Friday, December 17, 2004


Rumor has it that Motorola and Apple are planning an i-pod cell phone. The XMSR portable radio has TIVO style recording features. Motorola is working on a dual phone for Sprint/Nextel that will offer the NXTL direct connect and the sprint internet and media network. Yahoo has signed contracts with every cell phone company and has added traffic updates to its cell phone maps. QCOM is building a whole separate network for radio and video by phone. Fox, NBC and ESPN are producing 1 minute videos. And, Steve Jobs is working on a video i-pod.

From December 13-16 interviews with 50 sales clerk from major stores show that SIRI is getting good sales through Radio Shack and Wal-Mart is moving the XMSR out the door. JP Morgan estimates that SIRI will have 1.02 million subscribers at year end and XMSR will have 3.15 million. The really sad way to view the SIRI subscriber and shareholder numbers is to note that the owners of 145,000 shares of SIRI have 1 customer! If the customer pays $12 per month the revenue per share per month is .000008 cents.

Both XMSR and SIRI are expected to grow rapidly as NFL, MLB, and other programming is added. However, the terrestial radio stations are gearing up for a business and a legal fight. Many of them have contracts for local baseball teams. The satellite deal is supposed to exclude these cities but there is some leakage that will be fought over. Terrestial radio is gearing up to offer digital radio with superior features.

Dell's pocket DJ and DJ-20 is on backorder. Apple and IBM were once the leaders in selling personal computers. APPL now has about 2% of the market and IBM just sold 80% of its pc business to a Chinese firm. Dell, as the low cost producer and low cost distributor, has a large market share and is now building share in printers and consumer electronics devices.

Morningstar Research does not rate Apple highly. The stock sells at 5 times book, 90 times trailing earnings (maybe 75 times projected earnings) and produces returns on assets of less than 4%. Morningstar thinks it has zero moat (barriers to competition). On the other hand, JP Morgan thinks that Jobs has been smart to develop a proprietary music format and, if i-pod can move forward quickly with the video i-pod, it can own the VHS-Beta Max war of this decade. Big speculative bets are being made on the most speculative of these companies.

I have been selling out of the most speculative areas and have added to slower growth and more out of favor positions. (I still own some speculative issues including TIVO and NFLX but have sold most of my SIRI and XMSR positions). I sold some of my smaller equipment companies and added to my transportation stocks.

I still own TXN and MOT. TXN was able to spend billions on a plant that gives it the lowest costs on some of the best chips for digital light functions required in video applications. Competition will remain stiff. Margins will stay tight and the old consumers staples may look more and more attractive as the makers of toys battle it out.

Each time I think through the list of players, some conclusions remain the same. These include that Yahoo, QCOM, DELL, MOT and TXN are all competitive survivors. YAHO will arrange for MusicMatch to be be available on billions of cell phones and much of the equipment will be made by MOT and TXN. DELL will eventually sell more pocket DJs than Apple will sell i-pods.

At current prices and earnings, I am not willing to speculate on APPL, XMSR and SIRI. Of the others, YAHO and QCOM are clearly my favorites with DELL running a close third. I am a bit nervous over the cut-throat competition on the equipment side but these stocks are relatively beaten down. TXN has thousands of patents, a super efficient manufacturing program and thousands of super engineers. MOT went through a tough slump during the reign of the 4th generation of the founder but has since been doing the job right. MOT spun off its semi-conductor business and I sold the shares.

My most speculative position in the entire area is Real Networks. RNWK is still active in a 5 year old European law suit against Microsoft. It has some solid relationships in the music an video business. Microsoft would like to settle the lawsuit. Microsoft seems to be willing to unbundle the Windows Media Player and pay a fine of a few hundred million dollars. In a few months, I believe RNWK and Liberty Media will be ready to offer a new internet media box. The pressure to settle the suit will become very large. It seems very possible that two or three or even four competing formats could each be very successful and if RNWK can resume a leadership role in this huge business, the upside is huge.

If you buy into any of these stocks, please use a discount broker to keep your costs low. Also be sure to balance the portfolio. Remember that it is Hersheys, Maxwell House Coffee, Colgate Polmolive, Proctor and Gamble, Pepsi and other similar companies that have recently shown pricing power. These companies are not as exciting or glamorous as satellite radio companies but they make money for their owners.