Bret Piatt

The local paper is coming to an end...

The Internet and the plethora of news sources it contains gives you better and more timely information than reading your local paper.  “The paper” still had a chance when we could only use “The Internet” on big fixed location desktop computers.  Now that I can read the WSJ content on a mobile application on my BlackBerry I no longer need to have “a paper” if I’m out and want access to news.  It isn’t just about the better content on the Internet, it is about ease of consumption of that content as well.  What we all see happening right now to the newspapers will hit radio next.

This is where Pandora comes in to threaten local FM music radio.  I’ve recently acquired a new car that happens to have an AUX jack.  With that AUX jack I can hook up my  BlackBerry Bold with Pandora and play music, music relevant to me, music without commercials (I’m sure this will change over time), and it is easy to use.  As smartphones continue their proliferation and cars with AUX jacks (thank you Apple for the iPod success and it pushing automakers to add AUX jacks) do the same we’ll see more and more people doing what I’m doing now — listening to Internet streamed radio in their car for free.

This not only kills off local radio, it nukes satellite radio long before the local radio dies.  My new car came with a free 6 month Sirius/XM subscription and I’m not even going to activate it.  I’m a fan of the concept and I was actually an early subscriber to XM during my days commuting in the Bay Area during “the bubble”.  Sirius/XM is doing the right thing in coming out with smartphone based applications to consume their service.  This not only lowers their customer acquisition costs (I suspect they had to subsidize the hardware deployment in autos) but increases the ease in which I can use their offering.  They need to get all of their content over to the smartphone version yesterday and they need to start pushing this as their primary marketing effort.

Clear Channel, owner of over 1,200 local radio stations, is another player in the mix — and probably the player with the most to lose.  They’re experimenting in the smartphone space with iheartradio that currently supports both BlackBerry and iPhone with content from over 350 of their stations.  I haven’t tried this out yet personally so after I do I’ll come back and add more detailed thoughts.

Right now Google is a “one trick pony” and eventually like Microsoft did with DOS and then Windows you saturate that market and can only grow at the pace of the industry.  The only way to have huge growth again is to find a new line of business.  For Microsoft it was and still is the Office suite (Word, Excel, PowerPoint, Access).  For Google it is going to be YouTube…

This isn’t going to happen over night but it isn’t much more than 5 years out.  Early adopters are already consuming Netflix through their Xbox360.  TV manufacturers are starting to include network adapters and PC manufactuers are shipping home theater studio PCs with remotes.  The next generation of home game systems will all be TV/Movie capable; Microsoft can already run the AT& U-Verse software on an Xbox360 (Microsoft is partnered with AT&T with the video delivery software).

So how does all of this help Google and YouTube?  Right now for TV+Broadband the consumer spends $80-200/month with the broadband component costing $20-80 leaving $60-120 for the TV content portion.  Broadband $/Mbit will continue to become more efficient allowing more and higher quality video to be delivered over it.

Time Warner Cable already sees this coming and they put new bandwidth caps on their broadband (5GB, 10GB, and max 40GB tiers) that limit their users to ~9 hours of HD quality video per month.  AT&T only offers their highest speed broadband bundled with TV service (you can get 6Mbps DSL for $35/month which is enough to deliver 1 HD stream).  Verizon offers their FiOS service with or without TV and for $69.99/month you get enough bandwidth to have 3 HD streams going at once.

So as long as the carriers providing the bandwidth don’t lock Google out they’ll be in the game for the TV portion of the revenue.  Right now all cable providers are limited to providing commercials based on service area — Google and YouTube can deliver commercials to each subscriber.  Google can cross reference your search information and base the commercials you see on that.  Because of this they can generate more $/commercial.  Imagine this — you searched earlier in the day for ‘new car’ and went to Ford, Audi, and BMW websites — now you’re watching the newest episode of “Super Show” on YouTube and Google can show you car commercials.

The TWC, Cox, Comcast group will fight this as hard as they can because they don’t have a carrier backbone so if you’re a traditional cable customer expect to see further limits like the one TWC has in testing in a few service areas now.  AT&T and Verizon are better off as they don’t need to pay transit fees for traffic from their subscribers across the Internet.

With mobile devices starting to become video capable Google is in the drivers seat here as well.  YouTube already works perfectly on my BlackBerry Bold and as mobile carriers move from 3G to 4G and battery technology makes huge strides (thanks to the investment coming from the automobile industry) many of us will be watching TV in the future on our phones.

What about Hulu? What about other video startups?  Just like Microsoft having the OS it was much easier for them to create a synergy and add the Office suite.  All of the pure video plays lack the dominance in search that give them the ability to better place relevant advertisement.

The TV advertising market in the US is between $50-60B annually.  Google can double their revenue by getting half the market share in TV advertising that they have in Internet search.  Android, cloud computing, business e-mail and office applications, and the rest of their current projects don’t have the potential that TV does.  They can be good profitable business units but Google’s route to the next major growth will or won’t happen based on their ability to execute with TV.

We have a number of financial statistics quickly heading to 0.  The top linked pair of statistics I’m tracking are per capita income and population.  As long as both of those numbers aren’t declining then we’ll eventually burn through the excess inventory in the “bubble” markets.  I’ll define “bubble” as where the rate of supply is increased faster than the long term rate of demand.

Housing starts, existing home sales are both at the lowest levels since WWII and at the current rate of decline they’ll be effectively 0 before summer.  For perspective we’re at an annualized rate of 466,000 new homes each year down from 1.7 million in 2005.  The US adds around 2.5 million people each year with the average family size of 2.6 meaning we need somewhere in the ballpark of 900,000 new homes.  I can’t find the number of homes destroyed on an annual basis due to fire, flood, redevelopment, etc.  We can agree that number if always somewhere at or above 0 so it’s also eating into the inventory.

Auto sales are down to less than 10 million annual units and still declining.  For some perspective approximately 13 million autos are scrapped each year.  This means around 1 in 50 households have 1 less car each year we keep this up.  I’m not sure on the sustainability of the reduction of the number of cars.  Do we have less need as more people move to alternative transport, as our population ages and the retirees don’t need a commuter car each plus the weekend fun car?

For equity markets 0 isn’t really 0.  You’ll hit an effective 0 somewhere above the actual 0 when the price = real book value.  I use the term “real book value” because a number of balance sheets even with mark to market have many arbitrarily valued assets at a book value above what you could sell them for in a liquidation.  Hopefully we don’t go that low, rather we stop at somewhere above “real book value” based on cash flow that can be obtained from operating + RBV.

So when is the time to invest?  When you believe things are cheap enough and cash becomes risky.  Cash is the next “bubble” (a lot of people are talking about this as a T-Bill “bubble”, short term T-Bills are effectively cash).  While the relative value of the dollar may get stronger globally when we inflate our way out of the debt we’re creating the value of an individual dollar is going to decline. As long as the governments of the world are in debt and can print money we’ll have inflation.

I thought we’d see a bottom in the equity markets in February.  That has been wiped out by the threat of common stock equity destruction through intervention.  Once the intervention ceases and the future value of an equity investment can be modeled we’ll see a broad market increase.  1 out of 4 S&P500 stocks is up over the November 21st, 2008 bottom as they aren’t likely candidates for interventionist destruction.

With the way current policy is going now our market bottom could drag out to Q3, anything beyond that isn’t possible as long as the population and per capita incomes keep going up.  If they start going down 0 really can become 0 for everything (-89.6% from the GD is pretty darn close to 0).

Many people complained about Jim Cramer’s call to take five years of money out of the market this past fall because it put additional selling pressure on equities.  Equity prices are much more fickle than the average investor understands.  The “current price” is based on the price of the last trade, not the price of any sort of moving volume average.  This is why when companies make an acquisiton offer they often offer a 30% or more premium on the current price.

The same upward distribution you run into when trying to acquire a company occurs in the other direction when trying to liquidate large positions.  Over the past 40 years the first broad generational equity investing began with the baby boomers and the pension funds created by the post-WWII jobs.  Now those boomers are all hitting retirement age and they want to buy a motorhome, they want to golf, they want to lay on the beach.  Their pensions and 401k/IRAs have to be able to cover the distributions.  In order to do these things they need to sell equities they hold.

Some equities will hold up well, those that pay a large and safe dividend in an industry the pensions and boomers believe will continue to produce results into their retirement years.  The days of tons of people fighting to pay for a 30:1 PE on a growth stock with no dividend in sight are coming to an end.  If money is flowing out, rather than in, equity valuations will come down to other asset classes (i.e. you wouldn’t pay 30x earnings to buy your favorite local bar).

The recent market crash has many of the gen-X and gen-Y folks looking back to see a nearly flat or even down performance on their equity portfolios over the past 10 years.  Even with the real estate “crisis” we’re having now if they would have purchased more real estate in 1999 they would have made a better return in almost every market.

Now with instant access to charts, graphs, and an Internet full of education this generation of investor is going to compare asset classes.  The current bankruptcy filings are teaching people owning common, while it might have a higher upside, is last in line to get anything back.  For the boomers, the corporate bond market was a black box that only their pension touched.  Now anyone can invest in them through a number of bond funds.

While you may never see a 30% growth year on a bond fund, if you owned LEH bonds you got paid something, if you owned common you recieved a nice letter in the mail saying something such as, “if you are a major shareholder over 5.5% please submit this form to get in line after the bond holders are paid off.”  For every common holder outside of the major mutual funds and pensions you aren’t getting anything.

Enough rambling for my first real blog entry… when investing look at more than just equities as an asset class or you may find out that a piggy bank would have served you better as a retirement account.