Saturday, August 30, 2008

Purple Fringe Boots Now Available

I have discovered that my daughter is a girly-girl. Neither L nor myself have any idea how this happened. M must wear a dress every day and is not consoled by the fact no-one else in the household does. M is also a neatnick -- and how that happened, I am also at a loss to explain.

However, it seems that shopping for her without spending undue amounts of time in some distant hall of fashion is possible. I've noticed that you can, at the right sites, view purple boots with fringe -- and can see very good detail by scrubbing the cursor around the boot image. Unlike some outfits, this one seems to offer something like a plausible shopping experience. You can see how the light hits the leather, how the stitching looks -- you can actually see the product.

If only I could shop for jeans like this.

Kinky Sex Better Than You Thought

Unlike vanilla slavers whose genuine coercion ruins lives and attracts the well-warranted attention of law enforcement, consensual BSDM practitioners appear better adjusted than 'normals'.

So, is it time you hit the sex shop?

Friday, August 29, 2008

Mac Prices and Margins

Whatever one says about the competitiveness of Apple products on price and features in head-to-head lineups, the fact remains that Apple sells costlier machines. This doesn't mean they're overpriced, of course; they just don't sell low-end desktops. If you want to buy a computer for under $500, Apple offers the iPhone.

So, what's Apple to do if it wants to gain share in a market in which its products average twice the price of competitors' sales?

On the one hand, Apple can take Wil Shipley's position and say the low-end customers are lousy customers whom Apple doesn't want anyway. After all, will these low-end customers really buy applications and their updates, or subscribe to services, or buy extended warranties? Where's the money in a $500 notebook? Bleh. Maybe Apple doesn't need unit share, but profit share. Loss leaders isn't the way to lead there.

On the other hand, let's imagine Apple wants to do something about the fact that its low-end desktops -- because iMacs are powered by costlier notebook processors -- are costlier than competitors' low-end desktops, even given Apple's ownership of the operating system. Apple can't compete on price if, for engineering reasons, it can't use the same class of component parts and must spend more.

Maybe the way to get performance balanced against heat and space and so on is to better allocate processing demand to processing hardware. OpenCL stands to enable Cocoa apps to inherit creative ways to saturate GPUs that otherwise might languish with additional cycles to burn. Balancing more work on the GPU leaves the CPU available for things like scheduling user processes and managing I/O, which can help keep users feel their systems are responsive even when they're busy as all get-out.

Is there a strategy in here to decrease per-unit cost, or boost performance of desktops? I suspect there's a strategy here to sell top-end GPUs and chipsets designed to allow bigger video throughput, which would work well for nVidia and would work against Apple's margins, unless nVidia is so hungry to push this stuff into mainstream that it's willing in essence to buy placement in Apple's boxes. The mind reels.

We've seen the upside to becoming a consumer of commodity OEM parts: Apple doesn't have to re-invent the wheel, Apple can't get left behind based on its specialized chip vendor falling behind on a technical advance that's mastered by Intel, and any technology anyone else can get is subject to being readily incorporated the minute it seems a good idea. The downside to competing with commodity-component-based boxmakers is that the industry is full of highly competitive boxmakers who, in their zeal to make sales, will bid profits to the floor. It's in this atmosphere that Apple has been able to distinguish itself with software and to maintain pricing power.

How much price disparity will Apple be able to maintain and grow share? There's the rub. Sacrifice either margins or growth, and you have to worry about profits and their impact on share price multiples.

If Apple manages to make hardware capable of running its platform small and cheap (which is certain, given iPhones), Apple will face a hard question: does it want to risk cannibalizing higher-priced sales by offering bargain boxes? Historically, Apple's addressed this by crippling the bargain box. The Mini is terribly weak, though it allows one to select the monitor. The iMac can't handle much expansion in drives or RAM. If you want choice and expandability, you need the costly PowerMac. Offering capable low-end boxes could dramatically increase Apple's appeal ... but could also dramatically reduce Apple's margins.

If Apple discovers that buyers of discount boxes will buy extended warranties and software upgrades, then Apple may have the answer: it will make profit on the box once, but on the software repeatedly, and come out in the same place or better.

The bargain opportunity Apple can pitch would be quite a bit better if Apple could provide a better office productivity solution. The iWorks applications I use are cold-molasses-slow, and are candidates for substantial feature improvement. When fifty-page text-only documents cause the word processor to choke so badly you have to wait for each individual character to appear on the screen, something is amiss. Sun Microsystems offers what purports to be an Office replacement, and StarOffice 9 will purportedly fully support Macs ... Intel Macs.

The cheaper the box on which Apple can get its platform to acceptably run, the greater share Apple can chase. Because Apple owns the operating system it pre-installs, the incremental cost to produce another copy is vanishingly small. Apple's margins should continue to be better than competitors' margins at the same price points, given similar components, and simply moving down the price range may enable Apple to choke off profit from competitors who have been competitive chiefly at the low end. Apple won't be repeating the same trick it pulled in music players, but the strategy might be similar: compete all the way up and down the price spectrum, taking acceptable margin everywhere, and end up gaining unit share.

So long as Apple can convert hardware units into software and services units, Apple should do well at that game. However, Apple's never played it before, and there's no telling what Apple will find.

It would be nice to avoid becoming a mere commodity vendor, but if forced into the game Apple's advantage in owning the software platform should enable it to outcompete established competitors.

Thursday, August 28, 2008

DELL: Where's The Competitive Advantage?

Time was, Dell (DELL) was the king of computer sales. Dell marched past everyone. After Dell passed her firm, Carly Fiorona tried to retake the top-vendor crown by having her company Hewlett Packard buy Compaq (the reason HP's stock symbol is now HPQ). This worked -- for a bit. But the combined company was itself promptly surpassed by Dell in U.S. market share. Dell looks unstoppable, no?

Based on their relative growth rates, it seems Dell is likely to achieve the worldwide title again.

What has Dell got going for it?

Founded by Michael Dell while he was in college, the company offered what others didn't: it offered what people wanted. Instead of offering a couple of fixed configurations, Dell offered to custom-prepare the exact configuration buyers wanted. Since you can't have an inventory of custom machines, retail stores were incompatible with his sales model, so Dell shipped directly to customers, cutting out the middle man.

Online sales were a big boost for Dell: it allowed Dell to make sales to people who hadn't found a Dell catalog laying around. It put a Dell store on every connected desktop. Dell was lauded as a supply-chain wizard, and its lean, low-inventory operation was the envy of PC vendors. Tying up less capital in inventory amplified its return on equity. Fast delivery and custom assembly mated with highly-competitive prices to create a virtuous cycle of sales and fulfillment. Dell snared numerous institutional contracts to supply whole enterprises with computer hardware, locking in ongoing order streams from businesses, schools, and students.

What's not to like?

First: Dell has no moat.

Everything Dell does correctly can be copied by careful operators. Custom computer preparation (e.g., RAM amount, hard drive number and capacity, CPU speed, and screen size) is now so ubiquitous that the absence of options is now the exception. Supply-chain management may not be easy, but the careful operator can duplicate Dell's feat: Apple now tops Dell in supply chain management. Like Disney – well-known in its market but not unassailable – Dell has no readily-identifiable, durable, competitive advantage over industry peers (even if its prospects for survival appear solid). [UPDATE: Disney's acquisitions of Pixar and Marvel have worked to bring in-house some of the best of its competitors' assets, and rebuild its eroded competitive advantage. This kind of maintenance is important, and distinguishes Disney from Dell.]

But Dell has another problem.

Dell is also a commodity vendor. When selling commodities (in the absence of market manipulation), sellers bid each other down in the fight to win sales, and to choke off competitors' margins. (The alternative is to offer a differentiated product that cannot be considered a commodity because the differentiated product lacks the requisite feature of a commodity: an available supply of true substitutes. Truly differentiated products lack a ready substitute.) Unlike HP, which has substantial intellectual property in its high-margin software and consulting businesses, and can offer enterprises a differentiated deliverable, Dell is just a box vendor.

The math on commodity vendors is not good. Without a differentiating feature like customization (which, being now standard, is no longer differentiating) or single-source software (which HP can offer to enterprises and Apple can offer to consumers), one expects Dell to compete chiefly on price against rivals like Acer and Lenovo for the world's commodity PC business. Lenovo, which bought IBM's PC business when IBM realized commodities weren't its bag, is growing globally -- and so is Acer. Dell has serious competition, even as it claws back the top-PC-vendor crown from HP. Fighting on price has an unsurprising result: reduced profit margins. Anyone surprised by this hasn't thought about how the business works. In the PC business, margins can get so thin the size of the profit can depend on the fees manufacturers glean from software vendors to install teaser applications and other garbage-ware on their customers' computers before they are shipped – a practice that is so irksome that some buyers now actually pay resellers to remove the advertisement-ware, which in turn threatens the manufacturers' ability to make profit on the machines at all.

How safe are profits in a market like that?

Michael Dell, who once famously said that if he ran Apple he'd close shop and give the money back to the shareholders, has had to watch Apple's market capitalization pass and dwarf that of his own company. Being one of only two companies to increase customer satisfaction may place Dell ahead of its dreadful showing last year, but leaves the cost-cutting commodity vendor in poor position relative to Apple. Yet, it's much worse even than that: Michael Dell has had to watch Apple beat Dell in Dell's own area of strength -- supply chain management. Is there nothing Dell can do that others can't learn to do better?

Acer, which passed Apple in U.S. sales share by purchasing Gateway (which Apple had just passed), was itself passed by Apple, now #3 behind HP and Dell. Oddly reminiscent of Dell's rise and return, no? Will Apple become the next commodity vendor?

To avoid the commodity competition trap, Apple must maintain the distinctiveness of its products and work to increase the value of its platform. Apple has some advantage here, though. The fact that Apple need not pay an operating system licensing fee to an outside vendor for each hardware unit sold means that Apple's marginal costs will be better than other commodity vendors', ensuring that in a cutthroat commodity fight Apple has an edge in lowering unit costs. In short, if Apple and a competitor were to sell the same hardware at the same price, Apple's profit could still be higher on each unit – because Apple owns and need not pay for the operating system software every vendor must install. Still, falling margins isn't fun for anyone. Apple had best fight to maintain and build distinctiveness, to better resist being treated as a commodity vendor in the PC space.

For Dell, it's too late. Unable to make a distinctive or profitable product in the music space, Dell stands as a vendor of commodity PCs and their commodity peripherals (while hoping customers don't need printer supplies in an emergency, and can wait for Dell to ship them). Dell's profitability will depend on its ability to build machines more cheaply than competitors like Lenovo and Acer while offering them at the prices low enough to compete against rivals fighting for share.

My vote on Dell shares: don't own.

Folks interested in profit in the computer hardware industry might do well to look not at sales share but profit. Since the fight for share can run contrary to the development of profit, mere share should be ignored until one is satisfied with the profitability of the underlying business. (In a business that's satisfactorily profitable, of course, share can be a useful indicator of competitiveness; but without profitability, who cares about share?) HP and Apple both offer hardware to compete with Dell, but each offers distinctiveness through software and services that enhance each company's profitability. (HP's software and service offerings tend to be oriented toward enterprise customers, to whom HP also sells consulting services; Apple's software and services seem aimed at consumers and specific market niches in which Apple can offer all-Apple technology solutions. In this sense, the companies are not exactly head-to-head competitors – Apple doesn't make printers or offer enterprise consulting – despite both also being PC hardware vendors.) HP and Apple certainly sell computers, and there is overlap with the commodity business for the simple reason that the companies' computers have substitution options from firms like Dell, Acer, and Lenovo. However, in the market segments where the companies' distinctive features are valuable, HP and Apple will enjoy superior profits on the similar sales, leading to superior overall profitability.

With Dell's margins compressed while the company stands beset by numerous competitors in a commodity business, one would like to see a better angle into the computer business.

'Big Lie' Alive And Well In Post-Soviet Russia

The theory of the Big Lie is deceptively simple: if your story is so outrageous that nobody would make it up, people will buy it.

Take the story related by a Soviet émigré about his first time entering a grocery store in the West. When he spotted the aisle with the condiments, it didn't take long for him to end up his knees, weeping.

Buy, why, you ask?

In the Soviet Union, it was hard to obtain mustard. The reason had been clear for years: a worldwide mustard famine deprived the world of access, and only good Soviet planning made available the tiny amount that was to be had. If you weren't a Party official, though, you could pretty much plan to do without. It'd all been in the news for years, and the empty Soviet shelves bore the story out year after year.

Seeing one grocery store's condiment aisle packed with row after row of mustard containers, all different flavors -- he counted dozens of different brands of mustard before he broke down -- he realized that if his government was willing to lie about mustard then ... what might it not have lied about?

So, what's the news now? Putin says the United States orchestrated the violence in Georgia to manipulate November election results, though he's not saying in favor of which candidate, or even displaying any evidence of American involvement.

The story is crazy for a number of reasons, not the least of which is Occam's Razor.

Occams Razor is the principle that the explanation that requires positing the fewest causes is the superior explanation. To accept Putin's proposed scheme, we need to accept (1) a U.S. desire to make war within a country that seemed poised to acquire NATO membership, (2) Georgian complicity with a U.S. military scheme -- a scheme so quiet that nobody's leaked it or evidence of it in either involved government or on the field of battle -- and (3) Russian zeal to protect its helpless allies in an autonomous zone recognized by Russia as autonomous only after it invaded. To accept the alternative that suggests itself, we need only accept Putin believes what he himself proclaimed: that the break-up of the Soviet Union was the greatest tragedy of the twentieth century. Believing this, it's clear Putin would rather Russia invade Georgia before, rather than after, admission to NATO. Once you believe this, Putin's story falls nicely into the historical context of the Big Lie tradition long-exercised by the Soviet Union as a propaganda tool.

Will it fail this time? Russia offers the crazy story both for his own domestic consumption (where it could succeed nicely), for consumption by those inclined to latch onto anti-U.S. stories of all colors wherever they are generated and however implausible simply because they are eager to repeat anti-U.S. claims, and for consumption by United States voters who will receive good FUD tending to make voters nervous about the peaceful intentions of anyone even slightly tending to be labeled a hawk. The fact that most people don't buy it doesn't mean it won't have meaningful impact at the margins.

The Big Lie is definitely a solid basis for FUD for the masses.

The interesting thing about propagandizing the West is that for-profit media doesn't have a special bias toward viewpoints that are accurate. The bias in Western media is toward viewpoints that alarm people, and will keep eyeballs glued to the set long enough to show another commercial. Lying to the West is cheap, particularly if you are a high-profile personality followed by reporters precisely to get headline stories to sell.

Wednesday, August 27, 2008

Cashing In At Apple

A few years ago, before Apple shares kissed and were rejected by 200, the company's growing cash pile attracted some interesting news. Apple incorporated a Nevada entity called Braeburn Capital Inc., ostensibly to make money with Apple's recently-doubled stockpile of cash.

Now, Apple's nearly-$9Billion has grown to about $9.4Billion and stands next to a $11.4Billion portfolio of short-term investments (current assets have grown from $10.3Billion to $28Billion since the end of Apple's fiscal 2005). So, the cash management plan worked, right?

Well, maybe not.

Apple has created a ton of cash selling hardware, even as it accounts for some of the revenues over a 24-month period. Apple's cash management remains boring. There is no evidence Apple is doing anything creative -- or lucrative -- with its substantial liquid wealth. Was Apple really expected to do better? A careful read of the BusinessWeek article on Braeburn's position in the Apple business shows that the "job" of the senior and junior financial officer is to find managers to park cash in fixed-income vehicles with 1-5 year maturities. Um, why does it take two FTEs to find a fund manager with so narrow an investment objective? If Apple has decided the right way to employ its cash is to use fixed instruments with expirations between one and five years, exactly how much more work does one need to do just to hire outsiders to implement the plan?

On the one hand, the job posting could have been bogus, and reflect nothing at all of Apple's plans for Braeburn -- instead being a vehicle to attract applications by people without a lot of excitement for fanciful investing schemes. The fact that Apple's officers are Braeburn's listed directors leaves outsiders without much idea who's been hired to "run" Braeburn (if taking dictation from Cupertino can be called "running" a company), and thus little notion what Braeburn is doing, but the end-of-quarter reports don't show anything interesting happening at Apple's investment subsidiary. Just, you know, more T-bills.

It may be true that being famous for having cash can land Apple the first bite at interesting tech sales, and puts it in the front of the line when it enters acquisitions, but nothing Apple has shown interest in acquiring has involved the kind of cash Apple is stockpiling. The freedom to buy back shares during Apple's dips -- and at a company whose shares trade with the volatility of Apple, these aren't trivial -- might really add to the per-share metrics over time. The disinclination to make the kinds of investments that would provide Apple the sort of returns for which Apple's shareholders buy the stock seems to run contrary to shareholders' interest.

On the other hand, Apple's officers have weathered some lean times in earlier years, and one can understand management wanting to be able to survive a couple of hungry winters. Let's face it, though: twenty billion smackers is more than you need to survive a couple of years of dim sales, unless you insist on heating Apple's new campus by setting fire to the cash and short-term securities. Shareholders who want large cash positions presumably have them, and ultraconservatism isn't the strategy they would want their investments applying to their whole liquid worth.

Apple's ginormous cash pile is starting to make Apple look like a Depression-survivor miser, scared of banks, hoarding cash in a secret hole under the floorboards. The difference is that Apple's T-bills and federally-insured bank deposits, though providing a nonzero taxable return, are providing what is probably a zero-or-worse inflation-adjusted return. Anyone with insight into Apple's management of funds produced by ordinary operations is invited to tell me why I shouldn't be irked with Apple for not doing something more interesting with its money.

Berkshire Hathaway, which has regular need to pay out insurance claims all year long as its employees finish investigating claims made when cars collide or hurricanes slam its insureds' property, also has to manage cash. Berkshire Hathaway knows it could have horrendous claims in a given year, and can't be locked into 30-year investments with its whole portfolio. On the other hand, Berkshire knows that in order to make the best return it can, it needs to consider how to make prudent investments with the funds it won't need soon.

Apple needs to identify the money it won't need soon and either develop a plan to invest the money pending future need (ARM Holdings was a great example, but one Apple didn't repeat), or (a tax-inefficient solution) admit it's got no competence in funds management and consider giving to Apple's owners the money Apple can't productively employ. Personally, I think the opportunity to find competent managers is excellent with a portfolio of that size -- and the opportunities to find mispriced investments isn't likely to get better than in an economic downswing like the one we've got now. There are answers out there -- managers or individual investments -- with excellent track records for growing net assets per share over long periods, or producing income, or accomplishing whatever other objective Apple might properly set for funds it won't need in the next few years.

Given Apple's current assets, I hazard to guess most of its liquid worth won't need to be liquid in the next five years. On the contrary, I expect Apple's liquid asset position to become more and more as it is, as Apple sells more and more hardware, software, and services around the globe.

While that's great to see, it's frankly dismal to see Apple show such poor performance year after year managing for profit its enormous and growing liquid assets. Folks who value Apple by subtracting the cash per share from the share price and then working out whether the remaining "price" is justified are utterly ignoring that a cash dollar in Apple's possession performs worse than, and is not as valuable as, a cash dollar in the hands of an investor able to prudently apportion investments more broadly than into T-bills. Apple's cash is, ironically, a drain on its value. Apple needs to something more productive with its liquid net worth.

Trading Out

When asked about timing investment exits, Warren Buffett has said that at Berkshire the preferred investment horizon is "forever." Yet, even long-term investors occasionally sell.

Warren Buffett last year sold Berkshire's stake in PetroChina (ADR's Ticker:PTR), which hasn't done so well as crowed by others in the time since. Sure, Buffett could have timed his top better -- but Buffett's methods don't involve identifying fad peaks or the like, but analyzing value. Berkshire Hathaway (BRK.B -- I'd quote the A shares, but honestly, how many among us will be buying those at current prices?) doesn't promise to outrun bull markets, but to offer safety in times of risk. And why not? It's an insurance company. The fact that it's consistently delivered handsome returns while offering investors a rock-solid and diverse financial foundation says something about the quality of the management that's been at its helm for decades. (Unless you think that every year for these past several decades have been a fluke ...?)

Bailing out of PetroChina at nosebleed prices seems good in principle -- but knowing when a stock is crazily valued is a bit trickier. It requires homework. It requires advance-planned decisions regarding the price at which one is better off investing in other opportunities rather than retaining the investment gain.

One lesson The Motley Fool offered years ago was that paying for quality companies was worthwhile. What I was unable to discern from The Motley Fool is how you tell your slick stock is ripe for market. After accepting that paying for quality can be necessary ... how do you work out when a pick is past its prime?

A look at Warren Buffett's behavior offers an answer: don't buy slick high-fliers unless and until they become bargains. Then, you hold forever. Unless they start looking like they offer downside risk that scares you. Then shift out, into another bargain.

The key is finding a pipeline of bargains. I love ACAS at these prices, but I need to work on my pipeline.

Tuesday, August 26, 2008

A Developer's Take on the iPhone

The DotNet Addict's Blog has been an interesting place to get a non-Mac developer's view on Apple's software environment and developer's tools. Now, thanks to AppleInsider publishing reports of materials covered by a nondisclosure agreement (NDA), we get a bit of reaction on the iPhone.
There is one thing that I can confirm without breaking any NDA: the iPhone is hands down, without a doubt, the single most powerful mobile development platform EVER. Whether that platform will see enterprise adoption or whether it will remain plagued by people making $2 flashlights... time will only tell. That won't change the fact that the capabilities provided by the iPhone and the ease with which developers can tap into those capabilities is simply unprecedented. This is easily reflected by the fact that, from what I hear, the iPhone App Store is selling like $1,000,000 per day of applications.
Kevin Hoffman
The fact that folks try to sell $2 applications that do nothing but illuminate the screen to mimic a flashlight, or $1000 applications that show users an illustration of a glowing gem, doesn't help us understand what is possible on the high end of the development spectrum. The fact that the development environment is entirely covered by an NDA has invited critics, including of course the dotNet addict:
What's really going on here is that there is a huge, burgeoning community of iPhone developers and they are positively begging for community. They want to be able to talk to each other, help each other, learn from each other, and have some place where they can go for support and to hone their skills. They see the restrictive terms of the NDA as an inhibition to developer adoption of the SDK and possibly even an inhibition to commercial-quality applications being produced by first-time developers because there is such a lack of community support.
At some point this community is going to either self-form, and the NDA be damned, or Apple will facilitate it somehow.
My hope is that Apple facilitates it.
Kevin Hoffman
So, why might Apple NDA an environment that, if open to discussion, might become a more attractive environment to developers by virtue of community support for the development environment?

I wonder if the answer isn't to maintain, to the extent possible, any advantage Apple has in its tools or development environment. By making the materials available only via NDA, Apple theoretically creates an environment in which it is difficult to publicly criticize the environment from a position of informedness (the informed people can't describe the environment without violating the NDA). Moreover, Apple creates an environment in which duplicating the apparently-effective features of the development environment would invite litigation for copying materials subject to an NDA. (The fact one reverse-engineers features of the dev environment in violation of an NDA creates liability for breach of contract, which may be quite a bit easier to prove than violation of copyright law, which doesn't offer the exact same protections.) I suspect that Apple believes its development environment is its competitive advantage, and that it intends to prolong this advantage as long as possible by denying open access to the environment to those who might want to replicate it.

(GNUstep offers a non-Apple platform for deploying Cocoa-like applications, though some portions of the environment are at the time of this writing "experimental". I'm unaware of anyone working on GNUstep for mobile devices, which would also require building a mobile operating system atop which to run GNUstep. Presumably persons hoping to copy from Apple's development environment would be interested in looking at the programming interfaces, and the kinds of support the platform offers developers, and would not be particularly interested in deploying an Objective-C development environment or a clone of MacOS X.)

The question arises: does secrecy help Apple (e.g., does it prolong any platform advantage?), does secrecy hurt Apple (e.g., does it impair community support for writing great applications?), and if it turns out that both are true does it help more than it hinders? My guess is that most commercial software houses aren't particularly big on sharing (they regard their code as the kind of trade secret that enables commercial advantage), and that Apple assumes that "community" is more important to newbies and freeware shops than to the commercial developers Apple presumably assumes will provide real value to the iPhone platform.

My question: given Apple's NDA, how is it possible to offer instruction in the NDA-covered development environment outside a venue such as WWDC? What's the outlook for "How To" books? What about college classes I've heard reported on, focusing on iPhone development?

In short, I wonder if Apple's maintenance of an NDA beyond the product pre-release period isn't likely to engender unnecessary confusion, or -- as Mr. Hoffman suggests -- widespread systematic violation.

UPDATE: The day after posting, this story came out about developers breaking the spirit of the NDA while pretending to obey it's letter, buy paying each other $1 as development subcontractors so they can be part of the same "creative team" and thus under the NDA can share information covered by the NDA. This particular technique doesn't help how-to book publishers, or presumably computer science professors.

Monday, August 25, 2008

Americans Driving Less, Again

Years ago (starting in 1980), Steve Jackson Games[1] published Car Wars -- depicting a post-apocalyptic world in which armored cars bristling with weapons transported pseudo-survivalist citizens through a world overrun with violence. Cars that also supported them as they competed in arena competitions in their customized electric chariots. The backstory of the game's big arms vendor, Uncle Al's, is that when Uncle Al saw folks continuing to pay $5 a gallon for fuel and drive, he knew where he'd make his fortune in America: auto accessories. By the time of Car Wars, the world's basically out of fuel and everyone is driving electric, ha ha.

Yet, while 2030 remains well over the horizon and we've not really settled in for $5 a gallon fuel in the United States (though given the strength of the U.S. dollar, it's not hard to find $5 a gallon if you travel abroad) Americans are driving less. This isn't a one-month fluke, but a sustained trend.

I note here that Dr. John F. Annagers rode a bicycle to work routinely for decades before his death around the turn of this century. He walked into a bike shop in the '70s in Boston (so I heard the story) with the objective of bicycling to Texas (which he proceeded to do) where he'd received a faculty appointment at the University of Texas School of Public Health. By the time I met Dr. Annagers, his driver's license had long lapsed. The year he was President of the Faculty, he was obliged to visit each of the Houston school's campuses about the state -- including San Antonio, Dallas, and El Paso. He did all this by bicycle. When he had a teleconference to attend on a travel day, he'd pull over at a pay phone and attend it. Sometimes, when asked how it'd gone that day, he'd complain about a headwind or inclement weather, but he did it all; he did it on a schedule from which he was not deflected; and he did it on a bicycle.

Americans certainly can do more to use less fuel and get fitter. Maybe we're not all ready to duplicate the feat of epidemiologist John Annagers, but we could do more than we are.

For the first time in my life, I am happy to see the trend is in that direction ....

Curiously, government intervention doesn't seem to be getting much attention as a cause of this new fuel economy on the part of the public. Why is it, then, that people keep looking to political candidates to offer "solutions" that take us where we're already going?

[1] Yes, Steve Jackson Games of Steve Jackson Games v. U.S. Secret Service fame:
During the search on March 1, and on March 2, 1990, the Secret Service was specifically advised of facts that put its employees on notice of probable violations of the Privacy Protection Act. It is no excuse that Agents Foley and Golden were not knowledgeable of the law. On March 2, 1990, and thereafter, the conduct of the United States Secret Service was in violation of 42 U.S.C. § 2000aa et seq. It is clear the Secret Service continued the seizure of property of Steve Jackson Games, Incorporated including information and documents through late June of 1990. Immediate arrangements could and should have been made on March 2, 1990, whereby copies of all information seized could have been made. The government could and should have requested Steve Jackson as chief operating officer of the corporation to cooperate and provide the information available under the law. The Secret Service's refusal to return information and property requested by Mr. Jackson and his lawyers in Dallas and Austin constituted a violation of the statute.
Steve Jackson Games v. U.S. Secret Service, 816 F.Supp. 432 (W.D. Tex. 1993).
The things some imbeciles will do to honest businessmen in the name of the law and at public expense are simply abhorrent. Closing Steve Jackson Games by seizing the company's computer hardware indefinitely, with no apparent evidence anyone broke the law, is not the behavior we expect of agents of a government upholding the rule of law. The basic idea behind the seizure was that an employee doing research for a game about computer hacking -- later released as part of SJGames' Cyberpunk materials -- somehow implicated a security risk. Had the government picked up the phone and called Steve Jackson, he'd have happily toured them through the electronic bulletin board Illuminati Online and let them see what their employees were researching for their next game.

But, no. It's more fun to sieze the property and put people out of business, and make them spend a fortune having getting their rights enforced by a court. Who needs thoughtful police, anyway? And that tape is so sexy -- it makes you do it like a stallion after you cover innocents' places of work with it.

What do you mean, you can never go home?

The Olympics is over, but not the sports news.

There's a wide range of answers to what it means for a traveling athletic team to achieve success on the road. The United States men's gymnastics team worked their hearts out and were happy (just look at them) to get silver, while the women's team looked stricken as they realized they'd receive the same medal. Of course, some folks think it's a victory just putting on the best game you've got; others say it's top prize or bust.

Than, there's Sierra Leone. Sierra Leone offers the world a new definition of a successful athletic road trip as it celebrates the unusual occurrence that its traveling team actually returned. It's no joke, it's right here.

What might be depressing is that the team's sponsor, an "honorary consul" of Sweden, had to personally vouch to Swedish authorities for the players' safe return home before a ban on issuing visas to Sierra Leonean athletes would be waived. One imagines the players being herded through cattle-style gates as they are deported, still wearing their cleats, following the final game. However, a little civic pride is evidenced in these words by the team's top scorer:
I didn't want to disappear, I want to come back here because I like my country and I want to play for the national team.
via Issa Koroma, 13, who lost both his parents in Sierra Leone's civil war.
Maybe if enough victorious athletes return to Sierra Leone, the country can become known for something more ennobling than supplying the world with visa skips.

Congratulations on getting to the tournament, congratulations on getting the ball in the net, and congratulations on getting home!

Sunday, August 24, 2008

Bad Sports

I won't pretend bad sportsmanship is new. It's not even isolated to the players: when Korean officials aggrieved over judging at the Atlanta games promised vengefully biased reffing in Seoul, they weren't bringing justice to a sport riddled with flaws -- they were making absolutely sure the world knew they were themselves at just as bad as (if not worse than) those from whom they had taken offense. Of course, competitors themselves have cheated or been graceless winners or sore losers as long as they have competed before witnesses. Heck, if you take a page from the French 4x100m relay team playbook (or was that Gary Hall's playbook?), you can be unsportsmanlike before you even compete, then lose and pretend to graciousness. Who would expect better of athletes, when even coaches run out of control? I would like, however, to draw attention to a specatular instance of what I will take the liberty of awarding an Olympic Medal in Bad Sportsmanship.

I'm not going to pretend to know enough about the minutia of World Tae Kwon Do Federation competition rules to be able to discuss whether Cuba had a grievance against officials for disqualifying its competitor Matos. And if it were to turn out that Cuba's grievance were just but hopeless, that wouldn't be the first time, either. What's novel is the actual response Matos provided to his disqualification.

Talking trash over unfortunate calls is common enough that it's unremarkable, and many sports have official mechanisms for handling such behavior with color-coded cards. What's more unusual is shoving a ref to the ground and kicking another in the face so that he required stitches. This is join-the-Olympics-and-get-a-gold-medal quality bad sportsmanship. Losing to a decision -- even a bogus decision -- may leave one without real redress, but the honorable way out is civilized dispute.

Showing the world you can draw blood on a sucker punch against a noncombatant merely suggests the disqualification was warranted, even if for a different reason. Sucker-punches don't show much about one's combat ability, only one's sense of fair play. Evidently, not-so-angelic Ángel Matos never learned that part of the lesson. For those who've never studied it, the tenets of Tae Kwon Do are courtesy, integrity, perseverance, self-control, and indomitable spirit. (If you don't like the ITF for political reasons, you can see the tenets here, too.) Matos blew courtesy when he blew self-control, exposing along the way that his spirit was completely dominated by the kind of immediate need of gratification that convinces one he hasn't the fortitude for real perseverance.

Yes, sure: tell me he must have persevered to reach bronze in Tae Kwon Do. Maybe. However, prima donnas who can't keep themselves from hurting those about them shouldn't be surprised to have their competence questioned. Van Damme being sued by stuntmen injured while relying on his supposed expertise for their safety, for example. In this case, I'm surprised Matos isn't in a Chinese jail for assault.

Maybe he can learn some Kung Fu in prison. There could be a film career in it ....

I like to think athletic competition is an opportunity for civilized people, like ancient duellists, to select their weapons and square off without the risk of loss beyond pride. Some people seem to have so little pride in who they are and what they stand for that they do stupid, stupid things out of pride in their self-image, which in my view generally indicates the self-image is being viewed in a fun-house mirror.

Some people watch NASCAR for the crashes, and NHL for the fights. I understand. Some people think fart jokes are funny and laugh when some distracted innocent is injured on a banana peel. There's just no accounting for taste.

Get a real job, Matos.

Friday, August 22, 2008

Why We See FUD

What's FUD, and why are we drowning in it?

First, FUD: Fear, Uncertainty, and Doubt. The purpose of FUD is to cause recipients to forgo decisions that might be facilitated by confidence. One story of the origin of FUD is that a former IBM executive, running a competitor, created the term to describe how IBM prevented customers from choosing to buy services from his mew company. FUD is essentially a (dis-)information campaign to prevent confidence-building among potential adopters of hostile ideas, and to delay action.

How FUD Works: It's Marketing
Marketing involves bringing a target audience through a series of mental steps culminating in action consistent with the marketer's plans. The steps are sometimes discussed as part of a marketing communications spectrum. Assuming you are Apple and you want the audience to buy iPods, you want possibly oblivious members of the public to acquire awareness that there's a more-portable music-listening alternative to the Compact Disc, you want comprehension of the benefits of CD-free music listening and of the various iPod devices in particular (the click-wheel; the iTunes synching software; the store's ease of use if you want to buy downloads instead of encode existing CD collections; etc.), you want them to reach a conviction that some iPod is right for them, and you want specific action: adoption of an iPod by purchase.

The silhouette advertisements are all about awareness: Apple has a music product. The iPod will play music. People who know this are in a position to learn more if they care about music products. Comprehension -- the "learning more" -- is aided by some of the slogans, "5000 of songs in your pocket" (or whatever the number was in whichever ad you saw), but the nitty-gritty seems to be communicated by web pages and retail salespeople. The more you see folks actually using an iPod without adverse incident, the more likely you are to comprehend, and if having your own music collection with you is important, conviction is a short step away. Then, it's about making action convenient: Apple puts iPods in as many venues as possible.

If you can't cause the public to un-see the silhouette or other advertisements, what can you do to thwart a competitive advertising campaign? Awareness is hard to attack without actually enhancing awareness. Car ads that refer to specific competitors are an example of this. A bad Chrysler ad might actually encourage a prospective SAAB buyer, perhaps convincing the SAAB buyer that the SAAB product is so highly regarded that even competitors think it's the team to beat. BMW used to brag that it was the brand most mentioned in competitors' advertisements. How do you avoid this problem?

Enter FUD.

You can't un-teach people about the fact BMW makes a car, or that Apple makes a computer, but you can confuse their comprehension and prevent their convistion. To the extent you prevent people from moving along the road of marketing communication toward conviction, you can impede unwanted action.

Initial FUD against Apple on the launch of the iPod was interesting. First, before there was an iTunes Music Store, the stories that came out on why not to buy an iPod included (a) it's expensive[1] (this undermines conviction, as it makes action impractical if it's true; and if it's widely-believed, it makes people feel that adopting the product will cause them to be viewed as fools for overpaying) and (b) it'll be obsoleted when all the new music comes out in Microsoft-only DRM. (Yes, at the time the iPod came out as a non-DRM player, there was talk that all CDs would go DRM, and WMA was being pushed by Microsoft as the natural leader because "everyone knew" Microsoft was the "leader" in proprietary file formats.) Apple reponded to this by launching the iTunes Music Store (originally the Apple Music Store) to provide reassurance that iPod customers would always be able to buy music (no matter what happened to CDs) and increasing the price/performance story as drive sizes increased and components became cheaper. Subsequent FUD still trumpeted price differences, but began emphasizing that Apple's music format enslaved iPod owners to use only Apple's music store, or would lock iTMS buyers forever into buying iPods. The fact that tech writers knew nothing about file formats or the history of the iPod's development didn't help; lots of FUD probably originated in inartfully-worded descriptions of the various music players' access to online stores. Some of this is described at Daring Fireball. The last serious effort at iPod FUD was Microsoft's effort to pitch iPods as music theft vehicles, apparently an effort to give aid and comfort to those hoping to impose taxes on music players or impose per-player licensing fees to impair Apple's growing business. The fact that Microsoft got stuck with a per-player licensing fee may encourage scadenfreude at the possiblity of sticking Apple with a similarly-bad deal down the road.

By now the FUD on the iPod has dwindled to comments on Apple's ability to grow profits from a unit volume that is already enormous, in an environment in which component prices (and thus average sales prices) are falling. This may be a legitimate comment on the ability of Apple to grow iPod-related profits, but then again, Apple can use the iPod to bring enormous populations from unawareness to awareness of Apple products and their quality.

I offer the iPod FUD example to show that it doesn't always work. There was a similar FUD effort in IT departments that lacked Mac expertise against Apple computers, which basically went: why invest in Apple hardware, when everybody knows the company will be out of business soon? In 1997 this was plausible FUD.

Whence FUD?
We get FUD from anyone worried about consumers achieving conviction. When Microsoft feared operating system competition as it fought to gain enterprise share, its claimed software product pipeline -- announced to assure customers there was no need to leave for competitors' products, and no point to spending money on migration to a superior platform in light of any-minute-now release of improved Microsoft product -- won Microsoft a vaporware award. A Microsoft employee's self-evaluation form depicted a self-congratulatory description of a decision to nullify the first-mover advantage of competitor Borland by pre-announcing non-existent produsts with aggressive marketing, suggesting that the competitor's new product will soon become obsolete.

That's why the Microsoft-controlled DRM story was so powerful when iPod was first released: it suggested that the trend in all music was toward DRM, and that Microsoft would be the vendor which would win the format war, so (a) the profit to be made in players would be collected by Microsoft rather than player manufacturers, just as occurs with low-cost PCs, and (b) Apple's music players would be unable to play future music that would depend on these not-yet-released standards that were sure to be based on .wma, which iPods didn't play. The upshot was that iPod was thought by many to be dead before it had made any sales. The need for Apple to protect its ability to sell players by establishing a recognizeable alternative music venue was obvious. What Apple didn't expect was in a few years to be America's largest music vendor.

The epitome of vaporware as FUD is the announcement of a non-existent product to prevent customers from rewarding a competitor's innovations, when the FUD vendor has no actual plans to release the products it claims will obsolete the innovator. In other words, announcing a product with no intent to release it, but only intent to sabotage competitive products' launch. That's real vaporware.

Is There FUD Outside Tech?
Oh, yes. FUD is the entire basis of negative political advertising. People want to vote for a candidate that makes them feel ... well, if not confident, then at least not queasy. The best FUD makes people nervous about competitors' prospects.

Remember the Hillary Clinton ad about control of the nuclear button? Who will make the decisions when your children are asleep? The ad didn't work -- indeed, when the girl in the ad was revealed as preferring Obama as the Democratic candidate, it backfired -- but the design of the ad was perfect. The problem is that neither candidate really had any experience managing anything the size of the federal government, or the expertise making decisions about anything as lethal and unretractable as emergency late-night last-minute United States military action. The FUD just didn't stick.

The key here is that FUD requires your story to be plausible. You need to tell a believable story with your FUD. Of course, ideally you don't just pump out FUD, you tell the truth --
Start with the truth. Identify the worldview of the people you need to reach. Describe the truth through their worldview. That's your story. When you overreach, you always fail. Not today, but sooner or later, the truth wins out. Negative or positive, the challenge isn't just to tell the truth. It's to tell truth that resonates.
from Seth's Blog
However, I have some bad news for you. Neither our "news" industry nor any other major outlet has figured out how to make money on truth. The truth can be difficult to ascertain, costly to verify, challenging to convey, and uninteresting to the masses. By contrast, scary stories are worth a mint: bombs, murders, carjackings, rapes, drug kingpins wreaking havoc on helpless neighborhoods, corrupt officials hijacking the instruments of public policy to advance the interests of political supporters -- these stories make the headlines not because they are truer or more common, but because they help sell more advertisements than Boy Scout waters disabled neighbor's plants, doctor saves girl from hard-to-diagnose but often-lethal infection, child makes A on test after diligent study, old man learns to surf, couple has great sex, philosophy major gets paying work with his degree, dog saves owner from medical emergency, cat wakes owner from fire, bird finally learns to sing Happy Birthday, best-friends-forever have first sleep-over and loved the breakfast pancakes the next day ...

... the bad news is just more alarming, glues eyeballs better, and thus sells more ads. It's harder to tell you have truth than to see you have an exciting story. The result is stories that selected for attractiveness rather than stories selected for truth.

As long as FUD is scary or exciting, it'll be remain more attractive than potentially boring truths.

[1] The expense of the original iPod is an interesting point. Although it was costlier than other hard-drive-based players, it was the only hard-drive-based player at the time using a 1.8" hard drive, so it was the smallest; the retail price of the hard drive inside the iPod was actually so high that some people tried buying iPods to scavenge the 1.8" hard drives from the players. In short, considering the market price of the iPod's components, the player was dirt cheap. The fact that a person willing to carry a heavier player could do so for less money was, however, true.

The Silent Gondoliers

I justfinished S. Morgenstern's illustrated book The Silent Goldoliers. What's that? Who's S. Morgenstern?

You poor thing.

I recall when I first saw The Princess Bride -- yes, I saw it first, in a theater, with surround sound, on a date -- and I can assure you I didn't believe for a minute there was such a person as S. Morgenstern. The Princess Bride is a story about a grandpa reading a boy too sick for school "the good parts" of the book his father had read him when he was too sick for school. (The film's Grandpa is entertainingly portrayed by Peter Falk, whom I would like to say is famous from Himmel Über Berlin (titled Wings of Desire in English), but who is in fact famous for playing Columbo, which is what he was purportedly doing when he appeared as Peter Falk in Wim Wenders' Wings of Desire). The book Grandpa reads to the sick boy (who only with great reluctance turns off his video game when Grandpa arrives) is supposedly "The Princess Bride, by S. Morgenstern." But nearly all the action of the movie happens in the story-within-a-story, and there is no evidence of an S. Morgenstern, and nobody on the planet had ever heard of S. Morgenstern or The Princess Bride before the movie came out, which all suggest this book, like the Necronomicon, is a piece of fancy existing only to advance the plot of the movie.

And as one views the film, the proof the book is fake soon arrives: everybody knows that the book is always better than the movie, and the movie is so good that a better story is unimaginable. Therefore, the book described in the movie cannot exist. Q.E.D.

The book is always better than the movie.

And ... yet ... there is a book.

Therefore, you must order S. Morgenstern's The Princess Bride without delay and read it as soon as possible. I will, however, claim half-credit: The Princess Bride isn't written by S. Morgenstern, but by William Goldman, who presents his work as an abridgement of a longer work by S. Morgenstern -- a ponderous work which needed to have lots of stuff thrown out in order to make it suitable for young readers uninterested in the politics of Florin or the hat collections of ladies hoping to marry Prince Humperdink. Thus, S. Morgenstern is a joke created as a narrative device by Goldman, who takes the joke as far as anyone is willing. For example, persons writing the publishers of The Princess Bride for text that Goldman claims he wasn't permitted to publish receive bogus explanations that they cannot accede to fan requests for the requested passage due to legal troubles with the Morgenstern estate. As there was never a prior Morgenstern author, there is of course no estate with which to have legal wrangles, but this kind of interplay with fans -- and possible jokes on inattentive readers -- is also good entertainment.

Playing on the supposed death of S. Morgenstern (which one must conclude from the supposed wrangling with the Morgenstern estate), The Silent Gondoliers opens with a letter purporting to be from Morgenstern to his U.S. publishers explaining that though frightfully old, he still notices his hands moving as he writes and thus must be alive -- indeed, alive enough to have after careful research prepared a documentary manuscript of The Silent Gondoliers.

Using S. Morgenstern's puzzlement as an adult about the lack of Christmas-morning singing by Venetian goldoliers as the starting point, Goldman has Morgenstern (pretend to) faithfully report the results of his research into the reason the gondoliers stopped their world-famous singing. What? You've never heard of the famous singing gondoliers of Venice? It's all backed up by Morgenstern's claims to have documentary evidence at hand -- receipts and notes -- and he carefully identifies certain interviewee witnesses to support the credibility of his documentary.

I mean, you can't make this stuff up, can you?

The Silent Gondoliers is a good read, much shorter than The Princess Bride, and a sweet and uplifting tale. I don't want to spoil anything, but it's not a traditional boy-gets-girl in the style of ... well, in the style of The Princess Bride. It's good fun and suitable for folks without a week to spend on the much longer The Princess Bride.

The Princess Bride movie is so good that I can actually recommend it to people uninterested in taking the time to read the book. On the other hand, unless you have been diagnosed with a malady that leaves you with doubt you have enough time left to finish it, it's hard to believe you have something better to do than to read The Princess Bride. If you are worried about the time you have to read, consider The Silent Gondoliers as a possible warm-up for Morgenstern's longer work.

If you listen carefully, you can hear the dearly departed S. Morgenstern gently chuckling as you turn the pages.

Thursday, August 21, 2008

Polish iPhone Yawner

Finally, we may get to see an iPhone launch untroubled by demand-related service outages. In Poland, iPhone queues are manned not by crazed fans, but paid actors.

Who thought of that?

Wronged Over Rights In China

When China was selected as to host the 2008 Olympics, critics of China's rights record were shushed with the assurance that the Olympics would spur greater openness. The output should have been fairly easy to guess up front: China's immediate response in 2001 to being awarded the 2008 games was to convict a Chinese-American scholar in a closed-door trial and censor Olympic officials' comments about expected human rights progress. Lack of concern about China as a nation worthy to conduct something that should be as sacred and untainted as an international sporting competition suggests that the voting for Olympic venues was as corrupt as the voting at the games themselves.

An idealist might have imagined that the establishment of official protest zones would indicate tolerance for diverse opinion to be expressed in Beijing during the games -- a start on genuine freedom of expression. Apparently, filing for permission to protest in the free speech zones can get you sentenced to re-education through physical labor. Given that the two cane-carying elderly little ladies sentenced to labor camps in the story linked here were just trying to attract attention to the insufficient compensation they were given when their homes were taken, one can conclude that the Chinese Constitition's explicit protection of the right to property is as much a farce as its guaranty of human rights. When the rights described in the constitutional amendments were unanimously adopted by China's Congress, China's Premier Wen Jiabao vowed, "We will make serious efforts to carry them out in practice."

I wonder who the "we" was in his promise. I'm guessing it doesn't include the police or the work-camp operators. An attorney who's been arrested, beaten, and otherwise harassed for trying to bring to reality the rights China's law claims to guarantee explains the government's position against granting protest petitions in clear terms: “For Chinese petitioners, if their protest applications were approved, it would lead to a chain reaction of others seeking to voice their problems as well."

A cynic might conclude a formal system for obtaining protest permits would simply allow the government to identify malcontents for reconditioning, while providing excuse to oppress non-permitted protestors (i.e., for lack of a protest permit).

Having gotten away clean with this kind of conduct while the world's cameras were on Beijing, China will be emboldened to continue with business as usual. Locals, of course, will read nothing about this from censored papers, but will be fed victory propaganda about China's success in the Games.

Just for curiosity: are there any amateurs left in the Olympics? From any country?

Wednesday, August 20, 2008

Irrelevant 'News' Yields ACAS Buy Op Again

Merisel (MSEL) reported a loss today for its second quarter of 2008. The press release mentions American Capital a couple of times in connection with material legal, merger, and acquisition expenses. American Capital (ACAS) shares are trading down on the news.

Ahh, you say. American Capital's portfolio companies are dragging it down. And surely that's what the news suggests. But to get the real story you need to look a bit further.

Merisel is not a portfolio company of American Capital. ACAS decided not to buy MSEL, and that's the only connection between the firms. (The link is to MSEL's press release, which explains its spin on the transaction's collapse.) The two companies had inked a deal under which MSEL would be bought by an ACAS subsidiary, but ACAS determined the deal was bad (the sides naturally tell different stories about why) and invoked its termination rights under the parties' contract. ACAS' worst-case exposure in the deal (if MSEL is correct and ACAS has no grounds to terminate and merely breached the contract) is a sum so small as to represent a rounding error on ACAS net assets. Whether Merisel sinks or swims is thus of no moment to ACAS at all; a failure at MSEL means nothing except, perhaps, that due diligence at ACAS successfully protected the company from a bad deal before it was too late.

Avoiding bad deals is a major lesson in growing wealth. According to Warren Buffett, it's the first and second rule of investing. It's easy to see why. That's one major reason I like ACAS: consistent management with its eye on the long-term ball, willing to walk away from bad deals even if it means blowing some analyst-fixating number this quarter.

Yet, mindless bloviators happily report that American Capital shot itself in the foot by not buying Merisel last year at a premium to its trading price. I note that the author of that piece is a manager at an "event driven fund" which, I imagine, is code for investing wishfully on anticipated news rather than on existing research into the fundamental competitive and profit-making characteristics of proposed investments. Well, of course this guy is excited about ACAS proposing to buy MSEL shares at well above market, when the dead deal pushed MSEL shares underwater: deals like this are the kinds of news events he hopes will drive his holdings to profitable levels.

For folks who actually intend holding investments, though, the fact is that MSEL wasn't making money last year; its large loss carryforward confused even the linked article's author's own analysis of the company's worth; and the company is losing money now. Avoiding a non-producing dog like this (or alternatively, postponing purchase until the price rationalizes and MSEL shows it can make some money) is a feather in ACAS' cap. Why should ACAS tie up good money in a dud when there are better pitches for hitting?

Don't swing at bad pitches. It's not only risky, but unnecessary to ACAS' business. It's part of what originally started me blogging on ACAS. This lesson is utterly missed by the autor at The Deal Sleuth:
It is difficult to see what ACAS is thinking. As a business development company, it relies heavily on deal flow from small companies like Merisel. A scorched earth strategy with Merisel would damage its reputation and make building trust with other small firms difficult. Who wants to deal with a ruthless financier ...?
-- Thomas Kirchner
Kirchner apparently believes ACAS has a hard time luring companies into deals. As discussed in my first ACAS post, the reverse is the problem: sorting through the deluge of garbage deals looking for not mere recyclables, but genuine pearls. Since ACAS is the premier firm for middle-market buyout -- it owns or manages the capital that makes the deals possible -- ACAS is the go-to shop for people who think their deal is salable. People who know their deal isn't salable ... well, should I as an ACAS shareholder miss 'deals' like that? Not just no, but hell no.

ACAS continues to be hated and misunderstood. ACAS' recent earnings report (links and notes) shows the company has adequate liquidity for the foreseeable future, and solid deal volume going forward. European Capital continues to provide good income, and American Capital Agency demonstrates management can still raise funds without diluting shareholders, and has the ability to capitalize on temporary credit dislocations to provide good income. ACAS' funds management income has increased with the AGNC offering, and can be expected to grow with net assets under management -- enabling ACAS to better fund its due diligence with others' cash.

So long as ACAS' share price remains well under its net asset value per share, reinvestment seems to offer screaming returns. The company-run Dividend Reinvestment Plan enables slightly-below-market-price reinvestment when the shares trade above NAV, though, so increasing NAV doesn't pose much risk to the use of the DRIP. I consider the DRIP a fire-and-forget tool on a company with this kind of performance.

I expect continued lunacy in the pricing of these shares until it's clear (not from analysis but from ongoing performance) that the macro environment poses no threat to the company's operations or liquidity. We could see below-NAV trading for a half-dozen quarters or more, unless someone actually read by the wider public exposes the lack of sense behind the shares' pricing. Ironically, the senseless bouncing between 20 and 22.5 may generate trade opportunities for folks lacking the patience to make money the traditional way (letting strangers write them dividend checks).

Please let me know if you see something in this stock that I miss. I've really tried to look at the company's risks, and I'm keen to hear any thoughts you may have.

Tuesday, August 19, 2008

Down With Judged Olympic Competition

The whole idea of the Olympics -- to athletes, not to politicians -- is to get the best together in one place and have a show-down, so everyone would know the true champion. The events that most grip us are those in which the competition is fiercely contested, but the result is not in doubt: the controversy has been resolved, and we know. We know.

Competition is fierce. In some cases the unaided eyes of bystanders might disagree which sprinter crossed the line first, but for that we have cameras at all angles and slow-motion. And thank goodness! In some events, movements are so lightning-fast that winners can be discerned only by special outfits designed to tell a scoring sensor which fencer was first struck, or whether a hit was scorable or outside the fair zone. But these corner-cases, requiring technological assistance to see the victory, don't dilute what the event is about: proving to any careful observer who's best. In some events, that means fastest. In others, furthest. Or most accurate.

The the rowers, the high-jumpers, the runners, the swimmers -- sometimes they win by such a margin it takes one's breath away to see it at this level of competition, and sometimes it's such a nail-biter one can't breathe, but all of them know who the winner is, if only from the clocks and cameras and garment sensors. At the Olympics, however, there is a funny creature. There is a kind of "sport" where laymen watching -- with or without cameras -- often can't tell at all which of two amazing performances is best. And there the problem lies.

Do events requiring expert opinion to ascertain the victors have a place in sport competition? How can the events be called games if hard-and-fast rules can't be applied by any replay observer? I can recall when I first realized the women's gymnastics floor exercise score included points awarded for artistry. Artistry? Sure, it can be pretty -- so is diving -- but is this what the Olympics is about? Should a gold medal performance turn on the work of an absent choreographer? In fairness, ought the choreographer get a medal? Suppose the judged athlete was truly perfect in the execution of every technique, but lost because a better-funded competitor had a well-liked (among judges, anyway) choreographer to supply a prettier (to judges) arrangement of the exact same techniques. Why on Earth should she lose because her team didn't have the same choreographer?

Are we at a dance recital or an sporting competition?

Would that this were the end of the troubles. Judged events means that concerns like politics, pecuniary incentives, and prejudices will factor into results. One might imagine that boxing should have a clear winner, but enough matches are decided by decision of judges that even matches that aren't close are subject to controversy. When judges from Uruguay, Morocco, and Uganda outvoted Soviet and Hungarian colleagues to award Korean Park Si Hun the boxing gold, everyone knew who had really won: observers of the numerous right hooks Roy Jones landed on Park's face knew it, uninvolved ringside judges knew it, Park apologized to Roy Jones and said Jones had won but the officials had given him the medal anyway -- and raised Jones' hand on the award podium to show it. The whole world knew. See it yourself. There was a protest filed, but Jones' coach pointed out that "as you know, we don't do too well on protests."

This isn't a fluke. This is business-as-usual in judged competition. Whether the currency is event votes or political advantage or ... well ... currency, there will be sales of votes and outcomes at odds with clearly-observable facts. Take outcomes like this: "Our [skater] fell, the Canadians were ten times better, and in spite of that, the French with their vote gave us first place." Figure-skating might be particularly susceptible to this kind of results-gaming -- after all, there's no way to objectively score it so cheating judges should feel especially safe -- but it's by far not alone. Given the money to be made in marketing, co-branding, sponsorship, and so on, it's clear that parties can have powerful incentives to rig results. And given the national pride of judges whose personal fortunes at home turn in part on the success of their countrymen in the games (events with little draw at home will naturally have less need of officials), it's obvious that non-blinded judging is doomed to yield scams rather than consistently objective athletic results.

Events like the decathalon might have complex scoring formulae, but anyone with a calculator and a sheet of the rules can work out the score of an athlete, given the facts -- discernible from cameras and stopwathes -- about the times and distances involved in the athletic feats.

Not so, gymnastics. Even when you know the start values and the schedule of deductions, it's obvious that the judging in Beijing isn't the same as that occurring on scorecards at home. I understand that stepping out of bounds is a one-tenth deduction unless both feet are involved, in which case it's more. Seeing a competitor step out of bounds with one foot three times, I expected a deduction of 0.3, at minimum. Ahh, no. Apparently 0.1 x 3 is 0.1 in China sometimes. How do they figure this stuff out? And that's the problem: folks with squeaker margins of victory based on scoring systems no observer can replicate doesn't really give you the feeling you are seeing the truth revealed about the most superior athletes in the world. It gives, instead, the feeling you are watching a kind of Battle of the Bands, where the judging isn't by audience response on an applause-o-meter, but by professionals doing business with the bands' managers.

Given the money to be made on Wheaties boxes, I'd think such business must be worth quite a bit. Eliminating competition from the rounds in which one's allies will compete certainly can't hurt. Flat-out lying on the part of judges cheats athletes who do good work, and it undermines the seriousness with which observers take the games. Consider the North Korean woman whose vault errors caused her to land out of bounds, and to land not on her feet -- perhaps with a little bounce or a step -- but on her knees. Exactly how was she entitled to pass a skilled veteran competing for Germany was never even explained by anyone casting a vote. Bela Karolyi may not be unbiased, but he offers an analysis that smacks of brutal honesty. After talking frankly about the 12-to-14-year-old female gymnasts China fielded (with Chinese-supplied paperwork as proof of having reached 16, at which as a former Soviet-bloc resident he waved his hands in disdain), he summed up the women's vaulting final as a ripoff.

Apparently the Australians have suggested barring judges from scoring events in which their own countrymen compete. I think this line of reasoning, if carried far enough to plausibly work, would lead to analysis of international political blocs, and would soon result in officials from countries that (a) have no political relations at all, and (b) have no expertise in the events being judged. The judges aren't from Mars after all, or Venus: they're from the internal sporting apparatuses of the various participant countries, and affected by anything that effects the nation's interest in their speciality sport.

My own initial impulse is to draw a line between artistic athletics and sport, and suggest some new non-sport venue for people who want to demonstrate skill in ice dancing or trampoline or juggling or gynmastics. Even if we went so far, we'd still not solve judging misconduct in boxing (unless we forced matches to go until knockout or surrender, as occurs in certain martial arts competitions), which is as much a competitive sport as fencing. And the solution in fencing offers another ray of hope. Perhaps the kind of technology that makes objective and quantifiable the conduct of combatants with blades can be brought to other disciplines. Boxing gloves with hit sensors might be useful, particularly if combined with sensor technology to ascertain whether strikes were landing on opponents' blocks or might be plausible hits.

Imagine gymnastic floor exercise conducted by competitors in sensor suits that transmit the position in space and the movement of every joint to a computer, which presents for scoring purposes an artificial-reality generic form to judges who cannot see the competitors and have no idea what uniforms they use. Perhaps this kind of system would allow the best-qualified judges to correct computerized systems' judgment of in-bounds, stuck landings, and the number of degrees in a particular turn. Maybe there's a way to have fair competition.

But ... I wonder. Judges who've seen a floor exercise routine will know it whether they see it on computer or with their own eyes. And is the Olympic Games really the proper place to hold what amounts to a Battle of the Bands for gymnastic performers, skate-clad dancers, and the like? Making cracks about race-walking or curling is all well and good, but at least you can tell when you look at the film who won. I've spent enough time in my life watching opera, modern dance, ballet, martial arts presentations, and other artistic performances to defend myself against the charge I don't adequately love difficult-to-perform artistic performance. I'm crazy about the arts. I'm just not crazy about pretending there's an objective superiority between artists when there's not yet a stadard by which that is true.

We'll continue to need refs to call out-of-bounds when the balls fly out of the court. We'll continue to need refs to call personal fouls. We should not need judges in sport, just referees to keep the sportsmen sportsmanlike. My modest proposal is to move judged events to an artistic competition, and keep the Olympic games for sports with victors. When someone presents an outfit that allows objective scoring of acrobatics, or a scoring system that makes objective the mystifying and inconsistent lack of application of rules to diving and gymnastics, then we can have a look at the scoring systems and call these things sports.

Until that day, known-flawed judging systems stand unworthy of the respect we should want to accord Olympic games, and we should reject them. Bring these folks to town and I'll buy a ticket, but until there's a scheme that can be replicated don't tell me it's a sport and not an art.

And for God's sake, put sensors in the boxing gloves and fire the judges.

Service Quality at Apple; Extensions Total 120 Days

Apple's failure to deliver a worthwhile experience to MobileMe customers has caused Apple to attempt mollifying its paying customers through a series of no-fee subscription extensions. The cumulative thirty-day, thirty-day, and sixty-day extensions now total one hundred twenty days beyond the original scheduled end of customers' original subscription periods.

My original question was whether the extensions would actually showcase Apple delivering a high-quality service, and thus succeed in building goodwill, or whether the service would simply offer more of the same -- an extended demonstration that Apple neither knows nor cares how to deliver quality online services to paying customers. Apple's failure to deliver service has been quantified, and it's shameful. The only silver lining is Chuqui's explanation that the botched service isn't a reflection that Apple has some problem with enterprise sservices, but an indication that the particular team responsible for the service had its head up it's arse -- and has been replaced by the experienced first-string folks that made iTunes work. Apparently, the botched service was the output of ex-Microsoft employees recently escorted off Apple's campus with an invitation never to return. Given the difference between knowing what you want and actually building it, this is actually plausible. Outsiders with the wrong culture in a place lacking quality-assurance systems really do have the power to blow their leg off as they practice quick-draw on commercial services delivery.

Assuming that Eddy Cue is on the job and has been tasked with performance and uptime to make Apple's paid services the jewel of the Internet, Apple should be on the way to developing a fix. That's not to say the fix is in, yet; the whole architecture likely must be re-imagined along the lines of something that makes sense and can be scaled and can have features added to it down the road -- something dotMac just never delivered.

The bets should now center on how long it takes Eddy to right the MobileMe ship.

I initially expected the services Apple announced for the MobileMe package to be a prelude to offering broader-ranged enterprise solutions. The idea was that, having developed the expertise to offer reliable high-volume service through the iTunes Store, Apple would be in a position to offer third parties the benefit of its enterprise solutions expertise. I expected a services division á la Hewlett-Packard was a reasonable projection.

I hereby withdraw the notion.

With Apple's delivery of reliable services dependent on an overworked team of maniacs, and being independent of any actual software service culture at Apple, it's a sure thing that Apple will fail to leverage its internal enterprise expertise in a way that will enable it to offer enterprise services expertise to third parties. To achieve what Hewlett Packard does in services, Apple needs not one top-notch team full of tireless maniacs, but a culture that enables stable growth and repeatable performance across teams. Based on Chuqui's analysis, I conclude Apple cannot deliver this, and that despite Apple's internal accomplishments its possibility of offering custom enterprise solutions to third parties is near-term zero.

Also, if Apple is offering what it does on the basis of SAP atop Suns or the like, Apple isn't even eating its own dog food. If Apple doesn't own the IP behind its own solutions, Apple hasn't much chance of offering them to others. Worst, if it takes a team of virtuosos to make Apple's solution sing, Apple will never be able to sell such solutions to enterprises who need to be able to run the solutions from a manual using whomever is available on-hand when the need arises. Apple can't be exptected to enter the solutions business. The idea of Apple developing consulting revenues should be considered an utter fantasy through the medium term.

That's too bad: a high-margin services revenue stream like that might be the kind of thing to keep multiples up.

Ahh, well. At least the paid customers will get their money's worth by the time Eddy's team is done.