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Five Resolutions From Corporate America

Jason Stipp

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

Although a lot of people take vacation around this time of the year, Corporate America is already looking ahead to 2011.

And although we can't know for sure, Morningstar markets editor Jeremy Glaser has a short list of probable resolutions floating around the executive suite. And he's here to share them with us today.

Thanks for joining me, Jeremy.

Jeremy Glaser: You're welcome, Jason. You know the Friday Five is always a vacation for me.

Stipp: What do you have for us this week?

Glaser: Well, we're going to take a look at resolutions from Toyota, from the retail industry, from Comcast, from all of the non-Apple consumer electronics firms, and finally, from the airline industry.

Stipp: Given the kind of year Toyota had, they might want to think about how next year might be, how it could be improved. What do you think is on their shortlist for resolutions?

Glaser: Toyota did not have a very good 2010, although the recall got overshadowed by the BP oil spill and by other things going on in the marketplace, it really had a big impact on consumers. They saw sales decline. They had to offer really pretty substantial discounts to get people to continue to look at the cars, to prove that they are safe, to offer extra warranty services, to do all of these things, and they still haven't completely gotten rid of the cloud surrounding Toyota, surrounding their quality-control issues.

I think for 2011 their resolution is certainly going to be to get over that as quickly as possible, and to gain their reputation for quality back. Is this something that they can do in a year? Probably not. But with General Motors and Ford really firing on all cylinders again, and starting to produce cars that certainly people in the United States and abroad actually want to drive, [Toyota] is not going to have the easy market share gains that they had before. It's going to be difficult to get back to that top spot in terms of quality. It's going to be something they're going to work on--definitely a good resolution for them.

Stipp: Here at the end of 2010, we saw the consumer actually opened the wallet a little bit around the holiday season. This probably is a good sign for retailers. They want to carry that into next year. What do you think is on the resolution list for all those stores out there?

Glaser: It's a great sign for the retailers; it's also a great sign for the rest of the economy as consumer spending is really quite important. But the retailers are going to need to work a lot on getting people off of discounts and getting people to stop looking for massive discounts on inventory and just thinking, "well, if I wait another week, another two weeks, it's going to 50% off, 75% off."

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Those kind of discounts were necessary in the depths of the recession and even coming out of it, because consumer spending was so weak. But as people are willing to spend more, retailers are going to have to grow somewhat of a backbone and keep pricing higher.

I think a big resolution for them is going to be less discounts, less promotional activity, get people back onto full price. I think it's going to help their bottom line. We'll see if consumers react positively to it or not, but that's definitely going to be a big push for them.

Stipp: So, speaking of purchases, Comcast made a big one with NBC. That's probably something that's on their to-do list for 2011. What do you think they are resolving to do with that purchase?

Glaser: It's going to be a big part of their 2011, 2012, 2013, probably going on for a while. The deal hasn't gotten final regulatory approval yet, but it looks like it's inching very close. Certainly, there are going to be some restrictions put on it, certain net neutrality restrictions, who they are going to be able to not carry on their cable channels, carry on their cable channels. We're not sure what those are going to look like yet, but the deal will probably close sometime in early 2011.

Now Comcast has a broadcast network on their hands. It's not clear that they know exactly what they are going to do with it. Our analyst Mike Hodel doesn't think that there was a ton of synergy between the broadcast networks in the content and Comcast. It's not going to help them negotiate better terms with other third-party content; you can't just get rid of ESPN, get rid of other stations that people really count on. They, I'm sure, have some creative ideas for it, but I think that their resolution for the year is certainly going to be finding a way to make NBC work for them, make this pretty expensive deal for them turn out well for shareholders.

Stipp: In consumer electronics, Apple had a good 2010. The iPad had a lot to do with that. Apple's rivals probably have a few things on their resolution list, how to deal with Apple as a rival in the next year?

Glaser: At the beginning of this year, there was a lot of speculation as to whether tablets had a place in the marketplace. Do people really want this third device kind of squished between the smartphone and the laptop computer? It turns out the answer is, yes.

Apple convinced plenty of people to shell out a good chunk of change for their tablet computer, and all of the other non-Apple companies are now scrambling to put out their competitor and scrambling to get something onto the marketplace. I think their resolution for next year is going to be: Put out better products.

The ones that have hit right now are nothing special. A lot of them run a version of Android that's really optimized for cell phones and not for tablets. Microsoft has basically stayed out of the tablet OS space. And I think a lot of this is going to change in 2011.

We're expecting next week at the Consumer Electronics Show to hear a lot about new operating systems, to hear a lot about new hardware, to convince people that the iPad is not the only game in town. It's going to be a tough sell. We saw how hard it was to displace the iPhone sales; it took Android a while to gain some of that traction. They had to really do a lot of work there. In the iPod, it never actually happened. These manufacturers are going to have to work a lot to convince consumers that they are offering a better product at a better value. It's going to be difficult, but that's obviously what they're going to be working on.

Stipp: Jeremy, a lot of folks are traveling this time of year on airplanes, in airports. They probably have a list of how they'd like to travel better next year. But for the airlines themselves, what do you think is on their resolution list?

Glaser: The resolution is to find more things to charge you fees for. 2010 was not a terrible year for the airlines. For an industry that's known for losing money, they managed to turn a profit industrywide, and a lot of that was from baggage fees, from change fees, from anything that they could charge you for that previously you were getting for free. This allowed them to make the base fares rise a little bit. They took capacity out of the market. There are obviously other things that were happening here, but fees were something that they control very directly.

We saw Spirit Airlines this year decide to charge a carry-on baggage fee. I don't know if that's something we're going to see spread industrywide, but I think they are going to be looking very closely at different places to get a little bit more money out of your wallet, be it for better seating on the airplane, be it for onboard entertainment, Wi-Fi onboard--anywhere they can charge you, they are going to find it. They've found that's high margin, it's helping them fly and keeps them in the black, which is a nice change from where they were before.

Stipp: Well, Jeremy, I hope all your resolutions come through. Happy New Year.

Glaser: Oh, Happy New Year to you, Jason. Thank you.

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