Silverlight Streaming on iPhone

Nitwits who haven't really understood Apple's position on Flash were shocked to learn Microsoft's Silerlight can now stream video to iPhones. The truth is easy to believe: after making plain that Apple didn't want iPhones clogged up with performance-sapping plug-ins that would enable unbridled evasion of Apple's app-approval process by enabling unvetted code to run (and retransmit itself, and do any other security-nightmare activity) at will, Microsoft has made its server products able to send iPhones standard HTML 5 video tags instead of Silverlight content, and to stream iPhones H.264 content instead of proprietary Microsoft encodings that depend on a Silverlight plug-in for decoding, so that iPhones get the same standards-compliant treatment iPhones prefer. Microsoft does this transparently to its customers via server-side transcoding, so that they need not realize they don't really need proprietary Microsoft file formats or nonstandard HTML tags to make their content accessible to the rest of the world. Apple hasn't bent; Microsoft has moved to make its tech support iPhones change-free, perhaps as a move to compete with Adobe's iPhone-incapable Flash.

The real question is why Microsoft is still transmitting standards-nonconformant content to every platform but the iPhone.

Another Look at Apple's Sales Share

Apple may be a PC market leader, after all.

The huge and unusual (at least, for Apple) share of sales enjoyed by Apple in the smartphone market has been commented on here before. Also previously discussed is Apple's relatively higher share of profit than its rivals in the PC market.

Today, we have an opportunity to revisit Apple's share of the PC market with an eye not toward unit volume (which is a metric that, due to differing profitability and the potential for loss-leaders and the like, is not particularly useful to assessing power in the marketplace or profitability) but toward revenue. Apple's share of the laptop market is in the range of 8% by unit volume but has approached 20% in some quarters. Apple's share of the desktop market is lower, though Apple reportedly holds over 90% of the market for PCs costing over $1,000. Understanding Apple's overall share and its competitiveness with other manufacturers is undermined in some as much by dividing the market into numerous slices to find the niches in which Apple successfully sells hardware as by pronouncing that with nearly 10% of the US market by unit volume, Apple lacks significant market power.

The revisitation is a look at the sales volume by dollars. This is meaningful in the PC hardware arena -- in ways it is not in the market for server operating system or server application software -- because there is no significant source in the market for zero-cost computer hardware. Apple's share of the new sales revenue for laptop computers -- a market segment in which Apple is believed to be a volume leader in the high-cost market segment -- has been over 30% for some time and recently stood at 34%. The desktop market, a segment in which Apple anecdotally didn't make many sales outside its iMac business, has grown beyond Apple's one-third-share a year ago to over 40% earlier in 2009, and now threatens to take half of all sales by dollar volume by posting a 48% share in October.

(In the server operating system market, proprietary vendors dominate by revenue because open-source competitors are available with a licensing cost of $0, or free. Measuring that market by dollars is thus doomed to confuse onlookers. Combined hardware/software pricing makes it hard to tell whether a "sale" is a single proprietary system with high-end licensing options, or is a whole rack of systems with open-source software. Due to the different capabilities of various server hardware, one might prefer to view the server market in terms of queries run or pages served or megabytes served rather than installed units or software revenue; yet, there is a strong desire to look at the future rather than the past by asking about current-quarter sales instead of the performance of previously-sold hardware. The sales models of competing businesses in this space are strikingly different, with some making revenue on services and others relying principally on software licensing fees. While it's tempting to argue that market success should be measured by existing deployments instead of new sales, wishing folks would use different metrics doesn't change habits.)

In other news, Apple's mobile platform holds 50% of worldwide mobile device data traffic. Apple's share of the mobile phone market is a mere single digit: 2.5%. However, Apple only makes smartphones, and its share of smartphone sales is about 17% by unit volume. Yet, despite having less than a quarter of the smartphone unit share (and less than 3% of the unit share for cell phones), Apple's users account for half the planet's mobile data traffic: Apple's customers either like using their phones more, or for some reason must use them more, than customers of competing products. Why does this matter? These products, which people either are drawn to use more or are preferred by those with high use needs, command such a market premium that despite Apple's mere 2.5% cell phone share, Apple's cell phone profits ($1.6B) exceed those earned by Nokia ($1.1B) on its 35% global unit sales share. Selling high-margin, high-end machines is good business: Apple and RIM together held about 3% of the world's mobile phone unit sales share in 2008 (neither company being a handset unit volume leader), but received about 35% of the profits earned from building cell phones around the world (Apple itself claiming 20% of the global handset profit). As between Apple and RIM, it seems Apple has an edge in future growth. With that growth occurring squarely in the highest-margin part of the phone market, it's clear Apple's profit stands to benefit.

Meanwhile, Microsoft stands secure with over 90% of the PC operating system market share and -- with no PC hardware overhead -- enjoys pure gravy on every license sold. Not that this is any aid to OEMs saddled with MSFT's licensing fees, or improves the cost-competitiveness of products based on MSFT's products ....

Users Better Off Not Breaking iPhone Security

Hot on the heels of Phil Schiller's defense to BusinessWeek of Apple's application approval process is news of another Netherlands worm targeting customers who have disabled Apple's app-approval process by "jailbreaking" their phones to run anything loaded onto them (like malicious worms, surprise, surprise). Phones whose app-approval tools haven't been disabled are immune to the attack, as previously described here.

Phil Schiller's explanation of Apple's approval process is interesting because he expressly discusses Apple's effort to ensure that applications offered through the store don't obviously behave in a manner users don't expect. Developers whose apps easily crash, or snoop users' data, get a notice that Apple isn't ready to add the app to the store. Developers whose apps are designed to help users cheat at games of chance – something of potential interest in Las Vegas, for example – or otherwise to break the law, are often disappointed Apple won't play along. Why should Apple subject itself to liability for assisting people to violate the law in jurisdictions where gambling is legal, but regulated? (Cheating at a "friendly" game in another jurisdiction may not be illegal, but it's certainly unsportsmanlike – and why should Apple support it?)

Apple is trying to build a family product – something that parents can be confident their kids can use, something schools will allow on campus ... something that, in short, has a large and socially acceptable market. People who want to disable the security Apple has offered can apparently do so, but the folks helping them do it haven't proven themselves worthy of their customers' trust.

With Apple's exclusivity agreements expiring – and users' "need" to hack phones to work on unsupported networks seemingly coming to a close – one hopes that security-unconscious jailbreak tools will become increasingly a hazard of the past.

In the meantime, customers whose needs have driven them to jailbreak from necessity should change the passwords on their phones, disable root login, and close down the OpenSSH server started by the jailbreak tools.

Apple Developing Device-Generated Remote Control UI

After trying to control various electronics remotely -- with universal remotes, for example -- it is obvious to any user that the device you have in your hand is not quite as capable at controlling the device you want controlled as the controls on the target device itself. Apple seeks to remedy this with device-generated user interfaces that devices -- like iPods -- could push to would-be controllers in order to expose both a consistent interface (regardless the controlling tool) and an interface capable of exposing enough of the target device's functionality to make the controller useful.

The benefit of this scheme would be generic protocols for seeking and accepting both a UI and a command list. Users of iPods whose users hope to connect them to home stereos, automobiles, and other equipment will be able to expect easier control, more consistent behavior between devices, and perhaps (depending on licensing) cheaper control kits. If this matures into a shipping product, Apple could claim the high ground in the user interface fight over mobile devices in an increasingly interconnected (docking, bluetooth, wifi, etc.) world.

MSFT: Phone Apps Unimportant

On the heels of the news that Microsoft's mobile platform share is collapsing (losing 28% of its share Q32008 and Q32009), Microsoft reverses its long position on platforms (that it's all about developers, developers, developers ...) to proclaim that mobile apps just aren't important as a differentiator because they're so trivial that anything worth having will be immediately ported to any competing platform.

Not that Microsoft has explained who will be porting to its mobile platform over a hundred thousand applications now available on Apple's platform or why Google has said it can't afford to make all the necessary applications available and has urged developers to build mobile-friendly browser experiences for delivering web-based services in lieu of native applications. (Microsoft admits that the app/net line will blur until no-one can tell the difference, which is an admission that (a) Google's approach can work, and (b) MSFT's client platform lock-in strategy is doomed unless it can maintain file format lock or some other mechanism of dependence.) Instead, Microsoft seems to have fallen for a classic analytical failure: since Microsoft's own employees are overwhelmingly employed in desk jobs, the fact has entirely escaped Microsoft that everyone who is not employed at a desk job is more able to access important data from a mobile device than from a desktop computer. Mobile apps aren't a triviality unlike important desktop applications, they are in many cases the successors to desktop applications for people who will not spend much of their lives near desktop computers but will have mobile devices constantly available. Porting from iPhone's development environment to Microsoft's is surely at least as challenging as porting in the other direction.

The fact that Microsoft thinks mobile apps are trivial and easily ported ignores that (a) mobile apps developed with an API not available on another platform won't be ported so much as completely rewritten, (b) the complexity of mobile applications will increase with mobile platforms' power and users' expectation of using the platform as a primary interface to their electronic data and the data maintained by their brokers, bankers, movie rental vendors, and local movie theaters, and (c) developers, as Microsoft ought to have learned while enjoying an operating system monopoly for the last twenty-five years, target the dominant platforms and the remaining platforms tend as a result to fight to stay in the game. Microsoft's management may have, under the influence of its own Kool-Aid, developed the impression that its success in the PC market resulted from the quality of its APIs and not the spurious error messages with which it frightened customers from competitors' platforms, or the insidious effects of vendor-lock.

Meanwhile, developers have apparently not properly understood Microsoft's memo on app porting; Gameloft and other developers are scaling back efforts on Android in favor of their existing customer base on iPhone, where the sales are. With Android's share of the mobile approaching the share of Microsoft's platform and growing, the fact that developers have cold feet about Android development seems a grim portent for the future of similar development on Microsoft's mobile platform.

After admitting that Apple's gaining market share in PC operating systems is a big deal (though he claims MSFT holds 83% of the high-end notebook market, a figure at odds with data showing Apple commanding 91% of that market), it's odd to see MSFT pretending that its small and failing share in the mobile market is anything but an unmitigated disaster. The fact that Microsoft "wants" a commanding share of the mobile market only underscores the severity of the blow it's suffered from a combined field of closed-source and open-source platforms running on both differentiated and commodity hardware. Three consecutive quarters of declining revenue are no fluke.

A look at Gartner's mobile phone market share is instructive: RIM, Apple, HTC, and Samsung all gained market share while the market itself increased 13%. These gains were at the expense of Nokia (42.3% to 39.3%) and "Other" (21.3% to 13.1%). Since RIM, Apple, and Samsung all have their own mobile operating systems, HTC has begun shipping Android (and has added interface elements to protect people from noticing the MSFT operating system on its phones that ship with it), and Palm is migrating from MSFT's OS to a new platform based on open-source plumbing like the Linux kernel and WebKit, it's no surprise that these gains -- and the loss of share among the "other" category -- come at the expense not only of Nokia (which lost 7% of its share) but also Microsoft (whose 28% y/y share loss has to smart). The trend isn't good for Microsoft in the mobile space. To the extent Windows Mobile might have a market segment not subject to attack by iPhones, it's worth noting that Android is being viewed as preparing to eat MSFT's mobile lunch.

Microsoft hasn't got file format lock to trap customers in the mobile space, because people don't depend on Microsoft file formats for many mobile applications. Microsoft's small-percentage position prevents it from leveraging code investments in a proprietary API to keep developers from making other platforms attractive. The poor performance of Microsoft's operating system (this HTC review tellingly damns is with faint praise: looks good hidden, is bad at driving capacitive displays, etc.) can't be very exciting to developers who want a slick and improving platform to make their products look best. What has Microsoft got going for it in the mobile space, exactly? Developers can't be particularly keen to invest resources in a platform whose size is dropping more than a quarter of its share in a year.

Meanwhile, Apple's share of online traffic dwarfs even its growing share of the smartphone market. If iPhone users' demands outstrip their numbers, support for their traffic and their demands should continue to dominate. A few years ago, The Jaded Consumer contacted his broker to complain about its website not behaving well for the iPhone's browser; the broker said mobile users should access the broker through a crippled mobile site formatted to look awful on the iPhone and to waste enormous time scrolling about looking for the page's content. Today, the broker's data can be accessed from users' choice of four different native iPhone applications. The one the Jaded Consumer picked makes access to multiple accounts a snap. The application has been repeatedly revised and supports every feature of the site I like to access – in some cases, even better than the regular web version. How times change.

Chinese Sell Crummy Goods Locally, Too

The low-quality and mislabeled goods shipped to your hometown from China don't reflect Chinese hatred for foreigners especially; if this story is any guide, that's just the way they do business. Imagine: a third of condoms being counterfeit. (And likely unsterilized, lubricated with vegetable oil, and untested for suitability to function as intended.) While it's nice to see a (single) bust put an end to an IP theft/consumer fraud/public health threat, the fact that the aggregation of fraud so dominates the market invites serious questions (how the market should be approached, how one should distinguish one's products, how consumers should be educated to seek their intended products, how things got so bad without a revolution, etc.).

Chinese assumptions about the relative trustworthiness of foreigners (Chinese trust foreign brands more than domestic brands) may bode well for high-value brands seeking access to the growing market of middle-class and wealthier Chinese.

Worm News Leaves Foul Taste

Apple, which has traded on a reputation for immunity to the cyberinfections that plagued Microsoft's products since even before Apple sold an operating system with protected memory, has been predictably targeted by security-illiterate nitwits eager to proclaim that Apple has a serious security problem in the iPhone following a recent spate of attacks in Australia. Of course, the vector leveraged in the Australian attacks is not new, having been seen previously when demonstrated in the Netherlands.

So, what is this attack vector? It turns out that it runs only on jailbroken phones, and exploits a root password that is apparently left in a known state by at least certain jailbreak kits. To attack an iPhone with this technique, therefore, one must:

1. Find an iPhone that has been "jailbroken" – prepared by the phone's user in advance of the attack in order to allow applications not approved by Apple to run on the phone;
2. Discover that (a) the particular jailbreak technique used by the specific victim in advance of the attack involved permanently enabling an OpenSSH server, a tool for remotely accessing Unix machines for a command-line interface (note that the fact that OpenSSH can be run on phones isn't itself a security problem – OpenSSH is designed for secure remote access, so the rest of the idiocies decribed herein are absolutely essential to the attack's success); (b) the intended victim's OpenSSH server is configured to allow login by the user "root" (the administrative or "super" user, whose user ID is "0"; even if typical users did need their phones to offer a remote shell access -- and they manifastly don't -- why can't the jailbreak kit vendors at least script for the use of low-privileged users?), and (c) the password of the enabled root account is already known to the attacker (and I stress here that it is well publicized to OpenSSH users that OpenSSH is easily configured to prohibit login by the user "root", making this whole scenario impossible if only one cares a little about what one is doing, even if one wants for some reason to leave an OpenSSH server running on a phone), because the user's jailbreak kit made no effort to induce users to employ a hard-to-guess password and simply left every affected phone with the exact same, easily learnable, password for root;
3. login as root and execute any application one wants, including file transfer applications and applications that try to replicate this attack on other machines in the hope the other machine is a jailbroken iPhone with a braindead root password.
   

Reading this list, it's clear the problem isn't Apple's really at all: Apple offered a platform designed to make it impossible for a virus or work to propagate because all applications required a digital signature from Apple. (A virus in the wild can't create a valid-seeming Apple digital signature authorizing use on unknown-in-advance users' phones; Apple's app security infrastructure seems fairly proof against viruses and worms unless delibertely dismantled by users.) The fact some users modified their phones to allow unapproved apps to run without so much as a pop-up window for user permission can hardly be laid at Apple's feet.

Purveyors of jailbreak kits have at least as much blame to bear. Why on Earth need jailbreak kits fail to demand users enter a strong password, or else refuse to proceed? In fact, why on Earth bother to leave an OpenSSH server running at all on a phone? Getting a remote shell on another machine doesn't require one run the server, just the client -- and who interacts with their own iPhone via a command line interface?

Lastly, we wonder why it is that Apple gets blamed for these shennanigans. Perhaps the certainty that Apple would be blamed despite fault explains Apple's decision to create a system that makes worms impossible unless users dismantled it on purpose.

Apple Slowly Realizing It Sells A Potential Game Platform

Id Software's John Carmack sheds some light on what top tier game developers see when interacting with Apple.

Despite demonstrating the iPhone's UI and development environment to the public so as to highlight the platform's game potential, Apple apparently doesn't think about the iPhone and iPod Touch as a game machine.

Earth to Apple: the fact your platform rocks for games doesn't mean it can't be tops for other real-time applications closer to your heart. The fact that there's a market for high-end game consumers who want top-notch hardware to rock their favorite software should make you lick your chops, not roll your eyes. Just go with it.

Like Apple's apparent blindness to the enterprise market, Apple's deep disbelief that it should work toward enhancing Apple's products for their potential use as game machines is frankly hard to credit. So, get over it already. The new platform is great for making sure people get the right fraction of cycles into the right parts of an application, and making sure that all the 2D, 3D, 5.1 surround, and stereo video is supported by top-tier APIs is as good for games as it is for video editing, rendering special effects, and so on.

You've built it. Let 'em come.

ACAS' 3Q2009

ACAS' 3Q announcement contains two major pieces of news:

1. Unrealized appreciation increased (to the tune of over eighty million dollars, dwarfing NOI) rather than decreased over the quarter, for the first time in nine quarters; ACAS is no longer losing asset value. The charts plotting unrealized appreciation and NOI against indicators of the general economy suggest that as the US economy improves, that ACAS (as previously suggested here) will likewise benefit.
2. Management believes a deal to end the default status of its debt obligations is near, and will close by year-end. The deal apparently involves turning the unsecured creditors into secured creditors, with ACAS' investment portfolio as collateral, and includes a principal repayment schedule over the next several years. In effect, the deal closes the unsecured revolving credit line and leaves ACAS free to open another unsecured line later on as credit conditions and ACAS' performance enable ACAS to negotiate a better deal. The result is that ACAS will make (as predicted here) the minimum dividend legally allowed to maintain ACAS' tax status, will pay down the principal, and will face a declining interest rate as ACAS continues to reduce its debt balances. In the meantime, there's no effort to force ACAS into a bankruptcy or other situation that would place ACAS in the position of a forced seller, and the impending deal looks like an invitation to continue ordinary business with the single change that the credit line will end up looking like a series of secured notes with specific maturity dates rather than an open-ended unsecured line of credit. The doomsday preached by some looks unlikely.
   

Initial response to the news was good: shares spiked by over $0.50 (scared shorts fleeing? interested longs rejoining now that the scare is over?), but this declined and shares now trade near $3. The repayment schedule calls for hundreds of millions in repayments, but the initial repayment chunk can be made from cash on hand and the future repayments appear nonproblematic based on ACAS' history of recovering principal through maturities, exits, and so on.

The third interesting point is this: ACAS' exit volume has improved. Although ACAS has enjoyed well over a billion dollars in exits from the beginning of the recession, the deal volume, though it dwindled over the last few quarters, has now grown. The third quarter offered $463m in proceeds. According to conference call comments, exits were at higher multiples than ACAS' entrance, but given the economy's impact on EBIDA, this doesn't mean exits were profitable; it just means that ACAS' management was able to get good value out of its inventory. ACAS' exits generated realized net losses over the quarter. Realization of losses means ACAS' unrealized losses accordingly decreased; however, the reader will note that unrealized appreciation of $86m was much larger than the $41m from reversals associated with sales, and further that these associated sales were within 1% of prior-quarter "fair value".

What of earnings? NOI, which was hammered last quarter by reversal of PIK income, was hammered this quarter by "make whole payments" -- expenses incurred as part of ACAS' effort to mollify creditors whose ACAS-owed debts entered technical default due to breach of net asset covenants. While NOI per share this quarter was down 84% compared to the year-ago quarter, it was up 33% (on a per-share basis, which is important considering the significant issuance of shares in connection with this year's dividend) compared to the $0.09 of NOI posted last quarter. Compared to the year-ago quarter's net income of negative $2.63, this quarter's net income of positive $0.30 definitely evidences something going right. Management unsurprisingly attributes this to a combination of the economy's improvement and the work of ACAS' operations team. Without "penalties" like $22m in make-whole payments, ACAS' NOI would have been closer to $54m than to the $32m reported in 3Q2009. Ignoring these default penalties (which were one-time settlement payments to avoid threats associated with asset covenant breaches, and were unrelated to ACAS' payment performance or ACAS' business income), ACAS had NOI over 68% higher than reported, for a NOI of about $0.20/sh. This is more than double last quarter's reported NOI, though of course that quarter had its own special issues in the form of PIK reversals. (The $22m in "make whole payments" were incurred, and they were an expense in the quarter, but since they are associated with an asset covenant breach that occurred last year it seems strange to consider them as an income event in the current quarter -- though, of course, they must be so considered for accounting purposes even though it paints a misleading picture of ACAS' "normal" income-producing capacity. The $0.20 number isn't presented here to discount the fact ACAS was forced to cough up money to mollify frightened creditors, but is instead offered for consideration of ACAS' current power to generate income without tapping asset sales.)

Last quarter, ACAS' NAV per share closed at $7.42 following adjustment for the upcoming paid-in-shares dividend. NAV of $7.80 at the end of this quarter, following the share dividend, signifies a material increase over the period even after considering the diluting effect of the larger share base (a NAV increase exceeding 10% of current share prices). Since the debt ACAS owes won't increase as ACAS pays it down, but its investments' values and cash receipts will increase as the economy improves, NAV should be expected to head in the right direction from here forward -- unless the economic improvements turn out to be a head-fake and the whole thing heads into the toilet again.

ACAS' $7m in new investments includes investment in and recapitalization of existing portfolio companies, so ACAS spent more effort repairing the dykes than it did building new infrastructure. Presumably most of its creative efforts went into its exits, operations improvements, and in developing a cure for the default situation. I would like to see ACAS entering some screaming deals, but let's face it: ACAS still has some work to do in its own backyard before it can develop others' lots for sale. The good news is that ACAS' house isn't falling down, it's actually doing well just recently. The improvement seems to track with improvements in the general economy of the United States. Since the general economy of the United States has attracted some smart bulls, one isn't in bad company to conclude that the long-term trajectory of the economy is in the right direction. One is tempted to conclude that the association of ACAS' fortunes to the economy bodes well for shareholders.

Investing and holding ACAS on the theory of improving NAV makes sense, especially with the spectre of overhanging debt issues poised for resolution and actual, observed improvements in NAV. Improvements in deal flow will help with ACAS' future exits, but one would want to see that ACAS has access to new deals to support the kind of explosive growth that one wants to see exiting an economic recession.

Enterprise Buys iPhones

Apparently, despite initial hesitation, enterprise is buying iPhones by the millions.

Maybe Apple isn't such a hot short after all ....

Crippled iPhones Hit China

Built without WiFi to accommodate then-current wireless regulations, the first run of the iPhone's Chinese edition hit the shelves last week. Since Chinese consumers have been able to access unlocked grey-market iPhones imported from other countries, demand for WiFi-crippled devices is likely to be weak.

The next batch is expected to have the same features as commonly found in other countries, which will allow a better opportunity to observe "normal" Chinese iPhone demand.

Not yet reported: Chinese access to App Store and iTunes.

Apple Benefits from Windows 7

Despite Ballmer's representations to the contrary, Apple's share of the PC pie seems to have improved with the launch of Microsoft's newest operating system. The new operating system, while favorably reviewed, is more expensive to OEMs (thus reducing the competitiveness of OEMs' computers equipped with it); this observation is not a matter of mere theory, but stands with the support of anecdotal evidence of Apple's competitiveness. Concentrating ads on the majority of the PC population -- those who will be suffering the prospect of upgrading from XP rather than Vista -- Apple emphasizes the inconvenience of an upgrade path that seems a weekend project rather than a while-dinner-is-served background event. Even the students eligible for Microsoft's $30 limited upgrade offer seem not to have gotten what they expected. Even if Windows 7 is really all the reviewers claim (and didn't they say Vista was all that, too?), Microsoft has a reputation to overcome.

Apple's competitveness isn't simply in comparison to Microsoft products, but to other vendors' whose products rely on Microsoft for infrastructure. For example, the cost-effectiveness of Blackberry deployments in enterprise, supported by Exchange and RIM middleware, seems challenged by Apple telephony products that lack the need of additional middleware.