Mashlite

Smartphones and Millennials

2010-09-21T06:38:00.001-07:00

Lady Gaga, Mark Zuckerberg and Paris Hilton; we’ll stop right there, otherwise this would become an extremely long list. This trio is among the most famous representatives of the Millennial generation. Millennials are usually defined as those born between 1981 and 2002. In America there are 92 m Millennials, which according to the Census Bureau, makes this the largest section of the population.

Over the coming years, as more Millennials reach adulthood and enter the jobs market they will reshape society. On the early evidence Millennials might not be quite as selfish and self obsessed as the Baby Boomers who brought us Rock & Roll and birth control. In a reaction to their parents Millennials are said to be more respectful of rules and more interested in community. By contrast Baby Boomers were more into psychoanalysis and frivolous consumption. Nonetheless, Millennials are proving to be a revolutionary force.

On average Baby Boomers are said to spend 7hrs a week reading work related emails. By contrast, Millennials spend just four hours, according to Accenture, the management consultancy. Millennials prefer to spend their time texting and communicating on social networks. No surprise then that Millennials are the most connected generation in history: eight out of ten of them sleep with a cell phone glowing by their bed. You might not be able to reach your doctor when you need him, but the odds are you can phone a Millennial. Don’t lend them your car though. Two-thirds of Millennials admit that they text while driving. The average Millennial is really quite manic when it comes to staying in touch.

Re-wiring society

The long march of Baby Boomers through the workforce changed the way business was done. Baby Boomers killed the mainframe computer and replaced them with personal computers and the internet. Just as rock music rewired our ears, the internet and GSM rewired society. Now Millennials are quickly taking the internet to the next level and making it borderless.

If you are confused by what that might mean, consider the following numbers, which come from the CTIA, a non profit wireless industry organization. The CTIA estimates that in the US alone there were 257 m data capable devices in circulation at the end of 2009, compared to 228 m in 2008. Included in this number will be digital cameras, music players, personal computers, games consoles and the like. If a device is data enabled there is a likelihood that it can connect to a network. This is what is happening now.

World wide Cisco and Forrester estimate that in 2007 there were more than 500 m devices that were connected to a wireless network. The iPhone was launched in August 2007 so most of the devices connected would have been Blackberries, a tiny number of smartphone and personal computers with a WiFi or 3G data card. This equates to about 1/10th of a device for each person in the world. By the end of this year the estimate rises to 35 billion devices, or about 5 per person. This number will include mobile phones with some kind of data connection, computers, printers and a growing number of sensors and other pieces of invisible electronics that are connected wirelessly. At the same time, using several different industry estimates, there are likely to be around 265,000 different mobile applications in use worldwide.

These numbers are already striking but if the current trend continues it is expected that by 2013 there will be one trillion wirelessly connected devices. This equates to 140 devices for each person on the planet! By that time there is likely to be more than 600 m smartphone in operation and even with the extraordinary rise in tablet computers, such as the iPad, it takes quite a leap of imagination to get anywhere near 1 trillion devices. However, lets begin by considering the following - what would an average American college student now take away to college? At least one smartphone, an MP3 player, such as the Apple iTouch, a lap top computer, a digital camera, digital video recorder, E-reader, a digital television and two games consoles, one handheld the other fixed. Over the coming years most of these devices will come with a WiFi Direct chip that will enable them to connect directly with each other, without a wireless hotspot. Likewise, over the coming years the number of sensors that are WiFi enabled will rise exponentially. The world’s electricity grids are steadily being rebuilt using networked digital electronics and the same stead march towards the networking of sensors is taking place in oil, water and gas pipelines. Automobiles, medical instruments, road sensors, numerous monitors, sensors and meters within households and offices are now also being connected to the internet.

AT&T’s last set of quarterly results allow us to glimpse the future. In the second quarter AT&T saw 100,000 new data enabled devices, such as e-readers and a variety of monitoring systems, connected to its network. The estimates for connected devices is mind boggling and may prove to be far too high. However, when we look at the growth of data enabled devices they usually exceed forecasts. The sudden rise of the smartphone and tablet computers have taken most analysts and forecasters by surprise.

Source: US Gov Stats and Cyke Global Estimates

The chart above is based on a well known one produced by the US Department of Commerce, which examines the time it took new technologies, such as cars, TVs, radios and telephones to reach 100 m of the population. The main point to take from this chart is that in an age of networking, new technologies and new types of behavior spread more rapidly than before. Facebook is a powerful demonstration of this trend. The service was launched on Harvard University campus in 2004 and was opened to the general population in 2006. The site now claims to have 500 m registered users and recently overtook Google as the US site with the most internet traffic. A network gives a device power and in the modern world power resides in community and the ability to access applications and content. Today we live in a world where the private and public space through which individuals move is immersed in radio waves: we are always connected. There is now a small industry dedicated to examining and speculating on how all this connectivity might be reshaping human brains and behavior.

Baroness Susan Greenfield’s book ID, is an early example this genre; a more recent one is The Shallows: What the internet is doing to our brains, by Nicholas Carr. No surprise then that one of the most in vogue areas of scientific study today is neuro dynamics and mirror neurons. What this type of research strives to understand is how brains function in a society that can increasingly be described and understood using the terminology of complex networks. The discovery of mirror neurons at the University of Parma in 1995 reveals how much of human behavior is a result of sub-conscious mimicking of others in our social group. A famous experiment by VS Ramachandran, the noted neuo-scientist, examines what these neurons may mean for the destiny of Mankind. A taster of his exciting work can be seen at the following link: TED lecture One area of research, which is generating interest addresses the question of conscious will and our idea of self. Daniel Wegner, one of the leading scientists working in this area has written a book called, The Illusion of Conscious Will. The title gives a flavor of where all this is leading us. An excellent tour d’horizon can be found in a work I have mentioned before called Herd, by Mark Earls. Rather than being an academic, Earls is a senior advertising executive. He therefore manages to show how recent breakthroughs in neuro dynamics and the study of social networks has a commercial endpoint. As someone who has always been rather skeptical about the use of charts in stock analysis I am being forced to review my prejudice. Earls’ main contention, which summarizes recent scientific work and comes from his own experience in advertising, is that that society is not made up of individuals who exercise free will. Although he doesn’t mention Mirror Neurons, he, like scientists who are examining them, has arrived at the conclusion that very few of us are individuals, mostly we function as part of a herd. This is why stock charts are useful, they plot group behavior. They many not always be right but, as many experienced and successful investors know, often they are on the money. In my experience some investors are extremely skilled at reading them.

Now consider the following finding, which came from Accenture’s study: 45% of employed Millennials use social networks while at work, but only 32% say that this is supported by their IT departments. Millennials are addicted to being connected. The table to the left comes from another study carried out by Cisco, which examined how its customers use Facebook. It found that 7% of them spent an average of 68 minutes a day playing a popular interactive game called FarmVille. Mafia Wars was the second most popular game.

This underlines a theme that will be familiar to 5th Column readers - IT has become consumerized. Today, even the enterprise, once the bastion of the IBM mainframe and Microsoft compliant PCs, is becoming dominated by consumer choice. This explains the success that Apple is enjoying with the iPad and iPhone. Both products were aimed at consumers but more companies are being forced to adopt them because their employees use them. This goes for social networking too.We saw the same pattern with the adoption of the personal computer which, as we discussed last week, took place despite the protestations of corporate IT departments. They correctly saw that the PC would undermine their power.

What is cool for Millennial consumers is also cool for business. This is why the giants of the PC era face a daunting problem. Their shares have underperformed the likes of Apple over the last decade. It is not just that they are falling behind in consumer markets, it is that consumer markets have begun swamping business. Microsoft spotted this trend a decade ago, which is when it teamed up with two companies, Sendo and HTC, to produce smartphones. Microsoft’s plan was to topple the Black Berry and Nokia and dominate the enterprise. It has not happened and now it is never likely to. Androids and iPhones are sweeping in from the consumer plane, like the Mongol hoards and are storming the Great Wall of Enterprise.

There is gold to be found by studying how groups use social networks and other types of communication technologies. Over the last five years IBM for one has spent $11 bn buying up companies that provide network analysis software . IBM says that its annual sales of such software will exceed $15 bn by 2015 and is growing at a double digit rate. By one estimate there are more than 100 programs now available for network analysis. Gartner ranks this type of software as number two in its list of strategic business operations meriting significant investment this year.

Mobile phone networks are at the forefront of those who use this software. As mobile networks carry more services like Facebook and Twitter, this software can be used to create a completer picture of how large populations of subscribers function. The aim is to examine how subscribers operate within their social network. A recent article from the Economist gives us a taste of what is to come.

The police department of Richmond, Virginia, has pioneered the use of network-analysis to predict crimes. Police officers know that crime increases at certain times, such as on paydays and when there is a full moon. The software lets them analyse the social networks around suspects, such as dealings with employers and collection agencies. The goal, according to Stephen Hollifield, the department’s technology chief, is to “pull together a complete picture” of suspects and their social circle.

Richmond’s police have started monitoring Facebook, Myspace and Twitter messages to determine where the rowdiest social gatherings will be. On big party nights, the department now saves about $15,000 on overtime pay because officers are deployed to areas that the software deems ripe for criminal activity. Mr Hollifield claims that crime has declined as a result.

Investment Opportunities

So far we have surveyed how demographics and technological innovation are combining to create a society that is networked. We have also seen that the number of devices linked to networks is rising exponentially. In last week’s Fifth Column we looked at some estimates from Cisco, which underline that the place where the networking of human society will happen at the most rapid pace will be wireless. From 2009 to 2013 Cisco believe that wireless network traffic will increase more than 30 fold, compared to just over a four fold increase in fixed network traffic over the same period.

Due to this the number of mobile broadband subscribers is expected to rise to 2.7 bn. This is the number of subscribers who are expected to be using the high speed data variety of 3G known as HSPA. By that time another 100 m are also expected to be using LTE, which is a mobile technology specifically designed for high speed wireless broadband in dense urban areas. Within five years, close to 40% of the world’s population will be using wireless data over mobile networks. Now look at the chart below. What this illustrates is the speeds achieved by mobile networks compared to fixed line networks.Despite the improvements in wireless technology there is still a gap of ten years separating what a fixed line network can offer compared to what is available on a mobile network. Two of the most successful ways to invest in technology is to find bottlenecks and also to invest where the pace of innovation is the greatest. Wireless lives up to both of these rules

Let me explain. In the fixed line world, which is where the personal computer industry resides - bandwidth is not a constraint and neither is memory size, or power consumption. Another constraint that is lacking in the fixed wire world is human bandwidth. When someone is sat at a desktop they are able to concentrate better on the task at hand, even if that is a user manual.

If power and memory are not a problem, and neither is human bandwidth then electronic and software design can be loser. Microsoft is free to write bloated software and Intel is able to pack billions of transistors onto a piece of silicon without needing to worry too much about power consumption.

None of this works in the wireless world. Yet a growing number of wireless consumers will expect to receive the same services and applications over their mobile networks as they do on a fixed wire network. However, there is less bandwidth, less power and less memory than the fixed world can offer. This represents a barrier to entry and goes a long way to explaining the problems that PC centric companies, such as Microsoft and Intel, face when attempting to move into the wireless domain. By contrast, the constraints of the wireless domain represent the moat around ARM’s business. Arms’ devices were designed from the beginning with wireless in mind. As we saw earlier, with the number of electronic devices rising exponentially this puts ARM in a position that closely resembles that of Intel’s in the PC domain. Thanks to Moore’s Law each year Intel has been able to add more value to its microprocessors at the expense of other parts of the PC value chain. ARM is following the same progression; like Intel it has added graphics to its microprocessor cores. Over time other functions will follow. This is why Arm attracts takeover speculation.

The constraint in the speed of mobile networks explains why mobile operators can charge more for data delivery compared to an operator in the fixed world. Today, mobile voice and SMS represents about $800 bn globally. Data will eventually take most of this and also add new revenue. It will also increase margin.

Operator Capex+Opex Costs to deliver 1GByte of data

low ratings and typically offer yields of more than 5%.

The chart below, which was compiled by Rysavy Research plots data and voice usage over 3G networks. In the US data already represents just over 20% of the ARPU for the leading operators. However,

as the chart on the left illustrates, the speed of increase in data volumes is accelerating. The reason is not hard to locate - the availability of high speed mobile data networks is growing, the penetration of smartphones is rising and the number of Millennials who are entering the working population, and therefore have more money to spend is also increasing. Ingredient X, which feeds off of each of these developments, is that the pace of innovation in the mobile data domain will continue to accelerate.

By 2014 the number of 3G subscribers in the world is expected to be more than 3.3 billion, of whom 2.7 billion will use high speed data services delivered over the higher speed versions of 3G. The chart at the bottom o this page concentrates solely on mobile data volume and so gives a clearer picture of what is taking place. Over the coming few years the speed of growth will accelerate. By 2014 there will be more than eight times as much mobile data.

Over previous issues of Fifth Column and before that, when I wrote the Mash, I have often addressed the subject of smartphones and mobile operators. It must by now be clear that the key to successful investment in technology is to understand the characteristics of the Millennial generation and the dynamics of mobile data growth. As we saw last week, the estimates for the number of smartphones has been increased yet again; currently the market for these devices is growing at more than 50%.

Now it is time to look at some other areas where investors may want to consider investing. In a world dominated by wireless networks and social networking services, such as Facebook, it is clear that security becomes a more serious concern than it was when PCs dominated the IT environment. Security has become so important that the computer hackers themselves have taken to patenting their own technology.

The latest version of the Zeus banking Trojan, which has long been a threat to financial institutions and delivers lucrative financial information back to a botnet command and control server, includes the type of copy protection that one usually finds in enterprise software. The creators of Zeus have added a hardware based licensing system to the Trojan builder kit , which only allows the kit to be copied on a single computer.

The creators of SpyEye, which competes with Zeus, have now also included a hardware lock, developed by a Russian programming team, in their software.

Over the last few months Intel has launched a takeover of McAfee, a security software company and Hewlett Packard has announced the acquisition of ArcSight, another US based computer security company. Both Checkpoint Systems and Radware, two Israeli security companies quoted on the Nasdaq, have leapt in the wake of these bids. Symantec, another US security stock has also risen. In Asia, Trend is one of the big security companies, while in Europe F-Secure is another company that specializes in anti virus software.

We have looked at mobile operators on numerous occasions just as we have discussed the prospects for Apple, Google, Arm, Imagination, Mediatek, Cambridge Silicon Radio. Broadcom and many others. An investment in the right lithium battery company is another option. However, it is time to revisit a theme that I have not looked at since April 2009, and that is new screen technologies. A number of the new devices that link to wireless networks will use screens. Remember, one of the rules of investing in technology is to locate a bottle neck. Handheld devices are battery powered so energy consumption is an issue. At the same time, these devices are also required to run high quality video images, which represents a drain on power consumption.

My iPad fantasy

2010-05-19T09:03:00.000-07:00

Sunday was good; in fact it was better than good, it was sensational. I spent the morning in bed with a rather toothsome new friend. Outside it poured with rain. Perfect, we didn’t need to go anywhere because I was having more fun running my hands over her curves.

She’s slim; even sleek, and she is so damn responsive when I stroke her. When I clasped her I felt a buzz, a thrill. This, I thought, is definitely the one for me. She was so beautiful, like she might have fallen out of an alien space ship. What I mean is, she looked like she came from the future. A celestial future, where everything is perfect.

Yes, over here in London, I managed to get its hands on an iPad for the weekend ahead of the official launch. The publishing industry has taken to calling it the Jesus Tablet and if you ever get your hands on one you too will get that surge of faith, you will see, touch and believe. You’re doubtful I can tell, but I have an advantage over you - I’ve already used one. Over the last few months The Mash has talked often about the iPad and even suggested that it will revolutionise media and the web. Here’s the scoop, that may be an understatement.

The point I am making with the purple prose and fevered day dreams is that the iPad changes your experience of the internet. With an iPad you consume content, rather than surf the net; the experience is sensual and absorbing. One reason for this is that absence of a keyboard means that you can hold it in one hand like a book, or magazine. You are going to find this so much more comfortable than cradling a PC in your lap. For starters, it reduces those aches and pains you get from staying on a key board too long. With an iPad you can lie in bed; or crash out on the sofa and experience the web in comfort. As more of us spend our leisure time communicating on social networks, adding pleasure and ergonomics to the equation is something of a great leap forward.

In a year or so when the price has dropped by a third, or a half, The Mash suspects households will buy several. If you think that’s a bit rich, look at the

chart above, which is of US TV ownership. More than half US homes now have three or more TV sets. The iPad’s screen is sensational, so viewing videos is much more fun than on a PC. To tell you the truth, now that I have experienced the iPad I am not so sure there is much of a future for Amazon’s Kindle. As far as most homes go a device like an iPad has many more uses than either a TV or a computer, but most of all it is personal. Just like with mobile phones, the Mash suspects that consumers are going to become wedded to their iPads.

This might seem like hyperbole but just as Avatar has changed people’s expectations of film so the iPad will change our expectations of the internet and digital content. In two or three years, when the price is closer to two hundred dollars, devices like the iPad will take the emerging markets by storm and when they do the consequences will be profound.

Within the next five years the Mash suspects that a whole generation of children will have their first experience of reading on an electronic device such as the iPad. They will grow up imagining books and newspapers as digital. You might disagree and speaking as someone who owns a rather substantial library, it is with some regret that I write these words. Yet, let’s not forgot that once books used to be on lumps of clay, then they moved to papyrus, or where even chiselled into sheets of copper. No doubt there were those who moaned when the first paper back appeared. In each turn of the evolutionary cycle Marshall McLuhan’s famous dictum operates: The medium is the message. In other words, the medium through which content is presented changes the consumer’s experience of that content. The iPad brings the power of digital technology and the breadth of the internet and marries it into a desirable and useful object. The iPad will become a talisman, a treasured object with almost magical power.

What a difference 85 years makes

2010-05-19T08:58:00.000-07:00

The chart above plots the concentration of wealth in the US. As you can see, we are back to the levels last seen in the Jazz Age, when F. Scott Fitzgerald was America's most celebrated writer. My goodness, what an innocent time that must have been. Today, Cormac McCarthy harrowing tale the Road is the big hit - Go Figure!

Chinese Property and Tech Demand

2010-05-10T05:11:00.000-07:00

Lets begin with what we know: China’s appetite for high tech gadgets is exerting a mighty influence on global demand. The recent results from Samsung Electronics, Asia’s leading technology company, give one reason why. The South Korean giant estimates that China’s flat screen TV market is now as large as America’s, and is doubling.

Industry wide smartphone shipments were up 50% in the first quarter and as Apple’s astonishing first quarter results demonstrate, China is making its weight felt. iPhone sales in China were up 900%. China is also having an impact on the PC market. It is likely that close to 350 m PCs will be shipped this year, a 17% gain on 2009. As the recent results from Microsoft and Intel illustrate, consumer demand in both China and other emerging markets has more pull than Western corporate buyers. Yet it will serve investors well to remember an old stock market adage: news follows share prices.

China’s stock markets have been among the worst performing indices this year. On queue over the last few weeks concern has risen about the nation’s property market and slower economic growth during the second half of the year. Some analysts are citing a drop of 40% in property transactions during the second quarter, in some of the largest cities. There is also the realisation that the shockwaves spreading out from Greece might hit China.

A quarter of China’s exports go to Europe. Yet the Euro has been sliding against the dollar, as the markets worry that growth might falter. China pegs its currency to the dollar, which has been rising against the Euro and so making its goods more expensive.

China’s Property Market

Late last year Jim Chanos, one of the world’s leading short sellers, began voicing concern that China’s property market was in a bubble. You do not have to look very far to see that he has a point: last year, according to Morgan Stanley, sales of residential property were up 87%. There can be no surprise then that residential construction has also taken off, rising some 20% according to CLSA. It is still expected that growth will be of the same level this year.

With low interest rates and limited opportunities for alternative investments, property speculation is a popular way to make money. Particularly, as buyers of second homes were offered mortgage discounts. Chinese state enterprises have also been encouraged to join the property market. In a report earlier this year CLSA estimated that nearly a fifth of recent properties bought were kept vacant.

However, China’s many bulls will point out that the picture may not be quite as dire as critics, such as Chanos, make out. The four leading cities, Beijing, Shanghai, Guangzhou and Shenzen only represent 9% of the urban population and 8% of property sales by floor space. There are a 150 other cities with populations of at least a million. When it comes to floor space, China’s second tier cities represented 33% of residential sales last year. Prices in these cities are 60% below the tier one cities. In the third tier of cities prices are 74% below places like Beijing and Shanghai.

Another encouraging feature of the Chinese property market is the high proportion of cash transactions. The ratio of consumer debt to GDP in the country is just 17% compared to 95% in the US. Mortgage loans as a per centage of GDP are also low when compared to that of the Anglo Saxon economies. In China the figure is 14% compared to the US, where it is just below 80%. All the same, the cost of servicing a mortgage for the average family is 43% of income, according to Morgan Stanley estimates.

A Bear in the China Shop

China’s bulls have many convincing arguments, but so far this year, Chanos’ view has been the more accurate. He pointed out that investors ought to focus their attention on international stocks that were exposed to China’s infrastructure and building markets. In other words, steel and cement. In the month to 7 May, the SLX steel ETF had shed 18%, and Cemex, one of the world’s leading cement companies, lost almost 14% last week.

Falls like these, in combination with the growing nervousness shown by some of the analysts and strategists who follow China, give us reason to be nervous. Yet, for the time being, most of the evidence from the tech sector has been very upbeat. However, if the Chinese property market is weakening as some say, there is still time for the shock waves to be felt in Silicon Valley.

Over the medium and longer term China will become the biggest consumer of PCs, smart-phones and the like. What worries me is the following few quarters, we need to pay close attention to what is happening to tech demand in China.

A Coca Cola for the 21st Century

2010-05-02T11:45:00.000-07:00

The Financial Times has just published a survey of the world’s top global brands. The world’s three most valuable are Google, IBM and Apple. Microsoft made it into fifth spot, behind Coca Cola. Tech companies took seven of the top ten positions and most of the top twenty positions. We live in a technology dominated world, yet you often come across professional investors who would rather take a bath in battery acid than buy a tech share.

The problem is that tech is two faced. On one side you find dozens of companies that look, for a moment like winners, then flare out. Others, like Sun, Compaq and Palm do well for years before evaporating Then there is tech’s other face, the totalitarian one. In its day, IBM controlled between 60% to 70% of the mainframe computer market. Intel takes around 90% of the microprocessor market, and there is not much worth fighting over in the PC software market that isn’t owned by Microsoft. Google rules the hill in search and Amazon has cornered the electronic sale of books. These are businesses with moats around them, the kind of brand names that a young Warren Buffett would buy ahead of Coco Cola, or the Washington Post.

Now, I am going to make a crazed, typically top of the market prediction, within ten years Apple will be the largest consumer brand in the world. Furthermore, some media giants, it could be Disney, News Corp or Time, will ride the same jet stream. The key has to do with understanding where we are in the tech cycle and the rising power of the Asian consumer.

Over the last week we have seen Corning increase sales by 57%, citing strong demand for flat screen TVs and computer monitors, particularly out of Asia. Likewise, Samsung Electronics, Asia’s largest technology company, has just reported that Chinese consumers are showing a keen interest in higher specified flat screen TVs. A few weeks ago it was Apple’s turn. Analysts had been expected around 7 m iPhones to be shipped, instead the company sold 8.7m and earned nearly 30% of its profit from Asia. In the previous quarter, 20% of the company’s profits came from Asia.

Asian Demand

The strength of demand in Asia is the thread linking each of these results, but there is a noted change to the pattern of this demand. Chinese consumers, on the eastern seaboard, were the first to ship in container loads of high ticket luxury items and high tech goods. About 300 m live in eastern cities such as Shenzhen, Shanghai and Beijing. What has changed is that the 1bn or so Chinese consumers in the more Western provinces have begun spending. CLSA, the specialist Asian broker, estimates that these consumers have, when it comes to tech goods, close to the spending power that those on the eastern seaboard enjoyed in 2005.

Salaries are rising in China, while at the time the price of tech goods is falling. Since 2004, the price of notebooks, PCs and handsets has been falling at 12% a year. For LCD TVs the rate of decline is more like 20%. If these trends continue then, by 2013, it has been estimated that China will be the largest market in the world for high tech goods. By 2012, when it comes to electronic goods, rural China will have the same buying power as those on the eastern seaboard have today. By 2013, China could account for close to 30% of the world’s LCD TVs and smartphones and one in five of the computers made.

The ability of the average Indian to afford such tech products will reach those that existed in China over the last couple of years, by 2014. Just as Western consumers have driven the purchase of PCs and smartphones during the first decade of the century, Asian consumers will take the lead during this decade. The song, therefore remains the same: consumers buying not corporate expenditure is what drives IT sales. Microsoft’s most recent results are further confirmation of this trend.

The challenge for investors

One of the challenges facing investors will be to find the stocks that benefit most from this colossal shift in consumer spending. While the American consumer represents about $10.35 trillion dollars, compared to just $2 trillion for both China and India, Asia will dominate the growth in demand. This, of course, is the same pattern we saw in the oil market, as explained in the Energy Anomaly. Emerging markets represent 95% of the growth in demand for oil. Therefore, even as demand for oil dropped in the West the price rose because countries, like China, increased consumption. This shift will gain momentum just as Western consumers and governments enter the Great Contraction and cut spending to reduce debt.

If you want a sign of the times then here is one. In the UK, the Governor of the Bank of England has just warned that which ever party wins next week’s general election, it is likely to be out of power for a generation after. The reason, because the decisions needed to reduce debt are going to be so harsh and unpopular.

How to Play This Trend

Asia has a special affinity for technology. After all, tech products and computer games played an influential role in the rise of the Japanese economy. Accenture, the consultancy, has conducted research globally into consumer buying patterns and concluded that Asians are twice as likely as a westerner to have bought a computer, or mobile phone. Asia led the West in the use of the internet for building social communities and in the adoption of massively multi-user role playing games - MMPG. Across Japan, South Korea, Taiwan and now in China too, there is a problem with Asian youths becoming so addicted to the cyber life style that they withdraw from society. In Japan such youths are referred to as Otaku. Otaku culture is spreading rapidly across Asia.

How best then to play the Asian high tech Tsunami? This is where we need to revisit the secret of those global brand names and reacquaint ourselves with the two faces of tech.

History shows us that it is fiendishly difficult to make money from hardware companies. With a few exceptions hardware shows us the wrong side of tech. The pace of innovation is destructive and margins are atomized.

The 1980s were decade of the personal computer and it was also the decade that Sun, Microsoft, Compaq and names who would become leading tech companies went public. Yet, if you look at a chart of the market capitalization of US tech shares, as a per-centage of the overall market capitalization of US shares, you will see that as a group tech fell over the course of the decade. How can that be, when Sun, Microsoft, Intel and others were among the best investments of the 20th Century? Part of the answer is that most of the profits that were available in the PC industry were taken by two companies: Intel and Microsoft. The same pattern appears to be happening today with the PC’s replacement, the smartphone.

Have you noticed that it is becoming harder to find smartphone stocks to make money from? In the first quarter of this year, smartphone sales probably rose by around 50% in unit terms. Yet, at Cykepartners, we estimate that Apple took around 40% of the smartphone sector’s operating profit.

Apple is rampant while other smartphone makers, such as Nokia and even RIM, are finding it tough to stay with the pace. Don’t therefore be surprised if there are more rescue missions like the one that HP launched for Palm.

The reason that Apple’s growth has gone up a gear is because of Asia. Sales in China, Taiwan, Japan and South Korea rose several hundred per cent. Nonetheless, skeptics will point out that a competitor might emerge with a cooler device that will topple the iPhone. They might also argue that the new iPad might yet underwhelm. The latter, though unlikely, might be true. As for another device wasting the iPhone, that would be a tall order. Apple only spends 3% of its sales on R&D, and apart from a few cosmetic changes, the iPhone hasn’t been fundamentally altered since it was launched in 2007. Increasingly, the key to its success is the Apps Store. Just as hundreds of thousands of developers were really the key to Microsoft’s dominance, those Apps developers are Apple’s foot soldiers. To beat Apple now someone is going to have to find a way of inducing those foot soldiers away. Google’s Android has the best shot, but I am not convinced it will be able to pull it off. The momentum looks unstoppable and like Intel, Microsoft and Google before it, Apple has a good chance of establishing a hammer lock on what is the fastest area of growth in consumer electronics.

Therefore, as we saw in the age of the PC, power is being concentrated in a few hands when it comes to the smartphone. By 2012 there could be more than 500m of these devices on sale - which will be well ahead of the combined sales of laptop and desktop PCs. Besides Apple, and a handful of specialist chip and software companies, we still haven’t answered how will investors make money?

One answer is to look at content. We now live in an age of ubiquitous broadband, often it doesn’t feel that fast, but mostly we have access to it. By the end of last year there were 1.7bn internet subscribes and by 2012 there will be around 3 bn, close to half the population of the globe. Households around the world will increasingly have WiFi and a broadband connection. With these networks in place the desire for electronic devices will multiply. Ericsson, the world’s leading telco equipment maker, believes that by 2020 there might be as many as 50 billion devices. If that sounds incredible, try counting how many digital cameras, music players, games consoles, PCs etc you have in your house; well over 20 would be my guess.

In a world of devices and widespread networking, the stage is set for the consumption of digital content. Each minute of the day 24 hours of video are uploaded to Youtube. By December of last year mobile data traffic overtook mobile voice traffic despite there only being about 400m mobile broadband accounts world wide, which is a tenth of the number of mobile subscribers worldwide.

We have entered the content centric age and history shows that American content plays well around the world. Check out the performance of content shares over the course of this year. Stocks like News Corp (producer of Avatar), Disney and Time are out performing Google. With advertising rates rising and a revolution in high definition and 3D underway, media stocks are cheap and facing the benign version of a perfect storm. The iPhone and more lately the iPad point the way to future where digital content becomes pervasive and some of the big content names will shine as a result. My guess is that over time Apple itself will mutate more towards content, which is one reason why its recent move into mobile advertising is so interesting.

Apple’s Xen like coolness, is appealing to aspiring Asian consumers in a way that no other high tech brand appears to be able to rival. It is early days but I think Apple’s first quarter revenues, where Asian sales leapt points the way to the future - this is the Coco Cola of the 21 st Century.

ARM vs Intel

2010-05-01T01:24:00.000-07:00

Source. Siliconalley.com

Apparently, both HP and Microsoft have announced that they are shelving plans to launch tablet computers. HP has been reported as saying that Windows 7 and Intel microprocessors, are too energy intensive for such a device.

This is terrific news for ARM, the London quoted company that supplies about 95% of the microprocessors used in mobile phones. On the basis of its last numbers, on average 2.4 ARM processors can be found in each smartphone. While an ARM device consumes about 3 Watts of power, the comparable Intel device needs 6 Watts.

Make no mistake, this is a problem that Intel will have to get sorted, because the growth in so called embedded devices, such as smartphones, and now iPad like computers, is astonishing. With networking spreading through the consumer sector, both as WiFi and mobile broadband, the market for devices has gone exponential. Asia is just coming on stream, which adds to the growth. Ericsson estimates that by 2020 there will be 50 billion devices connected to the internet.

That number is astonishing but if you want a clue as to how it might come about, count how many electronic devices you now have in your home. Then, consider that today there are about 1.7bn people on the Internet, but that by 2012 (why does 2012 keep cropping up- ED), this will have risen to around 3bn, close to half the global population.

The chart above, which examines Amazon's latest financial quarter gives us a squint of what is taking place. Amazon is now selling more electronic gadgets than books and CDs.

The way I read this is that the internet is increasingly becoming dominated by 'embedded devices', that are still tethered to their manufacturer. You or I cannot freely program these devices and the software that we can run is dictated by the manufacturer, or possibly, by the network operator. This is a world that is familiar to ARM and less familiar with Intel. Intel will stay as the dominant force in PCs, but ARM is where the growth is.

Recently, there were rumours that Apple would buy ARM. Personally, I don't believe it. ARM is an intellectual licensing company, most of the world's device makers and chip companies are its clients. If Apple owned the company it would harm Arm's business model.

None of this is good news for Microsoft either. The Wintel duopoly does not play well in the embedded arena. But hey, we knew Windows was in long term decline anyway, didn't we?

Blackberry Crush Time

2010-05-01T01:00:00.000-07:00

The dramatic arc that RIM is following is now clear for all to see. It goes like this. In 2008, RIM achieved an average selling price of around $400; by the middle of last year this had fallen to $356, and by the last quarter of 2009 it had fallen again to $311. Next stop will be closer to $305. Yet, as Best Buy has just confirmed, the fourth quarter of last year was an exceptionally strong one for smartphones, Apple’s average selling price rose above $600. If you are a seller of smartphones, life had never been better, so why did ASPs drop for RIM?

RIM is following the same path beaten by Nokia at the beginning of the last decade. Average selling prices will continue dropping because RIM’s product is becoming passe, just as Nokia’s did. The next step will be that RIM’s market share in the US will drop as Apple picks up Verizon and Google’s Android operating system gains momentum. As they say in the pantomime, it’s curtains.

The latest results from Apple and others highlights the problem. On our estimates, Apple has taken about 40% of the smartphone industry's profits. But the REALLY big news, as highlighted by me in a SeekingAlpha piece back in January http://seekingalpha.com/article/185090-apple-s-real-big-news-massive-growth-in-asia is that Apple is now sweeping through Asia. For the quarter just reported, Asia represented close to 30% of Apple's profits. Asia had been Nokia's last hiding place and RIM was hoping to move into the same fox hole. Not any more, because Asia is developing a crush for Apple.

Or maybe we should call that Blackberry Crush. On the one side you have Apple rampant, on the other you have the Android. In the middle there is the Blackberry. Let's face it, Google’s Android is really aimed more at the Blackberry than the iPhone. The Android is a device that offers businesses the secure email that the Blackberry offered them. Secure email has, so far, been the Achilles heal for iPhone, which is a product that is largely focused at consumers.

A recently published survey by Crowd Science, a US based market researcher, found that 40% of Blackberry users would make the iPhone their next smartphone. However, coming up quickly on the inside, Google’s Android operating system appealed to a third of Blackberry users.

Another recent survey, this time from ChangeWave, specifically looked at US corporate IT budgets. A total of 1,702 respondents involved in IT spending replied. Importantly, the Apple iPhone saw a five per centage point rise in share, while Google’s Android device saw a 4 per centage point rise. The Android is at an earlier stage of development, so as hardware vendors and Google continue to enhance the design it will become more competitive. In particular, there are more than 20 companies supporting the Android, so we can expect prices to fall rapidly, which will bring further pressure on RIM.There will come a day when even Apple has to drop prices.

Smartphone Ecosystem

Smartphones are computers first and phones second, which means that applications and content are more important than the quality of voice calls. This is where RIM comes unstuck. There are now seven smartphone operating systems out there: iPhone, Symbian, RIM, Google, Windows, Palm and Meego(Nokia and Intel). This presents a headache for the hoards of developers who are, in reality, the people who decide which smartphones become successful. The developer has limited resources so they have to make a carefully considered decision over which operating system to commit resources to. The phone that gets the developers’ attention becomes the phone that has most to offer subscribers; more subscribers then buy the phone; result: a virtuous circle. The release of Apple’s iPad will make this even more apparent. At present there are 75 million users of the iTouch and iPhone users, within a year another 6m or so million iPads will be sold. These three devices all share the same operating system, which in turn is supported by Apple’s wildly successful Apps Store. From the point of view of developers, Apple offers you a great environment to write for, a tremendous storefront from which to sell your software and a large and fast growing user base.

Like Nokia before, RIM has been slow to recognise that the market has changed. The Blackberry’s operating system is old, the web browser primitive and the device itself is still largely keyboard based. Meanwhile, the market and even Nokia, has moved to touch sensitive screens. Eventually, RIM will launch a proper touch sensitive Blackberry and will improve its operating system, but by the time it does the market will have moved on. RIM is in catch up mode, it is not a leader.

What Blackberry does have going for it is market share. It has about 20% of the global smartphone market compared to Nokia’s 39% and Apple’s 20%. Mobile operators like the Blackberry device because it uses less bandwidth than either the iPhone or Android and, as we have seen, corporate like the email function. Kids like the Blackberry messaging function and, for the time being at least, the device is popular in emerging markets.

RIM is not yet in a dire state. However, from the point of view of investors, the stock has a half life, despite the recent share buy back. Before feeling more confident about this stock I think we need to wait until there is evidence that ASPs have become stable. That is unlike to happen anytime soon because it looks ominously as though RIM’s market share in the US is poised to implode.

The Oil Anomaly

2010-05-01T00:42:00.000-07:00

Anomalies, like some difficult people and risky jokes are where you find information, this is why we like them. The biggest anomaly out there can probably found in the global energy markets. The economic crisis that began in the second half of 2008, triggered a sharp decline in energy prices and consumption. By the end of that year the price of oil had fallen by 75%, traded coal was down by 62% and the price of natural gas sold in the US, had fallen by 58%. The economic slowdown continued into 2009, and then something strange happened.

While prices for coal and gas continued to fall, the oil price stabilised and then staged a sharp recovery. From a low of $34 in December 2008, the price of oil rose to $71 in June 2009. In the wake of economic recovery the oil price has continued rising and is now over $80. Week in week out pundits attempt to call the oil price and most of the time they seem to call it wrong. The reason it is so difficult is that the energy markets are going through a change and change is always difficult to forecast.

Demand for oil in the OECD countries had started to fall in late 2005, long before the economic crisis broke. It continued dropping through 2006 and into 2007. Since 2007, oil consumption in OECD countries was down by 8%. Yet, in the five years to 2008, the price of oil rose by 370%, traded coal was up 460% and natural gas rose by 120%. For the answer to this anomaly we can largely ignore the machinations of hedge funds and other speculators, instead we should look at what is happening in emerging markets.

The only other time since World War II that prices rose by as much as they have during this decade was in the 1970s. Then demand for oil was driven by growth in the developed world. This time round 90% of the growth in demand for oil is coming from the developing economies.

Emerging inefficiency

Emerging economies, like China and India, are not efficient consumers of energy. Therefore, demand for energy exceeds the growth in GDP. At market exchange rates it takes 3.4 barrels of oil equivalent to produce $1000 of GDP in the non-OECD countries, compared to 1.1 barrels of oil equivalent in the OECD. One reason for this inefficiency is that many emerging markets subsidise the price of energy. There is a direct correlation between energy efficiency and energy prices so subsidies are not a helpful distortion if you are worried about carbon emissions. Besides green house gases distortions have other implications for global economic growth.

The American consumer represents about $11 trillion of global GDP, compared to about $2 trillion for both China and India. In the US, fuel taxes are low and as a result the price of oil has a more direct impact on the prices that consumers pay at the pump. With demand rocketing in the non OECD, both because of stronger growth and inefficiencies, American consumers are likely to suffer, even as growth in their own country stagnates. Fuel subsidies, therefore, are a distortion that are being felt all around the world.

Fuel subsidies make the world a more unpredictable place. The other reason that unpredictability is rising is due to the different nature of growth in mature and developing markets. As Christof Ruhl, the chief economist of BP, from whom much of this article is derived, explains: in developed markets economic growth only gradually reshapes the sectoral composition of the GDP and employment; its principal affect is to expand the service sector, which is less energy intensive. In emerging market, growth is radically reshaping economies, making predictions about energy consumption harder to nail down successfully. Hundreds of millions of people have left low-energy-intensive activities, such as agriculture, for energy-intensive activities, such as construction and industry. In the West, industry is becoming less energy intensive, whereas in emerging markets the drift is the other way.

As discretionary incomes rise in the developing world, due to urbanisation, lifestyles change. Mobility and the need for transportation increases, as we can see by the explosion of car sales into countries, such as China. These changes have shifted the growth in demand outside of the OECD. Ruhl says that the entire net increase in global oil consumption since 1999, has come from outside of the OECD countries.

This rebalancing of consumption in favour of the emerging economies carries a heavy environmental cost. In the 1990s the growth in carbon emissions slowed, but since the turn of the century it has picked up on the back of emerging market demand. The carbon intensity of energy itself has increased. From 1970 until the late 1990s, global emissions per unit of energy consumed fell steadily. But then, in 1999, reflecting the increasing share o coal in energy portfolios of the non-OECD countries, carbon emissions per unit of energy began to rise. Since the turn of the century they have increased by two per cent globally and by 3 per cent in the emerging world.

The Role of Opec

As we have just seen, the rise of the emerging markets is making it more difficult to predict energy consumption. However, as we saw above, the price of oil rose sharply while other energy sources, such as gas and coal were more directly correlated to the overall economic growth. The rise for the divergence is due to Opec. The oil price is supported by a cartel, whereas coal and gas are not.

By 2008, the average annual price of crude had increased for 7 consecutive years, this had never happened before. One reason for this rally can be laid at the door of price fall, when the price for crude began to retreat from $80 a barrel, which was then a record high. To stop the decline, OPEC stepped in and cut production twice, in late 2006 and early 2007, by almost one million barrels a day. Crude oil then rallied from $50 to $147 in July 2008, their highest level ever, in both real and nominal terms.

What is extraordinary about this rise is that production was only cut by 1m barrels a day, where as daily consumption is 81m a day! Ruhl explains that like any complex system, the global oil market needs a degree of redundancy to operate smoothly. In the short term, inventories can provide this safety cushion; in the longer term, it is provided by spare production capacity. Following strong demand growth in 2003 and 2004, spare capacityin the global oil market was hovering around record lows, at little more than two percent of global production. Even after the OPEC cuts of 2006 and 2007, the global oil market was running at above 97 percent of capacity. At such a high level it is impossible to guarantee any meaningful stability in prices.

As growth picked up, an already tight market became tighter and prices exploded. As crude prices cruised through $120, Saudi Arabia unilaterally decided to increase production in an effort to help out the US, its largest customer. Curiously, oil prices jumped on heels of both announcements; the market believed that Saudi could not deliver the increase. The market was wrong. Not only was production increased in the Kingdom, it was rose from other Persian Gulf producers too. The timing could not have been worse because it coincided with the Great Recession. Prices fell from $147 a barrel in the summer to $34 by late December.

Production was cut by 4.2m barrels and by the first quarter of 2009, OPEC’s cuts finally met the fall in global demand.

Where are we today?

Ruhl estimates that the oil market now has 6 m barrels a day spare capacity. He calculates that it would take three years to burn through this capacity and wind markets up as tight as they were last year. Now hear this: prices are not expected to spike over the next two or three years.

Stability may be a dream because it assumes that the deep structural changes that affect the oil market comply. Three factors are worth keeping in mind. The first is that OPEC retains inordinate power over the oil market, even though it only controls 40% of crude output. The main reason for this is that there has been barely increase in supply from non OPEC regions, despite the strong rise in the price between 2002 and 2008.

The second reason, as we have discussed, is that emerging economies now drive the price of oil. The last structural change in the oil market is energy efficiency. The entire increase in global oil consumption this century has come from outside of the OECD in countries where its price is subsidised. Estimates of future shifts in demand will therefore have to determine how subsidies are likely to affect demand outside the OECD countries, for example, in China or the Middle East.

Coal and Gas

Global coal consumption is led by China, which consumes 43% of global supply and represents 85% of the growth in coal consumption. The market for coal is a lot less concentrated that that for oil. Coal trades internationally in smaller but highly competitive markets. During 2008, the price of coal rose and then collapsed as the Great Recession hit demand. It fell longer and further than oil because there is no cartel supporting the price. The market has also become more competitive: in response to higher transport costs, Europe substituted coal from the Indian Ocean with imports from the US.

Another factor is that fact that coal can be substituted by cheaper natural gas, which is what happened in the European Union. Electricity production from gas rose by 8 percent, compared to a 9 percent drop in electricity production from coal.

Natural gas got hit by the same one two punch that hit oil. Production increased just as economic growth went into a tailspin. The increase in gas production was partly due to technological advances in the US. Chief among these is horizontal drilling and hydraulic fracturing, which uses water pressure to release gas from hard rocks. Improvements in technology have led to an increase in the production of non-conventional gases. Production of non-conventional gases, such as coal bed methane, tight gas and shale gas has doubled over the last decade. The share of these gas deposits in total US gas production has reached about 50 percent. Like unconventional opinions unconventional gas is becoming the new normal.

As the technology that was pioneered in the US spreads the production of unconventional gases will increase. This is important because deposits of gas are less concentrated than those of oil.

Another change has been the development of an integrated market for LNG. About 8% of all internationally traded gas today is LNG. Traditionally, the relationship between LNG producers and consumers has mirrored that between piped-gas producers and consumers, which are connected by pipelines. This system is now changing. Spot markets have been emerging, thanks to buyers who have tried to secure additional LNG by purchasing single cargoes.

The emergence of a competitive market for LNG has the obvious effect of linking prices between regional gas markets in Asia, Europe, and North America, which have historically been segmented. The second consequence is that with long-term contract pricing under pressure, competition will increase and efficiency will improve. Consumers will benefit if the price of natural gas is increasingly delinked from the pice of crude. Finally, the advent of a globally integrated LNG market will improve energy security by fostering diversification.

We can already see the consequences of this: Russian and Central Asian gas deliveries to Europe are being affected by LNG prices. Whether the changes in the natural gas markets will have strategic significance will depend on two factors. The fist is whether more unconventional gas resources can be developed and where this occurs. The reason that coal is so popular is that it is available where it is needed - primarily, in China and India. By contrast, natural gas is, like oil, geologically concentrated: 60 percent of natural gas is consumed in regions that only control 14 percent of the reserves. Now if unconventional gases can be produced in places such as China, which currently are heavy users of coal, it could become the local fuel of choice, which would benefit carbon emissions. One kilowatt-hour of electricity with natural gas emits a little more than half the amount of carbon that producing the same amount of energy with coal does.

Conclusion

What we have learned is that no matter how severe the current recession, its effects on global energy markets are likely to be dwarfed by the long-term impact of the industrialisation of the emerging-market economies. The pressure on energy and commodity markets may have been relieved for the short term, but over the medium and long terms, the need for greater energy efficiency is paramount. Today, oil accounts for 35% of global primary energy consumption, coal for 29% and gas for 24%. Renewable energies, other than hydro and nuclear, are less than one percent. It’s time to wake up and smell the methane, it will be decades before alternative energies ever have a meaningful impact on global energy consumption and carbon emissions. Where we can make an impact is through improved efficiencies.

In the West industry has led the way in becoming more efficient. As consumers in both the developed and developing world show an increased desire for electronic goods, such as flat screen TVs, lighting, computers, music players, video cameras and digital still cameras, the ability to deliver greater energy efficiency becomes more prized. This is one reason the share prices of companies involved in such technologies as LEDs will continue to outperform solar, wind or any other alternative energy in future.

The Smart Paradigm comes to Asia

2010-05-01T00:34:00.000-07:00

After the great moderation comes the great rebalancing. If OECD economies are to reduce the amount of debt in both the public sector and within households, then saving has to increase. Just as falling interest rates and the decline in economic volatility, combined with a rise in credit, defined the world since 1982, the need to pay off debt in the OECD will define the coming decades.

Co-ordinated government stimulus and low interest rates have postponed the dreaded day that this will happen but investors can hear the clock ticking. One of the key elements of this great rebalancing will be that Asian consumers will have pick up the slack as consumers in the West consume less. Today, the US consumer represents $10.35 trillion in spending, compared to roughly $2 trillion for both India and China. However, Asia will represent an ever greater proportion of the growth in demand. This has long been the case for computers and, as Apple’s numbers demonstrate, it is now beginning to drive smartphone sales.

Asia is becoming the greatest markets for tech goods but how should an investor play it? First off, ignore analysts who continue to focus on the corporate PC market. Better still, sack them because they are in gross dereliction of their duty. Second, be suspicious of analysts who focus on networking equipment.

As Microsoft again affirmed, in its latest results, consumers continue to power sales, not corporates. As we have argued before, the super cycle that we are in the midst of is the networking of the private and public space. The mainframe and PC cycles of IT expenditure were about the networking of the corporate space. The life that is lived by ordinary people is of movement, in geographic and temporal terms it takes place in 360 degrees and not at a desk top within a corporate building.

The blue line represents PC sales, the purple line is mobile, the red lap tops and the green smartphone. All in hundreds of billions of dollars. Source: Cykepartners.com

The arrow of time in tech points to mobility becoming increasingly dominant. Mobile phone revenues overtook fixed line revenues around the mid point of the last decade, and lap top PC sales have been the fastest point of growth in the PC market for about 10 years. Tablet computers will accelerate the trend, particularly in Asia and emerging markets. Soon there will be a generation of young people. in emerging economies whose first experience of text has either come from a mobile phone or a small computer. In the first quarter of this year smartphone sales increased at 50%, if that rate were to continue there would be close to five hundred million on sale by 2011, by which point it will probably be outselling PCs.

Unlike the PC, smartphones are something of a fashion item, they are badges that we use to signal something of our selfhood. There appearance confirms what could be described as a super cycle. The first waves of technology were all about networking the corporate space. Smartphones, like tablets, netbooks, and notebooks play to networking of private and public spaces, in other words, society in 360 degrees.

A few years ago it was estimated that the average western home had twenty-six electronic devices. One trend, that is at an early stage, is that more of these devices will be linked to the internet. With this in mind, Ericsson estimates that by 2020 there will be 50 billion devices connected to the internet. Within the home there will computers, lap tops, netbooks, tablet computers, numerous phones, digital music systems and a TV. There may be something called a home media gate way, a server computer that stores digital media that can then be streamed around the home.

The simplistic way to play this trend is to buy Taiwanese companies, such as Gemtek, Realtek and Zyxel. The problem is that these companies have little pricing power. Networks are built using international standards, so it is difficult to add any value. Cisco might be a networking equipment company but its market position is built upon a proprietary operating system,.Like Apple, Cisco is not primarily a hard ware company. Some of the Taiwanese networking names might enjoy a moment in the sun, as sales take off but it will not last long.

The rise of the Asian consumer will, in many ways, be a reprise of the world that was dominated by the personal computer. Therefore, the Asian hardware companies that mainly win will be the ones who dominate the PC world now: Hon Hai, Samsung, TSMC, with the addition of newer names, such as Mediatek, would be a good place to start

A Media Centric Age

In an age when billions of devices are linked to the internet, and when most of them are mobile, what we have is the mother of all networks. Increasingly, these devices and the internet will be used for communication and the creation of communities. This pattern has been under way for some years and is already affecting which brands consumers value. Yet it may be have its profoundest impact upon the consumption of media. Look at the following chart, which comes from the Silicon Alley Insider website. It analyses Amazon’s sales, which for the first time are now dominated, not by books or CDs, but by digital products.

The network is being built, rapidly it is being populated by devices, as our various charts illustrate. The next step is that networks and devices have to do something. Increasingly, what they will be used for is the consumption of content. This is one of the articles of faith behind our theme of the Smart Paradigm.

The future just happened. In 2009 mobile data, for the first time, outstripped mobile voice. Yet there are only 400m mobile broadband connections, compared to 4.3 billion mobile phone subscribers. By 2013, more than 90% of global consumer data traffic will be video on demand and TV. Today, Youtube traffic is greater than that of the entire internet during much of last decade. Each minute 24 hours of video are uploaded to Youtube.

Asia’s influence is rising, and as the power of the region’s consumers increases, then Asian media companies and internet names, such as NC Soft, NHN, CTrip, Tencent, Baidu will continue to prosper. Over the coming weeks we will examine this theme further because there are obviously opportunities to be had within the Indian media scene.

However, let us not forget the West. American culture shaped the 20th Century, there is something about the American sense of fantasy that is seductive. This may have something to do with the fact that capitalism is making us more infantile. Therefore, American and some other Western media giants, such as Disney, Time Warner and News Corp, will among the winners from the digitalisation of Asia. Apple would be the other name we would focus on. Our hunch is that Apple may be the Western company that benefits most from the rise of Asia. By contrast, Microsoft, like Nokia, is likely to be among the Western losers.

The Pepsi Paradox

2010-03-29T04:05:00.000-07:00

Right now, the hottest area of science is focused on the brain, understanding consciousness, perception and the sub-conscious mind. Over the last decade interest in the field has been revolutionised by improvements in new scanning equipment, particular fMRI - functional magnetic resonance imaging - machines. The new tools allow scientists to monitor what is happening in the brain as it goes through certain tasks. In other words, we can see what is happening in the brain in real time.

Every breakthrough has a downside.Scientific revolutions usually start life as highly reductive. Remember the early days of genetic research, when we were told that a gene had been found for this or that, as though life was little more than a printed circuit board where components and transistors did specific tasks? The same is in danger of happening in brain research today. In particular, we should be wary of a new breed of neuro-economists who are recruiting the new research to support some of their own pet theories.

However, research into how the brain operates is beginning to reveal some surprising things about what drives us. There is an excellent survey of the latest research in a book called Mindfield, written by Lone Frank, a Danish neuroscientist. On reading her book I am tempted to say that we now live in the era of the medial prefrontal cortex and the mirror neurone.

Let’s take the medial pre-frontal cortex first. Decades of blind tastings have found that when presented with Coke or Pepsi, most people prefer Pepsi. All the same, Pepsi has a market capitalisation of $104bn whereas Coke, plus its bottling businesses, which were spun off, has a combined capitalisation of more than $170bn.In marketing circles this is known as the Pepsi Paradox.

In 2004, Read Montegue of Houston’s Baylor College of Medicine, finally nailed what was going on in the brain when consumers taste the two colas. Just under 70 volunteers were first asked to take part in a blind tasting. Just as so often before, Pepsi was the clear winner. What the MRI machine saw was that Pepsi set off greater activity in the ventral putamen area of the brain, compared to Coca-Cola. The putamen is an area cradled deep within the brain in the striatum, which is, among other things, a component of the reward system. In other words, those who drank Pepsi felt just as you would expect them to when sipping sugared water.

In the next series of tests the subjects tasted colas with visible labels. This time round most of volunteers preferred Coca-Cola. This shift in attitude followed an important change in the brain - this time, the medial prefrontal cortex kicked into action. The cortex was the last area of the brain to develop, it houses our higher cognitive processes. When people tasted Coke this region of the brain overrode immediate feelings of reward evoked by the taste impression. In particular, the medial prefrontal cortex is where elements of our awareness of self and identity are housed. Literally, when you say, “this is so me,” it is your medial prefrontal cortex that is lighting up. Products, such as iPhones, BMWs, Prada bags, trophy wives and certain types of music, light up our medial prefrontal cortex like a pin ball machine.

In the early stages of economic growth capitalism is focused on supplying our basic needs. This is why it makes sense to have a portfolio loaded up with consumer staples when investing in primitively developed economic markets. When you pass a certain point, which is probably when per capita income is close to $4000, capitalism enters its medial prefrontal cortex stage. In other words, it becomes increasingly concerned with satisfying our ever shifting sense of self. In a really poor country, very basic mobile phones will be what the market demands. Then, as incomes rise, we lust over an iPhone. At first all we can afford might be a cheap copycat iPhone from a Chinese white-box manufacturer but the goal will always be to buy the real article.

The Theatre of Envy

There is another force at work here and that is the recently discovered mirror neurone. Our brains are peppered with them. Humans and other animals are programmed to copy. The discovery of mirror neurones chimes with a theory long championed by Rene Girard, a famous literary critic. Twenty years ago, Girard published an highly influential book called, The Theatre of Envy. Girard’s big idea, made before the discovery of mirror neurones, is that our passions and desires are the result of mimicry. Girard identified Shakespeare as one of leading writers who recognised this basic human truth: if our friend falls hopelessly in love with a woman and starts regaling us with how marvellous she is, the chances are we will also fall in love with her too. There, in a nut shell, is the comedy of human relations and investment bubbles. The discovery of mirror neurones, and into which there is a considerable amount of research being directed, is revealing why the passions and dislikes of others have such an influence over us.

Within the next two or three years, around 3 billion of us - close to half the population of the world - will be connected to the internet. We will leave it to our readers to reflect on what will happen when passions, preferences and dislikes can be transmitted to millions of people at the speed of light. Now you know why Facebook has just overtaken Google as the most frequently visited web site on the internet.

What's smart about IT

2010-03-19T07:30:00.000-07:00

Some people always face the wrong way. Take the case of the average IT analyst. Many come from an industry background, and as a result they cannot but help see the world through the lens of desktop PCs, servers, outsourcing and enterprise software systems. This is unfortunate, because over the last decade corporate IT growth has been meager and the prospects do not look that much brighter.

In 2000, $371 billion was spent on PC hardware. By last year, this had shrunk to $326 billion, according to estimates from Gartner, a US based market researcher. This number includes the value of PCs, servers, printers and storage. For further confirmation, I suggests you examine the 10-year price charts for Microsoft (MSFT), Dell (DELL), or Intel (INTC). They are not quite flatlining, but the pulse is weak.

By contrast, where we have seen growth is in emerging markets, consumers and mobile telephony: A decade ago consumers represented 33% of desktop computer sales; by last year this had risen to 38% of the total. In the notebook segment, the contrast between business and consumer is even more striking: A decade ago consumers represented 32% of total sales; by last year this had risen to 56%.

Mobility and consumers are what drives the IT market. This trend is accelerating as smartphone shipments overtake computer hardware sales over the next two to three years. This is the single most important fact in technology investing. Missing it is rather like wandering past Mount Everest in the fog.

The catalyst for the long awaited pick-up in IT expenditure is said to be the PC replacement cycle. By 2011, it is estimated that 84% of desktop computers used by business will be five years old. In addition, corporate IT sales are expected to get a boost from Microsoft's recently released Windows 7 operating system. There is merit to this argument, just as there was merit to it during the last decade, but don’t hold your breath.

Most of the profits from the PC market go to Intel and Microsoft. Both companies have a better grip on the computer market than any analyst. When speaking in January, Paul Otellini, Intel’s chief, answered a question about a likely pick-up in enterprise spending by stating that growth would continue to be dominated by emerging markets and consumers. Both trends, as Otellini pointed out, lead to lower average selling prices.

Over at Microsoft, the picture was similar. Peter Klein, the company’s CFO said, that growth had been driven largely by strong consumer demand. He went on to say, “While consumer growth remained healthy, we have not seen a return of enterprise spending growth." The problem with IT is that the price of hardware tumbles each year. You can best see this by comparing unit shipments to sales: in 2000, 146 million PCs were shipped; by last year this had risen to 306m. Over that time revenues between the two data points had fallen 12%. Then, when you examine the trends that so enamour the average IT analyst, it looks suspiciously as though they will add to deflation. First, off, Windows 7 needs less memory and raw computing power than its predecessor, Vista; second, cloud computing itself requires less hardware.

My gripe with the whole PC upgrade cycle argument is that it has not worked for more than a decade. The reason it has not appeared in all that time is that corporate IT stopped being innovative sometime back in the 1990s. The truly last innovative piece of software that businesses needed to buy were enterprise resource planning (ERP) systems, which required the move to client server computing. This move, coincided with the launch of Windows 95 and the Unix/Linux operating systems and was the reason that stocks like Dell rose several thousand percent over the course of the 1990s. As if the move to client server were not enough, after 1995 the rise of the internet and the Y2K problem added momentum to what was already a strong trend.

Nothing like that exists anymore.

Where you do see a strong product cycle is, of course, in the area of mobility and the internet. Last year around 200m smart phones were sold. A new research report just out from ABI estimates that smartphone shipments increased 30% in Q4 over Q3. Our recent visit to Asia suggests that the smartphone trend has just taken hold there too, which may cause further surprises for analysts following this market.

At some point over the next two to three years these devices will outsell personal computers. Looked at in terms of revenue, last year the pure PC market, net of servers, printers and storage, was worth $224 billion, compared to $165 billion for the handset market. With smartphones now the fastest growing part of the mobile phone market, they will soon over take PCs in value as well as in unit terms.

This rise is the confirmation of the single biggest trend taking place in technology: mobile internet access. In turn this is generating colossal demand for content, as we can see from the rise in video traffic, which is more than doubling each year. Cisco (CSCO) estimates that by 2013, video traffic will represent 70% of the volume on mobile networks. YouTube has just announced that 24 hours of video is uploaded to its site each minute of the day, compared to 20 hours of video six months ago.

In a recent report from Chetan Sharma Consulting, it has been estimated that there were 7 billion software application and content downloads to mobile phones last year and that this will rise to 50 billion by 2012. By then the market for applications supplied to smartphones is expected to be of the order of $17 billion. This market barely existed a couple of years ago. This is a tsunami that will result in surprisingly strong profit growth and share price gains for a number of device and component makers and maybe some software companies, such as Sybase (SY). Google (GOOG) and Facebook will also win from this trend, as advertisers will pay more for mobile viewers.

The next place that this move to mobile computing will manifest itself is in the rise of the tablet computer. On this score, investors might like to monitor what is happening with estimates for Apple’s (AAPL) iPad computer. When first announced, most analysts seemed rather underwhelmed. The range was somewhere around 4 million units.

More recently, at least one major US investment bank has increased its estimate to 6 million units. Meanwhile, the buzz in Taiwan, among component suppliers, is that Apple is looking at 10 million units. If this device proves a success, it will be emulated by other device makers.

ARM (ARMH), the UK chip company, is the leading European beneficiary of this trend, as is Imagination Technologies (IGNMF.PK), which provides graphics chip intellectual property. CSR plc [LON:CSR], the Bluetooth and Wi-Fi chip maker, should also benefit. Infineon (IFNNY.PK) and STM (STM) in Germany and France, as providers of radio and baseband chips, will also see some impact. In Taiwan, outside of obvious names such as Hon Hai (HNHAF.PK) and Foxconn (FXCNY.PK), investors ought to look at touch screen makers, such as Wintek (WNTSF.PK). The LED supply chain, which will provide the backlighting for these devices, will also gain. In America, this would include Cypress Semiconductor (CY) and Synaptics (SYNA).

So, the next time an IT analyst tells you that the Windows 7 PC upgrade cycle or the move to Cloud computing are the main events in the IT market, hit him over the head with your smartphone.

Taiwanese component makers looking at 10m iPad sales

2010-03-16T06:22:00.000-07:00

Some Taiwanese component makers who are supplying Apple say the company has ordered enough parts for 10m units of the iPad over the coming year. If correct, these numbers suggest that there is plenty of room for upside surprises in Apple's results. Over the last month estimates for iPad shipments have been edging up. The initial estimate was for around 4m units, but more recently Goldman has published a 6m number and some other analysts are forecasting 8m units.

The other area where Apple could beat forecasts is with sales into Asia. In the company's last reported numbers, Asian sales were remarkably strong. Sales to both Taiwan and Japan had increased several fold and more recently, sales of the iPhone into South Korea have exploded. Apple has always struggled in Asia, but by the fourth quarter last year the region was contributing 20% of profits - double what it represented a year earlier.

I have just returned from a 9 trip to Singapore and Hong Kong and iPhones can be seen everywhere. Only a year ago you seldom saw any Apple products across Asia. In Hong Kong, I counted four Apple resellers in the Central region, compared to one 18 months ago when I last visited the island. A leading phone retailer in Singapore told me that smartphones now represent 70% of handset sales in the city state, with the iPhone being far and away the market leader.

The Revolution Will Be Televised

2010-03-01T06:47:00.000-08:00

Demand for internet TV continues to gain momentum in the US. The latest numbers from iSuppli, the market research firm, found that one fourth of TVs purchased by Americans in January were connected to the Web, either through integrated technology or an external device.

The researcher found that of the new sets purchased in January, 27.5% indicated their sets were connected to the internet. In December the number was 24.3%. Cisco estimates that video traffic is growing at 132% compound, making it the fastest growing type of data over the internet.

Latest numbers from DirecTV, a leading US pay TV service, with operations throughout South America, highlight the growing attraction of mobile connectivity. In the third quarter last year DirecTV saw twice as many connections to its service through the iPhone as in the entire year over personal computers. Since then DirecTV has signed up 2m mobile customers who schedule their DTVs from their iphones. As well as internet and mobile enabled TV companies like DirecTV are also benefitting from increased interest in 3D television.

Speaking at the company’s most recent results, Mike White, DirecTV’s president and ceo said: “ I think it's fair to say that increasingly our consumers expect us to be even more of a full video provider and they also expect to access that content whenever and wherever they want.”

He added that DirecTV, which has an alliance with AT&T, is working on ways to ensure that its customers will be able to watch the same programs they currently view on their TV on their mobile phones and other devices, such as Apple’s forthcoming iPad. DirecTV noted that its coverage of the US National Football League -NFL- was particularly popular with iPhone and other mobile device owners. Sport will therefore form an integral part of the company’s plans to attract mobile users.

As we have pointed out in the last couple of issues of the Mash, interest in content companies is increasing, both because of rising advertising traffic, but also the growing awareness that content in an age of mobile devices, may have a higher value than many at first thought.

The pay TV business in the US is mature but a number of technological trends are now infusing the sector with new life. Besides mobile internet access, which has only just begun, the sector is seeing increased interest in Digital Video Recorders -DVR, high definition TV - HD and now 3D and internet enabled TV. The growth in DirecTV’s subscribers who are taking HD and DVR has doubled over the last year.

Later this year the company plans to launch a 3D film and program service. Interest in 3D is high following the unprecedented success of Avatar, which has become the biggest grossing movie of all time. A number of other 3D film launches are expected this year.

Besides the technological angle to DirecTV the company a great deal of exposure to the rapidly growing Latin American market, where its sales rose by 47% over the year. DirecTV has operations in Mexico, Venezuela, Brazil and Argentina.

Over the last quarter Tiger Global, a leading US hedge fund, in which the legendary money manager Julian Robertson has invested, emerged as the largest institutional investor in DirecTV, taking an 11.4% stake.

As we highlighted in Mash 35, Vizio, the American based flat screen TV maker is the leading supplier of LCD TVs in the US. Vizio - in which Amtran of Taiwan is one of the leading investors - saw shipments increase 92% over the year to 5.9m.

iSupply found that nearly 42% of Web-surfing TVs in the US had integrated connectivity, which means that they can be accessed from other devices, such as PCs. Another 20% were connected through video-game consoles; 13% through Blu-ray players; PCs and stand alone boxes tied at around 12% each.

Message from Beijing

2010-03-01T06:39:00.000-08:00

I have just had an interesting chat with someone I know who has just moved from Taipei to Beijing. He is English but has, after a ten year stint in Taiwan, learnt Mandarin Chinese. His overall impression of Beijing is that there isn't much for the wealthy Chinese to spend their money on.

In America the rich, and certainly the super rich, can buy a ranch in Wyoming, or a Condo in Florida; maybe a town house in New York, or San Fran. They can dabble in art, wine, private equity and of course, stocks and shares.

By contrast, the rich Chinese have limited options. The property market is tight and by common consent is a bubble and most of the cities have little to commend them. There are few opportunities for private equity. They can certainly buy local art, which is becoming popular in the West and the Chinese are developing a taste for expensive wines. They have a penchant for mixing their vintage cabinet sauvignon with coco cola. I'm sure the French growers don't mind, as long as they are paid.

The point is, from a western perspective Asia and other emerging markets look like the place to be. However, if you are rich and live there then the West, and in particular, America is still the place with the most opportunity.

Besides, the brutal truth is that much of Asia is pretty un pleasant. Hong Kong is a beautiful and vibrant city but there isn't much of interest culture wise. Like most of Asia, Hong Kong finance types with little interest in creating a rich culture. Seoul is awful and the locals can be difficult. However, you at least see some interesting experimentation in clothes and films, such as Old Boy, demonstrate a streak of brilliance you don't find elsewhere in Asia, with the exception of Japan.

Taipei is a bomb site - there has been very little investment over the years, though you can find great Sushi. Singapore is clean and works but it has as much get up and go as a supermarket check out. You would be hard pressed to find a more spookily soulless place on earth. The high point - fish head curry on Race Track road. There is an underlying atmosphere of hysteria in Singapore that is really quite unsettling.

Off to Singapore to night so best not say anymore. In Hong Kong over the week end.

Oh no, not more on the future of publishing

2010-03-01T06:16:00.000-08:00

• In 2009, 5 million e-readers had been sold worldwide.
• In 2008, Amazon sold 1 m Kindles.
• In the US, 50 million adults pay an average of $16 a month to get a daily newspaper delivered.
• According to the Magazine Publishers Association 174.5m subscribed to magazines in 1970; by 2008 that number had risen to 324.8m.
• US magazine advertising revenues fell 26% in 2009 alone.
• When Kindle buys a newspaper or magazine e-book the publisher gets just 30% of the revenue.
• According to the latest issue of Wired magazine, this year 60 tablet and e-reading devices will be launched.
• “Where is the knowledge we have lost in information” TS Eliot.

At the end of 2009, there were 1.7bn internet connections in the world. An increasing proportion of internet access will come from mobile phones and other handheld devices. In a matter of two or three years, more than 3bn people come on line; within five, perhaps within three years, half the planet will be on line. By the end of the present decade, the majority of the planet will be connected to the internet. The number of people who feel swamped by digital data will increase. More of us are going to feel distracted, restless and unable to cope. Evolution has not equipped us to live in this way.

The human mind is the real bandwidth bottleneck that is choking internet access. As we saw last week, human conscious band width averages around 40 bits a second, which equates to one millionth of the data flowing into our conscious minds. The limitation of human bandwidth has profound consequences, both for our mental health, and also for the development of society.Any reader who wants to examine this further should start with the classic study, The User Illusion , which was published in 1999.

Apple, Google, Facebook and Twitter, are examples of companies that have cracked the human bandwidth problem. In other words, they have pulled off the most difficult engineering trick of all; they have buried complexity behind a facade of simplicity. This is the task now facing Asia’s hardware giants, such as Samsung. It is also the problem facing the global media industry. People will not pay for content that they do not have the time to find or read.

An Age of Distraction
The signs are that with the help of Apple, media companies might be on the point of mastering the human bandwidth problem as well. Several weeks ago, we gave a link for a concept electronic magazine made by Bonnier, the Swedish media giant. Sports Illustrated, has also developed a exciting concept for an electronic magazine, which can be seen on Youtube. Finally, it seems the penny might have dropped: print media has to find a way to use new devices, like the iTab to compete with video, TV, computer games and social networking.

This is what Bonnier’s Sara Ohrvall said of the concept magazine in an interview with Wired : “People become more ‘rootless’ in their media behaviour. They consume media in places where they just happen to end up. This leaves consumers uncertain about whether they have read/listened to/viewed what’s relevant for them, or not.”

Ohrvall went on to explain that the fundamental problem is the absence of ‘closure’ in most experiences that people have with digital media. On the web you always “link somewhere else; the story never ends. No sense of completion. For us, it was clear that there was something missing. We realised there must be other ways to tell a story in digital media, apart from millions of lookalike sites on the web.”

The touch screen interface of a device like the iPad is fundamental to what Ms Ohrvall is describing. Instead of viewing a crowded web page that is full of distractions in the form of ads and other links, the iPad allows the publisher to present a high quality graphic image, which the subscriber can then manipulate and navigate in an intuitive way. In other words, designers are grasping that they need to give their electronic readers a more complete, more immersive experience. As Ms Ohrvall explains, readers need a sense of closure and completion.

I would refer the reader to a fascinating book that scientifically examines the process of reading. Called Proust and the Squid, by Professor Maryanne Wolf, the book examines how reading leads to a rewiring of the human brain. Wolf’s central contention is that reading is not a natural act, it requires thousands of hours of training, which results in physically changing patterns of brain behaviour, which can be measured by scientific instruments. There is plentiful research that demonstrates that when we give our full attention to reading - remember how small human bandwidth is - we become less stressful because, quite literally, we are giving our brains a work out. In other words, instead of being focused purely on the conscious brain, literature works because it engages with memories and feelings that are not housed in the conscious mind. This is why a good book, a poem, or an interesting essay, really gets more neurones firing. Readers have richer mental lives than people who do most of their reading on a computer screen, hopping from blog, to web site to chat site; reading is brain food.

Conclusion
Since the foundation of Cyke our main area of focus has been the development of the mobile internet. We were among the first to highlight that the smartphone was the main product event in tech, while most were focusing on the PC upgrade cycle. As the world becomes populated by smart-phones and other handheld devices, such as `Apple’s forthcoming iPad, the very nature of the internet itself will change. It will be carved into empires, such as the Google, or the Apple empire.To sustain these empires content and applications are the key. Hardware innovation is becoming less important in an age when people want to interact with other groups of people and experience applications and content, both socially and privately. We call this change the Fourth Wave, or the Smart Paradigm. In Asia the Smart Paradigm benefits Baidu, Shanda, NC Soft and Tencent more than it does Samsung, LG Electronics or Lenovo, in Asia.

As we suggested above, the trial facing hardware companies is to hide complexity behind simplicity. This is the most difficult task an engineering based company can face. The mastering of this skill was why Apple could, as an outsider, invade the mobile phone industry and change it root and branch. RIM did it and now Google is trying. Notice that not one and intuition that comes from being completely immersed in internet culture. No mobile handset maker or operator has yet managed to replicate this skill.

We cannot be certain, but it is probable that we are emerging from a period of transition. To sell devices and control their empires, Google, Facebook and Apple need content and applications because that is how you lock individuals to your service and product. We have arrived at a point where the technology exists that can make reading on an electronic device an immersive, rewarding experience. We also now have payment mechanisms, such as iTunes, which easily enable consumers to buy on-line. What is not yet known is whether media companies have the skills to capitalise on these developments? What we can be more certain of is that we as humans need to be able to read, there has to be more to life than endless digital distraction.

Interesting Links

2010-02-25T07:33:00.000-08:00

Here are some interesting links that cover some of the investment themes we have talked about in the last year.

China US relations

Cool, sensible talk on US and Chinese relations, given by an expert at the Carnegie Institute. Likely rise in value of RMB ahead of April is discussed, and there are some useful comments on the Google dispute and the need for the US to upgrade its internet infrastructure.

Intel vs ARM

Useful New York Times article on the battle by chip companies to dominant the smart phone market.

Pellegrini Fund

Paolo Pellegrini was the right hand for John Paulson, he now runs his own fund, PSQR. This link will take you through to his latest letter to the investors. Lots of meat and some interesting comments on what could happen to US corporate tax rates.

Oled

This one is for Geeks. A technical comparison of the Oled screen used in the Nexus Android handset and the LCD screen in the Apple iPhone. The older, cheaper, LED screen wins the contest hands down.

Charlie Munger speaks

When I was in Washington, just before Christmas a well known billionaire, speaking at a conference I attended, said that the biggest investment theme out there was working out how to profit from the coming collapse in US government finances. The billionaire said we had three years before the shoe dropped. Here is Charlie Munger saying a similar thing and on a similar time scale. He thinks the ship goes down in 2012.

Smart Medicine

Here is another brilliant Ted lecture, this time on how smart-phones and other wireless devices are leading to a revolution in medical monitoring and diagnostic technology. Today, when stuck in a meeting, we check our emails; now you can check your heart rate and glucose levels instead. You see, with technology there are endless things to worry about.

Japan, past the pint of no return.

This link will take you through to a presentation about Japan from the really rather good, Contrarian Investing website. Not surprisingly, Japanese economic growth stalled around the time that the aging workforce started to shrink. Japan could be our future, it certainly looks as though it could soon be South Korea, which of all the Asian countries most resembles it in terms of culture and demographic profile. Lots of good data here.

OLEDs- an overhyped technology

2010-02-25T07:16:00.000-08:00

OLEDs - Overhyped and Over Priced.

If you have heard of Motorola’s Nexus One handset, you probably know that it supports Google’s Android operating system. What you are less likely to know is that it sports an Oled - organic light emitting diode - screen. Oled screens are supposed to be brighter and have a wider viewing angle than conventional LCD screens. Last year, 15 mobile handsets, supplied by Samsung, Nokia and Sony Ericsson, were equipped with Oled screens. Few people know this and fewer people care.

According to Display Search, the leading independent experts on screen technologies, in 2008, the global market for Oled was worth $600m. The two companies offering the most exposure to Oled are Universal Display (PANL US), and DS Hi Metal Display (077600 KS).

Samsung SDI, which has a 50/50 joint venture with Samsung Electronics, also offers exposure. LG Display and AUO of Taiwan are two of the other leading Oled wannabes. For each of these quoted companies, Oled is a miniscule part of sales.

In the last two weeks, Sony announced that it was closing its Oled effort because of technical problems. Oled screens work fine for the small screens used in mobile phones unfortunately, they are between three to five years away from prime time as far as TVs are concerned. More worrying are the latest results of an independent test carried out by Displaymate, which found that for all the excitement, the Oled screen on the new Nexus was inferior to the conventional LCD screen found on Apple’s iPhone. Oled’s and most other hardware innovations are a side issue. In the era of the Smart Paradigm, content, applications and brand determine the success of a product. This is bad news for Asian handset makers who depend on hardware innovations to make their products stand out.

Superior Technology

Besides the brighter colours and the greater viewing angle, Oled technology will, one day, be cheaper than TFT LCD screens to produce. To understand why, a basic comparison of the two technologies will suffice. TFT LCD is made by laying an array of thin film transistors upon a glass substrate. Then, when an electrical current is applied to this matrix, some of the transistors are turned on while others remain turned off. This combination of on and off transistors create pixels, which are the basic element of any electronically created video, or picture.

Like a TFT LCD, an Oled screen also requires a back pane, but instead of a matrix of thin film transistors a layer of organic diodes are deposited. When an electrical current is applied to the back pane the organic diodes emit different coloured lights.

A TFT LCD screen requires a back light source, which increasingly is supplied by LEDs; in addition, various colour filters have to be applied to the glass. Non of this is required in an Oled screen, which is why the technology promises, one day, to be cheaper to produce. In addition, to cheapness, Oled screens are thinner, consume less power and eventually will be flexible. What’s not to like?

Unfortunately, the technical problems behind creating Oled are daunting, which is why Japanese manufacturers, such as Sony and Kyocera, have either abandoned or moth balled their Oled efforts. For the time being, Oled screens are expensive, as a quick analysis of the handset market will underline.

Today, an Oled screen in a mobile handset costs about 50% more than a comparable LCD screen. Even by 2013, it is believed that Oled screens will still be 8% to 10% more expensive than LCD screens. For televisions the comparisons are worse. By next year the production cost of a 42 inch Oled TV panel is expected, according to standard industry estimates, to be 73% more costly than LCD. By 2013, Oled screens will still be almost 40% more costly than LCD. Therefore, Oled is unlikely to be a significant feature in the TV market before the second half of the current decade. This is why Sony has just withdrawn from the market.

Oled, therefore, will remain a side issue for a few more years. Any investor wishing to keep abreast of Oled should monitor Universal Display in the US. This company is the world’s leading supplier of both Oled intellectual property and the chemicals used to make the diodes. In particular, Universal Display is a leading supplier to the Samsung joint venture that is currently the biggest producer of Oled screens for smart phones.

US corporate taxes to rise?

2010-02-19T01:53:00.000-08:00

The enclosed link will take you to the latest fund letter from Paolo Pellegrini's new fund. Pellegrini was John Paulson's right hand man when he did his greatest ever trade. http://www.marketfolly.com/ . There is lots of good meet in this letter. In particular, it makes a logical case for US corporate taxes rising. US corporate is the only sector of the economy that is increasing its cash holding, yet capex and employment continue to be light. Therefore hitting this sector with higher taxes could play to the larger electorate and helps plug a fiscal whole. As Hewlett Packard's results made clear, corporates are not spending a lot on new computers, growth is still coming from consumers and emerging markets. A rise in taxes has not been factored into US equity valuations yet.

I thought the following paragraph, which argues for a one off Yuan revaluation, was also interesting:

We all know a revaluation of the RMB is likely and there is at least one New York listed ETF I know of that gives exposure to this trade. The interesting thing is then what happens? Commodities will rise, that's a given because of the impact on the dollar. However, a revaluation surely signifies a more concerted move to tilt the Chinese economy away from exports and fixed asset investment to consumer. As this sinks in will commodities continue to be strong?

Another -though unlikely thing to look out for - is that if the revaluation was much more than 5% it could hit other Asian exporters. China adds little value, it is essentially an assembly point for parts and subsystems supplied by the rest of Asia. A sharp revaluation of the RMB therefore runs the risk of hitting Asian exporters .

Interesting Links

2010-02-18T07:55:00.000-08:00

The Future of News Media

The Apple iPad will probably change the face of traditional print media. With stocks like News International on single digit PEs, having just increased the earnings forecasts, it is time to examine the future of media. Just as telco operators are beginning to show signs of life, there are some signs that old style media might have a future. Here is a debate between Arianne Huffington and Axel Springer’s ceo. Now watch the Facebook mobile strategy video below.

Sensational demonstration on why you will pay for content

Wired magazine gives a demonstration on how the iPad will lead to great magazines and content that we will pay for.

Russia

Here is a video discussion with Nassim Taleb, Marc Faber and Hugh Hendry about where and in what to invest. The panel session takes place in Russia; when you click on the link make sure you hit the English button, otherwise you’ll hear it in Russian. Hugh Hendry sounds like Scott Fitzgerald in the Crack Up, or a foot note from one of Nietzsche’s minor works. Someone should tell him to loosen-up; this is investment, not a Satanic struggle. As for investing in Russia itself, which one delegate argues for, it might worth remembering what Chekov said: Russia is an enormous plain across which wander mischievous men. I would also recommend that any potential investor read, The Oligarchs by David Hoffman, and Black Earth by Andrew Meier anything by Anna Politiskaya, and listen closely to people like Bill Browder and George Soros, both of whom know the market intimately.

Big Ideas in Biology

This is a video lecture of Sir Paul Nurse, speaking at the Royal Society earlier this week about the biggest ideas of biology. Nurse, a leading geneticist, has won a Nobel prize, explains that the most recent Big Idea is cells are highly complex systems built of networks that carry out the processing of information. The implications of this are not encouraging for drug discovery and the curing of disease because Nurse suggests we do not yet have the tools to unravel these systems. I attended this lecture and bumped in to both Mike Lynch (Autonomy) and David Potter (founder of Psion, the company that originated the Symbian mobile phone operating system). They, like other IT people, grasp the use of powerful computing systems is one of the ways that we will better grasp the inner workings of cells.

Mark Gerstenharber

CNBC interview with Mark Gerstenharber, former right hand man of Julian Robertson and now head of a hedge fund called Argonaut. He has some interesting things to say on Greece and the lack of jobs and consumer demand in the US economy. Growth will be hard to come by, which backs up our notion that the right areas of tech will outperform.

Facebook's mobile strategy

Here is a 16 minute video presentation given by a senior Facebook executive outlining the company’s mobile strategy. This is the big year for mobile content, as this video underscores. One interesting nugget, Facebook believes that mobile users are more engaged with the service than those on a desk top. For ‘engaged’ read more like to pay for stuff.

A new era for advertising

This link takes you through to a short video presentation by a senior executive from Facebook. He explains all about Facebook Connect, which could become a very important development for media companies and their hopes of getting paid. Very interesitng.

Paul Krugman

A video of a presentation just given to MIT by Paul Krugman. One point he highlights is that it is still too early to end the fiscal stimulus. Sober and provocative.

Stem Cells and Aging

An interesting report from the frontiers of medical research. In some cases stemcells might be able to reverse premature aging.

Republican renaissance

This comes from the American Thinker and focuses on the resurgence of Republican fortunes. This is likely to be a bad year for Democrats.

Cyber attacks

Fascinating news story abour a cyber attack that has affected 75,000 computers.

That supreme court ruling

Ronald Dworkin, a noted US legal expert, examines the bizarre and dangerous decision of by the US Supreme Court to allow companies and pressure groups to make political donations. Against the opposition of their four colleagues, five right-wing Supreme Court justices have now guaranteed that big corporations can spend unlimited funds on political advertising in any political election.

Apple and Facebook Equal Content's New Golden Age

2010-02-17T07:34:00.000-08:00

Without bandwidth everything sucks. But the big bandwidth problem is not the speed of your ADSL or your 3G connection. The bandwidth of human consciousness is the real bottleneck that slows internet access. Anyone who cracks this has a chance to be rich and powerful like Steve Jobs, Mark Zuckerberg, Page & Brin or Rupert Murdoch

The human bandwidth problem has googlesque implications for the sale of content and applications on the internet. One of the best surveys of the problem can be found in The User Illusion.

We are only consciously aware of about one millionth of the data flooding into our subconscious minds from our senses. Apple, Google and Facebook grasped the issue of human bandwidth better than any other companies. Their success might lead to a golden age for media companies like New Corp. That's the good news. The bad news is it might lead to the balkinization of the internet. The human bandwidth problem is easy to describe but close to impossible to solve. Apple cracked it, which is why the iPhone is so successful. Google cracked it too, which is why it is the dominant internet company.

When you're sat at a desktop you have the time to doodle around the internet. You don’t have that time when you use a smart phone or an iPad. This year, according to Ericsson, most access to the internet will come from mobile devices. Over the coming two to three years the number of users on the internet is likely to increase from 1.7bn users to close to 3 billion - nearly half the population of the world. The masses will not be able to use smartphones and other handheld devices unless designers crack the human bandwidth problem. Make access easy and quick. This will change the nature of the internet.

The Future

The future of the Web is all around us. It is Facebook, and Facebook Connect; it is Twitter; it is the Apps Store and maybe it's Google Buzz. It probably isn’t Google Wave because this service requires too much time to master, it is aimed at Geeks. The successful applications make life easier and more convenient in a way that Google search did for the desktop. Facebook Connect allows us to use our friends and contact group to filter our content. That is the neatest way of working with our bandwidth limitations. This method also allows Facebook to learn more about us so that it can better target content, services and ads. Better targeting is good for our limited conscious bandwidth.

This could mean that content companies will find it easier to get paid. First off, there is likely to be a bidding war for good content as the world fills up with mobile devices. When the iPad launched Macmillan books were pulled off Amazon's web site because the two companies couldn't agree a price for e-books. Instead, Macmillan did a deal with Apple. A day or so later Amazon relented and paid Macmillan more. This, I think, will become the sign of the times. There will be more bidders for content as the Android fiefdom, the Facebook fiefdom and the Apple fiefdom - just to name a few- need content to keep their customers satisfied.

And what of those customers? You can still get free music and TV problems on the internet so why bother with iTunes? The reason we do is that these services make it easy to download and pay for content. We trust the service and know that we aren't breaking the law.

Apple has a payment platform that works. The iPad will see the company expand this to other forms of content, such as newspapers, magazine subscriptions and books. This means that News Corp and content providers have a platform on which they can reach an enormous audience. In a world of specialist devices, like e-readers, iPads and smart-phones, it will be easier to get paid than in a world dominated by PCs. There is evidence that consumers find it easier to use a phone to pay for something than they do a computer.

From an investment point of view it's time to look at content again. As the internet becomes more dominated by fiefdoms, controlled by Apple, Google, Amazon, Facebook or someone else content is likely to become more valuable. Apple’s attempt to win Macmillan from Amazon is therefore a sign of the times. Some of the world's biggest media companies are selling on single digit PEs, have just increased earnings and are unloved. They also have good yields and global franchises.

The flip side of all this is that the Web is going to become more corporate. Each of us is going to have to make a Satanic bargain - ease of use and richness of user experience in return for a lack of privacy and freedom. Are you prepared to make that bargain?

Apple and the future of publishing

2010-01-28T04:38:00.000-08:00

We wanted shock and awe, instead we got shock and confusion. What to make of the launch of the iPad? The first rule for the folks who live at Infinite Loop, Cupertino, is that great products create their own market. Second, Steve Jobs actually knows quite a bit about publishing and print. With that in mind we shouldn't get too fixated on the iPad as a Kindle killer.

When it comes to divining the the future of publishing activate the link. It will take you through to a fascinating mock up of what an e-magazine or e-newspaper could look like. Think National Geographic, Life - um maybe Playboy - with high quality graphics, some of which mutate into speaking videos when you click on them. This is surely the kind of thing that someone would watch on the iTab. The Kindle is better suited for long reading sessions, but the iTab still has great potential in the publishing arena.

As for its prospects in other markets, we will have to wait and see what the Apps Community make of it. My guess is that the ITab will take off slowly but will then build considerable momentum a year or more out. Video traffic, which is already growing at 130 compound, according to Cisco is the real market for this device. I think a number of vertical markets, such as medical, could also run with the iTab.

The really big news out of Apple this week though has to be the astonishing breakthrough the company has made in Asia. Asia as a per centage of profits, doubled to 20%. Sales in Taiwan and Japan were up several fold and in China, 200,000 legal iPhones have been activated. I say legal because several hundred thousand have been smuggled into the country. China Unicom confirms that 70% of those buying an iPhone are switching to 3G.

To put that number in context, the iPhone sells for $1000 dollars in China, a country were per capita income is around $3,400. Furthermore, you cannot use WiFi on the official iPhone, though you can if you smuggle one in. The new official number for 3G users in China is 13m. That could double this year. Chinese operators are a accident prone as their Western cousins. 3G wont be big there unless they embrace a device like the iPHone. Apple growth in Asia will be the single most important event of the coming year.

A few days after Apple announced, LG Electronics published a 70% drop in mobile profits. I think we have seen the high water mark for Asian handset makers. It used to be possible to travel the length and breadth of Asia without seeing an Apple product but that is now changing. Asian handset makers compete on hardware design, but that doesn't count for much in the Smart Paradigm. Apple can now fight on its own terms - applications and content. Asian handset makers and Nokia will struggle to equal the richness of the Apps Store. I wonder what Good Night Vienna is in Mandarin

When it comes to Google and China it pays to be paranoid

2010-01-22T00:44:00.000-08:00

There is a real risk that the clash between Google and the Chinese authorities mutates into a trade war. Secretary of State Hilary Clinton's statement yesterday has cranked up the temperature. It is difficult to police the internet successfully, but it is an easy task compared to threats that come from microchips and communications systems that may have been tampered with.

In 1982, a three-kiloton explosion blew apart a natural gas pipeline in Siberia. The explosion was visible from outer space. Two decades later a leading US journalist, quoting senior secret service sources, revealed that what had taken place was a cunning plan that had been perpetrated by American security forces. The Man From Uncle had sprinkled faulty chips and software throughout the Soviet supply chain. At a designated time they blew apart and destroyed a large part of the Soviet Union’s gas supply. Nice work.

In September 2007, Israel launched a successful bombing raid against a suspected nuclear facility in Syria. Israeli planes were able to cross Syria’s borders and attack because agents had already planted a ‘kill switch’ that remotely turned off surveillance software. News of this attack was first reported in IEEE Spectrum, the respected trade magazine for electronics engineers. Over the last few days, India reported that just before Christmas it detected the first cyber attack on government computers originating from China. Last July 4th, US and South Korean government computers were put out of action following cyber attacks that again originated in China.

As both the Israeli and Russian examples show that lethal attacks not only come from the internet, or faulty software. The real danger might come from imported chips and electronic systems. If we are looking for the cause of the next trade trade war, high tech is likely to be at the heart of it.

Trojan Horses

Today’s integrated circuits can have 1 billion transistors, a number that will double every 18 months. To put this in context, at the rate of one transistor a second it would take 75 years for a person to check a pair of chips. A typical cell phone has several hundred million transistors, making them difficult to check for faults. Last year about 200m smart-phones, such as the iPhone and Blackberry, were shipped. This year the number will approach 300m.

These devices are powerful computers, but with the added twist that they are linked to the mobile phone network. Even at today’s level of sophistication it is difficult to check these devices for Trojan Horse circuits. Within a couple of years it will be common for smartphones to have a billion or more transistors. Any foreign power hacking into the phone network has the opportunity to gain information about the time and place of individuals. It would also be possible to gain information about who that individual met and communicated with. As such, smart phones take the opportunity for information gathering and for causing havoc to a new level.

According to an essay penned by General Wesley K. Clark and Peter L. Levin, in the respected Foreign Affairs Magazine, in January 2008 the FBI reported that 3,600 counterfeit Cisco network components were discovered inside US defence and power systems. The authors claim that as many as five per cent of chips are counterfeit. Now ask yourself, where are most of these devices made? Those that are not made in China are often made in Taiwan. Now, imagine the potential problems we would have if Taiwan became part of the PRC.

America says it wants to build a Smart Grid. Such a grid would be built using internet standards and use advanced IT systems. Sounds great in theory, but I hope they are able to check all parts and software because if not, the country is leaving itself wide open to attack. It's time to apply Andy Grove's dictum to politics and international affairs: only the paranoid survive.

Interesting Links

2010-01-17T05:08:00.000-08:00

ten worst tech forecasts of all time

Sir Alan Sugar gets a mention here for predicting that the iPod wont make it to the next Christmas. I can remember attending a conference in 1988 -I think- when he was sharing the platform with a very young Michael Dell. A journalist asked Sugar if he thought that direct sales of PCs was the way forward. No chance, said Sugar. I can’t remember what Dell’s reaction was but he has been laughing all the way to the bank ever since.

The last lecture

Were you lucky enough to see the great Dennis Potter’s last interview before he died in 1975? Didn’t he burn, didn’t he glow, life was intense, just as it was for Blake’s tiger. In a similar vein, here is the last lecture given by a brilliant young scientist called Randy Pautsch. There is something about proximate death that brings out the lyrical. It will probably be one of the most uplifting things that you will see this year. Pautsch, who died of liver cancer shortly after, is in fine form and rather disconcertingly, he looks amazingly well. There is one lovely Geek joke too: “Yes, I have to confess to a death bed confession, I’ve just bought my first Mac.”

Below is a link to a fascinating lecture give by VS Ramachandran, a leading neuroscientist that looks at the synapses that might create culture and the global mind. This is followed by a link to a McKinsey paper on the dollar's prospects

VS Ramachandran

McKinsey’s view of the dollar’s prospects

The future of publishing

This is a link to a design house that has created a mock-up of an electronic magazine. It is the most convincing demonstration I have yet seen of the potential of electronic publishing

What is to be done?

The excellent James Falllows, writing in the Atlantic, after having returned form a long stint in China, looks at the state of America.

Patent Trolls

A heart felt plea from a venture capitalist who bemoans the fact that a third of his portfolio appears to be in breach of patent laws. I dare say that the ancient Babylonians didn't plan to wreck their civilisation by over irrigating their fields. Patent laws might by our version of the Babylonian dilemma. We are slowly being strangled by patent laws that are being applied to software.

Net Neutrality
Interesting piece from an economic prospective that argues that net neutrality makes sense.

Slouching towards Renwistan. A review of Stewart Brand's new book

2010-01-14T12:22:00.001-08:00

A useful unit of energy is the gigawatt: a billion watts. A large coal fired plant generates a gigawatt, so does a dam like the Hoover, and so does a nuclear reactor. Multiple a gigawatt by a thousand times and you get a terrawatt. Global energy consumption is of the order of 16 terawatts.Most of the terawatts we use come from coal fired power stations.

Coal fire power stations belch out gigatons of carbon dioxide, which is the main contributor to climate change. Currently, there are 387 parts per million -PPM- of CO2 in the atmosphere. This is rising at 2 ppm each year. There is some agreement among scientists that a realistic number to aim for is 450 ppm.At this level it is calculated that global temperatures will only rise by about 2 degrees centigrade. A rise of this order will still mean a large loss of species but the odd polar bear and penguin might just struggle through.

The figures I am now going to use come from Saul Griffith, a materials scientist who received a MacArthur “genius” award in 2007. Griffith’s starting point is that 450 ppm. He calculates that, in order to keep atmospheric concentration of CO2 at 445 ppm humanity will have to cut fossil fuel use to around 3 terrawatts a year. He further calculates, taking account of efficiency improvements, that to reach this target we have 25 years to build a new country called Renewistan. Renewistan is a place where every available inch would be covered by wind, solar and biofuel energy sources. As a guide, he calculates that Renewistan is roughly the size of Australia. Australia; 25 years? It is not going to happen is it?

Like Marxism, Socialism, Fascism, the environmental movement has become a secular religion. The chief characteristic of a secular religion is that wants take precedence over needs. There may, therefore, be an argument for saying that the dogma of efficient markets is a secular religion as well. Certainly, there are similarities with the environmental movement and the way financial markets and many economists work. The wide use of complex models and the faith in their accuracy is one. The green movement, in common with some fundamental religions, has gone from concerning itself just with the environment to opposing many aspects of progress. It, rather like a fundamental religion, has become deeply conservative.

Non Linear

A handful of senior scientists, both in terms of age and achievement, point out that as the climate is non linear we should guard against placing too much faith in mathematical models. One of the most passionate critics of these models is Freeman Dyson, who we have quoted several times before. Dyson is one of most celebrated mathematicians and theoretical physicists of the last century, and, as it happens, a splendid writer too. Another scientist who we follow is Vaclav Smil, who has written numerous books on climate issues, and in his most recent, Global Catastrophes and Trends, also takes the global climate models to task.

The problem is that in a non-linear system a small, perhaps not even perceivable change, can lead to a dramatic effect. Another scientist who is familiar with the models and has serious doubts about them is Stewart Brand. He has just written a books that will, we think, become a classic. It is splendidly written and uses a clear, concise argument to demolish a number of the dogmas that the green movement clings to. In Brand’s view the Green Movement is one of the obstacles standing between us and survival. The books is called, Whole Earth Discipline.

I am the age of the average American dam, which means I am in the D to D- minus stage of my life ( see infrastructure piece). In 1978, when I came to London, there was a book shop I used to frequent on Camden High Street, called Compendium, that specialised in American imports. One of the first books I remember buying was, The Whole Earth Catalogue, which Stewart Brand created and edited. It was published annually for a number of years and won the National Book Award. In its day it was highly influential. When hippies weren’t doing drugs or listening to the Grateful Dead they would read it. Brand studied biology and ecology (back in the days when ecology was a dirty word) at Stanford. The point is, Brand was early to the environmental movement. Like most sane people he can see that climate change is happening, but being a good scientists he prefers facts to dogma.

In the spirit of Darwin, Brand has no problem confronting new facts that undermine many of his most cherished beliefs. On one level, the Whole Earth Catalogue reads like a coming of age. Brand is over 70 years old now.

Like James Lovelock, the scientist who devised the theory of Gaia with Lynn Margoulis, the noted American biologist, Brand whole heartedly endorses nuclear power. Furthermore, he has marshalled facts and arguments that shoot down the fears of storing the waste from nuclear reactors.

He also agrees that cities are to be encouraged. They are efficient users of energy, their existence, as demonstrated by Jane Jacobs, has, over the millennia, resulted in most agricultural breakthroughs. Cities are where innovation and civilisation happens. Brand loves cities, he would embrace nuclear power and he can see that genetically modified crops have a role to play in an over crowded planet.

That’s the good news. Now for something different. In one of the most alarming parts of the book Brand reports a telephone conversation he recently had with James Lovelock, the doyen of climate scientists. It is worth repeating in part:

I phoned Jim Lovelock after his Royal Society talk to get details on why the gentle optimist I’ve known for three decades is so alarmed. “ The year 2040 is when the IPCC (intergovernmental panel on climate change) is estimating that Europe, America and CHina become uninhabitable for the growth of food,” he said. “They’re grossly underestimating the rate of temperature rise, so that 2040 may be 2025. People don’t realise how little time we’ve got. The planet really is on the move.”

“On the move toward what?” I asked.

He said: “I don’t think there’s much doubt at all amongst those few of us that have worked on the problem, that the stem is in the course of moving to its stable hot state, which is about 5 degrees Celsius globally higher than it is now. Once it gets there, negative feedback set in again, and the whole thing stabilizes and regulates quite nicely. What happens is, during that period, the ocean ceases to have any influence on the system, or hardly any.”

To cut to the chase, Brand asked him how many people could earth support in its new hotter, stable state - 1 billion. As we like to say in the stock market, “It’s a view.”

Sipping a can of Dead Bull

2010-01-09T06:24:00.000-08:00

Google's Andy Rubin has been talking to the Wall Street Journal's Walter Mossberg about the new Nexus smartphone. Apparently, Google is planning to open some retail stores to sell the Nexus direct.

Get the picture? First, Google launches the Android platform and encourages the world's mobile companies to support it. Good thinking, that way you raise brand awareness and suck in legions of developers. Without developers the Android has as much fizz as a can of Dead Bull - which by all accounts is the favourite tipple of portfolio managers these days.

Then, as momentum builds you do what you were always planning to do anyway. Knee cap your customers by launching your own handset. None of this should come as a surprise. There has been a lot of hot air expended on the subject of smart phones. But one thing should, by now be clear. The Apple way - which is to be vertically integrated so you can control the product like a crazed control freak is the best way.

Microsoft might like to sing the old tune about horizontal value chains and how that worked best in the PC space. It is whistling in the wind. The smartphone is an embedded device, the PC by contrast is a generic device. A generic device is open, you can do with it what you will with it. You can run any software you want on a generic device. That's not the case with smartphones. You and I cannot take the lid off and write our own code. Instead, we have to get it from a registered supplier. Therefore, Apples plays the role of gate keeper in a way that Microsoft never could in the PC world.

The Apps Store has become the game changer. Just the other day LG Electronics' CEO said that the company was in a state of panic. Finally, the penny has dropped even in Asia. We are living in the Smart Paradigm: content and applications is the key to hardware sales. Giants like LG and Samsung will thrive or die over the coming years on their ability to replicate the Apps Store. Don't hold your breath though, this is a fiendishly difficult trick to pull off.

This is what makes Google's play so interesting. An Apps Store is really the marriage of software and content development with social networking. Therefore, the bigger your apps store becomes the less likely it is that a competitor will be able to build a successful one. Apps Stores, like any other networkable entity follow a power law - a tiny number will generate most of the revenue and control the market. Maybe just one or two - besides Google and Apple who are the other challengers? Nokia - possible but unlikely. A mobile operator - no way.

As a character in the Wire might say - mobile handset industry has been played.

2010-01-08T01:16:00.000-08:00

Youtube's traffic has risen 137% over the last year and the number of unique visitors is up 32%. Welcome to the Fourth Wave. My feeling is the up coming Apple Tablet will add further momentum to this trend because it will have great graphics - probably supplied by nVidia but possibly Imagination Technologies in the UK and 3G and WiFi .

The last blog mentioned the number of turning points that we have passed and are likely to pass during the present year and how this would result in upside surprises. By the end of 2007/8 we passed 20% for global internet connections, we have passed 20% for 3G and this year mobile internet connections will pass the number of fixed line internet connections. As these turning points are passed technologies like the mobile internet become mainstream social phenomenons, which means that growth rates could increase. We have become and look and see society - to be seen is to be. Welcome to the Panopticon - always visible, always seeing.

What Freud Would Talk About Today

2010-01-06T11:37:00.000-08:00

Turning point, fork in the road, this year will have more than most. Anyone who has studied the history of the mobile phone, the fax and internet penetration knows the importance of the 20% rule. Once a networked service reaches 20% penetration growth accelerates.

Last year internet penetration went through 20% of the global population. The latest estimates put the number of people connected to the internet at 1.7bn according to Wikipedia. My company, Cykeparters, estimates that more than 20% of the mobile handsets sold in the US are now smartphones. Globally the number of mobile subscribers on a 3G network recently passed 20%.

This year Qualcomm estimates 3G handset will outsell ordinary mobile handsets for the first time ever. Meanwhile Ericsson forecasts that this is the year that mobile internet connections outnumber fixed line internet connections.

Now this is just awful news for mobile operators because it means one thing - bad publicity. The reason is that their networks are unable to keep up with all the traffic. Following the launch of Apple's latest iPhone last year, Youtube stated that video uploads from mobile phones rose by over 400%. Weeping and wailing was heard from San Francisco to New York as AT&T's network kept dropping the ball. This Christmas AT&T had a new cell mate in the doghouse. In London the O2 network repeatedly crashed because of iPhone generated traffic.

Things look set to get worse with data hungary devices, such as Google's new Nexus and a posse of Android devices that are data hungary and come with video cameras. Those people at Apple are of course at it again too . If the rumours are correct, on the 26th January the company will launch the iTablet, or maybe it will be called the iSlate. Either way, the new device looks as though it will be optimised to carry video.

As a result there have been rumours that Apple is holding talks with a number of video and TV content providers to offer a subscription service similar to iTunes. This makes sense. With 3G penetration and connection speeds rising, and a likely surge in WiFi hotspots those old distinctions between TV, phones and computers will evaporate. We are moving to a world where every nook and cranny of the economy and environment will be saturated by wireless broadband and video content. We will live in a present saturated by data. One manifestation of this will be the growth in augmented reality. If Apple ever opens its video APIs on the iPhone interest in this technology will surge.

Cisco has estimated that mobile video will dominate network traffic by 2013. Mobile, plus video, plus social networking is a game changer. As Samuel Beckett (following Bishop Berkley) said, to be seen is to be. This plugs in to a very real human need. When Freud was alive repressed sexuality was the force that shaped the human psyche. Not many people today are sexually repressed; at least not in my neighbourhood. If Freud were alive today my guess is that most of his patients would not be complaining about Oedipus they would be talking instead about Big Brother, Hello Magazine and why they haven't yet made it on to Oprah. Today's citizens have hang-ups about identity not sex.

My hunch therefore is that companies, like Apple and Google and a host of others, such as Arm in the UK, that are linked to mobile video and smartphone theme will continue to surprise us on the upside. The 1970s were a terrible time for the economy but a golden period for tech. The same pattern is likely to be repeated over the next few years.

2009-12-17T03:54:00.000-08:00

Jamie Montier has been transmogrified. He now resides at GMO, where he works with Jeremy Grantham and Edward Chancellor. The latter is author of Devil Take The Hindmost, which is a rip roaring, roller coaster of a read, dare I say, a veritable financial thriller. You’d probably have to go all the way back to France’s Henry IV to find just as many Hugenots gathered together in the same room. Their clients should be thankful though because GMO brings home the bacon and produces a lot of thought provoking work too.

The chart above comes in Montier’s most recent document, which lists the ten things that need to be learned from the financial crisis. The chart shows the futility of forecasting. Let’s face it, if forecasting worked we’d all be socialists by now. Montier’s chart reminds me of a story, which I think was told by Kenneth Arrow, who spent the Second World War working in the US Navy’s Metrological department. He was asked to give a forecast for the weather some weeks, or it might even have been months, ahead for the D Day landings. Arrow told his superior that it was impossible to make a forecast that far out. “ I don’t care, just give me a forecast, any forecast,” he was told. This chart should be kept in mind when reading our piece of Happy Accidents.

The IPOD Generation (Indebted, Pressured, Over taxed, Depressed)

2009-12-13T07:38:00.000-08:00

Paul Kedrosky has just written a widely cited piece on the subject of contrarianism. The inspiration, he says, came from an article in the New York magazine, on the subject of counterintuitive thought. Writers, like Malcolm Gladwell, have become rich and famous popularising this style of thinking.

In finance, we worship the counterintuitive and the contrarian. Think of John Paulson, George Soros, and the late Jimmy Goldsmith, each of whom became as rich as, well: Paulson, Soros and Goldsmith. They had the nerve to take huge contrarian bets while the rest of us scratched our heads and bottled it.

Kedrosky’s believes that contrarianism is the new consensus, which is a shame because most of time it doesn’t work. Contrarians might make interesting dinner party guests and they certainly goose up dull investor conferences, but they are seldom right. At least, they are seldom right in a time frame that is useful. Contrarianism only works, he says, when you arrive at a turning point. He has stuck the drill into a nerve hasn’t he? We have just entered the forecasting season, when strategists and economists give their predictions for the coming year.

Turning Points

Kedrosky is right, trends do stay in place for much longer than most realise. The great bull market of 1982 to 1999, being a case in point. I entered the stock market in 1986 and throughout my career there were always a number of very clever people predicting the demise of the US consumer. They were right, eventually, like after more than twenty years later.

Where, though, are we now? The main reason why so many of us are nervous must certainly have something to do with the increase pace of change we experience in our lives. The influence of technology is certainly one reason for this. There are around 1.7bn internet users to day and 4.3bn mobile phone users. Within five years there will be more than 3bn internet users and most of those will connect to the network from a mobile device. Linked to this great cycle of connectivity is the burst we are experiencing in social networking. Facebook was only created in the first years of the current decade, yet it already has more than 300m subscribers.

Our global population is becoming more intimately linked and as result fear and ecstasy can zip around the globe in the click of a mouse. In parallel to what is happening in cyber space there is the breakneck pace of change of the real world. In 1960 the global population was 3bn. Today, forty years later, there are more than 6.5bn people alive. This may be the key. When you look at demographics it is extremely easy to believe that we have arrived at a turning point, a fork in the road after which some of those dire predictions, so loved of contra thinkers have more chance of coming true.

Prediction is a fiendishly difficult task to get right, in fact it is impossible to consistently get right. However, when you look at population the numbers are large and the pace of change is slow. We therefore have more chance of being right, or at the very least, being wrong, but in the right direction.

Over the course of the last century we have experienced two over arching mega cycles. Demographic change and the steady and continuous march of technological innovation.

When it comes to demographics, as we have seen, population growth has been explosive. As a result of this growth millions of young people have joined the workforce and helped increase GDP growth. In addition, the workforce got a boost from the number of women entering employment. In the US, in 1970, 40% of woman were in some form of employment. By this decade that had risen to 70%.

Population growth and an explosion in the rate of female employment are two of the main reasons that wealth increased in developed countries like the US. These are megatrends. Another megatrend, which boosted wealth, was an increase in the number of hours worked. On average, Americans today work two weeks longer than they did in 1970.

The next megatrend that boosted GDP has been the increased availability of credit and rising property prices. Consumers have been able to use the rising value of their homes to raise money.

The last megatrend, as we suggested above, has been technology. According to George Magnus, in a recently published book called, The Age of Aging, the only one of the megatrends that can continue is technology. We have arrived at the mother of all turning points.

The iPod Generation

Many of you will have come across Magnus in his role as UBS’s senior economist. I worked with him briefly, in the mid 1980s, when he was the chain smoking economist at Chase Manhattan, where he was teamed with Gavin Davies, who then went on to fame and fortune at Goldman Sachs.

Magnus’s focus in his book is the Boomerangst generation, which is the generation who will have to clear up the mess made by the Baby Boomers. A subset of the Boomerangsters is the cohort that was born during the 1980s and 1990s, which Magnus calls the iPod generation. That is iPod as in: Insecure, Pressured, Over Taxed and Debt ridden. I so wish I had thought of that.

The iPod generation has a lot to worry about. In the UK, according to a study carried out by Credit Action, 7.5 million, or 40% of parents had to help their children pay off their debts. Another survey, by the Nationwide gives a clue as to why: in 1997 the average cost of a house for a first time buyer represented 2.5 times their salary. Today that number has risen to 5.23 times.

In the US two thirds of 20 year-olds have debts. The average debt for the group aged between 22yrs to 29yrs was $16,120 as of August 2006. The fastest growing volume of debt was for those who had borrowed more than $20,000.

Overindulged and over nurtured the iPod generation are not well equipped for the new reality: 15% of 18 to 24 year-olds think an ISA is an add-on for an iPod. Weep? Now cry, 10% of them think it’s an energy drink.

Global View

One Magnus’s key points is the aging and the shrinking of the workforce. This, together with increases in life span, will affect the dependency ratio. The dependency ratio measures those in the working age group, between 15 and 64, and compared to those who are dependent upon them for support. Dependents are children and the old. In the West the declining birth rate has resulted in a drop in in the proportion of young dependents. However, the increase in life span has resulted in an increase in older dependents.

According to data that Magnus quotes from Ronald Lee, the total dependency ratio hasn’t changed much in over 300 years. But, as Magnus explains, that overall number hides a very important change. The reason the overall number is not expected to change much in future years is, as we have seen, child dependency is falling. By contrast, the number of old dependents is rising rapidly. It is forecast to increase from 23% to 45%. Just examine what this will do to health care costs. More than half the total amount spent on a person’s healthcare occurs in the last five years of life.

Taken globally, the proportion of the population that is over 65 will rise from 7% today, to 16% by 2050. However, when you look at individual countries the change is more stark, more worrying. Japan is at the forefront. Today, there are 3.4 people of working age to support each person over the age of 65. By 2050 that number drops to an astonishing 1.3. Two things will have to happen to counter this. Either Japan allows more immigrants in, or the right investor will find the right robotics company and make out like King Midas.

The changes in European dependency rates are also sobering, particularly for Italy, Spain, France and Germany. For America, because of the high levels of immigration, the change is more benign. In China today, there are 9.5 workers to support each of the over 65 group. Another encouraging sign for China is that the work force will continue to rise over the coming ten years. However, after that it starts to go pear shaped rapidly. The dependency rate will drop to 2.5 by 2050.

We appear to have arrived at a demographic turning point. Maybe that's why so many contrarians are starting to voice concern.

The complete version of this post, together with charts, was published by Cykepartners

At a turning point

2009-12-03T07:36:00.000-08:00

How many of the world’s biggest businesses are in disarray Finance and banking, advertising, newspapers and music, television or fixed line telecoms and soon, if we are right, mobile telecoms. The pharmaceutical industry has stopped innovating and has to buy it in.

The forces of creative destruction are on the rise. Consider then the following: today nearly a billion people use social networking sites. Within the next five years there will be 3 billion internet users, most of whom will also use social networking sites. Over that period the volume of internet traffic is expected to increase by 66 times and download speeds, over both mobile and fixed line, will have increased many fold. The distinction between TV and the internet will disappear and we will always be surrounded by rich digital content. Social networks will have a greater grip on the economy.

Ever had the feeling we are at some kind of a turning point? Ever felt swamped by the digital deluge of data? Do those bright, sparky teenagers, who will be entering the job market in five years, seem different and completely at home in the world I have just described? Now think how many of the companies you invest in, whether in China or Chingford, have thought about what social networking means for them? To gain access to the complete article go to Cykepartners.com

A review of Stephen Roach's new book on China

2009-12-03T07:28:00.000-08:00

In the first nine months of this year $126 bn of speculative money flowed into China, inflating the stock market and other asset prices. This sum is the excess in the nation’s reserves, after you deduct $327 bn in trade surplus and $64 bn in direct foreign investment. The market is voting with its wallet, it might like China’s economy but it loves the prospects of its currency even more.

The market’s view of the dollar and the renminbi gets to the heart of the issue, China and America are mirror images of each other. One saves while the other spends, one likes to invest in the future whereas the other doesn’t. The manner in which both countries’ are trying to stimulate their two economies in the wake of the financial crisis is a case in point. In the US, 15% of the funds are being spent developing carbon neutral technologies, whereas in China the figure is 85%. China is having a good financial crisis, as its stock market suggests. By contrast underperformance has become a long term trend in America. Despite the current rise, American stocks have had a miserable decade.

Tragedies always end in a death while comedies end in a marriage. When reading Stephen Roach’s recently published collection of essays, The Next Asia, there is a suspicion that one is witnessing that uniquely modern amalgam of the two, a tragicomedy in which China and America are the co-leads.

The most disturbing essay in the book relates to Roach’s appearance before the House of Representatives. In his written testimony, Morgan Stanley’s chief economist, and now the chairman of its Asian operations, attempts to explain why protectionism would be a disaster for America’s interests. Cheap goods from China and assertions that the currency is undervalued are not the key to the problem, Roach tells Congress. Placing tariffs on imports from China would be like squeezing a balloon, the problem would simply manifest itself somewhere else. Furthermore, in the wake of the financial crisis America is even more dependent on China’s investment in American bonds, so why antagonize your banker?

In his introduction Roach mentions the three mega-trends that animate our world: globalization, the IT revolution and the fact that an ageing population will require pensions. The last of these is a problem that the first two ought to have helped solve. Both globalization and the IT revolution have led to disinflation and increases in productivity. However, both these prizes have been squandered.

For twenty five years, US consumption represented 67% of GDP but, come this decade, that number surged to 72% at the peak. This rise in consumption had little to do with increasing salaries and as we now know, more to do with rising stock and house prices. Roach estimates that over the course of the last expansion, which lasted 69 months, private sector compensation, which he describes as the broadest measure of earned labor income in the US, increased by just 17% in inflation adjusted terms. This meant that it fell $480bn short of the 28% increase that occurred over the previous four business cycles. The US Bureau of Labor statistics estimates that median, inflation adjusted wages, have risen by a cumulative total of 0.9% over the seven years ending in 2007. As Roach points out, this meagre rise seems at odds with economic theory. With rather less hyperbole than John Ralston Saul, in The Collapse of Globalism, Roach has come to the same conclusion: the world’s largest submerging economy, America, is becoming just as polarized as emerging economies like China. Globalization is not working for the average American.

The imbalance will be magnified if America reverts to tariffs - the American consumer, that $10 trillion locomotive that has always pulled the World out of previous slumps, will be derailed if the protectionists on Capitol Hill have their way.

No one could be that stupid though, could they? They can in a tragicomedy. In an essay written in 2007 he estimated that the probability of America becoming more formally protectionist was 60%. He then warned that there was a disconnect between the financial markets, which seem oblivious to the risks and the direction of debate both in the Senate and Congress.

Yet while Roach is critical of his own country he hasn’t been dazzled by China. The hot money might be flowing into Shanghai property, or the Chinese stock market, but Roach fears he might be watching another slow motion train wreck. Tallyrand said of Napoleon that it was the qualities that made him great that finally caused of his downfall, you suspect the same might be true of China. The country’s response to the financial crisis is to do what it always does - invest in infrastructure. China loves fixed assets and exports, they represent more than 80% of GDP. About half the exports go to the developed countries, where consumption is fragile and the returns on fixed asset investment are falling.Between 2000 and 2008 $1.50 of credit resulted in a $1 gain in GDP, but by the first half of this year $7 of credit was required to add $1 to GDP. As China’s Premier, Wen Jiabao said in 2007, China’s economy was increasingly: “unbalanced, unstable, uncoordinated and unsustainable.” China needs less bricks and more credit cards, it needs soft infrastructure.

Warnings like these do not seem to impress investors much, which brings us to the most poignant lesson in Roach’s book. Economics does a decent job identifying the problems, where it fails miserably, is in the timing of the outcome. This tragicomedy, therefore, probably has a good more time to run.

Too Big To Fail

2009-12-03T06:24:00.000-08:00

You might feel that you have maxed out on

the credit crunch, that you know it all. You

donʼt. But you have a chance to enter the

circle of trust and see the inner secretes by

picking up a copy of Too Big To Fail, by

Andrew Ross Sorkin.

Maybe Sorkin has access to a swarm of

nanobots, or maybe he has the personal

brain scans of all involved because the level

of detail in this book is astonishing. We are

talking deeply private stuff here and some of

it is explosive. We all have suspected that Goldman's runs

Street and that its tentacles have spread throughout

government. Read Sorkin's book and you will see your

suspicions confirmed.

One of the criticisms of this book, which I am not sure that

Sorkin can be blamed for, is that so many of the characters

have the same personality type. This becomes wearing after

a while. There is only so much testosterone you can take before

feeling as so you have been hammered over the head by the

fist of an alpha male.

For me, the key to the book was the passage where
Fuld attends a black tie do and encounters Hank Paulson.
Paulson and Fuld were in regular contact at the time. Paulson
had repeatedly suggested to Fuld that he needed to find a buyer
for Lehman. It was an open secret that Lehman was on the ropes
and would be the next firm, after Bear Stearns to fail.

Fuld heard Paulson out. On his way home he sent an email from

his Blackberry to members of his management team. He ran through

the list of things that were worrying Paulson. But he failed to mention

that Paulson's biggest concern was Lehman itself. That's the problem

with alpha males, they don't listen. The tragedy of the credit crisis was

that it was always someone else's problem. No one took ownership,

took responsibility.

cykepartners.com

S&M and Apple's smartphone future

2009-12-03T03:02:00.000-08:00

In the late 1970s Herman Kahn, the polymath who is widely believed to have been the model for Stanley Kubrick’s Dr No, wrote an influential book called, The Emerging Japanese Superstate. Kahn was a master in the art of intellectual S&M, he both titillated and aroused American fears and dreams of Asian submission and domination. The script was simple and effective, Japan was on the way up and by implication, America was on the way down. In the early 1980s, with the dollar in a slump, Kahn’s interpretation was widely believed by a nation in self hate mode.

One of the few areas that America was doing well was in tech but even that was under threat. Japanese giants like Toshiba and NEC were beginning to give the US chip industry a good lashing. Then, when Japan threw its weight behind a new operating system called MSX, it looked like sayonara Silicon Valley, the PC industry would now fall. It never happened, the PC industry is still dominated by American names.

The reason that all this is now interesting is that the same script is being reprised today. Clients phone me up to say they have seen the future and the future is Chinese made smartphones selling for less than a hundred dollars. Apple is toast, and so is Samsung, Nokia and LG. Chinese white box handset makers, armed with Mediatek chips are on the march. Continued

What is Finnish for Good Night Vienna?

2009-12-03T02:58:00.000-08:00

Nokia’s top management are in rutting reindeer mode at the firm’s annual capital markets day today and tomorrow. As I write this the stock is up 1.6%, grab the gain while its lasts because the long boat is sinking.

Just as we predicted in last week’s Mash (No 47, 25th November 2009), Nokia is bellowing that it is “The World’s biggest platform for mobile.”

Outside of Helsinki, does anyone care? In terms of profits, both RIM and Apple earn close to 70% of what is available in the smartphones sector. But let’s talk about the future, not today, not the past. The omens for Nokia aren’t great, in fact they are awful.

The first piece of bad news comes from India, where the authorities recently blocked Chinese phones. Check out the link, it will take you to a fascinating piece on an Indian website called Techtree. The ban related to those same white box Chinese phones we talked about in last week’s piece on Mediatek. More than 25m of them have already been sold and Indian mobile operators succeeded in having them blocked in their county. However, for 199 rupees (£3), the Chinese handsets can now be unblocked. Nokia was circling the wagons and planning to make its last stand in both India and China, the world’s most populous mobile markets. As Apple, RIM and Android devices took the developed markets Nokia at least had the emerging world. To Continue go to the Cykepartners website.