Redbox Fully loaded: Can Netflix Stay 1-Step Ahead ?

Redbox unearthed the details of a joint venture with Verizon Communication, which delivers the required infrastructure for streaming video service at (you guessed it) $8 per month, under the brand name, “Redbox Instant”. Although, this exciting new business division does not include movie downloads as yet. The anticipated venture comes on the heels of their announcement in March that it purchased NCR’s entertainment division for $100 million, hammering the nail in the Blockbuster Express coffin. Kudos to Redbox for its successful execution of its expansion plan, that brings them to a head-to-head competition with the Market Leader, Netflix.
You may recall the of Summer of 2011, when Netflix's CEO (Reed Hastings) made the grave mistake of announcing their brilliant plan to separate the DVD Rental and Streaming Video business into two revenue streams. Charging $8.00 per month for each – essentially doubling the cost for customers who were enjoying access to both for only $8. The ill-fated plan was announced one moment and denounced the next, as customers made their feelings of disgust known. A mass exodus of 800,000 customers within a matter of weeks was an undeniable message to the business community that the Customer is Boss. By October, in response to the backlash, Hastings apologized to customers. He announced that the company decided not to separate the services for now, adding that they were moving too fast.

Netflix reported a loss of 800,000 subscribers in the 3rd quarter of 2011. Since Analysts predicted a loss of only 600,000, the market reacted unfavorably with a swiftly decline of over 20%. The company warned of more defections and stated that they anticipate losses for the first quarter of 2012 as a result of expanding their business to Europe. Netflix did not anticipate the fast and furious decline in market valuation, eroding their stock price from its highs The $305 per share in July 2011 to below $53 by September. By the year's end, Netflix has lost a million subscribers in the aftermath.

This costly business strategy turned out to be a public relations nightmare for Netflix, but an absolute dream for Redbox, waiting in the wings.

Using the Netflix business model, Redbox came onto the scene quietly, but well prepared to gradually scoop up stray Netflix customers. Then the Netflix blunder created a glorious opportunity or “gift” for any company poised to take advantage of it……. that company was Redbox. The gift translated into instant market share and name recognition, as news coverage of Netflix’s new strategy made reference to Redbox in just about every report.Jusk think; a sizable number of displaced Netflix customers were now searching the net for a comparable alternative to the DVD and streaming video service. Redbox scrapped-up stray, and disgruntled customers for the first 90 days following Nextflix’s announcement. It’s quite possible that Redbox pulled in the entire 4% market share Netflix lost.
As a business major in grad school, students learn a great deal about the world of business through reading piles of case studies and statistics about corporations that were successful versus those that folded. We learn that the fate and longevity of a product or service has a lot to do with originality or satisfying an underserved demand. In such a scenario, the first to enter the market with a new product idea or service is referred to as “Market Maker”, or “Market Leader”. The Market Leader holds an enormous advantage over those that follow in their footsteps. Research has shown that market leaders are likely to maintain the lion's share of the market for decades – unless the product or service becomes obsolete, such is the case (for example) with beepers. In keeping with this statistic, Netflix did eventually recover having lost 85% of their valuation, and approximately 4% of their business.
Nevertheless, the Netflix blunder, nearly two years ago, served to kick-start the new-comer, Redbox. As unhappy consumers fled Netflix, the gift of market share was well received and now Redbox is ready for a new challenge – Streaming videos.

By December of 2012, Redbox had increased its market share to 45%¸ up from 34% the previous year. Redbox’s founder Gregg Kaplan, leaves his post as President and COO, passing the role of President over to Anne Saunders, and Shawn Strickland as CEO of Redbox Instant - who will hopefully continue with equally successful leadership.
Well Netflix, “It is On”! You don’t have to be a market expert to conclude that this will be a battle for market share we haven’t seen since the early days of Coke and Pepsi. I look forward to the continued growth of Redbox, and hope the competition will inspire higher standards and consistently low prices. Redbox Instant, will be offered on the Roku box, and made available on Sony Playstation-4 consoles. Good luck Redbox, and may the force be with you!

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Desperate Times Call for Desperate Measures:Yahoo CEO is Poised for the Challenge

Yahoo CEO Declares “No Pain, no Gain” Policies, and sparks fly. Marissa Mayer, Yahoo’s New CEO, makes a gutsy move, as she dares to go against the grain to get the company back on track. Marissa Mayer was brought in to turn the company around, and given the steep decline in valuation, a new vision and direction is drastically in order. As the saying goes; “desperate times cause for desperate measures”, and Mayer has declared telecommuting a “No, No”, among other new policies. In an apparent move to bolster innovation and collaboration within the company, Marissa Mayer has taken a very unpopular step toward reinventing Yahoo, and rebuilding their value and competitive edge.
Over a decade ago, when Yahoo was the technology darling of NASDAQ, it traded as high as $445 a share (Jan 1999) - while today it trades under $25 per share. That said, the dynamic CEO certainly has her work cut out for her. As brilliant as she is beautiful, Mayer broke the gender barrier at Google, as being the first female engineer there. Often described as “tough as nails” Mayer rose through the ranks – steadily up the Google management ladder, but seemed to have recently been overlooked for Larry Page’s Senior Leadership Team. Perhaps that made it a whole lot easier for Mayer to say goodbye to Google.

After an exhaustive search, for their next CEO, Yahoo stunned the tech community when they crowned Marissa Mayer as their next Chief Executive. In just six months, Yahoo’s newest CEO has created firestorm of media attention, and an unrelenting buzz, even rising to thelevel of outrage at times. This could be both good and bad for the company, but time will tell which way the pendulum will ultimately swing in that regard

Technology advancements have pushed the envelope in favor of telecommuting, while the troubled economy forced corporations of all sizes to rethink their policies and staffing structures. The global fiscal crisis created an opportunity for corporations to develop creative staffing and compensation structures to optimize space and costs. The tech companies had already created a blueprint that was implemented in varying degrees over the past decade.

So why is the move away from Telecommuting so controversial? In this age of advanced technology, the internet and wireless communication fostered globalization, and with it came the Telecommuting. Multinational corporations and small companies alike sought to optimize efficiency and costs by implementing mixed workforce (sometimes in different countries) which gave prominence to remote work options. Telecommuting has become a high accepted and commonly utilized working method, particularly for younger, innovative companies. A highly positive perception of Tech firms stem from the fact that the technology firms of the 21st century emphasized the importance of employee satisfaction concepts that promote employee-centric policies in support of work/life balance.

Meanwhile, a simple ban on telecommuting initiated by Yahoo’s CEO has sparked a major controversy - as tech experts voice their argument in for or against Mayer’s policy. For the record, Forbes has cited their support for Mayer’s Policy, while a Bloomberg contributor (Slayer) views the decision as daunting. Is Mayer’s decision to reverse the Telecommuting policy at Yahoo prompting fear that corporations that bought into employee-centric life/work concepts will dial back on their family friendly policies? Many strategists and analyst claim that this drastic change may be seen as a blow to working women, yielding a negative perception of Yahoo. Citing the “working woman” will be disproportionately impacted by any shift away from telecommuting. Well, you might be surprised to learn that although working women are perceived to the hardest hit by any trending policy away from telecommuting, it is actually men that will feel it the most. As it happens, the male population makes up the lion’s share of the telecommuters, yielding 73 % of the total number of remote workers in this country.

Nevertheless, this whole spectacle seems odd, and yet so telling of how powerful Marissa Mayer actually is. It is almost as if the future of Telecommuting is riding on this one decision, particularly due to the high profile of Yahoo, being one of THE most visible brands in the world. The fact is, Mayer has a sound strategy to get the company culture back to cutting edge innovation. In the spirit of mavericks like Steve Jobs, there’s a need for “all hands on deck” attitude to shake the company up. In all fairness, given Mayer’s Degree in engineering and Masters in Science Technology, she is far more suited for the challenge than her predecessors. The 4th quarter earnings report yields a 26% increase, year over year. That's a clear indication that Mayer's strategy is already having a positive impact on the company.

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Industry Outlook: Technology Driven Jobs Growth

The Department of Labor names the Service Sector as one of the top five industries that will drive the economy over the next 6 years, out pacing all other industries According to a recent Bureau of Statistics Report, the service sector employs approximately 112.8 million people. Given the continuous advancements of technology, technology related occupations are expected to grow 25.9%, while the service sector (including project management and consulting) will be the driving force in the economic growth through 2018. It is no surprise that the demand for IT consulting and system upgrades will foster increased business, driven solely by the face-paced changes in technology.

This is really good news for a wide range of career paths particularly; project managers, IT consultants, and risk analysts, network security specialists, developers, corporate trainers and recruiters. The Industry Outlook page indicates the Department of Labor anticipates 18 percent growth in the IT management and consulting services through 2020, out pacing all other occupations by 4 percent.

The Department of Labor Industry Outlook page indicates that the service sector will be accountable for employing as many as 131 million people between now and 2018. In their Industry Outlook Report issued the second quarter of this year, the Department of Labor points out that technological consulting services will be among the fastest growing sectors for professional and technical workers. To further support the positive outlook for IT and related Management and Service sectors, a Plunkett Research Report issued earlier this year, reiterated the projected 18 percent growth for the aforementioned industries. Like a super heroe, Technology will impact the overall business community as it continues to drive change, demand and thus economic recovery.

Small and mid-size organizations struggle to keep up with advancements that influence their ability to remain competitive as the market place transforms. For this reason globalization and express technology advancements foster new opportunities for IT consultant firms (Deloitte, 2012). Industry and Occupational Outlook data can be found at US Department of Labor website

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Blue Chips in the Red: Kodak

In the digital world of imaging, the hardest hit in this sector, which should come as no surprise, was Kodak. The Wall Street Journal reported that Kodak may be filing for bankruptcy protection in the months to come. In the past three years, Kodak has incurred losses in 9 out of 12 quarters. For the 3rd quarter of 2011, Kodak's losses were estimated at $222 million, which had investors running for cover. Needless to say, their stock fell sharply last year. Although the company stock began the year trading at $3.00, Kodak's shares are presently fluctuating below .50 cents. Consequently, the New York Stock Exchange warned that they will move to delist Kodak if their stock price remains below $1 for over 6 months. Kodak is not quite in the "red" yet, but if the company continues operating at the same rate of quarterly losses they experienced in the third quarter of 2011, it is only a matter of time.

I remember purchasing stock in the company when I was about 18 years old, and I must have paid over $40 a share. I sold my Kodak shares when the price dipped to $23.00. That's when I realized that I really didn't have the stomach for the trading the market.

The Iconic Blue Chip, which had been a in the forefront of the imaging products and supplies for over 130 years, has lost its grip on the cutting edge. The once stellar company is struggling to reinvent itself in the new age of camera phones, desktop publishing, , and the digital transport, upload and storage of images. Let's face it, when was the last time you bought film, or dropped off film to be developed? The impact of the ever-changing technical environment couldn't be more evident, as Kodak's valuation has suffered an 80 percent loss in the past 52 weeks. Clearly, digital advancements, and steep foreign competition has taken its toll on Kodak, making them look more like a dinosaur than a ever. By June of 2011, the company's year-end target of $1.6 -to- $1.7 billion was revised to $1.3 - to- $1.4 billion, as a reflection of their reduced expectations. The third quarter earnings report was a dismal account of continued losses, shrinking their cash reserves to $862 million, from $957 million in the 2nd quarter. As it stands, Kodak is sitting on only 10% reserves, well below standard practice.

To tell the whole story, or at least put the current events in perspective, the eminent day of reckoning began nearly 12 years ago, as the tides started to shift away of processing, printing and "developing" photo images. Resisting the digital revolution, or buying time, Kodak began giving away Free Film with every film development pick-up. This was a good, albeit temporary strategy to insure repeat business. The disposable cameras was a wonderful product with a short life span,(no pun intended) but it did help to sustain revenues, and as reasonable amount of cash flow while the CEO and the his think-tank tried to come up with new "relevant" products and services. Alas, this is going to be a fight for survival with much at stake, and Kodak was seemingly not up to the challenge - or is it? Whatever the case, in the past decade, Kodak lost 95% of its value to the industry competition which bought new age, digital savvy products to the market.
Part 1 of 2

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Netflix: Losing Its Grip

In business, being the first to market an product or service places the company (market leader) at a huge advantage over those that follow in their footsteps. Research has shown that market leaders are likely to maintain the lion's share of the market for decades. Of course, there are exceptions to every rule; and Netscape was one of the unlucky market leaders that was not able to hold its edge over followers. That said, Netflix may prove to be another such exception to the rule if they are not careful.
Netflix is still recovering from the summer debacle, where they raised their fees 60% and attempted to separate the physical DVD rental business, from the streaming videos business. The strategy to shift their business model was ill-fated. The response to the announcement should have given them all the warning they needed not to move forward with the plan. The idea probably sounded brilliant in the boardroom, but it was obviously not founded on solid research, or customer surveys. In roughly three months time, Netflix stock price dropped 36% to $115 per share. To put it in perspective, on July 7th. Netflix stock sold for $292 a share. That is quite a fall from grace.

Netflix reported a loss of 800,000 subscribers in the 3rd quarter. Analysts predicted a loss of 600,000, which had caused the stock to swiftly decline 20%. The company warned of more defections and stated that they anticipate losses for the first quarter of 2012 as a result of expanding their business to Europe. In the meantime, RedBox is enjoying the flood of subscribers looking for refuge from Netflix who took their loyalty for granted.

Netflix‘s short sightedness, is clearly a result of both lack of due diligence and arrogance. Hastings, founder and CEO of Netflix had the vision and leadership to innovate and steer the company to tremendous success, so what happened? It is hard to believe it the same person at the helm steering the company recklessly away from its customers. The loyal, or stubborn shareholders that choose not to dump the stock are looking for an explanation. The public apology did eventually come from Hastings, but the damage was already done. As they say, you can’t un-ring a bell. I am willing wage a bet this debacle has already become a "what not to do" lesson that will be remembered by Hastings, and board of directors for years to come. It will be interesting to see what strategy the company will implement for damage control, and rebuilding its US customer base.

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Facebook: Untouchable, & in a League of Their Own

It is clear that Zuckerberg is Superman, and his Facebook is untouchable. In the midst of a downgraded, underrated, crawling economy, Facebook managed to double its revenues in the first half of this year with a staggering $1.6 billion, according to the Wall St. Journal. There was much talk about Facebook feeling the pressure from competitors, which was obviously completly unfounded. Although, at somepoint, Facebook may have to face external threats to its marketshare, but at the moment, they're in a league of their own. As market leader, having overtaken Myspace, leaving them in struggling to retain name recognition, Zuckerberg has successfully carved a permanent mark on the pop culture around the world.

In a Superman-esque feat, Zuckerberg’s Facebook platform saved the internet advertising industry. Although, it's safe to say social networking has revolutionized the online advertising, Facebook alone accounted for nearly 1/3rd of the internet display advertising impressions in June, which is more than Yahoo, Google, MicroSoft Corp and AOL combined. This illustrates the tremendous power of Facebook, and more importantly, the power of social networking as a whole. You don't have to be a marketing guru, or economist to see the impact social networking will have on allocation of advertising dollars in the not-so-distant future. But for now, it’s all about Facebook and the hundreds of millions of people, spending millions of minutes just "hanging out" on their page, or checking out their friend's pages.

The growing obsession has created global opportunities for advertisers, and businesses looking to market directly to their target in a personal environment - which (in the case of social network sites), is a captive audience.

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Myspace: Down but Not Out

Presently down, but in no way out of the game, Myspace, which is currently owned by News Corp, has hired investment banking firm Allen & Company to sift through the nearly two dozen firms interested in an acquisition or merger with the social networking site. Although Myspace’s popularity has been edged out by Facebook in recent years, it still has over a quarter of a million users. Since the social networking pioneer is free to it members, advertisers and affiliate contracts has been the main source of income, thus revenues began to take off by '2005. We’ve reported how well Facebook’s Mark Zuckerberg made out with a recent infusion of $1.5 billion via creative financing put together by Goldman Sachs. The Goldman-Zuckerberg finance documents indicated a Facebook value of an astounding $50 billion.

To put it in perspective, of the growing number of social networking sites, Myspace is ranked 3rd - just under Facebook and Twitter. So, what is the likely valuation? By the 2nd quarter of 2007, Myspace was on track to surpass the expected $500 million in revenues, but has since seen revenues decline steadily with intense competition stemming from Facebook and Twitter.

The Wall Street Journal Reported that News Corp is open to merging Myspace with another business in exchange for cash or equity in the merged firm. Myspace is a longway from the solid financial footing of Facebook, but New Corp realizes there is untapped potential in the Myspace brand. Considering the reported 4th quarter losses amounting to over $150 million, how can this, still viable, business be restructured, and re-marketed to emerge profitable once again? I suppose that will be for the winning bidder, and their business strategists to determine.

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Google: Reinventing itself

In the headlines several times in the last couple of weeks, Google appears to be making major changes to bolster its competitive advantage, and gear up for the next plateau in technology. Following failed attempts to expand into the instant messaging /social network genre with Google Wave, and the Nexus One phone, Google is bent on exploiting every ounce of its brand equity to slide into other online businesses. To this end, CEO Eric Schmidt is stepping down to hand the reins over to co-founder Larry Page, 37, to take the company where no man has gone before (hopefully).

Schmidt, for the most part, successfully accomplished what he set out to. He was brought on to bring some “grey hair” into the fold; meaning provide the company with steady, experienced management, while the two co-founders, then only 27 year old, gain more management experience as they tweaked their golden goose to perfection. Co-founders Larry Page and Sergey Brin were essentially kids at the time, and certainly did the right thing by bringing on someone with Schmidt’s expertise to keep the operation afloat. Schmidt, by the way, is a former board member of Apple, Inc, and was CEO of Novell when he left to become Chairman and CEO of Google. Eric Schmidt has been criticized for not have the technical dexterity of his bosses, Brin and Page, but in his defense, that is not what he was there for. Nevertheless his stint at Google was extremely successful, which is made abundantly clear by the 4th quarter earnings report showing Google had a 29% jump in revenues. Since August of 2001, Schmidt, Page and Brin ran the company as a triumvirate, and the company’s shares grew more than six-fold.

What’s Next for the Iconic Internet Giant, with 67% Market Share of the Internet Search Engines industry,
whose name has become a verb?
For starters, Google expected to acquire ITA software for $700 million. As the story goes, an agreement was reached for the acquisition of ITA software, which powers travel sites, including Kayak.com, as well as the reservation systems of American and Continental Airlines. Although the golden goose of the internet was initially cleared for by the Federal Trade Commission, but it is anticipated that the next hurdle will be met with resistance. It is reported that the government may be preparing to file an anti-trust suit against Google to stop this deal in its tracts. Google has had some issues come up about privacy, and concerns about the lack of security of the information Google has gathered, as well as how this information is being used. It would seem that if Google also had proprietary information collecting from million of airline customers, they may prove to be deemed a little too much “information” or a conflict of interest, or both. I will be watching to see how this plays out. It is certainly intriguing to say the least.

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Anonymous said......
It looks like Google's founders may have grown into their roles as chief executives, but can they stay ahead of the technology curve as Apple has been able to do, time and time again? Schmidt should probably stay on as a consultant, to keep an eye on the ship, while the barely seasoned founders find their rhythm.
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K. Reilly said......
I understand your feeling, and Schmidt has certainly been a solid guardian for Google, but I tend to believe the Mssrs. Page an Brin have earned great experience over the past 10 years, and well prepared to lead the company to the next level.

Followup Story - Net Neutrality Rules Adopted - Will They Last?

On December 21, a divided U.S. Federal Communications Commission adopted Internet traffic rules that would ban Internet service providers from blocking or discriminating against traffic on their networks. The rules, expected to come into effect early this year, will also allow high-speed Internet providers to charge customers according to their level of usage and would give wireless carriers additional network management freedoms. However, it may be some time before the full impact is apparent, even if the rules survive any court challenge.

Following are the likely impacts on various companies, consumers and the FCC based on reports from analysts and industry insiders:

INTERNET PROVIDERS

* Cable companies like Comcast Corp, Time Warner Cable, Cablevision Systems Corp, and big landline providers like AT&T Inc. and Verizon Communications Inc. are banned from blocking or discriminating against lawful Internet content.

* The rules will not stand in the way of usage-based pricing, allowing cable and other fixed line companies that also serve as high-speed Internet providers to increase rates for subscribers that do bandwidth-heavy tasks.

* Cable subscribers considering dropping their TV service to watch television and movies online may think twice if new pricing schemes push up the cost of streaming content.

* Cable companies are better off than when the FCC was considering reclassifying broadband under the stricter regulatory regime of existing phone rules.

WIRELESS CARRIERS

* Verizon Wireless (joint venture of Verizon Communications and Vodafone Group Plc, AT&T, Sprint Nextel Corp, T-Mobile (U.S. unit of Deutsche Telekom AG) and others would be granted added flexibility under the rules, acknowledging tighter bandwidth-constraints.

* They would be subject to a looser version of the no-blocking policy - banning only the blocking of websites and competing voice and video services.

* Mobile broadband could still discriminate against bandwidth-heavy content.

* CTIA, the trade association for the wireless industry, continues to say the rules are unnecessary, but commended the FCC for recognizing the need to regulate mobile broadband differently from landline services.

CONTENT PROVIDERS

Google Inc, Microsoft Corp, Amazon.com, Facebook, Netflix Inc. and other content providers could lose some of the edge they were building over cable companies if downloading content becomes more expensive under usage-based pricing.

According to Reuters “The Federal Communications Commission approved the "Open Internet" order after FCC Chairman Julius Genachowski's plan got the support of fellow Democrats Michael Copps and Mignon Clyburn. Some industry analysts think a court challenge is still likely. At issue is whether regulators need to guarantee that all stakeholders continue to have reasonable access to the Internet ("net neutrality") or whether the Internet is best left to flourish unregulated. The FCC's ability to regulate the Internet has been in doubt since an appeals court in April said the agency lacked the authority to stop cable company Comcast Corp from blocking bandwidth-hogging applications. Senior FCC officials have said they will invoke new legal arguments not employed in the Comcast case. The two Republican commissioners at the agency opposed the latest rule-making effort, saying it was unnecessary and would stifle innovation. Robert McDowell and Meredith Attwell Baker told an FCC open meeting that they believed the rules would fail in court.

High-speed Internet providers like Comcast and Verizon Communications can "reasonably" manage their networks under the rules and perhaps charge consumers based on levels of Internet usage. The rules, to be somewhat looser for wireless Internet, could help cable companies in competition with plans by Microsoft Corp, Google Inc and Amazon.com to deliver competing video content over the same Internet lines the cable companies run to customers' homes. Adoption of the measure had been expected after Copps and Clyburn had issued statements saying they would support the proposal despite some misgivings. But McDowell warned that the FCC was defying the court and also circumventing the will of Congress. "Litigation will supplant innovation. Instead of investing in tomorrow's technologies, precious capital will be diverted to pay lawyers' fees," McDowell warned. Genachowski, spoke last at the meeting, and said the Internet currently was unprotected and invoked the names of his Republican predecessors to back adoption of the rules. "The rules of the road we adopt today are rooted in ideas first articulated by Republican Chairmen Michael Powell and Kevin Martin, and endorsed in a unanimous FCC policy statement in 2005," said Genachowski.”

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The Great Net Neutrality Debate

What is Net Neutrality ?
It is simply that governments and Internet service providers (ISPs) should not place any restrictions on the Internet’s content or means of accessing that content. Internet users should be in control of what content they view and what applications they use on the Internet. The Internet has operated according to this neutrality principle since its earliest days and the big broadband carriers like AT&T, Verizon and Comcast for example, should not be permitted to use their market power to discriminate against competing applications or content. The telephone companies mentioned are not permitted to tell consumers who they can call or what they can say; Net Neutrality proponents say the same telephone companies and other broadband carriers should not be allowed to use their market power to control activity online.However, Google and Verizon put forward a proposal to the Federal Communications Commission to essentially retain this net neutrality on the public Internet but to allow broadband operators and network operators to offer new services that might be discriminatory in terms of their price and speed. They are proposing that broadband providers can allocate bandwidth for such projects, working with other application or service providers as they see fit. They mentioned a few specific examples to help illustrate this, such as health care monitoring, advanced educational services, or new entertainment and gaming options. Basically, they proposed that they be permitted to create a two-tier system whereby network capacity could be sold to companies willing to pay for that service, in turn to provide a higher quality service to their users.

Verizon said it has no intention of selling bandwidth from the ‘public’ network, it wants to make certain it could provide dedicated bandwidth-based services to third parties if it wanted to. Verizon CEO, Ivan Seidenberg said: “Verizon is standing tall. We said we agree that there should be no paid prioritization of traffic over the public Internet. Google (and others) will continue to innovate, and we have to feed that cookie monster. All we have asked is that we are allowed to offer services like Fios.” Fios is a bundled home communications service Verizon offers that makes use of an end-to-end fibre optics network, offering Internet, telephone and television. Verizon cannot offer it over the Internet, given neutrality requirements, so it is offered as a network separate from the Internet.
Those in favor of net neutrality clearly don’t like this at all, as creating a two-tier system, even if it means legislating neutrality in one of the tiers, results in the fragmentation that they fear and still discriminates in their eyes. Given that Google’s unofficial motto is ‘Do no evil’, the backlash in some quarters has been brutal. On the ominous Friday the 13th of August, internet users from across the Bay Area converged outside Google’s offices in protest. The rally was organized by ColorofChange.org, Credo Action, MoveOn.org, Free Press and the Progressive Change Campaign Committee. SavetheInternet.com summarized the sentiment as follows: “Google previously had been a champion of policies such as Net Neutrality — the fundamental principle that keeps the Internet open and free from discrimination. Its decision to team up with Verizon, long an opponent of such policies, has drawn the ire of public interest advocates.”

What is the scorecard? Many Internet giants are proponents of net neutrality, and also supporters of the U.S. government’s involvement in regulating it to ensure the Internet stays ‘open’. The likes of Amazon, Craigslist, Google (kind of), Facebook, Sony, IAC, and Twitter fall into this camp. President Obama himself does too: “I am a strong supporter of net neutrality … What you've been seeing is some lobbying that says that the servers and the various portals through which you’re getting information over the Internet should be able to be gatekeepers and to charge different rates to different Web sites… And that I think destroys one of the best things about the Internet — which is that there is this incredible equality there … Facebook, MySpace, Google might not have been started if you had not had a level playing field for whoever’s got the best idea and I want to maintain that basic principal in how the Internet functions. "As president, I am going to make sure that that is the principle that my FCC commissioners are applying as we move forward.”

In the against-net-neutrality camp are a number of large hardware and telecommunications firms, who would invariably benefit from being allowed to redefine the way the Internet works as they control the means of accessing it. In addition, opponents also include heavyweights such as Bob Kahn (inventor of TCP — “net neutrality is a slogan that would freeze innovation in the core of the Internet”) and Professor David Farber (“The Internet needs a makeover”). Robert Pepper, senior managing director of global advanced technology policy believes all the pro-net neutrality hype, is just that, hype.

What does the law say?
The law that affects net neutrality differs globally. In the U.S. there is considerable debate around the topic, with the FCC being involved in trying to legislate around this area, and sometimes not by choice. For instance, a court case against Comcast was the first to seriously touch on this aspect, with Comcast was accused of unlawfully throttling BitTorrent traffic in a class action suit. Comcast settled for $16 million, with the FCC stating Comcast needed to comply with transparent network management practices.

Are we truly net neutral today and if so,
How long can it be sustained?
There are a number of central arguments used in opposition to any kind of net neutrality legislation. Firstly, that the ability to charge users/sites different rates for differing levels of access will provide the revenues to ISPs and other network operators necessary for them to recoup their investments in broadband networks. Verizon has said there is no current incentive for it to develop and deploy advanced, super-fast fibre optic networks if it can’t charge more for access to such networks. Verizon and a number
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C. Cohn
The Cohn-Reilly Report

AT&T Surprises The Industry

AT&T has been slammed by its iPhone customers for dropouts and overall poor performance of its 3G network. Combined with attack ads from Verizon and media bashing from analysts, most thought that Apple would cancel their AT&T exclusivity contract for the iPhone, and hand over their new iPad tablet (a hand-held computer device touting a 9.7 inch screen, weighing 1.5 pounds and supporting 140,000 applications) to Verizon, when Apple held their iPad launch event this week.

Most were wrong on both fronts. Apple praised AT&T as a great partner, despite the technical problems, and will continue iPhone exclusivity with AT&T. The new iPad will also go to AT&T as the sole carrier. This is clearly a coup for the company, which will certainly take customers away from Verizon. Although most people are shocked that Verizon was not included, Apple executives realized that the grass is not always greener. No one anticipated the incredible data usage demands from the iPhone, and I do not believe that Verizon could have done a better job, despite their claim to having a superior network. AT&T has vowed to improve their service and will invest billions in the upcoming months to backup their promise.

Looking at the financial side, both companies have seen decreases in their share price by over 10% since the beginning of the year. This is due to price cutting, declining wireline revenues and the major indices contracting by more than 6%. However, Q4 revenues and cash flows reported this week were strong from both firms. Over 2 million wireless customers were added by each company, respectively. AT&T showed an increase in earnings of over 25%, and both companies have current dividends topping 6.5%. Notwithstanding the positive financial points, it is clear that the Telecoms have lost favor with Wall Street. With pummeled stock prices and high yields, maybe it is time for the institutions and hedge funds to realize investment value in these stable cash-cow giants.

C. Cohn

Telecoms Decline As The Market Climbs

The major indexes rallied over the last six sessions, approaching twelve month highs established in September. This was bolstered by the first government to raise interest rates in over a year - the Australian Central Bank, and Alcoa, the traditional first Dow component to report earnings, beating analysts expectations by sixteen cents.

The Telecoms did not participate in the week long rally - why? On Wednesday, AT&T surprised the industry by announcing that they will allow Apple’s iPhone to carry VOIP (Voice Over Internet) applications, such as Skype, over AT&T’s 3G Network. This was applauded by analysts and financial journalists, but the public reacted adversely, dragging down the sector each day since the announcement was made. The investor knee-jerk reaction was due to the concern that long distance earnings will suffer, because customers will use Skype to make overseas calls for free, avoiding the regular per minute charge that is a lucrative source of income.

The same kind of reaction occurred when AT&T decided to subsidize the purchase of the iPhone, resulting in an upfront hit to their revenue stream. This strategy and the opening up of voice Internet applications on their network are both designed to meet customer demands and more importantly, as a long term goal, attract new subscribers. After all, you cannot use the iPhone in this country, unless you sign up to AT&T, and you will not be able to use Skype on your cell phone for international calls, unless you become a subscriber as well. Currently, Verizon and the other Telecoms are not offering this service, so AT&T has a jump on the competition. It is even rumored that AT&T may partner with Google in the near future, to further solidify integrating Internet applications with wireless phones.

Although there is stiff competition and declining revenues in the wire-line area, the major Telecoms have been consistently performing well through the recession. Last quarter, AT&T earned $3.2 Billion, with total revenues of $30.7 Billion. Verizon earned $3.1 Billion with revenues of 26 Billion. Not many companies can make such a claim during these tough times. They are basically cash cows with many sources of income and increasing wireless bases, both consistently paying dividends, with current yields over 6%. Try getting a return like that at your local bank!

Earnings season is upon us and AT&T will be reporting on October 21 - Verizon on October 26. We will be watching closely to see if they can continue their successful track records.

DISCLOSURE: Charlie Cohn owns shares of AT&T and Verizon common stock.

Click Here for Telecom Earning (Oct. '09)

C. Cohn

The Great Net Neutrality Debate

What is Net Neutrality ?
It is simply that governments and Internet service providers (ISPs) should not place any restrictions on the Internet’s content or means of accessing that content. Internet users should be in control of what content they view and what applications they use on the Internet. The Internet has operated according to this neutrality principle since its earliest days and the big broadband carriers like AT&T, Verizon and Comcast for example, should not be permitted to use their market power to discriminate against competing applications or content. The telephone companies mentioned are not permitted to tell consumers who they can call or what they can say; Net Neutrality proponents say the same telephone companies and other broadband carriers should not be allowed to use their market power to control activity online.However, Google and Verizon put forward a proposal to the Federal Communications Commission to essentially retain this net neutrality on the public Internet but to allow broadband operators and network operators to offer new services that might be discriminatory in terms of their price and speed. They are proposing that broadband providers can allocate bandwidth for such projects, working with other application or service providers as they see fit. They mentioned a few specific examples to help illustrate this, such as health care monitoring, advanced educational services, or new entertainment and gaming options. Basically, they proposed that they be permitted to create a two-tier system whereby network capacity could be sold to companies willing to pay for that service, in turn to provide a higher quality service to their users.

Verizon said it has no intention of selling bandwidth from the ‘public’ network, it wants to make certain it could provide dedicated bandwidth-based services to third parties if it wanted to. Verizon CEO, Ivan Seidenberg said: “Verizon is standing tall. We said we agree that there should be no paid prioritization of traffic over the public Internet. Google (and others) will continue to innovate, and we have to feed that cookie monster. All we have asked is that we are allowed to offer services like Fios.” Fios is a bundled home communications service Verizon offers that makes use of an end-to-end fibre optics network, offering Internet, telephone and television. Verizon cannot offer it over the Internet, given neutrality requirements, so it is offered as a network separate from the Internet.
Those in favor of net neutrality clearly don’t like this at all, as creating a two-tier system, even if it means legislating neutrality in one of the tiers, results in the fragmentation that they fear and still discriminates in their eyes. Given that Google’s unofficial motto is ‘Do no evil’, the backlash in some quarters has been brutal. On the ominous Friday the 13th of August, internet users from across the Bay Area converged outside Google’s offices in protest. The rally was organized by ColorofChange.org, Credo Action, MoveOn.org, Free Press and the Progressive Change Campaign Committee. SavetheInternet.com summarized the sentiment as follows: “Google previously had been a champion of policies such as Net Neutrality — the fundamental principle that keeps the Internet open and free from discrimination. Its decision to team up with Verizon, long an opponent of such policies, has drawn the ire of public interest advocates.”

What is the scorecard? Many Internet giants are proponents of net neutrality, and also supporters of the U.S. government’s involvement in regulating it to ensure the Internet stays ‘open’. The likes of Amazon, Craigslist, Google (kind of), Facebook, Sony, IAC, and Twitter fall into this camp. President Obama himself does too: “I am a strong supporter of net neutrality … What you've been seeing is some lobbying that says that the servers and the various portals through which you’re getting information over the Internet should be able to be gatekeepers and to charge different rates to different Web sites… And that I think destroys one of the best things about the Internet — which is that there is this incredible equality there … Facebook, MySpace, Google might not have been started if you had not had a level playing field for whoever’s got the best idea and I want to maintain that basic principal in how the Internet functions. "As president, I am going to make sure that that is the principle that my FCC commissioners are applying as we move forward.”

In the against-net-neutrality camp are a number of large hardware and telecommunications firms, who would invariably benefit from being allowed to redefine the way the Internet works as they control the means of accessing it. In addition, opponents also include heavyweights such as Bob Kahn (inventor of TCP — “net neutrality is a slogan that would freeze innovation in the core of the Internet”) and Professor David Farber (“The Internet needs a makeover”). Robert Pepper, senior managing director of global advanced technology policy believes all the pro-net neutrality hype, is just that, hype.

What does the law say?
The law that affects net neutrality differs globally. In the U.S. there is considerable debate around the topic, with the FCC being involved in trying to legislate around this area, and sometimes not by choice. For instance, a court case against Comcast was the first to seriously touch on this aspect, with Comcast was accused of unlawfully throttling BitTorrent traffic in a class action suit. Comcast settled for $16 million, with the FCC stating Comcast needed to comply with transparent network management practices.
Are we truly net neutral today and if so,
How long can it be sustained?
There are a number of central arguments used in opposition to any kind of net neutrality legislation. Firstly, that the ability to charge users/sites different rates for differing levels of access will provide the revenues to ISPs and other network operators necessary for them to recoup their investments in broadband networks. Verizon has said there is no current incentive for it to develop and deploy advanced, super-fast fibre optic networks if it can’t charge more for access to such networks. Verizon and a number of ISPs have often referred to firms like Google and Skype as ‘freeloaders’ for making money using networks that they have provided at a cost of billions. Secondly, many suggest what we have right now isn’t in fact net neutrality at all. The biggest firms can invest in higher bandwidth deals and server replication to provide faster access for its users in comparison to smaller sites that wouldn’t be able to afford such infrastructure, for net neutrality isn’t even something that exists to uphold. Thirdly, the increase in rich media means infrastructure providers have far more pressures on their resources than was once the case. Bret Swanson of the Wall Street Journal suggests Youtube streams as much data in three months as the world’s radio, cable and broadband television channels stream in one year, i.e. 75 petabytes. By extension he believes telecommunications firms are simply not ready for the era of ‘exabyte’ delivery and something needs to give.

What’s next? In a recent bill introduced in Congress, U.S. House Democrats failed to win Republican support needed for legislation giving regulators temporary authority over how companies led by Comcast Corp. and AT&T Inc. provide Web service, Representative Henry Waxman said. A measure that would let the U.S. Federal Communications Commission enforce net-neutrality rules for two years won’t be introduced immediately, Waxman, a California Democrat and chairman of the House Energy and Commerce Committee, said on September 29, in an e-mailed statement. “This development is a loss for consumers and a gain only for the extremes,” Waxman said. “We need to break the deadlock on Net Neutrality.” The bill aimed to ensure the FCC has the power that was called into question when a U.S. court in April ruled it lacked authority over Internet-service providers. Republican leaders decided “there is not sufficient time to ensure that Chairman Waxman’s proposal will keep the Internet open without chilling innovation,” Representative Joe Barton of Texas, the top Republican on the committee, said in an e-mailed statement. Congress is to adjourn within days to campaign for the Nov. 2 elections. “It is not appropriate to give the FCC authority to regulate the Internet,” Barton said The bill may be introduced after the elections, Waxman said. The measure would restore the FCC’s authority to prevent the blocking of Internet content, bar phone and cable companies from unjustly or unreasonably discriminating against any lawful Internet traffic, and apply strictures to wireless providers, Waxman said.
“Under our proposal, the FCC could begin enforcing these open Internet rules immediately, with maximum fines increased from $75,000 to $2,000,000 for violations,” Waxman said. FCC Chairman Julius Genachowski in September 2009 proposed rules aimed at ensuring net neutrality. He hasn’t sought a vote while the commission considers its reaction to the April court ruling.
Today’s development prompted renewed calls for Genachowski to proceed with his idea to claim power over Internet service using rules written for monopoly telephone service in the 20th century. AT&T and Verizon Communications Inc. oppose such action and say it may prompt more regulation, including price controls. Lawmakers and advocacy groups have urged Genachowski to proceed, saying customers need protection. Waxman’s bill would bar the FCC from using the phone rules during its two-year duration. “If our efforts to find bipartisan consensus fail, the FCC should move forward,” Waxman said.
Complete freedom of open access on the Internet or tiered payment approaches to stimulate corporate innovation.- you decide.

C. Cohn
The Cohn-Reilly Report