The Stalwart

Online Shopping and Gas

Not that it should come as too much of a surprise, but high gas prices are encouraging people to shop online:

20% of consumers who shop online increased their buying as the result of higher gasoline prices in September 2005, Retail Forward said. 6.7% of consumers who shop online said they are shopping online much more as a result of higher gas prices, while 15% said somewhat more.

Hey, what do we need alternative-energy for if we've got e-commerce.  Well, there's still shipping costs (Techdirt):

Three-fourths of online retailers offered free shipping promotions during the holiday season, a research firm says, and all that free shipping is hurting their bottom lines, particularly in light of rising fuel costs being passed along by shipping companies. Analysts say that the promotions were a driver of a strong online shopping season, and that shoppers will expect to see them again next year, putting pressure on retailers to again offer them. Shipping fees have been a bugbear for many online sellers, as they try to come up with an ideal balance between covering costs and keeping prices low enough to attract buyers. Amazon's aggressiveness isn't helping matters, creating an expectation among consumers that free shipping is part and parcel of online shopping.

On the whole though, it's more efficient to have the Fedex truck come down the street, delivering gifts, than for everyone to load into their cars, clog the streets and parking lots, and pick up the gifts themselves.

Search Engine Marketing Gets Expensive

Check out this deceptively normal-looking press release from florist FTD (NYSE: FTD), in which they update investors on holiday sales.  There's a very strange line in the opening paragraph:

During the Christmas season, certain online search engine costs increased significantly over the prior year, and as such we made the decision not to pursue the resulting high cost order volume." stated Michael J. Soenen, President and CEO of FTD Group, Inc. "As a result, despite this slight decline in order volume for the Christmas season, we are reiterating our EBITDA and EPS targets for the year. Further, we have begun making additional investments in our marketing staff to help build a more diversified marketing portfolio. We believe these initiatives will enable us to regain our competitive position in the marketplace and continue to deliver long term bottom line results for our shareholders."

Whoa. Catch that?  Advertising rates (which are set by auction) on Google (for floral services) have gotten too high, and now they're spending money to diversify their marketing away from the internet.

What does this mean?  For starters, it's important to remember why advertising dollars are shifting to the internet in the first place.  There can be only one reason--it offers a more compelling return on the dollar.  If advertisers could get the same or better results simply with billboards or FM-radio advertising they'd never bother to set up an Adwords account.  The advertising migration should only stop when internet advertising rises, and traditional advertising rates drop to the point at which they're equal (that's the theory anyway).

Now because pay-per-click search engine advertising prices are set by auction, they should rise to some level correlated with the expected profits on each visitor.  The fact that FTD is not finding it worthwhile to engage in search engine marketing says one of two things.  1)  FTD is less efficient than their competitors, and can't afford the same per-click rates, because their expected profit per-customer is lower than the others.  This is possible, but a little hard to believe given their strength within the industry.  2)  Companies have bid up advertising rates past their marginal value because they're willing to take losses in order to gain market-share. 

This is worrisome for the likes of Yahoo and Google.  It doesn't suggest anything fundamentally wrong with their businesses, but that the rates at which they've been selling advertising is fundamentally unsustainable (at least in some categories) and prices will need to pull back.  Indeed, the partial-departure of floral heavyweights like FTD will cause this to happen.

It's interesting stuff, and certainly a trend to watch.

(found via)

Pay By Cellphone

You can stop lusting after Korean and Japanese consumers, who can make payments simply by swiping their cell-phone. The first trial of this technology is finally coming to the United States.  Although, according to Engadget the initial trial will be extraordinarily limited:

The test will be open to Atlanta Hawks season-ticket owners, who will also have to have Chase Visa accounts (Mastercarders might find this old hat) and be willing to use Nokia 3220 phones modded with an NFC chip.

Sadly I don't fall into any of those categories, let alone all three.

The Paranoia of Patrick Byrne

Why do we like to write about Overstock.com (NASD: OSTK) and their CEO Patrick Byrne so much?  Because it may be the single-most entertaining story in the markets and in business today.  It's not gratuitous because Byrne, like Bill Clinton to S'N'L, generously provides an endless stream of cannon-fodder.  The latest from Mr. Byrne is a letter he wrote to investment website The Motley Fool about TheStreet.com.  Here it is, taken from the website of hedge fund manager Jeff Mathews:

Dear Fools,

For those of you who don't know, Herb Greenberg is a crooked reporter who formerly worked at thestreet.com, then moved to MarketWatch, where he makes a living doing hatchet jobs on whatever companies David Rocker is short.

Sometimes for variety he goes on Mad Money with Jim Cramer (founder of thestreet.com), and together they do hatchet jobs on companies David Rocker is short. (Did I mention that Rocker has been the #1 or #2 owner in thestreet.com, owning as much as 15% of thestreet.com through various on-shore and off-shore entities, such as Helmsman and Compass Holdings ...?)

Cramer and Greenberg's hatchet jobs take an unusual form. They resemble Thomas Friedman's write-ups on the Arab-Israeli conflict: "Let's see, Arabs, Israel, Arabs... Israel, Arabs........ Israel...... okay, I gotta call this one for the Israeli's." In op-ed after op-ed.

Similarly, when Greenberg adn [sic] Cramer attack me together, it generally takes the form of Cramer saying, "Byrne might be a good guy," Greenberg saying something like , "No no, he's a bad guy," "Are you sure? 'Cause I thought he might be a good guy..." "Oh no, he's definitely a bad guy." "Well...OK OK, he's a bad guy."

Oh, did I mention that Cramer founded thestreet.com, Greenberg cut his teeth there, and Rocker has been the most significant owner outside of Cramer himself?

Anyway.... Herb came to his end of year piece on worst CEO's of the year. I think he must have written a couple dozen on me in the last two years, but I did not mind, except for the creepy ones (complaining about how I don't always answer his email promptly? Geeesh: he reminded me of a scorned woman.)

And yet,after all this love, he left me out. I did not even the [sic] make the #1 spot here! I'm hurt. Of course, maybe he is getting some legal advice at the moment that explains his ducking his pat writings now....

Best,
Patrick

Now, as Jeff Matthews points out as well, it's not a stretch to read an anti-Semitic tone into the letter.  Not only does he finger all Jews in his conspiracy, but he, out of nowhere, throws in a jab at Thomas Friedman's uevenhandedness in covering Middle-East affairs.  We'll leave the readers to decide this question for themselves.

It's well-known that Byrne is obsessed with what he sees as a shadowy cabal of Overstock short-sellers, but it's clear is that the David Rocker/TheStreet.com doesn't make sense.  If TheStreet.com really were a vehicle for Mr. Rocker to bash stocks he was short, then any gains he might have made have been canceled out, surely, by the utterly dismal performance of TheStreet.com (NASD: TSCM) shares.  Furthermore, it's not at all clear that TheStreet.com is particularly influential in moving a stock, unlike their star Jim Cramer.  The company recently had to fold it's professional research division as it could not find a buyer for it.

Recently shares of the company have jumped on speculation that it might get taken over, though no price can possibly compensate long-term shareholders for the company's bad performance.

As for Byrne, we'll keep you apprised of what he's up to next.

How Lame is Overstock.com?

On the left is a screengrab of a Google ad I came across yesterday.  "Shop with Amaz-on" is, as you can see, the top line not for Amazon.com, but for Overstock.com.  Apparently, CEO Patrick Byrne et. al. think they can only attract visitors by tricking them into thinking they're visiting their well-known competitor.

This kind of nonsense coming out of Overstock shouldn't surprise any readers of this blog.

The Fatigue System

In case you missed it before, China online role playing game companies are feeling the pressure of regulation.

The official Chinese media have been running alarming stories about online gamers becoming so twisted that they kill themselves, attack fellow players, or commit other crimes. Beijing therefore has recently decreed that the online-gaming companies must act against their own interest by discouraging people from using their games for too long. The government-mandated scheme, known as the Fatigue System, is designed to cut the number of hours players spend in front of their computer screens by, for instance, eliminating incentives to stay online for hours on end and gain experience that can be used to win virtual currency.

QUICKER QUESTS.  While the Fatigue System was implemented only last month, NetEase Chief Financial Officer Denny Lee already blames it for some of the company's disappointing numbers in the third quarter. NetEase reported a sharp increase in revenue, to $54.8 million, for the quarter. But that increase of 8% was lower than the 13% or so that many analysts had been expecting. Moreover, NetEase on Nov. 7 said that it expects revenue for the last quarter of the year to increase just 2% to 4%.

One reason for the fall, according to Lee, was anticipation about the Fatigue System, which went into effect Oct. 1 but had been announced several months earlier. "People think, 'We might as well stop playing for a longer period of time now,'" Lee says. ...

Now, in order to accommodate the bureaucrats, NetEase and other companies may have to change the way their games operate. "If there's an [in-game] assignment that used to require more than four hours to complete, we can change it to require three hours, so people can still have time to finish it," said Lee.

While such changes may satisfy the government, some analysts are concerned. "The full magnitude of the impact of the Fatigue System...has yet to be seen," wrote William Bao Bean, a Deutsche Bank analyst, in a Nov. 8 report. However, he warned, "the system could lead to [a] decrease in playtime," among other problems.

But perhaps now's the time to pick up China game companies at PE's well under 30 (and perhaps under 20 even). Two that come to mind, Shanda Interactive (NSDQ:SNDA) and NetEase (NSDQ:NTES).

Shanda is also knocked down because it has decided to switch to a free-play model whereby people just buy add-ons within their games. Investors obviously weren't fans of this new strategy, since the stock was clobbered, but to us it actually sounds pretty interesting. A freely open online gaming world could become massive.

As for NetEase, they face maturing gamelines, which might be getting a bit stale with gamers. Still they have new products in development.

Yet as the above quoted paragraph indicates, maybe we should be a bit patient, since there could still be more bad news ahead on the regulatory front. It'd be pretty humorous if Shanda's games went free for all to use, but the government still tried to restrict your time playing them. It'd be like telling people they can't be reading CNN online for more than 3 hours at a time.
[Disclosure: One Stalwart holds shares in NetEase.]

Cyber Monday, A Myth?!

You probably noticed a lot of talk, this week, on the news about Cyber Monday, the internet's answer to Black Friday.  The rationale is that on Monday people returned to work, where they have high-speed internet connections, and thus do their shopping.  That makes sense, except for the fact that people generally have to work at work, and that there are a lot of people who have broadband at home (this is particularly true of the demographic that can spend their work hours lolling around online).  Well, turns out Cyber Monday isn't a big day at all, it's just the 12th biggest online-shopping day of the year.  The term Cyber Monday was just invented by marketers to, you know, drum up buzz!  (Found via Techdirt)

In other e-cyber-NET.com news, you'll be surprised to hear that WalMart.com had more visitors this week than Amazon (though not necessarily more sales) according to research firm Hitwise.  Take the numbers with a grain of salt, Hitwise is the company that declared GM's aggressive price cuts this summer a success, because it drew more young people to their website.

Ringtone Revenues

Ever since the ring tone Crazy Frog outsold Coldplay by 4-1, we became highly interested in mobile media, and things like little ringtones and games in particular.

the single by German band Bass Bumpers, which mixes the ringtone with Axel F, Harold Faltermeyer's theme tune from the film Beverley Hills Cop, is outselling Coldplay by a margin of around four to one.

We recently found numbers on the ring tone market size for 2005:

Ring tone sales in the US alone are expected to cross $500 million in 2005, up from $245 million in 2004, according to BMI, the performing rights organisation representing more than 300,000 songwriters, composers and music publishers.

Thats pretty substantial growth (100%) off of a decent sized number ($245m), this could be hitting $1 billion in a few years, though the exact nature of the product may change. In whatever form, we're liking these small, high margin products which are sold in volume for pennies a piece. It's like selling taffy at the corner store.

The Future of Netflix

Many have speculated, including this blog, that Netflix (NASD: NFLX) is a likely buyout candidate.  There have been rumors as to the identity of potential suitors, and the filing of an SEC document updating the severance agreements of the executives only adds fuel to the fire.  But all this doesn't quite fit with the fact that the company continues to present an ambitious long-term plan.  It could be a decoy, but if I buyout were imminent, you'd think they wouldn't want to jawbone their share-price up--or maybe they would.

That being said, Davis Freeberg has covered Netflix's recent presentation Lehman Brothers Small Cap Conference and was quite impressed:

Barry McCarthy, the Chief Financial Officer of Netflix gave one of the best investor presentations I've ever heard at the Lehman Small Cap conference earlier today. If you've never listened to a conference call or an investor presentation, this is the one to catch.  In the call, he made a strong argument for why Netflix will make it to 20 million subscribers by 2010 - 2012.

During the presentation he gave great statistics about past growth and indicated that they believe they will hit 4 - 4.2 million subscribers by the end of this year. He also said that "our objective through the end of next year is to finish with at least 5.65 Million Subscribers." An amazing accomplishment considering that they had less then 2.6 million subscribers a year ago.

He pointed out that a key driver to their growth will be the superiority of their website design and proprietary algorithms. In the presentation he points out that "among online retail businesses we have been rated the best website on the internet and as we grow, our objective is to become an iconic brand." He sees brand loyalty, strong customer satisfaction and personalization as being key components to their growth.

He also quotes the CEO, who offers some read-meat for the long-tail crowd:

"Historically Blockbuster has reported that about 90% of the movies they rent are new theatrical releases. They do a great job of fulfilling demand, created by the studios who spend $4 billion per year marketing new theatrical releases and the studios own the gross margins associated with creating that demand . . . Now they have a slightly different mix online. A couple of quarters ago they said that about 70% of what they rent online is new releases and about 30% is back catalog. That's not true in our business and it's never been true in our business. The day we came public and in the most recent quarter about 30% of what we rent is new releases and about 70% is back catalog and it's not because we have a different subscriber. It's because we create demand for content and we help you find great movies that you'll really like, we do it algorithmically and we do it with recommendations and ratings."

If you're interested in this company, read the whole thing.

On a related note, much of the discussion about the "long tail" revolves around floorspace; i.e. retail operations with scarce floorspace must flog the new releases and best sellers in order to maximize sales per square foot.  Online sellers, obviously, don't have to worry about this limitation.  But what if physical retailers could solve the floorspace problem?  Yesterday, The Financial Times reported that Wal-Mart would be experimenting with downloadable DVD kiosks in stores.  In other words, the convenience of a store with the unlimited selection of an online retailer.  One could even see Blockbuster experimenting with some sort of microformat store for urban areas--a few kiosks and then a little space devoted to popcorn and candy.  Or what about being able to rent any DVD from your ATM machine?  Simply pick the movie, wait two minutes for it to burn onto a disc, and take it home.  Perhaps this could finally be a boon for the disposable DVD, an unfairly maligned innovation, in our opinion.

While Netflix is still the one to beat, the other players won't go down without a fight.  Furthermore, Hollywood having seen the battling between iTunes and the record-labels, won't want one company to become too powerful when it comes to distribution.

Overstock Misses Again

Overstock.com (NASD: OSTK) came out with quarterly earnings and, surprisingly, they weren't that good:

 Dear Owners,

     Gomen nasai.

Q3 was rough.  My bad.  I bit off more technology projects than my colleagues could chew.  The last bite, an ERP implementation, was one bite too many, and we choked on it.  This mistake resulted in two kinds of unfortunate results:

1.  Unexpected bad things happened.  We tested our new ERP system as much as time allowed, but in mid-August I cut-over earlier than I should have.  We anticipated that a small number of background processes would fail, but we had more trouble than expected.  Rather than pass the problem to the customer in the form of bad service, we ate the cost by doing a great many things manually that would normally be done automatically.  Of course, customer-facing issues (shipping products, processing credit cards, and handling returns) trumped internal issues.  One internal issue was our inability to post new products: this gradually reduced the number of products on our site (especially best- sellers).  This weakened sales (though we offset this for some time by running $1 shipping).  When we were able to upload new products in mid-September, sales snapped back to previous levels.

2.  Expected good things did not happen.  Some IT projects that were supposed to lift margins through improved efficiencies in logistics or customer service were either late or remain incomplete: some of these projects have since been delivered, some (e.g., a professional customer service application) have been scaled down and partially delivered, and some have been shifted to Q1.  Other IT projects that were supposed to yield marketing gains went unfinished.  One example:  Project Propeller's test results are extremely encouraging, but only rarely has it been turned on because the A/B test system required to fine tune the system has been low resolution and inconsistent. These projects did not get delivered because the work required to address the ERP problems eventually monopolized development resources and crowded out all other progress (until quite recently).

Yes, that's from their quarterly report.  The quarterly report of a real company traded on the NASDAQ.  A company with a $633 Million market cap. 

But it seems that folksy talk is paying off, because after opening down, the stock is up as of right now!

Still, all these misses don't help their argument that it's naked short-sellers driving their stock price down.  Really, the company just doesn't execute very well.

Update:  Oh, and apparently the CEO's opening salutation "Gomen Nasai" means "forgive me" or "sorry" in Japanese.  Whatever.