I’ve been remiss in finding the time to post lately, so I’ll make a few comments on miscellaneous non-tech topics as a place holder. Hope to get to something more substantive soon. (And yes, I’m a closet Jeopardy fan.)

Windbags

Are you as sick of hearing the word “headwinds” as I am? I admit to using it more than once as an analyst, where it has a fairly long tradition as shorthand for “difficulty ahead” or “resistance to achieving one’s goals”. But now, not only is it everywhere in the financial press, but the mainstream has picked it up (and stomped all over it). It seems that the word shows up at least once in any article anywhere that talks about the current economic situation. Enough already, find something new!

Anybody Staying Home?

We seem to be off to an awfully early start in the “centering” part of our program. That’s where each candidate–after genuflecting to the extremes of his party in an attempt to win nomination–now tries to make everyone believe they’ve really been in the middle all along. This morning’s Wall St. Journal editorial even accuses Obama of shifting so far to the right he’s the one trying to serve Bush’s 3rd term.

Each time this happens, the press is full of cautions or anecdotes about how this will cause the faithful to not vote for their nominee. But what are they going to do, now that there are really only two choices? Would left-leaning Obamaniacs abstain and risk McCain nominating more conservative Supremes? Are there any conservative evangelicals who dislike McCain so much they’re willing to chance someone in the Oval Office that they believe (erroneously, to be sure) is a Muslim?

Yes, there are probably some self-styled strategists who will let the other guy get elected so he can fail, and then the party can get a “real” president in office in 2012. But I just don’t see the average voter thinking this way. On the other hand, people will do pretty stupid things when they’re angry. We’ll see whether this is the case, or it’s just the usual bleating by the media, ultra-liberals, and far-right conservatives.

The real issue, I think, is who will be more believable as a centrist.

Things I’m Tired Of

How Apple is going to dominate the world. New oil price records. Incorrect predictions–they’re ALL incorrect–about how long our non-recession is going to last. Floods. (Next up: droughts.) Excuses from the studios about why Blu-ray isn’t taking off. Housing woes. Anything with “Hoo” or “Micro” in it.

Must be cranky today. Or just need a vacation.

Tom-AY-to, Tom-AH-to

Boy, the FDA and the press (yes, I think there’s lots of blame there) have really gotten us into a…er…pickle over this tomato thing. After initially alerting everyone to the dangers of salmonella in tomatoes, it seems they can’t find any contaminated tomatoes. NONE of the 1700 samples tested positive for the bug.

Which leaves them in the impossible position of trying to prove a negative. No one will ever be able to show that tomatoes AREN’T contaminated, even if they never find a single one containing the parasite. With all the other…sorry…headwinds facing the economy, the last thing we need is for a bunch of farmers, pickers, packers, shippers, and grocers to be devastated by the implosion of the tomato industry.

I got curious and searched for references to salmonella cases. To my surprise, there are typically tens of thousands of salmonella cases every year in the U.S. alone. With a mortality profile that seems similar to that of the flu–not huge, but nothing to sneeze at either, if you’ll forgive the pun. Compare that to the 800 or so cases and single suspected death reported as a result of this “outbreak”. Puts it in perspective, doesn’t it?

(Note to self: Write that piece about innumeracy, and the complete failure of the educational system in the U.S. to equip people with sufficient understanding of probability and statistics to live an informed and balanced life. Or better yet, direct readers to this book.)

To add insult to injury, the FDA is widening its probe to other types of produce. Isn’t destroying one industry enough? Apparently, the rest of my pico de gallo isn’t safe either.

Crossing the Street

Looks like I’ll have to walk another block or so, next time I’m in Manhattan, to get my morning Joe. Starbucks (SBUX) is closing about 600 stores over the next few months. Watching the local news last night, they literally said “you might go into the city tomorrow morning and find your Starbucks is gone”. Really? How fast do they think this stuff happens anyway?

Actually, those 600 locations are only about 5% of its stores. Not too devastating (except to any employees affected). And most have only been open a year or two. In its high-speed push to open as many stores as possible, Starbucks overshot a bit. Plus the company’s expansion timing (i.e. the economy) could have been better.

My local Starbucks is still doing a healthy business–as evidenced by the long lines. So I’m not worried about that one closing. And the extra steps as I walk across the street in Manhattan will be good for me, as long as I don’t get hit by a taxi.

Or get buffeted by headwinds.

Here’s an object lesson in how stocks with thin trading volume can get hammered.

Monday, Rimage Corporation (RIMG) reduced 2nd quarter guidance, citing the economic slowdown. Revenue expectations dropped from $24-26M to a new target of $20-22M. Earnings projections plummeted, to 9 to 12 cents per share, from previous guidance of 22-27 cents. Analysts estimates were–predictably–within the previous guidance ranges.

Rimage (pronounced like the French, i.e. “rim-AHZH”) makes high-capacity disc publishing systems that replicate CDs and DVDs as well as customize discs and print/apply labels. It also does a high-margin business selling blank discs and labels.

If you’ve ever ordered a custom-mix CD from Wal Mart, it was printed on one of Rimage’s units.

While Rimage sells its publishing systems into the media industry for music, movie, and software storage, it does a substantial amount of business with large enterprises that create custom discs for product promotion or employee training purposes. It also sells to data-intensive industries needing quick, simple records storage. In particular, the medical industry is one of Rimage’s most important end markets.

I never wrote on Rimage as an analyst, but I do keep it on my radar screen, as its business model not only ties into Digital Media but also fits a theme I’d developed on creating value at the edge of markets (in this case, disc replication). However its trading volume, averaging about 77M shares daily, is less than 1% of the float.

This makes for a very illiquid stock, especially one that until Monday was at a market cap of $170M. Which is the biggest reason it’s covered by only 2 analysts.

As you might expect, Monday the stock dropped a hefty 22%. I’m convinced a good piece of that was due to a lack of buyers for an undercovered, thinly traded name. But many pundits will claim a major reason is that Rimage’s business model is dead. After all, we’re in the iPod generation, discs are passe. With high speed broadband everywhere, and ubiquitous media players, nobody needs plastic anymore.

Bzzzt! Wrong answer.

Sure, any company that reduces guidance so much, particularly one that’s so thinly traded, is going to get a serious haircut on its stock price. And I do believe that eventually, all data storage will be on drives, and delivery will be via broadband. But the key word is eventually.

Recall Amara’s Law (often erroneously attributed to forecaster Paul Saffo): “We tend to overestimate the short-term impact of technological change and underestimate its long-term impact.” As much as we think broadband has already taken over, we forget that not everyone has fiber to the home, nor have they all junked their CDs for a portable mp3 player. The iPod has not reached 100% penetration. Netflix still expects to be renting DVDs for some time. Hell, 20% of Americans have never even sent an email. Not to mention the fact that there are numerous other applications for discs besides personal entertainment media.

These transitions always take longer than we think. Expect discs of some type to be with us for at least another 10 years.

Even at less than half its recent earnings growth rate (8% vs. a 2-year CAGR of 17.4%), Rimage has a PEG ratio hovering around 1.0, based on trailing twelve month earnings. And with a solid cash flow (price-to-FCF ratio is about 7), it’s likely to be able to milk that disc market for some time to come. Perhaps not a value play, but certainly not overvalued either.

Just watch that trading volume and liquidity. Yes, an upside surprise can really rock a thinly traded name like Rimage. But risk management is the name of the game, and you don’t want to be the last one out of the exits if the bottom falls out.

Disclosure: I hold no position in any of the stocks mentioned here.

Maybe I should have called this “A One-Channel TV, Redux”.

There are two recent bits from NewTeeVee about the last 10-foot problem, and especially getting YouTube to the TV. Whether via a special-purpose set-top box, or integrated into your TV, both still fall short.

How difficult can it be to get all the video services (current and future) into my TV? The answer may not be as simple as a browser, which is probably not the right user interface for the living room. But perhaps something close to that. Couple that capability together with a simple way to stream all the content you already have on your PC, and it’ll sell like hotcakes.

But yet another box with only a couple of services? No thanks.

Disclosure: I hold no position in any of the stocks mentioned here.

Blockbuster (BBI) has outdone itself now. It just announced a trial of in-store kiosks that will allow consumers to download movies directly into a portable media player (PMP) to take with them. For now, only the Archos player will be supported.

Let me get this straight.

Blockbuster wants you to hop in your car and drive to one of their outlets. Using soon-to-be-five-dollar gasoline. Just so you have the privilege of downloading a movie onto a portable player.

They do seem to have this whole thing ass backwards, don’t they?

Hello! Ever hear of the Internet? Why in the world isn’t this a download to your PC and then a transfer to the PMP? (Yeah, I know, the answer is the studios and their oh-so-customer-friendly Digital Rights Management fixation.) Blockbuster’s insistence on driving consumers to their increasingly useless stores has clearly reached new heights.

Meanwhile, Netflix (NFLX)–while noting its ultimate future is in downloads–predicts that its DVD mailing business won’t PEAK for 5 to 10 years. That tells me the smart money is on DVDs (either standard or Blu-ray) to last some time. I agree.

It’s not that downloads aren’t the preferred solution–personally, I can’t wait–but that universal adoption is a long way off. Why?

1. The studios’ love affair with DRM, artificially reducing the availability of video fare and making it difficult to transfer media to other devices
2. Still no inexpensive, simple solution in sight for getting video from the PC or Internet to your TV.

Here’s an idea: If you insist on making people drive somewhere, at least let them leave with a disc. Use Qflix technology from Sonic Solutions (SNIC) to print a fully licensed DVD out of the kiosk instead. That’s portability and ease-of-use in a single package. As I’ve noted before, this would allow Blockbuster to reduce/eliminate inventory, and get more Hollywood back catalog titles into customers’ hands.

[Sonic holds the key technology patents on download-to-burn, which has been approved by the DVD Copy Control Association (DVD-CCA). This allows discs to be burned with CSS encryption, pleasing the studios and making such copies legal commercial DVDs.]

Sonic was working with MovieLink, prior to its purchase by Blockbuster, to push this tech into the end user market. While disc burners for consumers probably won’t go mainstream anytime soon, Sonic is in trials with kiosk makers. It’s a nice transitional solution until discs are truly dead. Why Blockbuster has made no use of this technology is a puzzle.

But then so is everything else it does these days.

Disclosure: I hold no position in any of the stocks mentioned here.

Goldman Sachs analyst James Mitchell is out with a report that estimates sales of the Kindle electronic book reader from Amazon (AMZN) were between 25,000 and 50,000 in the first quarter. This is hot on the heels of another estimate of 30,000 from Citi analyst Mark Mahaney.

I certainly can’t fault Mitchell’s methodology, which backs out non-Kindle items from Amazon’s unearned revenue line to arrive at an estimate (roughly 10% of that line item) for Kindle revenue and units. Except to note that he’s made some rather broad assumptions about the other items. If so, his subtraction is suspect. Notice also that Mitchell assumes his estimates of unearned revenue for the Kindle could be higher (up to 20%), but not lower, which reveals his bias.

Citi’s Mahaney has even gone so far as to suggest 3% of Amazon’s revenue (about $750M) will come from Kindles within 2 years. Worse yet, he assumes a sales ramp roughly half of the original iPod. Frankly, he’s smoking crack.

If Eliot Spitzer hadn’t brought an end to the practice some years ago (cough, cough), I’d almost think these two were trying to drum up business for their investment banks. Instead it’s probably something much more innocent, like say pumping the stock for the traders.

Why do I think e-books are, at best, a niche item? Because end users don’t need them. Yes, it saves money for publishers and retailers. But it’s unclear whether the savings that trickle down to users overcome the hassle of another $300+ device that needs to stay charged. Plus I like paper. Apparently, so do the multitudes who continue to print things out instead of reading them on a screen. (Remember the paperless society that computers were going to bring?)

Think about it: what problem is the e-book solving for consumers?

1. Gee, if only my book was portable, I could take it with me…
2. Pushing a button to bookmark my place is SO much easier than bending a page corner.
3. Those nasty paper cuts.
4. I can take my whole library with me. (Sure, I often read 10 books at a time. And I wish I could read fast enough to finish several books on a long flight.)
5. I can download a new book whenever I need one. (Yep. And how long does that take over a pokey wireless link? EVDO isn’t everywhere. And can I read the first page while the rest is downloading?)
6. I want my reading material to break if I drop it.
7. It’s cheaper. (True, true. Unless you want to read blogs at $2/week or newspaper feeds at $15/month. That’s a lot to pay for portability.)

Kindle isn’t going to take off. Yes, there will always be technophiles and other early adopters that get one because it’s new, or somehow cool. But regardless of whether the Kindle succeeds or fizzles, the buzz-induced sales ramp will tend to look the same at this early of a stage in a product’s life.

Have you seen any gadget geeks flashing a Kindle around the way they did iPods or Razrs in the early part of the adoption cycle? I sure haven’t.

But let’s assume for the moment that the analysts are right, that Kindle will ramp smartly, that reports of large orders from Chinese manufacturers are accurate, and that Amazon won’t take a bath on the units.

Let’s even go so far as to assume e-book sales are completely complementary to paper books, that Kindle entices people to read more books and doesn’t cannibalize the traditional book revenue stream. (Live dangerously, I always say.)

How does that move the needle for Amazon? Whether you think the stock is a buy or not, is 3% of revenue really going to make it a game-changer? I don’t think so. Amazon’s a visionary company, they do a lot of things right, and I wouldn’t bet completely against Jeff Bezos.

But put your money on the whole company, and don’t pay attention to the noise.

Disclosure: I hold no position in any of the stocks mentioned here.

Who benefits the most from the recently announced Sprint/Clearwire deal? It may not be who you think.

This massive ($3.2B) infusion of money seems like a lot, but it’s just the beginning for this boondoggle. WiMax is a nice technology that works in some circumstances, with the right business model. But then so will WiFi, and it’s much cheaper. Besides, the mobile providers have a huge head start. Why buy new cards and sign a new contract when I already have what I need from my cell phone (or hotspot) provider?

In terms of becoming a successful business, WiMax is vying for the “most hyped” award with social networks. Expect more bags of money to be tossed into the trough before long.

So who gets what?

Sprint (S) - Removes one monkey from the back of CEO Dan Hesse as he is now free to focus on why Sprint has been shedding customers for so long. Also distracts everyone from noticing the delays in its own WiMax buildout.

Intel (INTC) - Intel has been peddling WiMax like a desperate streetwalker to anyone with an open car window. And its been seen hanging around the Clearwire convertible before. Intel wants to be the undisputed standard for WiMax chips, a role it failed to capture in WiFi. Not to mention selling lots of new processors for next generation laptops and smart phones.

Google (GOOG) - Yes, critical mass for Android will help extend its search and advertising dominance into mobile. And this network might turn out to be actually open. Despite Google’s game playing at the FCC auction, the “open” spectrum Verizon won will–in practice–be anything but. Fundamentally, Google has become a VC firm. A billion here, a billion there, something just might stick. All it takes is one 10-bagger to make it work. This ain’t it.

Time Warner Cable (TWC), Comcast (CMCSA) - the Rosencrantz and Guildenstern of mobile will be exactly as successful here as they were with Pilot, the failed MVNO venture with Sprint. And for the same reasons.

Clearwire (CLWR) - Now we’re getting somewhere. Big cash infusion, lots of media attention. The rights to resell Sprint 3G will allow it to grow its top line, giving it time to progress on the buildout. In the end, though, even with a working network it won’t be enough to either satisfy consumers or to make it a viable competitor to the telecableco ISPs. ( And I’m not alone in my thinking, here.)

But you see, by then Craig McCaw will have made his money.

McCaw has a history of promote, build, and sell. Usually at the top. And always with someone else’s money. He’s going to extract himself from this before long, and come out smelling like a rose.

Or a crisp thousand-dollar bill.

Regardless of what happens, whether the network succeeds, whether or not anyone else makes any money, you can be sure of one thing: McCaw has this all mapped out. There’s your winner.

Disclosure: I hold no position in any of the stocks mentioned here.

I don’t think this parrot is dead–yet.

Despite Microsoft (MSFT) walking away from the purchase of Yahoo (YHOO), there’s probably still more to play out in this drama. Ballmer will wait a bit for the share price to settle back into the low 20s, and try again, perhaps for even less than the original $31 this time. If Jerry Yang and the rest of the Yahooligans can turn the ship around, perhaps they’ll be vindicated. But don’t hold your breath.

As I commented elsewhere this morning, all of this reminds me of the property currently for sale on my street. The house is in such need of repair that it’s clearly a tear-down. As such, the market values it at the cost of the land minus demolition costs. But the owners refuse to set the price properly, figuring the house has value as a living space (natural, since they reside there.)

Similarly, Wang seems to believe Yahoo has a greater value than anyone else sees. So far he’s been unsuccessful in his attempts at home renovation. But In this case, Microsoft also has a problem: there aren’t any other suitable vacant lots available, and Ballmer can’t afford to wait too long to jump on this one, even if he has to pay more than he wants.

Frankly, both situations will be interesting to watch play out.

Disclosure: I hold no position in any of the stocks mentioned here.

As I expected, NPD reports sales of Blu-ray Disc (BD) players dropped precipitously over the last few months. This is contrary to the desires and expectations of Sony and others in the Blu-ray Disc Association, who seemed to think the BD/HD-DVD format war was the big impediment to HD adoption. Why should this drop have been obvious?

1. The economy sucks right now. Last thing people will do is buy another box, especially since–
2. Many consumers don’t see much advantage to Blu-ray over upconverted DVD players. (Of course, many people also bought HDTVs without any access to actual Hi-Def programming. )
3. There’s virtually no player available (except Sony’s Playstation 3) that incorporates the full functionality of BD Live interactivity. Why would anyone buy BD now if the final feature set isn’t available?
4. Oh, and did I mention that due to the lack of competition from HD-DVD, player prices have not only failed to drop, they’ve actually gone up. Doh!

By waiting as long as it did to settle the format war, the industry came perilously close to making discs irrelevant at the same time downloading is finally starting to gain traction. Its failure to prove a compelling Blu-ray value proposition for consumers is only making things worse. If this goes on any further, it’s game over.

Sony and its partners gave it everything they had just to win the battle, but forgot there’s still a war going on with the ultimate enemy–downloads.

Guess that makes High-Definition discs the Democratic Party of video.

Disclosure: I hold no position in any of the stocks mentioned here.

Startup Sezmi is beginning to get some notice–in a short piece on NewTeeVee, and a longer one on Forbes. Sezmi is aiming to become a new video distribution platform, combining over-the-air broadcast and internet delivery. While their strategy is ambitious, I have some doubts.

What it gets right:

• Video on Demand. These guys seem to get the transition from channels (called “nothing more than playlists for shows” by Sezmi co-founder Phillip Wiser) to VoD.
• Storage vs. Delivery. Storage is still cheaper, and Sezmi will “pre-load” it’s Terabyte box with some content, based on the results of a predictive software algorithm.
• Navigation. Sezmi is developing a viewing guide that will combine traditional TV fare with internet content, in customized “channels” that automagically group content by category.

What it doesn’t:

• Content. None announced yet, and Sezmi is attempting to extract per-sub pricing from the networks that’s identical to what the telecablecos pay. Good luck with that.
• Pareto’s Rule. The model relies on the fact that only a few shows account for most of the viewing at a given time. True enough. But take away the option for (or even impede) viewing that occasional odd show, and you’re D.O.A.
• Inertia. Such a new paradigm will create difficulty with viewers who are more interested in plopping down in front of the tube than in learning a new technology, box, and way of viewing TV. Certainly not impossible, but not easy either. At least with TiVo (TIVO), consumers could always default back to their old habits if they wanted–Sezmi will require jumping in with both feet.
• Cost Structure. This is where the wheels fall off, I think. Sezmi claims it can deliver TV for half the cost of cable, not having to pay for physical pipes. But it must pay to lease extra local broadcast spectrum. And it piggybacks on telecableco internet pipes that are largely cross-subsidized by the very content distribution it aims to disrupt. Let’s see how long that lasts. Not to mention beaucoup marketing and subscriber acquisition costs just to get off the ground–investments that incumbents like Comcast (CMCSA) and Time Warner Cable (TWC) have largely made.

My bet is that this will get lots of press, a few rollouts, and ultimately fail. If Sezmi is able to get some of its predictive algorithms right and create a useful way to combine internet and TV programming into a single guide structure, someone will buy it eventually–at a price disappointing to its VCs–for that technology alone.

Otherwise, Sezmi simply becomes Sezyu.

Disclosure: I hold no position in any of the stocks mentioned here.

Don’t you hate your movie having a greater dynamic range than your hearing? Is that explosion too loud and the dialogue too faint? Getting tired of having to increase your TV volume for DVDs only to reduce it again to watch TiVo?

Me too. Now there’s hope.

Dolby Laboratories (DLB) this morning announced the first market availability of its Dolby Volume technology. Dolby Volume automatically adjusts for differing volume among separate video sources, which means that video streamed from your PC will be the same loudness as your TV, which will be the same as the DVD you’re playing. Should help with commercials blaring at you, too.

What’s more, it also adjusts the frequency response at lower volumes to optimize the sound and account for what’s happening on the screen. So for example it can boost the midrange so those explosions on Iron Man won’t drown out the concurrent dialogue.

Dolby continues to find ways to make itself indispensible to CE manufacturers. It’s business model is sound, and I have a bias for IP models with big moats that generate lots of cash. It’s going to have to come up with a bit more growth, however, to justify its current valuation. At 35x Free Cash Flow, it’s not exactly trading in the nosebleed seats, but it doesn’t leave much room for error.

Still, Dolby Volume should help. Good stuff, coming to your TV soon.

Disclosure: I hold no position in any of the stocks mentioned here.