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State of MGX – 10.27.2010

State of MGX

There is always an urge to start all my “State of MGX” letters with “things have changed dramatically in the last few months”. I don’t write that, but it almost always seems that way. I consider it a great thing that we have always been a company that is nimble and aggressive in seeking out new opportunities.

In this letter, I try to lay out some of my thoughts so you will have an approximate idea as to where we are, and where we are heading. I also hope to elaborate on some topics that will help to explain the rationale behind some of our business choices. As always, I welcome as much discussion as possible, and I would love to hear your thoughts.


MGX Copy

As I was about to flip through the October 2010 edition of American Printer Magazine, a certain line on the cover page jumped out at me – “Serving Senior Executives in Commercial Printing Since 1883”. It’s shocking to think that a printing publication has been around for nearly 130 years, and perhaps more shocking to think that the printing press was invented over 500 years ago.

Printing is such an old industry.

But as old as printing is, the industry has not settled down, and is in the midst of major transformation. The biggest transformative elements I believe are the diminishing reliance on static printing, as well as the continued consolidation of industry into a few large online print retailers.

A few months ago as I was trying to gather my thoughts about the future direction of MGX Copy, as well as the other potential growth avenues, I tried to simplify down to the core as to the essence of what printing was about. The simplest answer I could come up with was that printing was a medium by which information could be effectively disseminated. This seemed to be a basic, if overly broad answer. However, if we view printing as a information dissemination medium, we can see heavy encroachment from competing mediums and industries.

There was a time where print was the only option for cheap mass marketing. Now, the cheapest medium is, and may always be, digital. As communication mediums, email, websites, and text messaging exhibit extraordinarily low operating costs and are arguably just as good if not better than print, what is print to do?

There has been a significant decline in print demand, as evidenced by the scores of traditional offset printers going out of business in the past few years. Companies and organizations are cutting down on their print marketing campaigns, especially since the internet has provided a robust medium by which much of the same information can be hosted. As digital solutions have provided our customers with a lower cost alternative, I have noticed a growing dissatisfaction with traditional printing pricing structures and models. I will discuss our response to these momentum shifts later.

In Peter Kaufman’s book Poor Charlie’s Almanac, there is a poignant story that has always stood out to me when I look at the state of the printing industry. The passage speaks about the time when people in the textile industry came to textile owner Warren Buffett and said “They’ve invented a new loom that we think will do twice as much as our old ones.” Warren promptly responds to say that he hopes that the new loom will not work, because if the new loom is as productive as the people claim, Warren will close the textile mill.

What was Buffett’s reasoning behind this statement? The reasoning was that the textile business has a heavy emphasis on a much commoditized product. With larger productivity increases, the benefits would go to buyers of the textiles – not to the owners of the looms.

There are some obvious parallels that we can draw between the textile industry and the printing industry. Both are mature industries that have products that are being driven by increasingly better and more productive capital equipment. It will be a major goal of mine to ensure that we do not focus on selling a much commoditized product, competing against non-differentiated companies simply selling on price, running more and more productive machines that engage companies in pricing wars with each other, all the while requiring heavy capital investment. At the sign of any downturn, the profits will dry up, and solvency issues will arise, which we have witnessed and are witnessing today with traditional offset printers.

As tumultuous as the past few years have been for printing, there have been a few green shoots, and I would like to highlight these green shoots.

 The growth sectors in printing have been mostly in the digital market. Digital is mostly different from offset in the sense that jobs can be printed on demand with minimal setup time, as well as the fact that digital can handle variable data and graphics printing. In addition, digital prints are cheaper, at least until the print run reaches into the higher volumes. MGX Copy is a strictly digital printing company, with all the offset work currently being outsourced.

Variable data and graphics refers to each individual printed page that comes off the press having the potential to have unique data and graphics. This can be a static background design with unique addresses(great for mailing services, which is a growing revenue stream for MGX Copy), as well as unique graphics.

Mark my words – printing at MGX Copy will be less focused on how many copies we make, and more focused on how many different copies we can make.

The company that we will not be is a company that is saddled with heavy capital investment, seeking marginal returns on price competitiveness, selling a commoditized product. We are saying no to a focus of printing of times past, characterized by high volume, static print jobs. We are saying yes to a high volume of unique variable data and graphics print runs with differentiation established by a creative and professional marketable corporate image.

Let me speak a bit about how we as a company have approached the printing industry differently. First off, we have already practiced for years, but will officially launch what I believe is an amazing customer service policy. It’s called Client Advantage, and the program is structured to give our customers full satisfaction throughout their entire shopping experience with MGX Copy.

Client Advantage has many benefits, but there are a few major ones. First, if any customer has any design issues, or problems understanding printing, we will offer our help and guidance. Second, Client Advantage gives access to a wealth of printing information geared toward creating and implementing a successful print marketing campaign. This can cover design specifications, paper choices, etc. Lastly and perhaps most importantly, with Client Advantage, in the chance that a customer is ever so slightly dissatisfied with their order, we can offer either a full reprint, or a full refund.

I believe the total satisfaction philosophy is the only prudent and moral way to run a business. In addition, from a business perspective, as more and more people shop online, we must realize that a single negative review online can negatively impact an incredible amount of potential sales.

The other major way in which we have approached the printing industry differently, is by our emphasis on technology. Since our inception, MGX Copy has focused on the internet sales channel. The bulk of our business has been driven by search engine marketing and the maintenance of a professional web shopping portal. On a similar note, our newest website, version 3.0, will be launched in less than a month. Version 3.0 is designed to compete with the top 10 online printing companies and in my opinion, the graphic design and basic functionality rivals, if not bests, most of our competitor’s websites.

I want to say that the idea that we have to adapt to the changing print market even though we have barely even gotten our feet wet in the industry is inaccurate. If anything, we are the trailblazers. Out of the 30,000+ printing companies in the United States, how many printing companies have more programmers than people working on the printing floor? How many of those companies are traditional offset printers who are just beginning to add digital to their offerings? How many printers are like us, already established in the digital market and looking to expand the digital opportunities?

How many printing companies are developing MGX Fresh Prints?



MGX Fresh Prints

MGX Fresh Prints is a great opportunity that we have in front of us. We will are currently building an application that we will launch on Facebook, which will allow Facebook users to design and order photobooks using the Facebook photos hosted on their account. Facebook is the largest, and fastest growing collection of pictures on the internet, as well as the largest social networking community. I think the potential is beyond the scope of any description I could provide in my musings in this paper.

The photobook market is currently pegged at over a billion dollars, and growing 20-30% per year. There is a revealing quote that helps to explain why I am so excited about Fresh Prints.

“Although the photo book market is growing in popularity, most potential customers have yet to engage in the creation of a photo book – nor have any knowledge that they exist.” – Muller Martini (Binding and Finishing Company)

The fact of the matter is, photobook printing is already a large market, but it will be dramatically bigger when people realize that this product exists and provides great emotional value. It reminds me a lot of what Apple has seemingly been able to do – show people that they need a product that they don’t really understand or realize exists yet. What is shocking is that there hasn’t been any meaningful market penetration in trying to integrate Facebook photos with photobook printing. I am sure we are all as eager as I am to have the opportunity to tackle this challenge.

Lastly, I am also excited that Fresh Prints allows us to explore our abilities in developing and launching our own software and hardware technology. I firmly believe that Fresh Prints will not only be a driver of future growth, but it will also act as a gateway venture by which we will be able to expand into some of our older, but perhaps even more amazing ideas such as MGX Inc. and Project Armonica.


MGX Investments

Although much emphasis is given toward our fund, I have chosen not to elaborate fully in regards to MGX investments. However, I can say that over the past year, we have been involved in holding equity in publicly traded companies, as well as a having a heavy emphasis on derivative instruments. As the volatility of derivative instruments are well documented, it’s not entirely clear what the current value of our holdings is. In addition, we do currently hold contracts with a time element embedded in valuations, further adding to the complexity of discerning the total book value of our holdings. However, it appears that over the past year, MGX investments have returned over 900%. 

I would like to touch upon some of the best trades recently as well as our worst trading day in the past year.

By far, the best trades we have had recently are best summarized by our continuous investment in Apple Inc. MGX investments has held derivative positions from $180 until now, even as Apple has crossed $300. Needless to say, these trades have been remarkable in terms of return, and the only other trade that has come close in terms of alpha magnitude was our belief in the price floor of BP stock as it neared the upper $20’s.

The May 6th “flash crash” will likely be the worst trading day for the foreseeable future. On May 6th, our positions lost dramatic value over a period of 15 minutes. The recent reports in regards to the cause of the “flash crash” have supposedly pinpointed a large sale of futures contracts, but I am still convinced that computerized trading algorithms were the true drivers of the crash, as well as the subsequent, almost immediate recovery. Computerized trading algorithms have always had serious flaws in my opinion, especially since I believe that interconnected social systems exhibit Pareto distribution characteristics as opposed to Gaussian distributions. To develop models using assumptions that are incorrect usually lead to models that are poor predictors, nullifying the goal of the model in the first place.

Do I believe another “flash crash” is likely? Absolutely. The temporary trading halts that are currently being tested are an improvement, and should help passive investors from being sold out on their stop loss orders. However, I want to make clear that my opinion on this matter is still undeveloped at the moment. We are not relying heavily on passive stop loss orders at the moment.

My intuition is that the MGX investments will continue to perform well for the foreseeable future. We have at our disposal different instruments that will allow us to take advantage of nearly any trading situation.


MGX Weddings – Keep the Kiss

A few years ago, MGX was a wedding video company that booked roughly 150 weddings a year, at roughly $1400 each. We had great ideas on how to run a wedding video brokerage company, with hiring teams of videographers and outsourcing all the video editing to lower income cities in an effort to build a wedding video production line. There were even plans to outsource all the video editing to India to really create a competitive moat of low prices. There was a San Diego branch, as well as a San Francisco branch, with Los Angeles and Las Vegas branches in development.

As great as things were, we soon realized what vast and scalable opportunities existed in MGX Copy, as well as our investment vehicles. Two weeks ago, we shot our last wedding video and with the delivery of the final videos, we will have effectively phased out the very time consuming wedding video productions.

It is a bittersweet moment for us, as we cut our business teeth on video productions.

I’ll never forget our first bridal show where we tried to sell our video services to brides at a booth in a convention center. It was extremely intimidating, and even more so since we were all 17 and younger.

I won’t forget watching our company become the largest wedding video production company in San Diego within 1 year because of our unique and aggressive marketing campaign. The average wedding videographer does 5-15 weddings a year – we did 20 our first year, 100+ the second year. Was there any other company that had the gall to use an ice cream theme as their marketing backbone?

I’ll never forget signing a $23,000+ video contract at age 18. We were floored with that amount of money – it seemed almost surreal.

We leave the weddings industry with video production experience, business experience, marketing experience, and most importantly, a better sense of what hard work and dedication can bring.

My deepest and sincerest thanks to everyone and anyone who helped build the weddings business.

Thank you Ian for your stewardship of the company while I was away at UCLA.
Thank you Andrew for all your input and support throughout the years.
Thank you Oliver for handling data storage and video conversion.
Thank you Aaron, Joaquin, Rino, Alex, Matt, Sasha, Sara, Cody, and Akira for the great videography throughout the years.
Thank you Todd for the creative, but countless edits and re-edits.

It was tough and challenging, but I hope that when we look back on this learning experience, we will be proud of what we accomplished.


Final Thoughts

With the launch of a new website, a new 3000 square foot office/production facility, uniquely favorable market conditions, and exciting new business prospects, I am very bullish for calendar year 2011. It is amazing that even in the face of such a tough recession, we have experienced amazing growth.

Just recently, we had discussions with investor Jeffrey Wu and his team in regards to debt and/or equity investment. The current offer on the table is a 1% ownership of the company, with an option for MGX to buyback the 1% in 5 years. We are also looking at other investor’s offers, especially if we deem it necessary to raise significantly more capital for the Fresh Prints project.

As for personnel, Ed Yamamoto will be joining us full time for print production in the next few months, and we will also be adding additional customer service help. Erik Krueger is currently helping with the programming side of the Fresh Prints project and we look forward to the input he can provide.

As for hardware, we will be bringing in a saddle stitcher, booklet folder, and face trimmer onto the production floor to assist in booklet production. There will be continued discussions as to the necessity of bringing in additional printing presses. I am sure these discussions will amplify as our print volumes increase from the aggressive marketing campaign that will coincide with the launch of website 3.0 for MGX Copy.

I would like to end my letter with some final thoughts that have an underlying tone of urgency. It’s great to look back and appreciate what we’ve done, but we need to stay competitive and grab new opportunities as they come along.

We need to continue our urgency in our MGX Copy/Fresh Prints work. Although I feel that we are at the vanguard of a new generation in printing, all the while doing better than most of our printing competitors at the moment, the printing industry is simply changing so dramatically. I strongly believe many, many of the small time, traditional offset printers will continue to go out of business. I believe that there will continue to be consolidation in the industry, and print buyers will shift to purchasing through the internet.

As this shift happens, the internet will make it extremely difficult for companies that do not have a great differentiation strategy, or were not able to have some sort of Stackelberg advantage of being the first mover. We need to firmly entrench ourselves as one of the big online print companies, and we need to do this soon. If we don’t move fast enough, the bigger online print companies will simply leverage their scale to further increase their competitive moat.

Fresh Prints is such a great opportunity for us to make a major splash in the variable graphics printing market. However, I expect the variable graphics market to exhibit power law distribution characteristics. There will be just a few, very large players, and very many small players.

It’s the same situation as MGX Copy – soon, we’ll either be a big online player, we won’t be a player at all.

Let’s really work together and make this happen. We’ve got the chance to do something really amazing.



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