While there is a vocal debate on how realistic the 2008 earnings estimates are, you ain’t seen nutin’ honey til you look at 2009. The current bottom-up 2009 estimates are forecasting a 39.8% earnings increase over the actual 2007. That puts the 2009 P/E at a very attractive 11.7; of course a good time (or forecast) is not shared by all. Top-down estimates (that incorporate a slight slowdown in the economy, a few charges for layoffs, inventory, and mark-to-market, as well as some bumps along the way), are estimating that 2009 earnings will be 4.2% lower than 2007, which puts the P/E at 17.1.
So if you believe the bottom-up analysts’ 2009 forecast you should start making buttons that read “Re-elect the senator for four more years”, since it would mean that with less than one year in office the new president has turned things totally around, added stability and increased earnings by 39.8% over 2007 actual.
If your thinking is more with the top-down people, you may want to change the button to read “We’re taking the pain, now show us the gain”.
As for me, I’m just trying to get through Q1, where there appears to me no consensus on individual company earnings. One thing for sure however, a lot of investors are going to be surprised real soon, which can only add to volatility.
The Innovation Engine: Connectivity
April 10th, 2008 | Posted by innovSure, you have smart people. But so does the company down the street. Simply being smart doesn’t give you an edge. It’s just the price of entry if you want to come up with new products that will keep you ahead of the competition.
To do that, you must move beyond smart.
The best, most innovative companies are discovering that expert connections are the new currency of innovation. A company’s capacity to create industry-changing products and services is directly tied to its ability to forge connections efficiently between big brains both throughout the company and around the world.
It turns out the old networking cliché is also true when it comes to innovation: It’s not what you know, but who you know.
Next time, we will talk about unleashing the power of your in-house experts—people who may not even think of themselves in those terms. But for now let’s talk about why you want to forge alliances with those who don’t use the company parking lot.
Two of the benefits of infusing outside experts into your innovation process are obvious: You access additional expertise, and you generate momentum. (There is nothing like introducing your smart people to someone else’s to spark all kinds of ideas.)
But there are other benefits that get overlooked. For one thing, you gain objectivity. If you have been with a company for a while, you are not objective. Someone from the outside can say the atomic-powered buggy whip that the R&D people are in love with is simply not going to work. In addition, those outsiders can give you a different perspective you may desperately need.
Here’s an example. For years oral-care companies have relied on dentists to help fill their innovation pipelines. These companies cut their teeth (pun intended) in the professional channels, so naturally they believe dentists know more about oral care than anyone. After all, dentists spend their days talking to people about teeth, looking at teeth, thinking about teeth. So, if “four out of five” dentists think a new product idea is good, it must be, right?
Not necessarily. The world has changed. When you ask people about their mouths today, it turns out they don’t talk much about cavities. They talk about sparkly teeth and fresh breath. The mouth is no longer just about dental health, it’s about image. Stopping cavities is a must-have, not a game changer.
If you are looking to create innovation in oral care, you need to see it through the lens of aestheticians, stylists, and fashion experts. You need to forge relationships with people in all those fields to gain insights about what a toothbrush should deliver today.
The key, then, is you must really understand the needs of your consumer&what is it they want your product to do&and then find experts who see these needs differently.
Consider something as seemingly pedestrian as furniture polish. Think about what it does. It cleans, protects, and restores. Now, what other things do that? Well, lawn-care and skin-care products are the first two that come to mind.
Armed with this realization, how do you gain another perspective? You could forge all kinds of formal relationships with other companies, but you don’t have to do that. You can simply call someone at a lawn-care or cosmetic company and ask to pick their brains.
Everyone loves to be seen as an expert. Think about it. Isn’t it flattering when someone asks you: “Can you help me?” Ask those people: “What opportunities do you see? What are the emerging trends?”
You aren’t a competitor, so odds are they will help, especially when you offer to share what you have learned with them. You want to create these kinds of partnerships to spur new thinking and draw connections to things you might not think are related.
Examples of how connections can create innovation are all around us. The drive-in movie inspired the drive-in bank, the ballpoint pen led to roll-on deodorant, and nature inspired Velcro—we just named it the cocklebur first.
To paraphrase innovation guru Roger von Oech, “connection is the father of conception.” Start connecting.
April 9th, 2008 | Posted by stockExperienced investors know that the market hates uncertainty. The market can handle bad news as long as it can understand and digest the gloomy information quickly, adjust stock prices to reflect it, and then move on.
That’s why the slow-motion credit and housing crisis has been so unnerving. “When will it end?” the talking heads kept asking as the crisis unfolded last year. If only, they said again and again, we knew how much damage all this bad debt is causing — a number in dollars that everyone on Wall Street could just accept and then adjust to.
Well, that number has arrived, but it hasn’t satisfied anyone. Because how do you adjust to losses of $1 trillion? How does the market wrap its collective head around a number that large?
The International Monetary Fund issued an estimate on Tuesday of losses from the U.S. mortgage crisis. Its estimate: $945 billion. The IMF admits its estimate is based on some imprecise information, but still it helps quantify the massive size of the problem. “The current turmoil is more than simply a liquidity event, reflecting deep-seated balance sheet fragilities and weak capital bases, which means its effects are likely to be broader, deeper and more protracted,” the IMF says.
The IMF estimate was the largest such estimate I had seen. At least until today, when hedge fund legend George Soros — a man who certainly has a head for numbers — said the IMF estimate might be low. “I think that is a fair estimate, but that number is likely to still grow,” he reportedly said, citing falling home prices.
Eventually, the world economy will absorb losses this large, but it might take a very long time. Let’s hope Soros and the IMF are wrong.
Grand Theft Auto IV: The Game Is On
April 8th, 2008 | Posted by innovInside Rockstar Games’ posh New York headquarters, there’s a buzz of round-the-clock activity. Just weeks before the company releases its much anticipated Grand Theft Auto IV video game, employees are scrambling to deliver finishing touches. “It takes a lot of work to make a crap game,” says Dan Houser, Rockstar’s co-founder, as he dips into a bowl of candy, “and just a little more to make a great one.”
Houser has good reason to be making the distinction. Grand Theft Auto will appear on Apr. 29 to high expectations and even higher stakes. Already, game analysts are forecasting that the fourth installment of the go-anywhere, commit-any-crime series, which will be available for Microsoft’s (MSFT) Xbox 360 and Sony’s (SNE) PlayStation 3, will be the biggest seller of 2008, moving some 13 million units. The three previous versions of Grand Theft Auto have been huge hits, selling a combined 32 million units and pulling in $1.24 billion in the U.S., according to market researcher NPD Group.
But more than money is at stake. Rockstar is finishing up GTA just as its parent company, Take-Two Interactive (TTWO), is under siege. Last month, games giant Electronic Arts (ERTS) made a hostile takeover bid for Take-Two, offering $2 billion, or $26 a share. Take-Two Executive Chairman Strauss Zelnick rejected the bid, calling it “inappropriate, unfortunate, and opportunistic.” He says Take-Two wants to delay any negotiations until after the Grand Theft Auto debut, when the expected strong sales of the game could force EA to increase its offer.
Timing Is Key
EA doesn’t want to wait. The company wants to strike a deal before the game’s release, in part so that it can count the Grand Theft Auto revenues as its own. EA also wants to stop Take-Two from plowing the profits from the game back into its sports games and other titles that compete with EA’s own products. The battle could come to a head in the next week. EA set a deadline of Apr. 18 for Take-Two shareholders to decide on its bid. “If we can’t close the deal in time to market their titles in the ’08 holiday, the value diminishes for EA,” says Owen Mahoney, EA’s senior vice-president for corporate development.
Although most analysts expect the deal to go through, it remains to be seen exactly how the negotiations will play out. If shareholders agree to EA’s conditions before an Apr. 17 shareholder meeting, Take-Two will likely be swallowed quickly. Shareholders could, however, decide to hold out for a higher price, giving Zelnick a bigger bargaining chip and delaying the deal until after copies of GTA start flying off the shelves.
The boardroom drama isn’t likely to match the new Grand Theft Auto’s plot, a tale of Eastern European immigrants pursuing gangster glory in a pre-Giuliani New York. Gritty and detailed, the game’s city teems with realistic life. In Midtown, grumpy fashionistas crowd the sidewalks, and a high-definition recreation of Times Square pulses with hundreds of satirical billboards. Rather than rote objectives and levels, as in many other games, players can pursue almost any path they wish. They can build relationships with digital characters through bowling, pub-crawling, or other social activities. They can make phone calls and punch out text messages on mobile phones. They can even surf a fake Internet with hundreds of tongue-in-cheek Web pages.
Net Benefits
The game is tied into the real Internet, too. The company has set up a new online social network dubbed the Rockstar Social Club. The digital misadventures of GTA players the globe over will be fed into the network, creating a continually updated map of the virtual high crimes and misdemeanors perpetrated by gamers around the world. Players will also be able to download songs heard on the in-game radio through the real-world Amazon.com (AMZN). Such features “really set this game far apart technologically,” says Greg Ford, managing editor of Electronic Gaming Monthly magazine.
Analysts expect all this pixelated mayhem to be worth billions over the next two years. Michael Pachter, an analyst at Wedbush Morgan Securities, says sales of GTA could be worth nearly half a billion dollars in revenue and at least $175 million in profit by the end of fiscal 2008.
Rockstar could use some redemption. The company has weathered one public relations disaster after another in the past five years. A sexually explicit mini-game hidden in the code of its last GTA release earned the company the ire of parent groups and Washington politicians, and eventually cost it millions when the game was pulled from store shelves. Take-Two has fared even worse, with Securities & Exchange Commission investigations and a string of management shakeups stretching back to 2001. Early last year, former Take-Two Chief Executive Ryan Brant pleaded guilty to filing false financial documents as part of an options-backdating investigation.
The Mayhem Won’t Change
All the controversy has done little to dampen players’ interest in Grand Theft Auto. “GTA may have become a cuss word on Capitol Hill,” says Leigh Alexander, news editor at games blog Kotaku.com, “but to gamers, Rockstar is like the cool upperclassman pulling pranks on the principal: They get the joke.”
Back at Rockstar’s headquarters, the adrenaline-pumping action that pulls in the gamers is on clear display. In a cushy demo room with plum-colored walls and leather couches, one massive, flat-screen TV shows a squad of police cars in full pursuit of GTA’s main character, Niko. As he knocks out the car’s window, bullets begin spraying into the vehicles behind him. Multicolored fireworks fill the screen, and thunderous explosions boom from the speakers. Houser bounces on a couch, confident that his company will satisfy fans. For Rockstar, this kind of mayhem is “one thing that will never change,” he says.
April 8th, 2008 | Posted by innovThe dizzying pace of upheaval in today’s business world makes it tough out there for leaders. Major U.S. companies struggle just to keep up with the economic clout of competitors in Mexico, China, and India.
And as if that weren’t enough to strike fear in the hearts of business leaders, the U.S. now finds itself on the cusp of a recession, with all that such a downturn entails in the already troubled housing, labor, and credit markets.
So what’s a leader to do? It’s not exactly a time for rejoicing, but neither is it a time for glum acceptance. For out of today’s grave problems sprout the seeds of tomorrow’s great opportunities—opportunities that will, in Darwinian fashion, be grasped by the smartest businesspeople among us.
The business universe has become a dynamo of powerful new practices that can sharpen any company’s competitive edge. That’s why I often say there’s nothing new in management theory, but there’s much that is new and exciting in business.
And much of what’s new concerns the strategy needed for growth—the goal of any successful company. Today’s approach bears no resemblance to the past, when privileged men occupying corner offices joined hands with hired guns from various consultancies to design a company’s strategy, totally ignoring the collective wisdom that arises from within the business itself.
Times change, but not everyone gets the message. The crux of the problem for old-style leaders, I believe, is that the practice of management has been over-intellectualized. The concept itself is relatively simple. The verb “manage” comes from maneggiare, an Italian word meaning “to handle”; the French expanded on the concept and influenced U.S. understanding with ménagement, meaning “care” and “consideration.”
In the early 20th century, Mary Parker Follett, a social worker and management theorist whose ideas infused the business world, put a human face on the concept by defining management as “the art of getting things done through people.” Then another Frenchman, mining engineer Henri Fayol, who rose to run his company, decided that management was made up of five functions: planning, organizing, leading, coordinating, and controlling. Too limited, cried Fayol’s critics. And so it has gone, with contributions to management theory coming from economists, business schools, consultants, and leaders themselves.
Unfortunately, much of what has been trumpeted as revolutionary management thinking (i.e., the totally “horizontal” company that would right all that was wrong with the vertical framework, or the “nimble organization” that vowed to teach us how to adapt to change at a moment’s notice) has ended up being little more than fads. Now, after spending more than 30 years thinking and writing about management and business, I’m convinced the best ideas in business come not from academics or consultants but from the people doing the work inside real companies, those who meet the challenges each and every day. And in today’s complex, volatile, and demanding global marketplace, a company’s record of growth is the yardstick by which ideas should be measured.
Exceptional growth rates signal success, as I describe in my new book, Outsmart!, which shows how a company can make itself into one of the smart survivors by staking out new strategic options. My exemplary companies are outsmarting and outgrowing their competitors by finding distinctive market positions and sustainable advantages—whether those be innovative thinking, the simplification of complex customer problems, or learning from the success of others.
For instance, in Outsmart! I tell the story of Mike Howe, the fellow who recognized a simmering crisis in health care and turned it into a business strategy for MinuteClinic, a chain of retail outlets staffed by nurse practitioners who tackle common medical problems in less time and at lower cost than hospital emergency rooms can manage.
I also write about Jeff Housenbold, the president and chief executive officer of Shutterfly (SFLY), who turned the company into much more than an online photo finisher. Seeing families on the run and generations separated by long distances, he parlayed the problem into a thriving social expression and personal publishing business where families and friends share experiences as well as photos.
My book contains a half-dozen other examples (dozens more were left on the cutting-room floor). What they all have in common is exceptional growth rates and unusual strategies that merge irresistible promises with a finely honed ability to deliver.
Perhaps the best news for leaders everywhere, however, is that these ideas can be adapted to their own businesses. They don’t require big bucks from venture capitalists or IPOs to become airborne. All that’s needed is the ability to spot an unmet customer need, backed by an enthusiastic resolve, and a thoughtful plan to put the idea to work.
We live in a time of innovation and expansion—a world of smart and smarter strategic options. The prize will go to shrewd competitors who can stake out new territory, define the boundaries, and even set new rules for the game.
Corporate Dividend Growth Deteriorates as Decreases Surge
April 4th, 2008 | Posted by stockDividend growth deteriorated as decreases surged during the first quarter, but large-cap issues with strong dividend history continued unabated.
(press release)
Based on U.S. domestic, common, listed (NY, ASE, NGM, NNM, or NSC), with dividend rates during the first quarter:
Increases down 19.2%; Decreases up 337% (83 from 19)
Non-financials increased slightly more (19.9%) than Financials (18.4%), but decreased more often (6.2% vs. 3.4%)
By the Dollars:
Financial cuts account for over 75% of the overall dollar reduction, with Citigroup accounting for over half the overall decrease
For the quarter, dividend rates were flat, with non-financials up 2.1% and financials down 5.0%; ex/Citigroup financials are up 0.1%
By Market Value: Over and Under $10 billion
Greater tendency for high-caps to increase: 27.2% vs. 18.7%, and lower tendency to decrease: 2.1% vs. 5.7%
For the S&P 500 I maintain my 9.3% dividend growth estimate for 2008.
The tendency for index issues to pay and increase their cash dividends is much greater than that of the general market, with 76.8% of the S&P 500 constituents paying cash dividends versus 39.6% for the non-S&P 500 companies. For 2007, over 60% of the S&P 500 increased their dividend payout compared to less than 28% for the non-S&P 500 companies.
While I continue to have concern over the deterioration within the Financial sector, as well as the economy at large, I believe the vast majority of S&P 500 companies will continue their long history of dividend payments and increases in 2008. I am therefore maintaining my 9.3% estimated growth rate in actual cash dividends paid in 2008 over that of 2007.
For additional dividend data, as well down loadable files of S&P 1500 issues that have increased their dividend payments at least 10 years in a row, S&P 500 issues that have increase at least 25 years in a row, as well as dividend payers vs. non-payers performance numbers, please click here.
Life on the Edge: Learning from Facebook
April 2nd, 2008 | Posted by innovFor most business executives, Facebook remains a remote, somewhat mysterious, online frontier. Many executives harbor strong doubts that Facebook is at all relevant to “real business.” After all, isn’t it just a bunch of college kids sharing photos of drinking exploits and trying to hook up with each other?
Let’s start with the stats. Facebook now brings together 66 million online users. While many of these users are students and recent graduates, users 35 years old and older account for more than half of Facebook’s daily visitors and are the network’s most rapidly growing demographic. Currently the average Facebook visitor spends about 2.5 hours per month on the site, which was founded in February, 2004, and was valued at $15 billion three years later when Microsoft purchased a 1.6% share of the company.
Facebook is still largely a social environment where very little commerce occurs. In fact, many businesses have expressed concern about the low click-through rates on advertisements placed on such social network sites. Products are generally not bought or sold on Facebook, but it is becoming an important site for creative talent and businesspeople to achieve visibility and build networks.
Dismissing Facebook as irrelevant to business would be dangerously shortsighted. Yes, it is on the edge of traditional business activity, but it is an edge where new approaches to business are being tested and refined. Like most edges in the business world, it may look marginal at the outset, but has the potential to redefine business more broadly over time.
Consider the momentous decision by Facebook in May, 2007, to make its site available to independent, third-party developers to offer their applications to the network’s participants. In one fell swoop a single edge between Facebook and its users fragmented into thousands of edges where a growing number of independent developers can connect and interact with Facebook users in very diverse ways. Developers, drawn by the large numbers of Facebook users, swarmed in to offer a bewildering variety of applications. At last count Facebook had attracted 150,000 active developers, who are now generating more than 20,000 applications.
These edges are fertile with innovation because participation requires such a small investment in time and money. Last fall, psychologist B. J. Fogg taught a class at Stanford University in which he assigned students to develop Facebook applications. During the 10 weeks of the class, 73 students developed applications such as Kiss Me, Oregon Trail, and Secret Admirer, that have since resulted in 25 million installs and, by the end of the class, were attracting about 1 million daily, active users. These applications have generated more than $500,000 in ad revenue since September. At least three companies were formed by students in the class.
Edges not only spawn product and service innovations; they also catalyze business-model innovations. On Facebook, for example, the fragmentation of development activity made it inevitable that brokers would emerge to help entrepreneurial application developers monetize the results of their programming efforts by connecting them with advertisers. One of the most prominent of these early brokers is SocialMedia, a company formed by Seth Goldstein, a serial entrepreneur and venture capitalist who recently migrated from Silicon Alley (the infotech neighborhood of Manhattan) to Silicon Valley.
Goldstein sees a massive shift in the online world of communications and advertising, shaped by social network sites like Facebook, as applications provide a new context for placement of relevant advertisements. Rather than placing an online ad on a page of static content, why not place it in an application at appropriate points within a sequence of user actions? To take it further, why not make the entire application a promotion for a product or service?
As conventional ad placement techniques continue to yield disappointing results, many media companies are exploring the role of Facebook applications (BusinessWeek.com, 3/3/08) in promoting new movies or TV series such as Resident Evil and Parking Wars.
The low cost of entry, the proliferating applications, and the blurring of conventional boundaries between content and paid advertising—as advertisers and developers join up to engage users—more effectively create interesting business challenges. Much of the experimentation and innovation in Facebook applications focuses on that holy grail—”virality.” How does a new application rise above the growing crowd of other applications competing for participants’ attention? Developers must strike a tricky balance, promoting rapid dissemination while avoiding resentment over spamming.
The application ecosystem on Facebook is an epidemiologist’s dream. Applications take off and spread like a flu epidemic but then, for most, usage precipitously falls off as participant interest shifts to the next “hot” application. How do application developers sustain participant interest and involvement? What are the design principles that promote sustained engagement?
As a broker working at the intersection of developers and advertisers, SocialMedia is in the middle of all of this. While serving the narrow broker role of matching buyers and sellers, the company also helps identify patterns for success within the application-developer ecosystem and works with advertisers to discover more effective ways to reach participants through applications. Developers and advertisers seek out companies like SocialMedia for advice and insight to catalyze the next wave of innovation. As an example of this broader knowledge-broker role, SocialMedia is hosting a workshop next month for its top developers to help them develop business plans to support their application development businesses.
So what lessons should more traditional companies take away from the early Facebook and SocialMedia experience?
Create more edges. The decision by Facebook to open up its platform to third-party developers unleashed a torrent of innovation that continues to expand. Thousands of developers are trying out ideas and learning from each other. Facebook participants benefit from a growing diversity of applications offering functionality Facebook would have never been able to develop on its own. By offering application developers easy access to millions of potential users, Facebook spurred broad innovation in a short period of time.
Provide better ways to connect at the edge. Brokers like SocialMedia attract diverse participants at the edge and provide mechanisms to catalyze new insight and share knowledge. Sure, developers and advertisers do business with the company because it helps to drive near-term economics through its advertising network. But in the process of interacting with SocialMedia and with each other in forums created by the company, they get more insight into what is working and what is not. The analytic tools used by SocialMedia help it to do pattern recognition and deliver even more value to the participants in its network.
Demographic edges are fertile grounds for business innovation. While older participants are a growing segment of Facebook users, younger participants are the early adopters of many of the applications introduced on Facebook. They are more willing to try new things and are much more likely to refer others to applications they like. Younger generations can be important catalysts for business innovation, both because they often uncover unmet needs earlier than older customers and because they are more willing to try a new product or service.
Experiment and iterate rapidly. The power of Facebook as an innovation platform is that it costs so little for an application developer to introduce an application and generate quick market feedback. This environment encourages lots of experimentation and accelerates learning. As B.J. Fogg from Stanford has noted, “Many crummy trials beat deep thinking.” Wherever possible, executives should be creating platforms for which the cost of failure is minimal and the upside is potentially enormous.
Social, technologic, and economic are inextricably intertwined. Facebook succeeds because it satisfies profound social needs to connect and be acknowledged via an easy-to-use technology platform. It also carefully manages the economics of its business to avoid upsetting the social order. When it makes mistakes, as in its recent Beacon initiative, it is quick to step in to fix them. For its part, SocialMedia understands that the key to monetizing applications hinges on understanding and leveraging social dynamics to drive adoption and use of the application.
Rather than dismissing the social dimension of the edges of the Internet, executives would do well to understand that social interaction often precedes economic activity. After all, well before we had the World Wide Web, people were venturing online to participate in bulletin board discussions and in Internet Relay Chat sessions. As the early business pioneers step into this new social arena, they are pushing themselves to redefine applications and advertising in ways that could, over time, reshape much broader business arenas.
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