I Finally Went Over to the Cat Side

I have studied many philosophers and many cats. The wisdom of cats is infinitely superior – Hippolyte Adolphe Taines

 

After many years of dedicated support to Microsoft and its operating system, Windows, I have finally decided that the time has come for a change. I remember starting on my first operating system, Dos, and the subsequent conversion over to Windows 95, then 98 and finally settling with XP. Well, after my Sony Vaio decided to give up the ghost, I decided to abandon the notebook along with XP operating system that came with the machine. With much reservation, I walked into the nearest Apple store and talked with one of the representatives about Apple’s creative yet tritely named operating system, Leopard. (Just as an aside, how introverted masochistic does one really have to be to start nicknaming operating systems after cats? I personally do not trust cats, I can see it in their eyes, always scheming and plotting. Those cats will take over the world one day, but I digress). After a brief conversation with the representative, I was assured that switching to Apple’s operating system would be painless if not beneficial to my sanity, if only switching would conclude the obligatory yells I at time launch at my notebook.

Apple was more than joyous to separate me from my hard earned money. Immediately seconds after placing the order, I was overcome with buyer’s remorse. Can this notebook really be worth the $1500+ price tag I just paid? I was convinced at the store, but with a lighter wallet, I wasn’t quite sure any longer. I would just have to wait for the notebook to arrive before I could be certain.

A few days later, the notebook arrive and my first impression was that this notebook appeared like any other notebooks I had owned in the past, but after powering the computer on and playing around with Leopard, my buyers remorse subsided. I could easily see that this was a well built operating system and its developers had its convenience, functionality and style in mind during development. Practically speaking, this notebook simply works. It does what I ask of it without the yells and it does it well. All my hardware were easily detected by the notebook without having me running around installing softwares and drivers. Everything just worked, including my printers, my camera and my usb drive. The only hassle I had was having to download Pocket Mac in order to sync my blackberry with the notebook, but it has flawless synced since the installation.

But alas, I am a practical man and I understand that Microsoft still control 90% of the operating system market and as such, most programs are still designed with Microsoft’s OS in mind. This didn’t present a problem in the new Intel Apple notebooks as the Intel chip allowed me to either run a copy Windows natively through boot-camp or as an emulation through Parallels or VMare Fusion. I did both. There are still many programs that I would prefer to run on the windows platform and now I at least have the choice to boot XP only when I require it.

Its now been about three (3) weeks since the notebook arrived and I’ve got to hand it to Apple, this operating system is well designed. I’ve seen found innovative software bundled with the notebook such as Front row and Spaces that I adore and even discovered numerous open source softwares I now have installed on my notebook. I still will never believe or accept that this notebook is worth its over inflated price tag, but I do agree with the necessity to make the operating system switch. 

Don’t fret though dear readers, I will do my best to stay away from the cultish fan boy culture that Apple user seem to have easily adopted. It would take more than a well designed operating system to get me to run around as a living advertisement for Apple.

Letter from the CEO

Dear Fellow Corporate Associate:

We have just closed out our third consecutive year of great achievement and accomplishment, putting our company on much more solid ground with a total of 220 contracts including seven wholly owned hotels and 47 joint venture properties. This is a long way from where we were back at the beginning 2005. There is real momentum within the company today as a result of your hard work and dedication to our strategy and goals.

Unfortunately, the economic environment we find ourselves in today is one of huge challenge and uncertainty. Who would have ever thought six months ago that a great organization like Bear Stearns would experience such a dramatic meltdown in a matter of days? Who would have predicted the headwinds all major banks and financial institutions are currently facing or the upheaval of the credit markets? I certainly did not anticipate this and I suspect you didn’t either. Some predict we will be in a recession very shortly if, in fact, we are not already there. I have no idea what lies beneath the surface, but I do know that we, all of us at [redacted], should assume the worst while hoping for the best.

The first two months of the year were in line with budget; however, March has softened rather dramatically and we remain concerned about future periods given the economic uncertainty. History tells us that our industry usually feels the real impact of an economic slowdown a few months after most other industries. I do not want to wait until the “horse is out of the barn” before we take prudent measures to mitigate a possible serious downturn. We have all worked too hard to let the progress we have made and credibility we have earned slip away. It is far better to err on the conservative side than to wait until our opportunity to prepare is gone.With this in mind, I have asked the Executive Committee to take certain actions to freeze or reduce expenses over the next few months. Effective immediately, we will freeze hiring unless approved by me, reduce travel expenses, delay some purchases, and implement other steps to ensure that we will be in a position to meet our commitment to our shareholders. As part of this program, I am delaying the implementation of corporate merit increases that are normally effective the 1st of April. We will look at our business levels and the direction of the general economy as we get further into the second quarter in order to evaluate when and if we will be able to implement this year’s annual merit increases. The manager level and below will be the first group to receive their increase while director level and above will be asked to wait longer. I fully understand that this is a serious measure to take, but I also believe that all our associates are committed to the long term success of [redacted] and this action, in my opinion, is a key element to the continuation of this success during these uncertain economic times. We all read the same newspapers, listen to the same news programs, and we all have witnessed first hand the changing economic environment, so I ask you to support this decision.

You have my word that we will revert back to a more normal operating mode as soon as we see positive signs in the economy and our business. In the meantime, I appreciate your continued hard work, loyalty, and dedication to [redacted] mission and goals.

[Redacted]

Chief Executive Officer

[Redacted]

My comments

1. As the company is in an industry (hospitality) which is a lagging indicator of the economy, this move is a bit premature and unnecessary (if you ask me). The entire reason for working in the hospitality industry is that it does not wildly fluctuate with the economy. If you were assign the hospitality industry a beta, it would hover somewhere around 0.30. When the company released its earnings earlier this month, the company actually beat forecasts for the 1st quarter of 2008, yet the CEO calls this drastic action necessary. Necessary to what? Necessary for what? It is clear that the company is in a healthy state: with sufficient cash flow and EBIDTA (take my word for it). Why the entire executive committee believes this is a necessary solution is short-sighted?

2. People are reactionary, and people react to the news they see and/or hear. This statement from the CEO sends exactly the wrong message. Everyone knows the general state that the economy is in right now, but when the company start to revise its forecast, then the workers start to believe the company is trying to hide some skeleton or delay some inevitable disastrous news. (Images of Enron shredding corporate documents quickly flash across my mind). I don’t believe that is the case with the company, but sending a message like this company wide proclaims a signal of the doom and gloom to come. A publicly traded version of the boy who cried wolf?

3. The company is doing quite well. The company was among the biggest price gainer on 3/25/08. Therefore, we, the associates are only left to feel that the company is more interested in shareholder equity than its associates. While a company that focuses on shareholder equity is not discouraged (it’s actually encouraged), it would be a bit pollyannaish for a company to focus on maximizing equity at the cost of its associate. Let’s face it, in the hospitality industry, people (workers) matter, and if the workers stop believing in the services they offer, profits will be sure to decline.

(I will look into providing the stock chart for the company. I will have to work to redact certain portions to keep the identity of the company confidential)

4. This destroys moral. I don’t even think this needs any special explanation. I personally know of lots of understaffed department (mine included) that cannot possible take kindly to the message. A hiring freeze and a postponement of annual merit increase: a double whammy.

I could think of more comments, but I’ll stop here. I don’t think there’s any need to continue. While I’m sure the executive committee had their reasons for their decision, I do feel it to be the incorrect one.

Bonuses: Another reason why I support a reformation of the US Tax Code

I’ve never been a huge fan of the US Income Tax Code or the IRS which was placed in charge of enforcing and collecting under the tax code. Any tax code that requires pages upon pages of explanation can not possibly be the most effective and/or efficient way to tax the population. Instead of listing thousand of examples of why I view the tax code as unnecessarily complicated, I’ll talk about an example that hits closer to home. This is the issue of how the tax code is applied to a bonus check and why the calculation unnecessarily overtaxes the bonus.

Bonuses are taxed in one of two ways: The Percentage Method and the Aggregate Method. For the percentage method, the bonus is taxed at a flat rate of 25% at the federal level as well as a flat tax at the state level (rates vary by state). It doesn’t matter what the tax payer’s effective tax bracket was the last paycheck, the percentage method applies a flat rate to the bonus. The other method, and the one most in use, is the aggregate method. Here, the bonus is treated just as any other paycheck and taxed at the then current withholding the tax payer had selected earlier in the year. While this sounds simple enough, it does get a bit complicated. First though, a brief lesson about how each tax payer’s income tax liability is calculated.

At any point in a year, but usually at the beginning or the start of a new job, a tax payer completes a W-4, which allows the tax payer to estimate their withholding (how much of their income will be shielded from taxation throughout the year) based on questions on the form. The form is used to estimate the federal tax liability the tax payer will have at the end of the year. Once this is complete, the IRS starts applying the withholding rates on subsequent paycheck and taxes any amounts not shielded by the withholdings. The amounts are automatically withdrawn from the tax payer’s paychecks before receiving it. At the beginning of the next year, up until April 15, the tax payer has to complete a tax return which applies the year’s federal tax rate to the actual income earned that year (as stated on the W-2 and other income forms) and reconciles this tax liability with the estimation that has been withdrawn throughout the year. If the amount taken out during the year is less than the calculated amount on the tax return, the tax payer sends a check to the IRS, if more the IRS returns a check to the tax payer. Are you still with me?

Where the complication arises with bonuses is that the estimated tax liability is calculated per paycheck over the course of the year. This paycheck is taxed under the assumption that every subsequent paycheck will be similar, if not identically. Of course, everyone is well aware that bonus paychecks are quite sizeable when compared to weekly/biweekly paychecks since the bonuses are one-time payments and not a recurring paycheck.  A simple example will shed some insight on why this creates an estimation nightmare.

If I am paid $2,000 biweekly, the IRS (rather the accounting software in place) would compute my tax liability by applying the $2000 over the course of the year or twenty six times (26 paychecks during the year if paid biweekly). $2000 * 26 = $52,000 annual salary. The IRS then applies the tax rate and my estimated total tax liability during the year becomes $4,386.25 plus 25% of the amount over $31,850 or $9423.75* (18% effective tax rate). This amount is then reduced to a single paycheck (divided by 26) and $362.45* is taken out the individual paycheck. If nothing changes and I receive the same amount over the course of the year, the estimated tax liability will reconcile with the actual calculation using the W-2. The problem occurs when I receive a bonus and the IRS taxes it. The IRS (once again, it’s really the accounting system in place) treats the bonus as a paycheck, and not as a one time payment. A bonus of $6,000 would also be applied with the same formula and $6,000 * 26 = $156,000. When the tax rate is applied, the amount owed on income of that magnitude would be $15,698.75 plus 28% of the amount over 77,100 or $37,790.75. Applied over a single paycheck, the tax liability would be $1,453.49*. This number grossly exaggerates the amount of taxes that needs to be paid and pushes the tax payer to a marginally higher tax bracket. At the end of the year, the tax filer actually report income of $58,000 ($52,000 base and $6,000 bonus) which should only have been taxed. Since the bonus paycheck actually estimated an end of the year income of $156,000 (albeit only once during the year), a greater proportion of taxes would have been collected by the government that the tax payer is actually responsible for remitting. This over estimation will be reflected in the over taxation of the bonus paycheck.       

The bonus check is effectively overtaxed, and while this money will be later returned to the tax payer, the IRS keeps the funds until then. Not only does the IRS keep the funds until a tax payer can complete his/her tax return the next year, the funds are not adjusted for inflation nor do the funds interest while the government holds on to it. It’s basically a free loan made to the federal government that devalues each second the government holds on to it due to lost opportunity cost and rising inflation.

My bonus check just arrived last week, and thanks to the IRS shoddy math, it’s effectively taxed at around 50% (including state, local, and social security) even though I’m no where near the highest tax bracket (35%). The funds I can use to “stimulate the economy” (as the government puts it) have been unnecessarily withheld and the earliest I can consider receiving re-payment from the federal government will be in 2009. Thank you Uncle Sam.

P.S. I am actually contemplating completing a revamped W-4 and increasing my withholdings so I can correct this over taxation. This method will allow me to intentionally pay less in taxes than my project will necessitate so as to balance the over taxation of my bonus.

* In reality, only the first paycheck of the year is projected over 26 weeks. All subsequent payment accounts for the prior paychecks and so each subsequent paycheck will effectively be increased over the remaining pay period in the year plus the amount already taxed. To make the math simple (if at all possible), all tax computations were calculated as if applied to the first paycheck of the year.

Then, Now, Later

This is my first blog post in the 2008 year. As such, I’ll try to fit multiple items into one blog post that I have entitled; Then, Now, Later.

Then

The year 2007 was a trying year for me. After I graduated college in 2006, I decided I was going to join the workforce for a few years, gain some experience and apply to medical school when I was ultimately ready. As time went on though, I began to pursue other interest outside of the pursuit of medicine. All throughout undergrad, I had always heard of careers in investment banking and management and strategic consulting, but with my pre-medical blinders on, I chose to ignore those career routes even though I had expressed early interest in them, evident by my ultimate choice to pursue an economic degree. In 2007, I sought to pursue this interest and attempted to transition into a new career in the banking industry. I pulled my application from medical school and sought instead to apply to business school (b-schools). I choose to apply to b-schools because I truly believe that b-schools were the path that would provide me the knowledge and expertise in the most accelerated, rigorous and structured path to allow for a success transition into a new career in the mergers and acquisition advisory at an investment bank. The problem with my hasty decision though, is that business schools search for different qualities in their students than do medical schools (which hitherto, I had been aim to meet medical school requirements) and now I’m struggling to show to the admission committees my story as to why I am a desirable candidate deserving of a seat in their business school.

Other aspects of my life did fall into order in 2007. Due to a renewed determination to better my current lot in life, I became serious about the decisions that affect my life, my finances, and my future. In 2007, I really began talks with my girlfriend in order to coordinate and manage our lives post (her) graduation. She, like I, is very ambitious and this ambition is driving her to medical school (bless her soul). So far, the conversations are going well and we’re working to collaborate and coordinate the directions that our passions are now pulling us towards.

In terms of finances, I started a Roth IRA in 2007 and I plan to continue that trend in the future. I also opened a taxable account to complete my desired asset allocation. My 401(k) at work will soon become available and I look forward to putting more funds in that cash deferred account.

While all my goals and aspirations were not met in 2007, I’m looking forward to pushing ahead in 2008 to try to achieve those goals.

Now

I’m contemplating what contingency plan I’ll engage if I don’t gain admittance to business school during this cycle. I’ve accepted the reality that the possibility exists that this might not be the year for me, but I know I can patiently wait and build up my candidacy for the day when the opportunity to enter into the career I desire arises (whether or not that path leads through business school). I’m currently awaiting the decisions from the schools I applied in the second round. I have decided that this is the last round that I will submit an application to, and if not successful in this round, I’ll accept that I need and can add to application by staying in the workforce and gaining extra work experience. Since I am unsatisfied in my current work position, I’ll seek to lateral into a new position if that is the route I am compelled to take.

For the first time since I carried a credit card, I’m carrying a balance from one month to the next. This is due to the application fees of the business schools I applied to. All of the balance is on a 0% interest card (currently) so I’m not too worried about carrying the balance from month to month. I’m paying down the principal with all available funds so as to avoid paying interest charges when the introductory rate expires. I’m still allocating and dollar cost averaging (DCA) into the market funds I own. The next couple of months will be a strain on my budget allocation as I continue to pay off this credit card debt, pay down my student loans, continuing adding to my Roth and taxable accounts and start a 401(k) plan. I’ve chosen an asset allocation plan (shown below) that I try to DCA into every moth. Hopefully, starting early in life, I can take advantage of compound interest to secure a financially independent future.

AA- 95% Equities, 5% Fixed Income

40% Vanguard Total Stock Market (VTSMX)
30% Vanguard FTSE All-World ex. US (VFWIX)
15% Vanguard Small Cap Value (VISVX)
10% Vanguard REIT (VGSIX)
5% Vanguard Inflation-Protection Securities (VIPSX)

Later

I have to consider what my options are in trying to ultimately end up in career in mergers & acquisition advisory at an investment bank within the next 5 to 10 years. I know if I follow stepwise a diligent plan, I will ultimately end fulfilling this desire.  I just have to find such a plan; that coordinated strategic plan that will make this desire a reality.

I do also have to factor in the fact that heading down this route will lead my life down a narrowly defined path, and I need to make sure that the path allows enough room for one more: my girlfriend. With her aspiration to enter medical school, I need to expect some difficulties that will come with combining both our lives.

So 2008 will be an interesting year. This is the year that I plan to make radical changes, whatever they may be. Here is to a new year, at least a 24 day old one.

Organizing my finances: Cleaning my house

A quick aside: It really is amazing just how quickly things can change in little as a week. Last week, I was preoccupied with the notion that I might not receive an interview invite from the schools I applied to during this cycle. This week, I am now trying to balance scheduling two three interviews into an already demanding work and life schedule. Go figure.

Now on to the post:

As I am applying to schools, it becomes painfully clear that I need to take a more active role in managing my finances if only to ensure that I am indeed building wealth and not spending income frivolously. I had passively tracked my spending and savings habits but hitherto, I have never considered creating a system that would track all aspect of my finances and present it in readable data for my convenient analysis. This newly documented system will allow me to efficiently track asset management, track progress towards financial goals, and see just how effectively I can abide to such a structured system. More importantly, by tracking the management of all my finances, I can benchmark my actual performance and/or growth against forecasted results and adjust the system to match my tolerance for risk.

From just from a quick brainstorming session, I’ve jotted down a few guidelines that should get me started in creating such a system.

1. Live below my means
   1. This is quite straight forward. There is no surer way to grow wealth than to live below one’s means. This is the first step of a successful strategy
2. Pay down loans or financial liability (credit cards, student loans, etc)
   1. I have student loans and other loan obligations that I pay each month. Most of these obligations carry low interest rate and does not present a disaster to my financial wellbeing but the sooner I pay down these obligations, the sooner I can shift my assets into a more efficient wealth generator.
3. Invest for the future
   1. The only stride I have made is this category is contributing the 2007 maximum amount into a Roth IRA at Vanguard. I plan to diversity into other investment tools including 401K, rental properties. As time permits, I will begin to devise the structure of my asset allocation plan.
4. Increases sources of income. Do not be limited to active income
   1. I plan to take active steps in increase my current income flow, both from active and passive sources. I see no need to be limited by one active income and constantly worry about maintaining that source of income.
5. Decrease tax liabilities: Be tax efficient
   1. The idea of this strategy might at first seem to run counter to the rest. By increasing income streams and generating alternate investment and income opportunities, I only succeed in progressively pushing myself into higher tax brackets. The logic though is to consider the tax implications of all my financial vehicles and decision and reduce tax liability whenever possible. There is no reason to pay Uncle Sam more taxes than I am legally mandated.
6. Keep It Simple Stupid (KISS)
   1. This is important for the future as I imagine that I will someday combine my assets with that of my spouse. I need to create a system that can be tracked without requiring a degree in finance. While simplicity is a pre-requisite for a sound financial merger, its effect on maximizing wealth should not be taken for overlooked.

I will track my progression by calculating my total Net Worth, which in layman terms equates to total assets – total liabilities.   

Caveat:

Any hint or reference in my writing concerning my choices of my investment tools, style or product should not be construed as a recommendation to buy, sell, or trade any of the securities mentioned. The investments are fit and tailored to my specific situation and in no way do they factor specific or extenuating circumstances regarding any persons but myself.

I will update the Legal Indemnification page (might rename the page) to reflect this warning. Please note that the indemnification will apply from the date of its writing whether a reader so chooses to read its text or not. By continue to read this blog, you accept the terms of the indemnification.

The Day I Stopped By The Emergency Room

To begin, a little introduction

About six months ago, I went to the dentist to fill a cavity in my lower left molar that had become infected. The dentist severed the nerve under the tooth and filled the cavity (root canal). The dentist wanted me to return to be fitted for a crown on the tooth but I chose not to return for the crown because of two reasons. (1) A crown is not always necessary after a root canal and (2) A crown is expensive. To have a crown fitted, the tooth would have to be sized and a mold created, that would guide the dentist in creating a crown to cover the tooth. The crown is used to protect a tooth with a compromised structural integrity to protect the tooth from further damage. My insurance only covers 50% of the cost of a crown, which runs anywhere from $600 to $1000 depending on how generous the dentist is. I decide to bypass the crown and just continue with the filling.

On Saturday, the same tooth stated giving problems again. I took some of the ibuprofen I had laying around, and withstood about twenty minutes of squirming in pain (thanks for the support babe) before the pain went away. Sunday morning, I awoke to the ache and I took another round of ibuprofen. Everything was fine until lunch at around 1:30pm. About ten minutes of finishing my lunch, the pain returned with a vengeance. Even after taking another set of ibuprofen, the pain refused to subside. I knew that I needed a stronger pain medication, but on a Sunday afternoon, my options were limited. I had to make the decision – Take a monetary hit and make my way to the Emergency Room (ER) in order to get a prescription for stronger pain reliever.

At 2:00pm, I arrived at the local ER, signed in and sat in the waiting room. I had brought a icepack that I was held to the side of my face to relieve the pain. I was in obvious pain here, but the neither the nurses nor the staff at the ER were too concerned. They had probably seen this patients in pain before, perhaps even worse, and they went on with their task unperturbed by the gentlemen with an icepack, grimacing in pain. Fifteen minutes later, I was called in to see a triage nurse who, even after my protests, took my blood pressure, pulse, temperature and asked numerous unnecessary health questions (no nurse lady, I do not take drugs. Yes nurse lady, I have insurance, no lady, I have no history of arrhythmia, I’m 23…blah, blah, blah). I knew I was going to be charged for this triage visit, and I asked the triage nurse how much this consult would cost. She couldn’t tell me because she didn’t know. She was able to tell me that I was a healthy, in-shape twenty three year old, but that was the extent of her magic. I was going to be charged for a series of unnecessary tests and I did not even know the price I would face. So much for market pricing and consumer choice. So much for efficient market hypothesis, Dr. Eugene Fama. I was resent to the waiting room where I briefly sat until a staff came over and collected my insurance information. Another round of waiting and I was later led to a room through the emergency room where a nurse (RN) came and did a quick examination. After looking into my mouth, she determined that I had an infection in the tooth and the exposed nerve was probably irritated (I really did attempt to restrain my “Duh” reflex). She left, and another thirty minutes later, a doctor (MD) came in, did the same examination and gave the same diagnoses as the nurse. He wrote a prescription for Penicillin and Percocet and I was discharged. At this point, it is 3:15pm. Not too bad, an hour and a fifteen trip to the ER is really a gift. I had witnessed longer line in other ERs during my volunteering days, but those were usually at nights during the weekdays. Still I considered myself lucky, and with a prescription in hand, I drove to CVS and fill the prescriptions. I paid the $2 co-pay for each of the prescription, head back home and took one pill of each. Pain over. Dizziness here I come.

Summary

Total Time: 1 hour and 30 minutes

Total Consult: 3. Triage nurse, emergency room nurse and a medical doctor

Total Cost (By insurance/by consumer): Unknown / $4 so far. ($0 to insurance, $195.80 by me)

Lesson Learned: I wish there was an easier, if not cheaper, alternative to get pain medication on a Sunday than going to the emergency room. The local ER had their rules and procedures that I was unable to bypass which will ultimately add to my total bill. Each time I met a different medical provider, they were unable to tell me just how much it will all cost, but they all said something similar to, “Don’t worry, you have insurance.” It’s impossible for a consumer to price compare, or even refuse or reject certain medical care when the consumer is unaware of the final cost of the procedures. Yet all the procedures today were mandatory (so I was told). It was the only way to achieve the end. Even now, I still do not know how much the ER visit will cost and I’ll just have to wait for the bill. Tomorrow, I’ll call an oral and maxillofacial dentist (a dentist doctor). Forget the crown; I’m taking the cheaper option. I’m pulling the tooth. 

Was it worth it: Of course. With the pain medication, I was able to continue with my day. The deadline to submit the Stanford GSB’s application is tomorrow, and because of the Percocet, I’ll was able to finish the application. Plus, I’ll be pain free until I can have the tooth pulled, which hopefully I can have done next weekend.

Is Short-Term Profits & Loss (P&L) More Important Than The Consumer: A Human Interest Case Study On The Effect Of “Throttling” By Blockbuster (Part 2)

Disclaimer: This is a rant post

Blockbuster has now followed Netflix’s poor customer relations strategy: reel the customers in with too good an offer, and then piss on them after they’ve comfortably settled in. After all, where else is the customer going to go? Blockbuster is currently arming itself to compete more efficiently in the market (see: Movielink acquisition) but somewhat fails to focus on appeasing its subscriber base. To Blockbuster, we, the consumer, must be sacrificial pawns in its ongoing battle with Netflix.

Can Blockbuster take over and become the significant player in the industry? Maybe, but Blockbuster should take care not to ignore the following points

1. Netflix will not stand idle, and if Blockbuster makes no attempt to differentiate their online rentals, it might face an uphill battle in its attempt to wrestle market share from Netflix.
2. Even with a high barrier of entry in the market, there is still a remote chance that a new competitor can enter and offer something that consumers are still yearning for: service.
   1. Does anyone smell a Netflix – Microsoft union? Fool.com dares to venture.
3. DVDs might become a technology of the past as the on-demand movie services and other streaming and downloadable movie site are only starting to increase their offerings.

But who is to tell. With its Brick and Mortar stores, Total Access Plan and now Movielink, Blockbuster has become the three headed Cerberus of the online dvd industry; fighting off competition from all three sides. Only time will tell how the market will play out, but for now, my money will go to Blockbuster until someone offers me a better deal. While I am at it, I think I will purchase some Blockbuster DRIP.

Is Short-Term Profits & Loss (P&L) More Important Than The Consumer: A Human Interest Case Study On The Effect Of “Throttling” By Blockbuster (Part 1)

Disclaimer: This is a rant post. I will post such disclaimers on subsequent rant posts so that you, the reader, can decide to skip over the post if you so deem necessary.

A while back, I took the plunge into the world of online dvd rentals and signed up for Blockbuster’s service. I signed up for their “Total Access Plan”, which offers – 3 dvd at a time, unlimited rentals per month, free in-store exchanges, and a monthly coupon good for a free in-store dvd or game rental at $17.99 per month. I had never signed up for Netflix because I could never find a reason to justify the monthly price in my budget allocation. When Blockbuster entered the market and offered these additional benefits (at the time, Netflix only offered unlimited rentals per month), it became easier to justify this expense because the potential to drop the cost per dvd to as low as $1 or $2 a month was tantalizing. Each dvd I received in mail could be viewed, and exchanged in-storefor a new dvd at no additional cost. Couple this with the one free dvd rental per month, and a clever mind (such as I would like to credit myself with) can devise a system where one could potential receive one new mailed dvd per day and exchange it for a new in-store dvd as quickly as it takes to watch the dvd and drive to the nearest Blockbuster store. If a consumer engages in this system, and is only limited by consumer-side bottlenecking (how fast they can watch and return the dvd), the consumer could ideally watch sixty-one (61) dvds in any given month (thirty mailed dvd, thirty in-store exchanges, and one free rental). Facing an $18 per month subscription fee, the consumer has effectively reduced the cost per dvd to $0.29. Compare this with $4.99 for a one time in-store dvd rental, $20+ for a cinematic experience (assuming you pay for a guest) or $1.99 for a on-demand cable movie. I personally had never rented 61 movies in a month, but even 15 movies rented per month, a cost of $1.20 per dvd, is still substantially cheaper than most other commercially available options.

Recently, Blockbuster has succeeded in stealing considerable market share from Netflix (who only provided online rentals and a paltry selection of online streaming movie) who could not compete with the free in-store exchange option that Blockbuster offers. Although Netflix is still the larger of the two in terms of total number of subscribers and market capitilization, Netflix experienced a drop in its total subscription base this quarter, a first in its history. A look at Netflix’s recent quarterly statement reads somewhat akin to “It’s all Blockbuster’s fault,”

In late 2006, Blockbuster launched its integrated store-based and online program, Total Access, whereby Blockbuster online subscribers may return DVDs delivered to them from Blockbuster Online to Blockbuster stores in exchange for an in-store rental. We have seen Blockbuster aggressively promote and price their Total Access program through in-store promotions and sign-ups as well as advertising on television and other mass-media channels and Blockbuster has indicated their intent to continue to aggressively grow their online rental business through the remainder of the year. As a result, we anticipate that growth in our subscribers and revenue will continue to be under competitive pressure for the remainder of 2007…
In the second quarter of 2007, we lowered the prices of three of our most popular subscription plans. As a result, we expect revenues to decline during the remainder of 2007. We expect revenue to slightly decline during the three months ended September 30, 2007 as compared to the three months ended June 30, 2007, due to the lowered prices of our subscription plans, coupled with the decline in average monthly revenue per paying subscriber resulting from the increased popularity of our lower cost subscription plans, partly offset by growth in our subscriber base.

With a major competition on the defensive, Blockbuster now apparently looks poised to turn on the same subscribers it recently gained. A recent pricing scheme change now introduces “Total Access Premium Plan”, a plan identical to the Total Access Plan in terms of benefits, but at a higher price; $24.99. Blockbuster also cripples the “Total Access Plan”, which retains the same price, to only allow for five in-store dvd exchanges. The previous pricing scheme had been a replica of Netflix’s prices with in-store exchanges tacked on. Blockbuster, apparently content with its position in the market, is seeking to boost its P&L statement.

This would be little cause of alarm, albeit an unwise strategic move. However Blockbuster started “throttling” its rental service, a business model that Netflix had employed which enabled it to lose many of its customers base. Throttling is the act of slowing down the amount of dvds that a subscriber can receive per month. The online rental company injects a supply side bottleneck, which effectively disrupts the pace at which a subscriber can receive new dvds. This is usually accomplished by delaying shipment of new release dvd, increasing errors in shipments, and decelerating the rate of registering and tracking dvd movements (when a dvd is reported as received, a new dvd is shipped: for Blockbuster, a dvd exchanged in-store qualified as a rental and effected the shipment of the next dvd in queue), or shipping from service centers farther away from the consumer. It is important to note that Netflix recently settled a class action lawsuit regarding throttling of its subscriber’s service. The driving argument behind the litigation was the claim Netflix “engaged in fraud, deceit, and misrepresentation; had committed a false advertising and unfair trade practices…” by throttling a service it claims to offer unlimited rental. After the settlement, Netflix amended its Term of Service (TOS) to introduce language informing subscribers that it engages in “smoothing” out its operation. A look at Blockbuster’s recent TOS tells a similar tale.

BLOCKBUSTER Online will automatically ship titles to you, up to your maximum number of outstanding BLOCKBUSTER Online Rentals, from and in the order that you have listed in your rental queue, subject to availability. However, BLOCKBUSTER Online reserves the right to determine product allocation among members in its sole discretion. In determining product allocation, we use various factors including, but not limited to, (i) the historical rental volume for each subscriber, (ii) historical number of outstanding rentals relative to the maximum number of outstanding BLOCKBUSTER Online Rentals allowed under a subscriber’s plan, and (iii) the average rental queue position of BLOCKBUSTER Online Rentals that have shipped to a subscriber in the past.

TO BE CONTINUED