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Innovation/Global Crisis Blog

Innovator: Can You Reinvent Any of These Businesses?   

By Shlomo Maital

Dear Innovator,

     As so often happens, while everyone’s attention is on the raging “fires” that consume the media – euro, capital markets, rugby’s All Blacks – the real crises lie elsewhere.  Six major industries all have business models that have become obsolete and need radical reinvention.  In my opinion, nobody in these industries has a clue how. 

* Publishing: The Economist writes:    Book publishing resembles the newspaper business in the late 1990s, or music in the early 2000s. Although revenues are fairly stable, and the traditional route is still the only way to launch a blockbuster, the climate is changing. Some of the publishers’ functions—packaging books and promoting them to shops—are becoming obsolete. The tide of self-published books threatens to swamp their products. As bookshops close, they lose a crucial showcase.  …

* Newspapers:  News and with it advertising are moving to the Web.  Newspapers everywhere are in deep trouble and have not yet found a way to replace print ad revenue. 

* Movies:  After DVD sales replaced box-office sales as a primary revenue source for movie makers, Internet downloads have now killed DVD sales.    

* Banks:   Since Jan. 1, 2011,  French bank share prices (BNP, SG, CA) have fallen by 44-58 %.  RBS shares have fallen by 44%.  Even Deutsche Bank and Barclay’s fell by 44%. Credit Suisse is down 46%, and UBS just announced it lost $2b. to a rogue trader.  The real problem: With their credit ratings downgraded, exposed to Greek, Italian, and Portuguese sovereign bond default, some banks now pay more for borrowing money than their clients.  Banks need a new business model, in the age of total mistrust and paranoia about risk.  None have yet found it.

*  Consulting:  Those fat multi-million-dollar contracts for ‘strategic renewal’ are really tough to get these days.  In an age of ‘value for money’, clients are re-thinking whether they really get value for these reports,  that mainly gather dust. 

* Business schools:  After selling over-priced MBA degrees that taught impressionable youngsters their sole goal was to maximize profits for shareholders, business schools are doing some soul-searching, as MBA grads find their traditional job sources (consulting, investment banking) have dried up.  

   The problem is especially acute in banking and finance.  Regulators are tightening the screws, demanding ever-higher capital ratios.  At a time when banks are already reluctant to lend, especially to other banks, higher capital requirements will squeeze credit even more, and squeeze bank profitability even more.  Yet, without this added capital, banks remain vulnerable to massive potential losses if and when sovereign bonds are in default. 

    The need to reinvent these industries occurs at a time when it is vital for nations to coordinate and collaborate, because no single nation can stimulate global demand enough on its own.  Yet there is no sign of such collaboration.  Even the 17 Eurozone countries cannot agree among themselves, not even when the euro itself is at stake – unanimity is required for key decisions, like issuing Euro bonds, and little Slovakia is casting a veto. 

    Innovator, now is your chance.  Can you come up with an innovative business design for any of these troubled industries?  I believe the top priority is the banking and finance industry.  Banking is becoming like politics – an adverse selection model drove capable young people away from politics, and now the same is happening with finance, for the same reason,  as the two endeavors are tainted by corruption, greed and unethical behavior.      


Innovation/Global Crisis Blog

The Man Who Paid $5 m. for Lunch – and It Was Worth Every Penny!

By Shlomo Maital   

   Ted Weschler, Warren Buffett



This is a true story.  A little-known hedge fund manager paid $5 m. for lunch – and it paid off in spades.   Of  course, we all know there is no free lunch.  But a $5 m. lunch? 

    The hedge fund manager is named Ted Weschler, manager of Peninsula Capital Advisors, a Virginia-based hedge fund with $2 bn. in assets.   In 2012 Weschler will join Berkshire Hathaway, Warren Buffett’s company, to manage a $1 b. – $3 b. slice of Berkshire’s $66 b. portfolio of equities. 

    How did he get this great job?

    Weschler spent over $5 m. in a charity auction, in which the prize was …lunch with the Oracle of Omaha, Warren Buffett.   

    What was said? What was discussed? We don’t know. But clearly it was enough to impress Buffett sufficiently for him to hire the impetuous Ted Weschler.    Along with the announcement of Weschler’s appointment at Berkshire, came an announcement liquidating Peninsula and distributing the proceeds to its owners and shareholders. 

   Has Buffett lost his touch?  Last month he bought $5 b. worth of Bank of America shares, which have since dropped sharply.   Can Weschler restore Buffett’s Midas touch?  Stay tuned. 

  •  Source: Telis Demos, Financial Times, p. 1, Sept. 13, 2011.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
September 2011
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