Business Blog: Hoover’s Business Insight Zone

• In an unusual turn of events, higher oil prices aren’t translating into higher gasoline prices for consumers. Why not? An unusual spate of refinery shutdowns earlier in the year drove demand for crude oil down (because refineries undergoing repairs or maintenance couldn’t process as much oil) but also drove down the supply of wholesale gasoline (raising prices at the pump). Now the process is being reversed: high demand for crude (reflected in sky-high crude prices), but also a larger supply of gasoline going forward (which moderates pump prices).
• Remember when I confessed to being leery about doing business in Russia? Here’s another development suggesting why.
• Someday, Alcatel’s $10 billion purchase of Lucent may mean immense business clout for the combined firm. Today is not that day.

How is it? For Northwest Airlines, much better, since they’re now out of Chapter 11 and recording profits.

Except that Northwest keeps canceling (and even “pre-cancelling”) flights, which ticks off a lot of their regular passengers.

“The first step in improvement here is to recognize that something is wrong.”

Indeed.

Sun Microsystems has had a wild ride in recent years. After being one of the darlings of the tech bubble — in many cases, it was Sun’s servers that were running the Web sites for all those dot-com wannabes — the company suffered from intensified competition in servers from Dell, HP, and IBM.

But yesterday the Silicon Valley stalwart was able to give investors a pleasant surprise by announcing a bigger-than-expected quarterly profit of $329 million — the company’s third profitable quarter in a row. The dark cloud behind this silver lining is that Sun’s revenues were almost exactly what they were in the same quarter a year ago. So, the company’s cost-cutting plan has been effective (good), but it hasn’t been able to scare up a higher level of overall business even though the economy has been solid (bad).

Now the task for CEO Jonathan Schwartz and the rest of Sun will be to get the company growing again in a highly competitive market. Let’s see if the quarters to come will keep bringing fresh sunrises for Sun.

Hank Aaron broke the major-league home run record when I was toddler, and my mother had rooted for the Milwaukee Braves all the way back to their Aaron-Mathews-Spahn glory days, so Hank Aaron will probably always be the Home Run King in my heart. But facts are facts: the record is about to fall to Barry Bonds. (He’s an outfielder for the Giants — maybe you’ve heard of him?)

If Bonds’s history is any guide, the record may not bring him much in the way of extra riches. His thorny personality and the taint of his admitted — though purportedly accidental — steroid use have denied him anything like the endorsement contracts commanded by other professional athletes at the top of their sports. While Bonds does have some endorsements, he failed to hit the endorsement jackpot after he broke the single-season home run record in 2001, and his legacy wasn’t nearly as clouded by performance-enhancing drugs then as it is now.

Bonds isn’t going to cry poverty, nor should he, considering the millions he makes from the Giants. But if an 18-year-old Kevin Durant can land a $60-million contract from Nike before he ever plays a game in the NBA, how much more might Bonds make if he backed up his dazzling smile with a winning personality — or if so many people didn’t see him as a drug-using cheater?

You know that old curse — “May you live in interesting times”? Given what’s happened over the past couple of weeks in the financial world, “interesting times” may be upon us.

Perhaps you noted that the stock markets fell hard, and repeatedly, last week. Perhaps you noticed that some big companies experienced big declines at the same time that the overall market indices have been flying very high. Big deals are going sour, and some of the biggest deals on the table may not even happen now. And all of this is happening even though the US economy has been pretty robust.

What’s underneath Wall Street’s jitters? Call it a “credit crunch,” or just say that the ocean of cash that’s been sloshing around the markets for the past year-plus seems to be drying up. It’s a funny thing about cash: big spenders (corporations, buyout firms, the Chinese government, Arab oil billionaires, whoever) will spend it freely so long as conditions seem safe and sound, but then it’s very, very easy to put the wallet back in the pocket as soon as conditions appear to head south.

The boisterous M&A market over the past couple of years reflects the Goldilocks conditions that have prevailed in the world of high finance. Maybe the markets will shrug off these problems and resume their money-printing ways. Or maybe the big-money movers are discovering that the porridge has turned cold.

Brace yourself: it could be a bumpy ride.

Ford reported a profit this week, which is a nice change from two years’ worth of dismal-to-horrific losses. But the company’s boss, Alan Mulally, didn’t mince words in explaining that things are going to get worse before they get better. Almost the first words out of his mouth during the earnings conference call were:

Overall, our plan is working and is showing clear signs of progress. Despite the improved results of the second quarter, however, we have a long way to go. The challenges ahead remain formidable, and we expect the second half to be difficult.

Give the man credit for telling it like it is. That’s been Mulally’s M.O. since he moved from Boeing to Ford, a move that made him the first industry outsider ever to head one of Detroit’s Big Three. At the beginning of this year, when asked what the most important things were that Ford could do in its turnaround, he said, “At the top of the list, I would put dealing with reality.”

For a few decades now, insulation from reality has been the bitter hallmark of Detroit. Read more

Breaking from the pattern of lower earnings reported by BP and Exxon Mobil* earlier in the week, Royal Dutch Shell said that its earnings rose nearly 20% during the second quarter of 2007. While it had problems with unrest around its holdings in Nigeria, it benefited from strong performance in its refinery operations.

Shell suffered some real setbacks in recent years, including a scandal about misreporting its oil reserves and losing control of a $20 billion oil and gas project on the Russian island of Sakhalin — a project that the Kremlin basically took from Shell and handed to Gazprom. (Several big oil companies went through something similar this year when Venezuela nationalized some of their assets, a development that particularly hurt Conoco’s earnings.)

It will be interesting to see how Shell does going forward. It is staking its success on improved use of technology — which helps to explain why Nokia’s former CEO Jorma Ollila is now Shell’s chairman — along with big projects in alternative energy. It seems clear that Shell wants to be a technology-driven energy company rather than an oil company per se.

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* Don’t shed a tear for Exxon: they still cleared more than $10 billion for the quarter.

After the gruesome loss it reported a quarter ago, Sony must be pleased with the strong profits it just reported. Spider-Man 3, brought out by Sony’s movie studio, racked up huge gains for the company — and good thing, too, since Sony continues to lose loads of money on its hiiiiiiiigh-tech but pricey PlayStation 3 video game console.

Lately Sony has been squeezed by rivals large and small. On the big end, you have Samsung Electronics — which is comparable in size to Sony — whose star has climbed steadily in the past decade-plus, such that Samsung’s products are now considered by many to be on a par with Sony’s in terms of quality and style. Such a thing would have been unthinkable in, say, 1990, when most consumers around the world saw South Korean brands as inherently inferior to Japanese ones. (Turnabout is fair play: a generation before, American consumers thought the same thing about Japanese electronics and cars when comparing them to US-made goods.)

At the small end is Nintendo, which is less than a tenth of Sony’s size, but which has been beating Sony like a drum in the video game market. While the PS3 has lost scads of money for Sony, Nintendo’s Wii continues to rock the Casbah so hard that Nintendo just raised its annual profit projection by 40 percent after the first quarter of the company’s fiscal year.

Maybe one of these days, we’ll look back this and laugh, if huge profits from the PS3 bail out Sony in a quarter when the movie studio bombs.  But for now, Sony is reliant on big hits — whether in movies or digital doodads — to bail out its video game business.  This looks to be the pattern for at least a while to come, since PS3 profitability hardly seems to be lurking around the next corner.  That’s a risky position for Sony to be in.

The short-term view: Brent crude futures went above $77 today, then yo-yo’d back down — but not too far down. You can find more details here, and get a handy month-over-month chart here. (Current prices here.)

The longer-term view: Oil’s gonna stay expensive. $80, anyone?

Given the market pressure that led to Terry Semel’s exit last month as Yahoo!’s CEO, you’d think that the online titan was hemorrhaging. Hardly. But Yahoo! lives in a strange business habitat, one it shares with a younger, larger, and purportedly much smarter company. Steve Tobak of News.com captured this well in his recent commentary on what ails Yahoo! and how to fix it:

Imagine this: a company has a $35 billion market cap, a P/E of 50, annual revenues of $5 billion, annual profits of $500 million, 60% gross margins, and about $3 billion in the bank.

Nice fundamentals, right? Now imagine the same company being characterized as “embattled.” What could possibly be so wrong with this picture that an outcry from investors got the CEO booted?

The company in question, of course, is Yahoo. And what’s wrong is that archrival Google has figured out how to mint money with search ads and now boasts a market cap of $170 billion and $3 billion in annual profits. The bad news for Yahoo is that advertising, for the most part, is a zero-sum game. Google’s good fortunes spell boohoo for Yahoo.

Now Jerry Yang — company co-founder, erstwhile Chief Yahoo, and now CEO — has given himself “100 days or so” to revamp the company’s strategy. What should he look to do during that time? Several Wharton professors have stepped up to offer suggestions:

Some Free Advice for Yahoo CEO Jerry Yang

There’s a lot of good sense in everything they say, but I’m particularly drawn to their advice to “Put Wall Street on the Back Burner.” All public-company CEOs must decide how they will manage Wall Street’s expectations, but sometimes massaging the investment community goes so far that it gets in the way of doing what’s right for the company. Jack Welch once said that the real challenge of management — the very thing that makes it hard — is that you have to manage for the short-term and the long-term at the same time, always. That’s true for Jerry Yang as much as anybody, but right now Yahoo! is doing okay in the short term, and it especially needs to focus on where it’s headed for the long term. If that means smiling, nodding, and saying the right things to Wall Street for a couple of quarters while mostly ignoring its signals, so be it — so long as you get the company pointed in the right direction.

Yang should be well positioned to do this: Terry Semel came in as an outsider, had to maintain his reputation as a pro’s pro of a top manager, and bore very high expectations. While in the long run expectations will be just as high for Yang, Yahoo! insiders and the investment community alike are much more apt to cut him some slack, at least during the first months of his CEO tenure. After all, he co-founded the company, and as one of its largest shareholders he has lots of skin in the game. It matters a lot to him personally what happens to Yahoo! now and in the future.

So, Jerry, listen to the good profs from Wharton: spend your time figuring out what Yahoo! can do best, lay out a strategy for doing that for years to come, and don’t worry too much about what Wall Street says about you or Yahoo! this year. Do this, and you’re much likelier to win in the long run, which is what counts most.