Holiday E-Commerce Sales Surpass $23B

ONLINE HOLIDAY SPENDING IN 2006 increased 26% over last year to $23.11 billion for the nearly two-month period ending Dec. 26, according to data released Thursday by comScore Networks. A late surge of Internet shopping in the week before Christmas--a 38% jump over the year-earlier period--helped push the total to new levels.
"That online retail consumer spending for the year-to-date has surpassed the $100 billion mark is a testament to the continued growth and strength of the online marketplace," said Gian Fulgoni, chairman of comScore Networks, in a prepared statement. He added that retail e-commerce now accounts for 7% of U.S. consumer retail spending, excluding gas, autos and food.
Amazon led all retailers in online holiday sales, followed by Dell.com, Yahoo.com, Walmart.com and Ticketmaster.com. BestBuy.com, Walmart.com and Ticketmaster.com posted the biggest gains over last year, with each site increasing sales by more than 50%.
E-commerce sales growth was fueled mainly by buying in big-ticket and popular gift categories including jewelry and watches (up 67%), video games (64%) video game consoles (63%), event tickets (55%), and consumer electronics (39%).
The 26% increase in 2006 online holiday sales is just slightly more than the 24% gain in e-commerce activity during the rest of the year. Web retail sales from January to October increased from $62.6 billion to $77.5 billion, according to comScore.

Online MediaDaily

A Tumultuous Year In Review For The Auto Industry

THE YEAR JUST PASSED WAS tumultuous even for the typically stormy automotive business.
It was a year in which Nissan North America made its corporate move from the heart of U.S. auto culture, southern California, to the relative hinterlands of Tennessee.
It's a year in which Ford and GM, after a rocky 2005, launched new turnaround plans. It was a year full of rumors of deaths exaggerated and alliances unrealized: that Ford, struggling to stay afloat after losing in 2005, would go under, in some form; that GM CEO Rick Wagoner, fending off stakeholder Kirk Kerkorian, would himself be ousted; that DaimlerChrysler would spin off its Chrysler Group; that GM would ally with Nissan; and most recently, that Ford would form an alliance with Toyota.
It was a year that, despite record gasoline prices, managed to finish with what will likely be around 16.4 million units sold.
The gainers were import brands, but General Motors has managed to hold on to share partly with a new warranty deal, and new versions of its Silverado and Sierra pickups.
The Chevy Silverado, representing the biggest portion of the highest single-platform volume for GM, launched with patriotic fanfare in September, using a Campbell-Ewald-created campaign derided by ad critics but celebrated by dealers and featuring the song, "My Country" by rocker John Cougar Mellencamp, and a theme, "Our country. Our truck." The patriotism is emblematic of an effort to counter Toyota, which has been running corporate advertising all year promoting its U.S. product footprint as a setup to its most important launch in years, the redesigned Tundra in the first quarter next year.
In turnaround mode all year was General Motors, which lost $10.6 billion in 2005, hasn't earned a quarterly profit in the U.S. since 2004, and saw its share of the U.S. market drop to around 24% this year, from over 30% 10 years ago. In addition to efforts to streamline operations, more sharply define its divisional brands, and get its vehicles on the shopping lists of the younger buyers who have forsaken the domestics, the company has tried to get away from incentive blitzes by focusing on "value" rather than deal-of-the week offers. For example, GM this year launched a 5-year, 100,000-mile transferable powertrain warranty program to validate its quality improvements.
Divisionally, the company has anointed Saturn as its ambassador to the world of Toyota and Honda owners, by giving that formerly product-starved division new vehicles and new ads. A new campaign this year, featuring the tagline "Like always. Like never before," preceded the launch of several vehicles, including the Aura sedan, a new version of the Vue SUV, a hybrid version, and a new crossover called Outlook.
High gasoline prices hurt SUV and trucks sales, especially at Chrysler Group, which lost its CEO Dieter Zetsche to the home office in Stuttgart, Germany at around the time inventories of hitherto hot vehicles like Chrysler 300, Dodge Magnum, and Dodge Ram and Durango, began hitting record levels.
The change, which put Tom LaSorda in the top position, also coincided with rising dealer ire about having to take delivery of vehicles they couldn't sell. Thus the ouster, in the fall, of sales and marketing chief Joe Eberhardt, and rumors that Wolfgang Bernhardt, who left Chrysler for VW might be headed back, especially since musical chairs at Volkswagen's Wolfsburg, Germany HQ, puts Audi chief Martin Winterkorn in the chairman's position at VW starting next week.
While it's unlikely Bernhardt would want anything less than top position at Chrysler, one thing is certain: the company is counting on new smaller vehicles, like Jeep Compass and Dodge Caliber to ignite sales. Currently, around 75% of Chrysler's volume is weighted toward minivans, pickups and SUVs.
Last week Chrysler Group CEO LaSorda went to Stuttgart to present a restructuring plan, after Chrysler lost $1.5 billion in the third quarter. Reports suggest that the plan, which the company will unveil in February, includes layoffs and the closure of at least two plants in the U.S.
Ford, whose "Way Forward" plan helped fuel its largest quarterly loss in 14 years, $5.8 billion last quarter, has put its operations up for collateral to borrow $18 billion to fund restructuring. But before that, CEO Bill Ford stepped aside after running the company for five years. Former Boeing leader Alan Mulally took over this fall as Ford's financial and sales woes deepened despite "Way Forward," which began in late 2005. The company is counting on its new crossover Edge, backed by a campaign aimed squarely at urban and culturally diverse audiences, to turn its fortunes around, as it trims its payroll to cut costs.
Last year saw imports continue to dominate in cars even as they expanded control of SUVs and crossovers. Nothing proves that more than Toyota becoming the No. 2 automaker worldwide, surpassing Ford and on track to be No. 1.
Toyota, which is set to oust GM in worldwide sales next year, sold 8.8 million vehicles this year. That is below the 9.2 million vehicles GM predicted it would sell worldwide this year. But while Toyota, which plans to sell 9.34 million vehicles next year, is expanding its factory footprint in the U.S., GM and Ford are both closing plants and tightening capacity.
General Motors' former 10% stakeholder Kirk Kerkorian had counted on his proxy on the board Jerry York to force changes, such as an alliance between GM, Nissan and Renault. When that deal fell apart, Kirk bailed out of General Motors entirely.
Meanwhile, analysts say next year will be slower than it has been in almost a decade. Detroit firm CSM predicts 16.2 million units will move next year.
While the good news for buyers is that they will have more vehicles to choose from and more deals to sway them, automakers are faced with shoehorning vehicles into a packed market. CSM--which said that automakers launched 60 new models in 2006, and will roll out 40 more next year--predicts that GM will stay level with about 23.5% of the US market next year; with Ford at 18.2% and Toyota at 16.3%. DaimlerChrysler--including Mercedes and Chrysler Group brands--will round out 2007 with a 14.7 share of the market.

Marketing Daily

Burger King Sells 2 Million Xbox Games

BURGER KING SOLD 2 MILLION of its $3.99 co-branded special edition Xbox Game Series in six weeks, making it a top-seller for the Microsoft game line.
"Most video games are considered a blockbuster when they reach the 1 million mark in sales, and this collection has achieved twice that," said Russ Klein, president, global marketing, strategy and innovation, Burger King Corporation, in a statement.
The three games in the collection, "Pocketbike Racer," "Big Bumpin'," and "Sneak King," incorporated Burger King brand icons, such as the King and Subservient Chicken. Sales rival other best-selling Xbox titles, such as "Gears of War," which sold 1 million copies in the first two weeks of release.
The BK Xbox Game Series was supported by television and print advertising, in-restaurant merchandising, custom packaging, direct-to-consumer events and a Web site aimed at 12- to-20-year-old males.

Marketing Daily

Strong summer movies drive DVDs to '06

Call it the year of smoke and mirrors. When 2006 began, fearful studio executives were still reeling with the first down year in DVD history.

They were anxiously looking for salvation, and hoping to find it in high-definition discs, digital downloads or perhaps a combination of the two.The next generation of software did launch in 2006, regrettably with two incompatible formats, first HD-DVD in April and then Blu-ray Disc in June.

Digital downloading began as well, with all the big Hollywood studios aggressively selling their hot new movies on Movielink, CinemaNow, Apple's iTunes and other download services. Studio executives even coined a new term, "electronic sell-through," or EST, for the lucrative business model.But in the end, none of these technological marvels really mattered. High-def discs still are a blip on the sales radar, and digital downloading are even less of a blip. And lo and behold, what saved the day for home entertainment was an unexpected resurgence in the DVD market, fueled by a powerful slate of summer theatricals.And thus it was that in a year when everything seemed to change, nothing really did. The bottom line was still good boxoffice leads to good video sales, as it has since this business was launched nearly 30 years ago. Or, as New Line Home Entertainment president Stephen Einhorn said, "At the end of the day, home entertainment is still a new release-driven business."

"What we're looking at is a market that is up slightly from last year, overall," Sony Pictures Home Entertainment president David Bishop said. "But if you break down the components, we're projecting DVD sales to be up 3%, year-over-year, and rental to be up about 12%. What drags the industry down to a flat or slightly up basis is that VHS sales and rentals are virtually going away.""The industry is up as a whole, despite a decrease in overall pricing," said Kelley Avery, president of worldwide home entertainment at Paramount Pictures. "Contrary to popular belief, reports of the decline of DVD have been exaggerated."Other studio presidents agree.

The year is expected to again finish more or less flat, but this time no one's running for the hills. It's become clear now that the home entertainment business has entered the mature phase, and the Great Slowdown of 2005 was due more to a weak boxoffice (which traditionally precedes a down video market), as well as a dramatic drop in videocassette sales and rentals, than anything else."Everyone's feeling pretty good," 20th Century Fox Home Entertainment president Mike Dunn said. "Thanks to the fourth quarter, the year may wind up in positive territory, and a big reason is the strong slate of summer theatricals -- as well as TV-DVD and some really strong catalog titles and promotions.""Notwithstanding last year's disparaging headlines regarding declining boxoffice and DVD sales, 2006 ticket sales and DVD purchases proved that the public actively enjoys moviegoing and the in-home DVD experience despite the proliferation of other entertainment alternatives," Genius Products CEO Trevor Drinkwater said.

Much of the cheery-eyed optimism floating around the studio DVD divisions stems from the fact that the industry has just come off an exceptionally strong fourth quarter. Things got off to a good start when 20th Century Fox's "X-Men: The Last Stand" and Buena Vista's "The Little Mermaid Platinum Edition" generated $80 million in consumer spending in a single day. Further triumphs came as the quarter progressed, culminating this month when Buena Vista's "Pirates of the Caribbean: Dead Man's Chest" sold 10.5 million DVDs its first week in stores, putting it on track to become the top-selling live-action DVD ever."A couple of interesting things happened in the fourth quarter," Warner Home Video president Ron Sanders said. "You had some very strong theatricals that performed very well across the board, and you also had the additional benefit of TV-DVD continuing to have a huge upside, year-over-year. All of this pointed to a very healthy category.""The consumer is the ultimate arbiter of what moves in the marketplace," Buena Vista Home Entertainment general manager North America Lori MacPherson said. "And when good entertainment is released to the home entertainment market, the consumer responds."The fourth-quarter DVD sales rally was probably the biggest home entertainment story of 2006, even though it didn't make the biggest headlines. That honor went to the launch of the two high-def disc formats and the flurry of major studio deals with digital downloading services.

On the packaged-media front, the launch of two rival, incompatible formats was, if not a disaster, a major disappointment. But the real culprit, and the reason software sales have been anemic (fewer than 10,000 units of even a really big title are typical), wasn't so much a lack of a unified standard. It was the fact that consumer electronics manufacturers really dropped the ball, with a series of delays that really pinged adoption rates. The HD-DVD camp never got beyond two Toshiba models, including an entry-level model retailing for $499, while only at the very end of the year did Blu-ray get additional players to join the $999 Samsung model that arrived in stores in late June."Everyone was disappointed in the quantity (of players) that came out of the electronics companies," Sanders said. "But what is encouraging is that the attach rate of the software was amazingly high.

On average, consumers bought 28 to 30 movies per set-top box, and that's just below what it was for DVD in the same time frame."Digital downloading, simmering on the back burner for several years, also had its official coming out in April when five of the six major studios begin selling downloads of their movies over the Internet, through services Movielink and CinemaNow. New releases went out day-and-date with the DVDs. Holdout Disney soon joined the party, and by year's end, the two dedicated download services were joined by a wide variety of others, including Apple's iTunes, Amazon.com and file-swapping service BitTorrent. The only hitch was that in most cases, downloaded movies could not be burned to standard DVDs for easy transport into the living room."We determined that there is consumer interest in the ability to download content digitally," Sanders said. "What is unclear is how big the economic potential is and what platforms will ultimately win out. But every studio wants to place a lot of bets, so we are leading consumer trends instead of following them, as the music industry did."The year brought other developments, as well.

Several major shifts took place on the content distribution side, with the MGM library moving to 20th Century Fox, DreamWorks transferring over to Paramount, and brothers Bob and Harvey Weinstein tapping Genius Products to distribute content from their film studio, the Weinstein Co. The brothers subsequently bought a 70% interest in Genius.Genius' Drinkwater sees a common thread: A desire by content providers to obtain "more control of how their products are marketed and distributed."In the retail world, the mass merchants continued to clobber each other over price and exclusive gifts with purchase on hot new theatrical DVD releases, while two veteran audio-video combo chains, Musicland and Tower Records and Video, bit the dust. The former was acquired by Trans World Entertainment after filing for bankruptcy, while Tower, which also filed for Chapter 11 bankruptcy protection, wound up being purchased by a liquidator.

So what lies ahead for 2007? For starters, studio presidents expect big things from high-def discs. The prognosis for 2007 is that one of the two rival formats will fall by the wayside, consumer electronics makers will rally and start cranking out players, the Chinese will weigh in with cheap players of their own and by the fourth quarter, high-def discs will be a viable, significant business."We're seeing tremendous growth in household penetration for high-definition displays and big-screen televisions," Dunn said. "At the same time, you have broadcast, cable and satellite delivery of high-def programming growing at an incredible rate. Given the popularity of purchasing and collecting movies, the next logical step is making those films available in a packaged-media format.""Consumers are buying more high-definition TVs than ever before," Universal Studios Home Entertainment president Craig Kornblau said.
And once they get hooked on high-definition entertainment through digital cable, he said, consumers are going to want, even expect, high-def content from all their media, spurring demand for high-def discs.Lionsgate president Steve Beeks agrees, noting that "the most sought-after gifts this holiday season were HD television sets" and predicting sales of high-def discs will mushroom in 2007 once hardware prices fall and a unified format is established.

The digital download market, too, is expected to grow significantly, particularly with the prospect that consumers will be able to burn downloaded movies onto DVDs playable in their set-top units. CinemaNow introduced the download-to-burn option on select catalog titles during the summer, but this year the gates are expected to be thrust wide open. An encouraging sign: The DVD Forum in late November gave its formal nod to a new type of recordable disc that will accept movies and other content encrypted with CSS, the same copy-protection system used on commercial DVDs, for playback on set-up players.

Depending on how well the summer theatrical features fare at the boxoffice, studio chiefs say 2007 could be a very good year, overall, for home entertainment."Certainly boxoffice is a key indicator in a maturing business, so that will do a lot to drive our business," Bishop said. "But I would say this time next year we are going to be in a growth mode. Will it be double-digit growth? I would say probably not. But I think you are going to start to see Blu-ray Disc get some traction in the marketplace and for whatever flatness we have in DVD you're going to start to see some incremental growth come out of that category.""The great story coming out of 2006 is that despite the drag of VHS, DVD still kept us flat for the year," Sanders said. "And when you look at 2007, when you factor in no VHS drag with the upside of high definition, you have nothing but great prospects for the year. When you look at the lineup of summer theatricals -- sequels to 'Harry Potter,' 'Spider-Man,' 'Pirates of the Caribbean,' 'Shrek 3' -- it's the biggest summer in memory. So for home entertainment, I think it's going to be a massive 2007."

The Hollywood Reporter

'Pirates' helps push '06 boxoffice tally up 5%

Boffice slump? What boxoffice slump?

The theatrical boxoffice might be under siege, but it fought back and actually gained some ground in 2006. As the boxoffice year, which will conclude with the New Year's holiday weekend, winds to an end, the total national tally is headed toward an estimated $9.42 billion, which would represent an increase of nearly 5% compared with 2005's $8.99 billion.Certainly, records were set along the way: The biggest cheers surrounded the record-breaking opening of "Pirates of the Caribbean: Dead Man's Chest," which set both an opening-day and single-day record of $55.8 million when it bowed July 7, supplanting the mark established a little more than a year earlier, when "Star Wars: Episode III -- Revenge of the Sith," debuted to $50 million on May 19, 2005."Dead Man's Chest's" opening weekend of $135.6 million also supplanted "Spider-Man's" $114.8 million record set in 2002. It also took just two days for "Dead Man's Chest" to pass the $100 million mark, another first.That helped set the tone for what proved to be a much more hopeful year -- at points during the summer, the year-to-date boxoffice was running as high as 6%-7% above the comparable 2005 figures.

Some of those increases declined in the final months. Although Hollywood opened a number of holiday offerings that turned into hits, none was as big as 2005's crop of year-end blockbusters. This year's biggest November/December release is "Happy Feet," with more than $165 million to date. By comparison, November 2005 unleashed "Harry Potter and the Goblet of Fire," which conjured up $276.9 million by the end of that year.

In point of fact, despite a few statistical upticks, the overall boxoffice picture for 2006 did not change dramatically from 2005. If the Cassandras decrying the end of the theatrical business last year were overly alarmist, the Candides proclaiming that this year represented the best of all possible worlds were just as overly optimistic.

Throughout much of 2005, Hollywood fretted and the media raised alarms as national boxoffice grosses declined nearly 6% from the previous record-breaking year. Industry executives and outside observers began assembling a lineup of possible suspects: Increasing competition from DVD sales as the window between theatrical openings and DVD releases narrowed; dissatisfaction with higher ticket prices, expensive concessions and unruly audiences; competition from such rival platforms as video games and music downloads for the minds and disposable income of the ever-more-elusive under-25 males. An endemic change in viewing habits seemed to be taking place.

Nonsense, insisted the skeptics, who argued that the big problem in 2005 was simply too many bad movies. Make better movies, and the audiences will come back.Last year was branded the Year of the Slump, when it suffered through a record 19 consecutive weekends during the first half in which boxoffice grosses fell below the numbers set during the comparable frames in 2004.

But a rally that carried into 2006 began in November 2005, when a number of high-profile movies, beginning with "Goblet of Fire" and continuing through "The Chronicles of Narnia: The Lion, the Witch and the Wardrobe" and "King Kong," broke through and began attracting audiences en masse.

For the most part, this year maintained that momentum. Overall, the movies might not have been necessarily better, but moviegoers found them more appealing.Critics, many of whom applauded Johnny Depp's performance as rascally pirate Captain Jack Sparrow when he first sashayed into sight in 2003's "Pirates of the Caribbean: The Curse of the Black Pearl," were less enthusiastic about its big, action-packed sequel -- again directed by Gore Verbinski and produced by Jerry Bruckheimer -- but audiences were eager to embrace the movie.By year's end, it topped out at $423.3 million; by contrast, 2005's top-grossing movie, "Sith," had to settle for a mere $380.3 million.

Although this year is on track to become the fourth best-grossing year in Hollywood history -- knocking 2005 down to fifth -- the upturn wasn't strong enough to challenge 2004, which holds the record with $9.54 billion, or even to catch 2002 or 2003, which grossed $9.52 billion and $9.49 billion, respectively.

Discounting for a slight rise in ticket prices, the number of admissions increased only marginally between 2005 and 2006. Last year, admissions numbered 1.4 billion. This year, they are headed toward a projected 1.44 billion, a nearly 3% increase.

Drill down through the numbers, though, and not that much really changed. In fact, by some standards, 2006's crop of hits were not quite as robust as the biggest movies of 2005 -- or years before that. Only one film passed $300 million this year and last, while three films reached more than $300 million in 2004 and two each were in that category in 2003 and 2002.In 2005, seven movies crested the $200 million mark, with "Sith" going on to top $300 million.This year, "Dead Man's Chest" might have gone on to pass the $400 million mark -- a mark that wasn't reached in 2005 -- but only five other films grossed more than $200 million domestically during the year, two fewer than last year.In addition to "Dead Man's Chest," this year's select class of $200 million-plus winners includes "Cars" ($244.1 million), "X-Men: The Last Stand" ($234.4 million), "The Da Vinci Code" ($217.5 million) and "Superman Returns" ($200.1 million).

In the $100 million-$200 million category, 2006 did improve slightly compared with 2005. Last year boasted 10 movies on that level, while 11 of this year's releases made the list.

In part, this year relied on the relative reliability of sequels and remakes to win over moviegoers. This year, there were five direct sequels in the top 20 as well as two series relaunches -- "Superman Returns" and "Casino Royale" (with $147.6 million to date). Last year's top 20 included only three direct sequels and one series relaunch, "Batman Begins."This year's big winners were slightly more original; 2006's top 20 didn't include any remakes -- unlike last year's top 20, which included four.Animated movies took up more top slots this year than in 2005, when three animated films reached the top 20. This year there were five, with Pixar's "Cars," the second highest-grossing movie of the year, easily outdistancing the competition.

Given all that animated fare, it's not surprising that there was no room for an R-rated movie in this year's top 10. In 2005, "Wedding Crashers," in fifth place with $209.2 million, was the top-grossing R-rated movie; this year, "Borat," in 13th place with nearly $125 million to date, took that honor.

Shifting to the indie sector, 2006 also showed some weaknesses. Following last year's pattern, genre movies released by indie outfits led the roster: Lionsgate's "Saw II," which grossed $87 million, was the leader in 2005, while this year, Dimension's horror spoof "Scary Movie 4" ($90.7 million) and Lionsgate's "Saw III" ($80.2 million) led the field. As far as more traditional indie fare goes, the big winner in 2005 was Warner Independent Pictures' "March of the Penguins," with $77.4 million. (Focus Features' Oscar-winning "Brokeback Mountain" eventually would gross $83 million, though at year's end it had collected just $15.1 million.)This year, by contrast, the biggest nongenre indie movie is Fox Searchlight's "Little Miss Sunshine," which has picked up nearly $60 million to date, though hoped-for Oscar noms could boost that tally.

There were more wide releases (movies bowing in more than 1,000 theaters) this year than last -- 160 vs. 145. But fewer movies received ultrawide bows of 3,000 theaters or more, as those releases were scaled back from 55 in 2005 to 52 this year.Possibly as a result, the average opening-weekend gross for a new film fell from $17.6 million in 2005 to $16.9 million this year. On average, movies debuted in slightly fewer theaters -- 2,543 this year vs. 2,591 last year -- but scored a slightly lower per-theater average. This year it was $6,663, compared with $6,782 last year. As for average second-weekend drops, they were slightly steeper this year -- 45% vs. last year's 43%.

With so many of the statistical markers appearing to tread water, the theatrical release business did appear to be holding its own. But does that mean the boxoffice declines that bedeviled first-half 2005 have been halted and a genuine recovery is under way? Or does it suggest a yearlong pause in an inevitable decline?Next year's lineup includes several movies that could head into $400 million-plus territory -- "Spider-Man 3," "Shrek the Third" and "Pirates of the Caribbean: At World's End" -- and help to lift 2007's boxoffice above 2006's level. If that does happen, then the boxoffice revival will genuinely have taken root.

The Hollywood Reporter

The Golden Oldie Of Gaming

Sony's PS2 is likely to outsell newer consoles such as the PS3—not just this year but next

In December video game maker Square Enix Co. began running prime-time TV ads in Japan featuring battle scenes from its new adventure game Seiken Densetsu 4, or Legend of the Sacred Sword. Every 30-second spot ended with a familiar logo: PlayStation. But the game isn't played on Sony Corp.'s new PlayStation 3 console. It's for the PlayStation 2.
This might seem an odd time to launch an ad blitz for a game designed for the PS2, which has been around since 2000. The PS3, after all, was just introduced this fall and offers richer graphics with more lifelike action. But despite all the hype surrounding the PS3, its predecessor is likely to outsell it for two more years. "The PS2 will have legs well into 2008," says Michael Pachter, an analyst at Wedbush Morgan Securities in Los Angeles. And while Nintendo Co.'s Wii console is getting most of the industry buzz, and the Xbox 360 from Microsoft Corp. has racked up big sales in its year on the market, some say the PS2 might even beat out each of those offerings in 2007. "The PS2 probably has the capacity to sell more than any other gaming" console, says Simon Jeffrey, chief operating officer at game maker Sega of America.
The PS2 already owns the industry's all-time sales record. As of last March, Sony had shipped more than 103 million units worldwide. In the year ending in March, 2007, Sony expects to sell an additional 11 million—and just 6 million PS3s. In the following year, Sony will likely ship another 11 million PS2s vs. 7 million PS3s, according to research by rating agency Standard & Poor's.
The PS2's direct rivals, Microsoft's original Xbox and Nintendo's GameCube, are no longer in production. So why is the PS2 doing so well this late in life? For starters, it's cheap. Sony has cut the PS2's price to about $130, down from a high of $300, to entice casual gamers and kids. And with continuing sales and so many PS2 consoles in living rooms worldwide, there's plenty of demand for new titles. "All the media focus is on next-gen consoles and games, but a lot of the software companies will make a substantial portion of their earnings by selling [older] games," says Erik Whiteford, marketing director at California game maker 2K Sports.
FAMILY FARE
To keep sales growing, software makers are tweaking their PS2 efforts. In the console's early days, hard-core gamers were its main audience, but those diehards are now moving on to the PS3. So makers are beefing up offerings of family-oriented titles, kids' games, and movie tie-ins. Square Enix next spring plans to sell Kingdom Hearts II: Final Mix Plus, a collaboration with Walt Disney Co. Around the same time, Paris-based Ubisoft will unveil Teenage Mutant Ninja Turtles to coincide with the release of a film in that series. And Sega is working on a game based on a film from Philip Pullman's story The Golden Compass, due before the holidays in late 2007. While some of these will be available for other platforms as well, game makers have no plans to discontinue PS2 titles.
Nor is Sony in any hurry to kill the PS2. The launch of a new console always puts game makers in the red, and the PS3 is no exception. With delays and production snafus for the machine, Sony's game unit is expecting a $1.7 billion loss this fiscal year. The PS2, meanwhile, long ago turned profitable as component prices have plunged and development costs have been written off. Even at $130 a pop, Sony earns about $8 on each PS2 it sells, compared with an estimated loss of $250 per PS3. (Nintendo is believed to break even on the Wii, while Microsoft takes a loss on the Xbox 360.) And Sony will rake in some $1.4 billion this year from license fees paid by game makers and sales of its own game titles for the PS2 and its predecessor, the PSOne, Goldman, Sachs & Co. estimates. So it's clear Sony will want to milk the PS2 for all it's worth.

BusinessWeek.com

Google Passes Yahoo in Tally of Visitors

Google, the search engine company, displaced Yahoo as the world’s second-most-visited Web site in November and closed in on the leader, Microsoft, a market researcher said yesterday.
Visitors to Google’s sites rose 9.1 percent, to 475.7 million in November from a year earlier, while those to Yahoo sites rose 5.2 percent, to 475.3 million, the researcher, ComScore Networks, said. Both sites trail Microsoft, which had 501.7 million visitors, ComScore said.
It was the first time that Google, based in Mountain View, Calif., attracted more visitors than Yahoo, reflecting Google’s growing popularity outside the United States. Yahoo, based in Sunnyvale, Calif., is still the most-visited site within the United States, ComScore said. Microsoft’s visitors increased 3.3 percent from a year earlier.
Visitors to Fox Interactive Media sites, owned by the News Corporation, rose almost fivefold, to 130.4 million, in November from a year ago, reflecting a surge from the purchase of MySpace.com.
Visitors at YouTube, bought by Google for $1.65 billion in November, rose more than 24-fold to 107.9 million, ComScore said.

BLOOMBERG NEWS

Nike's iPod Connection Pays

FUELED BY STRONG SALES OF its Nike+ and Converse lines, Nike reported a 10% increase in sales for its second quarter to $3.8 billion, compared to $3.5 billion for the same period last year. Net income for the period rose 8% to $325.6 million.
In the U.S., footwear sales gained 8% for the quarter, while apparel sales in the U.S. grew 10%.
"Nike+ is turning out to be huge," the company said in its conference call. "In less than 6 months Nike+ users have logged more than 3 million miles . . . and there are over 3 million Plus-ready shoes in the global marketplace and we expect to double by year end. Clearly, our confidence in this concept is proving to be accurate."
Nike+ shoes feature a built-in pocket under the insole specially engineered for the Nike+ iPod sensor.
Converse was also a bright spot, with "revenue up nearly 50 percent. Dwyane Wade was named Sports Illustrated's Sportsman of the Year. And Footwear News named Converse "'Brand of the Year' for 2006," the company said. Cole Haan revenues gained 9% over the prior year, driven by sales of its Dress Air product.
The company also said it increased "'demand creation' spending 27% versus relatively low spending levels last year, driven by advertising campaigns behind Nike Air, LeBron, Nike Pro and Nike+."
Separately, the company announced that it would celebrate the 25th-year anniversary of the Air Force 1 performance basketball shoe with the launch of the new Air Force 25 (AF25), available Dec. 26.
Retailing for $175, the shoe can already be seen on such players as Indiana Pacers' Jermaine O'Neal and the Phoenix Suns' Shawn Marion.

Marketing Daily

Are Big Media Companies Lining Up To Buy AOL, Yahoo?

Wall Street's Abuzz

ARE BIG ONLINE PORTALS AOL and Yahoo about to go into play, and could a major traditional media company like, say News Corp. or Comcast, be preparing to buy one or the other? That's what Wall Street is beginning to buzz about, according to a report released Friday morning by the equity research team at Merrill Lynch. "We believe there are several trends that could push either AOL or Yahoo! Towards a major transaction, with each other or with another competitor," the securities report speculates. "In the past year, AOL has shifted towards an advertising-supported model, but is still losing significant share in search. Likewise, Yahoo's technology and revenue results have fallen behind Google, resulting in a lagging stock performance."
The note predicts those trends could lead AOL and/or Yahoo to explore a "transformative transaction" over the next 12- to 24-months, and likely scenarios include:
* An AOL-Yahoo "tie-up," which Merrill Lynch deems the "most logical" outcome.
* An acquisition by Microsoft (the next most logical conclusion).
* An acquisition by a major traditional media player such as Comcast or News Corp.
While the least likely scenario, Merrill Lynch's analysis is that the math of a traditional media company play "could work," citing News Corp.'s previous acquisition of MySpace.com.
"News Corp. and Comcast are two media companies that have been speculated as potential candidates to purchase Yahoo!. Although we understand the rationale for each, neither appears likely," writes the firm, throwing water on the traditional media scenario. "Of the two, we see more logic in a possible News Corp.-Yahoo combination."

MediaDailyNews

Xbox Live challenge is to reach masses

Letting video game players compete against others online has distinguished Microsoft Corp's Xbox 360 console from Nintendo and Sony Corp. rivals, but casual gamers have yet to embrace the service in droves.
Xbox Live allows free game downloads, video chat sessions and more, but its main success is allowing gamers to play competitively against others online, often in violent games. Some 4 million subscribers pay $50 per year for the service.
But the runaway success of Nintendo's new Wii, a game console that openly caters to the mass market, has underlined the importance of more casual gamers to the industry. The console debuted mid-November and is expected to sell 4 million consoles worldwide by the end of the year.
"Microsoft has gotten a solid base of hardcore gamers who are drawn to its first person shooters," said video game analyst David Cole, president of DFC Intelligence. "But that is one small segment of the game market."
Even games with heralded online features are often played alone.
Cole says that even though 6 million copies of the hit alien-killing game Halo 2 were sold, only 2 million of those users took the game online, despite online being heralded as its most important feature.
"A lot of casual gamers are intimidated by online in general, both in terms of the technology and the human competition," said Cole. "That's changing, but it still has a ways to go."
SOCIAL NETWORK IN THE LIVING ROOM
Xbox Live's subscribers are spread across 24 million original Xboxes as well as Xbox 360s, which Microsoft says should have 10 million units shipped by the end of December.
The most popular games on Live are usually shooters such as Halo 2, Gears of War, Call of Duty 2 & 3 and Rainbow Six Vegas, and so the online environment is often full of aggressive and sometime verbally abusive players, which can make even experienced gamers uncomfortable at times.
"You kind of gravitate toward playing with your friends and co-workers," said Bryan Intihar, the reviews editor at Electronic Gaming Monthly, a video game magazine. "There's a lot of immature people playing online, but that's a problem that's been there since day one."
Microsoft hopes to counter any perception of Live as a service for the hardcore only. The company recently launched a video download service that allows users to download movies and television shows to their Xbox 360 consoles for a fee.
"We're building a social network in the living room," said Aaron Greenberg, the group product manager for Xbox Live. "I believe it's delivering on being something your mom, dad and kids can use.
Greenberg said that only 10 percent of original Xboxes were connected to the Internet, while more than 50 percent of all Xbox 360s are taken online, proving that the Live community is becoming more inclusive.
But Cole said new features like Xbox Live video are more enhancements for existing users, and not a huge attraction for mass market casual gamers.
Games that do not depend on Web play -- such as some roll-playing games -- are most important, he added.
"The key to the 360's overall success is what they'll offer consumers who don't go online," Cole said.

Reuters

Part 2: S&P's 2007 Tech Sector Outlook

A look at S&P analysts' expectations for key IT industries in the coming year—and their top picks within those groups

Here is the second of a two-part rundown of Standard & Poor's Equity Research information technology analysts' 2007 outlooks for selected tech subindustries and stocks, covering application software, systems software, home entertainment software, it consulting and data processing services, and Internet software and services. Part 1 featured outlooks on semiconductors, semiconductor equipment, computer hardware, electronic manufacturing services, and computer storage and peripherals.
Application Software
Analyst: Zaineb Bokhari
Standard & Poor's expects corporate spending on enterprise software to continue to grow at a mid- to high-single-digit rate in 2007, comparable to growth seen in 2006. We expect corporate spending in areas such as business intelligence, customer relationship management, and enterprise resource planning to do well, as we expect IT budgets to remain healthy for these programs. At the high end, we think there is some pent-up demand for application software due to the recent consolidation of several major players by Oracle (ORCL) and the expected delivery of new products and upgrades by large vendors such as SAP (SAP) and Oracle, which will likely take place in the 2007-2008 period.
We expect large purchasers of software to continue to exercise great discipline in their buying decisions and maintain a keen focus on return on investment and total cost of ownership. In this buyers' market, we think software vendors face intense competition and ongoing pricing pressure.
As a result, many vendors who have traditionally catered to the high end are looking to the underserved small and medium-size business (SMB) market as an area of growth. SAP plans to introduce new products targeted at the SMB market in the first half of 2007 and is adding features to its on-demand offerings to capture some of the growth seen by newcomer Salesforce.com (CRM; ranked 2 STARS, sell).
We have a strong buy recommendation on the ADRs of SAP partially because the company has been posting strong, largely organic growth in license revenues despite its massive size. We believe there are drivers currently in place for SAP to continue to grow at above-average rates. It has been making notable progress in the SMB market, in our view, and we like the company's largely organic product strategy, which has been less disruptive to customers than one driven by acquisitions.
By our analysis, this has promoted add-on sales of newer product introductions. We note that the recent weakening of the U.S. dollar relative to the euro is a concern to us, as it could affect reported growth rates.
Based on our optimistic outlook for future success of the company's current acquisition strategy, we have a strong buy recommendation on Oracle shares. While we think the company's acquisitive strategy comes with significant risks, we like Oracle because of its considerable technology assets, significant installed base, sizable maintenance revenue stream, high profitability, and attractive valuation relative to peers.
Systems Software
Analyst: Jim Yin
We forecast that PC growth in 2007 will be aided by the release of Microsoft's (MSFT) Windows Vista. Although most computers sold to consumers will have Vista as their operating system, we believe its adoption by businesses will be gradual and occur over several years as they evaluate and review compliance before upgrading from prior versions of Windows. As such, we view the launch of Vista as a positive, but not a major catalyst for increased IT spending.
We have a positive outlook on the systems software group as we enter 2007. One company that we like, and which is ranked strong buy, is Citrix Systems (CTXS). We expect Citrix to benefit from increased worker mobility, which requires remote connectivity from home and mobile devices. The company plans to release new products in the first half of 2007, which we expect to accelerate its revenue growth in the second half of the year. Citrix derives approximately 46% of its revenue from international operations and could benefit from the expected weakness in the U.S. dollar. We believe Citrix shares are undervalued following a recent price decline.
We have buy recommendations on two CAD/CAM companies: ANSYS (ANSS) and Autodesk (ADSK). ANSYS develops, markets, and supports software for design analysis and optimization. We expect its software license revenue to increase 43% in 2007, aided by the acquisition of Fluent. We see additional revenue growth coming from cross-selling opportunities as a result of the Fluent acquisition and a broader product portfolio.
Autodesk has seen strong demand for its 3D products, as sales increased 36% year-over-year for these products in the most recent quarter. We think its 3D products are in the early stages of a long-term growth cycle, with only 10% of its 2D installed base having been upgraded. We expect revenue growth of 15% in fiscal year 2008 (January) and operating margin expansion of 4% through better economies of scale.
Home Entertainment Software
Analyst: Clyde Montevirgen
The S&P Home Entertainment Software Index increased approximately 9% year-to-date through Dec. 8, vs. a gain of about 13% for the S&P 1500. Video game makers have been enduring highly variable sales and margins as the subindustry undergoes the transition to next-generation video game consoles, including Microsoft's Xbox 360, Sony's (SNE) PlayStation 3, and Nintendo's (NTDOY) Wii. However, share prices have rebounded dramatically from their midsummer lows in anticipation of improving fundamentals aided by expected growth in the installed bases for these consoles over the next few years.
We currently have a neutral outlook on home entertainment software companies. We believe near-term uncertainties will persist in the first half of 2007, as game makers decide how much to spend on developing and marketing games to support various platforms. We also think that as the profile of the video game player broadens and reflects that of the average consumer discretionary demographic, video game purchases will likely be more cyclical than in past cycles.
We expect sales and market-share growth to be driven primarily by releases of hit titles during the early stages of the console transition. But we see more robust growth in the second half of 2007, when installed bases for newer consoles should grow at more predictable rates and be large enough to entice developers to release titles more aggressively. We continue to favor companies with reasonable valuations and with a library of hit titles that appeal to a broad range of game players.
We have a buy recommendation on Activision (ATVI), hold opinions on Electronic Arts (ERTS) and THQ (THQI), and a strong sell on Take-Two Interactive (TTWO).
IT Consulting & Other Services; Data Processing & Outsourced Services
Analyst: Dylan Cathers
We expect the IT consulting and outsourcing subindustry to continue to benefit in 2007, as companies look for ways to reduce the costs of running their businesses. Companies in nearly all industries have continued to shift the burden of noncore tasks, such as finance, human resources, and customer service to third parties. The most notable trend in the industry has been the move to outsource these tasks overseas to areas with low-cost, high-quality workers.
No country has benefited from this trend as much as India. Indian IT outsourcers have routinely posted revenue growth in the 30% range, while their U.S. counterparts have typically seen revenue growth at 10% or less during the past couple of years. To try to compete with the Indian outsourcers, U.S. companies, such as IBM (IBM), Electronic Data Systems (EDS), and Accenture (ACN; ranked 3 STARS, hold), have opened facilities on the subcontinent to try to take advantage of the labor arbitrage opportunities. The problem has become, however, that as demand for these skilled workers has grown, the supply of workers has begun to dwindle and wages have been on the rise.
One strong buy-ranked stock in the group is Automatic Data Processing (ADP). We believe the company will be better positioned to grow its mainstay employer services business now that is has sold its claims services business and announced plans to spin off it brokerage services unit. Further, the company's balance sheet remains strong, in our view, with $2.9 billion in cash and marketable securities and nearly no debt.
Other picks include Electronic Data Systems and SRA International (SRX). We believe EDS is in the midst of a recovery, after being battered by unprofitable contracts and rising costs. The company has spent over a year restructuring, lowering its cost structure, and it has been active in increasing its use of less-expensive overseas labor, particularly in India.
SRA International specializes in providing services for the U.S. federal government, with a focus on the defense community. We believe that the company stands to benefit as the government ratchets up spending for defense and Homeland Security in the face of budget constraints.
Internet Software & Services
Analyst: Scott Kessler
It was a challenging year for many Internet companies and stocks in 2006. Year-to-date through Dec. 8, Internet software and services was the worst performing subindustry in the technology sector, and Internet retail was the second-worst performing subindustry in the consumer discretionary sector. We believe this underperformance reflects notable competition among Internet bellwethers, traditional companies, and startups. However, we expect 2007 to be better, in part due to intact fundamentals, strong balance sheets, and more reasonable valuations.
EBay (EBAY) is our only strong buy-ranked stock in Internet software and services. We believe its brands and businesses (including PayPal and Skype) have notable growth potential, especially outside the U.S. We also believe advertising could provide upside to 2007 forecasts.
In Internet retail, we have a buy opinion on priceline.com (PCLN). We recently upgraded the shares to reflect what we see as compelling international opportunities and an attractive relative valuation.
We have a strong sell opinion on VeriSign (VRSN), due largely to our concerns about organic growth, potential troubles in communications services, aggressive and perhaps excessive mergers-and-acquisitions activity over the past few years, corporate governance issues including options backdating, and a valuation we consider excessive (VeriSign's p-e and p-e-to-growth notably exceed those of the S&P 500 Technology sector).
In addition, we recently downgraded CNET Networks (CNET) to sell, from hold, owing in part to unfavorable traffic trends, substantial management turnover in 2006, balance sheet challenges, and well-above-peers p-e and p-e-to-growth-rate ratios.

BusinessWeek.com

Part 1: S&P's 2007 Tech Sector Outlook

Part 1 of a rundown of analysts' expectations for key IT industries in the coming year—and their top stock picks

Things generally happen pretty quickly in the technology sector. Market positions shift rapidly (consider the PC segment, for example) and tech stocks can move quickly as well. However, 2006 was marked by things that didn't happen as fast as some had expected, namely the introduction of several major new products and services. Microsoft's (MSFT; ranked 3 STARS, hold) Vista and Office, Sony's (SNE; ranked 3 STARS, hold) PlayStation 3, and Yahoo!'s (YHOO; ranked 3 STARS, hold) Panama search-technology upgrade are a few noteworthy offerings that were delayed during the year.
While the postponements hurt the 2006 results of associated companies, these and other offerings from the likes of Apple Computer (AAPL; ranked 4 STARS, buy) and Adobe Systems (ADBE; ranked 3 STARS, hold), among others, should contribute to notable revenue and profit growth in 2007.
Nonetheless, we at Standard & Poor's Equity Research continue to recommend market-weighting the Information Technology sector. Despite underperforming the S&P 500 since 2003, the sector's outperformance since mid-2006 has resulted in what we consider full valuations based on price-earnings and p-e-to-growth metrics.
Here is the first of a two-part rundown of our IT analysts' outlooks for selected tech sub-industries and stocks, covering semiconductors, semiconductor equipment, computer hardware, and electronic manufacturing services, and computer storage and peripherals. Part Two, featuring outlooks on application software, systems software, home entertainment software, IT consulting and data processing services, and Internet software and services, will follow at a subsequent date.
Semiconductors
Analyst: Clyde Montevirgen
We have a neutral opinion on the semiconductors subindustry. While 2006 witnessed healthy growth, reflecting sold demand from the cell-phone and consumer-electronics markets, we think current inventory congestion, possible erosion in average selling prices for certain chip types, and questionable end-market demand will likely present difficult year-over-year comparisons for the first half of 2007. However we believe that stocks are trading at relatively low levels and note that share prices could quickly rise on anticipation of improving industry fundamentals.
We project industry sales to grow 8% in 2007, lower than the Semiconductor Industry Assn.'s estimate of a 10% increase, based on our view of slower sales growth across a broad variety of chips. Economic growth is decelerating, and many companies have pared down capital expenditure plans for 2007 in the face of reduced demand visibility and inventory buildup. Although we see certain chip types experiencing substantial unit growth, we think that the combined average selling price may erode due to potential overcapacity, price wars, and unfavorable sales mix.
Year-to-date through Dec. 15, the S&P Semiconductor Index declined approximately 6%, vs. a gain of roughly 13% for the S&P 1500. We believe that shares of semiconductor producers are somewhat inexpensive based on historical relatives, and still see potential outperformance for companies that produce faster-growing chip types, such as high-end analog, graphics, and high-end microcontrollers, as well as for those that have market leadership in broad end-markets. We currently have strong buy recommendations on Texas Instruments (TXN) and Microchip Technology (MCHP).
Semiconductor Equipment
Analyst: David Kaplan
Following an estimated 25% rise in sales of semiconductor equipment in 2006, which we view as unsustainably above our long-term growth projection of around 10%, we see a period of digestion in the first half of 2007. Furthermore, with elevated semiconductor inventories and forecasts for a slowing global economy, we expect sequential declines in revenues for the first two quarters of 2007.
However, we see industry sales picking up in the second half of 2007, resulting in full-year sales being roughly flat with 2006. Our forecast incorporates our view that this slump will be less severe than historical downturns.
We view the shares of most semiconductor equipment companies as fairly valued, reflecting our expectations for a recovery in the latter half of 2007. However, we believe some stocks in this group are undervalued.
We have a strong buy recommendation on Axcelis Technologies (ACLS), which lost favor with investors after market-share losses in recent years. We see a turnaround for Axcelis in 2007 as the company's Optima HD tool gains traction. We believe these shares offer compelling value, as they recently traded at around 12 times our 2007 earnings per share estimate of 50 cents, and 12.8 times the consensus EPS estimate of 47 cents.
We also like the shares of Brooks Automation (BRKS), which is ranked buy. We expect the company to benefit from the increasing need for automation in 300mm-semiconductor manufacturing facilities.
Another stock on which we have a buy recommendation is photomask producer Photronics (PLAB), which is out of favor with investors, in our view, following lackluster performance in recent years. Photronics recently traded at 14 times our fiscal year 2007 (ending in October) estimate of $1.16 and 13 times the consensus EPS projection of $1.25. The company recently entered a joint venture with Micron Technology (MU; ranked 5 STARS, or strong buy) in a strategic shift toward selling higher-priced and higher-margin, leading-edge photomasks.
Computer Hardware
Analyst: Richard Stice
We have a neutral fundamental outlook on the S&P Computer Hardware subindustry. We anticipate PC unit growth of 10%-12% in 2007, in line with our 2006 forecast. Growth should be aided by the release of Microsoft's Vista operating system, as well as continued expansion in emerging geographies. Within the server market, we also believe unit growth in the low double-digit range is likely over the next 12 months as companies continue to build on the trend toward lower-end and bladed systems. However, we think profitability for both product lines will be somewhat inhibited by ongoing pricing pressures and a slowing U.S. economy.
Our favorite stocks within this sub-industry are Apple (AAPL), which carries a buy recommendation, and IBM (IBM), which is ranked strong buy. In the case of Apple, we believe the shares will benefit from new product introductions in early 2007, including a new operating system, its iTV offering, and an expected iPhone device. In addition, we anticipate further gains in the PC market and a sustained market share in the MP3 player category.
For IBM, we view its market leadership position in a variety of sectors, improving business mix, and significant research and development expenditures as favorable catalysts. Moreover, the shares trade at a discount to the S&P 500 on a p-e basis.
Electronic Manufacturing Services
Analyst: Jawahar Hingorani
Our outlook for the electronic manufacturing services (EMS) group is neutral for 2007, as businesses balance the need to cut costs with the need for greater flexibility in pricing and delivery, as well as help in managing their supply and distribution channels. Key differentiators in this group, in our view, include maintaining a global footprint, adapting to a continually declining cost structure, collaborating in design and development, and providing superior services across the customer's supply chain. Execution is also key, as companies winning new programs are required to demonstrate superior cash conversion cycles—that is, the time taken to convert orders into collected cash—while delivering high levels of quality and service to their customers.
One buy-ranked stock in this sub-industry is Flextronics (FLEX). We view Flextronics as the leader among the publicly traded EMS providers in the U.S. not just due to its size, but also due to the breadth of its offerings and its ability to compete across the board. Recent program wins, and strategic moves like the acquisition of International DisplayWorks and the divestiture of part of its software group, demonstrate in our view, the ability of this EMS leader to continually focus on growth. Organizing itself around a core of sound design, manufacturing, and supply-chain management services enables Flextronics to maintain that focus. We believe the company has the ability to gain market share on many of its competitors and maintain its leadership position in the EMS space in 2007.
Our other EMS picks (ranked buy) are Jabil Circuit (JBL) and Benchmark Electronics (BHE).
Computer Storage & Peripherals
Analyst: Jawahar Hingorani
We believe data-storage continues to be a top priority for large enterprises, as well as small and midsize businesses, particularly relating to regulatory compliance. We are encouraged by several favorable trends as the industry heads into 2007. Increasing amounts of data and content and the proliferation of broadband access have necessitated the need for greater capacity across the storage infrastructure. Faster transport has required network infrastructure for storage to evolve, and companies in this industry have achieved this through a combination of R&D spending, as well as strategic acquisitions. Aggressive pricing practices due to competitive pressures could squeeze margins, and long-term visibility will likely be a key to picking winners and losers in the group.
One company in this group that we favor is Western Digital (WDC), on which we have a strong buy recommendation. We believe Western Digital is positioned to increase its market share and compete with large rivals without having to invest immediately in technology or acquisitions. The company aims to take its successes in the traditional computing markets and capitalize on its ability to provide long-term quality and service to address new markets like portable media players and mobile handsets. We believe Western Digital's balance sheet is another attractive feature, with close to $3.40 a share in cash and investments and negligible long-term debt.
We also have a strong buy opinion on Emulex (ELX), due to what we see as the company's demonstrated ability to execute on its strategy, as well as grow faster than the market in many of the segments it serves. Additionally, we note Emulex's consistent record of cash generation, and its attractive valuation relative to peers.

BusinessWeek.com

AT&T Launches Telco TV In 7 Markets

Plans To Out-Maneuver Cable With 'Quadruple Play'

AT&T IS BUSY. IT HAS launched its fledgling telco TV service in the extended San Francisco area, but continues to miss deadlines promised for its national rollout. Still, this week, AT&T plans to announce that the service will kick off in seven additional markets--although the company declines to name them.
So far, the service known as AT&T U-verse--which is intended to compete with cable and satellite operators as another way to get multichannel TV service--has launched in parts of San Antonio, Houston, San Francisco (also Oakland and Fremont) and San Jose (also Sunnyvale and Santa Clara). San Francisco and San Jose are in the same DMA, but AT&T considers them two separate markets.
AT&T says it will be in 11 markets by Jan. 1--down from the 15 it initially promised by that date. An AT&T representative said the delay is to ensure that all the kinks are worked out, so customers continue to get "the best experience" when it debuts in a community. Any hint that the service is rife with technical hitches could taint the product. As is, AT&T faces a challenge in introducing it to consumers as a viable alternative.
The AT&T representative said that expansion into new markets will continue next year, but declined to cite any goals.
One advantage that U-verse could hold over large cable operators for consumers: its large bandwidth capacity, possibly allowing it to offer more channels than cable. It now offers the much-hyped NFL Network (on upper-level tiers), which cable operators Time Warner and Cablevision are not carrying, due to a dispute with the NFL over rights fees.
For advertisers, the speed (and specific markets) of U-verse's rollout is significant. It could offer them a third option for running spots on the local avails cable channels give to operators. Plus, AT&T may lower prices, compared to cable and satellite operators, to jump-start interest.
AT&T says it will offer TV service to customers in 19 million homes by the end of 2008. Leading cable operators, such as Comcast and Time Warner, have downplayed any threat--at least in the near term--from telco TV services offered by AT&T and competitor Verizon. (Verizon says it will make its FiOS service available to 18 million homes by 2010.)
So far, AT&T says about 10% of eligible customers in the areas it serves have opted for the service. If the goal of 19 million homes is met, and AT&T can double the adoption rate to 20%, its distribution would be equivalent to the fifth-largest cable operator, passing Cablevision.
Cable operators have had notable success with the rollout of the so-called "triple play" service, in which they offer TV, Internet and phone service as a bundle. AT&T will offer the same bundle next year; so far, phone service is not part of U-verse.
Eventually, AT&T plans to out-maneuver cable with a "quadruple play" that offers a bundle with wireless phone service. (Verizon already offers the triple-play bundle and plans to go with the "quadruple" as well.)
The AT&T rep also said DVR features could provide a leg up, including the opportunity to program DVRs from any Web connection worldwide, and the ability to record up to four programs at once.
Verizon is farther along than AT&T with its FiOS TV service, offering it to 150 communities in eight states, including the New York City area, where it has run a TV campaign to attract customers.
An email from Verizon referred to the scope of AT&T's slower-than-anticipated rollout as "oft-announced, often-changing and often delayed plans," showing that the two telcos may be building a rivalry, even as they each battle cable and satellite.

MediaDailyNews

Facebook Rejects $1.6 Billion Yahoo Offer

TechCrunch
December 13, 2006

Rumors about the possible acquisition of Facebook, usually with Yahoo as buyer, have been around for most of this year. Not that Yahoo or Facebook have asked for this attention, but the media is getting antsy. Robert Young put it best last week when he asked - Yahoo & Facebook: Deal or No Deal?. That is certainly the question of the fiscal quarter.
We know that Facebook has been pursued almost since the beginning of its existence. They narrowly avoided a $10 million acquisition by Friendster in mid 2004, just months before they took their first round of financing from Accel Partners. Former Friendster execs say that the deal was close to closing, but last minute negoations over control ultimately disrupted the deal. Since then, Facebook has certainly been approached by every major Internet company.
At Yahoo, the long running courtship has lasted at least as long as this year, and is internally referred to as “Project Fraternity.” Leaked documents in our possession state that an early offer was $37.5 million for 5% of the company (a $750 million valuation) back in Q1 2006. This was rejected by Facebook.
Things really heated up mid year. Yahoo proposed a $1 billion flat out acquisition price based on a model they created where they projected $608 million in Facebook revenue by 2009, growing to $969 million in 2010. By 2015 Yahoo projects that Facebook would generate nearly $1 billion in annual profit. The actual 2006 number appears to be around $50 million in revenue, or nearly $1 million per week.
These revenue projections are based on robust user growth. By 2010, Yahoo assumes Facebook would hit 48 million users, out of a total combined highschool and young adult population of 83 million.
Our sources say that Facebook flatly rejected the $1 billion offer, looking for far more. Yahoo was prepared to pay up to $1.62 billion, but negotiations broke off before the offer could be made.
These documents are now a couple of months old, and both Yahoo and Facebook may have changed their views on a possible deal substantially in that time.

Wii beats PS3 but both suffer Ebay effect

FT.com
December 8 2006

Sony sold only 197,000 units of its PlayStation3 games console in the US last month, well below sales of Nintendo’s rival Wii, because of supply problems.
It had aimed to put 400,000 PS3s into the biggest market for video games for the release of its next-generation machine in November.
But the figures from researcher NPD Group show it achieved less than 200,000.
In contrast, Nintendo’s rival Wii console outsold the PS3 by more than two-to-one, selling 476,000 units in November.
The PS3 went on sale on November 17 and the Wii on November 19.
Both products quickly sold out and have been reaching prices well in excess of their respective $599 and $250 price tags on websites such as eBay.
This has been bad news for video game publishers, who have seen “attach rates” on average of only one game being sold along with every PS3 console and two for the Wii, rather than the three or four that would normally be expected.
Both companies could clearly sell far more units if they could get supplies into the market.
Sony suffered a manufacturing setback with the Blu-ray player incorporated in the PS3, but analysts now expect full production to lift available units in the US to 600,000-800,000 by the end of the year.
Nintendo said on Friday Wii sales reached 600,000 in the Americas region in its first eight days of availability.
It also said it had sold 55 per cent of all video game systems in November, with 920,000 units of its handheld Nintendo DS machine and 642,000 Game Boy Advance sales.
Microsoft’s Xbox 360 console also appeared to have benefited from the hype around the new launches and from the frustration of gamers unable to buy the new products.
It outsold both the PS3 and Wii with 511,000 units.
Mr Pachter said the 360 was not as much a beneficiary as he had expected, perhaps due to the $400 price tag for its premium version.
The real winner was the PlayStation2, he said, which sold 663,000 units after Sony dropped the price from $149 to $129.

Video-Gaming Sales Set to Top $12.5 Billion

New Consoles, Strong November Could Power Industry to Best Year in Recent History
AdAge.com
December 14, 2006

So far almost $9 billion in hardware, software and accessories have been sold this year, led by a strong November that saw sales of hardware jump 69% over November 2005 and software and accessories rise 7% and 10%, respectively, according to a new report from NPD Group. NPD analyst Anita Frazier predicted total 2006 U.S. sales will top $12.5 billion, a boost of 16% over last year's $10.3 billion. Console sales lead upswingConsole sales led the November upswing, rocketing up 103% in sales over last year, thanks to the introduction of Nintendo's Wii and Sony's PlayStation 3 at the end of November -- despite widespread product shortages. "The demand for Wii and PS3 far outstripped the supply," Ms. Frazier said. "So the numbers there don't really speak to supply or sales as much as they speak to how much retailers had in stock." Nintendo sold 476,000 Wii consoles, while Sony sold 197,000 PS3s, according to NPD. Nintendo has said it has shipped 600,000 devices and plans several million by the end of the year. Sony continues to be beset by delays and has stopped commenting on the current season, but reiterated that it plans to have six million PS3s worldwide by the end of March 2007. The Wii was edged out in November sales, however, by the Xbox 360, by a slight margin of 36,000 units. Ms. Frazier attributed the Xbox surge to the November debut of the Xbox-only game "Gears of War," versus the idea that consumer bought 360s as a second choice when they couldn't find Wiis or PS3s. Highly anticipated titleThe highly anticipated "Gears of War" was the also top software title in November and posted sales of more than 1 million units, generating some $61.5 million. (The title was also Microsoft's first attempt to sell games at $60; it previously priced its next-generation games at $50.) "I'm a firm believer that content is what sells hardware, and Xbox 360 had a huge title out with 'Gears of War,'" Ms. Frazier said, adding that the game's high sales were "not a big surprise, but what a great performance." There were also a few older-generation surprises in the report, and some good news for Sony. Sales of Sony PS2 consoles and Nintendo Game Boy Advance handheld devices were strong, as were multiple software titles for both. Ms. Frazier pointed out those sales likely are price-based, since the older systems are much less expensive. But it may also indicate more first-time gamers entering the market as well. "The entire industry is really rallying around that mantra of expanding the gaming audience," Ms. Frazier said. The big questionBut the big question remains: When the holiday is over, who will be the big gaming winner? No one's ready to predict, and with the biggest sales month of December yet to be tallied, it could be too soon. However, Nintendo, and in particular its Wii system, looks to be a sure winner, if not the top winner, this season. In NPD's November data, the Nintendo DS sold 917,000 units to top the hardware rankings; the Wii game "Legend of Zelda: Twilight Princess" was third behind "Gears of War" and PS2's "Final Fantasy" in software sales; and the Wii remote led all accessory sales, with 270,000 sold. Still, if November sales are any indication, the whole industry will have something to celebrate in the new year.

Sony to enter video download market

FT.com
December 17 2006

Sony is to gatecrash the fledgling market in handheld devices to play downloaded video content early next year when it launches a service for the PlayStation Portable.
The decision, which could threaten Apple Computer’s grip on the video download market, will allow PSP owners to download a film from the internet to a PC and then to transfer a single, legal version of the film to a Sony device.
Sony, which has sold more than 20m PSPs worldwide, expects to launch the service in the first quarter of 2007 after tying up deals with online video providers.
Crucially for Sony, the service will not require the launch of a new PSP or for consumers to buy new hardware.
The new PSP service has been developed by Sony Pictures Home Entertainment and will use the Japanese company’s memory stick technology to store the video content. Sony is distributing a 4Gb memory stick capable of storing 10 feature films.
Amazon.com and film download sites such as Movielink and CinemaNow are in talks with Sony about signing up to the service. But the PSP service will not be compatible with Apple’s iTunes store, the dominant film download platform. Only iPod devices can download content from iTunes.
Only Walt Disney has made its films available on iTunes. Hollywood’s other studios have been reluctant to join Disney because of concerns about piracy: unlimited numbers of iPods can download copies of films that have been bought on iTunes and then downloaded to a PC.
Mike Goodman, a digital entertainment programme manager with Yankee Group, the research firm, said Sony’s PSP decision would “open the [video download] market up” for Sony.
Although the video download market is still immature, the industry is forecast to grow at an exponential rate during the next five years.
Global revenue from online video sales will be $298m this year, says Strategic Analytics. The technology research firm expects the market to grow to $1.5bn in annual revenues by the end of 2007 and to $5.9bn by 2010.
With Sony Pictures Entertainment producing film content in Hollywood and DVD sales growth slowing industrywide, Sony is keen to establish a strong position in digital delivery of film content.
Sony has had a difficult year. Launch of the PlayStation 3 suffered hitches. The group sold fewer than 200,000 units in its first month. It had intended to sell 400,000.
The problems led Sir Howard Stringer, chairman and chief executive, to describe the company as facing “a perfect storm”.

10 Internet Acquisitions from 2006

AdAge.com
December 18, 2006

Bubble? What bubble? Check Out a Few of the Year's Major Media Transactions.

1 YouTube by Google , $1.65 billion The year's biggest valuation is also the most debated: Is YouTube going to be a steal at Google's purchase price once it becomes the future of TV, or a growing source of legal hassle as more networks request to have their content removed?

2 Massive by Microsoft, $200 million-$400 million The gaming industry's most active in-game advertiser was a wise investment for Microsoft, which was a minor player in the crowded market.

3 Atom Films by Viacom, $200 million A move criticized by some as a me-too acquisition by Viacom, which shelled out $200 million for the seven-year-old web company. But Viacom did get a global digital media officer out of the deal-Atom CEO Mika Salmi.

4 DMarc by Google, $102 million DMarc marked Google's entry into the radio-advertising business. The deal was valued at $102 million upfront but could be worth as much as $1.2 billion, depending on how dMarc performs over three years.

5 Xfire by Viacom, $102 million Xfire's social-networking, instant-messaging and gaming-information services so impressed Viacom it was willing to shell out upward of $100 million.

6 Platform by Comcast, $80 million The Platform is a cornerstone of Comcast's fledgling online-video play. The broadband-services provider cost the cable company in the neighborhood of a rumored $80 mil.

7 Grouper by Sony, $65 million Sony gave copyright-shirking YouTubers a run for their money by purchasing this legit video-sharing site. Should its main competitor ever go down in a sea of lawsuit-induced flames, expect Grouper to emerge as the next major player.

8 JotSpot by Google, $50 million Google's venture into the wiki world was a questionable move for a company that has been notoriously low on ad inventory. Offering JotSpot's previously paid services free to users also raised questions of monetizing possibilities.

9 Petfinder by Animal Planet, $35 million The year's biggest (and cutest) no-brainer was the announcement that Animal Planet would unite TV fans and pet owners to help locate long-lost animal friends. Petfinder could give a dog a bone or five thanks to the $35 million buyout.

10 Wired.com by Conde Nast, $25 million Better late than never. Nearly a decade after its initial purchase of the tech mag, Conde Nast finally put its hot print property under the same roof as its web counterpart.

DVDs Beat VCRs In TV Households

IN THE RACE TO GET more TV households, DVD players surpass VCRs, according to Nielsen Media Research's Home Technology Report. DVD penetration is in 81.2% of TV households as of third-quarter 2006, versus last year. VCR penetration is in 76.5% of TV households.

Media Daily
Dec 20, 2006

AOL Chief Has a View, a Long One

If AOL were being dressed up for a sale, as has been rumored on and off for several years, Randy Falco is an odd choice to be the new chief executive.
As Mr. Falco notes, he is hardly a short-term guy. Before starting at Time Warner’s AOL unit this month, he spent every day of his career since college — 31 years — working for NBC Universal. And he has been married for the same number of years.
“I’m very devoted,” he said, having no trouble finding more ways to emphasize the point. “I’m very loyal. I’m not in here for a short ride. I’m not a one-off guy.”
Mr. Falco and his new deputy, Ron Grant, made their first moves yesterday to run AOL for the long haul by doing something its employees have become accustomed to in the six tumultuous years since the company merged with Time Warner: reorganizing the executive suite.
Mr. Falco will have eight people report directly to him, including Mr. Grant and AOL’s vice chairman, Ted Leonsis, as well as the top executives in areas like human resources, legal and finance, according to a memo sent yesterday to AOL employees. Mr. Grant, the president and chief operating officer, will oversee seven operating businesses, including products, platforms, programming, advertising sales, international, and the company’s large but declining business for selling Internet access.
This time, Mr. Falco says, the company is properly configured to capitalize on a strategy it began following in August: focusing on free services for broadband Internet users supported by advertising.
The new lineup will not only clarify who does what after the recent departure of several top executives, Mr. Falco said, it will also illustrate a clearer emphasis. (A few positions are still open, including new slots for chief marketing and “innovation” officers, he said).
The company, he said, will focus on attracting a bigger audience, selling more advertising and increasing the amount of time people spend on its Web pages and using services like instant messaging.
“At the center of all of this is product innovation,” he said. “It makes everything else work.”
Only three weeks ago, Mr. Falco was the president and chief operating officer of NBC Universal Television, the biggest division of the media conglomerate NBC Universal, which is majority-owned by General Electric. A tall New York native bearing a glancing physical resemblance to Howard Stringer, the Sony chairman, Mr. Falco was “the quiet giant” at NBC, said a longtime colleague, David M. Zaslav, now chief executive of Discovery Communications.
It was at NBC’s headquarters that Mr. Falco and some colleagues, including Bob Wright, the chairman of NBC Universal, met in August with Time Warner’s president, Jeffrey L. Bewkes, and Mr. Grant to discuss offering NBC’s programming on Time Warner’s cable systems on a video-on-demand basis.
Mr. Bewkes said he had been instantly impressed by Mr. Falco, whom he thought best understood the video plan and could be a champion for it within NBC and at other TV companies. At a couple of follow-up lunches, Mr. Bewkes began thinking of Mr. Falco for a senior role within Time Warner.
From Mr. Falco’s perspective, it had become clear that his immediate boss, Jeff Zucker, was the internal candidate most likely to succeed Mr. Wright, whose retirement loomed. Mr. Falco reasoned that at age 52, if he aspired to be chief executive, it would be easier for him to move to another company before Mr. Wright retired.
Mr. Bewkes, meanwhile, had been developing AOL’s strategy shift with Jonathan F. Miller, the chief executive, but the men did not see eye to eye. Among Mr. Bewkes’s concerns, he said, was that the company needed a strong operating executive to make the strategy work. With that in mind, he even recommended that Mr. Miller have a drink with Mr. Falco in November, and they did.
Mr. Falco was not interested in anything but a chief executive’s position — otherwise he would have happily stayed at NBC Universal — but he was surprised when Mr. Bewkes offered him the job of running AOL. With digital distribution and the Internet the current obsession of all media executives, Mr. Falco did not see his lack of direct management of a Web business as an impediment.
“I’m not sure that convergence is the issue anymore,” he said. “There is a shift going on, and it’s dramatic; the consumer is living on the Net and as a result, the advertisers are on the Net."
Mr. Bewkes said he did not look specifically for a so-called traditional media executive for AOL. "I just wanted the best executive I could get. If there was an Internet executive as qualified as Randy, I would have hired that person,” he said.
After Mr. Falco accepted the job, he told Mr. Bewkes that he wanted Mr. Grant as his deputy. Mr. Grant, 40, had worked as Mr. Bewkes’s chief adviser on digital strategy and operations for the last four years. Before that, he spent five years at AOL. He was one of only a handful of executives who remained from the company’s business affairs unit, which made deals that resulted in accounting scandals.
Mr. Bewkes — who as the head of Time Warner’s HBO division clashed with AOL’s leaders shortly after the merger — said Mr. Grant’s survival of that experience and subsequent success was evidence of his integrity and knowledge. Mr. Grant said, "I believed in AOL then as I do now.”
On seeing Mr. Grant in the halls at Time Warner headquarters, Mr. Falco turned to him and joked: “This is my computer.”
Having Mr. Grant’s familiar face back at AOL’s campus in Dulles, Va., has not dulled the shock of Mr. Miller’s sudden and unexpected firing last month, several executives at the company said. In carrying out the new strategy, the company also decided to eliminate 5,000 jobs.
But on his first day on the job, Dec. 4, Mr. Falco met as many employees as he could, and had lunch in one of the campus’s four cafeterias.
“The first message was: the change in strategy that we just announced was not in question,” he said. Taking his typically long view, Mr. Falco said that one of his main goals was to “develop a winning culture” at AOL, a company that pioneered the popularization of the Internet and is still one of its major participants but has been knocked around more than Rocky Balboa.
“I can’t imagine that Time Warner will want to sell or get out of AOL,” he said. “It is an integral part of Time Warner.”

NYT.com