Blackberry Outage Ends

Research In Motion's (NASDAQ:RIMM) Blackberry devices, which depend on RIMM-supplied back-end support for which RIMM charges subscription fees, suffered an intercontinental email service outage that began October 10 and went unresolved until October 14. Now that the outage is over, some customers who bought RIMM's "ready for business" pitch are re-assessing the single-point-of-failure aspect of depending on RIMM for critical infrastructure.


Although RIMM has suffered (and suffered) in stock price (market cap is at the time of writing about a tenth of the $123B RIMM once commanded) and in market share, it now also suffers a setback in something that might be hard to restore: its brand.

If RIMM's profit continues to suffer pressure, infrastructure investment (and service quality) may be in long-term jeopardy. The discussion of RIMM as a takeover target (more here) is interesting, as it offers promise of capital with which to address service quality – and management change to aid re-direction in a more competitive direction.

Frankly, a successful and independent RIMM has been a good motivator of other manufacturers; I hope they pull the firm out of its dive. RIMM has a large subscriber base; hope springs eternal.

A5 Leads Phone Performance

According to Anandtech, the A5 chip in the iPad2 – and now the iPhone 4S – performs significantly better than (like, 2x) the best of the recently-launched competitors' devices' CPUs. (*cough*Samsung Galaxy S2*cough*) Leading handset performance is certainly an Apple objective: iPad apps will run better on iPhones, and games will work better, and the services Apple wants to supply users while they're doing everything else they do with Apple's products will be easier with more computing power in each device.

Yet, Apple isn't sitting still.

With Apple's A6 apparently set to launch next year as a quad-core part built on a 28nm process (compared to the 40nm process on offer at NVidia's fabs), it's clear that Apple intends maintaining advantages in hardware even as it differentiates it phones with software. The hardware advantage isn't something Apple is taking lightly: it's got a thousand FTEs building the brains in Apple's next mobile devices. (And AppleTVs, and maybe its next MacBooks; who knows where this could go. Based on Apple's control of its developer tool chain and capacity to support compilation of multiple-architecture binaries, Apple can potentially do things others have no chance to duplicate.)

Outperforming NVidia chips in graphics, Apple's chips seem set to dominate mobile gaming and potentially replace games-specialist competitors. Unlike the XBox, which spent years losing money before it went into positive cash flow, Apple's iOS devices have consistently made money while building the platform from which to attack available markets. Where Apple will push the iOS platform is definitely a point of personal curiosity.

The more power I see in Apple's devices, the more I marvel at how auto manufacturers can keep shipping such crummy mapping tools, with kludgy interfaces and quickly-outdated databases of destinations. Surely the opportunity isn't lost on the manufacturers. Apple's devices can replace the stereo head unit, the GPS, the map, the address database, the climate controls, the bluetooth controller ... everything other than, you know, the car. The improvement in usability – especially for borrowed cars, rentals, and other situations in which users won't have unlimited time to become familiar with some screwball new way to identify a destination to a mapping program – is a huge plus for customers. Heck, with cloud music, car renters could log into the i-device in the dash and pull down the music they love rather than fighting local radio for something worth hearing. While using a map app that updates continuously from sources in Apple's cloud.

Apple's departure from the rack server space may certainly be a function of low sales volumes, but as Apple's tools improve for enterprise uses, the demand for something that will free users from high-overhead competitive server software will create an opportunity for Apple to sell low-power server hardware based on homegrown CPUs: cool-running, cheap to operate, and supporting ARM's hardware-supported security tools, Apple's non-x86 servers might be truly attractive for enterprises.

Did someone say Research in Motion was selling for less than Apple's cash on hand, and was becoming more affordable as its unit share teetered? Especially in the post-Jobs era, taking a serious look at the enterprise space might not be that hard to imagine a few years down the road.

Speaking of the post-Jobs era: there's been a lot written about him and what he did for tech. Much of it is really worth reading. I was at an airport when I heard, and as I looked around I saw white earbuds, iPhones, iPads, and other evidence of his passage all over the place. It was moving: he'd changed the world. We can argue how much, perhaps, but the evidence he was here is everywhere. It should be clear from the posts here in what regard his accomplishments are held here at JadedConsumer, but I don't think I have anything especially brilliant to say on the matter. I think much of what he contributed is a result of his expressed view that you only get one shot at life, so it stands to reason you should not waste your time on things that aren't excellent. We've benefited from his pursuit of excellence, and can hope that his successors really share the same value of quality.

Apple has a quality lead and a solid footing for retaining it. Sales seem strong at Apple's store and at AT&T's; nobody else is talking. Sprint's demand for the phone suggests Apple is something of a carrier kingmaker: Sprint's leading cause of customer loss before the iPhone 4S launch was the carrier's lack of an iPhone. (Now, carriers are competing for iPhone customers.) With China a relatively untapped market and smartphones still a minority of worldwide handsets, the long term trajectory of Apple is toward sales volumes increases in the handset market. Notice Apple doesn't drop its old models, just moves them down the performance ladder for customers unwilling to pay more? Apple is moving toward capacity to do with phones what it's done with music players, and overtake most of the business that's worth taking.

And, you know what? Apple is selling more computers, as well!

It's a good time to be Apple.

Thanks, Steve.

Selling Software: What Apple's Competition Is Doing

Google, having heard anecdotally that hands-on use of its Chromebooks greatly enhanced users' understanding of what they did and why they might want to buy one, is following Apple's strategy of improving the frequency of that hands-on access by opening physical store locations in which to enable customer access to its products in a demo-ready, functional environment. Google will surely sell more ChromeOS this way: people will start to become aware it exists.

By contrast, Nokia is following Microsoft's lead by bribing developers to support "Windows Phone 7" (or whatever it's called these days). And I do mean bribe. Nokia goes beyond Microsoft's platroem-software-plus-development-software-plus-even-yes-the-phone-hardware offer and doesn't just make development access free, it buys development. What else is a "cash incentive"? What other platform's vendors are so desperate as to guarantee third-party developers a minimum return?

Between these two strategies, I'm betting on Google's.

Timing ACAS

I was looking at ACAS and hunting for relevant news that might explain the apparent panic afoot, and I noticed this:

Since ACAS was "downgraded" from "hold" to "reduce", it is (despite its recent precipitous fall) up by 46.52%. Apparently, timing ACAS isn't their specialty, either. Interestingly, the ratings folks seem to rate their own ratings, too. Let's see how that works:

It seems that the ratings specialists "upgraded" ACAS to hold, and it outperformed the index to which it was compared, the ratings specialists called that a "correct" rating. "Hold" for an index-beating return. The more recent period, the ratings specialists admit to be incorrect. Yet, the rating stands at "reduce".

If they stood by their rating, you'd expect a report that said "just you wait!" But, no. It's "incorrect" but it remains the rating :-)

I'm interested to hear anyone's take on the recent price action. Uncertainty and volatility both work against comparables pricing (thus against NAV), and doubt about the macro-economic environment weighs against performance of ACAS' broad-based portfolio (which one expects to behave as a leveraged proxy for the overall economy).

Buffett has bet long-term on the economy of the US. Is there reason to doubt ACAS can hold on for the long term?

Comments welcome.

Motley Fool Notices Apple Owns Its OS

In this video, the Motley Fool reveals that Apple has a competitive advantage in not having to pay Microsoft a licensing fee, which results in value and pricing advantages.

Gee, who would have guessed that by acquiring the IP it wanted to deliver to customers, Apple would differentiate itself from beige-box makers not only on product but on price-per-value and ultimately on raw price? And that Apple's multi-language-in-each-installation OS would allow it to sell one version of a product worldwide?

The Motley Fool neglects something worth thinking about: Apple might not need to license the OS, but it needs to license things it bundles with the OS, like Microsoft ActiveSync (at least on iOS devices) and a rich selection of high-quality fonts (particularly on PCs; the reason Apple's font selection on phones is so thin is certainly the margins impact of font licensing for fonts of the quality Apple ships).

The next thing the Motley Fool didn't reach is the hardware: Apple, owning its own OS and providing its developers all the developer tools free-of-charge, is free to swap hardware underneath its software stack with virtually complete transparency to its customers. Sure, developers may have to click a button to build software for multiple platforms, but Apple has made it easy to deliver one software package for multiple hardware architectures. So when Apple decides that it wants to ship ARM chips in some segment of its product lineup in order to obtain a price/value advantage over competitors, Apple is free to do what Lenovo cannot.

The flexibility Apple obtains through its own OS isn't just the price of the OS: it includes flexibility in OEM hardware sourcing, architecture, launch geography, and other concerns that impact margins, supply-chain-management, and addressable market. Apple's control of the intellectual property driving its products is a critical part of Apple's competitive advantage.

MSFT To Earn More from Android Than WinPhone

Electronista has an interesting story. Samsung's licensing deal with Microsoft to avoid patent battles over IP that is part of Android, at something like $3-6 per handset, will yield Microsoft more revenue than it earns at $15 per Windows Phone 7 license on the 1.7m units that ship with Windows Phone 7.

One wonders what IP Microsoft has that's embedded in the Linux-based open-source phone software. Is there real MSFT innovation in there, or just patent trolling on old tech Samsung preferred not to be in court over?

On ACAS' Debt

At the end of June of 2010, ACAS announced that its long-running effort to arm-twist its many creditors into exchanging one family of debt instruments (under which ACAS was required to maintain asset levels that, under the combined effects of FAS 157 and the post-2008 liquidity crisis, were impossible for ACAS to meet, and led to default-rate interest, despite that ACAS had never missed a payment) for a different set of debt instruments (which granted creditors what they had long demanded: security) had finally succeeded. In the transaction, ACAS paid $1.03B of its loans back 100% in cash, and exchanged the remaining $1.31B for the new secured notes. The overview is here. At the close of the deal, ACAS owed $11m in unsecured old debt that didn't participate in the swap, and $1.31B of newly-issued secured debt.

I've recently been asked about ACAS' risk for being forced to liquidate its holdings in some kind of fire sale. According to the amortization schedule announced with the press release on the restructuring, ACAS didn't have any principal repayment obligation until December 31, 2011. At that time, if it didn't cough up about $70.4M, ACAS would suffer a higher interest rate. ACAS has further principal amortization requirements at the end of June 2012, December 2012, and June 2013 ($100m, $300m, and $350m respectively). Scary, eh? Shall we have a look at ACAS' outlook for meeting the schedule?

The next quarterly report following the debt restructuring was 2Q2010, which included the announcement that ACAS' total debt stood at $2.924B, placing the company at a debt:equity ratio of 0.9:1. Its interest expense in 2Q2010 was $56m, but that included time under the old debt regime. The total debt included the $1.31B in secured debt, and some securitized debt. The following quarter, 3Q2010, ACAS repaid $407m in debt, including $200m of the secured debt due in 2013. In 3Q2010, ACAS' interest expense had declined to $36m, and it foresaw a 4th-quarter secured debt repayment intended to lower its interest rate to the lowest available under its new debt facility. In 4Q2010, ACAS repaid $258m in debt. In that quarter, its interest receivable was $37m and its interest expense was $28m. (For those who cautiously ask about ACAS' actual income rather than its receivable number, its interest and dividend income in 4Q2010 was $133m.) In 1Q2011, ACAS repaid $517m in debt, including $300m of the secured debt due in 2013. (Interest expense was $29m, while interest and dividend income was $146m; fee income grew over the quarter from $10m to $13m.) The 1Q2011 repayment left ACAS with no principal repayment due under the amortization schedule until it owed $250m at the end of June 2013. ACAS' next quarter, 2Q2011, it repaid $100m of its securitization debt. This left ACAS (whose NAV had increased to $13.16 per share) with a debt:equity ratio of 0.4:1. In 2Q2011, ACAS' interest expense had decreased to $20m while its interest and dividend income stood at $131m.

Since ACAS plainly has the wherewithal to keep current on its interest payments, there is no basis for secured creditors (who aren't due any principal until mid-2013) to execute on the security. They're being paid in full. The whole point of the security was to free ACAS from maintaining specified asset levels; the value of ACAS is no longer the security, because the security is the security. Losing your job doesn't cause home foreclosure so long as you make your payments. ACAS' secured refinancing was designed to give it the flexibility to do what made sense without worrying about the market cap, net assets, etc. This is why ACAS was free to shrink the company by spending cold hard cash simply to retire shares. This raises per share value but it shrinks the company. Without a net asset covenant, it's no longer suicide. A few years ago, share buyback was impossible due to ACAS' ongoing concern about maintaining net asset levels to satisfy covenants under its old debt regime. If someone has a term sheet for the new secured debt, I'd love to see it to be sure I understand what else may be required, but as I understood the refinancing I think ACAS is in a great position based on its current earnings.

So, what happens if Paulson is forced to sell? Well, ACAS' capital is permanent capital: no-one can recall it. If Paulson has to dump shares, we may get a fire sale (if the sale isn't private and if there are no buyers lined up to absorb Paulson's block). Heck, with the share buyback plan in position – a share buyback plan which allows privately-negotiated purchases – ACAS itself might enjoy Paulson's fire sale, if there is one. I for one have no idea what Paulson's finances look like, and don't honestly care except that it may present a short-term buying opportunity.

So, why is ACAS' price in the toilet? We've re-entered a period of heightened uncertainty, ACAS' portfolio of small illiquid firms is viewed as vulnerable to turmoil, ACAS' management has couched positive guidance in terms of a continued favorable macro-economic environment, we don't know from day to day what effect market conditions of ACAS' portfolio's comparables has on ACAS' NAV, etc. With uncertainty comes perceived risk, and lower bids. And lower bids follow misinformation: I read a teaser for a new research report that referred to ACAS as having no dividend in the foreseeable future because of expected capital losses. Um, the dividend is expected to be zero for a while because ACAS' loss carryforwards will absorb taxable earnings (whetehr operating income or capital gains), and ACAS' dividend has historically been calculated on the basis of taxable income because it was regulated as a BDC. Claims of expected losses, even bogus ones, can't be good for share prices. Bogus analysis abounds. Anyone got a hard source for an actual forecast of losses? Didn't think so.

I have never claimed to be able to time anything, and I won't try here. One of the more painful investing errors I made was to decide that the market wasn't going anywhere and lose a ton of AAPL to covered call exercises years ago when the stock hadn't moved in ages, and I don't think the shares ever saw that price again. I'm not keen to replicate the experience by trying to time purchase and sale near $7 of a company whose last-announced NAV was north of $13.

My last move in ACAS was to buy 200sh for a niece, which I put into an asset protection trust. Kid's going to need money when she grows up, I figure. And me too!