Crooked Microsoft Smartphone Bake-Off

Microsoft's retail employees apparently don't read the rules to the Microsoft bake-off contest to which they invite customers to compete, and which it uses to attract customers. Making up new rules to disqualify winners with Android devices is so low, one suspects employees are docked if Microsoft's tool doesn't win.

If Microsoft had let the guy win a little notebook with MSFT's OS, he'd have presumably posted instead about his (presumably) fantastic new laptop. Marketing is why the contest was created, right?

UPDATE: A Microsoft evangelist, aware of the negative impact of this press, has apologized for one incident and claimed he stood behind the bake-off. To make sure people understood Microsoft "meant" the apology they threw in the hardware that had been at stake in the competition. Microsoft knew when the test started that it faced some risks, and trained employees on picking a test suited to the specific challenging device. Properly-configured Androids or iPhones – properly configured for speed on the test, not safe use in a security-demanding environment – can beat Microsoft's product at different tests, so the tester needs to be aware which race to announce after the challenger turns off his phone. So Microsoft wants the tester to collect information about the customer and the phone, have the phone turned off, then announce a "challenge" that the particular phone and/or configuration is most likely to lose at. Isn't it great to make the rules?

Why Issuing Shares Isn't All Bad For Shareholders

I've seen one too many articles describing accretive share issuance as "dilution". I wrote an article at Seeking Alpha (which gets more page hits than I did when I wrote about it here in 2011) in order to explain the difference between issuance that dilutes shareholder value, and issuance that accretes shareholder value.

I hope they get it.

I also hope ACAS maintains its issuance discipline in its managed funds. It's been wonderful and I'd rather not see a good thing spoiled.

ECAS Results Bullish for ACAS

Just published at Seeking Alpha is a new article on What European Capital's Results Mean for American Capital. I argue there that the recent announcement of 2H2011 results for American Capital's wholly-owned fund European Capital – despite its lackluster headline numbers – is in fact extremely bullish for ACAS' shareholders.

I'm working on an article on "one stock portfolio diversification" and American Capital's global reach and NAV stewardship will be featured therein. I'll also quote Buffett and ask just how much portfolio diversification one investor really wants. It'll be a while in coming.

Chrome Share Grows, Helps Advance Use of Standards

Chrome, which Google launched as a crash-resistant WebKit-based internet browser on September 3, 2008, now appears to have a weekend internet traffic share exceeding Microsoft's Internet Explorer, which previously commanded virtually all of the browser traffic on the Web. Google's reluctant assault on Microsoft's dominance has included ChromeOS, but its main thrust has been in offering data using freely-available standards and offering APIs to allow third-parties to deliver data handled by Google. The result? Steve Ballmer's description of non-IE browsers as "a rounding error" is more laughable than ever. IE-only web crippling is in full retreat; most of the Internet now uses something other than IE.

The Chrome browser and its Google Gears component made certain that users on any platform could access Google's internet-based offerings. Chrome with Gears is, in effect, like iTunes after Apple launched music-purchase as a feature: it protected the company's prospective users from content lock-out that would have resulted from continued Microsoft dominance of the ecosystem. And like iTunes, Chrome has succeeded. Chrome has grown in use so that on the weekend – when users aren't forced by corporate overlords to use an inferior browser – it's the leading browser on Earth.

Adding together WebKit and Mozilla, it's clear that standards-dedicated HTML interpretation is now in fact the global standard, especially in the now-much-targeted mobile segment. Standards-noncompliance is now the minority position rather than the de-facto standard. Moreover, WebKit browsers (mostly Chrome and Safari) now exceed Microsoft's browsers on an ongoing basis, and not just on the weekend (and constitute about 2/3 of the mobile traffic).* Who would have imagined such success for WebKit when Apple announced it at the Worldwide Developer's Conference as a new derivative of KHTML? Now, lazy web site developers can't rely on ignoramous clients to tell their online customers to go get Internet Explorer: everyone must meet the standards supported by WebKit, which in turn supports legitimate standards.

The success of WebKit leads to more momentum behind improving its underlying performance, and the desirability of advancing new, more feature-rich web standards. Since standards mean something now that most of the web users have tools committed to standards, effort dedicated to the promulgation of new open standards is no longer at risk of being wasted: browsers compete for early standards conformance, and most of the world uses one of them. As standards-conformance becomes a sufficient test for content accessibility, developers become to code to known standards rather than troubleshoot accessibility on a whole hatful of competing browsers.

The web is becoming free of dominion by Microsoft, and it can't come too soon.

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*: Looking only at the desktop, Microsoft still ekes out a majority of browser share, giving open alternatives a next target. Overall browser share, however, is no longer Microsoft's, and mobile browser share seems well out of its grasp so far. Of course, there's WinMo 8 to come in the fall.

Apple Leads Satisfaction, Not Just Size

Apple's satisfaction still leads the mobile industry, not just its sales volume. As mentioned at Daring Fireball, the poor turnout of 4G phones raises questions about whether Apple will make its next phone 4G – if it does, it risks the battery dissatisfaction seemingly endemic to 4G hardware. As shown by infrared photography, Apple's new iPad has increased heat – likely a result of increased power use by the product's new 4G, graphics, and display hardware – I believe directly related to the new iPads greater thickness and weight: all that performance requires more battery.

Adding less than 1mm to an iPad may give a lot more battery volume than adding that little to a phone. We'll have to wait to see what Apple does with batteries over the next six months, and whether Apple manages a technical miracle with the next phone.

Anyone have intel on when Apple will move to a smaller manufacturing process for its in-house chips? From 45nm to 28nm for the A6, as rumored here and here? The smaller process would reduce power consumption for the processor – and the more Apple crams into its system-on-a-chip, the more power savings Apple can expect from the improved manufacturing process. In the original iPad, Jobs said the power-eater was the display ("It's all about the display. Our chips don't use hardly any power."); does this remain true in the age of higher-performance silicon?

The answer to these power questions will govern the design limits within which Apple works on the next phone. If the display is the power-eater and the iPhone's display will not approach the pixel count of the new iPad, the phone may not face as much consumption increase in its next iteration as the iPad did in its last. On the other hand, the phone has a lot less room for a battery ....

Apple's New Dividend

Starting in July, Apple pays a quarterly dividend of $2.65 a share. At Apple's high-water-price of $600, the annual rate of this dividend ($10.60) amounts to just over 1.75%. At the $590 price printing around the time of this post, it's about 1.8%.

Commencing at the end of September, Apple will also repurchase shares from the open market under a buyback program with a $10B budget over 3 years. The primary goal of the repurchase program is to neutralize dilution caused by employee incentive programs that involve printing shares. $10B is about 1.8% of Apple's current market cap of $555B.

Apple's thinking on its use of cash has been interesting. According to Tim Cook on the conference call, Apple first concentrated on U.S. cash holdings, because of the negative tax impact of importing foreign-earned funds. Apple then took stock of its expected capital needs, and added some buffer for opportunistic acquisition, and worked out what it expected to be able to return to shareholders. This sort of thinking is interesting because it makes no grandiose assumptions about the relative capability of Apple and its shareholders to make productive use of otherwise idle cash. It also identifies the cash Apple isn't employing for its business purposes so that shareholders aren't paid funds Apple really can employ for business. This satisfies the concerns raised by Warren Buffett in his letter to shareholders in Berkshire Hathaway's 2011 Annual Report (e.g., at p.99-100).

After determining how much money Apple would return to shareholders, it did a strange thing: instead of making a decision about the value of Apple shares vs. the value of cash, Apple decided to pay a dividend because – as explained by Tim Cook – this is what shareholders wanted. Personally, I'd have preferred the tax-efficiency of share buybacks, and the impact over time of share buybacks in the face of continued business growth. But it's hard to fault management for doing something because its owners ask. The fact Apple has $10B dedicated to what amounts to a dilution-prevention program is sort of concerning: can't they get loyalty for less than $10B? They should call Buffett back to get notes from his shareholder's letters.

Apple's Tablet Market Moat

A new article at Seeking Alpha attempts to describe why Apple has safety in the tablet market with comparison to commodity vendors like Dell. After that article was submitted, the press revealed more reasons for developers to prefer Apple's ecosystem. Apple will be hard to catch in mobile.

Since Google makes its Android money on advertisement to mobile users, rather than on sales of devices or software, its incentive to make life good for Android developers is rather different than at Apple, which needs people to buy devices and can't retain its market unless its entire ecosystem offers perceived value to users and the developers who serve them. Google hasn't managed to use Apple-like control over users' software experience, instead allowing carriers to continue to dictate upgrade cycles. For example: only just this month, Samsung announced Android 4.0 would come to the Galaxy S II. Seriously? Just now announced availability of an OS released last fall?

Among the factors discussed in connection with the tablet market is the as-yet unreleased Microsoft Windows 8 tablet operating system. As an ARM platform, it won't be able to run desktop applications coded for x86 machines. Presumably Microsoft's business model will be akin to its business model on the desktop: it will sell operating system licenses to tablet manufacturers, and it will sell developer tools to developers. Based on Apple's success in acting as a transaction intermediary at the App Store, Microsoft should be expected to sell to developers its Product Activation feature – repackaged as the exclusive way to run applications on Win8/tablet. Microsoft will almost certainly try to secure subscription fees from users of tablets as it does from users of its console products. I have some theories about how this market will succeed at delivering value to customers, but they're a topic for another day.

Apple's position in the home entertainment market – which seems to include iPads now – has taken a step forward as AV receivers now support AirPlay from iOS devices and iTunes. Those without built-in support can do what the rest of us do, and plug into the AV receiver's HDMI port a $99 AppleTV, now upgraded to 1080p. This support will definitely be a trend to watch. If we start seeing this in cars' in-dash systems, we'll be able to dispense with some of the awful map controls in manufacturer-supplied GPS systems. Even without AirPlay, some manufacturers are targeting iPhone for in-car infotainment. The fact that iPhone is in specific demand from car manufacturers is an interesting development for a company that fifteen years ago was about to go under because its desktop business hadn't caught on in business. Now, OEMs line up to supply Apple with lower-cost parts through which Apple raises margins over the life of its products. (Some examples of competed-for parts are described in the video appearing here.)

The article at Seeking Alpha lays out the basic argument; these little additions were just a bit late to make the press.