Top 10 trends: Copywronged

Hollywood fends for its meal ticket as consumer appetite for digital content grows.

How quickly have audiophiles taken to online downloading? Data from research firms Forrester Research and The Yankee Group show that one out of every five PC users in Europe and the United States regularly downloads MP3 music files. Peer-to-peer file sharing jumped 300 percent from the end of 2001 to 2003, according to Internet solutions provider Websense.

Now consumers want more. ISPs, like EarthLink and Comcast, claim that one of the primary factors driving the switch from dial-up to broadband Internet is the ability to download and stream Internet video.

This makes Hollywood nervous. Worse, the trend is leaning on ancient intellectual property (IP) copyright laws that are more than two centuries old. One major controversy stems from the Digital Millennium Copyright Act (DMCA), a 1998 U.S. law backed by the major music and movie studios.

The Electronic Frontier Foundation (EFF) says portions of the DMCA, like the provision that outlaws the copying of digitized media without owner consent, have been obsolete since day one. The statute also does not address technological abilities or changing consumer demand.

Big bucks are at stake. Five years since the DMCA was passed, 20 percent of U.S. consumers download music from the Internet, says Forrester. Half of those are buying fewer CDs. Statistics from the Recording Industry Association of America (RIAA) show retail recorded music sales’ shipments have taken a blow, falling 21 percent to $11.5 billion since 1999.

The $37.3 billion worldwide television and movie industry is expected to get hit next. The Motion Picture Association of America (MPAA) asserts that studios lost about $650 million because of DVD piracy in 2002.

Time Warner, owner of the behemoth Warner Music studio, estimates the music industry loses $10 billion annually, or about a third of its business, to piracy. With no end in sight to the downward trend of the business, Time Warner struck a deal to sell its music business for $2.6 billion in cash in November.

“We need to create a system for resale so that once a file is digital, it is not gone and free for the taking,” says Michael Cohen, an IP attorney with firm Heller Ehrman White & McAuliffe, which represents the Digital Media Association (DiMA), an industry group of Internet and tech companies offering digital media services.

Some legal experts say that with laws like the DMCA, America is inventing IP rights the rest of the world may never honor. “The DMCA needs to be revisited. It created IP rights for the digital world that never existed before in the real world,” says Mr. Cohen.

One sticking point: the DMCA imposes stricter regulations for digital media than those governing comparable material. For instance, owners of paperback books can make copies for personal use, and lend or sell books at will. But owners who did the same with those books in digital form, as e-books, risk a lawsuit for copyright infringement.

Ironically, consumers may address the economic realities of digital distribution before legislators do. Forrester says consumer interest in paying for digital music is growing. By 2008, Internet downloads will make up 33 percent of music sales. The firm expects the online music market to grow into a $1.4 billion industry by 2005.

A handful of online stores like Apple’s iTunes and Roxio’s Napster 2.0 are serving that market, but face a mishmash of Asian, European, Canadian, and U.S. copyright laws. For instance, the European Union (EU) has not standardized cross-border music licensing sales; its member countries have been unwilling to cede control of cultural property rights. Many are uncertain what legal fees and taxes should be paid if, say, a digital fan in Cyprus tries to download a German-produced MP3 file that is stored on a server in Ireland. And in an unusual move, the Copyright Board of Canada recently ruled it legal to download copyrighted music files (uploading is still illegal). U.S. laws, which can vary between states, offer little insight into this legal tangle.

Rights issues prevent iTunes from offering a complete catalog of major acts like the Beatles or Rolling Stones. Mr. Cohen says that unless U.S. and European laws become more business friendly, more users may leave iTunes for sites like Russia’s AllofMP3.com, which employs Russia’s loose IP laws to offer the Beatles catalog and thousands of other MP3 recordings for about 10 cents per song.

In 2004, expect record studios, Hollywood, and Internet commerce companies to renew pressure on federal and international lawmakers to tackle copyright problems.

PLAYERS:

Apple Computer, Buy.com, CNet, Microsoft, Roxio: These owners of online MP3 music download services will battle it out for market dominance.

NBC Universal, News Corp., Time Warner, Viacom, Walt Disney: Major TV and movie studios are lobbying Congress to strengthen anti-piracy efforts.

Apple Computer, Microsoft, Real Networks: Makers of digital audio and video players stand to gain from exclusive Internet broadcasting contracts as the online streaming media audience grows.

Digital Media Association, Electronic Frontier Foundation: Expect these industry groups to battle it out in the courtroom and in the press.

ALSO IN MOTION:

Broadcasting: The U.S. Federal Communications Commission (FCC) will try to enforce its new regulation requiring equipment manufacturers to install hardware to recognize a “flag” that will prevent recording or Internet transmission of broadcast-quality digital television video.

International laws: Industry and consumer lobbyists will push for a more cohesive set of international standards for IP law.

Software patents: As the EU debates software patents, American software companies face the possibility that their U.S.-granted patents will not be recognized in Europe.

Top 10 trends: Ad infinitum

While digital technology continues to rock the music and film industries, major players in the advertising world are paying close attention and smartening up.

Madison Avenue is waking up to the limitless new opportunities in digital media.

While digital technology continues to rock the music and film industries, major players in the advertising world are paying close attention and smartening up.

Advertisers are devising innovative ways to target messages to specific audiences by embracing, rather than fleeing, new technologies. They are particularly keen, for instance, on understanding the role of commercial-skipping digital video recorders (DVRs) like TiVo, as well as the potential of placing ads on video games and throughout the Net.

One reason for the new interest: desperation. TV ads, once a stalwart of the brand-building community, no longer pay the same dividends. Younger people are watching less television than previous generations. According to October/November figures from audience monitor Nielsen Media Research, 7 percent fewer men between the ages of 18 and 34 were watching TV than in the same period of 2002. This is a new breed, raised on computers, movie rentals, dozens of cable channels, and video games.

Madison Avenue advertising executives won’t let this audience go without a fight. Why? Studies from sources including Advertising Age and the International Advertising Association indicate that consumer-buying habits of men under 35 are malleable and more receptive to advertising-inspired brand switching. (After 35, these studies say, brand loyalty is set in everything from deodorant to cars.)

Nielsen says the tune-out trend is highest among men between 18 and 24. That group is more likely to play video games or watch DVDs than kick back with TV programming. Advertisers are, in turn, adjusting their approach to fit the lifestyle of their audience. Case in point: as network TV ratings fell, annual video game sales have more than trebled from $6.5 billion in 2000 to a projected $20.8 billion in 2003, according to NPD Group and U.S. Bancorp Piper Jaffray. Agencies are in turn following the money beyond TV, collaborating with video game manufacturers to pay for product placements in the games. That is good news for video game makers, which are expected to rake in more than $700 million in advertising fees annually by 2005, according to data from Forrester Research and Jupiter Media. That is seven times more than in 2002.

Satellite and cable TV companies dependent upon TV viewers are also keeping a sharp eye on rapidly increasing DVR penetration (see chart). Many plan to provide the service in a two-pronged attack designed to both woo more customers and convince their current base to upgrade to premium services. This will further boost a mounting market; Nielsen says that DVR ownership grew by 50 percent over the last year to about 4 percent of U.S. households.

Advertisers are eager to tap into the underdeveloped potential of this growing audience. TiVo, one of the leading DVR platforms, is working with advertisers and audience measurement services to gauge viewer habits in extreme detail. Unlike Nielsen’s TV ratings, which measure viewing in 15-minute chunks, TiVo can break down data to the second. Advertisers get a clearer picture of ad campaign successes – and failures.

In 2004, advertisers utilize DVR technology to determine the specifics (houses, zip codes) of who watched, or skipped, their ads. They may also monitor which commercials are watched repeatedly, to better clue in on what is entertaining – and effective. With DVR technology, consumers can also request longer versions of commercials. It is an advertiser’s dream to spotlight special interest while increasing the cost-to-success ratio. Whether they are offering extended trailers of the next Lord of the Rings movie or ads for a new make of car, advertisers are managing DVRs as an advertisement delivery medium.

Meanwhile, the Internet will remain the king of targeted digital advertising in 2004. In a recent Forrester survey of 95 U.S. marketers and advertising agencies, Internet advertising captured the two highest planned growth areas next year with more than 60 percent of surveyors saying they planned to increase spending on digital advertising. More than 50 percent of respondents said they planned to spend more money on Web advertising, while only 20 percent planned to increase spending on traditional advertising print and broadcast.

The main driver is targeted search, a niche developed by Google, Goto.com, and Overture. Two years ago, advertisers were complaining that print-style Web banner advertising was ineffective. Today, they have been won over by the manner in which the Internet provides quick response from a targeted search, something neither print nor TV can offer.

The advertising industry is set to lead the media sector in 2004. Ad buyers at established firms are facing the global challenges of a digitally altered media landscape head on, intent on taking advantage of new opportunities to reach both specific niche and more broad-based target audiences.

PLAYERS

Google, Yahoo: The titans of targeted search should reap most of the benefits as this already-profitable business grows.

Comcast, EchoStar, Hughes Electronics/News Corp, Time Warner: Look for these cable and satellite TV providers to push DVRs and more digital programming services to boost revenues.

Scientific-Atlanta: Looks to be the big set-top box winner as the two top cablers, Comcast and Time Warner, push DVR technology in 2004.

Atari, Electronic Arts, Microsoft, Vivendi Universal Games: Video game makers are set to increase revenues from in-game advertising product placement.

ALSO IN MOTION

Anti-spam crusaders: The election year prompts state and federal lawmakers to press passage of tougher anti-spam laws.

Search turf wars: Google and Yahoo, the current leaders in search-based advertising, face new competition from Microsoft, which plans to launch a similar service.

Interactive marketing: Interactive TV has been promised for years, but now with DVRs, digital cable and satellite infrastructures have finally emerged.

Wells Fargo lures Garretty from sabbatical

After two years building up City National Bank’s Palo Alto private banking division as senior vice president and manager, prominent Silicon Valley private banker Jeanette Garretty is leaving.

After almost 25 years in banking, Garretty was convinced to cancel a long-planned sabbatical to join Wells Fargo & Co.’s Private Client Services banking unit in Palo Alto with an offer she says she couldn’t refuse. She will serve as a senior relationship manager and private banker.

Previously, Garretty was a technology economist and private banker with Bank of America in Menlo Park.

“She has extensive industry contacts. Let’s just say we had to increase the capacity on our server to accommodate her Rolodex,” says Mark Bigley, regional private banking manager for client services at Wells Fargo.

Garretty says the fact Wells Fargo is locally based was a factor in her move.

“I really like that Wells Fargo is the No. 1 corporate giver in the Bay Area and is a big believer in the community,” Garretty says. “It’s a wonderful time to build strategy in private banking, It’s been a tough economy, but more and more people are looking forward and that’s what I want to help them do.”

Startup muscles into online ticketing market

Sometimes great things spring from humble origins.
Vendi Software Inc., which is operated out of a home office in Belmont, aims to crack the online ticketing market with its Web site, www.vendini.com.

That’s a market Wall Street analysts estimate is worth more than $10 billion annually in U.S. sales and is dominated by Ticketmaster, a unit of e-commerce powerhouse USA Interactive of New York, which had $4 billion in ticket sales last year.

Vendini is happy to live in Ticketmaster’s shadow by focusing on small community-based or independent theaters and performing arts groups, such as the Berkeley Symphony.

So far, Vendini says the strategy is working. Although founder and CEO Mark Tacchi would not release specific numbers, he claims the company is profitable and growing with 400 customers nationwide since it launched in November 2001.

To make money, Vendini takes a small percentage of each electronic transaction, determining charges on a case-by-case basis. Other ticketing companies take similar custom-set charges from ticket sales, but unlike Vendini, they also charge set-up or administration fees even if no tickets are sold by them.

“We’re not elbowing in. There is a huge opportunity there that Ticketmaster won’t touch. There’s this unspoken threshold where the accounts are too small for Ticketmaster to even consider,” Tacchi says.
Ticketmaster says that’s not really the case, but acknowledges smaller clients are not as profitable as big-name acts or larger arenas.

“It’s just basically our concentration has been with the larger venues,” says Ticketmaster spokeswoman Kandace Simpson from her Los Angeles office. “Don’t get me wrong, we do all size venues, but obviously most of our business comes from larger venues and larger clients.”

Ticketmaster aside, Vendini’s biggest challenge could be from companies such as Paciolan Inc. of Irvine, which does ticketing for the San Francisco Ballet as well as Stanford and San Jose State universities.

Paciolan claims it handles 25 percent of all U.S. ticket sales, putting it neck-and-neck with Concord-based Tickets.com for the No. 2 position in ticketing behind Ticketmaster. Tickets.com did not return calls requesting comment.

“Traditionally, we owned the college athletic market, performing arts, museums and attractions,” says Paciolan spokeswoman Laura Christine.
Privately held Paciolan started 23 years ago as a brick-and-mortar company to provide a full-range of box office staffing for nonprofit sports teams and arts programs.

“We do ticketing — not only Internet, but the back office and phone as well as box office. We do the entire infrastructure to sell your own tickets,” Christine says.

After receiving $20 million in third round venture funding in January, Paciolan has a total VC take of $35 million.

Armed with new IBM servers that allow it to process 100,000 ticket orders per hour, Paciolan says it is ready to capture big arenas and major league sports and take on the industry’s Goliath.

“We compete head to head with Ticketmaster now,” Christine says.
That’s a far cry from Vendini, which is happy to stick with the smaller venues and operates with a staff of fewer than 10. The company started with $4,000 and lots of programming muscle from its founder, a programmer himself, who cut his teeth by founding enterprise software company Hipbone Inc. of San Carlos in 1998.

“What I realized with my last company is VCs want things to move a lot faster. But when you’re building a product and a customer base, sometimes this takes time and it’s hard to show month-to-month progress. The whole VC dog-and-pony show is a big time suck,” Tacchi says.

He also says his company is hell-bent on keeping expenses low, opting to operate out of home offices.

“The most important thing for us is to keep operating costs low. With Tickets.com and Ticketmaster, their cost of operations are higher and it’s reflected in their service fees,” Tacchi says.

Vendini says that a successful ticketing company doesn’t require a branded Internet portal.

“This is the best business to be in. Tickets are consumable; they expire after a few days and people come back to buy more. It’s not like we’re selling computers that can last three to five years,” Tacchi says. “Our next step is we’re going to Canada.”

Sarbanes-Oxley highlights risk management

Banking consultant examines the repercussions of last year’s far-reaching accounting law

As each week goes by, one of the newest federal laws affecting business continues to raise questions.

Born from the accounting scandals of 2001, Congress passed the far-reaching Sarbanes-Oxley Act (SOA) of 2002 in an attempt to regulate public companies and clean up messy accounting practices of the late 1990s.

In the true entrepreneurial spirit of the Silicon Valley, a group of consulting firms have sprung up to help companies address SOA, including BankVision Inc. of San Jose, which was founded this year and already has 45 clients.

BankVision managing director Chris McCulloch talked with Biz Ink reporter David Speakman about issues he faces with companies grappling with the new law.

When SOA was passed, do you think people were fully aware of its implications?
It is difficult to imagine that people understood the complete ramifications and implications of the Sarbanes-Oxley Act when it was signed into law in July 2002. The Act is so broad reaching that I think most corporate managers are still trying to digest its full impact. The topics addressed by SOA range across the corporate spectrum from governance standards to disclosure procedures.

What are some of the most common SOA issues you are seeing with your clients?
Our clients are financial institutions and, in many respects, they had a head start with respect to SOA. Even before SOA, they were operating in a heavily regulated, control-oriented environment, so SOA was not as traumatic as it might have been otherwise. For most financial institutions, compliance with SOA is really about formalizing and documenting many of the control processes and practices that already existed. In fact, our larger clients (banks with assets over $500 million) have been familiar with annually assessing the effectiveness of their internal control structure under Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) since the early 1990s. Proposed Section 404 of SOA regarding management’s assessment of internal controls looks very similar to FDICIA Section 112.
Ironically, in both cases, these regulations were direct responses to the well-published business challenges of their times. For instance, FDICIA was enacted in response to the savings and loan crisis of the 1980s, while SOA was a reaction to the corporate malfeasance and governance failures two decades later.
While financial institutions may have had a head start, compliance with SOA may be a real challenge for small manufacturing and service businesses that have not traditionally operated in heavily regulated environments.

What is the most important thing you tell companies to do because of this new regulation?
Develop a culture within the organization that fosters control awareness. An awareness of controls and risks will allow the organization to optimize the balance between risk and return. Business decisions can then be made with an understanding of the associated risks and thus minimize the type of corporate governance failures that plagued companies like Enron and WorldCom. This doesn’t mean that an organization should move to eliminate risk, because it would control itself out of business. Rather it should position itself to identify, measure and respond to risks that exist, as well as those that develop, as a function of environmental changes.
Once a general control awareness has been infused in the organization, it becomes a process of documenting the most significant risks, key controls and means by which these controls are periodically evaluated and validated by the organization. Risk-management professionals can help facilitate this process.
What are the benefits of risk management in regard to SOA?
The first has been a general increase in awareness regarding the importance of controls and risk-management processes. Another positive aspect of SOA has been the enhanced communication between senior managers and mid-level managers or supervisors regarding the control environment and financial reporting controls of their organization.
Section 302 of the act requires the written affirmation of the principal executive and financial officer (usually the CEO and CFO) that effective disclosure controls and procedures exist each time a periodic report is filed with the [Securities and Exchange Commission]. Well, these senior mangers are now asking very pointed questions about the control and disclosure procedures of the managers that report to them. This has improved communication between senior managers and mid-level managers regarding the controls and risk management processes of their business.

Have you noticed companies not originally targeted by SOA changing business practices because of it?
SOA was originally designed to address corporate governance responsibilities and transparency in financial reporting and disclosure at public companies. Any company that was an SEC reporter was covered by the act.
However, we have seen private companies take a keen interest in the act. Many of these companies have moved to comply with SOA even though they are not technically covered by it. The feeling is that there may come a day in the not-so-distant future when all companies will be covered by SOA or similar standards. These private companies are oftentimes enhancing their risk-management processes and control expectations in this context.

What ramifications of SOA did you find surprising?
That such sweeping change in U.S. securities laws could be precipitated by a few very large, visible companies such as Enron, WorldCom and Arthur Anderson. Unfortunately, the corporate malfeasance and fraud associated with these companies cast a shadow over the entire corporate world and undermined the public trust between companies and their stakeholders.
While we needed improvements in corporate governance and financial reporting transparency, SOA has been a significant burden for many companies that were already acting as responsible corporate citizens.

New software targets number crunchers

Campbell startup plans to help financial professionals manage their clients’ debt liability

Last year, consumer debt in the United States grew to record levels, passing $8 trillion according to the Federal Reserve Board.

One valley company sees a multibillion dollar opportunity as consumers may be unaware of cost and tax benefits on some debt, and increasingly rely on financial advisers for help.

FinancialCircuit Inc., a Campbell-based financial software company, says it has a tool that could help financial professionals help their clients manage their debt liability.

“Typically the financial industry is focused on helping clients with their assets. But everyone understands that actual net worth is your assets minus your liabilities,” says Adrian Nazari, CEO of FinancialCircuit.

He says his company’s new software product, called MoneyFind, which sells for a $70 monthly subscription, will help clients of banks, insurance companies and accountants cut costs in paying back loans.

MoneyFind can help save money by automatically auditing current loans to see if they are getting the best interest rates and tax breaks. It works by taking advantage of eased federal regulations that allow secure, encrypted sharing of financial data to scour 250 lenders to find the best rates for each loan to be refinanced.

FinancialCircuit, which was founded in 1999, has a hard task ahead of it to convince banks to compare loan costs to their competition rather than go it alone with their own software.

“Currently, we don’t put competitor pricing on our Web site,” says Bruce Cornelius, a senior vice president at Countrywide Financial Corp., which has Bay Area branches.

FinancialCircuit’s Nazari says traditionally many consumers do not shop around for the best rates on car loans and certified public accountants have had a hard time explaining to clients why smaller loans should be refinanced.

“We’re very strong in the CPA industry. We found in 1999 that many CPAs want to get into the financial planning business; they want more than just to do your taxes,” Nazari says.

One of those CPA firms is Vavrinek, Trine, Day & Co. LLP (VTD), which bills itself as the 77th-largest accounting firm in the United States.

“We get our biggest face-to-face contact with our clients during tax season and a number of them saw MoneyFind on our Web site and commented on it. There are similar products out there, but this is by far the easiest to use,” says VTD senior partner Don Driftmier from his San Bernadino office.

VTD says it has had MoneyFind on its Web site since November for customers to use if they wish.

“For our regular tax clients in the era of refinancing loans, it takes all of two seconds to figure out what your payment would be with a new loan. If you decide you want to do it, you can go all the way to filling out an application online,” Driftmier says.

“There are a lot of things people can use the Internet for and this is probably one of the more practical ones.”

Ask Jeeves sells off software unit for $4.25M

Ask Jeeves Inc. (Nasdaq: ASKJ) of Emeryville inked a deal May 28 to sell its search software unit, Jeeves Solutions, to privately held Kanisa Inc. of Cupertino.

Under terms of the deal, Kanisa will pay Ask Jeeves $3.5 million in cash and a promissory note worth $750,000.

Ask Jeeves says this move will allow it to spend more money on marketing and to focus on its core business, enterprise search, which made up 86 percent of the $25.2 million in sales it reported in the quarter ended March 31.

Kanisa says it will fold Jeeves Solutions operations, including some if its staff, into its existing customer service software offerings.

“The JeevesOne product is extremely strong and we look forward to working with the Jeeves Solutions team to serve the customer service needs of existing and new customers,” Kanisa CEO Bruce Armstrong said in a statement.

Both companies expect the acquisition to close by the end of July.

VC rebound hopes stagnate

Hopes of a major turnaround this year in the Bay Area’s once-thriving venture capital industry are not looking good.

A new report by Ernst & Young LLC’s venture capital advisory group shows last year both VC investments and valuations of startup companies fell to levels not seen since the mid-1990s.

But that doesn’t mean the VC industry is the same as it was back then.
Bill Reichert, president of Menlo Park-based Garage Technology Ventures disagrees with opinions that venture capital is at levels similar to 1995 or 1996.

“Both you and I know we’re not where we were in the mid-1990s. There is a huge difference between the absolute level of activity and the direction of activity. Clearly the fact [is that] the direction of VC investing is dramatically different and that means the whole environment is different,” Reichert says.

“Another big difference is that there were investment theses back then that people held on to fairly confidently and the problem is there is no investment theory that anybody is holding on to with any confidence whatsoever,” he says.

Ernst & Young says the VC industry will need an outside influence to act as jumper cables to get its engine running again — possibly the reemergence of the initial public offering market or a new emergence of a successful business model.

In the aftermath of the dot-com bubble, E&Y says the VC industry still hasn’t established a firm footing although there is an understanding with VCs that the industry needs to change.

Garage’s Reichert says some VC investors may sound confident about their industry, but that they are trained to do so, and it doesn’t reflect the real world.

“The reality is there is a huge lack of imagination, vision and confidence that there is any reasonable and solid investment thesis. Often you hear VCs are balancing their approach. That means instead of chasing after early stage deals, they’ve decided to go after deals that are generating revenues and are close to break-even,” Reichert says, explaining VCs increasingly will mix both kinds of investments.

He says investment strategy for many VCs has reversed their usual mode of operation as they no longer compete to be the first to invest in a startup.

“‘Last money in’ is the new investment thesis that you’re hearing a lot of,” Reichert says.

Some say early-stage investors have been burned too many times as they lose money when startup valuations at second- and third-round fundings fall.

“That’s been going on for a couple of years now. It’s not a new trend, but I don’t know how much longer you can have down rounds,” says Deepak Kamra, general partner at Canaan Partners in Menlo Park.

“Nobody invests in a first round thinking the company will be cheaper in the second round,” Kamra says.

“First rounds are dropping in both price and quality. Am I seeing a change in that? No,” he says.

Garage’s Reichert agrees.

“Very few [VCs] are willing to say they’ve abandoned early-stage companies. But practically speaking, there are a number who have.” he says.

There were 510 initial financings of startups in 2002, the lowest number in seven years, according to research by Ernst & Young and VentureOne. The silver lining is that 83 percent of that first-round money went to IT and bioscience startups, industries the Bay Area dominates.

The lower level of initial financings doesn’t concern one investment banker.

“You had more companies funded in the past than probably should have been,” says Rick Osgood, CEO of Pacific growth Equities Inc. of San Francisco.

He says the current crop of new startups will probably be more healthy than those funded during the boom years.

Garage’s Reichert says in the current market, huge VC fundings reliant upon billion-dollar IPOs will likely be replaced by a larger number of small deals, which still can provide reasonable returns on VC investment.

“Maybe that’s whistling past the graveyard, but that’s clearly what all of us are betting on,” he says.

No recovery seen in PC market during 2003

Despite higher sales forecasts, both corporate and analyst opinion is that a recovery in the desktop personal computer market may not happen this year or any time in the foreseeable future.
Gartner, a research firm, predicts worldwide PC sales in 2003 will grow 6.6 percent over 2002, keeping slightly ahead of global inflation rates.
And according to research firm ARS Inc., when businesses are buying, they are buying on the cheap. ARS research shows that for the same amount of money spent in 2001, companies can now buy a PC that is more than twice as fast and has four times the memory and almost four times the hard disk space.
Silicon Valley’s largest PC maker, Hewlett-Packard Co. of Palo Alto, says its PC unit is among its poorest performing businesses.
“Looking ahead we see stronger demand for notebooks versus desktop PCs, reflecting a shift toward mobility and the attractiveness of richly featured notebooks as desktop replacements,” HP CEO Carly Fiorina said in a May 20 conference call to analysts. “In the enterprise market overall, IT spending remains muted and there are no signs of a large-scale PC refresh cycle taking hold.”
Those comments did not go unnoticed on Wall Street, where analysts reflected upon corporate focus on return on investment (ROI) in technology spending.
“This is in line with our view that a fundamental change in the customer base to more ROI-sensitive, traditional corporations makes it unlikely that there will be significant spikes in PC demand as there have been in the past,” wrote Bill Shope, a New York-based analyst with JP Morgan Securities Inc., in a May 21 research note. “Overall, HP’s cautious comments on PC demand suggest that a broad recovery is unlikely to be a 2003 event. In addition, we believe that enterprise spending on servers is likely to be relatively stronger than PC spending throughout the rest of the year.”
Shope declined further comment. JP Morgan engages in investment banking for HP.
Desktop PC analyst Toni Duboise with ARS says with shrinking profit margins, PC makers continue to shrink away from the desktop.
“Absolutely. That’s why you have all of your major PC manufacturers focused beyond the box. This is no secret,” she says. “They are not making money on PCs anymore and they haven’t been making money on PCs for some time. That’s why they are investing in services and selling accessories. While we are in a beleaguered market and having economic woes, the real story here is that it is a PC buyers market.”

Media ownership proposals stir controversy

The last time federal regulators changed media ownership rules, a slew of deals altered the local television landscape.

Now regulators are looking into further changes that affect both TV and newspapers. Those proposals face opposition from such strange bedfellows as lobbyist groups the National Rifle Association and the National Organization for Women.

In the cross hairs is a Federal Communications Commission meeting June 2, at which commissioners will decide whether or not to relax rules governing consolidation among companies that own TV stations and newspapers in the same cities.

Under U.S. law, only an act of Congress or a federal court decision can overide the FCC in these matters.

Among the proposals are the following changes:

  •  Eliminate a regulation that bans the same company from owning both a newspaper and a TV station in the same market.
  •  Allow the same company to own as many as three TV stations in the same city.
  •  Allow big networks to buy one another.
  •  Increase the number of TV stations a single company can own.

The five-member FCC commission, which is controlled by three Republicans who usually vote in a bloc, is expected to support the drastic easing of many regulations.

According to a March 13 Standard & Poors research paper, broadcast companies already are strategizing mergers and acquisitions to take advantage of changes.

S&P says it expects any easing of regulations by the FCC could “fuel [a] transaction flurry” among media companies.

“Despite a lot of campaigning by … public interest groups, it looks like this thing is going to go through,” says TV analyst Rick Ellis of AllYourTV.com. “Although I think it’s going to be a short-term upside for a lot of shareholders in midsize broadcasting stocks, in the long term, I don’t think it’s going to be good for these companies.”

He says consolidation has been unsuccessful for AOL Time Warner Inc. and Walt Disney Co.

Other major media players are not looking to take advantage of opportunities from proposed FCC rules changes.

“From the newspaper side, you’re already starting to see some of the newspaper groups saying they aren’t so sure they’re going to get into TV because the stations are considered to be very over priced,” Ellis says.

The largest Bay Area-based media company agrees.

“We have no interest in owning TV stations,” says Polk Lafoon, spokesman for Knight-Ridder Inc. of San Jose, the second-largest newspaper publisher in the nation.

Locally, the company publishes the San Jose Mercury News and Contra Costa Times.

The National Association of Broadcasters, a Washington, D.C.-based lobbying group that represents most corporations that own TV stations, says it backs any changes that ease media ownership restrictions.
The biggest changes could come from consolidation of TV ownership in a single market.

The Bay Area already has seen some consolidation since 1999 when after a local test case, the FCC first allowed so-called “duopolies” where one company can own two stations at the same time.

At the time, Granite Broadcasting Corp. of New York, then-owner of KNTV Channel 11 in San Jose, wanted to buy Channel 20 of San Francisco.

fficials from Granite, along with the owners of the other major Bay Area TV stations, declined to be interviewed for this story.

Since that time there has been a domino effect of station ownership swaps and now the Bay Area has four duopolies (see box).

Under the proposed changes, things could change even more.

“You could have NBC and ABC owned by General Electric Co.,” says Chellie Pingree, president of Washington D.C.-based Common Cause. “If you don’t have a diversity of media ownership, there are fewer voices being represented, there is far less localism.”

Potential lack of diversity in local voices on both ends of the political spectrum has conservatives joining liberal groups in a chorus of opposition.

“When the NRA and NOW are on the same side of this issue, that tells you something. Either the planet has spun off its axis, or we’re right about this one,” Pingree says.