Thursday, April 30, 2009

Motorola, Android and Verizon

Rumors this week were that Motorola will release its first Android phone (“Calgary”) this quarter on Verizon. However, today Motorola handset CEO Sanjay Jha said that the phones won’t happen until the third calendar quarter (MOT’s Q4). As PC magazine reports:

"With Android we believe we can enable differentiated consumer experience and applications, with enhanced integration of messaging and social networking applications," Jha said during a conference call with analysts announcing the company's second-quarter earnings. "We also intend to offer a range of devices by delivering those capabilities in both the high tier and the mid tier ... [and] we will deliver meaningful products in the fourth quarter."

The Android lineup will include "entry level data devices," Jha said. "I like to think of rich, data-enabled devices which have capabilities more than SMS. ... One of the things that I particularly like about the Android platform is the very good mobile Internet experience ... I also think multimedia is important."
The Android phones "will launch with multiple carriers and not just in North America," although PC Mag notes that the US 57% of Motorola’s (declining) cellphone sales.

The timing of the next phones is a subject of intense speculation. The performance of the HTC G1 has been disappointing, which is causing many to hold off on buying the first Android phone in hopes of buying the next one. I am surprised by the amount of recent TV advertising for the G1, as well as the aggressive promotion on campus of a G1 event this weekend at Valley Fair.

However, the release of the new phones appears to be waiting on solving the performance issues. Qualcomm appears to be at the center of the solution, so perhaps (former Qualcomm COO) Jha has good insight as to how long this performance optimization is going to take.

The reports imply that Android will be used by Motorola for more than just smartphones. Motorola is a consumer brand with a relatively small presence in smartphones.

I will be very curious to see what Verizon’s smartphone strategy turns out to be. It won an exclusive on the first touchscreen BlackBerry, it’s making noises about a 2010 iPhone, and obviously will have some sort of Android phone, but nothing yet is appears to be a smash hit. Its largest rival, AT&T, is adding millions of customers using its iPhone exclusive, although it still sells BlackBerries, but implied it that it won’t use both Android and Symbian.

The smaller carriers have simpler strategies: Sprint is emphasizing the new Palm, and T-Mobile seems to be using both Android and Symbian.

Wednesday, April 29, 2009

Arithmetically challenged reporters

When I was a newspaper reporter, I remember that we looked down our noses at TV reporters — they were airheads, bimbos, pretty boys (such as the one portrayed by William Hurt in Broadcast News). The reputation of radio reporters was that they worked harder for less money, but were not quite as pretty.

When driving to work this morning, the CBS (radio) news at 10am EDT was reporting the grim economic news from the latest quarter. Here’s what the article said:

The last six months were brutal. Output fell at a 6.1 percent annual rate in the January-through-March quarter after falling at a rate of 6.3 percent in last year’s fourth quarter, according to the Commerce Department. If that pace were to continue, nearly $1 trillion would be wiped out this year from the nation’s economic output of $14.2 trillion last year.
In concluding her summary, the CBS radio reporter said:
It's unusual to have two quarters of such weak economic growth.
My jaw dropped: when it comes to the economy, growth is always up, and down means “contraction.” When I got to the office, I went to the NYT website, which got it right in the breaking headline on its home page:
U.S. Economy in 2nd Straight Quarter of Steep Decline
Here in California, learning about negative numbers is a requirement for every 4th grader in the state. So do we have someone who failed 4th grade math who’s now a national news reporter?

This week our local newspaper (the Merc) and the TV stations have been leading with the news about the swine flu. One person has died in the US so far due to swine flu, which is 20% as many as those who died in the Monterey County bus rollover Tuesday.

Of course, this is not the first time that the media and the public have gotten an exaggerated sense of risks due to poor math. Here is what ABC newsman John Stossel (my favorite TV reporter) wrote two years ago:
Worry About the Right Things
By John Stossel, April 4, 2007

For the past two weeks I've written about how the media -- part of the Fear Industrial Complex -- profit by scaring us to death about things that rarely happen, like terrorism, child abductions, and shark attacks.

We do it because we get caught up in the excitement of the story. And for ratings.

Worse, because many reporters are statistically illiterate, personal-injury lawyers get us to hype risks that barely threaten people… Sometimes they even con us into scaring you about risks that don't exist at all …

Newsrooms are full of English majors who acknowledge that they are not good at math, but still rush to make confident pronouncements about a global-warming "crisis" and the coming of bird flu.

Bird flu was called the No. 1 threat to the world. But bird flu has killed no one in America, while regular flu -- the boring kind -- kills tens of thousands. New York City internist Marc Siegel says that after the media hype, his patients didn't want to hear that.

"I say, 'You need a flu shot.' You know the regular flu is killing 36,000 per year. They say, 'Don't talk to me about regular flu. What about bird flu?'"

Tuesday, April 28, 2009

TARP: riskier, less transparent and more corrupt

In addition to the increasingly centralized control of the American economy over the past 7 months, the other troubling aspect of the Paulson-Geithner TARP era has been the lack of transparency.

Of course, the two go together: bureaucrats run the economy but don’t want people looking over their shoulders. Shareholders can vote out a CEO but no member of society (other than the president) can vote out a Treasury Secretary or Fed chairman.

Since January, we have been hearing how Paulson pressured BofA to bail out Merrill Lynch, despite the latter’s desperate straits. Under pressure, BofA bought Merrill, destroying more than $100 billion of shareholder equity.

An unsigned editorial entitled “Busting Bank of America” in the WSJ this morning summarizes the sordid saga. It begins:

The cavalier use of brute government force has become routine, but the emerging story of how Hank Paulson and Ben Bernanke forced CEO Ken Lewis to blow up Bank of America is still shocking. It's a case study in the ways that panicky regulators have so often botched the bailout and made the financial crisis worse.

In the name of containing "systemic risk," our regulators spread it. In order to keep Mr. Lewis quiet, they all but ordered him to deceive his own shareholders. And in the name of restoring financial confidence, they have so mistreated Bank of America that bank executives everywhere have concluded that neither Treasury nor the Federal Reserve can be trusted.
The two men used the coercive power of government to force private shareholders (I among them) to involuntarily assume a huge risk:
Evaluating the policy of Messrs. Bernanke and Paulson on their own terms, this transaction fundamentally increased systemic risk. In order to save a Wall Street brokerage, the feds spread the risk to one of the country's largest deposit-taking banks. If they were convinced that Merrill had to be saved, then they should have made the public case for it. And the first obligation of due diligence is to make sure that their Merrill "rescuer" of choice -- BofA -- had the capacity to bear the losses. Instead they transplanted the Merrill risk to BofA shareholders, the bank's depositors and the taxpayers who ensure those deposits. And then they had to bail out BofA too.
This has undermined investor confidence:
Messrs. Bernanke and Paulson also undermined the transparency that is a vital source of investor confidence. Disclosure is not a luxury to be enjoyed only when markets are rising. It is the foundation of the American regulatory system and a reason investors have long sought to keep their money within U.S. borders. Could either man have believed that their actions wouldn't eventually come to light, with all of the repercussions for their bank rescue plans?
It wasn’t just that they BofA shareholders and the public in the dark. The two men also misled the chairman of the SEC. For about three weeks, they also kept Merrill’s problems a secret from the Financial Stability Oversight Board, the government agency nominally in charge of the bailout program.

The WSJ editorialists conclude
The political class has spent the last few months blaming bankers for everything that has gone wrong in the financial system, and no doubt many banks have earned public scorn. But Washington has been complicit every step of the way, from the Fed's easy money to the nurturing of Fannie Mae and Freddie Mac, and since last autumn with regulatory and Congressional panic that is making financial repair that much harder.
Some might say this is just the aberration of a few individuals. However, history shows that hubris and secrecy is an inherent risk of any centralization of government power. In its commentary on Lord Acton’s famous maxim, the New Dictionary of Cultural Literacy offers this dry summary: “An observation that a person’s sense of morality lessens as his or her power increases.”

Symbian's planned app store

The Symbian Foundation has advertised for a new manager to run their app store:

The Symbian Foundation is looking for an Application Deployment Manager with a keen passion to drive a team in the creation of a superior Mobile Application Store. This will be a senior role within both the US office and Developer Services at The Symbian Foundation.

In this role, the Application Deployment Manager will work with the entire Symbian community (including device manufacturers and operators) to define, create and drive the deployment channels for Symbian Foundation’s Application Store.
It is interesting that the Symbian Foundation — substantially funded by Nokia — is creating a new app store while Nokia already is developing their own app store — due as the Ovi Store next month. The new store will support both S40 and Symbian S60, while presumably the Symbian store would only support S60.

Monday, April 27, 2009

Verizon and Apple talking about CDMA iPhone

USA Today reports this morning that Apple and Verizon are talking about the possible release of an iPhone on America’s largest cellular network when the AT&T exclusive expires next year.

As the paper notes, this is the biggest thing Apple could do to grow cellular market share in the US. (The paper doesn’t note that this is an old rumor that has been discounted before).

If the rumor is true, this would mean that Tim Cook was just practicing misdirection when he told analysts during the earnings call last week:

From a technology point of view as you know, Verizon is on CDMA and we chose from the beginning of the iPhone to focus on one phone for the whole of the world and when you do that, you really go down the GSM route, because CDMA is – doesn’t really have a life to it after a point in time.
It sounds like Tim has been learning Apple secretiveness from the master, even more evidence that he’s preparing to run the company on a permanent basis.

Certainly I agree with USA Today that the big loser in any Apple-Verizon deal would be AT&T. In fact, people who prefer Verizon would presumably hold off switching to AT&T until they see if they will be able to get an iPhone 4.0 on their favorite carrier.

Sunday, April 26, 2009

Web 2.0 conference model: free!

Stanford MS&E professor Bob Sutton posted an interesting update on his blog last week, announcing a social networking mini-conference this Thursday afternoon at the Stanford


With speakers from Facebook and LinkedIn, the business model for the workshop is as expected: free! (Other speakers are from Apple, Netflix, Ning and Stanford’s own Huggy Rao). Reservations are via email or Facebook. This the fourth year of the mini-conference and I imagine it will be an overflow crowd again this year.

I’d really like to go, but I’ve long committed to spending the entire day at another free (and overflowing) conference, this one co-sponsored by the Santa Clara and Berkeley law schools on the 100th anniversary of the 1909 Copyright Act. I only recognize a few of the speakers: Berkeley copyright guru Pam Samuelson and Google copyright council (a former copyright blogger) William Patry. Still, as an IP researcher (who in industry used to write copyright licensing contracts), this conference provides a no-miss opportunity to broaden my understanding of key issues in IP law.

Saturday, April 25, 2009

Still a BlackBerry nation

This week I had a two-day trip to the Michigan State telecommunications center to deliver a talk (more later). Due to the difficulties of getting to Lansing from San Jose (or SFO), that meant six flights through five airports in a 42-hour period, including a circuitous routing home: LAN-ORD-LAX-SJC.

Because my talk was on the iPhone (as was the Q&A and much of the informal discussion), on the trip home I was thinking a lot about iPhone and smartphone usage patterns. But instead of the iPhone, what I observed was a remarkable overlap between BlackBerry owners and airline travelers.

I didn’t see the phone model of my seatmate on the first leg. On the second leg, I was among the last to board the flight to L.A. at O’Hare airport: walking onto the plane, three of the eight people in first class were intently reading on their cellphones — all BlackBerries. When I squeezed into my middle seat, the two guys on either side were reading on their BlackBerries. On the final leg to San Jose in a CRJ-70 with 2+2 seating, my only seatmate was reading something on a BlackBerry.

All of these BlackBerries had thumb keyboards — no Storm in sight. In fact, these were all standard width phones — no Pearls either.

When I hang out with tech types here in the Valley, the iPhone is it, and the BlackBerry is passé. This includes not just those in the industry, but also housewives and students who have the bucks to buy the pricey phone and its pricier data plan. That also applies to many tech-savvy college professors or grad students that I meet in my travels.

But when you look at the market share numbers, the BlackBerry is still killing the iPhone. Here is the IDC smartphone marketshare for the US, as released in dribs and drabs of press releases over the last 15 months.

The story, of course, is pretty simple. Apple has only one model, and so gets a huge boost when it comes out (and had a 2nd boost in Xmas 2007) but otherwise tapers off the rest of the year.

The other reason is that to launch the iPhone in the US, Apple gave one company an exclusive, thus limiting its sales. Clever distribution ploys aren’t going to get around the fact that Research in Motion sells through almost everyone (even MetroPCS) while Apple is only selling to the 28% of the market that is on or willing to be on AT&T.

This exclusive is of course a legacy of its 2007 revenue sharing model. In 2008 (when Apple added the majority of its countries), the norm appears to be multiple carriers. In a quick spot check, that’s two carriers in Chile ((unlike Claro and Movistar), India (Airtel and Vodafone), Italy (TIM and Vodafone) and Sweden (Telia and Telenor), three in Australia (Optus, Telstra, Vodafone) but only one in Canada (Rogers and its Fido subsidiary), Japan (Softbank) and Mexico (Telcel).

This leaves out the differences in the devices and usage. Both devices seems popular for Internet use (as opposed to Palms which are often used as just organizers). However, the BlackBerries seem to be about reading text while the iPhone seems more about surfing the web. (Both are obviously used for e-mail).

Apple has some hope. The 20ish young man next to me en route to LAX put his BlackBerry away when the plane took off, and spent the whole flight with his iPod Touch. He said he would have bought an iPhone but still had a contract on his BlackBerry.

In 2008, Apple added most of the interesting countries, so in 2009 it won’t be able to add countries (except China) that will significantly grow its global market share. This leaves two options for growing share in the rapidly growing smartphone segment that was up 22.7% last year. However, I have major doubts whether Apple will pursue either one.

One is to release a broader product line in 2009 — not just one model but many, as it did with the iPod. However, Apple seems loath to cannibalize its premium product, nor (I suspect) is it willing to tinker with the original vision (e.g. by adding a keyboard).

It may be that Apple will add other types of mobile devices to increase unit sales without regards to cellphone market share bragging rights. After all, Apple sells 3 iPod Touch units four every 4 iPhones worldwide, and all of these models are driving revenue to the App Store. The rumored Apple netbook might similarly be an iPhone OS device that doesn’t count towards cellphone market share.

The other option is to add additional carriers in those countries where it originally granted an exclusive. One problem is that it appears the exclusive doesn’t expire until until 2010. The other is that Apple COO Tim Cook explicitly said last week that Apple has no interest in CDMA, which rules out the majority of the US cellular market (Verizon-Alltel, Sprint, US Cellular, MetroPCS, Cricket). T-Mobile is less than half the size of either AT&T or Verizon.

So if the 2007 story was the iPhone’s initial foothold, and 2008 was global proliferation based on 3G support, I suspect that 2009 will be about proliferating new devices that are not necessarily phones. That will leave US a BlackBerry nation for at least a few more years.

Friday, April 24, 2009

Android progress

T-Mobile USA has sold 1 million G1 by HTC phones since its introduction last October. That’s small compared to the iPhone (which has sold 8 million in 80+ countries during that period). It’s also not as fast as Nokia, which thanks to its strong global distribution, was able to achieve the same milestone for their 5800 phone in half the time.

Still, it’s slightly better than the Storm and overall a strong start for a brand-new platform and a phone that was rushed to market with serious performance compromises.

The key to more share for the Android platform is more handsets and the handsets are being held up until performance is acceptable. That suggests that when they do come, there should be a flood of adoption. HTC’s second phone (Magic) is long-rumored to be due Real Soon Now in Europe, and the latest prediction is that Vodafone will ship it next week.

It also looks as though that Android (via Leonovo) will beat the iPhone to the Chinese market, and the low licensing cost will fit well with the Chinese market. (No word as to how China Mobile feels about the Android Market, given it plans its own app store.)

China Mobile, like Vodafone, is a dominant carrier that likes commodity handsets. I wonder who’s next — DoCoMo? Its rival Softbank carries the iPhone, but DoCoMo already has both Symbian and Linux smartphones under its own brand.

Now Phandroid (a great Android rumor site) claims the HTC Hero will debut on Sprint in October (which would make it 5 months after the Palm Pre). Given AT&T’s strong ties to the iPhone, I speculated that either Verizon or Sprint would be next in the US to ship an Android phone.

Sprint CEO Dan Hesse has admitted Sprint is working with Google on an Android phone. It’s still possible that Verizon will beat Sprint to market, but no rumors yet.

Best things in life aren't free

Passing through the airport en route home, I saw a brief report on CNN about the latest Pew Research Center survey on how Americans are re-evaluating what material things are luxuries and what are necessities.

Falling dramatically are a microwave (a necessity to 47% today vs 68% in 2006), clothes dryer (down 17%), A/C (down 16%), dishwasher (down 14%), TV (down 12%), cable or satellite (down 10%). For the first time, they asked about a “landline phone,” a necessity to only 68%. The study continues a baseline study begun by Roper in 1973.

The CNN staff flashed graphics for the microwave and dishwasher, but not for TV or cable — although they nervously joked about it. I couldn’t hear if they mentioned that only 38% of Americans age 18-29 see a TV as a necessity. If young people are future growth, the politics of the young favor CNN over Fox but their Internet habits hurt both.

The only things that are flat or up are

  • cellphone: 49% (unchanged)
  • high-speed Internet; 31% (+2%)
  • flat-screen TV: 8% (+3%)
  • iPod: 4% (+1%)
Home computer is down 1%, but at 50% is still narrowly ahead of PC. Do the math and 62% of those who find a PC essential find broadband essential.

USA Today
reported that in response to the recession, respondents did more discount shopping (57%), cut/reduced their cable/DBS subscriptions (24%), cut/reduced their cellphone plan (22).

What was a little surreal was the chitchat between the CNN correspondent at the NYSE and anchor Kyra Phillips. (I didn’t know she was the anchor, but Google cleverly knew when I asked “CNN anchor” between 1-3pm EDT that I want the CNN anchor who is on duty from 1-3pm). The two women were trying to show empathy for the common man and woman, but their clothing and hairdos (particularly for Phillips) implied a six figure salary that the common person will never see. I’m no fan of class warfare, but have little sympathy for phony class sympathy (by journalists, politicians, demagogues or anyone else).

Thursday, April 23, 2009

BofA bombshell

The other shoe has dropped on BofA’s value-destroying strategy to buy Merrill Lynch after learning the extent of its toxic assets.

The lead story in today’s WSJ reports on sworn testimony by NationsBank Bank of America CEO Ken Lewis was pressured by then-Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke.

Excerpts from the interview conducted by the NY attorney general:

Q: Were you instructed not to tell your shareholders what the transaction was going to be?
Lewis: I was instructed that “We do not want a public disclosure.”

Q: Who said that to you?
A: Paulson…

Q: Had it been up to you would you (have) made the disclosure?
A: It wasn’t up to me.

Q: Had it been up to you.
A: It wasn’t.
The article also said
  • Paulson told NY investigators that Lewis “misinterpreted” what Treasury wanted kept secret.
  • Paulson threatened to remove BofA’s CEO and board if it cancelled the merger.
Being threatened with losing your job shouldn’t be enough to convince a CEO to do something that will destroy more than $150 billion in shareholder wealth. But it does illustrate the pressure that government officials were applying, and demonstrate why we don’t want central governments to have such power over free markets.

Wednesday, April 22, 2009

Kindle's gross margins

AP reports a story on the iSuppli cost of goods breakdown on the Kindle: $185.49 parts and manufacturing for a $359 retail price. The largest amounts are $60 for the display and $39.50 for the EV-DO modem for the Sprint network. That’s a 48% gross margin for a product sold by Amazon as the sole manufacturer, distributor and retailer.

By comparison, it estimates the iPhone 3G at $174.33 for a retail price of $599. Apple does distribute through channels but the 71% gross margin covers a lot distribution margin.

One thing that iSuppli would not cover is the cost of using the Sprint network. Does Amazon pay Sprint upfront? Or do they allocate a proportion of every download sale for bandwidth charges?

The AP story also reported an estimate of 500,000 Kindles sold in 2008. That’s perhaps good for an e-book reader, but it suggests the Kindle is far from crossing the chasm — a good reason why Amazon decided to make an iPhone reader app for Kindle content.

Tuesday, April 21, 2009

The Apple netbook

DigiTimes, The Inquirer, ZDNet and other outlets are reporting the latest rumors about the Apple netbook, based on leaks from its suppliers. The WSJ even claims Steve Jobs is actively shepherding the project.

Given Apple’s recent track record, I’m sure it will be cool and will probably send lots of units. But what is it? A large iPhone or small MacBook?

My inclination is that it will be a large iPhone. I had already suspected that because Apple hates to cannibalize itself — so selling an expensive iPhone will not steal business from the $1000-2000 MacBook line.

There is also the fact that with the iPhone App Store, after 30 years Steve Jobs finally controls the ISV distribution channel. Plus this puts Apple at the front of the migration of smartphones to be true laptop replacements, rather than late to the cheap sub-notebook party.

The clincher for me is the rumor reported by The Inquirer

Whispers suggest Apple will attempt to market the device as a portable gadget for reading e-books, connecting to the Interwarble and watching films.
The iPhone reads Kindle e-books and the MacBook doesn’t. Q.E.D.

Perhaps the big question is: unlike the iPhone, will it run Flash? If there were a new GHz-caliber processor — such as the latest Marvel XScale update — it would give Apple an excuse to back down from its previous stand.

The same arguments could apply to whether it will run Java. Steve Jobs historically was a good friend of Larry Ellison, so perhaps if Oracle finally does buy Sun (no deal is certain until it’s concluded) Steve will embrace Larry’s cup o’ Joe.

Sunday, April 19, 2009

Where the meltdown began

From the WSJ on Saturday:

'Perhaps the largest regulatory failure of all time." That's how J.P. Morgan Chase CEO Jamie Dimon describes the "inadequate regulation of Fannie Mae and Freddie Mac" in his annual shareholder letter, released this week.

Mr. Dimon devotes nearly a quarter of the 28-page letter to analyzing what caused the panic of 2008, and he hands out plenty of blame all around. But he calls it "amazing" that Fannie and Freddie were allowed to grow "larger than the Federal Reserve" thanks to Uncle Sam's implicit guarantee of their obligations.
Quoting from the letter:
Perhaps the largest regulatory failure of all time was the inadequate regulation of Fannie Mae and Freddie Mac
The extraordinary growth and high leverage of Fannie Mae and Freddie Mac were well-known. Many talked about these issues, including their use of derivatives. Surprisingly, they had their own regulator, which clearly was not up to the task. These government-sponsored entities had grown to become larger than the Federal Reserve. Both had dramatically increased their leverage over the last 20 years. And, amazingly, a situation was allowed to exist where the very fundamental premise of their credit was implicit, not explicit. This should never happen again. Their collapse caused damage to the mortgage markets and the financial system.
Dimon also makes some very interesting points about the prevalence of positive-feedback (he calls “pro-cyclical”) loops in the system: when things got bad, these policies made things worse. An example would be stringent mark-to-market rules (despite their other advantages) that encourage liquidation of assets at firesale prices — thus depressing the value of similar assets across the industry.

I certainly can’t agree with everything Dimon says. He seems quite enamored with more regulation to prevent failure rather than designing markets to be more self-governing and thus more resilient to the inevitable failure. But then as the CEO of one of America’s largest banks, he has a huge stake in preserving the current industry positions rather than seeking what’s best for the American economy as a whole.

Interestingly, Dimon is running at full tilt away from Federal money for Chase and thus Federal micromanagement, in hopes of gaining market share on its two main rivals, the TARP-enabled, bureaucratically hobbled Citibank and BofA. I suppose this is a form of market incentive — if these two banks will perform worse with government shareholders, they have a strong incentive to pay back what they owe and soon rejoin the ranks of (somewhat) free market companies.

Thursday, April 16, 2009

My rare agreement with the NYT

I have a lot of beefs with traditional printed and electronic media, particularly the elite media who it often seems have unchecked power to slant the news to fit their own biases. (Once upon a time, we journalists followed the Jack Webb dictum: “just the facts, ma’am.”)

That said, with professional journalists, their biases are usually better disguised (and less intrusive) than with most of the new media — us bloggers and the like. And today I find myself in the unfamiliar position of agreeing with the gray lady herself, THE New York Times.

I remarked on Monday that I thought the Yahoo video interview of Tesla CEO Elon Musk demonstrated a need for “journalism lessons for the new-media host.” Apparently I was not the only one to notice the interviewer’s shortcomings.

I did not know that freelancer interviewer Sarah Lacy is a former Business Week reporter. It is certainly not something I would have guessed, until I read a profile of Lacy and her latest interview with Musk,written by John Koblin of the online paper New York Observer. Nor did I know that one tech veteran called her “the hottest reporter in the tech world — ever.”

After Lacy and Musk complained about the accuracy of a NYT column on Tesla, Koblin asked the NYT what they thought. Here’s what Koblin found:

“I think Sarah Lacy was too busy giggling to do Journalism 101 and call Randy or me for comment to make sure what Elon was saying was accurate,” said Tim O’Brien, the Sunday Business editor of The Times, in an interview. “Because it was not only inaccurate, it was flat-out wrong. We wrote a clarification of the headline. We didn’t retract the story at all; we stood firmly by the story, and I still stand by Randy’s column.”

“You can’t help but watch that interview and marvel at the squishy familiarity between Lacy and Musk,” he continued. “And I wonder whether or not some journalistic blinders had popped off.”
To his credit, Koblin has comments from both The Times and Lacy, although not Musk or columnist Randy Stross (not that this kerfuffle warranted the extra effort).

Koblin notes that (as reported by CNET) Lacy made herself the center of the story during an interview a year ago with Facebook CEO Mark Zuckerberg. As with this week, afterwards Lacy felt like she had done a “fine” job. At the same time, the media blog Crisisblogger argued that the 2008 kerfuffle was “created largely by bloggers and tweeters.”

The one nice thing about an interview is that the journalistic bias is up front — whether for favoring the interview subject (as in Lacy’s case) or the traditional 60 Minutes “ambush” interview. This only tells us so much: we can’t see if the two parties are business partners, college classmates or current (or former) lovers. In most cases, we also can’t see what was left on the cutting room floor, to make the subject look better, worse or at least more exciting.

Now, more than ever, it’s essential for the citizens of a democracy to be able to sift through the news — fact, fiction, opinion and distortion. This should be part of any high school civics class, as well as the citizenship classes for those new to the US and its cacophony of news sources.

Wednesday, April 15, 2009

Consequences of AT&T and Google coopetition

In the out-takes of the interview with AT&T CEO Randall Stephenson published in the WSJ Digits blog, there was a rather pointed complaint about the Google-Apple coopetition.

“In some areas you look at Google and say, ‘They’re a competitor,’ and in some areas you say, ‘They’re a partner’…You’re always going to have points of tension with these folks,” Mr. Stephenson said.

People close to the situation say plenty of tension has built up over issues ranging from digital privacy to “open access” rules for wireless network operators. When the two sides were talking in 2007 about Google’s Android mobile operating system, Mr. Stephenson and other AT&T executives felt Google CEO Eric Schmidt misled them by understating Google’s wireless and regulatory ambitions, the people say. Mr. Schmidt, meanwhile, told colleagues he thought AT&T had a “jihad” against Google. Mr. Stephenson says he has “no inherent conflict” with Mr. Schmidt. A Google spokeswoman declined to comment.
I can see why AT&T (like Verizon and the rest of the cellphone industry) would be mad about Google’s support for net neutrality.

After reading this quote, I’m even more skeptical about the idea that AT&T is going to join the Android bandwagon.

Right now, AT&T is shipping the iPhone and various BlackBerry models. Based on this latest development, I think AT&T will embrace Nokia and Symbian long before they do anything to help the success of Android.

T-Mobile is going to stay with Android. I believe Sprint — with their sizable investment in the Palm Pre (due May 17) — are unlikely to move to the gPhone soon, but might do so in 2010.

So that to me suggests that after T-Mobile, the next Android phones in the US will come from Verizon Wireless. Yes, they have the same issues as AT&T does — but they don’t have the hit iPhone. Embracing Android would threaten Verizon’s traditional walled garden approach, but without a killer smartphone, maybe they will be more eager to get a hit device.

End of a noble experiment

For near 20 years, the Alfred P. Sloan Foundation began support for in-depth study of specific industries. (This is the same Sloan who created GM and whose name adorns the MIT business school).

The foundation funded research centers on 26 industries, and with that dozens of dissertations, books and research papers. As the website proclaimed:

Since 1990, the Alfred P. Sloan Foundation’s Industry Studies program has been founded on the belief that industries are sufficiently different from one another that they individually deserve rigorous and deep academic study. The industry studies community is composed of scholars who deeply understand industries by taking a direct approach to the companies and people of each industry for data and observations.

The multidisciplinary research conducted by industry studies scholars generally employs a wide range of both quantitative and qualitative research methods (including direct observation and primary data collection), often conducted across multiple firms within a particular industry. This leads to a contextually rich picture of business phenomena and a depth of understanding and insight that can uniquely complement both more theoretical academic research and individual, firm-level studies.
The foundation once sought both recognition and financial support from industry
American industry confronts many changes and opportunities in today’s global marketplace. The Sloan Industry Centers are a powerful resource for industry, as well as those whose work is concerned with overarching issues that affect industries. Each Industry Center dedicated to a single industry is able to examine in-depth the features of that industry and work closely with its leaders.

The Sloan Industry Centers comprise a unique national network. Housed in many of the nation’s most prestigious universities, they listen to the current concerns of industry – attentive to the needs of business, and relying on the accumulated experience of business leaders – as they address solutions.
Regular readers know that my research interests are more industry-focused that discipline focused. Working at a teaching school I’ve had a limited role in the Sloan program, which funded centers at major US research universities.

I was peripherally (!) associated with UCI’s Personal Computing Industry Center, which was hosted by my co-authors but didn’t start until after I left UCI for SJSU. I also gave an open innovation keynote in 2005 for the paper business products center at Georgia Tech, and presented two papers at the 2007 conference held at MIT.

However, all good things must come to an end. Today, Sloan is pulling the plug: pushing the program out of the nest in hopes that it can fend for itself. As the head of the revised program announced last week:
Barring unforeseen delay, the Industry Studies Association will accept responsibility for the domain from the Alfred P. Sloan Foundation on Wednesday, April 15, 2009.

Going forward, will inform viewers about the ISA and the activities of its members. As the organization grows, the ISA web site will increasingly become a resource for ISA members and place where many other scholars and the general public can go to understand more about industry studies research and this interdisciplinary community.

After launching the ISA web site we will also transition management of the industry studies listserv from the Alfred P. Sloan Foundation to the ISA, and this will take place in discrete steps.
The new ISA faces daunting odds: it has no journal, one conference and few resources. Most academics maintain primary allegiance to their disciplinary associations, such as the American Sociological Association or the Academy of Management.

Frankly, the loyalty came from the money that allowed academics the time and resources that made in-depth industry study possible. Now that the centers have received their final grants, most university centers will wither to a fraction of their former selves if not disappear entirely.

The end of the Industry Studies program marks a major cutback in Sloan’s support for empirical research on the US economy. With Sloan gone, there’s really no private foundation funding this sort of research. Some work gets funded by NSF’s Directorate for Social, Behavioral & Economic Sciences, but historically it has provided much smaller amounts for such studies.

Still, I am the first to admit that it’s better for a program to end on top. I am grateful for Sloan funding this effort for nearly 20 years.

I am only sorry that Sloan was unable to build the network of industry, foundation and/or government funding that would have allowed it to continue permanently. America has graduate education and research that is the envy of the world, and it seems a no-brainer to continue to deploying some resources to better understand the dynamics of the success or failure of the drivers of the American economy.

AT&T loves iPhone, but...

The WSJ Wednesday ran an interview with AT&T CEO Randall Stephenson that emphasizes the company’s desire to push more aggressively into wireless.

The article estimated that the iPhone 3G brought 1.7 million new customers to AT&T Wireless in 2008. Because of that success, Stephenson is seeking to extend expiration of its US exclusive on the iPhone from 2010 (presumably June 2010) to 2011.

The free side of the WSJ website includes a few interesting tidbits, including Stephenson being keen on Cisco telepresence (as a substitute for air travel) and the inevitable decline of its wireline business.

Two of the interesting tidbits are on the iPhone and expansion of the Cingular AT&T Wireless network:

Apple: AT&T engineers privately chafed at being blamed by bloggers and some industry watchers for early problems with the iPhone 3G that led to dropped calls. It turned out to be an issue mostly related to Apple’s operating software and hardware and was addressed through software updates. Neither side publicly cast blame on the other, and Mr. Stephenson says the relationship is strong. “Any relationships as tight as this one, they require hard work at the most senior levels,” he said.

Wireless networks: He said the challenge of increasing network capacity isn’t just about cell towers, but also about beefing up the “backhaul” trunks that carry data back from those sites underground. He says AT&T will build a fourth-generation LTE network in the 2011-2012 time frame. “There’s no panic or rush to get there,” he said, because the highest-bandwidth wireless applications, like high-definition video streaming, are still a ways off. “It’s about having capacity for the applications users actually want now.”

Tuesday, April 14, 2009

The worst is not yet over

The stock market has had a great rally since March 9. As someone who has a large pile of cash, I’ve was wondering if I missed a buying opportunity, but OTOH my large pile of mutual funds (such as my VFIAX) has come back to levels of early February — only 15% below Election Day and 33% below the end of August.

Still, I’ve stayed out because this felt like a sucker rally. (Peter Cooper of Seeking Alpha agrees). Perhaps the market was oversold: I’m not a technician, nor do I play one on TV. The rally could also be due to a change in sentiment, and I’m no expert on mass market psychology.

But as a young investor, I recall Charles Schwab’s advice to look for economic signs in your daily live to guide your investment decisions. (iPhones among Silicon Valley housewives might seem like such an indicator, but first I’d like to see their counterparts in Des Moines and Birmingham).

The indicators that I’m seeing suggest that firms have lost their pricing power, and are scrambling to cut prices (or pretend to cut prices) to gain sales, sometimes at any cost. This will depress the bottom line and probably the top line as well.

Of course, everyone knows auto sales are down and bankruptcy-prone GM and Chrysler are doing anything they can to attract sales. Here in California, car sales (and other big ticket items) will be down for months, because legislators raised the sales tax this month by 1% as part of an ugly end to an uglier budget mess. Buyers will also be postponing purchase of other big ticket items, whether HDTVs or Caterpillar earthmovers.

Beyond this, home improvement stores are also aggressively trying to attract business. Conventional wisdom is that in a down economy (or when financing is tight), homeowners remodel in place rather than buy a new McMansion, but that doesn’t seem to be happening right now.

Here we have three main stores — Home Depot, Lowe’s and OSH — and all three are promoting more aggressively than any time in the 6.5 years I’ve lived in the Bay Area. Perhaps they are quietly cutting corners on the quality, such as by pressuring suppliers to ship shoddier Chinese-made tools, or lowering the grade of building materials — but it still seems as though their earnings will be depressed for the rest of 2009.

The NYT wrote Monday about how the home improvement and other retailers are aggressively repositioning themselves as value havens during the down economy.

Another area that’s supposed to do well in downturn is fast food, and indeed McDonald’s has held its market value compared to the broader market. However, in the overall fast food/quick serve market, the last 3 months has seen a dramatic increase in the emphasis on bargain menus — items in the $1-1.50 range. Locally, it started with our sub shops (Subway, Togo’s, Quizno’s) which are at the high end of the fast food/quick serve price bracket, but now it's hit all of the FF/QS market. (Some of these are phony price cuts based on reduced portion sizes).

All of these depressed profits will not help stocks. Falling revenues and profits (into losses) would also bring more layoffs, and layoffs will reducing pruchasing power and consumer confience.

This morning, the Merc published a SVLG survey of SV CEOs about their expectations for the economy, which are expecting more job cuts this year.

Finally, economists at UCLA’s Anderson Graduate School of Management are predicting real GDP declines through September, and unemployment peaking in 2010 — at above 10% for the US and nearly 12% for California. Even ignoring Anderson’s good forecasting record, I don’t see how a recession this strong will turn around substantially in 2009.

So my expectation is for ugly corporate earnings for several quarters. Banks may be off their firesale prices, but it’s hard to see much upside for the overall economy for the next 6-9 months.

Monday, April 13, 2009

MySpace, spam slimeballs, and brillance

At, I found a link to a posting by the author of a new book, Stealing MySpace.

Here’s relevant excerpts:

Early in my investigation, I discovered that the founders of MySpace were scammers. Before they started the social-networking site, they sent spam, distributed spyware, and peddled spy cameras you could hide in your shoe and e-books touting “how to grow taller” and “how to hypnotize people.” MySpace was just an idea they copied from a popular Web site at the time, Friendster.

MySpace’s parent company, Intermix, wasn’t much better. It made most of its money selling subscription wrinkle cream and diet pills online, had a spyware business of its own, and had a thriving animated greeting card business best known for its fart and poopy diaper jokes.

In the book, the venture capitalist who backed Intermix (and was initially reluctant to support MySpace) David Carlick says why he’s not worried about the unsavory parts of Intermix. “Marketing has always been on the scary edge of ethical.”

This was a vastly different story than the canonical tech startup tale. This oft-told narrative stars a Bill Gates genius-type founder dropping out of Harvard to work on his technological breakthrough in a garage somewhere.

Meeting this new type of success story I wondered: were the MySpace founders just lucky? Or was their hucksterism part of what it takes to succeed?

And thus I stumbled onto my big idea: The greatest entrepreneurs are hucksters who have simply crossed the line into brilliance.
It sounds like a book well worth reading.

The moral hazard of cleantech hubris

Since last summer, many firms have lined up to get their share of taxpayer subsidies. It is not always clear which firms deserve such subsidies and which ones do not, but as always, it’s predictable that the undeserving firms will do their best to appear deserving.

One of the companies seeking Federal aid is electric car maker Tesla Motors. Tesla has shipped its Roadster to an affluent niche market, but hopes to find a broader (niche) market with its $57,000 Model S sedan. Plans for the Model S have been on again and off again; right now they’re said to be on again.

Tesla is personified by chairman/CEO/founder Elon Musk, a 37-year-old serial entrepreneur who appears to be simultaneously running his 3rd and 4th startups.

My coworker Randy Stross (author of Planet Google) wrote about Tesla in his New York Times column. His Nov. 30 column questioned Tesla’s suitability for Federal bailout dollars:

The Tesla Roadster is an electric car that goes fast, looks sensational and excites envy. The seductive appearance, however, obscures some inconvenient truths: its all-electric technology remains woefully immature and don’t-even-ask expensive. If enough billionaires step forward to inject additional capital to keep the doors of its manufacturer, Tesla Motors, open, I’m happy for all parties.

If investors pass up the opportunity, however, why should taxpayers fork over the capital that Tesla needs? The company is requesting $400 million in low-interest federal loans as part of the $25 billion loan package for the auto industry passed by Congress last year.

The program is intended to encourage automakers to improve fuel efficiency, but should it be used for a purpose like this, as the 2008 Bailout of Very, Very High-Net-Worth Individuals Who Invested in Tesla Motors Act? Can you conceive any way that federal dollars could be put at greater risk — and for no equity in return, keep in mind — to benefit fewer people?

Tesla Motors, a privately held company based in San Carlos, Calif., has spent almost all of the $145 million in capital it has raised to date. It says it will soon receive another round of $40 million from its private investors to sustain operations.

In the start-up ecosystem of Silicon Valley these would be respectably large numbers, but in the automotive world, fully developing an entirely new line of technology can easily run $1 billion. That is what General Motors’ first attempt at an electric vehicle, the EV1, was estimated to have cost to develop in the 1990s.
Stross had two inaccuracies in the original article. First, he confused the $109k Roadster with the “mass market” $59k Sedan (later corrected online).

Secondly, he said Tesla wanted $400m in Federal loans: today, the current estimate is $700m. The money would from the Department of Energy’s loan guarantee program instituted by President Bush. The first $250m would be funded by 2005 legislation to reduce carbon emissions, the second $450m from the 2008 program for drive-train electrification. (The loan guarantees will charge fees to cover the program’s projected default rate, estimated at 25% by the GAO.)

While Stross’ comments were harsh, they don’t seem unusually so. Silicon Valley companies are often called on their wildly optimistic predictions. And in this climate of bailout fatigue, formerly entrepreneurial companies embracing government subsidies should expect some level of public examination and accountability.

Still, this was in November: after four months, all was forgotten, right? Wrong.

In video clips posted Friday to Yahoo Tech Ticker, Musk was interviewed by Sarah Lacy. In one of the video excerpts, Lacy shows one of Tesla’s scarce Model S prototype and asks the question “Should your taxpayer dollars go towards producing it?” She then began her interview with Musk:
Lacy: The New York Times did this piece that everyone in Silicon Valley got very up in arms about…
I don’t think “everyone” in Silicon Valley got upset. Some are too busy trying to keep their own startups alive to worry about Musk’s electric cars. A few tech entrepreneurs (like Paul Allen) were even willing to be politically incorrect and oppose the bailout.

Let’s restart the hard-hitting investigative interview:
Lacy: The New York Times did this piece that everyone in Silicon Valley got very up in arms about, saying that, you know, that the government money going to Tesla, would be this, you know, huge risk of capital that would only benefit the wealthy and venture capital backers who put money in the company, and called the Roadster basically a $109,000 concept car.

What do you say to that article?

Musk: Randy Stross is a huge douchebag! [Both laugh uproariously.] And an idiot!
Wow! I’m impressed! What a command of the English language! What an ability to inspire confidence among taxpayers that their $700m will be well spent! I’m not sure which is the greater need: journalism lessons for the new-media host or PR lessons for the centimillionaire entrepreneur.

After this ad hominem attack, Musk changes the subject:
Musk: First of all, what is he doing picking on electric car company? I mean, why would he pick on the little guy who's trying to do good, when you’ve got egregious wastes of money in the tens of billions occurring in … in … in Detroit? Why?
Hmmm... So wasting nearly a billion dollars on a little car company is OK because it’s not as bad as wasting $10 billion on a big car company? Musk said the money was intended for a “mass market car,” but (since no one owns a car in Manhattan) only in Silicon Valley would $57k be “mass market.”

Musk supposedly has an undergraduate economics degree from Wharton, so I assume this is just posturing rather than a serious answer. Here is how I would explain why that answer would get an “F” in my technology strategy class:
We can look at a wide range of cutting edge technologies in the past — biotech, dot-com, PC makers, disk drive makers and semiconductors — and see that when many companies enter the market, some companies survive while other companies fail. A priori, there was no way to tell the winners from the losers: if there were, investors would not have invested in the losers.

Today, while society may want electric cars, we don’t know which companies will survive and which will fail. If Tesla fails, U.S. taxpayers could lose $0.7 billion.

A VC expects to lose its entire investment anywhere from 10% to 33% of the time. It compensates for that risk by taking equity and getting a 10x return for the big winners. Here, the government would be supplying 80% of Tesla’s invested capital, but will only earn a fixed fee should Tesla have a smash success.

If you and the current investors don’t want to put up that money — but instead want taxpayers to bear most of the risk — perhaps you know something that the public doesn’t about the riskiness of the investment.

Economist Ken Arrow calls that a moral hazard problem due to information asymmetry. Economics tells us we should be suspicious when people who know the most want others to shoulder the risk.
When funding is tight, many tech companies will grow slowly until their positive cash flow will enable further re-investment. However, in this case, Tesla wants to expand its capitalization fivefold to fuel explosive growth, in hopes of grabbing market share before GM, Nissan, Toyota and others bring their electric vehicles (or plug-in hybrids) to market.

However, by taking Federal funding, Tesla would move into the realm of a regulated government-sponsored enterprise, along with all the other companies received bailouts and subsidies. Government money means playing by government rules, however irrational those might be. The best and brightest of Wall Street are fleeing from the TARP-sponsored wards of the state, presumably a lesson that (most) cleantech entrepreneurs will learn someday, as well.

Sunday, April 12, 2009

Steve Jobs' replacement

The WSJ had a fascinating exclusive Friday on what’s happening at Apple at the midpoint of Steve Jobs’ planned medical leave. No one seems to have followed up on the story (yet).

Since Jobs and Apple aren’t talking, the WSJ reporters stitched together 2nd and 3rd hand accounts of how Apple is being run by COO Tim Cook as acting CEO with help from Jobs at home. The portrait is one of Jobs reviewing key details on current projects, as well as working on the future roadmap:

People privy to the company's strategy say Apple is working on new iPhone models and a portable device that is smaller than its current laptop computers but bigger than the iPhone or iPod Touch.
The article said that Apple expects Jobs to come back in June [my guess: to announce iPhone #3] and that the board is talking directly to Apple’s doctors.

The closing paragraph is the most intriguing:
Shaw Wu, an industry analyst at Kaufman Bros., says investors are prepared for the possibility that Mr. Jobs could play a reduced role. "Most investors have factored in a management transition," he said. "What people are expecting is that Steve Jobs would retain a chairman role, and Tim Cook would formalize his role."
I disagree that the market has factored this in: Apple with Jobs gone (or on his way out) is a much slower growth company that Apple of the past decade, which means the 23% stock growth this year would need a correction.

However, this prediction rings really, really true. Apple has gotten used to Steve not being there every day, Steve still has his finger in the pie and as chairman has the final say, but eventually he can let go. If there’s any point in the next few years when he’s going to give up day-to-day control, this is when it will happen.

Qualcomm did something like this when the only CEO it had ever known — Irwin Jacobs — gave up the reins in 2005 after exactly 20 years. He abdicated in favor of his son Paul Jacobs, who had trouble escaping the shadow of his legendary father. Irwin spent not quite four years as non-executive chairman, and then when everyone saw the company was running fine without him, quietly stepped down for good last month.

The problem is, Qualcomm is a systems and infrastructure company, and Apple is a consumer products company. It needs a product fanatic pushing the envelope on new designs, and neither Cook nor SVP Phil Schiller are it. So as I noted last August, if Cook is CEO they need a passionate product guru.

Mark Papermaster (poached from IBM) is finally starting work at Apple on April 24, when he will be SVP of Devices Hardware Engineering, reporting to the CEO. (Devices, of course, are Apple’s high-growth product lines like the iPhone). I know nothing about him other than his resume, but Papermaster (or one of the other product-related SVPs) is where Apple’s leadership will have to come from if Jobs decides (or is forced) to fade away into the sunset.

Life is more than just shipping products, and I hope that Steve will have some post-Apple time (whether now or a decade from now) to spend with his family.

California's budget problems

California faces a special election May 19 to ratify the ugly budget deal made by the governor and legislature to close a $40b budget gap. The deal included including $15b in spending cuts, $12.5b in tax increases, with the rest a combination of smoke and mirrors.

In the Los Angeles Times this morning is a thoughtful op-ed by Tom Campbell, the governator’s former finance director and former dean of the UC Berkeley b-school dean. Campbell’s understanding of financial issues is widely respected here in the Valley (where he once was a congressman), at least among the economically literate.

Campbell gives the true story behind the governator’s deal, admitting that one measure (Proposition 1B) was given to the K-12 teacher unions in exchange for supporting another measure (1A) that the governator badly wanted.

Rumored to be running for governor (against Meg Whitman and a half-dozen elected Democrats), Campbell pulls no punches in criticizing one (obvious) attempt at financial sleight of hand:

Proposition 1C would borrow $5 billion in future revenues from the state lottery. The problem is, it's a one-time salve for a recurring problem. Proposition 1C does nothing to reduce state spending -- the chronic cause of our budget woes. The $5 billion would have to be repaid, with interest, from lottery sales in future years. It's terrible public policy to postpone reckoning in this way.
Campbell has much deeper understanding than the action hero movie star, and both he and Whitman have significance administrative experience. Unlike Schwarzenegger, neither has significant name recognition, making victory difficult in a state that has a 13% Democrat voter registration advantage and a 24% margin for Obama las November.

Saturday, April 11, 2009

Reducing systemic financial risk

I temporarily found myself in the unfamiliar position of agreeing with Paul Krugman — in fact, twice in one week. First, I quoted favorably Krugman’s quote about the curse of the Business Week cover. (This observation seems derivative of the famous Sports Illustrated cover jinx, but still an incremental contribution).

On Friday, Krugman’s NYT column was entitled “Making Banking Boring,” which harkens back to the old days when our banking system was based on providing low-risk, low-reward financial infrastructure. It was a plausible argument.

Digging further, however, and the assumption starts to fall apart: the record does not support the assumption that reverting to the high regulation of 65 years ago will solve all the problems. As Theodore Bromund of Heritage wrote (in response to the G-20 communiqué)

Much of this language ignores one of the basic facts about the financial crisis: it was the regulated banks that failed, and governments are now trying to clean up the mess by encouraging less-regulated investors in hedge funds to step in.

If regulation and oversight were the cure-all for the development of systemic risk the summit implies, the financial crisis would never have happened.
Certainly Krugman would not agree with AEI regulatory expert Peter J. Wallison, who contends that higher government regulation will increase risk-taking by creating more Fannie Maes.

In his Congressional testimony last month, Wallison testified against a plan that would heavily regulate any “systemically significant firm” (i.e. too big to fail):
Giving a government agency the power to designate companies as systemically significant and to regulate their capital and activities is a very troubling idea. …

I say this as a person who has spent ten years studying, writing about, and warning that Fannie Mae and Freddie Mac would have a disastrous impact on the financial world, and that ultimately the taxpayers of this country would be required to bail them out.

This wasn't a wild guess on my part. Because they were seen as backed by the government, Fannie and Freddie were relieved of market discipline and able to take risks that other companies could not take. For the same reason, they also had access to lower cost financing than any of their competitors.

When Fannie Mae and Freddie Mac were taken over by the government, they held or had guaranteed $1.6 trillion of subprime and Alt-A mortgages. These loans are defaulting at unprecedented rates, and I believe will ultimately cost U.S. taxpayers $400 billion. That's major league risk-taking.

There is very little difference between a company that has been designated as systemically significant and a GSE like Fannie or Freddie. Almost by definition, a systemically significant firm will not be allowed to fail--because its failure could have systemic effects. As a result, it will seem less risky for creditors and counterparties and will thus be able to borrow money at lower rates than its competitors. This advantage--as we saw with Fannie and Freddie--will allow it to dominate any market it chooses to enter. …

Regulation does not prevent risk-taking or loss. Witness the banking industry, the most heavily regulated sector in our economy. Many banks have become insolvent, and many others have been or will be rescued with billions of taxpayer dollars.

On the other hand, as far as I am aware, no taxpayer dollars have been spent to rescue hedge funds, although they are entirely unregulated for safety and soundness.

Extending regulation beyond banking, by picking certain firms and calling them systemically significant, would be a monumental mistake. We will simply be creating an unlimited number of Fannies and Freddies that will haunt our economy in the future.
Wallison concluded
We will achieve nothing by setting up a systemic regulator. If we do it at the cost of destroying faith in the dollar and competition in the financial market, we will have done untold harm to the American economy.
As Wallison does, I believe that market discipline (especially consequences for failure) are necessary to reign in excesses by firms. We should deal with the problem of “too big to fail” by making failure less catastrophic for the financial market, not attempting to legislate away the consequences of inevitable human error.

At the same time, financial firms also need better incentives internal governance, so that a CEO that wrecks a company (whether Lehman Brothers, Bear Stearns or Fannie Mae) pays the same price (or greater) that shareholders and employees pay for such failure. One would hope that market forces — notably the institutional investors that lost 30-90% of their money in 2008 — would have an incentive for making this fix, but so far there isn’t much progress.

Scruitable Japanese

Looking for something else, I found an interesting website: What Japan Thinks.

The blog, written under the pseudonym “Seron,” is devoted to translating Japanese-language opinion survey results into English. For example, Friday’s post summarizes the effectiveness of contextual online ads in news sites and blogs, based on a survey of 1,085 Japanese respondents in March.

SeronIt is written by Ken Yasumoto-Nicolson, a mobile phone software engineer from Scotland who lives in Kansai (the region near Osaka). The author chose to write the blog after getting frustrated by how many people spouted off online based on stereotypes and assumptions, not facts.

The blog tags aren’t very useful, but there is a built-in (Google-based) search option. For example, on March 5 he summarized a panel survey of web surfers:

Q1: Is a computer or mobile phone the main way you view web sites? (Sample size=1,067)
Mobile phone 8.7%
Computer 84.0%
Both about the same 7.3%
An earlier 2005 survey produced very different results, but the sampling frame was people who already used their Internet-enabled mobile phones. As he notes, the March 2009 results may be skewed by the panel solicitation:
Note that one way that they recruit their mobile monitors is by getting them to enter their mobile phone email address when they apply to be a PC monitor, so bear that in mind while reading the results.
Other posts this year include on UMPC vs. Netbooks and portable music players/headphones.

As someone who likes free research data — for my research papers and for my blog — this is a great deal, even if the coverage (due to the availability of input product) is irregular.

Friday, April 10, 2009

Tax: none dare speak its name

From Tom Friedman’s column this week:

Advocates of cap-and-trade argue that it is preferable to a simple carbon tax because it fixes a national cap on carbon emissions and it “hides the ball” — it doesn’t use the word “tax” — even though it amounts to one. So it can get through Congress. That was true as long as no one thought cap-and-trade could ever pass, but now that it might under Mr. Obama, opponents are not playing hide the ball anymore.

In the past two weeks, you could hear a chorus of Republicans, coal-state Democrats, right-wing think tanks and enviro-skeptics all singing the same tune: “Cap-and-trade is a tax.” …

Since the opponents of cap-and-trade are going to pillory it as a tax anyway, why not go for the real thing — a simple, transparent, economy-wide carbon tax?
Since it appears that the NYT has run out of dictionaries and their Internet connection is down this week, let me provide a few common definitions of the word “tax”:
tax. Money paid to the government other than for transaction-specific goods and services. — Wikitionary

tax. n. (14th century). 1a.a charge usually of money imposed by authority on persons or property for public purposes. — Merriam-Webster Dictionary

tax. 1. a. A compulsory contribution to the support of government, levied on persons, property, income, commodities, transactions, etc., now at fixed rates, mostly proportional to the amount on which the contribution is levied. — Oxford English Dictionary.
Here is an old Reuters story about the cap-and-trade plan:
WASHINGTON (Reuters) - President Barack Obama's estimate of $646 billion in revenue for the first years of a carbon-capping program to curb climate change is realistic or possibly a little low, policy analysts said on Thursday.

Obama's budget for 2010 projects this revenue, from 2012 through 2019, will fund $150 billion in clean energy technology investments over 10 years and a tax credit to help Americans make the transition to a less carbon-intensive economy.
It appears that one of the prerogatives of a pundit is to say that red is green and expect people to believe it. This is nearly as Orwellian as “love is hate.”

Compelling $600+ billion in payments to enable other spending does not “amount to” a tax: it is a tax. The regressive nature of the wealth transfer is worth debating, but there are more fundamental issues. The regulation will distort the market, and create a government addiction to that distortion and the associated tax revenues.

In normal circumstances, a tax increase of a half-trillion dollars annually would be a cause for alarm. But it appears that today too many voters are inured to such excesses.

Thursday, April 9, 2009

Innovation, standardization and commoditization

If Silicon Graphics ran Christmas...
Ornaments would be priced slightly higher, but would hang on the tree remarkably quickly. Also the colors of the ornaments would be prettier than most all the others. Options would be available for 'equalization' of color combinations on the tree. — Internet joke, Dec. 1998.

Merc columnist Mike Cassidy had a poignant column Tuesday (also available here) on the liquidation of SGI (born Silicon Graphics). One excerpt:

There was a can-do and why-not attitude all rolled into one. One of the first people I met at SGI was Joe DiNucci, the vice president of marketing who worked at the company for five years ending in 1997.

Yes, he remembers the good times.

"There really was an entrepreneurial spirit there," he says. "The dark side of it was that it was kind of frat boy, locker-roomish."

But that sort of zeal and bravado meant that everyone talked to everyone and good ideas were infectious. "You could turn the company," says DiNucci, a valley veteran. "If you had a great idea and you had balls, you could make something happen."

And plenty did, starting with developing a way to create moving 3-D images on a computer screen. It was a lightning bolt at the time, and it was SGI's franchise.
DiNucci recalls when SGI was on the cover of Business Week, giving additional credence to the Paul Krugman line: “Whom the Gods would destroy, they first put on the cover of Business Week.”

Sure enough, Peter Burrows of BW, linked to some of this early coverage in his own column last week on the death of SGI (complete with a faux cover):
There was a time when Silicon Graphics Corp. was the Apple Inc. of corporate computing. It received coverage out of all proportion to its size, certainly by BW. And for good reason: It involved larger-than-life characters such as Jim Clark, who went on to co-found Netscape. SGI was forever on the cutting edge of technology innovation, and pioneered use of powerful computing technology in the making of movies, game consoles and for early Web companies in the mid-1990s. And it was a lightning rod in the best sense, always a central player in the big debates roiling the computer industry (workstation vs minicomputer, Risc vs Cisc and UNIX vs Windows, come to mind).
I think once upon a time, I would have shared in this nostalgia, but not today. Perhaps it was because I just missed becoming a Unix workstation geek when I jumped to the Mac in 1986. But I think it’s because as a researcher (and middle-aged industry veteran), the death of SGI seems like the natural order of things.

The normal progression is that maturing technologies get standardized, and standards enable commodization. Doing something unique lasts for a while, but unless you control a proprietary standard (possible but not likely) eventually there will be less control and more competition.

Competition engenders efficiency and price cuts for buyers, fueling adoption. The impact on innovation is mixed: competition can fuel innovation wars (as in cellphones) or it can squeeze margins and squeeze out R&D dollars (as in PCs).

So if some companies creating cool innovation in the high-risk, high-growth period — but fail during commoditization — that’s a dog-bites-man story. A few companies such as Apple, and IBM have re-invented themselves multiple times, but the cadre of one-great innovators seems much larger: Cray, DEC, Motorola, Sun. (Ironically, according to Wikipedia SGI once owned Cray, which in its latest incarnation is still making top-ranked supercomputers — only now using commodity processors).

I didn’t have this perspective as a 21-year-old software engineer or a 29-year-old entrepreneur — in part because I was young, and in part because (other than the BUNCH) the computer industry hadn’t seen a lot of casualties yet.

For my students, I try to sensitize them to this perspective: both the natural life-cycle of an industry and also the different sources of competitive advantage that firms need at different points in the life-cycle. As in previous years, I believe the best way to bring this realism to 20-something students is to assign Geoff Moore’s Dealing with Darwin, and I will be using it again in the fall.

Wednesday, April 8, 2009

Amazon gains on iTunes

By leading the way on DRM-free downloads, and on the strength of a joint promotion with Pepsi, Amazon is apparently gaining share on Apple’s iTunes store.

CNET quotes NPD as saying that in 2008, 87% of US digital music buyers used iTunes and 16% use Amazon (I would have expected more overlap).

Some 18 months after launching, Amazon is now in a credible 2nd place, at least in the US market. It appears — as the Big Four labels intended — that Amazon is having more impact on Apple than I had assumed.

Both Apple and now Amazon and Wal-Mart will be charging more (as labels long demanded) for current, more popular titles.

However, PaidContent (great site) has some news that has to be worrying for Apple’s rivals. Citing a Piper Jaffray report, Joseph Tartakoff writes:

…a new report from Piper Jaffray says that iTunes is now essentially the only option teens consider. Forty percent of high school students in the investment research firm’s bi-annual teen survey legally purchased music online. Of those, 97 percent said they used iTunes, up from 81 percent a year ago. Piper Jaffray attributes the growth in large part to slowing momentum from newer competitors, like Rhapsody, eMusic and Amazon MP3.
The way I read this:
  • Amazon is cross-selling MP3 files to its core customer base — people in their 30s and 40s who saw Amazon as breakthrough technology when it came out during the dot-com era.
  • Apple has a lock on selling trendy iPods to the affluent teen market where parents out of guilt pay for their kids’ legal downloads.
  • Kids whose parents won’t pay for downloads are using second-tier players and bootlegging music.
This is a really odd business relationship. On the one hand, Apple gives the labels exactly what they want: creating a new market that gives people a chance to buy legal downloads, and perhaps prevent an entire generation (just most of it) from thinking digital music is free music. The labels repay it by encouraging rivals like Amazon to Apple to put pressure on it.

In turn, Apple complains bitterly to the public and regulators that the big bad labels made it use DRM. When the labels help Apple’s rivals go DRM free, then it uses that precedent to ditch DRM too, enabling the same music copying problems the labels vowed to prevent.

I would say that’s just business, but this is a particularly thorny problem for which there is no good answer. Or perhaps we just have a test of wills between the one and only Steve Jobs-sized ego against Hollywood-sized egos (which are pretty big too).

Tuesday, April 7, 2009

Newspapers show some spine

At the annual meeting of the Associated Press on Monday, a big issue was the problem of Google free-riding off local newspapers and thus commoditizing the value of daily journalism.

There is a great summary by John Murrell on Good Morning Silicon Valley (part of the Mercury News), and specific reports by Staci Kramer at PaidContent and Peter Kafka at All Things Digital. Ironically, these are all free online sites (although the former and latter are affiliated with newspapers).

The charge seems to be led by newspaper publisher Dean Singleton, CEO of MediaNews Group (owner of the Mercury News among others) and this year chairman of the AP board. Another irony is that the first serious effort to save newspapers and the jobs of journalists from the commoditization of their work is coming from Singleton, who has been long derided by journalists with being more concerned with the bottom line than the noble calling of the profession. Today, he seems to be doing more to solve the problem than A.O. Sulzberger, Jr., scion of the clan that controls the venerable New York Times.

The AP will use tags and other technical changes to trace the use of its content by those that are not licensing its content. Or, as Kramer quoted an AP executive earlier, “What we’re really talking about here is much broader use, the commercialization of news that is scraped.”

Kramer’s interview with Singleton includes this clear shot at the free news portals (without mentioning the G-word by name):

“I think our industry has been very timid about protecting our content, probably because we’ve done so well in the past few years that we didn’t recognize that misappropriation is as serious an issue as it is. As we’re now relooking at business models, it’s become clear that we must protect the rights of our content. ... We perhaps have been timid about enforcing [those rights]. No more. We own the content but we’ve let those who spend very little, if any, get the most advantage from it.”
Kafka thinks it’s all for naught:
The thing is, even if the news guys somehow stopped people from using Google to find information they need, it wouldn’t do anything to solve the essential problems plaguing their business. Such as:
  • An overabundance of undifferentiated, commodity information.
  • The wholesale evaporation of classified advertising and local retail advertising.
  • Investors who paid too much for newspapers and other media assets during the last 10 years, using too much debt.
I find it encouraging that the news(paper) industry has decided to stand up for the value of its content, and (despite my disagreements with specific newspapers) wish them well at creating a business model to be compensated for their efforts.

Still, I agree with Kafka that this is not a problem that’s going away with a simple policy change. Clay Shirky wrote a column last month that documents 15 years of unsuccessful efforts by newspapers to deal first with online service providers (like AOL) and then the Internet as conduits for information.
One of the people I was hanging around with online back then was Gordy Thompson, who managed internet services at the New York Times. I remember Thompson saying something to the effect of “When a 14 year old kid can blow up your business in his spare time, not because he hates you but because he loves you, then you got a problem.” I think about that conversation a lot these days.

The problem newspapers face isn’t that they didn’t see the internet coming. They not only saw it miles off, they figured out early on that they needed a plan to deal with it, and during the early 90s they came up with not just one plan but several.
After considering various options, the papers were hit by a perfect storm:
As these ideas were articulated, there was intense debate about the merits of various scenarios. … In all this conversation, there was one scenario that was widely regarded as unthinkable, a scenario that didn’t get much discussion in the nation’s newsrooms, for the obvious reason.

The unthinkable scenario unfolded something like this: The ability to share content wouldn’t shrink, it would grow. Walled gardens would prove unpopular. Digital advertising would reduce inefficiencies, and therefore profits. Dislike of micropayments would prevent widespread use. People would resist being educated to act against their own desires. Old habits of advertisers and readers would not transfer online. Even ferocious litigation would be inadequate to constrain massive, sustained law-breaking. (Prohibition redux.) Hardware and software vendors would not regard copyright holders as allies, nor would they regard customers as enemies. DRM’s requirement that the attacker be allowed to decode the content would be an insuperable flaw. And, per Thompson, suing people who love something so much they want to share it would piss them off.
Whether or not the current initiative succeeds, the newspapers must try something different, and this seems like a good start.