Monthly Archives: December 2009

John Gapper

This blog is taking a Christmas break, as I hope its readers are too.

John Gapper

Lloyd Blankfein

Lloyd Blankfein is the FT’s Person of the Year and I have profiled him here.

John Gapper

Chattem, which Sanofi Aventis is buying for $1.9bn to bring its Allegra  anti-allergy drug to the over-the-counter market, has some striking products – Gold Bond, Icy Hot and Selsun Blue to name three.

The company also has an intriguing history reaching back to the days of the snake oil salesman, before the 1906 Food and Drugs Act cleared up some of the dubious claims and salesmanship of the era.

As Chattem’s official history puts it:

The company was founded as the Chattanooga Medicine Company on February 21, 1879. It began operations in a small unpretentious 2-story brick building located on a muddy, unpaved road called Market Street in the heart of downtown Chattanooga . . .

The first product was Thedford’s Black Draught, a senna based laxative, originally developed in 1840 by Dr. A.Q. Simmons of Snow Hill, Georgia . . .  Legend has it that in the early days of the British Navy it was customary for the sailors to be given a weekly infusion of senna along with their customary lot of rum. Since the mariner’s diet consisted largely of salt pork, bully beef and hardtack, the custom was in the best interest of all onboard . . .

With Black Draught successfully on its way, the Company acquired a second product called Dr McElree’s Wine of Cardui, a preparation or tonic for women based on the sedative and antispasmodic properties of Cnicus benedictus. While knowledge of the complex drug properties of botanical Cnicus benedictus extended back hundreds of years in Central Europe, there is no recorded history of the plant or its seeds being transported to the United States. Yet in 1833, Mrs. Francis Smith was growing it in her Fayetteville, Tennessee garden.

Reportedly, Mrs. Smith became acquainted with a Cherokee Indian who stopped temporarily in her town. Mrs. Smith observed this Indian bring dramatic relief to a young girl suffering from dysmenorrhea by using a compound from the dried leaves of this botanical plant. The husband of Mrs. Smith persuaded the Indian to give them a handful of dried leaves and a few seeds.

These days, Chattem still sells dietary supplements but its biggest area is medicated skin care, with products such as Cortizone and Balmex. The aforementioned Icy Hot is one of its topical anaesthetics, along with Aspercreme.

Sanofi Aventis is acquiring it to expand in OTC treatments and reduce its dependence on the still-troubled patented blockbuster business. A stream of patented blockbusters are now coming off patent at the large pharmaceutical companies and other drugs are being switched.

Sanofi Aventis is converting Allegra, which has 7.8m patients in the US, in order to keep leading its position in the market for fexofenadine, the underlying chemical entity.

To do so, it is keeping some interesting company.

John Gapper

James Cameron’s Avatar has opened strongly, despite the winter storm on the east coast of the US, and is said to have made $232m on its opening weekend around the world.

It is, however, not pleasing everyone. In particular, the story of how the Na’vi, a race living on the distant planet of Pandora, see off an attempt by a corporation to move them from their wooded idyll in order to exploit their mineral rights, is raising some hackles.

James Pinkerton, the Fox News reviewer, put it thus:

OK, so the politics of “Avatar” are left-wing, anti-corporate and anti-imperialist. There are even some even some indirect digs at George W. Bush and Operation Iraqi Freedom. A left-leaning Hollywood movie: no surprise there. So Third Worlders will eat it up. The Iranians, for example, should love “Avatar” – if, of course, their government would let them see it, which surely won’t happen.

So which is the left-leaning company that has produced this soft-minded bilge? Well, that would be 20th Century Fox, another arm of Rupert Murdoch’s News Corporation.

Avatar will probably be one of the biggest money-spinners for News Corp, as was Titanic, Mr Cameron‘s 1997 epic. That, incidentally, also had a rather leftist tone, with the poor people stuck in steerage displaying more moral fibre than the rich folks above.

Mr Murdoch is known for his right-wing views, expressed through papers such as The Sun and now the Wall Street Journal. But the entertainment arm of Fox has a history of producing films and television programmes with a subversive edge – notably The Simpsons.

Hollywood loves nothing more than native tribes fighting back against oppressors, and people trying to save the environment, so Avatar fits well in that tradition.

Mr Murdoch, of course, has declared his own environmental sympathies. He is not known for being left-wing or anti-corporate, but he puts up with it at his own studio.

John Gapper

Josef Ackermann’s intention to “globalise” the UK supertax on bankers’ bonuses within Deutsche Bank suggests that, in the short-term, the government may have succeeded in a tricky manoevre.

Logically, the British government should have applied the bonus tax only to UK-based banks – the ones that benefitted directly from UK taxpayer assistance in the financial crisis.

After all, if the tax was a quid pro quo for government support, then it should be targetted in that way. It was for other governments to step forward and levy a tax on their own banks.

In practice, only the French government has done so and there seems to be zero enthusiasm in Washington for following the UK example.

The British government therefore risked penalising its own banks while seeing international banks operating in London – the ones that pay the highest benefits – gaining financially and as employers.

But Deutsche Bank does not intend to apply the tax selectively to its London-based bankers (if it indeed applies it at all rather than making its shareholders absorb it).

Here is the relevant section from Mr Ackermann’s FT interview today:

FT: On the subject of the bonus tax row, banks have been telling us they will absorb the tax at a bank level and not pass it on to staff. Is this what you would like to do?

JA: It is still open. We will see what the final outcome will be. We will monitor what banks are doing, how much of the cost will be borne by staff and how much will be taken by shareholders. That is absolutely undecided. First we need to know the size of the number and what it means for the charges we have. It is premature to give an answer but we are watching carefully.

FT: If you do apply any tax to individuals, would you seek to restrict it to the UK bonus pool or seek to globalise it?

JA: We will clearly globalise it. If parts are paid out of the bonus pool we would seek to globalise it. It would be unfair to treat the UK bankers differently.

Score one to the British government, I think, in being able to tax British-based bank bonuses and see that transmuted by the market into a global tax.

Mr Ackermann also has some reassuring words about London’s status as a financial centre after the shock of the bonus tax recedes:

It is also clear in the context of globalisation that other hubs have started to become more important – but NY and London will always maintain their stature in the global financial architecture. London is a very attractive place to do business.

Whether those soothing words prove accurate, we shall see.

John Gapper

The lesson I take from reading Mary Meeker’s mammoth new report on the mobile internet is the degree to which Silicon Valley is in a position to dominate it, just as it did the wired internet.

Since Ms Meeker, a veteran Morgan Stanley analyst, was one of the sages/seers of the first internet wave, what she says about the growth of the mobile internet deserves to be taken seriously even if it involves wading through the 425-page full version.

To be honest, I have not done that but I have read the comparatively modest 92-slide presentation (itself a brief form of the full 659 slides available to devotees).

The message that leaps out is that, although the US lagged Asia and Europe in adoption of mobile phones, and of 3G technology, it has established a stronghold in mobile software and platforms.

That means that companies led by Apple and Facebook are in a position to lead, and to extract the most revenues from – a rapid shift from the fixed to mobile internet. She says that more people will connect to the internet on mobile devices than fixed ones within five years.

As Ms Meeker (and a team of Morgan Stanley analysts) puts it:

“It’s notable that, after years in the backwaters of global mobile development, American companies (led by the likes of Apple, Facebook, Amazon.com and Google) are becoming mobile internet innovation pacesetters.”

Conversely, she argues that Nokia and Chinese companies, which dominate the low-end, high-volume handset market face a shifting of the profit pool to Apple and Research in Motion.

Among companies Morgan Stanley says are “challenged” by this shift are Nokia and Sony-Ericcson, as well as the video games makeers Sony, Nintendo and Microsoft.

The report makes it glaringly obvious why Facebook has recently upset many users by trying to prod them to loosen their private settings. Ms Meeker again:

“We believe Facebook has the potential to serve as a communications platform/engine of one-to-one, one-to-some and one-to-many (and visa versa) for the mobile Internet.”

Incidentally, Morgan Stanley is presumably competing hard for a lead role in the likely Facebook initial public offering, for which this report may come in useful.

John Gapper

My FT column this week is on the achievements and failures of Tarp.

John Gapper

Book publishers are the latest media enterprises to be hit by the digital one-two punch – facing a revenue squeeze from their content moving to electronic distribution, while being berated for not embracing their fate.

The New York Times has a report on Stephen Covey, the business author, transferring e-book rights from his print publishers Simon & Schuster to Amazon for publication on its Kindle reader.

Mr Covey will reportedly gain more than half the net proceeds paid by Amazon in royalties to Rosetta Books, the e-book publisher through which he made the deal.

Meanwhile, in another corner of the NYT, Nick Bilton complains bitterly on its Bits blog about publishers, led by Simon & Schuster, deciding to delay electronic publication of books in order to preserve hardback sales, in the manner of the “windows” for release of Hollywood films to the box office, DVD etc.

Mr Bilton, a co-founder of a hacker collective in Brooklyn, argues:

“The publishers seem to be picking a fight with the wrong team: their customer. They are punishing the people who buy their content instead of making it simple for those customers to hand over their money, instantly, from any location in the world.”

This is painfully naive. It is not the consumer about whom Simon & Schuster and others are picking a fight but a distributor with market power in a nascent digital industry.

The idea that book publishers are failing to act in their own interests because they somehow do not want to serve their customers, or because they do not “get” electronic distribution ignores the business reality they face.

Publishers supply books to Amazon at the same wholesale price – about $12 per title – as to physical stores, so an e-book sale is currently worth the same as one on paper.

However, they are rightly afraid that Amazon will use its discounting strategy of charging $9.99 for popular titles to strengthen its grip on electronic distribution. Having gained market dominance, they fear, Amazon will force down the wholesale price to start making profits on book (as well as Kindle) sales.

This might turn out to be good news for the consumer in the long-run because books will be cheaper and authors will continue to be well-paid for popular content. That squeeze will affect intermediaries such as book publishers, just as the digital revolution severely hurt music publishers.

An alternative is outlined here by Rory Maher and Henry Blodget. The believe the wholesale price will fall but publishers will preserve their margins and the squeeze will instead fall on authors’ royalties.

In any case, why is it illogical for publishers to defend their own business interests against those of Amazon, which is a public company trying to extend leverage over them to benefit its own shareholders? I am afraid I plead guilty to not getting it.

(A disclosure: my employer Pearson owns not only the FT but also Penguin, which once published a book co-written by me and Nick Denton, the digital publisher).

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This blog is mainly about business and strategy and how and why people who run companies take the decisions that they do.

Most of the time, John Gapper is in New York and Andrew Hill is in London. We occasionally debate business issues between us, but your comments and criticism are welcome.




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About John and Andrew

John Gapper is an associate editor and the chief business commentator of the FT. He has worked for the FT since 1987, covering labour relations, banking and the media. He is co-author, with Nicholas Denton, of All That Glitters, an account of the collapse of Barings in 1995.

Andrew Hill is an associate editor and the management editor of the FT. He is a former City editor, financial editor, comment and analysis editor, New York bureau chief, foreign news editor and correspondent in Brussels and Milan.

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