Business Blog: Hoover’s Business Insight Zone

From the “Pot Calls Kettle Black” department: Microsoft asserts that Google would enjoy monopoly advantages if its pending acquisition of DoubleClick goes through. Here’s the pith of the analysis from Clint Boulton at GoogleWatch:

Now that the FTC has blessed the merger (Merry Christmas, Google), Microsoft’s documentation of Google’s online ad position comes off as the data-driven equivalent of flipping the chess board up in frustration; Microsoft sees Google’s checkmate coming, but the only thing it can do is make some noise and hope someone listens.

Will the European Commission listen? I doubt it. Turnabout is fair play. How many Microsoft competitors felt the same helplessness watching the presiding market gorilla eat all of its bananas?

Amen. I don’t have any special ax to grind against Microsoft, but they are convicted monopolists. Some things are just too easy to parody.

[Hat-tip: Slashdot.]

To me, that’s a key philosophical question raised by this post from the environmentalist blog Gristmill:

Throw the book at him

Sickening. Kevin John Moran of Camano Island, Wash., was just convicted of illegally cutting down 27 old-growth cedars on public land. They were between 400 and 700 years old. And they were dry-side trees, even rarer than the Northwest’s west-slope titans. . . .

The blogger, Eric de Place, notes that the maximum penalty Moran faces is 10 years in prison and a fine of $250,000. The charge is “theft of Government property,” there being no specialized penalty — so far as I know — for egregious damage to an ecosystem or the country’s natural heritage.

Now, there are plenty of folks who will read “10 years in prison and a fine of $250,000″ and think that it’s more than enough for cutting down some trees. But at some point, doesn’t a thing stop being a thing that can be valued strictly in economic terms? Outraged or no, de Place seems to be making the point that there ought to be some charge worse than theft — maybe something like “wanton destruction” — to cover offenses like this one.

Economics would say that the oldness of the trees, their magnificience, their role in their ecosystem, or what have you are “externalities” from a financial perspective. The point is that Moran took public property that didn’t belong to him, and that property was in the form of trees. Period.

Yet if the threat of global warming is as bad as many scientists fear, and if deforestation continues around the world as it has done lately, I expect that at some point penalties for wrongfully cutting down trees — especially big and old ones — will run much stiffer.

Here’s a sampling of press coverage of Conrad Black’s sentencing in a Chicago federal court on charges of mail fraud and obstruction of justice:

Bloomberg: Black Gets 6 1/2 Years in Prison for Hollinger Fraud [Start here for a good recap of the entire affair.]

Black was charged in November 2005. On July 13, a jury found him and three former subordinates guilty of fraud stemming from $6.1 million in checks paid to three defendants in exchange for sham non-competition agreements involving Hollinger. Black was convicted of obstruction of justice for removing 13 boxes of documents sought by regulators from his Toronto office in 2005.

New York Times: Black Given Prison Term Over Fraud

Mr. Black, who once declared he would “not re-enact the French Revolutionary renunciation of the rights of the nobility” when criticized for using shareholder money to pay for a vacation to Bora Bora, and charged a lavish birthday party for his wife at La Grenouille restaurant in New York to his company, was acquitted of charges stemming from those incidents.

FORTUNE: Conrad Black’s shabby downfall

Indeed, after all the hullabaloo surrounding Lord Black of Crossharbour’s downfall, he was ultimately convicted of stealing $6.1 million from his company and obstructing justice by lugging some boxes out of his Toronto office - in plain view of security cameras - after being warned not to do so. All of this went on at a time when, on paper at least, Black was worth close to $300 million and was leading a life among the jet-setting glitterati.

Comparisons to Richard Nixon — who would have won the 1972 election without the slightest help from his “plumbers” — are inevitable, especially since Black recently published a mammoth biography on the disgraced president. Indeed, Black is quite a writer: he produced a similarly long — and well-reviewed — biography of Franklin Roosevelt.

But his own perception of himself is a long way from the sordid realities uncovered during his trial. Possibly the most perceptive character study comes in this column from James Bone of The Times of London:

Conrad Black, the romantic hero whose dramatic plots have fizzled out

In his heyday, Lord Black of Crossharbour strutted the world stage as press baron, confidant of statesmen and biographer of American presidents.

The Canadian-born peer, as head of a global newspaper empire that included the Telegraph titles and Spectator magazine, held London in his thrall with parties for journalists, academics and politicians at his double-fronted house in Cottesmore Gardens, Kensington, with Barbara Amiel, his glamorous columnist-wife.

Yesterday the self-regarding former Telegraph chairman, who once famously dressed up as Cardinal Richelieu for a costume party at Kensington Palace (with his wife on his arm as Marie Antoinette), confronted the humiliating prospect of donning an orange prison jumpsuit instead.

“He wanted to be the hero, but for some reason he has always wanted to be the dying hero. He has this very melancholy view,” said George Tombs, the author of a new Canadian biography entitled Robber Baron: Lord Black of Crossharbour. . . .

Lord Black himself bristles at suggestions that his spectacular downfall was provoked by a fatal flaw in his character. . . .

Black peremptorily dismisses such colourful explanations for his troubles. “This theory that it’s all a great ‘rise and fall’ story or some sort of Shakespearean or Greek tragedy and that I was misled by my wife and lived to extravagance, that is all nonsense,” he told the BBC Radio 4 Today programme last month in his only British media interview since the guilty verdict in July.

When John Humphrys described his predicament as a “fall from grace”, Black quickly contradicted him, calling it “persecution” instead.

“He is still trying to maintain that narcissistic bubble he has been in, even now. He is casting himself as a romantic hero who has been victimised by the American justice system and the overzealous missionaries of corporate justice,” Mr Tombs said.

There’s a part of me that relishes the downfall of the likes of Black, ex-Tyco chief Dennis Kozlowski, and ex-Enron chief Jeff Skilling, not because they were rich and powerful — I’m a big fan of capitalism — but becaused they wilfully abused the systems that made them rich, and then clung to their hubris even in defeat.

~~

Related Hoover’s records:

• Hollinger Inc.
• Sun-Times Media Group

~~

[This is a bit of a Monday-morning ramble coming in between doses of coffee. Please just take it for what it’s worth — and feel free to tell me what it’s worth, good or bad, in the comments.]

When should an industry die? Should consumers hasten the process? Should regulators? These questions don’t have easy answers, but they’re worth thinking about, especially when we consider some of the macro-scale problems facing the U.S.

Once upon a time, the tobacco industry peddled what Doonesbury has lampooned as a “healthful lung snack.” But centuries before that, the fledgling tobacco industry brought thousands of adventurers, planters, and indentured servants from England to Virginia and the Carolinas, planting the seeds (literally and figuratively) not just for the worldwide boom in smoking and snuff-taking, but for the cash-crop economies of the New World. Oh, and the sustained European settlement of Virginia and the Carolinas, too.

But that was before people understood the now-obvious connections between tobacco use and various ailments including cancer and emphysema. Nothing against tobacco farmers, who typically work like dogs to support their families, but they grow a crop that (eventually) makes a lot of people sick. It’s not a political statement or even an editorial statement to point that out — it’s just the state of reality as understood by disinterested parties today.

A disinterested view of the early-onset obesity that now afflicts so many American children says that these kids are taking in way too many calories while getting way too little exercise. That doesn’t mean that we outlaw corn syrup — which, simply by the numbers, represents a lot of the empty calories in the typical American adolescent’s diet — or that we try to ban video-game use among kids in the U.S. But it could mean, in the long run, a consumer backlash against couch-potato activities (and, by extension, video game makers), possibly extending to calls to cut subsidies to the corn farmers whose crops help to produce all the yummy corn syrup that sweetens our sodas and everything else.

One more short example: coal is the largest source of electricity in the U.S., but also by far the largest source of greenhouse emissions related to energy production. Again, that’s not a judgment against the coal industry — or coal miners, or electric utilities that run coal-fired plants. It’s just an observation of the facts as we have them now. At some point, if worries about global warming become widespread enough, there will be calls to shut down the coal industry and coal-fired electricity generation in the U.S., or else to force emissions controls on these industries, even at costs that today seem too exorbitant even to contemplate.

I carry no brief for tobacco — I’ve never smoked and I don’t invest in cigarette companies. But I surely take in my share and more of corn syrup, and I happily use plenty of electricity produced from coal-fired plants. No one needs to tell me that people in these industries work hard, and I’m well aware of the unintended consequences — and large inefficiencies — that often accompany broad-based governmental regulation. In general, I’m a believer in the power of markets to deliver the goods to the public.

But what about when we decide that the goods in question are more than economic? We did that when the Surgeon-General started putting the warnings on cigarette packets, and when cigarette advertisements were banned from television. We did it, to a degree, when the elder President Bush helped push through bipartisan legislation that regulated emissions of sulfur dioxide and other acid-rain-causing chemicals. We’ve done it, piecemeal, as school districts have banned soda machines from their schools.

Of course, the industries affected don’t go along quietly with these changes. They will preach up and down about how we can’t afford to regulate these things, or how the products aren’t actually harmful at all, or how the real responsibility for childhood obesity lies with parents (which, as a parent, I can say is incontrovertibly true). But if there’s enough of a groundswell — and even if it’s ill-advised — these industries could go the way of the asbestos business.

Like I said, pardon the philosophical Monday-morning ramble, because these thoughts are still only semi-formed. But there’s something here worth talking about. If you want to tell me what you think it is, I’ll be most grateful.

The jury’s verdict in the Thomas case notwithstanding, the RIAA is pursuing an abysmally stupid long-range plan with its litigation strategy. Yes, I’ve ranted about this before — but seldom have I been so sure that I’m right. You simply don’t win by alienating and criminalizing your customer base.

More analysis of the verdict:

• Good Morning Silicon Valley
• Ars Technica

And more analysis of Radiohead’s move away from the major-label game:

• Radiohead Roundup at Portfolio.com

I’m telling you — the established powers of the music industry need to rethink their business model and come up with a better one that doesn’t insist on taking a pound of flesh from music fans. Otherwise, they will be circumvented altogether.

In a comment to my post yesterday about the RIAA’s breathtakingly inane litigation strategy, Barry Ritholtz said:

The history of the music industry, from an investor’s critical perspective, is one of mismanagement, waste, and sheer stupidity which is hard for the ordinary business person to comprehend . . .

I concur. But don’t take my word for for it — or even Barry’s. How about the view of the world’s richest man? With Barry’s comment fresh in mind, I came across this tidbit in today’s New York Times story about the Microsoft Zune music player:

In an interview here this week, Mr. Gates hinted at his strategies for taking potential customers from Apple and expressed bewilderment that the recording industry had failed to turn digital music into a big moneymaker.

Emphasis added. Do you know why Gates is bewildered about this? Because he’s a much, much better business thinker than the folks who run the record industry, that’s why.

I would love for someone from the music business to take issue with that statement. All I have to do is point to the numbers. And I say this as someone who’s thoroughly skeptical about Microsoft’s monopolistic ways. Even with his monopoly advantages, Gates is still savvier about customer needs than the music business is.

This leads me to assert for the music business the same thing that I’ve asserted about the airline industry over and over. Someday, somewhere, somebody is going to figure out how to make money in a sustainable way from recorded music, taking advantage of digital music’s downloadability rather than trying fruitlessly to fight it.

Oh, wait: Steve Jobs already did that for Apple. Some of the biggest bands around have sussed this one out, too.

Who’s up next to make a fortune in the music business? My bet: not the big labels.

I’ve held off from commenting on the asinine litigation strategy of the RIAA. Sure, protect your intellectual property, but . . . can’t you figure out a way to do it that doesn’t alienate and embitter your customer base while also losing you money? Cue this Ars Technica story by Eric Bangeman:

RIAA anti-P2P campaign a real money pit, according to testimony

… One of the biggest bombshells from the cross-examination was Pariser’s admission that the RIAA’s legal campaign isn’t making the labels any money, and that, furthermore, the industry has no idea of the actual damages it suffers due to file-sharing.

So, let’s be clear: this strategy loses you money. It’s punitive against music consumers. It’s obviously ineffective as a means of checking pirated music downloads. It fails to address the fundamentally shifted realities of the digital music world. Does that about sum it up?

No wonder Radiohead’s going it alone.*

Earth to the RIAA: Why not wise up and switch to an approach that’s constructive?

~

* Mind you that Bob Lefsetz has a mouth on him, so there’s R-rated language at that link. But his analysis is sound.

One more note: Bangeman must be having a fun time — or else grinding his teeth to powder — in covering the RIAA trial. Witness this:

Sony BMG’s chief anti-piracy lawyer: “Copying” music you own is “stealing”

Again, let me just sigh at the cluelessness of the big labels.

By no means am I advocating actual theft, but there is a sea change underway in the music industry, and these labels seem dead-set on doing the impossible by keeping it from happening. (Lefsetz is a great source for chronicling and analyzing this sea change as it unfolds.) They’d be much better served to figure out how to profit from the conditions that prevail in today’s world of ubiquitous digital technology.

Today’s Company of the Day is Vonage. Here’s a copy of the original article; an update, a correction, and amplifications follow.

~~~

Internet phone company Vonage got yet another bad piece of news this week when a federal court ordered it to pay nearly $70 million in damages to Sprint Nextel for infringing that company’s patents. Vonage said that it would appeal the verdict, and reasserted that its VoIP (voice over Internet Protocol) technology does not actually infringe on Sprint’s patents. The ruling comes in the wake of a March finding by another federal judge that Vonage’s technology infringes on patents held by Verizon — a ruling (also under appeal)* that would force Vonage to pay nearly $60 million in damages and, more importantly, bar it from its principal business of using that technology to deliver Internet phone service. Vonage has talked about devising technical workarounds that don’t use the contested technology, but so far hasn’t announced any breakthroughs on that front.**

The adverse court rulings have been just one facet of the company’s problems. In the eyes of many market watchers, Vonage’s May 2006 IPO constituted a clinic in what not to do when taking a company public. After debuting at a price of just over $13, Vonage shares went directly into a steep slide. By the end of 2006, the share price was under $7.00; by the middle of this week, the price had fallen below $1.00. Some customers swear by the clarity and reliability of Vonage’s service, and sales have grown rapidly, from $80 million in 2004 to $270 million in 2005 and more than $600 million in 2006. Unfortunately, losses have also piled up quickly, and the balance sheet will get even worse if the company must pay the damages awarded to its much larger competitors. Maybe Vonage can navigate all these problems and become a serious player in the phone market. If not, the dial tone for Vonage may go silent.

~~~

* UPDATE: Yesterday an appeals court overturned one count and upheld two counts in the patent infringement ruling against Vonage in the Verizon case. More details available here:

Vonage loses appeal in Verizon patent case

** CORRECTION: In the story just cited, Vonage says that it has completed workarounds that allow it to operate without the Verizon-infringing technology. My mistake.

More context: This BusinessWeek item

Vonage’s Prospects Dim

raises an interesting question that I was just discussing with a Hoover’s colleague this morning: If Vonage can’t keep going on its own, might a company like Sprint want to buy it? For all its troubles, Vonage has nearly 2.5 million customers to go along with last year’s revenue figure of $600 million. If the legal haze clears adequately, one of the bigger telcos might want to buy Vonage out and fold its service offerings into their own.

Quick hits on a hectic Tuesday morning . . .

Oil futures have been holding steady above $80. That’s not quite the highest inflation-adjusted price ever, but it’s not too far off, either, and it doesn’t look like the price is headed down much in the near future.

We may be living in a world where $80 oil becomes normal. Recalibrate your expectations accordingly — everyone in the business world is having to.

~~~

In the past few years, we’ve heard a lot less about Microsoft the monopolist. The EU is changing that now:

Microsoft must ‘change its illegal behavior’

Microsoft is trying to spin the EU ruling as potentially threatening to the business practices (and interests) of many large companies, but Europe’s competition commissioner, Neelie Kroes, isn’t buying it: “Let me be clear, ladies and gentlemen, there is one company that will have to change its illegal behavior as a result of this ruling, and that is Microsoft.”

~~~

The US home mortgage foreclosure rate is getting worse, not better, and the damage is spreading across the country. We have not seen the end of this mortgage mess, and while I think it won’t lead to a general recession (or not a long one, anyway), I do think we’re apt to see much more misery among homeowners, and more failures of big businesses involved in the real estate, home building, and mortgage markets.

~~~

We discussed the recent adverse court ruling against SCO here, then linked to a recent interview with company CEO Darl McBride just this week. McBride came across as full of confidence during that interview. Filing for Chapter 11 may not remove that confidence, but it can hardly boost it.