Josh Padnick’s Blog

I’ll be honest. I’m a little embarassed that I wrote the letter you’re about to read, and I’m even more embarassed that I’m posting it here for everyone to see. There’s nothing outrageous in it, I suppose, but I just can’t believe I actually took 30 minues out of my life to craft this letter to the CEO of Qwest, Richard Notebaert. I guess I can’t believe that I care about my TV service enough to write this letter (which I plan on actually sending; didn’t know how else to reach the guy). Maybe it’s just my shock at how absoutely terrible Qwest has been. Well, here we go, oh, and Google, feel free to index this on all the qwest-related searches:

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I was in the Sharper Image yesterday at the Kierlands Mall in Scottsdale, and in my brief 10-minute experience there, I felt like there were just a ton of business issues. When I got home I looked up their annual report to see how they were doing, and sure enough, they haven’t been doing so hot these days.

Actually, their income statement revealed something rather interesting:

• Q3 2005 — $18.6 million operating loss
• Q2 2005 — $11.3 million operating loss
• Q1 2005 — $7.6 million operating loss
• Q4 2004 — $26.7 million operating profit

Wow, so, the Sharpter Image basically limps along the whole year losing money, but then makes a decent profit during the holiday season. Still, they’re not doing so hot in general. After all, those operating losses aren’t exactly getting smaller every quarter!

So what’s wrong with the Sharper Image? Well, lots of things.

First, they’re not novel anymore. Fifteen years ago, the Sharper Image held really cool things like robots and electronic pianos and electronic tie racks that I’d never seen anywhere. The Sharper Image was a source of wonderment and fascination…it was just a ton of fun to go in there and see what new gadgets were now available for sale. But today, I feel like everything I’ve seen in there is well, ordinary.

I don’t know, maybe the whole Internet thing has just really increased my threshold for what’s considred novel and cool, but nothing in that store really stood out to me as “remarkable.” So that’s problem number one. But what else?

Well, second, the customer experience was pretty lame. When I walked around, numerous stereos were all blasting different music that created this painful cacophony that made me want to leave not learn more about the product. The store also lacked the sleek and modern look that I remember when I was a kid. Instead, it looked more like a flea market of goods that I might see South of the border, randomly assembled and without any organizing theme.

There were two Sharper Image personnel people there, and when our group walked in, they looked up at us, stared briefly, and looked away. “Oh we’re just browsing, thanks.” So, I didn’t feel welcome in the store. Not feeling welcome doesn’t make me want to buy air filtering systems I might be convinced I need.

And finally, third, many of their products come from categories where much better stores exist to support that category. For example, one of the people I was with was interesting in purchasing an XM Satellite receiver for his car. How good of a selection can Sharper Image provider here compared to Best Buy or Circuit City, stores that have entire sections dedicated to nothing but Satellite Radio. So that’s a problem — I come into Sharper Image to check out what they have, and I decide I need to keep looking because they don’t have enough selection.

So, that’s the business case for The Sharper Image — not such a brilliant future. Check out some other issues, too. I give you their Balance Sheet.

Total Assets: $240 million. Not bad.

Total Cash on Hand: $1.86 million. Yikes! They lost about 12 times that last quarter!

Total Inventory: $165 million. Whoah. Now we see where all their cash gets tied up.

And finally check out their Cash Flow Statement. Last quarter’s cash flow from operations: -$49 million. Yikes!

I’m not a professional financial analyst, so maybe I’m stepping outside my expertise here, but more instinctively, I just feel like the Sharper Image has some difficult business challenges ahead. Next time I’m in one of their stores we’ll see if things are looking any better.

Prior to being an entrepreneur I always felt confident that if ever I were unsure about a company, I could simply contact the Better Business Bureau to learn about the company’s reputation and resolve any concerns I might have.

After being an entrepreneur, I discovered that the Better Business Bureau is something of a sham. Every few weeks I get a call from the Better Business Bureau and the voicemail they leave sounds something like this:

“Hi Josh, this is Jane Doe from the Better Business Bureau. I’d appreciate it if you could give me a call. Thank you.”

This makes me think someone has submitted a complaint regarding Omedix and that they’d like to discuss it with us. We try *very* hard to provide excellent customer service so I respond immediately to a call like this and I find that it was a really a telemarketing come-on. When I’m connected to a representative from the BBB they tell me that “Our records indicate that Omedix has an excellent reputation, and we’d love to invite you to become a member of the Better business Bureau.”

What exactly must a company do to earn this excellent reputation? Well, actually that just means you don’t have any complaints against you. What must a company do to become a member of the Better Business Bureau? Well, that costs some $400 to call yourself a member and an additional $400 for the right to display the BBB logo on your website. And of course, you have to renew that every year, so it’s $800/year for as long as you wish to display the logo and claim you’re a member.

For a government agency, I thought these fees seemed pretty high. In fact, should a public agency have fees at all just to show that your business is in good standing? Moreover, why would a government agency aggressively telemarket me to join their membership? Where’s the apathy I’ve come to know and love in many of our government organizations?

Well, that’s the other thing — the BBB is *not* a government entity; it’s a private non-profit corporation. And of course, being non-profit means two important things: (1) The mission of your organization is not to earn a profit but to support a charitable cause, and (2) Your organization never pays income tax because it’s not really income anyway.

Ah, so the telemarketing is not because the BBB is so eager to have our company as a member; it’s because the BBB is so eager to increase revenue from our company, revenue which ultimately pays someone’s salary. And what did the BBB “do” for our company? Well, nothing at all, really. They simply gave us a label (”BBB Member”) and permission to use their logo. Total marginal cost for BBB: $0. Total marginal revenue: $800. Sounds like a very profitable non-profit to me!

I don’t know what I want to do about the BBB. For all my protestations and hemming and hawwing, the reality of our society is that they are a recognized organization and when your business can display their insignia, there’s an extra added level of trust. Is that trust worth $800 to me? Yes. But what about the cost of me compromising my feeling that I’m being strong-armed into that membership? I don’t know…I’m still thinking about it.

I’ll admit, the music industry is in a weird situation: a lot of people got used to stealing their product and still steal it. I’ll admit I have no idea how they can fix things. But the solutions the music industry has used so far have had some bad consequences.

Based on what I’ve read, the tactics have so far included:

• Suing their own customers
• Advertising that their customers are acting like thieves
• And just recently: this

As many digg readers pointed out, there’s nothing illegal about visiting a site, and yet the music industry is now employing outright scare tactics by reporting your IP address and threatening that it’s been logged! (Actually, this serves as a nice alternative to www.WhatIsMyIp.com for figuring out the IP address of your computer!)

I feel fortunate that our clients don’t attempt on a regular basis to steal our product, but if they did, my solution would not be to sue them en masse, because suing and policing is expensive and labor-intensive and makes people not want to buy from your company. Intimidating your customers and inciting fear in them probably doesn’t help either. In fact, doesn’t that sound more like a tyrannical government trying to maintain control than a company trying to demonstrate value to its customers?

I know it sounds naive, but isn’t the better solution to find a way of *offering a better value* to customers? iTunes has succeeded in doing it; I use Napster (legally) and love it, but nobody else I know uses Napster. I’ll be honest, I have no idea what solution the music industry needs, but suing, intimidating, and inciting fear is not working.

LATER EDIT: Here is an example of a music label that’s doing things differently appears to be succeeding. It would be extremely difficult for an existing label to convert to this model (50% of revenue to the artist!?) but this is pretty much capitalism doing its job of efficiently (and sometimes ruthlessly) re-allocating resources.

Word has been traveling about Dr. Gary K. Michelson, who was recently awarded $1.35 billion (no, that is not a typo) to settle a 4-year long patent battle with Medtronic. Dr. Michelson is an Orthopedic Surgeon and invented a bunch of spinal implant devices which were eventually used by Medtronic to establish a dominant position in the spinal implants market.

I read a few articles on this (thank you, news.google.com) and it sounds like, four years ago, Dr. Michelson started his legal dispute with Medtronic arguing that he wasn’t being paid the royalties due to him from his inventions. Medtronic no doubt figured that their power legal team would squash a single individual and that Dr. Michelson would just throw in the towel. Well, $60 million of legal expenses later (that’s what Dr. Michelson spent on this), bad call. The dispute was finally settled by Medtronic agreeing to pay $1.35 billion to Michelson and his company.

All of Medtronic’s comments about the settlement seem to express more relief than anything else, and their stock price barely moved (down $0.61 for the day) on the news. Very, very interesting.