Category: Big Business

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Malibu’s Most Wanted

We all say dumb things when we’re hammer drunk, and I think they generally fall into one of three groups:

Maudlin sentimentalities: “I love you guys,” “I could’ve gone pro if I didn’t blow out my shoulder,” or “My life is f***ed.”

Pronunciamentos: “David Duke is right! Who’s standing up for the rights of white men?” “This country will never be safe until we deport all the Eskimos,” or “The Jews are responsible for all the wars in the world.”

Things we say to get into someone’s pants: “Your poetry’s really good,” “I like Radiohead, too,” or “What do you think you’re looking at, sugar tits?”

Which brings us to the case of Mel Gibson’s DUI bust. It was funny enough to see that he’d been busted, but the humor level went through the roof when the report came out about his anti-semitic tirade toward the arresting deputy.

Dan Drezner has a neat chain-of-events that will spin out of the weekend, Chris Hitchens offers a great subhed for his Gibson column (“He is sick to his empty core with Jew-hatred”), the Times has the meta-story about the speed of scandal, and Gregg Easterbrook has a football column up at ESPN.com.

Why mention that last one? Because Disney-owned ESPN fired Easterbrook a few years ago for what were perceived as anti-semitic remarks directed at movie studio owners. I wrote about the situation here and here. For a while, Easterbrook’s Tuesday Morning Quarterback column was carried at NFL.com. It returned to ESPN this season without a comment. At the moment, it’s the lead item on ESPN.com, with the headline “Easter Tuesday.”

Maybe ESPN was just waiting for Disney CEO Michael Eisner to leave before bringing Easterbrook back. Or perhaps Willow Bay was a big fan of the column. The cold medication’s kicking in too strongly for me to make any real point here, but Easterbrook’s been “forgiven” by ESPN (which shouldn’t have fired him to begin with), even if they couldn’t get around to explaining how their interpretation of his comments has changed. Gibson, on the other hand, with his tortured apology, seems to be intent on proving the South Park guys right.

(In the process of “researching” this post, I came across a batshit-crazy anti-semitic website devoted to explaining Jewish ownership of American media. Enjoy.)

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Present success is no indication of future failure

In the New Yorker, James Surowiecki tells us to take a chill pill over Airbus’ current struggles.

In 2003, Business Week declared that Boeing was “choking on Airbus’ fumes,” and warned that Boeing’s “slip to No. 2 could become permanent.”

The problem with such prognostications is that they infer basic truths about a company’s prospects from its short-term performance. In fact, present success is often determined as much by context and chance as by fundamental viability. This is particularly true of the aerospace industry, because success is heavily dependent on a small number of big gambles. If you bet right, you look like a genius for a few years, even if the success of your bet was due to factors out of your control.

In the first few seasons after Jason Kidd joined the Nets, he would have two- or three-week stretches of lights-out shooting, leading commentators and sportswriters to announce that Kidd had “turned the corner” and become a good shooter.

Unfortunately, Jason Kidd is a career 40% shooter. All the good runs have been balanced out by below-average runs, leaving him exactly where he’s been since the start of his career: hitting 40% of his shots.

It doesn’t mean he’s not one of the best point guards of the last 30 years; he is. He’s just not a good shooter, and statistical blips are just that.

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And they said I’d never amount to anything

I’m interviewing a pair of companies this morning for an article in my September issue. Their combined 2005 revenues were $126 billion.

One’s a major drug company, the other a major healthcare distributor. Margins are a funny thing: the drug company had around $52 billion in sales, with a cost-of-goods of $8.5 billion, while the distributor had $74 billion in sales, with a cost-of-goods of $70 billion. On the other hand, the drug company’s selling, general, and administrative costs were $17 billion while the distributor’s SGA costs were $2.8 billion.

Reminds me of those differences in R&D costs from a few posts back.

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Alta Vista

Microsoft is trying to get PC designers to get some of that Apple feeling, by incorporating such exTREME! trends as the use of black! and white!

The PC world used to be divided into two camps: those who made lucrative software and the poor schlubs who built the low-margin hardware it ran on.

Apple has turned that model on its head. From the beginning it has managed to create a unified design for its products by building everything itself, first with the Mac and then later with the iPod. Although Apple sells one computer for every 20 PCs, the iPod’s success has proved how crucial it is to create a seamless experience for consumers, who are buying much of the gear these days. Says a top PC design executive: “You’re going to see more and more of this desire to integrate hardware and software.”

Even if it means borrowing from Apple. Microsoft denies doing that, saying it’s simply responding to demand for good design. Yet its approach has more than an echo of the Apple ethos.

“We’re decomposing the look and feel of Vista and bringing it into a language that hardware designers understand,” says Steve Kaneko, design director of Windows hardware innovation. And here’s another Apple-esque detail: The Zune player will work only with Microsoft’s planned music service, sources say. In other words, it will be part of a closed system, like iPod and the iTunes Music Store.

Decomposing? Anyway, given that a huge chunk of the Wintel PC market is based on churning out units as cheaply as possible for a customer base that wants to pay $499 for a computer, it’s unlikely that this initiative is going to yield anything half as elegant as the flatscreen iMac or the Mac Mini. But I give ’em credit for trying, even if it does put me in mind of that great “what if?” video about Microsoft designing the packaging for the iPod.

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Hey, Raj, What’s Happ’nin’?

It’s long-ass essay day here at VM! Here’s a piece from the new ish of Foreign Affairs about the economic dynamo in India. I think India’s in a far better position to succeed than China in the long-term. If you read Mr. Das’ article, you’ll see that there are some major reforms India still needs to implement (in order to get itself out of the way), but I think the Indian version of entrepreneurialism trumps the totalitarianism that still lurks over the Chinese model.

I used to think that the main advantage of India was the bureaucracy installed by the British, but Das’ interpretation is that the bureaucracy is a major problem for the country. It’s possible that we’re both right, insofar as the bureaucracy and its focus on education were necessary for India’s development, but have now grown out of control:

Today, Indians believe that their bureaucracy has become a prime obstacle to development, blocking instead of shepherding economic reforms. They think of bureaucrats as self-serving, obstructive, and corrupt, protected by labor laws and lifetime contracts that render them completely unaccountable. To be sure, there are examples of good performance — the building of the Delhi Metro or the expansion of the national highway system — but these only underscore how often most of the bureaucracy fails. To make matters worse, the term of any one civil servant in a particular job is getting shorter, thanks to an increase in capricious transfers. Prime Minister Singh has instituted a new appraisal system for the top bureaucracy, but it has not done much.

The Indian bureaucracy is a haven of mental power. It still attracts many of the brightest students in the country, who are admitted on the basis of a difficult exam. But despite their very high IQs, most bureaucrats fail as managers. One of the reasons is the bureaucracy’s perverse incentive system; another is poor training in implementation. Indians tend to blame ideology or democracy for their failures, but the real problem is that they value ideas over accomplishment. Great strides are being made on the Delhi Metro not because the project was brilliantly conceived but because its leader sets clear, measurable goals, monitors day-to-day progress, and persistently removes obstacles. Most Indian politicians and civil servants, in contrast, fail to plan their projects well, monitor them, or follow through on them: their performance failures mostly have to do with poor execution.

Anyway, Das makes some neat points about India’s development, most notably the fact that it jumped from essentially an agrarian society to a service-based one, without spending much time as a manufacturing/industrial power.

Just another example of stuff I find fascinating, but probably bore the crap out of you.

So here’s Tom Spurgeon’s writeup about the just-concluded San Diego Comic-Con. Enjoy.

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Today’s post is brought to you by the letters R and D

BusinessWeek has an essay about the lack of innovation at the major telephone companies (yet another installment in the “I care about this stuff; no reason for you to” series). Mind-blowing quote:

One way in which these companies are very different from the old phone monopoly is that while the original AT&T had a world-class research operation, its successors don’t. One of the signal facts of the communications revolution is that virtually all the new technologies that made it possible were developed outside the phone world. Last year, Verizon’s revenue came in at nearly $80 billion. AT&T (without BellSouth or Cingular) had revenue of $44 billion. And yet while Intel Corp. spent $5.1 billion last year on research and development, AT&T spent just $130 million. The word “research” doesn’t even appear in Verizon’s annual report.

Now, in the pharma industry, there’s a lot of talk about “rethinking R&D,” as major companies learned that simply pumping more dollars into the process doesn’t necessarily yield results. When I compiled this year’s Top Pharma Companies report, I noticed that plenty of big guns have reduced their R&D budgets — not drastically, but it was certainly a change from past double-digit increases. And these annual R&D figures were at least $1 billion for the top 17 companies on the list.

Obviously, the drug industry is keyed by development of new products; patent terms dictate that every product has a brief lifespan. When the R&D pipeline falls short, companies turn to in-licensing new drugs. In my many Yankees = Pfizer comments, this equates to buying free agents when the farm system isn’t producing good players.

Turns out that this is the main model for the telcos.

There is something to be said for “buying it elsewhere.” If the big telcos built everything themselves, there would be no Cisco and no Motorola. But years of buying it elsewhere has yielded a culture distrustful of technology — and of progress: It’s impossible to imagine Microsoft developing a big new product and having the lead engineer shift from foot to foot in the corner pretending to be just another customer. It has meant, as with AT&T’s Lightspeed, that telcos are likely to offer services that only match, but not surpass, those available from others. And increasingly their approach has put the telcos on the wrong side of technological innovation, leaving them in the position of protecting their investments in their networks from the encroachments of new ideas.

Anyway, I’m fascinated by the ways major industries function, and this essay provides some neat insights into what it’s like to be an $80 billion player with razr-thin (ha-ha) profit margins. So give it a read.

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The Hit Factory

Since I’ve been writing about the drug industry (our magazine bowed in October 1999) I’ve been hearing that we’re heading toward The Era of Personalized Medicine. This means that, as we develop more knowledge of the genome, proteome, and metabolome (you think I’m making this stuff up?), drugs will be tailored to generate greater efficacy or fewer side effects in smaller population groups.

The drug that gets touted as the advance guard in this wave is Herceptin, which can be very effective in treating breast cancer, but only in tumors that over-express the HER2 protein. Around 20% of breast cancer cases fall into this category; Herceptin isn’t effective against other tumors.

Some pharmacoeconomists contend that personalized medicine will lead to The End of the Blockbusters, as smaller patient groups translate to a cap on your “customer” base. On the other side of the spectrum is a “mass appeal” drug like Lipitor, the cholesterol treatment that sells more than twice the dollar amount of any other drug in the world and is now being tested for benefits in treating Alzheimer’s disease.

I bring this up not because I just finished that Top Companies report, but because of N’Sync.

This morning, I read a funny article adapted from the book The Long Tail by Chris Anderson (not this guy). It examines how the entertainment industry faces The Death of the Blockbuster, citing diminishing CD and movie sales figures and TV and radio ratings as indicators that the niche is where it’s at.

It’s altogether possible that NSync’s first-week record [2.4 million CDs sold] may never be broken. The band could go down in history [. . .] for marking the peak of the hit bubble — the last bit of manufactured pop to use the 20th century’s fine-tuned marketing machine to its fullest before the gears were stripped and the wheels fell off.

Music itself hasn’t gone out of favor — just the opposite. There has never been a better time to be an artist or a fan, and there has never been more music made or listened to. But the traditional model of marketing and selling music no longer works. The big players in the distribution system — major record labels, retail giants — depend on huge, platinum hits. These days, though, there are not nearly enough of those to support the industry in the style to which it has become accustomed. We are witnessing the end of an era.

His long-term economic arguments and his moralizing (near the end) are bizarrely off-kilter. For one thing, News Corp. owns MySpace. The site may offer massive “niche” opportunities, but it’s going to make cash hand over first for Murdoch & Co., both little (user fees) and big (as a promotional tool for its properties).

For another, in this era where every entertainment option is allegedly losing its hit-making power, Anderson manages to avoid any mention of the Harry Potter books and The Da Vinci Code. Both of these are such impossibly massive hits — despite the fact that more individual titles get published now than ever — that they blow a sizeable hole in the concept that we’re all moving to the margins.

It’s my contention that, while there a whole lot of factors at play in the decline of hits in the last five years, I think the biggest is that almost every blockbuster movie is crap, contemporary pop and dance music is so dull that radio stations needed to be bribed into playing it, and the current generation of TV executives were raised on the awful television of the late 1970s and 1980s.

Hits might not be as big as they once were, but they’re even more important to the entertainment industry now, given the high price of failure. I’m not saying it’s right, as it tends to lead to “safe” committee-designed projects, but in the pharmaceutical business, as in Hollywood, the big hits help defray the costs of a bazillion failures.

(The Agitator has some reflections on Anderson’s book.)

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Pf***ed

Sorry for the lack of posts, readers! I’m really busy on the home-stretch of that Top Companies special issue. Gotta finish the final profile today, so’s I can head to the shore tomorrow without worrying about it.

I decided to save the biggest one for last: Pfizer. As you may not care from last year, Pfizer is the biggest of the Big Pharmas, but it’s also got a ton of vulnerabilities, as many of its big sellers are getting hit with patent expirations and generic competitors. Here’s a little bit of this year’s report, just so you know I’m not slacking off from VM for no reason:

In his 2005 letter to shareholders, Pfizer chairman and chief executive officer Hank A. McKinnell, Jr. wrote, “The Pfizer built in the 1990s is fading away as some of our prominent, current medicines lose patent protection. This transformation process—this cycle of renewal—is not unexpected. We have been planning for it for years, understanding that while renewal brings challenges, it also creates numerous opportunities.”

That’s quite an understatement. Last year, we pointed out that many of Pfizer’s top sellers are going to lose patent protection in the next five years. The company got a feel for what’s on the way when epilepsy treatment Neurontin went generic during 2005; the drug’s sales dropped from $2.7 billion to $640 million. Antifungal treatment Diflucan did the same, shedding $445 million in sales.

With $1.3 billion of Bextra sales vaporized in 2005, and Celebrex shedding another $1.6 billion, Pfizer needed to add $6.1 billion in sales last year just to keep pace. That’s more revenue than any of the bottom three companies on our list generated in 2005.

And with Zithromax facing its first full year without U.S. patent protection ($2.0 billion in 2005 sales, after its patent expired in 4Q2005), Zoloft ($3.3 billion) going generic in June 2006, and Norvasc ($4.7 billion, the company’s #2 seller) and Zyrtec ($1.3 billion) set to lose protection in 2007, Pfizer needs to generate huge amounts of new revenues.

It fell short in that mission in 2005, with drug sales falling $2.0 billion in 2005. They’re down $394 million in 1Q2006 (-4%).

Tune in next year to find out if Pfizer manages to recoup sales with Lyrica, Sutent, Chantix, and a million other new drugs!

Till then, back to work. Then play!