Friday, September 07, 2007

iPhone falls from the Apple Tree

Apple (AAPL) did a dirty and stuck it to the early adopters. The moral of the story is "Never believe the hype". When this product was launched the media went crazy. Apple PR and IR just kicked back and watched the fireworks. Now that everyone has finished their cigarette it seems so disappointing.

Apple made a difficult product decision ignoring the ramifications for the Apple brand. This residual ill will could impact other product lines simply because people are annoyed and want to bite back. Whatever happened to the plans to roll out the iPhone in Europe or was everything decided on US Domestic experiences? Harvard B School professors please start researching the case studies.

The stock dropped dramatically because the fairy tale valuations from the iPhone turned out to be illusory. I do not recall Apple giving any specific number guidance that was driven by iPhone expectations. They did happily include in the last conference call the hype comments that must have came from marketing. (Would you like to have a quiet and private drink with the finance guys and see what they were really thinking when the iPhone rocket took off)

Apple does have have multiple product lines in multiple markets. Was iPhone really warranting the huge share price increases. While a lot of people are mad at Steve Jobs there are a lot of investors who got what was coming to them. If enough of the market spits out their bite of Apple the value investors may become interested.

The iPhone debacle raises an interesting question for early adopters. These are the shock troops in marketing who rush out to buy your product at premium margins and get the wheel rolling. Any observer of military history will tell you that most of the casualties in a battle occur in the first wave of assault troops. Has Steve Jobs sacrificed the first wave? Does he have reinforcements that will save the battle? What happens when the next set of products are announced?

The next conference call will be a barn burner. Call transcript to be found on

Thursday, September 06, 2007

If Its Mattel It's Not Swell

Mattel (MAT) has become the latest poster child for a grossly mismanaged supply chain. Yes they have been sourcing in China to take advantage of low wages and other efficiencies. But somehow the drive to efficiency allowed them to lose control over their products and actually endanger innocent children. This is a major management failing.

Yes we can engage in China bashing. Yes there have been some unacceptable substances such as lead found in toys and their components. Yes there are some bad actors in China who appear to have no scruples.

But the biggest problem is Mattel's management. They let the problem get by them and become so big they now have a major crisis. As we enter the Christmas season Mattel is stuck in the muck. Even if they can retool and reship in time for Christmas will the consumer trust them? Will major retailers gladly stock their shelves knowing full well that litigation lawyers are now one of their most careful shoppers? What indemnities should retailers be asking from Mattel.

How can the investor trust Mattel to find emergency solutions in a short time frame when they could not get it right in the normal course of business? There will be a series of lawsuits which will absorb senior management time and attention.

A few comments about their balance sheet. About 35% of their book equity is invested in intangibles. If their brand starts to erode kiss this number good-bye. Long term debt while down slightly from historical levels is still high; around $560 million. They need to keep this serviced and not blow the covenants. Todays lender is not waiving defaults very easily. With huge recalls and an almost sure revenue dip coming debt service will become an major issue. This company may be restructured by the banks.

In addition to the immediate problems of product recall there is a management issue. A company who puts up the following statement on their web site about governance and then fumbles the ball is not grounded in reality.

"At Mattel, unwaivering integrity defines our corporate culture on every level, guiding how we work and how we do business."

Tuesday, September 04, 2007

Netflix Pops Some

Netflix (NFLX) shares rallied some because Wedbush Morgan analyst Michael Pachter upgraded the stock to "Hold" from "Sell" and raised his price target to $18 from $15.
Part of the rationale is that Movie Gallery (MOVI)is expected to give up the ghost by the end of this calender year. He also expects Blockbuster (BBI) to reduce marketing spending.

Yes Movie Gallery has been parked in front of the coroners office for some time now. If they close 1,000 stores everyone will pick up a piece of a shrinking pie for a little while.

The future is online downloads. Neither Netflix or Blockbuster are good at downloads. At this stage in the game if either had figured out downloads the market would have bought in.

Essentially Netflix and Blockbuster are about to replicate Movie Gallery. There may be some residual marketing values in the name that a download service may want. These brand values are eroding fast.

Netflix and Blockbuster are on the "Highway to Hell". Some temporary share price appreciation will most likely not hold in anything approximating the medium to long term.

Monday, September 03, 2007

CNN Straightens The Battle Lines

CNN (owned by Time Warner TWX) recently announced that they will cease carrying the Reuters feed and use the money to beef up their own international offering. The Reuters feed was costing CNN approximately $3.5 million per annum. The stated rationale has a rather shaky logic.

Reuters is in the process of being acquired by Thomson (TOC) so the corporate suits probably wanted to redraw the battle lines. Sure you do not want to put cash into a competitors pocket. But at the level these guys play at $3.5 million is not financial significant. Reuters and Thomson are probably secretly happy that CNN will not longer carry them. It makes the Reuters news more proprietary especially when they develop a deep understanding of a story and cover it in detail. The headline hungry approach that CNN brings to the table will not develop the credibility that the marketplace will be demanding.

If you have ever travelled internationally and covered a professional payroll $3.5 million is a pittance. CNN will need to spend much more just to come even in coverage.

In the meantime Bloomberg TV is planning upgrades for OCT and has inked a deal with Comcast (CMCSA) bringing the channel to important lucrative markets such as New Jersey, South Florida and Washington.

If CNN is to be a factor if business reporting than it seems to in fourth place in a three way race among CNBC, Bloomberg and Fox.