The Innovation Index levels at 56%, crushes major U.S. indices

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The Innovation Index gained 3 points after a short drop last month, and has now gained 56% for the year, effectively tying the performance at the end of the 3^rd quarter. Could this be another banner year for The Innovation Index? The Innovation Index easily crushes the major U.S indices including the S & P 500, NASDAQ and Dow Jones. S & P 500 dropped 5% after the third quarter, and is now up only 2% for the year; NASDAQ shed 5% after the third quarter, and is now up only 7% for the year; the Dow Jones Index also dropped 5%, and is now up 6% for the year.

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The Innovation Index closed at 101.28 on December 17, 2007, effectively even from the closing price of 101.39 on Sep 28, 2007, and up 56% from the closing price of 65.05 on December 29, 2006.

The Innovators were busy in November, 2007 and went on an acquisition spree. Here were some of the top acquisitions by the top innovators.

Mid-Quarter Leaders

Apple Inc. (NASDAQ: AAPL) is the leader mid-quarter, after adding another 20%, and gaining a massive 117% for the year - early results indicate good results for Apple’s 4 horsemen: iPod/iTunes, iPhone, Leopard and the Mac. Google Inc. (NASDAQ: GOOG) is next at 18% increase mid-quarter, and up by a solid 45% for the year – Google’s Search is increasing market share and forays into video and integrated advertising appear to gaining strength. Microsoft Corporation (NASDAQ: MSFT), the earlier leader mid-quarter with 17% gains is third, up 16% for the year – Vista is gaining full steam, and also the Office productivity software. Wal-Mart Stores, Inc. (NYSE: WMT) with gains of 10% on the heels of a good November is next up, and up 4% for the year. Only 3 more Innovators have gains mid quarter - Research In Motion Limited (NASDAQ: RIMM) continued the bull run with another 2% gain, leading all innovators with 135%. The Proctor & Gamble Company (NYSE: PG) added 4%, with an envious 15% gain for the year, and Hewlett-Packard Co. (NYSE: HPQ) stayed true to form with 2% gain, and a healthy 24% increase for the year. These innovators are enjoying an impressive 2007 to date.

Mid-Quarter Laggards

It has been a tough quarter so far for many innovators and the U.S. stock market at large. Nine innovators have double-digit losses mid-quarter, and four innovators are in the red with single-digit losses. Starbucks Corporation (NASDAQ: SBUX) has lost 23% this quarter, and is now down a huge 43% for the year. Where are those consumers buying White Chocolate Mochas and Lattes? Starbucks could use more during the cold season. Target Corp. (NYSE: TGT) and eBay Inc. (NASDAQ: EBAY) are next losing 18% this quarter; Target is down 9% for the year, however eBay is up 6% for the year. Target had disappointing November sales and the outlook for December did not improve either. eBay on the other hand is hoping that consumers spend a ton of money trading the Nintendo WIIs, iPods and other high value products during the quarter.

Cisco Systems, Inc. (NASDAQ: CSCO) has given up 16% for the quarter, and is only up 2% for the year. Can Cisco rebound? Dell Inc. (NASDAQ: DELL) disappointed the investors with the results, and is facing growth challenges. Dell is down 14% this quarter, and 6% for the year. Yahoo! Inc. (NASDAQ: YHOO) has lost 14% for the quarter, and is down 10% for the year. If Yahoo finishes the year in red, this will be back to back years of investment losses. Is Yahoo a potential acquisition target in 2008? Southwest Airlines Co. (NYSE: LUV) can’t escape the rising oil prices either, and is down 13% for the quarter, and down 16% for the year. Southwest could also end up having back-to-back year of negative gains. Can travelers return to Southwest, and would they enjoy the new “business” service.

Bell-weather GE (NYSE: GE) has given up 12% this quarter, and is now down 2% for the year. Even the GE CEO is buying back shares. Can GE finish the year in positive? International Business Machines Corp. (NYSE: IBM) has also lost 11% this quarter, although has gained 8% for the year. IBM is poised to finish the year on a positive note with an announced stock buyback program. Other notable innovators with losses in the 4^th quarter include: 3M Company (NYSE: MMM) with 8% loss for the quarter and up a solid 11% for the year, Amazon.com, Inc. (NASDAQ: AMZN) down 9% for the quarter although up a huge 116% for the year, and America Movil (NYSE: AMX) down 8% for the quarter, although up a respectable 30% for the year. Tough quarter indeed for these innovators. Intel Corporation (NASDAQ: INTC) is only down 1% this quarter, and is up a rosy 28% for the year. The good news is that fourteen of the twenty innovators are still in positive ground and with a good year-end holiday rally, they could be all going home happy along with their investors.

Yearly Leaders and Laggards

Who sits on the top of The Innovation Index? There is a change in the top position. Research In Motion Limited - (NASDAQ: RIMM) is the leader of the pack at 135% gains for the year. Apple Inc. (NASDAQ: AAPL) is next up with 117% appreciation for the year. Amazon.com, Inc. (NASDAQ: AMZN) is holding steady with 116% gains for the year. There are seven other innovators with double-digit gains for the year.

Five innovators are in the negative territory. Starbucks Corporation (NASDAQ: SBUX) is the significant decliner, down 43% for the year. Southwest Airlines Co. (NYSE: LUV) has lost 16% for the year. Finally, Yahoo! Inc. (NASDAQ: YHOO) is down 10% for the year.

Year End Predictions

Where will The Innovation Index end up when all is said and done? Is there a rally in store for the broader market that will only boost The Innovation Index? We project The Innovation Index to inch up to around 60% for the year, gaining over 4% during the remainder of the year. The consumers will finish their Christmas shopping with a bang this week, and give some of the retailers a much-needed push.

Invest in the Innovation Index Fund

I just announced the launch of a new Innovation Index Fund last week that invests in the Innovation Index. We have opened the new private placement fund for serious investors seeking to maximize their investment returns and wanting to invest at least $25K. If you want to learn more about the Innovation Index Fund, check this announcement first, then browse to Innovation Index Group website at: http://www.innovationindexgroup.com Finally, fill out your contact information at the bottom of this form: http://www.innovationindexgroup.com/invest.html

The Innovation Index Reports:

Invest in The Innovation Index - Invest in the brand new Innovation Index Fund
Introducing The Innovation Index Fund - Invest into The Innovation Index
Top 50 Innovative Companies in the world - 2007 Report on Top 50 Companies
Annual Report - Chapter One - Total Innovation Activity - 2006 Annual Report One
Annual Report - Chapter Two - The Top Innovator - 2006 Annual Report Two
Annual Report - Chapter Three - The Innovation Insights - 2006 Annual Report Insights
Innovation and Stock Performance Correlation - The Innovation Index and Stock Performance
The Innovation Index gallops to 56% - Quarterly Report - Q3, 2007
The Innovation Index gains 3% during the first quarter - Quarterly Report - Q1, 2007

About The Innovation Index

The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in North America.

The Innovation Index has returned 119% over the last five years. This assumes an investment in each stock of The Innovation Index (buying each stock). An average of $100 invested in The Innovation Index on December 31, 2001 returned $219 as of December 29, 2006. By comparison, $100 invested in each of S & P 500, NASDAQ and Dow Jones Index returned $124. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by 77% over the last five years.

The Normalized Innovation Index has returned an impressive 174% over the last five years. This assumes equal investment in each stock of The Innovation Index as of December 31, 2001.

Alphabetical list of the top 20 Innovators of The Innovation Index and their stock ticker symbols:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Dell Inc. - (NASDAQ: DELL)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Microsoft Corporation - (NASDAQ: MSFT)
Research In Motion Limited - (NASDAQ: RIMM)
Southwest Airlines Co. - (NYSE: LUV)
Starbucks Corporation - (NASDAQ: SBUX)
Target Corp. - (NYSE: TGT)
The Proctor & Gamble Company - (NYSE: PG)
Wal-Mart Stores, Inc. - (NYSE: WMT)
Yahoo! Inc. - (NASDAQ: YHOO)

The Innovation Index will analyze the positions and standings of the top 20 Innovators at the end of each year. For 2007, there will be no further changes in The Innovation Index.

Disclaimer: I invest in the stocks comprising The Innovation Index.

Top Acquisitions by the Top Innovators

Invest in The Innovation Index - Invest in the brand new Innovation Index Fund

November 2007 was a busy month for the top 20 Innovators of The Innovation Index. Besides announcing key innovations, and staying on course with 53% performance gains for the year, the Innovators added more punch - in the form of key acquisitions, mostly large. Here is a roundup of top acquisitions by the top innovators in November, and the potential impact of these acquisitions in 2008:

3M (NYSE: MMM) and Aearo Technologies Inc. (NYSE: AER) announced that "they have entered into a definitive agreement for 3M's acquisition of Aearo for a total purchase price of $1.2 billion, to be financed through a combination of cash and other borrowings. Aearo is a global leader in the personal protection industry and manufactures and markets personal protection and energy absorbing products. Aearo is owned by funds advised by Permira, a leading global private equity firm, and company management." For the past year, Aearo had revenue of $508 million, growing at a CAGR of 12%. Key Aearo brands include: E-A-R, Peltor, AOSafety and SafeWaze.

According to 3M press, "Aearo will significantly expand 3M's occupational health and environmental safety platform by adding hearing protection as well as eyewear and fall protection product lines to 3M's existing full-line of respiratory products. It provides a broad platform for accelerated growth. This acquisition enables 3M to provide industrial, military and construction customers as well as consumers with a more complete personal protection solution."

Further, Aearo has a reputation for developing high-quality, innovative products and strong market competitiveness. "The complete Aearo product line includes passive hearing, communication headsets, eye protection, head and face protection and fall protection. The company also markets systems solutions and proprietary energy absorbing materials, which are incorporated into other manufacturers' products to control noise, vibration, shock and temperature."

Bottomline: Expect 3M to increase the revenue by $550 to $650 million with Aearo acquisition; also, 3M legitimately and significantly expands it's occupational health and environmental safety platform to more than 70 countries where Aearo is already marketed and sold.

Earlier in the month, 3M also announced that "it has entered into a definitive agreement to acquire the business of Bondo Corp., a manufacturer of auto body repair products for the automotive aftermarket and various other professional and consumer applications.

Bondo's established brand complements 3M's well-known line of auto body repair products for the automotive aftermarket. Bondo brand products are designed for and widely recognized by both auto body repair professionals and enthusiasts. Products include body filler, fiberglass repair materials, under coatings, and adhesives. Bondo products are sold to the auto body professional market through auto body paint specialty stores in addition to mass merchandisers and auto parts retailers."

Bondo manufactures and markets automotive body repair, household repair and marine products under the Bondo, Mar-Hyde, Bondo Home Solutions, Dynatron, Marson, Laminex and Bondo Marine brand names.

Bottomline: Bondo, which was predominant in the South and Southeast, will open a huge distribution channel through 3M's network of dealers. Although, the deal will not have a significant EPS impact in 2008, it gives 3M key products with which to expand the Automotive line of business.

Dell (NASDAQ:DELL), another top 20 innovator, "signed an agreement to acquire privately held Everdream Corp., a leading provider of Software-as-a-Service (SaaS) solutions for remote-service management." Since terms were not declared, this appears to be a small investment for Dell.

Bottomline: Everdream could be a key component in Dell's strategy of enabling customers to Simplify IT. "Everdream's capabilities complement those provided by the recently acquired SilverBack Technologies, further enabling end-to-end remote management of customers' IT environments. With this acquisition, Dell can now extend remote management of critical IT assets from servers, storage, printers, etc. to desktops, notebooks and other end-user devices globally." Is Dell done with acquisitions in this market? This will have a minimal impact on EPS for 2008.

Earlier in the month, Dell (NASDAQ:DELL) announced plans to acquire EqualLogic, a leading provider of high-performance iSCSI storage area network (SAN) solutions uniquely optimized for virtualization. The acquisition will strengthen Dell's product and channel leadership in simplifying and virtualizing IT for customers globally. iSCSI SAN technology represents the fastest growing part of the storage business.

"Under the terms of the agreement, Dell will purchase EqualLogic for approximately $1.4 billion in cash. The acquisition of EqualLogic is expected to close late in the fourth quarter of Dell's fiscal year 2008 or early in the first quarter of fiscal 2009. The company expects the acquisition to be dilutive to earnings per share, excluding the amortization of intangibles, by $0.02 to $0.05 in aggregate for Fiscal 2009 and Fiscal 2010."

Bottomline: Dell spent a lot of money for this company and placing big bets on storage; however without an announced upside in revenue, rather a dilution of EPS, one can't help but think about the future revenue growth from this acquisition. Dell has "plans to grow EqualLogic's successful channel-partner programs with current and future EqualLogic-branded products, and also to incorporate EqualLogic technology into future generations of its Dell PowerVault storage line available through the channel and direct from Dell." The investors will be in a "wait-and-watch" mode here until Dell sees real revenue growth from these acquisitions.

IBM (NYSE: IBM), a top 20 innovator, and Cognos(R) (NASDAQ: COGN) (TSX: CSN) announced that "the two companies have entered into a definitive agreement for IBM to acquire Cognos, a publicly-held company based in Ottawa, Ontario, Canada, in an all-cash transaction at a price of approximately $5 billion USD or $58 USD per share, with a net transaction value of $4.9 billion USD. It is expected to close in the first quarter of 2008."

In one word, this acquisition is HUGE!! Huge for Cognos shareholders. Especially, since this was an all cash deal.

"The acquisition of Cognos supports IBM's Information on Demand strategy, a cross-company initiative announced on February 16, 2006 that combines IBM's strength in information integration, content and data management and business consulting services to unlock the business value of information. Integrating Cognos, the 23rd IBM acquisition in support of its Information on Demand strategy, will enable new business insights to be delivered to a broader set of people across an organization, beyond the traditional users of business intelligence.

IBM said the acquisition fits squarely within both its acquisition strategy and capital allocation model, and that it will contribute to the achievement of the company's objective for earnings-per-share growth through 2010."

Bottomline: Together, IBM and Cognos are poised to become the leading provider of technology and services for Business Intelligence (BI) and Performance Management, and Business process management and possibly financial management. Cognos provides a technology platform and leadership that IBM was lacking; on the other hand IBM provides a worldwide distribution platform for Cognos across multiple industries and geographies. Together, both companies provide a complete integrated solution. This acquisition will have a nominal upside on 2008 earnings for IBM. If IBM Global Services make Cognos an integral part of their portfolio, the potential upside is huge.

Microsoft Corp. (NASDAQ: MSFT), another top 20 innovator, announced acquisition of Musiwave SA, an Openwave company (NASDAQ: OPWV) and a leading provider of mobile music entertainment services to operators and media companies, in particular in Europe. The terms of the pending acquisition were not announced.

"Mobile operators are continually looking for ways to deliver digital entertainment to their customers, and have looked to companies such as Musiwave to deliver music services that help provide the necessary infrastructure. As a provider of white-label music solutions to mobile operators in Europe, Musiwave has helped to bring a rich selection of millions of ringtones, full-track downloads and music videos to consumers." According to technology research firm Ovum, 1,106 million mobile music phones will be shipped worldwide in 2010.

Bottomline: The acquisition would bring Musiwave's relationships with music labels, device makers and mobile operators that deliver digital entertainment to consumers, together with Microsoft's Connected Entertainment technologies and services, including Windows Mobile, Zune, MSN and Windows Live. This is a strategic entry point for Microsoft in Europe, and provides Microsoft a network and a platform on which to serve up mobile entertainment. Whereas Windows Mobile provides the client entry point on mobile, Musiwave extends this further into the world of music services delivered through a solid network. Musiwave is Microsoft's answer to iTunes.

November was a busy month for some of the top innovators. Would these acquisitions lead to more innovations and positively impact the 2008 revenue for these innovators? Would Innovation Index sizzle in 2008 as it has in 2007 due to these acquisitions and its direct impact on revenue growth? We will have to fast forward to July 2008 to find answers to these questions. For now, the innovators have paved the way with key acquisitions.

The Innovation Index Reports:

Invest in The Innovation Index - Invest in the brand new Innovation Index Fund
Top 50 Innovative Companies in the world - 2007 Report on Top 50 Companies
Annual Report - Chapter One - Total Innovation Activity - 2006 Annual Report One
Annual Report - Chapter Two - The Top Innovator - 2006 Annual Report Two
Annual Report - Chapter Three - The Innovation Insights - 2006 Annual Report Insights
Innovation and Stock Performance Correlation - The Innovation Index and Stock Performance
The Innovation Index gallops to 56% - Quarterly Report - Q3, 2007
The Innovation Index gains 3% during the first quarter - Quarterly Report - Q1, 2007

About The Innovation Index

The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in North America.

The Innovation Index has returned 119% over the last five years. This assumes an investment in each stock of The Innovation Index (buying each stock). An average of $100 invested in The Innovation Index on December 31, 2001 returned $219 as of December 29, 2006. By comparison, $100 invested in each of S & P 500, NASDAQ and Dow Jones Index returned $124. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by 77% over the last five years.

The Normalized Innovation Index has returned an impressive 174% over the last five years. This assumes equal investment in each stock of The Innovation Index as of December 31, 2001.

Alphabetical list of the top 20 Innovators of The Innovation Index and their stock ticker symbols:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Dell Inc. - (NASDAQ: DELL)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Microsoft Corporation - (NASDAQ: MSFT)
Research In Motion Limited - (NASDAQ: RIMM)
Southwest Airlines Co. - (NYSE: LUV)
Starbucks Corporation - (NASDAQ: SBUX)
Target Corp. - (NYSE: TGT)
The Proctor & Gamble Company - (NYSE: PG)
Wal-Mart Stores, Inc. - (NYSE: WMT)
Yahoo! Inc. - (NASDAQ: YHOO)

The Innovation Index will analyze the positions and standings of the top 20 Innovators at the end of each year. For 2007, there will be no further changes in The Innovation Index.

Disclaimer: I invest in the stocks comprising The Innovation Index.

The Innovation Index stays course at 53%, crushes major U.S. indices, Mid-Quarterly Report 11-15-2007

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The Innovation Index steadied after the monster third quarter in 2007. The Innovation Index dropped 3% after the third quarter, and has now gained 53% for the year. The Innovation Index has already quadrupled the 2006 performance, and we still have a half quarter to go. Is there a Holiday rally this year? Could this be another banner year for The Innovation Index? The Innovation Index easily crushes the major U.S. indices including the S & P 500, NASDAQ and Dow Jones. S & P 500 dropped 5% after the third quarter, and is now up only 2% for the year; NASDAQ shed 3% after the third quarter, and is up to single-digit gains at 8% for the year; the Dow Jones Index dropped the most - 6%, and is up 5% for the year.

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The Innovation Index closed at 99.80 on November 15, 2007, down 3% from the closing price of 101.39 on Sep 28, 2007, and up 53% from the closing price of 65.05 on December 29, 2006.

Mid-Quarter Leaders

Microsoft Corporation (NASDAQ: MSFT) is the leader mid-quarter at 15% gains, up 13% for the year. Google Inc. (NASDAQ: GOOG) is next at 11% increase mid-quarter, and up by a good 37% for the year. Apple Inc. (NASDAQ: AAPL) added another 7% mid-quarter, and is up a huge 94% for the year. Only 3 more Innovators have gains mid quarter - Wal-Mart Stores, Inc. (NYSE: WMT) with gains of 6%, although flat for the year; Research In Motion Limited (NASDAQ: RIMM) continued the bull run with another 5% gain, leading all innovators with 142%, and The Proctor & Gamble Company (NYSE: PG) added 2%, with a respectable 12% for the year.

Mid-Quarter Laggards

It has been a tough quarter so far for many innovators and the market at large. Six innovators have double-digit losses mid-quarter. 3M Company (NYSE: MMM) with 15% loss for the quarter and up only 3% for the year, Amazon.com, Inc. (NASDAQ: AMZN) down 16% for the quarter although up a huge 97% for the year, Cisco Systems, Inc. (NASDAQ: CSCO) giving up 12% for the quarter and up 7% for the year, eBay Inc. (NASDAQ: EBAY) dropping a huge 18% however staying positive at 7% for the year, International Business Machines Corp. (NYSE: IBM) shedding 12% during the quarter and staying at 7% also, and Target Corp. (NYSE: TGT) tumbling 13% during the quarter and down 3% for the year. Tough indeed. The good news is that most of the innovators are still in positive ground and with a good year-end holiday rally, they could be all going happy along with their investors.

Yearly Leaders and Laggards

Who sits on the top of The Innovation Index? There is a change in the top position. Research In Motion Limited - (NASDAQ: RIMM) is the leader of the pack at 142% gains for the year. Amazon.com, Inc. (NASDAQ: AMZN) is next with 97% gains for the year. Apple Inc. (NASDAQ: AAPL) is next up with 94% appreciation for the year. There are six other innovators with double-digit gains for the year.

Only three innovators are in the negative territory. Starbucks Corporation (NASDAQ: SBUX) is the significant decliner, down 32% for the year. Southwest Airlines Co. (NYSE: LUV) has lost 8% for the year. Finally, Target Corp. (NYSE: TGT) is down 3% for the year.

Year End Predictions

Where will The Innovation Index end up when all is said and done? Is there a rally in store for the broader market that will only boost The Innovation Index? We project The Innovation Index to close over 65% for the year, gaining over 12% for the remainder of the year. The consumers will resume their buying beginning next week, speed up during the Thanksgiving weekend, and shop till they drop in December. This year the consumers are waiting for a bit of good news and a warm, fuzzy feeling before the holidays. This will happen, although will happen later than the usual shopping period. Sure the retailers will need to lure the shoppers with more specials and higher discounts; however, once the shoppers begin to return, they will in turn bring in more shoppers. If the weather stays unusually warm though, ironically, it could negatively impact the stock market and The Innovation Index.

The Innovation Index Reports:

Top 50 Innovative Companies in the world - 2007 Report on Top 50 Companies
Annual Report - Chapter One - Total Innovation Activity - 2006 Annual Report One
Annual Report - Chapter Two - The Top Innovator - 2006 Annual Report Two
Annual Report - Chapter Three - The Innovation Insights - 2006 Annual Report Insights
Innovation and Stock Performance Correlation - The Innovation Index and Stock Performance
The Innovation Index gallops to 56% - Quarterly Report - Q3, 2007
The Innovation Index gains 3% during the first quarter - Quarterly Report - Q1, 2007

About The Innovation Index

The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in North America.

The Innovation Index has returned 119% over the last five years. This assumes an investment in each stock of The Innovation Index (buying each stock). An average of $100 invested in The Innovation Index on December 31, 2001 returned $219 as of December 29, 2006. By comparison, $100 invested in each of S & P 500, NASDAQ and Dow Jones Index returned $124. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by 77% over the last five years.

The Normalized Innovation Index has returned an impressive 174% over the last five years. This assumes equal investment in each stock of The Innovation Index as of December 31, 2001.

Alphabetical list of the top 20 Innovators of The Innovation Index and their stock ticker symbols:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Dell Inc. - (NASDAQ: DELL)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Microsoft Corporation - (NASDAQ: MSFT)
Research In Motion Limited - (NASDAQ: RIMM)
Southwest Airlines Co. - (NYSE: LUV)
Starbucks Corporation - (NASDAQ: SBUX)
Target Corp. - (NYSE: TGT)
The Proctor & Gamble Company - (NYSE: PG)
Wal-Mart Stores, Inc. - (NYSE: WMT)
Yahoo! Inc. - (NASDAQ: YHOO)

The Innovation Index will analyze the positions and standings of the top 20 Innovators at the end of each year. For 2007, there will be no further changes in The Innovation Index.

Disclaimer: I invest in the stocks comprising The Innovation Index.

Amazon.com Valuation - Over, Right or Under Valued - You decide

Amazon.com, Inc. (NASDAQ: AMZN) is one of the top 20 Innovators of The Innovation Index. Amazon.com just announced it's quarterly earnings yesterday after market close. At market close, AMZN had closed at 100.82, up a whopping 156% in 2007.

"The online retail giant reported earnings of $80 million, or 19 cents a share, for the quarter ended Sept. 30, compared with earnings of $19 million, or 5 cents a share, for the same period last year. Revenue grew 41% to $3.26 billion from $2.31 billion last year. Analysts had expected the company to report earnings per share of 18 cents on revenue of $3.14 billion, according to consensus forecasts from Thomson Financial. The company said operating earnings for the period came in at $123 million -- ahead of the $108 million expected by analysts. Last year's third quarter saw operating income of $40 million."- source MarketWatch

Four things emerged from Amazon.com's most recent quarterly earnings results:

1. Amazon.com earnings remained flat at 19 cents a share from the previous quarter. Thus, there was no earnings growth from the previous quarter. Although Amazon.com grew the revenue by $0.38 billion or 13% from $2.88 billion the previous quarter to $3.26 billion in the current quarter. Whereas the total revenue grew 13%, the earnings did not budge - the earnings remained flat. The operating income only grew by 6% from the previous quarter. Does this mean Amazon.com had to overspend to achieve the revenue growth, and hence could not grow the profits?

2. Amazon.com had a huge quarter internationally. "International segment sales, representing the Company's U.K., German, Japanese, French and Chinese sites, were $1.47 billion, up 40% from third quarter 2006. Excluding the favorable impact from year-over-year changes in foreign exchange rates throughout the quarter, International net sales growth was 33%." Compare this to the previous quarter, when "International segment sales, representing the Company's U.K., German, Japanese, French and Chinese sites, were $1.28 billion." This means Amazon.com earnings positively benefited from the exchange rates and the increase in international business of about $0.19 billion. However, the earnings still remained flat.

3. 4th Quarter Guidance: Net sales are expected to be between $5.1 billion and $5.45 billion, or to grow between 28% and 37% compared with fourth quarter 2006. Operating income is expected to be between $221 million and $291 million, or grow between 12% and 48% compared with fourth quarter 2006. This guidance includes $54 million primarily for stock-based compensation and amortization of intangible assets... Thus, Amazon.com is poised to grow the revenue by 62% in the final quarter, the holiday quarter when Amazon.com rakes in the most revenue. The operating income will grow by 108% from the current quarter. When the operating income only grew by 6% from the previous quarter, can investors believe Amazon.com management when they project a growth of 108% of operating income? How would Amazon.com achieve this? What products will provide the increased revenue and profitability for Amazon.com? The new DRM-free MP3 store, or memberships, or 3rd party developers? Amazon.com has recently upped the shared bounty to 20% for the Mp3 store in order to attract increased buyers through its Associate referral program.

4. Operating expenses without the Cost of Revenue increased by $54 million or 9.2% from the previous quarter. This is huge since the generation of an additional 13% growth in revenue resulted in a 9.2% increase in operating expenses. When Amazon.com grows the revenue by 62% in the final quarter, what would be the increase in operating expenses? Overall, Amazon.com's net profit margin and operating profit margins have decreased from the previous quarter. And Amazon.com is planning to not only reverse this trend, but show a healthy increase in the fourth quarter.

Amazon.com closed today at 88.59, down 12.23% from yesterday's close of 100.82.

Here is a comparison of Amazon.com's forward P/E with other retailers (from Google Finance):

Amazon.com, Inc. (NASDAQ: AMZN) Forward P/E: 50.94
eBay Inc. (NASDAQ: EBAY) Forward P/E: 26.86
Wal-Mart Stores, Inc. (NYSE: WMT) Forward P/E: 14.55
Google Inc. (NASDAQ: GOOG) Forward P/E: 32.66
Target Corporation (NYSE: TGT) Forward P/E: 15.30
Barnes & Noble Inc. (NYSE: BKS) Forward P/E: 21.44

Is Amazon.com growing the fastest among all these companies to garner this upside on the earnings multiple? One note of caution: It has the lowest net and operating margins from the above companies (except Barnes & Noble).

Is Amazon.com over-valued, right-valued or under-valued at these multiples? You decide.

About The Innovation Index

The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in North America.

The Innovation Index has returned 119% over the last five years. This assumes an investment in each stock of The Innovation Index (buying each stock). An average of $100 invested in The Innovation Index on December 31, 2001 returned $219 as of December 29, 2006. By comparison, $100 invested in each of S & P 500, NASDAQ and Dow Jones Index returned $124. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by 77% over the last five years.

The Normalized Innovation Index has returned an impressive 174% over the last five years. This assumes equal investment in each stock of The Innovation Index as of December 31, 2001.

Alphabetical list of the top 20 Innovators of The Innovation Index and their stock ticker symbols:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Dell Inc. - (NASDAQ: DELL)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Microsoft Corporation - (NASDAQ: MSFT)
Research In Motion Limited - (NASDAQ: RIMM)
Southwest Airlines Co. - (NYSE: LUV)
Starbucks Corporation - (NASDAQ: SBUX)
Target Corp. - (NYSE: TGT)
The Proctor & Gamble Company - (NYSE: PG)
Wal-Mart Stores, Inc. - (NYSE: WMT)
Yahoo! Inc. - (NASDAQ: YHOO)

The Innovation Index will analyze the positions and standings of the top 20 Innovators at the end of each year. For 2007, there will be no further changes in The Innovation Index.

Disclaimer: I invest in the stocks comprising The Innovation Index.

The Innovation Index races to 21%, crushes major U.S. indices - Weekly Report 05-25-07

The Innovation Index five-peats – five week of back-to-back gains. The Innovation Index added 3% last week, and is now up 21% for the year. The Innovation Index has already surpassed the 2006 performance, and we are just in May 2007. Could this be the banner year for The Innovation Index? The Innovation Index easily crushes the major U.S. indices including the S & P 500, NASDAQ and Dow Jones. S & P 500 was unchanged, and is up 7% for the year; NASDAQ was unchanged, and is up 6% for the year; the Dow Jones Index lost a fraction, and is now up 8% for the year. This is the fifth week in 2007 where The Innovation Index is having double-digit gains.

The Innovation Index closed at 83.54 on May 25, 2007, up 21% from the closing price of 69.31 on December 29, 2006.



What caused The Innovation Index to add another 3% in one week? Five innovators caused the jump, the largest increase coming from Research In Motion Limited - (NASDAQ: RIMM) that went up 10% in just one week, and is now up 30% for the year.

“NetSuite Inc. (www.netsuite.com) and iEnterprises (www.ienterprises.com), announced that iEnterprises and NetSuite will be offering Mobile Edge for NetSuite(R), a wireless application designed specifically for NetSuite customers, so they can easily mobilize NetSuite for use on BlackBerry smartphones from Research In Motion (RIM).” – RIM can boast on-demand software suite on the BlackBerry. RIM also completed the status updates on its financials, and benefited from upgrades.

8 of the Top 20 Innovators showed positive gains (compared to 10 in the previous week), 8 of the Top 20 Innovators showed negative gains (compared to 7 in the previous week), and 4 Innovators were unchanged last week (compared to 3 in the previous week).

Can The Innovation Index six-peat, and have another week of gains? The Innovation Index is on a roll, and knows no stopping.

Weekly Advances

Google Inc. (NASDAQ: GOOG) was up 3% last week and is now up 5% for the year; Google increased the Search Market Share in the U.S. by 1.4% contributing to an additional 100 million additional searches. Google announced an innovative new Translation feature - Google Translate - that automatically provides the results of a search query in your own language from any other language (that Google supports).

Amazon.com, Inc. (NASDAQ: AMZN) was up another 8% in just one week, and is now up a whopping 74% for the year. New innovations, analyst upgrades and short squeeze contributed to the rise.

“Leading online retailer Amazon.com, Inc. (NASDAQ: AMZN) today announced it has acquired Brilliance Audio (www.brillianceaudio.com), the largest independent publisher of audiobooks in the United States. The acquisition will enable Amazon to work closely with the book publishing community to further expand the number of books produced in audio format and provide customers with an even greater selection of audiobooks to find, discover and buy.” “Amazon.com is also planning to launch DRM-Free MP3 music Download Store with songs and albums from EMI Music and more than 12,000 other labels.” “Amazon.com's grocery store launched new Subscribe & Save feature allowing automatic fulfillment of most popular items.” – Amazon is innovating on all cylinders, and these announced innovations will positively impact Amazon’s growth in 2007 and beyond. In particular, the millions of songs that Amazon.com will offer for MP3 music lovers.

Apple Inc. (NASDAQ: AAPL) was up 3% and is now up 34% for the year; there is a huge momentum building for the soon to be launched iPhone, including rampant speculation on the release date, and rollout frenzy. “Prudential reiterated overweight target for Apple, and raised their target on AAPL to $125 from $115 following meetings with the mgmt. The firm says mgmt appeared confident on a number of fronts including 1) its prospects for Mac share growth over time, 2) the potential for iPhone success, and 3) the viability of the iPod platform despite the impending launch of iPhone. The firm says their checks suggest 1) continued momentum for Mac sales, 2) a timely launch of iPhone, and 3) series of new iPod launches beginning as early as June, extending through September.” – All these timely innovations bode well for Apple and Apple investors.

Discount retailer Target Corp. (NYSE: TGT), amid innovations and strength in its credit-card business and better margins, reported an 18% jump in first-quarter profit on Wednesday. Target was up 4% in one week, and is now up 7% for the year.

On a conference call with analysts, Chief Executive Bob Ulrich called the results "excellent," adding that Target's (TGT) share of the market against competitors such as Wal-Mart Stores Inc. (NYSE: WMT), Costco Wholesale (NASDAQ: COST) and Sears (SHLD) climbed to 9%.

According to MarketWatch, for the quarter ended May 5, Target said it earned $651 million, or 75 cents a share, compared with last year's income of $554 million, or 63 cents a share.

Total sales for the Minneapolis-based discounter rose 9.2% to $14.04 billion from $12.86 billion a year ago. Revenues from operations climbed 9% to $13.62 billion while credit-card revenues were up 13% at $418 million. The most impressive data was: Sales at stores open longer than a year, which retailers use to measure growth, rose 4.3%.

The results outpaced Wall Street's expectations for a per-share profit of 71 cents but came up short of a forecast for $14.17 billion in sales.

Target said it still expects to post earnings of $3.60 a share for the full-year period, in line with the average forecast of analysts polled by Thomson Financial. And although quarterly guidance was not offered, CFO Scovanner called analysts' average estimates for the second, third and fourth quarters "respectable."

General Electric Co. - GE (NYSE: GE) introduced 11 new ecomagination products, services and projects, including the world's first hybrid locomotive and the ecomagination Homebuilder Program - a comprehensive package of energy efficient appliances, lighting, advanced building design and real-time energy management combined with a GE mortgage that rewards energy efficiency.

"Customer demand for the most advanced, most fuel-efficient and least emissive technologies is what sparked ecomagination," said GE Chairman and CEO Jeff Immelt. "Increasing demand from our customers is what is making it succeed beyond our expectations.

"Green is happening everywhere across GE," Immelt said. "From our transportation products to renewable energy to clean water to how we make television shows and movies to home building and mortgages, green is truly universal at GE." - GE was up 2% for the week, and importantly, is now in the black for the year – up 1%.

eBay Inc. (NASDAQ: EBAY) “announced an agreement with Sanook!, the leading online portal in Thailand, to launch an e-commerce site that will enable individuals and businesses in Thailand to participate in local trade as well as cross border trade through eBay's global Web sites. Under this revenue-sharing agreement, the co-branded site -- Sanook! eBay -- will be managed and operated under a newly formed Sanook! subsidiary. The Thai-language local site is expected to launch in approximately five to seven months. According to research firm IDC, Thailand currently has more than 16 million Internet users - a figure expected to grow at a compound annual growth rate of 25 percent through 2009. The agreement gives eBay the opportunity to participate and drive economic growth in the region. Once the site is launched, Thailand will be the 38th market where eBay has a local presence.” - Way to go global eBay! eBay was even last week, and is up 9% for the year. I attended TiEcon 2007 the previous weekend, and was inspired by Meg Whitman’s keynote presentation, President and CEO of eBay. Check out: Innovation and Leadership lessons from Meg Whitman, eBay CEO and President, and top Innovator

Weekly Declines

The news of the previous week was Microsoft’s (NASDAQ: MSFT) acquisition of AQuantive (NASDAQ: AQNT). Microsoft hits a walk-off home run with Aquantive acquisition. In last week’s announced innovations: “Microsoft Office SharePoint Server 2007 received U.S. Department of Defense 5015.2 Certification. 'Forza Motorsport 2' raced into living rooms on Xbox 360 worldwide.” – How hot is the Indian business for Microsoft? Ravi Venkatesan, chairman of Microsoft India, in his keynote presentation at TiEcon 2007 believes it is “absolutely red hot”. Opportunities abound everywhere. Microsoft was down 1%, however is up 2% for the year.

Yahoo Inc. (NASDAQ: YHOO) saw the biggest decline at 4% last week, however is still up 12% for the year; the rumors of a potential acquisition by Microsoft fizzled out upon Microsoft’s AQuantive acquisition and subsequent statements suggesting that Microsoft is set in the online ad business.

Yearly Leaders and Laggards

Who sits on the top of The Innovation Index? Amazon.com, Inc. (NASDAQ: AMZN) gained 8% last week and leads all innovators with 74% gains for the year. Apple Inc. (NASDAQ: AAPL) is next up with 34% appreciation for the year. America Movil (NYSE: AMX) stayed even last week to remain at 31% gains for the year. There are five other innovators with double-digit gains for the year, including: 3M Company (NYSE: MMM) at 13%, HP added 2% to grow to 11% (NYSE: HPQ), Intel Corporation (NYSE: INTC) at 10%, RIM (NASDAQ: RIMM) at 30% and Yahoo Inc. (NASDAQ: YHOO) at 12%.

Starbucks Corporation (NASDAQ: SBUX) is down 19% for the year; can Starbucks rally in the second half of the year?

About The Innovation Index

The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in North America.

The Innovation Index has returned 119% over the last five years. This assumes an investment in each stock of The Innovation Index (buying each stock). An average of $100 invested in The Innovation Index on December 31, 2001 returned $219 as of December 29, 2006. By comparison, $100 invested in each of S & P 500, NASDAQ and Dow Jones Index returned $124. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by 77% over the last five years.

The Normalized Innovation Index has returned an impressive 174% over the last five years. This assumes equal investment in each stock of The Innovation Index as of December 31, 2001.

Alphabetical list of the top 20 Innovators of The Innovation Index and their stock ticker symbols:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Dell Inc. - (NASDAQ: DELL)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Microsoft Corporation - (NASDAQ: MSFT)
Research In Motion Limited - (NASDAQ: RIMM)
Southwest Airlines Co. - (NYSE: LUV)
Starbucks Corporation - (NASDAQ: SBUX)
Target Corp. - (NYSE: TGT)
The Proctor & Gamble Company - (NYSE: PG)
Wal-Mart Stores, Inc. - (NYSE: WMT)
Yahoo! Inc. - (NASDAQ: YHOO)

The Innovation Index will analyze the positions and standings of the top 20 Innovators at the end of each year. For 2007, there will be no further changes in The Innovation Index.

Disclaimer: I invest in the stocks comprising The Innovation Index.

The Innovation Index drops 4%, still up 1% and leads major U.S. indices - Weekly Report 02-28-07

Amidst the biggest market selloff since 2001, The Innovation Index dropped 4% in one week. NASDAQ and Dow Jones Index each dropped 4% as well in one week. S & P 500 dropped 3% in one week.



For the year though, The Innovation Index is still up 1%. S & P 500 is down 1%, and Dow Jones Index is down 2%. NASDAQ is even for the year. The Innovation Index continues to hold on its own despite the large selloff, and is in the positive territory.

The Innovation Index closed at 70.12 on February 28, 2007, up 0.81 points, or 1% from the closing price of 69.31 on December 29, 2006.

Yahoo! Inc. (NASDAQ: YHOO) continues to lead the top 20 Innovators with an impressive 21% gain for the year. Research In Motion Limited (NASDAQ: RIMM) is back to double digit gains, and is up 10% for the year. eBay Inc. (NASDAQ: EBAY) is still holding well at 7% gain for the year. Target Corp. (NYSE: TGT) is surprisingly doing well at 8% gain for the year owing to a solid earnings report, same store sales increase of 4.8% from previous year, and good outlook. Wal-Mart Stores, Inc. (NYSE: WMT) is also in the positive at 5% gain for the year buoyed by strong retail market.

Across the board, all the top 20 Innovators were in the red last week owing to the large selloff. However, the top 20 innovators will prove their resilience as the market begins a rebound. For now, The Innovation Index is still up 1% for the year, and continues to beat the major U.S. indices.

About The Innovation Index

The Innovation Index introduced in December, 2006 is a weighted stock price index of the top 20 Innovators in North America.

The Innovation Index has returned 119% over the last five years. This assumes an investment in each stock of The Innovation Index (buying each stock). An average of $100 invested in The Innovation Index on December 31, 2001 returned $219 as of December 29, 2006. By comparison, $100 invested in each of S & P 500, NASDAQ and Dow Jones Index returned $124. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by 77% over the last five years.

The Normalized Innovation Index is even more impressive, and has returned 174% over the last five years. This assumes equal investment in each stock of The Innovation Index.

The alphabetical list of the top 20 Innovators of The Innovation Index along with their stock ticker symbols are presented below:

3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Dell Inc. - (NASDAQ: DELL)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NYSE: INTC)
International Business Machines Corp. - (NYSE: IBM)
Microsoft Corporation - (NASDAQ: MSFT)
Research In Motion Limited - (NASDAQ: RIMM)
Southwest Airlines Co. - (NYSE: LUV)
Starbucks Corporation - (NASDAQ: SBUX)
Target Corp. - (NYSE: TGT)
The Proctor & Gamble Company - (NYSE: PG)
Wal-Mart Stores, Inc. - (NYSE: WMT)
Yahoo! Inc. - (NASDAQ: YHOO)

The Innovation Index will analyze the positions and standings of the top 20 Innovators at the end of each year. For 2007, there will be no further changes in The Innovation Index.

Disclaimer: I invest in the stocks comprising The Innovation Index.

Blockbuster versus Netflix - Winner takes all?

Netflix (NASDAQ: NFLX), the leader of online movie rental, had revenue of $997 million and 6.31 million subscribers in 2006 (year end). Netflix revenue increased 45% in 2006, adding $309 million to the 2005 total revenue of $688 million. Netflix ended 2005 with 4.18 million subscribers (year end). An average Netflix subscriber spends about $16 for monthly subscription. Netflix added 654,000 new subscribers during the December, 2006 quarter alone. Netflix business appears to be firing on all cylinders, and is poised to repeat the performance or even surpass it in 2007. It appeared for a couple of years that Netflix will take over the movie rental business altogether. Wal-Mart (NYSE: WMT) tried the online movie rental business, launched it in a huge way, and quietly closed it down, bowing the leadership position to Netflix.

The leader of movie rentals, Blockbuster Inc. (NYSE: BBI) was nowhere to be found. Until recently. Blockbuster was once thought finished. Netflix single-handedly created the online movie rental business, a new category killer that caused total disruption in the movie rental industry. Netflix business epitomizes disruptive innovation. Netflix, the disruptor, went up against the market leader, the sustainer, Blockbuster, and carved out a huge bite of the movie rental business. Blockbuster was caught napping. Blockbuster did not know how to respond to the Netflix business model of mail-order movie rental. Blockbuster tried many models of its own by luring customers to the thousands of Blockbuster stores. However, the customers enjoyed the flexibility of renting movies online at Netflix, where they could browse the catalogs in the comfort of their own homes, read reviews, choose the movies to rent, and submit the order online. The movies arrived within a few days, by which time the customer has already viewed the previously rented movies multiple times. Customers simply shipped the movies back in a pre-paid postage return envelope. No trip to Post Office necessary. All for a monthly subscription of about $20 (which is now $17.99).

Blockbuster, the established leader of movie rental business had it made with over 5,000 stores in the U.S and over $5 billion in revenue in 2001. The movie rental business was in a status quo, with hundreds of thousands of customers going to Blockbuster stores, choosing the movies (or video games) by browsing around the stores, and renting the movies one at a time. Blockbuster required a paid membership to rent movies, and the business model was pay-per-rental. Blockbuster grew by creating local stores, and the topline revenue growth was tied to the number of new store openings. The incremental business per store was flat or tapered (Blockbuster tried selling movies and games, previously rented movies, and other movie add-ons without a tangible upside). Customers essentially paid anywhere from $2 or higher to rent out the movies. Customers were used to this model, and rivals such as Hollywood Video and local movie rental stores offered similar business models. The business model of pay-per-rental had a huge drawback: Late fees. Most customers forget to deliver the movie back within one day or two days, and ended up paying extra day charges (some even argued these late fees from time to time). Late fees were a sizable percentage of Blockbuster business; hence, there were no real plans to change the business model. Other drawbacks included not finding the movie you want to rent (it's already checked out), and the high cost of rental of a new movie. The customers quietly rented from Blockbuster, frustrated by the late fees, but content to rent (there were no viable alternatives). No one could really match the presence, the size, the selection and quality of Blockbuster. And Blockbuster was getting bigger each year, to the tune of $6 billion plus in annual revenue in 2004.

Enter Netflix

Netflix attacked the pain point of Late fees head on. Netflix introduced "No Late fees". The customers loved this. No more frustration of paying a late fee if you forget to return the movie on time. You simply return the movie when you are ready to return in a postage pre-paid envelope. And the icing on the cake: unlimited Movie rentals. Albeit up to three movies at any given time. The only limit was really the time it took for movies to ship from Netflix warehouses and arrival at your home. If you are into watching lots of movies, you can essentially time your orders so that you can end up watching fifteen or more movies each month. All for a low monthly subscription fee. Netflix essentially emulated a monthly service fee business model similar to a telephone company. And Netflix made it simple to rent online. Of course, Netflix had no stores, i.e. physical stores. Netflix was completely an online movie rental business, similar to a mail order business. Netflix also reduced the pain points of knowing which movies to rent ahead of time, without making a trip to the store. For instance, if a movie was rented out, Netflix customer simply had to put that movie on the wait list. And as soon as it became available, it was automatically shipped out. Finally, the cost per movie rental became somewhat cost-effective - especially if you watch at least half a dozen or more movies each month. When Netflix entered the movie rental business, Blockbuster and others scoffed at the whole online business. However, Netflix became hugely popular, and movie rental buffs from college dorm students to teenagers, adults to families, became Netflix loyal customers. To the tune of 6.31 million subscribers as of December, 2006. Netflix created a $1 billion movie rental business from nothing. Netflix disrupted the likes of Blockbuster, whose businesses essentially stalled or were in a free fall, became unprofitable, and even closed.

The second coming of Blockbuster

Netflix served notice. And Blockbuster business came under attack. However, Blockbuster, like a tried and tested champion, held up. Blockbuster tried many business models, eliminated late fees, introduced two for one rental, provided incentives to renters, and even introduced unlimited on-premise rentals. However, the business was spiraling down, and customers kept leaving the stores. Blockbuster even had to close stores, and put plans on opening new stores on hold. However, it did not succumb. Eventually, Blockbuster got it right. Blockbuster realized that it was in a unique position to address the customers on its given strength: store locations. However, in order to captivate the online movie renters, Blockbuster also needed to create an online business. With a twist. Blockbuster provided movie renters the best of both worlds - rent online or rent at the store, rent online and return to the store, rent at the store and return online (possibly), rent online and return online. Whereas Netflix only provided customers one service model: rent online and return online, Blockbuster now had the flexibility and delivery model to offer customers tremendous flexibility and choice. All for a monthly subscription fee which is the same as Netflix's monthly subscription. In retrospect, this innovation from Blockbuster made perfect sense. And now it was simply a matter of time before customers returned. Blockbuster became aggressive in the marketing, including the recent promotion inviting Netflix customers to rent movies on President's Day (when post offices are closed), and over the weekends. Also, asking customers to bring in their Netflix return labels for free rentals (with a membership). Blockbuster is appealing to the emotions of customers with the message that you can rent a movie on the weekend, when there's no mail or "just when the mood strikes" - providing a "freedom of choice" and not having to wait for movies as they arrive in the mail.

Blockbuster's new Total Access provides customers unlimited movie rentals, online or in the store. Blockbuster ended 2006 with 2.2 million subscribers and revenues closing in on $7 billion (to be announced next week). Importantly, in the last quarter of 2006, Blockbuster added 700,000 subscribers, beating Netflix by about 55,000 subscribers. Blockbuster's Total Access Model has the momentum. With timely promotions such as President's Day promotion, and Valentine's Day (where Blockbuster offered a list of favorite movies for the special occasion), Blockbuster is capturing the mindshare from movie renters.

Netflix answers back

Netflix Chief Executive Reed Hastings, in a Marketwatch story, told analysts after the recently concluded earnings call "that the company expects to see a modest increase in subscriber cancellations in the first quarter of 2007 as rival Blockbuster Inc. aggressively markets its new Total Access program, which enables its online customers to either return DVDs through the mail or exchange them at stores for free in-store movie rentals."

Hastings believes though that "Blockbuster's impact on its subscriber base should decrease in the second quarter." He added that Netflix observed a similar pattern in 2005, when Blockbuster cut its monthly subscription price and heavily marketed that move. In that case, Blockbuster "had already captured in [the first quarter of 2005] the few consumers most likely to switch," Hastings said.

The very fact that Blockbuster added more subscribers than Netflix's in the latest quarter has to make Netflix rethink their strategy. Netflix recently introduced the long-awaited plan to offer movie and TV downloads over the Internet. "Our accomplishments during the year -- strong subscriber growth, continued improvement in the customer experience, and increased profitability -- together with the recent launch of the first generation of our online video option, leave us better positioned than ever to achieve our long-term objective of being the movie rental leader," Hastings said in a press release.

Winner Takes All?

Who will be crowned the winner of movie rentals? Would it be Blockbuster whose stock price has appreciated more than 80% in 2006, and importantly, has finally figured out the appropriate formula: Blockbuster Total Access. Or would it be Netflix, who has found time and again to improve upon its business model, and has shown ability to innovate with the recently announced online movie downloads? What about Apple (NASDAQ: AAPL) with the iTunes Movie download service available to the millions of iPod owners and iTunes subscribers alike. Apple recently added 150 movie titles from Lions Gates (movies including "Saw", "Basic Instinct", "Dirty Dancing - Havana Nights") to the iTunes store, and is poised to grow the online movie business. Wal-Mart has re-entered the online movie rental business as well offering its own version of online movie downloads in partnership with the major movie studios and powered by HP (NYSE: HP). Finally, Amazon.com (NASDAQ: AMZN) has also recently expanded the Unbox online movie download service. Amazon.com and TiVo Inc. (NASDAQ: TIVO) recently announced "Amazon Unbox on TiVo," a soon-to-be-launched service feature that will provide TiVo subscribers with the ability to rent and purchase movies and television shows from leading studios and networks. There is also the DVDPlay rental kiosk service available at the local grocery stores through a station similar to a vending machine and providing DVD rentals for less than $1.30. And then there are all the cable operators and satellite TV operators coming up with various options to rent movies as well. The entire movie rental industry has many players vying for the top spot. If the online movie download business takes off, it can cause yet another disruption in the movie rental industry - in the same vein as what Netflix did earlier. It's only a matter of time before Blockbuster will offer its own online movie download service as well. Why not? Offer the customers all the choices, simplify the business model, and make it extremely easy for customers to rent a movie through any of the available mediums: in the store, online through mail, online through immediate download or directly through cable or satellite. Perhaps Blockbuster is in the best position to address this changing market of movie renters and movie rentals worth $25 billion dollar annually and growing. Perhaps no one player is.

References:

Blockbuster Press Releases, Quarterly and Annual Earnings reports
Netflix Press Releases, Quarterly and Annual Earnings reports
Marketwatch
Top Ten Innovations for 02-14-07
The Innovation Index

Disclaimer: I invest in the stocks comprising The Innovation Index, beginning in 2007.