Oracle takes over Sun; What sort of an inflection point is this? Intel the looser?????

Do you remember that old point about “inflection points” from “Only the paranoid survive”?

We had that great looking chart of various IT companies IBM, DEC etc. which had the entire stack of technology all by themselves. The hardware (often right from the chip), and the sofware. Then that model went bust with Microsoft dominating the OS market with its Windows OS and Intel dominating the chip sector and hardware makers basically getting invisible. Hardware makers, like Dell, were outsourcing manufacturing to OEM’s and branding to sell along with OS makers like Microsoft.

The first attack on this model, was apple, which managed to create a brand that was able sell hardware with out any regard to the underlying chip manufacture. Apple also managed to create a unified brand of “apple” with its hardware and software. Remember, even as apple embraced Intel chips for its computers, Intel was never the brand being sold. It was, Apple, with its hardware and software.

Today we see the same thing happening at an enterprise level. Oracle takes over Sun and thus becomes a brand that can sell across the whole stack of IT structure. If approved, Oracle will be able to sell hardware, OS, multiple database options, Applications servers and finally Enterprise applications systems.

Oracle is not the only company that can provide you some thing like this, IBM is pretty much in the same place and HP can do something pretty similar. We are not even counting Cisco’s avowed contention to get into the data center. I would think, Cisco is probably looking at EMC + VM Ware to get a piece of this pie.

In essence, we are going back to a situation where a customer can choose a single vendor and buy hardware, OS, Databases, Applications servers and even enterprise level applications. In an emerging situation like this, who will be the greatest looser?

I think given the current power structure, it will be intel which will be the biggest looser and the next, if at all, will be microsoft. Intel is the biggest looser since it will loose its pricing power enjoyed over a period of about 15 years if not close to 20 years. It will be interesting to see how AMD reacts to these unfolding events.

What will the reaction of Andy Grove, be to this trend?

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American recovery and reinvestment plan…. Whatever!

House passes the granduosly named American recovery and reinvestment plan, and, it is irrelevant at this point. For this plan is not far sighted enough nor does it change the game in any way. But don’t blame the president for this, for he was just working with in the boundaries of consitution. Fact is this is a failure of politicians and ultimately the citizenry. When will legislators realize that idelogy, either left or right, never gets anything done?

Not till, citizens of the country actually kick out politicians off their positions.

Let me elaborate…

Politicians are “ALWAYS” behind the curve in accepting reality, and when idelogy dominates clear thinking, they become spectators rather than take part in actively shaping the future. “Main street” has been hurting for years now. Politicians never really managed to understand that. Why would they? The re-election rate for house is close to 90% and for senate it is about 75 or 80%. And they make the laws. What incumbent would really have to think and adapt when they have a pretty secure career?

So much for my rant, but think about this stimulus plan and i may make sense.

There is a generally accepted, “Conventional Wisdom” (in John Kenneth Galbraith’s words), which says that tax cuts will be spent. Even liberal economists argue that tax cuts for the lower income will be quickly spent. This need not be correct!

Who pays taxes? Thanks to progressive taxation policies, income tax is paid by people who make more than a certain amount of money every year. Sales tax is paid by people who actually buy stuff. Property taxes are paid by people who own property, capital gains tax is paid by people who have invested some capital and inheritance tax is paid by people who inherit.

Except probably for people who have to pay inheritance tax every one else is not in a position to pay any tax. People who loose jobs do not have an income to pay tax on, those who have invested haven’t had any return worth mentioning and other’s who have invested in property are going ask for re-assessment. Finally, given 24 * 7 news cycles, the internet and personal experience pretty much every one out there knows that times are bad and so will conserve their expenditure and so, sales taxes tank.

In this environment, what is the impact of any kind of reduction in taxation? Zilch would be an attractive answer, but i would say negligible is a better answer.

Similarly, cutting business taxes doesn’t make businesses expand during a down turn. It is just a way to improve profitability of businesses there by improving their ROI. Will that impact the “Main Street” in any way? Sorry no dice.

Given all the above, what are all these tax cuts going to achieve apart from bloating up the stimulus plan? Nothing…

Finally, what will actually work? Get people to work, and that doesn’t mean just “Shovel Ready”. Get people to work at a visionary level, some thing like a moon shot, but here on earth. What are the immediate possibilities?

There may be many based on your own perspective on a large number of issues, but… we desperately require some thing huge, visionary, game-changing, “conventional-wisdom” busting, paradigm shifting, build a new framework for the society of the future, in nature.

Green Energy.

This implies, give tax breaks of “very” sizable nature to any thing that will make anything “GREEN” profitable. Hybrid cars? yes. Infact, hybrid anything is a big yes. How about incentives to making homes, public buildings, private buildings etc. reduce energy expenditure? Big yes. Roads, bridges? Big yes. A new power grid? applause. Broadband internet connectivity to every single town / village in the nation? Go now!, a mobile phone infrastructure that actually doesn’t drop calls even with in large cities? big smile,  a national plan to build high speed rail lines across all the big cities? That should get a resounding, collective thumping of the tables across house and senate.

Will that happen?

I doubt.

Elected representatives for the most part don’t need to fear loosing, and when that is the case, they can participate with elan in ideological gamesmanship.

USA is the economic engine for the whole world and the magnitude of the current economic situation doesn’t suit small acts, small moves and small minds.

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Speculative nonsense? or is it?

Here’s a post by Paul Krugman in nytimes on crude cost and speculation.

While i agree with the logic of this argument, a couple of curious points that should have been taken into account are as follows:

1. Assuming OPEC nations raise their production substantially, shouldn’t crude price go down? The natural response to crude price going up( which shows increasing demand) would be for the producers to increase their production (deploy increased capacities). While crude price has been increasing for some years now, there has not been any discernible increase in neither supply nor production.

Could this be considered hoarding in the ground instead of a warehouse or an oil tanker? If on the other hand, production declines are the reason behind no new supplies coming on board as is discussed here, then why were alternate strategies not identified and implemented? After all every one agrees that any transition from crude oil based society to some thing else will take huge infrastructure migration which will take decades.

2. Why should crude price start going up starting this January? By January 2008 it was a known fact that Sub-prime crisis in USA started off a downturn. The discussion in January 2008 was not about containment of the crisis, it was about the intensity of the downturn. Questions like the duration of the economic downturn, duration of the down turn were top of the mind priorities for most of the analysts. V, U & W were being considered for the economy in US. A rational analyst in that situation would have thought, US faces downturn, US is the largest consumer of crude, so demand for crude specific to US consumption would possibly go down. Since, it is a more globalised economy, chances are crude demand across the world will go down. So crude price as it existed in January 2008 should have trended down. But crude price went up significantly since then.

Now that is curious. Even as economy has stagnated over the past six months, crude cost has only gone up. To me that is curious and deserves some more digging in.

As i try to understand the situation, in a seller’s market for a scarce good, spot prices would always be accepted by the buyer, what ever be the futures price. Not because the buyer has higher income, but because, he has no other choice for immediate consumption. May be in this sense, oil has become a giffen good over the past few years.

In my opinion, there is definitely an element of speculation in the way crude price jumped over the past six months because, in a non-transparent market where information asymmetry is rampant, it is easy for a few entities to jack up the futures price of any good through a few tactical transactions and building sentiment through various means. Only an active market participant will understand this aspect of any markets.

In the long run, such opportunities would get eliminated in any market, just by virtue of the fact that over time every one in the market will wizen up to such tactics. But the early participant in such an action will invariably benefit from the run-up he instantiated. In a future’s market, the only cost of maintaining a position or view of the price is roll-over and leverage, the ability of an entity to force an opinion on the market will lie in his ability to back up his bet with sufficient amounts of money till a tipping point. Once the view gains enough momentum, the instantiator will be able to liquidate his position at a substantial profit.

I expect that point will occur once the second quarter and third quarter results for companies across the world start coming out.

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The brand new factors

I call this an inflection point because, there are certain factors that have come into play which were not around the last time we had a recession, especially financial sector recession.

1. Competitive global economic landscape.

2. Future inflation in commodities.

3. Competing global currencies.

This is not a very late call about, emerging economies, rising oil and falling dollar. I believe these are manifestations of a challenge that has not yet been recognized adequately. More on this later.

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Here comes the inflection point

Andy Grove, celebrated ex-chief of intel wrote a book titled “Only the paranoid survive”. It was a great read certainly, but the reason i recall it, was because, for quite some time now, i felt i was missing some thing, but could not place what it was. This, of course is in the context of the current economic scenario.

Well, i think we are currently in the middle of a “strategic inflection point” for global economy. But first, what is it? Here is what they have on Intel Site. A general google search will also result in quite a few links, so i wont point more. But the essence of a strategic inflection point is that it is a time of 10x change. A time when, the fundamental rules change. At time when the old rules no longer apply.

There may be multiple reasons why such a change occurs in a business environment. Things like a break-through technology (Microprocessors to Integrated Circuits), radically new distribution channel (Internet for media, snail mail etc.), Information source (Internet again for term life insurance and student home work) etc. are some such in the business arena. However, the changes currently in progress are at a far more fundamental level, that of geo-politics and society’s.

The best way to understand and survive current change is by having the context of such changes and the possible consequences My next post will be on the elements that suggest there is some thing to this line of thought.

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Microsoft’s offer for Yahoo is a loose – loose deal for both

The raison d’être for Microsoft’s offer to yahoo share holders is that, together, Microsoft and Yahoo will be able to make an impact on Google’s dominance in the internet advertisement market. Other elements supporting this takeover are, together, Microsoft and Yahoo will be able to stand up to the power of Google in search Engine market, together Microsoft and Yahoo will be able to stand up to Google App’s etc.

Most of these arguments are fallacious because of a very simple reason. This is a marriage thought up to generate business efficiencies, with out, a compelling end user benefit. The argument goes, together Microsoft and Yahoo will be able to offer an alternative to the Internet Advertising community which will decrease the dominance of Google.

In all the excitement of this news, every one seems to miss an extremely important point. Google’s dominance of the internet advertisement market is because it dominates search market in the first place. Considering that even if you consolidate all the other players in this market, the resulting entity wont be able to come any where close to Google’s market share, a merger between just Microsoft and Yahoo does not go any where near challenging Google’s dominance of this market.

The reason Google dominates internet advertising space is because it has the technology. People search on Google purely because it provides better quality of results and does so fast. It also places paid results but they are clearly marked as such. End user will click through a paid result not because it is indistinguishable but rather because the result is close to what is being searched for.

Even if Microsoft and Yahoo merge, the technology will remain the same. There is no incentive for the end user to shift from Google and go to either Yahoo or Microsoft to search the web. Since a merger will not change the market (either in terms of expanding the market or in terms of increasing the merged entity’s market share) it will not change the domination of Google.

A second argument for the merger is that it will counter Google Apps. This is an even more esoteric argument. Straight off the bat, Google Apps is not yet in full production and there is no saying how it will evolve. A lot of uncertainty still exists with respect to questions like, what the market is, how will it react, what will be the revenue’s generated out of it and so on. Given this situation, to argue that Microsoft and  Yahoo will  compete with Google on Web based office productivity suite is far fetched at this point.

On the other hand, considering the corporate cultures of Microsoft and Yahoo a merger will take a lot of work, with out much bottom line impact for quite some time in to the future. One very important aspect of IT industry is that most companies are only as good as its median employee is. Yahoo being an Internet company and Software on the web being its product line, significant employee departure will impact of the bottom line much more compared to what a merger with Microsoft may achieve.

Given that both Microsoft and Yahoo being large organizations, any merger will involve organizational and cultural clash which in fact will have an negative impact on the revenue’s of both these organizations with the probability of the impact being higher on Yahoo being greater.

Thus, despite Wall Street being all for it, this is not a win – win deal for Microsoft and Yahoo. The question at this point would be, to assess the negative impact of such a deal on both of these organizations.

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Is there a research lab for financial engineering?

This article in latimes today is a very interesting take on what is noticed over the past decade or so. Any one with a partial understanding of financial markets and their history would have remembered times in late ’80s while reading this article. “Liar’s Poker” and “Bombardiers” are non-fictional and fictional accounts respectively of that time and of course there is that well remembered movie “Wall Street” dealing with that time and place. More scholarly accounts like “Capital Ideas” and “Capital Ideas evolving” are great to understand history and evolution of the financial market place. While every one is focussed specifically on ways and means to tackle recession in the US and its effects, the article mentioned above moves to a higher level and asks some pertinent questions.

In a similar vein, an interesting difference between your average manufacturer and service provider is this. The service provider is under no obligation to prove that the service being provided actually delivers what is being touted. Nor is there a test lab for financial services. So, effectively any new product that any financial services company introduces into the market is untested. It is the investors who are the guinea pigs for those products because (take out the product literature for any financial product and read it, and i know hardly any one reads through them) the system says “Caveat emptor“. As the buyer, you are responsible for those decisions and you will have to bear the results of any consequence of the decisions you made.

It is not the same case with either health care industry or with any other manufacturing industry.

Will you buy a new automobile if models of the auto did not undergo government crash testing? Will an untested drug be allowed into the market at all? Then why can a financial services company come up with a new product with out any provenance of its ability to work as it is intended? Where are the research labs for financial engineering?

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Why a fiscal stimulus is more important than a monetary stimulus to the US Economy…

Now that most economists / analysts and other pundits are rather assured about recession in the US economy, and have started talking about the depth or intensity of it. The blogs are abuzz with the various views on the status of economy. While some predictions are dire, there are others which do not think so. Even though president has referred to a package, there are no specifics detailed. Mr.Larry Summers, former treasury secretary has detailed why the economy needs a fiscal stimulus as well as monetary stimulus.

The fiscal stimulus is of greater importance at this juncture. Firstly, it is an acknowledged fact that any monetary policy stimulus will deliver results with a lag. Considering that monetary policy easing started off approximately 4 months back, the earliest results may be expected in 5 to 6 months. Even this may not happen in considering the argument below.

Monetary policy advocacy postulates that lower interest rates will lead to lower real returns from non-productive hoarding of money by the financial institutions there by encouraging them to lend it to the consumers which in turn will stimulate economic activity. The implicit assumption in this logic is that US economy is treated as a unit not related to, nor influenced by the global economy. The quest for indirect stimulation will not produce results if the financial institutes start investing in, lets say, emerging markets like the BRIC economies instead of the US markets.

Given the impact of low interest rates on dollar, which lead to lower consumer purchasing power resulting in lower domestic economy growth leading to a clamor for still lower interest rates, the only reason a monetary policy ease should be considered would be to ensure that the housing crisis does not deepen. A lower interest rate, will make sense only if, it means lower ARM resets for the average mortgage payment.

However, a fiscal stimulus would directly kick off economic activity domestically which is important for overcoming a recession.

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First it was Real estate, then sub prime mortgage, then credit crisis, later recession, now it is stagflation

It was in March 2007, that S & P/ Case – Shiller Home price index first mentions deep trouble in Real Estate industry. To his credit, Robert Shiller made the correct call on real estate bubble back in 2005, at its peak. Over the past nine months, we moved from real estate bubble bursting to the effects of sub prime mortgage crisis to a general credit crisis, on to talk of recession and most recently about stagflation.

While there has been consistent discussion about the crisis of confidence facing the financial markets, the usual call is for the fed to lower interest rates. Television pundits like Jim Cramer went to huge lengths, literally begging for rate cuts. (It is funny listening to Cramer talk about not making a comment and do what it takes about bear stearns, and then pleading on national television for a rate cut, talking about guys loosing jobs and firms closing.)

Well, we have had multiple rate cuts since this video and the stock market hasn’t done any better. The expectation is there should be / will be more rate cuts along with fresh infusion of liquidity into the market which some how miraculously stabilize markets and save the economy. I don’t know if the Fed will cut rates further or if it will resist the temptation considering the inflation rate. That is where this new talk of stagflation comes in. If one were to believe these prognosticators, the only choice for American Economy right now is either recession or stagflation.

This is an extremely bad case of treating the symptoms and hoping the medicine will eliminate the disease. The wild gyrations of the stock market is just a symptom of the underlying crisis of confidence that plagues the economy. Rate cuts or fresh capital infusion are not going to resolve that crisis of confidence of Wall Street in Main Street.

What we face today is a crisis of confidence in the ability of borrowers to pay. We all know of that maxim, prove to a banker you don’t need money and the banker would tempt you to borrow with a great deal. The problem is, today, no one in the wall street believes there is any one on the main street capable of paying back. (Here i use the terms Wall Street and Main Street figuratively to indicate the financial industry and general society). All lending calculations by a lending institution are predicated on the ability of the borrower to pay up, along with interest. This implies faith in the ability of the borrower to improve his or her financial situation over the term of the loan. During the hey day of securitization when, all loans made at the reatil end were packaged and sold, this was not such a huge concern. Post sub prime mortgage write down, it will take real courage for a banker to do so.

This being the case, lending activity will be severely curtailed, leading to a reduction in economic activity which in turn will lead to reduction in lending further. With oil being priced at the levels it is, inflation is imminent. Thus, the choice between Recession and stagflation. Attempting to manage this crisis through rate cuts and liquidity infusion, may work at the wall street not necessarily improve the status of the main street. Given that Dollar value is falling, one likely scenario i foresee is gold moving up (good old store of value) and dollar eroding further as all the financial institutions compete to retain the value of their assets for the long term.

There is uncertainty associated with the withdrawal symptoms of binge lending and there will be flight of capital from the main street. Given this, a better option is to ensure that capital is attracted back into economy for the productivity and returns to be gained on the main street rather than to move to the next level of abstraction in financial products.

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Will there ever be a succesful e-Book Reader?

Amazon is debuting a new e-book display device branded kindle on Monday. (Though there are lot of web links on this, the one on Newsweek is in-depth.)  e-book readers are available for a long time now, both as software or as a hardware, Sony’s device being the latest to have some traction. Not too many of them have been succesful.

What would be the differentiating factor for a really succesful book reading device? i-podization is the answer.  Even though there were digital music players before ipod, why was it such a success? I think there are two significant answers. The Social statement that a buyer made, and the utility of the device itself.

It was an elegant device that looked cool to be seen using. But even a great design would still be not so succesful if not for the utility part of it. An ipod could play all the digital music a user already had and it also facilitated buying new music at very low prices. Most of the music publishers agreed to be on iTunes which catered to the tastes of every one.

In that sense, kindle would be a success, if most of the publishers are on board with it. Also, it should allow reading pdf format files since this is the defacto format of most existing e-books. As an end user i also should have the option of connecting it to my laptop or computer and copy existing e-books which implies it should have USB connectivity. Wi-fi connectivity is not equally important, since users already have an existing mode of connectivity to the internet from where they can connect to the Internet.

On the design side of the equation, form factor is extremely important. A typical book reader may read in any of the following places. Toilet (Don’t snigger, the number of people who read sitting in the toilet is very high. Just dont ask them what they read. Every one to their taste!), Dining table, Standing / sitting during public transportation commute and bed. So the reader has to be small enough to be easily handled. It also has to be light weight since it will be carried around and it has to be atleast water resistant. The other factor that would be important is the  readability of the screen. It should be able to display regular books as well as comics and screen visibility in open air should be quite good. One final thing would be the ease with which i can move around the book. If i have a design equivalent of an ipod scroll wheel, i would say it is perfect.

Will the kindle be all this? I am interested to see.

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The law of unintended consequences…

This article was published by the newyork times today .

A classic case of the law of unintended consequences playing its part. World is complex and all most all modern systems are entangled in a web of diverse parts pulling in different directions. The underlying assumption that is expected to make the system work with out a hitch is the invisible hand of market where each player is solely interested in their own betterment.

It is virtually impossible to think of all the various possibilities when ever a new action is taken by a business or a new idea is investigated by a professional. In this case, when the securitization of all those home mortgages was being done, evidently the implications on the legality of foreclosures was not studied enough. When the court applied its mind to the issue, it found that when a security is converted into a CDO, transfer of mortgage ownership rights was not legal. If this ruling is held valid, then there will be a huge number of borrowers who will be able to challenge the foreclosures of their homes. The result may be a further depression of the already, down in the dumps, mortgage security market. There may be immediate calls for a legal remedy, but a retrospectively effective law will only be a partisan way of handling the issue.

Every organization has huge risk management apparatus and one of the first things any risk assessor will learn is that total risk elimination is never really possible, not with the financial constraints that exist for any organization. So the next best way is to manage risk so that it is minimized and accept the residual risk. Usually organizations handle residual risk through insurance.

However as with most boom periods, during housing market boom, risk assessment took a lower priority compared to the returns expected from the business. We have all seen the result.

The point here is, such an unintended consequence, should only set a higher bar for analysis of future financial product ideas, not as a red-herring to ban them, nor should another law be made to cover this eventuality as an after thought.

The very nature of the system is chaotic and such unintended consequences do occur. These are the very set of eventualities that will balance the system by weeding out the week and unhealthy. Ultimately society as a whole will benefit.

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Techno-Sociology

Check out this opinion piece on nytimes.

Author makes the point that, being too dependent on technology makes, humans dumber. Though i love technology as much as the next person, i think David Brooks has an arguement.

This being a topic covering a wide gamut of teaching ranging from sociology, economics, technology and philosophy my take will be a separate post.

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