A Prepaid Blitzkrieg

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/12/31/prepaid-blitzkrieg/20178/

Recently, I wrote about the enormous effort that American Express (NYSE: AXP) was putting towards popularizing its prepaid card products, which include recently introduced SERVE and BLUEBIRD.  I also mentioned that American Express (AMEX) offered a third long standing product which is just a plain AMEX branded prepaid card. 

All of these cards appear to share the same “platform,” meaning, they all perhaps use the same database. What that effectively means is that even if you can create a BLUEBIRD account and a SERVE account, you would likely not be able to link it to the same bank accounts, because American Express cross verifies pertinent information such as email address and bank account information and perhaps even social security number.

American Express is ensuring that through its prepaid card marketing blitzkrieg, it is not just targeting the same customers.

Wider marketing efforts

Apparently not satisfied with the additionally branded prepaid cards, AMEX has aggressively rolled out prepaid cards that are cobranded with AAA (American Automobile Association) membership cards for the Southern New England area. I am not sure if this is a national rollout for all AAA clubs yet, but if it is not, it wouldn’t be a far reach to presume that they are testing it. Each AAA Southern New England membership card is already a loadable card, activated online or at a AAA office and a funds load.  I have not tested this feature so I cannot confirm whether this prepaid card shares the same platform as AMEX’s other prepaid cards.

In addition, through AAA, AMEX also offers American Express Gift Cards, American Express Global Travel Card and American Express Travelers Cheques.  At a AAA office, if you purchase five or more AMEX Gift Cards, each with a value of $20 or above, you can avoid the $4.95 card activation fee, making this a pretty neat and cost effective gift giving idea. 

It appears as though American Express believes that through this massive marketing effort, they are reaching a segment of the consumer population that is not yet receptive to American Express credit cards.  Already, for quite some time, through a partnership with the warehouse club Costco, they have ensured that the only credit card accepted at COSTCO is the American Express card.

Prepaid cards – A huge market

According to the Bureau of Consumer Financial Protection, this sudden widespread emergence of what they call “General Purpose Reloadable Prepaid Cards” needs further evaluation, for which they earlier solicited comments from the public.  They intend to extend protection normally afforded to credit cards to these prepaid cards which are expected to reach $164 billion in loaded value by 2014, according to the Mercator Advisory Group. The hundreds of potential billions in prepaid cards has many providers salivating, not just American Express.

Other prepaid card providers such as Green Dot (NYSE: GDOT) and JP Morgan Chase(NYSE: JPM) already have name recognition and established networks, so much so that even American Express is using them in their prepaid card marketing strategy.  For instance, you can load the AMEX Prepaid card using a MoneyPak from Green Dot or through the Vanilla Reload Network. 

JP Morgan, the purveyor of the Chase Liquid Prepaid card proudly proclaims that they have processed over half a trillion dollars’ worth of prepaid card transactions.  In fact, they offer a complete infrastructure that allows an independent issuer from the private or public sector to market their own prepaid cards that are powered by the JP Morgan network.

This is actually nothing new in the credit card industry. Other issuers such as Citibank (NYSE:C), and Capital One Financial (NYSE: COF), for example, power department store and gas station credit cards for a variety of companies.  It would not be a stretch to expect these and other companies to jump into the prepaid card business in a highly visible, big fray as well.  I particularly expect Citibank to be interested since their new CEO, Michael Corbat is credited with the restructuring of their retail partner credit card business. If there is a significant opportunity for a more visible, direct presence, beyond the current prepaid card infrastructure services that Citibank provides now, he is sure to spot it.

The future of prepaid

The prepaid card marketing blitz by American Express is only likely to become more intense and widespread.  Other market participants are not likely to stay put and watch a rapidly burgeoning market to be monopolized by an aggressive marketer who has recognized early on the massive potential of this market segment.  While that is likely to be good news for the consumer, I expect American Express to benefit from this headstart.  

The Gang Rape of Damini Should NOT Taint All of Indian Society!

I learned about with considerable distress, the gang rape of a young woman on a New Delhi Bus by six men along with a complicit bus driver.  I also read about the response of Ms. Sonia Gandhi, who addressed this incident and said this - "It deepens our determination to battle the pervasive shameful social attitudes and mindsets that allow men to rape and molest women and girls with such impunity."  I was shocked to hear that from the leader of a party that should know better.  I could not help but reach the conclusion that this woman was speaking from a western mindset, being that she is Italian.

Across the media and across the world, this incident is being portrayed as "evidence" that Indian men do not respect women or something along those lines.  That is a shame because this incident feeds into a much mistaken stereotype of Indian men by those in the western world who do not really know anything about India or Indians.  For starters, who really do you call an "Indian"?  Is that someone who is Hindu, or Muslim, or Christian. Buddhist or Sikh?  While one can pretty much guarantee that a Sikh would never perpetrate such a crime (yes, that is the undeniable and awesome reputation of the followers of the Guru Granth Sahib), anything else can be attributed to basic human nature and the failure of the government to enforce law and order.  Rapes occur all across the world, even here in the USA!  Does that mean that American Men are monsters?  Of course not!

While from the names of the accused it appears that they were all Hindu, one must remember that in the Hindu religion, women are considered equal to men.  A Hindu man is incomplete without his wife and cannot participate in Hindu religious ceremonies without his wife by his side.  The reverse is the case as well - a Hindu woman is incomplete without her husband and must be accompanied by him in all religious functions.  I am sorry if this is not widely and well understood across all sections of society in Northern India, but that can be chalked up to forced dilution of Hindu values through centuries of foreign invasions.  Delhi in particular has a perverse culture that tolerated what is euphemistically known as "eve teasing".  I stress - it is a uniquely New Delhi phenomenon!  Gang rape is nothing new in New Delhi.  I distinctly remember a group of young girls who gang raped a mailman in their home in the 1980's.

Unfortunately, what this incident really shows is the failure of the government to keep the peace and enforce law and order in a country where there is massive, unbridled corruption.  In fact, if it were not for a country such as India with a largely peaceful, tolerant and violence free population, there would have been widespread chaos, looting and violence every day for which any police force could have done nothing!  The nation survives and thrives despite the presence of an inept, ineffective and symbolic police that is corrupted to inaction by a system that condones bribing and lethargy.  

So, I ask people in India and people across the world NOT to judge Indian men and Indian Society through the lens of Western Perception, but understand that this is a Law and Order issue and NOT a Societal Values Issue.  If you must have a stated perception of India, then this is it -India as a country values Women better than any nation on this planet!  Every nation and every people have their "dark moments" and their "black sheep".  Let us NOT judge India and Indian men through incidents such as these despite what a foreign born self anointed leader of India might say!

Diebold's Diehard Competitors

This post is syndicated at The Motley Fool Network - http://beta.fool.com/malayappan/2012/12/28/diebolds-diehard-competitors/20053/

A few months ago, Citibank (NYSE: C) quietly rolled out a new generation ATM (Automatic Teller Machine) in my city’s local retail location.  It was a cutting edge ATM, manufactured by   Nautilus Hyosung, a Korean-based manufacturer. According to this company’s website, they pride themselves on “effectively integrat[ing] its software development capabilities with its sound hardware manufacturing platforms with speed and flexibility.”  Well said and amply validated through an extremely intuitive experience that was offered to me at my very first attempt to use the new ATM.

A few months later, in contrast to Citibank’s rollout, my other bank, Webster Financial (NYSE:WBS), announced their new line of ATM’s with much fanfare and trumpet.  They even offered incentives for trying out the ATMs through sweepstakes. Their ATMs are manufactured by Diebold (NYSE: DBD) and purport to emulate the new age ATMs that are sprouting all over the country.

What exactly are the new generation ATM’s?  They are the ones that allow deposits of cash and checks without envelopes, spit out receipts with deposited check images, email you receipts if you ask for it and even let you create “profiles” so that you can conduct ATM transactions faster the next time!

Diebold and innovation

I have to admit that my experience with the Diebold ATM was not nearly as intuitive and seamless as the Hyosung ATM.  I make my living off technology and user experiences are important to me, and I had quite a difficult time with the Diebold ATM.  It wasn’t quite as much about the hardware as much as it was about the software, meaning the user interface was not quite as intuitive.

For starters, Diebold says that you can “stack” several checks and deposit them all at once.  However, the machine’s scanner does not recognize the presence of the checks and automatically start scanning them in unless of course, you press “continue.” On the other hand, the Hyosung machine instantly knows when you start to place a check and starts scanning it in immediately. The Hyosung machine offers to send you an email receipt (for those of us who are tree huggers), while the Diebold machine offers no such avenue.

There are other nifty features that the Diebold machine misses out on, but the bottom line is that there is no way to send them feedback on suggested improvements.

In their not-so-rosy latest third quarter financial results released on October 25, 2012, they caution investors, asking them not to rely on “forward looking statements.”  Here are a couple of those –

• competitive pressures, including pricing pressures and technological developments;
• acceptance of the company's product and technology introductions in the marketplace;

There you have it. While Diebold lowered their revenue expectations for the full year, citing different reasons, their greatest fear should be their lack of innovation or at least the failure to perfect it. Nimble competitors like Hyosung are snapping at their feet, while others like NCR Corporation (NYSE: NCR) are getting ready to eat Diebold’s lunch.

The NCR story

NCR is a direct competitor in the so-called Self Service, ATM and POS (Point of Sale) business.  That about covers an entire gamut of rapidly evolving, technologically advancing devices such as vending machines, ATM machines, and the payment devices that you  see at supermarkets. POS devices are what often carry the NCR name and “advertise” this company’s perceived ubiquitous presence among consumers.

I have seen recently installed NCR’s POS devices that are cutting edge and incorporate RFID(Radio Frequency Identification) readers which enable contactless payments using RFID key tags. Furthermore, NCR has announced the introduction of ATM’s that allow a customer toinitiate an ATM transaction on their smart mobile devices and complete the transaction at the ATM.  Imagine that.  That is a clever use of technology that is one step ahead of what I saw at the Hyosung ATM and far ahead of the Diebold ATM that I used.

The future of self service technology

The future of self-service technologies that encompass any device that allows customer interaction with minimal service provider interaction is bright.  Technology can only get smarter from here on out and the manufacturer with the best integrated hardware and software will win.  Hyosung and NCR appear to be on the right track while Diebold appears to be playing catch-up.  

Walgreen No Longer Evergreen

This post is syndicated at The Motley Fool Network - http://beta.fool.com/malayappan/2012/12/28/walgreen-no-longer-evergreen/19875/

On December 21, 2012, Walgreen (NYSE: WAG) released first quarter 2013 results that were dismal, disappointing Wall Street expectations and sullying the holiday mood of its investors.  GAAP first quarter earnings per share were $0.43, which was 20 cents below what they earned for first quarter 2012, at $0.63 per share. 2012 results on the other hand were higher than first quarter 2011 results where Walgreen earned $0.62 cents per share.

While they crowed about the results in their 2012 earnings report, they also blamed the “decision to be no longer part of Express Scripts (NASDAQ: ESRX)” for a 2 cent impact to pharmacy sales and expenses.  Guess who they are blaming for this year’s woes?  

They talk about "ongoing  Express Scripts impact," and disruption from Hurricane Sandy.  However, they say that their performance was getting stronger despite these impacts. An ordinary investor could be excused for thinking Walgreen is an evergreen stock.

No longer evergreen

When Walgreen left Express Scripts, they felt that they would be impacted more in the long term if they stayed despite short term impacts.

Subsequently, for sparsely explained reasons, they decided to rejoin the Express Scripts network by agreeing to a new contract. However, it's hard to make an informed judgment about the new contract, as key details have not been shared publicly. 

I wrote earlier in October 2012 that it appeared that the new agreement contained provisions that would allow Express Scripts to exclude Walgreen from some of their network offerings.  I based this from my own experience because while I was eagerly looking forward to going back to my local Walgreen store for my prescriptions, Express Scripts informed me that it would no longer be possible.

Express Scripts told me that my plan sponsor chose a network that excluded Walgreen for cost reasons.  This seems to go against the argument Walgreen offered in their 2012 earnings report, which seemed to indicate a general preference by plan sponsors for Walgreen. Walgreen went so far as to suggest that many plan sponsors were changing loyalties due to their desire to maintain access for their plan subscribers.

Seemed like a pretty good story right?  If that was indeed true, then one is left wondering why Walgreen would accept anything less than an unaltered contract that existed prior to their dispute with Express Scripts.  Something does not add up and it still doesn’t in their latest 2013 Q1 earnings call transcript.

Competitors that benefit

Rite Aid (NYSE: RAD) appears to have genuinely benefited from the spat that occurred between Walgreen and Express Scripts. Rite Aid reported third quarter fiscal 2013 earnings of $0.07 per share that was up a penny from earnings a year ago for the same quarter. Further, Rite Aid raised earnings guidance for the entire fiscal year 2013. Wall Street liked the results and shares rallied. CVS Caremark (NYSE: CVS) reported third quarter 2012 results that were equally strong & they raised guidance as well.

I mentioned in my earlier post that both Rite Aid and CVS reported that they were picking up prescriptions from former Walgreen customers who were served by Express Scripts. This appears to be continuing and, furthermore, even as Express Scripts and Walgreen have patched up, former Walgreen customers are not returning.  It’s not that they don’t want to; perhaps they can’t thanks to the seemingly lopsided contract that Express Scripts negotiated.   

The future of Walgreen

Walgreen will need to deal with the likely permanent loss of customers who have migrated over to competitors. They have tried to play catch-up through the introduction of new loyalty programs such as their Balance Rewards program, which according to them has 45 million enrolled members since its recent introduction. However, CVS Caremark and Rite Aid have had an head start on this front.

Walgreen has a large footprint with over 8,000 stores across the country. For frequent travelers like me, it used to be a godsend. However, in a highly competitive retail pharmacy climate, every customer counts and the loss of Express Scripts customers will be a huge hit to their bottom line.

Walgreen management disagrees with the assessment that the Express Scripts fiasco has had a damaging impact and insists that customers are being regained. CEO Greg Wasson asserted that this quarter was a “turning point” and that the company was quickly regaining lost customers at the rate that they had shifted to competitors.

However, his response to the question from an analyst from Credit Suisse about sums it up. The analyst asked about the seeming “disconnect” between Walgreen’s claims about regaining lost customers and competitor claims about winning over and retaining these customers.  Mr. Wasson said that he could not “help you with that disconnect,” but he is “happy where we are.”

Walgreen executives further said that they were optimistic and that no one can predict the rate of retention (by competing pharmacies). I guess that's also what we should do as investors. The best we can do is to be optimistic and wait, watch, and see.

Goliath Versus David

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/12/21/goliath-versus-david/19574/

In my other post, Goliath Versus Goliath, I told you that one man’s Goliath is another one’s David (from the Biblical story).  Guess who won?  David, of course!  David was a diminutive but clever boy who went up against a terrifying giant with nothing more than a bag full of pebbles. How did he win?  He did something radical – he chose NOT to play by Goliath’s rules.  In other words, he chose NOT to use a sword and armor and instead used a sling and pebbles, something that Goliath wasn’t used to.  It was something that other warriors were not used to either.  Therein lay David’s secret to success!

Apple Versus Google

In case you were wondering, the wait is over!  Google (NASDAQ: GOOG) is Apple’s(NASDAQ: AAPL) David and the analogy while it might appear far-fetched, is appropriate and I will explain why.  One might conclude that both Apple and Google are Goliath’s and they are rightly so in their own spheres of influence.  Google is the King of search and Apple is the King of media.  Everything that Apple does is to try and enhance the consumer’s media experience and their products line up that way.  Consider their latest renewed foray into televisions.  There is a rumor that they are testing high definition television set designs.  In my humble opinion, Apple is rapidly entering what I would consider “commodity territory.”  Are they running out of ideas?  However, Apple currently has nearly complete dominance in the media enablement domain with their wide range of products – iPads, iPods, iPhones and such that all revolve around the iTunes ecosystem.  It would be daunting for another player to try to duplicate this amazingly efficient enterprise.

Until now that is!  Enter Google with their smart ploy of giving away for free their Android operating system.  According to Google,

“We wanted to make sure that there was no central point of failure, so that no industry player can restrict or control the innovations of any other. That's why we created Android, and made its source code open.” 

Anyone can download and use this software, including you and me!  A host of hardware manufacturers ranging from Samsung to Acer, Asus, Toshiba and Amazon (NASDAQ:AMZN) purvey phones and tablets that are powered by Android.  Google also acquired Motorola Mobility this year, in a move that is bound to further cement Android’s snowball like growing influence.  It’s a virtual bonanza out there for the discerning consumer who is thirsting for choices and the range of offerings is only going to get better and better.

From Google’s standpoint, they win in multiple ways.  First, by giving away the software, they are massively popularizing and promoting it.  This creates familiarity for the consumer and eases the transition into newer versions of Android.  Secondly, by now having the ability to control the design of their own line of mobile devices with the purchase of Motorola mobility, they have positioned themselves nicely.  Finally, by enabling a wide range of manufacturers and application makers, they have created an ecosystem that caters to a consumer market withdiverse needs and budgets.  In the end, despite the seemingly altruistic intentions, Google benefits and wins by developing a growing user base that is already hooked on to their search, map and email products and receptive to a pitch for a seamless experience across a broader spectrum.  It is indeed a win-win strategy for Google.

Other Warriors

While the Goliath of an Apple will no doubt be fending off the multi-pronged attack from a host of manufacturers that benefit from participating in the Android ecosystem, there are other warriors chomping at the bit.  Microsoft (NASDAQ: MSFT) hopes to offer a compelling alternative with their Surface tablet, which however benefited little from their recent multibillion dollar campaign.  They made a commendable effort that unfortunately had lackluster results just as I had predicted in my post about the Windows 8 launch.  However, Microsoft is still a competitor that can put some dents in Apple’s armor.  This just increases the visibility of choices in the eyes of the consumer who is starting to realize that there are choices out there.  Even if Apple’s products appear to have the edge thanks to the enormous popularity of their iTunes ecosystem and their status as bleeding edge innovators, the party cannot continue forever.  There is bound to be rapid, exponential evolution in the mobile marketplace and for now it appears that Google has positioned itself to win.     

The Future of Goliath and David

Google is definitely a solid long term growth play although it will be another couple of years before they unseat Apple’s currently predominant position in the smartphone and tablet space.  Apple is likely to remain appealing in the short term horizon, but it is unlikely that their meteoric rise is sustainable in the long run.  For now, they enjoy the advantage of having complete control over their ecosystem with their masterful execution, but the likes of Samsung are sure to catch up soon.  That is if they get their marketing messages right (starting by reducing product confusion).

Showroom Browsing at Best Buy For The Holidays

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/12/20/showroom-browsing-best-buy-holidays/19389/

In my other post, Goliath Versus Goliath, I told you how like millions of other Americans, my family “showroom browsed” at Best Buy (NYSE: BBY) before we bought our Samsung Galaxy Note tablet from another vendor on the Internet.  Any consumer wants to touch and feel an item before purchasing and any shopkeeper such as Best Buy would want the deal to be consummated on premises. Sadly, with the advent of smartphones, tablets and netbooks with wireless connectivity, shoppers browse through items at the store and buy elsewhere such as at Amazon’s (NASDAQ: AMZN) website.  Even if one did not have a smartphone, one could do what we did – check out the product at the store and then come back home and order on the Internet.  Either way, the store loses and the Investor as well.  Best Buy is one of the last of the “Big Box” electronics retailers that is at its last throes of survival. Or is it?

The Private Equity Buyout

It is no secret now that Best Buy’s founder Richard Schulze is attempting a leveraged buyout of this company using private equity money.  On December 14, Best Buy’s board gave Mr. Schulze and his Investors additional time to evaluate and assess the deal, taking into account how Best Buy performs for the holidays.  Schulze owns 20% of the company, so he does have to motivate other Investors to get on board with this decidedly head scratching move.  This attempt to take Best Buy private has been brewing for quite some time, but the latest move by the board to give Mr. Schulze time to February 28 2013 to present a fully financed bid has some risks.  The board has a month after the bid to accept or reject it, but a lot depends on how the holiday season goes for the company.  Needless to say, poor performance will either cause the bid to get lowered or maybe even evaporate.  A great holiday season on the other hand (extremely doubtful at this point) could have some interesting developments.

From a retail investor point of view, if one has not made an exit from the stock by now, this is a good time to do so.  There is no point in banking on a meaningful pop in the stock even if things go the way the board and Mr. Schulze are hoping.  Think about it – is Best Buy really a long term holding with so many storm clouds surrounding it?  The most plausible answer is – it is doubtful.

Glorified Showroom For Internet Shoppers

It is however, no longer doubtful that Best Buy is perhaps little more than a glorified showroom. Anyone who wants to buy on the Internet is perhaps well served by going to the nearest Best Buy and getting a hands on experience before deciding to click the “Add to cart” button onAmazon’s webpage.  Amazon on the other hand has become an Über shopping portal of the Internet.  This is a site where even other well established online merchants purvey their wares, hoping to take advantage of Amazon’s massive exposure.  They do so sometimes to their own detriment.  One prime example is that of Borders, a now defunct bookseller who thought that they could go online on the cheap by hiring Amazon to provide them with an online presence, Talk about the wolf guarding the henhouse!    The only thing that Amazon does not have is a showroom and unfortunately for Best Buy, they are the unofficial showroom for Amazon and other Internet retailers!

Other Brick and Mortar stores such as Walmart (NYSE: WMT) and Target (NYSE: TGT) are catching up as well.  One can in fact buy most electronics items that Best Buy sells at either of these stores at a greater discount.  You name it – Products from Apple such as iPads, iPhones, iPods, Televisions, DVD Players, Telephones, Recorded Media and Music, Microwaves, and a host of other electronic items from manufacturers such as Samsung, LG and GE can all be found at Walmart and Target.  In fact, the heavier electronics items such as dishwashers, refrigerators and washers and dryers can be found at better discounts at Home Depot, Sears and Lowe’s. Best Buy literally is flanked on all sides by competitors who are amassed against it – on the ground and on the Internet. 

Extended Warranty Sales Pitch is a Liability

I personally dislike shopping at Best Buy for one key reason and that is the extended warranty sales pitch!  I see online reviews where they say that salespeople at Best Buy are disinterested and unresponsive and I am not surprised.  They are perhaps demotivated due to constant pushback from the customer about extended warranties.  Oftentimes, I feel overwhelmed by their desire to sell me extended warranties that are supposed to make my life easier, but rather results in unnecessary added expenditure.  They skip out on the negatives of the warranty such as the things that are not covered and aggressively market the product while I am thinking of ways to decline it (nicely) and get out of the marketing pitch.  It is incredibly stressful so much so that I rehearse my response over and over in my head while heading to Best Buy!  Who needs extended warranties when all major credit cards – MasterCard, Visa, Discover and American Express extend the Manufacturer’s warranty by at least one additional year?

Salespeople at Best Buy receive commissions on the sales of extended warranties and unfortunately, this has the opposite effect of turning off customers.  Many shoppers for this reason alone shop at warehouse clubs such as Costco Wholesale where one does not encounter this sales pitch, although to be fair, extended warranties are heavily marketed elsewhere.  Try buying any electronics item over $10 at OfficeMax or Staples and try to get away from a marketing pitch for an extended warranty!  Home Depot and Lowe’s are not much different while Walmart and Target offer muted pitches. 

The Future of Best Buy

The future of Best Buy is weak despite the apparently heroic actions of Mr. Schulze and I rate BBY as a SELL.  For all one knows, Mr. Schulze might still be able to pull it off (taking Best Buy Private), but I expect it to benefit Mr. Schulze and his Investor group, and not the Individual Investor.

Goliath Versus Goliath

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/12/19/goliath-versus-goliath/19388/

I finally caved! Yes, I did.  I decided to go ahead and gift my kids a Samsung Galaxy Note tablet after I saw a great deal on the Internet for a $100 off the sale price.  I got the tablet with 32GB onboard memory for $449.99.  How could I possibly go wrong? I thought, although as abundant precaution, I did ask my wife and daughter to check it out first at the local Best Buy store before ordering.  Of course, there is an inherent issue with “store browsing” at Best Buy and giving my business elsewhere, but that is the topic of my next post – Store Browsing at Best Buy for the Holidays.  Samsung is not traded in US stock exchanges, so if you want to trade it, you will need a broker with trading privileges on the Korea Stock Exchange (KRX).

Electronics is Always a Commodity 

In the early 1990’s, I used to build personal computers for myself and they were completely tricked out, maxed out to the hilt with parts that I would buy from wholesale merchants.  It would cost me about $5000 or so to build and friends and office colleagues would try to buy them off me and I would oblige sometimes.  Similarly configured systems from Hewlett Packard (NYSE:HPQ) or DELL Computers (NASDAQ: DELL), would retail for about $7500, I was saving hugely.  I would sell my systems for a small $100 profit, since I really just enjoyed starting over and build a new one.  Sometimes, I would use the computer that I built for a year and then resell them without losing too much money.

As the years went by, my cost lowering strategy of building my own computers did not make sense any more.  In the early part of this millennium, I finally gave up building my own computers when the cost to build was greater than what I could purchase a new one for retail and the resale value of a used computer went down to less than $100.  Similarly, in the year 2000, I bought a Compaq IPaq for $550 that was worthless after a few years.  I could give other similar examples, but anecdotally, every consumer by now should know that when it comes to an electronic product, it ultimately becomes a commodity and worthless after a few years.  Unless of course it is legendary collector’s item such as an original Macintosh from Apple (NASDAQ: AAPL).  Almost every other electronic item would be hard to even give away, which is why one often finds them in the trash (environmentally hazardous). 

The Tablet Phenomenon 

Given this experience with electronic items and as a trained Electronics Engineer, no wonder, I refuse to fork out $800 or so for a top of the line iPad that would have WiFi and 4G wireless connectivity.  Even a sparingly configured iPad would cost more money that I am willing to pay for the reasons stated above.  I expect an iPad bought today to be worth nothing in a few years.  In fact, I fully expect a new iPad that one might buy in 2016 to be worth about $299 or less!  However, until recently, the iPad had little competition but now has an array of competitors aligned against it, including Samsung with their Galaxy Note. 

I personally have not touched any tablet, not the iPad and not the Galaxy Note and I doubt that I ever will.  I work neck deep in technology, but I go for the gadgets that increase my productivity such as a computer or a laptop with a keyboard.  A functional “smartphone” is the only other accoutrement that I need and that about rounds it up for me.  I have no time for mucking around with a currently overpriced, half-useful device such as a tablet, but I can understand peer pressure and the notion of “keeping up with the Joneses”.  No one in our friend or family circle has the Galaxy Note, but nearly everyone has some kind of Apple device such as the iPad or the iPhone.  Understandably, everyone is curious to see what our experience is going to be with the Galaxy Note, so we do get some initial bragging rights!

Goliath Versus Goliath

This holiday season market analysts across the investing spectrum are eagerly watching to see who is going to win the rapidly snowballing food fight between the two Goliaths of the phone and tablet industry – Samsung and Apple.  Over the airwaves and in newsprint and media, we are swamped by analyses and advertisements that would make one believe that there are only two kinds of phones and two kinds of tablets in the market that are made by either giant.  Conveniently forgotten is the range of tablets available from a multitude of other manufacturers such as the Kindle Fire HD from Amazon (NASDAQ: AMZN) and the Nexus 7 from Google(NASDAQ: GOOG) and much more.  However, none managed to capture my imagination in the same way as the Galaxy Note and that too came with an enormous catch!  That catch alone is enough to declare Apple the winner of this holiday season’s electronics war.

What is the catch?  Well, deluged by the advertisements from Samsung, I set out to research their tablet offerings.  What I found out was very confusing.  The Galaxy Tab first caught my eye, and the price was very appealing.  This is what I suspect most consumers bought this holiday season because it was heavily marketed and heavily discounted and price matched. Turns out, this is an older model tablet that obviously is part of Samsung’s inventory depletion strategy.  Upon more intensive and deeper research, I found that the latest and greatest offering from Samsung was the Galaxy Note tablet that has a namesake which is Samsung’s latest phone!  A Google search for the tablet using the keyword “Galaxy Note” will turn up the phone, not the tablet.  If one was none the wiser, he or she would never learn that a tablet with the same name is available.  An incredible missed opportunity for Samsung!

Apple won this round, but this is I am sure a very close call!  However, one man’s Goliath is another one’s David.  So, read all about it in my next post, Goliath Versus David!

Our Price Is Our Product

This post is syndicated at The Motley Fool Network: http://beta.fool.com/malayappan/2012/12/12/our-price-our-product/18559/

I traveled to the West Coast this past week on United Airlines (NYSE: UAL), flying coach (or Cattle Class as jovially referred to by frequent flyers). As the hours went by, I wanted to have a snack and the flight attendant told me about a few items that were available for purchase.  Pointing to the airline’s magazine, he said that the descriptions and pricing could be found on the last page.  I did, and I was surprised by a note at the bottom of their so called “Choice Menu.”  It said, “A portion of the proceeds from the Choice Menu program will go to organizations that promote breast cancer awareness and greater access to screening services.”  I was stunned at the brazenness of that note! First, you charge me an outrageously ridiculous amount for some light snacks and then you tell me that I am donating to charity in the process? I was flabbergasted at that thought.  I felt that I was being literally ripped off and the airline was telling me to feel good about it!  Furthermore, this was December, NOT October which is the designated National Breast Cancer Awareness Month.  Was the airlines capitalizing on this just recently passed event and counting on the passenger getting possibly confused?  What kind of message was the airline wanting to convey?  That they care?  I don't think so.

Feel Good Subliminal Message

I think United figured that as long as they put that message out there, a passenger like myself could be counted on to be “supportive,” feel good about where the snack money was going and acknowledge the airline’s altruistic intentions while forking anywhere between $3 to $9 or so for a bunch of peanuts and maybe a few raisins and almonds!  The words of the representatives ofSpirit Airlines (NASDAQ: SAVE) with whom I had just spoken to recently, flashed across my mind, “Other airlines break up fares and fees in a manner similar to what we do and still charge more on the base fare.  They just put a different spin on it and market their fees and charges in an entirely different way.  We on the other hand, feel that the lowest base fare is paramount to get new business and repeat business and position ourselves as the carrier with the lowest possible base fare.  Trust us!”  Well, “trusting them” became easier as it slowly dawned upon me that I really felt cheated as a passenger and a customer with that kind of marketing.  For any United Public Relations person reading this post, I want you to know –please don’t shove a charity down my throat (analogy intended).  The next time I fly United, I don’t want my purchasing decision and my conscience to be weighed by the act of deciding to buy an overpriced snack.  I do donate to Charity, and my belly is already full with the charities that I support, thank you!  Just charge me what you wish without any pretense and please skip the feel good message! For the record, United’s stock price has been about as flat as it can get during the same time period that I wrote about Spirit’s performance after their IPO (May 2011 to December 2012)

Unjust Characterization or Realistic Description?

In response to my recent post – Dollar Store of the American Skies, I was approached by Ms. DeAnne Gabel, Director, Investor Relations for Spirit Airlines. She wrote, “I read your article on Spirit Airlines dated 11/28/2012 and wanted to offer an opposing view to your characterizing Spirit’s a la carte model as nickel and diming.   If you are open to having a dialogue, please contact me at the number below.”  I took her up on the offer, made an appointment and called her a few days later.

On the call, DeAnne also had with her, Misty Pinson, Director, Corporate Communications for Spirit.  We got off on a hearty “dialogue,” as DeAnne wanted in an effort to address my characterization of Spirit’s strategy as “Nickel and Diming.”  Since I had recommended Spirit Airlines as a Buy, naturally, my first question was, “Why are you so unhappy at the characterization?  After all, I recommended your airline!”  DeAnne’s response was, “Well, because, that is a negative characterization that does not give a positive image to Investors and the flying public.  We are not out to rip off the customer, rather, we are trying to offer the lowest base fare by stripping out all the extras.  That gives anyone a chance to fly.”  “The word - Nickel and Diming used colloquially conveys a negative impression and we are really not trying to treat our customers with disrespect,” offered Misty.  Just to be sure, I looked up the definition atMerriam Webster and yes, the term is not flattering to say the least.

Sustainable, Consistent, Repeatable

I pointed out to Misty and DeAnne that lots of articles on the Internet (and in print) refer to Spirit’s policies, procedures and fees as Nickel and Diming and I was not the only one to refer to it that way.  In fact, I pointed out to them an article by the New Jersey Star Ledger that similarly described Spirit’s a la carte pricing. “That is the kind of impression, and unfair characterization that we are seeking to avoid,” said DeAnne.  “We are concerned that investors might be led to believe that our lowest base price model turns off customers and might not be repeatable or sustainable,” she said.  She continued, “In fact, the opposite is true.  How else can one explain the average 84% load factor from Atlantic City to Fort Lauderdale?” Misty also pointed out that the policies and fees were consistent and there were no surprises since everything is disclosed to the customer during the booking process.  Later, upon research, I found out that all airlines need to disclose additional baggage fees and all mandatory fees and taxes to the customer per the new USDOT regulations .

However, going back to United Airlines, what I experienced during my cross country trip last week shows how little the DOT can actually protect the customer.  On the outbound trip to California, United flew an older Airbus aircraft that did not have individual TV consoles on each seat.  So, they were forced to “give away” free TV viewing along with “free” headphones.  On the return trip however, United wanted to charge “only” $7.99 for TV viewing using the headrest console. I had assumed that the TV viewing would be free for long haul flights and with so little disclosure, this was absolutely unacceptable.  So, I did start to feel some sympathy for Spirit.  I also fly Delta Airlines (NYSE: DAL) and American Airlines and they both charge fees for TV viewing and to my knowledge, neither discloses those types of fees during ticket purchases.     

During our conversation, Spirit’s representatives told me that they have full disclosure of mandatory fees and taxes during the booking process and full transparency at their website under the “optional fees” section.  Misty told me that the passenger is kept informed during the booking process, through follow-up emails and signage at the airport to ensure that there are no surprises.  To be fair, I did a Google search using the same search terms to find out how US Airways, Delta, United and American fared on the optional fees front along with Southwest Airlines (NYSE: LUV).  The search term was the airline name and optional fees, such as “Spirit Airlines optional fees”.  Corresponding webpages turned up for US Airways, Delta, United,American and Southwest. 

It’s all About the Price!

Misty and DeAnne did make it clear that the objective of the airline was to provide the lowest base fare and although they did not explicitly try to stay away from catering to the corporate business traveler, the majority of their traveling public were leisure travelers and many of them were likely first time flyers who liked Spirit’s affordability.  They told me that Spirit has a reputation as a family friendly and price friendly airline.   To ensure they offered the lowest fare, they described how the airline went to great lengths to ensure that the “fuel burden” was reduced through extreme weight reduction measures.

Spirit does not carry any magazines, including one of my favorites – SkyMall because of the added weight that they represent, they said.  “We have offered vendors such as SkyMall and others to pick up a portion of the fuel burden in order to reduce our cost as well as subsidize their own marketing and we have had no takers,” said Misty. I was told that the airline planned very carefully for every flight day after analyzing how much water to carry in the lavatories, how many times a plane had to refuel, how much snacks to carry and so on.  To help reduce weight, the airline has no entertainment system since the added weight leads to a need to burn more fuel and thus higher flight costs.  “We do so much to reduce the base cost to the lowest number that it is really unfair to compare us to other airlines who bundle all those additional expenses and carry the cost into their so called base fare,” said DeAnne.  I suspect that vendors such as SkyMall “give back” to the other airlines through lucrative mileage loyalty programs which allow frequent flyers like me to earn airline frequent flyer miles while shopping at designated websites.  SkyMall in turn pays the airline for the “privilege” of getting the customers who are redirected to the website. How do they do it?  Companies such as SkyMall buy airline mileage points in bulk from the airline and then parcel them out to customers for some type of mileage to dollar ratio.  That mileage then gets deposited into the frequent flyer's airline mileage account.  Spirit has no such comparable program through SkyMall.

To be sure, weight reduction is not the only trick up Spirit's sleeve.  The company is extremely frugal about its marketing too, I was told.  "We have almost negligible advertising via traditional TV advertising, magazine placements and Newspaper ads," said Misty.  Apparently, the airline relies heavily on word of mouth referrals, articles and posts (like this one perhaps) that dwell upon the pros and cons of targeting the consumer's bottomline dollar.  Opt in email marketing is also a preferred method although the airline maintains a minimalist presence in social media such as Facebook and Twitter (one cannot post to Spirit's timeline on Facebook and the airline follows nobody on Twitter).  "This is to allow us to abide by USDOT rules that stipulate that we must respond to every passenger inquiry and this is extremely difficult to do," said DeAnne.  So, social media is not their marketing vehicle of choice!  Still, their revenue performance is impressive, given this information.  Perhaps, the media is doing their marketing for them? Hmm..

Still a Good Investment

As I said to the representatives of Spirit Airlines, I did recommend Spirit as a Buy and I stand by it.  My opinion is unchanged and that really wasn’t the issue in the first place.  At heart was my characterization of Spirit as a “Nickel and Dime” shop and while I was not the one to come up with that reference in the first place, I do understand why they would be upset at that term.  “We treat all customers equally and do not offer tiered status like other airlines so that we can single out a few for preferential treatment,” said DeAnne. She continued, "Our Price is Our Product! We provide exceptional value to our customers and in the process, we stimulate market traffic." As much as I would like to say that our “Spirited Dialogue” gave me a new perspective of the airline, I must say that my flight experience on United this past week did more to adopt a more understanding stance towards Spirit’s policies.  Investing in airline stocks is always a risky bet and yours truly has burnt his hand more than once after having faith in a couple that went through the bankruptcy wringer.   

Tell me what you think about Spirit’s fees, policies and marketing strategy?  Do you feel that they are being portrayed unfairly in the media?  Do you think the media is doing so is unwittingly acting as Spirit's marketing surrogate?

Dollar Store of the American Skies!

This post is syndicated at The Motley Fool Network:
http://beta.fool.com/malayappan/2012/11/28/dollar-store-american-skies/17328/

In an interview with the Wall Street Journal that was published last week, Ben Baldanza, CEO of Spirit Airlines (NASDAQ: SAVE) discussed his company’s aggressive nickel and dime strategy of profit making.  In the interview, Mr. Baldanza says that the airline’s core mantra is about offering the lowest price and how this drives everything that they do.  This strategy is amplified by the airline’s ticker symbol – SAVE! Fair enough!  Let us see how this makes Spirit a better investment.

Good for you, Good for Business

On Election Day, Spirit introduced the $100 per carry on bag at the gate for those passengers who chose not to prepay. Outrageous as it might seem, the airline’s spokesperson, Misty Pinson says that this is actually a way to deter customers from holding up the boarding process by encouraging them to pay for the bag in advance.  I have never flown Spirit Airlines before and I doubt that I ever will and I suspect that a majority of travelers feel this way.  Why?  Think of a buffet. What happens when the choices are too numerous and actually turns you off instead of stoking your desire and pleasing your palate?  The natural instinct is to turn away. Similarly, the myriad categories of fees and options available to a Spirit customer are mind-boggling!  I would want no part of that.

Mr. Baldanza feels differently.  His position is that the “unbundling” of fees serves to allow passengers to pay only for what they want and effectively not “subsidize” other passengers.  Theoretically, it might be true.  After all, a business passenger with just one carry-on, is not on an equal footing with a family of four traveling on leisure with an assortment of luggage.  Other airlines have taken care of this problem also and it is impossible to get on any airline as an infrequent passenger and not have to pay for luggage in some way, shape or form.  However, Spirit has taken this a la carte pricing to an extreme and Mr. Baldanza argues that this makes for greater profitability.  He says that with a plan to triple Spirit’s share of air traffic from 1% today to 3% in a few years, they will continue to cater to a segment of the population that cares about price above everything else.  In other words, the airline claims that it is doing well by the customer and in turn, doing well for their shareholders by focusing on a unique approach to profitability.

Flying the Cheap Skies

Mr Baldanza does not dispute (in answering the reporter’s question), that Spirit’s strategy could be a huge turn off to a significant number of airline customers, but says that there is demand for the lowest price, despite extreme nickel and diming.  There is no denying the fact that Spirit’s stock has soared from around $11 to about $17 as of November– that is about 50%.  No wonder, investors like this stock and Mr. Baldanza is so upbeat about how he runs his airline.  Airline stocks in general are not the best investment and the performance of Spirit’s direct competitors says it all.  Southwest Airlines (NYSE: LUV) lost about 20% in stock value during the same period, while Jet Blue lost 15%. 

Granted that Spirit just had an IPO in 2011, while its competitors have been public for a while, but as the Wall Street Journal reports, Spirit is “pound for pound, the most profitable airline in the U.S.” Spirit reported third quarter adjusted net income of $25.2 Million on October 31. Operating revenue was $342.3 Million, an increase of $53.6 million over third quarter 2011 according to Spirit’s earnings release.  In contrast, Southwest’s operating revenue decreased to $208 million from $285 million over the same period according to their earnings release. Southwest admits to “sluggish revenue growth” in light of the weaker economy, but it appears that Spirit is doing much better than its competitors in the same skies.  Not bad for a famously el cheapo airline!

Sustainable Growth

From all indications, Spirit is well poised to continue on its growth trajectory in an economic climate where a segment of the traveling public has embraced its pricing structure.  Mr. Baldanza claims that the airline will continue to grow 15 to 20% a year without sacrificing margins.  He must feel pretty strongly about this.  He says so in the WSJ interview and says so in the latest third quarter earnings release as well.  We better believe it!