If you haven't seen it, this takedown of Dell Computer is a little business classic.

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One of my former Wisconsin law students, Troy Vosseller, reports: "A friend and I recently competed in the Burrill Business Plan competition at UW and won!"

The business: Sky Vegetables. Pretty cool idea.

By the way, if you don't know Steve Burrill, for whom the Wisconsin competition is named, you can meet this amazing fellow through this podcast.  

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I grew up eating at The Cheesecake Factory, so I was somewhat disappointed when I heard that the Calabasas, California company had attained the dubious honor of making CalPERS' 2008 Focus List of underperforming companies.  They sell great cheesecake, but according to CalPERS, the company has underperformed its peers by 140.5 percent over the last 5 years.  CalPERS objects to the company's staggered board and supermajority voting requirements for certain bylaw amendments, and the pension fund has a pending shareholder proposal to eliminate its staggered boards.  The four other companies that made the list--all with staggered boards that CalPERS opposes--are:

Hilb Rogal & Hobbs, an insurance brokerage based in Glen Allen, VA;

Invacare, a healthcare equipment supplier from Elyria, OH; 

La-Z-Boy (remember The Price is Right?) of Monroe, Michigan; and

Standard Pacific, which sells household durables and homebuilding supplies, from Irvine, CA.

Interestingly, according to a 2007 report by Wilshire Associates, Focus List companies have annual excess returns of -13.3% below their respective benchmarks for the five years before CalPERS involvement, but enjoy positive annual excess returns averaging 12.2% in the five years following.  Perhaps there is an investment strategy here?  See Riskmetrics for additional commentary.

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Just in time for March Madness, Sneaker Wars has just come out, recounting the modest origins of the now-multinational multi-billion-dollar sports shoe industry.  I just happened to catch the book review in this morning's WSJ.   The story begins with the Dassler brothers' little Bavarian shoe factory, started during the thick of WWII.  Fraternal rivalry caused the brothers Adi and Rudi to part company in the late 1940s, when Rudi walked across the river to the other side of town--the medieval town of Herzogenaurach--to set up a competing factory.  Adi Dassler's shoe became, of course, Adidas.  Rudi developed the Puma brand.  Together, the rivaling brothers and their rival brands came to dominate the world sports shoe industry for decades.  Adi and Rudi pioneered what are today's standard marketing strategies for sporting goods and other consumer goods, giving away free shoes to athletes and later paying stars to wear the logo.   

It's a treat for me to read about the history of Adidas.  Anyone who played grade-school basketball in the 70s remembers the dominant basketball shoes--Converse All-Stars and the Adidas Superstar, with the latter gradually overtaking the former both in the pros and in the school yard.  According to Wikipedia, three quarters of all NBA players in the mid-70s were wearing the Superstar.  I remember well getting my first pair.  They were navy felt with white stripes (I know, I know . . . but remember, this was the 70s).  I was a mediocre basketball player at best, but at least the shoes looked cool.

The sports shoe industry took a big jolt in the mid-80s, when Phil Knight signed Michael Jordon for Nike and launched the Air Jordan, which became the best-selling basketball shoe ever.  Nike has dominated the U.S. market ever since, though Adidas and Puma appear to be making comebacks.  You can read about Adidas' recent comeback efforts with its signing of David Beckham in the Prologue to Sneaker Wars.

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Yesterday a number of the local news stations extensively covered the story of the Sharper Image bankruptcy, with particular emphasis on the fact that Sharper Image is no longer honoring gift cards as a result of its bankruptcy. The story not only appears to reflect a sign of toughening economic times, but also re-affirms some of the problems associated with gift cards.

To be sure, it is nothing new that when a company declares bankruptcy, many are left holding claims that have no hope of being satisfied. Now gift cardholders are a part of that “many.” Interestingly, rival store Brookstone is offering a 25% discount for anyone who makes an in-store purchase and turns in a Sharper Image gift card—regardless of the face value of the card. The discount may be more than some creditors ultimately receive.

Yet the Sharper Image story reflects an additional reason why gifts cards may not be the “perfect gift.” Indeed, we have blogged before about some of the problems associated with gift cards, including the fact that they often go unused or otherwise expire quickly. While legislators have sought to respond to these kinds of problems, it seems difficult for them to respond to the bankruptcy problem, even though it appears to reflect a significant amount of money left on the table. And as some news stories suggested, it is a problem that may be exacerbated during an economic downturn. Thus, one research firm predicts that shoppers could lose some $75 million this year as a result of gift cards that are not honored because of store closings. Indeed, given the booming business that gift cards represent for some companies, many news stories speculated about other companies that could find themselves in the same predicament as Sharper Image. For example, one station speculated about Barnes and Noble, which sells lots of gift cards and yet recently forecasted weaker than expected earnings for 2008. To be sure, Barnes and Nobles does not appear to be in danger of declaring bankruptcy, but it is something to keep in mind with respect to purchasing gift cards.

In the end, perhaps you need to research the financial solvency of a company before purchasing a gift card. At the very least, the Sharper Image story underscores the importance of using gift cards sooner rather than later. And since I have a number of Barnes and Nobles gift cards tucked away in various envelopes, I will be making a trip to the bookstore this weekend.

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Starbucks’ chief executive will be stepping down, replaced by the company’s chairman Howard Schulz.  This announcement comes in the midst of concern about Starbucks’ declining stock price, which has taken a hit over the last year.  Of course, with a Starbucks on virtually every corner and in many major stores, it seems hard to imagine that Starbucks isn’t or won’t always be king of the mountain. Indeed, Starbucks managed to make a lot of money not just by responding to the previously untapped market of consumers desiring to pay more for “good” coffee, but also by encouraging a market for various gourmet coffees and drinks from caffé mochas to chai tea.   So what seems to be the problem?

One of the issues is the very fact that there is a Starbucks on virtually every corner, a strategy that may have been too aggressive.  In fact, Starbucks is planning to slow down the number of new stores being opened and close some poorly performing stores.  Another problem is one related to its brand.  Even Schulz has acknowledged that part of the reason for Starbucks’ decline has been things liked bagged coffee and automatic espresso machines which may have served to water down the Starbucks’ brand and the Starbucks’ experience. 

But perhaps the biggest problem may be the increase in competition from companies, like Dunkin’ Donuts and McDonald’s, offering low cost alternatives.  The Wall Street Journal just reported that McDonald’s is installing coffee bars with “baristas” serving cappuccinos, lattes and similar drinks in nearly 14,000 of its US locations.   While these alternatives may not satisfy the most discerning coffee drinker (who incidentally may scorn even Starbucks), such alternatives may be perfectly suited to the consumer who wants the Starbucks-like experience without the price tag.  To be sure, the changes at the helm of Starbucks do not reflect the end of Starbucks, but they do suggest a weakening of the company’s influence.  Such weakening, in turn, suggests a need to re-evaluate the company’s business plan. 

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With the subprime mortgage meltdown, things are looking pretty bleak for many homeowners and consumers.  Bankruptcy is becoming a more common option.  As if things weren't bad enough, it turns out that the bankruptcy discharge ain't what it used to be.  In particular, creditors are routinely collecting on discharged debt.  Often illegally.  This much is not news.  But what is news is that the practice is sufficiently common that there is now an active market in discharged debt! 

Hounding debtors for repayment post-discharge, an age-old strategy, is clearly illegal.  Another device some creditors appear to be using is the failure to report to credit bureaus when debt has been discharged.  Eventually, the debtor may need to clean up her erroneous credit report to, say, qualify for a mortgage.  If the creditor and credit bureau are not responsive--a relatively common problem, according to some bankruptcy judges--the debtor may have no choice but to pay off the discharged debt. 

According to FTC opinion letters, creditors are required to report discharged accounts as zero balance.  But the legal force of those opinion letters is apparently ambiguous.  Some bankruptcy judges are holding that a lender's failure to update is an improper collection attempt in violation of the discharge.  In any event, the existence of an active market for discharged debt speaks volumes about creditor leverage in consumer credit.

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Having followed the company's goings-on over the past few months (here and here), I finally got a pair of Crocs a few weeks ago.  I guess my little vote of confidence didn't do much good.  Last Wednesday, Crocs stock lost 36% of its value, slicing about $2.2 BB off its market cap.  Ouch! (again).  Crocs had reported that its inventories had quadrupled from a year ago, and it failed to increase its quarterly earnings forecast as it had consistently done in the past.  Traders apparently read this as a sign of slowing growth.  Sales have grown from $24,000 in 2002 to an expected $820-$830 MM this year.  Before Wednesday's bath, Crocs stock had soared to six times its initial offer price from February 2006.  Wednesday night, Crocs' board approved a program to buy back as many as a million shares of its common stock (out of 82 million outstanding). 

Careful.  Crocs bite. 

[Clip art licensed from the Clip Art Gallery on DiscoverySchool.com.]

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According to the Washington Post, one car industry expert maintained that while the car sharing industry, in which both Flexcar and Zipcar are engaged, may not supplant the more traditional car rental market, it has developed a "little cult of users."  Both Flexcar and Zipcar, the nation’s two largest car-sharing firms, rent cars by the hour to people who are able to satisfy their environmental consciousness, while avoiding the expense of car ownership.  I must admit I never really thought this idea would take off.  It could be because I grew up in LA and cannot image getting around without owning a car.  Or maybe it is because the car sharing industry relies significantly on students, and hence I wonder about the wear and tear on the cars being shared.  Yet now that I think about it further, it seems that the car sharing industry is just a further extension of the leasing business model, whereby people are able to use cars without the expense and hassles of car ownership.  Indeed, the car sharing companies take care of gas and insurance.  And because relying on car sharing means you do not have to worry about where to park your car, it certainly makes sense for people who live in cities like DC where parking is scarce.  Of course neither of the two car sharing companies has managed to achieve profitability.  However, the two companies hope profitability is just around the corner, and hence plan to merge in order to establish one identifiable brand that offers a larger fleet of cars to share.  Experts predict that a larger fleet of cars will allow the company to achieve economies of scale and hence make more money.  I can imagine that offering a larger fleet of cars also provides certainty for customers regarding the availability of cars, thereby ensuring their commitment to the car sharing arrangement.  Since I am not personally aware of anyone I know actually participating in car sharing, it could be that this trend has simply passed by me.  Yet I can imagine that if the new company is successful in getting students to believe that car sharing is a viable and environmentally friendly alternative to car ownership, then there could be a core set of people committed to this industry and its business model.

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Before, I said Crocs rock.  Now, it turns out, Crocs bite.  Looks like kids, Crocs, and escalators don't mix.  It's gotten to the point, CNN notes, that:

One of the nation's largest subway systems -- the Washington Metro -- has even posted ads warning riders about wearing such shoes on its moving stairways. The ads feature a photo of a crocodile, though they don't mention Crocs by name.

Ouch!

Crocs says it's working with the Elevator Escalator Safety Foundation on public education initiatives, but that's apparently news to the foundation.

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Steve Jobs rents the Moscone Center, calls everyone in for the show, and then announces he's slashing the iPhone price $200 bucks and that Apple is gonna give the iPods iPhone interfaces.  Used to hearing more exciting claims from the CEO, the analysts slash Apple's stock value - mostly while Steve Jobs is talking.

Sometimes the hype machine can turn on you.  I liked the way Fake Steve Jobs described his thoughts before the presentation:

I have been up all night, energy coursing through my body. I'm totally electric. I'm vibrating at the frequency of the highest astral plane, thinking about what we are going to unleash upon the world on this day, September 5, 2007 -- a date that will live in history. Yes, it is big. It is huge. It is profound. But the words big and huge and profound are not sufficient to describe this event. No words, in fact, can contain the magnitude of today. Seismic? Still not big enough.

Well, it's tech after all, but the reaction to the stock did seem a little seismic, especially in speed.  But, then, I'm a lawyer; financial economists report during-the-announcement volatility is par for the course; or, more precisely that "prices react significantly to news over a 2 hour window on the announcement day."

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For some reason, a financial scandal doesn't excite me the way it does most people.  I guess I'm something of a cynic:  newspapers need to fill column-inches, TV networks need to fill airtime (oh, and law professors need to fill law journals and resumes).  At least to some extent, IMHO, financial scandals may be manufactured by media coverage.  Or if not manufactured, at least sensationalized.

So I've been following the mortgage crisis with only one eye.  But that one eye was caught by Gretchen Morgenstern's NYT piece two Sundays ago (sorry, I been busy), where she does something of an expose on Countrywide, the giant mortgage lender that has just been rescued by BofA. Her tagline for the piece is Countrywide's scripted pitch that it's getting "the best possible loan" for the customer.  She also echoes familiar outrages expressed about mortgage lenders and the mortgage crisis:

1.   Countrywide made risky subprime loans they should not have made.

    a.   subprime loan terms are unfair

    b.   Countrywide made too much money from subprime loans

2.   Countrywide is now getting its comeuppance, as subprime mortgage defaults are causing massive losses.

3.    securitization of mortgage debt is bad because it enables Countrywide and other mortgage lenders to lend irresponsibly and dish hidden problems to unsuspecting securities purchasers.

No doubt, the real estate downturn is causing much suffering for folks who are being hit with interest rate adjustments that can't meet.  How much of that is Countrywide's fault, though, I'm just not sure.

Subprime loans are surely risky, and according to Ms. Morgenstern's piece, 25% of Countrywide's subprime loans are now delinquent.  What this means also, though, is that 75% of Countrywide borrowers now own homes they would not have been able to buy if the subprime mortgage market had never emerged.  And without securitization to diversify the risk of these overly risky loans, lenders would not be making these loans, and many fewer folks would be homeowners.

Ms. Morgenstern points out objectionable loan terms--prepayment penalties, teaser interest rates, 100% financing, and loans requiring no supporting documentation of borrower income.  Each of these no doubt places risk on borrowers.  OTOH, each also makes it easier for a subprime borrower to get a loan.  I hate prepay penalties myself, but presumably the borrower gets a break on the interest rate in exchange for accepting the term, which gives the lender (and investors in mortgage-backed securities) some short-term protection from market-wide interest rate drops.  100% financing is also risky for both lender and borrower, but again, easy financing puts folks into homes they otherwise could not buy.  Moreover, each of these terms shows up in prime loans as well.  Are they inherently evil?

Countrywide made way too much money from these loans, according to the article, and now they're taking it on the chin.  The stock price is dropping and Countrywide had to draw down its bank credit line.  Again, I'm not sure how this counts as a criticism.  Countrywide took some risks by lending into the subprime market.  For a while, the risktaking paid off.  Now it turns out that delinquency rates are up, and Countrywide is smarting.  But that's how it goes, right?

Ms. Morgenstern also objects to smooth sale pitches, agents pushing home equity lines, high closing costs, and high appraisal costs, among other things.  We all hate these things, and perhaps Countrywide sale agents were pushier or slicker than most, but this is hardly expose material.

I don't want to minimize the human and financial toll of too-easy credit.  But I foresee Countrywide becoming the Wal-Mart of subprime mortgage lenders--condemned by being the biggest to also being the scapegoat.  Too much smoke just obscures the discussion of what ought to be done. 

Most observers seem to agree that market failure abounds in the subprime mortgage market (though I'm hardly an expert).  But regulating is tricky.  Though fraudulent representations to borrowers must surely be at least part of the story, even coming up with a definition of "predatory loan" is controversial.  As with Ms. Morgenstern's attack, many loan terms common in predatory loans also appear in prime loans. What about disclosure?   A whole raft of federal disclosure regulation already exists--perhaps too much?  Anyone who has bought a house is familiar with the raft of federal (as well as local) disclosure documents that accompany a mortgage.  Moreover, any regulatory approach should keep in mind that a lot of folks are (presumably) happy homeowners because of the availability of subprime mortgages.

Today's NYT discusses the plight of Maple Heights, a small town in Ohio because of slumping real estate values and foreclosures.  There, an advocacy group called East Side Organizing Project is helping homeowners renegotiate their mortgages.  Countrywide is in their cross hairs as well.  Besides protesting outside Countrywide offices, they've scattered plastic sharks on the lawns of Countrywide's regional managers.

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Are Crocs ugly?  There are websites devoted to their derision.   The proprietary resin ("NOT plastic NOR rubber") shoes have even won Ugly Shoe of the Year awards.  The company's stock, OTOH, has had a pretty good run since its IPO in early '06.  It IPO'd at 21; it closed Friday above 47.

Financial pundits have debated the staying power of the company and its Croslite (TM) clogs.  Now Crocs have finally made it to my Sunday morning reading via the NYT Magazine.  I tend to view this as something of a milestone.  Even if Crocs are just a fad, NYT coverage arguably elevates them to bona fide cultural phenomenon status.  So I wandered around the company's website for a little bit.  The quick history of the company goes like this:

Its (sic) all started when three Boulder, Colorado based founders decided to develop and market an innovative type of footwear called Crocs™ shoes.

Originally, Crocs were intended as a boating/outdoor shoe because of its slip-resistant, non-marking sole. By 2003 Crocs had become a bona-fide phenomenon, universally accepted as an all purpose shoe for comfort and fashion.

I also found out the originals now come in college colors, which for some reason I find endearing.  My kids wear the original ugly ones, too, as does just about every kid in their preschool and many of the parents.  So far my wife and I haven't succumbed (though for me, it's just been about finding my size in a color I can stand).  Probably a shoe and a company to watch.

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As your go to source for family business gossip, and lengthy Sunday profiles of business titans, I would be remiss if I didn't point you to the Post's excellent account of the 75-year-old Bill Marriott's increasingly permanent tenure as CEO of the eponymous hotel chain - one of the few actual businesses that started in the District of Columbia that didn't involve government contracts (the Marriotts began with one (1) root beer stand).  Marriott doesn't want to leave the job now.  I got the sense that he plans to die with his boots on.  But ... "There are other issues keeping Marriott behind his desk, the most personal and discomfiting being that nobody with the last name Marriott appears ready to succeed him."

It's a good analysis of a business dynasty and an interesting look in at a company that got to be a category leader by never, ever being cool.  Marriott, instead, excells at consistency.  I've never looked forward to a stay at a Marriott Courtyard - the company's most successful brand - but I've always been pleased to know pretty much exactly what I'll be getting.

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When Khaja M. Din approached me several years ago with an idea for creating an internet privacy and ID theft prevention solution, I was intrigued but skeptical. Many of the students who enroll in my Law & Entrepreneurship Seminar have nascent business ideas, and they rarely get beyond that. But Khaja was convinced that he was onto something big. He may be right.

Check out the a.K.a. Card. It is simple and ingenious. At the moment, however, it isn't cheap: $14.99/month. I haven't spoken with Khaja about this for awhile, but this looks like a company Citi or MBNA should buy so that they can bundle it with their existing cards.

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Ann discovered the charms of business histories on the road:

I adore [Paul] Orfalea, [founder of Kinko's,] who wrote a memoir called "Copy This! How I turned Dyslexia, ADHD, and 100 square feel into a company called Kinko's." He got me through the loneliest segment of that 1235 mile drive from Austin to Madison last month as I clicked the satellite radio over to C-Span and heard him giving a talk based on that memoir. What a wonderful, inspiring guy! Did you know Kinko's is called Kinko's because Ofalea was called Kinko because of his kinky hair.

As I have noted many times on this blog, I love business histories. When well done, they are both dramatic and instructive. With a recommendation like Ann's, Orfalea's book just went on my summer reading list.

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I confess to being a bit of a residential real estate voyeur. Like others of my ilk, I sometimes browse the real estate listings in my neighborhood or town just to get a sense of what’s out there. I’ve used Realtor.com and ZipRealty, among others. I’m still waiting for the internet to become the great equalizer for the consumer. Standard broker commissions haven’t gone down much, as far as I can tell, although fee-for-service arrangements appear to be more common, and DOJ is currently prosecuting an antitrust suit against the National Association of Realtors for its “blanket opt-out” rule, which enables traditional brokers to inhibit online brokers from providing complete MLS listings to their customers.

It was interesting to see Zillow, a relatively new real estate website, as the subject of a recent Fortune cover story. Zillow is trying to innovate, to go above and beyond the basic internet listing site. It is intensely data-focused, unlike most real estate sites. It aspires to collect and analyze lots of data on every house in the nation, in order to be able to offer accurate valuations across the board. The site collects publicly available information on each home, and also allows a homeowner to update existing information on her house. Zillow’s proprietary valuation algorithm calculates a “Zestimate” of the value of each home once enough data has been obtained. Apparently, much or most of the data used to Zestimate a house are publicly available.  It’s another nice example of the power of the internet to aggregate “small” information—lots of little bits of data, each piece of which may be useful to only a handful of people, such that collection, analysis, and dissemination just wouldn’t be cost-effective pre-internet. (See here for another example).

Zestimates are far from perfect, of course, and there are lots of parts of the country where Zestimates are either unavailable or way off. To its credit, Zillow gives statistics showing Zestimates coverage (as a percentage of all houses) in major metropolitan areas, as well as ratings and statistics on Zestimates’ accuracy in each market, including median error as a percentage of selling price and percentage of Zestimates within 10% of selling price. 

The site also has amazing “bird’s eye view” photos of houses from multiple perspectives. They’re taken from fairly close up—much better, say, than Google satellite photos. I can actually “walk” down the street of my childhood home, identifying each house on the street.  Another interesting innovation is the Make Me Move option, which allows a homeowner to effectively announce to the world the price at which she’d be willing to sell, without actually going to the trouble and cost of a formal listing. Potential buyers can email the owner via the website. I was a little surprised at how popular this Make Me Move tool is.  There are several hundred Make Me Move homes in Atlanta, and almost 70,000 nationwide.

Some of the navigation, especially map searching, seems less slick than other sites like ZipRealty. But Zillow seems to have an interesting approach to aggregating information about residential real estate.  Back in January '06, BW asked the question, Zillow.com:  How Scared Should Brokers Be? 

Worth a look.

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. . . ain't the hazard it used to be, at least not if you want to run Coca-Cola.  Coke just appointed Muhtar Kent as its president and COO, making him the No. 2 behind CEO Neville Isdell, as well as Isdell's likely successor.  Almost ten years have passed since Kent was fired from a senior position with Coca-Cola Amatil--a regional bottler based in Sydney--for shorting 100,000 of his own company's shares just hours before the company issued a serious profit warning that caused a drop of $2.5BB in the company's market cap, almost a 30% loss.  Kent had been managing director of the bottler's European division.  He apparently made about $324,000 from the sale.  After an investigation by the Austrialian Securities Commission, Kent coughed up the profits and another $30,000 to cover the costs of the investigation. 

This past October, Kent denied prior knowledge of the impending profit warning, calling it all a "bad coincidence."  The current official story from Coke is of the "dog ate my homework" variety:

Mr Kent was advised by his financial adviser to diversify his financial portfolio, which at the time consisted solely of KO stock and CCA stock options. . . . He accepted the proposal and left it to the financial adviser to execute. In doing so, he did not fully understand that it would involve a short sale or the elements of a short sale. As a result, he also did not know the specific timing of the transaction.

So he didn't know about the impending profit warning.   And he didn't know about the impending short.  Hmmm . . .  Sorta sounds like Martha Stewart's oral stop loss order.  I'm also not sure how short-selling diversifies his portfolio.  And why was he shorting his own company anyway??  When Kent was made president of Coca-Cola international in January, less than a year after rejoining Coca-Cola, it made Colin Barr's The Five Dumbest Things on Wall Street This Week at TheStreet.com.  Or you can watch the video.

In any event, CEO Isdell (declining to be interviewed) recently issued a written statement:  "Without doubt, Muhtar is a man of the highest integrity and deepest skills."

When Coke sneezes, Emory catches a cold.  So we tend to follow our local benefactor quite closely.

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Yesterday I was preparing to teach my first bankruptcy class of the semester, reviewing the Fair Credit Reporting Act.  And then last night at a parent conference for my sons' preschool, I ran into another parent who gave me an education about a new niche business related to credit reporting.  An Alanta startup called RentBureau collects tenants' apartment rent payment history for use not only by landlords to evaluate prospective tenants, but also for incorporation by the credit reporting agencies into their scoring models.  The business model seemed interesting to me:  RentBureau collects the information from owners and property managers and makes the entire database available to its reporting members.  So members have good incentives not to free ride re reporting.  Selling the information to the credit reporting agencies is in the offing as I understand.  Transunion also recently announced the creation of RentBridge, its own rent payment history database.  See also the report of consumeraffairs.com.

Just for fun, I googled a little to see what comparable firms were out there.  I found RentREPORTERS and RentReporting, which take a different approach.  They solicit applications from renters, pitching themselves as a free service that enables renters to get their good payment history into their credit reports to improve their credit scores.  This model seems to cast the firm as an information aggregator that puts renters and the credit reporting agencies together, whereas RentBureau gathers the information from the landlords' end.  I have no idea which model works best (or even details of exactly where the revenues come from).  Are there information privacy issues?  What's interesting to me is this new enterprise geared to filling information gaps in consumer credit scoring models.

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Freeload Press has a catchy name. Their tagline is "Liberating the Textbook." Their marketing pitch:

Students spend an average of $900 per year on textbooks.

We propose they spend $0.

The secret sauce: advertising. Their e-books, which come with embedded ads, are provided without charge. Paperback versions are available in two flavors -- ads and no ads -- with differential pricing.

I registered and tried to download a finance book, but was unsuccessful. When I returned to the site, I was asked to register again. Forget it. I get the concept, and it doesn't appeal to me. "Burdening the Textbook" is more like it. But I freely admit that am a snob about advertising. (You will notice that we do not accept ads on Conglomerate.)

That said, this is probably an inevitable development. Students are a captive audience, and 20 years from now, I suspect that our textbooks will look more like People magazine than Prosser on Torts.

Also, for students with limited means, this idea would be a very welcome development. Unfortunately for those students, Freeload has only a handful of titles, and the current lack of execution on the website does not bode well for the long-term prospects of the company.

HT David Wood.

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Joe Francis has found his niche in porn, and Claire Hoffman of the LA Times has a fascinating, albeit disturbing, expose on Francis and his company. The story begins with Francis assaulting Hoffman and screaming, "You don't care about the 1st Amendment. I care about the 1st Amendment, but you are the kind of reporter who doesn't care."

Hoffman also describes the tactics Francis uses to recruit the women in his videos:

Tonight we had spent almost five hours in a sweaty nightclub, crowded with 2,500 very young and very drunk people. Clubs like this are fertile fields for Francis. He's made a fortune selling videos of women who agree to flash their breasts and French-kiss their friends for the cameras. In exchange, a girl who goes wild will receive a T-shirt, a pair of panties, maybe a trucker hat. It had been a typical night for him. He'd scoured the club, recruiting young and, for the most part, intoxicated women.

As you would expect, this strategy comes with some built-in legal hazards:

It seems like Francis spends a lot of money on lawyers. I guess that comes with the territory of filming strangers who take off their clothes. More than a dozen women have sued him, alleging that his company used images of them exposing their bodies on "Girls Gone Wild" videos, box covers and infomercials without their permission. Only a few have convinced the courts that they were unwitting victims. For the most part, judges and juries have sided with Francis' 1st Amendment argument that the plaintiffs' images were captured in public places and that the company was free to use them as it pleased, particularly in light of the fact that the women had signed waivers.

The story is long and describes the day's activities in great detail, including an incident in which one of Francis' recruits claims that Francis forced himself on her. The woman stated, "I told him it hurt, and he kept doing it. And I keep telling him it hurts. I said, 'No' twice in the beginning, and during I started saying, 'Oh, my god, it hurts.' I kept telling him it hurt, but he kept going, and he said he was sorry but kissed me so I wouldn't keep talking."

Much of my life is spent studying entrepreneurs, and I admire many of them. I find nothing admirable about Joe Francis.

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This cover and its accompanying story have been getting a lot of play on the blogs ...

Check out Jason at 37signals, Scott at Wordyard, Mike at 9rules, and Paul at Infectious Greed ... in decreasing order of outrage.

The problem is that Kevin Rose has not made $60 million from Digg. Not even close.

Where did BW get that number? The article contains these sentences: "So far, Digg is breaking even on an estimated $3 million annually in revenues. Nonetheless, people in the know say Digg is easily worth $200 million." Add this sentence: "Rose ... owns 30% to 40% of the company (he won't specify)." And voila! You get $60 million! (Or $80 million! Why not $80 million on the cover? Were they really trying to be conservative?)

Well, if the point was to get me to read the article, it worked.

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W$J headline: "Big Three Restructuring Hits Minority Suppliers"

How much longer before we stop using "Big Three" to describe Ford, GM, and Chrysler?

Big? Consider this:

Last week, for the first time, Japanese auto companies said they were now selling more vehicles outside Japan than at home — the bulk in the United States. What’s more, Japan’s biggest automaker, Toyota, upset Ford for second place in the American market in July and reported a huge rise in profits for the quarter. Many analysts predict that Toyota will overtake first-place General Motors in global sales this year.

Three? With Dr. Z spreading "auf wiedersehens" across the U.S., it's hard to imagine that "Chrysler Group" will remain an American icon for long.

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Last fall I criticized the Toyota Prius for its gutlessness ("The first move feels like a golf cart, with only a bit more power"). Today, I discovered an electric car with some oomph! The Tesla Roadster! I could handle the stigma of a "midlife crisis," but I can't afford the $100,000 sticker.

Tesla is headed by Martin Eberhard, the entrepreneur who brought us Rocket eBooks. (Do you remember those? I do.) Tesla was founded on July 1, 2003 and is based in San Carlos, California, though the cars are manufactured in England. WaPo has the scoop on future plans:

Tesla Motors started taking orders for the car this week, though a publicist would not say how many customers the company has signed up. The first production models should be delivered next year, he said. A sedan is also on the drawing board, tentatively scheduled for an appearance in 2008.

Tesla has plans to open sales locations in Los Angeles and San Francisco this year, and in Chicago, New York and Miami by the end of 2007. Buyers outside those areas will be charged a $10,000 out-of-service-area premium to cover costs for transporting the vehicle for servicing during the life of the car.

Only 10 Tesla Roadsters have been built so far. Four are on the West Coast, to charm prospective buyers there, and the other six are in Britain and scheduled for use in safety tests.

The company launched a blog earlier this week. I don't know if these cars will sell, but if they don't, it won't be for lack of marketing prowess. Coming out with an electric sports car seems like a brilliant move to me.

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CNN/Money has a short interview with Bill Amelio, the American CEO of Lenovo, who formerly ran Dell's Asia operations.  Among other things, he discusses the perception and reality of Lenovo's Chinese-ness and how to compete with Dell.  Best quote, with which he explains that his current residency in Singapore will end when his wife says it's time to go:  "Happy wife, happy life."  (It sort of sounds like a traditional Chinese aphorism, but if it were, it wouldn't have the same nice rhyming in Chinese.)

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One of my students pointed me in the direction of a young company called meebo.com, which allows users to log on to an instant message account without having to down-load the software. I am not a big user of instant messaging, but I can see why people would love this service when they are not on their own computer.

More interesting to me is that meebo has a blog, in which the founders are chronicling the development of their company, including their search for venture capital funding (see here, here, and here). Nice story.

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After having its bonds downgraded again yesterday, GM shares are free falling today. According to S&P's credit analyst, "We're saying bankruptcy is more of a possibility than had seemed to be the case previously given the deterioration in their business prospects and their financial condition."

In my post on GM last week, I noted that its executives were not suffering from an incentive deficit. Instead, they are facing competitive and structural obstacles that may be insurmountable. The big question now on everyone's mind: will a new line of SUVs and trucks to be introduced in the spring save GM?

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In retailing, "Black Friday" refers to the day after Thanksgiving, when most retailers finally become profitable. (Best Buy and certain other retailers refer to the day as "Green Friday" because of the money generated on that day.) According to the W$J, "shoppers turned out in sometimes-frenzied droves."

After returning from an early-morning excursion to Best Buy, my wife reported that the customers who snapped up the deeply discounted Toshiba L25-S1192 laptops ("doorbusters") were mostly men in their 20s, who had camped out at the store beginning at 9:30 pm on Thanksgiving Day. Even more surprising, there was talk among this group of listing their purchases on eBay.

So I checked it out, and eBay has over 50 listings for that laptop, all posted on November 25. Best Buy's price was $379.99, and many of the listed laptops have already cleared that price. According to the NYT, many of the doorbusters are sold below cost. The volume of eBay listings doesn't seem particularly large, given the number of laptops sold by Best Buy, but I wonder whether this sort of "professional" activity will discourage shoppers like my wife from sacrificing sleep and ultimately lead to a change in the way that stores lure customers on the day after Thanksgiving.

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The W$J is reporting that Idaho grocer Albertsons Inc. is up for sale, and it appears that the most likely buyers are private equity firms, who are keen on Albertsons' real estate holdings. After driving Kmart to its knees, Wal-Mart is now doing the same to traditional grocery chains. According to the report in the W$J, "Wal-Mart and other discounters are grabbing the bottom of the market, while Whole Foods Market Inc. and other upscale chains siphon off a small but lucrative batch of customers at the top."

This is a good thing for consumers. Wal-Mart bested Kmart through superior performance, and it is doing the same thing in the grocery business. Look at this report from February 2004:

Most retailers pull in sales data from their "point-of-sale system"—once known as cash registers—at the end of the day or twice a day. Wal-Mart pulls in sales from its electronic registers every 15 minutes. By 4 a.m. each morning, suppliers can see how their products sold the day before in every Wal-Mart store around the globe. [S]ome suppliers are also allowed to see what other products were purchased by the consumer along with their own. The system is anchored by a Teradata warehouse that stores 200 trillion numbers and letters—the largest digital library of any company in the world.

And Wal-Mart never stands still. It is pressing ahead with what it believes will be its next big advantage, radio-frequency identification technology. All suppliers will be required to put radio tags containing electronic product codes on pallets and cases by the end of 2006.

As a result, Wal-Mart has been able to continually lower prices in the grocery aisles while maintaining a consistent profit margin. It's a recipe that could spell disaster for Albertsons.

Prescient.

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Many of the camps in the Philmont backcountry are remote, and the young men and women who staff them are deprived of movies, restaurants, and many of the other trappings of modern culture (though I did notice a fair number of volumes of Harry Potter and the Half-blood Prince). Those who staff the backcountry camps work nine days, then take three days off. I asked one of them what he did with his days off, and the first thing he mentioned was visiting the nearest Wal-mart in Taos, New Mexico. What did he do there? Mostly just hung out, munched at the snack bar, and looked for new music.

When I mentioned this to one of my fellow campers from Arkansas, he told me that he recently had a first date that consisted of roaming around the local Wal-mart Super Center. He denied responsibility, saying that his date has suggested it. At least he could see the humor in it.

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I flew Southwest Airlines last month and was amazed at how nice the experience was.  The seats were wider and had more leg room than the usual seats at American and United.  Today's Wall Street Journal gives me another reason to admire Southwest: if I was as smart as its executives are, I'd only be paying $1.19 a gallon for gas.

The Journal article reports Southwest had 41% higher earnings in 2005's second quarter compared to the second quarter last year.  This increase was helped out considerably by a hedging program that lowers the airline's fuel costs: "...Wall Street's focus remains on Southwest's ability to fight off the crippling effects of high oil prices with financial contracts that have essentially locked in lower fuel prices for the airline while its competitors groan under heavier costs. Though oil prices topped $60 a barrel in the quarter, Southwest has secured financial hedges that limit 85% of its fuel costs during the year to an equivalent average oil price of $26 a barrel."  If 85% of my gas costs were at less than half the going rate I'd be paying $1.19 a gallon (based on my last purchase at $2.29 a gallon).

The hedging strategy saved Southwest almost $200 million in fuel costs; while competitors saw fuel costs rise 50%, Southwest's fuel costs only rose 25%.  This was on top of an 8% decrease in non-fuel expenses per seat-mile flown.  Cost management like this (and nice seats!) is one reason Southwest has a market cap of $11 billion: that's more than the combined market cap of American, Delta, United, Continental, and Northwest (you'd need to throw in JetBlue and British Airways as well to get to Southwest's market value).

(And to keep gas prices in perspective: I remember the early 80's when gas cost $3.00 a gallon in 2005 dollars AND I'm aware that pumping crude oil out of semi-war zones, transporting it half way around the world, refining it in complex and dangerous refineries, shipping it to my neighborhood, and aggresively taxing the sale still results in a product cheaper than the bottle of water one of my colleagues bought at lunch today--less than a mile from Lake Michigan.)

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Apple reported yesterday that its net quarterly income rose to $320M, from $67M in 2004, drawing on another jump in iPod sales.  As the company noted, computer sales also rose to a four year high. According to an analyst who conducted a "survey of 1,400 consumers", there was evidence of a "documentable halo effect," from iPod to Mac computer sales.

I can offer anecdotal evidence for the effect, as an enthusiastic new iPod mini and iMac owner.  My first iPod, bought two years ago, reminded me of Apple's wonderful ability to make relatively glitch free technology. (I had owned a Mac way back in college, but gave up the cult years ago.)  When I was choosing a new computer, last fall, my iPod experiences made much more open to buying an iMac.  And, recently, I upgraded to the iPod Mini (green! engraved!) based on my happy experience with Apple products.  In terms of accessories for the iPod, I shop exclusively at the Apple store, believing (with some evidence to the contrary) that Apple imposes some kind of quality control standards on their merchants.

Can anyone think of other examples of a halo effect from an essentially tangential product line bringing back a moribund central business?  Off the top of my head, I can only think of fashion/shoe examples, but nothing else in the consumer electronics industry.

Is all of this evidence that Apple has a chance to come all the way back from its disastrously bad decision not to license its products in the 1980s?  Not a chance.

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As the self-appointed archivist of the Hurt-Stancil family, I spend a lot of time (and money) taking pictures and creating scrapbooks.  For three years now, I've been uploading my photos onto Shutterfly.com and having the pictures printed and sent to me.  I have approximately 3500-4000 photos uploaded onto their system in 76 different "albums."  Over the years, the prepaid price per 4 x 6 print has dropped from 29 cents incrementally down to 19 cents, staying in line with its competitors.  As I mentioned before, one of Shutterfly's competitors, Snapfish.com, was recently bought by HP.  About a month ago, after the acquisition, Snapfish announced that prepaid 4 x 6 prints were 10 cents.  (Individual prints are only 12 cents, compared with Shutterfly's individual price of 29 cents.)  I have been waiting for Shutterfly to reciprocate by lowering prices at least a few cents, but so far Shutterfly is standing firm at 19 cents.

Over the weekend, Shutterfly upgraded the service to make it more user-friendly and added some bells and whistles.  I don't want bells and whistles.  I want 10 cent prints.  (I figured out that this year I could have saved $400 at 10 cents a print.)  I'm not sure if Shutterfly is counting on path dependence to keep customers at their site or their new user-friendly features, but I'm wavering.

So why is Shutterfly (a privately-held company with about seven investors, including Texas Instruments) not budging?  Can they not afford to cut their margins on prepaid prints?  Do they think that Snapfish will not be able to stay at 10 cents forever?  Is HP taking a loss on prepaid prints to try to drive Shutterfly out of business or make them lose money?  We've been discussing lately some of the phantom synergies of conglomerates, but one type of financial synergy that conglomerates possess is the ability to use one division to subsidize another division to achieve a particular goal.

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Earlier this week, my family switched mobile telephone providers. We left Nextel in favor of Verizon. We considered Cingular -- I like the rollover minutes -- but Verizon gets better reviews, and we have some friends who already use Verizon, which is important because network calls are not counted against plan minutes. Cingular advertises its "50 million lines and counting," but Verizon is close behind with 43.5 million. Of course, what really matters is not the total number of customers, but the number of customers within my circle of contacts, and in that circle, Verizon is king.

Now, I wouldn't have written about this at all but for the extraordinary experience I have had with Verizon people. It started with my first conversation at the Verizion booth in the mall. As I explained to the Verizon rep that I was thinking about switching from Nextel, the woman next to me interrupted her own conversation and then mine to say, "You won't regret it. Verizon is wonderful!"

"A plant?" I inquried with my rep, who chuckled, then took off to collect various bits of propoganda. Within 15 minutes, I had settled on a plan and was inquiring after phones. We ended up with four of this one, but as I was getting the grand tour, another Verizon customer tapped me on the shoulder and said, "These guys are great." This was getting strange.

As my Verizon rep (Rob Lewis) rang up my order, we struck up a more personal conversation. If this were New York or LA, Rob would probably be an aspiring actor or writer. In Madison, aspiring PhDs take these jobs. Rob is ABD in History, and he is writing a dissertation on the history of stadia, which turns out to me more interesting than it sounds. (Sort of a cross between sports history and urban development.) Anyway, his girlfriend is the daughter of the former dean of Lewis & Clark Law School, and she is headed for law school next year. Rob said that just that morning she had been speaking with my good friend Jim Huffman, current dean at Lewis & Clark Law School. At this point, I am starting to wonder if this is The Truman Show, only with me as the star.

Since acquiring the phones earlier this week, I have had various occasions to call Verizon customer service. Nothing that would reflect badly on Verizon -- Nextel delayed in releasing one of my old numbers and I have had several questions about restrictions on my calling plan. Each customer service call has been an unbelievably pleasant experience as the Verizon reps tripped over themselves to be helpful. I'm not sure how they do it, but Verizon is doing something right.

And just in case you're wondering, I am not a BzzAgent for Verizon.

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John Burke of Trek offered the keynote address to the Burrill Competition this afternoon. He discussed Trek's Corporate Values, which I didn't write down and don't remember, but he is a very entertaining guy. He said he got his start in business selling golf balls that he had retrieved in a lake, which is exactly what I did as a youth. Though I use most of the balls that I found, rather than selling them. Maybe that's why I am a professor and he is leading of the hottest bicycle company going. Well, that and the fact that his father founded Trek and my father was an electrician.

He said he asks two questions every time he interviews someone for employment:

(1) "What has made you successful in life?" The implicit assumption of success looms large there. If your answer is, "I haven't been successful so far," I suppose you had better move on.

(2) "If you could have anyone for dinner tonight -- alive or dead -- who would you choose?" Well, I can tell you right now that I am not going to invite any dead people. Unless they have been resurrected, in which case I want all four to be formerly dead. (By the way, someone in the audience asked John whom he would invite, and he didn't have an answer! He eventually ventured "The Pope," by which I understood him to mean John Paul II. After more hesitation, he suggested FDR -- probably because he has been seeing endless commercials for the new documentary on the History Channel -- and Winston Churchill. He couldn't come up with a fourth on short notice.)

Before the talk, Christine emailed me this: "Could you tell the CEO of Trek that I might buy a $100 kids bike if they made unisex kids bikes?  I can't get my daughter to buy a red bike with flames, and I don't think I could hand down a purple bike with silver glitter." Well, I ended up having quite a conversation with John (mostly about the Tour de France and the Pope, who apparently never rode the Tour), so I passed Christine's request along (sans glitter detail). John said no unisex bikes were in the offing at Trek because they don't fit well. Girls bikes don't fit boys, and boys bikes don't fit girls. I'll take his work for that, even though I have no idea why.

Finally, I was interested to hear how much of his success he attributes to management books. His favorite: Good to Great.

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Almost everyone in Madison who flies regularly has sworn off United Airlines. Add me to the list, once and for all. When I moved to Madison, I switched my loyalties to Northwest, but I needed a late flight from San Francisco on Saturday, and United was the only airline leaving SF for Madison after about noon.

The main complaint against United in Madison is that they frequently cancel flights from O'Hare to Madison, leaving weary travelers stranded just two hours from home. So I took the precaution of routing my trip through Denver. What is disaster!

As you may know, the weather on Wednesday was snowy throughout the U.S., and Denver was hit hard. As far as I can tell, however, my problems were mostly unrelated to weather. Two of my United planes experienced mechanical problems in Denver, resulting in an seven-hour delay. Then, on the trip home, my plane in San Francisco had mechanical problems. Two more hours of delay, a missed connection in Denver, and a night at the beautiful DoubleTree Inn, somewhere between the Denver Airport and the city. The only compensation was that my friend Russell Hakes was in the same predicament, so we had dinner together. (The funniest part of the dinner: when we asked the waiter to confirm that Rocky Mountain Oysters, which were on the menu, were really what we thought they were. We were right. Yuck!)

By the way, it appears that I was not the only one delayed by United on my way to AALS.

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As regular readers of this blog know, I am a frequent visitor to Whole Foods. Mostly for cheese, but also for an occasional baguette, spinich and artichoke dip, or ground veal. I never buy staples -- like milk, sugar, flour, etc. -- at Whole Foods. I also rarely buy my produce there. (The organic thing has just not hit the Smith radar, yet, and organic produce is more expensive than the artificially poisoned varieties.) The Financial Times featured Whole Foods in a story over the weekend, which reveals the company's expansion plans. First stop: London. Followed by France, Germany, the Netherlands and Italy.

The story had a few other tidbits of interest ...

Two things I didn't know about Whole Foods:

1. "Whole Foods' latest growth phase will challenge its policy of using existing staff to fill a quarter of the initial staffing at new stores. 'To get the management and leadership is the biggest challenge,' says Mr Mackey. 'Whole Foods has never really recruited [managers with a business background] before, but I believe that we're going to have to start.'"

2. "Whole Foods, like Wal-Mart, is non-unionised. Mr Mackey - the classic trail-hiking, yoga practising, vegetarian capitalist - attributes this to a desire to avoid confrontational management. The stance has drawn fire from labour groups, but it has given the company a cost advantage in an industry where relations have been strained in recent years and where rivals such as Kroger are still recovering from damaging strikes."

And one thing that I had guessed:

Mr Mackey preaches an avowedly stakeholder culture, with customers and staff ranking ahead of shareholders. To reflect this philosophy, which he is to incorporate in a book, Mr Mackey has accepted that his salary is tied to a multiple of 14 times the level of the lowest paid employee - an interesting benchmark for a company hovering on the edge of the Fortune 500.

His stance on investors is avowedly unconventional. He unashamedly places shareholders third in the hierarchy of interested groups - after customers and employees - and he has shied away from calls to target gross margins at the expense of expansion.

The logic, he suggests, is compelling. "The best way to maximise shareholder value is not to shoot for it directly: if you go out to be happy, you probably won't be," says Mr Mackey. "I think the way Whole Foods does it is going to be the way everyone does it in 20 years."

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eBay's online auction is a great idea, but even great ideas have their limits, and it looks like eBay has reached the boundaries of the core auction idea. eBay announced yesterday that it was acquiring Rent.com for $415 million. (W$J) The price is about 10 times expected revenue for 2004. Earlier this year, eBay acquired craigslist, another online rental company. eBay claims that these businesses have a "complementary business model" to eBay's, but I don't see it. To me it looks like eBay is casting around for a new growth market, and this is what they found. Unfortunately, the new businesses are not well situated to add much growth. We are talking about classified ads here!

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IBM is selling it's PC business. Possibly to Lenovo, China's largest PC manufacturer.

I haven't owned an IBM PC for a long time, but I "grew up" -- at least in computer terms -- on IBMs. As I said, I was introduced to PCs in 1981, when I learned word processing (on WordPerfect) and some BASIC programming. Those computers belonged to BYU.

The