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Sizing Up Five Rivalries

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to Friday Five.

Ohio State versus Michigan. Batman versus the Joker. Jif versus Skippy.

If you can't tell, it's rivalry week on the Friday Five. We've got five rivalrous headlines that we're going to talk to you about today, and joining me fresh back from sabbatical is Morningstar markets editor, Jeremy Glaser.

Jeremy, welcome back.

Jeremy Glaser: Thanks Jason. Glad to be here.

Stipp: So what do you have for the Friday Five this week?

Glaser: Well, we're going to take a look at some competition between Pepsi and Coke, between AT&T and Verizon, Apple and Google, private and public markets, and finally we'll take a look at our social network showdown.

Stipp: Well, I'm thinking way back in my memory, I remember the Coke/Pepsi challenge. What's going on with Coke and Pepsi this week?

Glaser: Yeah, Jason, as you know, Coke and Pepsi are some of the longest-standing corporate rivals in America. Pepsi really upped the ante when they bought their bottlers. They said they were going to get all of these efficiencies and synergies in being able to control the distribution and get new products out to market faster.

And when they announced third-quarter results, it seems like that's actually the case. Pepsi was able to release a new line of Gatorade products that really gained some traction, helped them shore up with their somewhat struggling North American beverage business.

But with all great competitions, Coke wasn't just going to stand still. They announced that they were going to buy their bottlers, and this week that deal actually closed and they're going to be able to get some of the same efficiencies that Pepsi has.

So this is definitely a short-term advantage for Pepsi. But is this something that they can turn into a long-term competitive advantage over Coke in the beverage space? In time, we'll have to see.

Stipp: Big rivals in the telecom space, AT&T and Verizon were in the news because the iPhone will be available to Verizon starting next year. Is that going to be a game-changer for these two rivals?

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Glaser: We'll have to see. Verizon and AT&T have certainly been trading barbs over the last couple of years over the quality of their networks and over a bunch of other issues. But consumers continue to flock to really both networks for different reasons. Verizon if people wanted more of a reliable network and for AT&T if they wanted the iPhone--this seemed to be where people were going.

I think when the iPhone moves to Verizon, AT&T is certainly going to hurt. There is a lot of people who are on that network, not because they have some relationship with AT&T or they have a lot of family on it. It's because they want that one phone, and I think they are going to be pretty willing to move to Verizon if the pricing is roughly similar, if they think they can get the same phone on a better network.

But I think there are other people who could also be hurt by this deal. Motorola has done a pretty good job of selling phones like the DROID into Verizon with Google's Android software on it, and they could really be hurt if Verizon customers walk into the store and have to choose between the DROID X and the iPhone, I think they might still go for the iPhone if they have that option. It could hurt their sales right when that business is trying to get back on its feet.

Stipp: Sticking with Apple and the battle in the living room, Google announced Google TV this week. Could be a competitor for the Apple TV, which I think has been launched a couple of times now. What does it look like as far as who is going to control the TV in that space going forward?

Glaser: The idea of hooking up your Internet to the TV is nothing new. Web TV has been around for a very long time. People have been hooking up home theatre PCs, the original Apple TV has been around for a while. There has been lots of set-top boxes. A lot of people have tried to figure out this space, and no one has been really successful so far, and now there is a new push. Apple released their new Apple TV at a $99 price point, very competitive. But all it can really do is stream Netflix shows and stream $0.99 rentals that you get from Apple itself.

Now, Google is taking a slightly different track with a more open architecture, which they announced a while ago, but we really saw the first products come out this week. For example, Logitech announced a product this week, The Revue; it will cost $299 and does a lot of similar things to the Apple TV but also gives you full web access and will be able to run applications, and it runs on Google software as well.

So it certainly is a market that people are trying to get back into, but I think it's an open question of consumers: How much connectivity do they want on their TV? They have been able to potentially access the Internet on their TV for a while. People don't want to check their e-mail or surf the web. It seems like they really just want to get that content over there.

So we'll see if Apple's kind of lighter model works better or if Google's more open, heavier model is more successful. But I think this is a battle that's going to wage for a few more years.

Stipp: I guess we'll have to stay tuned, Jeremy?

Glaser: Exactly.

Stipp: So, Jeremy, in the broader markets, after an absence during the financial crisis, it looks like private equity has come back to compete for public companies. What do you see going on in that space?

Glaser: Sure. There's been a tension between private equity and being a privately held company and being a publicly held company. Certainly, there are advantages to both. You get the flexibility to do what you want as a private company and not have to answer to shareholders, but you lose the liquidity that you get from being a publicly traded company. This week we saw KKR potentially make a bid for Sara Lee; nothing's confirmed yet but the market really bid up Sara Lee shares after news of this potential bid leaked.

I think it shows that people think that private equity coming to take out a relatively large company is a credible threat that the financing is there, that there aren't any regulatory hurdles, that after kind of nursing their wounds from the peak of the private equity bubble that they are kind of back out there, making deals again.

I think we're going to hear a lot more from private equity. There is still a lot of money there looking to get invested. Another thing to keep an eye on.

Stipp: So, for number five, Jeremy, if you can, in 140 characters or less, please explain to me the significance of the new CEO at Twitter?

Glaser: I don't know. And I can do it in a lot less than 140 characters. Yes, this week, there was a lot of news about social network showdowns with the Facebook "The Social Network" movie being released. There is a lot of discussion about the founding of Facebook. Facebook released a few new features. But one of the things that really made the news was that the COO of Twitter is now going to become the CEO.

It doesn't seem like there is going to be a lot of changes in terms of direction and strategy. Twitter is certainly a company looking for a business model. It's very difficult to monetize the way that people are tweeting. They tried sponsored tweets, display advertising, and there are lots of things they can do, but it's really going to take someone with a lot of vision to figure out how to make a lot of money out of Twitter other than just have a lot of users.

It's something that they are going to be working on for a while. It's something Facebook is still working on. We all get very wrapped up in which social network is going to win. But I think the question, investors need to ask is when will any of these social networks truly be profitable and are any of them good businesses and not just cool products.

Stipp: Well, I'm going to take my Facebook status to say, "Jason Stipp welcomes you back from vacation, Jeremy." Thanks for joining me.

Glaser: You're very welcome.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.