Death of Newsweek magazine: inevitable or self-inflicted?

Along with newspapers, we also have dead tree magazines going away — the latest being Newsweek announcing Thursday that its print edition is finite at the end of 2012. MarketWatch went out on a limb and said that Newsweek “won’t be the last venerable media organization to take this drastic action.”

The NYT notes that the 80-year-old magazine recently took an odd turn with its forced marriage with The Daily Beast, an online-only opinion site. This came after audio magnate Sidney Harman bought this once lucrative weekly magazine franchise for $1 from the Washington Post Company in 2010. Harman’s heirs indicated earlier this year that they were no longer throwing good money after bad.

From the 1960s through the 1990s, Newsweek was one of the country’s most influential national media outlets, the Avis to Luce’s Time magazine. (The #3 magazine, US News, ended its print subscription in December 2010.) Today, information is no longer scarce, and killing trees is an inefficient way to deliver such information.

It’s certainly true that a weekly magazine delivered two days late to supermarket checkstands is a difficult sale in this era of instant Google-fed gratification. However, some commentators wonder whether the death of Newsweek is as much a function of its final (print) editor, Tina Brown. As the AP reported:

They say it speaks to the magazine's trouble connecting with and keeping its readers.

That brings to mind some questionable covers, like the July 2011 what-if image depicting what Princess Diana would have looked like at age 50, or last month's "Muslim Rage" cover depicting angry protesters, which was roundly mocked on social networks like Twitter.

Newsweek is using a difficult print ad environment as an "excuse" for its decision to end print runs, said Samir Husni, director of the Magazine Innovation Center at the University of Mississippi School of Journalism. He lays the blame at the feet of Tina Brown, the editor who took control of Newsweek when it merged with the news website she ran, The Daily Beast, two years ago.

"Tina Brown took Newsweek in the wrong direction," Husni said. "Newsweek did not die, Newsweek committed suicide."

Is Pandora boxed in by supplier pricing power?

The 1990s brought numerous dot-com companies that never turned a profit, but had a “business model” of selling themselves to the greater fool, whether it be public shareholders or acquisition by a large firm. (This trend confused my students, who after several years of bad examples thought flipping a money-losing company counted as creating a business model).

Most of those companies are long gone. Instead, we have Pandora, which has yet to show a profit since its June 2011 IPO, but has a market cap of $1.7 billion.

To be fair, it has survived predictions of failure from four years ago. In a difficult market segment where firms have little control over costs (i.e. royalties), Pandora remains the most successful Internet radio service of all time, with Last.FM swallowed up (and largely forgotten) within the bowels of CBS, Live365 remaining privately held and most of the other firms now defunct.

The recent interest (and speculation) in Pandora centers on Apple’s rumored plans to create its own music streaming service. (More recent accounts say Apple’s plans have been delayed by the greed of the same record companies that make it impossible for Pandora to turn a profit.) The speculation knocked Pandora’s stock off its highest price since March, but other than that temporary blip, the stock has been trading in a range of $10-11 per share for nearly five months — although below its $16 offering, that would be a raging success by Facebook standards.

Now some (including Business Week) speculate that Apple’s interest will prompt Apple’s major rivals to buy Pandora to compete. Google competes with Apple on cellphone platforms, while Amazon is its major competitor in music streaming.

This comes despite analyst predictions of 2012 Pandora losses nearly doubling to $30 million. As with three years ago, Pandora is losing money on every sale but making it up on volume. (Thanks to the IPO, the company’s balance sheet is solid enough weather several years of such losses, even without any secondary offering).

Business Week even speculates that Clear Channel might be interested in supplementing its online service with Pandora (much as CBS bought Last.FM). This seems the least plausible, given all Clear Channel has spent on iHeartRadio, the mobile clients and even live concerts to promote the brand.
So as in the dot-com era, we have the hope that losses will be redeemed by a beneficent acquisition before the company runs out of money. But where is the business model? If it’s not possible to make money with current pricing (and cost structure), will volume solve the problem?

From following the cost structure of Internet radio for more than a decade, I see no cause for optimism. Facing a collapse in their core business, Hollywood labels hope extract every penny from newer (and smaller) channels, including Internet streaming. The bigger and more successful Pandroa gets, the more money record companies will seek to extract. Like a Dumas musical, it’s unlikely to turn out well for the protagonist.

T-Mobile's exit strategy

Since having its $39b sale of T-Mobile USA to AT&T nixed on antitrust grounds, Deutsche Telekom AG has been trying to figure out another way to exit the US market.

Today DT announced that its US subsidiary (#4 with 33.2 million subs) will be merged with the #5 US carrier, MetroPCS (with 9.3 million subs). The press release is here and the story is covered by Fierce Wireless (among many others)

It’s being called a “merger” but it’s clearly an acquisition (structured as a recapitalization), since T-Mobile USA will retain its name, technology, HQ and CEO — while MetroPCS will lose all four. It will retain its NYSE stock listing but presumably not its PCS ticker.

Although the cash payout is only $1.5b — funded by a $2.4b sale/leaseback of T-Mobile USA towers — MetroPCS shareholders will own 26% share of the new company. I haven’t seen any estimate of the value of the acquisition. The market suggests that the cash only accounts for one third of the value: today MetroPCS has a market cap (on inter-day trading) of about $4.5b, vs. $4.2b yesterday and $3.5b a month ago.

So instead of being paid $39b to exit, DT is paying $1.5b cash to build up a more stable company. I would presume that DT hopes that it will be able to gradually unload its 74% holding in the combined company through open market sales.

The two companies will be run as separate operations until T-Mobile can get all MetroPCS customers to phase out their CDMA handsets in favor of GSM ones. At today’s press conference, T-Mobile said it hopes to pull the plug on the MetroPCS network by the end of 2015. In the meantime, T-Mobile gets cheap LTE spectrum that both types of customers can share as the CDMA voice footprint goes down and the GSM voice footprint goes up. Or perhaps both end up on VoIP, i.e. VoLTE) which MetroPCS announced it plans to introduce in 14 US markets by early next year.

The acquisition puts pressure on #3 Sprint (56.4 million subs), which was a more obvious buyer for MetroPCS (which would have avoided the disastrous technology incompatibilities of its Nextel purchase). But so far, Sprint shareholders seem not to have reacted (either way) to the news.

One thing I haven’t seen mentioned: this is the merger of the iPhone outsiders: the #1, #2 and #3 carriers have the iPhone but #4 and #5 do not. Perhaps this will make Sprint want to buy the #6 carrier (which does have the iPhone): San Diego’s Leap Wireless which has 5.9m subscribers on its Cricket network.

However, the two hitches are technology and pride. Sprint is migrating its 4G strategy from WiMax to LTE, while Cricket uses TD-LTE, the Chinese variant not used by the top 5 carriers. (However, Cricket only offers LTE service in Tuscon right now, so perhaps it could drop the incompatible LTE if its acquired soon).

The other problem is that Leap turned down acquisition efforts by MetroPCS since 2007. Perhaps its due to bad blood between the companies that wouldn’t apply to Sprint, or perhaps Leap will realize that it lacks scale to operate its own network indefinitely in an ever-commoditized market.

Retailers decide to stop slitting own throats

Wal-Mart has announced that it will stop selling the second hottest tablet line, Amazon’s Kindle. In doing so, it joins Target in ending support for its online rival.

Revenues aside, the support for the Kindle seemed puzzling by both retailing giants. Now that they have settled into a comfortable duopoly, the greatest threat they face comes from Amazon‘s continuing successes in moving people out of stores to their web browsers. This calls to mind a Marxist critique (source unknown) that rich countries in their greed will finance their own downfall.

Both Wal-Mart and Target continue to sell the world’s leading tablet, the iPad, from a company that’s an also-ran in online content (except for music). They also sell Barnes and Noble’s Nook line, which is promoted by the leading book retailer but is an also-ran both in hardware and proprietary content.

This raises the question: when or how will the coalition of willing anti-Amazonians be formed? Apple and Wal-Mart are losing the online content battle (which Target has ignored), so is there a possibility for a shared platform, content format standard or other deeper cooperation? Otherwise, it’s hard to see how the tide will be reversed that has favored Seattle’s online shopping conglomerate.

Eroding freedom has its price

During my first visit to South America, I was struck by the contrast between Chile (one of the economically freest nations of the Western Hemisphere) and Argentina (only Venezuela and Cuba are worse). Chile has enjoyed the benefits of its economic freedom, as the only Latin American country in the OECD, and through economic might that enabled it to cope with natural disasters and potential national tragedies.

Meanwhile, Argentina is suffering from a man-made disaster of more than a century of corrupt and incompetent rule, first by the oligarchs then by the Peronistas. As Stef Haggard noted in his book Pathways from the Periphery, Argentina was one of the wealthiest countries in the world in 1900, but was easily passed by Korea and Taiwan with their access to education and the concomitant labor mobility.

Last week, the AP reported on the stark consequences Argentina by President Cristina Fernandez. With inflation running at 25% annually (10x that of neighboring Chile) none of the locals want to hold pesos, so for years they have been rushing to trade them in for foreign currency or goods:

Legally trading pesos for dollars or euros has become ever more difficult as President Cristina Fernandez tries to keep dollars inside the country and bolster the Argentine peso's sliding value. And new rules taking effect this week are squeezing them still further by going after credit card spending.

Until now, travel has offered a limited exception to the currency controls first imposed last November: People up to date on their taxes and poised to cross a border, tickets in hand, can get permission to buy no more than $100 per person for each day abroad. The process is bureaucratic and intrusive, and many say their requests are rejected for reasons they don't understand.

Credit and debit cards provided a legal way out, enabling people to make purchases and get money while abroad. But now the government is cracking down there as well.

The new measures make using plastic inside or outside the country less affordable by charging 15 percent in taxes on all foreign purchases that appear on credit or debit card bills, plus a 50-percent customs duty on any goods from abroad that might be brought back to Argentina. Internet purchases on sites such as Amazon, eBay and the Apple Store are included, along with anything bought using online services such as PayPal.

The measures are Fernandez’s attempt to protect her sagging popularity by reducing the symptoms of economic mismanagement, but they don’t do anything to resolve the underlying issues.

Brazil once had an inflation problem too, but seems to have a more competent government that has promoted industrial development and economic growth. I don’t know a lot about Brazil, but the socialists seem more pragmatic (with an economic freedom index comparable to Italy) than in Argentina (which is more like Angola). Both are plagued by corruption (unlike Chile) but Brazil has average property rights and financial freedom versus Argentina’s abysmal record on both counts.

Despite their abysmal economic record, the Peronistas have dominated Argentinian politics for decades. Apparently populist demagoguery trumps actual competence — thank God we don’t have that problem in the U.S.