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ADAM SMITH'S MONEY GAME Missed the show? Get a phone call half way through? Fail to catch the name of a stock in "Personal Best"? In case you did, we are happy to provide you with a transcript. If you would like a transcript from a previous season, please visit 800-All-News at www.800-all-news.com or call them at (800) All-News. ANNOUNCER: [voice over] This program is made possible by a grant from MetLife, helping people become financially secure for 130 years. Funding has also been provided by the Roy R. and Marie S. Neuberger Foundation. ADAM SMITH: [voice over] In the Money Game this week, can Bob Pittman make AOL the next Microsoft? Will these images of America make you choose RC Cola? Does book selling on the Web spell the end of the bookstore? Can small cap stocks in your 401(k) help you do your personal best? Find out next. Face to Face ADAM SMITH: Hello, I'm Adam Smith and welcome to The Money Game. Is America Online the next Microsoft? Just a year ago, no one would have taken that question seriously. Now AOL is the hot company in the super hot Internet world. It's been called the Hertz of cyberspace with no Avis to challenge. ANNOUNCER: [excerpt from America Online commercial] Why is America on America Online? ADAM SMITH: [voice over] AOL operators are signing up thousands of new members each day and the company is making money by providing computer links to retailers. Can AOL stay on a roll? Bob Pittman, the man who made MTV a household word, is in charge of building the brand. Meet Bob Pittman, Face to Face. BOB PITTMAN: I happen to think, but it's my background, that brands win. I keep on my desk a can of Coca-Cola because whenever people get all worked up about this new functionality they have, I remind them Coca-Cola does not win the taste test. Microsoft Windows is not the best operating system. We live in America; brands win. ADAM SMITH: With more than 12 million subscribers paying a monthly fee of more than $20, America Online has emerged as the winning online consumer brand. It allows users to send e-mail, chat, follow their stocks, get the news, play games and buy things without leaving their desks. It is even starting to keep people away from that other glowing screen _ the tube. BOB PITTMAN: This is the first product that has taken time from the TV set in the household. And having done six cable networks, I do understand how important the TV set is. The TV set was so important people took time from eating to make more time for TV. They moved their dining room table in front of the TV so they could eat and watch TV. For something to steal time from the TV set _ it's really the first time in the history of television this has happened _ says it's a very powerful product. ADAM SMITH: [voice over] Wall Street is recognizing the power, sending AOL's stock price on a tear over the past 18 months. [on camera] Your stock has been a star _ $18 billion in market value, nine times revenues. What do you have to do to justify this price to Wall Street? BOB PITTMAN: As I look at it, we're essentially a high operating leverage business. We've passed break-even. High operating leverage is terrible when you're losing money, great when you're making money. This is a business that doesn't manage itself but is manageable, meaning that my goal as a manager is to try and keep expenses from rising as fast as the rate of revenue, keep a little lower ramp rate, keep our margin whole in the variable part of the business. If we do and the market grows like it does and we continue to do well, there's a tremendous upside. And I think the analyst's job is to try and calculate how big that is. I learned an important lesson at MTV. We built it for $30 million. It was sold for half a billion, thinking what a wild price. Today it's worth $8-, $10-, $12 billion? You tell me. ADAM SMITH: What about other forms of competition? The telephone companies? They have deep pockets? And the cable companies? All of these people already have wires into the houses. BOB PITTMAN: I think if you think competition, you have to think where are we getting our usage from? Where are we getting our members' time from? Where are we getting our advertising dollars? And it's really the television business for the most part. Most of the usage we're getting is coming from TV time, so I have to be focused and say we're competing with them every day, every night. When you think about advertising, they've got the advertising dollars. We're doing well _ we're small. If you look at the facts and figures, the ratings. We are up to now, our prime time simultaneous users are now approaching the size of CNBC, CNN, the cable players not yet at ABC, NBC, CBS. We have a long way to go. I think it's real easy for a company like ours to get distracted and say ``Let's just talk about other technology companies'' and we miss the real market we're playing in. And the real potential of this market is to be important in the home like the telephone and the television. ADAM SMITH: [voice over] Bob Pittman joined AOL about a year ago at the urging of Steve Case, the company's founder and CEO. Pittman had been at Century 21, the real estate company. Before that, he ran a division for Time Warner. Bob Pittman is best known as an early player in the success of MTV. He helped build that cable channel into a pop culture juggernaut, parlaying a career in radio that began when most people his age were hitting the books. Like some other entrepreneurs _ Bill Gates, for example _ Bob Pittman dropped out of college to go to work. BOB PITTMAN: My last year was supposed to be at the University of Chicago. I never showed up. I decided I'd wait out a semester and I guess I'm still waiting out that semester. ADAM SMITH: Do you think you missed anything? BOB PITTMAN: I think you really give up something by not taking that experience. I find I've learned a lot of things later in life that my friends learned in college. So I gave up a part of my development as an adult and deferred it in an effort to work a little harder earlier. ADAM SMITH: [voice over] At AOL, Pittman brings media and marketing savvy to a business that can be very techy. [on camera] Can you give me your vision for AOL in five years? BOB PITTMAN: The vision is that we continue to get embedded in people's lives, meaning we perform an important function; that the computer becomes as important in their lives as their television and their telephone; that the usage continues to grow; that we continue to eat into that seven hours a day the family spends with the TV set _ sorry _ and spends that time on AOL. And the service gets easier and easier and easier. We're not yet at instant-on TV. And if you think about how easy it is to have to get, it should get that easy. ADAM SMITH: Like a telephone? BOB PITTMAN: Like a telephone, like a television. You know, it's funny, when we're talking programming, we try not to kid ourselves. And we say first, is this important in someone's life? Yes. The next question is, is this really easier than the alternative? For example, there is a possibility to use AOL phone now. You know, you talk to somebody else. The reality is it's really easier just to pick up the phone and call somebody. So you say that's probably_ on the other hand, let's take e-mail. For me to write a letter, find the address, write it, put a stamp, go mail it, that's a lot more work than sending an e-mail. E-mail _ killer. It's great. Chatting _ the same thing. You know, for me to get dressed, go out, where am I going, drive somewhere. Or I can just talk here to people, not perhaps as robust an experience, but a lot more convenient, you begin to look and be able to predict which applications are probably going to do really well on line and which aren't. ADAM SMITH: Well, what will do well on line? BOB PITTMAN: Do you ever get pictures developed and try and do the scrapbook? I went on my honeymoon a few months ago. Sitting on my table in my den are still spread out all the pictures from the honeymoon and the photo album and they haven't gone in yet. Probably five years from now they'll be in a box somewhere still not put in. So we say, okay, we can add to that. So now we're looking at - take your pictures. When you get them developed, get the developer just to put them on line or you can take them and we'll put them on line, store them on line and just drag them and put them in your e-mails, put your own scrapbooks together on line and keep it all organized there. Now that's a real element of convenience. What are the other issues? When you turn on your computer, just have AOL come up. One of the complaints you have from people today is, you know, I really just want to go on line _ that's my primary use _ but I have to wade through all this other stuff to get there. That's going to become a lot more simple. But again, there's a lot of functionality in AOL that people don't know about. And a big part of our challenge is to get them to understand what it is and the value it has for them. ADAM SMITH: What do you want people to know that they don't know now? BOB PITTMAN: Instant message. Everyone knows instant message. I can't tell you how many people_ you know, I see them in New York or somewhere, and they say, ooh, I just love AOL. What's your screen name? And I'll write it down and put it on my buddy list. I see them on line. It pops up in buddy list and I send them an instant message. They're shocked. ADAM SMITH: What is instant message as opposed to e-mail? BOB PITTMAN: Instant message is, and if you're on AOL you get a little box called the buddy list. You add in anybody's screen name you want to and every time they're on line it will be in this box. It will appear that they're on line. And there's a little button down there that says ``IM'' for instant message. You click on it and suddenly a little box comes up. It's got their name tagged in it and you type them a message, push the button and send. Whatever they're doing, in front of them comes this thing _ bing! ``Hi. What are you doing?'' And you respond. You type back and you and I can carry on a conversation in a little box while you're doing other things on line. ADAM SMITH: [voice over] Bob Pittman is a minister's son, so it's no surprise that he's effective at preaching the gospel according to AOL. But his timing also seems to be right. BOB PITTMAN: I'm the lucky guy. I came in once the brand was built. I came in just as the company was ready to go into profit. The great genius Steve Chase had here was when everybody else was talking to technology people, Steve was building a mass market brand. [Graphic: AOL - Time On Its Side [Back to Top] On the Spot ADAM SMITH: Coke and Pepsi have been battling it out for years in every corner of the globe. But how do you fight the cola wars if you're number three? Royal Crown Cola has a new TV spot from the agency Blum Herbstreith and a new look. In a moment, Bob Garfield of Ad Age magazine will give his unvarnished verdict. But first, creative director Alan Blum, who created the commercial, is On the Spot. ALAN BLUM, Blum Herbstreith: The commercial is a day in the life, really, of America. The brand is an American icon. It dates back to the turn of this century. It is one of the_ it's the third cola brand. And it's decidedly American in the face of two cola giants who have kind of given up their American-ness to kind of take a bigger world view. We wanted to re-explore America and to redefine it for today. The image of the motorcycle going down the highway was a real_ an attempt at representing freedom and the excitement of an open road. The girls waving at the Fourth of July parade _ very American, very kind of true to our small town values as a country. The shot of the oil workers at the end of a hard day in the oil field, coming off of, you know, the sweat, the red heat of the earth and kind of drinking an RC. Again, a freedom to experience the end of a work day. ADAM SMITH: Bob, let's take a look at Alan Blum's commercial. [Excerpt from RC Cola commercial. SINGER: Homecoming queens with a twinkle in their eye. RC Cola and Fourth of July. It's a choice we're given, it's the life we're living. Right on to freedom's clear blue sky. ANNOUNCER: It's as basic as red, white and blue. The freedom to choose the taste that's right for you. It doesn't get more American than that. So be free, drink RC.] ADAM SMITH: It certainly sounds like Bob Dylan on the sound track, doesn't it? BOB GARFIELD, AD AGE Magazine: Yeah. It sounds like someone trying to sound like Bob Dylan. ADAM SMITH: So somebody sounding like that. It's certainly American, isn't it? BOB GARFIELD: Yeah, it is. And, in fact, Adam, my first impulse was to despise this commercial because of its pointed American-ness. I mean, I just_ the idea of just wrapping yourself in the American flag and saying that's why you should buy my product always truly upsets me on a visceral level. But after I got done being angry at this commercial, I thought, you know, this is really, really smart for RC Cola. ADAM SMITH: Because? BOB GARFIELD: Well, because their competition is Coke and Pepsi. And Coke and Pepsi outspend them probably 100 to 1 in the United States. But Coke and Pepsi have become such global brands that they have ignored their American-ness. They're trying to be all things to all people, all over the world. And they have ceded their American soda pop-ness to RC Cola, if it wants to take it. And they're saying, well, if it's there for the taking we'll take it and we will be the American cola. And I think they've done a very good job of this, even getting the notion of freedom to choose in there. ADAM SMITH: Freedom to choose. BOB GARFIELD: You don't have to drink Coke and Pepsi, this is America. No one is forcing you to_ ADAM SMITH: To drink Coke and Pepsi. It might be hard to find the RC Cola. BOB GARFIELD: They're forcing you actually to take Coke or Pepsi because if you try to find RC Cola in the supermarket, it's not so easy. ADAM SMITH: Do people want to drink the American cola, per se? BOB GARFIELD: I think that that will be resonant to some people in some places. Look, the soft drink business is fundamentally a distribution game and it has almost nothing to do with who has the most interesting advertising. ADAM SMITH: But now in the conference rooms of the ad agencies of the 800-pound gorillas do they then come back and wave the American flag a little and say, yes, we are American? BOB GARFIELD: No. There's nobody at Pepsi-Cola or at Coca-Cola USA who is paying the slightest bit of attention at all. [Back to Top] In Focus ADAM SMITH: Retailing on the Internet is one of the fastest moving parts of the money game. And nowhere is change coming faster than in the world of book publishing. The on-line book store, Amazon.com, has been an overnight sensation. What could it mean for individual authors and their prospects? My correspondent John De Natale has that story In Focus. JOHN De NATALE, Correspondent: [voice over] A display in the front of the bookstore. For author Doug Cooper, it's as good as it gets _ a great chance to reach readers and sell his new novel, Delirium. [on camera] This cozy bookstore environment is being challenged by a new one on the Internet. And that's turning a page for publishers and some authors. DOUG COOPER, Author: I was just a starving novelist living in Paris. My first book had just been sold and was about to come out. And I decided to serialize this novel on the Web. JOHN De NATALE: [voice over] Cooper decided to create a buzz in cyberspace. DOUG COOPER: [reading] In attempting to attain his goals_ JOHN De NATALE: He published all but the last chapter of his book on the Web. Cooper points out that there's nothing new about serializing a novel. DOUG COOPER: [on camera] This is how Dickens published his work. It's how Dostoevsky published his work. And I like the idea that I was using this fabulously intricate technology to throw novel writing back, 200, 300 years. JOHN De NATALE: Defying long odds, it worked. DOUG COOPER: I was reaching more readers per week with this novel on the Web than my first novel, which was a bestseller, reached in three years of publication. JOHN De NATALE: It helped that Time Warner put the chapters on its popular Pathfinder Web site. But the clincher was the little hyperlink down at the bottom of the page. DOUG COOPER: You can actually click on a button on the first page and it will take you to Amazon.com, to the very page on which can purchase my novel _ cheesy, but very effective. JOHN De NATALE: The Amazon.com bookstore is one of the Internet's biggest retail success stories. Without one bookshelf, Amazon took on a giant. Bill Bass covers Internet companies for Forrester Research. BILL BASS, Forrester Research: Last year, they sold about $150 million worth of books. And when the investment community looked at this and Amazon went public, their valuation ended up being roughly $400 million. At that same time, Barnes & Noble, which is one of the two dominant players in the traditional bookselling business _ they sell over $2 billion worth of books a year _ their valuation was only about a billion dollars. JOHN De NATALE: It was David and Goliath, but Barnes & Noble didn't fall down and die. Instead, the giant entered the Internet arena. And that's how Doug Cooper found his book linked to two booksellers online. [on camera] So is a place on the Web as valuable as a place on the bookshelf? DOUG COOPER: A hardcover book has the life of a vegetable. It sits on the shelf about as long as that and then disappears. Delirium is selling extremely well in bookstores, but I would predict that most of the copies got sold online. BILL BASS: Online you can have an endless inventory. You didn't have to fit all these books into a brick and mortar store. JOHN De NATALE: [voice over] And that means not only literary stars get attention. And the Web is bringing about another change to the book industry. Recently, the German media conglomerate, Bertelsmann A.G., announced plans to buy Random House and bring the distinguished publisher online. Publishers bypassing bookstores? Authors creating on-line buzz to hawk their own books? Will technology kill the bookstore? Well, to meet the challenge, bookstores like Barnes & Noble are trying to change. BILL BASS: You go in and you have the cafes and you're hanging out, you're meeting people. They've become big meat markets because if you just want to buy the book, you're easier going to the Internet. JOHN De NATALE: [voice over] And what would Dickens think? DOUG COOPER: I can fully imagine him serializing a book on the Internet. [Graphic: Amazin' Amazon.com [Back to Top] Personal Best ADAM SMITH: Many of you have written to us about your 401(k) plans and how to allocate your portfolio to minimize risk and maximize returns. The letter I've chosen this week comes from Lisa Quezada of New York City. ``Given the volatility of small cap stocks,'' she asks, ``should they be in my 401(k)? Is it worth the risk for the potential higher payoffs?'' Lisa, your signed copy of my book, The Money Game, is in the mail. And with me now to answer Lisa's question is Lynn Brenner of Bloomberg Personal magazine and author of Smart Questions to Ask Your Financial Advisers. Lynn is here to help improve your money game and turn your performance into a Personal Best. Lynn, should Lisa have small caps in her 401(k)? LYNN BRENNER, Bloomberg Personal: Yes, I think she should. I think she's lucky to have that as an option because most companies still don't offer a small cap fund as a choice in their 401(k) menu. It's true, she's right, they are more volatile than big cap stocks. But in a long-term investment like a 401(k) plan, volatility is much less of a concern than it would be in a short-term investment. And I think she ought to diversify among her stock holdings in the 401(k). She ought to own small caps and big caps and some international stocks, too. ADAM SMITH: What would the right percentages for small caps be? LYNN BRENNER: I would divide it maybe two-thirds big cap, one-third small cap of the U.S. stock holdings. ADAM SMITH: If you have a 401(k) and you get your company's stock in your 401(k), what do you do with that? LYNN BRENNER: Well, some companies actually don't let you transfer it into anything else. They insist that you hold it in company stock until you retire. And it's certainly nice to get stock as a match. I would be careful about contributing my own money into the company's stock too. If you're getting the match_ ADAM SMITH: Too much of one thing? LYNN BRENNER: Yeah, too much of one thing; not having all your eggs in one basket. ADAM SMITH: What are some of the trends in 401(k)s now? LYNN BRENNER: Well, 401(k)s are actually a very big business today. There's more than a trillion dollars invested in these plans. ADAM SMITH: In 401(k)s? LYNN BRENNER: In 401(k)s. The average 401(k) account now is $65,000 and a lot of people have more. And what employers are doing is broadening the menu. They're offering more selection; funds of more than one fund family, for example. And they're also offering institutional funds. Retail offerings are not the only thing in a 401(k) plan now. You can have institutional funds which normally serve corporate buyers and therefore their pricing is wholesale, which is very nice. ADAM SMITH: And aren't some companies sending employees to a sort of 401(k) school or is that just an exaggeration? LYNN BRENNER: No, no. I don't think it is an exaggeration. There's an awful lot of educational material provided to employees today, including seminars. And in some cases, and this is the latest trend, you can actually buy investment advice in your 401(k) from a third party, not your employer, not the investment manager, for a couple of hundred dollars a year you can get somebody telling you which funds_ which specific funds in your plan you ought to invest in. ADAM SMITH: You mean, you've mailed them in what you like or what your personal needs and characteristics are and they mail you back or e-mail you back what you ought to buy. LYNN BRENNER: It tends to be on computer. And, yes, you fill out a questionnaire. You tell them your preferences and you give them a look at your whole financial picture and they advise you. ADAM SMITH: So if they offer it, you should do it. LYNN BRENNER: Yes, I think that's a good thing to take. [Graphic: Lynn Brenner's 401(k) facts: *Percent of big companies (with over 1,000 employees) that have a 401(k) plan _ 80% *Percent of small companies (with fewer than 50 employees) that have a 401(k) plan _ 10%] [Graphic: Lynn Brenner's 401(k) facts: *Number of options in the average 401(k) plan _ 7 *Percent of big and mid-sized companies including their own stock as an option in their 401(k) plans _ 37%] ADAM SMITH: What question would you like answered to help you do your personal best in the money game? Get in touch with our e-mail address, Letters @ Adamsmith.net. Or write to us the old-fashioned way at Adam Smith's Money Game, 885 Third Avenue, Suite 2800, New York, New York 10022. We'll be answering your questions on the air and if we choose your question, I'll be sending you a signed copy of my book, The Money Game. Recently, Citicorp announced it was buying Travelers, creating a financial juggernaut. And two other megabanks announced they are buying other giant banks. Is this good? Will the customers and the shareholders be happy? That of course depends on how they're managed. But is there anything wrong with sheer size? Yes. When you get an institution this size it becomes too big to fail. If Citi Travelers were ever to get into trouble, there would be nobody that size to bail it out. You and I would become the rescue team _ and the other taxpayers _ because the moral hazard, risk, is missing from this deal that is too big to fail. And now a Money Game future. Be sure not to miss my exclusive conversation with the greatest investor of them all _ Warren Buffett, coming later this month. I'm Adam Smith, see you next week as the Money Game continues. ANNOUNCER: For more of the Money Game, visit us in cyberspace at www.adamsmith.net. ANNOUNCER: This program is made possible by a grant from MetLife with over $330 billion in assets under management. Funding has also been provided by the Roy R. and Marie S. Neuberger Foundation. CREDITS Produced by ADAM SMITH EDUCATIONAL PRODUCTION Footage provide by: Century 21 Thanks to: Royal Crown Company Special thanks to: 3-D Models Provided in Part by 3-D CAFE For a VHS cassette send $19.95 or $5.00 for a printed transcript to: Copyright _ 1998 Adam Smith Educational Productions Ltd.
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