Tuesday, February 05, 2008


Reporters have speculated about the Best Buy policy of "chasing away the bad customers" for many years. Marilyn and I have experience with this policy. Years ago, we got a Best Buy Credit Card but we practiced our personal policy of paying no interest. In those days, we primarily used a Visa Card during the month but paid it off in full before interest was added. When Best Buy offered the lowest price on an appliance with no interest due if paid within 2 years, we bought the appliance, refused the pressure to buy the extended warranty and then were careful to write a check in full for the purchase price after 23 months. Best Buy sent us a notice that our credit at Best Buy had been suspended.

As many of you know, in the retail trade now a days, companies often make more off the financing and more off the extended warranties than they do off the sale. Some customers consistently pay triple the price for extended warranties and, even 21% interest for financing. Retailers do well to break even on the goods, or to even offer "loss leader specials" to those who willingly pay for these other services at ridiculous rates.


For some time, I have pointed out that airlines make high returns during the 3 to 5 years of prosperity that comes near the end of the business cycle. During this time, commercial travelers fill the seats without shopping for weeks to get the best deal. The casual traveler is "pushed out". Who wants to fly a million people on their once in a blue moon vacation at deeply discounted rates when there are 100,000 experienced fliers available to make an average of 10 trips each without shopping high and low for the lowest fare?

The experienced travelers become members of frequent flier programs. As such, they are loyal to their carrier or carriers of choice and they do not need their hand held every step of the way. They know how to use a kiosk to check in, they know how to travel light and they are willing to pay a little more in exchange for the better seats and services.

UAUA just instituted a $25 second bag charge for those who are not "members of the club". Reporters such as Herb Greenberg immediately started whining. He sees this as a dumb policy that might run away some customers. He does not understand that it is wise to chase marginally profitable customers away during the times when highly profitable customers are looking for seats.

Despite all the yak, yak, yak, about recession or the possibility of recession driving away demand, the major carriers once again set record load factors in January. The demand for air travel picks up during the second half of the business cycle and we are there. Company after company is looking to restructure its business to take advantage of "globalization". You do not suddenly decide to use a company in India without sending a number of company representatives to "check out the business landscape". On the other hand, if you are a frequent traveler to India, you may feel very comfortable bringing grandma over to have her cataract surgery done at a 70% discount. Once India or China or other places become familiar, it is no big deal to visit frequently.

The new rate card at UAUA includes $25 for the second bag and $100 for the third and fourth bag. Here again, why haul these bags for less when commercial shipping space is in high demand? Again, the prosperity phase is a time of high demand for international cargo. When the business passenger climbs returns to his "frequent business home" he does not even need to pack a toothbrush. All of "his luggage space" can be sold to Fed Ex or others.

I have made the current airline situation as clear as I can. If you do not have an over weight position in airlines, I believe you are missing an easy trade.


Google is the king of search. Google has a 56.3% market share in search. The share of others is:
Yahoo 17.7%
MSN (et al) 13.8%
AOL 4.7%
ASK 2.2%
And AT&T and lots of others with the rest scattered between them.

This service cost almost nothing to provide and the cost is getting cheaper by the minute. The profit margins are huge. In effect one click of one add pays for thousands of searches and the volume of searches continues to expand rapidly.

Google has built monster data centers which are well connected by super highway data cables. The Google system is big on redundancy with much data backed up 6 times or more. If a computer or even an entire data center goes down, other computers or data centers automatically perform the duties required until repairs are done.


MSFT tried to negotiate a deal with YAHOO several times in the past. When a deal could not be closed, MSFT spent a lot of money on one attempt after another to build a competitive system. As you can see from the numbers above, MSFT has not come close to catching up with GOOG. Indeed, so far, it has not even caught up with YAHOO. So far, Google has been the Ford Motor of 1908 to 1919. Ford started getting ahead of everyone else when it introduced standardized parts in 1908. Ford was able to offer the lowest priced vehicle. It was not fancy but it did the job and was affordable. When Ford invented the assembly line in 1914, the company was able to really leave all other car companies in the dust. During the mid cycle correction from 1919 to 1921, Buick, Oldsmobile, and Pontiac were merged into a strong competitor. When Ford made the mistakes of sticking to limited choice and cash on purchase, GM took the opening to the bank. GM offered colors, options, trade-ins and financing. GM passed Ford as if Ford was sitting still (as it was). Who would pay $700 cash for a black straight drive Ford when one could pay $70 down for a beautiful automatic Olds? Millions who still relied on a horse and buggy suddenly had all the more reason to give the car a try.

The Internet is going through a similar transition. The computer of tomorrow will make the desk top of today look as silly as a horse and buggy on an interstate highway. There is no evidence that Google is going to make the mistake of sticking to the "old". Indeed, Microsoft has a much bigger percentage PC market share than did Ford and it is Microsoft that waited too long to recognize the "new world". Google is leading the way to the mobile Internet which will make the current Internet the equivalent of the horse and buggy.

YAHOO saw the light long before MSFT but YAHOO took the wrong approach. Yahoo held the mind set too long that it should gather up all the content and hold the Internet user as a hostage on its sites. As we have seen from YouTube, the creative power of the masses is great. Videos shot by armatures have gotten massive play. The "long tail theory" has proven to be reality.


In the "old days", a library, music store or video rental store could house so many thousand items and cover 90% of the demand. Indeed in the "really old days", three TV channels offered 100% of TV programming. Today, every day, millions of different "programs" are watched. The bell shaped population curve is still reality but it is now a very flat curve with extremely long tails. While there are still certain shows or events, such as the Super Bowl, that will garner millions of views, the sum of the viewings of all the other stuff is greater than the sum of the few most popular items. The most interesting thing is how the long tail theory gives new life to stuff that has no new production costs. In terms of TV, it cost the cable company virtually nothing to offer very old re-runs on TV Land and yet it advertises just as often on those channels. The audience does not have to be large to turn a profit. The advent of the Internet means that thousands of these shows are available on demand. An audience of one is a profitable audience.


MSFT spent huge sums and worked hard to try to be the king of the hand held computer. It has spent fortune after fortune trying to force its way into the hand held device leadership spot. MSFT does sell (at loss leader prices) a lot of "Smart Phone" software. However, Nokia has about a 50% market share using Symbian Programming and Google is leading a massive effort to develop an open source competitor. YAHOO has fought to get its "Mobile Internet Software Package" onto major networks. It has enjoyed some success. The combination of MSFT and YAHOO is being considered now because the "New Mobile Internet" is just getting started. Google will have a difficult time maintaining a 56.3% search market share when the world goes mobile, or will it?


This new pie is the biggest one yet. The power of the Internet connected hand held computer is still under estimated. Even Captain Kirk did not use the "Internet Connected Computer" any where near its potential. The Star Trek Computer responded when asked but in Science Fiction, the computer that does stuff without being prompted always turns into a monster. We fear the unknown.

The reality is that the Internet connected mobile computer will do thousands of task for us daily. The value of items such as personal calendars will become 100 times more useful. When a person gets a ready answer from the question, "computer, what is on my calendar Thursday afternoon?" making and keeping appointments will become as "easy as pie". The computer might know to remind you 30 minutes in advance of a meeting across town and only 5 minutes in advance of a meeting down the hall. The computer might also automatically notify you when the other party to the meeting has failed to leave on time. There is an endless variety of situations where the mobile computer will be a blessing.

This computing pie is going to be huge. Today, the grand total of hours spent "in-touch with the Internet" is a very tiny fraction of the hours of connection in the near future. There is enough business for MSFT, YAHOO and GOOG. My bet is that Google continues to lead, however, it would not be a bad idea to own both. MSFT has the cash flow from software sales to buy its way into a significant role.


Wiki, FaceBook, MySpace, NewsCorp and thousands of others are working hard to capture the flag. Google is the king of the mountain and Google has a wide moat built around the mountain. I am still amazed at how many services Google can offer free of charge in exchange for advertising space. With the cost of computing power and storage space continuing to fall, the volume of services provided is growing by leaps and bonds. Once a group of people start collaborating on Google Documents for Free instead of buying Microsoft Software, it will take a might crowbar to dislodge them.

The Internet is still evolving. The social networks such as FaceBook and MySpace have enjoyed great and virtually instant success. All the old "ford companies" are having to adopt the new features. Google is very active in building social network features into all sorts of programs. We ain't seen nothing yet.


The airlines are benefiting greatly because the Internet is making it possible for large and small businesses to "go international". As a result of high demand, the airlines are chasing away marginally profitable customers. They are moving assets away from marginally profitable routes. They are adding routes to places far and wide where people will flock to direct the direct service which has heretofore not been available. Google has shown that it can offer services in volume at very low cost per service. As a result, Google is not chasing any customers away. It is making tactical and strategic decisions as to where it should go to collect the greatest number of customers. With cost low and margins high, it does not need to worry about short term profits.


I keep reading discussions about just how big mobile advertising revenues will be. The range offered is generally from 5 Billion to 19 Billion annually by 2011. I think this way of looking at the situation is a short sighted view. The mobile computer is going to become a necessity. It's use will influence every step we take. By individual choice, it will allow our spouses, co-workers, bosses and others to know where we are and what is on our schedule. The potential is for the boss to know everything there is to know about our work habits. Again, we are frightened by the fear of the unknown. Today we cannot say exactly how the mobile computer will be used, but we can already see that this new technology is being adopted rapidly and we can surely appreciate that our current devices are the steam powered cars that preceded the Model-T.