Sumner Redstone was in a pickle. Viacom stock was stagnant and appeared to be going nowhere despite the company’s diversified media holdings. Wall Street analysts felt that the stock was going nowhere because the fast growing parts of the company (the movie studios and cable networks) were being held back by the slower growing parts. (CBS, the theme parks, etc.) Therefore, the Wall Street brain trust thought that the company should be split into two. Eager to see the stock begin rising again, Mr. Redstone did exactly what Wall Street told him to do; he split the company into two parts- Viacom and CBS. (With CBS getting all the slower growth discards, like the radio stations, outdoor advertising group and theme parks.) What everyone expected would happen is this; the stock for “Viacom” would jump up to equal, if not exceed, the value of the old company. The smaller valued CBS part would be icing on the cake. Instead, the mighty Viacom part is stagnating while CBS is leading the pack.
What went wrong and why was this a stupid thing to do? First off, a diversified company can be strong even in down times because chances are that not every segment is lagging. A full sized Viacom could weather any storm because if one side had a problem, then maybe there would be somewhere else that wouldn’t, thus balancing things out. Splitting into two actually made things worse; if CBS’ ratings plummet, the CBS side will get hit hard. A bad summer at the box office for Paramount is monumental if there isn’t much else to balance that out.
There are other problems on the horizon. CBS has the means to begin making films of its own. CBS could also choose to use its cash flow to buy cable networks as well. This could make CBS a viable competitor to Viacom because it has a valuable distribution method; the network itself. CBS could practically guarantee that its movies get network cash and exposure. Viacom can no longer provide this guarantee for Paramount.
A pretty good example of the stupidity of this decision is best illustrated by the popular Star Trek franchise. Star Trek began life as a production of Lucille Ball’s Desilu Productions. Paramount bought out Lucille Ball and got the rights to Star Trek with it, a franchise that it has successfully exploited with Movies, merchandise licensing, themed entertainment venues and TV spinoffs. While the Star Trek universe has been in a downturn recently, it is still a valuable franchise that is set to be rebooted soon in a new feature length film from Paramount Pictures… But wait a minute! Who got the rights to Star Trek? Apparently it was CBS, so the near perfect synergy where Star Trek reruns could appear on Viacom Cable Networks, Paramount Films and DVDs and the UPN broadcast network (Now CW) has been disrupted. Who gets the new Star Trek film? Who releases the DVDs? Where does the licensing money flow? With CBS and Viacom being run as completely separate companies, neither side can legally dictate licensing terms. What was once a centrally managed and controlled billion dollar franchise has been artificially dismantled, solely for the benefit of short sighted Wall Street analysts.
So, while the jury still is out on whether this will be a good idea in the long run, Mr. Redstone has proven that he isn’t as capable a manager as he’d like us to believe. By breaking up the media empire that he built up just because Wall Street said he should is a baffling decision that hasn’t yet provided the short term results he hoped to gain, which is why the Viacom Split is one of the stupidest things that happened in 2006.
Wal-Mart’s stupidity actually started in 2005. Before the start of the holiday shopping season, the retail giant’s CEO announced that for once, the company was going to sit out the pricing wars. Wal-Mart’s customers love to shop there because of how great Wal-Mart is and not just because of low prices, he noted. Wal-Mart would not try to compete on price and just sit back and enjoy a hugely profitable holiday season. Then “Black Friday” came, sales were dismal and Wal-Mart panicked. Wal-Mart instantly realized that Christmas 2005 would be a huge disaster if they didn’t try to salvage things, so they took the unprecedented step of taking out advertisements in local newspapers to spread the word that Wal-Mart was cutting prices. What started out as a dismal holiday season turned into a modest success. Crisis averted!
So, did Wal-Mart learn its lesson that customers only shop there because of their low prices? Not really, because Wal-Mart made a bold move in 2006- they decided to go upscale to attract the freer spending Target demographic. You see, Target seems to attract a higher income customer who is less sensitive to prices. By recruiting fashion designers and selling trendy merchandise, Target has gained a cachet that Wal-Mart could only dream of. While many people flock to Wal-Mart to buy low or no margin items, Target is where folks go when they want designer clothes without designer prices, home decor and other high margin, hugely profitable merchandise. When gas prices hit record highs, the average Target customer wasn’t hit as hard and kept buying the high margin merchandise. (In fact, Target probably was the beneficiary of a lot of people who traded down and bought more clothing from them instead of at more expensive department stores.) Wal-Mart was stuck watching from the sidelines, because hardly anyone thinks of Wal-Mart as a place that is in step with the latest fashions.
So, instead of sticking with what it knew best and perhaps tightening the belt a little more, Wal-Mart decided to go upscale. Gone were the typical Wal-Mart ads featuring actual southern accented employees and customers extolling the virtues of shopping at Wal-Mart. Instead, Wal-Mart’s new ads featured professional actors who were enjoying fast paced and fancy lifestyles. They could have it all and save money by shopping at the Wal-Mart, the ads suggested. The clothing and housewares departments were full of higher margin but trendier merchandise that would hopefully bring in big spending teens who most likely spent their allowances down the road at Target. Wal-Mart executives probably sat back and waited for the sales to come rolling in.
What they got instead made last year’s holiday season look like a banner year. First off, Wal-Mart didn’t do a good job of convincing the “Tar-Zhay” crowd that they now had merchandise that would appeal to them at reasonable prices. Merely changing the advertising and stocking the shelves with new merchandise wasn’t enough to turn around the dowdy image that the average customer had of Wal-Mart. Wal-Mart’s core customers were turned off by the more expensive clothing and houseware items they found on the shelves and cut back their Wal-Mart purchases even more than they had previously. There is no doubt that the newer items were a great value, but the average price sensitive Wal-Mart shopper just wants a ten dollar pair of jeans. It doesn’t matter that the twenty dollar pair is of the same quality as those found in department stores for forty dollars or more. So Wal-Mart was left holding the bag, stuck with tons of unsold low-rise jeans and cheap cashmere sweaters.
So Wal-Mart decided to start a price war, cutting prices even more, since their “Trendy Wal-Mart” experiment was such a colossal failure. Considering that Wal-Mart started cutting prices earlier this year and had a lousy November last year, one would have expected that they would at least eke out a modest increase this year. Unfortunately, Wal-Mart couldn’t even muster even a modest sales gain.
What did Wal-Mart do that was so stupid? They alienated their loyal customer base in search of higher profits from people who would never dream of wearing clothes purchased from Wal-Mart. They also didn’t seem to learn anything from last year’s sales debacle; people expect to find really low prices at Wal-Mart. They’d probably shop somewhere else if they could afford it, because the entire Wal-Mart experience of fighting crowds, standing in long checkout lines and getting very little assistance isn’t fun, regardless of what Wal-Mart believes. People tolerate going into Wal-Mart because they want to save some money. It took time for Target to build up the “Tar-Zhay” image. Wal-Mart wanted to build up a new image overnight.
Wal-Mart’s sheer size practically guarantees that these recent problems will be just a blip on the radar screen. Even without sales increases or high margins, Wal-Mart is still making more money than most of us could ever dream of seeing in our lifetimes. Wal-Mart can only hope that it can right itself before things get too bad, because as Wal-Mart founder Sam Walton once commented, there’s always someone else waiting to take Wal-Mart’s customers. And with things going the way they’ve been these past few years, it seems that Wal-Mart’s loyal customers aren’t as loyal as the company thought they were.
Arte Moreno made one of the stupidest decisions in baseball. Despite the fact that he had a loyal group of fans, eager to support the Anaheim Angels (Especially after their 2002 World Series win) and happy about the changes he enacted when he took over the team, he decided to rename the Anaheim Angels the Los Angeles Angels of Anaheim, a name that translates from Spanish as “The Angels Angels of Anaheim”. Despite the fact that he actually made this decision in 2005, a court sided with him against the city of Anaheim early this year, stating that he did not violate the terms of his lease by renaming the team.
So what was stupid about this decision and why did he make such a boneheaded decision to begin with? Mr. Moreno eliminated all the goodwill that he received when he took over the team and alienated the team’s hometown of Anaheim. (Which heavily subsidized the construction of the stadium, by the way.) That the name makes no sense when translated just adds to the stupidity. Why would he make such a decision? Well, it seems that there is more money involved in sponsorships and television money if the team were tied to a bigger town like Los Angeles instead of the lesser known Anaheim. (Though Anaheim is home to the one tourist attraction that nearly every traveler to Southern California visits- The Disneyland Resort.) Mr. Moreno figured that by simply re-naming the Angels, sponsors and locals would magically change their opinion of the team. Corporate leaders would say, “Sponsor the Anaheim Angels? No thank you. Sponsor the Los Angeles Angels of Anaheim? Where do I sign up?” Los Angeles residents would think, “I don’t want to drive all the way down to Anaheim to see the Angels. What? They’re the Los Angeles Angels of Anaheim now? They’re still playing in Anaheim? Who cares- I’m totally there!”
While all evidence points to this ploy not really working, the ridiculous name remains, primarily due to the ego of a billionaire who doesn’t want to admit that he made a stupid decision.
