Interesting interview in Barron's with David Richards, evidently a pretty savvy money manager.
interactive.wsj.com
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He is currently 20% long in his personal portfolio. He is short a bunch of stocks, mostly techs, and expects a lot more tech pain. He is long 3 stocks, one of which is GMH. Here are some of his opinions about the internet, the new economy, GMH and the satellite industry:
"Q: How do you explain the tremendous excesses in the Internet and telecommunications companies, and now the selloff?
A: There has been a misallocation of capital. The demand for traffic, say, on the 'Net is very different from the dollars that will be generated by that traffic. As an individual, I can call up any Website from anywhere in the world and I can have any kind of content on it, whether it's video or Napster or whatever. Somebody has to pay to get that site to me over the Internet. They have to pay for the routers and the switches and the fiberoptics and get it to me. I am demanding that. But I am not paying anything for it. The phone companies and the Internet service providers have been able to continually upgrade their systems by issuing more stock, more junk bonds. Now that is over. The spending has to slow down. It is not going to go away, but the growth rate will slow.
Q: So the return on capital will never pay for the level of investment?
A: Yes. It is just not obvious to me that this great demand for capability assumed by the buildout of the tremendous fiberoptic networks is going to be enough, soon enough, to make it pay off. Increasingly, if a company's customers weren't making money, companies would still sell to them and use vendor financing to enable them to grow. If, after two or three years, they still aren't making money, you can't continue to do that. They go broke. Your receivables are bad. Volume slows. Companies have a harder time issuing debt. Bankruptcies occur. It backs up on the manufacturers, the consultants and everyone else. And that has an impact on the money people have borrowed and spent for houses and cars and everything else.
Q: You're also concerned about saturation in terms of Internet usage, aren't you?
A: Internet usage in households shot up to 50 million from two to four million households. There are 100 million households in the U.S. Of those 50 million that aren't hooked up, probably 20 million can't read much. You have to read on the 'Net. It's not like watching television. That last 50 million also includes the elderly, the low-income people. So you've probably hooked up 80%-90% of the disposable income of America right now."
. . .
"Q: What about new applications, new sources of growth?
A: Well, for instance, I don't know whether video-on-demand over the Internet is a real money-making proposition. The 'Net is not designed for video at all, and it is not really designed for sound. The model appears to be similar to what existed in the computer business, when there was an IBM mainframe and dumb terminals. You call up a database of movies and choose one and it's shipped to your computer and you watch it at any time of day. The quality is poor. And the only people that can do it are those who have a DSL [digital subscriber line] or a cable hookup. The cable hookup is a disadvantage because it's a party-line technology: if somebody else in your neighborhood is loading movies it will slow down your system, too. Besides that, there is a competing technology on the horizon.
Q: Which is?
A: Which is TiVo. TiVo is to video-on-demand what the PC was to the mainframe. You put the hard drive on the TV and you get the stuff off satellites and DirecTV.
Q: Is TiVo a threat to the Internet or to the cable industry?
A: All of the above.
Q: Go on.
A: What we expect in the way of a great future from video-on-demand, a paying proposition where the quality is superb and the flexibility of choice is huge, may never come because it may come in this other form, TiVo. At least, this other form is going to be a significant competitor to it so the potential for video-on-demand is smaller. But I think satellite is a death star for the cable industry.
Q: Do you own TiVo?
A: No. It's a small, speculative company and it's so tiny I just don't want to get involved.
"Long term, Hughes Electronics will be worth a great deal of money."
Q: You've mentioned DirecTV, and you're enthusiastic about satellite. Do you own Hughes Electronics?
A: I'm long Hughes. There is big cash flow. I look at the value of the company and at the value per subscriber and look at the degree of saturation and output. At the end of last year, they were allowed to put local channels on their system, making DirecTV a viable competitor against cable. It's a more efficient way to distribute videos and movies. They are going to have much stronger Internet capability in a few years. It's an asset that clearly has a long way to go in terms of growth. That's why so many people are interested in it. Malone, AOL, Murdoch. This will be how entertainment is distributed. This is the future.
I don't know what it's worth or what General Motors is going to do with it. But long term, it will be worth a great deal of money. The per-capita cost of buying into it now, with its market cap of about $40 billion, is one-third AOL's, yet its revenue base is virtually identical to AOL's and its market is far less saturated. It receives higher revenues per customer than AOL: $60 a month instead of $20 or so. They have about 10 million customers and will have 15-20 million in a few years. It is a huge asset for General Motors, worth over $20 a share of GM stock."
Needless to say, I agree with almost everything David Richards says. Only, I prefer Loral to GMH. A much much better bargain, IMO -- although more risky, of course.
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