Financial Markets and the Internet

Michael Lewis, one of the great writers in the US, profiles the rise of Dr. Mike Burry, a hedge fund manager who started out his life as a neuro-surgeon intern at Stanford. this is a fellow who had almost no investment experience and made more than 40x times the money invested by his small group of investors. How did he get his start? Lewis writes:

He was working 16-hour shifts at the hospital, confining his blogging mainly to the hours between midnight and three in the morning. On his blog he posted his stock-market trades and his arguments for making the trades. People found him. As a money manager at a big Philadelphia value fund said, “The first thing I wondered was: When is he doing this? The guy was a medical intern. I only saw the nonmedical part of his day, and it was simply awesome. He’s showing people his trades. And people are following it in real time. He’s doing value investing—in the middle of the dot-com bubble. He’s buying value stocks, which is what we’re doing. But we’re losing money. We’re losing clients. All of a sudden he goes on this tear. He’s up 50 percent. It’s uncanny. He’s uncanny. And we’re not the only ones watching it.”

Mike Burry couldn’t see exactly who was following his financial moves, but he could tell which domains they came from. In the beginning his readers came from EarthLink and AOL. Just random individuals. Pretty soon, however, they weren’t. People were coming to his site from mutual funds like Fidelity and big Wall Street investment banks like Morgan Stanley. One day he lit into Vanguard’s index funds and almost instantly received a cease-and-desist letter from Vanguard’s attorneys. Burry suspected that serious investors might even be acting on his blog posts, but he had no clear idea who they might be. “The market found him,” says the Philadelphia mutual-fund manager. “He was recognizing patterns no one else was seeing.”

So he formed a hedge fund called Scion Capital. His final result? Lewis notes:

(The one who) had made $100 million for himself and $725 million for his investors—sat alone in his office, in Cupertino, California. By June 30, 2008, any investor who had stuck with Scion Capital from its beginning, on November 1, 2000, had a gain, after fees and expenses, of 489.34 percent. (The gross gain of the fund had been 726 percent.) Over the same period the S&P 500 returned just a bit more than 2 percent.

The story in between these two happenings is fascinating so you should read the article if you are interested in how the financial markets work.

Korea IT Policy

The Korea Herald published an article "Korea introduces new IT Policy Drive".

It quotes members of the Ministry of Knowledge and Economy as follows: ""The government will openly embrace changes, create a new market through IT convergence, secure growth potential and facilitate free communication among stakeholders,"

To quote Ronald Reagan, "the nine most terrifying words in the English language are 'I'm from the Government and I'm here to help.'

According to the article, the government will list prospects for IT trends to help both the private and public sectors to deal with rapidly evolving technologies.

It is amazing that they can be so smart and so patriotic because the writers could make so much more money (and more personal life flexibility) in the stock market.

And furthermore....

"For the nation's mobile industry, which has lost some of its market portion to foreign smartphones this year, the government will push ahead with commercializing next-generation wireless networks, developing the core parts of mobile handsets with homegrown technology and creating new mobile applications.

Maybe they haven't switched their calendars yet--the new Millennium was 10 years ago.

Sorry--I could not resist. I have deep respect for Korean IT companies--like Samsung and LG has also done a good job, it seems, given their resources. But these guys don't need the government for much --except lower taxes and a better focus on education and its output.

HP

There is a good profile of HP and their CEO, Mark Hurd in the latest issue of Forbes. A little known fact which surprised me: 70% of HP's sales come from Global 2000 customers. The article brings out the convergence of competition that is occurring in serving the large enterprise customers as follows:

With the explosion of computer networks and data, customers--willing to shell out for multiyear contracts of tens of millions of dollars and more--need a vendor that can manage many aspects of many businesses and help them find efficiencies within and among them. Clients don't want to deal with a dozen different salespeople from as many different companies every time they upgrade equipment or introduce a new app. The new titans of the one-stop world include Oracle, which recently added to its database empire the remains of Sun Microsystems ( JAVA- news - people ), maker of computer servers; IBM, the longtime consulting, software and mainframe powerhouse; Cisco Systems ( CSCO - news - people ), now with servers built into its network, and alliances with data storage giant EMC and virtualization software maker VMWare.

The International Internet

Sometimes I think the US view is so so local-centric (and because the US is big they don't think of it as being local) and that within the next decade the country will require a major shift in its thinking--how to empathize with and consider the view of those outside of their own country. The USA is not alone in this need. Well, the same applies for the internet business. Brad Feld, a leading VC in the US, had this to say about internationalization and business:

I spent some time on Comscore this morning looking at US vs Rest Of World traffic for some of the largest web properties. Here are the stats for Feb 2010:

Google: 890mm worldwide visitors, 745mm non US - 84% non US

Facebook: 471mm worldwide visitors, 370mm non US - 78% non US

Twitter: 74mm worldwide users, 53mm non US - 72% non US

I suspect Facebook and Twitter will both end up north of 80% once their internationalization efforts are fully realized. Facebook is a lot farther along that path than Twitter but it seems like Twitter is growing like a weed outside the US right now. This is a Comscore chart of Twitter's non-US traffic through February 2010.

The conventional wisdom is that international usage cannot be monetized as well as US traffic and that is certainly true. But with >80% of your potential users outside of the US, I think the web sector needs to start working harder on international monetization.

Even if international traffic could only be monetized 25% as well as US traffic, when your international traffic is 80% of your total traffic, you would make as much money internationally as domestically. So that's a lot of potential out there to be tapped.

And of course, not every international market is equal when it comes to monetization. Markets like western europe and japan monetize very well today. Emerging markets like the BRIC countries (Brazil, Russia, China, and India) should be big opportunities for monetization this decade. Other markets may be tough for years to come.

What this means to me is that web services that are highly international today should invest in fully localizing their user experience and then start thinking about monetizing outside of the US. Start with local partners and then start putting people on the ground in your best international markets.

There's a lot of money "rest of world" and I suspect that will only be more and more true over time. So we should start building web businesses with that in mind.

Apple -- an Equity Analyst View

Barron's Eric Savitz writes about Apple's upside from the view of a well-known equity analyst on Wall Street (bold letters are my points for emphasis):

The market for the Apple (AAPL) iPhone has a long, long way to grow.

That’s the basic conclusion of a report today from Bernstein Research analyst Toni Sacconaghi on the ultimate addressable market for the phone.

Sacconaghi estimates that the iPhone has won about 40% market share among smart phones sold at carriers who distribute the device. At the moment, the iPhone is sold through 143 carriers, in 89 countries; together he estimates that they sold 360 million phones, of which 64 million were smart phones - which is to say that they required a data plan. Since Apple sold 25 million phones in calendar 2009, that gets you to 39% market share among the company’s carrier partners.

With that kind of market share, he says, it will be “increasingly difficult” for Apple to boost its share of the smart phone market among current carriers.

On the other hand, he estimates that Apple can more than double its addressable market by expanding to new carriers that don’t sell the iPhone yet. And he says they can triple the addressable market by offering a device that does not require a data plan. Together, Sacconaghi says, those two opportunities can boost the addressable market to 557 million units, or more than 7x the current level.

Sacconaghi notes that Apple’s current line up of carriers actually accounts for less than half of all global post paid customers - among the missing are China Mobile, NTT DoCoMo and - of course - Verizon Wireless. If the company signed up the 13 largest carriers not on the list, the addressable market would increase 65%, the analyst estimates. He points out, by the way, that Apple has added 15 new carriers in just the last four months.

The more controversial idea is his suggestion that Apple sell a non-data plan phone, something he has been nagging Apple to do for a long time now. “With prices at $99 now for the 3G iPhone, we believe incremental elasticity is likely to come from Apple offering phone devices that require less expensive monthly fees,” he writes. He says a non-data-plan iPod Touch with a $40 voice plan could address “the vast majority of the post-paid subscriber base,” and a portion of the pre-paid market as well.

He notes that the post-paid handset market is 4x the size of the post-paid smart phone market - and that average revenue per subscriber of around $40 a month is enough to supply carrier subsidies. He thinks a non-data-plan phone could sell for $350 wholesale, and have 50% gross margins, which would be accretive to overall Apple economics.

Sacconaghi calculates that the incremental iPhone distribution could generate $5 a share in EPS - with another $4 from a low-end non-data-plan phone. In short, he thinks the company has left on the table so far potential earnings of more than $9 a share, which compares to an estimated contribution from iPhone in FY 2010 of around $8 a share.

Finally, he issues a warning to investors. “While we are encouraged by the size of iPhone’s potential addressable opportunity, in the near term, Apple increasingly risks disappointing on iPhone sales if it fails to secure incremental distribution or introduce a lower priced offering,” he writes. “To date, Apple has done an excellent job expanding distribution, lowering the iPhone’s price, and enhancing the device’s feature/functionality – all of which have contributed to sustained, strong iPhone unit sales. Given its increasingly high market share, we believe that Apple increasingly risks disappointing on investor expectations for iPhone unit sales if it is not able to secure additional incremental distribution and/or introduce lower priced offerings over the next 12 – 18 months.”

Samsung and Smart Phones

Barron's blog has a short piece on Samsung's strategy in the Smart Phone market. Eric Savitz notes:

Samsung mobile exec J.K. Shin told attendees at the CTIA Wireless trade show in Las Vegas on Tuesday that the smart phone is the future of the wireless industry. No surprise there, but the numbers he throws out are impressive: There were 178 million units sold in 2009, he notes, heading to an expected 393 million units a year in 2013. That’s more than a quarter of all handsets sold.

For more details, go here.

And Engadget describes their latest Smart Phone, the Galaxy S here.

Your Camera Phone

Your camera phone (for your next smart phone) just might be getting better. For some details on how this might happen, please go here.

Newspaper Economics

We have spent some time in class discussing the position of newspapers. For a well-documented case for where it is headed, see the presentation of Hal Varian, Chief Economist of Google.

Interview w Guy Kawasaki

Guy Kawasaki was one of the earlier managers of Apple (Marketing Manager for the Mac). I follow his blog as for his insights. He was interviewed in the NY Times.

Some key excerpts:

What he learned from Steve Jobs:

"I learned from Steve Jobs that people can change the world. Maybe we didn’t get 95 percent market share, but we did make the world a better place. I learned from Steve that some things need to be believed to be seen. These are powerful lessons — very different from saying we just want to eke out an existence and keep our heads down.

Q. What should business schools teach more of, or less of?

A. They should teach students how to communicate in five-sentence e-mails and with 10-slide PowerPoint presentations. If they just taught every student that, American business would be much better off.

Q. Why?

A. Because no one wants to read “War and Peace” e-mails. Who has the time? Ditto with 60 PowerPoint slides for a one-hour meeting.

What you learn in school is the opposite of what happens in the real world. In school, you’re always worried about minimums. You have to reach 20 pages or you have to have so many slides or whatever. Then you get out in the real world and you think, “I have to have a minimum of 20 pages and 50 slides.”

On the value of Consulting:

The issue with consulting is that if you go straight to work for a consultant, you develop this perspective that the hard part is the analysis and the decision. In reality, that’s not the hard part. The hard part is implementing the decision, not making it.

So the problem with consulting is you get paid $400 an hour, you do your beautiful charts, you make your PowerPoint presentation, you tell the client what they should do, and you go on to the next project. Meanwhile, you’re building up this belief that you’re a genius: you know how to analyze; you know how to make a decision; and, worst of all, you know how to implement — but all without implementing.

You can develop an absolutely incorrect perception of yourself as a great manager when, in fact, you haven’t implemented anything. You haven’t fired anybody. You haven’t introduced a product. You haven’t supported a customer. All you’ve done is make spreadsheets and PowerPoint presentations.

The view of one experienced Entrepreneur

One entrepreneur who has been involved in a few high profile young companies in the digital media/video area had this to say about the Google/Intel/Sony TV alliance:

’m very curious as to the potential from Google, Intel, and Sony. Intel has wanted in on the “connected TV” for a long time (disclosure: they were an investor in Mediabolic), and has never really executed very well. It’s not to say they can’t, but it’s safe to say the space is far far away from their core DNA. Sony too has stumbled frequently in this space (here’s their version of a convergence device). Logitech? See Sony. And then there’s Google.

Part of me thinks Google believes that all devices are effectively the same, and their (limited) success in the phone market implies opportunity in the TV market. Another part of me thinks Google is just so big they take on any sector they see opportunity in. But most of me thinks Google wants to get firmly entrenched in the biggest advertising market there is – television. And as hard as doing phones might be, doing TV boxes is much much harder. Here’s why:

• Phones play highly restricted media types. Converged TV devices are expected to play all media types. This topic alone is probably worthy of a blog post, but trust me when I say – it’s hard.
• Consumers buy new phones on a recurring basis (multiple times a year in some countries). Consumers replace TVs infrequently, and buy TV “accessory” devices only a couple of times per decade. While the market is huge, it’s hard to get new devices into the home.
• Carriers are motivated to push new devices and services into the hands of their customers, it’s part of their business model. TV service providers are not motivated to do so (as discussed above).
• As much as phones are “closed systems”, a manufacturer is able to purchase equipment and get a device certified and get it on the network without too much involvement by a carrier. While the path is actually similar (CableCard Tru2Way certification), the realities for both the manufacturer and, more importantly, consumer are much much worse.
• Again, as stated above, consumers are generally dissatisfied with their phones (a problem unlikely to go away) and are excited about new ones. Consumers literally dread changing equipment in their living room – even us geeky dads with cool quadrophonic sound

TV--The Next Frontier

Arguably, the device really hasn't changed much in the last 30 years--since color made the screen. But change is happening. NY Times reports:

Google and Intel have teamed with Sony to develop a platform called Google TV to bring the Web into the living room through a new generation of televisions and set-top boxes.

And Tech Crunch opines on the expected Apple reaction:

As Nick Bilton points out, this Google TV would be based around the Android platform. This means that the key idea is likely to have third-party developers work on it to make applications built for a television set. That’s easier said than done, but Android’s open nature should yield some interesting results rather quickly.

Apple, meanwhile, is of course anything but open with regard to their devices. In fact, the Apple TV is entirely closed right now, as only Apple is able to modify its software (without hacking it, of course). I suspect that will change, following this revelation.

The idea of running iPhone-style applications on the Apple TV has long been a sexy one. Hell, people have even ported apps over to a TV screen to show how well it could work. The main problem with developing iPhone apps for the Apple TV seems to be resolution. With the iPhone (and iPod touch), Apple offers only one screen size/resolution, ensuring developers have an easy time making great-looking apps — while at the same time, making sure end users have a great experience.

But the iPad has already changed everything. With their new device, Apple has kept things as simple as possible by making iPhone apps scale up two times to work on the bigger display, but it’s still shows a willingness to move beyond the one screen size. Unfortunately, with the Apple TV, it can be attached to a screen that could be a huge variety of sizes, so it would be hard to control that.

Google doesn’t care about that because Android already runs on dozens of phones with different screen sizes. But Apple clearly cares about how apps look on its devices (so much so that the iPad itself was likely designed at a strange ratio simply to make scaling apps look as good as possible). So does that mean they start offering an actual Apple TV (as in a screen)?Rumors of that have been around for a long time. Or maybe they black-box apps to a certain resolution — similar to what they’re doing on the iPad when an app isn’t scaled up?

Who knows. But what I do know is that upon hearing this Google TV news, the Apple TV became a little less of a “hobby” yesterday.

Aside from calling it a hobby, Steve Jobs haseferred to the Apple TV as being a potential “fourth leg” of a chair Apple is building. Leg one is the Mac, leg two is the iPod, leg three is the iPhone, and Jobs had hoped the Apple TV would complete the chair one day. But it seems clear now that he thinks the iPad could be the fourth leg instead.

Tech Eye reports:

Social networking website Facebook.com is now more visited in the US than Google, according to figures from Hitwise.

While Facebook has only just over taken Google with 0.03 percent more traffic, it is still significant, and looks to increase in the future. In the past year Facebook member numbers have doubled to about 400 million.

Facebook.com now accounts for 7.07 percent of all US web traffic according to Hitwise, while Google.com is the destination for 7.04 percent of traffic.

Platforms and Apple

Much of the IT Industry revolves around building platforms--or an ecosystem--where developers build services, devices or applications around your standard, regardless of whether it is open or proprietary. Flurry notes that the application development activity in the past two months is up 185% for the i-Phone OS after the announcement of the i-Pad. Further details are here.

When Alpha Males Collide

The NY Times writes an in-depth article on the Apple-Google feud that has developed. They say part f it is personal and part is strategic. They write:

Quote:

Many of those meetings turned confrontational, according to people familiar with the discussions, with Mr. Jobs often accusing Google of stealing iPhone features. Google executives said that Android’s features were based on longstanding ideas already circulating in the industry and that some Android prototypes predated the iPhone.

At one particularly heated meeting in 2008 on Google’s campus, Mr. Jobs angrily told Google executives that if they deployed a version of multitouch — the popular iPhone feature that allows users to control their devices with flicks of their fingers — he would sue. Two people briefed on the meeting described it as “fierce” and “heated.”

While Google listened to Apple, it rarely backed down. “I don’t think they made many accommodations,” says a former Google executive who was briefed on the discussions. “Google is not a company that is particularly afraid of anyone, including Apple.”

UNQUOTE

Internet and Development

Anand Giridharadas, a columnist for the NY Times wrote about the shake-up that the "user generated content" is creating in the developing countries:

"After Kenya’s disputed election in 2007, violence erupted. A prominent Kenyan lawyer and blogger, Ory Okolloh, who was based in South Africa but had returned to Kenya to vote and observe the election, received threats about her work and decided to return to South Africa. She posted online the idea of an Internet mapping tool to allow people anonymously to report violence and other misdeeds. Some technology whizzes saw her post and built the Ushahidi Web platform over a long weekend.

The site collected user-generated reports of riots, stranded refugees, rapes and deaths. It collected more testimony — which is what ushahidi means in Swahili — with greater rapidity than any journalist or election monitor could. Ushahidi had found a quintessentially 21st-century way of bearing witness.

When the Haitian earthquake struck, Ushahidi went again into action. An emergency texting number, 4636, was advertised over the country’s radio waves. Ushahidi received thousands of text messages reporting the location of trapped bodies. The messages were translated by a diffuse army of Haitian-Americans in the United States and each was plotted on a “crisis map.”

Ushahidi volunteers at the Fletcher School of Law and Diplomacy in Medford, Massachusetts, ran a situation room from which they instant-messaged with the U.S. Coast Guard in Haiti, telling them where to search for lives. When the Chilean earthquake struck, Ushahidi redeployed again....

Ushahidi also represents a new frontier of innovation. Silicon Valley has long been the reigning paradigm of innovation, with its ecosystem of universities, financiers, mentors, immigrants and robust patents. Ushahidi comes from another world, in which entrepreneurship is born of hardship and innovators focus on doing more with less rather than on selling you new and improved stuff. And so bright people from Nairobi and New Delhi and Nanjing can today take their place at the leading edge of industries from cellphones to banking to car making."

Microsoft

So far on this blog we haven't seen much action from that big whale, Microsoft. Many, if not most, feel that the whale is stuck on the beach. But just to let you know that whale is at least wiggling on the beach, I am posting this from the NY Times' David Pogue. Actually, a lot of the free stuff sounds pretty good. And it answers my question of why Movie Maker was not installed on my pc when I bought it. I am going to the site now. Go here to learn more.

Big in Japan

So I have been looking for international content, as I am aware that we are tilted a little too heavily toward IT Innovation in the US. I came across an article entitled: "Big in Japan Plans to Move the Needle in QR Codes". and immediately zoomed in. I find that the company is focused on bar code reading of products--which will be big. So imagine my disappointment when I find the Company is based in Dallas Texas, and does not even have a country manager for Japan. What kind of branding is this?

Mark Zuckerberg

The WSJ wrote a profile of Mark Zuckerberg, Founder and CEO of Facebook. Unfortunately I cannot link to it due to the WSJ's restrictive policies. The company has grown to in user base to 470MN worldwide and is rumored to generate revenue in the range of USD 700MN. Many people view the company as the next "Google" of Silicon Valley--a budding superpower of the internet. He is 25, a Harvard drop-out who first built the Company in his dorm room. He recently sold stock in the Company at a USD 10BN valuation and he owns 25% of the Company and controls the Board (very unusual in SV for a VC backed Company). An anecdote in the article helped me understand who he is. Quoting the article about a meeting he had with his employees:

Mr. Zuckerberg recounted the scene (in the movie of Troy) where a messenger tells Achilles how scared he would be to confront the giant Thessalonian, whom Achilles was preparing to battle. "That's why no one will remember your name!" Zuckerberg shouted. When potential hires ask why they should join Facebook, Mr Zuckerberg said, "Tell them: 'because people will remember your name'".

MVNOs

This from Telegeography:

South Korea to allow MVNOs

According to local newspaper JoongAng Daily, citing the Korea Communications Commission (KCC), a bill passed last week by South Korea’s National Assembly will pave the way for the entry of mobile virtual network operators (MVNOs). ‘Any company can pursue such a business if it meets the criteria,’ said Shin Yong-seop, communications policy director at the KCC. ‘The bill will take effect in September, and we will be drawing up criteria to select new operators.’ The report says that regulator has been working to reform South Korea’s mobile market for some time, criticizing KDDI, SK Telecom and LG Telecom for charging excessively high prices and spending too much on marketing efforts that do not add quality to their services.

Apple Sues HTC

Apple has announced that it is suing HTC, the Taiwan based smart phone provider, which uses the Google Android operating system. As reported in the NY Times:

Steven P. Jobs, Apple’s chief executive, said in a news release: “We can sit by and watch competitors steal our patented inventions, or we can do something about it. We’ve decided to do something about it.” Mr. Jobs added: “We think competition is healthy, but competitors should create their own original technology, not steal ours.”

The legal documents from the suit, posted by the technology blog Gizmodo, cite patent infringement across numerous areas, including touch screens, power conservation and the orientation of graphics on a mobile phone.

So you are in management at Samsung or LG and you see this news--what do you do with your Google Android phone that you are developing?

e-Books

The NY Times had an excellent article on the break-out costs of e-books--worth understanding in our "IP-driven, creative content" age. They compare e-books and hard copies as follows:

At a glance, it appears the e-book is more profitable. But publishers point out that e-books still represent a small sliver of total sales, from 3 to 5 percent. If e-book sales start to replace some hardcover sales, the publishers say, they will still have many of the fixed costs associated with print editions, like warehouse space, but they will be spread among fewer print copies.

Moreover, in the current print model, publishers can recoup many of their costs, and start to make higher profits, on paperback editions. If publishers start a new e-book’s life at a price similar to that of a paperback book, and reduce the price later, it may be more difficult to cover costs and support new authors.

Another reason publishers want to avoid lower e-book prices is that print booksellers likeBarnes & Noble, Borders and independents across the country would be unable to compete. As more consumers buy electronic readers and become comfortable with reading digitally, if the e-books are priced much lower than the print editions, no one but the aficionados and collectors will want to buy paper books.

A summary of estimated costs are as follows:

Publish Post

Entrepreneurship

There has been a long debate of whether entrepreneurs are made or born. Tech Crunch writes the following:

Silicon Valley investors often have a picture in their heads of the type of person who is worthy of funding: young, brash, stubborn, and arrogant. They believe that successful entrepreneurs come from entrepreneurial families and that they start their entrepreneurial journey by selling lemonade while in grade school. Angel investor and entrepreneur, Jason Calacanis said as much in hisrecent talk to Penn State students. And after meeting Wharton students, VC Fred Wilson expressed shock when a professor told him that you could teach people to be entrepreneurs. Wilson wrote, “I’ve been working with entrepreneurs for almost 25 years now and it is ingrained in my mind that someone is either born an entrepreneur or is not.”

Jason, Fred, and Silicon Valley VCs, I’ve got news for you: you’ve got it all wrong.

For their reasons, go to the article--good data. But remember that general data for the most part never applies to you.