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Apple as Another Sony?: Talking to Michael Whalen

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First, happy Memorial Day to all of our service men and women around the world and at home (see my comment on Breitbart.com). 

Over the past decade, I have been discussing the tech sector with my brother Michael Whalen who is currently the Head of Digital Rights Administration for TuneSat,LLC. TuneSat’s audio fingerprint technology monitors hundreds of TV channels in 14 countries and crawls millions of websites.  Mike is a professor at NYU and The City College of NY, a two-time Emmy® Award-Winning composer as well as an internationally-known recording artist. In terms of reference points, let’s just say that Michael put me on to Apple Inc. (AAPL) over a decade ago, just before the introduction of the iPod and iTunes.  He has been watching the transformation – maybe decomposition – of the media industry from the front row.  I caught up with him last week in NYC. -- Chris

 

RCW:  So Michael, we have not spoken in some time about the tech/media sectors.  Let's start off with the obvious topic, namely AAPL.  A year ago this company could do no wrong and the stock was neat $700, but now AAPL's future prospects are very much in doubt and the stock is below $450.  Vast piles of cash is just not the same as growth, I suppose.  How do you see AAPL today and going forward?

MW:  Ah, AAPL... it's pretty clear that their transition from being a innovation company to a company that manages the innovation they've already created is just about done. Look at their pipeline - it's all improved versions of what we have already got: lighter iPads, faster Macs and iPhones with more stuff. Beyond the endless rumors of a really expensive television, Tim Cooke's big idea seems to be AAPL moving from the hardware business to the information business – namely iCloud.

RCW:  Is that a bad thing?  How many new gadgets can any company spawn in a decade?  Why do I feel a sense of déjà vu? 

MW:  It's highly debatable whether AAPL iCloud is making the inroads that they predicted. AAPL is building military-grade data centers around the country - but the jury is out on the short-term wisdom of this strategy. In other words, how many times can you re-sell me my own iTunes library over iCloud? For the long-term, this idea MIGHT work but then anyone who is serious about being in this business is looking at how data services have become commoditized and they're everywhere - - with the price slashing and much lower margins that come with it. Look at the Amazon (AMZN) business data services - they have more "virtual servers" than just about anyone and they're feeling the downward price pressure. So, the "data wars" have started to happen and the overall picture is muddy at best.

RCW:  Agreed on AMZN cloud servers, which is a great but commodity product.  How can anyone compete with irrational players like AMZN or Google (GOOG)?  So what would you do?

MW:  I think AAPL's best play is to take what's left over cash from their very ill-advised stock buyback plan and to start BUYING technology companies. If they don't have the creative wherewithal to do it internally - they have the checkbook to make some serious strategic acquisitions. Here's idea #1: buy companies OUTSIDE of media, technology and entertainment.

RCW:  So, what, steel mills?  I know you are not very keen on the media space as a store of value.  Where do you go in terms of M&A if you are AAPL?

MW:  The television networks and film studios, which are looking to be bought (did someone say Sony (SNE)?), aren't worth their current valuations.  It's already a buyer's market out there. So staying away from "media" companies is smart. But how about alternative energy companies? There are all kinds of conversations about "wireless electricity" and optimizing solar. You need energy to power all those servers - right? (laughs).

RCW:  You’re kidding, right?

MW:  AAPL has some major decisions to make and building a new billion dollar campus in Cupertino (Steve Jobs' design) is further evidence that they're looking in the wrong direction.

RCW:  Agreed. I have to chuckle hearing your analysis.  For all of those years when AAPL could not get out of its own way operationally, nobody would have ever suggested that they become an M&A platform.  It’s easy to buy when you spend other people’s money. Now that AAPL is the top dog in a declining space, do you really want them to start buying more operating assets?  Your comment on SNE is very telling here because it reminds me of AAPL today.  What value do you see in the media space?  I am not sure that I'd want AAPL to spend my money on deals.  Isn't the stock buyback the best course? 

MW:  You'd think that the stock buy-back would be "prudent" for AAPL. However, what kind of economic weather is AAPL preparing itself for? Are we rolling up the drawbridge in Cupertino and getting into a siege mentality? If the widely anticipated "depression" on 2008 hasn't happened yet in the United States – does APPL know something we don't? Frankly, they've done very well as a publicly traded company predicated mostly on the "heat" of their brand. I assert that if Steve Jobs was still at the wheel at APPL he'd be taking that money and putting it into development. So, given that they have about 45 billion dollars left over (mostly offshore - by the way), I would like to see them investing outside of their declining space. There is VERY little value in the media space long-term.

RCW:  As you and I have discussed, entertainment as an economic proposition seems to be sliding backward into a model where artists have sponsors rather than revenue. Think the Middle Ages here.  If you are not Tom Cruise, then the studios can’t monetize your content.  What does any media company do with a pile of cash?

MW:  The Internet media business is a business that moves at light speed. People under the age of 21 don't "view" content - they devour it. So, as a response, the film studios have become banks to finance the few "big" movies they do produce and they are making fewer and fewer of those pictures. Also, they have co-opted their investments into bite sized clusters that almost eliminate their risk – but these projects don’t build anything for the future either. The studio bosses are patting themselves on the back with their 2012 numbers - but they know in reality that the party is over. The future of media is about being a lean, mean and a profitable machine.

RCW:  That does not sound bad.  But explain why the major media companies are not building foundations for future revenue? 

MW:  You might have seen the strategy of Netflix (NFLX) to create "high end" content for their customers. In some ways, this strategy has paid off in the short term by converting some of the “boo birds” on Wall Street to stop telling investors to sell after 2 very long years and give the company a second look. Their shows have created some positive buzz and their subscriber base is over 40 million worldwide. The bad news is that they cannot possibly keep spending money on content and over-priced licenses. Reed & Co. at NFLX have done a good turnaround but their moves are just a version 1.0 of the realignment that I am talking about. Said another way, you won't see Netflix spending $100 million on another series EVER again or certainly not without a lot of cooperative help/risk sharing. And investors will have to hold their breath again when their major licenses come due.

RCW:  So more of the same “withering away” of the economic model for new content we talked about last year?  Does this movie have a happy ending?    

MW:  Said simply, internet-based media companies will have to be transformed to make whatever money they're going to make in a DAY or a weekend. Their production and operational costs will have to be almost literally zero. Look at GOOG and the new subscription channels they are offering. YouTube earns money at about $25 million dollars an hour in advertising. However, look at how lean these new content channels are and will be. No one around Eric Schmidt is urging GOOG to write a big check to an A-list actor. They don’t NEED to.  Also, most of this new Internet content will be made for phones and mobile devices. Yes, we have seen for some time now that people want their entertainment on the move and no one wants to pay for the content. So, welcome to an entire industry looking for "back end" money or the ability to monetize eyeballs somehow some way. There won’t be any money in the front end.

RCW:  You’ve been describing this process for some time, where legacy content is losing value and only super brands can attract eyeballs.   Does this really mean that all other content goes begging? 

MW:  The monetization of endless catalogs of audio and video content over long periods of time with ancillary licenses and sales are OVER as well. So, when SNE Pictures is up for sale – what is SNE selling? They'll tell you it is brands that people know and can be capitalized in the future. This is not really true because the future they're talking about is 5 - 7 years. They won't tell you that the generation of people who would buy "The Godfather" in any format a decade ago isn’t buying anything anymore.

RCW: Well, I give Spotify $9 a month.  Your point about SNE is interesting, though.  Once upon a time, SNE came up with some clever, albeit derivative consumer products like the WalkMan.  Remember that?  Kind of like the many "new" AAPL products in that they were a refinement of an existing product/functionality.  New technology allowed SNE to make a tape recorder or TV smaller, better, portable.  But much of the SNE product line was basic conventional TVs, cameras and sound equipment.  Is AAPL the next SNE in a sense that they are now being eclipsed by new technology and use trends?  Remember when AAPL kicked SNE et al out of the professional audio/video segment?  The other day, our cousin Billy Demarco, a veteran TV animation artist, told me he is almost ready to take his studio back to PCs after a decade on the MAC.  Is the age of AAPL over?   

MW:  Let’s talk about SNE first.  It's pretty clear when you parse through their "shiny" numbers from Q4/2012 that water is flooding into the SNE engine room. Third Point Capital has made an offer to create an "IPO" for 15 - 20% of SNE's entertainment business. The idea here is to put together a war chest of cash to fund the electronics division of SNE. Frankly, SNE would be happy to SELL the entertainment division if it meant the bleeding would stop and the rapidly shrinking asset that they paid top dollar for over the last 15 years would just go away. SNE needs to reestablish itself in the technology space. But the problem is that the market they want to reclaim has all but disappeared.  

RCW:  Wait, is this another benefit of technology? 

MW:  Some 20 years ago, it was brilliant to have a consumer electronics company and a media company together. Now, you have competing balance sheets, foggy outlooks for both sides. SNE's real problem is that their overhead versus cash flow is killing them. They have the infrastructure of an "old" media company with the declining sales of a new one. You can only fire so many people from a large, legacy company before it completely implodes. SNE’s content side could be relevant again but not riding shotgun with an ailing legacy sister company added to a own mountain of operational and market issues. In this environment, the culture of innovation that spawned devices like the WalkMan, BETAMAX video, Blu-Ray video and more isn't possible. When you're trying to survive - the creative juices don't flow very well. 

RCW:  No indeed.  One of the reasons that the Bank of Japan is printing money like crazy is a desperate effort to save old line companies like SNE.  The Koreans, Taiwanese literally chased the Japanese out of the device business.  But tech hardware, like autos, is a commodity business that eats capital.  So where does this annihilation of value in both hardware and content leave AAPL?  Everyone assumes that “content is king.”  Does that sound correct in your view?

MW:  I think AAPL has been smart to stay OUT of the content creation business. However, I think you're assertion is correct - looking 3 to 5 years out - AAPL's position will be weakened due to inroads made by HUNDREDS of technology companies – not by a single huge competitor.  GOOG is not the AAPL killer – but rather the tiny new companies that will nibble all of the giants into irrelevance. The age of hardware made by large, dominant brands is OVER. In this environment, killer software and popular apps can take hold for VERY little money (or overhead). There is so much downward pressure on hardware prices that more and more major companies will opt out of the hardware business.  The model in simple terms is to be a data and information systems company. 

RCW:  IBM was the early first mover example of running away from hardware.  What’s the bottom line on AAPL for you? 

MW:  It's interesting to note here that Third Point Capital dumped a huge position in AAPL in February. It's dangerous for even professionals to jump in and out of the mud in the media space - the pieces are moving very quickly.  But vast arbitrage opportunities do pop up. 

RCW:  It’s just the wonder of the free market in operation.  Thanks, Michael.

 

www.rcwhalen.com

 

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Tue, 05/28/2013 - 00:09 | 3602730 adr
adr's picture

I'd also add that every company is getting into every market as to not miss out on any trend. This is also driving up the price of everything since the few succesful products must carry the burden of the hundreds of failures.

So how many people will get a free Netflix 30 day account to watch Arrested Development and then cancel the subscription? Every episode is available right now. Watch what you want and never pay, GREAT BUSINESS MODEL!

Tue, 05/28/2013 - 00:40 | 3602774 Zero Govt
Zero Govt's picture

take your focus off the big players who are stagnating ...we're in the Dinosaur Stage, the asteroid is soon to strike

focus on where there's been growth, rapid growth... personal entertainment. Look at YouTube and Facebook, both free personal platforms, bot growing like crazy contented by real people who are far more interesting than Big Co's with big commercial products that are far less interesting and relevant to our lives

This is IBM Mainframe versus Personal Computer war all over again and there's only ever been one winner in that battle. I still watch the odd Blockbuster movie but I spend 100 times more time on personal content sites watching short movies or other personal content like friends photos, their news and views etc etc 

Small business is 70% of the economy... big media only focuses on the big players ...that's neither where the action is nor the growth nor where we're heading... the dinosaurs are making themselves extinct by being ever more irrelvant to you and I ...Game Over soon

Tue, 05/28/2013 - 00:02 | 3602714 adr
adr's picture

The youth don't devour content, they reject content. There are no more trends. A trend lasts a week and then is gone.

A successful product is now 100% luck.

If Kim Kardashian gets drunk and picks up the wrong purse at a club. That purse becomes the new hot product, even if it was acomplete mistake.

You can't run a large company on luck. All that happens now is some rapper has his week of fame and whatever clothes he wore for that week are hot.

One week it is a denim hat with a snakeskin brim. Then it is a cashmere scarf. Myabe pink shoes next, maybe plaid shorts. There is no style and you can't plan ahead. It is the death of commerce.

Why is Apple having problems? Because the iPhone is old. Apple has nothing new. Nokia will be on top for a month, then Samsung, maybe Apple makes a comeback in a school in Nebraska, won't matter in Indiana.

The big trend now is "Street Style" and the boutiques that sell it. But the trends that define Street Style change constantly. A store might buy 100 pairs of leather pants and blow out 80 pairs in a week, only to see the 20 left sit on the shelf, never to sell. Could you run a business that way?

You can thank Youtube. If anyone can be famous for a day, then nobody really is. Some kid breaks his leg in half trying to jump a bus, he gets 20 million hits and becomes the latest celebrity. If he was wearing a Hurley hat, better buy 100 for the next week. If it takes longer than a week to get them, forget it, you'll miss out.

Mon, 05/27/2013 - 19:59 | 3602252 Bobportlandor
Bobportlandor's picture

They say they need eyeballs well the problem is my eyes are all over the internet. No longer am I funneled into a product with lots of others where they can monetize the cost of production at a reasonable rate.

So how do you make a living serving up content when the content could be anything a person thinks is interesting. Not just traditional media, but also reviews, manufactures specifications, house plans, charts, actuaries, stat, how to videos, education and millions of other topics.

Add to that competition to provide that material is worldwide.

You either have to get revenue thru advertizing, selling a product or subscription service. Everyone of theses revenue streams as I see it will be small.

I see a lot more people involved in media of all kinds just in smaller groups.

So I guess the Unions and middle men are going to get punched in the face and told to take a hike.

 

 

Mon, 05/27/2013 - 17:15 | 3601865 Zero Govt
Zero Govt's picture

Mr Whelan is quite correct, Copyright and Licensing are dead in the water, he should set his egg timer for leaving the Digital Rights Administration for TuneSat, LLC.

This interview is not definitive and is lost in space/guesswork. Predicting the future is difficult so I'm not surprised except only that the Whelans went through with the interview without a point

If you want to see the future it's staring everyone in the face, under their nose, it's the most successful industry on the planet and it's the biggest on the internet by far

The Free Porn Industry

It's an amazing model, an amazing and un-published raging success story and puts every other industry in the shade ...even Apples mighty achievements

I've developed a free music model over the past 6-7 months with many legs to stand on, and more to add soon enough. ZH will get an exclusive if they're interested in a month or so as I roll it out with major music Co's, ecommerce and distributors from angles you'd never associate or imagine with the music industry

It'll make musicians, DJ's and bands richer by far than the old dying priced music model. If Mr Whelan makes good music prepare to get rich with the "Dark Ages" back-end sponsorship model

Mon, 05/27/2013 - 17:25 | 3601893 Moe Howard
Moe Howard's picture

Porn made VHS, free porn made the interwebs, and don't forget, video killed the radio star.

 

I knew the music "industry" was dead when ppl were selling hard drives full of mp3's back in 1999. It was just a matter of time.

Why did rap crap and preteen take over the music scene? The audience was the last to learn to use the interwebs.

Mon, 05/27/2013 - 17:19 | 3601880 jimijon
jimijon's picture

Hey..I want in! I am a musician and app publisher.

Mon, 05/27/2013 - 18:47 | 3601903 Zero Govt
Zero Govt's picture

Give me 4 weeks, I've just got a tour of Spain, then UK, and meetings with big clubs, e-ccomrece, distributors and music labels ...pecking order to honour first

I was gonna fight the big boys but penny dropped I'd developed a platform, not a music label, for everyone to dance on ...and make (much) more money

I'll befriend you in ZH's back office and clue you in shortly ok

Mon, 05/27/2013 - 22:33 | 3602548 williambanzai7
williambanzai7's picture

I have noticed the innovation explosion in the online porn and "water trade" industry, which goes way beyond concocting new sexual positions. But this has always been the case hasn't it.

Obviously, the urge to hear good music does not approach the magnitude of other primal urges.

Keep me posted.

Tue, 05/28/2013 - 00:24 | 3602720 Zero Govt
Zero Govt's picture

Banzai, I'll not only keep you posted i'm about to rope you in ...to do some of my album artwork ...if you'd be so kind you multi-talented mystical creature

The free music model will be the free market in operation, pure, fast and furious. The biggest adjustment for the music labels in the creative area will be removal of executives from the creatve process. I can wipe the floor with every album on the shelf and online simply because i am free to be creative, free of interference at all levels but most importantly from above (management)

those music labels, and deeply mistaken/confused platforms such as Soundcloud, that cling onto the old Copyright model are going to be left behind at light speed. But I'm confident they won't as the free music model will not only deliver amazing new music and opportunities for everyone right through the commercial chain but better revenues for their back catalogue too

iTunes will have to transform from priced music which is near-dead to a platform for free music. They'll have to make money from advertising and other ideas I've developed for the back-end music business

I'm currently in dispute with Soundclouds copyright cretins (lawyers) whose automated bots wreck every album i put up. All my tracks are free download from Zippyshare and Hulkshare, none of my albums are for sale (commercial gain). So there is zero/zippo Copyright issues yet their auto-bots and auto-complaint system auto-vandalises and auto-bullshits so stupidly it's amazing they got where they did as one of the leading platforms.

Soundclouds Legal Dept is so far up Shit Creek without a paddle with the case weight of evidence i have piled up against them it's only a matter of weeks before they capitulate and dump their antiquated system

I've big music contacts and friends, and no DJ I've spoken to likes Soundclouds baseless, senseless and destructive Copyright policies. I begun this journey into sound and the music biz precisely because my music friends were moaning they were not making any money from the current Copyright/Licensing system. It's a complete failure to generate revenues, it only hammers the Indians and is weilded for nobodies benefit but the Chiefs, as all law/regulation is designed to do.

Business is about problem solving, I saw an opportunity and developed it to the enth degree, my brain hurts every day with the new and endless ideas the free music model offers

it's the reason i've been AWOl from ZH for so many months, my mind has been so full of new commercial ideas and how to practically roll it out I've had no time for anything else

Music Leads Trend

Remember those 3 little words... heard it here first on ZH, where else eh?

Those 3 words will change the music industry forever, and put music at the very forefront of commerce itself ...first we change the music industry to the new free music model, then its effects will change the rest of commerce itself. No small claim but I will bring a tsunami of substance in the months ahead

All good  :)

Mon, 05/27/2013 - 16:50 | 3601818 gorillaonyourback
gorillaonyourback's picture

Fuck apple and microsoft.

Mon, 05/27/2013 - 17:21 | 3601887 Moe Howard
Moe Howard's picture

Don't forget to fuck sony and ibm.

Mon, 05/27/2013 - 17:20 | 3601883 Zero Govt
Zero Govt's picture

Apple fucked Microshite ...and Google ...and Sony, Motorola, Nokia and Dell combined

fixed it

RIP Steve, you had the last laugh

Mon, 05/27/2013 - 16:22 | 3601709 Kiss My Iceland...
Kiss My Icelandic Ass's picture

 

 

Speaking from my personal buying experience, SONY used to have an unimpeachable reputation in hardware, especially TV. In fact, a SONY Trinitron I bought back in the early 90's is still going strong (well, the picture tube anyway.) Since then their quality has gone down the toilet. Just won't buy their crap any more .

So if AAPL is another SONY ... good luck AAPL !

Excellent interview. Thanks and kudos.

Mon, 05/27/2013 - 15:35 | 3601618 jimijon
jimijon's picture

Deflation hits the status quo's media revenue system while inflation hits its production costs. Creative destruction in the making. Meanwhile, the cost of producing good content by independants has dropped beautifully creating new content, truths, art, music, and more. The renaissance is coming... or is the Dark Ages?

Mon, 05/27/2013 - 14:49 | 3601528 slaughterer
slaughterer's picture

"They are asleep"  Repeat that to me at the next new product launch.  

Mon, 05/27/2013 - 14:42 | 3601510 Sandmann
Sandmann's picture

SONY went off a cliff when it bought into Columbia Pictures which was really a response to VHS signing up studios and leaving Betamax out of the renta;s market. Studios did nothing for any SONY product - it did not help them in laptops, it did not help them in LCD displays, it did not help them in Mini-CD. It has simply been a diversion from hardware.

There was so much cost-saving SONY could have made in reducing complexity of sourcing and presentation. I was inside the corporation and watched them stupidly embrace cheap manufacturing in China to turn out rubbish.

They took a great name as an innovator and went mass-market junk instead of premium-pricing innovation. APPL learned that lesson having started with SONY as a supplier, but SONY forgot to innovate and made over-priced laptops - like APPL. Had a good business in CRT displays but let it slide on LCDs.

APPL failed to broaden the iPhone range and let Samsung take them to the cleaners. The iPad was an innovation but unappealing compared to the Samsung Tab - for me. They should have made bigger iPhones and Phablets. They should have worked with Canon on photo-printing and nstalled video cards in their laptops instead of Retina displays with shared video RAM.

They are too slow as innovators and should focus on hardware. They will become a mess like RCA if they continue to listen to I-Bankers. Jobs was a visionary, Sculley was not, Cooke is not.

They are asleep. They manufacture little but are being whipsawed by the manufacturer Samsung

Mon, 05/27/2013 - 12:23 | 3601258 bank guy in Brussels
bank guy in Brussels's picture

Absolutely superb interview above with Michael Whalen, on how there is almost no way to make money from media now ... the movie studios, the entertainment industry, the internet and hardware companies ... it is all in trouble. Let alone antique junk like 'books'.

Profound implications ... the media world around us is shifting rapidly ... It is a world of Free Sh*t on the Web, period ... (and of course, creeping propaganda 'entertainment' and 'news', back-door funded by governments and oligarchs)

Some quotes from the article above:

« ... entertainment as an economic proposition seems to be sliding backward into a model where artists have sponsors rather than revenue. Think the Middle Ages here. ...

« ... People want their entertainment on the move and no one wants to pay for the content ... There won’t be any money in the front end ... legacy content is losing value ... The monetization of endless catalogs of audio and video content over long periods of time with ancillary licenses and sales are OVER as well. »

And then, Whalen has some wisdom for goofballs like ZH's Reggie Middleton, forever touting the CIA's criminal contracting company Google Inc. as the 'future' - Whalen says:

« GOOG is not the AAPL killer – but rather the tiny new companies that will nibble all of the giants into irrelevance. »

Great article

Mon, 05/27/2013 - 13:31 | 3601359 disabledvet
disabledvet's picture

Well thank God neither you nor Cris Failin' made any regard to the biggest sector move in the market over all. I mean give me a break...distribution is about to drop to zero here...but the premium on SECURING content is soaring. Hard to gauge content..."it's all free" is a typical Wall Street conceit. That's why...sure...they get IPO play..but that money ends up in a bank or insurance company or secutities firm...but unless you're the pimple faced kid you're still not the billionaire. Listen...we got problems in tech world...and neither this article nor this comment even comes close to realizing the very basics of them. "full retard" indeed.

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