The electronic book market is looking increasingly hot, flat and crowded. A vicious price war has broken out among producers of digital readers thanks to Apple’s success with the iPad. Companies such as Amazon hope that selling tomes across multiple devices will fill the profit gap. But competition in e-book distribution is heating up and could pressure margins there, too.
Apple has sold more than 3 million iPads in about two-and-a-half months. While Amazon doesn’t give figures, analysts think it has sold a similar number of its Kindle e-readers in two-and-a-half years.
Apple has taken another bite out of Nokia. As customers stampeded for the new iPhone, the Finnish cellphone giant warned of disappointing sales and operating margins. It lost another 9.7 percent, or about $3.5 billion, of its market capitalization on Wednesday. Nokia is increasingly at risk of becoming just a commoditized, low-margin manufacturer.
Nokia pinned the blame for its lower expectations on several causes: competition in high-end phones; the weak euro increasing the cost of goods sold; and a shift in product mix to low-margin devices. But it is smartphone competition that is really vexing the Finns.
Cerberus has stanched its blood loss with the $3.4 billion sale of Talecris Biotherapeutics to Spain’s Grifols. The private equity group is in line for more than a 20-fold return on its investment in the healthcare firm. Losses from its funds’ disastrous investments in Chrysler and GMAC threatened to send Cerberus to the underworld. Its roughly $2 billion profit on this one deal offers new life.
The Talecris buyout didn’t seem particularly appealing at first. Cerberus and partner Ampersand bought the unit from healthcare giant Bayer. Talecris, which makes drugs derived from blood, had been a low-growth, non-core headache for the parent firm. The private equity buyers signed up in late 2004 to buy it for $590 million, and Cerberus cut an equity check of around $80 million to acquire majority control.
Big Pharma has three big problems — its most important drugs are losing patent protection, growth in developed markets is slowing to a crawl, and much of its cash is trapped overseas. Abbott’s purchase of India’s Piramal Healthcare’s generic drugs business for $3.7 billion offers a partial answer to all three variables.
Six of the world’s ten biggest drugs are likely to lose U.S. patent protection by the end of 2012. Other major markets in Europe and Asia are on similar timetables. The value of many big franchises will be gutted as cheaper versions of these compounds are introduced. As a result, growth of drug sales in developed countries is likely to be between 3 and 6 percent over the next several years, according to IMS.
It has become a rite of passage for young and ambitious nerds to pack their bags for California. But giants like Cisco, Microsoft and Google have tens of billions of dollars trapped outside the United States. Perhaps the young Turks should consider basing or at least incorporating their new technology businesses overseas if they want the best chance of selling out to an industry leader.
Google’s purchase of Oslo-listed and San Francisco-based Global IP Solutions (GIPS) is just the latest example of such a purchase. And the technology aristocracy has plenty of overseas firepower. Cisco, Microsoft and Apple, for instance, between them had $120 billion dollars of cash and investments, and very little debt, on their balance sheets at the end of last quarter.
Executives at Psychiatric Solutions have done well for themselves. The hospital chain’s top four managers were awarded rich options packages in February. Just a few weeks later, news leaked of a leveraged buyout with the CEO onboard. The timing looked unsavory, and led to a federal investigation. But it also spurred an auction, bringing a higher $1.9 billion bid from rival Universal Health Services. This chain of events, which led to a 41 percent takeover premium, should at least partly ease shareholders’ minds.
There’s a solid theoretical reason for rewarding top brass for selling their company. Otherwise, it could be too tempting to spurn a deal, which could put them out of their cushy jobs. So change-of-control bonuses and options vesting can help to align the interests of executives with those of shareholders.
The golden age of software piracy is upon us. More than four in 10 computers run on illegitimately installed programs. And the figure is rising as the places where the fewest pay account for nearly all PC growth. The annual damage is more than $50 billion, according to a survey by the Business Software Alliance and research group IDC. The figure should be taken with a grain of salt, but there’s no disputing the industry loses plenty of money every year.
The growth of piracy in developing countries masks another important trend. Illegitimate use keeps falling in most places, even in some developing ones, such as China. This is partly down to better enforcement. Countries home to large software companies are pressuring others to crack down.
Video may have killed the radio star on MTV. But in the cellphone wars, it’s the computing industry that’s destroying the former leaders of the handset business, namely Nokia and Motorola , whose roots lie in the wireless radio business.
The reason is simple — handsets are quickly becoming all about instant messaging, accessing the web and applications that let you do nifty things like find a free parking space. Voice is fast becoming an afterthought — a trend that favors the Silicon Valley crowd.
The stock market’s already figured this out. Motorola and Nokia have lost $25 billion and $24 billion, respectively, since the iPhone was unveiled at the start of 2007. That, and more, migrated to Apple’s market value, which has increased by nearly $150 billion over the same period. The iPhone accounts for most of the gain.
Indeed, the gadget’s sales now account for 40 percent of revenue at the group led by Steve Jobs, a figure that’s rising quickly. Research in Motion — the Canadian company whose phones have a facility with email — is another, albeit, smaller, winner. It has added $11 billion of value.
So what’s wrong with the old guard? While Nokia and Motorola were excellent at making basic wireless telephones, their software tended to be clunky, impeding the transition to high-end devices. Several other factors have compounded their difficulties.
First, operators heavily subsidize advanced cell phones that require customers to sign up for expensive data plans. The resulting low upfront cost makes iPhones and Blackberries appear as affordable to consumers as a basic phone — so they naturally prefer those with more bells and whistles. Second, competition at the high end is becoming fiercer, as every firm tries to squeeze its way into the fast growing market. For example, HP , a perennial also-ran in handsets, has bet it can get back into the game with its recent purchase of Palm .
Third, basic phones have become largely undifferentiated commodities as electronics prices continue to fall. The market for simple phones could shrink from last year’s $65 billion to $37 billion in 2011, according to German bank WestLB. In contrast, smart phones could be worth $70 billion in 2011, the bank reckons.
While this rising tide may raise most boats, investors in the old guard firms still have reason to be worried. Nokia captured nearly half of all money spent on smart phones at the beginning of 2008. It now captures less than 30 percent, according to research from RBS. Sure, the pie is growing, but it’s alarming for Nokia’s owners that Apple’s share has gone from close to zero to about a third.
Nokia and Motorola are now taking different tacks to catch up. The Finns are bundling services — such as e-mail, navigation and free music in some markets — into phones and introducing a better operating system later this year. It’s also aggressively taking on Apple in court, claiming the iPhone and iPad infringe Nokia patents relating to wireless data transmission.
Motorola’s response is to quickly ramp up production of phones which use Google’s Android operating system. It sold 2.3 million of the expensive handsets in the first quarter alone. That’s far fewer devices than Apple, but Motorola appears to have finally regained its innovative mojo.
Still, climbing back to the top won’t be easy. Far fewer applications are available to Nokia phone users than are available on the iPhone. The danger is Apple’s lead in high-end devices will be difficult to overcome because it is self-reinforcing. Users tend to flock to the most useful handsets, and software developers go to the most popular platforms.
While Nokia still produces about a third of all phones made, its status could erode quickly if consumers perceive its software as second-rate. Don’t forget the experience of the Sony Walkman franchise, which was crushed by Apple’s introduction of the iPod.
Motorola faces a different danger. While the Android platform is becoming increasingly popular, Motorola could eventually become one of many producers of commoditized, low-margin mobile devices running the system — leaving Google to skim off most of the advertising-based cream. HP’s purchase of Palm appears motivated by a desire to avoid falling into this trap.
The old guard still has a chance to halt the phone industry’s shift to Silicon Valley’s computer kids. But it’s getting late.
Twitter is taking a small step to becoming a real business. The microblogging site for the attention deficit disordered is carefully rolling out advertising. Ads will be limited to searches and those that don’t generate favorable response pulled. It’s a sensible first step in Twitter’s need to generate revenue without annoying users. But more are needed.
While Twitter’s users send about 50 million messages a day, and the figure is growing quickly, it has been unclear how the company will support itself. Yes, the company raised a reported $100 million in September. And agreements with Microsoft and Google later in the year added perhaps a quarter as much. But the firm needs regular and larger injections of cash to sustain growth and fight off rivals like Facebook.
Apple has just lent a hand to Google in the search giant’s increasingly tense relationship with regulators. The U.S. Federal Trade Commission worries Google’s proposed purchase of AdMob may extend its dominance of internet search advertising into the burgeoning mobile Internet space. Apple’s latest iPhone operating system will give the government less to worry about.
The FTC’s concern is understandable. Google could well use the profits for a near-monopoly in its original business to muscle into the promising mobile advertising market. That business is currently small — total spending of around $400 million in 2009 was less than 2 percent of Google’s revenues. But research outfit IDC estimates $1.9 billion of revenues by 2012.
Yet the tech trade creates a dilemma for the FTC and other antitrust regulators. As the long fight with Microsoft has demonstrated, once a monopoly is established, its huge economies of scale make conventional remedies ineffective. Officials need to strike before the competitive barriers are too high to tear down.