Digi-sue-them

The age that we are living in does not cease to amaze me. It is not about the gadgets and useful electronic devices we own. The completely new information and entertainment channels are the major achievement. Bloggers culture springs, giving a voice to virtually anyone and sites like YouTube, AOL videos, as well as similar ones supply the internet users with millions of funny, scary or just interesting clips, both long and short.

Google Inc. recognized the potential of YouTube and decides to make a move before any of the competitors did, acquiring the site for a whooping 1.7 billion $ last year. The popularity of YouTube was and still is its greatest asset, the downside of the page was that everybody could have uploaded anything desired. This means - copyrighted material was available on YouTube and intellectual property rights were violated.

The question that has risen is - how are issues like that going to be handled in the digital internet hooked society of today and tomorrow? Viacom is the owner of some of the copyrighted material viewable on YouTube. This entity's answer was a 1 billion $ lawsuit against Google Inc. Viacom's press release read, among other: "YouTube is a significant, for-profit organization that has built a lucrative business out of exploiting the devotion of fans to others' creative works in order to enrich itself and its corporate parent Google. Their business model, which is based on building traffic and selling advertising off of unlicensed content, is clearly illegal and is in obvious conflict with copyright laws", as well as: "There is no question that YouTube and Google are continuing to take the fruit of our efforts without permission and destroying enormous value in the process. This is value that rightfully belongs to the writers, directors and talent who create it and companies like Viacom that have invested to make possible this innovation and creativity" (For the whole statement see: http://online.wsj.com/article/SB117379240271535457.html?mod=home_whats_news_us ).

In my opinion, this case bears a lot of similarity to the Napster issue. The fundamental question is: can a for-profit organization earn money advertising while offering free entertainment to internet users? There is only one catch here: the content is copyrighted, so an organization earns money using someone else’s work! On the other hand: "Google supporters say YouTube's actions simply reflect the evolution of what an Internet company does and that protections intended for Web hosts in general should apply." (From: http://online.wsj.com/article/SB117379140954435400.html?mod=home_whats_news_us ).

The fundamental difference between Napster and YouTube is the scale of the problem - there are far more YouTube users, than there were Napster users.

The lawsuit was filed after failed licensing negotiations between Google Inc. and Viacom. Viacom asked Google to remove the copyrighted content, which was apparently not done. Viacom vs. YouTube is the biggest problem, but it is not the only problem concerning copyrights of digital entertainment content. TimeWarner has similar worries about its content on YouTube, but it is willing reach a compromise with Google. Universal Music Group vs. MySpace is yet another pending big case worth mentioning (For more on all those cases, see: http://online.wsj.com/article/SB117379140954435400.html?mod=home_whats_news_us ).

The outcome of this case holds great significance. It is possible, that the way this case is resolved might set the benchmark for future issues of similar nature.

Bleak seasons coming, or just a passing shower?

This week we have once again witnessed that the world is one global market place, and stock markets cannot be viewed in isolation. Tuesday's 9% plunge of the Chinese Shanghai index sent stocks in the US and Europe falling. Dow Jones reacted with a 400 points drop, erasing last week's record high, S&P 500 and NASDAQ also noted substantial losses. (More on that: http://online.wsj.com/article/SB117260706682921020.html and: http://blogs.wsj.com/marketbeat/2007/02/27/china-no-its-not-just-china/ ). The situation is even more serious due to the fact that Far Eastern markets, Chinese in particular have been an attractive place for US and European based capital lately. However, many have probably forgotten that this market carries high volatility along with the attractive returns.

Alan Greenspan also contributed to investors insecurity as the word recession was among the ones he used while speaking to investors in Hong Kong (More on the possible effects of this speech: http://www.ft.com/cms/s/2ad62eba-c6d1-11db-8f4f-000b5df10621.html ). Mr. Greenspan's words were interpreted as a prediction of a recession in this year. The former FED's boss's expert status added weight to the claim and certainly did not help the stock markets, which reacted severely to mixed economic data (See: http://online.wsj.com/article/SB117249340786119234.html ).

Another possible reason contributing to the drop is a apparent change in investors attitudes, which seem to change towards putting capital into less risky investments than before. (The Wall Street Journal reports on that: http://online.wsj.com/article/SB117271330926722830.html?mod=home_whats_news_us ).

Just a Shower, or the eye of the Storm?

All in all, the question rises: was this just a single event, or are encountering a bearish period? US Federal Reserve Chairman Mr. Ben Bernake came to the rescue first on Wednesday, when he confirmed his previous US economy outlook for "moderate growth" and referred to the financial markets as being "closely monitored" and "working well" (See: http://online.wsj.com/article/SB117267441551822115.html ). After that, Mr. Greenspan has down-played the tone of his previous utterance (More on that: http://online.wsj.com/article/SB117272314862823068.html ).

The US market reacted well to those news and even though they did not rise, they stopped the rapid losses, as of now all the major US indices have only very marginal losses (See: http://online.wsj.com/article/SB117275252509823347.html?mod=home_whats_news_us ). The fall in the Treasury bills price may indicate that the investors a willing to bear some risk again.

The long term question remains - are the stock market players going to be more risk averse after this weeks events? Regardless of that - if the moderate growth economic outlook holds for now, investors should be able to record gains on their securities in an intermediate time span.

Follow up

Over a month passed since the time I have created this blog and life has written new lines to some of the stories present in my previous posts.

Business ethics

Last week's Wall Street Journal presented a couple of interesting stories, which add to the post about unethical behavior of business professionals (http://janbartczak.blogspot.com/2007/01/when-will-they-learn.html).

Siemens seems to be in a lot of trouble as bribery allegations might overlap with a German-Russian big-time telecommunications scandal, deepening the company's problems. The case is even more severe, as the issue is clearly not only unethical, but also unlawful behavior.

An example of handling a similar issue completely differently was given with KPMG and its CEO, who decided to admit to the organizations unlawful practices and tried to eliminate such behavior. These actions apparently saved the company, which faced a threat similar to the one that destroyed Arthur Andersen a couple of years ago.

Securities market

In the post “What does the market hold for the future?” (http://janbartczak.blogspot.com/2007/01/what-does-market-hold-for-future.html), I have discussed the possible effect of various factors on the stock market.

Some time followed since then and a couple of things are clearer now. The stock market is obviously affected by the fluctuations of oil prices, and moves in such industries as the Technology Sector (which particularly holds for NASDAQ).

Through this month the Dow Jones Industrial Average showed strength, as it climbed over 12,700 points, and set yet another record in the high 700’s. It is interesting to see now, how the major indices will react to such factors as lower automobile demand, changes in real estate prices and oil price fluctuations.

Re-energize

The world has been dependant on fossil fuels, especially oil, as a source of energy for many decades now. What is worse, a major part of the world’s oil supply is controlled by a cartel grouping mostly Middle Eastern states, which pursue their own interests regardless of the influence they have on other countries’ economies. The rest of the world has painfully felt that during the 1973 oil crisis. To illustrate the scale of the shock that developed economies suffered, let me use this example: before the crisis West Germany had virtually no unemployment, after the crisis the rate of unemployment jumped rapidly and never returned to the pre-crisis values (See: http://www.destatis.de/indicators/e/lrarb01ae.htm ). This is only one of the many examples has the crisis shocked developed economies.

Since then, not much has changed – the world has experienced a few more oil supply shocks, and in the recent years has struggled with high oil prices, which were the effect of a combination of things. The US is the biggest consumer of oil in the world, using it mainly for gasoline and heating. The dependence on OPEC’s oil has been seen increasingly painful by the American policy makers. President George W. Bush in this year’s State of the Union Address: “Extending hope and opportunity depends on a stable supply of energy that keeps America's economy running and America's environment clean. For too long our Nation has been dependent on foreign oil. And this dependence leaves us more vulnerable to hostile regimes, and to terrorists -- who could cause huge disruptions of oil shipments ... raise the price of oil ... and do great harm to our economy.” (Quoted after: http://online.wsj.com/article/SB116960205937185687-search.html?KEYWORDS=state+of+the+union&COLLECTION=wsjie/6month For comments on the Address see: http://online.wsj.com/article/SB116960576529585829-search.html?KEYWORDS=state+of+the+union&COLLECTION=wsjie/6month ).

The factors named above, as well as environmental concerns, brought up a discussion about alternative sources of energy. Unfortunately, for a long time they have been in efficient and economically unviable. The common view, which is also one that the author of this blog shares, is the following: economic effectiveness cannot be sacrificed simply because of environmental issues. This has made a large scale use of alternative energy sources a rather futuristic scenario.

Well, the future is right now. It actually seems that alternative fuel sources become cheaper and more efficient. High oil prices make it easier to achieve economic viability (For details see: http://online.wsj.com/article/SB117087922327101294.html?mod=mostpop ). This might mean that the day when energy is traded in a really free market and the oil cartel does not have a grip on the rest of the world can come very soon. Furthermore, alternative energy sources seem to be a good investment for the future which satisfies the need of many investors for a environmentally friendly policy. Hopefully in a couple of years we will be able to say “welcome to the future”.

Encore

Last week an interesting news piece hit the news, but did not make a significant impact. The story was about Michael Dell returning as a CEO for Dell Inc. The company, his “child” which grew to be one of the most successful computer hardware sellers in the USA, if not in the world is struggling now. Dell’s vision and skills are supposed to be the answer.

In my opinion, he might just succeed, but I do not find the question “will he make it or not?” the most interesting aspect of the story. For me it is about another founder coming back to the business he/she created and trying to make a turnaround.

Steve Jobs of Apple, Charles Schwab of Charles Schwab Corp. are just two of the examples of how a founder can make a difference when coming back. Actually, Jobs practically save the company, revitalized it and allowed to achieve new heights. After Bill Gates stepped of at Microsoft, what followed was a turbulent time for the software giant, with greater competition on the account of Linux and tons of anti-monopolistic law suits. This resulted in a drop in stock price after 2000 (See: http://mwprices.ft.com/custom/ft2-com/html-quotechartnews.asp?symb=msft&vsc_appId=ts&ftsite=FTCOM&searchtype=equity&searchOption=equity ), which in turn resulted in Mr. Gates running Microsoft actively again.

Can it be a start of a nation-wide trend? The Wall Street Journal informs there have been 65 such “encores” in USA biggest 1500 companies in the last dozen of years (More on this story: http://online.wsj.com/article/SB117063556472497775.html ). Of course, not every such return is a stunning success, but most of the time you only hear about those that are.

I feel there might be something to it – the rules: “no one knows this company better than the founder”, and “if you want to have something done right, do it yourself” could very well apply…

Finally taking off?

Most airlines operating (both domestically and internationally) in the USA had a hard time through the last couple of years. The year 2000 has been the last good one for the airline industry. Since then the events of 9/11 took place, oil prices shot up, which in effect left most of the airlines in the red since then.

There was another reason for the air carriers' problems, which is easily overseen because of the obvious ones I have just named above. The passengers’ attitudes and needs changed. They did not feel like they needed the service major airlines offered for the premium price, but rather fast and reliable travel and most of all: cheap. The customers needed service such as Southwest Airlines provides. SWA was the only big airline that stayed profitable all the time from 2000 through now.

The competition understood that finally. It took them a lot of layoffs, Chapter 11's etc., but they finally grasped the facts. After that, it became a struggle to increase operational efficiency, be leaner and faster... and, guess what? It seems that this corporate turnaround is successful, as many airlines' figures where in the black for 2006. The drop in oil prices also help the carriers, lowering there cost (The profit data and more on that: http://online.wsj.com/article/SB117010210807591473.html?mod=home_whats_news_us ).

In this pretty optimistic picture, there is a concern. Airlines stocks fell today, as Saudi Arabia cut down its oil production, sending the crude oil price up. The question remains, whether the major airlines will be able to sustain their profitability in the coming months regardless to the oil prices fluctuation.

The bigger they are...

Ford Motor Company is one of the oldest, and historically one of the most successful American auto manufacturers. "Historically" is the key term here. Ford has been loosing money for years now, and its stock has price steadily declined. It is now near the 8$ value, a mere 1/5 of what it was just in 1998 (For Ford's stock chart see: http://mwprices.ft.com/custom/ft2-com/html-interactivecharting.asp?osymb=F&ocountrycode=&expanded=true&subtab=1&colMode=&pageNum=&company=NEW&industry=&region=&extelID=&isin=&ftep=&sedol=34537086&FTSite=FTCOM&symb=F&countrycode=&t=e&s2=&q=F&time=3yr&freq=1dy&compidx=SP500%7E3377&indName=aaaaa%7E0&sid=205397&ma=0&maval=9&uf=0&lf=1&type=8&lf2=0&lf3=0&comp1=&comp2=&comp3= )

Today Ford announced whooping 5.8$ Bln Q4 loss, totaling its 2006 loss to 12.7$ Bln, making it the biggest loss in the company's history. These figures are attributed to major decline in global auto sales, as well as high costs of a painful restructuring process that Ford is undergoing (More on that: http://biz.yahoo.com/ap/070125/earns_ford.html?.v=28 ).

Ford is not the only auto manufacturing giant in trouble, as the rest of the US "big three" GM and Chrysler (a division of DaimlerChrysler) also struggle. The Wall Street Journal reports that GM and Ford cut down more than 70,000 jobs in 2006. Their oversea Far East based competitors (like Toyota, Honda and Hyundai) are giving the American auto makers a hard time.

With such a serious situation, the domestic manufacturers are looking towards the government for help. It seems that this time, they actually might get help. In his annual "State of the Union" address the President announced a few policy elements that could be of great help for the American auto industry. The new energy policy and possible obligation to use alternative fuels such as ethanol should give the domestic auto makers some edge over the competition. On top of that, a possible reform of the health care system could lower the costs that the big three carries in employees benefits and health care plans (The whole story on that: http://online.wsj.com/article/SB116969452776887202.html?mod=home_whats_news_us ).

The question is, whether the automakers are going to be able to take advantage of this and build on it to successfully compete with oversea competition. The forecasts for the auto industry in 2007 are supposedly better than for 2006, the next months will show how Ford and GM use those opportunities.