Monthly Archives: November 2010

insider trading, hedge funds, expert networks and skilled securities analysis (ll)

November 24, 2010 By in Current Market Thoughts, hedge funds, insider trading, soft dollars Tags: , , , , Leave a comment

In yesterday’s post, I wrote about what insider trading and expert networks are.

Why have expert networks flowered over the past decade and been especially favored by hedge funds?

hedge funds

When I started working in the stock market in 1978, it was common for both brokerage houses and large institutional investors in the US to have extensive staffs of analysts.

As the sell side continued to rebuild itself and improve its analytic capabilities after the 1973-74 recession, buy side firms worked out that they could save money by shrinking their own staffs and rely on brokerage house research instead.  Better still, from their point of view, they could pay for access to the brokers’ analysts through commission dollars (“soft dollars”), a tab picked up by money management clients, rather than paying analysts’ salaries out of the management fees clients paid them.

Control of brokerage firms gradually passed into the hands of traders, who regard research as a cost center that produces no profits.  They did what seemed the obvious thing to do and began to lay off analysts.  During the Great Recession of 2008-2009 the steady trickle of layoffs became a torrent–and gutted the major brokers’ analysis capabilities, particularly in equities.

The professional disease of analysts is that they analyze everything, including their own jobs.  Senior people have long known that they’re vulnerable in a downturn, especially since they all are compelled to have assistants who earn a small fraction of what they do–and who can sub for them in a pinch.  Their response?  –in many cases, the senior people hire assistants who look good in business attire and can present well to clients, but who have limited analytic abilities.  As far as I can see, this defense mechanism protected no one during the fierce downturn recently ended.  It may be harsh to say, but “place holder” assistants may be all that’s left in some research departments.

If the cupboard is pretty bare in brokerage house research departments, do hedge funds build their own?

Some have.  But–and this could be nothing by my own bias–a lot of hedge funds are run by former brokerage house bond traders.   Traders and analysts are like the athletes and the nerds in high school.  Very different mindsets.  So hedge funds that are run by traders, and that have a trading orientation, don’t have the temperament or the skills, in my opinion, to build research functions of their own.  They also want information that’s focused strongly on the very short term.  (Is it a coincidence that the subjects of the recent FBi raids are all run by former bond traders?)

They can’t get it from brokers.  They can get it from independent boutique analysts.  But were better to get information about, say, the upcoming quarter for Cisco than from a Cisco employee visiting as part of an expert network.

securities analysis

I wrote yesterday about the immense amount of information publicly available to a securities analyst.  In the US, companies are required to make extensive SEC filings, in which they report on the competitive environment, the course of their own business and the state of their finances.  Some firms hold annual analysts’ and reporters’ meetings–sometimes lasting several days–in which they try to explain their firms in greater detail.  There are trade shows, brokerage house conferences on various industries and–in many cases–specialized blogs that discuss industries and firms.  Publicly traded suppliers, customers and the firms themselves hold quarterly conference calls, in which they discuss their industries and their results.  The internet allows you to reach competitor firms around the world.

Companies also have investor relations and media departments that provide even more information for those who care to call.  Many times these departments also organize periodic trips to major investment centers to meet with large shareholders and/or with large institutional investors.  The talking points for these trips are scripted in advance.   My experience is that the company representatives attempt to create the impression that questioners in the audience have penetrating insights and are forcing the company to answer tough, and unusual, questions.  And people on my side of the table are usually more than happy to believe that this is true.  But in reality the companies tell basically the same things to everyone.

Still, the idea that anyone who obtains inside information is “infected” by it and becomes a temporary or constructive insider as a result has made profound changes, I think, in the way companies and analysts interact.

Let me offer two examples:

1.  In my early years, I ended up covering a lot of smaller, semi-broken companies that senior analysts didn’t want.  It’t actually a great way to learn.  Anyway, I had been talking regularly for about a year with the CEO of a tiny consumer firm that was flirting with bankruptcy.  This CEO was understandably downbeat and our talks were rather depressing.

Then rumors began to circulate that a Japanese firm was interested in buying the firm at a high price (in reality, anything greater than zero would have been a high price).  I called the CEO a couple of days later to prepare for my next report.  He was very cheerful, didn’t have a care in the world, actually joked his way through my questions.  I didn’t need to ask about the potential takeover.  His whole demeanor told me that the rumors were true.

Did I have inside information?  Twenty years ago, the answer would have been no.  I was just a skilled interviewer drawing inferences from the conversation.  Today, I don’t  know.  I suspect the answer is yes.

2.  I’m in a breakout session with the CFO of a company which has just presented at a brokerage house conference and is answering follow-up questions from analysts in a smaller room.  Someone raises his hand and says that for a number of reasons he thinks this quarter the firm will miss the earnings number it has guided analysts to.  He requests a comment.  Most people know the questioner–or at least can read his name badge.  He comes from a hedge fund that is rumored to be short the company’s stock.

The CFO clears his throat, takes a sip of water and says there’s no reason to think the firm won’t easily make its guidance.

I’ve known the CFO for a few years.  He only clears his throat and sips when he’s getting ready to say something that’s technically true, but is misleading  –in other words, a lie.

Do I have inside information.  Again, years ago the answer would have been no.  Today, I’m not sure.  If this were a private meeting with the CFO, I think it’s likely that I’ve got inside information.  But is a breakout session public disclosure?  Does it make a difference if the session is televised, so everyone can see what the CFO is doing?

My uncertainty changes my behavior.  How?

I probably no longer want a private meeting with top management of a company.  I probably don’t want the company to comment on my earnings estimates, or to give any indication that a non-consensus estimate I may have could be right.

I have to rely more on my independent judgment.  I want to be wary of any interaction with company management.  I don’t want any “help” with my estimates (not that I need any).

This is actually good news for individual investors, because the playing field between them and professional analysts has been leveled significantly.


insider trading, hedge funds, expert networks and skilled securities analysis (l)

November 23, 2010 By in insider trading, Trading Tags: , , , 2 Comments

News reports over the past day or indicate we may be in the early days of what could prove a widespread regulatory crackdown on insider trading.  The FBI has raided the offices of several hedge funds, a number linked with SAC Capital.  A west coast independent technology analyst has publicized a failed attempt by the federal police agency to trade more lenient treatment for alleged offenses in return for recording (presumably incriminating) conversations with a client, hedge fund SAC Capital.  “If felt like a street mugging,” he’s quoted as saying.  The analyst reported this encounter by email to his customers, instead.  They, in true Wall Street fashion, immediately ceased doing business with him.

All this prompts me to write about four loosely linked topics:  insider trading, expert networks, hedge fund information gathering and issues that the fuzzy nature of what constitutes insider trading create for professional securities analysts.

Two posts, today and tomorrow.

insider trading

First, a pedantic point.  Insiders, like the top managements of publicly traded companies, can trade legally.  There are, however, clear restrictions on what they can do and when.

But that’s not what people usually mean when they talk about insider trading.  They’re referring to illegal insider trading.  There’s actually a good, if a bit dated, survey of insider trading regulations and their purpose on the SEC website.

Here’s my take on what insider trading is.  Remember, though, that despite the fact I’ve sat through 25 years+ of mandatory compliance training that included a heavy dose of insider trading information, I’m not a lawyer.  As you’ll see below, this can be a pretty fuzzy concept, with lots of gray area, border line cases.

The standard definition of insider trading is that it is based on material, non-public information.  Doing so is illegal for two reasons:

1.  It’s like stealing.  It’s taking information that is supposed to be used only for a corporate purpose and using it for personal benefit instead.  For the corporate employee who has such information, trading on it is a violation of the duty of trust and care he is expected to have for his employer.

2.  It’s like fraud.  That’s because the inside information trader is taking advantage of the fact he knows the person on the other side of the trade can’t possibly be aware of the material information he is acting on.

That’s straightforward enough.  But inside information also has a viral or fungal quality to it.  Today’s rules maintain that anyone, whether employee of the company involved or not, becomes a “temporary” or “constructive” insider the minute he reads/hears the information.  This means he has the same fiduciary obligation that a company employee would have.  He can’t trade on the information, even if he had figured out 95% of it on his own already.

It also means that the last thing any securities analyst worth his salt wants is inside information.  It’s like a runner getting a knee injury.  It puts him out of the game and on the sidelines.

Another modification to the rules concerns selective disclosure, which under Regulation FD (Fair Disclosure) is no longer allowed.  At one time, companies routinely disclosed information to sell side analysts but not to shareholders or their representatives.  Or they gave extra information to favored institutional shareholders in private meetings.  I remember vividly once being asked to leave a briefing by Sony about its video game strategy, even though I was representing owners of the company’s stock, because I didn’t work for an investment bank.  That’s crazy, to tell company secrets to strangers but not the owners, but it happened.  (I refused, by the way, and wasn’t thrown out.)

expert networks

Analysts and expert networks are different.

Most sell side analysts specialize in a single industry.  Their buy side counterparts usually cover several industries, sometimes closely related, sometimes not.  Both kinds read industry literature, attend trade shows, go to company analyst days (where top management explains how the company in question makes its money and where it stands among its competitors), read company SEC filings, listen to earnings conference calls.  They also produce detailed spreadsheets modeling company operations, hoping to project future earnings with a high degree of accuracy.  Gradually, even if they have no prior industry background, they become extremely knowledgeable about the areas they cover.

Expert networks, in contrast, are collections of industry consultants who are assembled by a middleman and whose services–usually a one- or two-hour meeting–are offered to professional investors for a fee, most often paid in soft dollars.

Say a company wants to find out about communication networking equipment and doesn’t have an experienced analyst who covers the area.  Or maybe the company does but a portfolio manager wants an especially detailed or technical question answered.  Then he calls the expert network organizer to say what he needs.  What he probably gets is a middle-level manager or technical employee from, say, Cisco, who is willing to talk for two hours for $1,000 (the payment to the network organizer may be $2.000-$3,000).

The legal issue is that the guy from Cisco may have no idea how much of what he knows is inside information.  So the result of the meeting may be that inside information is passed from the expert network consultant to the investor.  If so, it’s the functional equivalent of whacking every investor at the meeting in the knee with a crowbar.  What the SEC is investigating is whether obtaining inside information is the intent of the meeting and, in particular, if some hedge funds use these networks as conduits to get illegal information that they can trade on.

Back to analysts, for a minute.  I don’t John Kinnucan, the analyst the FBI tried to wire, and I’ve never seen his work.  The Wall Street Journal description of his business suggests he operates in a gray area.  According to the article, his specialty is “channel checks.”  That is, he schmoozes with tech company salesmen and with distributors, to see what’s selling and what isn’t.  He then synthesizes the information he gets and passes it on to clients.  It’s also possible that clients ask for specific items of information–I don’t know whether they do or not, but I think it’s a reasonable supposition that they do.

The big question is whether Mr. Kinnucan’s sources of information tell him very specific things that they have an obligation not to reveal to people outside the company.  In other words, is this activity like #1 above, a use of confidential company information for personal benefit.  If so, Mr. Kinnucan and any of his clients who receive his reports are infected.  They’re insiders and can’t trade on the information.  The FBI appear to have waned Mr. Kinnucan’s taped conversations with SAC Capital to build/buttress an insider trading case against SEC.  So they must either think, or hope, that the information in the reports do contain inside information.

That’s it for today.  Tomorrow:  why I think hedge funds use expert networks and highly specialized analysts like Mr. Kinnucan; and practical issues for any securities analyst.

the size of “gray” income in mainland China: the Wang Xiaolu study

November 22, 2010 By in Asian economic development, Balance of Payments, China, currency effects, Current Market Thoughts, economics, emerging markets, Hong Kong Tags: , , , , , , , Leave a comment

I mentioned in my post from yesterday that in looking over the Li & Fung corporate website, I came across mention in Li & Fung’s 3Q10 China Trade Quarterly of a study by a prominent Chinese economist, Dr. Wang Xiaolu, on the size of the underground, or “gray,” economy in China.  Dr. Wang’s estimate of the gray economy in China in 2008 is RMB 5.4 trillion, or about US$ 815 billion at today’s exchange rate.  That would amount to around 30% of aggregate disposable personal income in the Middle Kingdom–an immense percentage.

The study itself, sponsored by Credit Suisse and a followup to a less extensive earlier analysis using 2005 data, can be found on Scribd.

Dr. Wang’s conclusions

Based on 2008 data:

1.  official average per capita income of the top 10% of wage earners in China =  Rmb 43614 (US$6580)   actual income = Rmb 139,000 (US$20,950).

official income of next 10% = Rmb 26500 (US$3990)     actual income = Rmb 54900 (US$8275).

2.  Two-thirds of the gray income is in the hands of the top 10% of the population.

3.  Official figures substantially underestimate income inequality in China, which is in fact even worse than in the US.  On Dr. Wang’s numbers,

–51.9% of disposable income is in the hands of the top 10% of Chinese earners  vs.  47.2% in the US

–7.8% of income is in the hands of the bottom 40% of Chinese earners  vs.  9.6% in the US.

what is “gray” income?

Gray income is money received in exchange for goods and services that is not reported to the government and on which no tax is paid.  Dr. Wang clearly seems to me to be a reformer who wants to call attention to systematic abuse of power by high-ranking officials.  His examples of gray money all seem to revolve around this issue.

His examples include the semi-legal, like:

–excessive bonuses or perquisites for high officers of government-owned enterprises, or

–excessive wedding gifts to the children of politically powerful parents.

They also include the illegal, such as:

–bribes paid to public officials

–excessive costs in public construction

–government officials profiting from land sales they control

–stock manipulation.

Dr. Wang’s methodology

his reasoning

Dr. Wang points out that official statistics on income are derived from interviews from a random sample of Chinese citizens.  Participation in the surveys is voluntary, however .  Dr. Wang maintains that:

1) all citizens questioned under report their income, and

2) many high-income people contacted decline to participate.

Together, these factors create a systematic downward bias to the official numbers.

an illustration

Dr. Wang illustrates that the official figures cannot be correct by pointing out that one can use them to conclude that Chinese citizens saved, in the aggregate, Rmb 3.5 trillion in 2008.  But data from other sources that show the increase in personal bank savings, private property purchases, and private buying of bonds and stock IPOs–in other words, that act as a proxy for the actual amount of money citizens saved during the year–total to over Rmb 11 trillion!

how Dr. Wang proceeded

In general outline,

–Dr. Wang trained a cadre of interviewers and developed a questionnaire intended to develop detailed information about expenditures on necessities like food and, in a more subtle way than the government’s survey, inquire about income.

–He created a list of potential interviewees from the friends and acquaintances of his interviewers, and selected  a subset of about 5000 of these to be actually interviewed.

–Post interview, the questioners graded the survey questionnaire based on their judgment as to the completeness and truthfulness of the answers, rejecting a bit less than 20% of the questionnaires on these grounds.

–He used the data collected from the remaining 4000+ to generate an Engel coefficient for China, that is, a relationship between expenditure on food and total income.  He then applied this coefficient to the government survey data, on the assumption that the information revealed by interviewees about expenditure on food is relatively correct.

is this scientifically correct?

No.  The biggest issue is that here’s no reason to believe that the friends and acquaintances of Dr. Wang’s interviewers are representative of wage earners in China as a whole.

Also, interviewees in the US tend to be less truthful in person-to-person interviews than in internet or mail (in the old days) surveys.  I don’t know what evidence there is in China.  I also don’t know what evidence there is that the cadre of interviewers is good at telling whether an interviewee is  being honest or not.

is this the best information we can hope for?

Probably yes.

investment implications

Even if Dr. Wang’s results are only directionally correct, they imply that disposable income in China is a quantum leap higher than official figures suggest.

If he’s right that the extra income in concentrated among the wealthiest Chinese citizens, then the market for luxury goods there may be much bigger than is commonly believed.  This would be good news for the Macau casinos and for luxury goods producers around the world–including local brands that may develop.

Severe income inequalities are a potentially politically destabilizing social issue.  This is Dr. Wang’s greatest concern, I think.  As Credit Suisse points out in its report that contains Dr. Wang’s findings, Beijing seems to concur.  It has encouraged/allowed large wage increases for factory workers in eastern China.  And it appears to be signaling it wants workers’ unions to take a greater role in ensuring that workers get a greater share of enterprise profits.

This may also be a big reason the Chinese government is opposed to a one-time large appreciation of the renminbi.  Doing so would simply validate the current, potentially dangerous, income inequalities.  Better, say, to encourage a doubling of workers’ wages over the next five years and allow the resulting demand for foreign goods push up the Chinese currency than to let “hot money” portfolio inflows do the job all at once.

a closing note

Credit Suisse points out that Greater China (the mainland, Hong Kong and Taiwan) already accounts for 28% of Swatch’s sales and 20% of Richemont’s.  Booming watch sales seems to be more evidence for the sharp male skewing of Chinese luxury consumption that Bain points out in its latest annual luxury goods survey (see my posts on Bain).

Credit Suisse’s favorite among the Macau casinos is the Galaxy Entertainment Group (0027:HK), on the idea, prevalent in Hong Kong, that the mass market is the best place to be.  That may well be true, although I’m still a bit skeptical.  But Galaxy appears to me to be the weakest of the casinos, however.  CS also thinks that the stocks of property developers stand to benefit as the world begins to appreciate how much income China has.  Myself, although I really like property stocks, I’d prefer something in financial services.

a turning point for the Chinese economy

November 21, 2010 By in Asian economic development, China, Current Market Thoughts, economics, emerging markets, Hong Kong, Industrials, Industry Analysis, Recent Market Action, Shaping a portfolio for 2011, Strategy Tags: , , , , , Leave a comment

Last Thursday, David Pilling, a columnist for the Financial Times, wrote about the views of Victor Fung, the chairman of the Hong-Kong based supply chain management company Li & Fung.   This is presumably the result of an interview with Mr. Fung, although the article doesn’t say. There are three interesting points in it.

Victor Fung himself is an influential political and business figure in Hong Kong, and a senior member of the Fung family, which has substantial commercial and property interests in Greater China, including the Hong Kong-traded Li & Fung (HK: 0494).  0494 sources garments and other manufactured items, mostly from China, but also from other developing countries, for wholesalers and retailers in the US and Europe.

The three points:

1.  The Foxconn incident signals a change in the way manufacturing is done in China.  If you recall, about half a year ago, Foxconn, a Taiwanese assembly company, had a period of labor unrest in a manufacturing complex in southern China.  Workers protested poor working conditions that had induced a number of employee suicides inside a factory town.  Under pressure from US customers like Apple, Foxconn agreed to, among other things, a 30% wage increase.  The Shenzhen plant continues to have problems, though.

Mr. Fung sees this as marking a decisive turn in manufacturing in Guangdong province in southeast China, which it doubtless is.  This isn’t new news, however.  It’s an illustration of economic forces that have been in motion for the past several years (see my post on China’s economic development model.)

In short, eastern China has run out of cheap labor and has to shift to making higher value-added products there to continue to prosper.  Manufacturers can also move labor intensive operations–as Beijing would like to see happen–to western China, where plenty of unskilled workers are still available.  That would foster greater political stability and help address the sharp income imbalances between the more affluent east and the more rural, agriculture-oriented, and poorer, west.  The gating factors, as I see them, are the availability of reliable transport for finished products to the eastern ports, and infrastructure, like continuous electric power.

More interestingly, Mr. Fung also says that:

2.  Beijing is encouraging the development of labor unions.  A first glance, this seems very odd for a government constantly worried about labor unrest–after all, that’s what Tiananmen Square was all about.  And for a socialist country as well, where criticizing the owner of a factory (that is, the government) could be seen as a political crime.  But the factories in question are typically controlled by some sort of partnership between a regional/local government and a foreign manufacturing company that has the technical know-how.  Beijing has little control over either party.  Unions may be a way to get some.

Also,

3.  For the first time ever, some Chinese clients have asked Li & Fung about sourcing shoes and garments for sale in China from countries like Bangladesh or Vietnam.  The clients are presumably domestic retailers or wholesalers who currently get their wares from unaffiliated factories in China.  This development is good news for Li & Fung, but puts another source of pressure on eastern China manufacturers to lower their costs.

In general, China factories have two possible responses:

–they can lower costs, i.e., move west; or

–they can try to get Beijing to impose tariffs or other protective measures against garment imports.

Given that this would run counter to the central government’s plan to shift labor intensive manufacturing west, I think there’s little chance of the latter happening.  But this is an area to watch.

my thoughts

Developing countries have invariably had difficulties when they have reached the point where all the available unskilled labor is used up.  Typically, the companies that use unskilled labor have developed considerable political power and are also incapable of migrating their firms to higher value-added tasks.  Such firms vigorously defend the status quo.  As a result, they often form an immovable roadblock that destroys the possibility of economic progress for years (think: Malaysia).

China is in a much better position than most.  The country still has lots of unskilled labor left.  And the current administration in Beijing isn’t particularly beholden to the Guangdong-Hong Kong manufacturing interests that, in theory at least, have the greatest interest in defending the status quo.

For an investor, it seems to me the implications of all this are simple.  For someone like me, observing from halfway around the world, there’s no reason to take the risk of owning manufacturing-related companies that derive a significant chunk of their profits from eastern China.  It’s better for now to have less exposure to specific industries/geographical areas in China, and more to the general positive effect of increasing incomes.  Financial services, though not often my favorite sector, comes to mind.

By the way, in poking around the Li & Fung website, which I haven’t done in a while, I stumbled across mention of a study on the gray economy in China which I think has investment implications.  More about this tomorrow.

3Q10 SNL Kagan numbers: pay TV declines again in the US

November 19, 2010 By in Capital-intensive firms, Current Market Thoughts, Entertainment, Industry Analysis, Technology Tags: , , , Leave a comment

the pay TV industry

The pay TV business in the US has three parts:  cable TV, satellite TV and telecom TV.

cable maturing

Traditional cable TV subscriber numbers peaked in 2001, when the country had 52.4 million basic cable only households and 14.5 million with digital, for a total of 66.9 million.

The overall figure dropped by 800,000 in the recession year of 2002, although the decline was masked in industry revenues by 4.8 million households upgrading to higher-cost digital.  Aggregate subscriber numbers declined from that point, but only by a total of about 1% through 2006 (700,000 households lost over four years).  But any revenue decline from this source was trivial compared with the gains from rapid adoption of digital.  In 2007, however, the combination of aggressive marketing of telecom offerings and economic weakness sparked a sharper rate of subscriber loss.

Overall cable figures, from industry expert SNL Kagan, break out as follows:

2001     66.9 million total subscribers     14.5 million digital, 52.4 million basic only

2006     65.4 million total subscribers     32.6 million digital, 32.8 million basic only

2009     62.1 million total subscribers     42.6 million digital, 19.9 million basic only.

satellite and telecom providers gaining subscribers

Even in 2009, total pay TV industry subscriber numbers rose.  Traditional cable losses of 1.6 million household were more than offset by:

–satellite broadcasters, who added 1.4 million subscribes to end the year at 32.7 million, and

–telecom providers, who added 2.1 million subscribers to end the year at 5.1 million.

a big change over the past six months

Even through the dog days of 2007-2008, the pay TV industry steadily added subscribers, though at a relatively slow rate.  Within the industry, traditional cable steadily lost small numbers of subscribers to satellite and telecom.

In the June quarter of 2010, however, the US pay TV industry lost subscribers for the first time ever. Same intra-industry dynamic as before–cable lost a stunning 711,000 subscribers; satellite added 81,000 and telecom signed up an extra 414,000.  The net industry loss:  216,000 customers. SNL Kagan attributed the cable losses to the economy–high unemployment and the weak housing market.

In the September quarter, whose figures were just released, the story was the same:

— a net loss, the second ever, of 119,000 customers, and

–cable lost 741,000 customers, its worst performance ever; satellite added 145,000 subscribers, telecom 476,000.

SNL Kagan points out that this is normally the seasonal peak for subscriber additions, so what’s going on with cable can’t simply be the economy.

what’s going on?

I think three factors are involved:

1. The continuing sub-par economy is probably the trigger for consumers’ rethinking their spending priorities.   It is a bit unusual, though, that the rethink is coming with such a lag.

2.  Cable has raised its prices to a level that it is providing a pricing umbrella that made the financial decision to enter the pay TV industry easier for telecom companies.  This will likely prove a horrible strategic mistake in a capital-intensive industry.  Even if the telcos eventually conclude they can’t be profitable, they will turn their attention to recovering as much of their invested capital as they can.  In other words, the billions they’ve spent on TV means they can’t simply exit the industry.  So they won’t stop discounting.

3.  New, cheaper forms of entertainment distribution have emerged.  Netflix and Hulu, together costing about $20 a month, are leading examples.  Ironically, both require the high-speed internet that cable delivers.  But they’re the iTunes store to cable’s CD albums.  They’re cheaper; they’re more flexible; and they offer on-demand service.  In addition, buying a $15 cable will allow you to display streaming content on your wide-screen TV.  Newer TV models connect directly to the internet.

More confirming evidence:  look at the resistance cable companies have put up to broadcast networks’ demands for higher retransmission fees; look at the more basic “basic” services cable companies are offering.  Time Warner, for example, is offering basic for the first time without ESPN, to lower the cost.

my thoughts

Cable is in trouble on two fronts.  One is from a kind of “creative destruction,” the emergence of competing technology that’s newer, better, cheaper.  In this regard, it’s somewhat like the music companies were ten years or more ago.  The second is a more traditional kind.  Faced with competition, cable ceded the low-end market to the telcos and preserved profits by moving up-market.  That strategy–the same one GM used when faced with Japanese competition–has backfired.