CONSUMER STRATEGIES REPORT August 19 2003

al berrios & co. CONSUMER STRATEGIES REPORT 08.19.03: My Day In A Mob: Blackout 2003

QUOTATION OF THE WEEK
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"I don't think we have local competition in place in a substantially meaningful way yet," said Chairman Michael Powell explaining his views on the telecom [and most other] marketplace(s) at a conference denying rumors of his resigning his post at the FCC.

I hope last week's Blackout had a trivial impact on your life. But did you understand everything that occurred? Friday, I published an article describing my experience and explanations for the behaviors you may have witnessed. It is below for your consideration.

As a result of the Blackout, last week's panel on Entrepreneurship & Advanced Negotiations at Baruch College's Zicklin School of Business has been reschedule for this Wednesday, August 20, 2003 (that's tomorrow), from 5:45pm until 7:45pm. Speakers still include a venture capitalist, a consultant who's previously sold his tech company, and a corporate attorney. As usual, RSVP by replying to this email. There is no cost to attend if you've received this email.

On November 6th, al berrios & co. will be sponsoring and hosting a forum called "How To Spend A Hundred Million Dollars Reaching Consumers And Other Marketing Not In Textbooks" at Baruch College. Featured speakers will be major consumer products manufacturers. Stay tuned for details.

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[3] OPINION
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The Entertainment Analysis Futures Market
By Al Berrios

...skip to section:
> Why Could This Work?
> How Could This Work?

A couple of weeks back, the Pentagon launched a highly controversial marketplace to assist them in predicting where and when terrorist activity might occur. It attempted to harness Wall Street thinking in a futures market to help them become better predictors. The plug was quickly pulled due to ethical concerns, not to mention the possibility of terrorists profiting from this marketplace.

Predicting terrorism didn't fly with the American public, but what about predicting movie studio flops and successes? Imagine if we could predict "Gigli"'s performance based on the script, the actors involved, the directors, producers, and marketing plans committed to this production before spending the first penny? I believe that an entertainment analysis futures market has vast potential for the future profitability of the entertainment business. But how do we gauge consumer attitudes towards current events? After all, Arnold's "Collateral Damage" wasn't released on time due to 9/11's events because it was believed consumers would consider it in poor taste and wouldn't want to see it? But don't consumers naturally seek more information on relevant subjects and didn't "Collateral" deal with subject matter particularly relevant during that time?

Movie studios have already started spreading their risks by partnering with other studios on big projects. Other studios have decided to simply set limits on production budgets. And finally, studios have increased the amount of licensing and advertising partnerships in place to reduce their investment risks. All these attempts at reducing risks simply squelch creativity and limit the subject matter that can be produced to strictly marketable projects.

An entertainment marketplace would pump needed capital into projects, and only as much as investors believe the project to be worth, meaning, movies can start becoming profitable again just from showing domestically, with all other sources of revenue being cream. Capital unencumbered by politics, egos, or low risk-tolerance would also increase the likelihood of producing more specific, less general-interest, highly creative, cultural phenomenons. It could make every production a "Blair Witch". And it would definitely democraticize the production process, as the business would no longer be restricted to big Hollywood studios or big-pocketed producers. (Right, the establishment obviously doesn't want this, but in the end, everyone stands to make more money, especially the establishment, already having the experience and resources necessary to remain competitive.)

And although movie studio corporate parents have publicly available stocks which increase or decrease in value often based on the success of a particular movie production (i.e. Disney's "Nemo"), in this day of conglomeration, the viability of one production is still not predictable, yet very necessary.

First, we'd need a constant gauge of consumer social trends to increase our insight into our investment decision into particular productions. I'd naturally suggest leaving that to my firm, as that's all we do. Second, the variables on which we'd make our decisions would also have to have some scientific proof of validity (i.e. James Cameron or Cameron Diaz committed to a film would yield lower risk and yield than say, lesser known names who would command higher risks and yields.) I propose basing expected profits on historic performances of prior works. Third, we'd need maturity dates, so that investors don't wait indefinitely for rewards or losses. (i.e. "Charlie's Angels III", directed by James Cameron, due in 23 months). If "Angels" doesn't get done by then within its budget given to it by the value investors believe this production has, future projects with these names associated will automatically have higher risks. Success or failure affects the grade of the variables, assigned to them by some independent body, such as Standard & Poors or even movie-goers, essentially creating an eBay rating system for these variables. I don't really believe this will impair creativity, but rather, enhance it based on what consumers demand.

Although I've heard of marketplaces similar to this, I don't believe it's being exploited optimally due to the lack of sufficient or appropriate consumer variables, which my firm can develop and provide regularly using our methodologies.

Eventually, this same marketplace can accept other forms of content such as books, television programming, and Broadway productions. I don't believe music would really make sense with this model, as the cost of music production has diminished considerably since the late 90s. Good books require research and bills which can run into the hundreds of thousands; good television programming and broadway shows requires good casting and setting, which always runs into the millions. All require marketing, which, due to the high cost of production, is always small, leaving entertainment an intensively competitive business, open to those who have the funds.

[4] PREDICTION
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Wireless Programmers, Distributors, and Manufacturers Need to Learn to Play Together Better; Chairman Powell Gets Benched For Good
By Al Berrios

...skip to section:
> Exclusive Deals Will Make Everyone Money
> Changes At The FCC
> We Called It On Wi-Fi

I find it interesting that content companies seem to be getting too much attention lately for doing something that's a natural consequence of competitive forces - pumping their content through any media possible. (i.e. Disney's recent entry into wireless.)

Our research (to be presented at the ARF Conference) has shown that consumers respond well to this strategy. And even though American consumers comparatively take longer to alter their media usage habits, American content companies, through collaborative marketing efforts with their distributors, will ultimately succeed in forcing it down our throats in record time.

Unlike cable, though, the variable that puts an obstacle on the rapid adoption of wireless content are the handset manufacturers that haven't fully aligned their strategy with that of the content makers. Content is, and always will be, king and even the most geeky tech guys will tell you that technology must serve the content for it to be successful.

Accordingly, I also believe that exclusive content arrangements between wireless carriers and handset makers is the only way that any of the players will achieve profitability from the branded wireless service business (a.k.a. affinity services like Disney's). Consumers have already been programmed to subscribe to quality content, however, where's the value if the same content is available everywhere? (Think HBO...) Not only that, today's consumer appears to be more price sensitive to wireless content than (hopefully) the future consumer. (I've personally observed teens in suburban movie theatres in New Jersey and New York self-limiting the amount of text messages they get and send out, acutely aware of that 10-cent surcharge). Based on discussions I've had with industry analysts, I anticipate that it'll take at least 3 years to change American consumer's sensitivities to price and get them to adopt wireless content. And once consumer's standards for the value of a wireless minute has been firmly set, can carriers and handset manufacturers begin to realize value from their content deals.

In the middle of all this is the FCC? Michael Powell seems to have taken lessons on making friends in Washington from Harvey Pitt. He crudely navigated his way around Washington bureaucracy and despite his renowned brain and high-powered dad, he's widely expected to not remain in his current position as FCC Chairman too long. I give him 12 months tops. First Next Wave Communications wins a ruling against the FCC for illegally taking away and auctioning their wireless spectrum licenses to Verizon. NextWave has successfully sold them to Cingular in a better deal for the industry. Then the FCC's controversial decision to ease regulations for broadcast networks was reversed by Congress, effectively telling Chairman Powell that he's incompetent. And Congress has practically left him out of the conversation on cable billing, something that the FCC should be leading the charge on. He hasn't just fumbled the ball, he's been benched.

His excuse? He's got two: First, that there are two many chiefs. The FCC has five members that by law have to be members of opposing sides. These commissioners are always negotiating for their version of language in all piece of regulation, making action by industries in their purview very difficult and always open to interpretation. This 5-headed hydra would never work for in a corporate environment (imagine 5 co-CEOs?!) because it prevents the FCC from being nimble and decisive.

This independence also presents the second major problem for Chairman Powell. He firmly believes that the FCC should be governed as a part of the Legislature or Administration. He believes the FCC should serve the politics of the day of either of these bodies, and not have the cumbersome burden of voting on every last detail. Using the co-CEOs scenario: they're not really co-CEOs, they're more like vice-presidents without clear guidance on what their function should be, helping the people or supporting the policy.

And finally, although not formally admitted to as a problem by Chairman Powell, this tedious bureaucratic process has the unfortunate result of missing competitive developments. All of the industries in their purview progress and change quickly. As technology improves, competition changes. And this is happening faster and faster every year. Although the FCC is required by law to defend their regulations in Congress, it is often difficult to explain their positions to elder statesmen and other uninformed politicians about the state of the industry and why they did what they did. As evident by their reversing of the FCCs relaxation of ownership regulation, Congress isn't addressing the competitive landscape, their addressing popular opinion, which is uninformed.

Another example of this blatant missing the boat on competitive conditions in the market place is the seemingly overnight adoption of wireless fidelity or wi-fi. Originally believed to be the next big thing after the internet, wi-fi allows users to wirelessly log on to the internet and intranets. No wireless means increased productivity. Although the FCC is firmly entrenched in the regulation of this medium, the technology and its uses is difficult to grasp for a bunch of self-interested vice-presidents, all trying to be the main head of their hydra. Their lack of prompt and decisive action has virtually shut the market out from small businesses and dropped it in the lap of the Cisco's and Intel's.

[5] OPINION
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Politics: No Longer For Guys Too Ugly To Be Actors
By Al Berrios

This thing in California was a joke, until actors started organizing themselves to be politicians. Arnold's recent appointment of Rob Lowe to help get celebrity support for his candidacy may seem ridiculous, but in a society that's manipulated by TV, who better to lead us than its most prominent role models: actors.

I do believe Arnold will win, no matter what he represents, because contrary to what politicians believe, constituents do prefer a take-charge type of guy, with clear-cut simple goals and standards. And in a time when unemployment is high and morale in our system low, Arnold's strategic entry into politics is almost too perfect to believe. But aside from his obvious character qualifications, he's also got his most powerful weapon, familiarity, which, as we've argued in our media influence argument, ("An Analysis of How Media Companies Influences Consumers") has given him influence over the whole world, not just California. Even my friends in Brazil know Arnold's running for governor.

In an article in the Wall Street Journal Thursday, August 15th debating the decision for Arnold to appoint an anti-immigrant campaign spokesperson, I think Allan Hoffenblum, a party political consultant, said it best: "if Arnold Schwarzenegger and Cruz Bustamante were to show up two blocks apart in a heavily Latino community, who do you think would draw the crowds?"

Disclaimer: The recommendations, commentary and opinions published herein are based on public information sometimes referenced via hyperlinks. Any similarities or likeness to any ideas or commentary from any other sources not referenced is purely coincidental. al berrios & co. cannot control any results occurring from advice obtained from this publication nor any opinion(s) conveyed by any reader of this publication.

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