It's tough getting real business news this morning, as the major cable business channels, CNBC and Bloomberg, are devoting so much time to eulogizing Steve Jobs.
Over on CNBC, his royal pompousness, Jim Cramer, actually self-referenced his capacity for being pompous and windbaggish.
Yes, it's sad that Jobs is dead. Yes, he was the Thomas Edison of our era.
No, despite the claim of one Bloomberg guest, Jobs was not our era's Thomas Jefferson nor Ben Franklin. To my knowledge, Jobs carefully eschewed both public office and/or ambassadorships.
Yes, Leo Hindry- why this guy keeps popping up everywhere after destroying his last venture, Global Crossing- was correct to declare that there have been at most four other business inventors of Jobs' calliber in the past few decades, including Watson, Sr., David Packard and Bill Hewlett. No, Hindry said, Mark Zuckerberg is not the next Steve Jobs.
That said, let the dead bury the dead.
The remaining question, which I addressed in this frequently-read post from last December, is how to approach Apple as an investment. Here's what I wrote,
"One, of course, is the firm's clear, successful focus on consistent innovation and evolution of well-received products. Those products have achieved high brand preference status. Additionally, they are typically in price ranges that have made them less vulnerable during the recent US recession and continuing economic weakness. With Steve Jobs' continued leadership, the firm may outperform expectations for a little while longer still.
And, finally, there's something which many investors fail to grasp. That is, even broadly-followed, popular firms can outperform. What is required is unexpected excellent performance. Firms like Microsoft, Dell, Kolhs, in the past, and, currently, Apple, have achieved this. It can never last forever, but it can often outlast ill-informed, generically-based expectations.
What Google does seems to be less unique with time, while Microsoft has been mismanaged for over a decade, with no sign of significant change in that important parameter.
The bottom line for me is that I don't subjectively select equities. But I can and often do interpret why my quantitative approach selects those equities which appear in portfolios. And from post hoc, informal inspection, it's easy for me to see why none of the recent portfolios have held Google or Microsoft, while many have included Apple."
And, soon after, this post concerning his first medical leave,
"Of the three developments, I'd say that Jobs' departure will be the most critical. As expected, it knocked some value off of the equity's price this morning, causing a 3.7% drop by 11AM, as I write this post. As a growth equity, it's understandable that uncertainties over Jobs' future at the company will affect the forward-looking component of its price. So even strong quarterly performance reports will probably be overshadowed by these worries.
I remain comfortable trusting the management that brought Apple to its path of consistently superior performance. If Steve Jobs becomes unavailable in the long term, that will probably affect the company's share price and, thus, it's implied performance for shareholders. It's a self-fulfilling prophecy that could very well remove Apple from my equity selection process' results. So be it."
With Jobs' death, many will question how long they should continue to buy/hold Apple. As I wrote in the above passages, I use quantitative methods. So as long as Apple continues to meet my performance criteria, my portfolios will include the equity.
Many pundits have argued, in the hours since Jobs' death was announced, that Apple's culture and team approach to management is so strong that it will outlive Jobs.
That's doubtful. Maybe for a few months, a year. But with Jobs dead, the remaining Apple executives will eventually evolve to a new team dynamic, since Jobs will not be coming back anymore to get them all back in line.
People have personal goals, individual objectives, visions, etc. And without Jobs' unifying vision, Apple will, must, in time, become different.
But for me, the proof is in the performance. It's as simple as that.
Even with Jobs, it's quite likely that Apple would eventually have fallen victim at least to investors' expectations finally catching up with the firm's fundamental performance. Without him, there's the potential for that, as well as competitive pressure that no longer has Jobs' instincts to counter it.
And the possibility of federal regulatory action which they wouldn't have dared initiate against America's favorite innovator while he lived.
But, dead, his company is fair game.
So, to reiterate, sad though we all are that Steve Jobs died yesterday, decisions regarding owning shares in the company he co-founded should not depend upon that event. They should depend upon the firm's performance going forward.
Showing posts with label Apple. Show all posts
Showing posts with label Apple. Show all posts
Thursday, October 06, 2011
Tuesday, October 04, 2011
Regarding Amazon's Fire Tablet- And Apple
The big news in online business last week was Amazon's unveiling of its Fire tablet. By now, you've doubtless read plenty of reviews of the product, comparisons with Apple's iPad, heard and seen countless pundits pontificate on the new entry.
Here's my take.
First, as I've always contended, and several pundits reinforced, Amazon will always trail Apple in this product space, by virtue of its entirely outsourcing the design and manufacture. For example, from what I've read, the Fire has no camera and lacks some connectivity options.
Second, the real and most important aspect of the Fire is its $200 price point. While it technically exploits a market segment which Apple doesn't care to currently address, it does begin to exert more downward pressure on pricing and margins in the product/market. In fact, the Wall Street Journal's report on the Fire alleged that Amazon is not only pricing to profit on the downloadable content, but that the $200 list price doesn't even cover the Fire's production costs.
Thus, as I told a friend over lunch last Friday, Amazon is embarking down a very dangerous road- using a sprawling, integrated business model including its entire online general store to subsidize the cost of its latest deliverable tablet. Sooner or later, some aspect of Amazon's business will probably begin to experience pricing problems as the transfer pricing and allocation of overheads begin to distort the prices and margins of products which effectively fund the Fire.
Mixed into that mess is Amazon's tying the Fire to an automatic Premium subscription. So various shipping and other discounts on content are included with the tablet, but it's unclear that buyers of the Fire actually want, prefer or will use much of that content. Or spend more money to buy or rent what isn't free with the Fire.
In contrast, Apple's business model seems simpler and cleaner.
As I also explained to my friend last Friday, this development is why Apple won't be in my equity portfolios forever. Eventually, one or more of three forces tend to drive equities from the buy list: investor expectations adjust to the firm's actual performance, resulting in the equity's price no longer rises so smartly; competitive forces attenuate the firm's revenue and profit growth, and/or; regulatory action puts a stop to the firm's previously-unstoppable growth.
I've seen a succession of former portfolio holdings fall victim to one or more of these forces over time: Kohls, Dell, Microsoft, Home Depot and Wal-Mart.
Now Apple and Amazon seem to be heading in that direction. Both have been recent portfolio members. But now their evolving struggle involving tablets and online-delivered content- music, video and books- is likely to limit margins and pricing power for both.
Thus, Amazon's Fire has accelerated the move of the tablets and their content toward commoditization. Good for consumers, not so great for investors in the providers of these services.
Interestingly, in his weekend Wall Street Journal column, Holman Jenkins, Jr. contended that the real reason for the demise of technology firms Microsoft and HP has been that their product lines are devoid of the social media content which Apple, Amazon, Google, and Facebook have so zealously and successfully pursued. Including, for the first three, developing special-application computers, a/k/a tablets and smartphones, which undercut general-purpose computers and emphasize media consumption.
Certainly, that's one view. But personal computers became commoditized some years ago- well before the rise of Facebook, social media and the general accessibility of media content via cheap, ubiquitous wireless connections.
Still, as I contended in today's companion post, competitive forces tend to affect every product/market, even if at different speeds.
Here's my take.
First, as I've always contended, and several pundits reinforced, Amazon will always trail Apple in this product space, by virtue of its entirely outsourcing the design and manufacture. For example, from what I've read, the Fire has no camera and lacks some connectivity options.
Second, the real and most important aspect of the Fire is its $200 price point. While it technically exploits a market segment which Apple doesn't care to currently address, it does begin to exert more downward pressure on pricing and margins in the product/market. In fact, the Wall Street Journal's report on the Fire alleged that Amazon is not only pricing to profit on the downloadable content, but that the $200 list price doesn't even cover the Fire's production costs.
Thus, as I told a friend over lunch last Friday, Amazon is embarking down a very dangerous road- using a sprawling, integrated business model including its entire online general store to subsidize the cost of its latest deliverable tablet. Sooner or later, some aspect of Amazon's business will probably begin to experience pricing problems as the transfer pricing and allocation of overheads begin to distort the prices and margins of products which effectively fund the Fire.
Mixed into that mess is Amazon's tying the Fire to an automatic Premium subscription. So various shipping and other discounts on content are included with the tablet, but it's unclear that buyers of the Fire actually want, prefer or will use much of that content. Or spend more money to buy or rent what isn't free with the Fire.
In contrast, Apple's business model seems simpler and cleaner.
As I also explained to my friend last Friday, this development is why Apple won't be in my equity portfolios forever. Eventually, one or more of three forces tend to drive equities from the buy list: investor expectations adjust to the firm's actual performance, resulting in the equity's price no longer rises so smartly; competitive forces attenuate the firm's revenue and profit growth, and/or; regulatory action puts a stop to the firm's previously-unstoppable growth.
I've seen a succession of former portfolio holdings fall victim to one or more of these forces over time: Kohls, Dell, Microsoft, Home Depot and Wal-Mart.
Now Apple and Amazon seem to be heading in that direction. Both have been recent portfolio members. But now their evolving struggle involving tablets and online-delivered content- music, video and books- is likely to limit margins and pricing power for both.
Thus, Amazon's Fire has accelerated the move of the tablets and their content toward commoditization. Good for consumers, not so great for investors in the providers of these services.
Interestingly, in his weekend Wall Street Journal column, Holman Jenkins, Jr. contended that the real reason for the demise of technology firms Microsoft and HP has been that their product lines are devoid of the social media content which Apple, Amazon, Google, and Facebook have so zealously and successfully pursued. Including, for the first three, developing special-application computers, a/k/a tablets and smartphones, which undercut general-purpose computers and emphasize media consumption.
Certainly, that's one view. But personal computers became commoditized some years ago- well before the rise of Facebook, social media and the general accessibility of media content via cheap, ubiquitous wireless connections.
Still, as I contended in today's companion post, competitive forces tend to affect every product/market, even if at different speeds.
Thursday, August 25, 2011
Steve Jobs Leaves Apple
After the equity markets closed last night, Apple released the news that Steve Jobs has resigned- permanently, it appears- as Apple's CEO, but will be chairman of the board of directors. Tim Cook will assume Jobs' duties.
The major buzz on business/finance cable news and in the Wall Street Journal is the future of Apple and its equity price.
For example, in a development to which I alluded in today's prior post, Tyler Mathisen grilled a guest technology sector analyst by demanding that he forecast Apple's equity price two years hence. This, of course, is a perennially stupid question because equities always have some component of their price movement linked to equity index levels. To be a veteran financial network executive and/or anchor and not understand the uselessness of that question is, well, to be Tyler Mathisen.
But, back to Apple......
Apple has been in my equity strategy's monthly selections frequently for the past few years. Anyone holding the stock has had to expect that some day, any day, this event could occur, probably triggering a decline in the equity's price.
Between yesterday's close and this morning's open, Apple's share price declined 5%.
But to put that in perspective, here are the respective returns for Apple (post-Jobs departure decline) and the S&P500 in my strategy's portfolios since November:
Month Apple S&P500
Nov +14% -4%
Dec +13% -3.8%
Jan +7.5% -7.5%
Feb 0% -10.9%
Mar +6.3% -11.8%
May +3.5% -11.8%
So if the 5% decline constitutes most of the damage to the stock, I don't think it's a big deal.
To me, there are three elements to assessing the effect of Jobs' departure as CEO on Apple and its equity price.
The first is actual product development and strategy. I believe those are probably set for the next 18-24 months, so the company's fundamental performance shouldn't suffer. Moreover, I would anticipate that as long as Jobs is alive and able, he will continue to be involved with these areas, with management's blessing.
The second element is investor perception of the impact of Jobs' departure as a full-time operating executive at the firm. In that regard, I believe that one should largely ignore this element, so long as the company's strategy and operations continue to provide strong fundamental performance, i.e., earnings growth.
In this regard, I recall holding Dell in 1998, when nearly every analyst publicly said the company couldn't sustain its torrid profitable growth. My portfolio held two of the S&P500's top ten total return equities for that year- Dell and Schwab. Both were negatively assessed throughout most of the year, only to defy predictions of their demise. In Dell's case, most analysts failed to see how much more capable Dell's management then was, compared to their peers, and how attractive their product/market segment was. The stock doubled that year.
My quantitative strategy's proprietary evaluation criteria determined Dell to be surprisingly within a normal range of performance on an attribute that most analysts viewed differently and, thus, incorrectly.
For Apple, now, I believe that its fundamentals are very similar to Dell's 13 years ago. It won't be for perhaps two more years that Apple's strategy and products suffer from Jobs' absence.
Finally, there will come a time, probably about 18-24 months after Jobs' ceases any active involvement, even if it were reduced to periodic dabbling in development and product strategy, when the company's performance begins to falter. That's when it will be time to be out of Apple.
But I suspect that time is still a few years off. In the meantime, it's very likely that consistently superior returns will be earned by owners of Apple equity. The cost of being a few months late to sell will almost certainly be offset by owning it until then.
The major buzz on business/finance cable news and in the Wall Street Journal is the future of Apple and its equity price.
For example, in a development to which I alluded in today's prior post, Tyler Mathisen grilled a guest technology sector analyst by demanding that he forecast Apple's equity price two years hence. This, of course, is a perennially stupid question because equities always have some component of their price movement linked to equity index levels. To be a veteran financial network executive and/or anchor and not understand the uselessness of that question is, well, to be Tyler Mathisen.
But, back to Apple......
Apple has been in my equity strategy's monthly selections frequently for the past few years. Anyone holding the stock has had to expect that some day, any day, this event could occur, probably triggering a decline in the equity's price.
Between yesterday's close and this morning's open, Apple's share price declined 5%.
But to put that in perspective, here are the respective returns for Apple (post-Jobs departure decline) and the S&P500 in my strategy's portfolios since November:
Month Apple S&P500
Nov +14% -4%
Dec +13% -3.8%
Jan +7.5% -7.5%
Feb 0% -10.9%
Mar +6.3% -11.8%
May +3.5% -11.8%
So if the 5% decline constitutes most of the damage to the stock, I don't think it's a big deal.
To me, there are three elements to assessing the effect of Jobs' departure as CEO on Apple and its equity price.
The first is actual product development and strategy. I believe those are probably set for the next 18-24 months, so the company's fundamental performance shouldn't suffer. Moreover, I would anticipate that as long as Jobs is alive and able, he will continue to be involved with these areas, with management's blessing.
The second element is investor perception of the impact of Jobs' departure as a full-time operating executive at the firm. In that regard, I believe that one should largely ignore this element, so long as the company's strategy and operations continue to provide strong fundamental performance, i.e., earnings growth.
In this regard, I recall holding Dell in 1998, when nearly every analyst publicly said the company couldn't sustain its torrid profitable growth. My portfolio held two of the S&P500's top ten total return equities for that year- Dell and Schwab. Both were negatively assessed throughout most of the year, only to defy predictions of their demise. In Dell's case, most analysts failed to see how much more capable Dell's management then was, compared to their peers, and how attractive their product/market segment was. The stock doubled that year.
My quantitative strategy's proprietary evaluation criteria determined Dell to be surprisingly within a normal range of performance on an attribute that most analysts viewed differently and, thus, incorrectly.
For Apple, now, I believe that its fundamentals are very similar to Dell's 13 years ago. It won't be for perhaps two more years that Apple's strategy and products suffer from Jobs' absence.
Finally, there will come a time, probably about 18-24 months after Jobs' ceases any active involvement, even if it were reduced to periodic dabbling in development and product strategy, when the company's performance begins to falter. That's when it will be time to be out of Apple.
But I suspect that time is still a few years off. In the meantime, it's very likely that consistently superior returns will be earned by owners of Apple equity. The cost of being a few months late to sell will almost certainly be offset by owning it until then.
Friday, July 22, 2011
The iPad, The Laptop & Schumpeterian Dynamics
This week has seen some interesting fireworks between Intel and various analysts concerning the future of personal computers and laptops.
Specifically, upon learning of Apple's blowout quarter and torrid pace of iPad2 sales, many pundits have pronounced he laptop effectively dead. With a generally-acknowledged 2% p.a. growth rate, the former desktop killer has been itself eclipsed by X-pads of several varieties.
I had the occasion recently to assist a friend in buying an iPad2. What I saw caused me, prior to the flurry of this week's analyst and pundit remarks, to conclude that the laptop as a home device has seen its best days.
It began with a visit to Barnes & Noble. My friend picked up a Nook, sneered and asked why she'd ever want to read books like that? A few minutes later, she wanted to buy one! When I saw the $249 price of a color screen Nook, I told her to wait and visit the nearby Apple store to check out an iPad.
Specifically, per my prior posts, I suggested that she buy a pad made by the firm selling it, and that she choose one with more applications than simply ebook reading. I had in mind that she could replace a laptop's functionality at a fraction of the price, with much greater ease of use.
How right I was.
She asked me to accompany her to the local Apple store a few days later. After steering the Apple rep to some specific topics of interest for my friend, we left the store and discussed what we'd heard. We returned about an hour later and she bought an iPad2 without the cellular modem.
As expected, the post-sale support to configure her iPad was superb. She left the store with iTunes, a web browser, text writing and ebook apps on her device, plus a few books to start. It took no effort for the iPad to recognize my friend's home wireless network and connect.
Since then, she's been attached to the device whenever possible.
And, just as I expected, she no longer needs to use a laptop, with its long bootup time, operating system and hard drive. Instead, the solid state, unbelievably small and thin iPad does everything she needs as a casual user who does not run a business on a laptop. Whatever questions she has can be answered during the store's afternoon workshops held, for free, just for that purpose.
It's no surprise to me that Apple is selling all the iPads it can assemble. And why laptop sales have faltered.
I doubt I'd buy another laptop, except for business purposes. For home use, traveling and general non-business daily use, it would be difficult to see why an expensive laptop would be necessary.
Despite Intel's attempts to rebut the analysts' 'death of the laptop' theme this week, I believe the latter are correct. Schumpeterian dynamics are hitting laptops with a vengeance.
Just as lighter, cheaper and better laptops eventually made consumer desktop computers obsolete, so, too, are the many X-pads, particularly the iPad, rapidly cannibalizing laptop sales growth.
Yet another reason not to sell Apple short, literally, just yet. But I wouldn't want to be caught holding equity in HP or Dell.
Specifically, upon learning of Apple's blowout quarter and torrid pace of iPad2 sales, many pundits have pronounced he laptop effectively dead. With a generally-acknowledged 2% p.a. growth rate, the former desktop killer has been itself eclipsed by X-pads of several varieties.
I had the occasion recently to assist a friend in buying an iPad2. What I saw caused me, prior to the flurry of this week's analyst and pundit remarks, to conclude that the laptop as a home device has seen its best days.
It began with a visit to Barnes & Noble. My friend picked up a Nook, sneered and asked why she'd ever want to read books like that? A few minutes later, she wanted to buy one! When I saw the $249 price of a color screen Nook, I told her to wait and visit the nearby Apple store to check out an iPad.
Specifically, per my prior posts, I suggested that she buy a pad made by the firm selling it, and that she choose one with more applications than simply ebook reading. I had in mind that she could replace a laptop's functionality at a fraction of the price, with much greater ease of use.
How right I was.
She asked me to accompany her to the local Apple store a few days later. After steering the Apple rep to some specific topics of interest for my friend, we left the store and discussed what we'd heard. We returned about an hour later and she bought an iPad2 without the cellular modem.
As expected, the post-sale support to configure her iPad was superb. She left the store with iTunes, a web browser, text writing and ebook apps on her device, plus a few books to start. It took no effort for the iPad to recognize my friend's home wireless network and connect.
Since then, she's been attached to the device whenever possible.
And, just as I expected, she no longer needs to use a laptop, with its long bootup time, operating system and hard drive. Instead, the solid state, unbelievably small and thin iPad does everything she needs as a casual user who does not run a business on a laptop. Whatever questions she has can be answered during the store's afternoon workshops held, for free, just for that purpose.
It's no surprise to me that Apple is selling all the iPads it can assemble. And why laptop sales have faltered.
I doubt I'd buy another laptop, except for business purposes. For home use, traveling and general non-business daily use, it would be difficult to see why an expensive laptop would be necessary.
Despite Intel's attempts to rebut the analysts' 'death of the laptop' theme this week, I believe the latter are correct. Schumpeterian dynamics are hitting laptops with a vengeance.
Just as lighter, cheaper and better laptops eventually made consumer desktop computers obsolete, so, too, are the many X-pads, particularly the iPad, rapidly cannibalizing laptop sales growth.
Yet another reason not to sell Apple short, literally, just yet. But I wouldn't want to be caught holding equity in HP or Dell.
Thursday, May 19, 2011
The Fading Fortunes of PC Firms
Hewlett-Packard's warning this week as it announced quarterly earnings threw Tuesday's equity markets into the tank at the market's open.
Predictably, a stream of analysts, portfolio managers and other pundits weighed in on HP, how it was different than Dell, whether it had major challenges ahead of it, etc.
I heard various analyses of HP's businesses, including focusing on corporate services.
To me, however, it simply boils down to HP, like Dell and Microsoft, being a company with the bulk of its fortune still tied to personal computers.
This is clear from inspection of the nearby price chart for HP, Dell, Microsoft, Apple and the S&P500 Index from 1990 to the present. The first three firms, which have relied more heavily on conventional personal or business computing for their revenues and profits, have had their stock prices languish or fall over the past decade.
In contrast, Apple, which transformed itself from a mere computer maker to a special-purpose digital device company early in the decade, has significantly outperformed the other three firms.
That is why, in my opinion, unless you are hoping for a near-term timing play on Dell or HP, or even Microsoft, for that matter, you will be disappointed if you buy or hold those equities anymore. They are obviously no longer the firms they once were, either fundamentally or in terms of market appreciation of their performances.
Apple is a very rare firm in its having arisen from near-disaster during the Scully era and been transformed by Jobs upon his return. Dell, HP and Microsoft are unlikely to duplicate that feat. They are, for the most part, firms, the fortunes of which rose meteorically, then plateaued, with the fortunes of the personal computer.
As iPods, iPads and enhanced smartphones increasingly cannibalize functions and activities PCs once dominated, the firms which remain largely defined by the latter are destined to continue to decline. Even having the largest share of the global PC market does HP little good when it has become a commodity business with a comparatively slow growth rate.
I heard various analyses of HP's businesses, including focusing on corporate services.
To me, however, it simply boils down to HP, like Dell and Microsoft, being a company with the bulk of its fortune still tied to personal computers.
This is clear from inspection of the nearby price chart for HP, Dell, Microsoft, Apple and the S&P500 Index from 1990 to the present. The first three firms, which have relied more heavily on conventional personal or business computing for their revenues and profits, have had their stock prices languish or fall over the past decade.
In contrast, Apple, which transformed itself from a mere computer maker to a special-purpose digital device company early in the decade, has significantly outperformed the other three firms.
That is why, in my opinion, unless you are hoping for a near-term timing play on Dell or HP, or even Microsoft, for that matter, you will be disappointed if you buy or hold those equities anymore. They are obviously no longer the firms they once were, either fundamentally or in terms of market appreciation of their performances.
Apple is a very rare firm in its having arisen from near-disaster during the Scully era and been transformed by Jobs upon his return. Dell, HP and Microsoft are unlikely to duplicate that feat. They are, for the most part, firms, the fortunes of which rose meteorically, then plateaued, with the fortunes of the personal computer.
As iPods, iPads and enhanced smartphones increasingly cannibalize functions and activities PCs once dominated, the firms which remain largely defined by the latter are destined to continue to decline. Even having the largest share of the global PC market does HP little good when it has become a commodity business with a comparatively slow growth rate.
Monday, May 02, 2011
Tablets & Microsoft: More Pundits Finally Catch On To Microsoft's Decline
Looks like reality may finally be catching up to more observers' views of Microsoft after this quarter's results were announced last week.
An article in the Wall Street Journal's weekend edition even suggested Ballmer finally step down.
If I heard reports on Bloomberg and CNBC correctly, Apple, for the first time, out-earned Microsoft in a quarter. The nearby chart displays the price moves of Microsoft, Apple, and Google since inception, along with the S&P500 Index.
It's clear that Apple is the rarity among technology stocks, having been able to regain its meteoric trajectory. Ballmer's Microsoft, on the other hand, has never returned from the drubbing it took in the 2000 bubble-burst, while Gates still ran the show.
The Journal article, and other sources, all largely credit tablets, led by Apple's product, with hurting sales of Windows and Office, due to their dependency on PC platforms.
But I noticed this interesting passage in the Journal article,
"Spending 14% to 15% of revenues on research and development, which Microsoft has done for years, looks extravagant given Microsoft's new product history. Apple, for example, spends less than 3%....some of (Microsoft's) new products, like Windows Vista or the Zune music player, have been duds."
This reinforces something I've observed for years. It's not how much money is spent on research, per se, but how good the research is. Sounds tautological and obvious, but look at those numbers again while considering the new product torrent flowing from Apple since the introduction of the iPod.
Somehow, you get the feeling that Apple's environment is both more attractive and conducive to creative techies, while Microsoft probably resembles some sort of software factory. Its hardware releases have been few and poor, except for the Xbox. But that's something more like an Apple device- it isn't so totally restricted to computing.
However, it makes the point that with an activity like R&D, quality matters more than quantity.
Microsoft looks like it has finally had its growth crimped for good by technological evolution. Tablets are on the rise, while desktops are nearly gone, and laptops are suffering attrition from the tablets.
A product that didn't exist, what, two years ago, has now torn a hole in Microsoft's vaunted cash machines.
Of course, if the firm had split itself up into several homogeneous pieces several years ago, such as Windows, Online, Office, and Gaming, then tablets wouldn't have damaged all four. But, as it is, all must suffer as one equity.
Perhaps, now, even the staid portfolio managers who feel Microsoft is a safe tech stock will see that it is far more vulnerable and risky than they dared imagine.
If I heard reports on Bloomberg and CNBC correctly, Apple, for the first time, out-earned Microsoft in a quarter. The nearby chart displays the price moves of Microsoft, Apple, and Google since inception, along with the S&P500 Index.
It's clear that Apple is the rarity among technology stocks, having been able to regain its meteoric trajectory. Ballmer's Microsoft, on the other hand, has never returned from the drubbing it took in the 2000 bubble-burst, while Gates still ran the show.
The Journal article, and other sources, all largely credit tablets, led by Apple's product, with hurting sales of Windows and Office, due to their dependency on PC platforms.
But I noticed this interesting passage in the Journal article,
"Spending 14% to 15% of revenues on research and development, which Microsoft has done for years, looks extravagant given Microsoft's new product history. Apple, for example, spends less than 3%....some of (Microsoft's) new products, like Windows Vista or the Zune music player, have been duds."
This reinforces something I've observed for years. It's not how much money is spent on research, per se, but how good the research is. Sounds tautological and obvious, but look at those numbers again while considering the new product torrent flowing from Apple since the introduction of the iPod.
Somehow, you get the feeling that Apple's environment is both more attractive and conducive to creative techies, while Microsoft probably resembles some sort of software factory. Its hardware releases have been few and poor, except for the Xbox. But that's something more like an Apple device- it isn't so totally restricted to computing.
However, it makes the point that with an activity like R&D, quality matters more than quantity.
Microsoft looks like it has finally had its growth crimped for good by technological evolution. Tablets are on the rise, while desktops are nearly gone, and laptops are suffering attrition from the tablets.
A product that didn't exist, what, two years ago, has now torn a hole in Microsoft's vaunted cash machines.
Of course, if the firm had split itself up into several homogeneous pieces several years ago, such as Windows, Online, Office, and Gaming, then tablets wouldn't have damaged all four. But, as it is, all must suffer as one equity.
Perhaps, now, even the staid portfolio managers who feel Microsoft is a safe tech stock will see that it is far more vulnerable and risky than they dared imagine.
Monday, February 21, 2011
What Lesson Did the Phone Wars Provide for Energy Policy?
Holman Jenkins, Jr. in last Wednesday's edition of the Wall Street Journal, provided a very concise view of the evolution of mobile telephony in the US and Europe. He discussed how the US eschewed the unified, monolithic European GSM mobile standard. And how Nokia, one of the originators of that standard, is nearly dead, while Apple and Google, thanks to the US indecision on such a standard, flourished with new approaches.
Isn't this a commentary on government's unwanted, unnecessary intrusion in sectors where competing private solutions drive better ultimate solutions?
Jenkins describes the process as messy and inefficient, but, in the end, delivering superior results. Nokia has run into the arms of Microsoft, having fallen on hard times after initially leading in the GSM standards setting process. Jenkins ended his piece,
"The lesson for the new Nokia and everyone else is an old one: Nobody knows anything, and there's no substitute for messy, wasteful competition as a finder of solutions to problems we didn't even kow we needed solutions for. Whether the mobile world will settle into one proprietary or many proprietary ecosystems is far from decided."
Interestingly, from my reading of Amity Schlaes' The Forgotten Man several summers ago, those cries of how competition is so messy and wasteful are the very same arguments that FDR and his minions used to seize control of so much of American business. They decried the waste and inefficiency of free market competition, only to stifle innovation and mismanage the economy for most of the 1930s.
There's a larger lesson here. Right now, and in a technologically intensive sector- energy.
Doesn't Jenkins' illustrative tale of the mobile phone sector over the past few years suggest that we are making a horrific mistake by acceding to demands for monolithic, command-economy directives to subsidize and produce certain energy- wind, solar, ethanol- without subjecting them all to real, fair economic forces?
What ever happened to price as a market signal? As gasoline prices rise, largely silently, above $3/gallon, pundits predict a weakening of the US economy. So be it.
I wrote this post back in the summer of 2008 after reading a WSJ piece on Air Force experimentation with synfuel for jet aircraft. We have lots of coal and a known, reliable process to liquify that energy source to burn instead of gasoline or jet fuel.
If you worry about sending dollars abroad to buy oil, then promote synfuels. If you're simply worried about carbon emissions, then admit that you want to turn the US standard of living back about 110 years.
But this government system of choosing energy source winners is going to end badly. Market forces may entail some initial waste and inefficiency, but the result is the best solution, with much less long term waste and inefficiency, while satisfying consumer needs and desires. The latter of which is the point.
Not to have government dictate what consumers want, and how they'll get it.
Isn't this a commentary on government's unwanted, unnecessary intrusion in sectors where competing private solutions drive better ultimate solutions?
Jenkins describes the process as messy and inefficient, but, in the end, delivering superior results. Nokia has run into the arms of Microsoft, having fallen on hard times after initially leading in the GSM standards setting process. Jenkins ended his piece,
"The lesson for the new Nokia and everyone else is an old one: Nobody knows anything, and there's no substitute for messy, wasteful competition as a finder of solutions to problems we didn't even kow we needed solutions for. Whether the mobile world will settle into one proprietary or many proprietary ecosystems is far from decided."
Interestingly, from my reading of Amity Schlaes' The Forgotten Man several summers ago, those cries of how competition is so messy and wasteful are the very same arguments that FDR and his minions used to seize control of so much of American business. They decried the waste and inefficiency of free market competition, only to stifle innovation and mismanage the economy for most of the 1930s.
There's a larger lesson here. Right now, and in a technologically intensive sector- energy.
Doesn't Jenkins' illustrative tale of the mobile phone sector over the past few years suggest that we are making a horrific mistake by acceding to demands for monolithic, command-economy directives to subsidize and produce certain energy- wind, solar, ethanol- without subjecting them all to real, fair economic forces?
What ever happened to price as a market signal? As gasoline prices rise, largely silently, above $3/gallon, pundits predict a weakening of the US economy. So be it.
I wrote this post back in the summer of 2008 after reading a WSJ piece on Air Force experimentation with synfuel for jet aircraft. We have lots of coal and a known, reliable process to liquify that energy source to burn instead of gasoline or jet fuel.
If you worry about sending dollars abroad to buy oil, then promote synfuels. If you're simply worried about carbon emissions, then admit that you want to turn the US standard of living back about 110 years.
But this government system of choosing energy source winners is going to end badly. Market forces may entail some initial waste and inefficiency, but the result is the best solution, with much less long term waste and inefficiency, while satisfying consumer needs and desires. The latter of which is the point.
Not to have government dictate what consumers want, and how they'll get it.
Thursday, January 20, 2011
Holman Jenkins On Apple, Goldman & Facebook
Holman Jenkins, Jr.'s editorial in yesterday's Wall Street Journal dealt with the uselessness of the SEC. He approached the topic rather ingeniously, using the recent news concerning Apple and Facebook.
Regarding Apple, Jenkins simply noted that the firm has disclosed what it felt was sufficient regarding the health of its iconic CEO, Steve Jobs. After that, shareholders are free to buy, sell, or hold the stock, as they wish.
For what it's worth, I believe Jenkins is the first major pundit whom I've read that has explicitly stated the same sentiment I share on this topic, i.e., shareholders have the ability to exit their position in a stock, at nominal cost, if they don't like something about the way the firm is managed. Period. Stop whining.
On the matter of Facebook and Goldman Sachs, Jenkins concluded his brief series of pieces which have generally lauded Facebook's management and absolved Goldman of anything other than simply doing their usual job. Since I wrote this post last week, Goldman yanked its Facebook private placement from its domestic clients, ostensibly to avoid potential SEC sanctions, and, instead, turned to its overseas client base. This has reputedly resulted in a lot of angry domestic clients.
Jenkins has written several pieces extolling Facebook's Zuckerberg's right to remain private, maturity in recognizing his own not-yet-ready-for-prime-time management expertise, and the victimless nature of the firm's right to use a private offering rather than an IPO to raise more capital.
I continue to disagree, somewhat, with Jenkins on the matter of public access to such firms only after the big initial gains are locked in for the wealthy few. But I enjoyed reading his clever turn on the SEC, contending that Goldman's sudden reversal makes a mockery of the agency.
Specifically, Jenkins contends that the SEC made noises about the lack of total privacy of the Facebook private placement in part to look aggressive and tough in the wake of its lapses in the Madoff case and the implosion of the major investment banks, under its watch, during the 2007-09 financial crisis.
On both Apple and the SEC, I concur with Jenkins. He's especially astute to point out how the SEC, by its very existence, has ironically resulted in more investor risk, not less, since many believe the SEC has made investing safe.
Obviously, it hasn't, which creates an enormous and expensive unintended consequence. The core benefits of the agency, whatever they would be, could no doubt be achieved for less money and with less interference in market activities.
Regarding Apple, Jenkins simply noted that the firm has disclosed what it felt was sufficient regarding the health of its iconic CEO, Steve Jobs. After that, shareholders are free to buy, sell, or hold the stock, as they wish.
For what it's worth, I believe Jenkins is the first major pundit whom I've read that has explicitly stated the same sentiment I share on this topic, i.e., shareholders have the ability to exit their position in a stock, at nominal cost, if they don't like something about the way the firm is managed. Period. Stop whining.
On the matter of Facebook and Goldman Sachs, Jenkins concluded his brief series of pieces which have generally lauded Facebook's management and absolved Goldman of anything other than simply doing their usual job. Since I wrote this post last week, Goldman yanked its Facebook private placement from its domestic clients, ostensibly to avoid potential SEC sanctions, and, instead, turned to its overseas client base. This has reputedly resulted in a lot of angry domestic clients.
Jenkins has written several pieces extolling Facebook's Zuckerberg's right to remain private, maturity in recognizing his own not-yet-ready-for-prime-time management expertise, and the victimless nature of the firm's right to use a private offering rather than an IPO to raise more capital.
I continue to disagree, somewhat, with Jenkins on the matter of public access to such firms only after the big initial gains are locked in for the wealthy few. But I enjoyed reading his clever turn on the SEC, contending that Goldman's sudden reversal makes a mockery of the agency.
Specifically, Jenkins contends that the SEC made noises about the lack of total privacy of the Facebook private placement in part to look aggressive and tough in the wake of its lapses in the Madoff case and the implosion of the major investment banks, under its watch, during the 2007-09 financial crisis.
On both Apple and the SEC, I concur with Jenkins. He's especially astute to point out how the SEC, by its very existence, has ironically resulted in more investor risk, not less, since many believe the SEC has made investing safe.
Obviously, it hasn't, which creates an enormous and expensive unintended consequence. The core benefits of the agency, whatever they would be, could no doubt be achieved for less money and with less interference in market activities.
Tuesday, January 18, 2011
Steve Jobs' Medical Leave, Cash Levels & Apple Pundits
Since I wrote this morning's post over the weekend, I didn't include the recent news of Steve Jobs' latest medical leave. Nor this morning's Wall Street Journal pieces concerning Apple. One focused on new Android devices, the other on an institutional manager's fury over the tens of billions of cash on the firm's balance sheet.
Of the three developments, I'd say that Jobs' departure will be the most critical. As expected, it knocked some value off of the equity's price this morning, causing a 3.7% drop by 11AM, as I write this post. As a growth equity, it's understandable that uncertainties over Jobs' future at the company will affect the forward-looking component of its price. So even strong quarterly performance reports will probably be overshadowed by these worries.
As to the cash concerns, I continue to be surprised by whining fund managers who can't simply make a buy/sell/hold decision. They keep wanting to push management by complaining in public, whereas simply dumping the equity if they really object to Apple's financing policies would probably have far more effect. Until these managers mount an Ed Lampert-style takeover of Apple, however, they'd be better off just voting with their trades.
As to Android-based smart phones, the back page piece in the Journal's Money & Investing Section didn't really impress me all that much. The major gripe the author had was that, like its laptops, Apple commands a high price premium for its iPhone, making Android devices more attractive to carriers for discounting. But at the very end of the piece, he admits that Apple's apps are triple the current number for Android phones.
Isn't the real issue, however, growth of Apple's iPhone base, not total market share? Apple's share of PCs and laptops hasn't been dominant, but their sales certainly have continued to help fuel the firm's revenue and income growth.
I remain comfortable trusting the management that brought Apple to its path of consistently superior performance. If Steve Jobs becomes unavailable in the long term, that will probably affect the company's share price and, thus, it's implied performance for shareholders. It's a self-fulfilling prophecy that could very well remove Apple from my equity selection process' results. So be it.
But the other concerns seem, to me, pointless. Such second-guessing is akin to trying to influence the same management which has produced the results which drive investors to buy the equity in the first place.
Of the three developments, I'd say that Jobs' departure will be the most critical. As expected, it knocked some value off of the equity's price this morning, causing a 3.7% drop by 11AM, as I write this post. As a growth equity, it's understandable that uncertainties over Jobs' future at the company will affect the forward-looking component of its price. So even strong quarterly performance reports will probably be overshadowed by these worries.
As to the cash concerns, I continue to be surprised by whining fund managers who can't simply make a buy/sell/hold decision. They keep wanting to push management by complaining in public, whereas simply dumping the equity if they really object to Apple's financing policies would probably have far more effect. Until these managers mount an Ed Lampert-style takeover of Apple, however, they'd be better off just voting with their trades.
As to Android-based smart phones, the back page piece in the Journal's Money & Investing Section didn't really impress me all that much. The major gripe the author had was that, like its laptops, Apple commands a high price premium for its iPhone, making Android devices more attractive to carriers for discounting. But at the very end of the piece, he admits that Apple's apps are triple the current number for Android phones.
Isn't the real issue, however, growth of Apple's iPhone base, not total market share? Apple's share of PCs and laptops hasn't been dominant, but their sales certainly have continued to help fuel the firm's revenue and income growth.
I remain comfortable trusting the management that brought Apple to its path of consistently superior performance. If Steve Jobs becomes unavailable in the long term, that will probably affect the company's share price and, thus, it's implied performance for shareholders. It's a self-fulfilling prophecy that could very well remove Apple from my equity selection process' results. So be it.
But the other concerns seem, to me, pointless. Such second-guessing is akin to trying to influence the same management which has produced the results which drive investors to buy the equity in the first place.
More of James Stewart's Questionable Investing Advice
I have had the occasion to answer some investing questions from friends as the new year begins. Having been professionally involved in equity and options investing for nearly 15 years, and in the financial sector for much longer, my advice is typically simple.
Avoid individual equities unless it's speculative money. If investing for a longish term, stick to dollar-averaging the S&P500 from a low-cost fund complex. Any other sector bets are best made via Vanguard or comparably-priced, passive index fund complexes.
The dirty little secret of investing is that non-professionals should steer clear of individual equity, bond or option trading and, for that matter, trying to chase the, on average, 25% of actively-managed publicly-available funds which manage to beat the S&P500 Index each year, because they are usually a different 25% the next year.
So I found a recent Wall Street Journal column by its official investing guru, James Stewart, particularly disheartening. Stewart spent most of the article's ink fretting about Apple's continued dominance and growth prospects. After much 'analysis,' Stewart confided that he'd sold some options on the firm's equity recently, content with the profits. His other recommendation involved Google and the new Motorola Mobility. About Apple, Stewart concluded,
"I see only one problem: I'm not sure what worlds are left for Apple to conquer."
Then, in classic fence-sitting fashion for a market pundit, he adds,
"I haven't given up on Apple. I still own shares and another set of call options that expire in January 2012. But the market recently hit one of my selling thresholds, and I feel comfortable taking some profits."
Clear on that now? Me neither.
But here's what really stuns me. Stewart holds options expiring a year from now. That means enduring a lot of potential price volatility. And he doesn't mention any sort of time-dimensioned discipline.
The problem with the price-targeting he uses is that it isn't referenced against a market index level. It's just free-floating, as if that's adequate.
My own equity approach holds portfolios for less than a year, but more than a few months. Shorter than that is to be nearly a market-timer, which doesn't work consistently over long time periods. Longer, and you are asking for trouble due to changing company situations. I don't mind holding the same equity for over a year, so long as the decision is made month by month to do so, for the entire planned duration.
With investing technology and institutional money management having evolved as they have in recent years, the notion that you can buy and hold technology issues for the long term is misleading. Even more so when the Journal recently published an article describing how concentrated many large hedge fund holdings are in just a few equities, often in the technology sector.
But I approach this from a professional perspective, and Stewart ostensibly writes market advice columns for a living. His readers, however, presumably have day jobs.
They have no business sinking substantial amounts into individual, volatile equities. Most of his readers are probably best off dollar-averaging their way into ever-increasing S&P500 Index positions, with some diversification into perhaps one or two passive sector funds and a corporate bond fund.
Many years ago, when I was just out of graduate school, I read the chilling, sad Wall Street Journal stories of how so many retail investors lost everything on WPPS bonds. The infamous Washington Public Power Supply debt wasn't actually federally guaranteed, but had been sold as such by unscrupulous brokers.
The moral of the story for me, however, was simply this. For many investors, just keeping their capital over their investing horizon probably puts them far higher in the distribution of retail investor returns than many would care to admit. Chasing tempting returns on individual technology equities merely adds to the risk.
Which is why I think Stewart's column is inappropriate for the Journal. But, as I wrote at the beginning of this post, that's the sector's dirty little secret. Most retail investors have no business even bothering over individual equities or debt issues.
That's what low-cost, passive index fund complexes, staffed by professionals, are for.
Avoid individual equities unless it's speculative money. If investing for a longish term, stick to dollar-averaging the S&P500 from a low-cost fund complex. Any other sector bets are best made via Vanguard or comparably-priced, passive index fund complexes.
The dirty little secret of investing is that non-professionals should steer clear of individual equity, bond or option trading and, for that matter, trying to chase the, on average, 25% of actively-managed publicly-available funds which manage to beat the S&P500 Index each year, because they are usually a different 25% the next year.
So I found a recent Wall Street Journal column by its official investing guru, James Stewart, particularly disheartening. Stewart spent most of the article's ink fretting about Apple's continued dominance and growth prospects. After much 'analysis,' Stewart confided that he'd sold some options on the firm's equity recently, content with the profits. His other recommendation involved Google and the new Motorola Mobility. About Apple, Stewart concluded,
"I see only one problem: I'm not sure what worlds are left for Apple to conquer."
Then, in classic fence-sitting fashion for a market pundit, he adds,
"I haven't given up on Apple. I still own shares and another set of call options that expire in January 2012. But the market recently hit one of my selling thresholds, and I feel comfortable taking some profits."
Clear on that now? Me neither.
But here's what really stuns me. Stewart holds options expiring a year from now. That means enduring a lot of potential price volatility. And he doesn't mention any sort of time-dimensioned discipline.
The problem with the price-targeting he uses is that it isn't referenced against a market index level. It's just free-floating, as if that's adequate.
My own equity approach holds portfolios for less than a year, but more than a few months. Shorter than that is to be nearly a market-timer, which doesn't work consistently over long time periods. Longer, and you are asking for trouble due to changing company situations. I don't mind holding the same equity for over a year, so long as the decision is made month by month to do so, for the entire planned duration.
With investing technology and institutional money management having evolved as they have in recent years, the notion that you can buy and hold technology issues for the long term is misleading. Even more so when the Journal recently published an article describing how concentrated many large hedge fund holdings are in just a few equities, often in the technology sector.
But I approach this from a professional perspective, and Stewart ostensibly writes market advice columns for a living. His readers, however, presumably have day jobs.
They have no business sinking substantial amounts into individual, volatile equities. Most of his readers are probably best off dollar-averaging their way into ever-increasing S&P500 Index positions, with some diversification into perhaps one or two passive sector funds and a corporate bond fund.
Many years ago, when I was just out of graduate school, I read the chilling, sad Wall Street Journal stories of how so many retail investors lost everything on WPPS bonds. The infamous Washington Public Power Supply debt wasn't actually federally guaranteed, but had been sold as such by unscrupulous brokers.
The moral of the story for me, however, was simply this. For many investors, just keeping their capital over their investing horizon probably puts them far higher in the distribution of retail investor returns than many would care to admit. Chasing tempting returns on individual technology equities merely adds to the risk.
Which is why I think Stewart's column is inappropriate for the Journal. But, as I wrote at the beginning of this post, that's the sector's dirty little secret. Most retail investors have no business even bothering over individual equities or debt issues.
That's what low-cost, passive index fund complexes, staffed by professionals, are for.
Friday, December 31, 2010
Confusion Over Apple As An Investment
I've noted with interest this past week's flurry of comments about Apple as an investment for 2011.
In my own equity strategy, which is outperforming the S&P for the year by roughly 25% to 11%, Apple would now be a holding in four of the currently active six portfolios. Apple trails the index slightly in two recently-formed portfolios, and outperforms in the other two.
While I can't predict with certainty, I'd expect that Apple will be part of the January 2011 equity portfolio, as well.
The nearby price chart for Apple, Google, Microsoft and the S&P500 Index reveals how dominantly the former has outperformed the latter three entities, Google and Microsoft being two of the more popular alternates in the technology sector.
What surprised me somewhat is how comparatively anemic Google's performance has been, when viewed with Apple's. The S&P's and Microsoft's track records for the past five years isn't all that unexpected.
Listening to many pundits, it's tempting to believe that Apple's performance is a purely technical feat, with a parabolic curve that must descend soon.
However, on the several bases in my quantitative equity portfolio selection process, Apple probably has some life left in it. Moreover, I've seen broad consensus on prior growth equities be wrong. For example, in 1998, Dell was viewed as overpriced and unable to sustain its then-torrid fundamental growth. It ended the year as one of the S&P500's top ten total return issues, so I was thrilled to have followed my portfolio selection process and held Dell for the entire year.
Ironically, as I observed back in the late 1990s, the bulk of the analyst community views equities in aggregates, often with some technical perspective. Thus, the individual merits of many attractive equities are lost amidst broad comparisons and conventional 'rules of thumb.'
Thank God for that.
As I consider why Apple, with its lofty share price and steady march upwards in price since January of 2009, may continue to outperform the S&P500, several reasons come to mind.
One, of course, is the firm's clear, successful focus on consistent innovation and evolution of well-received products. Those products have achieved high brand preference status. Additionally, they are typically in price ranges that have made them less vulnerable during the recent US recession and continuing economic weakness. With Steve Jobs' continued leadership, the firm may outperform expectations for a little while longer still.
And, finally, there's something which many investors fail to grasp. That is, even broadly-followed, popular firms can outperform. What is required is unexpected excellent performance. Firms like Microsoft, Dell, Kolhs, in the past, and, currently, Apple, have achieved this. It can never last forever, but it can often outlast ill-informed, generically-based expectations.
What Google does seems to be less unique with time, while Microsoft has been mismanaged for over a decade, with no sign of significant change in that important parameter.
The bottom line for me is that I don't subjectively select equities. But I can and often do interpret why my quantitative approach selects those equities which appear in portfolios. And from post hoc, informal inspection, it's easy for me to see why none of the recent portfolios have held Google or Microsoft, while many have included Apple.
While I can't predict with certainty, I'd expect that Apple will be part of the January 2011 equity portfolio, as well.
The nearby price chart for Apple, Google, Microsoft and the S&P500 Index reveals how dominantly the former has outperformed the latter three entities, Google and Microsoft being two of the more popular alternates in the technology sector.
What surprised me somewhat is how comparatively anemic Google's performance has been, when viewed with Apple's. The S&P's and Microsoft's track records for the past five years isn't all that unexpected.
Listening to many pundits, it's tempting to believe that Apple's performance is a purely technical feat, with a parabolic curve that must descend soon.
However, on the several bases in my quantitative equity portfolio selection process, Apple probably has some life left in it. Moreover, I've seen broad consensus on prior growth equities be wrong. For example, in 1998, Dell was viewed as overpriced and unable to sustain its then-torrid fundamental growth. It ended the year as one of the S&P500's top ten total return issues, so I was thrilled to have followed my portfolio selection process and held Dell for the entire year.
Ironically, as I observed back in the late 1990s, the bulk of the analyst community views equities in aggregates, often with some technical perspective. Thus, the individual merits of many attractive equities are lost amidst broad comparisons and conventional 'rules of thumb.'
Thank God for that.
As I consider why Apple, with its lofty share price and steady march upwards in price since January of 2009, may continue to outperform the S&P500, several reasons come to mind.
One, of course, is the firm's clear, successful focus on consistent innovation and evolution of well-received products. Those products have achieved high brand preference status. Additionally, they are typically in price ranges that have made them less vulnerable during the recent US recession and continuing economic weakness. With Steve Jobs' continued leadership, the firm may outperform expectations for a little while longer still.
And, finally, there's something which many investors fail to grasp. That is, even broadly-followed, popular firms can outperform. What is required is unexpected excellent performance. Firms like Microsoft, Dell, Kolhs, in the past, and, currently, Apple, have achieved this. It can never last forever, but it can often outlast ill-informed, generically-based expectations.
What Google does seems to be less unique with time, while Microsoft has been mismanaged for over a decade, with no sign of significant change in that important parameter.
The bottom line for me is that I don't subjectively select equities. But I can and often do interpret why my quantitative approach selects those equities which appear in portfolios. And from post hoc, informal inspection, it's easy for me to see why none of the recent portfolios have held Google or Microsoft, while many have included Apple.
Tuesday, September 07, 2010
Apple TV Returns
Last Thursday's Wall Street Journal articles discussing Apple's return to television left me with the sense that the company is now too late with too little to make a difference as it typically does in its other specialized digital processing hardware.
When I read that the new Apple TV offering includes Netflix streaming video access, it told me that Apple is accepting the latter's dominance in television-delivered internet-based video content.
That wouldn't seem to bode well for Apple TV's ability to differentiate from other similar video content purchase/storage systems.
Perhaps it's more of a niche-filling strategy, so that the firm offers something in this increasingly hot space.
However, as I noted in this post late last month, Tivo has finally marketed a relatively inexpensive keyboard remote. This will allow viewing of virtually any website through Tivo, which also streams Netflix.
Doesn't this make Apple very late with nothing particularly unique in this product/market space?
I think it does.
When I read that the new Apple TV offering includes Netflix streaming video access, it told me that Apple is accepting the latter's dominance in television-delivered internet-based video content.
That wouldn't seem to bode well for Apple TV's ability to differentiate from other similar video content purchase/storage systems.
Perhaps it's more of a niche-filling strategy, so that the firm offers something in this increasingly hot space.
However, as I noted in this post late last month, Tivo has finally marketed a relatively inexpensive keyboard remote. This will allow viewing of virtually any website through Tivo, which also streams Netflix.
Doesn't this make Apple very late with nothing particularly unique in this product/market space?
I think it does.
Thursday, July 29, 2010
CNBC's Jim Goldman Departs & A Look At His Gaffe Involving Apple's Steve Jobs
I noticed last week that CNBC's long time technology reporter, Jim Goldman, was missing in action. A quick Google search revealed that he had left the network recently for a VP job at public relationships firm Burston Marstellar.
In the process of that search, I discovered this webpage containing the video of Goldman, Dennis Kneale and 'Fake Steve Jobs,' a/k/a Dan Lyons of Newsweek.
It's priceless.
After viewing it, I began to wonder whether Goldman had become damaged goods. I reflected on his interviews over the years, and have to admit, he mostly tossed softballs. Once he mistakenly took on Carol Bartz without solid facts, and she ripped him a new one, as well.
However, in a larger sense, Dan Lyons' revelations of Goldman's complete and consensual digestion and public regurgitation of the Apple party line concerning Jobs' health issues in 2009 may have reduced, if not eliminated his credibility.
Makes you wonder about other CNBC reporters, doesn't it? Because it fits nicely with the network's tendency to softball interview CEOs and generally say nothing that might affect interview access to and/or advertising from large corporations and financial sector personalities.
In the process of that search, I discovered this webpage containing the video of Goldman, Dennis Kneale and 'Fake Steve Jobs,' a/k/a Dan Lyons of Newsweek.
It's priceless.
After viewing it, I began to wonder whether Goldman had become damaged goods. I reflected on his interviews over the years, and have to admit, he mostly tossed softballs. Once he mistakenly took on Carol Bartz without solid facts, and she ripped him a new one, as well.
However, in a larger sense, Dan Lyons' revelations of Goldman's complete and consensual digestion and public regurgitation of the Apple party line concerning Jobs' health issues in 2009 may have reduced, if not eliminated his credibility.
Makes you wonder about other CNBC reporters, doesn't it? Because it fits nicely with the network's tendency to softball interview CEOs and generally say nothing that might affect interview access to and/or advertising from large corporations and financial sector personalities.
Thursday, June 24, 2010
The iPad's Success Affects Amazon's Kindle
"I don't think there's any question that the iPad will be significant in its category. Some claim that, at least initially, it will also increase volume of ebook sales at Amazon. Perhaps so. But I continue to believe it will marginalize the Kindle, relative to its prior market position."
How much more marginal can Kindle get, than to have to cut its price from $259 to $189, as it did earlier this week?
The e-reader functionality is quickly moving toward a razor-razor blade sort of dynamic. Much more quickly, one suspects, than Amazon expected.
Perhaps, in time, an e-reader will be priced and marketed like a cell phone, with an upgrade included if you buy some sort of volume purchase contract from the vendor's site.
Of course, the gorilla in the room that isn't just an e-reader, the iPad, will continue to affect the lesser-functioned competitive offerings. And as I have written in a prior post, the fact that Apple controls the design and manufacture of the iPad gives it a tremendous advantage.Over the past five years, as the nearby price chart for Apple, Amazon and the S&P500 Index displays, Apple has outperformed Amazon.
Currently, both firms are in my equity portfolio. They are two of the very few S&P500 firms which have consistently outperformed in the past years. As well as Amazon has done, it pales in comparison to Apple.
The two firms are structurally very different. Apple is essentially a producer of a family of specialized digital applications devices and associated content and advertising systems. Amazon is an online general merchandiser, book and music seller, and vendor of cloud computer.
Still, whether it's due to growth rates or business mix, Apple has been viewed for some time as more valuable than Amazon. You have to wonder, with Amazon having so much less control over its Kindle development than Apple does over the iPad, if that difference will have ramifications for its content sales in the years to come.
One thing is sure. The Kindle is in a direct fight with the Nook and other e-reader-only devices, while Apple's iPad floats above them, offering a different set of features which clearly differentiates it and commands the typical premium Apple price.
Wednesday, May 26, 2010
Apple v. Microsoft- Lessons On Value Creation
Today's Wall Street Journal happens to contain two separate articles involving Apple and Microsoft.
Still, we'd rather be Google. Why? Because Google can fail at everything but as long as it keeps its search box at the center of our digital lives, the ad gusher will continue to flow."
The lesson here seems, at least to me, to be obvious. Mr. Jenkins' appetite for market size notwithstanding, I'll take consistently superior total returns every time. And as long as Steve Jobs continues to run Apple, that's probably what you'll get.
The headline piece in the Marketplace section is "Microsoft CEO Takes Over Gadget Unit," while Holman Jenkins, Jr.'s editorial is titled, "Apple's Second Date with History."
In the Marketplace article, Nick Wingfield discusses the troubles Microsoft has had since its initial splash with XBox. Two key senior managers are retiring, and Ballmer is now taking over the entertainment and communications devices units. He writes,
"Microsoft's problem hasn't been that it was late to the consumer-device market. Michael Garternberg, an analyst at advisory firm Altimeter Group, said Microsoft missed important consumer trends by focusing on its core business markets.
The shifting fortunes could be underscored in the coming weeks by a changing-of-the-guard in market capitalization. While Microsoft has long been the tech industry's most highly valued company, a little more than $6 billion now separates its $229 billion stock market value from Apple's."
Wingfield quotes an academic attributing the difference to higher consumer spending growth versus that for business IT products and services.
Personally, I think that academic got the cart before the horse, in the sense that the real difference between the firms has to do with pursuing commodity markets instead of product/markets which reward better design and functionality.
Holman Jenkins begins his editorial noting how Apple had a near-death experience many years ago, only to be rescued by the internet. Jenkins, too, discusses how Microsoft competed in operating systems, which became commoditized, while Apple went off in a different direction, specializing in digital devices for specific applications.
Jenkins believes Apple, through its closed systems for the iPod and iPhone, risks another brush with death, as Google's Android cell phone operating system challenges it for supremacy. He ends his piece contending,
"Apple this time understands (we hope) that it isn't playing for all the marbles, but can build a very nice business on just those customers who crave a premium service tightly controlled by the wonderful Mr. Jobs, even if it means paying a bit more and forgoing access to a lot of Web goodies that might not work so well in favor of a smaller number that work really well.
Still, we'd rather be Google. Why? Because Google can fail at everything but as long as it keeps its search box at the center of our digital lives, the ad gusher will continue to flow."Jenkins' parting comment led me to construct the nearby Yahoo-sourced price chart for Apple, Google, Microsoft and the S&P500 Index for the past five years.
Sorry, Holman, but I'd bet on Apple. And actually have, as it's been a frequent member of my recent equity strategy portfolio selections, whereas Microsoft has not for a decade, and Google has not, if at all, for quite some time.
The price chart confirms what I suspected. That is, Apple's highly-focused, niche strategies have given its shareholders better returns over time, with Google already falling back to earth, and the now-hapless, gargantuan Microsoft lumbering along near the S&P's return.
I think quite highly of Mr. Jenkins, but on this topic, I have to respectfully part company with him.
In my humble opinion, as a trained marketing professional, both Messrs. Wingfield and Jenkins miss the key point about Apple's strategy versus Microsoft and Google.
Jenkins actually mentions that Apple chose to forsake the open operating systems world, and focus on niche digital devices. But he fails to understand the key benefit of that choice.
I believe it is this. Both Microsoft and Google became dominant in large markets, which, though providing for rapid early growth, have made it difficult to sustain such growth. Whether it's operating systems and basic office productivity software or online ad revenue from free search, both companies have saturated those markets and must look to higher-cost, more challenging new businesses for growth.
Apple, by contrast, chose to pursue specific consumer need satisfaction with a family of specialized digital devices. Steve Jobs has a flair for design, packaging and promotion of these devices.
Truth be told, over time, the product/market segment Jobs chose provides for better product margins and higher barriers to entry. Note how Microsoft has become loathed for its poorly-designed, patch-heavy operating systems. It's an open secret that many users still run XP and older Office packages. Including me.
Google has even forced Microsoft to include net-based Office applications in their recent product version. Meanwhile, Bing competes with Google's search, and everybody is looking at proprietary online or cell-based ad systems.
The lesson here seems, at least to me, to be obvious. Mr. Jenkins' appetite for market size notwithstanding, I'll take consistently superior total returns every time. And as long as Steve Jobs continues to run Apple, that's probably what you'll get.The nearby price chart for the same entities, from 1985, clearly shows Microsoft flattening by the dawn of this decade. Apple declined after the dot-com bust, then rocketed forward on the i-series products and services. Google, from its inception, only matched Apple's returns.
After Jobs, le deluge. No argument there. But Microsoft crested while Gates was still there, and Google's very wide-open business model, while initially capturing huge profits as the first-mover, is now having some difficulty continuing that early growth.
I see Schumpeter's theory at work in this picture. Apple re-invents itself in a technological space far faster and more successfully, profitably, than either of its putative rivals.
With large markets tends to come commoditization and earlier end to superior growth and returns. The case of Apple, Microsoft and Google bears that out once again.
Tuesday, April 06, 2010
Apple's New iPad
Saturday was the big debut of Apple's iPad. Friday was full of pundit previews and technical reviews of the much-anticipated product.
For example, over on CNBC, David Pogue gave a very positive review of the new ereader. Complaints included no camera and a virtual keyboard. Pogue pronounced it great for getting information, but poor for sending/creating it.
I wrote about the product in these two prior posts, here and here.
In retrospect, the earlier piece has conclusions with which I remain comfortable. Seriously, how much better a compliment can the iPad be given than to be compared to a netbook more than Amazon's Kindle.
My business partner told me last week that, just in pre-orders, the iPad already had 33% of the volume of Amazon's Kindle, though the latter has been in the market for at least two years.
I don't think there's any question that the iPad will be significant in its category. Some claim that, at least initially, it will also increase volume of ebook sales at Amazon. Perhaps so. But I continue to believe it will marginalize the Kindle, relative to its prior market position.
As to Holman Jenkins' points, I'm not quite as sure of them now as I was then. Yes, Apple doing cloud computing and advertising seems a stretch. But, when you consider the iPod, iPhone and iTouch, the iPad represents simply the latest in Apple's second-generation application-specific digital devices.
That strategy seems to set Apple apart, make it unique, and capitalize on it, and/or Steve Jobs' genius for the design, production and marketing of such devices.
Look how easily and thoroughly Apple has moved into and changed the music and phone businesses. Perceiving Apple's niche as application-specific digital devices has allowed Jobs to cleverly and profitably combine software and hardware solutions to specific consumer needs, outflanking phone and computer makers. Plus creating whole new devices for music and video.
On Friday, I was left musing over David Pogue's comparison of Jobs to Edison, and simple identification of Apple's success with Jobs. According to Pogue, no more Jobs, no more Apple. He explained and described Jobs' incredible control over details of Apple product designs. Unlike Gates, Jobs has a clear magic touch with consumer products and systems.
Plus, he is very decisive, according to Pogue. That's why Apple can product devices so quickly, from concept to market, with such beauty and functionality. Jobs is focused, moves quickly and eliminates delays.
I suppose it's both good and bad news, in the conventional vein regarding Jobs' health and energy where Apple is concerned.
But there seems to be no denying that the iPad is another milestone product.
For example, over on CNBC, David Pogue gave a very positive review of the new ereader. Complaints included no camera and a virtual keyboard. Pogue pronounced it great for getting information, but poor for sending/creating it.
I wrote about the product in these two prior posts, here and here.
In retrospect, the earlier piece has conclusions with which I remain comfortable. Seriously, how much better a compliment can the iPad be given than to be compared to a netbook more than Amazon's Kindle.
My business partner told me last week that, just in pre-orders, the iPad already had 33% of the volume of Amazon's Kindle, though the latter has been in the market for at least two years.
I don't think there's any question that the iPad will be significant in its category. Some claim that, at least initially, it will also increase volume of ebook sales at Amazon. Perhaps so. But I continue to believe it will marginalize the Kindle, relative to its prior market position.
As to Holman Jenkins' points, I'm not quite as sure of them now as I was then. Yes, Apple doing cloud computing and advertising seems a stretch. But, when you consider the iPod, iPhone and iTouch, the iPad represents simply the latest in Apple's second-generation application-specific digital devices.
That strategy seems to set Apple apart, make it unique, and capitalize on it, and/or Steve Jobs' genius for the design, production and marketing of such devices.
Look how easily and thoroughly Apple has moved into and changed the music and phone businesses. Perceiving Apple's niche as application-specific digital devices has allowed Jobs to cleverly and profitably combine software and hardware solutions to specific consumer needs, outflanking phone and computer makers. Plus creating whole new devices for music and video.
On Friday, I was left musing over David Pogue's comparison of Jobs to Edison, and simple identification of Apple's success with Jobs. According to Pogue, no more Jobs, no more Apple. He explained and described Jobs' incredible control over details of Apple product designs. Unlike Gates, Jobs has a clear magic touch with consumer products and systems.
Plus, he is very decisive, according to Pogue. That's why Apple can product devices so quickly, from concept to market, with such beauty and functionality. Jobs is focused, moves quickly and eliminates delays.
I suppose it's both good and bad news, in the conventional vein regarding Jobs' health and energy where Apple is concerned.
But there seems to be no denying that the iPad is another milestone product.
Thursday, February 11, 2010
Holman Jenkins On Apple
Holman Jenkins, Jr., wrote a very interesting column in yesterday's Wall Street Journal concerning Apple's recent product extensions, entitled "The Microsofting of Apple?"
In a nutshell, Jenkins contends that Apple is beginning to behave like Microsoft
"Rumors abound that Apple is considering a deal with Microsoft's search engine Bing to displace Google on the iPhone. Rumors abound that Apple will get into the advertising business, that it will expand its cloud services to compete with Google's. Who is this beginning to sound like?"
As the nearby price chart for Apple and Microsoft illustrates, the latter's price plateaued shortly after it won the 'browser war' with Netscape.
It can be argued, as Jenkins does, that Microsoft's spread into internet browser, its online business unit, and even gaming, gradually eroded and unfocused the company's software strengths.
The details of Jenkins' piece involve Apple's refusal to support Flash software on its iPhone and iPad, making them suspiciously built to only download material from the iTunes store.
In an era of interoperability, Jenkins notes, Apple seems content to and intent on restricting its products' owners to content available only from Apple. He also relates stories of Steve Jobs lately becoming obsessed with Google and its infringement on Apple turf, e.g., the Android cell phone operating system.
I think Jenkins makes good points. Generally speaking, when companies expand beyond their original areas of competitive advantage, their profit margins fall. Growth is purchased at the expense of margin, and, in time, the key unique elements which originally defined the firm become blurred.
In a word, well, two, really, Schumpeterian dynamics at work.
Sad to say, the areas into which Apple is rumored to be looking to grow, and, with the iPad, is growing, aren't quite so unique as its recent sources of growth. That alone should give one pause concerning Apple's future prospects.
In a nutshell, Jenkins contends that Apple is beginning to behave like Microsoft
"Rumors abound that Apple is considering a deal with Microsoft's search engine Bing to displace Google on the iPhone. Rumors abound that Apple will get into the advertising business, that it will expand its cloud services to compete with Google's. Who is this beginning to sound like?"
As the nearby price chart for Apple and Microsoft illustrates, the latter's price plateaued shortly after it won the 'browser war' with Netscape.It can be argued, as Jenkins does, that Microsoft's spread into internet browser, its online business unit, and even gaming, gradually eroded and unfocused the company's software strengths.
The details of Jenkins' piece involve Apple's refusal to support Flash software on its iPhone and iPad, making them suspiciously built to only download material from the iTunes store.
In an era of interoperability, Jenkins notes, Apple seems content to and intent on restricting its products' owners to content available only from Apple. He also relates stories of Steve Jobs lately becoming obsessed with Google and its infringement on Apple turf, e.g., the Android cell phone operating system.
I think Jenkins makes good points. Generally speaking, when companies expand beyond their original areas of competitive advantage, their profit margins fall. Growth is purchased at the expense of margin, and, in time, the key unique elements which originally defined the firm become blurred.
In a word, well, two, really, Schumpeterian dynamics at work.
Sad to say, the areas into which Apple is rumored to be looking to grow, and, with the iPad, is growing, aren't quite so unique as its recent sources of growth. That alone should give one pause concerning Apple's future prospects.
Wednesday, January 27, 2010
Apple Joins The eReader Business
Today's much-heralded announcement of the Apple tablet brings Apple into even broader competition with Amazon.
Several weeks ago, I discussed this impending event with a business colleague who has had involvement with other companies entering the electronic book reader business. In a few short years, the niche most recently pioneered by Amazon's Kindle is getting rather crowded.
For example, Barnes & Noble debuted a reader, as has Sony. Now Apple brings its prowess to the category.A glance at the two nearby price charts for Amazon, Apple & the S&P500 Index for the past 5 years, and then for the companies since Apple's inception, tells an interesting story.
Over the past five years, Amazon's and Apple's equity price moves have been surprisingly coherent. While both suffered somewhat through the last year's market troubles, both delivered performance significantly above that of the S&P. The pattern of the price moves almost leads one 
to conclude that Amazon now behaves in a quasi-technology issue manner.
to conclude that Amazon now behaves in a quasi-technology issue manner.Looking at the same three series from the mid-1980s, it's rather shocking to see that, in a much shorter timeframe, Amazon has created more return for its shareholders than has Apple. And, again, looking over the longer term, the recent nearly-identical patterns of the two firms' equities moves is stunning. If I'm not mistaken, Amazon began performing like Apple around the time of the Kindle's introduction.
This morning's Wall Street Journal features articles focusing on Apple's battle with Amazon over pricing of titles and relationships with publishers, as well as, on the technology front, its continuing march into new product areas.
If I were handicapping this race, I'd have to bet on Apple. For several reasons.
First, by controlling the entire business system, including in-house product design, as a software and hardware producer, Apple has more natural advantages over the long term. My colleague and I discussed how likely it will be for Apple to release, in future versions, an iPhone-like tablet, where the phone application becomes a freebie.
Second, Apple cut its teeth on this business model with the iPod, which has consistently outperformed MP3 players. At a stroke, Apple can neutralize Amazon's history with publishers, simply through its contracts for epublication on the tablet.
Third, Apple has a much more visceral brand loyalty than does Amazon. In a product space becoming crowded with entries, the vaunted Apple brand, distribution system, and customer service are all advantages which will bring share to the tablet. By comparison, Amazon is simply a place where you buy books online. And maybe some music, if you don't use an iPod. Perhaps rent or buy videos, as well.
I just don't think Amazon has built strong enough brand identity for what is coming in this product/market space to withstand Apple's assault on the ereader category.
Finally, if Apple only competes on a par with Amazon, it's already won. For Amazon, it's a defensive game of mitigating share loss. Perhaps the tablet will expand the overall market, but with its expected higher price, probably not share that was going to Amazon. For Apple, any sales of tablets and content through its online site are net additions.
The momentum and nature of the competitive situation would seem to favor Apple- again.
Tuesday, December 15, 2009
ATT Wireless, Network Management & Capacity, & the iPhone
Recently, I wrote this post regarding the general nature of ineffectual management at the old ATT and, for that matter, the bulk of its old-style telephony competitors, now the surviving Bell System companies Verizon and (new) ATT (old SBC).
One of the passages I wrote reflected my overall sense of the type of managerial skills and qualities bred by the old telephony companies,
"In all of this, however, there loomed large a business and financial fact. Old-style circuit-switched telephony depended upon regulatory tariffs. These were set, as with most utilities, like power companies, based upon assets.
In effect, those portions of your telephone service which were subject to regulation were priced to provide the telephone company a target rate of return on assets. That's why the old Western Electric built gold-plated, everlasting switchgear. That's why the telephone companies capitalized unbelievably large amounts of labor to install said switchgear as asset value.
In 1983, the average line management talent of ATT was basically involved in internal allocation fights, regulatory affairs management, and some small but ineffective amount of competitive activity. The truth was that what ATT and its units did was take a regulatory-provided pot of money and divide it up, using somewhat initially arbitrary, but thereafter consistent rules, among the various operating companies, Long Lines and Western Electric. From that pot of gold, funding for Bell Laboratories was also provided.
My point in relating this history is to provide some background for the world of then-middle and -senior ATT and operating company management. Folks like, well, Ed Whitacre. And some of my former colleagues who hung in at ATT and gradually moved up the ranks amidst the ongoing confusion as the newly-deregulated firm went through amazing changes."
Now comes word from ATT that they are seeking ways to incent iPhone customers to actually use their phones less for data and various other bandwidth-hogging applications.
This spoof, one of the "fake Steve Jobs" series, sent to me by a colleague, couldn't be more topical, nor accurate.
Of all the passages in the piece, perhaps these two best distills the point of "Jobs' " rant,
"So let’s talk traffic. We’ve got people who love this goddamn phone so much that they’re living on it. Yes, that’s crushing your network. Yes, 3% of your users are taking up 40% of your bandwidth. You see this as a bad thing. It’s not. It’s a good thing. It’s a blessing. It’s an indication that people love what we’re doing, which means you now have a reason to go out and double or triple or quadruple your damn network capacity. Jesus! I can’t believe I’m explaining this to you. You’re in the business of selling bandwidth. That pipe is what you sell. Right now what the market is telling you is that you can sell even more! Lots more! Good Lord. The world is changing, and you’re right in the sweet spot.
And now here we are. Right here in your own backyard, an American company creates a brilliant phone, and that company hands it to you, and gives you an exclusive deal to carry it — and all you guys can do is complain about how much people want to use it. You, Randall Stephenson, and your lazy stupid company — you are the problem. You are what’s wrong with this country."
But ATT can't really seem to shake that old regulatory mindset. Yes, they sell bandwidth. But it's not like they're going to actually raise capital to build a lot more cellular towers and figure out how to increase wireless network capacity.
No, they're happy with the old 'busy hour' mindset. The mindset that equates busy signals with a contentedly fully-used network. Why overbuild?
It is ludicrous to see a vendor mis-price a service, then, when stimulating demand, react by trying to cut usage, when the demand is habit-forming. If ATT were really intelligent, they'd address pricing with subsequent contracts, but, in the meantime, build out or lease capacity to satisfy demand and retain all those iPhone customers.
But I think that's like asking a leopard to change its spots. This is, after all, a unit of a telephone company.
Not some cutting-edge technology services firm.
No, it's only ATT.
One of the passages I wrote reflected my overall sense of the type of managerial skills and qualities bred by the old telephony companies,
"In all of this, however, there loomed large a business and financial fact. Old-style circuit-switched telephony depended upon regulatory tariffs. These were set, as with most utilities, like power companies, based upon assets.
In effect, those portions of your telephone service which were subject to regulation were priced to provide the telephone company a target rate of return on assets. That's why the old Western Electric built gold-plated, everlasting switchgear. That's why the telephone companies capitalized unbelievably large amounts of labor to install said switchgear as asset value.
In 1983, the average line management talent of ATT was basically involved in internal allocation fights, regulatory affairs management, and some small but ineffective amount of competitive activity. The truth was that what ATT and its units did was take a regulatory-provided pot of money and divide it up, using somewhat initially arbitrary, but thereafter consistent rules, among the various operating companies, Long Lines and Western Electric. From that pot of gold, funding for Bell Laboratories was also provided.
My point in relating this history is to provide some background for the world of then-middle and -senior ATT and operating company management. Folks like, well, Ed Whitacre. And some of my former colleagues who hung in at ATT and gradually moved up the ranks amidst the ongoing confusion as the newly-deregulated firm went through amazing changes."
Now comes word from ATT that they are seeking ways to incent iPhone customers to actually use their phones less for data and various other bandwidth-hogging applications.
This spoof, one of the "fake Steve Jobs" series, sent to me by a colleague, couldn't be more topical, nor accurate.
Of all the passages in the piece, perhaps these two best distills the point of "Jobs' " rant,
"So let’s talk traffic. We’ve got people who love this goddamn phone so much that they’re living on it. Yes, that’s crushing your network. Yes, 3% of your users are taking up 40% of your bandwidth. You see this as a bad thing. It’s not. It’s a good thing. It’s a blessing. It’s an indication that people love what we’re doing, which means you now have a reason to go out and double or triple or quadruple your damn network capacity. Jesus! I can’t believe I’m explaining this to you. You’re in the business of selling bandwidth. That pipe is what you sell. Right now what the market is telling you is that you can sell even more! Lots more! Good Lord. The world is changing, and you’re right in the sweet spot.
And now here we are. Right here in your own backyard, an American company creates a brilliant phone, and that company hands it to you, and gives you an exclusive deal to carry it — and all you guys can do is complain about how much people want to use it. You, Randall Stephenson, and your lazy stupid company — you are the problem. You are what’s wrong with this country."
But ATT can't really seem to shake that old regulatory mindset. Yes, they sell bandwidth. But it's not like they're going to actually raise capital to build a lot more cellular towers and figure out how to increase wireless network capacity.
No, they're happy with the old 'busy hour' mindset. The mindset that equates busy signals with a contentedly fully-used network. Why overbuild?
It is ludicrous to see a vendor mis-price a service, then, when stimulating demand, react by trying to cut usage, when the demand is habit-forming. If ATT were really intelligent, they'd address pricing with subsequent contracts, but, in the meantime, build out or lease capacity to satisfy demand and retain all those iPhone customers.
But I think that's like asking a leopard to change its spots. This is, after all, a unit of a telephone company.
Not some cutting-edge technology services firm.
No, it's only ATT.
Tuesday, October 20, 2009
Amazon's Kindle's Coming Competition
Yesterday I wrote a post concerning the coming, unanticipated and unintended consequences of high volumes of high-bandwidth multi-media wireless communications applications.
Along the same lines, the colleague with whom I discussed that topic has led me through the logic behind another coming unanticipated consequence of a recent technological development.
Amazon's Kindle ereader is on its second or third version by now. And other entities are hot on their heels with competing products. It's clearly another opportunity for an iPod and iTunes sort of system competition.
My colleague then observed that, now, about the least-used and simplest of iPhone applications is voice communication. The screen, fonts, and apps on the iPhone are all superior to other multi-media phones and communications appliances. In fact, it appears that Steve Jobs' relentless focus on special fonts for his products is bearing fruit on the current generation of small, hard-to-read screens.
But my colleague noted that, soon, all Apple has to do is put the iPhone on steroids and produce it as a tablet-sized reader.
When that arrives, Amazon's Kindle is toast. It will be a one-app device in a new, multi-app world.
How attractive will a Kindle be in a world in which an iPhone and its competitors, with rich communications applications, including voice, text, video store and messaging, cameras, all contain ereader apps, too?
My colleague showed me how reasonably clear the type and presentation of a current iPhone are. Apparently, the Kindle still has clarity issues. It's weak on actual readability, but alone, for now, in providing electronic access to material.
That is probably going to change in a few years.
Jeff Bezos might well be enjoying the halcyon years of his firm's ereader right now. Because once Apple arrives with a competitive product, I don't think Amazon's core skills will allow it to keep pace with the dominant US consumer technology firm.
Along the same lines, the colleague with whom I discussed that topic has led me through the logic behind another coming unanticipated consequence of a recent technological development.
Amazon's Kindle ereader is on its second or third version by now. And other entities are hot on their heels with competing products. It's clearly another opportunity for an iPod and iTunes sort of system competition.
My colleague then observed that, now, about the least-used and simplest of iPhone applications is voice communication. The screen, fonts, and apps on the iPhone are all superior to other multi-media phones and communications appliances. In fact, it appears that Steve Jobs' relentless focus on special fonts for his products is bearing fruit on the current generation of small, hard-to-read screens.
But my colleague noted that, soon, all Apple has to do is put the iPhone on steroids and produce it as a tablet-sized reader.
When that arrives, Amazon's Kindle is toast. It will be a one-app device in a new, multi-app world.
How attractive will a Kindle be in a world in which an iPhone and its competitors, with rich communications applications, including voice, text, video store and messaging, cameras, all contain ereader apps, too?
My colleague showed me how reasonably clear the type and presentation of a current iPhone are. Apparently, the Kindle still has clarity issues. It's weak on actual readability, but alone, for now, in providing electronic access to material.
That is probably going to change in a few years.
Jeff Bezos might well be enjoying the halcyon years of his firm's ereader right now. Because once Apple arrives with a competitive product, I don't think Amazon's core skills will allow it to keep pace with the dominant US consumer technology firm.
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