Last month, we looked at some pretty hard falls and found that hard falls are not so common. Thanks in part to the government “investing” in failing companies and various legal maneuvers, large companies are actually less likely to flop. They hiss like a balloon losing helium.
Other possible hard falls need investigation. Over the last few years, Apple (AAPL) and Google (GOOG) expanded rapidly, supplementing industry leading products with many acquisitions that ensure the technology edge. Not surprisingly, a big shakeup is underway in the Information Technology (IT) industry. HP (HPQ) , which until recently garnered more revenue than Apple, went on a crash diet slashing 30,000 jobs over the last few years ago. Microsoft (MSFT) chopped off about 18,000 employees last year. IBM plans to lay off 20,000 this year. These big numbers look like hard falls. But, all three of these companies are afloat and doing well. In fact, the IT industry has been overvalued and overstaffed for years. In addition, these companies do not compete head-to-head. Mobile and Internet ascend as servers and desktops try to hold their own. Painful as this is, it represents a correction rather than a hard fall. Again, we expect a hard fall but find that the market lets the air out of the tires slowly.
What Is a Hard Fall?
Going belly up or falling out of contention would be a hard fall. Radio Shack’s technology standing on the bottom rung, Blackberry (BBRY) , Motorola and Nokia being swept under by the iPhone represent hard falls. Dell (DELL) found itself outmaneuvered by HP and Lenovo, who jumped into online selling, Dell’s long-standing advantage. Market watchers may think the exposure of hard falls in technology is too obvious. After all, Motorola and other cell phone makers offered a good product. Along came the technologically more sophisticated and cheaper-to-make IPhone. Even the established relationships the cell phone manufacturers had with telephone service companies could not protect them against superior technology. So, Apple and Samsung (SSNLF) sink their teeth into exciting mobile devices for a ballooning market that Microsoft, IBM (IBM) and HP only nibbled at. The sweeping change in profits in the IT industry explains why Warren Buffett dislikes investing this industry.
Let’s switch from fast-paced high technology to the other end of the bell-shaped curve. Maybe we will find hard falls in old, low tech industries. Newspapers are shrinking because of television, cable and mobile news. The revenue, circulation and staffing of the New York Times have been dropping for years, which has lost half its employees in five years. America’s premier news provider has also had a terrible time making good business decisions. WQXR, the Myth Buster’s favorite radio station, is now part of National Public Radio. That means it isn’t making money! The Times also owned Hesser College, now known as Mount Washington College and owned by Kaplan. Several locations of this New Hampshire for-profit school have closed and it never got big enough to battle giant University of Phoenix. (Incidentally, the name change appears to be geographical rather than an indication of the political aspirations of the Times.)
Cable news, another ballooning industry, also offers candidates for hard falls. CNN, the 24-hour news pioneer, is preferred in many public places such as jury assembly rooms and doctors’ offices. But, CNN has been on a profit slide for years. Their market share, revenue and profit are slumping. This provides plenty of lessons for their competitors. CNN is no longer the only game in town for round-the-clock news. An explosion of alternatives includes at least 25 that offer round the clock news nationally. Other 24/7 operations are local. And, the meaning of “news” has been watered down. Politics, sports and the weather have their all-day and all-night outlets, draining viewers from CNN. The mobile explosion also offers news without the older model of an announcer behind a desk. None of this is good news for CNN, which finds itself in a spot similar to Nokia, Motorola and Blackberry. The difference is that falling behind in technology is fatal. In news broadcasting, second or third place does not cause a hard fall. We’ll see if CNN picks it up. (See why Warren Buffett does not like IT investing?)
Beyond stiff competition, CNN’s flatfooted broadcasts explain its shaky performance. Sorry to say it but Wolf Blitzer delivers news with little or no emotion. Even worse is CNN’s inability to report the news with any clear sense of what is important. The stories run together based more on the idea that they can be shown live around the clock than by the significance of the story. A threat of war precedes or follows a swimming contest discussed with equal length and intensity. Investors will note that if The New York Times had jumped on the cable bandwagon, for example, with a CNN alternative, it would still be in financial trouble.
And yet, no hard falls. Yahoo Finance shows that HP generated over one hundred billion in revenue in 2014. According to Forbes, CNN garnered $725 million in subscription revenue last year from its presence on satellite and cable venues. The New York Times added three Pulitzer prizes this year, making its grand total 117.
So far, the myth is not doing well. Next month, we will do more searching on this challenging myth.
By Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.
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