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Understanding Focus Media’s LCD Count Scandal (FMCN)

|Includes: Focus Media Holding Limited (FMCN)
… An Analogy Mixing Apples And Oranges

[Mr. Bagholder, a supermarket owner, telephones Farmers' XYZ Fruit Co. In this analogy, "customers" represent investors.]

F: Hello.

B: Hello there. How many oranges are in a truckload of oranges?

F: The number of oranges in an orange truckload is 30,000. It's $3,000 a truckload.

B: Oranges for ten cents each. What a deal! I'll take them.

A: You have to pay upfront.

B: Hmm … well, for a deal like that … OK.

[Truckload arrives. Mr. Bagholder immediately calls the farmer on the phone.]

B: Hey, I just bought a truckload of oranges and there are only 20,000 of them in here. The rest are apples. Look, the going rate for apples is a nickel each this year. Even if I wanted them I wouldn't pay ten cents for them. But all this is besides the point, I didn't order apples and I don't need apples. I paid for oranges.

F: Oh, you don't understand. See, we loaded those apples and oranges in California, where our orange trees are, and so we called them "truckloads of oranges." And the other truckload with just apples was loaded up in Washington, where our apple trees are and so we call that one a "truckload of apples."

B: Huh? Why didn't you just call it the "California truckload of Apples and Oranges." I mean you just said that the place where you loaded the fruit was the reason for mixing apples with oranges, and apples and oranges were certainly mixed, so why not say, "apples and oranges"?

F: That's what you want; that's not how we do it.

B: I don't want it this way; clear expression demands that it be this way. How could I possibly have known that what you called a "truckload of oranges" would have apples mixed in?

F: Look, it's how we need to think about it at our business. California is where we pick the oranges, see. That's where we have our Orange Tree Division, so doesn't it make sense that we need to remember that the load came from the Orange Trees Division?

B: For you, maybe. For your customers? No. It makes more sense for you to tell your customers exactly what they are buying. Why didn't you tell me all this before I bought them? I'm out 10,000 oranges because you are still mixing apples and oranges.

F: But we aren't mixing apples and oranges. We put both them in the same truckload labeled "Oranges" because, as I've already told you, they were loaded by the Orange Tree Division ‒ that's why they were all called "oranges" ‒ and then we shipped them to you.

B: No, because both apples and oranges are in the same truckload, we have mixed apples and oranges, call it what you will.

F: Absolutely Not. We have been completely correct with our count; you have 30,000 pieces of fruit don't you?

B: How can it be completely correct if what you call a truckload is still an incomplete reference to the contents?

F: We were completely correct.

B: You weren't correct just because you now say you were. I remember exactly what you said, and I quote, "The number of oranges in the orange truckload is 30,000." What could be more obvious than that?

F: Let me make an official declaration. [He puts one hand on his hip and waves the other authoritatively] I hereby refute you. Now that that is done ‒ on a more pleasant note, I have some good news for you. We've decided to have the contents of the truckloads broken down into greater detail from now on.

B: How does that help me? I've already paid for 30,000 oranges and I'm out 10,000 of them. Can I have my money back?

F: But you've already paid for the … [ahem] … oranges and we've given you such a wonderful explanation.

B: I'd rather have what I paid for. I'm calling the police. I'll tell them everything you've said. You clearly misrepresented this sale.

F: I've already called them and filed a complete report.

B: Yeah right. Like you just ….

F: No really. I did. Here I'll send you a link to the police report in an email … there … done.

B: [clicks on the link] Well, so you have. You … you just wait and see what happens next.

F: [Yawns] ... whatever.


If you are unfamiliar with the debate, start here ...

Focus Media Holding LTD

FMCN told investors that the company had about 180,000 LCD displays:

..."the total installed base of LCD displays in our LCD display network was 178,382 nationwide …"

Meanwhile FMCN was telling their customers that they only had 120,000. Muddy Waters Research called them out on this point.

The company's explanation:

""The LCD 1.0 picture frame devices are included in the Company's LCD display network device count because, when the Company developed its LCD display network in Tianjin, Kunming and Shijiazhuang, it encountered difficulties in installing LCD screens or LCD 2.0 digital screens due to a lack of adequate power sources or other technical limitations, and therefore opted to use some traditional picture frame devices in these areas. Since the LCD 1.0 picture frame devices in these three cities were developed by the Company's LCD display network division, the Company has consistently included such devices as part of its LCD display network device count since it first began installing them. "

This information is now included in the recently Amended SEC 20-F

Note that "LCD" in "LCD 1.0 picture frame devices" does not refer to Liquid Crystal Technology -- or an electronic device.

"... due to a lack of adequate power sources or other technical limitations, and therefore opted to use some traditional picture frame devices in these areas..." (see above)

"The word "LCD" in the name of each type of device clarifies that the Company classifies it and includes it for device count purposes within its Focus Media LCD display network, and not in its Framedia poster frame network."
Focus Media Responds Further to Muddy Waters Allegations

See Muddy Waters Research, see "Muddy Waters Initiating Coverage on FMCN - Strong Sell"

Disclosure: I am short FMCN.