Disney’s Alice in Wonderland: how important?

Despite tepid reviews (52% from Rotten Tomatoes) and questions about how well integrated the 3-D is into the plot, Disney’s Alice in Wonderland has turned out to be a big box office hit.  Out about two and a half weeks, Alice has been the #1 film in the US for the past three weekends.  It has grossed $265 million in the US so far and another $300 million abroad, according to Box Office Mojo.  This compares with estimated production costs of $200 million.  (This contrasts sharply with DIS’s previous major release last November of The Princess and the Frog, which grossed $104 million in the US and $160 million abroad vs. production costs of $105 million.  It’s now in DVD sales.)

There’s no easy way to go from movie revenues to movie profits, for two reasons:

–the division of profits among the various parties–producers, stars, distributors–can differ widely from film to film, and

–the studios use project accounting for films.  This means at the outset they estimate total revenue and total costs, and allocate each proportionately as the money comes in.  Marketing, for example, is a major expense that comes mostly during the theatrical release period.  If the studio estimates half the revenue will come from DVD sales (that would be very high in today’s world), then only half the total marketing expense would be allocated against box office.  If, in contrast, the studio said DVD revenues would be zero (another unrealistic assumption), then all the marketing costs would be allocated against box office.

It seems to me that the contribution to operating profits of Alice will be north of $200 million for this quarter.  It will be interesting to see what the actual number is.

Alice will be followed by Ironman 2, the most anticipated movie release of 2010, which will debut during the June quarter.  IM2 will likely creating another blockbuster operating profit result.

The big issue for the just-revamped Disney movie business is, of course, that neither film has much to do with the new film management.  Alice was put in the pipeline by the old regime, and IM2 was bought with Marvel Entertainment.

Nevertheless, I think some of the positive glow from these films will rub off on the rest of DIS.  Investors will be somewhat more willing to believe that Disney’s movie business is back on the right track.  And they’ll probably be willing to extrapolate any nascent signs of recovery in the theme park business more quickly than they would otherwise.

For now, that probably doesn’t translate into outperformance when the market is going up.  But it will likely mean some protection on the downside, therefore outperformance when the market is weak.

another SEC problem: first Madoff, now the Lehman case

Madoff vs. Lehman


By now, everyone is at least somewhat familiar with the extent of the SEC’s failure in not detecting the Bernie Madoff ponzi scheme, even after being handed damning evidence on a silver platter by whistleblower Harry Markopolos.

Probably just like any other present or past Wall Streeter, I find two aspects of the Madoff case particularly striking:

–Markopolos’ account of how little the SEC knows  (basically, nothing, in his view) about how the finance industry works, and how disinterested it was in either learning about the industry it is mandated to regulate or in doing its job of enforcing the rules

–Madoff’s comments on how easy it was to fool the SEC.  Auditors came in, asked a few questions and left without bothering to actually audit–that is, to verify the truth of Madoff’s answers.

From hearing Markopolos on Bloomberg radio during his book (No One Would Listen) tour, I came away with the impression that Markopolos is a very obsessive, prickly man with a more-than-healthy respect for his own intelligence.  Whether he was that way before his pursuit of Madoff, or because of it, is an open question.  But, if you wanted to be extra-generous to the SEC, you might think that he gave off a weirdness vibe when he (repeatedly) visited them, that worked against the case he was making.


Now comes Lehman, which is shaping up to be a carbon copy of the Madoff case.

I’ve already written about the bare bones of the Lehman case a few days ago.  Basically, SEC examiners were sent into the offices of the major investment banks, including Lehman, as the financial crisis was unfolding.  Their job was to monitor trading activities and identify liquidity or leverage problems.  According the the just-released report of the Lehman bankruptcy court, however, Lehman was, in effect, falsifying its financial accounts right under the SEC’s noses.

See my earlier post for more details, but in the simplest terms what Lehman did during the last year of its existence was to:

— borrow tens of billions of dollars right before its quarter ended,

–use the money to repay other debt,

but not show the new borrowings anywhere in its financials.

The result was that the company substantially understated its financial leverage in its reporting to shareholders and the SEC.

New information

1.  Initial reports indicated this accounting sleight of hand was being accomplished by shunting highly questionable transactions through Lehman’s London office.  This activity, and the associated “funny” accounting, was presumed to have the blessing of the British Financial Services Authority, the UK equivalent of the SEC.

To me at least, this seemed like another bad consequence of the UK’s “regulation lite” policies, which were aimed at building up the country’s financial services industry by  supervising companies’ activities less rigorously than was customary elsewhere.

It turns out, however, that this isn’t right.  The Financial Times reports that Lehman rendered a full and accurate account of these transactions to the FSA, using conventional accounting standards.  It reported both the cash received and the new borrowings.  It was only when Lehman gave its worldwide financials to shareholders and the SEC that it eliminated the new debt.

This sounds just like the Madoff ponzi scheme, where Madoff told the SEC one thing and foreign regulators another, in the hope no one would make a simple phone call to compare notes.  And, of course, no one did.

2.  It also turns out that Lehman used its dubious financials to bad-mouth other brokers, including Merrill Lynch, to the commercial banks who were lenders to both.  Merrill believed itself at a disadvantage.  It briefly considered mimicking the Lehman accounting technique but rejected the idea.  So Merrill called up the SEC–and the Federal Reserve–and reported what Lehman was doing. Apparently, both the Fed and the SEC–again, a lá Madoff–ignored what Merrill was saying.

3.  In what appears to me to be twisting the knife a little bit, JP Morgan Chase announced that it had at one time used an accounting treatment similar to Lehman’s for a small number of low-dollar-value transactions.

Morgan makes two points, in an implicit criticism of Lehman, the SEC and the auditors, Ernst & Young:

(1) it stopped doing so when Jamie Dimon, one of the few heroes of the financial meltdown, took over (read:  this was at best a dubious way to do business); and

(2) it disclosed the new borrowings in footnotes, as it believed accounting rules required it to do (read:  JPM thinks Lehman should have disclosed the new borrowings someplace, even with the accounting dodge it was using).

Where is the SEC?  When did it stop regulating the markets?

The SEC response

The SEC response to the newspaper accounts is reportedly that all the senior people assigned to Lehman have since left the agency–and, I guess, by implication they have nothing that they can investigate.

I don’t think this is a good enough answer.  Although the investigatory wheels are grinding extremely slowly, they do seem to be moving.  The Lehman bankruptcy report could easily, I imagine, lead to prosecution of Lehman’s top management.  This is something that I think the American public wants, given the enormity of the damage to the economy the financial crisis has done.

Given instances like Madoff and Lehman, investigation of the regulators can’t be far behind.  If the press depiction of the SEC inaction turns out to be substantially accurate–and the evidence seems very strong that it is–the most benign finding I can imagine is one of incompetence and negligence on a level that defies belief.

Of course, logically speaking, it may turn out that the situation with the SEC is not so benign–and is in fact far worse than that.  There’s no evidence of a darker side to the SEC as yet, however.  And in any event, the strength of Wall Street lies less in the SEC than in the basic honesty of the very large majority of market participants.

MGM Mirage’s choice: leave Atlantic City rather than sever ties with “unsuitable” Pansy Ho

Why the New Jersey Casino Control Commission is important

The New Jersey Casino Control Commission came into prominence as the most vigilant of the state government agencies overseeing legalized gambling in the Seventies, when Atlantic City was establishing itself as a gaming destination.

At that time investors generally avoided what publicly traded casino companies there were, fearing that the industry had associations with organized crime that would express themselves in money laundering, underreporting of profits or other illegal activities.   But the rigorous application process established by the Commission and the careful screening by its Enforcement Division were, I think, the main vehicles in reversing investor opinion to its present, casino-friendly state.

What it decided about MGM

MGM entered the Macau gambling market through joint venture.  The original concept was to have Stanley Ho as a partner, but even typically less rigorous US regulators voiced strong opposition, given Mr. Ho’s links with organized crime in Asia.  So the company decided to do a deal with Pansy Ho, one of Stanley Ho’s daughters, instead.

This change was enough to allow MGM to get the approval from Nevada regulators for the expansion into Macau–but not from New Jersey.

The local Trenton newspaper, the Trentonian, has a good summary of the New Jersey Casino Control Commission’s findings.  The 70+ page report from the Commission’s Division of Gaming Enforcement–released with the most sensitive data edited out–also has interesting information, although the reading is a bit tedious.

The Gaming Enforcement findings:

1.  Stanley Ho is “unsuitable” to hold a casino license in New Jersey because ” numerous governmental and regulatory agencies have referenced Stanley Ho’s associations with criminal enterprises, including permitting organized crime to operate and thrive within his casinos.” , and

2. “upon concluding that it could not partner with Stanley Ho or entities under his control, and without conducting adequate due diligence on her suitability, MGM simply substituted Pansy Ho as its joint venture partner despite her financial dependence upon Stanley Ho and his companies.”  In other words, Ms. Ho was little more than a figurehead representing her father’s interests.  In addition, the top management of MGM also seemingly “forgot” to supply the regulators or its own internal compliance department with negative suitability information they learned about Ms. Ho.

The Casino Control Commission’s decision

The Commission, in a decision rendered last May but just made public this week, told MGM to either sever its ties with Ms. Ho or it could no longer operate a casino in the state.

MGM’s response?

It has decided to sell its 50% interest in the Borgata casino and leave New Jersey.  I assume that this is a purely commercial decision–based on the idea that MGM’s Macau interests are more profitable and have better growth prospects than its Atlantic City holdings.

about Stanley Ho

He’s never been indicted for, or convicted of, any offense relating to his asserted underworld connections.  There’s no proof that he ever was, or is now, a triad member.  Of course, given Mr. Ho’s advanced age, initiation rites might have been three-quarters of a century ago.

It seems to me that this is a taboo subject among securities analysts in Hong Kong.  In twenty-five years of watching that market, I’ve never read an analyst report or met privately with an analyst where the subject of triad links ever came up.

On the other hand, gaming authorities in Australia, Singapore and the United States are convinced enough about Mr. Ho’s associations that they have made it clear that no one associated with Mr. Ho will receive a casino license.

In response to the release of the New Jersey report, Mr. Ho has denied any triad involvement.

Why, then, would MGM partner with the Ho family in Macau?

In the initial round of concession-granting, the Macau government selected Mr. Ho, the incumbent, plus WYNN and LVS.  MGM submitted an application but reportedly finished fifth.  One might reasonably defend this decision by pointing out that WYNN, a specialist in high-end gambling, and LVS, a specialist in conventions, both have more focussed skills than MGM.

In the second round of concession-granting, which involved sub-concessions being issued by the original three, MGM elected to partner with Mr. Ho rather than one of its Las Vegas rivals.  I imagine that MGM regarded this as purely a commercial decision to select the lesser of two evils, since Mr. Ho has no (and can have no) competing Las Vegas interests.  I disagree with the choice.

Investment implications: Continue reading

Who doesn’t like/want the internet?: an FCC survey

Chapter 9 of “America’s Plan,” which is how the FCC refers to its Connecting America plan in the body of the document that outlines the FCC strategy, is about internet adoption and utilization.

One of the key areas of focus for the FCC is trying to figure out who does not have broadband internet access at home, and why that is.  The agency bases its conclusions on a survey it conducted last fall about Americans’ use of technology.  In designing the survey, the FCC decided to place special emphasis on non-users of broadband at home.   Of 5,005 survey respondents, 2,334 did not have broadband access at home.

Connecting America doesn’t discuss the survey methodology, other than to say in a footnote that the sample size is too small to draw statistically valid conclusions.  The FCC draws conclusions anyway.

(In fairness, one should note that this is probably a fact of life in 21st century surveying.  The increasing sophistication of junk mail has meant that people simply throw away any mail that isn’t familiar.  People tend to embroider the truth when interviewed on the phone.  There’s no good way to figure a response rate for an internet survey.  And some segments of the population are notoriously difficult to sample effectively.  So what the FCC has, while not as rock solid as census data or exit polls, is likely as good as it gets.)

Here are the FCC results:

Who the non-users are

Demographic group————adoption rates at home

National average               65%

Asian Americans               67%

African Americans               59% 

Hispanics               49%

Rural Americans               50%

People with disabilities               42%

Income under $20,000/yr               40%

Americans 65+ years old               35%

Less educated/no high school degree               24%

So if you’re old, poor, have a disability and didn’t finish high school, chances are you don’t have broadband access at home.

Why non-users don’t have broadband

1.  The number one issue is cost, which is cited by about a third of non-users.  This may be the continuing expense of service (15% of nonusers), installation fees (9%), or having to buy a computer in the first place (10%).

2.  Lack of familiarity with computers or with the internet is the second issue, mentioned by 22% of the non-adopters.

3.  19% of non-adopters don’t find internet content particularly interesting or useful.  (I’m sure these people would change their minds if they could read this blog!)

Interestingly, non-users are not technophobes:  80% have satellite or cable TV, 70% have cellphones, and 42% have at least one working computer in their homes.  Among all survey respondents, 24% have disabilities, but 39% of the non-users have disabilities.  (I’m not sure what to make of this last sentence.  At the very least, it casts some doubt on the validity of the survey, since a 2002 Census Bureau study says only 18% of Americans have disabilities.)

What the FCC proposes

Three initiatives, one to address each of the three “barriers” to internet adoption:

1.  subsidize broadband internet service for low-income families, much in the way–and possibly using the same programs–the government currently subsidizes telephones service.

2.  launch a National Digital Literacy Program, with the aim of “training and outreach” in communities that have a lot of non-adopters.

3.  increase the relevance of the internet for non-users.  Government agencies that address non-user segments could require interaction through the internet.  Public and private groups can work with non-user segments to help them find relevant content on the internet.

I get it, sort of

I presume, although the report doesn’t say, that, other than the small group of non-users who think the internet is a “waste of time,” the rest have dialup.  So they have internet access, just not fast or user-friendly internet access.  Still, if you’re unemployed and looking for work, logging onto job sites, researching potential employers…can be a real pain in the neck with dialup.  So, too, can finishing a homework assignment for school–or getting a part-time job that requires computer/internet literacy.

Also, it may be the best approach politically to frame the broadband question as one of social justice, rather than of the competitiveness of US industry.

As well, the report makes it clear on almost every page that the FCC is going to do everything it can to speed the development of broadband internet.  So the bottom line for investors is to concentrate on finding winners from an impending wave of government action.

Still, the evangelism makes me a little uneasy.  I keep asking myself how the report would change if we substituted “reading material from ESPN.com” or “participating in Facebook” for adopting and using broadband internet.

We’d probably find the same community of non-users–older, poorer, less educated.  Then we’d be saying that the government should go into senior citizen or assisted living communities to teach the residents about the value in, and pleasure of, following sports statistics closely.  Maybe ESPN could be induced to offer discounted subscriptions to its premium content for low-income families, or persons over 65.  Suppose programs like this worked and non-users went from thinking that sports statistics are a waste of time to spending three hours a day trolling the various ESPN sites.  Would this be a good thing?

“Connecting America,” the FCC’s National Broadband Plan

Happy St. Patrick’s Day!!!

Connecting America

The FCC presented Connecting America:  the National Broadband Plan to Washington yesterday.   The report is the culmination of close to a year of work, mandated by Congress, of laying out a roadmap for government help in the development of broadband, both fixed and mobile, in the US over the next ten years.

remedial action

As almost any foreigner will cheerfully point out while visiting the US, the country is much closer to being the caboose of the broadband train than the locomotive.  As a result, a lot of what the FCC proposes is necessary for the US to catch up with the rest of the developed world–although, of course, that fact isn’t mentioned in the report.  On the other hand, some of the ideas proposed have already been tried elsewhere.  And the projections of economic benefits to be had from development of broadband, especially mobile broadband, are on surer ground than most economic forecasts, since they’ve already been realized elsewhere.

mobile broadband is the plan’s focus

The centerpiece of the plan is the goal of providing an additional 500 Megahertz of spectrum available for broadband over the next ten years.  A more immediate goal is to provide an extra 300 Mhz spectrum for mobile broadband over the next five years.

Of that latter figure, the FCC has 50 Mhz in inventory–meaning it has to find an additional 250 Mhz fairly quickly.  About half is envisioned to come from spectrum now licensed by over-the-air television.  More is supposed to come from getting government agencies (I think we’re supposed to understand that the FCC means the military) to free up unused, or very inefficiently used, spectrum for better social use.  Presidents have been asking Congress to allow this for the past ten years, though, without any success.

I’ll write more about the report’s findings in later posts.  For today, however, the main point I want to make is that the star of the FCC show is (and correctly so, I think) mobile broadband.

winners and losers Continue reading

A thought on Toyota’s current troubles

When I began to study the Japanese economy and stock market twenty-five years ago, a brokerage friend of around my age described his generation as having one foot in the samurai era and one foot in the modern world.  His father had bequeathed to him forty cypress trees to use to build a traditional home.  He thought the equivalent gift for his children would be an American college education, which he thought would give them over their Japan-educated peers.

True, that was a long time ago.  And, yes, twenty-and thirty-somethings reject large parts of the traditional Japanese culture.  But, on the other hand, there’s even a kind of nostalgia today in Japan for what might have been, had the black ships of Commodore Perry not arrived in Uraga harbor in 1853, triggering the demise of the Tokugawa shogunate and the restoration of imperial rule as part of a rush to incorporate advanced Western technology into the domestic economy.  In addition, managers in their fifties and sixties still do have a partial anchor in the traditional culture.

There are two important consequences of this cultural tie:

1.  much traditional Japanese discourse serves to communicate that the speaker understands his place in the social order.  Unlike the US, where the lightly regarded social butterfly can secretly be Zorro or Batman, in Japan the senior manager is exactly what his position proclaims him to be–older, wiser, more powerful, a sound decision maker.  The senior does not expect his views will be contradicted by a lower-level employee.  The junior will have a lot of psychological difficulty in conveying such dissonant information;  the senior will have trouble making it sink in that the junior might be right.

This inflexibility is not only an ailment of the pre-WWII zaibatsu conglomerates, like Mitsubishi or Mitsui.  High-level Sony executives, it seems to me, destroyed their first-class video game software business sometime between the PS1 and PS2 generations because the mostly North American game developers weren’t deferential enough.  Sounds crazy, but the two sides were too culturally different.

2.  “Stamp your feet loudly and walk through a wall of iron,” is a famous tenet from a samurai training manual.  It means that a warrior with a pure heart and the right martial spirit can overcome any obstacle, no matter that the laws of physics may say otherwise.  (Another way of putting it might be that any action, no matter how apparently foolish, is a better choice than no action at all.)  tradition invites the manager to think that he can will a part that doesn’t quite come up to specifications to perform as well as if it did.

I’ve seen numerous Japanese firms over the years that I regard as having competent, hard-working, honest managements put out flawed products.  #2 is the best explanation I can come up with for why.  Of course, it doesn’t hurt if information only flows easily in one direction, either.

Of course, Japan is not alone in having management foibles.  For example, where but in the US would a spiritual descendent of P T Barnum be able to Powerpoint his way to become CEO of a huge industrial conglomerate or a major commercial or investment bank, without having much idea of how the operations actually work?  Here such a person might put a cap on his career by becoming Secretary of the Treasury, as well.

Investment implication: Yes, there is one.  In Japan, go for counterculture companies, run by younger people–women, if possible.