Anti-Trust vs Cable Industry Consolidation

Anti-trust regulators in the US typically do a pretty good job (IMO) when it comes to preventing “excessive” industry consolidation and concentration of power – things that would otherwise inhibit “healthy” competition and hurt consumers.

So what then to make of Charter or Comcast’s chances of buying Time Warner Cable?

But David Gelles, at the NYT’s DealBook thinks there are two good reasons why either company might be allowed to proceed with the acquisition:

Antitrust regulators are understandably skeptical about allowing big companies to get bigger. However, there are reasons why Charter, or even Comcast, might be able to prevail in its pursuit of Time Warner Cable.

Cable operators make two arguments in favor of consolidation. The first is that broadcast and cable networks are demanding ever higher fees for their programming. Cable operators are being forced to pay up, and the consumer is getting hit with higher cable bills. A bigger company would potentially have more bargaining power, and cable operators argue that they will be have more leverage with the programmers, allowing them to keep costs down and save consumers money.

Perhaps. But a more compelling argument made by the cable operators is that while there are a few big companies that dominate the market, they have very little overlap when it comes to customers. In most markets, consumers don’t have a choice between Comcast, Time Warner Cable or Charter, or even two of those three. In fact, most big markets have only one of these available, which might compete against other telecommunications firms, like Verizon and AT&T, and the satellite operators DirecTV and Dish Network.

#2 is fine, but as a consumer, it will be really nice if we actually see the beneficial effects of argument #1 post-acquisition. 

Fashion Icons = IPO-Driven Multi-Billion Dollar Brands

Ralph Lauren (market cap = $15.2B), to begin with, and Michael Kors (market cap = $15.3B. note that it’s ~ $100m more than RL), more recently, are inspiring many new eponymous fashion labels to go public and pull in billions of dollars from investors, writes Peter Lattman, on The NYT’s DealBook.

With his red-carpet gowns, lush cashmere sweaters and jet-set shoulder totes, Michael Kors has influenced fellow designers across the globe.

These days, though, Mr. Kors is inspiring the fashion world not only with his “affordable luxury” merchandise, but also with the extraordinary success of his initial public offering nearly two years ago.

On Wednesday, Marc Jacobs announced his departure from Louis Vuitton to focus on an I.P.O. of his own brand. Last year, Diane von Furstenberg set off speculation about a stock offering when she hired a top-level fashion executive in a push to expand her business. And while Tory Burch has denied any near-term interest in an I.P.O, there are persistent whispers of a Wall Street debut.

Call it the Michael Kors effect.

To some extent, that makes sense. For, if, at some level, fashionable clothes are really not that different from each other (fashionistas, you can stop gasping now), and a high profile celebrity fashion designer has both the design chops and cachet to pull in shoppers repeatedly (no one-trip ponies here), then investors and bankers might be OK with eschewing traditional fears of being overly exposed to a non-diversified set of revenue streams.

The only thing I wonder though is about exposure – or too much of it, to be more precise.

Publicly traded companies, fairly or unfairly, have to show strong quarterly and annual growth numbers to Wall St, lest the stock be punished. And in order to do that, they can either wring more out of their existing customers or expand – geographically and/or across categories. But they need to do it in such a way that the increased visibility doesn’t damage perceived exclusivity, cachet and pricing power (in that order).

That, could be a delicate dance though, after a point. 

American and US Air – Not Destined To Be Together?

After United+Continental and Southwest+AirTran – not to mention Delta+Northwest – everyone thought American+US Air was a fait accompli (because mergers are a solution to the airline industry’s historic “wretchedness problem“). 

No, said the DOJ today and filed a lawsuit to block it. 

Interestingly, according to an NYT article, it cited those past mergers as the reason why it thought this one, which would have created the world’s largest airline, shouldn’t be allowed. Those transactions, it contends,  led to higher prices and fewer choices for air travelers – something it says it can’t allow yet again.

And according to a blog post on The WSJ’s CFO section, not only is the DOJ not bluffing, but its case might be built on some pretty damning evidence:

Experts in antitrust law tell Reuters that the Justice Department lawsuit signals a sincere intention to block the deal, not just a negotiating ploy to get concessions before possible approval. Jonathan Lewis, an antitrust lawyer in Washington, called the suit “very powerful” because it quotes company documents and executives anticipating higher prices through consolidation. “If there were going to be a settlement, it probably would have happened already.”

As the WSJ points out, the Justice Department built its lawsuit largely on company executives’ own past comments. The 56-page court submission is full of remarks company officials allegedly made in settings from industry conferences to internal publications, the Journal says. The lawsuit quotes US Airways President Scott Kirby as saying that industry consolidation has allowed airlines to increase fares and charge fees for services like checked baggage. And the department said a US Airways presentation last summer observed that fewer airline competitors had allowed the industry to “reap the benefits.”

But what about the financial health of these airlines should they stay separate?

American, for one, will take a hit – though not a fatal one, says this excerpt from another WSJ article

A scuttled merger would prolong AMR’s stay in Chapter 11, perhaps until late 2014, said another person close to the process. The company would have to fashion a new reorganization plan to emerge from court protection as an independent company, revise its financial projections and negotiate anew with bondholders, unions and other creditors—all of which would take considerable time.

As for US Air, it’s stock took a 13% hit following the news, as was to be expected.

But very interestingly, other airlines’ stocks suffered too because a resurgent US Air might actually do things that are detrimental to the industry:

Investors worried that if American were forced to remain independent, it might try to bulk up to the size of merged behemoths Delta Air Lines Inc. and United Continental Holdings Inc. That could cause industry capacity to grow and earnings prospects to diminish, according to J.P. Morgan Chase & Co.

For now, both airlines are putting up a brave face, vowing to fight the DOJ and promising to complete the merger before the year.

Who’s going to prevail? My money is on the DOJ.

What Ails Infosys?

Recently, Infosys, one of India’s IT outsourcing giants released some weak results. The stock took a massive hit. In contrast, TCS, another Indian IT outsourcing giant, released great results a couple of days later.

So what’s the problem with Infosys, assuming that both are fundamentally in the same business – IT labor arbitrage between the developed world and the developing world?

According to The Economist

Infosys’s central dilemma is that its prices are too high compared with its peers’, and hence its best-in-class margins are unsustainable. The firm has now admitted that it has struggled to balance the short-term preservation of profits with long-term growth. Its hesitance has put it in a sort of Catch-22. It is reluctant to have a push for growth for fear of diluting its margins. Yet the cloudier the outlook for sales becomes, the harder it is to control efficiently the costs of ramping up recruitment and investment, thereby cutting into the margins the firm was trying to preserve.

The firm now says it will stop letting profit-margin targets get in the way of winning contracts. 

In other words, it is willing to trade margins for volume. 

On the face of it, such a strategy makes sense. IT services have come to define commodotization. So with a large number of firms – both Indian, and India-based western ones – chasing the same clients and offering the same types of services, pricing power is obviously weakened and volume is the name of the game. 

So why did Infosys think that customers would pay it higher prices? Any Infosys readers care to comment?

Why Did Starbucks Cut Coffee Prices?

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Recently, Starbucks said that it would reduce the price of its (bagged) coffee, sold in grocery stores, by 10%.

The simple explanation is that coffee prices, as reflected in Arabica coffee futures, are quite low and this enables them to “pass on the savings” to customers. A more ambitious explanation is that this makes them more competitive with Folger’s and Maxwell House and others that sell bagged coffee in grocery stores also.

But the best explanation, in my opinion, comes to us by way of an article on Businessweek by Kyle Stock and includes insights from Rita McGrath, a Professor of Strategy, at Columbia Business School.

Here’s the summary, presented by yours truly, with some additional commentary (since just clicking on that article is obviously hard):

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Novartis, India, Patents and Gleevec

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On the face of it, yesterday’s Indian Supreme Court decision denying Swiss pharma-giant Novartis patent protection for its’ leukemia drug, Glivec (“Gleevec” in the US), seems unfair.

Since intellectual property protection is generally a suggestion in the developing world, it seems like this is yet another example of countries in that part of the world not respecting IP rights of foreign (and western) countries.

Novartis, of course, is disappointed with the verdict.

According to a statement from Novartis, “The primary concern of this case was with India’s growing non-recognition of intellectual property rights that sustain research and development for innovative medicines.” And Ranjit Shahani, vice-chairman and managing director of Novartis India, told Indian newspaper The Hindu that “No global player has invested in R&D here, and it is unlikely to happen given the atmosphere. India is a developing country and needs to encourage innovation. The verdict is not very encouraging and shows that the ecosystem to encourage innovation does not exist here.”

Pharma industry groups in the US are also unhappy (NYT article by Gardiner Harris and Katie Thomas):

“It really is in our view another example of what I would characterize as a deteriorating innovation environment in India,” said Chip Davis, the executive vice president of advocacy at the Pharmaceutical Research and Manufacturers of America, the industry trade group. “The Indian government and the Indian courts have come down on the side that doesn’t recognize the value of innovation and the value of strong intellectual property, which we believe is essential.” 

Equally predictably, the other side and various “patient groups” across the world are happy with the decision.

So what is really going on and why did India’s Supreme Court rule the way it did?

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