Despite relatively good earnings, GM has much more work to do before it can claim that it is actually turning around

by David Welch

General Motors (GM) looks pretty good these days when you compare its performance to the huge losses reported this week by rivals Ford Motor (F) and DaimlerChrysler’s (DCX) Chrysler Group. But GM’s meager profits and burning cash pile show that the struggling automaker still has a long way to go before management and shareholders can start popping champagne corks.

GM made $529 million in the quarter if you exclude $644 million in special charges, including a big one for the sale of 51% of its GMAC finance arm. That’s a $1.6 billion turnaround from last year. But dig in to the numbers a bit and all but $81 million of that came from a few one-time tax windfalls. “These are baby steps in a long road to recovery,” says Gimme Credit analyst Shelly Lombard. “The quality of earnings was disappointing because most of it came from tax benefits and they are still burning cash.”

The bottom line for GM is that the company still has a very long way to go. The latest results, while much better than last year’s $1.1 billion third-quarter loss, are hardly enough to keep dissident shareholder Kirk Kerkorian from trying to woo shareholders should he decide to launch a proxy fight. Kerkorian was displeased when GM nixed his proposal to form an alliance with Renault-Nissan (NSANY) early this month, prompting his deputy, Jerome B. York, to quit the board that he joined only in February.

Cash Concerns

The arguments on the two sides are this: GM says that its small operating profit is evidence that Chairman and CEO Richard Wagoner Jr.’s turnaround plan is taking hold. Kerkorian’s camp argues that the company still has most of the long-term problems that got the company into its big mess in the first place.

Without a doubt, GM has big problems still to manage. While some new vehicles are generating strong margins, GM still has a lot of older models for sale that don’t drop much to the bottom line. GM also burned through $5 billion in cash in the quarter, including restructuring costs, and can’t yet say when the company will stop the burn. “Relative to where we came from, there is significant improvement,” GM Vice-Chairman and CFO Frederick “Fritz” Henderson said in an interview. “But our starting point was really bad.”

Henderson readily admits that turning GM’s cash flow around is still a big job. Even though GM—which has $20.4 billion in cash—will realize about $6 billion in cost cuts this year, only $2.5 billion of that is in real cash savings. The rest is purely savings on an accounting basis. Even the $448 million tax windfall GM enjoyed in the third quarter did not bring in any cash, Henderson said.

Next year, GM will get the full impact of Wagoner’s $9 billion cost-cutting plan. But $3 billion of that is also noncash.

Plus, GM still hasn’t paid for all of the severance packages and buyout deals that eliminated 35,000 jobs. The company paid $1.9 billion in cash in the third quarter for restructuring costs. Henderson says GM will be paying more separation costs into the first quarter of next year.

Burden of Delphi

Former GM parts unit Delphi will also drain GM’s cash in the future. GM still has contractual obligations to employees of the bankrupt parts maker. It may have to assume up to $7 billion in pension and health-care liabilities that would boost its cash expenses, albeit over many years.

Plus, to get the union to accept a lower wage-and-benefits package so that Delphi can drop costs and GM can possibly sell the company, the automaker may have to subsidize the wages of some of the employees. That could cost GM $400 million in pretax payments next year and $100 million a year after that. That, too, will eat some cash.

That doesn’t mean GM is headed toward bankruptcy, says Lombard. Its $20 billion cash pile is shrinking, but when the sale of 51% of GMAC goes through this quarter, GM should get $10 billion in cash.

Automotive profits still remain elusive, though. GM’s auto business lost $116 million, with the struggling North American business losing $367 million. What’s worse is that even as GM’s revenue per vehicle jumped almost $370 a car from the second quarter, the amount of profit its cars contribute actually fell.

Long Way to Go

Henderson blamed a number of factors, including rising shipping costs and a big jump in prices for raw materials, especially precious metals used in catalytic converters.

Another factor is GM’s model lineup. The new full-size SUVs launched in January pushed up per-vehicle margins because buyers tend to order loaded vehicles with lots of expensive options when new models hit dealerships. But as a new model rolls through its first year on the market, consumers buy less pricey models and their profit power slips.

Even though new models represent 30% of GM’s volume, the older models are under pressure from competition and have a tougher time making stronger profits, Henderson said.

It’s no wonder. GM’s U.S. market share is down from 26.6% to 24.5%, according to Autodata. To keep market share up, the company has pushed up incentives to more than $3,400 per vehicle—about $1,100 above what GM spent in the second quarter.

Those kinds of numbers are why Henderson says that GM is “a long way from where we want to get to.” Kerkorian would probably agree. Looking ahead, the question will be whether Wagoner and Henderson can get GM where it needs to be fast enough to keep Kerkorian at bay.

Welch is BusinessWeek’s Detroit bureau chief.

Skype, the Web telephone company, said on Monday it would allow consumers in the United States and Canada to make free phone calls, a promotional move that marks a new blow to conventional voice calling services.The offer, which extends through the end of 2006, covers calls from computers or a new category of Internet-connected phones running Skype software making calls to traditional landline or mobile phones within the United States and Canada.

Previously, users of Skype, a unit of online auctioneer eBay Inc., were required to pay for calls from their PCs to traditional telephones in both countries. Calls from North America to phones in other countries will incur charges.

Skype already offers free calling to users worldwide who call from computer to computer.

The company is seeking to accelerate usage in the North American market, where adoption of its voice-over-Internet technology has lagged other regions of the globe. Based in Luxembourg, it counts more than 100 million registered users globally, including 6 million in the United States.

Henry Gomez, general manager of Skype North America, said he believes the move would rapidly accelerate adoption of the service. Skype will pick up the interconnection costs of making calls to phone networks owned by other carriers, he said.

“Skype anticipates that completely free calling in the U.S. and Canada will expand Skype’s increasing penetration in North America and solidify Skype’s position as the Internet’s voice communication tool of choice,” Skype said in a statement.

The offer is likely to put price pressure on rival voice-over-Internet phone service Vonage Holdings Corp., which is expected to go public later this month. A spokesman did not return calls seeking comment.

Although Vonage and Skype serve somewhat different markets — with Vonage acting as a full replacement service for traditional phones over Internet lines, and Skype considered by most as a complement to existing service — the free offer could siphon customers away from Vonage.

“In one stroke, Skype simplifies the choice to try Skype,” said Phil Wolff, an editor at Skype Journal, an independent consulting group that publishes an online news site on Skype developments. “This promotion targets Skype’s hardest market: North America.”

The move puts pressure on rival Internet services such as Microsoft Corp., Yahoo Inc., AOL, Earthlink and Google Inc., which charge small per-minute fees for computer-to-phone services, Wolff said.

Skype, which allows free Web-based calls between members, said the offer to U.S. and Canadian consumers is made feasible by the low cost structure of North American telecom markets relative to other countries, where phone tariffs are higher.

“The structure and efficiency of the telecommunications industry in the U.S. and Canada make it possible for Skype to offer free calls,” Skype said on its Web site.

In October, eBay CEO Meg Whitman signaled that Skype users could eventually expect to make telephone calls for free, with no per-minute charges, as part of a package of services through which carriers make money on advertising or transaction fees.

“In the end, the price that anyone can provide for voice transmission on the ‘Net will trend toward zero,” she said.

The company is betting that by combining electronic markets, online payment systems and Web-based communications, eBay can emerge as a leader in all three businesses.

Gomez said the free phone service promotion will not alter the company’s plans to generate more than $200 million in revenue during 2006, up from roughly $60 million last year. Skype will promote the offer via online advertising, radio spots and ads in selected local cable TV markets, he said.

Online DVD rental company Netflix Inc. on Tuesday sued rival Blockbuster Inc. for patent infringement, asking a federal judge in Northern California to shut down Blockbuster’s 18-month-old online rental service and award Netflix damages, according to a copy of the filing.Blockbuster declined to comment, saying it had not received a copy of the lawsuit.

Netflix, which was founded in 1999, holds two U.S. patents for its business methodology, which calls for subscribers to pay a monthly fee to select and rent DVDs from the company’s Web site and to maintain a list of titles telling Netflix in which order to ship the films, according to the patents, which were included as exhibits in the lawsuit.

The first patent, granted in 2003, covers the method by which Netflix customers select and receive a certain number of movies at a time, and return them for more titles.

The second patent, issued on Tuesday, “covers a method for subscription-based online rental that allows subscribers to keep the DVDs they rent for as long as they wish without incurring any late fees, to obtain new DVDswithout incurring additional charges and to prioritize and reprioritize their own personal dynamic queue — of DVDs to be rented,” the lawsuit said.

The lawsuit says No. 1 U.S. rental chain Blockbuster, which launched its online rental service in 2004, was aware that Netflix had obtained a patent for its business method and was seeking a second, but willfully and deliberately violated the existing patent.

Netflix, which is represented by the San Francisco law firm of Keker & Van Nest, is demanding a jury trial and asks that Blockbuster Online be enjoined from using Netflix’s business method and be forced to pay damages and court costs.

“We felt it necessary to take this action to protect our rights as inventors of the very unique business methods that Netflix offers,” Netflix spokesman Steve Swasey said on Tuesday.

“Netflix created a very unique service, from the dynamic queue, to the idea of letting subscribers keep movies as long as they want with no late fees, to the idea of allowing customers to get new DVDs as soon as they return old ones,” Swasey said.

Since launching its online rental service in August 2004, Blockbuster has poured more than $300 million into setting it up and marketing it.

But a debt load of more than $1 billion and weakness in its primary business of store-based movie rentals forced the Dallas-based company to cut back its marketing investments this year in Blockbuster Online, which has 1 million subscribers, compared with 4.2 million for Netflix.

Shares of Netflix closed down 72 cents to $27.41 a share on Nasdaq before the suit was reported, while shares of Blockbuster fell 8 cents to $3.80 on the New York Stock Exchange.

Wedbush Morgan analyst Michael Pachter, who also is an attorney, said it was unclear whether Netflix’s challenge to Blockbuster’s online service would be upheld by the federal court.

“It’s my opinion that it won’t be,” Pachter said. “Blockbuster detrimentally relied on their silence as consent. If in fact (Netflix) feels so damaged they should have sought injunctive relief before Blockbuster rolled out its service.”

U.S. lawmakers plan to propose fines of up to $500,000 for violating regulatory principles aimed at preserving consumers’ ability to freely surf the Internet, a senior House of Representatives Republican said on Tuesday.The House Energy and Commerce Subcommittee on the Internet and telecommunications will consider legislation on Wednesday that would authorize the Federal Communications Commission to enforce its principles on Internet network neutrality.

Those principles call on Internet service providers to permit consumers unfettered Internet access and allow them to run any Internet-based applications. The bill would also make it easier for telephone companies to get into the subscription television business.

Content companies like Amazon.com Inc. are worried that network providers like AT&T Inc. and Verizon Communications would create a fast Internet lane for their preferred clients who pay more, while leaving the public on a slower road.

AT&T and Verizon have said they have no intention of blocking where consumers surf on the Internet or the use of Internet-based applications. However, they want the ability to offer private networks for faster services like movie downloads.

Rep. Fred Upton, a Michigan Republican and chairman of the subcommittee, said he worked with Rep. Eliot Engel, a New York Democrat, on the fines provision and will offer it as an amendment to the bill on Wednesday.

“I believe that authorizing the FCC to enforce its broadband policy statement — on a case-by-case adjudicatory basis — is a better framework to ensure that the public Internet remains open and dynamic,” Upton said.

He said adopting more stringent regulations “would have a dramatically chilling effect on broadband deployment and the development of exciting new services.”

Michigan Rep. John Dingell, the senior Democrat on the full House committee, said the legislation would allow companies to control the Internet, calling them “tax collectors”.

“Private tax collectors could single out certain consumers and content providers to pay extra fees,” Dingell said. “They could also single out others for preferential treatment.”

It is unclear whether the legislation will move forward this year, particularly because of the differences. Additionally, the Senate is considering a broader measure that would overhaul more communications laws.

Congress has relatively few work days in 2006 because of the November election, which could make it tough to work out differences between any bills the House and Senate may approve.

Google Inc. co-founders and its chief executive will continue to receive $1 each in annual salary and forego bonuses in 2006, while holding shares potentially worth billions of dollars in the Web search leader, according to regulatory filings on Friday.

CEO Eric Schmidt and co-founders Sergey Brin and Larry Page set the $1 annual salary for 2005 and decided to continue the policy in 2006, Google said in its shareholder proxy statement filed with the U.S. Securities and Exchange Commission.

Schmidt and Page earned bonuses of $1,630 in 2005, while Brin earned $1,723.

“Their primary compensation continues to come from returns on their ownership stakes in Google,” the statement said. “As significant stockholders, their personal wealth is tied directly to sustained stock price appreciation and performance, which provides direct alignment with stockholder interests.”

The three also exert voting control over Google through their holdings of class B shares in the company.

Schmidt holds more than 12.4 million class B shares in Google. Brin, who is president of technology, holds 31.5 million class B shares and Page, who is president of products, holds 31.6 million class B shares. Google shares traded 0.4 percent lower at $390 on the Nasdaq on Friday.

Google said it nominated its 11 board members for another term, to be voted upon at an annual shareholders meeting on May 11. The company also seeks to expand by 4.5 million shares to 17.9 million its reserve of class A stock for employee compensation awards.

Google said it also did not plan to pay any stock dividends to shareholders “in the foreseeable future” as it intends to retain any future earnings. The company has never paid dividends in the past.

Dutch citizens will get a personalized Internet page giving them access to their records at public institutions and reminding them when to renew important documents, the government said on Friday.

The aim is to let citizens and companies, which will also get pages, access their data at any time, and eventually reduce administrative costs.

A trial Personal Internet Page (PIP) project will start later this year. Between 10 and 15 government organizations will participate, giving citizens on-line access to their tax information, grants, licences and social security data.

The PIP will also remind citizens when to renew their travel documents or driving license, and may show the status of a building permit. Forms can be filled in and submitted on-line, and will re-use standard personal data.

No date was given for when pages would be available to all.

“It is unclear when the Personal Internet Page will be fully functional, because a comprehensive introduction is a long-term and complex affair,” the Interior Ministry said in a statement.

Several countries in Europe have put state, regional and local services on the Internet. Denmark even offers citizens a mailbox and a personal digital key to access all public services.

Search giant rolls out trial version that allows consumers to view financial news and even blogs alongside historical price charts.

Google Inc. is introducing a financial news, stock quote and chat service that seeks to shake up the online finance information market now dominated by Internet media rivals and online brokers.

The Web search leader said late on Monday that it has begun offering a trial version of the service called Google Finance that uses a keyword search system to help consumers target information on public and private companies and mutual funds.

Google Finance primarily provides financial news, stock quotes, charts and data. In its trial form, the site is far less comprehensive than established financial sites such as those from Yahoo Inc., Microsoft Corp.’s MSN America Online’s Money & Finance and TheStreet.com.

“We are going to provide quick, easy access to financial information … by taking complex financial data and making it more digestible,” Katie Jacobs Stanton, product manager for Google Finance, said in a phone interview.

The new Google site relies on information from a variety of financial publishers and data providers including Reuters Group Plc, Hoover’s Inc., Morningstar Inc., Interactive Data Corp. and Revere Data LLC. Google plans to introduce advertising eventually, Stanton said.

Yahoo Finance, the king of online financial sites offers not only many of the features Google Finance does but also links to stock research, retirement planning, bonds, options and downloadable spreadsheets for making finance calculations.

Peggy White, general manager of Yahoo Inc.’s Yahoo Finance, said the 10-year old finance site is aimed at everyone from entry-level investors to professional money managers.

“The Yahoo Finance customer doesn’t have any one given customer profile … We talk to all clients across the finance spectrum,” she said.

FINANCIAL NEWS, QUOTES, BLOGS

Google Finance can be found at http://finance.google.com and links to it appear in a featured area at the top of general Google search results pages when users search for stock or corporate information that appear to be finance related.

Beneath the finance-focused search box at the top of the Google Finance main page are sections that provide summaries of the market, stock quotes and links to news, blogs and moderated-finance group discussions.

One of the more novel features of the site gives user the ability to view financial news alongside historical price charts over various time frames. As the user zooms back in time, the news results change with the date.

The site identifies financial stories within Google News, the company’s existing news search site that features articles from roughly 4,500 different sources. By contrast, Yahoo’s financial news relies on three dozen top editorial brands.

And while Yahoo was the first of the major Internet sites to incorporate blogging alongside news in its Yahoo News site, Google Finance is first to run blogs alongside financial news.

Matthew Bienfang, a retail brokerage analyst at research firm TowerGroup, said the broad-based financial information sites such as Yahoo or TheStreet.com are chipping away at online brokers such as Charles Schwab Corp., which depend on their sites to attract their core customer base.

“Every time a new online finance portal shows up it challenges the online brokerages, which have much more trouble retaining accounts,” Bienfang said.

Other Google features include the ability to set up stock portfolios, track mutual fund performance or connect to other online finance sites, including Yahoo, MSN, Dow Jones’ MarketWatch and AOL and regulatory filings from EDGAR Online.

Google will use human editors to help moderate a part of the site called Google Finance Groups. This service relies on the same group discussion technology as Google Groups, which features unedited discussion forums on a myriad of topics.

Google Finance started out as a part-time project by Google engineers working in Bangalore, India, Stanton said.

Financial terms of the deal between Google and Reuters were not disclosed. A Reuters spokesman said the company stands to benefit as customers of Google Finance click on links to Reuters sites seeking deeper information.

Besides links to its news, Reuters supplies some stock quote data on publicly traded companies as well as background summaries, profiles of executives and directors and links to key historical developments that may have affected a stock.

A parental advice Internet site has sued Google Inc., charging it unfairly deprived the company of customers by downgrading its search-result ranking without reason or warning.

The civil lawsuit filed in U.S. District Court in San Jose, California, on Friday by KinderStart.com seeks financial damages along with information on how Google ranks Internet sites when users conduct a Web-based search.

Google could not immediately be reached for comment but the company aggressively defends the secrecy of its patented search ranking system and asserts its right to adapt it to give customers what it determines to be the best results.

KinderStart charges that Google without warning in March 2005 penalized the site in its search rankings, sparking a “cataclysmic” 70 percent fall in its audience — and a resulting 80 percent decline in revenue.

At its height, KinderStart counted 10 million page views per month, the lawsuit said. Web site page views are a basic way of measuring audience and are used to set advertising rates.

“Google does not generally inform Web sites that they have been penalized nor does it explain in detail why the Web site was penalized,” the lawsuit said.

While an entire sub-industry exists to help Web sites feature prominently in Google results, the company is known to punish those who try to trick the system into boosting their search rankings.

The lawsuit notes that rival search systems from Microsoft Corp.’s MSN and Yahoo Inc. feature Kinderstart.com at the top of their rankings when the name “Kinderstart” is typed in.

The complaint accuses Google, as the dominant provider of Web searches, of violating KinderStart’s constitutional right to free speech by blocking search engine results showing Web site content and other communications.

KinderStart contends that once a company has been penalized, it is difficult to contact Google to regain good standing and impossible to get a report on whether or why the search leader took such action.

The suit was filed the same day a federal judge denied a U.S. government request that Google be ordered to hand over a sample of keywords customers use to search the Internet while requiring the company to produce some Web addresses indexed in its system.

A federal judge ordered Google Inc to give the Bush administration a peek inside its search engine, but rebuffed the government’s demand for a list of people’s search requests - potentially sensitive information that the company had fought to protect.

In his 21-page ruling on Friday, US District Judge James Ware told Google to provide the US Justice Department with the ad-dresses of 50,000 randomly selected Web sites indexed by its search engine by April 3. The government plans to use the data for a study in another case in Pennsyl-vania, where the Bush administration is trying to revive a law meant to shield children from on-line pornography.

Ware, though, decided Google won’t have to disclose what people have been looking for on its widely used search engine, handing a significant victory to the company and privacy rights ad-vocates.

“We will always be subject to government subpoenas, but the fact that the judge sent a clear message about privacy is reassuring,” Google lawyer Nicole Wong wrote on the company’s Web site last night. “What his rul-ing means is that neither the government nor anyone else has carte blanche when demanding data from Internet companies.”

Attempts to reach a spokesman for the Justice Department last night weren’t immediately successful. The government had asked for the contents of 5,000 randomly selected search requests, dramatically scaling back its initial de-mands after Google’s vehement protests gained widespread attention.

Google is free to cache whatever material it wants unless content owners specifically forbid the search site from copying and archiving online content, a federal judge ruled last Friday.

The judge dismissed a lawsuit claiming Google had violated an author’s copyright by archiving his Usenet posts and providing excerpts from his Web site in Google’s search results.

Gordon Roy Parker, who is also known as Ray Gordon, filed suit against Google in 2004, after the search engine archived a chapter of one of Parker’s e-books, “29 Reasons Not To Be A Nice Guy.” Gordon had posted the chapter on Usenet, a collective name for the thousands of public discussion forms available online.

Parker filed his original complaint on Aug. 18, 2004, and then filed an amended complaint on Oct. 22, 2004, accusing Google of copyright violations, racketeering, civil conspiracy and negligence, along with other charges. He also named 50,000 “John Doe” defendants in the case.

The U.S. District Court for the Eastern District of Pennsylvania ruled (PDF) last Friday that Google (and all those John Does) did not infringe on Parker’s rights.

“Despite our lenient review of Plaintiff’s Complaint, it is clear that with regard to his claims of copyright infringement, contributory copyright infringement, vicarious copyright infringement, defamation, invasion of privacy, negligence, Lanham Act violations and abuse of process, Plaintiff has failed to state a claim on which relief can be granted.

“With regard to Plaintiffs racketeering and civil conspiracy claims, the Complaint fails to meet Rule 8(a)’s short and plain statement requirement and will be dismissed,” the court ruling read in part.

In one of his court filings, Parker said Google had “come out swinging” by “unjustly branding him a vexatious litigant.” Parker also claimed that Google had invaded his privacy by creating an “unauthorized biography” of Usenet posts about Parker, many of which Parker says are defamatory.

If Parker, who was not reached for comment by presstime, appeals, he may be fighting precedent. In January, a Nevada federal court ruled in “Field v. Google” that Google’s caching of Web pages is not copyright infringement, a finding that was cited in the Pennsylvania ruling.

The Nevada decision was the result of a court case brought forward by a lawyer, Blake Field, who posted a story on his Web site and later removed it.

He charged copyright infringement when the story appeared in Google’s cache of his site. A cache, in this instance, is a copy of online data that is stored on a server separate from the originator or creator of that data.

Web site owners who choose not to have their material cached by Google need only add some simple text to their Web sites. Usenet posters can decline to be included in Google’s cache by adding ” X-No-Archive: yes” to the headers of their Usenet posts.

The Pennsylvania court, while noting in its ruling that these techniques exist to stop Google from caching content, also added: “When an ISP automatically and temporarily stores data without human intervention so that the system can operate and transmit data to its users, the necessary element of volition (willful intent to infringe) is missing.”

Google was not reachable by presstime for comment.