Diane Francis on Business Issues

Wednesday, September 13, 2006

Hewlett Packard and Patricia Dunn

Hewlett-Packard's stock recovered yesterday after its board announced the resignation of its Chair following a scandal involving dirty tricks against certain directors.

But the board's actions, before and after the scandal became public, is in itself scandalous.

The woman at the center of it all, Chairwoman Patricia Dunn, apologized yesterday. But the board said she will remain Chair until January and a director after that despite all the embarrassment she has caused shareholders as well as the fact that the story as known thus far certainly reveals poor judgment on her part.

Ms. Dunne certainly knows her way around boards. She is a high-profile player who oversaw the removal of Carly Fiorina as HP's CEO and helped find a replacement.

Apparently, it all began when she became angry after a media outlet quoted an anonymous HP source who reported that a meeting of directors was held at a posh spa in Southern California.

She hired private detectives to find out who was talking to the press.

It's not a good idea for directors to talk to the press about company business but it's not illegal unless it involves confidential, fiduciary board discussions or knowledge.

That certainly wasn't the case here.

By telling the press the board met at a posh spa, the director was disclosing to shareholders that perhaps board venues should be less expensive
So what did the Chair do?

She went out and spent more shareholder money hiring detectives to find the director who told shareholders their money was being wasted on fancy meeting venues.

What happened next was not her fault, however, the buck always stops at the top.
The detectives used questionable, possibly illegal, means to unearth her director-culprit.

And they found him: George Keyworth II, a highly respected former science advisor to President Ronald Reagan and director of the physics division at the Los Alamos National Laboratory.

In the spring, she confronted him in front of the board and demanded his resignation but he refused. Then the board banned his re-election as a director.

Another director, famous venture capitalist Tim Perkins, resigned in disgust.

So now what's left is a queen-sized mess.

The FBI yesterday told newspapers that it was looking at whether Ms. Dunn's detectives illegally wiretapped individuals and illegally hacked into their computers.

Ms. Dunn said that the investigators she hired impersonated board members and journalists from the Wall Street Journal, New York Times and other prominent outlets, to acquire their phone records. Ironically, she's a former freelance journalist herself.

Yesterday, she issued a statement to distance herself from the detectives.

"Unfortunately, the investigation, which was conducted with third parties, included certain inappropriate techniques. These went beyond what we understood them to be and I apologize that they were employed," read her statement.
She also tried to defend the need for the investigation.

"These leaks had the potential to affect not only the stock price of HP but also that of other publicly traded companies," she was quoted as saying.

I find that a stretch.

In fact, I think it behooves Ms. Dunn and her board pals to answer some of the following questions raised by all of this.
How much did the posh spa cost shareholders? How many posh spas, jet flights and other perquisites has this board been enjoying?

More importantly, how much has all this damage control as a result of her foolish requisition of detectives cost shareholders?
The private detectives charges?

The crisis management costs?

The legal advice bills as a result of this scandal?

The cost of attorneys going forward now that the police are involved?

What's the damage to the brand Hewlett-Packard as a result of all this unnecessary upheaval?

What's been the reduction in market capitalization?

Who's responsibility was to oversee the efforts of these investigators, along with Ms. Dunn, and how can the board justify keeping either her or others employed?

Lastly, why should any shareholders vote for this board of directors next year?

Wednesday, September 06, 2006

Tom Cruise Unplugged

It used to be said there's no such thing as bad publicity, but just ask Tom Cruise and Mel Gibson.

Their firings, over bigoted statements, are "brand chill", or a warning to the overpaid members of Hollywood's brat pack that if they too become defective they will be discarded.

In fact, a market correction may be underway, given the fact that Hollywood is embattled. Like overpaid CEOs in sunset industries, these superstars cannot make the case that they should make mega dollars and benefit more than others.

Cruise's goofy Scientology, girlish outbursts about his female friend and dismissiveness of psychiatric drugs led Viacom Chairman Sumner Redstone of Paramount Productions to end a 14-year partnership. He called Cruise's behaviour "suicide" and said it was affecting his box office popularity.

Mr. Redstone estimated that Cruise's "Mission Impossible" sequel should have made US$150 million more than the US$383 million to date due to his offensive remarks.

The "brand discipline" imposed on Mel Gibson is much more severe and permanent. Now in rehab for alcohol problems after his arrest for drunken driving, he is probably finished. Or should be.

His anti-semitic outburst, during his arrest, as well as his arrogant threats toward the police cost him a television series deal immediately. And photos of him with a bevy of young beauties in a bar that night certainly raises questions about his marriage and Catholic faith.

In the days that followed these revelations, Gibson published an apology that repaired nothing.

Today, there are rumors that his next self-financed extravaganza "Apocalypto" may never be released or distributed. If true, that will mean he is financially as well as professionally finuto.

What's interesting about these silver screen dust-ups is that they further underscore an inflection point in the world of entertainment.

Salaries have become so stratospheric that performers are often self-destructive, indulging themselves, morally or otherwise, without regard to others, including their business partners. Think Cruise or Gibson. Think Michael Jackson.

At the same time as the business world has created these monsters, Hollywood is embattled, as are all artistic businesses, as a result of the web and computers.

The music industry will never be the same. But animation and special effects have started to crowd out big-name talent in terms of attracting crowds into movie theatres. These include recent blockbusters such as the "Lord of the Rings", "Harry Potter" or the "Incredibles".

The public also has a thirst for documentaries which take on subjects as diverse as global warming, penguins, McDonald's or President Bush.

Games are also a problem. Video games now earn more revenues than Hollywood's movies, a cross-over that occurred two years ago.

Then there's piracy. The industry is wrestling with the switch to digital filmmaking, which creates significant benefits for studios -- it is cheaper and provides better picture quality -- but will require more attention
to the risk of piracy.

What's also different is how the marketplace has waded into all these issues too, imposing discipline on the studios. Stocks thud with every dud.

So perhaps what we're seeing is a badly needed market correction.

"Many insiders say that only one in 10 bets pays off in movies,"
said Harvard Business School Professor Anita Elberse in an interview with me last year. "If you are looking for a sure return to your investment, you should not invest in movies."

There is also no link between success and star power, she said.

Stars have more staying power because they are, by definition, good at selecting the best scripts and portraying their characters. In addition, they have the best advisors and marketers to enhance their reputations and salaries.

But the payoff is minimal. She examined the financial results of 500 movies since 2001 involving 600 stars to determine whether there was a payoff for the
enormous amounts that movie stars earn.

"There is," she said. "On average, a major star is worth US$3-million revenues."

But to some studios a star is worth much, much more.

Take the all-time record payout which was earned by the mildly talented Keanu Reeves. After turndowns by all the A-list players, even he had to be enticed to lend his name to the "Matrix" movie.

The project caught the public's imagination and his revenue-share, back-end deal ended up giving him the biggest payday ever, or US$225 million.

His salary range went up but his movies since then have been bombs which proves that paying huge sums of money to anyone, whether a talented, known actor or CEO, is no guarantee of success. Or failure.

Tuesday, September 05, 2006

Jeff Jarvis, Blogger

Jeff Jarvis is a pioneer columnist, blogger, consultant, and professor who believes that journalists and advertisers are impeding the media's transformation.

"I hear complaints from newspaper editors about how hard it is for them to maintain the size of their newsroom," said Mr. Jarvis in a recent interview in New York. "No other industry talks about how to maintain the size of its shop floor. The world's changing and everybody must. It's ridiculous. Newspapers are too wasteful, commoditized and too much about supporting egos."

Mr. Jarvis now writes a blog called BuzzMachine.com, is a consultant to the New York Times, a columnist with the online version of Britain's The Guardian and newly-minted professor at the City University of New York's Graduate School of Journalism.

His credentials as a traditional journalist are also impressive: former columnist with the San Francisco Chronicle, TV critic for TV Guide and People Magazine, creator of Entertainment Weekly and former Sunday Editor and associate publisher of the Daily News.

But today he is an icon among new media types because of his track record and his outspoken criticism of mainstream media and its advertisers.

"The news business sends 15,000 journalists to the two big U.S. political conventions because everybody wants to get a byline from there and who notices bylines?" he said. "My mother didn't even notice my byline when I was writing in a newspaper which she read every day. Most of the news is on C-Span anyway."
Pundits are also over-rated.

"We don't need another TV critic or a movie critic. Movies are the same everywhere so why should every newspaper have a critic? Golf writers too," he said. "Advertisers are way behind and should be demanding more for their dollars or paying less for all that duplication, waste and ego-tripping they are getting."

Television advertisers and execs don't understand the industry is collapsing.

"Neilsen said that the networks are getting 28.8 million on average, the lowest in history," he said. "Meanwhile, uTube [a free web broadcast that uses content from viewers] is getting 100 million viewers a day."

"For example, [comedian host of The Daily Show] Jon Stewart went on CNN's `Crossfire' to kill the program because he hated it. CNN viewership for that show was 150,000 only, which is why it was cancelled," said Mr. Jarvis. "After Stewart's appearance, the show was on various outlets on the web and had an audience of 10 million. So there you have it. 150,000 viewers on CNN versus 10 million. What CNN should have done was put that segment on its website and make a fortune."

He's a champion of so-called "citizen journalists" or people who voluntarily write or broadcast news or opinion pieces on-line. Likewise, he believes that the best critics in our society are bloggers because they are free from constraints, whether it be imposed by owners, advertisers, editors or publishers. An example of his own independence was his recent battle with Dell Computers.

"I bought a Dell laptop that sucked and the service was worse. Finally, in exasperation, I wrote about this on my blog, under the headline `Dell Sucks'. I know it sounds juvenile, but six million people went to my site and thousands commented because the problems were more widespread than just mine," he said.

Mr. Jarvis continued to hammer away at Dell without any reaction until a Houston newspaper called Dell for comment and BusinessWeek featured the company's low stock price and the heavy blog criticism.

"The point was the stock price and other problems at Dell were not my fault," he said. "We, the mob, were the leading indicators of what was going on at the company. We are the canaries in the mine and it's actually a business benefit for companies to read these blogs."

Eventually, the company began addressing the issues raised by Mr. Jarvis and others.

"It's certainly a mistake to think that public relations is about telling people things and not about listening to what people are saying," he said.

Likewise, he believes that citizen journalists and blogs provide needed analysis or, in the case of CBS and Dan Rather, raise important questions concerning mainstream media accuracy.

He said only a few companies have transformed themselves.

A Nashville TV station pays bloggers to shoot video of news events for them and has a blog editor to coordinate these submissions. A local California newspaper, completely written by readers and citizen journalists, was launched last year and was immediately profitable.

Britain's Guardian has a web-first newsroom policy, meaning that all "scoops" must immediately be published on-line, rather than held for the print edition the next day.

"This is the crown jewels of journalism, the scoop, but it opens up the process. There is no such thing as a scoop anymore that lasts for more than two seconds anyway," he said. "And people with cameras and notepads on the ground can find out news that no newspaper or TV station can afford to dig up. That's the beauty of the new media."