Thursday, December 18, 2008

Apple After Autos?

Previously, Apple entered deals with auto makers for iPod integration.

Given the crummy user interface on Mercedes' "Command" system, I was excited Apple might sell high-end auto makers on a less user-hostile interface using Apple tech.

According to Apple's recent patent filings, the future is here. Apple describes multitouch skins that would put controls on steering wheels and enable context-sensitive modification of interfaces. Thus, the silly icon for the in-car built-in phone you didn't order need not roll your eyes the whole life of your auto ownership: the buttons you see would be multitouch surfaces whose descriptors would vary with what you were doing. Zooming and moving maps should be vastly better with this than with the existing map system, which is so heinous that I haven't had time to finish my excorciating comments on it.

The short story: the included maps are obsolete on the day the car is delivered, the categories in which destinations are sorted make it impossible to find the post office in the town you just drove in (or hell, your own town), and the slow and cumbersome mechanism for scrolling about and zooming on the map looks like something that might have been dreampt up decades ago for a sci-fi movie targted at a culture in love with buttons and happy to suffer. And it crashes.

So let's hope -- whether you own Apple, or just drive cars -- that Apple has some success pitching its UI tools to auto makers. At least at Mercedes, they're in desperate need of a lifeline.

Wednesday, December 17, 2008

Apple Cancellations

On the heels of Apple's recent announcement that MacWorld would be permanently canceled[*] -- improved access to customers through retail and online stores make it less relevant than when coverage of the event was a major source of new product press -- this press release confirms that Apple, for similar reasons, has also canceled Christmas.

You can visit an Apple Store year 'round, and have what is left of Christmas in July. And May.

And so on.

At the same time, it's been reported that Apple has just suffered its first computer sales decline in modern history. This claim is about what one should expect from the tech media, but it doesn't jive with the data. Apple has had wild unit sale fluctuations since it first introduced the iMac in the late 1990s, and often has had sequential declines, year-over-year declines, unit declines, dollar-value declines, and so on. What Apple has consistently done -- with notable exception in the case of the Enron-crash-era Quarter of the Cube -- is produce a profit. Apple is still producing a profit, as it appears set to dominate yet another market segment with its handheld products. Apple's profit has created such a glut of cash and cash equivalents that Apple is justifiably criticized for not doing more with the cash.

To Apple's credit, Apple hasn't lost that cash and cash equivalents in the market collapse because it was in ... drumroll please ... cash and cash equivalents.

When I wrote about Apple's "dismal performance" with its cash, I hadn't yet seen September and October of this year. As much as I think Apple's cash management has been a drag on shares, marking to market a bunch of materially impaired investments would have been rather worse. So, hat's off to Apple on its cash.

[*] In fact, Apple can't cancel MacWorld, as it's not an Apple-run event. This is part of the joke on cencelling Christmas, you see? MacWorld, like Christmas, is an event run by others. Apple is simply the highest-profile vendor in the MacWorld show (and if they're lucky and good then maybe sometimes Christmas, too). Steve Jobs didn't go to the first MacWorld, and indeed didn't attend one until his return to Apple in 1997. With Apple's improved power to obtain attention for its press releases without the platform of a third-party's computer trade show, the need to spend time and money on the show seems slight. On the other hand, based on the previous link's comments about the impact of encountering customers and developers, it's possible that Apple's folks might benefit from the trade show. On the gripping hand, the current world of instantaneous electronic communication makes it certain that awareness of users and their feedback is not the kind of thing that requires physical presence at an annual trade show.
My own take is that the increase in the impact of the Apple brand over the last decade makes it unnecessary to present in Moscone, when Apple could for less money announce a press event and host it on Apple's own campus, as Apple has done with some iPod-related announcements. Apple's gotten high profile acts like U2 to show up for these gigs, without even giving them billing. Apple may one day need a trade show to give it profile, but at present Apple can make its own press and doesn't need the expense or distraction. Plus, other developers will have a chance to do something that isn't rendered irrelevant by the keynote presentation.

Tuesday, December 16, 2008

CNN Censorship Slip

As I mentioned recently, I'm working too much just now to post much. The unpublished drafts are piling up, but they need polish; I have some pride. Also having some pride this week are Parisian nude models, who are outraged at (tax motivated) government intervention against their traditional supplementation of their minimum-wage art-school jobs by accepting tips from students and instructors. CNN covered the ensuing outdoor naked protest, with the expected American-media pixelation of nipples and a little effort to film only above the waist.

Worry about inadvertently objectifying women seems to have paid off as expected, but if you want to see a highly detailed male member whose partially exposed glans peeks from its foreskin in full focus, look at the chap laying on his back next to the sitting woman wearing the blue robe.

Cold out there in Paris this time of year, isn't it?

Tuesday, December 9, 2008

Lamb: A Read For The Season

I recently read Christopher Moore's comic Lamb and I approve.

Immediate reaction to a work claiming to present a lost Gospel -- especially a comic work -- is that its author will look for laughs at the expense of those who believe what is taught by the religion in question. Examples aren't hard to think of: Monty Python's Life of Brian comes to mind, trying to explain the conclusion that Mary, mother of Jesus, was concluded to have been a virgin because she refused to answer blunt questions about her sex life when posed by rude strangers. Some folks get worked up over that kind of thing.

Moore's Lamb avoids this by heaping the bulk of his irreverent and often obscene script onto the lap of Biff. Lest anyone stand tempted to attribute to this new character the virtues of other Biblical good guys, Moore introduces Biff by having an angel demand to know why he should be ordered to have such an a---ole write a new Gospel.

This is important to keep readers from inadvertently deciding he should be identified with the saints and apostles and becoming angry at the author's treatment. Most of the jokes, after all, depend on the reader having fairly conventional ideas about sex and bodily functions, and being easily surprised Jesus should have a lifelong buddy who is into hookers. The remainder of the humor is a series of just-so stories about the origin of Jewish consumption of Chinese food on Christmas, the invention of the pencil, the true origin of the theory of evolution, and the ultimate fate of the yeti. Biff is no saint, he's just a bystander -- and a loyal friend.

From the "action" standpoint, Moore actually gets the reader interested in the question whether Biff, while looking out for his buddy Jesus, is going to manage to botch the sacrifice and resurrection. Is he going to explain it all away with medicine, killing the miracle altogether, or is everything going to come out according to Canon? In my view this part of the story constitutes a thriller worth the trouble to experience the rest of the book to appreciate, even if you don't care for yetis or hookers. I nominate it into the running for the best part of the book.

Of some interest to people who know and like the New Testament is Moore's effort to "explain" Jesus' perspective on traditional Jewish religions matters by fabricating anecdotes to make them seem reasonable, human, and plausible.

Well, OK; not so much plausible. I mean, the last of the Yeti? But it's entertaining, especially if you like lowbrow humor. For a light and irreverent trip, and perhaps to stir more serious thoughts about what really did happen so many years ago, have a read.

Monday, December 8, 2008

MSFT "On Sale": Still Not Exciting

Microsoft (MSFT), which is bathing in cash generated from its enormous applications and operating systems business, is heading back up over $20 a share but I don't see a return to greatness, and am not buying.

Back in the day, Microsoft didn't pay a dividend. Today, MSFT pays a dividend, which is a subtle message that Microsoft thinks that even after paying taxes twice on the money it's making, you're in a better position to figure out how to invest it. The $0.52/sh per year Microsoft pays shareholders is a couple of percent at this share price, which while non-zero is nothing to write home about. MSFT's EPS of $1.89 is something to write home about, though, and with a P/E about 10, one would tend to get interested in the company.

There are two reasons not to buy a huge, well-known cash-generating machine like Microsoft.

Losing The Market To Competitors
Microsoft's share of the web browser use on the Internet -- an indicator of the importance of what Microsoft brings to the browser world, and the relevance of the company's web-authoring and web-serving products that enable developers to leverage proprietary MSFT browser features and thus force the world to keep using MSFT's broswer products -- has continued its fall from over 90% in the 1990s to dip this month below 70%. (Data source is here.) The chief culprits? Free browsers. Firefox' Netscape-derived Mozilla codebase and Apple's KHTML-derived WebKit code base offer no-fee, standards-based browsing. WebKit in particular is nefarious, as it has garnered a number of other business adopters seeking a portable-friendly, fast-rendering, full-featured browser. With but one phone model, Apple's WebKit-based phone browser already exceeds the browser use of all Microsoft phone products combined, from every hardware manufacturer that licenses Microsoft's mobile products.

The desktop is where it hurts, though: Netscape, in a sort of Ghost-of-Christmas-Future act, has taken the bulk of Microsoft's lost browser share. By showing the world that one in five on the Internet is using a standards-based browser, Netscape has killed the "everyone is using Internet Explorer, so all you need to do is to target IE" meme and thus has killed Microsoft's browser strategy. Microsoft's browser strategy, in essence, is to use proprietary variations to force users back onto the IE shipped with their copy of Microsoft Windows in order to keep being able to use the Internet.

With developers targeting standards Microsoft can't control, Microsoft is stuck trying to keep its own web sites broken-looking, as if anyone cared what Microsoft's web sites looked like. For example, Microsoft frankly admits that it sniffs browsers' user-agent strings to determine whether to send standard or non-standard content to requesting users. This so breaks users' experience on the Internet that developers of the Opera browser now support not only lying about your user-agent string when you visit web sites, but deciding which lie to tell on the basis of the domain name you are requesting. In my own experience, most sites that claim I can't use Safari on a site and serve me a "go get a different browser" page instead of my requested content turn out to work just fine if you tell Safari to lie and claim to be Internet Explorer for Windows. This is exactly the kind of scam Microsoft pulled to combat DR-DOS, a competing pre-Windows operating system that had created pricing pressure on Microsoft and threatened to offer a complete alternative at a lower price and with higher quality. Management's instructions were clear how to combat the threat of high-quality application interfaces: "Make sure it has problems running our software in the future." This monopoly-seeking behavior ultimately cost MSFT $100,000,000 in antitrust settlement of the DR-DOS claims, but it was a small price to pay: MSFT retained its monopoly and is reaping billions to this day.

Let's remember why Microsoft entered the browser market, and why it was important that the browser be available at no charge to Microsoft's existing base of consumers. Netscape was feared to be ready to offer a programming interface for its browser, which would have enabled a "deploy-anywhere" opportunity for developers and freed them from Microsoft's operating systems, development tools, and upgrade cycles. A migration path from MSFT's operating systems and applications to a platform that could me created anyplace Netscape chose to deploy its browser was a nightmare for Microsoft, which first sought to shackle Netscape contractually to MSFT's EOL'd 16-bit Windows APIs and then decided to bury the whole company by shipping a competing browser to undermine Netscape's capacity to deploy a universal platform. Microsoft deliberately made its browser different, and ensured all its authoring tools made sites look good in MSFT's browser and not in Netscape's.

Microsoft pulled a similar trick with Java. Remember Java, the computer language that was going to free everyone from dependence on operating systems by delivering a Java interpreter to any platform Sun chose to support? Microsoft sold Java development kits that created programs that would run only on Microsoft's own operating systems. Consumers figured out pretty fast that Java wasn't write-once, deploy-everywhere -- and developers didn't want to write their apps twice, so . . . .

Google has deployed a browser, Chrome, from which it need not make any money. (Google is making its pile of cash on advertising, and it gets eyeballs because it's got both the leading search tech and an enormous community of users of services you may have seen . . . like, uh, Blogger.) Google's release of Google Gears for numerous platforms, and its integration of Gears into Chrome, means that yet another hard-to-defend front has opened in the Microsoft-is-becoming-irrelevant movement.

So I suppose, since Microsoft's whole business -- applications and operating systems -- are dependent on users or their hardware vendors paying to deploy Microsoft APIs on virtually every system that is sold, I should have thought about leading with the other market in which Microsoft is losing share: the operating system. Microsoft's operating system has just turned in its lowest sales share in fifteen years. New-sold machines used to be virtually all shipped with Microsoft Windows Certificates of Authenticity, serial numbers, and so on. Recently, the share has dropped -- as Internet Explorer droped a while back -- to less than 90%.

This is significant for a few reasons. Fifteen years ago, there was serious desktop operating system competition from IBM in the form of a 32-bit, multithreaded, multitasking product that shipped with an object-oriented development environment; the product, OS/2, became a standard feature on ATMs and other mission-critical applications and was at one time widely deployed in financial enterprises. Microsoft captured nearly all this business when IBM withdrew OS/2 from the marketplace. The best you can do as an OS/2 fan now is to attend WarpStock. Fifteen years ago, Sun was a serious computer company with an apparent future in servers. Fifteen years ago, Microsoft didn't have protected memory on the desktop and its products required rebooting so routinely that shipping a better product was trivial; it's just making an API that wouldn't force everyone to re-buy their applications ... if any applications could be found. (This API arms race and relative dearth of native applications is the reason IBM could not keep OS/2 competitive.) The fact that Microsoft can now -- when it has killed all the non-Unix competition, when it delivers a 32-bit, multitasking, miltithreaded, protected-memory user environment -- lose market share . . . wow. This is Microsoft on its best possible product deployment environment: it has enough cash to buy anything it needs to produce anything it wants, and it controls both the desktop and most of the business back-office with its proprietary APIs. MSFT should be eating this for lunch.

What Happened?

CEO Has No Vision For The Future
Mr. Gates retired from active duty to while away his autumn years deciding how to give away his ill-gotten gains so he will be regarded as a major philanthropist when he dies (and to keep people from throwing pies in his face when he walks down the street), the leadership of the behemoth that is Microsoft has fallen to the company's most senior marketing manager. Steve Ballmer doesn't have a deep grasp of the technical underpinnings of the company's products, but he sure knows bad news when he hears it. Microsoft can create interesting new highly-dependable operating systems, but it hasn't any intent to deploy them. Instead, Microsoft continues to dole out successive MS-Windows versions to stretch as far as possible the period in which it can capitalize on the API monopoly it achieved in the 1990s when it poisoned DR-DOS, choked Netscape, rigged its Java tools to sabotage Sun, and re-rigged its Win32 API repeatedly to prevent IBM from being able to make a clean-room copy รก la DR-DOS with which to ship OS/2 Warp. With its current initiatives apparently unlikely to move the needle on corporate profits (XBox' lifelong result is still red, and its quarterly numbers look good only by dint of prior accounting charges to allocate funds for ongoing warranty problems; the iPod killer Zune is virtually dead, having won market share mostly from Windows Media partners rather than from Apple; you can find products like Microsoft Bob only secondhand, and they haven't even got a fan community like OS/2 has; and technologies like WinFS can't be found at all), Microsoft's corporate strategy appears to be the milking of last century's victories to generate this century's profits.

But what is Microsoft doing now?

At a developer's conference in Sydney, Ballmer faced a serious question from one of his developer constituents:
Q: Why is IE still relevant and why is it worth spending money on rendering engines when there are open source ones available that can respond to changes in Web standards faster?

A: That's cheeky, but a good question, but cheeky.

via TechWorld
Cheeky? This goes back to whether Microsoft is making effective use of capital, or should be giving the money to shareholders.

Ballmer's reported answer -- he didn't just call the man cheeky and move on, he did give an answer -- was apparently rambling. He reportedly said it was "likely" that there would be no innovation in browsers and that Microsoft would need to continue developing its own browser to be able to issue proprietary extensions to broaden its functionality. (Given what's happening in Chrome, and in client-side databases, why is it "likely" innovation will halt? No answer.) Ballmer has apparently not used products from the Mozilla project, and has no knowledge of the enormous ecosystem of browser plug-ins supported by products like Firefox. Extending open-source browsers with closed-source extensions is the whole point of the plug-in framework. Google's decision to have plug-ins run in their own address space to make sure they don't cause instability in the browser itself is an example of innovation to ensure that (a) plug-ins play nicely with one another, (b) developers can deploy plug-ins fearlessly because their operating and debugging environment will be consistent, and (c) users can choose the browser they want because the browser only requires content to meet standards, not to specifically target the browser, but users can use plug-ins to handle any wierd content proprietary vendors might foist on the internet. *cough*flash*cough*

Ballmer continued to claim that "Open source is interesting. Apple has embraced Webkit and we may look at that, but we will continue to build extensions for IE 8."

Microsoft has no current strategy to leverage open-source projects in the web area, and it doesn't describe a clear advantage to an entirely-in-house solution. Rather, Ballmer displayed the kind of out-of-touch mindset that he inavertently confessed to the world when he initially dissed the iPhone as unlikely to have a meaningful impact on the market due to its price, at a time Microsoft's Windows Mobile shipped in products that cost more.

What does the future hold for Microsoft?
The only big idea Microsoft displayed in Sydney was creating an online store opportunity to help independent vendors share their revenues with Microsoft, before they abandon the platform.

Also: Flying Cars For Everyone!

Yes, Ballmer predicted that in ten years folks "will talk to their computers, and they will respond." I hate to be the bearer of bad news, but this was a leading feature of OS/2 Warp v.4. You know, from the mid-1990s. And we know how well that went over.

Management's Deep Grasp of Application Development, English Grammar
Ballmer gave us this gem, on which I will close:
There is sure a lot of software left writing in this world.
via TechWorld

Friday, December 5, 2008

Not Trading

I've been out making money -- that is, working -- and haven't been completing posts I have in the works. I apologize. In the works is a post I started on Berkshire Hathaway when it was at $2500, touting it as a one-stop shopping opportunity for investors looking for fire-and-forget portfolio diversification, which I promised here. I see the company's B shares have been past $3500 since then, and are on the way back down. I'm sorry I haven't been able to spend more time here.

I keep getting posts about my developing thoughts on ACAS. I'm not trading, to get in or to get out.

The stock price collapse since the last quarter has been severe. I believe that the combined effect of ACAS losing its income investor constituency to the dividend suspension (necessary to maintain liquidity; gaming the rules to pay taxable income as late as possible will aid efforts to survive whatever happens in the near term, and will leave ACAS with time to work out whether a different tax structure -- and different accounting treatment -- would help the company survive the current panic) and the share price dropping low enough that some institutional investors are no longer permitted to buy it have created an environment in which the motive and reason to buy ACAS seems hard to fathom. After all, between the quarterly announcements, one hardly knows what's going in at ACAS.

One thing I believe is happening at ACAS is that its investments are paying as expected. ACAS made $0.74/sh in NOI last quarter. Articles suggesting that ACAS got killed because it "dabbled in commercial mortgage-backed securities and structured finance products such as collateralized debt obligations" miss the point that those products are performing according to plan. ACAS isn't hammered because it made a shaky CDO bet. Understanding what's happening at ACAS is trickier.

ACAS has been killed by the accounting rules that apply to BDCs. Berkshire Hathaway, for example, need not report each quarter what GEICO is worth, or Dairy Queen, or any of its businesses that are intertwined with the housing industry. Berkshire just reports its income, and leaves you to work out what the enterprise value must be. Only for certain assets -- like derivatives -- does Berkshire have to apply mark-to-market. Because of its tax status, ACAS lives in a different world. FAS-157 and the use of bond-yield-analysis (for debt holdings) and comparables pricing (for modeling equity values) to create SEC-reportable values have the perverse effect of creating "losses" where there are no investment realizations, and where a company with different tax treatment, like Berkshire, would never have to report trouble. If ACAS were a bank, its performing loans would be carried at face value rather than at the steep discounts that the current credit market gives loans being dumped for liquidity. In fact, ACAS' senior loan syndications are sold at par, and not at a discount at all. ACAS never intended liquidating its subordinate debt in its portfolio companies; those are the tools by which ACAS makes money on its portfolio companies prior to liquidation. Who cares what strangers would pay for debt that yields ACAS regular payments?

ACAS has a problem that has nothing to do with its accurateness in underwriting investments. ACAS' problem has to do with unrealized valuation changes causing a liquidity crisis unconnected to its earnings. Redirecting liquidity into debt pay-down prevents ACAS from investing in good deals as bargains erupt in the marketplace, lest ACAS blow regulatory debt/equity ratio limits. I think ACAS' managed investment AGNC shows us something about ACAS' debt underwriting acumen.

The problem is that ACAS can't just sit back and enjoy the performance of its investments while the market re-values these investments. Ordinarily, a Buffett-like investment horizon (well, until the subordinated debt matures, which isn't really "forever") is no problem for ACAS. These times aren't ordinary. In a liquidity crisis, the long-term accuracy of underwriting is less important than the extent of the fear of the current market participants.

At the moment, I am neither buying nor selling. I think it's possible that ACAS is trading at a huge discount to NAV -- the last quarter's published NAV was easily more than six times current prices -- but the hard cold fact is that with only quarterly snapshots, ACAS' health at this point in the panic (and the market is in a panic) is at best an educated guess. I can't say whether tomorrow will be so much better a buying point that today is a fool's bet, and I can't say that the current panic has driven the price so far down that ACAS' efforts to control liquidity will cause a chorus of euphoric cheers when the next quarterly report appears. Frankly, I expect the current economic macro-conditions to remain bleak well into 2009. The effect on comparables pricing should be harsh. ACAS' announced plan to plow funds into debt reduction and its stated preference to work without leverage are on the mark for how to approach this environment ...

... but ACAS has been de-levering for over a year. ACAS' NAV has been clobbered not by the implementation of FAS-157 -- the bogeyman we were offered last year -- but by the need to mark to market investments which were intended to be held to maturity and are performing to model. Earlier this year, these discounts gave me reason to be confident the company was on sale. Today, the prospect of further depression of valuations of performing investments sends cold chills down my spine: it produces a liquidity crisis while risking breach of net worth covenants that would in turn trigger more liquidity problems (as lines of credit became at risk of withdrawal).

The irony is that I don't dislike ACAS' portfolio. ACAS had, in effect, the same problem I had in my own portfolio: good ideas whose performance have been clobbered by the application of leverage heading into a panic, creating a liquidity crisis. Entering counter-cyclical and non-cyclical businesses was a good idea, and shunning them in favor of debt reduction didn't seem reasonable to me before VIX hit 60. Closing offices and reducing staff aren't what ACAS wanted to do, but it's a solid cost-control measure that will impact ACAS' liquidity in the right direction.

Will ACAS be able to take ECAS private? If so, shareholders of both companies would benefit (ECAS from the increased liquidity of ACAS shares, and ACAS from the accounting impact of buying ECAS below NAV). If not, ACAS will suffer as ECAS' illiquid shares continue to be valued awfully low by a market distrustful of private equity. In the meantime, ECAS is producing nice income for ACAS, to the tune of €0.14/sh this quarter. Buying more of that income below NAV would be good stuff.

Failing to pull off the ECAS transaction would hurt.

My prediction is that ACAS will fight to keep its current tax status, but it's dicey. I believe the fallback position will be something like a bank holding company, which will have radically different accounting rules and freedom from mark-to-market on much of its portfolio (the equity will be, but much of ACAS' portfolio consist of debt holdings that would be carried at face value if performing), or an investment holding company like Berkshire Hathaway. Neither enjoys the tax-efficiency of pass-through tax status -- something that made ACAS as a BDC very attractive in pre-tax/tax-deferred accounts -- but either would position ACAS to weather the current economic storm on the strength of actual investment performance rather than suffer the illusory gain and loss risk caused by FAS-157.

I didn't think FAS-157 would have any impact but to lower my reinvestment price, so I thought it was an entertaining but good thing for me as an investor. The current panic reveals FAS-157 to be a truly dangerous opportunity to whipsaw both asset values and debt ratios on the basis of factors that may be substantially disconnected from actual investment performance. As I previously posted, if ACAS were to lose half its income production to debt-eradication efforts, its NOI would support a price several times current levels. That's a bad case.

That's not the worst case, though. The worst case involves a liquidity crisis that drives ACAS into liquidation. However, that kind of liquidity crisis seems strongly associated with ACAS' tax status, a condition within management's power to change. Conversion into a C corp, and registration for treatment as some different type of investment, would also change the accounting rules Kosher for ACAS to apply to its business. Management is loathe to ditch BDC status, but they've explicitly addressed it and therefore are looking at the factors that would drive them to it. Conversion to a C corp would result in a Berkshire-style dividend (zero, to avoid double-taxation), improved book value, and a share price that should stabilize as it becomes evident that NOI continues to perform and that banks haven't abandoned ACAS as a house of cards.

This last year makes me think diversifying out of Apple was a silly idea. Apple's phone has, after all, just passed Microsoft in smartphone operating system share after passing Motorola's RAZR in sales share ... while Apple is taking sales share from competitors. Apple shares are going to come out of this one very nicely if I'm not mistaken.