Dave Friedman's Soul of Wit

Middlebrow and Urbanity

Civic leaders of various large cities claim that Wal-Mart is too middlebrow and therefore has no place in cities:

Wal-Mart is used to opposition, but these antagonists are tougher and better organized than earlier breeds. In the Northeast and America's big urban centers, they've augmented a traditional anti-Wal-Mart message with something more potent: an appeal to urban cultural values. Here, Wal-Mart is a metaphor for the worst of middlebrow America.

After missing out in Boston, the company lost a two-year fight to open in Leominster, in central Massachusetts. Some of the same antagonists are now organizing to block Wal-Mart in adjacent Lancaster.

Officials in Miami prevented Wal-Mart from locating a store amid a 55-acre midtown redevelopment project, on the grounds that its sprawling, suburban aesthetics and low-end appeal didn't conform to the city's architectural and social vision for the project.

"I feel bad for Wal-Mart, but that's their image," says Johnny Winton, the former Miami commissioner who helped plan the project.

Now, there is some truth here: Wal Mart is middlebrow, decidedly and avowedly so. They pursue middlebrow with a passion. And, it is true that, in cities such as Boston, Miami, and New York, there is a relatively large population of people too wealthy* to shop at Wal Mart.

But so what? Why does it follow from any of this that (1) the poorer residents of the city would not benefit from having access to a cheap retailer, (2) that Wal Mart should not make its presence known, and, if concerns about its middlebrow-ness turn out to be true, lose money from its operations in the city?

The notion that there is a "correct" retailer and an "incorrect" retailer for a city is nothing less than class snobbery, of the very worst sort, because, this type of class distinction directly affects the pocketbooks of those least able to afford it.

There certainly is something to be said for the wanton nature of Wal Mart's stores. They are poorly laid out, hard to navigate, attract low income people, sell crappy products, have annoying, cloying ads, and otherwise do not appeal to me or most of my demographic. But so what? I have the option of not shopping there; why can't low income people have the option of shopping there?

*Of course one can't be too wealthy to shop at Wal Mart; this is an attempt at wry irony. Don't read too deeply into it.

In Which I State the Obvious

Companies' market capitalizations are proxies for their skill--or lack thereof--in doing what it is they specialize in doing.

GE's market capitalization, therefore, is a proxy for its finance arm's ability to maintain its AAA rating, Wal-Mart's market capitalization is a proxy for its renown in logistics and efficient operations, and Coca-Cola's market capitalization is a proxy for its ability to sucker people into drinking sugared water like it's going out of style.

What the hell, then, does the following say about FEMA:

FEMA field officials working with the new systems say that their abilities, particularly those of the tracking system, are overblown.

For example, FEMA is equipped to track only the trucks delivering its own pre-positioned supplies. It can't electronically monitor the shipments of private contractors, upon whom the federal government relies heavily during emergencies. There also is some confusion about whether FEMA managers can communicate directly with drivers should they get lost or if FEMA needs to divert them.

FEMA officials in Washington say the system allows them to talk to drivers, but officials on the ground working in its warehouses say that the system's communications ability is so limited as to be almost useless, and that the tracking system as a whole is very basic.

"Without the ability to communicate with a driver, all we have is a dot moving aimlessly around a computer screen. What's the value in that?" says one senior FEMA official in Mississippi.

FEMA, being a government agency, is very much like a poorly run business, in which decisions are made from on high, without regard to how the people on the ground will actually use the systems put in place. If this year's hurricane season is as bad as last year's the smart money will be on the Wal-Mart's and Coca-Cola's to get needed supplies to devastated areas quickly because, unlike FEMA, their existence depends upon the goodwill they engender among their customers. They have an incetive to operate efficiently and competently where FEMA does not.

Solution: shitcan FEMA and outsource disaster relief to those organizations normally tasked with creating wealth, namely, America's corporations. Besides, if the next Katrina wipes out your house, whose van would you rather see roll up: FEMA's or Wal-Mart's?

The smart money, as always, is on private industry to fulfill a need in the marketplace. Kill FEMA.

Good Perspective on Outsourcing

Consider, if you will, the following: most people in the United States are not adequately educated for high-paying, white collar jobs.

Why then does the specter of outsourcing lead many to conclude that India and China, with their largely ill-educated, non-English speaking populations will take away professional jobs from Americans?

The following makes a lot of sense:

Diana Farrell, director of the McKinsey Global Institute, the consulting firm's in-house think-tank, was one of the first to take the heat out of the issue. Initially, she pointed out how limited is the data on the phenomenon. In a report last year, the institute said that “the debate about offshoring has been fuelled by anecdote rather than fact.” It then set about gathering data which, in turn, suggested some limits to offshoring.

It estimated, for instance, that only “13% of the potential talent supply in low-wage nations is suitable to work for multinational companies”, and it cited three main reasons for this: the lack of language skills; the limited capacity of the educational systems of the offshoring hosts to impart practical skills; and the lack of cultural fit. Other evidence of limits—this time to the demand for offshoring rather than the supply—comes from a recent survey by Proudfoot, another firm of consultants. It found that over three-quarters of the companies it surveyed had no business functions carried out offshore; just over one-third had no business functions outsourced at all, neither at home nor abroad.

There are two observations I have about India and China:

1) The quality of their education matters less than the quantity of their people being educated in Western management and accounting practices;

2) The ability to speak and write English fluently is critical, as there are two $12 trillion economies for which English is the business lingua franca.

Those economies, of course, are the United States and the E.U. Say what you will about the E.U. and its inability to ratify its constitution, and France, Italy, and Germany's intransigent attitudes toward flexible labor laws and the creation of wealth. Most of Europe's economic growth occurs at its margins, and when an Icelander meets with an Estonian to propose a business deal, they speak neither French (the language of diplomacy) nor Latin (the language of the Catholic Church) nor Icelandic nor Estonian. They speak English. (Not for nothing do Turkey's edcuated families require that their children become fluent in English.)

The point being, of course, that exposure to western management and accounting practices and English fluency are requirements to compete in today's international economy, and those are two counts on which the vast majority of India and China's populations are woefully unprepared.

Vonage

Vonage had its IPO last week, and some people claim that by virtue of it being a well-known company it should do well.

I'm not so sure, either on the idea that Vonage is a well known company, or that it should do well:*

1) Vonage has spent a lot of money on quirky ads, but, my bet is that a random selection of people will not know what Vonage is, or how its use of the internet threatens telcos.

2) Cable companies, which are both larger and more well-capitalized than Vonage can easily market VOIP services (and, in fact, do have such services).

It is not clear what Vonage's competitive advantage is.

*Disclaimer: I am a Vonage customer.

Dell

Ouch:

If you chart the stock performance of Dell vs. H-P over the past year, you get a sideways V, with the trend lines moving in opposite directions, and Dell on the bottom heading lower. Oddly enough, you get strikingly similar patterns when you plot other rivals, such as Intel vs. AMD or Microsoft vs. Google -- with the latter names on the top.

Something seems to be in the air: Formerly bulletproof business models are fissuring under the pressure of new and unexpected competition. Two months ago, when Dell bought Alienware, which makes high-end gaming computers, a lot of people began to worry that Dell appeared to be resorting to the sorts of acquisitions that companies employ when they don't have any more ideas about how to keep growing. The company's poor tech support has been a theme of many scathing Web-site and blog postings in recent years.

But for all that, Dell remains a huge industry power. Its market capitalization is $55 billion, although by that measure it is now a smaller company than Apple Computer, which Mr. Dell once suggested be liquidated and the proceeds given to shareholders. When it sets its mind to it, Dell is capable of fixing parts of itself that are broken. Dell says it is spending a lot of money to make things better.

Back in the days of the great tech-stock bubble, a money manager was asked what he did when he ran out of investing ideas. His response: "I just buy more shares of Dell." You sure don't hear that any more.

Bubble Company?

So there a blog news aggregator out there, called FeedBurner, in which the venture capital firm Union Square Ventures has an investment.

Apparently, this blog aggregating service's business model depends on placing ads in blog feeds.

All well and good.

Except the ads are optional.

Who the hell would voluntarily view ads?

Either this company is one set up to be a failure or I am just too skeptical to be either an entrepreneur or venture capitalist. I fail to see how this is a viable model on which to run a business.

More here.

UPDATE: Apparently, I misunderstood the post about this company: the ads are voluntarily for the publisher of the feed, not its reader. This is per an email I just received from the Union Square V.C./blogger who posted about it. I put a second comment up at the post:

OK, now I see that it the publishers themselves who choose whether to have ads or not; that makes more sense.

But then what's to prevent me (or anyone else) from choosing to use an ad-frees news aggregating service?

It seems to me that the barriers to entry in this space are surprisingly low (just write code, publicize your application, etc.) So what's the competitive advantage?

W$J: "Berkshire Hathaway is not a Financial Company"?

Under what system of logic could Berkshire Hathaway not be considered a financial company? In discussing Exxon's growing cash horde in the midst of high oil prices, the Journal claims that BERK.A is not a financial company:

Exxon's cash doesn't include $4.6 billion it has set aside related to the appeal of a court case. Berkshire had cash and equivalents of nearly $43 billion at the end of March, giving it the largest cash holding for a nonfinancial company, according to research provider Capital IQ. Banks, insurers and other financial firms, by definition, are huge cash compilers. (A number of Berkshire-owned companies are financial firms, but Berkshire also owns consumer-goods makers and other types of companies.)

So, "banks, insurers and other financial firms, by definition, are huge cash compilers" but BERK.A, which, by definition, derives most of its income and all of its float from insurance activities, is not a financial company? Go check out GE Capital and GMAC and come back to me and tell me that neither GE nor GM* are financial companies. That they make turbines and cars, respectively, is both incidental and irrelevant to the question of whether they are finance companies. Same goes for BERK.A.

*At least, prior to GMs divestiture of GMAC.

Gilder on Stock Picking

George Gilder, failed stock prognosticator and current darling of the intelligent design crowd, waxes philosophic about the relationship between picking stocks and evolutionary biologists' hold on reality:

"I do think that writing about technology and picking stocks is a very powerful and edifying discipline," he said. "It requires you to have a purchase on reality that is much more rigorous than the average evolutionary biologist has or the average free-floating technology writer has."

That anyone takes this guy seriously is as absurd as the contention that evolutionary biologists do not have a grasp of reality.

For the record, here is a table showing how an investment of $10,000 in Gilder's technology stock list would have fared from 1997 through 2006:
Download gilder.pdf

Bad Times for the New York Times

Any serious observer of the newspaper industry has to see that, at best, it faces enormous challenges in the coming years. Morgan Stanley is trying to compel change at the New York Times:

Tough times for newspaper companies are showing up weaknesses in their managements. In January, Dow Jones & Company, publisher of the Wall Street Journal, replaced its chief executive. Some people reckon that Arthur Sulzberger, chairman of the New York Times Company, and his chief executive, Janet Robinson, are simply not doing a good enough job of steering the firm through a changing market. “They've not been as forward-thinking strategically as you would expect from such a powerful franchise,” says Lauren Rich Fine, a publishing analyst at Merrill Lynch.

Morgan Stanley is unlikely to get its way, since the Sulzberger family is unlikely to cede control. But Mr Sulzberger has already presided over two inglorious episodes at the paper—the Jayson Blair affair in 2003, when a reporter was found to have made up parts of his articles, and the recent departure of Judith Miller after flawed reporting on Iraq. Though its purpose may be chiefly symbolic, Morgan Stanley's campaign is a further blow.

In Which I Put Pompous Academics in Their Place

TIAA-CREF, the pension giant that insures that thousands of academics don't have to dirty their hands with messy details like money, is trying to reform itself. Retired, and ignorant, academics are none too happy:

But missteps and controversies have hobbled the overhaul. In 2004, two members of the board of trustees caused a scandal when they went into a side business with TIAA-CREF's independent auditors. Criticized for a conflict of interest, they left the board. Then, a bid to upgrade the computer system in a hurry backfired on thousands of clients, some of whom didn't receive pension or other retirement-account payments for a time. Meanwhile, a program of steeply raising mutual-fund fees angered some clients and prompted fund-tracker Morningstar Inc. to accuse TIAA-CREF of "blatant disregard" for shareholders.

Reactions like that could imperil one of TIAA-CREF's great strengths: the nonprofit's longtime reputation as being on the side of the little guy. "It doesn't seem right that they would turn this company into a Merrill Lynch. They're not as interested in the individual clients as they are in making profits," says Dick Benson, a retired math professor in Bellevue, Wash.

Well, here's some news for Professor Benson: (1) Merrill Lynch was founded on the explicit premise Wall St. did not cater to the "little guy"; claiming that TIAA-CREF is turning into Merrill shows only the good Professor's ignorance of financial services history; (2) money management firms need to make money, as do all firms; (3) though the law treats corporations as a kind of person, companies nonetheless are not corporeal beings and therefore do not have a "soul."

One reason I cannot take the professoriate seriously is that so many of its kind are self-righteous, bloviating anti-capitalists who think that theirs is a rarefied world, unsullied by the wheels of commerce. Never mind that universities, as they currently exist in the United States, are anachronistic. Never mind that corproate America's biggest lament is that graduates don't know how to write, compute, or communicate.

Never mind that academics have too much education and too little practical experience to make sense of the world.

Alcatel, Lucent To Destroy Shareholder Value

Megamergers, which rarely work as planned, have a history of destroying, not enhancing, shareholder value.

Alcatel & Lucent have entered into an agreement to merge. If this merger is consummated, look for shareholders to be the ultimate losers.

Calling 1999

Google bulls are partying like it's 1999:

Mark Stahlman, the technology strategist at broker Caris & Co., figures Google will ultimately garner 1% of the global digital-services economy, which will include everything from buying books to paying a fee to store your medical and financial information. As a result, Stahlman says, Google's revenues could grow to a cool $100 billion, which would justify a long-term target of $2,000 on the shares.

Many bulls are focused simply on the company's ability to expand search into the world of audio and video content and tap into the $20 billion radio advertising market or the $64 billion market for television advertising. To that end, Google has purchased dMarc Broadcasting, which runs an online system for advertisers to buy radio advertising, for $102 million of cash and more than $1.1 billion more over three years if the company hits certain targets. It has also launched Google Video, which allows you to search for and download TV shows and music videos.

In a word, no.

Investment Bankers With a Penchant for the Dramatic

Lazard has been retined by Carl Ichan and others to argue for Time Warner's breakup. Lazard's bankers explain:

TWX is at the center of the storm that has and will continue to jolt American industry. Technology, regulation and competition are changing at an accelerate pace. The markets are increasingly rewarding companies--across all industries--with a well-defined vision, as shareholder expectations on transparency, capital returns, appreciation and corporate governance increase. Against this backdrop, anticipating and harnessing change is critical for success.

This is the TWX story. It is a difficult story to tell because the history and performance of the Company has been skillfully enshrouded in the fog of one of the largest public relations efforts in American industry. The spin is generated by scores of divisional people, over 30 corproate image executives and a series of outside public relations firms. Success is heralded as triumph; failures are trumpted as success. A corporate mythology is spun and is largely accepted, unchallenged by the media. Some facts are simply obscured.

What I want to know is what the hell is a corporate image executive?

In not so many words: the emperor has no clothes.

Report available here.