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Coming Full Circle

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We're coming full circle and seeing the same businesses surge again.

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"This is it! This is the answer. It says here... that a bolt of lightning is going to strike the clock tower at precisely 10:04pm, next Saturday night! If we can somehow... harness this lightning, channel it... into the flux capacitor... it just might work. Next Saturday night, we're sending you back to the future!"

-Dr. Emmett Brown, "Back to the Future"


Each year I tend to assess where I stand in the scheme of my investments and my career. Having spent the past sixteen years in media and marketing, I've had a lens into what I believe is the future of this business. I certainly have had a chance to see the past. Timing is everything and we're at a major inflection point.

For the past month or so, I've been obsessing, feeling like I might be a bit out of step with what's happening in the marketplace. The media landscape is in turmoil right now. When you confuse an issue of AdAge for a flimsy Sunday circular, you know there is trouble in the media and marketing world. But where there's trouble, there's tremendous opportunity.

We're coming full circle and seeing the same businesses surge again. Technology and content are finally starting to synchronize and it's exciting.

A great strategist I worked with on Sun Microsystems (SUNW) (Mike Breen – Parallel Thinking) would offer the familiar quote attributed to Benjamin Franklin and Albert Einstein:

"The definition of insanity is doing the same thing over and over and expecting different results."

I would posit the definition of insanity is to NOT do the same thing over and over without expecting huge returns. The results are starting to appear and guess what, they are different than what we saw in the late 90's or during the dot bomb. Whether it's YouTube (a.k.a. the Kazaa/Napster/LimeWire of video), FaceBook or MySpace (the Geocities or Globe of present day) or the telephone business, I am seeing history repeat itself.

In 1998 I worked on launching Qwest (Q). Not U.S. West, but the Joe Nacchio Qwest that was progressive, arrogant and pushing the limits of bandwidth in the U.S. – Ride the Light was the line. Ultimately it became "Ride the Lie" for the investment community.

Qwest has built an infrastructure to handle massive amounts of data. The only problem was the data wasn't there. Now the data is moving in that direction and the companies of the past that survived are poised to surge again. They're doing the same thing all over again, but this time, they will see different results.

A great example of companies poised to fill these pipes are Netflix (NFLX) and Blockbuster (BBI). (Broadband is the saving grace of BBI's dying brand. Let's save that for another story. Although Netflix, a $22 stock, is down about 20% in the past three months and Blockbuster at $6 is up about 45% in the same period. Keep an eye on Blockbuster – don't call it a comeback yet.)

The other night Steven Colbert did a financial segment where he dissected the recent news that Cingular was now going to "de-brand itself" and become AT&T (ATT). Hey – we've seen this before, AT&T spun off AT&T wireless to create…you guessed it, Cingular. What comes around goes around.

Like you, I'm an investor. As an investor I look for trends and machinations in the markets that enable me to get the win and make some money.

For the past year, we have seen the excitement of Google (GOOG), YouTube and Myspace. We have seen Steve Jobs introduce beautifully designed devices that "revolutionize" the PC, phone, and video. 2007 will be one of the most tumultuous and revolutionary years in media and communications for the simple fact that people are starting to figure out what works. Actually, people are starting to figure out what worked and they're doing it again. Only this time, they are doing it without the limitations of bandwidth.

I wrote a piece about a year ago that there would be a battle for bandwidth in the coming years; that the cable companies and the telcos would duke it out. The race really heated up about a year ago when AT&T threw its hat into the ring with ads that touted phone, internet ,and video from one company. Verizon (VZ) also entered that pitch. Both recognized one thing: there are two kinds of devices, input and output. Input are the touch pads, the mouses (would they be "mice" plural?) keyboards and remote controls. Output devices are essentially screens. Plasma, LCD, cell phone to the new 108 inch Sharp that was just introduced at the Consumer Electronics Show.

So now the challenge comes down to the delivery and my outlook on who will win is changing a bit. I'm leaning more towards the telcos than the cable companies. The irony of this premise is pretty funny as I wrote this article Monday and in Tuesday's NY Post, there's an article on Cablevision's (CVC) business cannibalization by Verizon.

The cable companies are isolated. They own small footprints around the country and there is very limited consolidation in the space. The telcos have something called fiber. It was rolled around the globe like a giant ball of twine about seven years ago if not more. Global Crossing (GLBC), Level3 (LVLT), Qwest and yes, AT&T all laid fiber and they laid it on thick. They laid it on so thick that many of them almost went out of business. Well...they're back!

The cable companies don't have any infrastructure like this. Telephony is now at maturation with general standardization of processes and technologies. At its simplest level CTI or Compute Telephony Integration allows a lot of the features that synchronize computers and telephones globally. The processes to create and manage phone based data are mature and are rapidly being applied to the more bandwidth intensive data like video.

So, I'm putting my money into the telco hat. I'm banking on telcos buying content companies. I'm banking potential mergers like AT&T with a Time Warner (TWX) or Disney (DIS). Remember the rumors a year ago – Comcast (CMCSA) may make a bid for Disney? It missed the opportunity.

2007 will be the year of the telco. It will be the year when the telcos finally figure out how to acquire and better yet retain their user base. It's back to the future. It just took them about seven more years than I expected to figure it out.
Positions in: TWX, CMCSA, T
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