Jagmohan Raju recalls that when the founders broached their idea to him, they originally planned to sell their glasses at half that price. “I really liked the idea overall … but after examining their analysis, I told them it’s not going to fly. [At $45 a pair], there’s no money [left over] for brand building; there will be no money in it for you and no money for investors.”

In addition to squeezing the business, a price tag of $45 was “too low” to be seen as credible to customers, according to Raju. “It would have put [Warby Parker] in a category I believed they did not want to be in. There are many companies selling cheap eyeglasses. Anyone can go on the Internet and buy two pairs for $99. But there is a perception among customers that the quality is not as good.”

The goal was to create a new price point that was still reasonable, but not low-end.

David Bell, professor of marketing at Wharton, served as an advisor to the founders in an independent study about pricing models and demand analysis. He recalls conversations around the social-psychological reasons for staying under $100. “There was a bit of discussion about what happens [psychologically to the customer] when you get to three digits,” he says. “[At the same time], $99 gets you a little bit of extra margin — $4 — but it doesn’t feel quite as classy. A price tag of $93 sounds more like a Walmart price: There’s too much exactitude there.” 

The price had to be right for another important reason: For every pair of glasses Warby Parker sells, it gives a pair to someone in need. (According to the company, almost one billion people worldwide — 15% of the global population — lack access to glasses.) TOMS, the shoe manufacturer known for its simple cloth espadrilles made with recycled vegan materials, is perhaps the best known company that employs a buy one/give one business model.

Google’s Music Service – Catching Up or Getting Started?

Google unveiled its new music service, Google Play Music All Access, at its I/O conference last week. As Matt Peckham wrote on Time this week (he chose to call it GPMAA, BTW):

…GPMAA represents Google’s attempt to offer a subscription-based music service, streaming “millions” of songs — intermingled with up to 20,000 more, uploadable or song-matched from your personal library — for $10 a month ($8 a month if you sign up by the end of June). Chris Yerga, Google’s engineering director who steered this part of the keynote, explained that GPMAA would include common music streaming features like curated playlists, album recommendations and a build-your-own-radio-station feature.

Since the current streaming music market is dominated by the likes of Pandora and Spotify, both of which offer “freemium” models (free for a certain number of hours/features; beyond that, consumers pay), Google’s move is a bit unusual because its music library is similar to their libraries. Also, no ads. Just a paid subscription, with adaptive streaming sound quality. 

As Matt and several others noted, this doesn’t sound like a differentiated service. In fact, it actually sounds like a narrowly focused offering, targeting those that listen to a lot of music every month. 

So why do it? And what is its long game?
(You can bet a decent amount of money that this seeming head-scratcher of a move fits in with a larger strategy.)

Some thoughts on this topic come to us from James McQuivey, a Forrester analyst, who writes on his blog:

To be clear, music is one of the most powerful tools for engaging digital consumers because they use it every day and connect to it emotionally and socially. If Google failed to make a play for the music business, it would later regret it because its customers would remain forever tied to another digital service that could ultimately open a vulnerability in the company’s relationship with hundreds of millions of Android and Chrome users. The fear of ceding this permanent vulnerability to others explains why Google Play is adding All Access.

In fact, he thinks that Google should have created a first of its kind “media package” consisting of music, movies and video games. 

If only the company had reached beyond simply catching up to existing music players. Google’s PC, phone, and tablet based customer relationship puts it in a unique position to reach for a blended media subscription experience, something that expands the very notion of what media is and how people believe they’re paying for it. Imagine $24.99 a month for all-access music, Netflix-like streaming, two current movie downloads, and a lending library for paid games where you can “check out” one paid game for free for one week at a time. That would be a way to make Google Play media content do more than merely copy iTunes, Pandora, and Spotify, it would take media consumption beyond the reach of Netflix, Amazon, and anyone else. But evidently Google wasn’t ready to reach for the real prize.

That last sentence is the key, IMO: Google may have exactly those ambitions, but its not ready. Yet. 

The bundle itself makes a lot of sense in theory, at least to me. Why have consumers sign up with 4 different services, for their audio, video, movie and game needs, when they can just sign up with Google? (Or Amazon, for that matter, who may also presumably be thinking along those lines…) 

And if you look at the Google Play snapshot I included above or go to this site and click on Books, Magazines, etc., you may just be impressed at the choices that already exist. (Question – do you know that you can buy magazine subscriptions via Google now? How about bestsellers from the NYTimes’ list? No? Thought so). 

So if I were Google, while I develop Google Music, on a parallel track I would furiously work to increase my partnerships in Movies and TV (Priority #1: Add streaming video) and start work on that all-inclusive monthly media bundle.

If and when this happens, successfully, not counting its driverless car business and its cloud provider (ala Amazon EC2) aspirations, Google would have transformed itself into a twin-headed colossus: An ad-driven “free” online enabler or provider of all kinds of data/user-content driven services, and a non-ad-revenue driven consumer media distribution giant. 

What do you think? 

PS: A big caveat here is that consumers that are willing to pay for movies, those that are willing to pay for music and those that will pay for other kinds of media may all behave very differently and may (or may not) see the value in a bundled offering. Just because something sounds good in theory is no excuse to expect it to succeed in practice. So I would imagine that Google either already has models that tell it that bundled offerings may not succeed, which is why it hasn’t already offered one just using the libraries it has access to – or – its models are telling it that such a bundle will be a runaway success, and all it needs is access to vast content libraries and a reputation in this space, both of which it will build in the coming months and years. As they say, watch this space…

Tata’s $1.6B Corus Writeoff – The Backstory

In 2007, Tata Steel of India bought British steel maker, the Corus Group, for $12B. This was nearly $3B more than what it offered initially (the reason for the extra? a bidding war). Recently though, it announced a $1.6B write down in connection with the acquisition.

So why did the write-down occur more than 6 years after the acquisition?

A plausible reason is that it did take Tata Steel this time to realize that the full forecasted cost-side synergies, market power synergies, or both, were not going to materialize.

But The Economist, citing data that shows that 5 years is the average time across the world between “error and admission”, argues that these lags are often a result of companies’ internal politics – in the sense that write-downs are seen as (tacit?) admissions of mistakes on the part of a CEO, the board, or other executives. 

Specific to the Tata case, it makes two interesting observations:

So what does Tata’s write-down signify? Ratan Tata, the patriarch of the Tata group, retired as chairman of Tata Steel on December 28th. Until he left it was probably impossible to recognise that Corus, his biggest deal, was a flop.

His successor, Cyrus Mistry, has several underperforming businesses to deal with. Yet Mr Mistry has opted for a small write-off. Corus, analysts estimate, is worth a third or less of the $13 billion Tata paid for it, meaning the impairment should be much bigger. So this is no cathartic moment, of the kind that Hewlett-Packard and Rio Tinto sought. Instead of admitting defeat Mr Mistry probably hopes to sell all or part of Corus, or allow it partially to default on its debts (which are ring-fenced and not guaranteed by the Tata group).

Too big a write-off might suggest he would accept a low price, or cede control of Corus to the banks. Tata’s goodwill charge, then, tells you that the firm is not yet ready to walk away from its European arm. Given that this arm is losing about a billion dollars a year of free cashflow, that could be an expensive decision.

Anti-Dumping Laws – To Be Applied To Huawei and ZTE In Europe?

Traditionally, anti-”dumping” laws are used by countries to erect non-market barriers to imports.

Sometimes, when the importer’s prices are much lower than domestic producers’ prices, thanks to subsidies the importer may have received in their home country, one could argue that the application of these laws is justified. In other situations though, when these laws are used to turn importers into pawns in tit-for-tat political games between countries, their use is a bit harder to justify.

Consider Huawei and ZTE, two Chinese makers of telecom equipment.

Long targeted in the US and elsewhere for supposed connections to the Chinese military, they found the going easier in Europe. But not anymore, writes the Economist. 

They are accused not of being spies (though Europeans also worry about security) but of being too cheap. On May 15th the European Commission agreed “in principle” to investigate the dumping of and subsidies for Chinese mobile-network equipment, of which the EU imports just over €1 billion-worth ($1.3 billion) a year. Karel De Gucht, the EU’s trade commissioner, says he will not start yet, to allow time for negotiations. Huawei, which is privately owned, has long denied being a tool of the Chinese state. ZTE, which is listed, insists it is “in full conformity” with the rules of the World Trade Organisation.

Interestingly, European telecommunication equipment makers are not too enthused about this unusual move and are fretting about potential tit-for-tat retaliations that may affect them in the very large, and growing, Chinese market.

Nokia Siemens Networks (NSN)

says it opposes “any efforts to erect trade barriers [and has] urged the commission to refrain from taking such steps”. Ericsson has damned Mr De Gucht’s foray. “We see nothing beneficial coming out of this,” says Ulf Pehrsson, the company’s head of government and industry relations. “Any protectionist measures taken are bound to trigger other protectionist measures.”

With billions of dollars in bilateral trade at stake, this situation is sure to be monitored closely in different parts of Europe and China. 

Dan Loeb’s Sony Charm Offensive (Not Really)

Abenomics, according to Wikipedia, is a “portmanteau” of Abe and economics, and refers to the Japanese Prime Minister’s strategy for fixing Japan’s economy.

Results so far have been encouraging (at least according to Matt Yglesias). 

One of the ways in which this new strategy is/will working/work is by devaluing the Yen. This makes Japanese exports more competitive abroad. (Obviously this also makes imports more expensive, a problem for Japanese consumers, in the short term. In the long term, thanks to Abenomics, they become more affluent and should be able to buy all the Jimmy Choos they want. In theory.)

Perhaps because of Abenomics, or because of other reasons, this has attracted interest in Japanese companies from abroad. Not just in the form of (passive) investors that are content to buy stock in Japanese companies hoping for dividends and appreciation, but also activist investors that want to change the very nature and structure of the companies they own slices of. We speak, of course, of Mr Dan Loeb, of Third Point fame, a hedge fund that controls $13B in assets and now 6.3% of Sony.

Mr Loeb has a reputation for clearly and colorfully telling the CEOs of target companies why they need to (a) step down, or (b) break up a company or (c) change the management structure, or all of the above. 

As Michael J De La Merced writes on The NYT’s DealBook blog, 

Over the years, aficionados have collected his writings, from one executive’s “imminent involuntary extraction” to another’s “seemingly perpetual failure.”

Among his most famous epistles was his 2005 letter to the chief executive of Star Gas, a heating oil distributor. In 2,000 words, Mr. Loeb berated the official, Irik P. Sevin, for his “ineptitude” and for using the company as his “personal ‘honey pot.’ ”

“It is time for you to step down from your role as C.E.O. and director so that you can do what you do best: retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites,” he wrote.

Mr. Sevin resigned soon afterward.

For now though, as Michael writes, and others have noted, his letter, hand delivered to Sony’s CEO last Tuesday, politely “recommends” a few things that Sony could do, to unlock value (including offering 15-20% of the Entertainment unit as “subscription rights to current stockholders”).

A sample passage from the missive:

Since taking the helm as Chief Executive Officer in 2012, your stated commitment to reinvigorating the Company has given us hope that Sony is entering a new era. We applaud your frequent statements that “Sony Will Change”. We similarly support your statements that you are “fully committed to transforming this company” and that the Company “cannot afford to waste time” in making the necessary changes required to improve.

Sony stands at the crossroads of compelling corporate opportunity and massive Japanese economic reform. Under Prime Minister Abe’s leadership, Japan can regain its position as one of the world’s preeminent economic powerhouses and manufacturing engines.

For its part, Sony has responded equally politely, thanking Mr Loeb for his interest and ruling out any possibility of a full spin off (which, I don’t think is what he was talking about…unless Sony thinks that a partial offering puts it on a slippery slope to a complete break-up).

It will be interesting to see how this plays out over the next few months. Shareholders (or just traders?), who pushed the stock 10% higher the day the news was announced, seem to have great expectations. 

PS: You can enjoy Mr Loeb’s letter in its entirety on The NYT’s website. 

Is Tiffany’s The Kleenex Of Diamonds?

Does “Tiffany’s” connote an exclusive, luxury product? Or does it refer to the company Tiffany & Co.?

That, is at the heart of a lawsuit, writes Claire Suddath, on Bloomberg Businessweek.

One of the interesting excerpts from the article is around the “true value” of the diamonds sold in both stores:

Meanwhile, that Costco diamond might actually be worth more than its price tag. In 2005, Good Morning America, appraised both a Tiffany diamond and a Coscto diamond. As it turned out, the $16,600 Tiffany cut was 58 percent more expensive than its $10,500 value, while the $6,600 Costco version was actually 17 percent under its appraised value of $8,000. On the WeddingBee.com blog, several women admitted to having Costco rings and said that when they had them appraised, every single ring was worth more than they paid, sometimes by thousands of dollars.

Of course, a diamond is just a piece of coal subject to super high pressure and temperature. But if you still attach intrinsic value to it, perhaps a diamond from Costco is not such a bad deal after all.  

Groupon and Dynamically Priced Restaurant Meals: DOA?

Adam Lashinsky, of Fortune magazine, has an interesting piece on Groupon that is wrapped around his interview with Eric Levkofsky, one of Groupon’s founders and one of its two co-CEOs today. 

It makes for an interesting read. But what jumped out of it for me was this: 

What’s more, Groupon thinks it has a whole new approach to retail pricing. Jeff Holden, an Amazon veteran who heads product development for Groupon, suggests that Groupon can use its giant merchant and customer rolls to introduce dynamic pricing that mimics the success of airlines. It’s “completely ridiculous,” says Holden, that a restaurant would charge the same for a meal on an evening when the joint is empty than when it is jammed. Airlines figured this out a long time ago, and restaurants, using Groupon’s ability to target local customers, adjust their pricing opportunistically. “There’ll be a street price and a Groupon price,” says Holden.

Now, dynamic or “demand-based” pricing is one of those things that makes great sense on paper and some sense in practice.

Airlines use this of course, as the excerpt says. And scalping, for movie tickets and sporting events, is the market’s response to the lack of dynamic price setting on the part of authorized ticket sellers. In fact, in markets where electricity is dynamically priced, there is even some evidence that consumers respond in intended ways. So far, so good. 

But restaurants selling a steak for $64 on a Friday evening but dropping it to $32 on Mondays and Tuesdays?

In theory, based on basic laws of supply and demand, such a scheme should smooth out demand over the week and everyone comes out ahead. But in practice, I highly doubt if that’ll work because it collides with consumer behavior. 

We go to restaurants not because of the “utility value” of ready-to-eat fresh food (alone). Instead we go because we value the whole restaurant “experience”. We go because a crowded, hard to get into place signals quality and scarcity in our primal brains. And so many of us go towards the end of the week and over the weekends because we have the luxury (or the illusion, depends on how you see it) of time. 

What this means is that while many of us are OK with flying (for leisure) on off-peak days between inconvenient airports to save money, not many of us (a few might) are going to visit restaurants on off-peak days, at inconvenient times, just because the food is marked down by 50%. And that is even if the restaurants were to rashly sign up to gain a predictable discounter’s reputation.  

So how exactly does Groupon plan to change consumer behavior on such a massive scale?

And Today, The Economics of Musicals

Yesterday I wrote about the economics of shows in Las Vegas. Today, it’s the Musicals’ turn, by way of an excellent article (as is almost always the case) in The Economist. 

An excerpt: 

“You can’t make a living, but you can make a killing,” goes the Broadway adage. Musicals have odds like venture capital: only one in ten makes money, and two out of ten lose it all. The hits, however, are huge (see table). “Cats” probably made a 3,500% return for its initial investors. Since it debuted in London 27 years ago “The Phantom of the Opera”, a musical by Andrew Lloyd Webber, has grossed $5.6 billion worldwide, more than any film or television show.

…

The business today is not all song and dance, however. Margins are not what they were. Labour costs, especially in unionised New York, have risen, as has the price of theatre rentals, sets and costumes. David Ian, a British producer, reckons that putting on a musical is three times costlier than it was 20 years ago. “When I first started, if you had a hit show you’d expect to make your money back in 20-25 weeks,” he says. “Now you’d absolutely expect a year.” Producers are losing more of their profits to intermediaries. “If you want to make money off of theatre, open a ticketing company,” harrumphs one producer.

Musical-goers now expect more spectacle. “Spider-Man: Turn Off the Dark” is thought to have cost $60m, because actors fly across the stage. Other big musicals have seen their budgets scale skyscrapers, too. Opening a big musical on Broadway can cost $10m-15m, and then another $500,000 a week to run it.

PS: Agreed, a handful of musicals can make a lot more over their lifetime, compared to movies. Still, in exchange for what? Tens of millions of dollars in recurring costs and the “headache” of making sure it all goes well, all the time. I would probably take a “make it, then forget about it” movie anytime…

Cirque du Soleil And The Economics of Las Vegas Shows

A few months ago, when I was in Las Vegas, watching and enjoying yet another Cirque du Soleil show (isn’t that what we do in Vegas?), as always, the sheer scale of it all impressed me. And it made me wonder about the economics of these shows, beyond the $50 or $100 tickets (sometimes more) that revelers see, and enjoy buying. 

Thanks to Google, selected and interesting details of the underlying economics come to us today from Christopher Palmeri, by way of a 2004 Businessweek article (Yes, that is 2004 and this is 2013, but I imagine that while costs today are likely much higher, the fundamentals are probably still the same):

Like most other Cirque shows, Kà, which means “fire” in Japanese, has been a group process. The project began in 2000 when casino giant MGM Mirage told Cirque founder Guy Laliberté that it wanted a new attraction for the MGM Grand, which was launching an upgrade of its restaurant and entertainment offerings. The casino giant agreed to foot the entire bill for a $135 million, 1,900-seat theater built according to specs just for Kà. Some $30 million more in costumes and other production costs are split evenly between Cirque and MGM. So are the profits. Like the three other Cirque shows playing at MGM casinos in Las Vegas — Mystère, O, and Zumanity — this production will never tour, creating an only-in-Las Vegas mystique that is part of the draw — and which also assures MGM its steady cut.

…

Cirque executives are betting that Laliberté is right again and that folks will shell out big bucks to see Kà — seats range from $99 to $150. Cirque generates about 80% of its revenues at the box office; the rest from show-related merchandise, including custom clothing and $39 DVDs of Cirque touring productions such as Quidam and Varekai. And Cirque gets plenty of help from MGM Mirage, its deep-pocketed partner. MGM’s three existing Cirque shows bring more than two million visitors a year into its casinos. Only 20% of them actually stay at the casino hotel that hosts the show, but showgoers drop an average of $30 apiece on dinner or drinks at the property. Based on ticket and merchandise sales alone, MGM figures it earns a return on its total investment in the mid-teens, only slightly below the 18% return it shoots for with its casinos overall. And the Cirque shows expose the casinos to a desirable base of consumers. “They’re sophisticated, and they have high incomes,” says Robert Baldwin, president of MGM’s Mirage Resorts division.”

Those two paragraphs contain a number of interesting details:

a. The cost of producing shows in Vegas is extremely high. The cost for Ka alone, in 2004, was more than the cost of all 36 broadway musicals in 2003, for example (source: the article). 

b. With that kind of an investment, we have the potential for a classic “hold-up” situation, and the attendant problems. 

c. But the exclusivity (to Vegas, and I am going to guess, the host Casino) clause significantly weakens the hold-up problem. The full contract and its various Ts and Cs should make for some boring but fascinating reading.  

d. The shows are nearly as profitable to the Casino owners as the casinos themselves. 

e. Casinos use the shows to attract a different demographic vs the one that comes in just for betting and gaming. This, in terms of marketing, is brilliant – the ability to use gaming floors and sophisticated shows in the same space, to target two very different sets of customers, and still making similar returns on both. 

Now go read the rest of my blog.

The Machine Will Fit You Now – Retail Adventures

When you are ready to spend $30, $50 or more on a shirt, a pair of jeans or even a T-Shirt, retailers want to make sure that you can quickly and easily find something that fits. Because, when they do that, it increases the probability of you buying something there and it probably prevents you from returning ill-fitting clothes later. 

Enter the “Me-Ality” machine. 

As Abha Bhattarai wrote on The Washington Post last month, it is

A futuristic-looking machine that uses radio waves to measure 200,000 points along your body. Ten seconds later, the system uses that data to spit out a list of jeans, sorted by color, style, fit and brand…

…

Me-Ality representatives say the machine uses the same technology as airport body scanners. Customers are asked to take off their shoes and hold their arms away from their bodies while a wand-like contraption circles around them twice.

“We want people to feel comfortable,” said Ahmed Aslam, regional manager for Me-Ality. “We don’t want them to feel like they’re at an airport.”

Aslam would not disclose how much each machine costs, but reports show that similar airport body scanners cost about $180,000. 

At that price, not every store will be able to afford them of course (so will large malls perhaps offer them as a service for small tenant-stores? Or, will Me-Ality offer the device on a lease basis?). Those that do may be able to differentiate themselves and win over more shoppers.

PS: Interestingly, from what I can tell, the machine’s recommendations are tied to sizes in specific brands (Ex: “Size 6, Lucky Jeans”). What this means is that shoppers could presumably get their “fit data” and then shop elsewhere (online?) based on price…which hurts the retailer whose machine the shopper used, but not the clothing brand itself. 

Purchasing “Intent” and Behavior = Higher Prices?

Sometimes ideas that come out of research offer plenty of food for thought – both the good kind and the not so good kind. 

Consider an excerpt from a piece by Tom Ryan on RetailWire:

Technology is increasingly available that enables retailers to alter prices on certain products based on customers’ intentions to purchase or not purchase other products. Researchers at the University of Arkansas label the practice “sequential pricing” and claim it can be highly profitable.

According to a new study from the university, sequential pricing occurs when a seller, aided by technology, is able to set the price for a subsequent product based on a customer’s interest in or preference for an initial product. 

They are not talking about reducing the price on something based on what the shopper just bought, or even added, to his or her shopping cart. Au contraire, they are positing that “sequential pricing” can be used to increase prices, resulting in higher profits. 

That’s great in theory – but can you imagine the consumer firestorm that will be set off when, say, Amazon (who I don’t think will do this, just to be clear), raises the price on a pair of jeans because you added a matching pair of shoes or a shirt to your shopping cart?

OK, So Foxconn IS Going To Launch Its Own Brands

Back in February, when Foxconn announced a hiring freeze, sage pundits (ahem…) prophesied that this could actually foreshadow Foxconn-branded electronics. And that, in doing so, it would just be the latest contract manufacturer to want to move up the value chain. 

Well, guess what?

Foxconn appears to have already tested the waters with low-priced 60-inch TVs (back in November 2012?!!). And, writes Lin Yang on The New York Times (definitely a NYT thing going on today on this blog), it may be getting ready to make a much more aggressive push on this front. 

While Lin attributes this to Foxconn wanting to “move out of Apple’s shadow”, I suspect, and the comments from a Foxconn VP in the article echo this, that this is really more of a increased-value-capture-via-vertical-integration strategy. And the first step in that direction was a 9.9% investment in Japan’s Sharp corporation, in exchange for USD $840m. 

But, as Lin notes, the global demand for TVs – LCD and non-LCD – is declining. And this may be a problem for Foxconn. This, despite the fact that Foxconn may be mitigating the brand-building problem, at least for now, by selling TVs in China under the RadioShack brand and in the US under the Vizio brand. This, also despite the creative financing strategies it is using to both get its TVs into consumers homes more easily and not dissing its upstream contract-manufacture partners. 

Still, this is a long-game. Mr Gou, Foxconn’s CEO, is tenacious and quite shrewd, as any number of profiles have described him. Ten years ago, most Americans didn’t even know who LG and Samsung were, leave alone buying their appliances and electronics. And it wouldn’t surprise me if we are buying Foxconn branded electronics a decade from now.  

Boeing and Airbus Turn To Model “Extensions” To Minimize Risk

Risk mitigation is in the air. 

The latest industry (after the movie industry) to think about ways to mitigate risk is the ever-wary-of-risk Airline industry (don’t blame the industry for that attitude, blame super high fixed and just high variable, costs).

Writes Christopher Drew on The New York Times, 

Boeing’s announcement last week that it had begun pitching airlines on an enhanced version of its 777 jet, rather than a whole new plane, underscores how the aerospace industry is pulling back from the risky bets that have led to costly, and humbling, delays on other planes, like Boeing’s 787 Dreamliner.

Instead of following the Dreamliner template, in which it sought to create a revolutionary plane brimming with new technology, Boeing is now seeking a safer, more incremental path. It plans to add the most crucial new technologies, like lightweight plastic composite wings and more fuel-efficient engines, to the 777, while avoiding the time and expense of designing a replacement from scratch.

To be clear, even extending existing models by upgrading various parts (the wings, the engines, other systems) iteratively is not without financial risk either. Unlike generic lego blocks that easily snap onto each other, fuselages for example are designed to support a certain set of systems and materials. So when new materials are used, some major new design work may be required – just not as much as is needed for a brand new plane though. 

PS: And these concerns are not limited to Boeing by any means. The article also includes this memorable quote:

“Risk, risk, risk,” Tom Enders, the chief of Airbus’s parent company, European Aeronautic Defense and Space, said of Boeing’s approach to the Dreamliner.

Using Data To Optimize A Movie’s Box Office Success

The Interwebs are abuzz today with the news that a small new breed of Hollywood’s “script doctors” is rising – one that uses algorithms, in addition to, or instead of, painstakingly accumulated and honed skills, to tweak and optimize movie scripts for box office success.

Brooks Barnes, writing in The New York Times, describes this phenomenon. One of the more interesting excerpts mentions the most prominent practitioner of the art of the analytics:

A chain-smoking former statistics professor named Vinny Bruzzese — “the reigning mad scientist of Hollywood,” in the words of one studio customer — has started to aggressively pitch a service he calls script evaluation. For as much as $20,000 per script, Mr. Bruzzese and a team of analysts compare the story structure and genre of a draft script with those of released movies, looking for clues to box-office success. His company, Worldwide Motion Picture Group, also digs into an extensive database of focus group results for similar films and surveys 1,500 potential moviegoers. What do you like? What should be changed?

“Demons in horror movies can target people or be summoned,” Mr. Bruzzese said in a gravelly voice, by way of example. “If it’s a targeting demon, you are likely to have much higher opening-weekend sales than if it’s summoned. So get rid of that Ouija Board scene.”

Bowling scenes tend to pop up in films that fizzle, Mr. Bruzzese, 39, continued. Therefore it is statistically unwise to include one in your script. “A cursed superhero never sells as well as a guardian superhero,” one like Superman who acts as a protector, he added.

From a studio’s perspective (and the perspective of producers and other investors), this is yet another way to minimize risk. Given that movie budgets keep rising, they can certainly use all the help they can get. Disney, with its ~ $250m John Carter bomb, for example, might be wishing that it had used an algorithm or two. 

But at the same time, if movies within the same genre have increasingly similar elements and twists and turns, they risk turning off their audiences – which would defeat the purpose of using these hi-tech script tweakers in the first place. So are the masses going to catch on and punish these “doctored” scripts? Or will they blissfully keep working on their over-priced popcorn and soda while they sit back and take it all in?

With Billions At Stake, Hollywood Localizes Its Products For China

What do you do if you want a slice of a $2B movie market (expected to grow to $5B by 2015), when that market lets in just 34 “foreign” movies, every year?

You edit your movies in ways both small and big, to satisfy a select group of 37 capricious censors in that country, who also enjoy the power to arbitrarily yank a movie just hours before its local premiere.

The result, as William Wan writes on The Washington Post, is this, in the case of Iron Man 3:

Even the nerdiest comic book fan would be surprised to learn what cutting-edge technology secretly fuels “Iron Man’s” action-packed heroics: a milk-grain drink called Gu Li Duo from China’s Inner Mongolia.

That’s according to the Chinese version of the new blockbuster, which was released here complete with other surprising (read: odd and at times outright nonsensical) footage inserted by producers to win the favor of Chinese officials.

But when the reward for these advanced theatrics is a $64m haul in just 5 days (and who knows how much more in the next few weeks), expect more “product localization”, not less. 

Want Quality Online Content? Pay Up.

The Financial Times reported earlier this week that some YouTube channels may be going the paid subscription route soon.

The obvious question though is, will YouTube viewers pony up? 

That’s important because, while the amounts in question – $1.99, OK, $2 a month, $3 or $4 – don’t represent a lot of money in absolute terms on a monthly basis, YouTube customers aren’t used to paying for content and any attempts at changing that behavior may only be marginally effective. A company called J. C. Penney recently and famously found out how set consumers are in their ways…

At the same time, companies like Google are not dilettantes. They have enormous amounts of historical and research data, and some pretty clever models that must be telling them what their chances of success are with this move. Otherwise why would they bother going to the trouble of launching these new channels in the first place? We’ll find out in a few months just how good those models and their underlying assumptions are. 

Anyway, let me get back to the immutable truth that made me write this post: Quality costs money. Repeat after me, if you’re not already convinced. Quality. Costs. Money. And nowhere is this truer, than online. 

Consider these companies or services (what’s the difference if you’re a consumer?): Facebook, Twitter, Google Search, Gmail and YouTube.

The business model for the first four is based on content created by users, growth via network effects and various creative (and mostly ad-driven) monetization techniques. And that was true of YouTube also, as long as its content consisted mostly of user-made videos of babies, cats and exploding cans of Mountain Dew that didn’t cost much more than a few minutes of someone’s time. 

However, content on YouTube has been evolving over the last couple of years. Tens of YouTube channels have been drawing millions, or even tens of millions of viewers on a daily basis. In fact, one of the many things that the 290m+ views for Gangnam Style on YouTube illustrate is that quality entertainment draws immense audience interest online (or offline, for that matter). 

But…what good are millions of viewers if you can’t capture some portion of the value you are creating for them – and using those proceeds to in turn pay your employees, pay your bills and make a respectable amount of profits?

The Internet does many things. It dramatically lowers your distribution costs. It also significantly weakens the distributors and allows content creators to more directly connect with their consumers. Further, it helps with the content discovery issue. And finally, it meets the needs of the long-tail. 

What it doesn’t do, and cannot do, is to reduce all the other costs associated with creating quality content (original series, anyone?) - actors, writers, editors, AV crews, etc. This is as true of video entertainment as it is of quality journalism and writing, as many magazines and newspapers have also been discovering over the last year or two. 

Unfortunately, ad revenue can only subsidize that content to a certain degree. That’s because the online content market is highly fragmented (blame the long-tail) and the cost for online ads is steadily dropping as the number of online destinations increases much faster than the online population. 

Brian Robbins, the man behind AwesomenessTV, of the Dreamworks acquisition fame, admits as much:

“If we were building a business today solely on advertising revenue from YouTube, I’m not sure I’d be so bullish,” he said. “Eventually, yes. But the opportunity to create IP that’s valuable and that could be valuable downstream in all the other platforms that exist, that’s a big revenue stream.”

[As an aside, I couldn't find a single article or post on AwesomenessTV's profitability. Not saying it wasn't profitable, but this little detail is strangely lacking in all the breathless articles describing its acquisition.]

So with neither broadcast TV’s re-transmission fees nor million-dollar TV-network style ads underwriting quality content, what’s left?

Subscription fees. 

Don’t want to, or can’t pay? There’s always LOLcats on YouTube. 

The Man Behind Dish’s Bid For Sprint

Dish Network made waves a couple of weeks ago with its $25.5B bid for Sprint (against Softbank’s $20.1B bid from two months ago).

While Dish’s founder and CEO, Charlie Ergen seems to directly manage and control various aspects of Dish’s strategy, and operations, the brains behind Dish’s wireless strategy though seems to be Tom Cullen. 

As someone that’s always interested in reading about executives with strong powers of persuasion and influence, I found this portrait of Mr Cullen, written by Liana Baker on Reuters, to be a good read. 

An excerpt, if you are in a rush, about how he is different from his boss and why that helps:

In some ways he is the opposite of his boss, despite their close relationship.

Ergen brings his own lunch, while Cullen buys a meal at the cafeteria and eats at his desk. As much as Cullen favors the National Football League, Ergen is more rabid about college basketball. Cullen has always worn a sports jacket to work while Ergen prefers a more casual look of a sweater and button-down shirt.

While Ergen has been involved in countless corporate disputes that end up in court, Cullen is seen as being more open to understanding the other side of the negotiating table.

“He’s a natural bridge builder, that’s why he’s done well in M&A,” said one person who used to work for him at another company and was not authorized to speak to the media.

Another person who worked with Cullen at Dish said of his negotiating skills, “Tom can help put into words that Charlie can’t. He might communicate more evenly whereas Charlie is speaking in his own personal interests to what he wants to gain.”

PS: The extra $5.4B that Dish is offering may or may not be enough to hand it a victory, it appears. On the one hand, you have Softbank’s President Masayoshi Son who thinks that his bid is still superior to Dish’s. And on the other, curiously, Intel’s CEO wrote to the FCC claiming that it was better for consumers if Softbank won control of Sprint. Not clear yet what the shareholders think and what the FCC’s role in swinging its approval one way or the other, is going to be. 

Sensors In Pills Bring The Future Closer

A big problem with many patients is that they forget to take their medications on a timely basis. Or they take the wrong dosage. Or they may experience side effects and other problems that are not immediately apparent to the patient (or the doctor).

Proteus, a company out of Redwood City, CA, aims to fix all of that with its “ingestible sensor”-based pills. [The picture above explains how it works.] The FDA has already approved this “technology” and as an indicator that this has legs, Oracle and others just invested $62.5m yesterday.

Very innovative, and likely to make its way through the world’s healthcare system in a few years. I think. 

Tax Distortions, Apple and Its Bonds

This week, for a change, the world wasn’t obsessing over Apple’s stock. Instead, it was obsessing over the money Apple wanted to borrow from investors. 

And that obsession stemmed not just from the size of the bond offering (though that in itself was a record high $17B), but also the fact that, with $145B in cash, Apple really had no reason to borrow money to give some back to its’ shareholders. 

So why did it do it? Very low interest rates, and taxes. 

The former, colloquially called “cheap money”, has been fueling share buybacks and a lot of debt-financed M&A activity of late. Some think that we are in dangerous territory there though. 

The latter, is simpler. Companies face as much as 35% in taxes if and when they repatriate the cash they earned and now hold, abroad. So why bring back tens of billions of dollars and then pay billions of dollars in taxes in the process when Apple can quite easily raise the money here for super low interest rates and get a tax write-off on that interest? 

The Economist, yet again, frames the issue with this strategy more clearly

But think of it from the point of view of the hard-working American taxpayer. Apple’s money will still sit overseas and not be invested at home to create jobs. Apple’s tax bill will fall, as it offsets the interest payments against its profits. The buy-back will probably push up the share price in the short term*, boosting the value of executive options; profits from those options will probably be taxed at the long-term capital gains tax rate of 15%, lower than the rate many workers pay. Organising a bond issue, rather than using a company’s own cash, incurs costs in the form of fees to bankers on Wall Street; the same bankers taxpayers helped support five years ago.

…the whole deal is linked to tax distortions; the treatment of repatriated cash, debt versus equity and capital gains versus income. The ideal tax system, as we have argued many times, is neutral between sources of income. The tax deductibility of interest played its part in creating this mess, both in the corporate and mortgage markets. Why should the taxpayer want to encourage higher leverage, when high leverage is the root of financial crises?

Yet another reason the American tax code and some of the complicated incentives therein must be changed and simplified – in a way that benefits both companies and the taxpayer. 

YouTube, Others Seek To Capture TV Ad Dollars

That many young viewers and perhaps some older viewers are watching their laptops and SmartPhones instead of TVs, is well known. But in the $64B US TV Ad market, the ad spend on YouTube and others (AOL, Yahoo, Hulu, et al) doesn’t seem to reflect the number of online viewers. 

This year, Google and the others are making a concerted attempt at changing that, writes Michael Learmonth, in a fascinating article on AdAge. 

A couple of things caught my eyes as I was reading the article.

1. While online TV is often edgy and can show and discuss what can’t be easily shown on Broadcast and Cable TV, a lot of ad dollars are still spent on family audiences. To this end, 

In a further bid to lure conservative TV advertisers, YouTube signed a deal with the Alliance for Family Entertainment, whose members include Unilever, Walmart and Subway, to create a family-friendly package across 32 channels on YouTube. Commitments from the members of AFE represent one of the bigger upfront deals YouTube is doing this year.

2. Google, with 12,000 sales people targeting TV advertisers, is becoming a force to reckon with, more so than in the past. Consider one way in which it is fighting for TV ad dollars:

This year, they’ve got a secret weapon designed to attack TV’s biggest weakness: the expense of reaching light TV viewers. National TV buys can pretty easily reach heavy TV users, but advertisers have to spend more on reach and frequency to find the last few when they happen to tune in.

This year, all of Google’s salespeople will be armed with what they call an “Extra Reach Tool” on their laptops to show TV advertisers that those light TV viewers can be reached for less money on YouTube. “The tool sits on a laptop and ingests Nielsen TV data, mixes in YouTube and produces a customized report,” Mr. Watson said. “More than half of campaigns would benefit from a 16% shift of TV to YouTube.”

Legacy TV networks and broadcasters may want to at least start thinking about how to pre-empt the Google juggernaut. 

Demolishing The “Rational Consumer” Myth

As consumers, we like to think that we are rational beings that carefully, and instantly, perform cost-benefit analyses in our heads every time we have  serious decisions to take. 

So we have consumers who, when they need to buy, say, a new digital camera for $200,  spend three hours reading 10-15 reviews on Amazon and CNET, asking their Facebook and Twitter friends for their recommendations and possibly soliciting advice from colleagues at the water cooler. 

If you momentarily overlook the opportunity cost of those three hours, all of that seems like perfectly rational behavior.

Even if they are not particularly price sensitive, those consumers expect to get a certain amount of utility from that purchase and consequently want to make sure that they can do everything they can pre-purchase, to minimize remorse and maximize satisfaction. 

But say it’s Friday evening and the same group of consumers is thinking about a night on the town. 

There’s this hot new club that is very difficult to get into. Celebrities are known to stop by every weekend. Many that they know have stood outside for hours, but couldn’t get in. The good news though is that a friend of a friend has an acquaintance that can get them into the club. The catch? They are still on the hook for the cover charge ($100) and their 4-person group must get table service for $1200. Before the evening is over, each of them is going to be poorer by at least $400, maybe $600.

So how long do they spend on deciding whether they are “in or out”, in this case? Remember that it’s a situation that involves a decidedly one-time experience which will likely be “washed over” by similar expensive experiences in the future (unlike the digital camera that is going to look them in the face day after day).

The problem with classic economics is that it assumes that consumers always behave like those in the first example above, whereas, in reality, they are often like the ones in the second one. 

The Economist makes the point much more eloquently of course, as it always does: 

“SOVEREIGN in tastes, steely-eyed and point-on in perception of risk, and relentless in maximisation of happiness.” This was Daniel McFadden’s memorable summation, in 2006, of the idea of Everyman held by economists. That this description is unlike any real person was Mr McFadden’s point.

The Nobel prizewinning economist at the University of California, Berkeley, wryly termed homo economicus “a rare species”. In his latest paper* he outlines a “new science of pleasure”, in which he argues that economics should draw much more heavily on fields such as psychology, neuroscience and anthropology. He wants economists to accept that evidence from other disciplines does not just explain those bits of behaviour that do not fit the standard models. Rather, what economists consider anomalous is the norm. Homo economicus, not his fallible counterpart, is the oddity.

While the full article I excerpted from, above, focuses on the theory of consumer choice specifically, the sample human biases discussed in there strike some powerful blows at our purported rationality.  

Students of marketing (and human psychology…for, what is marketing but applied psychology?) will find it worthy of their time. 

PS: For another fascinating example of human psychology affecting consumer behavior, read this HBR blog post. 

[* “The New Science of Pleasure”, NBER Working Paper No. 18687, February 2013]

“India Rising” – Aberration or Inevitable?

Over the last several years, while some parts of India have seen extensive development and life for the middle class in selected pockets has gotten largely better, hundreds of millions of Indians have been left behind.

And this manifests itself today as a slowdown in GDP growth (but note: that is a slowdown in the rate at which GDP is growing, not a decline in GDP itself).

Raghuram Rajan, a University of Chicago Finance Professor and the chief economic adviser in India’s finance ministry, writing on a website called Project-Syndicate, attributes this to multiple reasons.

First, India probably was not fully prepared for its rapid growth in the years before the global financial crisis. For example, new factories and mines require land. But land is often held by small farmers or inhabited by tribal groups, who have neither clear and clean title nor the information and capability to deal on equal terms with a developer or corporate acquirer. Not surprisingly, farmers and tribal groups often felt exploited as savvy buyers purchased their land for a pittance and resold it for a fortune. And the compensation that poor farmers did receive did not go very far; having sold their primary means of earning income, they then faced a steep rise in the local cost of living, owing to development.

In short, strong growth tests economic institutions’ capacity to cope, and India’s were found lacking. Its land titling was fragmented, the laws governing land acquisition were archaic, and the process of rezoning land for industrial use was non-
transparent.
 

The rest of the highly readable article discusses other reasons, and remedies. 

The Effect of Leaks On Mergers and Acquisitions

Rare is the big M&A announcement that doesn’t sneak into the news in the form of a leak.

“Unnamed sources”, “sources close to the deal” and “persons not authorized to talk to the media” are forever engaged in leaking key aspects of deals. Sometimes, they tell us that a deal is imminent. Sometimes they inform us about talks that are early stages. And once in a while, they helpfully tell us that talks have collapsed. 

But what happens to a deal that is in the works, when news leaks?

Andrew Ross Sorkin, writing in the DealBook, on NYT, cites a Cass Business School study that examined 4,000 deals over a 8 year period (2004 – 2012). Some of the more interesting excerpts:

…buyers of companies involved in deals that leaked before the announcement paid a premium averaging 18 percentage points more than in deals that did not leak.

<snip>

The Cass study also reflected a distinct downside to deal-leaking: a deal’s chances of completion drop significantly. Leaked deals were 9 percent less likely to close than those kept under wraps and took, on average, a week longer to complete, perhaps given the added commotion and complexity created by the leak. (The study did not look at what happened to deals that were leaked but never reached the point of being announced.)

And, he writes, leaks have been around for a long time and provides this anecdote:

Bryan Burrough, the author of “Barbarians at the Gate,” described how Henry Kravis reacted in 1986 when news that he was planning to bid for RJR Nabisco leaked, and he made a phone call to a banker he was convinced was responsible.

“I can’t believe you did this to me,” Mr. Kravis reportedly told Jeff Beck of Drexel Burnham Lambert. 

“I didn’t do it! I didn’t do it! You’ve got to believe me! It was Wasserstein! It had to be Wasserstein!” Beck shot back, referring to Bruce Wasserstein. Years before Mr. Wasserstein died, he insisted to me that he wasn’t behind that leak, but he did say that leaking was part of every deal maker’s arsenal in the 1980s. I can confirm that Mr. Wasserstein never leaked to me.

But the question is, other than a case of “loose lips” (which Andrew says in his article are the primary reason behind most of the leaks that he’s encountered as a reporter in the financial world), are there strategic reasons why leaks occur in the first place? Again, Andrew cites the Cass study:

“Leaks from the seller are seen primarily as a way to improve the target’s bargaining power,” for example. The authors added that “leaks from a buyer are seen as a tool to scupper a deal which has not progressed as originally hoped.” The authors also said that third parties, not involved in a deal but aware of it, are “seen as a source of leaks designed to sabotage a deal.” Yet, the authors also said that “some M.&A. practitioners also feel that leaks can be used to help drive a deal through when one side is delaying.”

With M&A activity heating up, thanks in some part to record low debt costs, I guess we can expect more unnamed sources to be speaking up in the future.