Is there anything in the business model you don't like but that Henry does that would prompt you not to hold the stock?
How's that for blunt?
I like it! As for the business model and not holding the stock, there are a few concerns.
(1) is Henry's eBook plan. First off his plan is in complete conflict of interest with the publishers and etailers. Henry's strategy in ebooks is to take between 15-90% of each book transaction. He gains % by disintermediating publishers, printers and etailers like Amazon. Why would a publisher or etailer want to aid Henry in this disintermediation process by setting up Gemstar ebooks as the standard.
Absolute security and critical mass of readers. Henry has the former but the latter is in danger. A $299 price point. I can't give out any cost information on the ebooks, but what I can say is that Henry is not doing all he can to distribute these books as quickly as possible.
This is particularly disturbing given Henry's often stated claim of $99 ebooks, and selling millions of them by next year. Not at $299. The price needs to hit about $99 or so to do that.
Also, the go straight to the consumer market is a mistake as well. (1) little content, (2) high prices, (3) no compelling value proposition; does this sound like the Apple Newton to anyone?
What these ebooks need to do, as specified in Crossing the Chasm, is find markets where the ebooks will provide compelling value. This is not in Henry's plans. I can't reveal any of Thomson's plans, and this strategy may yet take shape, but in the end it is up to Henry, and he was not very excited about any use of the ebooks other than as consumer reading devices.
In the enterprise market, for example, there is no chicken and egg problem, enterprises have swarms of digital documents they need managed. Employees, forced to use ebooks at the office will venture to use them in personal life, and before you know it the consumer market will develop on its own, etc. There is demand in this arena, this is not vapor-thought.
There are also issues regarding the functionality of the ebooks. This goes to Henry's preference of making the ebook a device that can only connect to Henry's servers and download materials from there. All other functionality wrung out. I don't know how this will work out either, but it certainly removes many of the myriad uses many of us envisioned for the books. Again, this is Henry's preferences, nothing written in stone.
The possible uses of the ebook are further squashed by Henry's insistence that he will not license out the technology. Everything must go through his servers. Can you picture a fortune 500 company putting all their documents on to Henry's servers and then integrating their software processes to Henry, and then trusting Henry to be the outsourced ASP? Of course not. Henry's decided to use a closed system with ebooks, and concentrate solely on the consumer market. As gorilla gamers, most of us should have some concern in this approach. Moore has specifically stated that almost without exception new technologies do not cross the chasm in the consumer market. Ebooks may be another lesson in this regard.
But, despite what I consider a fundamentally flawed go to market strategy that is taking place, the thing that really has me upset is the outright puffing that Henry did on ebook price points and sales targets. Henry knew better when he was making many of these statements. This gives me much less confidence in the $150 per household projections for the IPG. This is in total contrast to a CEO like Mr. Hunter at CREE who soberly and conservatively gives guidance quarter after quarter after quarter. I can trust the information and projections out of CREE as honest and conservative, can we say the same for the projections coming out of Gemstar?
In the end the IPG is the reason to hold GMST. IF I can no longer trust Henry's projections after I've seen how much he outright puffed ebook estimates, can I still trust his numbers on IPG?
Fortunately, even if he only gets $100 per household on the IPG (instead of $150) GMST will clean-up.
The other concern is still uncertainty over the TVGUIDE business. The business has changed dramatically since last summer. I have kind of lost touched with that aspect of it.
But those are just some general concerns. I have many more specific ones, but the only one that would materially affect my opinion of the stock (1) Trust in Henry's numbers on IPG and (2) Getting a handle on the TV Guide businesses. I'm currently perplexed on that end, particularly on how this will affect growth rates going forward and margins. My model still has Gemstar doing about 60% net margins and 65% CAGR over the next 5 years. I haven't found enough info to integrate TVGUIDE into the model. So I have trouble trusting my models going forward. This has affect on my judging valuations with Gemstar going forward.
Didn't stop me from picking up some GMST when it fell to the 50s yesterday. Some things we just intuitively know are too good to pass up;)
Incoherently, Tinker
P.S. I of course hope the billionaire is right in the end and I'm proven wrong, and indeed given the venom coming from the industry I have no doubt GMST is a gorilla or on the verge thereof, but yes, GMST's handling of the ebook products do concern me. In the end Henry may actually have to spend some serious dollars (not just advertising barter money like with the $100 million ad campaign of which $75 million will be barter) if he wants to succeed with this product. That would put a big crimp in 100% gross margins and 50% net margins.
Well, I hope I haven't rambled on too long.
BTW/if the ebook business does work out, and Henry can establish himself as the industry standard and get 10 million readers on the market, etc., ebooks can easily be a several billion dollar 90-95% gross margin business. It is frustrating to see this potential go to waste with the fundamentally flawed go to market strategy that Gemstar is using. JMVHO all. Not that "humble" much less "very humble" and Shaw has often gone hand in hand. |
