SharkJumping

To no one's surprise, HP General Counsel Baskins resigned today, continuing the utterly predictable saga at HP (as I have laid out for weeks), similar to watching a train wreck in slow motion - you just know you'll see the caboose anytime  smashing into the rest of the cars.   

Outside counsel Sonsini will drop away next, and the Board and company will declare itself "clean", apologize profusely one more time, and move on with Hurd as combined CEO/Chairman.  And we'll never figure out how CEO Hurd could "forget" to read the critical report commissioned by the Board which detailed the illegal and unethical activities commissioned by HP.

Analyst Darren Aftahi of Think Equity put out an interesting report today calculating the value of Napster's assets in a M&A scenario since Napster has retained investment bank UBS to "look at strategic options" (meaning sell itself).  I agree with Darren that Napster is the most attractive M&A target out there today in digital music, and that there is a decent sized group of potential buyers, although I think a hardware maker will end up buying them vs a service provider.  Given Napster's $100M in cash, decent brand, $100M in revenue and 500K subscribers, $5 a share seems like a reasonable value, even if the economics of the digital music business are pretty rough.

However, where Darren's analysis breaks down is on the replacement cost of what he calls Napster's "subscription architecture", meaning the content library, the label deals, the customer/subscription management system, database, etc.  He places the replacement value on that piece at an astonishing $120-$145M, giving the stock another $3 in value, which is why he indicates there only 3 significant subscription providers, vs many music download providers.

That number just isn't right.  In the last few years, it has gotten substantially easier to build a digital music service, subscription or otherwise.  On the label side, the major deals are now pretty standard, and most of the indie deals can now be done through aggregators - that process has matured enough that it's almost become a rote process now if you know what you're doing.   On the content library side, there are a few people who have built one from scratch who could do it again, or you can use Musicnet to do so, which accelerates the process.  As to the "subscription architecture" part of it, that's just a fancy name for a consumer-facing media delivery system - it takes work, but there is nothing unique or impossible to understand about subscription music versus other media.  Finally, hardware, storage and bandwidth prices have plunged in recent years, and off-shore development is now a lower priced option in many cases.  And this time around, one could hire a team who has already built a music system, accelerating the entire process by skipping the known issues.

The end result is that a good team could now build a competitive Subscription Architecture for the US market in less than 12 months for less than $20M.  Now a new market entrant may not want to wait that long, or may want other aspects of Napster's assets, which is why I believe Napster has significant value, but let's not go crazy over-estimating what it takes to build one.  Plus in today's competitive market, I would build in other characteristics such as enhanced community, avatars (Meez), karaoke () or other user-generated content options in order to differentiate the experience, but it's simply not that hard.  What's hard is actually making money in the digital music business, which is why I believe there aren't that many providers anymore - they can get a better ROI in other parts of the digital media sector.

The ever-amusing and increasingly bizarre HP soap opera continues to play out in a predictable manner (see earlier post) with Chairwoman Patricia Dunn now immediately resigning from the Board today (versus wandering out the door in January), although passing the buck on the way out by blaming her underlings for the disaster.  CEO Hurd took over the Chair seat, which is not exactly a step forward in corporate governance, especially since he approving some of the allegedly illegal activities, but then said he didn't read the actual report that was created about the activities - huh?  In addition to that foolishness, why does the "independent" investigator HP has appointed to look into the issue end up reporting to Hurd?  How does that make any sense, although I suppose there is almost no one credible left on the board since neither the General Counsel nor outside counsel are clean in this episode.  This sounds like it's going to get worse, not better, before we're done.

My father and I were discussing the saga today, and he made the astute observation that it just points out how out of touch with reality these corporate boards and executives often are.  To think that there were actual conversations about planting covert operatives in newsroom cleaning staffs, sifting through peopl's trash, attempts to implant spyware on journalist machines, and the shadowing of suspected leakers around Silicon Valley - it's just staggering how a group of supposedly intelligent people could just drive the truck off the cliff. 

As I have said before, I have no idea how the other HP players in this saga realistically survive this episode - it wasn't as if Dunn contacted the investigators herself.  But I assume those players will be drummed out as the parade of law suits, congressional panels, and criminal investigations takes place.  Plus, as an experienced tech executive told me yesterday, once a company really screws over a set of reporters, there won't be a positive article written on that company for a long time.  HP could invent cold fusion this weekend, and still get shelled next week for other gaffes.

The downside to this episode is that it's not going to make it easier to recruit board members now that these guys have been dragged in the mud.  The good news is that it finally pushed the option back-dating scandal off the headlines for a while - oh wait, Cablevision just admitted backdating stock options for a corpse - I guess it's back...

As I outlined in an earlier post, there was no way Hewlett Packard Chairman Patricia Dunn would survive the "pretexting" scandal.  That having been said, the HP board totally wimped out and let her retain her board seat while having her step down at some arbitrarily decided time in the future, being Jan 1, 2007.

To the shock of all involved, it now looks like the stupidity involved in the drive to ferret out the leaks was far greater than anyone imagined outside of most people with IQ's below 10 who somehow believed the first explanation, kind of like the US drive to find WMD's in Iraq.  The NYT is now reporting that it looks like HP-employed investigators attempted to install spyware software on reporters' computers and may have even followed them around to track down their sources, in addition to the general idiocy involved in the investigation.  I assume this type of information will continue to expand as we hear more about it, as it always does.

Let's be blunt - Chairwoman Dunn should (and will) fully resign  unlike this first attempt at gradual resignation, and most probably, the General Counsel who managed the investigation will do so as well.  This is unfortunate since Silicon Valley doesn't have enough senior female executives, but you can't  do these types of things and continue to be involved with public companies, especially those with formerly stellar reputations.  There is a larger debate about the role of HP outside counsel Larry Sonsini (of Brocade stock option backdating fame), but that will not end up being relevant since my assumption is that he will be off the board shortly as well.  It's unfortunate since we have lost track of the core issue that a board member was allegedly leaking information, but given the illegal behavior involved here, it's not a big surprise.

The New York Times launched its revamped alpha/beta NYT Reader this weekend (download ).  The NYT Reader is an ambitious and incredibly interesting attempt to combine the look/feel and breadth of the actual paper version with the interactivity and vibrancy of the online version - it has been unsuccessfully tried with options such as Zinio before, but this is a next generation effort.  Let me be clear first that I'm a NYT weekend subscriber and that I think it's the top paper in the US, but that I now read the daily versions only online, so I'm a perfect test market.

The installation process is a nightmare - there is no way around that issue, but one assumes that many of the issues are due to the beta part of the process since the commercial version is allegedly due in 2007.  You have to first download the "pre-beta Microsoft.Net Framework 3.0" which invariably either causes your computer to crash or just produces strange error messages.  Once you reboot and figure out how to return to the necessary page, it's somewhat simpler to download the NYT reader part of it, but it's at least a 30 minute process in total - I assume this will get better over time but you're still looking at a client software install, unlike we what we did with Meez.

Once you survive the painful install process, my early thoughts are that this hybrid service is a great step forward for the NYT in particular, and for the overall newspaper business in general - it just feels like the actual paper online while still being cutting edge.  The software syncs up on some type of schedule, or whenever you feel like connecting - it's almost like the old Pointcast service with far better features and graphics.  Once it syncs up, you have most of the experience sitting on your desktop, whether your connected to the Internet or sitting on a plane. I'm still getting used to the feature set, but it offers an incredibly rich set of photos and features, all with very quick response times since it's cached on the PC hard drive.  To be clear, you need to let it synch up in some time of schedule in order to fully enjoy the experience, but you can always change those options in the "settings" section.

Once you get synched up, it's true that the ads are also quite prominent, you need an NYT sign-on account, and it doesn't look like the "Times Select" subscription content is available, but it offers a really rich experience which mimics the paper version while offering the advantages of the online one.  It has a set of cool features like the ability to mark which articles you have already read, a very rich search feature, easy ways to change the fonts, and the ability to optimize it for Tablet users (all 3 of you).  There may be more options, but I'm still working my way through the service.

The service is currently available only for XP users, so one assumes the next steps are to broaden the user base to include Mac and portable/cell phone users, but that will be difficult given the bizarre software requirements of MS Framework 3.0.  There should be some way to create this experience without downloading a strange Windows update, but it seems to offer some advantages as well.  That having been said, if you're a NYT junkie who is looking for either a richer online experience or the ability to have a great offline one, this is a great find.

Apparently following the Bush administration's lead on ignoring the law, common sense, and basic ethics in search of leaked information, HP's "pre-texting" scandal continues to widen as more facts come to light (see NYT article here).  It now appears that not only did HP search personal phone records of its own board members, but that it also allegedly illegally obtained phone records of up to 9 journalists who write about HP - maybe if that doesn't work, they should try "rendition" as their next option now that the CIA prisons have officially been revealed. 

It's simply outrageous, even if HP will maintain that they didn't condone or approve of the actual illegal investigative tactic - it's simply hard to believe that HP/Dunn didn't specifically order the investigation into the journalists themselves, which is the really outrageous part of this entire disaster.  The only rational thing to do is for Chairperson Dunn to resign since it was clear that she was the driving force behind this aggressive stance.  There was a time when HP stood for ethical conduct, both externally and internally - it's time to return to that standard.

As I predicted on March 23 in this post, Sony announced this week that they were cutting their 2006 PS3 sales and production numbers, thus pummeling their stock (see IHT article here).  In addition, they will now not launch the PS3 in Europe until Q2 2007 rather than attempting to carry out a simultaneous global release as they had previously stated.  Sony is holding to its 6M projection by end of Q1 2007, but it's hard to see why that's a credible statement at this point.

None of this is a surprise - there is simply no way to design and manufacture a system this complex in the time frames they were discussing.  This is especially true when Sony is in the midst of a massive laptop battery recall, which makes the emphasis on quality even more important.  Given that Microsoft is increasing its XBox 360 sales projections, and that Nintendo remains firmly committed to its November launch date in volume, the situation at Sony is getting increasingly difficult.  As one can see from the PSP, Sony can still make gorgeous hardware, but the higher price, lack of quality software and the inability to create a compelling online experience is hurting sales vs the Nintendo DS - it looks like PS3 might be heading down the same path.