Stephen’s Posterous

Publishers Nurture Rivals to Kindle by Shira Ovide and Geoffrey A. Fowler, WSJ.com

Some newspaper and magazine companies, feeling let down by the Kindle electronic reader from Amazon.com Inc., are pushing for alternatives.

A few publishers are forging alliances with consumer-electronics firms to support e-readers that meet their needs. Chief among their complaints about the Amazon portable reading gadget is the way Amazon acts as a middleman with subscribers and controls pricing. In addition, the layout isn't conducive to advertising.

Hearst Corp., which publishes the San Francisco Chronicle and Houston Chronicle as well as magazines including Cosmopolitan, is backing a venture with FirstPaper LLC to create a software platform that will support digital downloads of newspapers and magazines. The startup venture is expected to result in devices that will have a bigger screen and have the ability to show ads.

Gannett Co.'s USA Today and Pearson PLC's Financial Times are among newspapers that have signed up with Plastic Logic Ltd., a startup that is readying a reading tablet, the size of a letter-sized sheet of paper, that can displays books, periodicals and work documents. The device, which uses digital ink technology from E Ink Corp., the same firm behind the Kindle, is slated to be rolled out by early next year, and will offer publishers the chance to include ads.

People familiar with the matter have said Apple Inc. is readying a device that may make it easier to read digital books and periodicals, a prospect some publishers are eagerly awaiting. News Corp., which owns The Wall Street Journal, also is exploring a possible investment in a Kindle competitor. Amazon declined requests for comment.

Behind the publishers' e-reader efforts are hopes for a digital-distribution mechanism that offers new venues to expand readership and collect revenue for news and information, publishers say. The tablet-style devices play a role in the debate about charging for electronic content.

Some publishers regret not charging people for newspaper and magazine subscriptions on the Web. They believe mobile devices, whether it's the iPhone or e-readers, re new enough that consumers won't balk at paying for the digital content.

"This channel potentially could revolutionize the consumption of content in much the same way the Internet did," said Rob Grimshaw, managing director for the Financial Times's Web site.

Publishers see an opening in the failings of existing electronic reading devices, the Kindle most prominently. The Kindle, introduced in 2007, has the U.S. periodical market pretty much to itself. Sony Corp.'s Reader is sold in the U.S., but it isn't yet adapted for newspaper and magazine subscriptions.

Sony said it will launch a wireless e-reader device that can download "daily content," and is currently in talks with publishers. A Sony official declined to say when that device would make its debut.

Critics gripe that Kindles don't allow for displaying ads and are poor substitutes for the look and feel of thumbing through pages. Magazine and newspaper executives also stew that Amazon won't let them set subscription prices for their own publications. Publishers keep less than half of the revenue from sales of their subscriptions on the Kindle, according to publishers.

Amazon has kept figures on Kindle hardware and title sales confidential, but the number of people reading periodicals on the Kindle remains small, partly because of price. The latest generation, the Kindle 2, costs $359.

The Wall Street Journal, the second-most-popular newspaper for the Kindle after the New York Times, has more than 15,000 subscribers, according to a spokeswoman for the paper, compared to its paid circulation of more than two million daily.

Fortune magazine has roughly 5,000 subscribers, according a person familiar with the matter, while the magazine has an average print circulation of nearly 866,000. Subscription prices vary, and are set by Amazon. In general, newspaper subscriptions range from about $5.99 to $14.99 a month, and magazines range from $1.25 to $7.99 a month.

Some publishers chalk up any Kindle shortcomings to early growing pains, and Amazon itself is developing a new Kindle, according to people familiar with the matter, with a bigger screen more suited to newspapers and magazines.

The Detroit Free Press and Detroit News are placing some bets on the competition, though. They hope to have roughly 100 Plastic Logic devices to test with readers this summer, months after the papers stopped delivery of the print newspaper most days of the week.

"We believe the Plastic Logic experience is going to be so much better," said Janet Hasson, senior vice president of audience development and strategy for the Detroit Media Partnership, which manages business functions of the two Detroit papers. Executives are discussing plans to lease the Plastic Logic e-reader to long-term subscribers, with the money going toward purchase of the device.

The papers also are prepping for sales on the Kindle because readers have requested it, Ms. Hasson said.

Some publishers also are focusing their portable-reading efforts on devices people already use. The new iPhone applications store rolling out this summer will support subscription prices, spurring the Financial Times, Time Inc. and other publishers to tinker with ways to offer subscriptions on the iPhone. Last week, Amazon bought a small startup that makes free e-book reading application Stanza for the iPhone

Van Baker, consumer electronics analyst for research firm Gartner Inc., said e-readers likely will appeal to only small numbers of people because of their cost, and he wonders whether a slew of devices will confuse consumers. "If the newspaper has one reader, and the book store has another reader and the magazine publisher has another reader, it just doesn't make any sense," he said.

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Thank goodness for banks and carmakers. Were it not for them, US newspapers would be in pole position as the nation’s most distressed sector.

The recession is merely a cyclical overlay to its biggest challenges: who will pay for news, how much and in what form? The Sun-Times Media Group, publisher of the Chicago Sun-Times, on Tuesday became the latest newspaper publisher to file for bankruptcy.

One senator, Benjamin Cardin of Maryland, would like to help by making it easier for newspapers to switch to non-profit status. The idea is that endowments from local bigwigs or even a newspaper-loving public could keep newspapers ticking over, aided by tax breaks granted in exchange for restrictions on political endorsements.

Supporting serious news organisations is an expensive business, however. Endowing the New York Times’ operations by an estimate in its own pages would alone require $5bn.

Giving the sector tax-exempt status cannot help when there are no profits to tax, which is often the case. In the US, print advertising fell 18 per cent last year, according to the Newspaper Association of America, accelerating throughout the year.

This is a longer-term problem as advertisers are finding more cost-effective and measurable ways to reach audiences. The last positive quarter was the first three months of 2006. The internet is more threat than opportunity for most titles, even if total online advertising also fell last year.

Propping up a failing status quo by burning through the cash of well-intentioned and civic-minded do-gooders is a poor solution. The term “non-profit status” is particularly unhelpful.

The much-admired Scott Trust in the UK, for example, has never been “non-profit”. Its role has been to fund The Guardian’s distinctive journalism rather than to enrich shareholders, but it has achieved this through the ownership of profitable businesses. Without those cashflows, the Scott Trust would almost certainly not have survived as long as it has.

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We the people got what we wanted. Most of the top executives at AIG’s financial products arm have agreed to pay back their bonuses. So, too, have many of the derivative business’ rank and file employees. So, that’s settled then, right? Not so fast. There may still be a consequence of the AIG clawback.

Staffers at the AIG black-box operation whose massive wagers in the credit default swaps market necessitated a $170bn US government lifeline are leaving in droves. Many are quitting at the group’s Wilton, Connecticut office, including one whose letter of resignation to chief executive Ed Liddy made the New York Times op-ed page.

In London, where the bulk of the CDS bets were put on the books, at least two top dogs running Banque AIG left Wednesday. And insiders at AIG are bracing for resignations en masse, some even speculate the entire division’s employees in London will walk. A spokesman declined to comment.

Who cares, one might ask. These are the villains that nearly put the global financial system in the junkyard and then had the gall to proceed with paying themselves millions of dollars in bonuses. Even erstwhile compatriots on Wall Street and in the City share sympathies with the torch and pitchfork brigade.

After all, if it hadn’t been for the $165m that AIG was contractually obligated to pay the derivatives folks two weeks ago, Congress wouldn’t have passed a law taxing bonuses at big recipients of government bailout money by 90%.  So news that the AIG bankers are handing back a chunk of money takes the pressure off everyone.

But the story is not over. While some of the $165m may boomerang back to the taxpayer, what about the $170bn the government has pumped into AIG? Retrieving this will depend on how well AIG can unwind the remaining $1.6 trillion in trades to which the financial products division committed.

These aren’t simple IOUs. Some have durations of up to 90 years. They encompass many geographies, jurisdictions and asset classes. Many have models attached that were engineered in computer programming languages that are no longer even taught in universities. This is going to be a big, complicated task.

Of course there must be lots of unemployed bankers and traders willing to replace the fleeing bonus-takers of AIG. Perhaps, but the perquisites aren’t compelling: a low base salary and no bonus. Meantime, incredible public scrutiny has unfairly cast the image of AIG employees somewhere between that of a child molester and a journalist.

And the career path for those who agree to take a chisel to the derivatives book? Well, spend a few years winding down the portfolio and if you’re lucky you get to be the last guy to turn out the lights. There is, in short, no career upside and no money in this trade.

Outrage has clawed back a few million dollars in less than two weeks. But taxpayers better hope it has not come at a far greater expense in the long run.

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Barack Obama’s populist streak risks undermining his authority. The US president said Tim Geithner, his Treasury secretary, should pursue every legal avenue to block $165m in bonuses to American International Group executives, but it seems like Geithner already has. The bonuses stink. But implying doubt over contract commitments and contradicting his own officials is unwise. Obama needs to be smarter.

True, Obama’s message might be more of a bullying tactic than a true-to-word statement. A threatened legal investigation mandated by the president might be enough for some of AIG’s employees to tear up their bonus contracts. This type of rhetoric has worked before. UBS chairman Peter Kurer used a similar tactic on his top executives, persuading some to hand back their bonuses.

The outrage is understandable with AIG on the receiving end of $180bn-odd of taxpayer cash. But Obama’s message comes a little late. Larry Summers, the president's chief economic adviser, noted on a talk show over the weekend that the US “cannot just abrogate contracts”. An administration official told the New York Times that Treasury had done its own legal analysis and concluded that the AIG contracts could not be broken.

Obama’s somewhat contradictory statements sound like knee-jerk populism. They also make his administration appear uncoordinated. What’s more, using political power to disrupt business contracts is dangerous territory for an administration anxious to restore investor confidence.

And it is unnecessary. Obama could be cleverer. Just threatening to name and shame these executives might encourage them to turn down bonuses. Or he could tell the employees accepting the biggest bonuses that they will have to justify their pay in front of Congress. Quickfire populism may play well in the short term, but Obama's famous cool under fire is what he needs to persuade investors he can turn financial markets around.

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From John Yoo, law professor at the University of California, Berkeley, a visiting professor at Chapman Law School, an official in the Justice Department from 2001-03. and a visiting scholar at the American Enterprise Institute.

Suppose al Qaeda branched out from crashing airliners into American cities. Using small arms, explosives, or biological, chemical or nuclear weapons they could seize control of apartment buildings, stadiums, ships, trains or buses. As in the November 2008 Mumbai attacks, texting and mobile email would make it easy to coordinate simultaneous assaults in a single city.

In the weeks after the Sept. 11, 2001, strikes on New York City and Washington, D.C., these were hypotheticals no more. They became real scenarios for which responsible civilian and military leaders had to plan. The possibility of such attacks raised difficult, fundamental questions of constitutional law, because they might require domestic military operations against an enemy for the first time since the Civil War.

Could our armed forces monitor traffic in a city where terrorists were preparing to strike, search for cells using surveillance technology, or use force against a hijacked vessel or building?

In these extraordinary circumstances, while our military put al Qaeda on the run, it was the duty of the government to plan for worst-case scenarios, even if, thankfully, those circumstances never materialized. This was not reckless. It was prudent and responsible. While government officials worked tirelessly to prevent the next attack, lawyers, of which I was one, provided advice on unprecedented questions under the most severe time pressures.

Judging from the media coverage of Justice Department memos from those days, released this week by the Obama administration, this careful contingency planning amounted to a secret plot to overthrow the Constitution and strip Americans of their rights.

As the New York Times has it, Bush lawyers "rush into sweeping away this country's most cherished rights." "Irresponsible," harrumphed former Clinton administration Justice Department officials.

According to these critics, the overthrow of constitutional government in the United States began with a 37-page memo, confidentially issued on Oct. 23, 2001, which concluded that the September 11 attacks triggered the government's war powers and allowed the president to use force to counter force.

Alexander Hamilton saw things differently than critics of the Bush administration. He wrote in Federalist 74: "The direction of war implies the direction of the common strength, and the power of directing and employing the common strength forms a usual and essential part in the definition of the executive authority."

Congress agreed with Hamilton. Restrictions on deploying the military for domestic law enforcement, originally passed to end Reconstruction in the South, did not apply to self-defense of the nation. Congress blessed military action on Sept. 18, 2001, when it authorized President Bush "to use all necessary and appropriate force against those nations, organizations, or persons" connected to the September 11 attacks, "in order to prevent any future acts of international terrorism against the United States."

Passed as the sound of Air Force combat air patrols flew over the Capitol, Congress must have understood that its words included stopping domestic attacks, since the hijacked airliners of 9/11 took off and crashed on American soil.

The government faced another fundamental question, which we addressed in our memo. Does the Fourth Amendment's requirement of a search warrant based on probable cause regulate the use of the military against terrorists on our soil. In portraying our answer, the media has quoted a single out-of-context sentence from our analysis: "First Amendment speech and press rights may also be subordinated to the overriding need to wage war successfully."

This line deliberately misrepresents the memo. The sentence only summarized a 1931 holding of the Supreme Court in the case of Near v. Minnesota concerning press freedom: "When a nation is at war many things that might be said in time of peace are such a hindrance to its effort that their utterance will not be endured so long as men fight and no Court could regard them as protected by any constitutional right."

The Court continued: "No one would question but that a government might prevent actual obstruction to its recruiting service or the publication of the sailing dates of transports or the number and location of troops."

Our memo had nothing to do with the First Amendment. It only referred to the case to show that constitutional rights apply differently during the exigencies of warfare than during peacetime. The 1931 case bolstered a point that the Supreme Court recognized in 2000 in Indianapolis v. Edmond, striking down random traffic stops to search for illegal drugs.

"The Fourth Amendment would almost certainly permit an appropriately tailored roadblock set up to thwart an imminent terrorist attack," the Court wrote. Courts have understood that law-enforcement standards could not govern military operations against wartime enemies. They have rejected, to take one example, claims that the Constitution required compensation for the destruction of oil facilities before the invading Japanese in World War II.

Imposing Fourth Amendment standards on military action would have made the Civil War unwinnable, combat occurred wholly on U.S. territory and enemy soldiers were American citizens. The military does not have the time to obtain warrants before soldiers fire upon enemy targets and personnel; the battlefield does not provide the luxury to collect evidence needed to meet probable cause standards in civilian courts.

Even if the Fourth Amendment applied, we believed that courts would judge military action under a standard of "reasonableness" -- as they might review a police officer who fires in self-defense -- rather than demand a warrant to use military force to stop a terror attack.

In releasing these memos, the Obama administration may be attempting to appease its antiwar base, which won't bother to read the memos in full, or trying to look good for the chattering classes.

But if the administration chooses to seriously pursue those officials who were charged with preparing for the unthinkable, today's intelligence and military officials will no doubt hesitate to fully prepare for those contingencies in the future. President Obama has said he wants to "look forward" rather than "backwards." If so, he should not restore risk aversion as the guiding principle of our counterterrorism strategy.

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With industries from autos to banking begging for taxpayer handouts, what would you call an industry that says thanks, but no thanks? Crazy, but like a fox. Even for venture capitalists, some ideas are just too risky.

Hundreds of the country's venture capitalists this past month blogged against or otherwise rejected proposals that the U.S. government fund early-stage investing.

They dismissed a recent column by Tom Friedman in the New York Times that urged bailout funds for venture capitalists. "You want to spend $20 billion of taxpayer money creating jobs?" Mr. Friedman wrote. "Fine. Call up the top 20 venture capital firms in America" and invest the money with them.

Venture capitalists certainly agree that innovators and start-up companies, not bailed-out GMs or Chryslers, will create the new jobs. They rightly brag that almost 20% of U.S. gross domestic product is generated by companies built by venture capital, such as Intel, Apple and Google.

Still, they almost universally panned the notion of taxpayer support. Their real-time rejection is an excellent example of how social media -- here, the venture community dissecting a proposal online -- can now quickly take down bad ideas.

"The top venture firms don't want, don't need and are never going to take government money. The same is true of the top entrepreneurs," Fred Wilson of New York's Union Square Ventures wrote on his blog. "The worst firms, on the other hand, will gladly accept government money," which would go to investors who can't raise funds privately and to entrepreneurs whose ideas shouldn't be funded. "It's a problem of adverse selection."

Venture firms have had a hard time profitably investing $30 billion each year for the past several years. Even in the paralyzed markets of the last quarter of 2008, more than $5 billion was invested in more than 800 deals. Returns, however, have been low.

Some areas, such as clean tech, look especially troubled now that oil no longer costs $145 a barrel. Another $20 billion would be impossible to digest efficiently. Instead of subsidizing the biggest venture firms, Geoff Entress of Rolling Bay Ventures in Seattle posted that tax breaks are needed for seed-stage angel investors, who "are quickly becoming an endangered species."

The idea of direct government funding is also anathema because it would undermine market discipline. Pension funds, endowments and other institutional investors keep a close eye on how their invested money is doing. Venture firms can raise new funds only if their previous performance was good.

Several venture capitalists pointed out the irony that government-funded venture capital could mean trading a credit bubble for another technology bubble. Artificially inflating the venture coffers through a government fund could risk repeating the debacle of 1999-2000, when too much money chased too few good ideas, resulting in the sharp deflation of the Internet bubble.

Taxpayer funds would reduce hard-won investment discipline as cheap money backed riskier, less-promising ventures. Valuations assigned to companies would artificially rise, poorly selected start-ups would fail, and taxpayers would be on the hook.

Taxpayer money would bring other unwanted side effects. As Bill Gurley of Benchmark Capital in Silicon Valley put it on his blog, "If American citizens were truly appalled with John Thain's bathroom and the GM executive's private plane, then they should find plenty to abhor in the well-compensated VC community." Congress would no doubt hold hearings on the obscene profits earned by the founders of the next Google.

If policy makers want to help entrepreneurs and their investors, there's no mystery about what's needed. Immigration needs to be reopened. Venture capital is still available, but the U.S. is now a laggard in the other half of the equation, which is making sure the entrepreneur's sweat, energy and risk-taking can ultimately pay off. Sarbanes-Oxley helped kill the market for public offerings, which had been a lucrative step for successful start-ups. Income taxes are going up, not down.

And the U.S. capital gains tax rate of 15% contrasts with the 0% rate in Hong Kong, Singapore and even Germany, where there's an understanding that these investments are made with income that's already been taxed once.

This no-bailout-please episode is a wider reminder about the downside of Washington picking winners and losers. Government spending almost always distorts markets. John Maynard Keynes included among his prescriptions a do-no-harm fiscal stimulus of simply paying people to dig and then fill in ditches. Venture capitalists have now reminded us that throwing taxpayer money at an industry is more likely to be a kiss of death than to transform frogs into princes.

Innovations supported by venture capital in technology, health care, education and other promising but risky industries are at the heart of our economy, too important to be dictated by nonmarket forces. Other industries now lobbying for their own bailouts should weigh more carefully the risks that come with taxpayer involvement. The lesson of accepting government involvement often is something ventured, nothing gained.

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It has been a bloody week for US newspapers.

Bankruptcy filings from the Journal Register and Philadelphia Newspapers brought the number of newspaper owners seeking creditor protection since December to four. Gannett, publisher of USA Today, slashed its dividend by 90 per cent. The Washington Post’s fourth-quarter earnings fell 77 per cent.

Colorado’s oldest paper, the Rocky Mountain News, closed having failed to attract a buyer. Hearst, meanwhile, said that without rapid cost cutting it must sell or close the San Francisco Chronicle. The New York Times, in what counts as good news, now thinks it can pay the bills in 2009.

The advertising collapse hurts everybody. Fundamentally, the newspaper industry is facing a structural overhaul. Papers increasingly must be very large or very small. There are as many as 8,000 non-daily, community newspapers, with median circulation of perhaps 5,200, plus some 1,400 daily titles.

Demand for so-called hyper-local news delivered on paper or online remains strong in areas under-served by other media. True, titles are struggling as local retailers close or merge, but a survey, admittedly by Suburban Newspapers of America, found a 1.7 per cent advertising fall at community papers in 2008’s third quarter against 18 per cent industry-wide.

Among the dailies, USA Today, the Wall Street Journal and the New York Times with perhaps the Washington Post can credibly claim a national presence. The mid-market, however, is packed with competing, major-metropolitan titles, largely distributing third-party content. Such titles are being hit both ways, with their bread-and-butter content and classified advertising moving online.

Shooting for national distribution would require vast investment. Some perhaps, like the LA Times, could emerge as niche titles, with specialist content. But rather like markets in the UK and beyond, the industry will reshape around a big few and a mass of tiddlers. Stand by for further casualties.

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Slumping sales have been dogging Saks (ticker: SKS) for some time now, but at least one buyer still has his wallet open: Mexican billionaire Carlos Slim Helu raised his stake in the luxury retailer yet again, for the first time since November 2008.

On Jan. 23 Slim purchased 300,000 Saks shares for $700,695, an average of $2.43 each. He now owns 2.55 million shares, a 17.7% stake in the New York-based company. Slim, who turned 69 on Wednesday, began racking up his stake in Saks over the summer. He reached the 10% ownership mark in July, paying over $9 per share. Slim has a long history with Saks, and in the early part of the decade had built up a stake over 15%, before selling much of the stock.

Slim, a Mexican telecom mogul, often shares the winners' circle of the world's richest with Bill Gates and Warren Buffett. A few days before his Saks buy, he shelled out $250 million for a vote-of-confidence loan to the New York Times (NYT). Although Slim has continued to buy, other investors have shied away from Saks in the past year. Over the last 12 months the stock has plummeted nearly 85%, more than double the 40.4% drop seen by the Dow Jones U.S. Apparel Retailers Index.

Previously, luxury retailers like Saks were seen as a safe haven. However, once the recession deepened and even wealthy consumers began pulling back, the stock suffered. Slim's purchase came the same day that the stock dipped to a 52-week intraday low of $2.25. A year ago, the stock was trading at a high of $19. On Thursday the stock closed down 14 cents to $2.59.

Saks is one of the many companies cutting jobs in an effort to stay afloat. On Jan. 15 it announced it was laying off 1,100 employees, or 9% of its workforce. Lon Juricic, president of StreetInsider.com, notes that investors considering following Slim into the stock should be cautious, as liquidity concerns continue to plague the company.

"Apparently he believes they can work through this downturn," he says. "It's going to be a battle that could last probably at least another year until the stimulus takes effect and we really see how the consumer is going to react, if they are going to get any more confidence and start shopping again, and if the credit markets are going to open up." Juricic notes that Saks is much like Slim's other investment, the New York Times.

"They are great brands that have had great successes in the past, but they are just extremely volatile right now and are teetering on the edge," he says. "[Interestingly], Slim sees opportunity in both these companies while people here in the U.S. don't. So it's an outside foreign investor that has confidence in these brands, while others don't."

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It turns out that one commodity still commands a hefty price: time.

For the New York Times, which has $500 million in credit facilities and debt due this year and a further $250 million next, the sound of the ticking clock is sufficiently disturbing to have compelled to pay Mexican billionaire Carlos Slim more than 14% on $250 million of senior notes. The company will also grant warrants enabling the investor to increase his stake in the group from 6.9% to about 17%.

The terms, including an option to add 300 basis points, 3%, of the coupon to the debt rather than pay cash, reflect the Times’ financial straits. The environment for raising funds, either through a sale and leaseback of part of its headquarters or disposal of its Boston interests, could hardly be worse. The advertising slump, meanwhile, is hurting even its flagship brand. With part of a $400 million 2011 revolving credit facility unexpended, Mr. Slim’s funds will see the company through 2009, and help refinance a portion of the notes coming due next year.

Bank financing, in contrast, would probably have come with a coupon in the high teens and without the payment-in-kind feature. In that sense, the Times has a good deal. Mr. Slim will not get a board seat or the votes to challenge the controlling Sulzberger family. But he now has greater upside should the Times pull off its asset sales and moves higher up the capital structure, above the family, with about a fifth to a quarter of its debt, in a worst-case scenario.

Mr. Slim has also strengthened his position should he later opt for a more aggressive stance. The Times must shed assets and cut costs, while also grappling with non-cyclical pressures affecting print advertising and regional media. The Times’ Mexican lender will squeeze far harder should it return a second time. Source.