Monday, December 3, 2007

Goog-411, Part 4

The Final Piece of the Puzzle

Let’s consider the idea of Google becoming a wireless telephone provider. In recent news, the FCC rules for the upcoming sale and use of 62 megahertz of spectrum in the 700MHz band has the mobile community titillating with interest. It is a highly desirable slice of the airwaves because it can easily transport mobile-video services and applications to end-users located dozens of miles away in hard-to-reach places like basements and elevators. The 62 megahertz of spectrum is coming available due to the fact that television broadcasters are moving to a digital signal from an analog signal in early 2009, which requires much less spectrum. The sale of the spectrum will be done through an auction scheduled to happen in January 2008, so most parties will have to wait until then to find out how far Google will go towards acquiring the highly coveted 700 MHz band.

To appreciate the situation, one must first understand that purchasing the spectrum would be an incredible feat for Google, especially considering the opposition they would have to overcome from existing telephone giants, AT&T, Verizon, and Vodafone. Additionally, the auction is highly anticipated since the sale of 62 megahertz of spectrum is widely seen as the last opportunity for a new entrant to establish a presence in the wireless broadband market. On 22 megahertz of the lucrative 62 MHz airwaves being sold off by the Federal Communications Commission, two open-access conditions were attached that are aimed at introducing greater consumer choice and competition into the wireless industry.

Specifically, Google encouraged the FCC to require the adoption of four types of "open" platforms as part of the license conditions:

1. Open applications – no restrictions should be imposed on downloading and using any software applications, content, or services.

2. Open devices – consumers should be able to freely switch their handheld communications device between any wireless network available.

3. Open services – third parties (resellers) should be able to acquire wireless services from a 700 MHz licensee on a wholesale basis, based on reasonably nondiscriminatory commercial terms.

4. Open networks – third parties (resellers) should be able to acquire wireless services from a 700 MHz licensee on a wholesale basis, based on reasonably nondiscriminatory commercial terms.

In the end, the FCC approved the creation of networks that can work with any device (consumers will have the freedom to attach any device and any application to a 22-MHz section of the band), but refused to comply with the so-called "wholesale condition," (conditions No. 3 and 4 in the aforementioned list).

Consumers would greatly benefit from Google’s request to allow open devices and applications on a third of the spectrum. Traditionally phone companies have been stringent about what applications and devices could operate on their networks. With the 700 MHz band open to fresh companies, a whole new breed of mobile technology may emerge. While the FCC did not mandate the charge of wholesale prices of the 22 MHz of the spectrum, they did heed what some consider Google’s ultimatum, open devices and applications. It will be interesting to see the results of the auction. The entire band has been valued around $20 billion, which would be financial blow for any one company to bear, but Google could easily partner with any large carrier (Sprint, Alltel) or a fellow tech company (Apple, Intel) to offset the expense.

Does the evidence support the theory that their established interest in mobile technology can only peak with the introduction of a new mobile device, or are they simply setting up a network of mobile applications in order to offer mobile advertising in the future? We may not have a definitive answer, but after January 2008 and the FCC auction, we may know more about Google’s desire to become a mobile provider.


Could Google be poised to expand into the telecommunications and cable arena? The possibility definitely exists, and the company’s deep pockets mean they would be an instant competitor. Many believe, like TeleGeography’s Mr. Schooner, that Google will not venture into these markets because the profit margins are far too small. It is more likely that Google will use the dark-fiber they have bought cheaply and invest in their own backbone to the internet. They will effectively create their own infrastructure, and force their service providers into a lonesome corner. In contrast, Stephen Arnold has identified seventeen telephony-related patents and patent applications by Google and another dozen with a tangential link. “That means 11 to 12 percent of Google’s innovation effort since 1999 is in telephony,” he said. “Somebody at Google cares about this telephony stuff.”

Will Google offer a G-Phone? Google has been on the upward pendulum swing with their wireless and network aspirations. Google has been purchasing dark fiber in the US for many years. They will connect all their dark fiber to their new 700 MHz wireless spectrum throughout the US (if they win the auction). As subscribers utilize ‘Goog-Tel’, Google will push advertising based on their wireless activities or location further increasing revenue and margins. This national network will provide Google with unlimited bandwidth allowing them to compete with the telephone and cable monopolies for both internet and wireless customers as well as lowering their bandwidth expenses in the U.S..

Friday, November 2, 2007

Goog-411, Part 3

Surprisingly, it may be too narrow of a view to see Google’s recent movements as a push towards becoming a telephone company. Google managed to reinvent online search and advertising, so the same may be true of their aspirations with wireless and network technology. It would not be beyond the scope of their inventiveness to approach the wireless business from a fresh angle.

Google may be exploring the mobile arena for the possibility of expanding their advertising offerings into the cellular world. Some like, Scott Cleland the president of Precursor, are struggling to find the logic behind the G-Phone rumor. "Getting into the phone handset business or the wireless network business would radically change Google's business model," he said. However the mobile advertising market has grown tremendously from $60 million in 2006 to $275 million in 2007, with an expectation of reaching $2.2 billion by 2010. This type of growth does in fact warrant Google to explore and aggressively participate in the mobile phone and networking business. If Google simply wants to have a stronghold on those advertising dollars, then they need to develop a multi-prong approach in their dealings with the current mobile providers.

To cement their interest in wireless technology, Andy Rubin, the former co-owner of the popular technology creator Danger [and its popular Sidekick device], currently works at Google. Danger was a major player in the Web 1.0 era. Danger’s most accomplished project featured a flip out screen that transformed the way users interacted with the Internet, at a time when the technology was at its infantile stages. Many believe Rubin’s employment at Google signifies their work on a secretive G-phone. Presumably, Google has charged Andy Rubin with the task of creating the G-phone.

Google has already begun offering its own mobile applications through a partnership with Sprint. A Sprint customer can use Gmail, Google Calendar, and GoogleTalk through their mobile devices. Google and Sprint have also been in talks to offer their WiMax mobile internet customers the ability to search the web and interact with Web 2.0 social-networking tools. Google, an already active member in the mobile software arena, may use their acquired companies to create a phone comparable to Apple’s iPhone or even something well beyond the scope of that device.

Mobile providers have proven over the years to be just as stringent and guarded about their services, technology, and partnerships. It would be hard to imagine a mobile provider giving up much of the mobile advertising dollars to Google. They would only need to look deeper into the profits of the Adwords program at Google to see the vast potential of doing something outside a partnership. This may be the impetuous for Google to offer its own wireless solution. Before we go further, we should look at the key acquisitions of Google that could make them a strong player in the wireless, mobile market.

Key Acquisitions

We already spoke of Andy Rubin, Danger’s co-founder. He began work at Google labs after
Android—his startup company—was procured by Google. Android revealed very little during their 22 months of existence, only that they were a mobile application startup presumably developing software for a location-aware mobile OS designed by Rubin. Given greater ease of Internet access with mobile products, this would allow Google to greatly expand the real-world utility of its search offerings.

While the purchase of Android could be a precursor to developing wireless technology, the acquisitions of
ReqWireless and SKIA indicate Google’s strong desire to have their own handheld device. ReqWireless creates mobile applications and SKIA produced a vector-based presentation engine that essentially renders 2D graphics on mobile devices. The 2D rendering graphics technology that SKIA produces could be the building blocks of the graphical user interface of a future G-Phone. Purportedly SKIA’s core can fully utilize Java2D and PostScript, with an approximate 300K footprint.

Google purchased
Grand Central Communications on July 2nd 2007. Grand Central communications offers a unique and control friendly solution for mobile phone users. The company developed a service that merges phone numbers from various accounts, including voice mailboxes, into one single account. The service complements existing phone lines, like for those who have home, work, and cell. Basically the service allows users to utilize one central voicemail box to collect messages. The user can access voicemails online or from any phone, and they have more control over these messages. Users can forward voicemails to anyone, block callers, save caller’s information, and more. One phone line can take calls from any of the lines a user has connected to the service, which would be an attractive feature for many business professionals. The most unique feature allows users to listen in real-time to messages being recorded.

On August 31th 2007, Google announced its investment in a company called
Ubiquisys. Ubiquisys is a femtocell developer, meaning it is working on technology that would allow wireless signals (for example, from a WiFi node and a cellphone) to link up for added signal strength and interconnectedness. While a mobile provider would use the tech to strengthen cell signals in user's homes, Google could use it to promote unlicensed mobile access, service which could help mobile phones drop their ties to providers.

We know Google has purchased and invested in many unique mobile software companies. To add to that list, Google bought
Dodgeball, a mobile social-networking service. The purchase of this company adds to Google’s repertoire of exciting and functional mobile services. Google made sure to purchase a company that would eventually open the door to social-networking on mobile devices. Another mobile networking company Google has invested in is Fon, a startup that allows consumers to share their wireless access points with a wider network in exchange for money or network-wide access. If such a network grew large, participating consumers could essentially access the internet anywhere, regardless of the provider. Google’s most recent purchase in the burgeoning social mobile space is Zingku. Whose services let consumers share cell phone photos with others through texting, get online blog posts sent to their cell phones as text messages, and poll friends via text message. As social-networking grows in popularity, the move towards mobile social-networking seems the next logical step for a company trying to develop sticky applications in which to sell ads on.


The possibility of Google having their own phone escalates when analyzing their various acquisitions. The mythical device dubbed the G-phone is being spear headed by Andy Rubin. Under Rubin works a team of about 100 people reportedly focused on the device. It’s believed that Rubin is working directly on the OS of the device. Collectively, the “mashed up” mobile application companies (Android, SKIA, and ReqWireless) could be poised to work on the yet undefined project, which could be the G-phone. Early rumors suggest the G-phone will run on a C++ core with a linux OS bootstrap, and be similar in design to a Blackberry. As should be expected, the phone will reportedly run the G-talk software and be optimized to run Java based applications similar to the Sidekick that Danger produced.

Concluded in Goog-411, Part IV

Thursday, October 11, 2007

Goog-411, Part 2

Continued from Goog-411, Part I

According to a recent blog post I came across during my research I believe that they are on the cusp of an even bigger strategic move, let me explain. The Internet as we know it is a utility pipe similar to electricity or water, with internet service providers (ISPs) building their profits primarily on how many users they can have practically share the same Internet connection. Based on the idea that most users aren't on the net at the same time and even when they are online they are mainly between keystrokes and doing little or nothing when viewed on a per-millisecond basis, ISPs typically leverage the Internet bandwidth they have purchased by a factor of at least 20X and sometimes as much as 100X, which means that the DSL line or cable modem that you think is delivering multi-megabits per second is really only guaranteeing you as much bandwidth as you could get with most dial-up accounts.

This bandwidth leveraging hasn't been a problem to date, but it is about to become a huge problem as we all embrace Internet video. When we are all grabbing one to two hours of high-quality video per day off the net, there is no way the current network infrastructure will support that level of use. At that point we can accept that the Internet can't do what we are asking it to do OR we can find a way to make the Internet do what we are asking it to do. Enter Google and its many, many regional data centers to fill this gap.

Looking at this problem from another angle, right now somewhat more than half of all Internet bandwidth is being used for BitTorrent traffic, which is mainly video. Yet if you surveyed your neighbors you'd find that few of them are BitTorrent users. Less than 5 percent of all Internet users are presently consuming more than 50 percent of all bandwidth. It's BitTorrent -- not Yahoo or Google -- that has been the target of the anti-net neutrality from telephone and cable companies. But the fact is that rather than being an anomaly, the BitTorrent users are simply early adopters and we'll all soon follow in their footsteps. And when that happens, there won't be enough bandwidth to support what we want to do from any centralized perspective. A single data center, no matter how large, won't be enough. Google is just the first large player to recognize this fact as their building program proves.

It is becoming very obvious what will happen over the next two to three years. More and more of us will be downloading movies and television shows over the net and with that our usage patterns will change. Instead of using 1-3 gigabytes per month, as most broadband Internet users have in recent years, we'll go to 1-3 gigabytes per DAY -- a 30X increase that will place a huge backbone burden on ISPs. Those ISPs will be faced with the option of increasing their backbone connections by 30X, which would kill all profits, OR they could accept a peering arrangement with the local Google data center. In which their internet traffic will be encrypted and sent through Google's servers to the Internet. The data that is received will then be encrypted and sent back through Google’s servers to your computer.

Seeing Google as their only alternative to bankruptcy, the ISPs will all sign on, and in doing so will transfer most of their subscriber value to Google, which will act as a huge proxy server for the Internet. We won't know if we're accessing the Internet or Google and for all practical purposes it won't matter. Are we tomorrow sending all of our internet traffic first to Google before it is passed from there to the destination server of your preferred site? This would really put Google in the driver seat. With one move, Google reduces all operators to bitpipe providers (from the end-user to the Google network) essentially marginalizing the ISP’s.

Take note that YouTube, owned by Google, accounts for close to 10% of today’s Internet traffic this means Google would literally save millions each month by activating their own branch on the internet tree. If Google moved all its traffic onto its own network, phone and cable firms would suddenly find the electronic equivalent of a vacuum on their own networks. They would also find a gaping hole where big network usage revenue used to be and the roles could be reversed -- the phone and cable firms could become customers of Google and be forced into buying access to the Google network.

Wireless Strategy

However, if purchasing dark-fiber for the past three years was the sign of Google pulling anchor and heading towards becoming a telephone company, then the acquisition of ReqWireless in July 2005 was the tide that took them out to sea. Even more recently, Google has purchased GrandCentral Communications—a Web Startup that allows users to consolidate their different home, work and mobile phone numbers into one through an Internet application. More tangible evidence comes from Europe where the South Korean electronics maker LG introduced a new phone on the market preloaded with Google applications. Many have dubbed this phone the “Google phone.” The other giant factor to Google leaning towards becoming a wireless provider comes from their interest in the 700 MHz wireless spectrum auction set to happen in January of 2008.

Continued in Goog-411, Part III

Saturday, September 29, 2007

Goog-411, Part 1

Have you ever dialed 1.800.GOOG.411? Better yet, have you ever heard of it? If the answer to either question is no, you may want to add a new number to your list of contacts. You may be wondering why it is so important to have this particular number. Well, it happens to be Google’s directory assistance line. If you still aren’t seeing the benefit of etching this number into your cell phone, perhaps you’d like to know more about this service and what it offers those who use it. This is Google’s directory assistance and free call connection alternative to the traditional 411 service provided by the incumbent telephone companies. The introduction of this service, along with many other key acquisitions, have many wondering what exactly Google has in store for the future. Is the sky darkening for many wireless and Internet providers as Google could be poised to unveil a wireless phone or even launch their own network for the internet? When investigating Google’s acquisitions during these past few years, interesting signs appear; the purchase of companies that create mobile applications, aggressive lobbying of the FCC for wireless spectrum, as well as buying dark fiber by the mile. What does it all mean? Will Google soon be the purveyor of a G-phone, or will they simply slash their own Internet costs by building their own network?

So far Google has not allowed the public to see past the hazy windows of the Google labs. Based on Google’s own acquisitions—their purchasing of dark fiber, and their other takeovers—it is only a matter of time before the whole world sees exactly what they have in store. “It’s not an if, it’s a when,” says California-based technology analyst Rob Enderle. “Different parts of this are coming in at different speeds, but once they’re done what they plan to do is offer comprehensive services through their own backbone and effectively lock a lot of the traditional players out of the market. A lot of them don’t even see it coming.” When we consider Google’s recent actions, coupled with their past acquisitions, the future seems to hold more for this Internet giant.

“These guys are increasingly swirling and swiveling around the telecom space,” says Lawrence Surtees, vice-president and principal analyst of Canadian communications research for global technology consultancy IDC. “If you put all of this together, is Google a search company or a telecom network service provider or all of the above?” Google famously built its own data center by stringing together thousands of inexpensive Dell PCs with Gigabit Ethernet and developing all the software internally, as opposed to purchasing high-end proprietary solutions sold by vendors such as H-P, Sun, or IBM. Google is now doing the same thing in telecom. It's using cheap standard technologies such as dense wave division multiplexing (DWDM) and Ethernet to drive costs down and develop its own private network using dark fiber coupled with the aforementioned DWDM and Ethernet. Rather than buying an expensive "solution" from an internet service provider i.e. telecom or cable company.

Google is likely working on a project to create its own global internet protocol (IP) network, a private alternative to the internet which could be controlled by the search giant. Their efforts appear to be picking up speed with each passing moment. Google has been buying up miles of unused fiber-optic cable called dark fiber, this usable network of cables was overbuilt by telephone and cable companies during the tech boom in the late nineties. Google has spent a small fortune purchasing these lines for pennies on the dollar at auctions and bankruptcy proceedings as well getting long term leases for these lines from third party vendors in order to construct its own private (IPv6) backbone between its data centers (estimates are 60 to 80 locations globally). Google is also buying shipping containers and building additional data centers within them, possibly with the aim of using them as significant nodes within the worldwide cable network. "Google hired a pair of very bright industrial designers to figure out how to cram the greatest number of CPUs, the most storage, memory and power support into a 20- or 40-foot box" Robert Cringely wrote. "The idea is to plant one of these puppies anywhere Google owns access to fiber, basically turning the entire Internet into a giant processing and storage grid." Late last year, Google purchased a 270,000sq ft telecom interconnection facility in New York and it is believed that from here, Google plans to link up and power the dark fiber system and turn it into a working internet network of its own.

If the move to provide internet access was to take place on a national level, then Google would eventually seek out a company that offered “last mile” access through acquisition as opposed to partnering (via Sprint, Earthlink, etc). The “last mile” refers to connecting the fiber optic backbone to buildings. The broadband company GigaBeam (GGBM) presents an ideal acquisition, with a market cap of $27.25 million. GigaBeam specializes in the last mile with their WiFiber solution, which is a new concept in point-to-point wireless technology. The WiFiber ultra-high frequency bands allow wireless fiber-equivalent speeds with reliability similar to terrestrial fiber. WiFiber provides last mile access and backhaul, while complementing both Wi-Fi and WiMax. This could enable faster communication capacity, delivery, and cost less than previously possible. With the addition of WiFiber to Google’s information backbone, many customers would have access to video, data, or voice at prices once unimaginable. Gigabeam’s strategy also addresses the common last mile problem which represents the biggest hurdle for any company challenging the incumbent telephone and cable monopoly. GigaBeam would fit perfectly with Google, utilizing the miles of dark fiber in Google’s network, and allowing Google to offer a true full scale internet pipe straight to the consumers’ home.

Google has been experimenting in WiFi in the city of Mountain View, California where they have mounted networking equipment to public utility poles in the city. Google is also partnering with Earthlink to try to get WiFi into the city of San Francisco. In the partnership between Google and EarthLink to provide WiFi access in San Francisco, EarthLink would provide wireless service for 16 years and Google would be the sole Internet provider or ISP. Google would profit by having their search engine, maps, and other online applications available to users through the EarthLink pages. Even though this test-bed scenario has since faltered due to price and politics with the city of San Francisco, Google is still looking to offer free wireless access to other cities across North America and possibly Europe. Suppose this secure WiFi solution becomes popular, the Google servers will see a huge surge in the amount of data traffic they currently process. It could be the reason for their interest in the miles of dark fiber, or it could be a reason to build their own, private network backbone?

Continues in Goog-411, Part II

Tuesday, August 28, 2007

Is Niche apparel a Niche stock ?

Clothing is a very ugly industry despite its glitz and glamour. For small businesses to survive and thrive – they need to create products that are emotionalized, authentic and, above all, differentiated. These businesses must be able to distinguish themselves from their direct competitors, establish themselves in consumers’ minds and therefore create a niche. Over the past few years we have seen an explosion of new brands in the niche apparel market. I’m going to examine two companies going in two very different directions in this hyper fickle realm of retail. Both companies have products that qualify as niche markets. HEELYS specializes in wheeled footwear that is currently all the rage among children, tweens and even teenagers. Under Armour has specialty sportswear that is engineered to keep athletes cooler during physical activity. These companies represent niche apparel as well as niche stocks. Stocks that are considered to have a short life once the fad (demand for the underlying product or service) begins to decline are known as niche stocks. Niche stocks have been making waves in the stock market for some time but it is difficult to determine which companies will qualify for more permanent status on the market and in your portfolio.

Heelys, Inc. (HLYS) is a designer, marketer and distributor of action sports-inspired products targeted to the youth market. The Company’s primary product, HEELYS-wheeled footwear, is a line of dual-purpose sneakers that incorporate a removable wheel in the heel. HEELYS-wheeled footwear allows the user to seamlessly transition from walking or running to skating by shifting weight to the heel of the sneaker. During the year ended December 31, 2006, approximately 98% of HEELYS’ net sales were derived from the sale of its HEELYS-wheeled footwear. The Company, however, also offers a selection of HEELYS branded accessories, including protective gear such as helmets and wrist, elbow and knee guards, heel plugs, wheel bags and replacement wheels, and a limited variety of apparel items.

HEELYS current share price of $9.25 is in stark contrast to its public debut late last year when its shares received an enthusiastic welcome at $21. Heelys Inc.'s shares dropped to a then all-time low of $11.84 on August 8th, 2007 as a reduction in orders cast a cloud over sales for the remainder of the 2007 fiscal year. The shoe-maker forecast a dismal second half of the year due to over-inventoried U.S. accounts. It cited aggressive expectations and retail softness in footwear and apparel as explanation for the downward trend. The company's shares were trading down about 57.72 percent at $9.25 in morning trade on the NASDAQ, August 28, 2007. Robert W. Baird analyst, Mitch Kummetz, downgraded the stock to "neutral" from "outperform," adding that even if the company's sell-throughs were to improve before orders for spring 2008 came in, revenues for the first half of 2008 will likely be hurt due to cautious ordering. Bear Stearns analyst, Jennifer Childe, reports that retailers are hesitant to place additional orders in the face of already bloated inventories. Childe lowered her rating on the stock to "peer perform" from "outperform," but said management's guidance appears to reflect a "worse case scenario," with room for potential gains if back-to-school sales momentum continued. Bear Stearns was one of the underwriters for the company's initial public offering. At least three other brokers also downgraded their ratings.

Under Armour (UA), founded in 1996 by former University of Maryland football player Kevin Plank, is the originator of performance apparel - gear engineered to keep athletes cool, dry and light throughout the course of a game, practice or workout. The technology behind Under Armour's diverse product assortment for men, women and youth is complex, but the benefits are simple: for optimal performance wear HeatGear® when it's hot, ColdGear® when it's cold, and AllSeasonGear® between the extremes. Under Armour's mission is to "provide the world with technically advanced products engineered with their [our] superior fabric construction, exclusive moisture management, and proven innovation. Every Under Armour product is doing something for you; it's making you better...”

The sports apparel company is popular among more than just gym rats and teenage athletes. Short sellers, who try to make money by betting that the price of a company stock will fall, have made Under Armour one of the hottest stocks for short sales on Wall Street in recent months. In a Bloomberg News July 2007 ranking of companies with more than 10 percent of shares available for short trading, Under Armour ranked 25th among companies with the largest amount of short sales on the New York Stock Exchange. According to several analysts, it is not surprising that Under Armour’s stock is hot among short sellers. Since the company became publicly traded in November 2005, its stock price has prompted frequent Wall Street criticism. The company’s price to earnings ratio – the common Wall Street gauge in determining how expensive a stock is relative to its market value and earnings during the past year – is 78.16, according to Bloomberg statistics. In comparison, Nike, which dwarfs Under Armour, has a P/E ratio of 19.57. Under Armour has revenue of $467.32 million, while Nike $16.3 billion.

Many analysts have also wondered if the company can maintain a large enough growth in sales to justify its stock price. So far, the gamble that short sellers are taking has been stonewalled - by a large block of institutional investors who believe Under Armour stock will move even higher. Rather than falling, Under Armour stock has increased approximately 24.78 percent in 2007, and has achieved record highs during the past several months as investors push up demand for shares. Institutional investors, who are satisfied with the business fundamentals of the company are aware of its popularity among athletes and non-athletes alike, have been buying the stock and pushing up its price. The stock reached a record high of $67.10 after the company released second-quarter earnings July 31, 2007, and raised its financial outlook for the year. These diverging views have created a Wall Street money battle on which direction the stock will turn. Under Armour continues to receive praise and criticism as its stock price has fluctuated wildly during its two-years being publicly traded.

It is not surprising that these companies are being scrutinized. With the fall season almost upon them, sales from these two niche apparel makers will help determine who will survive to become a household staple and a stock market portfolio stalwart. Based on the analysis from Haye Capital Group, it is believed that unless HEELYS starts to diversify its product offerings they will go out of style like the zipper and metal studded leather jackets of the mid eighties. Under Armour has a more utilitarian purpose so for the time being it is the clear choice for both a lasting brand and stock portfolio pick. With its current product lines having a longer and better product life that is not just trendy but practical as well, Under Armour has a clear advantage. The key for both of these companies is to get the “niche” out of the perception of both their apparel and their stock if they are to be truly mainstream and lasting brands.

Tuesday, July 17, 2007

The "Magic Eye" in Business

Chaos—that unwieldy absence of order that haunts inventors, the creative-minded, and the entrepreneur in all of us—may be the very foundation of success. I am speaking of chaos, as in the spaghetti on the wall, where all the noodles converge to create a path, a miraculous mess, but substance nonetheless. In that mess, ideas intersect to make new business models or innovative solutions, at times birthing mistakes and at other times, lending new form to long standing businesses. Inside chaos the essence of innovation lives and breathes.

Every so often the creative chaos of the mind coalesces, preparing the way for sustained profitability around a new business model. In the nineties, Internet portals like Yahoo! and AltaVista positioned themselves to compete in the search market, but also offered directories, ads, news articles, and more. A young startup company, named Google, took what both Yahoo! and AltaVista had created, then turned it on its head. Google offered instead of more content—a minimalistic page, and instead of advertisements —whitespace. Only after Google had successfully tailored their search engine technology over years, did it branch into offering news, calendars, webmaster tools, and more. By first offering less (and doing that right), Google became the most lucrative Internet business in history.

Google’s business model has proven to be successful, as their search engine currently accounts for 63% of all internet searches, according to HitWise. Like Google, the utility of both PayPal and eBay was initially questioned, but ultimately embraced. How many thought similarly about PayPal or eBay? Like many successful entrepreneurs, we need to peer into the crossroads of ideas, seeing where they intersect, then take control of where they lead our businesses.

Think of chaos as a “Magic Eye” poster, or an autostereogram which is a 3D image buried in a 2D pattern, painted by consumers, businesses, technology, and emerging trends. The jumbled pixels in the poster obfuscate even the most ardent observers. But, if you relax just enough, allow your eyes to un-focus, a picture begins to take shape. The resulting picture may outline a new and innovative business idea.

Many businesses believe consumers want price cuts as a solution, like cheaper software, when, in reality, an innovative solution may infuse more profits into their bottom line. Imagine if eBay had only offered an e-commerce site with lower prices, rather than being innovative and creating an auction site for users to sell wares. What if Google had cluttered their pages, displayed obtrusive ads, and ultimately mimicked every other site at the time? They may not have stamped their brand into the minds of millions. It takes innovation to capture the imagination of consumers.

In the same way eBay cleared many garages of junk, and Google saved us hours of surfing the web to find a resource, the next big idea may solve a relatively small problem. The solution to a common problem can become a massive success overnight. The young coders from PayPal, who started YouTube, can attest to the frenzy created when a business offers an immediate solution. In a time when video was first becoming commonplace on the web, YouTube offered free hosting for user generated content. A HitWise study from May of 2006 showed that YouTube traffic was up 160% in a three month time period (March 2006 to May 2006), moving the site to the top 50 sites on the Internet. This happened only a year from their inception. This type of leaps-and-bounds success can be attributed to the risks they took. In order to host a site that had user uploaded and viewable content, they also had to have servers to handle the load and bandwidth to broadcast these large files to an audience numbered in the millions. YouTube’s bandwidth expense per month elevated from $900,000 to $1.5 million, by most estimates. Of course, we know about the buyout by Google, but many do not know the amount of money invested to keep YouTube online long enough to be purchased.

With innovation, there will always be risk involved. A business idea may take the breath away from complete strangers at the coffee shop but, when dealing with the global marketplace timing means just as much as potential. For instance, failed in 2000 before ever fetching a profit. An internet business failure can be caused by a combination of market climate and consumer apathy or something as simple as poor site construction.

An idea can only be as good as its execution. A cumbersome website, faulty product/service, or other missteps can hinder a good idea. The crux of a successful introduction into the marketplace relies on timing, sound marketing of the product or service, and a solution that opens customer’s minds to a new way of doing something old or creating something new. Chaos in business can be briefly muted, absorbed, and altered by a solution that comes from the ether. As an entrepreneur, chaos may be the cluttered avenue of information for a particular service industry or the immediate need for a new product. By allowing imagination to lead where intellect cannot travel, an entrepreneur must believe in the possibilities generated by that imagination, nurture those possibilities, and make those possibilities a reality.

Monday, April 16, 2007

The IP in VOIP: A Vonage Story

On March 23rd 2007, Vonage Holdings Corp., the voip (voice over internet protocol) giant, lost a key hearing in its patent infringement dispute with Verizon. Since that ruling and the following injunction issued April 6th 2007 there has been rampant speculation as to possible solutions for Vonage Holdings. One possible work-around is an acquisition. Analyst Jon Arnold of J. Arnold & Associates believes Vonage Holdings may simply purchase a company like VoIP Inc., which operates its own telecommunications network and holds a variety of patents, some of which might help Vonage Holdings sidestep Verizon's patents. Another possible solution is intellectual property rights securitization through bonds also known as Bowie or Pullman Bonds.

Vonage Holdings Corp. would create a "separate, wholly owned, bankruptcy-remote subsidiary"—essentially a company within a company. Called Vone IP (for Vonage intellectual property), the entity would issue $250 million worth of bonds backed by the intellectual property of the Vonage brand. Vonage Holdings could pay a royalty fee of 5.5% to Vone IP to license the Vonage brand. This would be the same 5.5% of revenue the court has ordered Vonage Holdings to set aside to pay Verizon while it awaits its appeal. Vonage Holdings will have to wait two years for its
US circuit court appeal, and according to 2007 and 2008 revenue estimates Vonage Holdings will set aside approximately 103.67 million for Verizon during those two years in addition to the 58 million it currently owes Verizon in back royalty fees.

Intellectual property bonds got their start with an unlikely financier: David Bowie. The rock star floated $55 million worth in 1997, backed by 287 song titles, with the interest covered by royalty payments from the songs. The ‘Bowie Bonds are asset backed securities of current and future revenues from the first 25 albums (287 songs) of David Bowie's collection recorded before 1990. Issued by David Bowie in 1997, they were bought for $55 million by the Prudential Insurance Company. The 287 included songs also acted as collateral to insure the bond. The Bonds were a ten-year issue, after which the royalties of the songs would return to David Bowie.

The principle of valuing intellectual property (IP) is to determine the future income associated with its ownership. Intellectual property is generated mainly through research, development, and advertising (IP generating expenses or IGE), making it hard to assess the effectiveness of IGE as the value of IP is generally independent of its cost. Determination of future income requires estimating the income due to the intellectual property in each of all future years over its life; i.e., the amount sold and the net income per unit after routine sales costs are deducted. If the intellectual property is used internally, then the savings due to owning it can be similarly estimated. The risk that intellectual property becomes obsolete is high, and reduces the current value. Without risk, future income is discounted by using a risk-free interest rate. Risks include unexpected competition, unauthorized copying, patent breaches or invalidation, and loss of trade secrets. With such risks, discount rates increase, based on the expected Beta coefficient. With high discount rates, sales that occur far in the future have little effect, simplifying the determination of the net current value of the included intellectual property.

Based on analyst from Haye Capital Group, the best possible bond structure would be a $250 million bond with a 3yr issue and a 5.5% yield. Note that Vone IP could end up paying a possible premium of two basis points on the current 5.5% court ruling giving their bond a yield as high as 7.5%. The bond could have a rating of Ba, with the calculated yield and rating due to the risk affiliated with owning this company’s debt while awaiting the outcome of their court appeal.

The company would create the payments in order to issue the bonds. Vonage Holdings Corp. would, in essence, create licensing income. First it transfers ownership of its brand’s name to Vone IP. Now, Vone IP charges Vonage Holdings Corp. royalty fees to license the Vonage brand and uses the royalties to pay the interest on the $250 million bonds issued by this intellectual property rights securitization. Vone IP sells the bonds to a wholly owned Vonage Holdings Corp. insurance subsidiary, where, like any other security on an insurer's books, it serves as protection against future loss. The insurer, meanwhile, protects Vonage Holdings Corp. from financial trouble by issuing either business interruption insurance or financial loss insurance—and because it's a captive insurance company, it does so at a lower premium than Vonage Holdings Corp. could get from an outside insurance company. The payments net out to zero because Vonage Holdings Corp. would own every piece.

An alternative for Vone IP is to sell the new bond issue to an outside insurance company for the $250 million which Vone IP could use to finance the court ruling of 5.5% of annual revenue, litigation costs, the possible acquisition of another player in Voip field, or use it as an emergency line of credit. They could also sell the bonds to an outside insurance company for a financial loss or business interruption policy for Vonage Holdings Corp. in anticipation of their court appeal. Concurrently Vone IP could work out licensing agreements with other Voip carriers to use its trademark to sell their voip service, creating another revenue stream from licensing fees to help offset potential Verizon fees and court costs.

Whenever stripping away valuable - albeit, intangible - assets from a company will only serve to make issuing old-fashioned debt more expensive for the company in the future. But, if the gain from the IP securities is greater than the fall in the old debt, then it is worth the risk. Vonage, which on April 24th 2007, won a stay of an earlier decision barring the company from recruiting new customers, must now focus solidly on the future of the company while it awaits its patent infringement appeal. They are going to need to aggressively identify and execute alternative solutions to maintain their viability. Maybe the IP in VOIP should stand for intellectual property as Vonage fights to keep dial tone.

Monday, March 5, 2007

Elliot Wave Theory

This current market volatility is a great time to learn about the Elliot wave theory and how to look for it during this current bear stretch we are currently witnessing courtesy of the Shanghai index collapse on February 27, 2007.

The Elliott Wave Theory is named after Ralph Nelson Elliott. In the 1930s, Ralph Nelson Elliott found that the markets exhibited certain repeated patterns contrary to the chaotic perception at the time both past and present. His primary research was with stock market data for the Dow Jones Industrial Average. This research identified patterns that recur in the markets. These patterns trade in repetitive cycles, which he pointed out were the emotions of investors and traders caused by macroeconomic events or the predominant psychology of the masses at the time.

Elliott explained that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns, which were then divided into patterns or as he called them, "waves". Very simply, in the direction of the trend both upwards (bull) and downwards (bear), expect five waves. Any corrections against the trend are in three waves. Three wave corrections are lettered as "A, B, C." These patterns can be seen in long-term as well as in short-term charts. Ideally, smaller patterns can be identified within bigger patterns. In this sense, Elliott Waves are like a piece of broccoli, where the smaller piece, if broken off from the bigger piece, does, in fact, look like the big piece. The recognition of smaller patterns fitting into bigger patterns, coupled with the Fibonacci relationships (another blog) between the waves, offers the trader a level of anticipation and/or prediction when searching for and identifying trading opportunities with solid risk/reward ratios.

The 5 – 3 Wave Patterns

Mr. Elliott showed that a trending market moves in what he calls a 5-3 wave pattern. The first 5-wave pattern is called impulse waves and the last 3-wave pattern is called corrective waves.

Here is a short description of what happens during each wave. I am going to use stocks for this blog since stocks is what Mr. Elliott used but it really doesn’t matter what it is. It can easily be currencies, bonds, gold, oil, or futures. The important thing is the Elliott Wave Theory can also be applied to the foreign exchange market.

Wave 1
The stock makes its initial move upwards. This is usually caused by a relatively small number of people that all of the sudden (for a variety of reasons real or imagined) feel that the price of the stock is cheap so it’s a perfect time to buy. This causes the price to rise.

Wave 2
At this point enough people who were in the original wave consider the stock overvalued and take profits. This causes the stock to go down. However, the stock will not make it to its previous lows before the stock is considered a bargain again.

Wave 3
This is usually the longest and strongest wave. The stock has caught the attention of the mass public. More people find about the stock and want to buy it. This causes the stock’s price to go higher and higher. This wave usually exceeds the high created at the end of wave 1.

Wave 4
People take profits because the stock is considered expensive again. This wave tends to be weak because there are usually more people that are still bullish on the stock and are waiting to “buy on the dips”.

Wave 5
This is the point that most people get on the stock, and is most driven by hysteria and a “me too” following. This is when the stock becomes the most overpriced. On the end of Wave 4, more buying sets in and the prices start to rally again. The Wave 5 rally lacks the huge enthusiasm and strength found in the Wave 3 rally. The Wave 5 advance is caused by a small group of traders. Although the prices make a new high above the top of Wave 3, the rate of power, or strength, inside the Wave 5 advance is very small when compared to the Wave 3 advance. Finally, when this lackluster buying interest dies out, the market tops out and enters a new phase, the ABC corrective pattern, typically caused by contrarians shorting the stock starting the corrective pattern.


The A-B-C wave correction pattern follows the 5 wave impulse pattern

There is only one pattern in a simple A-B-C correction. This pattern looks like a Zig-Zag . A Zig-Zag correction is a three-wave pattern where the Wave B does not retrace more than 75 percent of Wave A. Wave C will make new lows below the end of Wave A. The Wave A of a Zig-Zag correction always has a five-wave pattern. In the other two types of corrections (Flat and Irregular), Wave A has a three-wave pattern. Thus, if you can identify a five-wave pattern inside Wave A of any correction, you can then expect the correction to turn out as a Zig-Zag formation.

Wave B is usually 50% of Wave A and should not exceed 75% of Wave A

Wave C is either 1 x Wave A or 1.62 x Wave A or 2.62 x Wave A, in this wave the multipliers for Wave A are based off Fibonacci ratios

Elliott based part his work on the Dow Theory, which also defines price movement in terms of waves, but Elliott discovered the fractal nature of market action. Thus Elliott was able to analyze markets in greater depth, identifying the specific characteristics of wave patterns and making detailed market predictions based on the patterns he had identified. There have been many theories about the origin and the meaning of the patterns that Elliott discovered, including human behavior and harmony in nature. In fact, Elliott believed that all of man's activities, not just the stock market, were influenced by these identifiable series of waves. These rules, though, as applied to technical analysis of the markets (stocks, commodities, futures, etc.), can be very useful regardless of their meaning and origin.

Saturday, January 27, 2007

The Cents in Downloaded Music

In the final week of 2006, Beyonce’s song “Irreplaceable” set a new record for a single digital track, selling 269,000 copies in one week. What exactly does that mean? Looking beyond the numbers, we see a clear shift in how downloadable music is perceived. It is now a viable metric in gauging the popularity of a single without the bias of the artist. Music is being judged and purchased strictly on its individual appeal and quality, which is refreshing after decades of being forced to buy whole albums containing three to four good songs and twice as many bad to mediocre tracks. Anonymous artists can compete with the big record labels and their stable of marketed artists through companies such as and, which provide distribution and licensing for these independent artists. Fortune 500 companies and Madison Avenue can shop at these web sites to find and license the music of these independent artists to feature in marketing campaigns just like mainstream artists’ music. It would make sense for an artist like Jim Jones who has the #1 downloaded rap single according to Billboard music, “We fly high”, but only sold approximately 267,000 units of his album, Hustler P.O.M.E., not even gold status according to industry standards. There are many artist like him that could generate a better return by promoting, selling, and licensing one single as opposed to putting that same effort and significantly more money into producing and subsequently promoting an entire album.

U.S. album sales continued to decline, about 588.2 million albums were sold in 2006 — a 4.9 percent decline from 2005. However, overall music sales increased by more than 19 percent in 2006, a number that includes all albums, singles, music videos and digital downloads. A closer look at the numbers shows where the growth in music really took place, the digital music landscape. Digital song sales grew 65% during 2006, reaching 582 million, according to Nielsen SoundScan. Digital album sales more than doubled from 2005, with 32.6 million albums sold, making up more than 5% of the 588.2 million total album sales. Digital song sales only trailed album sales by slightly more than 1%. If digital album sales are subtracted from total albums sales, then digital song sales are outselling albums. A discrepancy that can only be expected to grow as both cell phone/iPod users upgrade to the Apple iPhone, Microsoft's Zune gains traction, and cell phones capable of playing downloaded music become standard and more affordable.

Billboard magazine senior correspondent Brian Garrity said consumers are buying more single songs and fewer albums, and that makes it harder for the record industry to maintain profits. “At the end of the day, pop music is a singles driven business, so why would I want to buy a whole album?” Garrity said. Music has become a much more democratic process with the proliferation of iTunes, satellite radio, and ring tones. I wouldn’t be surprised if artists focused more on developing and selling singles as opposed to creating the traditional 12 to 14 track CD’s. The average consumer only listens to approximately 40% of the songs on their CD’s with the average music CD retailing for $14.99 (for the sake of this blog we will use an average of 13 tracks per CD) this breaks down to $1.15 per song. The average listener should spend $5.98 for the music they actually listen to, saving them $9.01 which is spent on unwanted or simply mediocre music. By contrast, individual songs are sold at $0.99 cents at the iTunes store and, $0.88 cents at, while Yahoo offers a subscription service for $12 a month to their music library of 12 million songs. Those are numbers that the record labels can’t compete with. In the current digital age, you’re better off buying six songs from iTunes or that you’d be 100% satisfied with rather than wasting $9.00 every time you want a new song. And that’s without considering the amount of physical space you’re saving.

This information isn’t new however what is, is the proliferation of small companies like rumblefish and inGrooves that allow artists to distribute their most popular singles and make a comfortable living as one hit wonders as opposed to the traditional album distribution model. These are both digital media publishers and technology companies, which execute distribution, marketing and licensing services (music to television, films, video games, and ringtones). Making a compelling shift in how music is both sold and distributed in today’s web 2.0 environment, leveling the playing field for lower profile artist to compete with their more popular peers.

Monday, January 15, 2007

The Tax Beauty of an LLC

Every dollar earned in this country, the IRS wants a piece. It doesn’t care who pays it, as long as it gets paid. Problems only arise when the IRS doesn’t get its taxes. A good business attorney makes sure his client is paying the IRS all of the taxes required while finding ways to reduce that tax liability without breaking the law. For the sake of this blog we are dealing with a limited liability corporation (LLC), formed and based in Maryland for tax purposes. The LLC, we’ll call it the entity, is granted the limited liability benefits of a corporation without the double taxation detriment.

Double taxation is basically where a corporation is considered a taxable entity and thus has to file and pay a separate tax return from the owners, or shareholders. First, the corporation does all its accounting and gets its final operating profit before taxes. This is its taxable income and the number which the corporation has to pay taxes on. After calculating its net profits, the corporation can then pay the owners/shareholders a dividend, their percentage of the corporate profits, based on their respective shares of the corporation’s stock. If the corporation chooses not to pay a dividend, then the owners only pay taxes on their individually earned incomes, including any salary paid by the corporation. Thankfully, the owners’ salaries are subtracted before profits are calculated but this doesn’t save them from single taxation just double. However, if a dividend is paid it is added to the owner’s income for the year. In this manner, the owners pay taxes on that dividend, even though money comprising the dividend has already been included, and had paid taxes on it, in the corporation’s tax filings. An LLC does not have this problem.

An LLC does not pay taxes on its income. This is because an LLC is not considered a taxable entity by the IRS, rather, it is a “disregarded entity” and subject to pass-through taxation. Pass-through taxation means that any income generated by the LLC passes through the entity directly to the owner(s). The LLC serves solely as a conduit for the income generated by the owners while protecting them from liability. An important distinction to remember is that while an LLC is a form or conducting business, the IRS does not care what form you conduct your business in when it assesses your taxes. The IRS only cares if you made money and how much.

An example of this difference: John and Lucy form Tables LLC to sell tables. They own $10,000 worth of tables. If they are sued, the suit can only affect the holdings of the Tables LLC, the $10,000 worth of tables. Now, assume Tables LLC sells the tables for $25,000 – a tidy $15,000 profit. The IRS expects tax revenue from that $15,000. However, the IRS disregards the existence of Tables LLC when deciding who to tax. It only sees the LLC owners, John and Lucy. As far as the IRS is concerned, John and Lucy, not Tables LLC, made $15,000 and have to pay taxes on it – even if Tables LLC never actually writes a check to John and Lucy for that $15 grand. If Tables LLC was Tables, Inc. the IRS would expect Tables, Inc. to pay taxes on the $15,000 and John and Lucy would only pay taxes if they subsequently received a share of the income. Either way, someone, John, Lucy, or Tables, has to pay taxes on the $15,000.

Is your company in a similar situation? Someone has to pay taxes on the income, whether it’s you or your company. If you’re able to choose to have your company treated as a corporation, then your company has to pay taxes on the revenue, even if it doesn’t distribute it. If you’re taxed as an LLC, then your company doesn’t pay anything but you have all of the tax burden, regardless of if you pay yourself a salary or not. In fact, paying yourself a salary doesn’t do you any favors. You’re still exposed to the same tax consequences. This is why you need to start thinking of ways to reduce your tax exposure.

Here are a list of questions you need to think about. Some of them you probably already have answered but they just set the framework:

1) Is your company a LLC?

2) Am I the sole owner of this company?

3) What is the company filing as its income for this tax period?

4) What is a “disregarded entity” for tax purposes?

5) What is pass-through taxation?

6) Is your company subject to pass-through taxation?

7) Is there some legal reason that I am not subject to pass-through taxation for my company’s revenue?

8) How does pass-through taxation affect me and my company?

9) How does your state tax law differ from Federal tax law with regards to LLC’s and pass-through taxation?

10) What deductions and exceptions am I qualified for?

11) Does paying myself a salary expose me to double taxation?

12) Do I use a Schedule C, Form 1120 or a 1092 to file my taxes?

13) For Federal Purposes am I classified as a corporation?

14) Do I have to, or have I, file/d a File Form 8832

For more information please read these articles, particularly the sections regarding taxes:,,id=137016,00.html

For more on this please check out my book Millionaire in the Basement due out in 2007.

Tuesday, January 9, 2007

How the NFL Blitzes in Business, Part 3

Continued from How the NFL Blitzes in Business, Part II

I suppose your next intelligent question is: “Sure it’ll be more expensive, but since the cable company is going to past the cost on to the subscriber, why don’t they just give in to the NFL Network?” Actually, the NFL Network is just the latest form of an old problem for cable companies. Cable operators have been wrestling with big TV sports money issues for years: Should they put sports channels on sports tiers–making only the interested portion of their subscribers pay extra fees for it, or should they foot the cost and make all subscribers pay? The problem is that sports are way more expensive–especially the NFL. In addition, under the terms that the NFL is offering the cost would not be borne only by those watching the games, but by the majority of cable subscribers.

One way to phrase the issue is: “Why do those sports subscribers, mostly men, have to pay for channels like E!, HGTV or the Food Network, which for the most part they’ll never see?” The answer isn’t that the cable companies won’t let you buy the channels you want to watch. They would but the content providers don't allow that. Large media companies, like Disney, force cable providers to accept predetermined packages to get the best channels. Allow me to demonstrate. ESPN is one of the more popular channels offered on cable television, it is also owned by the Disney corporation. Disney, recognizing their leverage, doesn’t allow the cable companies to just offer ESPN, instead the cable company must also force Disney’s other channels onto subscribers, channels like ABC Family, the Disney Channel, and for those who didn’t want ESPN in the first place, ESPN2. FOX uses similar channel packages, including the FOX Sports Network, FX, etc., as does TNT and Viacom.

There are pluses and minuses to this system. One important plus is that cable providers can negotiate lower overall rates for these channel packages, then bundle the programming together so that people are able to get the most popular channels at a reduced cost. The NFL Network doesn’t have any other channels to offer that could be included to help defray some of the costs included with providing their channel to the masses. This means that cable providers have to absorb the full cost of the NFL Network’s programming. Unfortunately, the price for the eight live games is just too great for the cable providers and their concern is that this is only the beginning. If they passed the cost of these eight games on to the subscribers, it would only encourage the NFL and the NFL Network to continue offering games but an additional fee basis. Look at the success of boxing and with their pay-per-view model, which eventually destroyed the popularity of their sport. Now, Brian Roberts, chairman of Comcast Corp., is so perplexed by the situation he wants to organize an industry summit to hash out differences. Roberts is also worried other sports leagues/groups will take a similar tack. For example, the U.S. Olympic Committee is considering its own 24-hour network. Even then, Olympics sports would conceivably be priced more reasonably than the NFL. The ability to generate additional pay for premier events is the kind of leverage all sports leagues would like to have–especially when it comes to getting paid from cable operators.

The NFL Network is currently available in about 40 million of the 111 million homes with TVs, not bad for a three year old network. In comparison, ESPN, which airs Monday night games, is available in 92 million. It would seem that the cable companies should offer the NFL Network as a stand-alone option, not part of an expensive, take-it-or-leave-it package. However the cable operators feel they have largely lost their football audience due to the NFL's decision to give exclusive viewing rights of its NFL Sunday Ticket to DirecTV, which allows the company to air up to 14 out-of-market regular season games every Sunday. As such, they don't feel overly inclined to add the NFL network to their basic programming at a premium price.

With the NFL having grand ambitions with its own network, could NFL Sunday Ticket become a bargaining chip with its service providers? That's clearly conjecture at this point, but opening up Sunday Ticket, once the DirecTV contract expires in 2010, to all providers in exchange for having the NFL Network widely available across all providers on a basic tier could be advantageous to both cable operators and the NFL.

Before the broadcast of the first game, the NFL was trying to urge cable networks to pick up the channel. The big issue, however, is cost and tier placement. The NFL wants the network available to the widest available audience, while charging cable companies a hefty price per household. Cable operators, meanwhile, want to offer the channel on one of their premium tiers. So far no resolution has been reached.

Tuesday, January 2, 2007

How the NFL Blitzes in Business, Part 2

Continued from How the NFL Blitzes in Business, Part I

Ultimately, the team owners came up with a compromise. The players would receive at least 60% of every team's revenue, which resulted in a bigger pool for the salary cap. But this caused a problem for the lower-revenue teams, like the Buffalo Bills and Jacksonville Jaguars, who might see 70% of their revenue going into player salaries while the New England Patriots and Washington Redskins would be spending only that 60%. So to try and make up the difference, the owners agreed that the 15 highest-revenue teams would pay equally into a pot totaling $30 million to be redistributed to the 17 poorest clubs.

It only adds up to a couple of million for each small-revenue franchise but other concessions were made. At the same time, the owners agreed that the 15 larger teams would also give up their profits from the league's new media ventures and share that money with the smaller-market teams as long as those small-market clubs dedicated at least 65% of their revenue to player salaries.

Unfortunately, some of the small-market teams still feel left out in the new contract, unsure how a trickle of money from the richer clubs is going to help them catch up. The potential solution is to aggressively generate revenue from any new media ventures and to squeeze more revenue out of the existing media properties. Hence, the bolstering of the NFL Network by adding those eight Thursday and Saturday night games.

Those games that are being shown semi-exclusively by the NFL Network can be directed at a wide variety of media as exclusive content that FOX, CBS, NBC, and ESPN can’t duplicate. The NFL Network will help feed content to the Internet, cell phones, iPods and whatever else has yet to be invented. These various new media connections, when filled and under the NFL's control, have the potential of becoming viable revenue streams for all NFL team owners.

"There's going to be peaks and valleys and some acceleration and deceleration [in new media]," said David Katz, the head of sports and studios at Yahoo!, which currently streams NFL games on the Internet overseas. "The NFL has proven to be the best at exploitation and management of their assets. I have no doubt they will continue to be good at what they do." It's a delicate balance. The NFL needs its revenue quickly to try and fill some of the gulf between big- and small-market owners, but moves cautiously in the ever changing new media markets.

No one really knows how much revenue could be generated because no one has a grasp on exactly what forms and opportunities the new media will present and partially because the league is only starting to cut deals in this new media world (adding games to the NFL Network, signing contracts for podcasts, cell phone telecasts, and just last month, the owners voted to operate the league's Web site,, themselves – previously CBS SportsLine held the contract).

"We hope that [new media] will be a real contributor and hopefully it will ameliorate some of that" big-market/small-market tension, Jeff Pash, the NFL's executive vice president, said recently after testifying before a congressional antitrust hearing. "And also by bringing it in house we can keep that revenue as a league asset and share it equally among the 32 teams as opposed to having yet another revenue source that exacerbates revenue disparities between teams."

Or as Broncos owner Pat Bowlen said, "If [the media money] is coming from a league-owned asset, then it will be easier to cut it up and give it to the smaller market teams rather than to just take it from the higher-revenue teams." Those previously mentioned eight games will be used to generate that media money. One question down!!!

Concluded in How the NFL Blitzes in Business, Part III