Tuesday, February 15, 2005



I've got a mule,
Her name is Sal,
Fifteen years on the Erie Canal...

Low Bridge, ev'rybody down,
For it's Low Bridge,
We're coming to a town!
You can always tell you neighbor,
You can always tell your pal,
If you've ever navigated
On the Erie Canal.

Written by Thomas Allen in 1905 to protest the mechanized barges that were replacing mule draw barges.

Yesterday, Nokia (NOK) and Microsoft (MSFT) announced a deal. Nokia will embed the Microsoft Media Player in new cell phones and will offer a service similar to Apple's I-tunes. Earlier Nokia announced a software development relationship with Real Networks (RNWK). Nokia has mentioned LOUD as the possible provider of the music down-loads. RNWK operates the biggest music down-load service over the internet. Motorola (MOT) and APPLE (AAPL) have been working on a combo cell phone--i-pod for some weeks.

Some readers have questioned why I do not like Apple. Apple has done extremely well selling I-pods and music. I believe the stock price already reflects this growth. The NOK--MSFT deal highlights Apple's problem. Using bluetooth technology, songs down-loaded on NOK phones (something like a 35% worldwide market share), will be transferable to Windows based personal computers or from computers to the phone. AAPL will offer the same advantage but the installed base of Windows Media software is huge relative to the AAPL software. There will need to be serious consolidation of several companies to go head to head against NOK and MSFT. Companies like RNWK and AAPL will need to be on the same format. RNWK has tried to develop a relationship with AAPL but AAPL seems to want to "go-it-alone". Does this sound like a repeat of what happened between AAPL and IBM years ago?

Low Bridge, ev'rybody down

Canals were one of the keys to the industrial revolution. Canals dramatically lowered the cost of shipping goods. England's canals were part of the reason that the cottage industry system collapsed and that industrial production was centralized. Canals were also a major factor in America's growth. The Erie Canal is credited with bringing prosperity to Syracuse, Albany, Buffalo New York and even to America. America had low cost raw materials, England had lots of people and manufacturing capacity (does this remind you of the current America--China deal). It took the development of canals to transport raw materials and finished goods cheaply.

TXN (Texas instruments) has expectations of selling double the number of 3G equipped phones this year. NOK is TXN's biggest customer. MSFT has pushed for years to make the Windows Media Player the most widely used digital player--music and video. RNWK has sued MSFT and expects to win a $500 million settlement. The settlement will mean that the free players are not available in Europe. MSFT gave away its internet browser and took the business away from Netscape. MSFT has given away its media browser but RNWK continues to fight back. RNWK sells a lot of songs that can be played on its system. It sells many of the songs with little or no profit margin for 49 cents but it is gradually getting significant numbers of buyers and subscribers.

In my opinion, cell phones will become the biggest distributor of music! Instead of comparing cell phones to the Erie Canal, I probably should compare cell phones to railroads. Many folks became wealthy investing in canals. However, when the railroads came along, businesses suddenly had a cheaper distribution channel. Many canals were built in many places but not when compared to railroads. Railroads were relatively cheap to build (especially using Chinese labor) and they quickly criss-crossed America. Railroads quickly put most canal companies out of business. Andrew Carnegie and many others made considerable fortunes investing in railroads.

I can't pass up the chance to remind folks that Carnegie made $1.20 per week as a bobbin boy, $2.49 a week as a messenger and finally $35 per month as a telegrapher for the railroad. His first brilliant contribution to the railroad business was the idea to burn wrecked rail-cars. Prior to this time a wreck could take days or even weeks to clear. He received a raise for making this innovation and by 1856 he had saved $217.50 which he invested in the Woodruff Sleeping Car Company. By 1901 he was recognized as the richest man in the world. A song traveling on a cell phone network is a good analogy to a sleeping car traveling on a railroad network.

Billions of cell phones will be sold in the next few years. The primary purpose will be for making calls. However, the next steady revenue stream for the service providers will come from music and video. TXN and NOK have rallied on the prospects as have Ericsson, QCOM and Motorola. These firms will sell a lot of new equipment. The wireless phone carriers will extract a slice of the per song charge or the monthly subscription fees.

The equipment companies should do well but the long-term big winners may be the song providers. LOUD would be the most speculative play. The purest play in wireless service is FON (buying out NXTL). VZ, SBC and BLS will make money through wireless phone services but these firms are steadily losing land line business. BankAmerica upgraded cable companies this morning. The analyst believes the phone companies will have to offer lower phone prices to compete with cable service.

MSFT is such a big company that a "win" in the media player world looks insignificant. However, check my earlier posting to read about the growth in MSFT for five years while the stock has gone down or sideways. Soon, many if not most of the TV-set-top boxes in the world will contain MSFT software. MSFT investors will do well if they have the patience to "let the grass grow".

My family owns many of the stocks mentioned above. RNWK is perhaps the most speculative of the bunch. I am anxious to learn if XMSR or SIRI will be able to make deals with service providers. To some extent, it is redundant to build a satellite service into a cell service phone. On the other hand, SIRI and XMSR have tied up content such as professional sports. When the cell music systems are built, will these systems bid against SIRI and XMSR for future programming renewals or deals.

So far, growth of music subscriptions over the internet has not been incredibly strong. When these services are available on most cell phones, many consumers may adopt $7.95 per month for unlimited music versus $12.95 for SIRI service. Others may not subscribe to a monthly service but may buy individual tunes. The per song price has tended to be 99 cents except for the specials that RNWK and others offer from time to time.


The follow-through to the massive turn on Friday is apparent today. The Dow is up .4% and the NASDAQ is up .9%. Average moves of these sizes in a month of trading would yield returns of about 9% and 20% respectively. My top performer today is the options on TXN.

Low Bridge, everybody down,
For it's Low Bridge,
We're coming to a town!
You can always tell you neighbor,
You can always tell your pal,
If you've ever navigated
On the Erie Canal.

Written to share. The above is entertainment only--not investment advise.


Anonymous said...

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All the best, Cell Phones