George Mannes

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The Five Dumbest Things on Wall Street This Week

George Mannes

1. What Goes Upload Must Come Download

Here at the Five Dumbest Things Research Lab, we're all in favor of blind justice. The problem comes when blind journalism follows close behind.

Yep, that's what we decided this week after close examination of a story that dominated the business press late last month. We're talking about the legal battle between Verizon (VZ Quote) and the music industry trade group known as the Recording Industry Association of America.

At issue, you may remember, is a subpoena that the RIAA sent to Verizon last year as part of the record industry's battle against illegal sharing of copyrighted music. Citing the authority of the Digital Millennium Copyright Act, the RIAA asked the phone company for information that would identify a certain customer that the RIAA alleged participated in the KaZaA peer-to-peer file sharing network. Verizon, arguing that the RIAA was misinterpreting the music copyright act, refused. That's when the lawyers got busy.

The RIAA vs. Verizon case, by all accounts, is a crucial legal clash as far as Internet cases go. It pits privacy rights on a collision course with the protection of intellectual property rights in the digital age. It's seen as a key courtroom battle in the music industry's attempt to smash online piracy -- a case that may have as much impact as the one that knocked Napster on its rear.

So you'd expect that in a high-profile case like this -- one that conceivably will end up on the doorstep of the Supreme Court -- the judge in the case, U.S. District Judge John D. Bates, would make sure he got the basic facts of the case straight.

You'd be wrong.

Yes, when Judge Bates issued a ruling in favor of the RIAA on Jan. 21, here's how he described a key action on the day last summer when the RIAA served its subpoena on Verizon: "Along with the subpoena," wrote Bates on page 6 of his opinion, "RIAA provided Verizon with a list of more than 600 files (predominantly individual songs, most by well-known artists) allegedly downloaded by the user in one day."

Except that's not what the RIAA gave Verizon. According to both sides of the case, RIAA's list didn't comprise files that the anonymous user had downloaded -- that is, copied from elsewhere on the Internet onto his anonymous computer.

No, the list contained files that the anonymous user was willing to upload. They were files already on his computer that he was willing to share with others via KaZaA.

Got that straight? Not downloading, but uploading. And not even uploading -- simply ready to upload. The RIAA made no allegation as to how many copies of the files at issue were actually made from the files at issue.

Compounding Judge Bates' error, numerous news outlets repeated the "downloaded 600 files in a day" accusation. People who should have known better. Institutions you would think get tech. Places like CNBC. CNN. Reuters. The Washington Post. The San Jose Mercury News. The Atlanta Journal-Constitution. Newsday. And, oh yeah, TheStreet.com.

OK, we know what you're thinking. You're thinking, download, schmownload, what's the difference? Piracy is piracy, no matter what end of the transaction you're on and no matter what pace you do it at.

Maybe so. After all, representatives of both the RIAA and Verizon say the factual mix-up doesn't really make any difference in Judge Bates' opinion. This is no Perry Mason detail that's going to turn things around for Verizon.

And yet, and yet. It's not just a legal battle being fought here, but a public relations one as well. And on the PR front, this particular error weighs heavily in the RIAA's favor. After all, what sounds more heinous when you read it in your local paper of record: offering to share 600 files? Or stealing 600 songs in a single day?

Separately, says Verizon Communications general counsel Sarah Deutsch, the confusion is emblematic of larger problems with Judge Bates' ruling, which Verizon is appealing. "It's evidence that they're not really paying attention to the technical issues at stake," she says. "It's just another thing the court got wrong in its decision."

2. It Takes iVillage to Issue a Form 8-K

Speaking of problematic journalism, get a load of the statement that female-focused Internet publisher iVillage (IVIL Quote) filed at the Securities and Exchange Commission on Wednesday.

It seems that in this past Monday's edition of The Delaney Report -- a weekly newsletter targeted at advertising and media executives -- iVillage CEO Douglas W. McCormick was quoted as saying, "We lost $30 million in 2001, but broke even in 2002 and consider that a tremendous accomplishment."

One little problem, apparently. iVillage hadn't yet reported its 2002 financial results, and doesn't expect to report them until Feb. 12. Thus, one might think that the lucky subscribers to the Delaney Report were enjoying a sneak preview of a type allowed rarely, if ever, in the world of publicly traded companies.

No such luck, of course. McCormick "had been misquoted and his remarks taken out of context," says iVillage.

McCormick's comments, says iVillage, "generally referred to the fact that iVillage had reported a loss of approximately $31.9 million on an Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") basis (pro forma as if the June 2001 acquisition of Women.com Networks, Inc. had occurred on January 1, 2001) in fiscal year 2001, excluding certain one-time and non-cash charges, and that, through the first three quarters of fiscal year 2002, iVillage reported an EBITDA loss of approximately $0.4 million, excluding certain one-time, restructuring and non-cash charges. For the same periods, iVillage reported a net loss of approximately $48.5 million and $26.5 million, respectively. For more details regarding these financial results, please refer to iVillage's Report on Form 10-K for the fiscal year ended December 31, 2001, Report on Form 10-Q for the quarterly period ended September 30, 2002, and its respective press releases announcing its financial results for those periods."

Yes, time period confusion aside, we're sure that McCormick didn't say something as simple as, "We lost $30 million in 2001, but broke even in 2002."

Indeed, no doubt he said something like, "iVillage had reported a loss of approximately $31.9 million on an Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") basis (pro forma as if the June 2001 acquisition of Women.com Networks, Inc. had occurred on January 1, 2001) in fiscal year 2001, excluding certain one-time and non-cash charges, and that, through the first three quarters of fiscal year 2002, iVillage reported an EBITDA loss of approximately $0.4 million, excluding certain one-time, restructuring and non-cash charges. For the same periods, iVillage reported a net loss of approximately $48.5 million and $26.5 million, respectively. For more details regarding these financial results, please refer to iVillage's Report on Form 10-K for the fiscal year ended December 31, 2001, Report on Form 10-Q for the quarterly period ended September 30, 2002, and its respective press releases announcing its financial results for those periods."

Obviously, those Delaney Report people -- who didn't return a phone message we left them -- just weren't paying attention.

3. The Burgers of Calais

Little did we know that when we started writing about McDonald's (MCD Quote) Happy Meals, we'd be opening such a can of worms.

Not literally, of course.

No, we're generally referring to some ground-breaking research we published last month -- our shocking discovery that after decades of selling nutritious children's meals accompanied by a single plastic toy, McDonald's had started selling nutritious children's meals accompanied by two plastic toys. For the same price.

This two-trinket policy, we quickly decided, was evidence of the deflation that some economists say haunts our economy. Our theory was confirmed, we decided, by subsequent sightings of all-you-can-eat deals at the IHOP (IHP Quote) pancake chain.

Happy Meal Index

Unfortunately, contradictory research keeps rolling in.

First, some email from Jeff Kagan, a vice president at supply-side research firm Polyconomics. "Kind of hard to argue about deflation when gold is hovering north of $350 and the dollar is slipping into the abyss," Kagan writes. "McDonald's dropping prices is a sign of competition, not deflation. Oil is spiking, and I would argue very strongly that that is a much more important indicator of price strength than the price of a hamburger in an overly competitive marketplace."

Seems plausible.

We must also acknowledge the fine journalism practiced by the competition over at The Wall Street Journal. No doubt embarrassed by our Happy Meal scoop on Jan. 17, the Journal fought back. They fought back hard. They assigned two reporters to the breaking story. They labored on it for nearly two weeks. Unlike us, to their credit, they even spoke to people from McDonald's to learn what was going on.

And the conclusion of their investigation, published Jan. 31? Sales of Happy Meals are declining, for a variety of possible reasons. Two-toy meals are a means to get rid of excess inventory.

So our deflation story was deflated. But we in the first-draft-of-history business still hold our heads high.

4. Deere-ly Beloved

Speaking of toy stories, we'd generally refer to a Wednesday press release from agricultural equipment manufacturer Deere & Co. (DE Quote) as our nominee for Pointless Press Release of the Week.

Apparently, the die-cast John Deere tractor introduced in 1947 -- back when Deere, like Cher, went by two names -- was one of the 100 toys included in The Toy Industry Association's "Century of Toys List," issued to commemorate the 100th anniversary of the industry group's annual trade show.

So John Deere's tractor is up there with the Betsy Wetsy doll, the Furby, and the Mighty Morphin Power Rangers.

We're so proud.

5. Coming Soon: Improving Your Car's Gas Mileage by Demolishing the Engine!

Finally, speaking of nutty press releases, this week's George Orwell memorial "Two Plus Two Equals Five" award goes to Circuit City (CC Quote), for its announcement generally referring to "Customer Service Initiatives."

As the electronics retailer explains up high in its Wednesday press release, its objective is to create "Information-Rich, Easy-to-Browse and Shop Stores."

So how will Circuit City make its stores easier to shop? Why, by eliminating 1,800 salespeople -- approximately three per store.

Well, that's a great way to streamline shopping at your local Circuit City: reduce the chances of a salesperson blocking the aisle.

Of course, what Circuit City is doing here is acknowledging what consumers of consumer electronics have already figured out: No matter where you're buying these days, if you want detailed, accurate information about a prospective purchase, do your homework on the Web. Plus, Circuit City is trying to save some money. But calling this an initiative "to create a simpler more efficient company with a singular focus on meeting the shopping preferences of consumers in America's dynamic retail marketplace?" We'd generally refer to that as Dumb.