Thursday, October 29, 2009

Apple's Appetite Clears Plates

Remember when Toshiba's 1.8" hard drives were in short supply because Apple was building music players? Then Flash drives?

Then there was the Samsung LCD production Apple squatted for a while, right?

In what is becoming a familiar echo, CMOS vision sensors are constrained because Apple has bumped iPhone production. A 20% production bump seems consistent with the prediction Apple is inching ever closer to RIM's smartphone leading position in market share.

Apple's position as a major OEM consumer of electronics components places it in an interesting position from which to benefit from economies of scale, both in terms of buying in bulk and in terms of negotiating with vendors whose businesses' fortunes are dramatically impacted by Apple's component sourcing decisions. Consuming huge chunks of the market's ability to produce components is an interesting way to reduce competitors' ability to chase Apple's design decisions: bidding on Apple's leftovers can't begin at particularly favorable rates ....

Wednesday, October 28, 2009

Retail Therapy No Cure for DELL, MSFT

Dell's budget retail kiosks were a flop, put down for mercy. Dell's high-end retail stores, opened in obvious imitation to Apple's retail stores, were just not effective in improving profit on the #1 vendor's commodity hardware. Apparently, "if you build it, they will come" requires dream visions, or a carefully scripted plot, to serve as a recipe for success.

Now, Microsoft is building retail outlets. Rather than conduct research into where Microsoft should place stores in order to realize meaningful impact on its profits, Microsoft is simply sticking the stores up next to Apple's. (Pundits proposed features by which observers might differentiate the companies' stores.) Pricing a half-baked retail strategy into every copy of MS-Windows can't be good for its pricing.

Just when Apple's competitors thought it couldn't get worse, the news comes that Apple's profit can increase even while iPod unit volume drops. Let's hope Apple's competitors got into that retail space at a discount.

Apple: Handheld Hegemon?

Apple seems set to overtake RIM for first place in smartphone unit sales. Rising iPhone share (now 35%) and dwindling share for RIM's combined product lines, together with strong iPhone intent-to-buy, are trends that suggest Apple's Unix handhelds will top the smartphone rankings in the not-distant future. PALM's share holds steady at 7%. (Demand for iPhones may be related to increasing user expectation that non-phone features be practically usable; iPhone apparently leads this, if iPhone's share of web traffic is any indicator of real-world non-phone use.)

Applications for Apple's handhelds continue to be developed and listed on Apple's one-store-for-all-iPhones electronic software marketplace; the tally of submitted and Apple-approved products now exceeds one hundred thousand native iPhone applications (UPDATE: available apps exceed 100k now, too). To the extent that Apple's development environment makes application development easier than on other platforms, porting some of this content to other platform could be not only a nuisance but logistically infeasible. A significant installed base of iPhone users may guarantee loyalty to developing for the platform. If the best apps are there, and the apps that do what the users want, what will smartphone users choose to buy?

In other news, mobile navigation vendor TomTom is selling a car navigation kit for the iPhone. The application that makes it sing is compatible with the models of iPhone that include (no surprise) GPS hardware. Whining third parties ask whether prior models will be supported, and get a typical "no announcement at this time" response. Let's face it: you need GPS hardware to make turn-by-turn navigation software useful. Get a grip, people. But that's the real news in this item -- these people don't have a grip at all: they expect magic.

The expectation that Apple's handhelds will solve every concern, regardless their actual technical specifications, raises an interesting point about what Apple must deliver in order to satisfy customers. The fact Apple maintains its satisfaction ratings in the face of this kind of expectation is frankly amazing.

Apple is making outsized profits in the mobile space on the handsets, and is set to make quite a bit from follow-up transactions after each hardware sale.

On the opposite end of the hardware/software spectrum, Oracle issued an update on Sept. 30, 2009 to its announcements on support for MacOS X, and describes Oracle Database 10g Rel 2, Oracle SQL Server, and Oracle JDeveloper as "fully certified" on MacOS X, with support for 64-bit Intel chips. Anyone know how many MacOS X installations of commercial Oracle products exist?

Even without news on substantial enterprise use, Apple's PC sales are up 11.8% in the third quarter compared to the prior year, taking 9.4% of the PC market. Given that 0% of Apple's PC sales are into low-margin segments like netbooks and three-generations-old-CPU commodity boxes, that 9.4% of the whole PC market may not be the right metric for measuring Apple's success in the segments in which it competes. In the segment of the PC market with a retail price exceeding $1,000, Apple is not the number four vendor by any means. Share gains in this segment -- and movement of customers from cheap machines into this segment -- represent significant profit for Apple, more valuable than the marginal customer of a vendor with an average sales price of $700 or less (considering how much of the market above $1,000 is held by Apple, maybe much less than $700 on average). Apple's outsized profits mean that despite Dell's position as the #1 vendor by volume, Apple could at current share prices buy Dell with cash on hand. Not that I see Dell as a good buy.

Apple's position is strong and strengthening, both in the traditional CPU space and in smartphones. Unlike the PC space, however, where competitive platforms mean rough competition due to customers' significant software installed base, the mobile space is new and offers Apple the power to become the dominant platform.

On ACAS' Earnings Announcement (3Q2009)

ACAS' earnings announcement scheduled for November 3 and the conference call on the 4th should not contain many surprises. The economy is in crummy shape, which is why Rug Doctor and these holdings make such sense, and why ACAS has continued to trim expenses. The likelihood that portfolio companies continue to suffer as a result of macro-economic factors should come as no surprise to shareholders.

Interestingly, I didn't see Rug Doctor in the last 10-Q. Anyone know if it's a subsidiary of another company? Why would it not show up? Was it recently (and silently, like NPC Inc.) exited? At the time Rug Doctor was bought, some other good investments were being made, including the New England Confectionary Company (it's Halloween, which is one of North America's busy candy seasons). Some of those have already been profitably exited, and some are still (like NECCO) making money for ACAS.

What to expect? Announcements about the total exit proceeds. ACAS wants to project that it's able not only to do deals, but is able to achieve exits for cash money today. Management will drive this point home with a tally of cash proceeds since either the beginning of the year or the beginning of the recession, or the like. The number of exits isn't the headliner here, but the amount of liquidity ACAS generates. ACAS will also comment on deal flow, so folks reading the tea leaves for ACAS' future will be able to answer the question how close things are now to business-as-usual. ACAS will comment -- for good or ill, it can't help but comment since it made the metric a keystone of its solvency argument earlier in the year -- on its interest coverage (that is, its ability to fund interest from its ordinary business, without being reduced to running a fire sale).

Critics will again ask how investors can't know ACAS is selling the good companies and sticking investors with a portfolio of pigs for the future, and management will repeat its mantra about reclaiming unproductive funds for better purposes, and making exits that aren't newsworthy gains. Whether anyone believes ACAS' management this time is up for grabs, but it's the story we've heard before and the same question we've gotten virtually every quarter I can recall. Expect to hear people ask questions about the value of ACAS' holdings. To understand the value of the holdings, one needs both a more sophisticated discussion of various portfolio companies than ACAS has ever ventured in a conference call and the ability to look at the world without reference to FAS 157. A medical billing company, for example, seems a strong candidate in this economy: medical services is a growing industry, physicians' interest in current funds rather than an inventory of recievebles is enduring so demand should remain high, and still-productive loans with 15% cupon should be a strong reason to like owning it. Medical Billing Holdings, Inc. is, however, given a FAS 157 value of $0 for its common stock, even while its sub debt was current and valued above cost at par. Why? Maybe because it's a "financial" and there's no market for small private financials just now. Perhaps FAS 157 cannot tell us much of interest about the long-term value of porfolio holdings. Since management can't dismiss FAS 157 without looking like a pack of loons, however, expect them to dance around the question what the holdings are really worth. What about the dental practice management company? What about still-productive commercial real estate CDOs nobody would buy today because CDOs have a stink after Merrill Lynch imploded over poorly-engineered "AAA" residential CDOs? Is keeping investments like this really a silly idea if they are still paying? Maybe these are just the duds we want management to stuff into the portfolio for good.

What I'd like to learn is likely not in the call at all: what new businesses has ACAS entered in the last few quarters while the markets were most pessimistic, most likely to offer the wildest bargains to buyers with cash. We know ACAS isn't using exit funds just to pay down debt or fund dividends; those expenses are modest in comparison to the size of ACAS' exits. ACAS is obviously doing deals.

What deals?

More even than this quarter's NOI number (which everyone will be watching as an indicator of financial strength), I want to know what ACAS has been doing with the opportunity presented by the crazy markets. I want to see what ACAS has planned for the future.

Although critics clearly have opposing views, I think ACAS will last long enough for those plans to matter.

Sunday, October 25, 2009

On AGNC's Dividend

An article recently suggested that AGNC's dividends were doomed because they were supported in part with capital gains. Since my own exposure to AGNC is modest, I'm not particularly keen to debate the merits of the prediction that AGNC's dividend might fall. A reader asked what The Jaded Consumer had to say on AGNC's dividend, so here it is: I don't know.

AGNC is capable of working with 10x leverage without violating its governing documents. Like a bank, AGNC makes money on interest spreads (the interest earned less the cost of borrowing, as multiplied by leverage). To ask whether AGNC can keep up its dividend is to ask whether AGNC can borrow more cheaply than it lends to such an extent that income stays up. AGNC has demonstrated creativity, though: when volatility went through the roof last year, AGNC shed leverage for protection and lost the ability to make money from multiplied interest spreads (at the end of 2008, leverage was 5.2x) -- but earned money from the volatility due to options activity (in effect, covered calls). Creative approaches to financial management in the face of changing conditions has enabled AGNC to earn money at a much better rate than onlookers might have guessed on the basis of interest rate spreads alone.

I don't dare predict AGNC's dividends -- any more than I'd try to predict specific interest rate spreads or prudent leverage levels -- but I offer the quality of AGNC's management (rented from ACAS), as evidenced over AGNC's history, as a counter-argument to the thesis that some particular indicator (like the appearance of capital gain in AGNC's income) proves that AGNC's dividend is doomed. Sure, capital gain in fixed instruments may be cyclical and therefore doomed to a finite life, but this doesn't mean AGNC can't make money in other ways. With government stepping in to guarantee the obligations of Fannie and Freddie (for example), increasing leverage beyond last year's levels may be more sensible.

Let's have a look at ACAS' management of AGNC, though: ACAS, like many other shareholders, have very much wanted high current dividends during the liquidity crisis of the last year. ACAS has benefited from AGNC-created liquidity, and if the train slows down for cyclical reasons it's of little harm to ACAS. My real question is whether AGNC can raise more capital at its current above-IPO prices. ACAS benefits from capital increase because its management fee is based on the size of funds under management. However, ACAS seems to make quite a bit more at the moment as a shareholder than as a manager.

(To those who worry about AGNC holding ARM-based assets: imagine AGNC holding fixed-mortgage assets in a climate of increasing interest rates, and ask whether holding ARMs is risky or is a hedge. Frankly, I believe home mortgage interest rates are already increasing and that having begun moving from fixed-rate holdings early in the year is a Good Thing™.)

The fact that ACAS has been able to generate outsized returns from AGNC could be dismissed as some kind of fluke, but I doubt success entirely an accident. ACAS may not be able to replicate indefinitely the crazy returns it's produced to date from AGNC, but this doesn't mean that market-beating returns are dead. The fact that AGNC's investment mandate has such rigid restrictions -- it's a REIT, for example, and invests in agency-backed mortgages (and obligations comprised of such mortgages) -- means that it will be subject to a host of limitations peculiar to those investments, constraining what ACAS can do to wring profit from it. However, creativity demonstrated thus far suggests ACAS can do quite a bit with AGNC under various conditions to create value. The only question is whether the value ACAS can wring from AGNC has peaked. Since the performance of agency backed mortgage investments isn't stable over time I'd expect ACAS to derive an unstable benefit from AGNC even if it continued to produce market-beating returns.

So, has the dividend peaked? Who knows. The question is whether market-beating returns have ceased, and the answer there is maybe not. And let's assume for a moment that the day comes that an investor becomes convinced the dividend must be decreased. Is this a reason to bail from AGNC? Only if you have someplace even more market-beating to put your money.

Saturday, October 24, 2009

Apple Officially Bins ZFS

As pointed out by Daring Fireball, Apple has pulled the plug on the ZFS-on-Mac project and will take down the archives shortly. Gruber speculates that this is about legal issues -- like the NetApp patent litigation or CDDL issues discussed here -- and there's some precedent to this. OmniGroup once wrote a backup application for Apple that was binned over IP litigation threats, for example.

However, the CDDL doesn't require indemnification unless products are released under a different license, and Apple certainly didn't throw DTrace from Snow Leopard, and it's CDDL. Apple releases products under numerous different licenses (Apache, GPL, etc.). The NetApp litigation seems to be in its death throes.

The idea that Apple "needs" to use a different filesystem simply because Sun is being bought by Oracle seems fairly thin. Apple uses (and produces -- think of Google's use of Apple's WebKit in Chrome) other open-source software in use by third parties, such as Perl, Apache, fetchmail, gcc, procmail, python, ruby, zsh .... What has filesystem (in)compatibility to do with Apple's competitiveness in user interfaces, or its becoming beholden to a database vendor? Apple has certainly maintained project forks when it's offered benefit (*cough*gcc*cough*).

My question is what Apple thinks it wants to offer that isn't offered well -- or offered for the right price (performance, overhead, maintenability, size, and so forth ... not money) -- by ZFS. The fact that ZFS is a dream for big storage may not make it the lithe, low-overhead tool Apple sees in embedded devices, for example. I frankly can't guess. The fact that Apple imagines diverging from ZFS down the road may make Apple more interested in building the future now than in confusing people about the direction of the future.

Personally, I thought ZFS sounded great. If it turns out that frequently-used characteristics (file type or creator codes, file comments, etc.) are too much overhead for Apple to tolerate but rately used by anyone else, maybe ZFS' design for handling this kind of extended attribute is just a bad deal for Apple. Who knows?

After seeing Apple react to OpenSSH trademark claims, I just don't think the soon-to-die NetApp litigation is really the whole answer. The fact that Apple links CDDL-licensed code into the xnu kernel makes it a fairly sure bet Apple doesn't regard the CDDL as sufficient reason not to include code. The answer -- whatever it may be -- lies someplace else.

UPDATE: An interesting post suggests that licensing is behind the ZFS dump, then proceeds to list a host of reasons that Apple may have both the incentive and the resources to develop something different than ZFS and more suited to Apple's expected deployment situations. This, I view as supporting my hypothesis that a non-licensing reason exists for the ZFS dump. Yes, it's a drag to lose ZFS. However, it's good that Apple is at work on something likely to benefit from high-quality engineering directed at Apple-specific engineering challenges. Among the cites factors are (a) post-ZFS filesystem research, (b) predominantly single-drive system deployments, (c) RAM overhead in ZFS apparently inappropriate for embedded devices, as discovered by another would-be ZFS implementor, and (d) improved resources for original filesystem development now that Apple (i) can amortize the gain over so many platforms (iPhone, iPod, notebooks, routers/switches like Airport-branded stand-alone products, desktops, servers, future devices) and (ii) can direct more engineering toward the problem from the same engineers who a few years ago were trying to add journaling to HFS+, make HFS+ support Unix privileges, make Unix filesystems support MacOS file attributes under MacOS, etc.. In the comments, the author adds a link to this comment, supporting the licensing-issue hypothesis. I agree that the comment appears to be a smoking gun for the issue that Apple asked for special licensing terms. However, given Apple's willingness to use similarly licensed code elsewhere in the kernel without special terms (e.g., DTrace), and Apple's willingness to use indemnity-free code with a history of prior IP claims, I strongly believe the decision not to move forward with existing licensing is founded in concerns about the technical suitability for Apple's intended application. Were ZFS a dead-on match for Apple's intended application, Apple could easily have tolerated existing licensing in ZFS like it tolerated the exact same licensing in DTrace (which is a dead-on match for Apple's intended application). Apple did not: by 2009, ZFS just wasn't that attractive to Apple, which decided to break off its engagement to the filesystem.

Friday, October 23, 2009

Sendak: Wimp Kids Can Wet Selves

Questioned about the potentially frightening content of Where the Wild Things Are (now also a major motion picture), author Maurice Sendak said that worried parents could go to hell, and scared kids could go home or wet themselves. Also, he said, Mickey Mouse has been diluted from an enjoyable character into a loathsome marketing puppet.

Marketing droids at his publisher, he said, tried to get him to rewrite the last page of his story so that Max' meal would be found "warm" instead of "still hot" -- the wusses.

Thankfully, saner heads prevailed.

(Note: the German title of this book -- remember, the "w" is pronounced like a "v" in English -- sounds so delicious that I initially thought Sendak might have written it in that language, but this isn't the case, the German is a translation of an English original. But if you read German, the sounds of the words describing the Wild Things and their horrible teeth and claws roll so beautifully, so fiercely from the tongue that it's a delight you shouldn't fail to enjoy.)

UPDATE: Sendak specifically instructed the film's director not to let the movie feel "safe" but to make it as alarming as his book was when released -- he reported that librarians and others pleaded that adults keep it from their children.

Thursday, October 22, 2009

Microsoft's New Operating System Costlier to OEMs

News shows use of Microsoft's operating system is more expensive to PC OEMs than the mere cost of the operating system licenses. Paying Microsoft for the OS doesn't apparently absolve OEMs from additional OS-related engineering overhead. Toshiba's Redmond-based engineers labored harder than ever before to make sure Microsoft's newest operating system sucked less than prior versions on Toshiba's hardware. Dell also spent engineering resources to reduce the MS-Windows suckage, and Windows 7 will reportedly cost OEMs more than prior versions.

The increased OEM investment in MSFT's OS development doubtless will aid MSFT in its primary objective, which is to launch an OS capable of pulling customers off the 8-year-old XP operating system to which they've clung to avoid Microsoft Vista. The fact that OEMs have to pay more for the privilege of pre-installing a Microsoft operating system while also contributing to its development will likely go unnoticed by customers, unless in the form of higher retail prices. On the other hand, can commodity PC OEMs price their products to recapture their increased expenses and retain share against non-MSFT competition?

What does this mean for PC hardware? Apple's ability to make a profit on comparable hardware is ensured well into the foreseeable future. Competitors pay increased operating system overhead, face undiminished supply constraints, suffer ongoing limitation in selecting alternative hardware, and increasingly end up like Dell -- commodity vendors without a durable competitive advantage or distinguishing feature. While Windows 7 might be a victory for Microsoft (offering upgrade revenue and increased per-installation fees), it's doubtless a disaster for hardware OEMs whose margins are already in trouble. (Sure, there'll be a surge of hardware demand based on waiting-until-the-new-OS-is-pre-installed, but this is neither a competitive advantage for any given OEM nor a situation that will endure. It's a blip. If people shop on pure price, it'll be a blip that leads people into low-margin products whose sale offers scant value to their manfacturers.)

Meanwhile, Apple's top-notch supply chain management, freedom to renew products with radically different underlying hardware without disrupting consumers' experience, self-produced operating system, and high rate of new operating system adoption mean that Apple enjoys competitive advantages that increase with its improving fortunes in the marketplace. Simply copying Apple's retail outlets' aesthetics (an NPR piece on Microsoft's imitation of Apple's stores can be heard here) will do little to address the underlying economics of Apple's profitability relative to commodity vendors'.

(Interestingly, Microsoft's investment in direct relationships with customers runs contrary to its prior model of relying on OEMs to market hardware to and solve the technical problems of customers; Microsoft undermines part of its old high-margin model by accepting the overhead of building customer relations and supporting their issues. Apparently, Microsoft has reaslised that being hated as a distant ogre is worse for its long-term image than the short-term pain of increased expense; in short, the whole effort to engage customers is marketing expense. We will have to look at MSFT's sales and margins over time to understand the degree to which it succeeds in this effort.)

UPDATE: Daring Fireball offers this piece on how PC makers are doomed to commodity product competition, and pointing out that HP's answer to a new iMac line with quad core CPUs and an integrated 109dpi monitor was to offer, for the same money, a desktop and two notebooks with Windows 7. HP -- the owner of the once-awesome Alpha chips and vendor of one of the planet's major Unix versions -- is arguably transforming into a commodity vendor.

ACAS' Imperial Sale: $66m cash, 34% Premium

Despite earlier reports failing to contain details of ACAS' sale of Imperial, ACAS' subsequent announcement offers some interesting and bullish facts. First, the Imperial sale is an all-cash deal that provides ACAS with $66m in immediate liquidity. This is good news.

But the better news?

The $66m sale is $16m ahead of the portfolio company's prior-quarter FAS-157-compliant "fair value" – meaning that actual liquidation showed a 34% premium to SEC-reported valuation.

Better-than-FAS-157 exits aren't universal, but are definitely not uncommon. ACAS doesn't always give us all the information we want on transactions, and doesn't always sell at a substantial premium to FAS-157-compliant values, but selling a third above "fair value" seems common enough even in these hard times to cast doubt on the value to shareholders of FAS-157 in guaging the value of assets. Since substantial variation in value seems to exist primarily to the updide, and much of ACAS' investment portfolio consists of investments valued at nil (even if some of the debt is still paying), it stands to reason that things are less bad for ACAS than FAS 157 would have us believe.

Friday, October 16, 2009

ACAS Sells Again

ACAS, which recently sold Granger a portfolio company for an undisclosed amount, recently announced another sale, bringing its total number of exits past 20 in the fourth quarter of 2009 and helping ACAS reduce debt by $300m while increasing its liquidity.

The newest sale completes ACAS' exit from HomeAway by separating it from its remaining equity in the company, which first saw ACAS investment in November 2006. The transaction brings ACAS $15m in cash, of which $4m is profit. ACAS' total investment in HomeAway included the financing of add-on acquisitions and other expansion strategies; the total investment in HomeAway reached $120m, but ACAS had previously exited the entire remainder of the transaction. Over the life of the investment, ACAS realized $18m in gains.

Hopefully ACAS' exits enable it to continue freeing cash for investment in interesting opportunities; this market should be swimming with them. I for one will be reading the annual report with interest to see what's been added over the year. ACAS may be forced to pay down debt as it matures, but I'd rather not see ACAS pay down revolving lines when better returns await in the markets.

Wednesday, October 14, 2009

ACAS sells Imperial to Grainger

A major facilities maintenance products distributor, Grainger Inc. (Ticker:GWW), announced the purchase of ACAS' portfolio company Imperial Supplies LLC. Previously described here as a recession-weathering ACAS portfolio component, Imperial is expected by Granger to improve its bottom line by three to five cents per share in 2010.

In 2008, Imperial's sales were $67 million, and the transaction was an all-cash deal. The sales price was not immediately evident, but the transaction evidences ACAS' ability to identify private buyers able to benefit from the capabilities of ACAS' portfolio companies and willing to pay cash to obtain them. In this market, that's not a bad thing at all.

Monday, October 12, 2009

Finished: Google/Apple Board Overlap

Google's Schmidt having left Apple's board, the only remaining cross-pollination between the firms was Levinson, who resigned Google's board effective immediately.

Worries about the companies' cross-pollination seem done; the FTC's concerns have supposedly been satisfied by the resignations.

As previously discussed here, the Jaded Consumer take is that both companies offer each other significant help in avoiding a MSFT-dominated future, providing open-source code for projects of value to both, and fostering standards-compliance to enable competition on quality instead of losing customers to lock-in. Both companies are good for each other.

The Cost of Apple in Enterprise

According to this article, Apple's hardware quotes for government bids allow contractors to make the same money or more as on bids based on Microsoft's platform. Apple's price is apparently not more than Microsoft's, after all -- quite a change from the accepted wisdom of the past. If the hypothesis is right, and the military's adoption of Apple products in certain recent sales isn't a statistical fluke, Apple could see more enterprise use than it's used to getting.

Although the U.S. military has used Apple products for some applications in the past (e.g., the 1999 migration from NT/IIS to MacOS and WebStar for serving to the world), this use has been fairly minimal. Now that Apple is one of a mere handful of vendors (now up to 5) shipping certified Unix, Apple's ability to reach broad markets with standards-conformant software is vastly different than it was a decade ago. Given the relative security of Microsoft's products and Unix-like alternatives and the confidence Microsoft has inspired in customers with its software and services, the prospects for migration to Unix seem rosy.

Anyone else got recent Mac migration stories?

Sunday, October 11, 2009

Microsoft Can't Be Trusted To Run Your Cloud

After buying Danger, Microsoft's Sidekick users have been informed by T-Mobile that their data, including personal data and photos, "has almost certainly been lost" following a server issue at Microsoft/Danger. While Microsoft may be interested in targeting consumers with its next phone release, terrifying users with the prospect of incompetent cloud maintenance isn't likely the most effective way to win their business.

Cloud errors at Google may leave one unable to access data, but emails not to reset one's phone because data doesn't exist anyplace else is a bit much. I thought Microsoft had been making money at databases long enough to realize how to run one without losing the database's contents.

Apparently not.

MacOS: On ZFS and Licensing

An Apple technote reminds us that secure remote logins is available via OpenSSH on MacOS 10.0.1 and later. Given that OpenSSH was readily available at the launch of MacOS X v.10.0, one wonders why on Earth would Apple ship a Unix-like operating system without it? The idea that one would enable some kind of remote login, then not use ssh is ... well, silly. The answer? Apparently, Apple Legal was gun-shy about the OpenBSD team's OpenSSH suite because its binary (named "ssh" and available at /usr/bin/ssh, just like a product from SSH Secure Communications Security Corp.) might infringe the trademark claimed by SSH Communications Security Corp in the ssh name. After some further discussion, including the claim that the name 'ssh' had been in prior use before Tatu Ylonen's effort to trademark 'ssh', and mention that there was an open standard describing ssh protocol (if thrown by the 2006 date on that document, note there are drafts as early as 1995 on the topic), Apple (after no doubt fielding a number of complaints and upgrade requests besides my own) put OpenSSH into the MacOS X distribution at the very first sub-point upgrade, 10.0.1.

Some think license liability is at the heart of Apple's ZFS drop. Is this what's going on with ZFS? Despite ZFS being in significant commercial deployment, and being the default filesystem and boot filesystem for the well-known Solaris operating system, Apple has nixed it as a feature of its most recent operating system. The license under which Sun offers ZFS is the CDDL, which requires licensees indemnify Sun and other contributors for liability they might face in connection with their code contributions if licensees distribute ZFS under a different license:
You hereby agree to indemnify the Initial Developer and every Contributor for any liability incurred by the Initial Developer or such Contributor as a result of any such terms You offer.
Common Development and Distribution License, ¶3.5
Presumably, Apple's binary distribution under its standard clickwrap license is a "different license" though it's possible Apple could fine-print references to the CDDL, the GPL, the Apache license, and other licenses applicable to various parts of Apple's software distribution. Is Apple afraid Apple might be on the hook for indemnification liability?

A little thought is in order, here. Calls for Sun to GPL ZFS are misguided. Sun has a non-GLP operating system, and if Sun wants to link ZFS to its operating system without GPL-ing it, Sun needs to make sure ZFS stays non-GPL. The Oracle purchase of ZFS doesn't mean Oracle can unilaterally change the license on code contributed (potentially) by a host of third parties, who expressly licensed their additions under the CDDL, presumably so they could link ZFS to their non-GPL operating systems (e.g., FreeBSD). Just as the ssh trademark litigation was without merit, claims to patent rights by NetApp (and potentially others) in ZFS are likely also without merit. If so, inclusion of ZFS dramatically improves the feature set of low-cost hardware in the storage space, to the detriment of first-tier storage vendors and to the benefit of, say, Oracle and Apple (whose revenues don't come from storage but from computer hardware and software licenses).

If patent liability is the issue, the obliteration of NetApp's claims in court probably bode well for Apple's re-inclusion of ZFS as a feature of MacOS X, perhaps even on a timetable similar to that of the inclusion of ssh. The fact that ZFS includes a broad tool suite and would require specific support from some user-facing apps to access important features might make Apple's inclusion of ZFS rather less trivial than OpenSSH, but there's reason to suspect that Apple might actually release a ZFS-supporting operating system sometime in the foreseeable future rather than kill the project forever.

After all, what else does what ZFS does? And is production-ready and proven in use?

UPDATE: Randall Smock's comment at is interesting -- it points out that folks using Boot Camp to access Microsoft operating systems from Apple hardware will face an interesting challenge if Apple starts shipping ZFS ... because those machines would start being unable to access parts of the Mac while booted in MS-Windows. I doubt this is by itself sufficient reason to scrap ZFS (even as a non-default filesystem), however. It is interesting, and invites questions about how Apple might solve this (e.g., with MS-Win drivers to enable at least read-only access to the volumes in question). After all, Apple ships read-only access for NTFS, though there are solutions for this, too.

Saturday, October 10, 2009

iPhone Tops Quality Survey

Widening its lead over the next contender, iPhone took the top spot in a J.D. Power smartphone survey. Leading average-and-worse RIM products, the iPhone increased its score from the prior year's survey.

Products running Microsoft Windows Mobile operating systems seemed to do worse than average, though Palm and HTC have made known plans to migrate from the platform.

Thursday, October 8, 2009

On Apple Server Products

A few years back, a friend employed by Microsoft asked why Apple bothered to build rack servers when its money was obviously coming from MP3 players. This article suggests why Apple cares to have effective server products, and how Apple has succeeded.

Let's back up a bit: you remember that big online store that has delivered over two billion iPhone apps, over 5 billion songs (and now delivers 25% of all music sold in any format, whether digitally or on physical media, in the United States), and conducts billions of dollars in product sales annually for while serving up advertisements not only for Apple's own products but for a whole host of movies? Yeah. Imagine what the administrators of that property want in terms of hardware, remote control, and so forth. Imagine how they want to be able to recover from failure, and avoid losing transactions. Imagine how they want to save money running all that hardware and keeping it in working order.

To build outstanding hardware, Apple need only ask its own in-house administrators what is needed to make life as low-overhead and user-friendly as possible. Similar questions address quite a few of the administrative issues, as well. Apple doesn't need to speculate what big web sites need; it operates the fifth largest online store in the nation and a highly-trafficked web site subject to unexpected bursts of demand. Apple can do most of the server testing it wants in-house.

What could be easier?

Now, when someone asks why Apple would bother to build low-TCO rack-mounted servers, you know the real question: how can Apple not build them?

The next question is better: why is Apple not better at advertising the fact of its hardware to the rest of the worldwide users of server hardware? Apple's reputation isn't in servers, server customers may never have thought about Apple's Unix-powered hardware, and the products have been getting consistent accolades ("best-in-class in build quality, engineering, durability, and serviceability"; "Apple knows something its competitors don't, and after three weeks ... I know it, too"; "An objective reviewer's job is to find fault, and I've done my job. But the sum of XServe's flaws is overwhelmed by the system's unique, leading-edge, user and administrator-friendly engineering."; "Before we were running everything on a [F]edora server that had to be managed by an outside contractor who[se] availability was sketchy at best. Now I can control my whole server room from my laptop anywhere in the world. It really is fantastic. They are so powerful."). When Apple bothers to spend the kind of attention to the management tools for its server products that it spent on the last iteration of the iTunes client app, Apple will have something to write home about.

New York Ballet Cribs From Old Apple Ads?

Apple's "real people" ads that conclude "my name is ____, and I ________" has apparently inspired the New York Ballet, which uses the same conclusion in an ad for its 2009 ballet season. The idea of pitching a product by delivering a narrative from the lips of someone who sounds like you can identify with them -- whether a computer user who wants to get work done and not run a tech help desk (and turns out to run the company), or a ballet fan who loves to see the dance and needs encouragement in performing swift footwork (and turns out to be a principal dancer with the New York Ballet) -- seems to have caught on.

This is the Jaded Consumer and I write a blog on the Internet.

Dell To Compete With Apple in Phones. Music Players, Anyone?

Commodity PC maker Dell, having failed in competition against Apple's music-player handsets, will now attempt to compete with Apple in cell phones. Although shuttering a North Carolina plant and firing 900 workers, Dell is reportedly gearing up to launch a new class of hardware next year for supply to AT&T, the service provider for iPhones in the United States.

AT&T's reason to do this is simple: Dell doesn't have AT&T over a barrel to kick in a stiff subsidy for the phones (AT&T's subsidy requires 17 months of customer contract payment to reach break-even), and the consumer demand for the phones doesn't give Dell Apple's leverage in dictating tough terms to AT&T. AT&T will thus presumably keep more service revenue from Dell handset customers. Dell is doing what commodity vendors do: compete on price (for a look at Dell's five-year and ten-year charts to see how Dell has fared as a commodity vendor, try Google Finance). Moreover, AT&T likely prefers to have an Android offering, which Sprint and Verizon either offer or will soon offer: if customers want Android-driven hardware, why shouldn't AT&T offer some?

Dell presumably likes Android because it is free from operating system licensing fees, which suck profit from its PC business. What Dell may fail to realize is that whereas lack of a licensing fee is a distinguishing feature for Apple in the PC business (allowing Apple to make more on a given piece of hardware than could Dell, because Dell like HP must pay Microsoft a licensing fee to install the operating system consumers still expect on their computers), everyone selling phones has already decided to stop paying third-party licensing fees. Palm has dumped WinMo for its homegrown Linux/WebKit combo it brands WebOS, for example. The largest WinMo vendor by unit volume, HTC, is launching Android hardware to stem declining profit. Nokia bought all the Symbian it didn't already control then licensed the OS royalty-free to its other users. RIM has its own OS, though it's apparently moving to WebKit for web rendering. Even laggards like Motorola who recently shipped sluggish WinMo-powered clunkers, are experimenting with Android going forward. What this means is that Android isn't a competitive advantage for Dell: everyone else has either Android (because it's free) or a home-grown alternative (because they believe it is better on their products), and nobody is stuck bearing licensing fees they don't want to pay. Dell is back in the same position it is in the PC business: competing on price to deliver hardware running the same kind of software available to everyone else.

AT&T can't lose, because AT&T can keep selling iPhones or Symbian-powered handsets or whatever else might be in demand by customers who are willing to buy AT&T's service. AT&T's money is made on service, not hardware, so the hardware is of interest only to the extent it prevents AT&T from making sales. Perferably, AT&T makes service sales to folks willing to accept low-cost hardware involving modest subsidies -- the very deal AT&T likely made with Dell.

Whether Dell's offering is an "iPhone killer" will depend on the quality of the software integration offered by Android with the rest of customers' electronic lives, but because anyone who wants can offer Android, will depend even more on Dell's ability to design and deliver reliable, exciting hardware offering real improvement in the way people organize their lives. Does this sound like Dell?

Dell's music player failed because it just wasn't exciting hardware, and because its content market wasn't as attractive as Apple's. What's different now?

Wednesday, October 7, 2009

More Apple Litigation?

After Apple Corp. v. Apple Computer, one might think the computer maker's trademark infringement fights might have cooled.

Not so.
Australian multi-line retailer Woolworths' new logo has been registered for every class of product, including classes of products in which Woolworths competes with Apple (e.g., mobile phones) and in which future competition is plausible (e.g., computers).

Apple has taken its concern to the courts. Maybe, having discovered the long-term effect of trademark infringement settlement agreements, Apple will have strong feelings on the subject.

Apple has previously been a trademark plaintiff in a foreign country.

Monday, October 5, 2009

MSFT Launches WinMo App Store

Microsoft, for $99 registration plus $99 per application, will sell developers' wares and remit to them 70% of the proceeds. Registering developers' new applications can join fewer than three dozen Windows Marketplace for Mobile applications (including as many as ten games!). This, after accepting applications since July. According to ArsTechnica, the program offers a buyer's-remorse option for those rejecting purchases within 24 hours of an application's purchase: a no-questions-asked return period.

Presumably, existing developers who have figured out how to distribute their applications see little reason to abandon successful distribution channels, and the Marketplace will eventually satisfy the distribution needs of new developers who don't want to spend resources on non-development efforts. Once users look to the new Marketplace for apps, existing developers may be pulled into the store, too. Thirty-four apps on launch may inspire a few giggles, but it's not the kiss of death.

The kiss of death may be elsewhere in the system: application incompatibility between divergent hardware with different screen sizes, different input methods, different key layouts, and so on. Maybe.

Application pricing is likely to be impacted by Microsoft's deliberate avoidance of the $0.99 application commonly found at Apple's App Store. Interestingly, Microsoft argues that by charging ten times as much, developers can enjoy greater profit even at half the sales volume. This sounds like a quote from the Dell vs Apple hardware vendor debate, doesn't it? And in an echo of the server share metrics that so deceive readers about the relative abundance of various server software on the planet, Microsoft will rate apps' popularity by revenue and not by sales volume. (Hardware sales share can be found here, but a hardware vendor like IBM might potentially deliver AIX, Linux, or MS-Windows to different customers with different demands, and is thus little aid in understanding operating systems entering the market. Also, on existing hardware one never knows whether operating system upgrades are being undertaken, and if so whether they retain software vendors from version to version; thus, outside special cases like web-facing http servers that can be queried by strangers, share among the installed base can be difficult to gauge.)

Funny, that.

And another item from the Now Copying Apple newsdesk: Microsoft (like Apple) has now launched an open-source operating system. No, really.

Pystar Offers MacOS "Virtualization"

Pystar – the maker of Cupertino-unsanctioned Mac clones that failed to get traction with antitrust counterclaims against Apple for failure to license its operating system to third-party OEMs – now resells MacOS X as a virtulization solution.

It'll be interesting to see what Pystar will be able to win in terms of arguments about the limitations of software vendors to buyers' use of their wares. Assuming Pystar really has been destroying evidence against it and otherwise conducting itself contrary to the applicable rules, it's possible that case-ending sanctions end the case and not a genuine ruling on the merits. This might be good for Apple, but who knows what it might portend for customers.

Sunday, October 4, 2009

Ballmer on Market Share Against Apple

Ballmer says his company is gaining share against Apple:
I mean, we’re gaining share. Apple is expensive. And in tough economic environment, people get it. Their model is, by definition, expensive. And we’ve actually held or maybe even gained just a tiny bit of share relative to the Mac in the last 12 months. And it’s not really Snow Leopard. It’s really Windows PCs versus Mac.
Steve Ballmer, TechCrunch interview
Um, wasn't that a headline from the '90s? With 97% of the market a few years ago, wasn't the desktop war over? As proclaimed by no lesser authority than then-ousted Apple founder Steve Jobs: "The PC wars are over. Done. Microsoft a long time ago." This was quoted by Fortune in 1996, so it was a long time ago over a decade back.

Yet, Microsoft under Ballmer is still talking about its share against Apple. What? Share against Linux or Chrome, one could readily see: they are newer threats. The fact that Ballmer is claiming current success based on not losing much share to Apple now is just amazing. If Microsoft can worry about Apple's share it is no claim of success, it's an admission the company has snatched the threat of eventual defeat from the jaws of certain victory.

The fact that Microsoft can be bothere to talk about desktop market share says volumes about its worries in this regard. Sure, mobile share. Given the disastrous decline of browser share, even that is open to discussion. But desktop share?

If it can't get its head on straight, Microsoft is in long-term trouble. The future isn't about last year's competition.

UPDATE: Maybe Microsoft isn't gaining share against Apple, after all. Although the article discusses Apple's new operating system version "Snow Leopard", most of the hardware in the market isn't capable of supporting Apple's new operating system (being comprised mostly of non-Apple hardware), so the share numbers are apparently sales share and not OS market share numbers.

Friday, October 2, 2009

Apple Maps? New Geo Team Position.

The CEO of Placebase now has a new credit to his online profile: member of the Geo Team at Apple. Apple has been quiet about its July purchase of Placebase, but PlaceBase's customers noticed.

Apparently, Apple wants to offer maps layered with various kinds of data -- maybe even customer-collected data not to be shared with third parties. The idea that businesses could subscribe to a service to make sure their information is current in the map app is interesting; Mercedes' in-car map system has such woefully out-of-date restaurant data that it is virtually useless. Apple could potentially leverage its well-known brand to attract deliberate registrations. On the other hand, Apple could use sources like telephone books to generate data accurate at least as of recent printings. Commercial application is obvious: Placebase had millions in revenue and was profitable before Apple's acquisition.

Apple's software acquisitions aren't accidents, but strategic efforts to improve competitive position. Placebase means something to Apple.

ACAS Trims More Expense

ACAS' closure of its Frankfurt office makes quite a bit of sense by the time you get to the press release's line about the office's accomplishments: €153 million invested? Is such an amount even material to ACAS? Was the office intended to do deal volume, or to make ECAS more high-profile for European investors? If the outlook for private equity deals isn't terrific in Europe and the office isn't free to run (salaries are likely significant; it was a whole team, right?), consolidating in London might make quite a bit of sense.

Now, about London ... anyone know what it's done lately?

ACAS has "more than 135 investment professionals" worldwide, though it's not clear whether this takes the Frankfurt closure into account. Interestingly, when you click the link on ACAS' site, you get a directory with locations, titles, and names ...

... including Myung Yi, managing director of ACAS' special situations group. This is an area in which I expect ACAS' management to be paying special attention, as the world is now awash in special situations. Interestingly, Mr. Yi is listed as a board member of The New Piper Aircraft. Remember Piper Aircraft, ACAS' above-FAS-157 exit earlier this year? Apparently ACAS hasn't washed its hands of Piper altogether: after making money offering a line of credit and bonds with warrants, ACAS still has personnel on its board. Is there some kind of service agreement between the companies? Is ACAS leaving a connection open in order to marke future services? Continuing to make money on good companies is good business, I'd think. Anyone know what's going on there? Is that just an out-of-date link?

Let's hope ACAS continues to find good places to trim expense and succeeds in maintaining and finding new sources of revenue.

iPhone: Cost-Competitive?

When the iPhone's v.2 operating system was pitched with MS-Exchange support, one of the blessings touted at the release was the absence of per-user licensing fees for synch support software. To use corporate contacts, email, and calendar services offered by MS-Exchange, the RIMM Blackberry famously requires back-office support from proprietary servers whose license fees scale with the user population; Apple builds ActiveSync into iPhones' stock configuration. Cost isn't device price alone, apparently.

Between bottom-up pressure from users who are beginning to buy Apple's advertising that browsing is important on a smartphone, and the top-down cost pressure caused by Apple's competition, migrations to iPhone have begun in enterprise.

I wonder how far that might go.

Thursday, October 1, 2009

Browsers: Rounding Error?

Microsoft's Ballmer recently described the share of competing browsers from Apple and Google as a "rounding error". While Microsoft's efforts have left it significant desktop browser share even after its recent declines (the halycon days of 95% share are long dead), the share of browsers in the mobile space offers an entirely different story:

Source: PC World (direct link here)

The version of this image that shows up here misses a comparison pie-chart with different numbers, so click the link. The fact that different measurement methods yield such wildly divergent results is certainly interesting (Safari's share is 36% ... or 66%?), but the most interesting thing is that share for WebKit browsers (Safari, Palm's Pre, Google's Android/Chrome, RIMM's Blackberry, Nokia's Symbian S60; more discussion here) seems to be taking over the world in mobile browsers just as predicted. Aside from Opera, which has a significant installed base, is there a serious competitor for mobile browser engine share? It seems a bit like the original America's cup in 1851. You know:

Queen: And who is second?
Attendant: Your majesty, there is no second.
-- interview with Stuart Alexander (alternate version recounted here)

Microsoft may have committed to delivering quality products in the future, but at least with WebKit it's the case that the rest of the world is already delivering. With Windows Mobile an apparent marketplace failure in the segment of phones capable of delivering a usable browsing experience (and WinMo suffering non-Microsoft browser competition), and mobile devices exploding at a rate not seen this century in desktops, it seems WebKit's star is on the rise. Meanwhile, Firefox gains steadily against Internet Explorer in the desktop space.

Who's got the rounding error?

UPDATE: while the browser's rendering engine gets top billing -- people think of browsers and expect to see HTML rendered -- there are other important components to consider, like the browser's Javascript engine. Although Apple's Squirrelfish Extreme looked like the field leader around the time of Chrome's launch, Google's V8 javascript engine has matured to take the top spot. Sadly, Chrome isn't available on any Unixlike operating system yet, except for the especially adventurous. Anyone with Javascript performance benchmarks more recent than January are welcomed to post :-)

USB Implementers Forum Backs Apple

In a move likely to surprise and anger consumer advocates, Apple's strategy to block software interoperability with third-party hardware by sniffing for manufacturer codes has been supported by the USB-IF, which apparently chastised Palm for spoofing Apple's vendor ID in a bid to provide an iTunes-friendly competitor to Apple hardware.

On the one hand, spoofing a competitor's product clearly violates the rules governing USB implementations ... but on the other hand there are consumer protection concerns in refusing to allow apparently-compatible hardware to communicate effectively with users' legitimately-installed software.

This one might end up in arbitration (if the agreements require it) or the courts; Palm wants to synch with Apple's software, and being denied synch puts it at competitive disadvantage on Apple's platform.

On the other hand ... how much sales volume was Palm really getting on Apple platforms?

UPDATE: New WebOS update re-enables sync broken by recent iTunes updates.

OpenCL As HPC Tool?

Programming supercomputers has traditionally been a narrow area of computing involving careful vectorization efforts targeted to specialized hardware.

With GPU makers like NVidia now specifically courting the high-performance computing market with OpenCL-capable HPC hardware, and Apple having open-sourced Grand Central Dispatch to aid on-the-fly parallelization, maybe programming high-performance machines will become a skill more commonly found in everyday programmers.

Whether Apple ends up using NVidia hardware for this kind of purpose, or leverages its own acquisitions to deliver Apple-satisfactory custom hardware, or takes advantage of the competitive pricing behavior of third-party OEMs, it seems that Apple's hardware-independent APIs have prepared it to compete in a world of potentially radically changing hardware.

Software really is Apple's durable competitive advantage.