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Interview With a Short-Seller

I'm convinced television programming is going to go over the Internet, an open system that's the most efficient distribution network ever created. This I see very clearly happening -- people setting programming for Internet standards. The Bells wiring fiber optics to get into the video business is going to be over an Internet standard.

Everybody will be selling broadband access as a commodity. In such a world, a cable or satellite company packaging channels with some choice but not much and charging you 40% off the top is insane. At the end of the day, the cable company is the middleman. In a digital world, middlemen margins get crushed, because the marginal cost of transmitting a bit of information is zero. If you are a middleman with a closed architecture, you're in a world of trouble. You might not feel it in 2006 or even 2008, but longer term you're doomed.

Who else is on the wrong side of a technological wave?

We believe Eastman Kodak (EK) is a classic value trap, in the midst of an analog-to-digital transformation. Any debate on the extent of the transformation in photography is over. Even professional photographers are all going digital, which tells me a lot.

Historically, value investors have found opportunity in declining businesses with companies that could milk cash flow and make smart investments elsewhere. The idea, properly so, was that you could get a free call on any new-business upside because the stocks were so cheap.

This isn't happening anymore in areas of rapid technological change because the cash flows evaporate faster than you ever dreamed. Eastman Kodak's free cash flow last year was $500 million. It was roughly $1 billion in 2003 [and] $1.5 billion in 2002. We think the company goes out of its way to obfuscate it, but that's really from the decline in its cash-cow business of film. We think they have a reasonable chance of having no cash flow this year and going negative next year.
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