March 2008

Curse of the Legacy

It happens a lot this time of year.  Companies that prepared their calendar year budgets are now implementing those budgets and many are finding that when they squeezed out their capital expenditure(capex) budgets late last year, attempting to manage their bottom line, that they were a bit short sighted in realizing how much capital expenditures  they really needed.

It can be especially exasperating as often these budgets were revised over and over until finally approved.  You have seen that and so have I.

Individual departmental or divisional budgets may initially seem to be in line.  However, when the overall picture for the entire company is put together, the grand total may be more (or less, depending on your perspective) than the senior execs and/or the board will approve.

Sometimes it is due to the requests for additional headcount, other times it may be due to various overhead items.  Often though it is due to operations departments requesting more for their capital expenditures than will be approved.   

While some managers may have excessive requests, too often they make reasonable requests, but are caught by the curse of the legacy. 

What is this?  Legacy equipment is equipment that the company has had for some time, but for a variety of reasons does not want to replace, even though replacement is overdue.  “It runs, right?” is the frequent response to the request.

It is the recurring challenge companies large and small face as they attempt to replace and upgrade equipment.  It happens in a lot of companies, but most often in companies in relatively low margin businesses. 

Often companies buy a significant amount of equipment during their start up days and then add to it regularly as the company grows, spending for expansion based on new projects that have come in, thus increasing capacity.  But, when the company stabilizes, finding the additional capital to replace old equipment becomes a challenge. 

The reasons for this are many. We have heard (and at times provided) the explanations or the rationalizations.  Sometimes the equipment is so busy that it just cannot be taken out of service.  Sometimes, management decides that it is just better to continue to fix it rather than to replace it.  That is commendable, but at times, the cost of incessant repairs, including the hidden cost of employee morale is greater than the cost to replace.

And even though many companies do not upgrade and replace equipment as often as may be necessary due to financial pressures, when the company is sold, the new owners often undertake the upgrade and expansion process to put their stamp on the facility.  Often the cost to do so is part of their financial analysis upon which their bid price is based.

So, what is the solution?  It is not easy, especially when there is always something more pressing to spend on.  We have all encountered that.

However, it is vital that the companies have a set system to consistently examine their equipment usage, purchase dates, repair and maintenance records and the upgrades that are available in the marketplace.  This is, of course, dependent on their ability to maintain adequate records.

In our discussions with various production and post production organizations, for example, some see the current standard definition to high definition transition as a time when it is opportune to drastically upgrade or be forced out of business.  While this has been a process that has been ongoing for several years, in the next year more channels will be HD and thus the supporting infrastructure will be required.  They can't be caught by the curse of the legacy.

Other facilities, with the ongoing switchover to file based systems are re-inventing their pipelines to accommodate more efficient methodologies at all points in their processes.

DirectTV has been working on a major upgrade with many added HD channels and the cable systems will need to follow suit.  The telco systems, namely FiOS and U-verse appear to have HD at the heart of their systems.

In the final analysis, to be sure not to be caught by the curse of the legacy, companies will need to put more thought and effort into their financial planning processes.  This should include a master capital expenditure plan to examine the needs for the next three to five years and it will need to be reviewed and updated on a regular basis.

A more formal approach than what is present in many organizations can help to stave off the curse.

 

Trends in the Marketplace

Next generation DVDs – in a prior newsletter, we discussed the format war.  While that war is now over, some of the issues that were inherent in the marketplace still exist.  Even with the prices for new HDTVs decreasing, they are still expensive for the mass market.  And the standard definition DVDs still look really good on the new HDTV, thus prompting many to forgo the next gen players.  So for the Blu Ray player to truly take off, the prices will need to drop dramatically, probably not becoming a mass market item until they reach $200 or less.  Time will tell if that will be this coming holiday season or more likely in 2009 before we see even a big step toward lower prices.

Electronic deposits – much of our banking is done online or electronically these days.  Some organizations have drastically reduced the number of checks that are written internally or they have used the online services of their banking organizations, although many are merely check writing services. 

While not exactly a brand new idea, we have seen the highly secure check scanning services that attach to our desktops whereby through a secure connection, checks received can be scanned and transmitted to the bank for electronic deposit. 

The future of TV – although 3D TV is on the horizon, and that is definitely a significant part of the future, this discussion relates more to the programming cycle.  The recent WGA strike has prompted several studios and networks to say publicly that they are re-thinking their programming/production strategies.  We think, and hope, that this is not just rhetoric.  It is something that impacts all of our businesses to varying degrees.

While the “new season” had traditionally started in September to coincide with both the end of summer and the rollout of new automobile models and related heavy advertising, it has been years since the car companies released new models exclusively in the fall. 

Movies are released throughout the year and TV has had mid season replacements for a very long time.  Soon we will see how serious the networks are for releasing new product on an ongoing basis.  After all, appointment TV has been dying for a long time and it is now time to reinvigorate product offerings throughout the year.

As for The Shindler Perspective

We continue our consulting work in areas ranging from brick and mortar projects to sophisticated digital tools and technologies. Here are some of the events in which we have been involved, some that are forthcoming and our closing thoughts.

CES –Since our last consulting newsletter, we have been to the annual Consumer Electronics Show.  CES continues to amaze us as to its growth, although after all these years of attending, it should not. 

Of particular note this year, Samsung's large display of 3D enabled TVs with DDD technology built in, the continued proliferation of wireless devices, a significant green presence at many booths and, of course, the OLED TVs (organic light-emitting diode). 

Although we had seen it demonstrated previously, it seems that Microsoft Surface made big gains this past year.  We look at this as being more prevalent in the next 3 – 5 years with the continued proliferation of smart products.

Further on the cool scale was the Cellulon virtual laser keyboard, the Neat Receipts portable scanner, iShoes, My Vu and many others too numerous mention. 

3D stereoscopic technology – As for our ongoing involvement in many aspects of the burgeoning 3D stereoscopic business, both Hannah Montana & Miley Cyrus: Best of Both Worlds Concert and U2 3D demonstrated how good 3D can be.  These two productions should be catalysts for jumpstarting the production of many more 3D movies.

Game Developers' Conference – We attended GDC recently on behalf of client Eyetronics.  This conference while not of the magnitude of CES or NAB, is well attended and presents the latest tools and technology for this rapidly growing industry.

National Association of Broadcasters – NAB is coming in less than 45 days.  On April 15, 2008 I will be moderating a panel at the Creative Storage Conference that is running in conjunction with NAB.  The panel is entitled Entertainment and Media Users Session, with panelists to date from Microsoft, Thomson, CNN/Turner and Stargate Films.  More on additional panelists will be posted on our web site as the information is available. Check back soon.

Digital Hollywood – Once again, I am going to moderate a panel at the spring Digital Hollywood entitled The Arrival of 3D - Digital 3D Platform for Feature Films and Television.  Further details for the Tuesday May 6, 2008 event will be posted on our web site as they become available.

And finally, we were pleased to learn that Facebook hired Sheryl Sandberg as COO.  This is an example of what we mean when we say that companies need a balance of creativity and technology on a strong business base.  Over the years, we have seen too many companies have problems because they have not placed sufficient importance on the business function.

If you have not been to iShindler.com, our web site, lately, Roberta and I invite you to visit.  The site includes a sample listing of the types of projects in which we have been involved, the companies with whom we have worked and our credentials.

We are always pleased to hear from our friends and clients.  We look forward to hearing from you.

 

For The Shindler Perspective, Inc.

Sincerely,

Marty Shindler

MBS/m