Sony BMG just settled with the states of California and Texas over their fantastic XCP and Mediamax rootkit that they shipped on 2.1 million CDs.
Back in December of 2005, I offered to take the job of Senior Vice President of Common Sense after this debaucle first came to light. Later on that same month, I posted about their "patch" that introduced even more problems to victims computers.
You would think installing invasive software without permission on millions of your customers computers that allows just about anyone root access to the victims most sensitive data would be a criminal act. Any normal person would go to jail forever and ever for doing this sort of thing. But not Sony. Oh no. Their punishment isn't even a slap on the wrist.
"Under the terms of the separate settlements, each state will receive $750,000 in civil penalties and costs. In addition, Sony BMG agreed to reimburse consumers whose computers were damaged while trying to uninstall the XCP software. Customers in both states can file a claim with Sony BMG to receive refunds of up to $175. State officials estimate some 450,000 compact discs carrying the XCP software were sold in California, while about 130,000 were sold in Texas."
So the maximum liability for these two settlements, assuming EVERY consumer can come up with a $175 receipt proving they had to pay to have this malicious software removed would be:
California: $750,000 + ($175 x 450,000) = $79.5MM
Texas: $750,000 + ($175 x 130,000) = $23.5MM
Total of two states: $103MM (max)
In reality, I think we'll only see a few hundred people actually take advantage of the settlement, since the majority of people that know about it are computer geeks - and those geeks wouldn't pay to have the product removed and will thus have no receipts to get reimbursed with.
So pretty much, Sony BMG got away with only paying a few million dollars for damaging millions of machines with the most VILE form of software imaginable. Pennies per CD. This is a complete travesty of justice and I firmly believe that someone should have gone to jail.
Want to know more? Read the slashdot responses.
A few nights ago, I watched a documentary on PBS on the rescue of the Willie and Martin Handcart Companies in 1856. Some of my family were mormon pioneers, and so I was somewhat interested.
After the show, I decided to see if I had any relatives that were in the ill-fated companies. An uncle of mine had mentioned once that we had "handcart pioneers" in our past. It turns out he was entirely wrong. Our common mormon ancestors arrived in Salt Lake in 1850, 1852, and 1864 - completely missing the handcarts from 1855-1860. They travelled mostly by wagon.
Anyhow, it was interesting in that I never realized just how Mormon my family really was. For example, my great great great grandma was born in Nauvoo, IL - and my great great great great grandpa helped build the temple there. By the time I was born, I guess my chunk of the family had fallen mostly away from the church.
What was most interesting of all was the fact that nearly all of my ancestors had RIDICULOUS NUMBERS of kids. My great great grandpa, for example, had 13 total children over his lifetime - and had 10 of those after the age of 41. Pretty incredible. Math wise, if every generation had that many children - think how big the family would be by the time it reached my generation.
Great great grandpa is 4 generations back. So:
4 back. Great great grandpa has 13 kids. Next generation = 13
3 back. Great grandpa and kin have 13 kids. Next generation = 169
2 back. Grandpa and kin have 13 kids. Next generation = 2,197
1 back. Father and kin have 13 kids. My generation = 28,561
So in just 4 generations, you can have almost 30,000 people that call you "common ancestor." That's in a perfect world of course, where no one ever dies or goes sterile. So I guess you don't just have to do something great to be historically meaningful - you can also go by the "have a ton of babies" route.
Yesterday, Amtrak pulled a switcheroo with it's senior management. The idea, of course, being that the new management will be able to somehow miraculously resurrect the rail lines and turn it into a profit machine. According to the article:
Amtrak has $3.6 billion in debt and is heavily dependent on government subsidies. Its operating loss for 2005 topped $550 million.
I've always been a big fan of trains. I don't know why. Perhaps from riding the Heber Creeper too much as a kid? Anyhow, I've been really wondering - why is it that Amtrak is perpeptually a financial failure? I'm going to try digging into their consolidated financial statements to see if I can find the answer.
Let's start with the income statement on page 4 of the 2005 statements.
2005 Revenues: $1.886 B
2005 Expenses: $2.940 B
You can see right away that there is a big problem. What are the major items in their expenses?
Salaries, wages and benefits: $1.477 B (50.24%)
Depreciation: $0.557 B (18.95%)
Fuel, power, utilities: $0.227 B (7.72%)
Everything else: $0.679 B (23.10%)
Let's start by looking at Fuel. Supposedly, Amtrak is more fuel efficient than other forms of travel.
The U.S. Department of Energy (DOE) has reported that Amtrak - on an energy consumed per passenger-mile basis - is 18 percent more energy efficient than commercial airlines. According to DOE's Transportation Energy Data Book, Amtrak energy intensity was 2,935 British Thermal Units (BTUs) per passenger-mile and commercial airlines were 3,587. Commuter rail was 2,751 and automobiles were 3,549 BTUs. The DOE figures are from calendar year 2003, the latest available.
In addition, Amtrak uses less refined diesel fuel instead of more expensive jet fuel. Assuming those facts are true, fuel isn't the problem.
I'm going to generalize about depreciation, because I think it's pretty safe to assume that a train is cheaper to own and maintain than most other forms of travel. Except for internal wear and tear, the cars last nearly forever. Some railroads are still operating cars from the turn of the century. The power units might be more expensive, but when you consider that you need fewer complex engines to move the same amount of weight, it seems like maintenance would be cheaper than a bus and easily more than a jet liner. I may at some point go into more depth on this subject in another post, but for now let's assume that it is cheaper to operate trains.
Next, lets look at employement. I found an interesting analysis of the employment during 2004 which comes to the conclusion that Amtrak is a pork barrel federal jobs program, mostly for the North East Corridor (NEC).
"Collective NEC state Amtrak expenditures (for all trains that serve these states, including regional and long distance trains) - $281,140,685. Collective NEC state Amtrak employees (for all trains and services that serve these states, including regional and long distance trains, and the company headquarters in Washington, D.C.) - 13,452. Collective NEC state Amtrak employee payroll (for all trains and services that serve these states, including regional and long distance trains, and the company headquarters in Washington, D.C.) - $626,356,482. When you add the expenditures and payroll figures together, Amtrak poured raw cash of $907,497,167 into these eight states and the District of Columbia for Fiscal Year 2004.
Amtrak ticket revenue for FY 2004 was $1,256,424,267 (with an average ticket price of $50.15, a very low figure). Of the revenue, 53% was generated in the NEC. Yet, Amtrak spent $907,497,167 in the NEC states, or 72% of its ticket revenue, a very negative return on investment.
The point I think he's missing in his analysis is that Amtrak executives are trying to expand the NEC because it's one place where the trains have an operational advantage over other forms of travel. In the NEC, the population is tightly packed in close proximity. If you only need to go 100 miles, it hardly makes sense to fly. Driving is problematic because of traffic. Trains MIGHT be the way to go.
But I think he is dead on with naming Amtrak for what it is: a federal jobs program. In a normal company, you would NEVER see salaries exceed revenues for an extended period of time because 1) Management would layoff as many people as possible, and 2) The company would eventually go bankrupt if they didn't. I hope that someday, Amtrak is allowed to fail and that new, commerically viable train companies take it's place.
I live just outside Los Angeles. On July 22, 2006 (150 days ago) I was whining because it was 109.9 degrees outside.
This morning, it is 58 degrees inside my office with the heat on full blast. When I got in my car this morning, the back window was covered in frost and the temperature was 38 degrees. Supposedly it got down to 34 last night.
That's a temperature variance of 75.9 degrees. Seems pretty seasonal to me. I guess I've just grown weak and soft from years of California living.
A few months back, I purchased a 2006 Subaru Impreza 2.5i. I wanted something that was cheaper, more reliable and better built than my previous Audi. Up until this morning, I hadn't had a single problem with it.
I've still been trying to figure out how many miles I can get per tank of gas. I've been averaging about 24 mpg, which isn't fantastic - but isn't terrible either. AWD is a drag on the powertrain, but it's worth it.
This morning, I was running somewhat behind and didn't want to be late to work. The problem was that the fuel light had come on in my car the previous night on the way home. I sat down and looked in the manual. Supposedly, the Impreza has a 15.9 gallon tank and the low fuel light comes on when there is around 2.3 gallons left. So, milage wise, 15.9 - 2.3 = 13.6 gallons x 24 mpg = 326 miles for the low fuel light. This seems to be about right. The most I have ever put in my car before this was 14.6 gallons.
The light came on last night with about 8 miles left on my drive home. It's a 15 mile drive to work. I figured that 2.3 gallons x 24 mpg = 55.2 mile range. 55.2 - 8 = 47 more miles to go. My 15 mile drive to work should be easily within that range, right?
About 10 miles into the drive on the freeway, the car seemed to stumble. It's an eerie feeling. You press the gas and the car just stutters, and the speed drops. Then it shakes a bit and picks back up. It did this a few times and I decided "Uh oh, I'm almost out of gas." So I jumped over a few lanes, got off the freeway and pulled right into a gas station. It was dumb luck that I found the gas station - I'd never exited there before.
The car only took 14.9 gallons. I should have had 1 gallon left, or at least another 20 miles to drive. A little research on the internet shows that this problem is not uncommon with Subarus. I guess it has something to do with the shape of the gas tank and isn't fixable. The solution is fairly weak. "Keep your car filed up with gas."
Labels: Consumer Goods
After a lot of thinking, and the recommendation of a bipartisan panel, President Bush has apparently just about decided to put another 40,000 soldiers into Iraq. Whether you agree or disagree with this move, you realize this will be a frightenly expensive proposition.
According to this (somewhat dated) article from the Wall Street Journal:
Monthly expenditures are running at $5.9 billion; the U.S. commitment in Afghanistan adds roughly another $1 billion. Taken together, annual spending for the two wars will reach $117.6 billion for the fiscal year ending Sept. 30 -- 18% above funding for the prior 12 months.
According to globalsecurity.org, we currently have 152,000 troops deployed in Iraq. Using an obviously simple analysis:
$117.6B - $12B (Afghanistan) = $105.6B
$105.6B / 152,000 = $694,736.84 per soldier per year.
40,000 soldiers x $694,736.84 = $27.8B more money spent on the war.
$27.8B / 300MM Americans = $92.63 per year for every man woman and child in the US.
It seems like an awful lot more money to spend on such an unpopular war, especially given the fact that it might not even work out. When you consider that the population of Iraq is only 26,074,906 people, by adding 40,000 soldiers, we will be spending an additional $1,066 per person to provide them with security for a year or $5,116 total. GDP per capita is only $1,800. So we will be spending roughly 3 times as much as the entire Iraqi GDP to provide security, which clearly isn't very secure.
I'm going to go out on a limb here and say that this is completely unacceptable.
Last night, I watched a documentary by Bob Gilner on PBS about Heifer International. To say the least, I was very impressed by the organization. The idea behind Heifer is that they go to the very poorest places on earth, partner with locals, and give them the ability to feed themselves.
Their methods are downright brilliant. Instead of just giving temporary aid to improve the immediate situation of an area, they shoot for the real long term survival of the population. They find partners who are willing to work hard, give them training on how to produce food through livestock, get them to agree to some basic terms, then provide them with the animals they need. The partners agree to "pass on the gift" which means that at some point, the partners will give some portion of the offspring to new partners in the same area.
This approach makes a lot of sense to me. Instead of just giving away goods UN-humanitarian-relief-style, they are very carefully giving away capital and training with the understanding that it will eventually spread to the entire surrounding community. The impact of the training is permament - even without the capital, the farmers learn new methods of farming that are easier and more effective (and also have the side benefit of having less environmental impact.) The capital is in a form that is hard for corrupt governments to steal. How many corrupt dictators will go to the far reaches of a country to steal a few goats from a dirt poor farmer?
Looking at Heifer's financial info, it appears that they are about a $100MM organization. Around 25% of the money is used by fundraising/administration the remaining 75% goes directly to programs. It seems reasonably efficient to me. Most of their donations are directly from individuals. They've been around since 1944, so it looks like they are here to stay.
Heifer International has an impressive donation page where for as little as $10 you can choose an animal (or a share of one) to give.
Anyhow, I was really moved by the documentary. One part showed a "pass the gift" ceremony in Albania. The people were living in abject poverty. The documentary followed an old man to his home which was a simple stone hut. He slept on a pile of rags on the floor and there were a few chickens crawling all over his bed. The goat he received in the ceremony clearly would make a real difference in his life; he planned on selling it's offspring for a little money and consuming the milk it produced. The original small gift of a few goats and training had spread throughout the entire community and improved many lives.
In an article today on CNN.com, PIMCO's Ray Kennedy was quoted as having said:
"It's just going to get bigger and bigger," Kennedy said. "We will test a mega-deal. You have to accept a $50 billion deal likely will occur."
If I understand his meaning correctly, he's saying that at some point in 2007, there will be a megadeal leveraged buyout that will result in a $50 Billion dollar bond offering.
The article gives this example:
"Freescale Semiconductor (Charts) sold $5.95 billion of debt last month, the biggest for a buyout since 1989, to help finance its $17.6 billion takeover by a Blackstone Group-led consortium."
So roughly 34% was financed through the issuance of debt. Another example from the article is the issuance of $6.1 Billion in debt in the leveraged buyout of RJR Nabisco in 1989, which from other sources appears to have been a $25 Billion dollar deal = 24.4% debt funded.
There have been rumors floating around about stagnation at Microsoft and poor management. A few have even mentioned the possibility of a private equity buyout, including this article from August 18th in Financial Times titled "Private equity folk could do wonders with Microsoft" Daniel Pimrack of Thompson Financial argued that this was a virtual impossibility at the time.
Say this mega deal is funded 35% through debt. $50 B / 0.35 = 142.85 Billion dollar deal. Playing with Yahoo's Stock Screener, you can see that there aren't too many companies with that kind of market cap. By my count, there are currently 25 - and IBM is the smallest. Obviously a deal of this magnitude will require a huge consortium of investors or one REALLY big company that has enormous cash flows to support that kind of debt.
A buyout of Microsoft makes a lot of sense. Microsoft is LOADED with fat, but not in the unionized, contract laden way that the auto makers are. Instead, it's mostly in the form of highly educated, very employable workers which can be easily cut down. I believe a good manager could change the strategy from "Growth" to "Cash Cow" in less than a year. Elminate all the products that are unprofitable, cut down the workforce, focus on Microsofts core products, and wham: everlasting cash machine. Well, at least a five year cash machine. Long enough that private equity buyers could generate enormous profits.
If anyone knows about this potential megabuyout, it's Ray Kennedy. Pimco is no joke:
"PIMCO, one of the largest specialty fixed income managers in the world, with more than $641 billion in assets under management and more than 800 employees in offices in Newport Beach, New York, Singapore, Tokyo, London, Sydney, Munich, Toronto and Hong Kong."
I just wish I knew which firm it's going to be. Microsoft sounds like a possibility, but I've been wrong many times.
Labels: Private Equity
Today, Sirius Satellite Radio (SIRI) fell sharply after cutting their "subscriber forecast" on weak holiday sales. It got me thinking, how big is the market for satellite radio, really?
Sirius said it expects to add between 2.6 million to 2.8 million new subscribers in 2006, to a total of between 5.9 million to 6.1 million by the end of 2006. Previously, the company expected to end the year with a higher total of 6.3 million subscribers.
As of the quarter ended September 30, 2006, they had the following revenues:
Subscriber revenue, including effects of mail-in rebates: $155,337
Advertising revenue, net of agency fees: $7,130
Equipment revenue: $3,579
Other revenue: $1,067
Two things stand out from this 10-Q.
"As of September 30, 2006, we had 5,119,308 subscribers."
"a monthly subscription fee of $12.95."
At the end of the previous quarter:
"As of June 30, 2006, we had 4,678,207 subscribers."
Let's say that the average number of subscribers they had over the period was 4,898,758. 4.9MM subscribers x $12.95 a month x 3 months = $190.36MM in revenues. But somehow, they only managed $155.3MM in revenues from all these subscribers. So what's the deal here? A significant number of subscribers are either getting the service for free or at a discount. By my calculations, they are only getting around $10.57 per subscriber.
For the quarter ending March 31, 2007, analysts are projecting revenues of $218.11M. Please note these numbers haven't been revised for lower projected growth yet. Assuming similar ratios, here's the breakdown:
Subscriber revenue: $202.74
Advertising revenue: $9.31
Equipment revenue: $4.67
Other revenue: $1.39
Monthly revenue: $202.74 / 3 = 67.58 / $10.57 = 6.39MM users average.
Beginning subscribers: 6,000,000
Estimated ending subscribers: 6,780,000
For the year of 2007, using the same ratios:
Subscriber revenue: 1,208.39
Advertising revenue: 55.47
Equipment revenue: 27.84
Other revenue: 8.30
Monthly revenue: $1208.4 / 12 = 100.7 / $10.57 = 9.53MM users average
Beginning subscribers: 6,000,000
Estimated ending subscribers: 13,060,000
Obviously it's possible that they could also increase their revenue per subscriber or other revenues, but we'll assume they are still in the growth phase right now.
Now let's do a similar analysis of XM Satellite Radio Holdings (XMSR).
"the addition of more than 868,000 gross and 286,000 net new subscribers to end the period with over 7.1 million total subscribers"
"Our basic monthly subscription fee is $12.95"
10-Q for quarter ending Sept 30, 2006:
Net ad sales: $8.79
Monthly revenue: $214.82 / 3 = $71.61MM / 7.1MM subscribers = $10.09 per subscriber
To get to December, let's do a projection for the 4th quarter using analyst estimates of $247.18MM revenues.
Net ad sales: 9.03
monthly subscription revenue: $220.84 / 3 = $73.61MM / 10.08 = 7.3MM subscribers average
Estimated ending: 7.5MM
One more time, using XM Projected revenues for 2007: $1.24B
Again, using the same ratios to project the entire year:
Net ad sales: 45.31
Monthly subscription revenue = $1107.84 / 12 = $92.32MM / $10.08 = 9.16MM subscribers
Beginning subscribers: 7.5MM
Ending subscribers: 10.82MM
Current Size of the Market
So here is the total estimated subscribers of the two Satellite radio services:
3Q 2006: 12.22MM
4Q 2006: 13.50MM
4Q 2007: 23.88MM
At this point, I'm getting a little iffy about the projected growth. Supposedly, there will be 23.88MM subscribers by the end of next year. Assuming it's only 1 subscription per household and there are 2.6 people per household, that represents 62MM people or over 20% of the United States' population of 300MM. How many more people REALLY are willing to pay $155 a year for radio?
Analysts project XM's five year earnings growth at 25% and Sirius' at 22.3%. Now obviously they will eventually tone down advertising expense and reach a break even point of some sort. But let's say these numbers requires 7% annual subscriber growth for the next 5 years. What percentage of the population will be covered by satellite radio assuming 2% population growth?
I am, to say the least, VERY skeptical that it will ever reach that level of adoption. I think it is much more likely that we will see a big growth in alternate radio technologies like wireless internet connections with streaming internet radio stations instead.
In the meantime, the satellite radio companies are BLEEDING money. Take a look at the current ratio for the two as of the last quarter:
Current Ratio: 0.83
Current Ratio: 0.83
Both are already basically already insolvent. Without massive earnings growth, they are obviously in big trouble.
I could be completely wrong, but I very much doubt that satellite radio will ever reach the levels of adoption that are guesstimated by the analysts. It seems like alternative, cheaper technologies will overtake the services well before they reach the levels of subscription they need - basically every man, woman, and child in America. More than likely, one or both of these services will be bankrupt in the next 3-4 years. They are already appear to be close to it now.
Survivorship Bias is:
"the tendency for failed companies to be excluded from performance studies due to the fact that they no longer exist. It often causes the results of studies to skew higher because only companies which were successful enough to survive until the end of the period are included."
An example of it comes from this Wall Street Journal article posted on NYU Professor Damodaran's web site:
"Consider 1986: A decade ago, Lipper reported that 568 diversified U.S. stock funds had delivered an average 1986 return of 13.39%. Today, Lipper, which supplied the data for this section, puts the average 1986 return at 14.65%. Why the improvement? The new number is based on the performance of only the 434 funds from the 1986 group that are still in business today."
In the June 2006 edition of the Journal of Financial Planning, a short blurb notes that Morningstar's data may include suvivorship bias of up to 1.6% between 1996 and 2004:
"A study by the Zero Alpha Group and ZAG member Savant Capital Management claims that because Morningstar doesn't eliminate "survivorship bias" in its mutual Rind data it is "systematically and significantly" overstating the performance of actively managed mutual funds.
Morningstar concedes that it doesn't include defunct funds in its performance rankingneither do other major fund data providers-but it argues that not only is it no big deal, the elimination of survivorship bias creates its own problems.
Savant and ZAG (composed of nine independent investment advisory firms, all proponents of indexing) studied Morningstar data from 1995 to 2004 of actively managed funds relative to their related indexes. The survivorship bias, claims the study, inflated managed fund returns relative to their index, on average, by 1.6 percent a year."
Playing with Morningstar's Fund Screener, after having checked "No load funds" I got the following results (with S&P results in parenthesis):
YTD: 10.87 (11.89)
1 Year: 11.12 (10.44)
3 Year: 10.11 (9.28)
5 Year: 7.74 (4.16)
10 Year: 6.78 (6.35)
Please note this isn't the entire database, there were only 200 results. As you can see, if you deduct 1.6% from the 10 year results of 6.78%, the Mutal funds only returned 5.18% - well below the return of the S&P 500 6.35%.
Apparently, there is a similar issue with Hedge Fund returns, although available data is much less reliable as hedge funds are very conscientious about the information they disclose.
The bottom line is "BE CAREFUL" when looking at historical results and aggregate averages of funds. They are probably skewed.
The news this morning was that Kirk Kerkorian, billionaire activist investor and owner of Tracinda Corp has sold his remaining stake in General Motors Co. (GM). A few days ago in this post, I figured that Kerkorian's average rate of annual return on the GM stock was 4.26% - but that was BEFORE he sold off a whole lot more stock.
From today's Wall Street Journal [$$]:
"The person familiar with the matter said Tracinda sold 28 million GM shares at $29.25 a share. The shares were sold to Bank of America, a key lender to Mr. Kerkorian. A sale of 28 million shares crossed market-data services yesterday afternoon, but it wasn't clear during trading that the seller was Tracinda.
Earlier yesterday, Tracinda said in an SEC filing that it had agreed to sell 14 million shares for $28.75 a share in a private transaction. Tracinda last week sold another 14 million shares in a private deal for $33 a share. Before the sales, it had held a 9.9% stake."
So we have three chunks:
1) 14 million shares @ $33.00 = $462.00MM
2) 14 million shares @ $28.75 = $402.50MM
3) 28 million shares @ $29.25 = $819.00MM
Combined, we have:
56 million shares sold for $1,683.50 = $30.0625
From the same article:
"Mr. Kerkorian's GM sales come at a point when the 89-year-old investor is ahead on his investment in the auto maker by less than $100 million, when dividends and gains from his recent stock sale are factored in. The gain represents a modest return on his $1.6 billion investment in the company, falling well short of the multibillion-dollar profits he has reaped in the auto industry in the past."
In my previous analysis, I did not factor in dividends because I did not know the precise amount of stock purchased by Kerkorian and on which dates. To guesstimate his total dividend receipts, lets say he averaged an 8.5% stake in GM between the end of May 2005 and today. This number I'm guesstimating based on the graph labelled "STUCK IN NEUTRAL" from an article in the Wall Street Journal on 11/24/06.
Yahoo Finance tells me there were the following dividends during that period: (There was another on May 17, 2005, but we'll assume he didn't hold it then.)
15-Nov-06 $ 0.25 Dividend
09-Aug-06 $ 0.25 Dividend
10-May-06 $ 0.25 Dividend
14-Feb-06 $ 0.25 Dividend
08-Nov-05 $ 0.50 Dividend
10-Aug-05 $ 0.50 Dividend
Total of $2 a share.
If GM has 565.61M shares outstanding, and Kerkorian possed an average of 8.5%, that means he had an average of 48 million shares x $2 a share = $96MM dollars. If his total gain was $100 Million including the dividends, he only made something like $4MM from share price appreciation.
$4MM / 56MM shares = $0.07 a share over a time span of 548 days (1.5 years)
This means his real average purchase price was more like $29.99 - not the $31 a share reported by Nat Worden at TheStreet.com on 10/12/06.
$29.99 x 56MM shares = $1,679.44MM initial investment
Return = $100MM
Return on investment = 5.95%
Annualized ROI = 3.93%
Obviously without exact dates and amounts, this is still just a guesstimate, but it shows just how badly things went for Kerkorian during this timespan. He could have easily beat a return of 3.93% with a multitude of less risky investments. I do admire his ability to take a swing at such a risk. He is obviously a wickedly smart guy. It's a shame things didn't work out for him, as his plans for GM may have been a smart move - now we'll never know.
Labels: Kirk Kerkorian