Piling on Groupon and Our Taste for Misery
Groupon's $100 million earnings restatement announced late last Friday and its 10-K filing noting a "material weakness in its internal controls" were sins swiftly punished this week. Despite the fact that the restatement lowered Groupon's fourth quarter earnings a mere 3%, Groupon's stock plunged 17% on Monday and closed yesterday at its lowest price since its IPO last November. (Tuesdays are always crummy; see below.)

The bad news for Groupon came fast. The SEC reportedly will be investigating the company (which is not all that uncommon following restatements); a shareholder lawsuit was filed yesterday, and there has been an outpouring of articles questioning Grouponıs business model. Today, a "Seeking Alpha" headline reads "Groupon: The Beginning of the End." Note: no question mark.

All this seems extreme given: the restatement was more like a revision; it was small; new companies often struggle with growth and new products. Plus, restatements are hardly rare. A recent study, "Financial Reporting Credibility After SOX: Evidence From Earnings Restatements," notes "the volume of restatement announcements has risen significantly over time" since the Sarbanes-Oxley Act was passed into law in July 2002.

But everyone is piling on Groupon, just as they're piling on RIM, the once-beloved company that makes what's almost always referred to these days as the soon-to-be-extinct BlackBerry, a tool once so compelling that it earned the nickname CrackBerry. With only 13% of the U.S. smart phone market as of last February, people are basically saying that RIM should just crawl into a hole and die. On the other hand, the BlackBerry's security advantages are rarely disputed, and today's Washington Post suggests that you'll have to rip those Blackberries from official Washington's cold, dead hands. President Obama still loves his.

Now everyone knows that if it bleeds, it leads, but the enthusiasm with which bad news is devoured and shared, and the immediate reactions and over-reactions to it, points, I think, to a growing epidemic of schadenfreude. (It will make me happy if you don't know what that means.) A recent University of Vermont study of 46 billion words contained in 4.5 billion tweets posted over a 33 month-span by over 63 million unique users (talk about Big Data!) found that over the first half of 2011, the general public's happiness was trending downward.

(The study even breaks happiness down into days of the week. Not surprisingly, Saturday is the happiest day, bracketed by Friday and Sunday. The weekly low occurs on Tuesday not, as one might suspect, Monday or Wednesday. So the common practice of breaking bad news on Fridays may not be so wise. It might be better to break it on Tuesdays, when people are going to be miserable anyway, and bank on the upswing as moods improve heading toward Friday.)

Why are we so unhappy? I have no idea. But our ability to share our unhappiness, thereby infecting others, has never been so robust. Technology has industrialized crankiness through the internet and social media, and we're consuming its products in larger and more frequent bitter bites than ever before. That has to have an impact on our lives and it's probably not a good one. The trick, at least for business, is to factor in an unhappines quotient when analyzing opportunities and devising strategies.

Perhaps things aren't as bad as they seem; it just seems that way.
Posted by David Rosenbaum | April 04, 2012 02:48pm | Comments (0)

Merger Ump Misses the Call

Many observers of the pharmacy benefits management (PBM) industry, including myself, were disappointed to learn this morning that the Federal Trade Commission had approved the merger of the largest and third-largest PBMs, respectively Medco and Express Scripts.

With less competition in the PBM market, most of the unhappy observers ı legislators, state attorneys general, consumer-protection groups, retail pharmacies, and certainly many corporate users of PBMs ı were likely concerned about the financial consequences for companies and/or individuals. As for me, while I think the FTCıs decision is absurd, Iım miffed mostly because I predicted the deal would be quashed.

Express Scripts CEO George Paz said in a statement that the merger ıis exactly what the country needs right now. It represents the next chapter of our mission to lower costs, drive out waste in health care, and improve patient health.ı If you believe that, I have a friend in Africa whoıll be happy to share his millions with you if youıd please provide your bank account number.

What the country needs right now is a long, hard examination of the FTC, which voted three to one in favor of the merger. The dissenter, commissioner Julie Brill, said in a separate statement that the merger will create ıa duopoly with few efficiencies in a market with high entry barriers ı something no court has ever approved.ı Duh. Doesnıt everyone know that?

Not the other three commissioners, who said in their own statement that ıthe merging parties are not particularly close competitors, the market today is not conducive to coordinated action, and there is little risk of the merged company exercising monopsony power.ı I donıt have a degree in economics, but Iım comfortable in my skepticism.

The Express Scripts-Medco combination will command more than half of the countryıs retail PBM market. The lone remaining mega-player, CVS Caremark, will control something on the order of 20% to 25%. ıItıs scary,ı says Ed Kaplan, national health practice leader for the consulting firm The Segal Company. ıSome of my [corporate] clients are disappointed.ı

Still, Kaplan says, the fear is probably unjustified. ıThere are just enough other playersı ı like Catalyst, Cigna, informedRx, Optimum, and SXC ııı ıthat have enough investment infrastructure that our clients could move to one of them if the terms the jumbo PBMs offer become noncompetitive. And they would move. Moving a PBM contract is not like moving a medical plan.ı Kaplan says heıs talked to a number of other informed observers who think that too.

Fair enough. But opposition to the deal has been so widespread and heated that I donıt know who could be very surprised if it ultimately does push up drug prices, and at a time when companies and their health-plan participants are collectively nearing the breaking point after years and years of steep increases in overall health-care costs.

Let the games begin.

Posted by David McCann | April 02, 2012 03:29pm | Comments (0)

Helpless, Hopeless: Cybersecurity Fatigue
They call economics the dismal science.

Well, economics got nothing on cybersecurity.

Today's Wall Street Journal reports that Shawn Henry, the departing executive assistant director of the FBI and the Bureau's top cyber cop, says that in the war between the people trying to keep the bad guys out of public and private data networks and the criminals trying to get in, "We're not winning."

The evidence supporting Henryıs assertion is overwhelming. A survey by Panda Security found that half the computers it scanned last January were infected with some kind of malware that could allow someone who's probably not very nice to control your computer. And Panda only scanned those computers that run its software. A recent Financial Executives International article noted the increased frequency and intensity of cyberattacks and saw a growing cycle of "malicious activity." When a company is attacked, it's not pretty.

But all this only tell us what we already know and what Henry put so succinctly: We're losing the war. "You never get ahead," Henry went on, gloomily. "You never become secure, never have a reasonable expectation of privacy or security."

The security vendors I speak to, who have great faith in the efficacy of their products, are still no cheerier than Henry. "Cybercriminals will always be out in front of whatever companies can do," says IronKey CEO Arthur Wong. IronKey supplies secure, encrypted USB flash drives for the military, government, large enterprises, and consumers, and its technology assumes, as Wong says, that the end user -- for example, you, trying to access your bank account on your laptop -- is already "compromised."

And the problem -- securing digital data -- is engineered to get worse. There's always been a tension between allowing easy access to information -- which is the basic promise of the Web -- and securing that information. Given current technology, that tension may be irresolvable. "In the early 2000s," says Eric Olden, Founder and CEO of Symplified, a cloud-based identity authentication management provider, ıapplications ran on networks owned and operated by companies. They were behind a firewall. Fast forward to today. Cloud apps don't sit behind a firewall so network defenses don't work." Then you have the problem of mobile phones. "If you lost your phone years ago," Olden says, "big deal. Now, if you lose your phone a bad guy has huge amounts of data to exploit."

My phone, for example, knows where I am, all the time. I allowed it to track my whereabouts because I wanted to be able to use it to find my way if I got lost. I traded privacy for convenience. I know that it might have been smarter not to make that trade but, like most of us, nothing bad has happened to me . . . yet. And even though I know it's probably just a matter of time, I act as if it isn't.

Of course, I'm not a CFO. If you are, mitigating risk is part of your portfolio. Henry suggests keeping your most valuable data off your network entirely. I doubt that will work for most companies. Having data you canıt access is as useless as having a phone that canıt help you if you're lost. It's a risk-reward calculation. I made mine. You'll make yours. Just don't expect to be happy about it.
Posted by David Rosenbaum | March 28, 2012 01:35pm | Comments (0)

When Talent Runs Amok
Walt Disney's "John Carter," which cost an estimated $250 million to make and $100 million to market, will go down in history as one of Hollywood's biggest flops, joining the infamous ranks of "Ishtar" and "Heaven's Gate."

Monday, Disney Studios said it would take a $200 million write-down on the movie, and estimated an operating loss of between $80 million and $120 million for the quarter that ends this month. (By contrast, in the second quarter of last year Disney recorded an operating profit of $77 million.)

The tale of "John Carter's" doom -- turbulence in the executive suite; upheavals in the marketing team -- is detailed in a recent L.A. Times story, but what "John Carter" and the megaflops mentioned above have in common is that they were driven by people who because of their talent -- validated by a record of past success -- were given blank checks. Talent is a priceless commodity but, as is well known within the financial community, past performance is no guarantee of future results. Or, as Malcolm Gladwell says, speaking of his 2011 book, Outliers, "We vastly underestimate the extent to which success happens because of things the individual has nothing to do with."

"Ishtar," "Heavenıs Gate," and now "John Carter" were all projects driven by individuals who were funded to follow idiosyncratic dreams. "Ishtar" was ramrodded by Warren Beatty who, after the successes of "Shampoo" and "Heaven Can Wait," was box office gold. Beatty wanted to act in a Bing Crosby-Bob Hope-type road comedy; he wanted the famously prickly Elaine May to direct, and he wanted the notoriously difficult Dustin Hoffman to co-star. Beatty got what he wanted, and more. "Ishtar's" budget, initially set at $27.5 million, rose to $51 million. The movie lost $42 million.

"Heaven's Gate" was director Michael Cimino's 1980 follow-up to 1978's "The Deer Hunter," which won five Academy Awards, including Best Picture and Best Director. "Heavenıs Gate," a grim, more-than two-and-a-half hour long Western, overran its budget by an estimated $33 million. Its final cost was $44 million and it grossed a little under $3.5 million. After the dust settled, it became apparent that Cimino was denied nothing by his studio, United Artists. No UA executive had the nerve to say stop, enough. And soon enough, no UA executive had a job, at least not at UA, which went under shortly thereafter.

The talent driving "John Carter" was Andrew Stanton's. Stanton, the lead writer on "Toy Story," directed the wonderful "Finding Nemo," and the award-winning "WALL-E." All three were hugely and somewhat unexpectedly successful (movies starring toys, fish, and silent robots?), almost black swan events. And precisely because their success confounded analysis, Stanton was perceived to possess an unfathomable, intuitive connection with the audience. But Stanton's love for Edgar Rice Burroughs' musty 1917 pot-boiler A Princess of Mars, upon which "John Carter" was based, was not shared by the audience it had to reach to succeed: young males between 18 and 25. In fact, it wasn't, it seems, shared by any audience. And whether it was wise to invest $250 million in a movie directed by a man who had never before directed a live-action film -- well, that will be answered when the heads begin to roll at Disney.

The moral of the story is that while talent is priceless, the money it spends isn't. There should always be an eye on the checkbook. Isn't that why God made CFOs?
Posted by David Rosenbaum | March 20, 2012 02:30pm | Comments (0)

Is Our Affair With Apple Doomed to Hit the Rocks?
I had a few friends over for dinner last week and by 9 p.m., over coffee and cake, about six had pulled out their iPhones and were talking apps. One raved about Pandora, the app that creates a virtual radio station, playing tunes algorithmically designed for you and you alone; another swore she used her iPhone flashlight every day; a third enthused about an app that scans bar codes at supermarkets, helping him avoid lines at check-out. My friends nattered on, holding their phones tenderly. They loved them. As Fernando Alvarez, mobile solutions practice leader for technology consulting firm Capgemini says, "The device has become part of who you are. It's very personal." That loving connection between person and device has helped make Apple the world's most valuable business. It broke the $500 billion market capitalization barrier this month, and yesterday it was reported that it had socked away almost $100 billion in cash last year. Some analysts are predicting that its stock price, which briefly topped $600 yesterday, is hurtling toward $700. Morgan Stanley predicted Apple shares could approach $1,000 by the end of 2013. Much of that investment is based on love. But love can turn sour. Early this week, a man filed a class action suit against Apple saying the company's advertising for Siri, the iPhone 4S' voice-activated assistant, is "fundamentally and designedly false and misleading." If youıve seen the ads (and who hasn't?), Siri is supposed to be an electronic Jeeves, swiftly responding to your every wish. In fact, what Siri mostly does when you ask it a question is suggest you search the web. Big whoop. Indeed, Siri's functionality has allegedly degraded since its release, which is why (some speculate) it's not in the new iPad that hits the stores today. In other Apple bad news, the company is still being raked over the coals about sweatshop conditions at Foxconn, the Chinese factory where iPhones and iPads are manufactured. Of course, Foxconn also builds products for Intel, Dell, HP, Nokia . . . the list is long. But Apple gets most of the heat because love (or, if you insist, goodwill) is a more important component of its value than, say, Cisco's. And yesterday, the New York Times reported that Apple is receiving "hundreds of online complaints" about the practices and security of its App Store. Accounts have been hacked and fraudulent transactions processed; money has been stolen; developers have been ripped off; false advertising is rife; app rankings have been manipulated; some apps are blatant scams. Of course, with more than 600,000 apps in the store, there are bound to be some bad apples . . . so to speak. What all this points to is that the bad press Apple has received recently will inevitably get worse. If your business is based on people loving you, you better be good . . . all the time. Love may not be the best foundation for a relationship. Just look at the divorce rate, whatever it is. Hey, I know. I'll ask Siri. Siri suggests I search the web. Pretty lazy, Siri. I'm beginning to dislike you. And FYI, Siri, for the past 20 years about half of all U.S. marriages, most begun in love, end in divorce.
Posted by David Rosenbaum | March 16, 2012 10:16am | Comments (0)