Gaming and Nintendo

Nintendo is a company from which the gaming industry sprang. A Kyoto based company, its roots precede the advent of the digital age. As it grew in the gaming business, it became more difficult to deal with, even upsetting their alliance partnership with Sony. This split resulted finally with the development of the play station by Sony. The two are still battling, except now on different terms and platforms. The Economist has written an article on Nintendo's latest strategy. For the few of you who might believe that the best technology wins and you can overcome the opponent with the latest and greatest of processing horsepower and memory, this is "must" reading.

As you may have gathered from my speaking points, I have an admiration for revolutionaries--Steve Jobs, Larry Page/Sergey Brin, yes Bill Gates--the Think Different crowd. And whenever they speak it pays to listen very carefully. George Lucas is another one and he says this about the movie industry and its future in Variety:

Spending $100 million on production costs and another $100 million on P&A makes no sense, (Lucas). "For that same $200 million, I can make 50-60 two-hour movies. That's 120 hours as opposed to two hours. In the future market, that's where it's going to land, because it's going to be all pay-per-view and downloadable. You've got to really have a brand. You've got to have a site that has enough material on it to attract people."

As you may have gathered from my speaking points, I have an admiration for revolutionaries--Steve Jobs, Larry Page/Sergey Brin, yes Bill Gates--the Think Different crowd. And whenever they speak it pays to listen very carefully. George Lucas is another one and he says this about the movie industry and its future in Variety:

Spending $100 million on production costs and another $100 million on P&A makes no sense, (Lucas). "For that same $200 million, I can make 50-60 two-hour movies. That's 120 hours as opposed to two hours. In the future market, that's where it's going to land, because it's going to be all pay-per-view and downloadable. You've got to really have a brand. You've got to have a site that has enough material on it to attract people."

German Broadband

As noted in the class, Europe and Asia have lagged behind the US in the introduction of competition in their telecom industry. In part, sheer size may be one explanation. With the larger scaled economy, the US may be in a position to allow greater number of competitors in the industry. These competitors will often compete on a local or regional basis and then aggregate and expand through M&A. This process in itself helps builds competition since companies are constantly striving to increase firm value. A second reason is finance: as we have noted, it is expensive to build a telecom network (even wireless); but as we have seen in cases like Clearwire, it is entirely possible for an entrepreneur in the US to raise hundreds of millions of dollars--not just Craig McCaw, but many others as well. The capital markets are tuned for entrepreneurial finance. A third reason is regulatory: less of a "license" regime where firms are selected by bureaucrats, and one more tuned to "open systems".

This article in the Herald Tribune suggests that the broadband landscape is changing in Germany. A number of new start-ups backed by private equity and cities are challenging the dominance of Deutsche Telecom. And it appears to be having an effect: Deutsche Telecom's broadband revenue fell by 6% in the first half of 2006, while its operating profits from this sector fell by 11% to 2.5BN Euro. How can you have declining revenue in what should be a rising market?

The Hole in the Tire Keeps getting Bigger

Free Overseas Phone Calls? And not using Skype but your regular Phone? You can hear the air going out of the tire, otherwise known as voice services. For a description of the service, please see this link. That is what is happening in the telecom industry and it is hard to see where the economics for Futurephone lies-hard to get more "rock-bottom" pricing than this. Hard to picture how you monetize this service. But it does portend the future where voice services are free.

This is an advance of your reading for New Media but Andy Kessler, former Morgan Stanley equity analyst for technology has a strong view of the direction of the media industry. Please read this link and its succeeding three other postings--serious strategic thoughts behind his "light-hearted" style of writing. Go wide is his central thought (not particularly new but insightful from a industry development perspective), but in the case above, with what?

Buyout Cable TV in Taiwan

MBK Partners announced that they are buying China Network, Taiwan's second largest cable provider for $930MM. MBK is run by Michael B. Kim, formerly of the Carlyle Group. He recently raised a large private equity fund for investments in Asia.

There are several reasons for private equity fund interest in cable TV (current and historical). First, there is steady cash flow based on a relatively stabile customer subscription. This allows for a leveraging of the deal with debt. Second, there is typically well-known operational risks--one has not had to "think" about other technology coming in from left field. Third, there is a substantial opportunity for revenue enhancement based on the internet, digitial TV, and VOIP services that cable companies can offer. It has proven easier for cable companies to implement new services (e.g., VOIP) than telephony companies to offer IPTV. Lastly, in the area of convergence, the competition is usually a well-worn, under-managed Telco. One can beat them to the deployment punch, provided you don't run out of money.

Wimax and Sprint-Nextel

Wimax (or Wibro as it is known in Korea) is the "New Big Thing" and leading the charge in the implementation is Sprint-Nextel, one of the largest cellular companies in the US. The person in charge of the $2.5BN deployment at Sprint is Barry West, the former CEO of Nextel. For an insight into their thought process, see this article.

Google has agreed to buy YouTube, an online video company in the US for $1.6bn. The deal raises a number of interesting points. First, this was a company that has been in existence for about one year. To go from zero to $1.6BN in such a short time frame -- it shows how quickly value builds in the internet time zone. And what goes up so fast can come down so fast (or as News Corp has found out through its acquisition of My Space, can keep going up faster and faster!) . Traditional metrics--what did the Company do in EBITDA in the last twelve months is irrelevant in valuation- what was the traffic this month vs. last month is more appropos. Old players like Yahoo who put a stake in the ground on video long ago (like 2003 is long ago) have failed. Note that in video No. 1 is YouTube, No. 2 is MySpace and No.3 is Google.

Second, look how young the entrepreneurs are. All of the entrepreneurs of the new media powerhouses--My Space, Facebook and YouTube are in the 20s. Never has the "generation gap" been more prominent in business in such new industries. It is a perception gap--it is hard for the "aged" with settled views of the way the world works to understand this world, frankly. Stay light on your feet.

We will be learning more about this "New Media" and try to understand how it is disrupting the media industry.

Speaking of disruption, it has long been my claim that the "air" would go out of the mobile telephone business. Technology related industries are increasingly acting like the capital markets--finding ways to arbitrage price differences--and moving at the speed of light to rub out the difference. As an example, see two articles (one, two) from the IHT on such arbitrage plays.