Wednesday, September 30, 2009

Regulatory Overload

In the UK, the term "nanny state" has taken on new meaning involving an absurd degree of literalness. Working mothers swapping childcare to enable each other to work a job-share involving a single position with chaotic hours were set upon by a government bureau for the regulation of standards in education. The comments on this article are possibly as interesting as the article itself. One observer notes that in Greece, the bureaucracy is so bad that ordinary life is possible only by routine disregard of the law:
Here in Greece, bureaucracy is so excessive that nobody has anything to do with it if they can possibly help it. The only way for Greeks to live a semblance of a normal life is to be the least law-abiding nation in Europe. The British need to learn the same lesson: don't let the state know what you're doing and you can get on with your life.
Andy Holliday
Routine disregard of the law, as an accepted state of affairs for respectable people, is simply not a recipe for a successful representative government. It may be a recipe for surviving tyranny, but it is not what the Greeks had in mind when they invented their democracy millennia ago.

Laws that are out of touch with social norms and societal expectations would seem strong contenders for undermining rather than strengthening the rule of law, clouding rather than illuminating approved notions of justice, and reducing rather than safeguarding liberty.

Tuesday, September 29, 2009

Game Console Loss Leaders As Medical Subsidy?

CNN reports that British researchers have discovered a medical use for XBox hardware. Simulating cardiac behaviors historically requires sophisticated computer systems whose cost can be prohibitive for some institutions. However, thanks to the triple threat of competitive design, mass production, and deliberate pricing below cost, the high-end game console seems poised for use in medical research.

The question: can Microsoft charge enough for medical imaging software to make up its per-unit loss on non-gaming sales of its loss-leader hardware, or will Microsoft subsidize medical research in Britain and the world?

For Microsoft's sake (I have some friends who own shares) I hope this doesn't become a major market ....

Saturday, September 26, 2009

U.S. General Announces The Obvious

Gen. McChrystal announced that in the Middle East, the enemy holds the information warfare high ground. While true, it was also true last year. The interesting thing in the Washington Post announcement is the apparent "news" that "the information domain is a battlespace." Hello, Captain Obvious.

Maybe McChrystal's point is that this circumstance prevails in Afghanistan as surely as it does in other parts of the Middle Eastern theater. Maybe it's a reminder the General has decided people need. Maybe it's a plea for effective counters to the troubles lamented here (and by anyone else watching America fumble the framing of all the meaningful issues in the region).

Fascinatingly, the Washington Post article exposes that the American failure in the information war has been achieved not by ignoring the problem, but by spending hundreds of millions of dollars doing things that seem to have been grossly ineffective. Imagine that: Defense Department expenses that don't yield much for the money. Who would have guessed?

Friday, September 25, 2009

Ballmer as inverse barometer for the new Apple?

Microsoft's longtime marketing officer and now-CEO Steve Ballmer has made a number of statements about Apple's future in recent years. His latest, that Apple is a niche-only player with no prospect for significant control in the phone market, is sufficiently interesting to warrant a little historical overview of Ballmer analysis of Apple, with an eye on how his spin has been borne out (or not) by marketplace performance. In particular, I'd like to investigate a little whether there's a case to be made that Steve Ballmer, like Dustin Hoffman's character Jack Crabb is accused by General Armstrong Custer in the 1970 fictionalization of the Battle of Little Big Horn Little Big Man, is in fact a reverse barometer of the truth.

Cell Phone Hardware: A Swing And A Miss
When Apple announced it would sell a cellular telephone, Steve Ballmer was quick to dismiss Apple's effort as "the most expensive phone in the world" and pointed out that Apple had an annual phone sales of zero units. He echoed Motorola's official line that making good phones was too hard for an upstart, and pointed out that Apple had never been more than a niche player in anything but music players – a market much less mature than the market for telephones. After the phone's release, Ballmer affirmed his position that "there is no chance" that Apple's iPhone would get much market share. When admitting in 2007 that Apple's iPhone product makes Apple "a lot of money", Ballmer nevertheless dismissed the iPhone as irrelevant to the larger market because Apple was doomed to be a little niche player. By the beginning of 2009, after Apple became the world's third-leading smartphone vendor ("enough to put Apple ahead of all Windows Mobile device vendors combined"), the manufacturer of the number-one-selling cell phone, and the vendor whose phones were responsible for more mobile web requests than Windows Mobile and Blackberry combined, Ballmer conceded that Apple's product was a significant competitor. Ballmer's effort to cast Apple's success in terms of sales share of a 1.3 billion-unit cell phone market hid the fact that in the smartphone market – where software offers the most significant differentiating opportunity for a platform venor – Apple has not the 4% Ballmer suggests but over 13% of unit sales share (and 32% of the profit share) in a high-margin market whose size is about 40 million units per quarter. (Moreover, Ballmer's claims of 60%+ share in mobile devices generally seems to have been pure fantasy.) The migration of commodity phone vendors to royalty-free alternatives (such as Android, Google's royalty-free smartphone-capable platform, and Linux, versions of which now power half of all phones, including future Palm smartphones after Palm dumped Windows-mobile last week in favor of its own WebOS, which involves a Linux kernel plus – like Google and NokiaWebKit) in the face of inevitable margins pressure suggests that Microsoft's opportunity in the low-margin segment of the market is shrinking, leaving it to fight RIMM and Nokia and Apple (all non-Microsoft platform vendors) for share in the smaller smartphone market. Ballmer apparently hopes to reboot Microsoft's mobile platform with new blood, which isn't a capitulation but is certainly an admission Microsoft doesn't believe it's been on the right track. ("This will not happen again" smacks also of apology; Ballmer knows he has a turkey to turn around.)

Digital Music Formats And Retail Strategy: A Swing And A Miss
On the sale of digitial music, Ballmer came down strongly against users' freedom to play what they wanted on their digital players, calling Apple reckless for shipping a player that permitted non-DRM content to be played at all. His pitch was squarely toward content suppliers: DRM, good; everything else, theft. (more on the genius of that here) After joking about his teenager's desire to put his bought music where he pleased in 2004, he announced in 2006 that he'd banned iPods (and Google) from his home to prevent user-friendly products tainting his children (or his employees, apparently). After creating a slew of music store partnerships with third-party licensees of Microsoft DRM, Microsoft opened a solely-operated music store to compete with Apple's music store. Ultimately, Microsoft killed its MSN-Music store; by contrast, Apple has passed vendor after vendor to become the number-one selling music retailer by volume in the United States and in the world. On the way up, Apple shucked DRM to allow customers to buy tracks that play anyplace that supports the AAC (MPEG-4) audio standard. With about two thirds of the digital sales and a quarter of all U.S. music sales, Apple's music distribution system has proven itself superior to extant competition. DRM seems to have lost as the wave of the future for music, and Apple seems to be winning as the place to buy digital tunes.

Mobile Devlopment API High Ground: A Swing And A Miss
On applications, Steve Ballmer seemed to argue that Apple's application distribution model was flawed, and suggested that developing iPhone applications with Microsoft's Flash-lookalike "Silverlight" was "interesting" though admitting that he "can't say there's been extensive discussion" about making Silverlight available on iPhones in the first place. The fact is that developing applications on Apple's mobile platform excites mobile platform developers in a way Ballmer's famous screams haven't. The iPhone application distribution (and removal) system is simple and elegant, making it easy for users to discover (read find) and try (read purchase) software – and easy for vendors to get paid. Developer interest in non-iTunes application distribution is limited; one of the primary reasons to develop for the iPhone (other than its slick API) is that getting the product to market is easy. Despite Ballmer's assurances that Microsoft's mobile platform will be the one on which to make real money, Apple has been supporting significant revenue for developers for some time. Apple's revenue from the App Store might not eclipse iPhone revenue any time soon, but it's clear the system isn't a loss-generator for Apple: it's a ten-figure business with strong reasons to expect significant future growth.

Platform Independence: A Swing And A Miss
When asked about Apple's switch to Intel processors, Ballmer suggested first that this would make no difference in Apple's competitiveness and might pose difficulties for Apple moving forward. Ballmer's marketing folks have echoed Ballmer's own price/value claims attacking Apple, with a series of (misleading?) ads suggesting that price is value. It's no secret that market segmentation creates opportunities for vendors with differentiated products, and that Apple competes in the high-margin segments. As a comparison of GM and Toyota shows, price isn't everything.

After predicting that the platform switch would cost Apple share (can't find the link just now, but he commented that Apple's switch from Motorola's prior chip to the PowerPC cost Apple significant share and predicted more of the same), Ballmer named Apple in an internal memo to reassure Microsoft's employees that Microsoft had a competitive strategy for addressing what Ballmer admitted was a thriving Apple. (Other copy, with comments, here.) What did Ballmer miss? Ballmer's "what changed?" response showed that Ballmer failed to grasp the competitive advantage of platform independence, which allows Apple (like NetBSD users, but not any of Microsoft's OEMs) to nimbly pick whatever hardware will offer the best medium-term price/performance mix, without threat to Apple's installed base or application availability. The Intel switch's migration of developers to Universal code -- that is, platform-independent code -- meant that developers were able to leverage MacOS projects for use in iPhones, for example, and means that Apple's future products can enjoy hardware advantages unavailable to Microsoft's platform customers. (By contrast, low-budget Chinese Apple-knockoff netbook hardware designed with ARM chips to save power can run either Linux or Microsoft's Windows Mobile, but cannot run Windows 7 because the machine is not x86-compatible and Microsoft's operating system and applications have for years supported only x86 and its derivatives; desktop applications can't run on the device, only Win-Mobile-specific applications. Were Apple to roll out an ARM tablet, it would need only offer a "click to compile for ARM" checkbox next to the "PowerPC" and "Intel" checkboxes in the developer tools Apple ships free for its operating systems, and customers would get all the hardware benefit of ARM without the software headaches one would expect migrating a Windows application to a mobile device or a new architecture.)

Ballmer's Real Motives?
Maybe Ballmer isn't as dumb as he pretends. Ballmer's effort to sow doubt into the public mind about Apple's future in the phone business is likely related to Microsoft's latest effort to boost the company's largely immobile market share numbers for its mobile phone operating system. Having bought Danger, Microsoft is apparently using Danger's hardware maker Sharp to launch a Microsoft-branded phone that is hoped to do better than it did when branded as a Danger device. Good luck with that. If you spout enough BS, perhaps people will – as if receiving it from Soviet newsrooms – assume it must be true. Microsoft's leaders don't seem to have a clue about what it will take to provide a differentiated product in the future, and that makes me doubt its long-term viability for any purpose other than milking existing products for run-on revenues. Growth? Hm. Even when Microsoft is handed the answer from a trusted source, it can't perform at present.

Preliminary hypothesis: Microsoft's new phone will either be a loss-leader in the tradition of XBox (and a net loss), or will experience a sales share commensurate with its modest price-to-value ratio. (The presumed modesty of the price-to-value ratio assumes it's not a loss-leader, and is priced to profit. If a loss-leader, Microsoft might offer customers (though not simultaneously its shareholders) significant value with a new phone launch.)

The reverse barometer hypothesis finds significant evidence in Microsoft officials' success in predicting Apple's success in non-PC markets -- music sales, music players, music formats, cell phones, cell phone applications -- and in their recent success competing with Apple in such markets (share of WebKit (Safari, iPhone, Android, WebOS, Nokia, Gnome/Epiphany, and RIMM) and share of Internet Explorer (whatever that might really be) haven't had the same curve while both have existed, and Microsoft's share of high-end laptops' operating systems hasn't exactly stood up to Ballmer's predictions in the MacIntel era).

Microsoft must launch a phone to protect its interest in providing the back-ends to corporate mobile support and protecting its other market areas. Providing a soup-to-nuts plug-in system for end-to-end servers, clients (mobile and not), and software is Microsoft's apparent bid to maintain the status quo. What Microsoft has best going for it in the status quo may be Apple's apparent utter lack of interest in pursuing the enterprise market. In preserving Microsoft back-end support and server sales, Microsoft may be successful for years.

Pity Microsoft can't dream up a more noble and exhilirating ambition than more of the same. This apparent lack of vision makes self-serving predictions of competitors' doom seriously hard to credit. In the absence of compelling information to the contrary, the Jaded Consumer will be seriously tempted to consider Steve Ballmer's specific predictions of Microsoft's major competitors' performance as endorsements of the competitors' prospects.

Wednesday, September 23, 2009

iPhone Accounting Changed

Apple's GAAP earnings (and their transparency) will take a huge boost with the unanimously-approved new accounting rule. Instead of booking iPhone revenue evenly in the 24-month period following the sale of each phone, Apple will book the revenue at the time of sale. The fact that iPhones have high margins, combined with the fact that it is a high-growth area of business for Apple, makes this an especially important change for commonly-evaluated metrics like earnings, gross margins, and the price-to-earnings ratio (which plummets on the news, theoretically justifying higher share prices).

Although news of the impending change has moved Apple's price significantly over the last week or so, the company has of course not done anything dramatic at all over the period. The price excitement is based on "news" about how to account for the same things Apple's been doing literally for years. Articles have been written already (even here) about the impact of subscription accounting on the valuation of Apple's shares; it's not news at all. In a rational world, it would have no effect on the price at which shares traded.

Apparently, we do not live in a world in which markets are governed by rationality.

Long live the markets!

Bought Cop Arrest: A Good Start

In the Mexican state of Hidalgo, over ten dozen law enforcement officials were arrested for links to the drug cartel Los Zetas. Let's hope this isn't merely an effort to advance the interests of some competing cartel, but a real law enforcement effort.

Without the complicity of authorities, major crime enterprises are difficult to operate without hideous overhead and risks. Regulatory capture -- the process by which officials with the power to regulate a thing become beholden to those whom they supposedly oversee -- is so normal that crooked cops are a stereotype, and the vocabulary describing it reads like a travel phrase book (buy off? bribe? kickback? on the take? seeks post-retirement employment in the private sector?). Around the world, government offices are bought with present gifts, future employment, and anything you can imagine.

In the case of Los Zetas, regulatory capture is the origin of the organization: the gang was originally formed from airborne commandos trained to locate and interdict drug cartel members (you don't need to play the disturbing video to read reports about the gang's origin). Mastering on the government nickel the skills needed to put cartels out of business, they were in a great position to place themselves in the newly-vacated jobs. Imagine if Blackwater entered the drug business instead of security.

Let's hope the arrest of hundreds of crooked local and federal cops in Mexico are a blow for the rule of law. Meaningful law is the friend of all who seek to advance their lives in the face of oppression, and the people of Mexico are as deserving of the chance as any.

Sunday, September 20, 2009

Pratt's Hart & Boot: Excellent Volume of Appetizer-Sized Tales

T.A. Pratt's Hart & Boot & Other Stories is my favorite fiction find of 2009. (Genre: Fantasy and/or Urban Fantasy, though the title tale's Western setting makes it technically a story of the Weird West.)

A short story collection allows me to finish one tale, in a short period, and to get on with the rest of my busy life until I have another fiction break. Unlike longer works of this quality, that I'd fear to begin during a busy week because of the threat I will be unable to put it down and will miss deadlines (or that I will find myself distracted and thinking about where a long story is going instead of reading it to find out), Pratt's collection of shorts allows me to finish a whole piece and then move ahead with my day --potentially putting it down without that nagging need to snatch it up again and finish the whole book immediately. Each stands alone, delicious and refreshing. You can, of course, buy a Pratt short story in another collection, and enjoy it among samplings of others' work, but Pratt's wares are delictible, entirely worth consuming one after the other, and worth having in quantity.

Everything in Pratt's Hart & Boot collection is good ... but a few of the stories are just damn good. Several have been published elsewhere before – Cup and Table, for example, was first published in Twenty Epics, as a genuine epic in a short story. Sound impossible? Read and believe. Pratt mines myths for material in which to embed several of his stories, the result of which is a combination work that seems to fit in with a universe of existing narrative you've long known, and work that assumes nothing about what you've read and known. Delightful.

According to Amazon, used copies of this gem are dirt cheap -- so even in hard times, there's little excuse not to buy:

UPDATE: I've discovered through the author's blog (note: contains numerous segments of a series Bone Shop, in reverse order, so be careful where you start!) that his current series about the sorceress Marla Mason will not be continued by its previous publisher. To sample the wares without the irritation of cliffhanger chapter-endings, try reading Pratt's short story Pale Dog, which I regard as a great teaser for the series.

Thursday, September 17, 2009

MSFT: "Me Too" on $30 OS Update

Microsoft's response to Apple's software update pricing ($29 for Snow Leopard) is interesting: $30, but only to students.

Businesses, families, and others won't be eligible for the discount. Presumably MSFT isn't adding to Windows 7 any features that it expects to change how developers work or what applications will be able to do, or it'd be marketing the upgrade to encourage adoption beyond the seemingly business-as-usual tone apparently taken with the upgrade.

Both Snow Leopard and Windows 7 have been dismissed by critics as mere service packs to their predecessors, so the low pricing isn't hard to understand as a tool to drive adoption in the absence of universal excitement. The puzzle is why Microsoft would want to encourage a diverse array of legacy software when it might be pushing broader adoption of its most recent technology.

Perhaps it's related to Microsoft's position (or lack thereof) in the PC support ecosystem, where improved operating systems might be expected to yield particular benefit ....

AAPL Analysis Half Realistic, Half Fantastic

A recent analysis of Apple's shares provides realistic optimism in describing the substance of its transactions as poorly described by GAAP. As observed by entertainer Jim Cramer, Apple's numbers will look much better when accounting standards allow immediate realization of Apple's hardware sales profits rather than causing it to recognize profits across the duration of service providers' wireless subscription contracts. Apple has supported the proposed accounting change. The impact on Apple's per-share metrics is given treatment at both the Financial Alchemist and on Jim Cramer's show; they are genuine, and material. The GAAP earnings numbers have confused people about Apple's sales and profits (to the benefit of Apple's ability to confuse competitors, but the detriment of shareholders looking to see appreciation based on current iPhone figures), and modifications to accounting principles to allow Apple to reflect the substance of iPhone sales transactions will make the whole of Apple's finances easier to comprehend.

However, the Financial Alchemist erroneously models future share values on the basis of share buybacks for which there is little evidence management will implement. While Apple has occasionally authorized share buybacks, it has not in recent memory retired serious share volume (it made some buybacks years ago while simultaneously printing dilutive shares into insiders' incentive plans, but never made a real net reduction). Everything in the Alchemist's analysis may be technically true -- a massive buyback would have a positive effect on Apple's earnings per share and thus its share prices at likely P/E multiples -- but this kind of buyback just lacks foundation in management's apparent motives, and certainly in its recent history.

Apple's shares may be reasonably priced, but not because there's a buyback on the horizon.

Wednesday, September 16, 2009

ACAS' Axygen Exit Clarified

The good-looking Axygen described here was thrown into confusion by ACAS' recent email claiming that the sale "for about $400 million in cash" caused ACAS to receive $182 million in proceeds.

I'll post the link to ACAS' statement when it goes online, but my email claims that "The total inception to date gain and income, including dividend and fee income, from the equity invested by American Capital’s affiliated funds under management was $102 million, representing a 25% compounded annual rate of return." This suggests that while the investment was exited at $400,000,000, much of that price went not to ACAS but into accounts managed for third parties which also had funds invested in Axygen.

The upshot: The Axygen exit doesn't show ACAS can exit 120% above last-reported fair value; like the recent fair+4% sale, this shows ACAS again nets about fair value.

ACAS' sale of debt instruments yielding quarterly interest payments of $2.25m provides cash capable of paying down debt, or entering distressed situations with high rates of return eclipsing ACAS' cost of capital. I'm betting on the latter. $182m cash goes a long way these days. Since the rest of the $400m presumably is headed into ACAS-managed accounts, the $182m will go even further: ACAS will be able to invest it alongside funds under management, and will be in a position to get free "leverage" in this way while positioning itself and the beneficiaries of managed funds for the future.

Lousy Analyst Coverage in ACAS Still

After Monday's 20% up-day in ACAS, The Motley Fool ran an article "Monday's Biggest Stock Stars" touting ACAS' gain as having been "predicted" by Fools participating in the site's CAPS stock-evaluation system. (Some of those who give ACAS a thumbs-up in CAPS have loved ACAS since it traded in the $40s.) ACAS, it seems, is a four-of-five-stars stock -- "Approaching Greatness". However, The Motley Fool's early edition of the article said a reason to own ACAS was the confidence inspired by its dividend. That argument certainly sounded good last year, but is counterproductive in light of the company's current dividend policy (also announced last year). The currently-served version of this article seems to address the dividend issue by removing all reference to it. At least they notice when they have it wrong.

Still, to suggest that ACAS' '"pop" was in effect predicted by CAPS is silly. Not long ago, ACAS was featured in a Motley Fool article titled "3 Stocks in a Tailspin". Moreover, ACAS was a four-of-five-star pick when it began falling from the $40s. As CAPS participants' own experience shows, loving ACAS can look smart or stupid depending on the price one declares one's view. Some of them don't look much smarter than the Jaded Consumer.

To the extent ACAS is attractive as an investment, it's because management has a track record of avoiding lemons and over time has produced excellent returns (15% compounded in 264 realizations since Aug. 1997) on its investments (and, depending when they bought, its shareholders). ACAS claims to be a value-oriented investment house (see Myung Yi's Special Situations Group video). I believe these are great times to make value-oriented investments and I think there are reasons to give ACAS an opportunity to perform.

Let's just not get carried away with regular quarterly dividends as a present-day reason to purchase. There may be a great trade opportunity someplace, but I can't time worth a dime. I'm in for the long haul or not at all. ACAS' opportunity to sniff out unnoticed bargains eclipses my own, and I'm happy to let ACAS create a diversified portfolio for my benefit.

ACAS Closes Another Sale

UPDATE: This sale wasn't closed above fair value.

On the heels of closing the profitable sale of an unnamed portfolio company, ACAS has closed a truly big fish: the sale of Axygen for about $400m. The $400m sale is reportedly an all-cash deal. ACAS' interest in Axygen was recently given a FAS-157-compliant "fair value" of $182.6m. Although the Jaded Consumer had mentioned several exits well above "fair value", the sale earlier this week was made at a mere 4% above "fair value", which as mentioned wasn't much reassurance to purchasers who entered ACAS when its NAV was several times present levels.

Today's announcement underscores that ACAS' exits involve funds under management, and that ACAS has the ability to leverage funds that aren't its own to make deals happen.

Considering the size of ACAS' currently-maturing debts, the cash gives ACAS enormous flexibility in deciding whether its interests lie in paying off debt or in entering new opportunities. Based on ACAS' success in growing AGNC's value, I'm inclined to trust management's judgment in this regard.

Although some reports describe Corning as purchasing all the shares of Axygen, leaving open the possibility that ACAS still holds debt, I conclude from the announcements that ACAS' "exit" leaves it without a material position in Axygen. The payoff of $62.3m in 14.5% notes reduces quarterly interest payments by $2.25m, and the sale of preferred shares not listed as "non-income producing" in its last 10-Q seems to suggest that receipts may be in for further impact. Assuming ACAS found no better place to invest the funds, reducing ACAS' debt by the amount actually received by ACAS would have a $2.5m impact in the reduction of ACAS' quarterly expense based on the interest rates disclosed in the last 10-Q. However, since the last 10-Q the interest rates have likely increased in connection with ACAS' subsequent agreements with acceleration-declaring creditors. Thus, ACAS' interest expense would likely be effected even more positively than $2.5m per quarter if ACAS simply paid down interest.

However, I do not expect ACAS to simply pay down interest. ACAS' management has taken the position that it need not liquidate, and that it is free to refinance debt and to reinvest capital so long as it doesn't take on new debt that would drive its debt-to-equity ratio further out of compliance with the 1:1 limit imposed on BDCs. I therefore expect ACAS to look for steal-of-the-century opportunities involving high-quality companies whose owners have strong incentive to exit, and need cash. Distressed opportunities likely abound in the current environment, which provides both squashed valuation multiples and in many cases reduced EBITDA even before considering the potential distress of sellers. Value increases going forward on investments like this are easily creditable to be worth far more than 5.5% or so, and I support management's inclination to enter such deals -- especially when they provide adequate current cash flow.

Tuesday, September 15, 2009

PA Semi Purchase Produces Products

Apple's purchase of PA Semi may yield not just API tweaks but real products.

Reportedly reliable sightings of Apple MacOS X-running tablet computers combines with production rumors suggesting a February 2010 launch window of a device powered by PA Semi processors to emphasize that Apple's cross-platform Cocoa frameworks offer Apple flexibility other vendors lack.

Apple's work during the Intel transition to move developers from processor-dependent coding and onto platform-independent frameworks places Apple in the enjoyable position of being able to nimbly migrate hardware across architectures without necessitating a revolution in software development. Software is the key to platform success. The ability to shift hardware architectures without disturbing the kind or quality of available software is so badass as a competitive advantage that it's hard to imagine trying to compete with Apple in hardware. Apple can sell the cheapest, best-performing hardware and customers won't know the difference except by the price and the performance.

For Dell (or HP, or Acer, or ...) to shift architectures, it first needs to replace its operating system with one that will support its new target platform – something in which it may get little help from its principal operating system vendor. Even were Dell to move to Linux – The Jaded Consumer assumes Linux will eventually reach a point that its UI will allow the majority of users to accept it as a principal operating system – the inability of applications written for Linux to readily move between platforms (it's possible, but requires careful platform-independent coding practices that might not be natural to x86 developers) prevents Dell from shipping any hardware it pleases. Moreover, Linux has no mechanism for delivering applications that sense at launch time what platform they're running on and behaving properly in response; one would apparently need platform-specific versions of applications.

Apple makes it look so easy ....

Assuming Apple delivers a slick notepad powered with low-energy PA Semi hardware, and offers kick-butt battery life at a reasonable price, Apple may make notepads a real market.

Monday, September 14, 2009

ACAS Profits From Sale of Unidentified Portfolio Company

ACAS' recent press release was sparse on details, but described (a) realization of $16m gain and (b) receipt of $37m in proceeds when (c) it exited a portfolio company at 4% ($1.5m) above last quarter's FAS-157-compliant and SEC-reported fair value.

As a shareholder who became interested in ACAS when NAV was north of $30, it's not particularly heartening to hear about sales within 4% of a fair value that places NAV at less then $8. On the other hand, the fact is that ACAS needs cash to retire debt and to enter high-value distressed situation deals that will pay off in the long run. We need more of that 30% return on equity and less of the more modest returns.

So, what was the mystery portfolio company exited? The last quarterly report is some help. It's not Avalon Laboratories Holding Corp. (last valued at $34.8m); that one was carried far enough below cost ($64.4m) that its exit would not result in a realized gain. (Since the footnotes show its debt to be pledged as collateral, and not in default or non-income-producing, the nearly $40m face value of 11% and 18% notes are good to keep holding – $1,484,750 per quarter good, in fact.) Edline LLC (basis $20.8m, last valued at $35m; investment consisted of debt and membership warrants) is close, but after a first glance does not quite fit. We're looking for something with a last-quarter value of $35.5 so that after a $1.5m markup we see $37m gross sales price. We're looking for a basis of $21m (to produce $16m gain on a $37m exit). We're looking for a company for which ACAS held debt to be repaid, and warrants to sell.

ACAS had a $21.0m basis in the convertible preferred stock of FAMS Acquisition, but this wasn't the whole investment (ACAS earns $980,500 per quarter on $26.5m face falue of FAMS debt, so this isn't bad not to lose). ACAS held $21.0m face value of Zencon Holdings Corp. debt, but its basis was $20.8m and the whole investment wasn't quite the right size. Still, continuing to hold Zencon is worth just over $1.08m/quarter when you add in the senior debt (senior and sub are both pledged as collateral, but neither are listed as nonperforming or non-income-producing). Close to the $35.5m fair value mark is ACAS' subordinated debt holdings of Core Financial Holdings LLC (13.7% on $39.9m face, valued at $36.5m), but the whole Core Financial investment had a value over $60m and a basis that would lead to a realized loss in a sale at "fair value" (though with $1,366,575 per quarter in interest, I'd think holding until "fair value" is more attractive is worthwhile). The fact is that a $35.5m fair value doesn't appear in ACAS' roster of holdings on June 30, 2009. Neither does a $21.0m whole-investment basis.

I can't spot the mystery company right off, but it's got to be there somewhere. I'm inclined to think the real answer is Edline LLC, with the wiggle room coming from things like accumulated interest and fees. If anyone has another idea, please post it :-)

The Bottom Line:
ACAS can raise money exiting investments. Despite multiples contraction, ACAS can even make exits at a profit.

Not-yet-exited investments include some attractively-performing, regularly-paying debt holdings. Patiently waiting for the market to turn around isn't too hard to imagine when the paying debt is considered, assuming non-accruals don't bloom past their current 20%-of-face-value position. Yes, 20% of face makes me shiver, too. Presumably ACAS is taking a terrible fee from non-performing debtors – PIK notes with nasty terms, or the like. One hopes.

The prospect that ACAS might use cash to retire debt below face value is attractive, but ACAS may want to keep large investors happy with ACAS so that on expiration they become buyers of future rounds of debt. Not sure what ACAS' strategy is in this regard. Definitely good to see ACAS able to accomplish exits, though.

Based on ACAS' dividend-paying requirements, ACAS would not need to pay another dividend for over a year, and even then only if in 2009 it had a taxable net income. I'm wondering whether ACAS will deliberately enter some net-loss transactions in order to be able to stave off cash dividend payments while shares are so far below NAV.

Sunday, September 13, 2009

Apple Open-Sources Key New API

Apple's new operating system Snow Leopard contains several new technologies for allowing programmers to better utilize modern hardware. Remember the bad old days, when you thought about maybe buying a multiple-processor system or a system with more than one core, and you were told that whether you derived any benefit from the extra processors would depend significantly on acrobatics taken by developers to be aware of what you have and to use the resources properly? Them days are numbered. The assault has begun in earnest. Apple attacks the problem with two tools it's opened to the world.

OpenCL: OpenGL for Non-Graphics Applications (delivers cross-platform hardware acceleration)
One, OpenCL, was opened to the public when it was submitted as an open standard, and has the backing of graphics card vendors whose hardware would become more valuable if developers were to find more demand for their products. OpenCL is a generic language for allowing applications that aren't strictly-speaking graphics applications to take advantage of the extremely powerful GPU hardware commonly found in quality computers, offloading from the CPU computations that are well-suited to GPUs. OpenCL allows programmers to access computational hardware resources in parallel without having to understand what hardware will be available at runtime, which vendor will supply GPU hardware, how many processors will be available, and so on; it promises to be like OpenGL for non-graphics applications, allowing hardware acceleration of computations without foreknowledge of hardware specifications. To the extent high-end GPU hardware were frequently leveraged by non-graphics applications and would speed ordinary programming logic, they could become non-optional equipment in a broader class of machine. A graphics OEM win. Also, because OpenCL applications make better use of available high-end Apple hardware, a win for Apple.

Grand Central Dispatch: All The Benefit of Multithreading Without The Bother Of Unnecessarily Numerous Threads
Apple's other major technology for allowing computers to better utilize available hardware, Grand Central Dispatch, has just been open-sourced. This means two things: first, Apple wants to make projects commonly ported to MacOS from other environments (*cough*penguins*cough*) capable of enjoying Apple's new CPU-saturation technology. If technology is broadly accepted to allow CPU saturation without advance knowledge of system load or system capacity, and permits programmers to use fewer system resources because work can be divided among work units without the overhead of a thread for each of the work units, porting applications to MacOS without performance degradation will become better. Moreover, use of MacOS as a development platform will become more attractive because the tools for making widely-used Unix tools (*cough*Apache or Perl or Python or Ruby or your favorite Go program*cough*) perform better on Macs will be broadly available on all Unix platforms. (In the case of Apache, it will become trivial to performance-tune the job thread count under GCD, as GCD will make decisions about thread counts in well-written GCD-enabled applications; parallelizing Go calculations or the like will be a snap.) As Macs become a development platform of choice (which from anecdotal evidence isn't entirely crazy), applications for Macs get better and better. Second, Apple is making LLVM – which already offers smaller executables and better execution speed than is sometimes available in the open-source gcc compiler – even more attractive to developers. Apple has had to maintain its own fork of GCC because the compiler project's maintainers (which include some folks hostile to proprietary software vendors like Apple) have different goals than Apple. Migrating to LLVM frees Apple from the maintenance overhead of synchronizing a fork with an actively-developed main branch (as OpenBSD experienced after incorporating ProPolice into the compiler for security, causing it to be "stuck" with a GCC fork based on more primitive versions than those in use on other platforms; as of September 2009, OpenBSD ships patched versions of Gcc 2.95.3 and 3.3.5, whereas the GCC project offers updates through version 4.3.4; OpenBSD also ships a version of Apache 1.3 rather than one of the Apache Project's own successor versions).

By helping make LLVM the wave of the future – that is, by enabling LLVM developers to leverage things like Grand Central Dispatch on all target platforms – Apple decreases its maintenance overhead by joining forces with a compiler project that isn't actively hostile to Apple's development plans. Apple also increases the potential code base that easily ports to Apple's platform with built-in resource-saturation adaptations. Further, Apple simultaneously increases the potential quality of compilers available to its developers. (As the OpenBSD team commented, the GCC tool chain has some shortcomings and can profitably use competition.)

By opening the source of Grand Central Dispatch in an LLVM release, Apple advances a programming model that serves to improve the quality of code that will be available to run on Apple's machines, while promoting a software development tool chain with a potentially interesting future not only on Apple's platform but on other Unix and Unix-like platforms (*cough*penguins*cough*). Promoting Unix-like systems increases both the demand for such systems and the availability of those who would support them, which is of course a win for Apple (as a leading vendor of such systems). Performance improvements that can be derived by developers of Mac products simply by recompiling on the new tool sets will enable a generation of performance updates that benefit both consumers and their software vendors.

Open-sourcing GCD is a win for Apple and the C-coding Unix world.

UPDATE: HardMac reports an example of real-world performance improvements experienced by an application developer adding OpenCL and GCD to an application. Offloading decoding work to the GPU with OpenCL decreased CPU use in decoding, and improving processor saturation of encoding with GCD drove multiprocessor encoding from 100% (saturating a CPU) to 130% (effectively balancing load at least some of the time). Frame-rate performance increased 44% on the same hardware. Universally multiprocessor hardware (especially considering the proliferation of coprocessors like GPUs, DSPs, and network interface hardware accelerators) enables GCD and OpenCL to differentiate applications from competitors on platforms that don't offer similarly elegant means to access diverse hardware that is unknown until runtime.

Wednesday, September 9, 2009

On The Purpose of Snow Leopard

Piper Jaffray's Gene Munster reportedly believes Apple's new operating system release is a reaction to MSFT's impending Windows 7 release, and represents only a "minor upgrade". Jaffray's evidence on the latter point seems to be the release's low price tag and the fact the release is "without many significant new features."

Nothing could be further from the truth.

Snow Leopard is a developer-targeted release. Snow Leopard is a major new release: it introduces kernel changes that break kernel extensions that don't rely on officially-supported kernel interfaces, in the process freeing Apple to refactor ancient code Apple dared not change lest it break some third-party developer's code. Apple offers improvements (facilitating among other things load balancing and use of coprocessors) to its programming environment, including support for technologies that make it easier to leverage (by which I mean deliver practical access to) the power in Apple's existing and future hardware. The fact that there is little eye-candy to differentiate the interface from Leopard was certainly capitalized upon by Apple when Bert Serland introduced the release to developers last year (advertising "0 New Features"), the truth is that Apple is full of newness. 64-bit code not as a supported extra but throughout the system, and with this code comes improved access to registers and security enhancements. (Yes, Apple has taken steps to ensure that it doesn't continue blithely to ignore security going forward. The new MacOS security chief ensures the task is given someone's full attention, and some excitement.) Among the benefits of Apple's iPhone work is serious concern about resource management: Snow Leopard is smaller and faster than its predecessor.

If Snow Leopard is all that, why is Snow Leopard priced at a measly $29? The answer is simple. Snow Leopard is a developer-targeted release. For developers to gain the benefit of Snow Leopard (and for Apple to shed the burden of the problems raised by older systems), the customer base of older operating systems needs to take on a trajectory of decline so stark as to make it uninteresting as a development target. If Apple had half its users on old operating systems, advice to upgrade or buy a new machine would sound callous. With only fringe nuts avoiding upgrade (and G5 owners; Snow Leopard is Intel-only), and only obsolete hardware standing as an obstacle to upgrade (Apple has been in Intel vendor for several years now), Apple and its developers would be forgiven for saying "sorry, Snow Leopard only beyond this point."

The benefit to Apple is as great as to developers. Apple gets to showcase machines that seem fast. Applications written without awareness of Apple's new technologies will not take optimal advantage of the hardware Apple ships, and users can face interface delays while things are calculated in the foreground application. Not cool. Anyone who's suffered interface glitches on the iPhone realize how jarring it is to burst the illusion of swiping text and pictures around with one's fingers. Slick new machines that ignore your input are a disappointment. Apple wants people to be impressed, and use of the new tools promises to provide a better experience -- and make Apple's products so much nicer to use.

From the developer's standpoint, getting an API that figures out how to handle your multithreading on the fly based on what things can be done independently of each other (because the code uses blocks) with awareness of the state of the entire system and all its resources and currently running tasks ... just too cool. Think of the time saved not trying to work out application-specific multithreading behavior, and testing it on plausibly available customer system configurations. Getting more performance out of an application is just too cool an opportunity to miss -- especially in performance-demanding applications like high-frame-rate action games. And Apple is definitely selling its platform to developers as a gaming target. Considering the fraction of all notebook sales that are Macs, and the fraction of all high-end desktops that are Macs, it's not unrealistic to think Apple might have a chance at serious traction there.

AppleTV as a game console, down the road?


Snow Leopard may not make a big splash in this quarter's bottom line -- several cents, but not several dimes -- but it is a strategic play for Apple's future. Snow Leopard places Apple on track to obsolete technologies Apple wishes to stop maintaining, modernize software long frozen by compatibility concerns, show developers how to more easily leverage the diverse array of coprocessors and extra processing cores typically found on Apple hardware, and avoid the embarrassment of security issues fostered by things like old hard-to-maintain code designed before security was a concern and hardware that didn't support execute-disablement. Snow Leopard is too important for Apple to allow not to be installed as broadly as possible.

Apple's next operating system may have some interesting things -- a modern filesystem, full resolution independence, support from novel network services, support for users who want to carry their home folders with them from computer to computer -- but this operating system delivers what Apple needs to get into users' hands now to make sure developers aren't lulled into thinking the future isn't coming quickly.

Friday, September 4, 2009

Student Bus Hijacking Resolved Bloodlessly

Disarmed by a fit football player, a fourteen-year-old girl was taken into custody without apparent injury to anyone after she drew a .380 semi-automatic to threaten bus-riding students whom she accused of teasing and bullying her. Video is available.

Bullying and teasing are both cruel, and also often overlooked or discounted. Some observe it's ironic that its victims are more likely to be caught retaliating than initial aggressors are for their instigating behavior (about which, The Onion has a take). Obviously, wielding firearms on a school bus is neither ideal nor likely to achieve effective bullying reduction: for would-be vigilantes there is worse bullying in incarcerated populations, and for those facing "justice" the message is surely lost behind the medium. However, it's possible that sober adults should exercise a bit of responsibility rather than abdicate solutions to the imaginations of outraged teens whose self-worth lays in ruins due to years of steady abuse.

Bullying and its sequelae are not a uniquely American problem. It likely derives from fundamental dynamics of social organizations, as it has analogs in other species that live in social groups, such as baboons. Fighting bullying is likely akin to creating an ideal government: it works against the instincts of many who would be subject to the rules but prefer to avoid their application. It's a problem that requires real study and not simply armchair quarterbacking by self-proclaimed experts. Imagine the improvement in the quality of life -- and worldview -- of future generations if we get a handle on bullying among youth.

Thursday, September 3, 2009

ACAS Paying More Interest, Not Getting Squashed

Despite the headline, ACAS doesn't suddenly owe hundreds of millions to "defaulted" unsecured creditors. In exchange for an agreement to pay default interest rates, retroactive to March 30, 2009, ACAS gets agreement not to institute involuntary bankruptcy proceedings or other unhappy consequences.

ACAS has things to do with its recently-acquired cash. Curiously, some of the notes involved in the non-acceleration deal were due to mature in two days -- but presumably will entitle holders to the bonus interest.

So, how is confidence in ACAS' management on the street? For what it's worth, Zacks just ranked AGNC as a "#1" or "strong buy". With jobless claims falling and the economy ostensibly in recovery, might things be looking up for ACAS' diverse portfolio of businesses?

Let's see the operating income.

Tuesday, September 1, 2009

Paid Transplants A Reality in America

If reports that 1500-2000 paid-for kidney "donations" occur in the U.S. annually, payment for organs is an undeniable reality in America.

Given the history in America of the effect of banning commerce in things for which definite demand exists, one wonders whether lawmakers will have the courage to develop policy based on the balance of interests rather than the political expedience of pushing puritanical proclamations on the public -- claiming that moral reasons exist to tell people they do not own their own bodies and cannot choose as they like what to do with them that does not harm third parties.