Sunday, February 28, 2010

Starbucks Is Bad At Math

On 2/15, a the Starbucks on Montrose in Houston, I bought a drink for $3.84 using the card 6046 0431 9760 6044. Then, my friend arrived.

The guy who sold me my drink told me, when I tried to buy my friend's identical drink, that the card had been "killed" -- that I needed to pay more for the drink than was on the card. So I handed him a $20 bill and told him to put the change on the card. Because there was some money charged on the card before I handed him the $20, the change should have been MORE than $16.16. I was not given any change except the card, and I didn't get the receipt (the clerks were talking with a customer and I didn't want to interrupt; I assumed the card had been charged as instructed).
The next day I tried to buy a drink at the Starbucks at the intersection of Buffalo and Westpark. I was told that the card was empty. EMPTY! It had to have over $16.16!

When I called about this, the friendly and understanding customer service assistant said she'd sort it out by sending me some coupons. Coupons aren't cash, so I can't spend them where I want if I grow dissatisfied, and they won't qualify me for rewards so they're not the same as having my card reloaded, but enough coupons could put me in an acceptable position. It sounded fine. In fact, I felt sufficiently appreciative of her effort to solve my problem that I spent extra time answering a little survey to make sure her supervisors understood she'd taken care to understand and offer a plausible solution to my problem getting shortchanged while reloading a card.
But today, I opened the envelope with the coupons. I was baffled. Knowing that I was buying drinks that cost $3.84, the customer service associate – who knew I'd been shorted change from a $20 – sent two (2) drink coupons. Unless I'm buying $10 drinks, this is the worst math I've seen in ages.

With math like this at the home office, or with customer service like this to make sure regular customers get as irritated as possible, one fears for Starbucks.

I'll watch carefully to see how Starbucks sorts this out. I can always buy people a drink someplace else.
UPDATE: Starbucks also can't code a feedback page that works, either. The evidence is that "submit" doesn't work when, in a text window claiming to accept 2600 characters, it refuses to submit the form when there are 2217 characters remaining:

UPDATE II: Starbucks' page for submitting ideas is broken, too. Clicking to submit an idea (like "Starbucks could buy a calculator") yields an instruction to sign in. However, there is no sign-in window even after you click to sign in. Nice, eh? So I fished around to send the webmaster feedback on the broken card-reloading-page feedback form. The result was amusing for a page dedicated to receiving feedback on technical issues on

Given these execution issues, I'd wonder about Starbucks as an investment thesis even if the company didn't appear besieged by high-volume commodity vendor competitors.

Thursday, February 25, 2010

Asian Beauties

While watching the Olympics' figure skating competitions, I realized I had seen some very nice Asian figures that I ought to have mentioned here.

The first are from China Armco Metals, the metal broker whose recent steel recycling plant investment will make it one of the top ten metal recyclers in China. Located within 3km of a deep-water port, and close to a major hub for automotive production (both a potential customer and a potential source of scrap, as local law requires auto manufacturers to recover and recycle abandoned vehicles), China Armco's facility seems well sited to take advantage of the steel industry as China begins firing on all cylinders during the worldwide economic recovery. Heck, why wait for the world? China needs steel now, has a large population with a growing middle class, and is consuming steel at a regular and growing pace.

China Armco's recent numbers include improvement, but don't show what investors need to know: those numbers are based on its old non-ferrous metals brokerage business. Although China Armco is growing its distribution business, that's not the company's future. And the future is bright: the company has gone from trimming 2009 revenue projections in its distribution business to announcing post-2008 recovery and predicting record revenues and projecting $0.45 or so profit per share in the full year of 2009.

The fact that China Armco will be earning these revenues in China offers an interesting hedge against the value of U.S. currency. Yet, these past earnings are not the reason China Armco is interesting. The company's future is in higher-margin production. The company's prospects have been discussed favorably from time to time online, but now that the company is listed on the Americal Stock Exchange under the symbol CNAM, it'll get more attention from analysts and will get noticed by folks who'd have shuddered to consider buying on the pink sheets.

CNAM currently trades 10x the earnings it projected for 2009, while offering a steady business in a currency that is deliberately kept mispriced and which could explode once China's government becomes unable to maintain the currency's artificially low value. It offers a chance to buy productive assets at a discount (being bought with underpriced Yuan), take a share of a business yielding an income stream in a non-US currency from a country lacking a banking or inflation crisis, and get a piece of China's expected national growth. It might not be getting in on the ground floor, but it's hard to get closer and be on a major exchange.

There are a few other Asian figures worth discussing, but it's late here in Houston. Good night!

Tuesday, February 23, 2010

ACAS Reports 4Q2009

American Capital Ltd. announced its results for the fourth quarter of 2009 and for the whole calendar year. First, the good news:
  • NAV up to $8.29/sh, up from $7.80 at the end of 3Q2009 (6% over the prior quarter)
  • Realizations of $476m in the 4th quarter, for annual realizations of $1.1B
  • Unrestricted cash of $835m, up from $445m at the end of 3Q2009 and $500m at the end of October
  • Net earnings were positive in the quarter again, with earnings of $0.38/sh for 4Q2009, up from a loss in the year-before quarter of $8.13. For the year, the net loss narrowed to $-3.77, up from $-15.29 for the prior year. (These numbers reflect FAS 157, and therefore some unrealized changes in value.
Then, the medium news:
  • The realizations were within 1% of reported "fair value"
This is reassuring (valuations aren't low), but also concerning (the investment thesis is that NAV doesn't reflect true value, but sales at NAV suggest that NAV is close to current liquidation prices, which may in turn suggest that real value and NAV aren't far apart).

The bad news is that NOI will be under pressure as interest rates rise, because ACAS owes all the money it borrowed to make its investments – and owes lots of this at a floating rate – but ACAS can only collect on its performing loans. ACAS' effective rate on its private debt portfolio is 9.9%, which is better than prime but nowhere near what ACAS expected when it entered the deals it's got on the books.

Interesting news in connection with the debt restructuring: "we are working towards launching an exchange offer during March[.]" Exchange offer? If this means management is preparing to swap shares for debt in order to bring its debt:equity ratio in line with expectations, this could help confidence in ACAS as a going concern (because it's not in default, because it is in compliance with required ratios, etc.) and help ACAS shares trade without a significant discount to NAV. On the other hand, exchanging shares for debt is terrible: ACAS' portfolio was picked for being expected to perform better than the cost of debt, so trading the debt for ownership of (part of) the portfolio (by issuing shares) works against the whole thesis of ACAS' prior practice of borrowing to invest. I'd like to see the economics of this transaction before passing judgment. At the right price, this might not be bad – but at the wrong price this is a concerning possibility. On the other hand, "exchange offer" might simply mean exchanging one debt for another – making unsecured creditors into secured creditors, changing existing debt holders into holders of debt with updated interest rates and expiration dates, etc. What management means by "exchange offer" is something that needs some understanding to evaluate.

In the past, ACAS has been good (e.g., ECAS, whose ability to realize NAV has improved due to improvements in the status of its credit facilities) about making good deals by issuing shares below NAV. Based on the representations in the proxy statement, I favored this below-NAV authorization, too. Let's look forward to more good things, including more NAV improvement, as the end of the economy's free-fall becomes clearer.

In the meantime, let's look for evidence that ACAS has an effective plan to stabilize NOI and normalize its credit situation.

Apple's Opaque Application Guidelines

While the Jaded Consumer previously argued that Apple's walled-garden approach to application deployment on its mobile devices was a win for security and customer experiences, the news on Apple's hard-to-understand policies on application availability has taken a turn for the strange.

Apple wants content on the iPad, including previously-published-on-pulp content whose vendors have had a rough time as the world has gone digital. However, applications that make amusing photo manipulations but don't include any photo content have been shut out of the store on the grounds that the apps contribute to complaints against the quality of what's visible to children (i.e., are not rated PG or cleaner). Hmm. Anybody notice this app? Ahh, but content from GQ, SI's Swimsuit Issue, or Playboy is safe, even if containing plainly-suggestive content or bald-faced pornography. (Granted, in pornography it's not the face that's typically depicted bald. Still.)

The real answer is obvious: place ratings on content and enable parental controls. Censorship shouldn't be about what Apple will let people view (Apple's position on Playboy and the Swimsuit Issue makes it clear Apple recognizes some material is so widely available that it's pointless to restrict one more outlet), but about making sure people don't accidentally disgust themselves. Want to not hear foul language in music? Want to not see nudity? This stuff is only a click away. Halting eBooks because a character uses a foul word is silly; foul language has been on the required reading in high school for years. The issue is how Apple will make sure that customers' experience is a quality one, not to make sure it's the experience they might find at a Disney attraction.

Get with the program. The quality of the experience is a big part of what makes people love products and shouldn't be ditched over something like a photo manipulation app that makes a user's own photos into a titillating experience.

UPDATE: Apple now reportedly offers an "Explicit" category for applications submitted by developers, which may go live soon. (Or not.)

Monday, February 22, 2010

Apple Selling Internationally

As foreshadowed in earlier posts about how Apple's software platform supported international expansion, Apple has moved in the last year from making the majority of its sales in the U.S. to making more than half its sales internationally. According to Gartner, Apple's globally minuscule share has taken a step forward when Apple became a top-five computer vendor France. Considering that Apple claims half the US computer sales share (not by units, which can be a money-losing place to compete, but by money spent), a trend toward success in the international market could be big.

Since Apple's operating system offers a single backdrop for all Apple's third party development, and is optimized by Apple for the specific hardware Apple ships (or in some cases Apple-designed chips), Apple's control offers it an advantage against competitors. Moreover, Apple's object-oriented and runtime-linked deployment environment means that as Apple updates system components from which developers inherit functionality, those developers' products inherit Apple's performance improvements. This inherited optimization goes deeper than Microsoft's ability to ship a "fixed" DLL applications might ask to perform functions: Apple's runtime linking means that commonly-used objects in the Cocoa environment, whose object-oriented-descendants appear in applications from every vendor of Cocoa applications, will not only answer to calls from applications for help from system libraries, but will appear in developers applications themselves and offer performance, stability, and security enhancements as soon as Apple deploys them -- without need of a developer update. Every bit of performance Apple wrings out of its Cocoa environment on any Apple platform will be multiplied in user benefit because the improvements will appear on re-launch in every application on the platform.

As performance becomes a selling point -- and the battery life of mobile devices has long been a selling point -- Apple's power to influence performance deeply in every application on the platform will enhance Apple's ability to deliver a product users will experience as superior.

Oh, and Apple's localization scheme allows developers to deliver one application to all users, and on launch the application will launch in the best-fitting language supported by the developer automatically based on the logged-in user's language preferences. Even multiple users on one machine can experience their favorite language with just one application installation. The days of separately-bought applications in different languages are numbered. Can you say worldwide installation image? Can you see how Apple would be the preferred platform vendor for international hardware partners?

Add to this Apple's apparent interest in supporting new hardware platforms, and one sees the makings of Apple as the basis for user-friendly interfaces on hardware all over the world. (The position described in the article involves managing the bring-up of the iPhone's operating system on new platforms and requires understanding of design at the system-on-a-chip level.) Apple's touch-interface UI and its embedded/SoC platform are an excellent way to license Apple's way into the UI of high-end consumer devices like car stereo/navigation, home security, DVR systems, and the like.

Expect more Apple products in different markets.

Expect Apple's sales, PC and non-PC, domestic and foreign, to continue to improve.

Saturday, February 13, 2010

ACAS: Confusing News

The news that ACAS shareholders have approved issuing shares below NAV will no doubt result in share price depression as people banking on a return to NAV lose hope.

Are they right to bail?

Depends where you stand.

If you believe that management can't value investments, then you should bail regardless whether ACAS does or does not issue more shares. If you believe management does not warrant your confidence, invest elsewhere. Since the first quarter of 2009, when ACAS last entered one of these below-NAV issuance transactions, ACAS has done pretty well.

If ACAS wants to repeat that feat, I say let 'em.

Nicolas Marshi's apparent argument that funds raised in the issuance could be paid to lenders makes little immediate sense. Although ACAS' 4Q2009 results are not yet published, ACAS enjoyed $463m in realizations in 3Q2009 and ended that quarter with hundreds of millions in cash: "Unrestricted cash and cash equivalents totaled $445 million as of September 30, 2009 and approximately $500 million as of October 30, 2009." This cash trove was presumably intended to satisfy the expected cash pay-down of debt obligations under its already-developing agreement with creditors. Adding a couple hundred million in a defensive move against a future payment date makes little sense: if ACAS didn't meet internal guidelines for raising capital for pay-down, ACAS could always have an emergency fundraiser later.

If one credits management's competence, one likes to see management gain the freedom to make deals for shares. Meanwhile, there are genuine distress opportunities to be had, and ACAS has a division specializing in distress opportunity. A while back, ACAS was itself one of the distress opportunities. However, its 6.85% unsecured notes due in 2012 have gained value from "up to in the 60s" to $0.97 on the dollar.

I don't think ACAS' transaction is retiring its own debt, unless there's some illiquid debt not priced as quoted above. I suspect distressed opportunities.

Thursday, February 11, 2010

RIP Charlie Wilson

Charlie Wilson may be dead, but is not gone: he can be visited along with thousands of national heroes memorialized at Arlington National Cemetery. Wilson will be buried with full military honors, which befits his enormous contribution to the expulsion of the Soviets from Afghanistan in the 1980s.

Without Afghanistan, how much longer might the Soviet Union have lasted?

What the world owes to Charlie Wilson.

Iran: Welcome To The New Rule By Terror

When accusation of allegiance with the United States or Israel failed to thwart anti-government protesters, insiders clinging to power began executing them as Enemies of God.

Given that there's no worse accusation in the nominally theocratic state, the legal and moral escalation of government's accusations against those who would hold government politically accountable by demanding genuine ballot counts has apparently reached a pinnacle. The question is whether the government will abandon its nominal public participation and announce naked despotism, or will use terror fostered by religious-branded executions to suppress transparency advocates while pretending to continue public participation.

Flash Capacity Advances Mobile Device Prospects

Japanese researchers – a label with a strong post-WWII history for evoking efficiency in size and power consumption – claim to have developed solid-state storage technology that will support drives with no moving parts, no bigger than a postage stamp, deliverable by 21012, and offering a capacity of 1TB. They demonstrated a prototype.

The question is now how to make computers' UI elements small and low-power enough to match the improvements in processing and storage. Shall we jack the things directly into our heads?

More seriously, though, the prospects raised by such tech are pretty cool.

Global Warming?

We're suffering a heinous cold snap that has Houston raining ice chips instead of water, and has stranded travelers, closed airports, and delayed flights from cold-weather issues. Endangered manatees are suffering cold-weather injuries in Florida's waters. Naturally, it's a fine time for pundits to issue a seasonal zinger on climate change policy. I mean, you really think it's getting hotter?

With Japan having already announced the conclusion that manmade global warming is as scientific and as grounded a theory as ancient astology, one wonders where the political and ecological pendulum will swing. And whether they will swing in concert, or in diametric opposition.

In the meantime, the music is good and the lyrics fun.

Wednesday, February 10, 2010

iPad Cost Estimates In: Profitable, Price-Flexible

Now that parts people priced iPads' components south of $250, Apple's per-unit margins and potential price flexibility have at least some source on which to begin projecting things like Apple's ability to profit, battle competitors, etc. The most expensive part of the iPad (est. $80) is also the part most draining of its battery: the multitouch display.

I would expect Apple to be interested in partnering with producers of display innovation to address both issues. Anyone remember Apple investing in Samsung LCD-manufacturing capacity in order to ensure price and supply?

The idea that the brains in Apple's new machine cost within $5 of the iPhone's processor is interesting: Apple may be able to produce a lower-end version for even less money, assuming it doesn't want to try to stick a whole A4 in every phone, or improve iPhone margins by moving to an in-house chip. The flexibility created by Apple's in-house design and lack of need to support ancient instruction sets for customers Apple won't be seeking means that Apple can now make exactly what Apple needs, and can expect to benefit from huge-volume pricing since it will be installing each chip in every single unit it sells of the design that houses it.

As competition for iPhone and iPad competitors heats up over the next few years, Apple will be able to do with these products what it did with the iPod: move to more and more price points until nobody can compete without having their air choked out as high-end consumers prefer Apple's offering in the same price range.

Catching Apple could prove a trick.

Monday, February 8, 2010

Apple To Pull iPhone With iPad?

This article suggests Apple's management is ready to drop iPad pricing if demand doesn't hold up. Gruber's Daring Fireball suggests that Apple deliberately priced to grow the market and its share of the market and not just to make big per-unit profit as it did at the iPhone launch (whereupon Apple promptly dropped the price to grow share, based on evidence the market for the phones was a lot richer a hundred bucks or so cheaper).

Friday, February 5, 2010

Schwartz Quits Sun, Doesn't Understand Haiku

Sun Microsystems (formerly known under the symbol SUNW, then later JAVA) was all but irrelevant by the time it was acquired by Oracle. Whether bought for its engineers or for its server support contracts, Sun was no longer the quality leader in hardware or software its CEO Johnathan Schwartz tried to portray when he pitched black-box server containers and argued Java was the way to deliver applications to the world, and pitched Java as the next smartphone platform.

However, Sun's focus on Microsoft's operating systems and its refusal to do serious Java work for some of its most significant alternatives in the server and desktop space caused Sun to blow its Java opportunity. And what, exactly, was that opportunity? To give away an open platform to anyone who wanted to use tools sold by anyone? How does a company make money like that? The lesson seems clear: one doesn't.

Today, Schwartz left Sun on a low note. Quitting by Twitter wasn't all that surprising for a CEO known for blogging, but his pretense at poetry was simply shameful. He claimed he wrote a haiku, but what he wrote was classic drivel: "haiku" selected as a form by someone without the sense to build a rhyme. This isn't haiku at all. "In traditional haiku there is always some reference to a season." The necessity of the season reference in real haiku is underscored by the kigo, the word or phrase specifically associated with a particular season, which occurs in haiku. The kigo anchors each haiku in a specific time and place so that experiencing the haiku allows one to experience a particular snaphot of nature.

In English, the lack of traditional kigo doesn't mean haiku have no seasonal reference, but that writers must stretch themselves to make haiku despite the lack of traditional seasonal anchors.

In college I met a group who thought it was extremely funny to write stomach-churning perversions with a 5-7-5 syllable count and call them "haiku" as if they were subtle art. I tried to explain what haiku was and they quickly dismissed it: writing would be hard if one had to satisfy the requirements of the art.

So I undertook to educate them. I wrote a haiku – a true haiku, with clear seasonal reference to anyone familiar with the mating habits of frogs – that turned everyone's stomach. I did exactly what they wanted done, but I wrote an actual haiku. I will not repeat it here because then I will never be able to seduce any of the chicks that visit. It's so gross, N won't let me recite it.[1]

Now, Johnathan Schwartz is an educated guy and surely possesses the brains to write a genuine haiku. He could have grounded it in winter, to highlight the death of his job or of Sun as an independent company; he could have grounded it in spring to emphasize his future opportunity; he could have linked it to the moon, which will appear to change completely but will before long look exactly the same again. There are so many ways one could write a haiku about leaving Sun that would have been real haiku that it's simply shameful to see Schwartz' drivel even treated with the name "haiku".

[1] N does, however, allow me to recite a haiku I wrote for her. In autumn in our part of the country, we get cicadas. Every few years, we get lots of cicadas. When they make their cicada-noise in the trees in such vast numbers, it's a swelling, roaring sound that penetrates any wall or window, overcomes gentle indoor music, and interferes with sleep. The sound is so deep at its lowest that it moves straight through earplugs. N was cursing, shaking her fist, and yelling the worst epithets she could muster while enraged to the point it was hard to make coherent sentences. After enough nights of the cicadas, you can get pretty fried and sleep-deprived. And N is a light sleeper. I suggested to her that her passion could be more fruitfully channeled, and she regarded me with doubt, but suggested I write a haiku on the topic. She really hated my haiku about the frogs, and she wanted revenge on the cicadas. She wasn't in the mood for love, so I appealed directly to her rage as I slowly spoke the words of a haiku made just for N:
chirping cicadas
thunder rolling from the skies
flaming cicadas
I don't pretend this is a masterpiece – the seasonal reference only gets you into autumn, and you have to imagine the blackened, smoking tree full of blazing cicadas – but it's a damn sight better than what Schwartz published. He should be ashamed.

ACAS: What is WRH, Inc.?

Earlier the Jaded Consumer posted about some apparent duds in ACAS' portfolio. The idea was to identify companies whose listed fair value wasn't holding after investment, the better to understand what was going on with the valuations and to shed some light on whether ACAS' investments were terrible or whether, instead, ACAS' pricing environment was terrible but its investments were not.

ACAS' last 10-Q shows another such company whose data invites inquiry: WRH, Inc.

ACAS lists the industry of "WRH, Inc." as "Life Sciences Tools & Services". Depending whose Google links you trust, the private company WRH Inc. is either an Iowa company with $15m in annual sales involved in water & sewer system construction, or a New Mexico company with revenues between $2.5m and $5m in an industry described by NAICS Code 532412 ("Other Heavy Machinery Rental & Leasing"). The moniker "life sciences" seems a bit closer to water and sewer systems than to heavy machinery leasing, but who knows? If you have a clue, please post. ACAS' site seems bereft of detail. Based on the quarterly interest payments ACAS gets from the company (described below), I think it's clear that if either of these companies is our man, WRH, Inc. has to be the $15m/y water treatment tools and services company.

Two ACAS vice-presidents of buyouts – the Stanford MBA graduate Scott Kauffman, and former KPMG manager Justin Dufour – are observers on the board of WRH Holdings Inc. As of September 30, 2009, ACAS had invested $353.3 million in its "non-control/non-affiliate investment" WRH, Inc. in the following manner:
  • $4m in senior debt (4% coupon and $4m face value, due 9/13, pledged as collateral and not non-performing, for an apparent quarterly income of $40,000 or $0.04m; this is valued at $4.0m which is both the investment's face value and its cost);
  • $86.5m in subordinated debt (14% coupon and $87.1m face value, due over the period 7/14-9/15, pledged as collateral and not non-performing, for an apparent quarterly income of $3.0485m; this is valued at $87.1m or face value, which is above listed cost);
  • $213m in convertible preferred stock, listed as not income-producing and valued at $$86.9m; and
  • $49.8m in common stock, listed as not income-producing and valued at $0 (nil).
ACAS is required to value the investment at $178.0m, approximately half its listed cost of $353.3m. At the listed value of $178m, the still-produced quarterly income of $3.0885m is 1.7%, for an annual yield of about 6.9% (this ignores potential for capital appreciation; based on ACAS' listed cost, the yield is 3.5%). According to the 10-Q the preferred stock had been income-producing as of December 31, 2008 (in some undisclosed amount), and at that time the whole investment was valued at $332.3m. Between the two measurement points, however, the current valuation was not the only thing that changed: ACAS' cost changed. ACAS' cost of preferred stock was reduced by $13m and its cost of senior debt was reduced by $0.3m, and its cost of subordinated debt (the fat 14% notes) climbed $5.5m from $81m to $86.5m. What happened?

I haven't looked at ACAS' internal accounting, but one scenario suggests itself: when WRH informed ACAS that it wouldn't be able to pay dividends on the convertible preferred, ACAS converted some of the preferred (reducing its basis in the remainder of its convertible preferred holdings) to increase its holdings in still-paying sub notes. The reduction in "cost" of ACAS' holdings of WRH's senior notes suggests something similar occurred in the senior notes, but the transaction isn't as easy to guess as in the case of the convertible preferred, which was almost certainly converted to sub debt under the shares' conversion feature at whatever rate applied to the shares. The fact that the change in costs doesn't equal zero means that ACAS realized a loss at the time it exited the non-performing convertible preferred. The face value of the sub debt increased $5.4m in the transaction, quite close to ACAS' change in cost (the least-significant digit's off-by-one issue could result from rounding; or the other digit could represent something having to do with the change in senior debt).

So, ACAS converted preferred into sub debt, and did something with its senior debt that's less clear. ACAS gets $3,088,500 per quarter in interest, could potentially convert more preferred to debt, and holds common stock. Assuming that water treatment is still a valuable industry in Ohio or the nation, it's expected that the long term value of the zero-listed common stock isn't zero, and that the currently-nonperforming preferred stock may have future value either on conversion to debt or after reinstatement of dividends. At currently-listed "fair value" the interest payments are rather better than many of my own holdings, though presumably ACAS entered the deal to profit from equity increases (hence, the equity investment).

Anyone know anything solid on the company? My understanding was that infrastructure was considered a sexy industry and that efforts to improve greenness and sustainability had strong support. A company that provides water treatment tools and services seems well-positioned to benefit from increasing water demands as populations grow and their associated ecological concerns become infrastructure plans.

Is this really a long-term loser? Is the company reinvesting in growth rather than paying dividends in order to capitalize on some present opportunity? Was business horrible after the end of 2008 but picking back up? If ACAS didn't think the preferred shares had value, why would it not have converted them all to get paid interest?

WRH Inc. will be a holding to watch: both for listed fair value and for evidence of ACAS converting investments into different holding types as performance changes. In the meantime, several million a quarter in cash doesn't hurt ACAS' prospects.

If you have insight into WRH Inc. or any other ACAS holding, please post.

If You Build It ...

Steve Jobs' effort to pitch Apple as a conduit for content vendors is apparently in high gear, as he's appeared in person to pitch iPad as a delivery platform for historically printed content. The delay between announcement and shipping will allow Apple to capitalize on increased buzz to make content deals that will make the platform more attractive by the time of sale, and to put in place deals that can be pre-announced regarding content and the utility of the platform.

If the iPad has a tool for searching back-issues of newspapers for research, lots of folks in news and academia will be all over it. As argued here before, the rights of users to access and handle the content will have a big impact on the utility – and thus the practical value – of the content.

Thursday, February 4, 2010

ACAS: Why So Sudden A Need To Sell Shares?

Unlike the ECAS deal, in which investors had lots of notice what ACAS was up to when management announced it wanted to "sell" shares below NAV (by exchanging them for ECAS shares that were even more below NAV, thus increasing ACAS' post-transaction NAV), ACAS hasn't educated the public about its latest solicitation of authority to sell shares below NAV.


(1) ACAS is working on a deal in which it doesn't want competitive suitors, or in which it is working under a nondisclosure agreement. The evidence that ACAS has a specific deal in mind is that ACAS has given a very short time frame in which to solicit the necessary shareholder approval. ACAS' desire to make sure the approval is obtained is underscored by the fact that ACAS had someone call The Jaded Consumer soliciting a recorded proxy vote of shares held by the Jaded Consumer.

(2) ACAS' distressed assets group has a special situations group that looks for distressed-priced businesses that stand to benefit from ACAS' operations expertise. Founded in 2005, the group doubtless has been swamped with exciting opportunities, and is surely clamoring for capital at any price that is less discounted than that needed to enter distressed opportunities with profitable price-adjusted results. By this I mean that ACAS knows that investing a dollar for a $1.10 return is a loss if ACAS has to sell shares at half NAV to raise the $1; ACAS needs to adjust prices to accommodate the cost to ACAS of $1 in shares to assess the viability of investments. An asset's purchase for ACAS shares is still accretive to NAV despite shares being valued at half NAV if the asset itself can be had for $0.10 on the dollar. 5:1 isn't as good as 10:1, but it's awfully good. Why doesn't ACAS wait until share price exceeds NAV? "Speed is a critical component" in the special situations market.

Upshot? Vote your shares "yes" or decide you lack confidence in management and vote with your feet. Voting "no" seems to make no sense.

Why is ACAS plummeting? Apparently, someone thinks ACAS has a liquidity problem despite having hundreds of millions in cash. But think for a minute. By adding high-return assets that are hard to value without either taking on debt (forbidden because of BDC debt ratio limits) or losing cash (likely required to solve issues with outstanding creditors), ACAS both grows its business and de-leverages its balance sheet.

Nice, eh?

MSFT: Lost In the Woods

In a prior piece, Knowing The Path Isn't Walking The Path, the Jaded Consumer discussed how Microsoft had been unable to solve clearly-identified problems apparently addressed just fine by competitors with fewer resources. In today's op-ed in the New York Times, a former Microsoft executive explains that this is the inevitable result of Microsoft's dysfunctional internal culture.

So instead of leading the world in technology, the world's richest tech company is apparently reduced to making false predictions of doom about its many competitors while milking decades-old software franchises for continued cash flows as long as developer API dependency and file format lock-in supports its business model.

Now, perhaps we understand why Microsoft has failed to deliver on its promises of the future.

Apple in Mobile

Apple's advance in smartphone market share took a step forward when it announced a 100% y/y increase in iPhone sales. With the Research In Motion Blackberry line increasing its sales 40% over the period – respectable, but not quite Apple's pace – Apple advanced its share from about 11% to 16% while RIM remained nearly flat at about 19.5%. RIM keeps the lead, but that lead is less commanding than previously.

With Apple expanding its mobile devices with the iPad, it's unclear whether the market share measured by those trying to keep track of competition among "converged devices" will eventually become hard to define. However, as initial iPad versions don't show evidence of direct competition with phones, this isn't an issue at launch.

How To Cripple Digital Books With DRM

Late last year, I checked out a book from my local library without leaving home. I got an email that the book I had placed on hold was ready, and I followed the links to check it out. After installing some Adobe software, I was able to download the book and read it on my computer screen.

The prospect of digital access to a whole book was initially very interesting: suppose I lost my place and wanted to find it. Could I search by some quote I remembered? What if I forgot some detail from an earlier chapter – could I search for the appearance of a certain character by name or description? If I wanted to make a block quote for a book review, could I copy and paste without spending time re-typing the text?

Nope. Well, not with Adobe's tool or by respecting Adobe's DRM. Worse, Adobe's DRM doesn't support accessibility tools like screen readers or Braille output any more than it supports the plausible and ordinary uses of academics to copy and quote text under traditional fair use precepts.

Apple is offering not just major publishers' books, but textbooks. Will this do for the iPad what educational offerings on iTunes did for iPhone in education?

As with music, Apple has an opportunity to re-invent digital rights for users. Rather than hard lockdown of content รก la WMA (which is so draconian that instead of getting articles about the limits when you Google for them, you get links about converting files out of WMA or avoiding the format altogether), Apple offered fairly lenient restrictions on music use (all the iPods you cared to sync, and up to five simultaneous computers). Will Apple allow users to search textbooks for the names of theorems, or force you to look in the index then flip – as in a physical book – to the listed page? Some of this is, of course, dependent on what content owners allow Apple to offer ... but Apple has an opportunity to exert leverage. The utility of allowing Spotlight to help you hunt through your library to find all the books that relate to radiography or spectral analysis, or nuclear chemistry, or thorems governing limits would suddenly make all the content one buys more valuable on Apple's store, because it could be accessed faster. Time saved finding quotes in classic works, locating passages from books whose bookmarks were moved by your roommate, and the like is time you can spend polishing your papers into an A. Search, copy, paste, and the like is a huge win for academic users if available.

If not available, it's a crucial loss. The iPad won't run applications side-by-side, so your prospect of reading from one application and typing into another, as with a wide-screened iMac, is nil. Either you can copy and paste, or you can't make verbatim quotes without printing to paper or developing photographic memory. Hey, maybe MacMillan expects you to have two iPads when referring to its texts while writing a paper.

We don't yet know the digital rights limits users will face, but their extent will be a crucial feature that will impact the value of the content sold for Apple's device. Adobe blew it, and won't ever sell me a book (though I might check non-reference "fun" fiction out for free). Here's hoping Apple manages to offer better.

If Apple makes textbooks easier to carry, easier to search, and easier to quote and cite in students' papers, Apple will have a hands-down winner on its hands – a platform to which content producers will fight to offer works because it's so highly in demand by users. Imagine carrying a whole semester's books in the same 1.5lb package you use for email. It could be a winner.

HTML v Flash

Religious war brewing?

Although Flash certainly is the feature-rich favorite for immediate deployment of complex video/graphical interface content to the web – and due in part to Microsoft's current non-support of HTML5 is the only alternative for truly broad video playback capability – this is the present and not the future.

Microsoft's Explorer team now participates in efforts to improve developing HTML5 standards (since it can't rely on Silverlight to beat Flash, and would prefer HTML5 to another vendor stealing developers to a competing platform). Presumably Microsoft's IE9 improvements will include an effort to rejoin the lead echelon of modern browser experience in offering standards that, not incidentally, will reduce developers' dependence on competing proprietary development tools like Adobe's Creative Suite.

Meanwhile, HTML5 promises to allow vector graphics, video rendering, and all kinds of other things Flash used to be required to do – all without plug-ins.

Adobe arguably can get this developer business, too ... but my own experience with Adobe products poisons me on the idea. Years ago, I hand-coded a page full of resources for people doing research in a specialized professional field and included numerous places one could get information – different government agencies, universities, etc. – and with these provided everything one wanted from links to the online resources available there to links to maps for getting to the physical locations for examining paper-only resources, links to hours and campus maps for finding buildings once one was present, and institutional logos so users could quickly spot the institution they wanted if they already knew what they were hunting for. All this was provided in a table that made it easy to tell what type of content you wold get from a clicked link, based on the horizontal location of the link. Some "web designer" at the institution for which I created this little gem was in the habit of examining contents of the various folders on the server she ran by double-clicking the files – an act that, on her computer, opened the page in an Adobe HTML editor. Then, she would fool with it. Not much – she'd try to move a column in the table, for example, then see it didn't help and put it back – and sometimes not at all; yet, she was in the habit of always saving every document before closing it.

My page – which had been carefully tested to be usable on Microsoft's Internet Explorer, the MacOS 9 browser iCab, Opera, the Firefox predecessor Netscape Navigator, and every other browser I could get my hands on – was continuously broken. Every time she saved it with her Adobe HTML-editing tool, something happened to the page based on her preferences in her editor (e.g., the color changed unaccountably) or based on some little tweak Adobe didn't bother to code to work across browsers, or simply because Adobe's editor wasn't designed to work everywhere, just on browsers Adobe engineers used. No matter how often I replaced the page with an undestroyed version, she managed to screw it up with her Adobe tool for no reason at all. Moreover, she was utterly oblivious to the fact she broke it: "I didn't change a thing," she would say. Yet as soon as I replaced it with my version, it would work everyplace. This circumstance just never lasted.

Eventually I tired of the Sisyphean task of pushing the page back into cross-browser utility, and when I left the institution nobody bothered to maintain it. Why should they? Any browser they used to open it invariably revealed a horribly broken mess of which users could make no sense. Why waste time with tripe like that? It disappeared shortly after the institution "lost" the web designer who broke it; her replacement (justifiably) discarded it as unmaintained, broken garbage.

So, what's the future of Adobe? Who cares!

The future of HTML5 looks solid, as all the major browser manufacturers are working together to make an unambiguous standard that will allow write-once development for any compatible browser. The range of issues to be addressed by HTML5 and other incoming standards seem fairly broad: video playback, 2D animation (WhatWG's work on Canvas), scalable vector graphics, mathematical markup, user-side database storage, 3D (e.g. WebGL), and a host of things that Flash might have been used to accomplish in the past but can be handled more elegantly, and in a way better matched to the rest of a given system's user interface, by careful implementation of standards-based content interpreters on the platform of a user's choice.

Adobe promises to update Flash, to make it a moving target. Of course, if it moves too fast its developers may not be able to follow.

Let's hear it for the future, and open standards.

Wednesday, February 3, 2010

Why Vapid Soundbites Beat Analysis

This article paints a pessimistic view of the worried world's likelihood to embrace reason when the alternative rhymes.

The good news? People who are comfortable and unafraid may be fully capable of seeking out and enduring unfamiliar experiences, thoughts, and mental exercises – even if just for fun.

Does progress depend on happy people? The pessimists – who claim, if you ask, to be the only ones capable of seeing the truth – would revolt at the thought. But then, are pessimists about progress, or about merely avoiding regress? Pessimists have a valuable place in society – warning us against mass-suicide, for example – but theirs is not the job of building the future.

The future belongs, perhaps, to those who refuse to accept that "easy = true" and are willing to suffer to learn what is true. The question is whether anyone will be willing to join them in this future, or if these few, this band of brothers, will be left alone in the land into which they venture.