Kiwis on the March

Friday evening I attended a mixer at the Kiwi Landing Pad on Harrison, in San Francisco. It’s a home base of sorts for New Zealand tech businesses to enter the U.S. market.

I arrived 30 minutes late, only to find that the 70 or so gathered already had either a bottle of beer or glass of wine on the go - typical Kiwi style.

The Right Honorable Mike Moore, New Zealand’s Ambassador to the U.S. gave an interesting 20-minute talk.  A few takeaways stuck out for me:

• At a population of only 4 million - less than the Bay Area - New Zealand does not have a loud commercial voice.  But they know this, and very cleverly have spent the past 50 years both aligning themselves with larger APAC countries, and strengthening ties with the U.S.
• Where, only a couple of decades ago, perhaps 4 U.S. business leaders would attend a major NZ-sponsored commercial briefing event, that number now reaches 50.
• The government brings serious funding to support export of its technology base, and to help its domestic firms enter foreign markets - especially the U.S.
• With the increase of American travel to New Zealand, coupled (until recently) with a very favorable exchange rate, many thousands of Americans have purchased vacation properties in New Zealand, and expanded commercial networks as a result.
• New Zealand has a strong international association with mountains (where Lord of the Rings was filmed), sailing, and sheep.  It has tended to live in the shadow of Australia.  The country’s politicians (a pragmatic lot) are quite determined to shift that perception, and will likely sponsor an extensive marketing effort along the lines of ‘the NZ you probably don’t know.”

New Zealand is a wonderful little country that I’ve visited several times.  Though small, it has progressed substantially in the almost 25 years since I first visited it.  Kiwis very much have this “little engine that could” feistiness, and a very optimistic outlook on their affairs.

My betting is that the NZ dollar will continue its appreciation against the U.S. dollar during the next 6 - 10 years.  Small and feisty make for an interesting combination.

Netflix and the Lessons of Price Elasticity

Following Netflix’s announcement in late July of price increases of up to 60%, I blogged about the situation, offering some recommendations.  Well, I don’t think anyone at Netflix read it or, if someone did, my advice certainly went unheeded.

To refresh memories, Netflix was besieged by a torrent of customer and analyst criticism resulting from its announcement of price increases.  CEO Reid Hastings publicly offered that “We feel bad about having our customers upset with us”, later adding, “We’re feeling great about the decision, tough as it is.”

Somehow I doubt that Netflix management - and its shareholders, in particular - were feeling in a heady mood on Thursday.

Less than two 2 weeks after the price increase took effect, Netflix was forced to alter its prediction that it would grow its subscription base to 25 million by September-end.  Now, management is forecasting a drop of 1 million subscribers worldwide - 4% of its subscription base.  The market, which has been skittish to say the least the past two months, tanked the stock, selling off to a one-day decline of 18.9% of its value.

Price Elasticity Takes no Prisoners

It is generally true that, over a reasonable range, changes in price have a proportionately small effect on quantities sold.  In other words, even though a price increase will see some customers abandon the offering, total revenue will still be higher than it was at the lower price.

The price elasticity of demand for Netflix services probably is inelastic - just not as much as inelastic as management had assumed, though.  That, I’d wager, is leading to some sleepless nights in Los Gatos.

Then there is the matter of Customer Lifetime Value (CLV) - one of the key attractions of the subscription pricing model.  With a churn rate of 4% of customers lost in just one quarter (who’s to know what it will be next quarter) it’s very unlikely that departing customers have sworn off streaming video.  They’ll take their business elsewhere.

What Will Netflix do in 4Q2011?

In the final calendar quarter of 2011, a safe bet is that Netflix management will have its eyes fixated on that churn rate - and new subscription acquisition, too.  If the churn does not level off soon, it’s also a good bet that Netflix will have to quickly come up with something attractive for the fat old man who comes down the chimney to put in his bag.  For subscribers.  And for shareholders, too.

Terry McGraw's Bad Year

Harold W. McGraw III, more commonly known as “Terry”, is Chairman, President and CEO of McGraw-Hill Companies, publisher and broadcaster.  He is the founder’s great-grandson.

M-H is known widely for the tens of thousands of textbook titles it has published.  With annual revenue of $6+ billion, M-H has some well-known brands under its mantle: The Ryerson Press, Random House, J.D. Power & Associates and, yes ... Standard & Poors.

McGraw-Hill has had a tough go of things for a few years.  It sold BusinessWeek, which has been racking up losses for years, to Bloomberg in 2009.  It has also brought in an an outside company, Evercore Partners, to sell its large Education business.

Now, on the heels of the debt ceiling stand-off and Standard & Poor’s decision to lower the U.S. debt rating to AA+, we learn that the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) are investigating S&P’s rating practices.  Specifically, federal bodies are examining S&P’s ratings practices as applied to mortgage-backed securities during the financial crisis.

What’s even more interesting is to learn that S&P is conducting its own internal investigation to determine if insiders leaked its intentions to drop the U.S. of its AAA rating.

Just how big a problem does this pose to Terry McGraw?

• For starters, S&P is the rose among the thorns in the M-H fold.  In the second quarter, it represented 30% of McGraw-Hill’s revenue, and contributed over half of its net income (53%).  The performance of S&P is a big factor in M-H’s valuation.
• Speaking of which, immediately following S&P’s shaving of the U.S. debt rating, shares of McGraw-Hill tumbled 8%.  (Film maker Michael Moore even called for Obama to arrest S&P President Deven Sharma.)  Add to this the market volatility surrounding fears of a double-dip recession and the spread of the Euro crisis - it does not make for a good investment climate.
• Finally, there is the matter of the Obama Administration and Congress.  The debt ceiling debate left both sides bloodied (Tea Party-ers perhaps excluded).  No one needed this salt added to their wounds.  So, don’t be surprised if the DOJ and SEC operate in payback mode on this investigation.

Terry McGraw will have his work cut out for him during the remainder of 2011, and well into 2012.

Warren Buffett wants to Tax the Rich

Warren Buffett’s Op-Ed piece in Sunday’s New York Times has caused quite a stir.  His premise: U.S. tax law since 2000 has reduced taxes for the wealthy, while increasing the burden on the less fortunate, thereby setting up an inequality that will create difficulties for U.S. society.

Following hot on the heels of Washington’s debt ceiling standoff, Buffett’s contrarian view is embraced by Liberals while eschewed by Conservatives.  It is a thorny issue indeed.  Paying taxes is like visiting the dentist: I don’t know anyone who looks forward to either. 

Yet, this is not a new theme for Buffett.  He’s been talking publicly about the structural inadequacies of the U.S. tax system since at least 2007 - notably, in this interview with Tom Brokaw in 2008 (run time: 4 minutes, 41 seconds).

 

While the Brokaw interview has a folksy charm to it, Buffett provided considerably more detail to his arguments when he testified before the Senate Finance Committee on November 14, 2007 (RT 5:18 in length).

 

If you really want to understand Buffett’s views, here is a video shot on August 15, 2011 - the day following the NYT Op-Ed piece. Buffett is interviewed by Charlie Rose (RT 51:18).  It’s a lengthy play, and Buffett makes his attitudes regarding the Tea Party clear.  But, Buffett’s views are clear, and his opinions worth understanding.

Charlie Rose Interviews Warren Buffett  http://www.charlierose.com/view/interview/11845

Those of you who follow this blog know that I am an unabashed fan of Warren Buffett.  Yet, I’m about to exclude other views in forming my own opinion.  To that end I offer up a critique of Buffett’s NYT Op-Ed piece written by Jeffrey Miron, undergrad studies director at Harvard and Senior Fellow at the Cato Institute.

The debate on taxation is not going to end this week.  It’s just starting, and should reach full swing by the 2012 elections.

Tax the rich to fund government spending?  Or allow the private market to allocate dollars better than elected officials?  You decide.