Kremlinology in Our Times

Flew in from Miami Beach BOAC Didn’t get to bed last night All the way the paper bag was on my knee Man, I had a dreadful flight I’m back in the U.S.S.R. You don’t know how lucky you are, boy Back in the U.S.S.R.

—Lennon/McCartney

I do realize that a certain portion of our readers may never have come across the word “Kremlinology.”

After all, the notion of studying seemingly minor things such as the placement of officials in photographs of the May Day Parade in order to determine what was going on at the Kremlin—and, therefore, in the government circles of the notoriously secretive USSR—seems ridiculous in light of the fact that:

a) The USSR no longer exists;

b) Vladimir Putin, the President of its Russian successor, simply takes whatever he wants whenever he wants it.

So who needs “Kremlinology” anyhow?

To illustrate how quickly the world has changed, the spell-checker in this word processor, brought to you by the Microsoft Monopoly, doesn’t recognize “Putin,” and insists on underlining his name in a squiggly red line as I type.

That squiggly red line is highly annoying, although compared to something as evil and pernicious as the “Insert Key”—which computer users only discover when they accidentally it hit by mistake and then wonder why their words are being eaten up by the computer—the squiggly red line under “Putin” is nothing.

I know some people who, before they learned what that innocuous little button in the right hand corner of the keyboard actually did, would re-start their notebook computer in order to turn off the “Insert Key.” They would then pray that whatever strange bug had suddenly gripped their system would not re-occur.

When they learned the source of the problem, they were so relieved their machine was not infected by some strange virus created by a twelve year old kid in Uzbekistan that they experienced a sense of relief akin to discovering that a biopsy had come back negative.

Now, the fact that twelve year olds in Uzbekistan and Lithuania are free to create computer viruses is all thanks to the end of the Cold War in 1989, when the Berlin Wall fell and the USSR began to disintegrate.

Which is why the term “Kremlinology” means nothing these days: by the time this year’s college graduate was old enough to read a newspaper, the Soviet Union no longer existed.

In any event, the term itself is a good description of the type of work analysts must do when companies resort to the type of self-deception practiced by the occupants of the Kremlin during the heyday of the USSR.

A prime example is the following press release recently issued by Netflix, the DVD-by-mail service that recently upset Wall Street’s Finest with modestly disappointing subscriber growth, even while reiterating plans to reach 20 million subscribers sometime down the road—video iPods and YouTube notwithstanding.

LOS GATOS, Calif., Feb. 20 …Netflix Inc. (Nasdaq: NFLX – News) today announced that Chief Operations Officer Bill Henderson is planning to become a strategic advisor to the company and that Vice President of IT Development Andy Rendich, an eight-year Netflix executive, has become interim head of Operations. Mr. Henderson is expected to serve as a consultant to Netflix for at least the next two years. The casual reader might think nothing more of this than what it says: that the Chief Operations Officer is getting a new job title following a job well done. After all, the CEO heaps praise on Mr. Hendersen as follows:

“Bill’s unprecedented operational expertise as former Postmaster General of the United States has contributed to Netflix’s tremendous gains in automation and efficiency,” said Netflix Founder, Chairman and CEO Reed Hastings. “We look forward to Bill’s continued participation in the company’s growth.” However, the less-casual reader would recall a press release from a little more than one year ago in which the same CEO, Reed Hastings, welcomed Mr. Hendersen to the the COO job with great expectations:

LOS GATOS, Calif., Jan. 18 [2006]…Netflix, Inc….today announced the appointment of former U.S. Postmaster General William J. Henderson as chief operations officer of the world’s largest online DVD rental service. He assumes his new role on January 23 and succeeds Tom Dillon, who is scheduled to retire in April. Mr. Henderson, 58, was chief operating officer of the United States Postal Service (USPS) from 1994-98 and postmaster general and USPS chief executive officer from 1998 until his retirement in 2001. He was the 71st postmaster general of the United States and the fifth career employee to lead the world’s largest postal system, which processes, transports and delivers more than 650 million pieces of mail to more than 130 million addresses every day.

At the time, cynical observers scratched their collective heads at the notion that a guy from the Post Office—the Post Office!—could bring anything more dynamic than longer lunch breaks to an operation already honed to a fine tune by the outgoing COO, Mr. Dillon, who as it turns out came from a slightly different background than Mr. Hendersen.

Actually, Dillon came from an extremely different background.

He came from the disk drive industry, which is to the Post Office what a NASCAR driver is to your average Oldsmobile-driving Florida retiree when it comes to speed and efficiency. Mr. Dillon, according to my friends in the business, was the guy who really made Netflix an efficient operation.

But Mr. Hastings, who is nothing if not a cheerleader for his cause—was insistent that this Post Office veteran was the right man for the job:

“Bill Henderson is about the only person on the planet who looks at our volume of mail as a trickle,” said Mr. Hastings. Netflix ships over one million DVDs a day from 37 distribution centers across the U.S.

“Bill is the perfect person to ensure that our operations are inextricably linked with every aspect of the business and that our service levels are a linchpin of the Netflix customer experience,” Mr. Hastings added. “We’ll look for him to extend our current competitive advantages in this area, particularly as our mail volume increases with our forecasted growth to at least 5.65 million subscribers this year and 20 million by 2010-2012.” “Bill” is gone—at least in Kremlinological terms, having been metaphorically air-brushed out of the May Day parade photo of the top guns at Netflix, and shifted off the platform to a minor post in Uzbekistan.

So what really happened behind the scenes?

Why has a man—of whom so much was expected not 13 months ago—been shifted to the role of “Strategic Advisor” for a company whose strategy has, as far as most observers of the company would tell you, been set and directed by the founder, Mr. Hastings.

And, not for nothing, why in this age of instant communication, Regulation Fair Disclosure and the democratization of the investing class, must we resort to Kreminology here in the first place?

Jeff Matthews I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.