Escape from Alcatraz
In a recent Wall Street Journal there was an interesting article on jailbreaking iPhones. It seems many people–more than I originally thought–may be using software to “break” the restrictions on an iPhone, allowing the installation of applications that have not been purchased through the App Store, or certified by Apple (NASDAQ: AAPL).
The article quoted Jay Freeman, developer of Cydia, as saying 1.7M have downloaded it–implying a like number of jailbroken iPhones. Even if he’s exaggerating, it’s probably fair to say the total worldwide number of jailbroken iPhones could be in the millions now.
In terms of sheer volume, this doesn’t present much of a threat to App Store revenue. Though certainly the availability of applications that are not blessed by closed Apple ecosystem will appeal to many.
Awhile back, I suggested that the most widespread app for the iPhone in 2009 would be a virus. Subsequently, I was roundly flamed by the ever-sensitive Apple fanboys, who claimed that the App Store system is practically (if not completely) virus-proof.
Above all, there’s the dreaded “Kill Switch”, which lets Apple disable an application on every iPhone in the world, once its discovered to be malicious or defective in a way that allows the spread of a virus.
[The presence of that kill switch has become a lightning rod for those critical of the amount of control Apple has retained over its ecosystem. Google's (NASDAQ: GOOG) Android OS for mobile phones promises a great deal of freedom and diversity. Apple provides a more limited functionality, but users get stability, increased virus security, and a world-class user experience. The liberty vs. security trade-off seems universal.]
I’ll admit to a bit of hyperbole in my original post. And I certainly got more of an education in iPhone security than I ever wanted. So perhaps a virus won’t be the MOST downloaded app. Or happen this year. But I stand by my original sentiment.
Imagine the following: One day, some unexpected data finds its way into your computer. Some time later, tens or even hundreds of copies of the data leave your machine and end up on the hard drives of other people’s PCs. And the process repeats until hundreds of thousands of computers have been infiltrated by copies of this data.
A virus, you say? No, just a joke email. But I think you get my point.
The problem with those who defend Apple is they have far too limited a definition of a virus. No one says it has to be malicious, or take control of your hardware. Hackers are first and foremost pranksters, who often spread mayhem but are also driven by the challenge–seeking recognition in their own way and in their own circles.
And people make mistakes. That includes both the developers of legitimate iPhone applications, as well as Apple itself. Perhaps an innocent error could sneak through the certification process and be exploited by a creative youth with time on his hands. It needn’t be a malicious attack that takes over peoples’ iPhones.
On the other hand, imagine if you could claim bragging rights by forcing Steve Jobs to actually use that kill switch, disabling a popular application on every iPhone in the world.
That would make a hell of a “virus”, wouldn’t it?
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
2 comments March 16, 2009
That Was Quick
On the front page of today’s Wall Street Journal:
Well, it could have been worse. The sign could have said “Mission Accomplished”.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
2 comments February 11, 2009
Crybaby
It was exciting to watch such an historic inauguration yesterday. I wish President Obama well. [Note to the folks at WordPress: "Obama" is getting flagged by your spellcheck. You probably want to fix that...]
He is clearly inheriting a mess, no matter whom you believe was responsible for it. The Onion certainly has one view, as they noted on a recent video piece: “Obama to keep Bush on as National Scapegoat.“
Terrorism threats, two wars to resolve–and plenty to avoid being entangled in, a banking system nearing either collapse or nationalization, a recession (perhaps a depression), energy and environmental issues, the list goes on and on.
The state of the country brings to mind my son, who as a baby suffered from colic.
As any of you who’ve experienced it know, this is a disaster. For months, no matter what we did, he would just start crying for no apparent reason. Every night, like clockwork. (And before you ask, no, it wasn’t synced to the market close.)
Nothing we did, no medicine, no old folk remedy, no comfort we provided, seemed to help. It simply had to run its course. When his colicky period ended we were relieved, and now it’s a distant memory for us.
I suspect this is how–eventually–some of our current crises will play out.
I’m optimistic that Obama will be a very good President. His early moves have indicated he is deliberative and even-handed. And most of all, intelligent. This is a hopeful time for many. [Disclosure: I voted for Obama. My respect for his intelligence and leadership overcame my reluctance over his inexperience and the fear he would be too liberal. I hope I am right.]
Some have suggested President Obama’s first major crisis will be a terrorist strike. Others have opined that the economy will severely test our new leader. I have another suspicion, that Obama’s initial challenge will be dealing with the inevitable disillusionment that accompanies his first few failures. The existing groundswell of support, hope, enthusiasm, and (here it comes) irrational exuberance may not serve Obama well in the coming months.
When he stumbles, many of his supporters–some perhaps the most fervent–could quickly become critics instead.
In other words, it appears we are in an Obama bubble. And when the bubble pops, there will likely be some oscillation in our new President’s approval rating.
This is not to say he will fail all together. As I said, I’m hopeful. But he is not perfect, he does not walk on water, nor did he arrive from the mountain with tablets in hand. He is human. More important, he is a politician, and is surrounded by other politicians. Each with their own beliefs, agendas, and baggage. No matter how well he has picked his advisers and cabinet, that will not change.
Still, he has already done one thing right. By inheriting a country with so many issues–real and perceived–it appears there is very little downside risk for him. And tremendous potential on the upside.
Or as a rather crafty mentor of mine said to me long ago: “Never accept an offer to hold a happy baby.”
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
4 comments January 21, 2009
Close to the Edge
With the New Year upon us, and a possible rally (well, sometime this year we hope), it may be time to think about dipping your toes back into the market. But how to put your money to work?
For technology stocks, I think it’s important to have an “edge”.
Over the past few years, I’ve been following a trend that–while not new–still has plenty of legs. Particularly coming out of this bear market. It’s not a stock screen, but it helps me see which technologies could be viable investment candidates, and which might instead require swimming against the current.
Things like control, intelligence, and value creation have long been shifting away from the center. Moving from large, centralized bodies towards the edge. The edge of markets, networks, locales. There are exceptions, of course, but this movement is still happening.
So I always check first to see whether any new technology–or its market–supports this trend towards decentralization and democratization.
“Uh, gee Scott, that’s great. I have no idea what the hell you’re getting at.” Fair enough. Let’s look at a few examples.
Healthcare
Lots of innovation here. Doctors interacting with patients and each other at a distance. Sending X-Rays to specialists abroad for review. Doctor-patient consultations over videophone instead of in the office. Glucose testers and home dialysis kits let measurements occur at home, not the hospital. Portable ultrasound machines and defibrillators allow diagnosis and treatment in remote areas.
Consumers are rating doctors, sharing treatment experiences, and finding health information via social networks and the Internet. Doctors themselves are forming “expert” networks to vet new research and treatments according to the wisdom of crowds thesis.
All of this is related to distributing power or value creation away from traditional central facilities and control.
Companies such as Sonosite (NASDAQ: SONO), HealthGrades (NASDAQ: HGRD), WebMD (NASDAQ: WBMD), Vital Images (NASDAQ: VTAL), and American Well (private) are among many in this space.
Manufacturing
Here’s a favorite.
Computer Aided Design (CAD) made it easier for companies to decentralize or even outsource much of their product design. But now they’re actually outsourcing the fabrication, and in some cases the end product manufacture can be done outside of a factory.
3D Printing (often more formally termed Rapid Prototyping or Rapid Manufacturing) has come of age, with machines that can take computer files and fabricate plastic or metal objects from nothing more than raw material and software. Before, even simple prototypes had to be fabricated over the course of weeks. Now, companies can turn a design into a marketing concept model within hours, and make needed changes much quicker, shortening design cycles. They also can avoid expensive tooling, since short-run items can be “printed” instead of made with traditional manufacturing processes.
Companies like Stratasys (NASDAQ: SSYS) and 3D Systems (NASDAQ: TDSC) make large industrial grade fabricators, as well as less expensive versions suitable for office use. Soon, they (and others like Desktop Factory–private) will make consumer versions cost effective.
Why have a replacement part for that lawn mower or kitchen mixer shipped from the factory, when you could simply download the file and print it at home?
Municipal Networks
While many think this is an idea that went bust, there’s still a huge demand for municipal networks. FCC statistics on broadband penetration are quite misleading, and plenty of Americans have either pokey DSL-like speeds, or no broadband at all. Towns and public utilities, often in partnership with private enterprise, are filling the gap.
True, many of these projects have not fared well–but that was usually due to faulty business models, not the underlying tech. Many ideas have been tried, and people are getting much smarter. There are many thriving wireless and Fiber-to-the-Home projects.
Instead of one giant centralized “mother of all” (Ma) Bell owning your phone or Internet connection, the end piece is owned locally. And its often faster, with more capacity, than many parts of the Internet. This is recapitulating what happened years ago to television in underserved areas, as Community Antenna Television (CATV) gave birth to today’s cable networks.
And it’s happening with energy generation too.
Others
Here’s a partial list of other innovations that are benefiting from “the edge”:
So how do we wrap our minds around this explosion of innovation? I think of this trend as occurring in 3 distinct ways:
Decentralization–moving utility to the edge
The basis for this first one is hardware, and typically some kind of disintermediation. It’s driven by things like the availability of leading-edge technology, shrinking hardware sizes, falling costs, and the Internet.
Examples–3D printing, TiVo, municipal networks, distributed energy generation
Authoring–tapping users to create
Here the basis is centered more around software, the demand for mass customization, and hobbyists. You know, that class of people with time, passion, interest, and the willingness to work for nothing but recognition and/or personal satisfaction. The availability of software tools, Broadband, and the Long Tail (everyone’s a hobbyist in something) are drivers.
Examples–Blogs, mashups, personalized ad streams, podcasts, YouTube
Emergent Systems–enabling collective/cooperative effort
This last is typically facilitated by an enabling service. Often with the existence of an intermediary to provide a control or filtering function. But while the result mimics a more centralized function, the value is created on the edges–a true “whole is greater than sum of parts”. Here the driver is simply networks of people in easy, rapid communication. I think they call that the Internet. 
Examples–Wikipedia, open-source software, eBay, prediction markets, grid computing
Then according to the man who showed his outstretched arm to space,
He turned around and pointed, revealing all the human race.
I shook my head and smiled a whisper, knowing all about the place.
Yes, “Close to the Edge”
Of course, like all classification systems, the answer you get will depend on which consultant you talk to. The concept is pretty general, and sometimes unwieldy. Regardless, I find the edge idea to have a lot of merit, and hope you do too.
The key is to find companies that create, use, and benefit from the technologies that are fostering these trends. Or the markets that they enable. It might be tool, a marketplace, an ad platform, a device, a network, whatever. Then do your research.
Once you get down to individual companies, it’s caveat emptor. Picking stocks based on trends alone is what cost people so much money investing in the likes of Webvan (another “edge” play) or Pets.com.
I have done research on some companies that are emblematic of this trend–including a few mentioned here–to a greater or lesser extent, some more recent than others. In fact many I covered as an analyst fell into this mold–and not by coincidence. But do your own due diligence before investing, or hire someone to do it for you.
Let me know if you think of other ways this idea might be manifesting in technology markets.
Disclosure: I currently hold no positions, either long or short, in any stocks mentioned here. However, I do consult with companies in some of the markets discussed.
2 comments January 10, 2009
We Interrupt This Transition…
…to bring you an important announcement.
In today’s NY Times, former FCC commissioners William Kennard and Michael Powell both urged Congress to delay implementation of the digital TV transition. There’s been neither enough money set aside to subsidize converter boxes, nor are there enough in stock to satisfy demand anyway.
Oh, and not enough people have taken advantage of the government offer. Nor is the FCC call center prepared to handle the estimated 1.5 million calls from confused consumers once the switchover occurs.
“Moreover, many people will need help hooking up their converter boxes and setting up their antennas. (Picking up the digital signal may require reorienting or moving an antenna, or buying a more powerful digital antenna.)”
That last part has not generally been communicated to anyone. At least those likely to be affected.
[Switching to my best Jon Stewart falsetto]: “Nailed it….”
I agree with the commissioners. The FCC and other powers-that-be need to do a better job of making this transition happen. It’s not a simple one, and there are technical elements beyond the skills of many people to understand without help. Otherwise, as the article states, “If the transition to digital TV goes badly, it will inconvenience millions.”
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
1 comment January 9, 2009
Pump, Baby, Pump
Speaking of today’s NY Times, Paul Krugman’s op-ed just begs for a comment.
[Actually, I haven't spoken of the NY Times, because the article where I mention it hasn't been written yet. But you've already read that article that I haven't written, because postings on blogs are displayed in reverse chronological order, so that article appears before this one. Wait, I'm getting dizzy. I'd better sit down.]
Anyway, the piece concerns Krugman’s belief that Obama’s proposed stimulus package is a good start, but is woefully short of what’s needed by the economy. I think what he’s really saying is we have to reinflate the bubble.
I read Paul Krugman even though many times I don’t agree with him. He’s an eminent economist, his writing is lucid, and I usually learn something new every time I read his stuff. I do wish he’d stick with economics and avoid the purely political rants.
And I get impatient if he has too many columns in a row where he just whines without offering a specific solution. But none of those problems arose today.
Here’s where I fall off the wagon:
Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.
And the Obama plan is nowhere near big enough to fill this “output gap.”
Yet by his own admission, Krugman believes that the economy that we had a year or two ago was an unsustainable balloon. To quote:
The fact is that the U.S. economy’s growth over the past few years has depended on two unsustainable trends: a huge surge in house prices and a vast inflow of funds from Asia. Sooner or later, both trends will end, possibly abruptly.
So our national output rose to meet a demand that is unnatural. Our ability to produce has outstripped our natural ability to consume. Why, then, is he suggesting we try and ramp demand up to that pre-crisis level?
Our problem isn’t that the pump needs to be bigger. It’s that the balloon we’re trying to reinflate is too large. You don’t grow the economy to a level that’s an aberration without suffering contraction as things revert to the mean. There’s no pain-free recession.
Now maybe I’m missing something. If so, somebody explain. Maybe that $15 trillion/year figure was less than our pre-crisis demand, and so Krugman’s large suggested figure is OK. But it still seems to me that his remedy would simply set us up for some rather painful oscillations somewhere down the road.
And that assumes at least a modicum of fiscal stimulus is a good idea. Others disagree. For me, the jury’s out on Keynes. But as I said recently in “Tiny Bubbles“, to try and pump that balloon all the way up again is a recipe for disaster.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
4 comments January 9, 2009
Viral Marketing
Smartphone applications are one of the biggest trends going, one that will only get bigger in 2009. Not exactly unexpected, especially for anyone who’s followed Salesforce.com’s (NYSE: CRM) AppExchange model. But despite how Google’s Android (NASDAQ: GOOG) foreshadowed the market, it’s taken the brilliance of Steve Jobs to get the ball rolling.
On the one hand, the dynamics are similar to ring tones
- Cheap. A few bucks each; some are free
- Easy. Apple (NASDAQ: AAPL) sets the standard for ease-of-use, though with the usual drawbacks that come from its closed system. Android’s market will be a little more “wild west”, but probably more innovative for it.
- Not originated by the service provider. The best services never are, telcos are about as innovative as rocks.
- Customizable. Make your phone personal, whether it’s playing apps or having different ring tones for each caller.
- Cachet. Everyone wants the latest “cool” app, just like they wanted the most popular songs to sound out whenever their phone rings.
On the other hand, the mobile phone app phenomenon is also evolving into an analogue for the gaming industry, with developers writing apps for one of only a few “platforms” (e.g. iPhone, Windows Mobile, Android, etc.). I expect to see developers selling versions of their apps onto multiple platforms, especially for the more popular ones, just as happens with game consoles.
The last, and most ominous similarity, is with Windows. Despite the existence of Android, there’s a chance the iPhone could become the uber platform, with most apps being written for it (at least first), creating a Microsoft-like dominance of phone applications. All of which leads to the following prediction for the New Year:
The most widespread iPhone application in 2009 will be a virus.
Think about it. All the elements are already there:
- rocketing platform/device popularity with a growing market share
- viral growth in application number and complexity, providing plenty of ready vectors for the introduction of malicious code
- existence of a large, dedicated, developer base
- a ready black market for both hardware and software–which means plenty of hackers.
Despite assurances to the contrary from its PR department, Apple software is not virus proof. It’s largely benefited from a lack of attention given its small (though growing) share of the desktop/laptop market. But the success of the iPhone changes those dynamics. Already, iphone dev team has unlocked the iPhone 3G, and is even now delivering its yellowsn0w software to the masses.
True, Android will undoubtedly be more vulnerable, given its marketplace model and the lack of a central control. But betting against hackers has always been a sucker play, and it will remain so even for the iPhone. Just ask the Blu-ray folks.
The predators are circling. And it’s only a matter of time.
Disclosure: The author holds no position in any of the stocks mentioned here.
4 comments January 5, 2009
Tiny Bubbles
My vote for 2008 word of the year is bubble. (With Ponzi scheme being a close second only because it’s top of mind right now.)
We’ve seen so many bubbles come and go, many bursting in the last year. Housing bubble, stock market bubble, CDO bubble, Wall Street salary bubble, debt bubble, and now a divorce bubble. Kind of makes you nostalgic for the Internet bubble, doesn’t it?
We’ve even had a labor bubble. In the auto industry, most of today’s at-risk workers should have been laid off years ago as Detroit rationalized its businesses. Instead, GM et al hung on for dear life and the labor force remained too large while the air went out of the market. Now we’re facing all of those job losses at the same time.
Like a tub full of soap suds, these bubbles have decayed into a single, giant, “mother-of-all” bubble. Which, naturally, has popped in turn. And as Paul Krugman wrote recently in a New York Times op-ed, there aren’t any more bubbles left. No wonder we’re in such a mess.
It’s not for lack of trying, though. We want things to go back to the way they were before. Despite what they might be saying, the Treasury, the Fed, Congress, and others are all essentially trying to re-inflate the world. Refinance mortgages! Force banks to issue more debt! Buy distressed assets! Stop foreclosures! Loosen credit and people will spend money! Get house prices back up!
(Isn’t this what got us into trouble in the first place? Do we really believe that easing credit will get people to buy cars when they’re worried about whether they’ll have a job?)
But the rips in the fabric are too large, and our sources of air are far too small. Using TARP and other Fed/Treasury funds to re-expand the “mother bubble” is like trying to fill a hot-air balloon with a bicycle pump.
Worse yet, every one is now lining up for their bowl of gruel–finance firms that want to be bank holding companies, auto executives trying to build cars no one will buy, mall owners who can’t pay their mortgages, etc. Who’s next, I wonder?
Please sir, I want some more.
Despite the comic relief I got watching auto execs jump through hoops for doggie treats (or this gem of a parody here), that way lies madness.
Even if we could find a big enough pump, prices have to reach a bottom eventually, so markets will clear. There is no pain-free recession. The alternative is wide speculative swings and an oscillating market.
Prices drop through the floor (too low), then rebound to new heights (too high). Lather, rinse, repeat. We’ve seen this before when the Internet bubble was followed by a bull market fueled by debt and mortgage speculation.
Already, many believe housing in some areas is severely underpriced, as is the stock market. CDOs and other “toxic paper” brought us to this tipping point because prices sank to artificially low levels, driven down by mark-to-illiquid-market accounting.
We’ll see this in the job market soon also. Companies shed consultants and temp workers to minimize employee pain, then lay off full-timers as things worsen. But soon they’re hiring back the same consultants because they can’t get the work done without them (yet still can’t afford full-time employees). And so on.
Oscillation is dangerous. Not only paralyzing, but confidence sapping. And that keeps markets from working efficiently. Even if we’re successful at finding another bubble (or reinflating this one), it’ll just lead to another downfall a few years from now.
We can shed light on this phenomenon by looking to the lessons of classical mechanics. We need some damping in the system. [Yes, I'm a recovering engineer. "Hi, my name is Scott." "Hello Scott!" "It's been 237 days since my last Fourier Transform..."]
Oscillations are minimized by introducing some mechanism to slow down the wild swings. Ideally, you want things to be critically damped (the diagram on the right, above). That means a smooth movement to an equilibrium state, with no oscillations. Think of the way a door closer works in your office building–smooth and easy–vs. the way saloon doors swing back and forth.
Economists, of course, call this a soft landing.
If we don’t critically dampen the system, we’ll have punishingly wild oscillations. True, we can’t banish economic cycles. But we should put in place safeguards that minimize the swings with only a small amount of undershoot. (Blue line to the right).
In order to do that, we’ll need to find a way to “resegment” our large, sagging balloon, and use our available tools to reinflate a few of these markets, but on a much smaller scale. Call them tiny bubbles.
A few ideas:
- Admit that owning a house isn’t a good move for everyone.
- As Robert Shiller suggests, create jobs.
- Refinance at new rates but not new prices. Let housing find its level.
- Reinstitute the uptick rule.
- Let some banks and businesses fail, but not whole industries.
- Make banks lend, but only to credit-worthy clients.
- Don’t bail out speculators.
- Create public markets for CDOs.
- Stop (temporarily?) marking illiquid assets to market.
- Force higher capital requirements on banks when times are flush, and loosen them when the inevitable downcycle hits.
What we don’t want at the bottom of this long fall is a trampoline. Rocketing us back up again simply creates oscillations, prolongs the fear and anguish, and delays finding a bottom in each market. Besides, there’s nothing to look forward to there but another long fall.
What we need instead of a trampoline is an air bag. Something to cushion the impact. Or better yet, that material they wrap packages in to keep the contents from getting crushed.
You know, the stuff with the tiny bubbles.
Disclosure: I hold no position in any stocks mentioned here.
Salutation: Happy New Year!
6 comments December 31, 2008
Up And Down Vote
The Wall Street Journal had an article out yesterday that has created a real firestorm of controversy. It’s about how some of the large Internet players (such as GOOG, MSFT, and AMZN) are backpedaling on their previous Net Neutrality stances.
Moreover, they’re variously negotiating with telecablecos to gain “favored nation” or preferred treatment status on their networks.
Holy Turnaround, Batman!
Some writers quickly noted–here, and here–that Google at least is simply caching content closer to customers, just like Akamai (NASDAQ: AKAM) and other CDNs do. And that much of the Journal article reflects the kind of sensationalism many feared would appear once Rupert Murdoch (NYSE: NWS) bought the paper.
[As an aside, when I was doing research a year or two ago on Akamai, top management there vehemently denied my suggestions that they would ever be in competition with Google. Heh.]
If any of this is true, it’s a sad development, but hardly unexpected. As competition heats up for everything from ad serving to video downloads to cloud computing, everybody wants an edge. And they’re willing to pay for it.
Those that can afford to will get better services, better access, better distribution. Which means the little guys get shafted again. If you want to buy from Amazon, you get speedy page refreshes (not to mention faster access to things like S3). Google apps will work faster than, say, Zoho.
The rich do, indeed, get richer.
This plays right into telecableco hands. It’s what they’ve been lobbying for, after all. (I can almost see the big, fat, spider sitting there in the middle of its web inviting them all in. ) The result will be a vertical model, with only a few players controlling the entire value chain, up and down.
If this was just about commerce, I’d be less concerned. But it’s also about access to information. And about control of content. Ultimately, it’s about exclusion and higher costs for everyone. As well as a loss of the kind of innovation that has made this country successful.
Imagine if TV stations were free to broadcast good signals from those advertisers (or news programs) that spent more. Everyone else, they deliver fuzzy pictures with the sound continually dropping out. Pay to play. Eventually, everyone gets their news and entertainment from a few large companies. Welcome to the 50′s. There’s progress for you.
Critics argue: “But as businesses they should be allowed to offer different levels of service”. If there was true competition at the last mile level, I’d be inclined to agree. However, most of the large telecablecos built their networks–and their competitive advantage–on the revenue streams from exclusive franchises and government mandated monopolies.
You and I paid for their broadband networks through our monthly TV and telephone bills, mostly at a time where we had no choices. Or they used the proceeds from bonds whose attractive terms were based on the existence of those same “guaranteed” payment streams, which is basically the same.
Now that the moats around them have been fortified, we shouldn’t think that they’re entitled to operate as normal businesses. Monopolies (or even duopolies) don’t get the same rights as firms in a free marketplace. It’s not that I believe Network Neutrality should be regulated. (I agree about the principle but not the solution.) It’s last mile competition where the natural monopoly lies, and that’s what should be regulated. Until it’s no longer a monopoly, or until the telecablecos no longer have insurmountable market power.
Or until there’s structural separation.
Many thinkers (at least the ones whose salaries don’t depend on the success of telecablecos), have long recognized the most efficient market structure is to go horizontal–one company does the infrastructure, one does the content. Each competes within its own level, but not up and down the stack.
The PC industry helped this country thrive with the same model. Some companies built chips, some sold computers, some provided software. This drove innovation and helped keep costs low and falling. (Even the emergence of intra-level monopolies like Microsoft couldn’t halt the effect–some argue the standardization even helped.)
But now the big players are changing the game, in order to become even bigger. The Internet guys want to differentiate on performance, because they’re finally getting into each others businesses, and have to compete–some for the first time. The pipes guys want a piece of the content pie, because as network usage grows their costs go up, and they face resistance in trying to charge consumers more money for Internet access, especially as they’ve been billing flat rates for so long. But we will pay, one way or another.
Not everywhere, thankfully. Much of the rest of the world actually has competition in the last mile. They’ve created a more horizontal model, with providers competing “across” levels. If we fail to adopt this kind of structural separation in the U.S., we can watch our innovative spark and competitive advantages slowly drain away.
And just as many around the world laughed at us for voting to re-elect George Bush, they’ll laugh at us again, for voting to go “up and down”.
Disclosure: I hold no position in any of the stocks mentioned here.
Add comment December 16, 2008
Ganders and Geese
Whether or not you believe the government should be “bailing out” Wall Street banks, I think it’s fair to say that the financial system itself is critical to the functioning of our economy. If it wasn’t, we wouldn’t see our current problems growing so quickly and pervasively.
The automobile industry is another issue. It’s certainly a smaller part of our economy, even after the shrinkage of investment bank market caps. And there’s no way I’d ever call it essential. Fundamentally, people aren’t buying cars, so what does anyone expect to happen? Why should the auto industry be different than any other industry that’s facing a deep recession? And do you notice none of the foreign-owned manufacturers are crying? All of them operate plants here, why aren’t they in dire straits?
All of which makes talk of a bailout of Detroit significantly more contentious, notwithstanding the recent pilgrimage of auto and union execs to genuflect before the newly vitamin-fortified Democratic leadership in Congress.
But OK, I’ll bite. The failure of any of Detroit’s Big Three would have a large impact on jobs, at least in the short term. And it would propagate to the auto parts industry, and probably a few service industries, as well as financial services (think GMAC). So let’s suppose that a bailout of some sort makes sense, and Congress decides to pump some of that rapidly vanishing $700M into GM, Ford, and Chrysler.
What are they going to do with it? How do we know they’re going to use it to solve their problems? Even more important, what sort of return should America expect from this “investment”? Are we just bailing out a bunch of fat-cat executives who flubbed their corporate strategy? I mean seriously, these incompetents have been lining their pockets with big bonuses, and now they want us to bail them out? WTF?
I have this strange feeling of deja vu.
Seems to me the same politicians in Washington that have been screaming for oversight of the financial services industry, and influence on how any bailout money is used, ought to be making the same kind of noises here. After all, what’s good for the goose is good for the gander. But so far, not a peep. Or a honk.
Here’s what I’d like to see:
- The Chief Executive of any auto company taking government bailout money should be fired.
- Suspend executive bonuses for the rest of the top management ranks
- No dividends of any kind to be paid out to shareholders of the auto makers (sorry, Cerberus Capital Management, no quick exit here.)
- Only two permissible uses for the money: reducing carmakers’ onerous pension obligations to a more manageable level, or retooling plants inside the U.S., to produce more fuel efficient and/or otherwise competitive cars
Think any of this is going to happen? Nah, neither do I. My bet is that the money will go out with only token strings attached to it.
And in 5 years or so, the Big Three–whichever ones are left–will still be limping around getting their butts handed to them by foreign manufacturers who are making better cars in U.S. plants for less money and selling more of them.
I think our goose is cooked.
Disclosure: I hold no position in any of the stocks mentioned here.
2 comments November 7, 2008
by Michael Mauboussin
