What Global Warming and the U.S. Government Shutdown Have in Common

Last week we learned that there is no doubt, the world is warming.  A U.N. report affirmed by some 1,000 scientists asserted 95% confidence as to the likely outcomes, as well as the cause.  We must expect more volatility in weather, and that the oceans will continue rising. 

Yet, most people really could have cared less.  And a vocal minority still clings to the notion that because the prior decade saw a slower heating, perhaps this will all just go away.

Incredibly, for those of us who don't live and work in Florida, there was CNN news footage of daily flooding in Miami's streets due to current sea levels which have risen over last 50 years.  Given that we can now predict the oceans will rise between 1 and 6 feet in the next 50 years, it is possible to map the large areas of Miami streets which are certain to be flooded

There is just no escaping the fact that the long-term trend of global warming will have a remarkable impact on everyone.  It will affect transportation, living locations, working locations, electricity generation and distribution, agriculture production, textile production – everything will be affected.  And because it is happening so slowly, we actually can do lots of modeling about what will happen.

Yet, I never hear any business leaders talk about how they are planning for global warning.  No comments about how they are making changes to keep their business successful.  Nor comments about the new opportunities this will create.  Even though the long-term impacts will be substantial, the weather and how it affects us is treated like the status quo.

What does this have in common with the government shutdown

America has known for decades that its healthcare system was dysfunctional; to be polite.  It was incredibly expensive (by all standards) and yet had no better outcomes for citizens than other modern countries.  For over 20 years efforts were attempted to restructure health care.  Yet as the morass of regulations ballooned, there was no effective overhaul that addressed basic problems built into the system.  Costs continued to soar, and more people joined the ranks of those without health care, while other families were bankrupted by illness.

Finally, amidst enormous debate, the Affordable Care Act was passed.  Despite wide ranging opinions from medical doctors, nurses, hospital and clinic administrators, patient advocacy groups, pharmaceutical companies, medical device companies and insurance companies (to name just some of those with a vested interest and loud, competing, viewpoints) Congress passed the Affordable Care Act which the President signed. 

Like most such things in America, almost nobody was happy.  No one got what they wanted.  It was one of those enormous, uniquely American, compromises.  So, like unhappy people do in America, we sued!  And it took a few years before finally the Supreme Court ruled that the legislation was constitutional.   The Affordable Care Act would be law.

But, people remain who simply do not want to accept the need for health care change.  So, in a last ditch effort to preserve the status quo, they are basically trying to kidnap the government budget process and hold it hostage until they get their way.  They have no alternative plan to replace the Affordable Care Act.  They simply want to stop it from moving forward.

What global warming and the government shut down have in common are:

  • Very long-term problems
  • No quick solution for the problem
  • No easy solution for the problem
  • If you do nothing about the problem today, you have no immediate calamity
  • Doing anything about the problem affects almost everyone
  • Doing anything causes serious change

So, in both cases, people have emerged as the Status Quo Police.  They take on the role of stopping change.  They will do pretty much anything to defend & extend the status quo:

  • Ignore data that is contradictory to the best analytical views
  • Claim that small probability outcomes (that change may not be necessary) justifies doing nothing
  • Delay, delay, delay taking any action until a disaster requires action
  • Constantly claim that the cost of change is not justified
  • Claim that the short-term impact of change is more deleterious than the long-term benefits
  • Assume that the status quo will somehow resolve itself favorably – with no supporting evidence or analysis
  • Undertake any action that preserves the status quo
  • Threaten a "scorched earth policy" (that they will create big, immediate problems if forced to change the status quo)

The earth is going to become warmer.  The oceans will rise, and other changes will happen.  If you don't incorporate this in your plans, and take action, you can expect this trend will harm you. 

U.S. health care is going to be reformed.  How it will happen is just starting.  How it will evolve is still unclear.  Those who create various scenarios in their plans to prepare for this change will benefit.  Those who do nothing, hoping it goes away, will find themselves struggling.

The Status Quo Police, trying their best to encourage people to ignore the need for change – the major, important trends – are helping nobody.  By trying to preserve the status quo they inhibit effective planning, and action, to prepare for a different (better) future.

Does your organization have Status Quo Police?  Are their functions, groups or individuals who are driven to defend and extend the status quo – even in the face of trends that demonstrate change is necessary? Can they stop conversations around substantial change?   Are they allowed to stop future planning for scenarios that are very different from the past?  Can they enforce cultural norms that stop considering new alternatives?  Can they control resources resulting in less innovation and change? 

Let's learn from these 2 big issues.  Change is inevitable.  It is even necessary.  Trying to preserve the status quo is costly, and inhibits taking long-term effective action.  Status Quo Police are obstructionists who keep us from facing, and solving, difficult problems.  They don't help our organizations create a new, more successful future.  Only by overcoming them can we reach our full potential, and create opportunities out of change.

 

Why Apple Investors Are Deservedly Worried

Apple announced the new iPhones recently.  And mostly, nobody cared.

Remember when users waited anxiously for new products from Apple?  Even the media became addicted to a new round of Apple products every few months.  Apple announcements seemed a sure-fire way to excite folks with new possibilities for getting things done in a fast changing world. 

But the new iPhones, and the underlying new iPhone software called iOS7, has almost nobody excited. 

Instead of the product launches speaking for themselves, the CEO (Tim Cook) and his top product development lieutenants (Jony Ive and Craig Federighi) have been making the media rounds at BloombergBusinessWeek and USAToday telling us that Apple is still a really innovative place.  Unfortunately, their words aren't that convincing.  Not nearly as convincing as former product launches.

CEO Cook is trying to convince us that Apple's big loss of market share should not be troubling. iPhone owners still use their smartphones more than Android owners, and that's all we should care about.  Unfortunately, Apple profits come from unit sales (and app sales) rather than minutes used.  So the chronic share loss is quite concerning. 

Especially since unit sales are now growing barely in single digits, and revenue growth quarter-over-quarter, which sailed through 2012 in the 50-75% range, have suddenly gone completely flat (less than 1% last quarter.)  And margins have plunged from nearly 50% to about 35% – more like 2009 (and briefly in 2010) than what investors had grown accustomed to during Apple's great value rise.  The numbers do not align with executive optimism.

For industry aficianados iOS7 is a big deal.  Forbes Haydn Shaughnessy does a great job of laying out why Apple will benefit from giving its ecosystem of suppliers a new operating system on which to build enhanced features and functionality.  Such product updates will keep many developers writing for the iOS devices, and keep the battle tight with Samsung and others using Google's Android OS while making it ever more difficult for Microsoft to gain Windows8 traction in mobile. 

And that is good for Apple.  It insures ongoing sales, and ongoing profits.  In the slog-through-the-tech-trench-warfare Apple is continuing to bring new guns to the battle, making sure it doesn't get blown up.

But that isn't why Apple became the most valuable publicly traded company in America. 

We became addicted to a company that brought us things which were great, even when we didn't know we wanted them – much less think we needed them.  We were happy with CDs and Walkmen until we discovered much smaller, lighter iPods and 99cent iTunes.  We were happy with our Blackberries until we learned the great benefits of apps, and all the things we could do with a simple smartphone.  We were happy working on laptops until we discovered smaller, lighter tablets could accomplish almost everything we couldn't do on our iPhone, while keeping us 24×7 connected to the cloud (that we didn't even know or care about before,) allowing us to leave the laptop at the office.

Now we hear about upgrades.  A better operating system (sort of sounds like Microsoft talking, to be honest.)  Great for hard core techies, but what do users care?  A better Siri; which we aren't yet sure we really like, or trust.  A new fingerprint reader which may be better security, but leaves us wondering if it will have Siri-like problems actually working.  New cheaper color cases – which don't matter at all unless you are trying to downgrade your product (sounds sort of like P&G trying to convince us that cheaper, less good "Basic" Bounty was an innovation.) 

More (upgrades) Better (voice interface, camera capability, security) and Cheaper (plastic cases) is not innovation.  It is defending and extending your past success.  There's nothing wrong with that, but it doesn't excite us.  And it doesn't make your brand something people can't live without.  And, while it keeps the battle for sales going, it doesn't grow your margin, or dramatically grow your sales (it has declining marginal returns, in fact.)

And it won't get your stock price from $450-$475/share back to $700.

We all know what we want from Apple.  We long for the days when the old CEO would have said "You like Google Glass?  Look at this…….  This will change the way you work forever!!" 

We've been waiting for an Apple TV that let's us bypass clunky remote controls, rapidly find favorite shows and helps us avoid unwanted ads and clutter.  But we've been getting a tease of Dick Tracy-esque smart watches. 

From the world's #1 tech brand (in market cap – and probably user opinion) we want something disruptive!  Something that changes the game on old companies we less than love like Comcast and DirecTV.  Something that helps us get rid of annoying problems like expensive and bad electric service, or routers in our basements and bedrooms, or navigation devices in our cars, or thumb drives hooked up to our flat screen TVs —- or doctor visits.  We want something Game Changing!

Apple's new CEO seems to be great at the Sustaining Innovation game.  And that pretty much assures Apple of at least a few more years of nicely profitable sales.  But it won't keep Apple on top of the tech, or market cap, heap.  For that Apple needs to bring the market something big.  We've waited 2 years, which is an eternity in tech and financial markets.  If something doesn't happen soon, Apple investors deserve to be worried, and wary.

Out with a Whimper – HP, B of A, Alcoa and the DJIA

This week the people who decide what composes the Dow Jones Industrial Average booted off 3 companies and added 3 others.  What's remarkable is how little most people cared!

"The Dow," as it is often called, is intended to represent the core of America's economy.  "As the Dow goes, so goes America" is the theory.  It is one of the most watched indices of all markets, with many people tracking how much it goes up, or down, every trading day.  So being a component of the DJIA is a pretty big deal.

It's not a good day when you find out your company has been removed from the index.  Because it is a very public statement that your company simply isn't all that important any more.  Certainly not as important as it once was!  Your relevance, once considered core to representing the economy, has dissipated.  And, unfortunately, most companies that fall off the DJIA slip away into oblivion.

I have a simple test.  Do like Jay Leno, of Tonight Show fame, and simply ask a dozen college graduates that are between 26 and 31 about a company.  If they know that company, and are positively influenced by it, you have relevancy.  If they don't care about that company then the CEO and Board should take note, because it is an early indicator that the company may well have lost relevancy and is probably in more trouble than the leaders want to admit.

Ask these folks about Alcoa (AA) and what do you imagine the typical response?  "Alcoa?"  It is a rare person under 40 who knows that Alcoa was once the king of aluminum — back when we wrapped food in "tin foil" and before we all drank sodas and beer from a can.  To most, "Alcoa" is a random set of letters with no meaning – like Altria – rather than its origin as ALuminum COrporation of America. 

But, its not even the largest aluminum company any more.  Alcoa is now 3rd.  In a world where we live on smartphones and tablets, who really cares about a mining company that deals in commodities?  Especially the third largest with no growth prospects?

Speaking of smartphones, Hewlett Packard (HPQ) was recently considered a bellweather of the tech industry.  An early innovator in test equipment, it was one of the original "Silicon Valley" companies.  But its commitment to printers has left people caring little about the company's products, since everyone prints less and less as we read more and more off digital screens. 

Past-CEO Fiorina's huge investment in PCs by buying Compaq (which previously bought minicomputer maker DEC,) committed the rest of HP into what is now one of the fastest shrinking markets.  And in PCs, HP doesn't even have any technology roots.  HP is just an assembler, mostly offshore, as its products are all based on outsourced chip and software technology. 

What a few years ago was considered a leader in technology has become a company that the younger crowd identifies with technology products they rarely use, and never buy.  And lacking any sort of exciting pipeline, nobody really cares about HP.

Bank of America (BAC) was one of the 2 leaders in financial services when it entered the DJIA.  It was a powerhouse in all things banking.  But, as the mortgage market disintegrated B of A rapidly fell into trouble.  It's shotgun wedding with Merrill Lynch to save the investment bank from failure made the B of A bigger, but not stronger. 

Now racked with concerns about any part of the institution having long-term success against larger, and better capitalized, banks in America and offshore has left B of A with a lot of branches, but no market leadership.  What innovations B of A may have had in lending or derivatives are now considered headaches most people either don't understand, or largely despise.

These 3 companies were once great lions of their industries.  And they were rewarded with placement on the DJIA as icons of the economy.  But they now leave with a whimper. Their values so shredded that their departure makes almost no impact on calculating the DJIA using the remaining companies.  (Note: the DJIA calculation was significantly impacted by the addition of much higher valued companies Nike, Goldman Sachs and Visa.)

If we look at some past examples of other companies removed from the DJIA, one should be skeptical about the long-term future for these three:

  • 2009 – GM removed due to bankruptcy
  • 2004 – AT&T and Kodak removed (both ended up in bankruptcy)
  • 1999 – Goodyear, Union Carbide, Sears
  • 1997 – Westinghouse, Woolworths
  • 1991 – American Can, Navistar/International Harvester

Any company can lose relevancy.  Markets shift.  There is risk incurred by focusing on the status quo (Status Quo Risk.) New technology, regulations, competitors, business practices — innovations of all sorts — enter the market daily.  Being really good at something, in fact being the worlds BEST at something, does not insure success or longevity (despite the popularity of In Search of Excellence). 

When markets shift, and your company doesn't, you can find yourself without relevancy.  And with a fast declining value.  Whether you are iconic – or not.

Microsoft’s $7.2B Nokia Mistake

Just over a week after Microsoft announces plans to replace CEO Steve Ballmer the company announced it will spend $7.2B to buy the Nokia phone/tablet business.  For those looking forward to big changes at Microsoft this was like sticking a pin in the big party balloon!

Everyone knows that Microsoft's future is at risk now that PC sales are declining globally at nearly 10% – with developing markets shifting even faster to mobile devices than the USA.  And Microsoft has been the perpetual loser in mobile devices; late to market and with a product that is not a game changer and has only 3% share in the USA

But, despite this grim reality, Microsoft has doubled-down (that's doubled its bet for non-gamblers) on its Windows 8 OS strategy, and continues to play "bet the company".  Nokia's global market share has shriveled to 15% (from 40%) since former Microsoft exec-turned-Nokia-CEO Stephen Elop committed the company to Windows 8.  Because other Microsoft ecosystem companies like HP, Acer and HP have been slow to bring out Win 8 devices, Nokia has 90% of the miniscule market that is Win 8 phones.  So this acquisition brings in-house a much deeper commitment to spending on an effort to defend & extend Microsoft's declining O/S products.

As I predicted in January, the #1 action we could expect from a Ballmer-led Microsoft is pouring more resources into fighting market leaders iOS and Android – an unwinnable war.  Previously there was the $8.5B Skype and the $400M Nook, and now a $7.2B Nokia.  And as 32,000 Nokia employees join Microsoft losses will surely continue to rise.  While Microsoft has a lot of cash – spending it at this rate, it won't last long!

Some folks think this acquisition will make Microsoft more like Apple, because it now will have both hardware and software which in some ways is like Apple's iPhone.  The hope is for Apple-like sales and margins soon.  But, unfortunately, Google bought Motorola months ago and we've seen that such revenue and profit growth are much harder to achieve than simply making an acquisition.  And Android products are much more popular than Win8.  Simply combining Microsoft and Nokia does not change the fact that Win8 products are very late to market, and not very desirable.

Some have postulated that buying Nokia was a way to solve the Microsoft CEO succession question, positioning Mr. Elop for Mr. Ballmer's job.  While that outcome does seem likely, it would be one of the most expensive recruiting efforts of all time.  The only reason for Mr. Elop to be made Microsoft CEO is his historical company relationship, not performance.  And that makes Mr. Elop is exactly the wrong person for the Microsoft CEO job! 

In October, 2010 when Mr. Elop took over Nokia I pointed out that he was the wrong person for that job – and he would destroy Nokia by making it a "Microsoft shop" with a Microsoft strategy.  Since then sales are down, profits have evaporated, shareholders are in revolt and the only good news has been selling the dying company to Microsoft!  That's not exactly the best CEO legacy. 

Mr. Elop's job today is to sell more Win8 mobile devices.  Were he to be made Microsoft CEO it is likely he would continue to think that is his primary job – just as Mr. Ballmer has believed.  Neither CEO has shown any ability to realize that the market has already shifted, that there are two leaders far, far in front with brand image, products, apps, developers, partners, distribution, market share, sales and profits. And it is impossible for Microsoft to now catch up.

It is for good reason that short-term traders pushed down Microsoft's share value after the acquisition was announced.  It is clear that current CEO Ballmer and Microsoft's Board are still stuck fighting the last war.  Still trying to resurrect the Windows and Office businesses to previous glory.  Many market anallysts see this as the last great effort to make Ballmer's bet-the-company on Windows 8 pay off.  But that's a bet which every month is showing longer and longer odds.

Microsoft is not dead.  And Microsoft is not without the ability to turn around.  But it won't happen unless the Board recognizes it needs to steer Microsoft in a vastly different direction, reduce (rather than increase) investments in Win8 (and its devices,) and create a vision for 2020 where Microsoft is highly relevant to customers.  So far, we're seeing all the wrong moves.

 

Ballmer Resigning – Next?

Steve Ballmer announced he would be retiring as CEO of Microsoft within the next 12 months.  This extended timing, rather than immediately, shows clear the Board is ready for him to go but there is nobody ready to replace him. 

The big question is, who would want Ballmer's job?   It will be very tough to make Microsoft an industry leader again.  What would his replacement propose to do?  The fuse for a turnaround is short, and the options faint.

Microsoft has been on a downhill trajectory for at least 4 years.  Although the company has introduced innovations in gaming (xBox and Kinect) as well as on-line (games and Bing), those divisions perpetually lose money.  Stiff competitors Sony, Nintendo and Google have made these forays intellectually  interesting, but of no value for investors or customers.  The end-game for Microsoft has remained Windows – and as PC sales decline that's very bad news.

Microsoft viability has been firmly tied to Windows and Office sales.  Historically these have been unassailable products, creating over 100% of the profits at Microsoft (covering losses in other divisions.) But, these products have lost growth, and relevancy. Windows 8 and Office 365 are product nobody really cares about, while they keep looking for updates from Apple, Google, Amazon and Samsung.

The market started going mobile 10 years ago.  As Apple and Google promoted increased mobility, Microsoft tried to defend & extend its PC stronghold.  It was a classic business inflection point in the making.  Everyone knew at some point mobile devices would be more important than PCs.  But most industry insiders (including Microsoft) kept thinking it would be later rather than sooner. 

They were wrong.  The shift came a lot faster than expected.  Like in sailboat racing, suddenly the wind was taken out of Microsoft's sails as competitors shot to the lead in customer interest.  While people were excited for new smartphones and tablets, Microsoft tried to re-engineer its historical product as an extension into the new market.

Windows 8 tablets and Surface tablets were ill-fated from the beginning.  They did not appeal to the huge installed base of Windows customers, because changes like touch screens and tiles simply were too expensive and too behaviorally different.  And they offered no advantage for people to switch that had already started buying iOS and Android products.  Not to mention an app availability about 10% of the market leaders.  Simply put, investing in Windows 8 and its own tablet was like adding bricks to a downhill runaway truck (end-of-life for PCs) – it sped up the time to an inevitable crash. 

And spending money on poorly thought out investments like the Barnes & Noble Nook merely demonstrated Microsoft had money to burn, rather than a strategy for competing.  Skype cost some $8B, but how has that helped Microsoft become more competive?  It's not just an overspending on internal projects that failed to achieve any market success, but a series of wasted investments in bad acquisitions that showed Microsoft had no idea how it was going to regain industry leadership in a changing marketplace going more mobile and into the cloud every month.

Now the situation is pretty dire, and now is the time for Microsoft to give up on its defend and extend strategy for Windows/Office.  Customers are openly uninterested in new laptops running Windows 8.  And Win 8.1 will not change this lackadaisical attitude.  Nobody is interested in Windows 8 phones, or tablets.  This has left companies in the Microsoft ecosystem like HP, Dell and Nokia gasping for air as sales tumble, profits evaporate and customers flock to new solutions from Apple and Samsung.  Instead of seeking out an update to Office for a new PC, people are using much lighter (and cheaper) cloud services from Amazon and office solutions like Google docs.  And most of those old add-on product sales, like printers and servers, are disappearing into the cloud and mobile displays.

So now, after being forced to write off Surface and report a  horrible quarter, the Board has pushed Ballmer out the door.  Pretty remarkable.  But, incredibly late.  Just like the leaders at RIM stayed too long, leaving the company with no future options as Blackberry sales plummeted, Ballmer is taking leave as sales, profits and cash flow are taking a turn for the worst.  And only months after a reorganization that simply made the whole situation a lot more confusing for not only investors, but internal managers and employees.

Microsoft has a big cash hoard, but how long will that last?  As its distribution system falters, and sales drop, the costs will rapidly catch up with cash flow.  Big layoffs are a certainty; think half the workforce in 2 years. Equally certain are sales of divisions (who can buy xBox market share and turn it competitively profitable?) or shut-downs (how long will Bing stay alive when it is utterly unnecessary and expensive to maintain?) 

But, there is a better option.  Without the cash from
Windows/Office, you can't keep much of the rest of Microsoft walking. So
now is the time to cut investments in Windows/Office and put money into the
best things Microsoft has going – primarily Kinect and cloud services.  A radical restructuring of its spending and investments.

Kinect is an incredible product.  It has found multiple applications Microsoft fails to capitalize upon.  Kinect has the possibility of becoming the centerpiece for managing how we connect to data, how we store data, how we find data.  It can bring together our smartphone, tablet and historical laptop worlds – and possibly even connect this to traditional TV and radio.  It can be the centerpiece for two-way communications (think telephone or skype via all your devices.)  Coupled with the right hardware, it can leapfrog iTV (which we still are waiting to see) and Cisco simultaneously. 

In cloud services it will take a lot to compete with leaders Amazon, IBM, Apple and Google.  They have made big investments, and are far in front.  But, this is the bread-and-butter market for Microsoft.  Millions of small businesses that want easy to use BYOD (bring your own device) environment, and easy access to data, documents and functionality for IT, like guaranteed data back-up and uptime, and user functionality like all those apps.  These customers have relied on Microsoft for these kind of services for years, and would enjoy a services provider with an off-the-shelf product they can implement easily and cheaply that supports all their needs.  Expensive to develop, but a growing market where Microsoft has a chance to leapfrog competitors.

As for Bing, give it to Yahoo – if Marissa Mayer will take it.  Stop the bloodletting and get out of a market where Microsoft has never succeeded.  Bing is core to Yahoo's business.  If you can trade for some Yahoo stock, go for it.  Let Yahoo figure out how to sell content and ads, while Microsoft refocuses on the new platform for 2017; from the user to the infrastructure services.

Strong leaders have their benefits.  But, when they don't understand market shifts, and spend far too long trying to defend & extend past markets, they can put their organizations in terrible jeopardy of total failure.  Ballmer leaves no with clear replacement, nor with any vision in place for leapfrogging competitors and revitalizing Microsoft. 

So it is imperative the new leader provide this kind of new thinking.  There are trends developing that create future scenarios where Microsoft can once again be a market leader.  And it will be the role of the new CEO to identify that vision and point Microsoft's investments in the right direction to regain viability by changing the game on the current winners.

 

Be Really Glad Bezos Bought The Washington Post

Jeff Bezos, founder of Amazon worth $25.2B just paid $250 million to become sole owner of The Washington Post

Some think the recent rash of of billionaires buying newspapers is simply rich folks buying themselves trophies.  Probably true in some instances – and that benefits no one.  Just look at how Sam Zell ruined The Chicago Tribune and Los Angeles Times.  Or Rupert Murdoch's less than stellar performance owning The Wall Street Journal.  It's hard to be excited about a financially astute commodities manager, like John Henry, buying The Boston Globe – as it has all the earmarks of someone simply jumping in where angels fear to tread.

These companies lost their way long ago.  For decades they defined themselves as newspaper companies.  They linked everything about what they did to printing a daily paper.  The service they provided, which was a mix of hard news and entertainment reporting, was lost in the productization of that service into a print deliverable. 

So when people started to look for news and entertainment on-line, these companies chose to ignore the trend.  They continued to believe that readers would always want the product – the paper – rather than the service. And they allowed themselves to remain fixated on old processes and outdated business models long after the market shifted.

The leaders ignored the fact that advertisers could obtain much more directed placement at targets, at far lower cost, on-line than through the broad-based, general ads placed in newspapers.  And that consumers could get a much faster, and cheaper, sale via eBay, CraigsList or Vehix.com than via overpriced classified ads. 

Newspaper leadership kept trying to defend their "core" business of collecting news for daily publication in a paper format.  They kept trying to defend their local advertising base.  Even though every month more people abandoned them for an on-line format.  Not one major newspaper headmast made a strong commitment to go on-line.  None tried to be #1 in news dissemination via the web, or take a leadership role in associating ad placement with news and entertainment. 

They could have addressed the market shift, and changed their approach and delivery.  But they did not.

Money manager Mr. Henry has done a good job of turning the Boston Red Sox into a profitable institution.  But there is nothing in common between the Red Sox, for which you can grow the fan base, bring people to the ballpark and sell viewing rights, and The Boston Globe.  The former is unique.  The latter is obsolete.  Yes, the New York Times company paid $1.1B for the Globe in 1993, but that doesn't mean it's worth $70M today.  Given its revenue and cost structure, as a newspaper it is probably worth nothing.

But, we all still want news.  Nobody wants the information infrastructure collecting what we need to know to crumble.  Nobody wants journalism to die.  But it is unreasonable to expect business people to keep investing in newspapers just to fulfill a public good.  Even Mr. Zell abandoned that idea. 

Thus, we need the news, as a service, to be transformed into a new, profitable enterprise.  Somehow these organizations have to abandon the old ways of doing things, including print and paper distribution, and transform to meet modern needs.  The 6 year revenue slide at Washington Post has to stop, and instead of thinking about survival company leadership needs to focus on how to thrive with a new, profitable business model.

And that's why we all should be glad Jeff Bezos bought The Washington Post.  As head of Amazon.com  The Harvard Business Review ranked him the second best performing CEO of the last decadeCNNMoney.com named him Business Person of the Year 2012, and called him "the ultimate disruptor."

By not doing what everyone else did, breaking all the rules of traditional retail, Mr. Bezos built Amazon.com into a $61B general merchandise retailer in 20 years.  When publishers refused to create electronic books he led Amazon into competing with its suppliers by becoming a publisher.  When Microsoft wouldn't produce an e-reader, retailer and publisher Amazon.com jumped into the intensely competitive world of personal electroncs creating and launching Kindle.  And then upped the stakes against competitors by enhancing that into Kindle Fire.  And when traditional IT suppliers like HP and Dell were slow to help small (or any) business move toward cloud computing Amazon launched its own network services to help the market shift.

Mr. Bezos' language regarding his intentions post acquisition are quite telling, "change… is essential… with or without new ownership….need to invent…need to experiment." 

And that is exactly what the news industry needs today.  Today's leaders are HuffingtonPost.com, Marketwatch.com and other web sites with wildly different business models than traditional paper media.  WaPo success will require transforming a dying company, tied to an old success formula, into a trend-aligned organization that give people what they want, when they want it, at a profit.

And it's hard to think of someone better experienced, or skilled, than Jeff Bezos to provide that kind of leadership.  With just a little imagination we can imagine some rapid moves:

  • distribution of all content via Kindle style eReaders, rather than print.  Along with dramatically increasing the cost of paper subscriptions and daily paper delivery
  • Instead of a "one size fits all" general purpose daily paper, packaging news into more fitting targeted products.  Sports stories on sports sites.  Business stories on business sites.  Deeper, longer stories into ebooks available for $.99 purchase.  And repackaging of stories that cover longer time spans into electronic short-books for purchase.
  • Packaging content into Facebook locations for targeted readers.  Tying ads into these social media sites, and promoting ad sales for small, local businesses to the Facebook sites.
  • Or creating an ala carte approach to buying various news and entertainment in an iTunes or Netflix style environment (or on those sites)
  • Robustly attracting readers via connecting content with social media, including Twitter, to meet modern needs for immediacy, headline knowledge and links to deeper stories — with sales of ads onto social media
  • Tying electronic coupons, and buy-it-now capabilities to ads linked to appropriate content
  • Retargeting advertising sales from general purpose to targeted delivery at specific readers, with robust packages of on-line coupons, links to specials and fast, impulse purchase capability
  • Increased use of bloggers and ad hoc writers to supplement staff in order to offer opinions and insights quickly, but at lower cost.
  • Changes in compensation linked to page views and readership, just as revenue is linked to same.

We've watched a raft of newspapers and magazines disappear. This has not been a failure of journalism, but rather a failure of business leaders to address shifting markets and transform old organizations to meet modern needs.  It's not a quality problem, but rather a failure of strategy to adapt to shifting markets.  And that's a lesson every business leaders needs to note, because today, as I wrote in April, 2012, every company has to behave like a tech company!

Doing more of the same, cutting costs and rich egos won't fix a newspaper.  Only the willingness to experiment and find new solutions which transform these organizations into something very different, well beyond print, will work.  Let's hope Mr. Bezos brings the same zest for addressing these challenges and aligning with market needs he brought to Amazon.  To a large extent, the future of news and "freedom of the press" may well depend upon it.

 

Will Living Wage Trend Kill or Make McDonald’s and Walmart?

Will Living Wage Trend Kill or Make McDonald’s and Walmart?

Alex Robles protests in front of a McDonald’s in 2013, in Phoenix. (AP Photo/Ross D. Franklin)

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Horatio Alger wrote books in the 1800s about young poor boys who became wealthy via clean living and hard work.  Americans loved the idea that anyone can become rich, and loved those stories.  We love them as much today as then, clinging to the non-rich roots of successes like Steve Jobs.

Unfortunately, such possibilities have been growing tougher in America.  Today U.S. income inequality is among the highest in the world, while income mobility is among the lowest.  You are more likely to go from rags to riches in France or Germany than the USA.  Net/net – in current circumstances your most important decision is who will be your parents, because if you are born rich you will likely live a rich life, while if  you are born poor you’ll probably die poor.

Organizations like Occupy Wall Street have tried to bring the problem of inequality and jobs to the face of America – with mixed results.  But the truth is that 80% of Americans will face poverty and unemployment in their lifetimes.  And the biggest growth in poverty, declining marriage rates and single mother households all belong to white Americans today.  These poverty related issues are no longer tied to skin color or immigration they way they once were.

It’s safe to say that a lot of Americans are sounding like the famous Howard Beale phrase from the 1976 movie “Network” and starting to say “I’m mad as hell, and I’m not going to take this any more!

This situation has given birth to a new trend – frequently referred to as the “living wage.”  A living wage allows one parent to earn enough money from a single 40 hour per week job to feed, cloth, educate, transport and otherwise lead a decent life for a family of 4.  Today in America this is in the range of $13.50-$15.00 per hour.

This, of course, should not be confused with the minimum wage which is a federally (or state) mandate to pay a specific minimum hourly wage.  Because the minimum wage is lower than living wage, a movement has been started to match the two numbers – something which would roughly double today’s $7.25 federal minimum wage.

This concept would have been heresy just 40 years ago.  America’s Chamber of Commerce and other pro-business groups have long attempted to abolish the minimum wage, and have fought hard against any and every increase.

As the income inequality gap has widened popularity has grown for this movement, however, and now 70% of Americans support higher minimum wages, almost 3 times those who don’t.  Whether effective or not, this week fast food employees took to old fashioned strikes and picket lines in New York City, Chicago, St. Louis, Milwaukee and Detroit for higher wages.

Regardless of your opinion about the economics (or politics) of such a move, the trend is definitely building for taking action.

The biggest industries affected by such an increase would be fast food and retail.  And if these companies don’t do something to adapt to this trend the results could be pretty severe.

McDonald’s is the largest fast food company.  And it definitely does not pay a living wage.  The company recently published for employees a budget for trying to live on a McDonald’s income, and it translated into requiring employees work 2 full-time jobs.  Rancor about the posted budget was widespread, as even pro-business folks found it amazing a company could put out such a document while its CEO (and other execs) make many multiples of what most employees earn.

Estimates are that a wage increase to $15/hour for employees would cost McDonald’s $8B.  McDonald’s showed $10B of Gross Income in 2012, and $8B of Pre-Tax Income.  Obviously, should the living wage movement pass nationally McDonald’s investors would see a devastating impact.  Simultaneously, prices would have to increase hurting customers and suppliers would likely be pinched to the point of losses.

Couple this with McDonald’s laissez-faire attitude about obesity trends, and you have two big trends that don’t bode well for rising returns for shareholders.  Yet, other than opposing regulations and government action on these matters McDonald’s has shown no ability to adapt to these rather important, and impactful, trends.  Hoping there will be no legislation is a bad strategy.  Fighting against any change, given the public health and economic situation, is as silly as fighting against regulations on tobacco was in the 1960s.  But so far there has been no proposed adaptation to McDonald’s 50 year old success formula offered to investors, employees, customers or legislators.

WalMart is America’s largest retailer.  And the most vitriolic opposing higher wages.  Even though a living wage increase would cost customers only $12/year.  When Washington, DC passed a requirement retailers pay a living wage WalMart refused to build and open 4 proposed new stores.  Even though the impact would be only $.46/customer visit (estimated at $12.50/customer/year.)

It would seem such harsh action, given the small impact, is a bit illogical.  Given that WalMart is already out of step with the trend toward on-line shopping, why would the company want to take such an additional action fighting against a trend that affects not only its profits, but most of its customers — who would benefit from a rise in income and buying power?

In 1914 Henry Ford was suffering from high turnover and a generally unhappy workforce.  He reacted by doubling pay – with his famous “$5 day”.  Not only did he reduce turnover, he became the perferred employer in his industry – and rather quickly it became clear that employees who formerly could not afford an automobile were able to now become customers at the new, higher pay scale.  Apparently nobody at WalMart is familiar with this story.  Or they lack the will to apply it.

Fighting trends is expensive. Yet, most leadership teams become stuck defending & extending an old strategy – an old success formula – even after it is out of date.  Most companies don’t fail because the leadership is incompetent, but rather because they fail to adapt to trends and changing circumstances.  Long-lived companies are those which build for future scenarios, rather than trying to keep the world from changing by spending on lobbyists, advertising and other efforts to halt (or reverse) a trend.

McDonald’s and WalMart (and for that matter Yum Brands, Wendy’s, JCPenney, Sears, Best Buy and a whole host of other companies) are largely unwilling to admit that the future is likely to look different than the past.  Will that kill them?  It sure won’t help them.  But investors could feel a lot more comfortable (as would employees, suppliers and customers) if they would develop and tell us about their strategies to adapt to changing circumstances.

Are you looking at trends, developing scenarios about the future and figuring out how to adapt in ways that will help you profitably grow?  Or are you stuck defending and extending an old success formula even as markets shift and trends move customers in different directions?

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Fighting Trends is Expensive – Coke and McDonald’s

Both Coca-Cola and McDonald's have produced good investor returns over the last decade.  From stock lows in early 2009, Coke has more than doubled.  After shutting many stores and investing heavily in upgrades as well as supply chain efficiencies, over the last decade McDonald's has risen 6-fold!

But  recent quarterly returns have not impressed investors as both companies failed to meet expectations.  And for traders with a short-term focus both companies are off their 2013 highs.  The open question now, for patient investors with a multi-year focus, is whether either, or both, companies are going to go back to long-term valuation growth (meaning they are a buy) or if their value has fizzled (meaning they are a sell)?

This question cannot be answered by looking at historical performance.  As all investment documents remind us, past history is no assurance of future gains.  Instead investors need to look at trends, and whether each company is positioned to take advantage of major trends as we head toward 2020.

One major trend is obesity.  And not in a good way.  The USA is fatter than ever, and shows no signs of thinning as one in 3 people are now considered obese.  For Coke and McDonald's this is not a good thing, since their products are considered major contributors to what some call a national epidemic

Over the last few years this trend has led schools to remove fast food and soft drink dispensers.  America's first lady has started a national campaign to fight childhood obesity.  And the nation's largest city's mayor has tried to make large portion sizes illegal in New York.  While all of this might seem like crank activity that isn't making much difference, truth is that soda consumption per capita has been declining since 1998, and 2012 declines now put soda drinking at the lowest level since 1987!

Even if this still seems like much ado about nothing, investors should be aware of the long-term impact when products are seen as unhealthy.  Cigarettes were a common consumer staple well into the 1960s, but when that product was determined to have adverse health impacts advertising was banned, consumption was restricted to adults only, dispensing was severely limited as machines were eliminated, taxes shot through the ceiling creating a 20-fold price increase and consumption was banned in buildings and many public places. None of this happened overnight, but eventually these actions caused the sales and profits of tobacco companies to decline — despite their heroic efforts to fight the trend.

If the Centers for Disease Control takse the point of view that soft drinks are a major contributor to diabetes and other obesity-related illnesses, it is not out of the realm of possibility that Coke could find itself in a situation somewhat like Phillip Morris did.  If the CDC made the same determination about certain fast food items (such as double-patty burger sandwiches or large french fry orders) the amount of advertising, free toys, discounted product and super-sized packaging available to McDonald's could be severly curtailed.  It could become a requirement that Coke and Big Macs have warning labels educating consumers about the possibility of long-term illness from consumption.  And product sales could only be limited only to people over 18. 

This may seem extreme, even bizarre, and far off into the future.  But this is the direction of the trend.  There seems no solution for obesity at this time, so public policy is starting to point toward doing something about consumption. 

Recall that when alcohol-related deaths showed no sign of decline it didn't take long for much tougher drunk driving laws to be enacted, then for a string of adjustments lowering the level at which people were considered drunk.  Public policies that took direct aim at product consumption.

Looking at the tobacco and alcohol analogies, Coke and McDonald's are behaving a lot more like the R.J. Reynolds than Miller-Coors

Tobacco companies fought the trend, and ended up in a very expensive and long battle they inevitably lost.  They denied there was any public health problem, and denied they had anything to do with the nation's, and their customers', health issues.  The fight lasted a very long time.  Now their customers are often ostracized, and the industry is contracting.

Liquor companies took a different approach.  While not admitting anything, they aggressively promoted "responsible" consumption levels.  They promoted individual abstinence (non-consumption) in group settings so there could be a "designated driver"  while actively promoting product bans for people under age.  They did not fight drunk driving laws, but instead worked with organizations to reduce deaths.  Though far from angels, the industry players did not fight the trend, and managed to find ways to avoid the kind of bans dealt tobacco.

Coke and McDonald's today are denying the obesity problem and their contribution to it.  While they both have healthier products, they remain committed to the least healthy offerings.  Watch a Coke ad and you'll always see the traditional, sweetened red label product receive top billing.  Likewise, you can purchase a salad at McDonald's, but the ads and promotions always feature the far less healthy burgers and fried foods which characterize the company's history. 

Neither company promotes responsible consumption levels, nor does anything to discuss the importance of limiting use of their products.  To the contrary, both like to promote larger package sizes and greater consumption – often beyond what almost anyone would consider healthy.  Neither works aggressively to improve the quality of healthy products, nor showcases them as preferred products for customers to purchase. 

One would not expect Coke or McDonald's to fail any time soon. But the trends which made them huge companies have reached an end, and new trends are headed in a direction which do not support growth.  Both companies seem unwilling to recognize the new trends, and find ways to align with them.  Future revenue growth is up against a difficult environement, and historical cost reduction activities leave little opportunity to improve future earnings without revenue growth.  While the valuation of both companies are unlikely to remain flat, it is hard to identify the bull case for either to provide long-term investors much gain.

 

How CEO Lampert’s BIAS Is Killing Sears – and Maybe Your Company Too

Sears has performed horribly since acquired by Fast Eddie Lampert's KMart in 2005.  Revenues are down 25%, same store sales have declined persistently, store margins have eroded and the company has recently taken to reporting losses.  There really hasn't been any good news for Sears since the acquisition.

Bloomberg Businessweek made a frontal assault on CEO Edward Lampert's leadership at Sears this week.  Over several pages the article details how a "free market" organization installed by Mr. Lampert led to rampant internal warfare and an inability for the company to move forward effectively with programs to improve sales or profits. Meanwhile customer satisfaction has declined, and formerly valuable brands such as Kenmore and Craftsman have become industry also-rans.

Because the Lampert controlled hedge fund ESL Investments is the largest investor in Sears, Mr. Lampert has no risk of being fired.  Even if Nobel winner Paul Krugman blasts away at him. But, if performance has been so bad – for so long – why does the embattled Mr. Lampert continue to lead in the same way?  Why doesn't he "fire" himself?

By all accounts Mr. Lampert is a very smart man.  Yale summa cum laude and Phi Beta Kappa, he was a protege of former Treasury Secretay Robert Rubin at Goldman Sach before convincing billionaire Richard Rainwater to fund his start-up hedge fund – and quickly make himself the wealthiest citizen in Connecticut.  

If the problems at Sears are so obvious to investors, industry analysts, economics professors, management gurus and journalists why doesn't he simply change? 

Mr. Lampert, largely because of his success, is a victim of BIAS.  Deep within his decision making are his closely held Beliefs, Interpretations, Assumptions and Strategies.  These were created during his formative years in college and business.  This BIAS was part of what drove his early success in Goldman, and ESL.  This BIAS is now part of his success formula – an entire set of deeply held convictions about what works, and what doesn't, that are not addressed, discussed or even considered when Mr. Lampert and his team grind away daily trying to "fix" declining Sears Holdings.

This BIAS is so strong that not even failure challenges them.  Mr. Lampert believes there is deep value in conventional retail, and real estate.  He believes strongly in using "free market competition" to allocate resources. He believes in himself, and he believes he is adding value, even if nobody else can see it.

Mr. Lampert assumes that if he allows his managers to fight for resources, the best programs will reach the top (him) for resourcing.  He assumes that the historical value in Sears and its house brands will remain, and he merely needs to unleash that value to a free market system for it to be captured.  He assumes that because revenues remain around $35B Sears is not irrelevant to the retail landscape, and the company will be revitalized if just the right ideas bubble up from management.

Mr. Lampert inteprets the results very different from analysts.  Where outsiders complain about revenue reductions overall and same store, he interprets this as an acceptable part of streamlining.  When outsiders say that store closings and reduced labor hurt the brand, he interprets this as value-added cost savings.  When losses appear as a result of downsizing he interprets this as short-term accounting that will not matter long-term.  While most investors and analysts fret about the overall decline in sales and brands Mr. Lampert interprets growing sales of a small integrated retail program as a success that can turn around the sinking behemoth.

Mr. Lampert's strategy is to identify "deep value" and then tenaciously cut costs, including micro-managing senior staff with daily calls.  He believes this worked for Warren Buffett, so he believes it will continue to be a successful strategy.  Whether such deep value continues to exist – especially in conventional retail – can be challenged by outsiders (don't forget Buffett lost money on Pier 1,) but it is part of his core strategy and will not be challenged.  Whether cost cutting does more harm than good is an unchallenged strategy.  Whether micro-managing staff eats up precious resources and leads to unproductive behavior is a leadership strategy that will not change.  Hiring younger employees, who resemble Mr. Lampert in quick thinking and intellect (if not industry knowledge or proven leadership skills) is a strategy that will be applied even as the revolving door at headquarters spins.

The retail market has changed dramatically, and incredibly quickly.  Advances in internet shopping, technology for on-line shopping (from mobile devices to mobile payments) and rapid delivery have forever altered the economics of retailing.  Customer ease of showrooming, and desire to shop remotely means conventional retail has shrunk, and will continue to shrink for several years.  This means the real challenge for Sears is not to be a better Sears as it was in 2000 — but to  become something very different that can compete with both WalMart and Amazon – and consumer goods manufacturers like GE (appliances) and Exide (car batteries.) 

There is no doubt Mr. Lampert is a very smart person.  He has made a fortune.  But, he and Sears are a victim of his BIAS.  Poor results, bad magazine articles and even customer complaints are no match for the BIAS so firmly underlying early success.  Even though the market has changed, Mr. Lampert's BIAS has him (and his company) in internal turmoil, year after year, even though long ago outsiders gave up on expecting a better result. 

Even if Sears Holdings someday finds itself in bankruptcy court, expect Mr. Lampert to interpret this as something other than a failure – as he defends his BIAS better than he defends its shareholders, employees, suppliers and customers.

What is your BIAS?  Are you managing for the needs of changing markets, or working hard to defend doing more of what worked in a bygone era?  As a leader, are you targeting the future, or trying to recapture the past?  Have market shifts made your beliefs outdated, your interpretations of what happens around you faulty, your assumptions inaccurate and your strategies hurting results?  If any of this is true, it may be time you address (and change) your BIAS, rather than continuing to invest in more of the same.  Or you may well end up like Sears.

Some Leaders Never Learn – Tribune’s Big, Dumb Bet

Tribune Corporation finally emerged from a 4 year bankruptcy on the last day of 2012.  Before the ink hardly dried on the documents, leadership has decided to triple company debt to double up the number of TV stations.  Oh my, some people just never learn.

The media industry is now over a decade into a significant shift.  Since the 1990s internet access has changed expectations for how fast, easily and flexibly we acquire entertainment and news.  The result has been a dramatic decline in printed magazine and newspaper reading, while on-line reading has skyrocketed.  Simultaneously, we're now seeing that on-line streaming is making a change in how people acquire what they listen to (formerly radio based) and watch (formerly television-based.)

Unfortunately, Tribune – like most media industry companies – consistently missed these shifts and underestimated both the speed of the shift and its impact.  And leadership still seems unable to understand future scenarios that will be far different from today.

In 2000 newspaper people thought they had "moats" around their markets. The big newspaper in most towns controlled the market for classified ads for things like job postings and used car sales.  Classified ads represented about a third of newspaper revenues, and 40% of profits.  Simultaneously display advertising for newspapers was considered a cash cow.  Every theatre would advertise their movies, every car dealer their cars and every realtor their home listings.  Tribune leadership felt like this was "untouchable" profitability for the LA Times and Chicago Tribune that had no competition and unending revenue growth.

So in 2000 Tribune spent $8B to buy Times-Mirror, owner of the Los
Angeles Times.  Unfortunately, this huge investment (75% over market
price at the time, by the way) was made just as people were preparing to
shift away from newspapers.  Craigslist, eBay and other user sites killed the market for classified ads.  Simultaneously movie companies, auto companies and realtors all realized they could reach more people, with more information, cheaper on-line than by paying for newspaper ads. 

These web sites all existed before the acquisition, but Tribune leadership ignored the trend.  As one company executive said to me "CraigsList!! You think that's competition for a newspaper?  Craigslist is for hookers!  Nobody would ever put a job listing on Craigslist."  Like his compadres running newspapers nationwide, the new competitors and trends toward on-line were dismissed with simplistic statements and broad generalizations that things would never change.

The floor fell out from under advertising revenues in newspapers in the 2000s. There was no way Times-Mirror would ever be worth a fraction of what Tribune paid.  Debt used to help pay for the acquisition limited the options for Tribune as cost cutting gutted the organization.

Then, in 2007 Sam Zell bailed out management by putting together a leveraged buyout to acquire Tribune company.  Saying that he read 3 newspapers every day, he believed people would never stop reading newspapers.  Like a lot of leaders, Mr. Zell had more money than understanding of trends and shifting markets.  He added a few billion dollars more debt to Tribune.  By the end of 2008 Tribune was unable to meet its debt obligations, and filed for bankruptcy.

Now, new leadership has control of Tribune.  They are splitting the company in two, seperating the print and broadcast businesses.  The hope is to sell the newspapers, for which they believe there are 40 potential buyers.  Even though profits continued falling, from $156M to $89M, in just the last year. Why anyone would buy newspaper companies, which are clearly buggy whip manufacturers, is wholly unclear.  But hope springs eternal!

The new stand-alone Tribune Broadcasting company has decided to go all-in on a deal to borrow $2.7B and buy 19 additional local television stations raising total under their control to 42.

Let's see, what's the market trend in entertainment and news?  Where once we were limited to local radio and television stations for most content, now we can acquire almost anything we want – from music to TV, movies, documentaries or news – via the internet.  Rather than being subjected to what some programming executive decides to give us, we can select what we want, when we want it, and simply stream it to our laptop, tablet, smartphone, or even our large-screen TV.

A long time ago content was controlled by distribution.  There was no reason to create news stories or radio programs or video unless you had access to distribution.  Obviously, that made distribution – owning newspapers, radio and TV stations – valuable.

But today distribution is free, and everywhere.  Almost every American has access to all the news and entertainment they want from the internet. Either free, or for bite-size prices that aren't too high.  Today the value is in the content, not distribution.

In the last 2 years the number of homes without a classical TV connection (the cable) has doubled.  Sure, it's only 5% of homes now.  But the trend is pretty clear.  Even homes that have cable are increasingly not watching it as they turn to more and more streaming video.  Instead of watching a 30 minute program once per week, people are starting to watch 8 or 10 half hour episodes back to back. And when they want to watch those episodes, where they want to watch them.

While it might be easy for Tribune to ignore Hulu, Netflix and Amazon, the trend is very clear.  The need for broadcast stations like NBC or WGN or Food Network to create content is declining as we access content more directly, from more sources.  And the need to have content delivered to our home by a local affiliate station is becoming, well, an anachronism. 

Yet, Tribune's new TV-oriented leadership is doubling down on its bet for local TV's future.  Ignoring all the trends, they are borrowing more money to buy more assets that show all signs of becoming about as valuable whaling ships.  It's a big, dumb bet.  Similar to overpaying for Times-Mirror.  Some leaders just seem destined to never learn.