iPhone: Apple's New Videogame Console

If you have a chance take a look at the video of Apple's recent March 6th presentation at its software developers conference. Besides announcing that iPhone would be fully compatible with Microsoft Exchange ActiveSync and essentially targeting the enterprise market, they also showcased announced that they would be opening up iPhone to outside developers.

While I am an Apple shareholder and think this is could be huge for its stock, I was blown away by the videogame demonstrations that were presented by Apple, Electronic Arts and Sega at the conference. Apparently Apple's new SDK (which was downloaded by more than 100,000 programmers within four days) makes it really easy for coders to develop all kinds of things including video games. Moreover Apple will showcase new applications (videogames) in its Apps Store which will be on the homescreen of every iPhone ( there are already 4 million in circulation). Apple will share 70% of application revenues with third party developers and Kleiner Perkins announced it was setting up an iFund with $100 million to finance new iPhone applications. (Remember how Facebook usage exploded after it opened up its platform to outside developers?)

Anyway, EA showcased its long awaited Spore video game, Sega showcased Super Monkey Ball and Apple demonstrated a jet fighter game called Touch Fighter. Each had under two weeks to develop their iPhone games. All of these games were motion sensing games taking advantage of iPhone's 3.5 inch touch screen and its triple axis accelerometer. Please watch the video of Touch Fighter below. It is amazing.

Once you see these demos you will realize that the iPhone/iPod Touch is Apple's bold step into the video game business. The iPhone is not only an amazing mobile device for productivity and connectivity, but it is a handheld videogame console which could give Nintendo's DS ( 50 million units sold) and Sony's PSP a run for their money. There is even a cheaper version called the iPod Touch, which has all the cool features except the cell phone. So why carry a cell phone, Blackberry, and or videogame handheld, when you could just have the smartest mobile device on the planet, the iPhone. This could be really big.

Dear Bill, Zimbra is a Keeper

As far as I can tell, most of the mainstream media has overlooked a possible jewel within Yahoo's sprawling operations. About a year and a half ago Yahoo acquired a promising Web applications start up called Zimbra for $350 million. Zimbra has a really neat Web-based version of what is essentially MSOffice that seems to be superior in many ways to Google Docs. The company recently released Zimbra 5.0 which added support for Microsoft Outlook 2007. It also supports BlackBerry Enterprise Server, J2ME-enabled handsets such as the Motorola RAZR, and a new version of ZCS for mobile Web browsers.

Some of the technology press thinks that Microsoft would either sell or let Zimbra wither, in favor of their own .NET Web based applications. Also Zimbra is open source and the folks at Redmond have never been to keen on open source software.

I think Microsoft should instead embrace Zimbra. As Apple has proven superior software drives market share and from what I read, Zimbra is getting rave reviews when it comes to Web-based collaboration and productivity software. It functions online, offline and in a mobile platform. Zimbra could come in handy during the coming Web-based apps-smartphone wars. You will note that Apple's has announced that it is going after the enterprise market with its new iPhone software update due in June.

From a financial standpoint Zimbra's software is smack in the center of MSFT's core business. Microsoft's high margin "Business Division" accounts for about 30% of the companies overall revenues and for the six months ending Dec 31, 2007 , nearly 50% of the company's profits. Microsoft Busines Division is by far its fastest growing division and it is home to such core franchises as Microsoft Office, Microsoft SharePoint and Microsoft Exchange.

Many in technology watchers are eagerly awaiting the day when desktop software is a thing of the past and when most of our applications are Web based. Of course this appears to be core to Google's strategy and a big reason why Google Documents, Gmail and Google Calendar and other web based productivity apps are such a looming threat for Mister Softee. Zimbra's productivity and collaboration software has been widely adopted at universities and works well on Blackberry's and other smartphones like Treo's and iPhone.

Zimbra is a keeper Bill.

Don't Cry for Electronic Arts

On October 27th I wrote a post entitled "Video Games Uber Alles" speculating that Activision (ATVI) and Electronic (ERTS) would be good acquisition candidates for other larger entertainment companies. I put my funny money where my mouth was when I purchased shares of ATVI on www.SocialPicks.com for $19 on November 20, saying that "Guitar Hero was ATVI's Grand Theft Auto." Now Vivendi Universal is buying ATVI for $27 and merging it with its great Blizzard Entertainment massive multiplayer franchise. (By the way, is that an amazing franchise? Blizzard is projected to have $1.1 billion in subscription revenues from 9.3 million World Of Warcraft gamers in 2007. Operating margins of 50%!)

Vivendi Universal understands the power and stickiness of these video gaming franchises understands that no media company of the digital age will thrive without gaming as a core competency. Video gaming, virtual worlds, social networks, Youtube, iTunes, Pixar, Kaneva, its all finally converging.

ERTS is still independent, has an amazing sports video game franchise and would make a nice fit for Disney (DIS)/Pixar/ESPN. It's new CEO from Elevation Partners is a deal maker, who obviously saw opportunity at his former employer EA. Now he's back to make EA a major force. Why else would you leave the cushy and lucrative world of private equity? EA under John Riccitiello has already purchased former Elevation video gaming companies Pandemic and Bioware for over $800 million. A few days before the Vivendi/Activision deal broke, Ricitiello was quoted saying most of the best independents had been bought up. So how do you make your mark and get ERTS stock out of its mid-50s malaise? You sell out to a big entertainment company like Disney or Sony (SNE) the way ATVI did.

So don't cry for Electronic Arts because it's no longer the undisputed VG leader or because it now has formidable foe in Blizzard and Activision. Rejoice because BIG media is finally waking up to the power and potential of a good video gaming franchise. ERTS is now in play.

Video Games Uber Alles

Why are stocks like GameStop and Nintendo and Activision among the best performing stocks over the past few years [see stock chart]? Because video gaming has become pervasive. People who were raised on Space Invaders, Tetris and Pong are now the movers and shakers of our society. The video gaming market has swelled from the 16 year old boy locked in his room to practically anyone with a cell phone. I have two children ages 12 and 9 and I can honestly say that some of our best family time has been tethered to a controller in front of our TV. This is one reason why I am a longterm bull on these stocks and a reason why I think sometime soon, one of the big studios is going to make a play for these largely independent creative content companies. Now that Nintendo is something like the third largest company in Japan as measured by market cap (surpassing Sony), it may be too late and too difficult for them to be acquired. However I look at Activision and Electronic Arts as possibilities. And GameStop may be in the best position of all as a well run retailer with a diversified stake in the business.


Check out this recent article in Wired by Rex Sorgatz entitled "When Reality Feels Like Playing a Game, a New Era Has Begun". The author does a really nice job explaining the paradigm shift.

Who Will Buy GameStop?

With all of the reports of excess capital sloshing around the globe you can't help speculating about potential mergers and buyouts.

How about GameStop [GME] - one of my favorite stocks. I just read that the company recently opened it's 1,000th store overseas. Since its acquistion of EB Games, GME has been on a tear. As of the end of Q1 2007, the Grapevine, Texas-based video game retailer had 4816 which is roughly double the number the company had 18 months prior. And earnings have been breaking records thanks to the boom in video game hardware and software brought on by a new generation of consoles from Microsoft, Sony and Nintendo.

GameStop's overseas footprint falls mostly in Europe, specifically in Italy, Norway, Portugal, Spain, Sweden, Austria, Denmark, Finland, Germany, Great Britain, Ireland, Switzerland, Australia, Guam, New Zealand and Puerto Rico.

Video Gaming is clearly a global business and one of GameStop's main "brick and mortar" competitors in the U.S. is Best Buy [BBY] which has a market cap of $21 billion. That's more than three times greater than GameStop's $6 billion market cap. However apparently electronics retailers like BestBuy dont get the respect on Wall Street that certain specialty retailers like GameStop do. GameStop has a p/e of around 36 while Best Buy's is less than half that.

Best Buy is also eager to expand overseas however it has mostly focused on China. European expansion is glaringly absent. Even though they have very different approaches to retailing ( big box versus mall stores), they both are targeting the same customers. Capital is easy and the urge to merge is becoming more infectious. Would GameStop make a nice acquisition for Best Buy?
GameStop is one of the best pureplays in video gaming. Besides the retail stores, it has a thriving Web commerce operation and a magazine that has over 2.7 million subscribers making it one of the strongest magazine franchise out there. Most of these subscribers have provided GME with their email addressses and they also have affinity bonus cards that bring them back to the stores after weekly emails are sent out advertising deals. GameStop is a clear example of a tradition retailer that is using the Web effectively to improve business. So if another bigger retailer like Best Buy doesn't buy GME, who will? A media company? News Corp [NWS], Interactive Corp [IACI]?

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Dual Buffett Strategy

Christopher Rees' wild life is the stuff of Jimmy Buffett songs. His investment track record is more like Warren's.

Chris Rees may be the best virtual portfolio manager in the world. In terms of five-year performance his 44.6% annual return, as measured by Marketocracy.com, is the No. 1 of all 88,000 online portfolios it tracks. Still, Rees is quick to point out that he is not "a very smart" guy.

Forty-seven years ago at age 10, British-born Rees was pegged by his teachers, as he puts it, "to shovel horse manure on loganberry plants." Rees never went to university and instead left his home in Stony Stratford at the age of 16 to see the world. Over the next 20 years, that is exactly what he did.

These are the first three paragraphs of another Armchair Guru column I recently posted on Forbes.com. This guy is an amazing stock picker. If you click through on the link below, you can read the full story and get his top five stock holdings. If you are interested in investing in a portfolio tracking Rees' picks you can contact Marketocracy.com.

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Sirius & XM: Is Advertising Up Mel's Sleeve?

As expected the National Association of Broadcasters is lobbying vigorously against the proposed merger between satellite radio companies Sirius[SIRI] and XM[XMSR]. Here are some excerpts from a recent dispatch to its member radio stations:

• When the FCC authorized two satellite radio operators in 1997, it specifically prohibited the nationwide systems from merging. Nothing has occurred in the 10 years since to warrant changing the rules for XM and Sirius.
• XM and Sirius are unique in their ability to provide portable radio service on a nationwide scale. Clearly a merger between these two satellite radio giants would create a monopoly.
• Companies who make bad business decisions, such as spending hundreds of millions of dollars to secure talent, should not expect a government bailout. If that's the case, the floodgates will be open to bailout the more than 30,000 companies that filed for bankruptcy in 2006.
• The precedent is clear based on the FCC's action in the DirecTV/Echostar proposed merger ? the FCC prohibited that merger, finding that even if they considered the merger in the context of the whole market, they could not find the merger "in the public interest."

Cut through all the posturing and it is clear that the radio folks are scared. Their mature cash flow business has been in trouble for years. That is why LBO firms run the show now. Moreover many listeners are bored with terresterial radio because it has increasingly adopted cookie cutter corporate approach to radio. The stations are all the same and there are too many ads.

Nobody in the radio business wants to deal with a bigger and stronger satellite competitor that will essentially have a lock on the automobile industry. Drive time listeners are the heart of the radio business and a few months of free satellite radio to all new car buyers leads to a lot of subscribers.

However I think there is an even greater threat to the radio business. Radio's share of the advertising dollar has been under attack for years, first cable and more recently from the Web. Despite his new post atop a "commercial Free" subscription radio company, Mel Karmazin's is still one of the greatest advertising salesmen in the broadcasting. That is how he started his career, how he made Infinity great and how he built CBS radio. It is his strength.

If the merger goes through he will have a company with a 14 million subscribers around the nation and in Canada. He also has content deals with some great franchises, from Howard Stern to Nascar, NFL, Oprah. I listen to Sirius and I can tell you that, yes there is advertising on talk shows. And it is significant. The problem is most of it is schlocky. Things like Mangroomer, a back hair remover or diet pills or adult web sites.

I have also noticed that since Karmazin arrived advertising revenues have grown rapidly from $6 million in 2005 to $31 million last year. I believe that once the two companies audiences are combined, Mel can and will step up his advertisting effort to national advertisers at higher prices. More subscribers will also mean better talent on his radio stations and the ability to attract A-list guests on his talk shows.

As a Sirius subscriber, I dont think Karmazin is a very good subscription marketer. My experiences with customer service have not been good. And if you cant keep your existing paying customers happy, it generally means big trouble for the business. As an advertising salesman Karmazin rules. This will be a big boon for Sirius/XM and hopefully they will hire a great subscription marketer to set that important side of the business straight.


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