The Fed discount window dressing goes on

I wrote about the Fed's public relations play last week at the discount window, where four major banks each borrowed half a billion dollars they didn't need at disadvantageous rates to shore up credit market confidence. Personally, I'd think such unbusiness-like behavior would discourage investors. But given such unprofessional behavior, I speculated that US Treasury Secretary Paulson had engineered the big bank borrowing as a marketing play to hide actual bail-outs of smaller institutions.

Well, guess what. The Wall Street Journal today featured a page 3 article titled
Banks Pare Borrowings From Fed Window. And in that article, we get some very interesting clues to what is going on:

Borrowing from the Fed's discount window dropped to $1.101 billion as of Wednesday, about half the $2.001 billion level reported a week earlier, the central bank disclosed yesterday.

The change suggests the Fed has managed to calm markets even though banks haven't taken its strong encouragement to borrow at the discount window.

As a credit crisis deepened two weeks ago, the Fed cut the rate on the loans it makes directly to banks by half a percentage point, to 5.75% -- which still is above the rate at which banks can borrow among themselves in the market, roughly 5.25% -- and extended the period for loans from one day to 30.

Last week, four big banks borrowed $500 million each to support the Fed's efforts to rebuild confidence in the system. At least some of those banks have repaid some of those loans, the Fed numbers indicate.

Average borrowing during the week was $1.315 billion, up $115 million from a week earlier. A year ago, the average weekly borrowing was $52 million under the Fed's primary credit program.

What a surprise. Two major banks decided that that Fed discount window was a bad deal and paid back their loans. But what's more interesting is that there's another $101 million that isn't accounted for in two banks repaying their $500 million loans. $2.001 billion minus $1 billion does not equal $1.101 billion.

The bottom line: the Fed can declare mission accomplished: Through clever marketing, it managed to hide a $100 million dollar bailout of some unnamed financial institution during the last week before Labor Day. But no one should imagine that anything has changed with regard to the credit crisis we had last week -- it's still there. And it will remain there until someone in the government figures out that it is going to have to do more than window dressing and bailout hiding to regain our confidence.

Technorati Tags: Federal Reserve, Finance, Financial analysis, Marketing, Opinion

Apple calls NBC TV's digital download bluff

Earlier today, we got news that NBC was planning not to renew Apple's distribution of its TV shows via the iTunes Store, but there was always the possibility they might negotiate a new deal by December. Well, Apple has decided to call NBC's bluff by publicizing the terms of disagreement in a press release:

CUPERTINO, California—August 31, 2007—Apple® today announced that it will not be selling NBC television shows for the upcoming television season on its online iTunes® Store (www.itunes.com). The move follows NBC’s decision to not renew its agreement with iTunes after Apple declined to pay more than double the wholesale price for each NBC TV episode, which would have resulted in the retail price to consumers increasing to $4.99 per episode from the current $1.99. ABC, CBS, FOX and The CW, along with more than 50 cable networks, are signed up to sell TV shows from their upcoming season on iTunes at $1.99 per episode.

“We are disappointed to see NBC leave iTunes because we would not agree to their dramatic price increase,” said Eddy Cue, Apple’s vice president of iTunes. “We hope they will change their minds and offer their TV shows to the tens of millions of iTunes customers.”

Apple’s agreement with NBC ends in December. Since NBC would withdraw their shows in the middle of the television season, Apple has decided to not offer NBC TV shows for the upcoming television season beginning in September. NBC supplied iTunes with three of its 10 best selling TV shows last season, accounting for 30 percent of iTunes TV show sales.

I don't know about you, but to me, that sounds like a very good call on Apple's part. Would you pay $5 -- half the price of a feature movie -- for an episode of a TV show? I sure wouldn't. Heck, I can rent the entire season on DVD from my local blockbuster for $10.

But Apple didn't leave it there. To avoid disappointing subscribers who wanted complete season sets, it is cutting NBC's fall season from the iTunes store in September instead of January when the contract expires. Apple's saying to NBC, "OK, explain to your board why you just gave up $20 million a year [my estimate] in very-low-cost digital revenue that you now have to make up in advertising sales." Personally, I'd love to hear the answer to that one.

Every business thinks they can be a destination on the Internet, but the reality is that consumers only have so much time available to hunt down content they want; it's just the tyranny of too much content. If convenience didn't trump most other marketing factors, we'd have no convenience stores. Yet network execs are still fighting to believe that they can be THE portal to digital content -- despite the fact Apple is five years and a multi-billion-dollar business ahead of them in establishing that beachhead with iTunes. And we'll ignore the issue that the only way to get video onto the best-selling portable video players and the hottest cell phones in the world is through Apple.

NBC put down a $20 million bet on a bad hand. Apple just called, knowing that even if it loses, it has a $2 billion a year iTunes business bankroll to keep playing with. Want to bet who wins the match?

Full disclosure: the author owns Apple stock.

Technorati Tags: Apple, iPhone, iPod, iTunes, NBC

Bandwidth as currency goes to Harvard -- and possibly Leopard

Harvard University's School of Engineering and Applied Sciences is trying to crack the code on one of the social questions of peer to peer file sharing: "How do you get people to upload as well as download?" Their approach incorporated in new Tribbler BitTorrent client : treat bandwidth like currency. Uploads gain you cash, downloads spend it. It's a nice and easy model to understand.

I wrote last year that Apple may incorporate such a technology into Leopard to support peer-to-peer movie distribution. In the Apple model, though, the technology would be security built into its next OS Leopard, and the virtual currency that Harvard is using would turn into real currency spendable at the iTunes store such as free downloads of other titles or tracks. While this sounds far out, paying Leopard users to redistribute iTunes Store content would:

• Decrease Apple's bandwidth costs. Bandwidth is one of the biggest costs of running the iTunes Store, and that will get only worse once Apple announces high-definition video and movie downloads. Adding consumer-level distribution would both decrease download times for many consumers while reducing Apple's bandwidth costs at the same time.


• Increase Apple loyalty. By doing a small amount of revenue sharing with its customers, Apple would bind those customers even more tightly to its brand. Further, because the technology will most likely be built only into a secure software layer of Leopard to prevent fraud, it would drive Leopard upgrades, further boosting Apple's sales.


• Provide copyright accounting for peer-to-peer networks. Because Apple would be tracking currency for peer-to-peer redistribution, it would also have the ability to account for that redistribution to record labels, TV networks, and movie studios. Those stakeholders would have a good business reason to support peer-to-peer distribution -- but only if they continue to work with Apple.

Will it happen? Honestly, I have no idea, but my bet is that Apple has it on the list for a not-too-distant release if not in Leopard. After all, the Internet was originally designed to be a peer-to-peer network; it's only been carriers demanding network control who have turned it into the asymmetric client/server network of today. With Japan and Korea already boasting of 100 Mbps symmetric broadband connections and organizations like BitTorrent and Harvard University fielding the technology today, someone is going to make billions by solving the content redistribution problem. My bet's on Apple to make it real.

Full disclosure: the author owns Apple stock.

Technorati Tags: Apple, BitTorrent, Harvard University, Internet, iTunes, Peer-to-peer

Nokia's marketing missteps just help Apple's iPhone push into Europe

Press and Bloggers alike are raving about Nokia's new music- and game-playing smartphones, as well as Nokia's Ovi music and game service to go with them. But what has undoubtedly gotten the most attention has been Nokia's touch screen phone video that bears a striking resemblance to Apple's iPhone. So is Nokia about to kill off Apple's iPhone momentum in Europe before it even begins?

Not a chance. iPhone will be well established in Europe long before any Nokia touch-screen launches. The reason: marketing.

While Nokia's Anssi Vanjoki said "If there is something good in the world, then we copy with pride," he got his targets mixed up. Nokia meant to be copying Apple's iPhone marketing, but instead, they've been copying Microsoft's Zune. Some of the more blatant characteristic fingerprints of Microsoft-like techno-marketing masquerading as Apple consumer marketing were:

• Pre-announcement of products and services long before availability. Try to buy any of the new Nokia phones and products at your friendly local carrier or Nokia store and you will be disappointed. In a play straight out of the Microsoft playbook of "announce, announce, announce, and someday ship," Nokia plans to begin shipping in the fourth quarter of 2007, the same time that the iPhone will hit Europe, yet none of these phones boast the touch-screen capabilities shown in the video.


• Demo videos masquerading as products. Countless bloggers and commenters have been raving about how that new iPhone-like phone will eat Apple's lunch because it offers 3G, replaceable batteries, and countless other desirable features. Too bad it's not for sale -- the video is actually a mocked up demonstration only and is meant only to show the S60 software capabilities.


• Competing with their carrier partners for services revenue. Microsoft originally built its music business by supplying music coding and decoding software while letting partners build hardware. But then it broke trust with those partners by introducing its own incompatible Zune hardware and music stores, which took millions of dollars in sales out of partners' pockets overnight. Nokia has just created the same Zune-like betrayal of its carrier partners by introducing its own music and games download stores; as a result, Nokia's carrier goodwill is likely to take a big hit.

Now Nokia has a huge piece of the handset market, just as Microsoft has a big piece of the music coding and decoding market. But marketing blunders like these just make it easier for more thoughtful competitors like Apple to steal away their customers with smart, well-designed products and good marketing. And with Apple actually negotiating a cut of service revenues with carriers because of their better marketing, poor marketing will not only hurt Nokia's brand in the short run, but will hurt its business in the future.

Full disclosure: The author owns several Nokia phones and Apple shares.

Technorati Tags: Apple, iPhone, Microsoft, Nokia, Zune

High-definition video putting the special in next week's Apple Special Event?

Speaking of the Internet bringing the end of TV as we know it, everyone seems to be expecting new music and iPod offerings at the Apple Special Event in Moscone Center on September 5. But what has gone more or less unnoticed is the fact that Akamai, Apple's long-time Internet content partner, has announced that it is adding high-definition video to its Internet distribution offerings.

A coincidence? Perhaps. But add the fact that Apple TV, a product whose revenue is being recognized as a 24-month subscription model like the iPhone, sports high-definition outputs, yet has no high-definition iTunes content yet, and you've got a high-definition shoe ready to drop sometime; the only question is when. Given we predicted high-definition movies and movie rentals would be announced in September back in June, we're expecting iTunes to add high-definition content as well as movie rentals next week.

Technorati Tags: Akamai, Apple, HDTV, Moscone Center, High-definition TV, Special event

Google's Vint Cerf predicts end of TV as we know it

Little-noticed because of the slow pre-holiday week this week, The Guardian cornered Google VP Vint Cerf at the Edinburgh International Television Festival, where he charmingly and convincingly (as is his wont) predicted the end of television as we know it. His actual words:

The 64-year-old, who is now a vice-president of the web giant Google and chairman of the organisation that administrates the internet, told an audience of media moguls that TV was rapidly approaching the same kind of crunch moment that the music industry faced with the arrival of the MP3 player.

"85% of all video we watch is pre-recorded, so you can set your system to download it all the time," he said. "You're still going to need live television for certain things - like news, sporting events and emergencies - but increasingly it is going to be almost like the iPod, where you download content to look at later."

Somehow, when Vint Cerf says things like this, they always sound so simple and obvious. But the implications of TV moving to become 85% downloadable and non-real-time are huge. A couple quick examples:

• Cable TV lineup bundles become toast. You don't need 150 channels of TV for $99 a month if you're downloading the programs you want to watch whenever you want them. You just need a very fast Internet pipe. And $99 a month buys a lot of downloads, even if you opt for pay ones such as from the Apple iTunes Store.


• Telco investments in TV become writeoffs. Telcos like Verizon and ATT are investing anywhere from $50 to $200 billion to supply traditional TV services to homes. But they may finish those rollouts just in time for real-time TV demand to fall off a cliff as consumers go to downloads. The result: investment write-offs as far as the eye can see.


• Apple and Google suddenly have new TV market power. Apple has spent more than two years developing its iTunes video store and Apple TV. Google paid more than a billion dollars for YouTube. Yet with the end of TV as we know it, these investments are now bargains as those properties become the new Boardwalk and Park Place of the new TV business, since they monetize the new Internet video model. And today's announcement that Apple has opened an iTunes video store in the United Kingdom means these companies are only adding to their leads.

Forrester mobility VP Maribel Lopez and I discussed this exactly phenomenon the other day when we both contemplated not even bothering to subscribe to cable TV in the future. And while Vint Cerf, Maribel Lopez, and others like them are early adopters of technology shifts, those shifts in demand do have a way of snowballing into major trends, especially as the economy softens and consumers look for ways to save money.

It wasn't that long ago that cable TV bills were $20-$30 a month; now many US households have cable TV bills in the $100-$200 range. The end of TV as we know it has bears the possibility that those bills may return to their past smaller sizes -- and in the process bring an end to the TV business as we know it too.

Full disclosure: the author holds both Apple and Google stock at the time of writing.

Technorati Tags: Apple, Apple TV, Forrester, Google, Internet, Internet TV, Maribel Lopez, Television, TV, Vint Cerf

Engadget confirms Apple September 5th special event

Engadget has confirmation that Apple is holding a
special event on September 5th. We've been predicting said event for about six months, but it's nice to see it in the form of an actual invitation. We expect to see Apple revamp its iPod line, including an iPhone-like video iPod without the phone capability, and iPod nanos that do video.

Technorati Tags: Apple, iPhone, iPod, Special event

Who says iPhone hacking doesn't pay?

The Associated Press reports that one of the teenagers who unlocked the iPhone so it can be used on non-ATT networks has traded his unlocked iPhone for a Nissan 350Z and 3 8GB iPhones. Not a bad trade for a couple month's work -- and it sure beats baby-sitting.

Technorati Tags: Apple, at&t, Hacking, Hacks, iPhone

How much is exceptional customer service worth?

Today's Wall Street Journal fetes United Airlines Captain Denny Flanagan, who, in this day of cut rate airlines and even more cut rate service, buys delayed passengers food, raffles off unused first class wine in the coach cabin, and most importantly, goes out of his way to make customers feel informed and appreciated. The article's lead paragraphs:

When pets travel in cargo compartments, the United Airlines veteran snaps pictures of them with his cellphone camera, then shows owners that their animals are on board. In the air, he has flight attendants raffle off 10% discount coupons and unopened bottles of wine. He writes notes to first-class passengers and elite-level frequent fliers on the back of his business cards, addressing them by name and thanking them for their business. If flights are delayed or diverted to other cities because of storms, Capt. Flanagan tries to find a McDonald's where he can order 200 hamburgers, or a snack shop that has apples or bananas he can hand out.

And when unaccompanied children are on his flights, he personally calls parents with reassuring updates. "I picked up the phone and he said, 'This is the captain from your son's flight,' " said Kenneth Klein, whose 12-year-old son was delayed by thunderstorms in Chicago last month on a trip from Los Angeles to see his grandfather in Toronto. "It was unbelievable. One of the big problems is kids sit on planes and no one tells you what's happening, and this was the exact opposite."

I don't know how much United is paying Captain Flanagan, but I'm sure it isn't enough. A front page, middle-column story in the Wall Street Journal can't be bought, but a tiny front page ad goes for around $75,000 to $100,000, and this article was significantly larger. Further, Capt. Fanagan's efforts have undoubtedly retained numerous customers who might have defected to other airlines, and with the lifetime customer value of a loyal airline customer ranging in the low to high six figures, his exceptional customer service could easily be valued in the millions of dollars in revenue retention and cost savings.

An industry is in sad shape when serving customers well merits front page news. This story shows that the best marketing is done not by marketers, but by employees deciding to do what they can to make the customer's experience better. And maybe, just maybe, if other captains and airlines follow Captain Flanagan's example, it may be a starting point for the airline industry's service to climb out of this summer's low point.

Technorati Tags: Airlines, Customer service, Denny Flanagan, United Airlines, Wall Street Journal

Battle of the Chinese computer brand buyers

I wrote back in 2005 that Chinese companies have done a remarkable job of recognizing undervalued brands from US companies. Well, this morning's headlines brought another proof point to that claim with the news that Taiwan's Acer is going to buy Gateway Computer. Gateway has fallen on hard times in recent years, but was still relatively well-known here in the US. And since it had the right of first-refusal to buy the parent company of Packard Bell, the deal also thwarts the hopes of Chinese computer-maker Lenovo to purchase that brand. This deal just proves how aggressive Chinese companies are becoming in trying to establish global brands -- and how rough and tumble the commodity computer business has become.

I will pose one question to both Lenovo and Acer marketers: how are you going to differentiate your products beyond price? Unless Lenovo and Acer start focusing on differentiated products, they are in a race to drive each other out of business. Brands must stand for something other than low prices -- and the time to find out what that is before the battle of the low-priced brands gets completely out of hand.

Technorati Tags: Acer, Brand, Branding, China, Computers, Gateway, Lenovo, Marketing

Gambling against catastrophes

Sunday's New York Times has a fascinating article on How insurance companies vastly underestimated the costs of the Hurricane Katrina catastrophe. The challenge: how do you properly the costs and value of insuring losses that are so unlikely, there is no historical record that can guide you? Insurers thought they had good models of those costs and values, and then Hurricane Katrina proved those models to be extremely weak tea. It turns out that risks they thought were simply bad were more catastrophic than they believed.

The article is fascinating reading, if for no other reason that to realize that many insurance companies actually had no means to pay off the actual catastrophic damage they might be insuring up prior to Hurricane Katrina. They just didn't understand their own risks and liabilities. They just assumed they were reasonable and prudent because they had always capitalized their risks in a certain way, not because they actually understood those risks and liabilities.

Our market-based processes for buying and selling risk are complex systems, and as any complex system, they aren't well understood except in the most ordinary situations. They are usually orderly, but once every so often, they run into insightful discoveries or catastrophic failures that completely upset them. When those upsets happen, they stop being numbers on a computer screen; they become crises of bankrupted companies, decimated investors, unpaid insurance claims, and thousands left to fend for themselves. And some of this happens because institutions and instruments for moving risk hide behind secrecy and overpriced illiquid assets. Said another way, it's the process of marketing risk without actually disclosing it.

Ben Stein's column in yesterday's Times Business Section makes the same point in a different way:

It's about the fees. Hedge funds are largely a fraud. A hedge fund is supposed to hedge against market movements by unhedged instruments. In a very simple example, they are supposed to go short when the market is falling and thereby make money to hedge against losses in long positions.

I am sure that some were doing that recently, but from what I’ve seen, many were just highly leveraged bets on long positions. When the market turned sharply against them, they not only lost, but also sometimes had to sell under the compulsion of margin calls and thus hastily and for a loss.

These are not what I could call hedge funds. This is just gambling. Now we see that, at least for many funds, it’s not about investing prowess or sharp insights. It is, as my idol, Warren E. Buffett has said so many times, about “fees, fees, fees.” The model hedge fund is not a means to outperform the market. It is a means to outcharge the investor.

Sounds a bit like the insurance business described in the previous article, doesn't it? In summary, hedge funds have found new ways to duck risk. They aren't any smarter than mutual fund managers -- they've just come up with better marketing to sell off their risks while accepting less risk to their own incomes.

There's an old saying that if you sit down at a poker table and don't know who the sucker is, you are it. The same rule seems to be guiding the creation and marketing of new financial products, be they CDOs or hedge funds. As the Hurricane Katrina incident illustrates, even armies of Ph.Ds and billion dollar bankrolls can't eliminate risk, no matter how many credit rating agencies and investment banks say they can. So the next time you hear someone at a cocktail party touting the 20% risk-free return they got from a hedge fund, think of it like a big win at the poker table in Las Vegas. They think their investment is risk-free, but they'll think otherwise when the casino operator of their hedge fund has a bad run of luck.

Technorati Tags: Finance, Financial analysis, Gaming, Hedge funds, Insurance, Markets, New York Times, Opinion, Probabilities, Catastrophes

Humor: one person's ad for the Microsoft zPhone

It's Friday, and this video gave me a chuckle. Regardless of how you feel about the Zune, this compares favorably with the Microsoft-produced video about how Microsoft would package and market the iPod.

Technorati Tags: iPhone, iPod, Microsoft, Zune

Music marketers: tear down this wall of sound

IEEE Spectrum has a wonderful article describing how a marketing war among record companies has compressed the music we hear today far beyond what the music from recordings 20 years ago. The bottom line: even today's "lossless" CD formats have thrown away vast amounts of music dynamic range that used to be present on vinyl recordings. Personally, I find that comforting -- I thought it was just my ears were getting old (which they are).

Technorati Tags: Compact Discs, IEEE Spectrum, Music, Compression

Easy and handy tips to help you present better

Even wonder how you can make your next presentation just a little bit better?

Merlin Mann over at 43 Folders posted a nice article about the steps he has taken to make his presentations a little better. Many of his resources such as Guy Kawasaki's 10-20-30 rule and iStockPhoto we also recommend to our clients. But his example slides about actually presenting -- grabbing people at the beginning, telling stories, and finishing early -- are great visual examples and worth emulating.

Technorati Tags: Guy Kawasaki, Marketing, Presentation Zen, Presentations, iStockPhoto

The Fed's discount marketing is just window-dressing for more bad news

Today's Wall Street Journal notes that Citigroup, Bank of America, J.P. Morgan Chase, and Wachovia all borrowed $500 million from the Federal Reserve discount window. The description:

The move came five days after the Federal Reserve cut the rate it charges for discount-window loans on so-called primary credit to 5.75% from 6.25%. It also lengthened the duration of the loans to as long as 30 days from the previous one-day limit. Fed officials then held an unusual conference call with bank executives in which they encouraged banks to tap the window. Deutsche Bank AG borrowed from the discount window the same day.

It was part of a concerted effort by the Fed to restore confidence to credit markets, where losses on subprime mortgages have rippled across numerous markets and have made investors reluctant to lend to any but the most creditworthy borrowers. Fed officials acknowledge banks don't need the money but hope some will lend the money to creditworthy borrowers facing difficulty financing themselves in the current environment.

So investors, home-owners, and lenders should now feel confident that the credit crunch we had last week is now under control, right?

Actually no. What you saw yesterday was a marketing campaign, pure and simple, probably orchestrated by either the Federal Reserve or by US Secretary of the Treasury Paulson. Instead, what is really going on is that the Fed is softening up the market for more bad news.

How do I know this? Simple -- the story makes no financial sense. After all, why would Citicorp or BofA borrow money from the discount window at 5.75% interest, when they could have borrowed it at the Fed Funds rate of 5.25%, or on the open market at a rate of between 4.54% and 5.03%? Even for Citicorp, a half-point of interest on half a billion dollars isn't something you happily pay when you don't have to. And when four banks all borrow the same amounts at the same unfavorable rates, you know something is up.

Now we're all in favor of marketing; after all, it's our business. Marketing is about communicating a value proposition that convinces prospective customers to buy. That means that the Fed orchestrated this event to send a specific and carefully honed message.

So what is Fed-crafted marketing campaign trying to say to investors and lenders? It's saying that despite the fact that the Fed discount windows has traditionally been the lender of last resort, it's now just another source of money that lenders can tap. It's saying that the good times for lenders haven't ended, regardless of how bad their loan portfolios are. It's saying that the Fed won't let any major institution actually fail, regardless of the kinds of trouble they've gotten themselves into.

These big banks announced today are just window-dressing; they don't need the money. They're there at the discount window to hide the ones in the next round that do, where the Fed actually will be the lender of last resort. The fact that the Fed has gone to the trouble to orchestrate this response means that it knows there are more troubled financial companies out there that haven't gone public yet. And that means more bad news yet to come.

Technorati Tags: Federal Reserve, Finance, Financial analysis, Marketing, Opinion, Federal Reserve

Why Wal-Mart's needs more than DRM-free tracks

[Click on the image for a larger version]

The headline is irresistible: Wal-Mart selling digital music free of copy curbs. And already reporters are eager to write the epitaph for Apple's iTunes. The Wall Street Journal yesterday wrote:

"Wal-Mart's move undercuts Apple's pricing on its iTunes store. In May, Apple started selling some songs without DRM software for $1.29 a track, or 30 cents more than the usual price of songs on iTunes.

DRM has been a contentious issue in the world of online music sales. until recently most major record companies have insisted that digital retailers employ the software to prevent rampant copying. But two of the major labels have since shifted gears and begun to offer parts of their catalogues without protections.

Universal Music said two weeks ago it will allow digital tracks from its catalog, including artists such as Sting, 50 Cent and Stevie Wonder, to be sold online without copy-protection technology for a limited time. However, they won't be available for sale at Apple's iTunes store.

....

Apple uses its own DRM software, which doesn't work with services or devices made by competitors, resulting in locking owners of its popular iPod players into buying the most popular mainstream music at iTunes, and not from its competitors. Record companies have blamed this lock-in for limiting digital-music sales, which account for around 15% of all recorded-music sales in the U.S.

I believe that the reports of iTunes death at the hands of DRM-free music are exaggerated. Why? Because:

• Wal-Mart's site remains in thrall to Microsoft's DRM. Despite the near-universal appeal of MP3 music, you need a Microsoft Windows computer, Microsoft Media Player, and Microsoft Internet Explorer to even browse Wal-Mart's music site [I captured the image above using Windows 2000 on Virtual PC]. Ironically, customers looking to avoid DRM and gain access to DRM-free music only can do so by subscribing to Microsoft's rights-managed environments.


• Wal-Mart's MP3 selection is only part of its store. While Universal is providing MP3 versions of many of its songs, it's by no means, well, universal. A quick spin through the store showed that almost all the MP3 songs were back catalog albums and singles. Buyers who are turning to Wal-Mart to quickly download the soundtrack to High School Musical 2 onto their iPods will still have to go to the iTunes Music Store; that and most modern albums are only available in Windows Media format at Wal-Mart.


• Wal-Mart's store offers little differentiation except price. Wal-mart has no particular marketing differentiation in music over iTunes, Amazon, or the Zune marketplace other than its lower prices -- $0.88 for WMA tracks, $0.94 for MP3s. Worse, for a large segment of buyers -- the 74% of music player buyers with iPods for example -- the Wal-Mart customer experience is hit-or-miss for products that will actually work with their players. The result: customers are likely to cherry-pick low-cost tracks at Wal-Mart when they can, but any large-scale defections from iTunes or even Amazon just aren't going to happen without a lot more marketing work.

Apple already offers DRM-free music on the iTunes music store, so Wal-Mart's move only brings it to possible parity with that digital music leader. To unseat the leader in any market, a challenger must offer consumers a significantly better and differentiated experiences to get them to switch vendors. Said another way, you have to give them a big increase in value to overcome the switching cost of choosing another product. Wal-Mart's me-too move is too small to overcome the inertia of more than 100 million iTunes customers and three billion iTunes songs sold. If Wal-Mart wants to make a dent in Apple's iTunes domination, it will have to do more than cut prices to win its customers -- much more.

Technorati Tags: Apple, iPod, iTunes, Wal-Mart

Predicting Apple's new iPods: evolutionary, but borrowing from the iPhone too

As September looms, rumors abound on what's going to be in Apple stores for 2007 holiday shopping. So I thought I'd take a whack on what the marketing -- not technology -- criteria are for Apple's upcoming refresh of the iPod line to power Apple's holiday sales.

One of the challenges facing the iPod this holiday season is that this will be its sixth year in the consumer market. Worse, the iPhone has stolen a lot of the iPod thunder over the last year, while the iPod has not had a significant redesign since 2005. So what does Apple have to do to create iPod excitement this holiday season? Apple's new design must:

• Bolster the music and video experience for iPod owners. First and foremost, the iPod experience must center on music and video, not communication as the iPhone does. That means a rugged device, long battery life, great displays, and excellent audio.


• Differentiate iPod from iPhone. Consumers shouldn't be confused about whether they should spend $249 for a video iPod or $499 for an iPhone. The value of each product should be clearly defined and clearly different.


• Continue delivering iPods traditionally strong margins. While it's tempting to consider just selling an iPhone without the cell phone radios as an iPod, the profits on such a product would be insufficient to satisfy Apple's business goals. Dropping the parts for GSM would save Apple only $25 in parts cost out of a total of $230 in iPhone parts. The parts cost needs to be more in the range of $100 for a video iPod and $75 for an iPod nano equivalent for those products to be successes for Apple's business.

So what types of designs would meet these criteria? Here are my takes on what we'll see in a September special event for an iPod refresh:

• A wide-screen video iPod. Apple's new video iPod will still rely on disk storage in 80 and 160 GByte capacities, but will gain the iPhone's high-resolution screen and touch panel interface. I do not believe that Apple will add WiFi wireless networking to these iPods, choosing instead to keep the functions simple to understand and the interface simple, while providing music and video lovers with storage far beyond that available on an iPhone. These features will set the prices of the high-end of the iPod line at $299 and $349.


• iPod nanos with video support. The iPod nanos will look much like smaller versions of the video iPods, with displays across more (but not all) of their bodies. But these iPods will only sport flash storage in 4 and 8 GByte sizes, and their screens will be considerably smaller than the video iPod. I further expect these nanos to retain the touch wheel of today's iPod nanos to keep costs down and to retain one-handed operation, a key attribute for many iPod users. Price points here will range from $149 to $249, just as today.


• More storage in the iPod shuffle. The low end of the iPod line will continue to eschew displays, focusing instead on delivering more storage to accommodate large iTunes plus songs. Expect the iPod shuffles to now sport 2 GBytes of storage for $79.

My view is that Apple's updated iPod product line largely matches that of today, just with slightly better feature sets and better user experiences. Further, pricing remains relatively constant as well, with prices actually rising slightly at the high end to accommodate trickle-down demand from the iPhone. iPods would remain clearly differentiated from the iPhone, yet would provide many of the same benefits.

I don't have any inside line on what Apple is actually planning here, but I do know Apple is a savvy marketer. This product lineup introduces iPhone technology into the iPod line without requiring Apple to significantly change its iPod marketing or positioning. The iPod update I've proposed is simply an evolutionary update, while the iPhone was a revolutionary introduction. But when you're running a $25 billion business, one revolution a year is probably enough.

Technorati Tags: Apple, iPhone, iPhone nano, iPod, Marketing, Opinion, Predictions, Video, Video iPod

Fixing the financial black holes of today's markets

This is the last in my series of commentaries on the current financial markets and stock prices in general. Following this, I'm going to return to my more focused and comfortable commentary on Apple and marketing. But after last week, I felt I had to write one more article.

The US Federal Reserve cut its discount rate Friday, sending the US stock market up about 300 points at the open. Yet, a third of that rise was gone by the close, and today, the stock market is only rallying weakly at the open, waiting for the Fed to do more. To the people who keep asking "Why does the stock market keep struggling even after central banks have injected billions?," I have a simple answer:

Investors are losing their long-term confidence in the US market.

Now that's a pretty extreme statement, so let me try to defend it.

Investors view the US stock market as a proxy for the US economy; investing in US stocks like a bet that the US economy will grow. That's why so many money managers put their money in index funds -- regardless of whether any one company succeeds or fails, a bet on the growth of the Dow Jones Index has paid off with an annual compounded return of about 9.5% a year for about 80 years (annual return non-compounded is about 11.5%). It's hard to argue with a track record like that. It's those kinds of numbers that attract people to put money in the stock marketing instead of their local bank -- many people see the 9.5% average return, compare it with the 5% they could earn investing in CDs, and think, "I'll take the 9.5%."

Of course, there's additional risk that comes with the stock market investment. The market can and does go down. There's no guarantee you'll get your 9.5% return. There's no insurance. You're on your own. But even so, millions of investors take the risk every year because they feel like they understand those risks they are taking, and believe the higher reward over long periods of time is worth it. Their personal experience or their financial advisors have taught them that these risks are 1) known, and 2) not significant so long as they invest for the long run.

The problem today -- and the reasons that markets are falling apart -- is that no one really knows what the risks are any more [NY Times article, subscription required]. After all, if we did, subprime mortgage issues wouldn't have affected BNP Paribas, one of the large banks in France, or the emerging markets in Brazil, Turkey, and Indonesia that were hit, even though they hold no US mortgages. Lowering discount rates is just throwing gasoline and matches on truckloads of $100 bills -- It will create a lot of excitement, but won't fix the root problem: lots of sellers of debt with unknown risks, but not many buyers.

We can trace the root cause of both the credit crunch and other emerging confidence woes to two basic problems -- really marketing problems since marketing is the science of getting consumers to buy -- that make buyers nervous. I call them the "black holes" of financial markets because they have an almost irresistible negative pull on investor confidence. They are:

1. Institutional secrecy. Privacy for US citizens today may be scarce, but it's easy to buy if you're a private equity firm or a hedge fund. Unlike more traditional investment vehicles like stocks and mutual funds that must disclose their holdings quarterly and provide liquidity daily, these institutions don't need to disclose anything about their risks or holdings except to their investors. In a Senate Judiciary Committee hearing last year concerning hedge funds, one witness testified that "No one even knows within a trillion dollars [emphasis added] how large the hedge fund business is." The number of investors interested in possibly betting against the unknown interests of institutions wielding trillions of dollars is understandably small.


2. Assets with unknown values. Financial markets rely increasingly on derivatives, contracts whose price and value derive from an underlying asset. While useful as ways to buy and sell risk, many of these contracts are not priced on markets, but as private deals between institutions or investors. As a result, their actual value for the purposes of being bought or sold may actually be completely unknown, even though they are maintained on balance sheets as having very high values, often in the millions or billions of dollars. Warren Buffett has referred to derivatives as "weapons of mass destruction" and "time bombs for the financial system.". Yet those derivatives -- of which the sub-prime mortgage bonds now roiling markets are just one type -- are more prevalent now than they were in 2003 when Buffett issued his warning.

So what could the US do to address the root problems instead of just throwing discounted loans at Wall Street? Here are some regulatory steps that would help bring buyers back into the market long-term:

1. Enforce disclosure rules for institutions managing assets more than $100 million. Despite this existing law, many hedge funds and private equity firms still don't disclose their holdings regularly [Wall Street Journal article requires a subscription to read it.]. With private institutions throwing their the weight of billion-dollar portfolios around the market, public investors should be able to know whether they are betting for or against their interests. If a hedge fund or private equity firm acts like a financial institution, and expects treatment in the markets like a financial institution, shouldn't it have financial disclosure requirements and certification requirements like financial institutions? After all, if a hedge fund fails, the managers still get paid some of their fees, while investors lose all their investments, and creditors may end up waiting years to get paid in bankruptcy court. Public disclosure would at least allow those risks to be more visible.


2. Require conservative accounting for derivatives. Regular investors only can use a fraction of public stock values when they apply for margin accounts, while derivatives are often listed on balance sheets of funds at many times their actual exchange value. The SEC should require companies claiming derivatives as assets to either list them at exchange market values or not allow them to be claimed as assets. While this may sound extreme, it is no different than the rules used for private investors at major brokerage firms. Pretense that large brokerages deserve treatment different from ordinary investors is just that: pretense.

Now regular readers know that I believe secrecy is one of the important strategies behind Apple's success. But that's marketing secrecy, not financial secrecy. Yes, Apple can secretly develop iPhone 2.0, but it can't legally hide the money it spends on that development from investors. In fact, any consumer or prospective investor has access to reams of financial data about where Apple is putting its money. That's just not true when we start talking about today's private institutions like KKR and Blackstone Group. Yet those companies move significantly more money and affect consumers more than Apple does.

Hyman Minsky, the late economist, believed that economic crises like today's credit crunch are inevitable after any period of good economic activity because good economic environments encourage investors to take on more risk than they can handle. But Minsky's theory assumes that investors can actually see the risks they are taking. Regulators today may not be able to eliminate financial crises, but they can do something about today's black holes of investing. And shining light on those black holes is one of the most effective ways to give investors confidence again -- and it will be a lot cheaper than throwing billions of dollars at the problem to no effect.

Technorati Tags: Apple, Finance, Investing, Psychology, Credit Crunch, Stock prices, Stocks

Retail stores add more than a billion a quarter to Apple revenues

ifoAppleStore.com has an excellent analysis of the revenue impact of the Apple Retail Stores to date. His take: Apple retail stores now contribute more than a billion in revenue to Apple's income statement each quarter.

I believe that the Apple retail stores actually have a larger overall effect on Apple's business results because they are very powerful marketing and support tools as well. After all, back in the dark old days when Apple relied on the likes of Best Buy and CompUSA to sell its computers, it didn't have nearly as good results, largely because those retail outlets didn't really market its products well or properly. And no one should discount the positive effect that the Apple Genius Bars have had on its customer satisfaction -- it really is a huge plus to be able to take your iPod or computer to the Genius bar and have it seen to personally.

Technorati Tags: Apple, Apple Store, Retail

When the market sneezes, Apple stock catches a cold

[Click on the graph for a larger version]

One of Blackfriars' loyal readers wrote yesterday to ask,

AAPL has been WAY down. Is it just the bear market or is there trouble brewing. Any recent news on Leopard or the iPhone that isn't widely known yet?

My short answer: Despite the dire look of August's AAPL price declines shown above, this is just a correction at this point. Personally, I don't consider it anything to worry about. I haven't heard any news of Leopard being late and products being changed (other than the rumor that iPods shipments are slowing in anticipation of the iPod refresh I am predicting for next month). As people have commented on the blog, I think Apple's mortgage bond holdings are already fully discounted. ;-)

My own Analyzing Apple report series predicted large volatility going into August, although I hadn't expected the mortgage credit crunch that seems to be affecting prices globally. As a point of comfort, the average stock varies about 50% in price over 12 months. The 12 month low for AAPL today is 65 as shown in the chart. The 12-month high at this point is 148. Apple has varied more than the average, but it is not anywhere close to out of whack. It's just being slammed by the overall market. And Apple stock has a beta greater than 1. That means that any move in the larger market is amplified in Apple's stock price.

One other factor that's affecting AAPL in this correction is the hedge funds. They use borrowed money (leverage) to make investments. If those investments fall, they will get a margin call asking them to put up more collateral. Often, that means selling stocks that they have big profits on. Guess what stock has been very profitable this year? Yup, AAPL. So the margin calls as a result of the credit crisis indirectly causes hedge funds to sell AAPL. That's sad, but true.

Today is options expiration day, always a volatile stock day, and the Fed cut its discount rate, meaning there's a pretty big rally coming. As I write this, the market just opened, and the Dow is up nearly 300 points and AAPL is up almost six. But the reality is that despite the Fed move, nothing has changed. At the end of every day, month, or year, the thing that most affects AAPL stock price is how many people want to buy its products and how well it runs its business. At some point, investors will reassess and discover that where a few months ago they had to pay 40 times Apple's earnings for the year, they now only have to pay 30 or so. Just as iPod and Mac sales don't happen very often, neither do Apple stock sales like this one. It's just a matter of time waiting for buyers to notice.

Full disclosure: the author owns Apple stock.

Technorati Tags: Analyzing Apple, Apple, Financial analysis

Is there a cable bandwidth crunch or is this just FUD?

Ars Technica has an article today claiming that
cable companies facing big bandwidth crunch, based upon a report at ABI research. The author of that report says:

"The increasing bandwidth demands on cable operators will soon reach crisis stage, yet this is a 'dirty little industry secret' that no one talks about," said Stan Schatt, VP and research director for ABI Research.

Currently, cable providers need close to 750MHz of spectrum to deliver the goods: about 676MHz for downstream applications like analog cable, digital cable, HD programming, video on demand, Internet data, and VoIP service. Upstream spectrum needs are comparatively paltry, totaling about 54MHz.

750MHz of spectrum isn't going to be enough in the future, says ABI Research. "Uploading bandwidth is going to have to increase," Schatt told Ars Technica. "And the cable providers are going to get killed on bandwidth as HD programming becomes more commonplace."

It later argues that cable companies will need 3 GHz of new spectrum to meet all demands and Schatt makes what I think is rather a silly prediction at the solution:

Digital switching is key," Schatt argues. "Ultimately, the cable companies will have to move to IPTV. They'll be brought kicking and screaming into the 21st century."

Yeah, digital transmission is essential. I'll buy that. But IPTV? Not necessarily.

In my geographic area (Boston rural exurbs) our cable infrastructure is actually fiber to the neighborhood, not copper. 90% of the transmission goes over the fiber, where bandwidth is plentiful; only the last few hundred yards use copper coaxial cable that has the bandwidth limitations mentioned in the article. And given that most customers don't actually buy all the features that the article mentions, the cable companies can actually manage much of their bandwidth demand at the box in the neighborhood without affecting customers one bit. IPTV, on the other hand, would require wholesale rip-and-replace changes to the cable plant and cause much more disruption. Let's see, incremental upgrades versus rip-and-replace. Which do you think the cable companies will go with?

Another fun fact in our area of the country: Verizon is deploying its fiber service, FiOS, to compete with our major cable provider Comcast. Verizon is deploying fiber to the house, while Comcast uses the above-mentioned fiber to the neighborhood technology. So is the user experience so much better with Verizon? Ummm. Not really. In fact, the Verizon cable boxes being used to deliver its FiOS TV services are actually nearly identical to the Comcast ones. And Comcast is actually delivering more high-definition programming at the moment, despite the "limitations" of its cable infrastructure. Yes, Verizon offers faster Internet services over its fiber connections, but those are also more expensive too.

Bottom line: Don't get hung up on the bandwidth crunch and immediately assume there's a "one-technology-cures-all" solution. Technology is only one piece of marketing communications services. Customers also care about the costs of delivering service -- and that's where all of these companies will end up making real and significant tradeoffs. How they are implemented and marketed will have just as much effect on the business results as how those services are built. Anyone who claims that everyone will be forced to convert to a single new technology just doesn't understand how businesses actually work.

Technorati Tags: ABI Research, Cable, Comcast, Fiber, Marketing, Stan Schatt, Telcos, Telecom, Verizon

Scott Karp and Robert Young start up Publish2

I've always enjoyed Scott Karp's thoughts and writing over on publishing2.com. Well, now he's started a new adventure with Robert Young called
Publish2, where they intend to explore the power of socially networked journalism. This effort has echoes of some of what Dan Gilmore was trying to achieve with his startup and later at the Center for Citizen Media. That said, we know it sometimes takes multiple efforts to unlock a new medium, and we wish Scott and Robert well in their new effort. I can't wait to read it.

Technorati Tags: Citizen journalism, Dan Gilmore, Publishing 2.0, Center for Citizen Media, Robert Young, Scott Karp, Social Journalism

Nokia E61i update: getting WiFi networks to work properly

After nearly a month of living with this phone and fiddling with settings, I've finally discovered how to make the Wireless LAN feature behave. People who have read my review know that I found the phone full-featured, but frustrating in many respects, many of which had to do with Nokia's odd wireless networking protocol implementation. One feature that was driving me up the wall was the phone's insistence in asking me to choose a new WiFi network, even if one had already been configured.

It turns out after much Googling and searching that I can make the problem go away by turning off power-saving in the Wireless LAN configuration screen. Now, I'd never even seen that screen up until a couple of days ago. That's because it is protected by a Nokia dialog box that says, "Changing advanced settings is not recommended. Continue anyway?" Silly me -- I told it no up until a few days ago.

In any case, the setting that worked for me is as follows:

1. Go to the wireless LAN menu area under Tools > Settings > Connection > Wireless LAN.


2. There, hit the left soft key for "Options" and select "Advanced settings." Click the same soft key to answer "Yes" to the dialog box that says, "Changing advanced settings is not recommended. Continue anyway?"


3. Scroll down to the setting labeled "Power saving" and click that to the "Disabled" setting.


4. Optional: change your transmit power from 100 mw to 10 mw. It will save battery life at the expense of requiring you to be closer to any Wireless LAN base station you are using. I've found unless I'm in a busy area, the lower power setting works just fine.


5. As you back out of the settings menu, change "Show Availability" to "Never" under the "Wireless LAN" menu unless you enjoy being constantly prompted to join new wireless networks.

Now that I've made that change, the phone appears to be working much more reliably and I'm no longer seeing those "Out of memory" errors. The phone still isn't as easily usable or fast as an Apple iPhone, but it is at least doing what it is designed to do.

I know some will say that IT or my local Nokia guru would have been able to figure this out for me in less than a month. Whether that is true or not, the reality is that most people will never bother spending a week or a month trying to figure out the setting that makes the phone actually work properly; they'll either return it or simply be ticked off that it doesn't work intuitively out of the box. That's not a good thing for Nokia's brand image.

At one time, the Symbian Series 60 looked pretty when compared competitively against other phones. But the iPhone has raised the bar considerably on how usable and functional new phones need to be. I would have considered the E61i a very functional and acceptable smartphone if I'd never seen or used an iPhone. But now that the iPhone is in the market, the E61i is just another smartphone that doesn't really clear that very high bar of user friendliness and usability. And Nokia is going to have to step up its game if it wants to continue to be a leader in that market.

Technorati Tags: iPhone, Mobile phones, Nokia, Nokia E61i, Symbian 60, Usability, User experience, Wi-Fi, WiFi

How type design is saving money and lives

OK, I'll confess. I am a type geek. I studied calligraphy in high school, and I had a subscription to the U&lc magazine when it actually was a magazine. I'd devour the esoterica of how lettering and fonts communicated ideas over and above words and I'd dream of the perfect balances of form, content, and white space in words. Of course, being a computer guy made me more interested in the digital versions of the above, but that biweekly issue of U&lc sensitized me to the type in displays, signs, magazines, and newspapers.

So it was with great delight that I spotted the New York Times article this weekend titled The Road to Clarity, which described the seemingly invisible transition of US highway signs to a new typeface called Clearview from the old Highway Gothic. A better title for the story might be "The story of how better type and design are saving millions of dollars a year and possibly lives on US highways." Yes, they really are.

As the article points out, Highway Gothic signs were never tested for readability -- they were simply put up and used. And much to Clearview designers Don Meeker and James Montalbano's amazement, most of the international typefaces hadn't been tested for road signs visibility and usability either. The rest, as they say, is history and a New York Times article. And Joshua Yaffa tells the story compellingly and with charm to boot. It is definitely worth reading, whether you were ever a type geek or not. You will never see highway signs the same way again.

Technorati Tags: Clearview, Don Meeker, Fonts, Highway Gothic, James Montalbano, Type, U&lc

Simpler processor branding should be Intel's branding goal

Ars Technica notes that Intel intends to revamp its processor naming again on January 1, 2008. All we can say is, it's about time. I was never big on the whole Viiv brand that didn't appear to stand for anything other than Windows Media Center-compatible, and while the Core Duo brand worked, it got quite baroque when we started getting into Core Duo versus Core Duo 2 brands and trying to differentiate among them.

So here's some free advice for Intel: the more you change your branding, the more damage you do to those brands. Pick a naming system that can describe a wide range of products and stick with that. While the Core Duo moniker had promise, Intel's own R&D work on large numbers of cores in processors suggested it was going to fall down in the near future (what do you call a 60-core processor -- a Core Sexaginta? Yeah right).

Branding should guide and inform customers about what products best fit their needs. That means providing some differentiation among similar products and doing so consistently. Any new naming scheme that doesn't do this is only going to add to confusion rather than diminish it.

Our suggestion: segment your customers with words and differentiate with numbers. Intel actually has three lines of products: entry-level, pro-level, and server processors. Intel could do worse than to actually use similar words for its Core line: Core Home, Core Pro, and Core Server and then to follow these words with model numbers that differentiate different performance levels (e.g., 225 might be a 2-core processor with an arbitrary performance rating of 25). A similar naming effort in its mobile line such as Core Mobile Home and Core Mobile Pro would make it all consistent and easily extensible.

The longer Intel takes to straighten out its branding and naming, the harder it is for buyers to select the right product. That just lengthens sales cycles and increases costs, while tempting customers to try other brands. It's great that Intel is looking at the naming problem they face, but they should ensure they don't make it worse instead of better.

Technorati Tags: Brand, Branding, Intel, Marketing, Naming, Processors

Roaming Internationally with the iPhone

Anders Brownworth has a great posting on taking his iPhone to Argentina and Chile. It worked flawlessly with the carriers there and was quite a conversation piece, given that they have a street price of about $2,500 there. Scarcity drives up prices no matter where you are.

Technorati Tags: Apple, Argentina, Chile, iPhone, Roaming

Wall Street's Hurricane Katrina looms

[Click on the image for a larger version]

The parallels are eery.

Storm clouds are gathering. The president has gone on vacation. Everyone is wondering if the storm will hit, and if it does, whether the levees will hold. But this time, ground zero is Wall Street, not New Orleans.

I wrote back in June that when private equity and hedge funds want funds or help from the public, everyone should hold onto their wallets, because it means they want out. And guess what. This week, we have Jim Cramer melting down on television crying that the Federal Reserve has no idea how bad things are out in the real world and that millions of traders are losing their jobs. The irony of this is when a financial crisis hits Wall Street, that last bastion of laissez fare capitalism, runs to the government for help. Nice. Real nice.

But just as in New Orleans, both government agencies and private enterprises have been assuming that this storm would never hit. Sub-prime loans were made possible by the government not bothering to enforce existing lending limits and restrictions on the mortgage industry. The SEC allowed hedge funds to avoid most ordinary US securities reporting requirements because they were only for rich investors with high risk tolerance, yet they happily accepted the investments of retirement funds and municipalities that focus on risk-avoidance. Yet what will happen when all these assumptions go by the boards? We'll end up with hedge fund managers crowded into Madison Square garden begging for FEMA trailers in which to set up their laptops, the taxpayer bailing out the retirement funds, and leaders saying, "No one could have anticipated breech of the levees." Yeah, right.

At one time, the US markets were a magnet for foreign investment because we had the strictest reporting requirements and the most transparency of any market in the world. Investors had confidence that company information was timely, accurate, and fairly distributed. Today, that confidence is gone, washed away by the financial engineering of Worldcom, the financial manipulations of Enron, and the black secrecy of private equity and hedge funds. No one knows where the risks are any more -- and that means investors lie exposed to the elements without any information about where storms might hit or why. The past confidence in US markets is waning -- and investor's money with it.

In an ideal world, US treasury secretary Paulson would be having a conference call with the heads of the major financial institutions today, demanding a clear accounting of the financial industry's exposure to the sub-prime loan hurricane that's coming. Without it, we're just blindly hoping the levees hold. New Orleans proved that hope isn't much of a defense against disaster. Would that the finance industry and regulatory agencies had learned that lesson too.

Technorati Tags: Finance, Financial analysis, Hedge funds, Opinion, Private equity, Jim Cramer

Stormy weather and Apple stock prices

Reflecting on my recent post on profiting from the Apple iMac launch, the strategy I can only say this:

My prediction was wrong. If I had been forecasting the weather instead of Apple's stock price, I'd have predicted a nice, sunny day in Brooklyn yesterday instead of the tornado that that actually landed there. To see what I mean, look at the graph below.


[Click on the graph for a larger version]

While the tracks are moving in parallel now, there certainly hasn't been any profit on the long side of the price movements yet. As noted in the prior article, prices decline about 1% going into an iMac launch and then rise an average of 1.5% the day after the launch, but we haven't seen any rebound this year. Instead, AAPL stock price declined a tiny 0.1% going into the launch, then declined another 0.8% after. while today's trading has just begun, AAPL is down another 1.8% so far, and I expect to see the usual post-launch depression to continue for another day or two before the price ticks up again.

Now as I noted in the caveat on the original post, past performance is no indication of future results, and my little analysis there just proves that point again. Predicting a week of stock market prices is about as reliable as predicting next week's weather -- getting even 50% right isn't actually too bad.

But long term, the odds shift in our favor. Why? Because Apple keeps earning more money from its business. That's why I focus on revenues and earnings in my Analyzing Apple reports. Even with all the volatility we've had, Apple stock is still up more than 55% year to date, and more than 100% over the past 12 months. That's because the company keeps earning more money on a regular basis, and one way or another, that money eventually shows up in the stock price. Said another way, I may not be able to predict the weather next week, but I'm fairly certain that December is going to be much colder here than it is now in August. Long-term, the fundamentals of seasonal weather and business are just a lot more predictable than the chaos of short-term results.

I remain confident that Apple's fundamentals will drive the stock higher over the next two years, simply because the fundamental business results remain good and growing. And who knows, Apple stock may recover even next week and give me some of my pride back by tracking the historical averages. But it may not too. After all, based upon historical averages, Brooklyn doesn't get tornados.

UPDATE: By the close of trading today, perhaps it was actually AAPL stock on Wall Street that got hit by the tornado, not Brooklyn. The actual final tally was that AAPL stock is now down 6.5% since the iMac launch day. Somehow, I don't think Apple is involved in sub-prime lending, but tornados tend to uproot everything in their general vicinity.

Technorati Tags: Analysis, Apple, Business, Predictions, Stock prices, Stocks, Weather

Apple's Numbers answers questions before you ask

[Click on the graph for a larger version]

I've downloaded the iWork '08 trial application, and I've just started playing with Numbers. I've used Excel for about 20 years (I actually used the original Macintosh version 1.0 before it got ported to Windows in 1995), and I have to say, in Numbers, Apple demonstrates that there's actually quite a bit of innovation that can be done with the basic spreadsheet application.

The image above is actually an Excel spreadsheet I use for forecasting Apple earnings (this is an old one, by the way). I've selected row 19 on the spreadsheet to look at my projection of iPod unit sales. When I made that selection, I discovered my favorite feature so far is in the bottom left-hand corner of the sheet/style pane. Here's a quick blow-up:



In Excel, if I wanted to know how many units I had projected for those two years, I'd have to find a spare cell and insert a sum formula there. But in Numbers, just by selecting the cell, I get the sum and average right there on the page: I projected 115,000 iPods over two years, an average of 14,381 a quarter. It may not sound like much, but when you've got a client on the phone asking for an answer, it's so nice when software anticipates what questions you might reasonably ask.

Another feature I'm rather excited by is the ability to send a spreadsheet, table, or graph to iWeb for publishing. At present, my process for doing that is to either export a Web image from Excel (which looks awful, generally), or to craft tables by hand in HTML. If I can actually get to the point where Numbers and iWeb generate my blogging tables for me, I will be using this application all the time.

Now Numbers is no speed demon on my 4-year-old Titanium G4 Powerbook. But to be fair, neither are Word or Excel. I've been using both Pages and Keynote more this year here at Blackfriars to achieve our year-long mission of "better documents faster." Already, our default for presenting is now Keynote because it just looks more professional, and 90% of our documents now get produced in Pages and then exported to Word. Numbers now makes it likely we'll be doing the same with spreadsheets, simply because it saves us time, which turns into money. And with these programs able to import and export Office 2007 files -- something that Microsoft Office on the Mac doesn't even do yet -- iWork '08 is starting to look like a gotta-have-it app.


UPDATE: Astute reader Adam Daniel notes that Excel actually has such a feature down in its status line. If you select a range of cells, a "Sum=" appears and gives you the sum of the cells. If you click on that item, you can select Average, Count, and other statistics, although you can only show one at a time. It's a great example of a how different the two user interfaces and experiences are. Sum= is a feature I've seen in Excel for more than 20 years and never understood or used, while the corresponding feature in Numbers was obvious and I used it within the first 10 minutes of playing with it.

Technorati Tags: Apple, iWork '08, Numbers, Spreadsheets

Apple's bumps up its iMac and software business

[Click on the image for a larger version]

As expected, Apple refreshed its iMac line today, and with it, its consumer applications software suites, iLife, .Mac, and iWorks. For anyone not reading the news feeds, here are the highlights. All of the products mentioned here are available for shipment today.

1. New aluminum and glass 20-inch and 24-inch iMacs. Apple redesigned these consumer desktops with design elements from both its Cinema display line and from its MacBook portables. The new iMacs will sell for $1,199 and 1,799.


2. iLife '08 applications are now slicker and more capable. Apple has completely redesigned iMovie to allow consumers to build great vacation movies quickly, while iPhoto now can organize photos by events as well as by more traditional criteria. Garageband and iDVD got big updates, while iWeb gained more capabilities to integrate new custom elements like Google Maps, Google Adsense, and Web widgets like YouTube movies with Apple's .Mac service below. iLife '08 sells for $79.


3. .Mac has gone Web 2.0. Apple's .Mac hosting service boosts storage to 10 GBytes per user. That will come in very handy for iLife users, since iPhoto, iMovie, and iWeb now all boast one-click publishing to .Mac areas called galleries, which implement Web-powered versions of those same desktop applications. Further, .Mac now allows users to use their own domain names to point to .Mac content. .Mac content is also fully compatible with iPhone viewing for all media types.


4. Apple's iWorks adds Numbers to presentation and word processing. Apple's consumer and small business office suite finally added a spreadsheet to the set, while existing tools Keynote and Pages added new templates and transitions. iWorks costs $79 just like iLife.

Our take? Despite the fact that Apple stock sold off right after Steve Jobs finished talking, we think this event actually did quite a bit to assure Apple of good financial results the rest of the year. Why? Because:

• Apple's new consumer computer lineup is now in the market. Only the Christmas selling season exceeds the financial effect of back-to-school sales in the Apple fiscal year. With this announcement, Apple now has its consumer computer line set for both those selling seasons with quite attractive machines and software.


• iLife now has no parallel offering in the Windows world. By integrating iPhoto, iMovie, and iWeb with its .Mac Web service in deep and easy-to-use ways, Apple has raised the bar again for consumer creating Web content. While consumers could piece solutions together from the likes of Flickr and YouTube, many won't want to bother. And these easy to use software-service bundles will become a big selling point for iMacs and MacBooks this holiday season when Microsoft is making no comparable consumer products for Windows Vista.


• iWorks shows off Microsoft Office's old age. The latest version of Microsoft Office for the Mac is now three years old, and it won't be updated until 2008. With Apple's iWorks happy to read and write Microsoft Office file formats and offering better looking documents and output to boot, many consumers ask why they should pay $329 for an old and tired product when they can pay $79 for a brand new and better looking one.

The bottom line: this wasn't the glitz of the iPhone launch that set up Apple profits for 2009. Today's iMac and software launch was about Apple ensuring it had products in the market consumers can buy to take to school and put on home desktops this fall and winter. And with these core products, it looks to me like Apple's record earnings will just keep on coming.

Full disclosure: the author owns Apple stock.

Technorati Tags: .Mac, Apple, iLife, iMac introduction, iWorks, Numbers

Should we rethink 'Crossing The Chasm' or technology marketing?

ReadWriteWeb has an interesting article on Rethinking Geoffrey Moore's 'Crossing The Chasm'. I did love that book way back when it was sorta kinda new (it was already several years old when I got ahold of it in mid-1990s). But ReadWriteWeb asserts that perhaps it needs updating:

The problem is that compared to a few years ago, the speed with which new technologies are coming to the market has increased dramatically. All these technologies are aimed at the early adopters. And they love it and they try it. But the question is what happens when your early adopters run off to play with a new great thing before you have a chance to take your technology mainstream?

For example, some people who used to blog regularly, blog less now because they discovered Twittering (microblogging). Or, early adopters who have discovered Second Life might not have as much time to spend on MySpace anymore. These are not even necessarily competitive technologies, they are complimentary, but the fact is that they all compete for peoples' time and attention.

It is an interesting theory -- namely, that the fast pace of technology is outrunning society's ability to adopt it -- but in my opinion, the author leaves out an important aspect of the book. Geoffrey Moore asserted that to convince the early majority (the folks after the early adopters), you needed to build "the whole product", i.e., a complete solution to a real-life problem with all the necessary pieces to deliver all the value of the solution, not just a technology. But for most of the technology-centric developers, the concept of actually doing what a large community of people really want runs counter to their whole way of thinking, especially when they focus their efforts mostly on the early adopter avant garde. The result: they miss the early majority, not because the early adopters are too distracted or busy, but because they never built something that the early majority wanted anyway.

The other factor that the article leaves out is the concept of identifying a target market of early majority users. Too many technology companies believe that their market is, "consumers" or "large businesses that buy software". Sorry, those aren't markets, or at least not actionable ones. A real market is one where you can identify a clean list of prospective customers or buyers where each person on the list has a reasonable chance of actually wanting to buy your product because it solves a problem or satisfies a need for them. The question I always ask someone who thinks they have a market identified is, "How would I generate a list of 100 phone numbers of people in that market to call to test your product with?"

Personally, I think Moore's book has just as much value today as it did in 1991. The entire thesis of the book was to identify the marketing problems that keep most technologies from becoming business successes. Most of those challenges are still out there -- it's technology marketing, not the book, that needs to change.

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