Thursday, December 23, 2010

Google Chrome OS Is Microsoft's Nightmare

(Originally published December 20, 2010)

Amid Android's strong success in 2010, Google has been hard at work preparing its "silent killer" attack on the highly concentrated PC operating system market. This was originally announced in July 2009, with further clarification by November 2009. I saw it clear as crystal then, but it was too early for an investment theme. It may still be a little too early, but here it is.

Microsoft's worst nightmare has just started its six-month test-run. Earlier this month, Google began to distribute a pilot batch of laptops running its PC operating system called Chrome OS. The feedback provided by these thousands of users will form the basis for commercial availability from multiple well-known PC hardware makers around the middle of 2011. By 2012, one should expect almost every single PC hardware maker to offer laptops and desktops with Chrome OS.

This is not a review of Chrome OS. I could write one, but why re-invent the wheel, when outlets such as have written excellent ones in which I have little to add? Instead, this piece focuses on the broader market implications of this new product.

Let's step back for a second. What are the biggest costs of buying and owning a PC? First, it's buying software. A new PC can be as little as $300, but the basic Microsoft productivity suite -- Office -- can be $200 to $300. A three-year, in-home service contract can also run almost as much. Now that $300 PC is $700.

Once you have bought your PC, the software and in-home service warranty, the most expensive part of the equation starts: time. If you are an employer, you will have to employ an IT staff in order to deal with issues such as printer driver set-up, virus disinfection, application installs, "things that just don't work" and so forth.

But the main cost here is time. How many hours do you spend over the phone with tech support over a PC's three-year life span? I know I spend on average of over one hour a month.

One hour a month over three years? That's 36 hours. What's a price for an hour in average America? $25? Minimum wage is below $10, but a lawyer can be $500. It's obviously an individual issue, but at $25 that's $900 over three years. So let's tally this up:

PC -- $300
Microsoft Office -- $200
Three-year tech support -- $200
Wasted time -- $900
Total -- $1,600

This is the real situation faced by many individuals and IT departments alike -- a $300 PC really costs $1,600. Let's cut straight to the bottom line here: What Google promises to do for many types of users is to dial that $1,600 expense right back to the original $300, or an 81% savings. That's music to anyone's ears -- except Microsoft's.

For those who say I am skipping the obvious, let me explain how Google accomplishes these savings. Basically, Chrome OS hides from the user all of the complexities of managing a PC. Chrome OS seems to basically make it impossible to foul up the PC, making any need for maintenance and tech support obsolete. Google also includes access to its productivity suite, competing with Microsoft Office.

Wait a minute! Doesn't this sound like an Apple iPad? It sure does, but despite the many similarities, there are also important differences for now. First of all, an iPad isn't shaped like a traditional laptop or PC, but that could change in coming months or years. Second, an iPad requires a full PC in order to activate and operate properly -- but that too could change soon. An iPad stores things -- apps and data alike -- locally, but Chrome OS could also evolve in time for commercial launch from "pure cloud" to a "hybrid cloud" architecture, just like Google itself used to do with its Google Gears product.

You can see a pattern here. Apple and Google are ganging up on Microsoft with products that are "idiot-proof" and therefore much more pleasant to use for many people. These two approaches have significant differences today, but are likely to look more similar two years from now.

Google Chrome OS, though, isn't for everyone yet, just like an iPad doesn't replace a PC for most people. For example, people who need high-performance scientific apps, or use it for gaming, will not go for Chrome OS. But many people will be well- served by Chrome OS when it becomes available to the public. Examples include students, general worker bees in the white collar corporate world, and elderly people. The PC tech support costs in schools and enterprises are huge, and how often have you received a call from an elderly relative asking for PC help?

I think that as soon as Chrome OS can be refined within one year from now it has a shot to take more than half of the Microsoft Windows/Office market. Yes, you read that right. I believe that the "special cases" needing the full power and flexibility of the current Microsoft PC portfolio are a minority of the market. Having used the first Google Chrome pilot project laptop for a week or so now, I can say I'm one of them. Yes, the product isn't ready for prime time today, but I think it will be in as little as six months from now. It's not hard to see, at least to me.

If you are Microsoft, what do you do? In theory, Microsoft could simply copy Google's Chrome OS in terms of its revolutionary cloud architecture. The problem is that Microsoft would lose almost all of its revenue and profit margin. Google can do this because it makes up for it with search and advertising. Microsoft doesn't seem like it will be able to make those numbers work anytime soon. Rarely have I seen a bigger problem for a company: It's a combined technology and business model shift. Remember what happened to AOL after 1999?

What about Apple? Its iOS platform is onto an alternative approach at replacing the traditional PC, and is therefore likely to continue to gain significant ground against Microsoft. That said, Apple faces a similar problem to Microsoft for its Mac laptop/desktop business. Seriously, could this mean Apple will someday become a Chrome OS licensee as well? Apple will want to avoid this, but its hand could be forced into making the option available, in order to remain relevant and hold market share. As crazy as it sounds, I wouldn't bet against it. No, it won't happen in 2011, but perhaps in 2012 or 2013.

Speaking of 2012 and 2013, that's when Chrome is likely to start eating into Microsoft's market share and profit dollars materially. Next year will still be a year of testing and early adopters, but Chrome OS will be waiting to blossom.

These technology transitions typically take at least five years to fully play out. Microsoft isn't going away any time soon. But how does Microsoft get out of the death grip of the Google Chrome OS challenge that will start unfolding over the next year?

Friday, December 17, 2010

Pundits Fail to Read RIM

Yet another beat-and-raise quarter from Research In Motion keeps the pundits scratching their heads. This shouldn't be happening: "I went into my local Verizon store last month, and they told me Android is outselling Blackberry almost 10:1. How could RIM beat and raise?"

This reminds me of the reaction to the 2004 election when left-wing activists in San Francisco and Manhattan scratched their heads in surprise over George Bush's big win: "I don't know a single person who voted for Bush, so how could he win by 3 million votes?" If all the people you poll are on the Upper West Side or the UC Berkeley campus, well...

There was so much commentary on CNBC repeating the mantra that RIM must really be doing poorly because Apple iOS (iPhone) and Android are beating it everywhere, that I forgot to count the instances. So with RIM beating and raising yet again, what is it that these pundits don't understand?

First, these pundits don't realize that in most of the countries of RIM's main competitor is not Apple or Android, it's Nokia. The Finnish company has about one-third of the world unit market for mobile phones, even though its market share in the U.S. is very close to zero. This means that in many countries, Nokia constitutes close to 50% of the market.

The U.S. smartphone market is uniquely warped, as Motorola CEO Sanjay Jah rarely forgets to remind us. In the U.S., almost all high-end smartphones sell for $200, while there is a second tier around $100 and then others at zero, all with a two-year contract.

Considering that most smartphone monthly bills run about $100, or $2,400 for two years, the upfront price difference is peanuts. Who cares if it's $200, $100 or zero upfront, when I'm really paying $2,400 after that?

As a result of this warped U.S. pricing, the market has tilted heavily in favor of the smartphones most expensive to manufacture, most notably the iPhone and high-end Androids. Why not get the best for only $200? This means RIM is more challenged in the U.S. market.

In most parts of the world, however, there is no effective credit system. As a result, carriers don't subsidize smartphones in exchange for a contract. In those countries, consumers buy smartphones by paying "full price" (typically a price close to manufacturing cost) and then pay-as-you-go. For the smartphone buyer in, say, Indonesia, here is what his choices may look like:

Nokia -- $150
BlackBerry -- $250
Android -- $450
iPhone -- $700

For this Indonesian consumer, who may be spending $40 a month on mobile communications services, this now becomes a meaningful price difference, unlike in the U.S. market. A BlackBerry is a relatively easy step-up from his old Nokia, and it's ideally suited for SMS, which is the only non-voice service he may be using.

RIM is growing primarily because it is crushing Nokia in most countries around the world, in terms of market share shift. These RIM gains don't look to abate for at least the next couple of quarters. The fact that Android and Apple are also gaining is beside the point because Nokia's massive losses outside the U.S. means RIM can feast from Nokia's share decline in at least 100 to 150 countries around the world.

Of course, RIM has fundamental product challenges that will need to be addressed very soon. RIM's new OS launches in March with attractive 3G/4G support by the second half of 2011. This will include a similar shift for RIM's smartphones. RIM will have to fight hard in order to attract competitive developer support in the battle, not only against Android and Apple, but also Microsoft and Hewlett-Packard.

If RIM doesn't succeed in this transition, or the transition is delayed, RIM will eventually have a huge existential problem.

In the meantime, however, pundits will have to learn how markets outside the U.S. work in order to better predict RIM's demise as evidenced by their local Verizon stores. And keep in mind, RIM's guidance for the February 2011 quarter doesn't include a penny's worth of PlayBook (tablet) revenue, although it includes all the associated expenses. What does this say about the upside potential for the May 2011 quarter?

Monday, November 22, 2010

Electric Car Demand Could Dwarf Supply

About 11 million cars are sold in the U.S. each year. The first two practical and moderately priced plug-in electric cars -- the Chevrolet Volt and Nissan Leaf -- are about to be delivered to the first customers in December. Over the next 12 months (calendar year 2011), Nissan will deliver 20,000 Leafs and Chevrolet about 15,000 units in the U.S. market.

The total of 35,000 cars is less than one-third of one percent of the U.S. car market.

Leaving aside the important distinction that the Chevrolet Volt, made by General Motors, is close to a "no compromise" solution with a back-up gasoline engine that picks up after the first 25 to 50 miles, who will be buying plug-in electric cars out of these 11 million annual U.S. buyers? The debate seems focused, almost subconsciously, on single-car households, and the argument goes that almost all U.S. households won't tolerate the familiar "range anxiety" phenomenon.

Let's for a moment assume the debate is right about single-car households: If you are a one-car household, you will simply not buy an all-electric car. This is where the analysis these days typically stops.

But what about multi-car households? In most multi-car households, the second car is driven shorter distances -- to school, shopping, soccer practice and local errands. It is often asserted that a majority of cars are driven less than 60 miles a day. Rarely is the question asked: How many second or third household cars are driven less than 60 miles a day? I would venture to guess close to 99%.

In other words, most households only need one car that can go 60 or 100 or more miles a day, while the second car almost never doesn't. This means that as long as all-electric cars can be price-competitive, the demand in the U.S. alone could be 5 million electric cars a year if one assumes that almost half all cars sold in the U.S. are for multi-car households. You only need one car that can handle a longer road trip; the second car is almost always used only locally.

Are all-electric cars price-competitive? Thanks to the generosity of your tax-paying neighbors, the Nissan Leaf sees its $33,500 sticker price reduced by $12,500 ($7,500 federal tax credit, plus $5,000 in some states) to $21,000. At that price, it appeals to a majority of second-car buyers.

Therefore, as a baseline scenario, we should be able to say with some confidence that as soon as electric car awareness spreads, even without a meaningful public charging infrastructure, U.S. demand for all-electric cars should be about 3 million units a year (a majority of 5 million multi-car households). Even if we too-generously include the Chevrolet Volt into the equation, this means that in 2011 we will have a 100:1 demand/supply imbalance based on these two cars.

Clearly, the supply of all-electric cars will increase rapidly as we move into 2012 and beyond. Nissan has announced that by the end of 2013 it will be making 500,000 Leafs per year, about 200,000 of which will be made in the U.S. Indeed, 2013, will be the year when almost every other significant car manufacturer will enter volume production (more than 10,000 units a year), although there is very little precision to the 2013 numbers outside Nissan.

By 2013, the U.S. will also have a very well-developed charging infrastructure for plug-in electric cars. Already today, most any establishment in control of a few parking spaces is looking to install chargers: hotels, malls, fast-food joints, parking garages, office buildings, apartment buildings, you name it. It is not inconceivable that the U.S. alone may have more than 100 million electric car chargers installed or in planning by 2013. The low cost of these installations (well below $10,000 apiece), and the simplicity of the environmental requirements, should mean that already in 2012 we will have many more electric car chargers installed than traditional gasoline/diesel fueling establishments.

Therefore, by the end of 2013, the U.S. should be seeing the demand for all-electric cars by single-car households go from near-zero to at least 10% to 15% of that part of the market, with plenty of upside potential as people realize they can plug in their cars almost anywhere they stop. All in all, by 2013-2014, therefore, the U.S. alone should drive demand for about 4 million all-electric cars a year.

There are all sorts of legitimate arguments against electric cars, applying to different people in different situations, causing 100% adoption to be unrealistic for the next 10 or so years. For example, people with very large/heavy van needs, trailer-pullers, or classic supercar enthusiasts, are less likely candidates for all-electric cars. Likewise, however, the strongest case for electric car demand comes from multi-car households, where the majority of demand will reside for at least the first two to three years following the current pioneering Nissan Leaf introduction. And as I have said, that part of the market alone should be about one-third of the total U.S. car market.

For the next two to three years, the supply/demand imbalance is so dramatic, with production being well under 10% of demand, that investment opportunities should abound. As to what those companies are, that will be the subject of a separate analysis, and in the meantime I welcome suggestions and arguments.

Tuesday, November 16, 2010

4 Days in January: The Mother of All Smartphone Clashes

The new frontiers in personal computing have unmistakably become the smartphone and the tablet. In the smartphone arena, Apple is hampered by its reliance on AT&T, while it is enjoying a supremely successful near-monopoly in the 10-inch tablet segment.

This all changes in January, 2011. Here is a timeline for how it will likely unfold:

Jan. 3, 1pm Eastern: Verizon and Apple announce a CDMA version of the iPhone. Additional versions for T-Mobile and Sprint to follow six months later. This may put the brakes on Android's dramatic market share gains in the U.S., and shore up the competition against RIM and Microsoft.

Jan. 4: RIM provides the final details of the Blackberry PlayBook, which will be found on U.S. retail shelves later in the March quarter. This may just be the highest-performance tablet to date, and you can view the comparison video vis-a-vis the iPad here:

Jan. 5: Motorola announces a 60- or 90-day exclusive of the Google-optimized Android tablet, initially available on Verizon. Unlike the Samsung Galaxy Tab, which is just now becoming available on U.S. retail shelves, this one is optimized by Google for a very competitive refinement in relation to the Apple iPad. Sometime after March, other OEMs such as Dell, Samsung, Lenovo, HTC, LG and Sony Ericsson will also bring to market versions of the Google-optimized version of Android.

Jan. 6: Hewlett-Packard announces its new WebOS-based smartphones and tablets. Widely recognized as having one of the most attractive smartphone interfaces when it was first announced two years earlier, the Palm WebOS suffered from weak hardware. This time around, the smartphone hardware should be more competitive, and a tablet should complete the lineup.

You heard it here first. The new competitive reality will be announced on these four days in early January.

Friday, October 22, 2010

What the Feds Can Learn From Amazon

Amazon reported spectacular September quarter results -- sales up 39% and profits up 16%, from a year ago. At the same time, the U.S. federal government concluded a September fiscal year-end with a $1.3 trillion budget deficit, or $325 billion per quarter on average.

More than any other retailer in America, Amazon has its sales spread across every single zip code, every single neighborhood. Its spectacular growth in revenue and earnings comes as a result of its superior knowledge of what works in terms of selling to the American people. Clearly the federal government, with its record deficits and abysmally poor results in terms of stimulating business and employment, could learn a thing or two from Amazon's methods to achieve economic growth.

What is Amazon's secret sauce? The key to Amazon's success is that it conducts a never-ending series of experiments in terms of what works and what doesn't. Basically, here is how they do it:

Amazon divides its customer base into two. Try method number one on the first half of the base, and then try idea number two on the second half. Measure the outcome. Then apply the more successful method to the entire customer base. Repeat with a new experiment. Repeat, repeat...

This relentless pursuit of improvement, by conducting a never-ending series of experiments on 50% of the customer base, has made Amazon America's most successful retailer. So how can Washington DC learn from Amazon to improve economic performance, maximizing growth and prosperity?

The answer is easy, really: Divide the U.S. into two parts, each applying the economic policies and principles of the two political parties. Each political party will get four years to start, with a veto-proof majority, in each of these two new Americas.

Let's give Obama and his fellow geniuses the first draw: They can pick up to 25 consecutive states, out of whom at least 23 need to be geographically consecutive if they also pick Hawaii and Alaska. The Republicans get the other 25. Then let the competitive race begin, just like it works at Amazon every day, in pursuit of economic performance.

The federal government in the 25 Democrat states would implement Obama and Biden's vision for rising marginal tax rates, stiff corporate taxes, increased capital gains taxes as well as on dividends, detailed regulation of all business activity, government-defined health care, massive government spending on just about everything (except police and military). Basically, a three-step economic plan: If it moves, tax it. If it continues moving, regulate it. If it stops moving, subsidize it.

On the Democrat side of America, there would be unrestrained stimulus. The government would spend as much money as the government departments want. There would be no shortage of money because taxes would be raised at every step of the way. Alternatively, the Democrat government would just print the money, so-called "Quantitative Easing." Printing money was so successful in Zimbabwe and Argentina, as well as in Germany in 1920, so why not try it here?

Obama would probably introduce a new, simplified income tax form, with only three lines:

1. How much money did you make last year?
2. How much have you got left?
3. Send it in.

In the Republican 25 states, led by -- say, FedEx CEO Fred Smith as President and Rush Limbaugh as Vice President -- there would be no income tax, business tax, sales tax or any other tax except that every person between the ages of 25 and 65 would have to pay $4,000 per year. With a total population of around 150 million people, that would imply approximately 100 million such adults and therefore $400 billion in tax revenue. This would be four times JFK's 1962 federal budget of $100 billion. It would pay for national defense and federal law enforcement, but nothing else.

On the Republican side of the 25 state fence, there would be no business regulations, and people would be free to do whatever they want to do -- or not to do, and build, start a business, buy, sell, whatever -- without any red tape. No permits, no bureaucracy, no forms to fill out. You make money, you get to keep it -- just send the government $4,000 per year. No income tax form, no sales tax to calculate, no accountants or lawyers to hire.

If we Americans would organize ourselves to conduct this Amazon-style experiment, what do you think would happen? After the first four years were over, we could measure the results. Which side had more economic growth? Which side saw more prosperity? It is clear that there would be some sort of a result, from which we could learn.

If Washington DC is serious about improving the performance of the United States, it would immediately put in motion a plan to implement this experiment, as Amazon does every day. As I write this [Oct. 21], President Obama is having dinner with Google in Silicon Valley. He could start by asking Google's management where they would choose to put their headquarters if the country were so divided into two new 25 state countries.

Amazon has shown the way, with superb performance -- 39% revenue growth and 16% profit growth this September quarter alone. It is time for the federal government of the United States to follow Amazon's example and divide itself into two, for a similar experiment of two different economic policies.

Tuesday, September 28, 2010

RIM's PlayBook -- An Android Tablet?

The most important thing about Research In Motion's new PlayBook tablet announcement isn't the form factor -- a 7-inch screen tablet -- but rather that there may be a possibility that the brand new operating system from RIM's recent QNX acquisition could be modified to run Google Android applications.

No, RIM didn't say that this will be the case. But a description of the QNX OS architecture by QNX CEO Dan Dodge appeared to hold out the hope that this new OS could easily be modified to run Android apps. As to whether RIM would actually bake this capability into a future version of the QNX OS is, of course, entirely unknown.

This does beg the question, however: If it was possible, why wouldn't RIM open up the possibility? While RIM didn't say that its new OS could be easily modified in order to run Android apps, it didn't completely deny it either. I think the capability is in the cards, and we should find out in 2011. It sure would make for a blockbuster leap into the Android marketplace with over 100,000 apps!

Android-app compatibility or not, the important part of the PlayBook announcement isn't at all that it's a tablet, but rather that this is a brand new OS. Blackberry's current OS is, at its core, well past its prime, and I experience this every day because all of my BlackBerrys take close to half an hour to reboot, and they crash and freeze frequently.

Make no mistake about it: The new QNX OS will power not only the PlayBook tablet, but also the BlackBerry smartphones starting perhaps in late 2011, but for sure by 2012.

Much has been made about the connectivity of the PlayBook. It's not that complicated, actually. Just like Apple's iPad, the Playbook will first launch with WiFi + Bluetooth. The version which adds cellular connectivity (3G/4G) will arrive later, just like the iPad 3G did.

Seeing that this is a brand new OS, it takes some time to integrate the 3G/4G drivers, and then the carriers as well as the Federal Communications Commission need some time to certify these PlayBook 3G/4G versions. It is a reasonable expectation that the 3G/4G versions of the PlayBook could arrive in the third calendar quarter of 2011.

For the first time, a BlackBerry product will have a non-removable battery, and for the first time in years, a BlackBerry product will be lacking a MicroSD card. In other words, it will be again taking cues from the iPad. The apps processor looks to be from Texas Instruments, but that is not 100% confirmed, even though most signs point to TI.

The PlayBook's RAM is a whopping 1-gigabyte, or 4 times compared to the iPad. Storage versions are 16-gig and 32-gig in the prototypes I saw, but those could change in time for the first-quarter production. Apple offers 16-, 32- and 64-gig for the iPad, and at least my iTunes library doesn't fit in the 32-gig version.

Based on the specs and the impressive description of the stability of the brand new OS, the PlayBook looks like a class-leading product, for a 7-inch tablet. But therein lies the rub: It's just 7 inches. I think it's a mistake for anyone to offer "only" a 7-inch tablet. I think what people primarily want is a 10-inch tablet, which can be used as a laptop replacement as long as the software evolves sufficiently. A 7-inch tablet will probably not be a laptop replacement for more than a very few people.

Perhaps RIM will offer a 10-inch version of the PlayBook soon enough. There aren't any signs that this will happen, even though logically speaking it would seem easy for RIM to make one of those too. If in the end the PlayBook was to be deemed a failure, I believe the cause would have been that it was a 7-inch tablet instead of a 10-inch.

Count me as a skeptic. While it is true that all the signs are that this will become as good a 7-inch tablet as I have seen, I also think most people will be buying 10-inch tablets. For this reason, I don't think Steve Jobs is losing sleep over RIM's first PlayBook product. But I've been proven wrong before.

What about the stock? Not only the new PlayBook tablet, but more importantly the all-new OS, should make RIM much more valuable than it was Monday morning. Those who believed RIM was in trouble had better start covering because it looks like RIM will now be offering a much wider range of products starting in 2011 and increasingly in 2012, based on an all-new and seemingly very capable OS.

Sept. 27, 2010, was without a doubt the most important day in RIM's Blackberry history since the launch of the first Blackberry in 1999.

Friday, September 24, 2010

Top 3 RIM BlackBerry Myths

Despite posting strong August quarter results, and providing solid November quarter guidance, RIM stock is keeping close to its 52-week lows. While RIM has its fair share of challenges, mostly as a result of a severely aging operating system which keeps crashing, freezing and just isn't as capable as Google's Android and Apple's iPhone, there are also some myths that present RIM in a too unfavorable light.

Myth #1: BlackBerry competes with Android and iPhone. BlackBerry is sold in 175 countries. In most of these countries, BlackBerry has zero competition from Android and iPhone. In some of these countries, Android and iOS are available, but are not available on a pre-paid basis -- which is close to 80% of the world's cell phone sales. In most of these countries, iPhone in particular -- but also Android -- are just too expensive for most people. An unsubsidized iPhone may be $700 and up, whereas an unsubsidized BlackBerry can be had for $250 even in a Best Buy vending machine at an airport or at a Las Vegas casino.

The truth is that it is only in a relatively small number of countries out of the 175, such as the U.S. and the U.K., does BlackBerry compete with iPhone and Android -- and even in those countries, BlackBerry is available from numerous operators on a pre-paid basis and is a lot cheaper than iPhone and many Android devices. Yes, I know there are some exceptions, such as Sprint's Boost and Virgin Mobile brands, but this is true in most of these 175 countries.

Americans also don't often appreciate that iPhone and Android are more competitive in the U.S. than in most other countries. Many desired features of iPhone and Android simply aren't available in so many countries. For example, Google Voice is only available in the U.S., and even Apple's signature iTunes store for some products, iBooks and other critical features are not available in all countries.

In reality, BlackBerry's main competition in a majority of the 175 countries is Nokia, and to a lesser extent basic old-style cell phones from Samsung, LG, Sony Ericsson and Motorola. In this fight, BlackBerry has been gaining market share every day.

Myth #2: New subscriber count guidance is fishy. On the conference call a week ago, RIM stock reacted negatively after management stated that its policy was to move away from subscriber guidance. While this may sound suspect at first, there is a really good explanation for it.

An increasing degree of BlackBerries sold worldwide are to people who don't use email. This may sound doubly fishy to a U.S.-centric analytical crowd, but the fact is that most people in the world have never used email or for that matter a PC with a browser. Their equivalent of our email is SMS. As a result, they use their new BlackBerry for massive SMS volumes, but not email or web surfing. For this reason, they don't need to "subscribe" to RIM's Internet service.

The result of this is that BlackBerry ends up selling more and more handsets to people who don't show up in subsequent statistics. BlackBerry gets a good margin on the handsets, and may up-sell these people to email and other Internet services some time down the road, but for the near future, these sales go into a de-facto black hole with the only certain money collected up-front. And this shows up in revenue and profit growth, but not subscriber growth.

For this reason alone, it made sense for RIM to stop giving out these "subscriber" numbers -- they just don't matter as much going forward, as they did in the past when almost all BlackBerries sold were to people who were living in "modern" countries where everyone used BlackBerry for email. The revenue and profit numbers will simply speak for themselves.

Myth #3: Tablet as "companion device" is a joke. The only thing about most of the reporting to date on the subject of the BlackBerry tablet that's a joke, is the inconsistent reporting itself. Commentators have made fun of this "companion device" concept as something quaint and reminiscent of Palm's failed 2008 "Foleo" product, which ended up stillborn.

The alleged definition of this "companion device" concept is that the tablet won't have cellular connectivity, but rather only WiFi. In other words, the same thing as approximately 80% of all iPads sold to date. Are these commentators criticizing the iPad as a joke too? Of course not, but this only reveals that they apparently don't know what the heck they are talking about. Clueless, and shamelessly so!

A WiFi-only iPad is also a companion device, in that it will only connect to the cellular network using a device offered by Sprint and Verizon Wireless such as the the Sierra Wireless Overdrive, the HTC EVO, the Samsung Epic (all on Sprint), the two Palm devices Pixi and Pre Plus (both on Verizon Wireless) and the Novatel MiFi (on both Sprint and Verizon Wireless). There is nothing wrong, quirky or otherwise quaint about this approach. Some consumers prefer it; others don't. Clearly the vast majority of Apple's iPad sales -- probably around 80% -- are in this "companion device" format.

To further show how insane the commentary has been with respect to the prospect of a BlackBerry "companion device," let's take the initial comments made about the Samsung Galaxy tablet, introduced a couple of weeks ago and expected to become available by November or so. Initially, it appeared that this Samsung tablet would only be offered with a cellular subscription, i.e., the opposite of a "companion device." The bloggers screamed bloody murder! How dare Samsung not offer a WiFi-only -- i.e., a companion device -- version?

Only a few days later, commentary from Samsung appeared to have suggested that a WiFi-only version was indeed also going to be offered. The tech bloggers shouted a big sigh of relief. Well, gee, how about some of the same feelings for BlackBerry alleged similar approach, then?

Of course, we don't know what the BlackBerry tablet will look like, when it will be offered or any other details for that matter. But can we please have any consistency in the criticism of it, even on the terms assumed by the commentator assailants? You can't have it both ways. You can't praise Apple and Samsung for offering the exact same "companion device" concept -- and in Apple's case be extremely successful in doing so -- while at the same time criticizing BlackBerry for it allegedly planning to offer the same concept.

Perhaps BlackBerry will offer its tablet in both kinds of versions, just like Apple does, and which Samsung apparently will do? If so, will these early inconsistent critics give up and recognize that BlackBerry will have a device for every person's preference? I think the real answer is that these commentators don't really know what they are talking about, and they never stopped to ponder their (lack of) analogy with the other tablet products offered.

The bottom line is that while BlackBerry has huge challenges in terms of an urgent need to come up with a brand new operating system, it has been unfairly vilified for several things where BlackBerry is in fact doing a lot better than the critics suggest. The basic revenue and EPS numbers support this. If BlackBerry can only get away from an operating system which takes me almost half an hour (yes, I kid you not) to reboot, and which doesn't crash and freeze all the time, it can continue to have a great and rapidly growing business, deserving of a much higher set of multiples.

For this turnaround to work, it would help if the negative myths around RIM are crushed. That said, its flaws and challenges aside, RIM isn't the first player on the world stage to be misunderestimated.

Friday, August 27, 2010

VoIP-Smartphone Revolution Is Coming

For all the talk of dramatic change in the smartphone landscape over the last two or three years, they pale in comparison to the impact of what's next: The shift from circuit-switched voice to VoIP, or Voice over Internet Protocol. This has been talked about for 10 years, but the stars are finally aligning to hit with full force right now. Here is why:

The average U.S. smartphone monthly bill is approximately $100, plus tax. Of this $100, approximately 2/3 goes to an unlimited voice plan, and the other third to a broadband data fee for service ranging from 2 gig to unlimited.

Think about this for a moment. All the excitement of new and old apps alike, ranging from email to simple Web browsing to Facebook, Netflix, Dropbox, Twitter and numerous games -- is covered by one third of what you pay every month. In the other corner, the 100+ old app of simple phone calls eats 2/3 of your bill.

This may have been justified until recently, but Skype is now available on the iPod Touch, iPhone, iPad and other platforms. Other VoIP apps are, too, including Vonage, Fring, Truphone, 8x8 and others. Most recently, Google announced on August 25 that all calls to U.S. numbers will be free -- at least until the end of this year.

Do you now see what is so wrong with this picture? Once you bother using any of these apps -- Skype, Google Voice, Vonage, Fring, Truphone, 8x8 or any of surely many others already (or soon be) available or soon -- you are paying 2/3 of your monthly smartphone bill for nothing. Pure waste.

Did you wake up yet? I have just pointed out that a multi-trillion dollar industry may stand to lose 2/3 of its revenue once people invest in a smartphone and click to install one or several of these VoIP apps.

Of course, as with almost all changes in technology, this will not flow through the system as soon as a solution is available. It will take years to play out. But once there's a crack in the Hoover Dam ... and you can't plug it ... do you really want to invest against this trend?

Who will be the winners and losers in the market, as a result of the imminent VoIP smartphone revolution? The answer is divided into two parts: Smartphone makers and network service providers.

First, smartphone makers. There are only two devices in the market today with the ability to take advantage of the VoIP smartphone revolution, not forcing you to also pay for a traditional circuit-switched voice plan. The most interesting example is the Apple iPad. It is to my knowledge the only GSM-ecosystem device in the market with significant smartphone capability, that you can buy with a data plan only, and not have to pay for any circuit-switched voice.

All you pay is $25 per month for 2 gigs worth of data, and then you use Skype. This makes the iPad the cheapest smartphone in the market today, in terms of the monthly service fee. Yes, really. Compared to the iPhone, it saves you $70 per month, or $1,680 over two years. You hadn't thought of this, had you?

Of course, the iPad is a huge device and most people aren't going to use it "as a phone" because it doesn't fit in most pockets. But Apple has "a device for that" -- the iPod Touch. The current iPod Touch, of course, runs Skype, and you can use it with a separate data modem such as the Novatel MiFi (available from Verizon Wireless, Sprint and Virgin Mobile) or the Sierra Wireless Overdrive (available from Sprint and its partners). These types of plans start at $25 per month, mimicking AT&T's iPad data plan.

We all know Apple will be announcing a new iPod Touch on September 1. Today, the iPod Touch is the only device in its class, feeling just like a smartphone, but lacking the cellular modems of every other smartphone in the market. Apple could simply mimic the iPad and equip the next-gen iPod Touch with the same kind of embedded HSPA (or EVDO or WiMax or LTE) data modem as it has already done with the iPad. If so, it would be a pure VoIP machine, in the right size for a traditional smartphone.

If Apple were to unveil such an improved iPod Touch device, it would be the only company offering a smartphone with a monthly bill two-third lower than every other smartphone on the market. If Apple were the only company doing this, it would punctuate the sales of every other handheld communications device in the market. At that point, Apple could sell well over 100 million of these units per quarter, on a global basis. Indeed, this is at the core of my bull case for Apple stock.

That said, why would Apple be the only company offering such a device?

Of course it wouldn't. Every other smartphone maker can easily jump into this game. Every one. Skype and Google Voice, among others, could run on every OS, every device. Nokia, SonyEricsson, HTC, Motorola, RIM, Samsung, LG -- one wonders what excuse any of these companies has for not already having launched such a product.

Indeed, I will go so far as to say that the failure to launch this product represents nothing short of gigantic malpractice by all of these managements. The first company bothering with this would catapult its market share like nothing we have seen in the smartphone world to date, including the iPhone and Android.

Interestingly and paradoxically, while Apple is the only company having offered devices able to take advantage of this trend thus far -- iPod Touch and iPad -- it may be the only company restricted from launching the killer product I described above (iPod Touch with data-only modem). Why? Because its agreement with AT&T may prevent it from creating a product that so closely competes with -- and whose sales would completely punctuate -- the iPhone.

That said, if the well-publicized rumors of AT&T's deal with Apple ending by January 2011 are true, this restriction will soon be history anyway.

Conclusion on the smartphone side: Anyone stepping up to the plate and bothering to make this VoIP-only machine will be a winner -- if they do it in time. Anyone who doesn't, or takes too much time figuring this out, will go the way of the horse-and-buggy and mainframe. While Apple has the early lead here, this lead could be vaporized in a nano-second by Google and its partners -- or by anyone else.

What about the service providers? The lion's share of revenue and profit from the traditional cellular service providers comes from circuit-switched voice. With this business collapsing into the corner of Skype, Google Voice and others, it would appear to present an impossible equation for these companies. Yes, data revenue will continue to grow like a weed, but that may not be enough to replace the profits from the legacy voice business. In this light, I don't see any reason to be long any of those companies -- AT&T, Verizon, Deutsche Telekom and others.

Only one company stands out as a zero-loser in this new VoIP telecom world: Clearwire. It's the only pure 4G play, with not a penny of circuit-switched voice revenue to lose. Its network has the lowest latency -- critical for VoIP to work well -- and offers the most capacity for VoIP. As all other cellular network providers see their revenue fall by two-third over time, Clearwire's revenue should mushroom dramatically.

Perhaps Clearwire will fail anyway -- the perils of being heavily leveraged -- but if that doesn't happen, it may be the only wireless company left standing with revenue growth. Either way, it makes it a most attractive acquisition target.

So there you have it, folks: The mobile VoIP revolution is up for grabs for any smartphone maker willing to cater to this market, and Apple has the fragile early lead with the iPod Touch and the iPad. On the service provider side, this will be a blood-bath for all of them except the VoIP-only network play: Clearwire.

Tuesday, August 24, 2010

"Net Neutrality' Is Akin to Socialism

Someone has to say it. The debate surrounding so-called net neutrality proposed policies reminds me of a heavily Marxist-influenced student protest from 1968. It's all about keeping private property in name only, while regulating the product so that it can only be provided in a way defined by the government. In other words, it's a regulated utility which may just as well not be a private enterprise at all.

The "debate" regarding net neutrality is in fact no debate at all, reading 99% of the commentary on the matter. It's equivalent to the debate surrounding "rent control" in many cities, say 50 years ago. Just prohibit private property owners to run their businesses the way they want, and the consumer will benefit unequivocally and proportionately the argument goes. The government bureaucrat proposing to rob Peter and give the monies to Paul can always count on the support from Paul.

We all know what a brilliant idea rent control was. Indeed, applying the net neutrality principle to all of society, as it was ostensibly done in the Soviet Union, really catapulted the standard of living forward to new consumer friendly heights -- not.

So what is net neutrality? It's the idea that it will be illegal for anyone to purchase preferred access on broadband networks -- wired as well as wireless. All bits must be treated equally. No special privileges for anyone. A fine principle, taken straight out of Cambodia's "Killing Fields" and of every other socialist utopia attempted over the last 100 years or so.

Indeed, why limit the net neutrality legislation to broadband networks? Shouldn't all products and services in society benefit from the egalitarian principle of nobody being able to purchase a preferred service or product? Take an airline, for example. Let's establish an air neutral policy of prohibiting business class and the practice of charging people based on supply and demand for seats. Each airline seat will have a fixed price and there will be no multiple classes of service. Air neutrality will prevail in the same nirvana as on the net utopia envisioned by the Federal Communications Commission.

What are the most important products in society? Food, shelter and clothing. Without them, we would die relatively soon. We can manage without broadband, air travel, and even health care in many cases over an entire lifetime. Let's apply the net neutrality principle to food. Nobody should be able to buy "preferred" food of higher quality and better taste than anyone else. This dictates a government bureaucracy dispensing identical rations to all citizens. Think Mao's Chinese cultural revolution and great leap, and 50 million dead.

The net neutrality principle applied to shelter? Equal apartments to all. Nobody should be able to pay for a better house than anyone else. That is, except for the political elite. Did you ever pay a visit to a Moscow suburb in the 1980s?

How about the net neutrality principle applied to clothes? Nobody should be able to pay up for something differentiated or better. Government must ensure neutrality in clothing, with everyone in adult school uniforms. Think North Korea or China in the 1950s, again. I can't wait!

I could go on and on showing how the net neutrality principle is simply a warmed-over Marxist wet dream. The sad part here is that these madnesses of Marxism sometimes make it into policy, such as the innocent-sounding "rent control" which managed to destroy the living conditions in many U.S. cities for decades until they were phased out, allowing for entrepreneurial freedom and individuality.

Owners of broadband networks need to have the freedom to provide access to their properties on whichever terms they see fit, just like owners of hotels and airlines. If the consumers demand and are willing to pay for usage looking like net neutrality, chances are those service providers will find it in their best interest to supply services in that fashion. You can always get together with like-minded investors and build your own net neutral network if you think the incumbents aren't doing what they should.

We just can't have a situation -- at least not in a free non-North Korea-style society -- in which government bureaucrats dictate the manner in which private companies provide services. If this happens, we must ask ourselves why the government doesn't just expropriate Comcast, AT&T, Verizon, Time Warner Cable and others. If a private company isn't allowed to design and price its product in any manner its shareholders see fit, we simply aren't a free country anymore.

Back in 1944, Friedrich Von Hayek, who later came to receive the Nobel Prize in economics in 1974, published his most-read book -- "The Road To Serfdom" -- in which he explained that government control over the private means of production must spiral into a lack of political freedom. If people don't have control of their private property, they cannot fund political pluralism.

Hayek's book became a favorite behind the Iron Curtain, passing hands in brown envelopes because its possession could yield a labor camp sentence or worse. In the current net neutrality debate, we should heed Hayek's warning and praise the right of owners of property to be free from socialism enacted through the back door. If you like government-mandated products and services -- from food to clothing, shelter and transport -- you will love net neutrality. Those of us who value the freedoms afforded to us through our exercise of private property rights will fight net neutrality just like Ronald Reagan fought the Evil Empire.

Advocates of net neutrality tend to be the same people who complain that there hasn't been enough broadband capacity built. If broadband networks are to remain privately owned, net neutrality legislation will only serve to disincentivize investment. If the government told you how you had to use your house, offer services in your hotel, or whatever, how much would you invest in such a building? Probably next to nothing. You surely wouldn't expand. This is basic incentive theory, folks. If the government will punish you for making an investment, you're not going to do it. Enacting net neutrality legislation is simply one big discouragement of investment.

Tuesday, August 17, 2010

Superior Protection for Your iPhone 4

So you've paid $299 plus tax, perhaps bought a MobileMe membership, a car charger, an international travel charger and a superb Motorola S305 stereo Bluetooth headset, for the market's finest handheld computer design -- Apple's iPhone 4, 32-gig version. All in, you're out more than $500 plus over $100 (inclusive of tax) per month for a two-year contract. The iPhone 4 is an engineering piece of wonder all right, the new decade's equivalent of the finest Leica camera design.

The problem is now twofold: (1) You have this thing -- the iPhone 4 -- on you all the time, doing everything imaginable from text and visual communications, to reading books, listening to podcasts and engaging in business productivity; and (2) because you depend on it for almost everything, you're toast if it's destroyed.

What's the most likely reason your iPhone will suffer a hardware failure? Dropping it onto a hard surface, such as a marble floor or a sidewalk.

So what should a responsible iPhone 4 owner do to protect the two-year investment? If you're serious, may I suggest the Otterbox Defender case. It is the Mercedes 600 of iPhone 4 cases, and the price is $50 plus tax. Bottom line -- it's extremely well worth it!

There really isn't an easy way to describe the physics of the Otterbox Defender multi-layer case, except to say that it naturally adds some bulk to the very thin and narrow iPhone 4, while giving it more protection than any other case I've seen. Much of the exterior is covered in a rubber that's neither too slippery, nor too rubbery. Oh, OK, some people may have wanted it more rubbery for better grip, but that would have caused complaints among those who want to get it in and out of a pocket with ease.

Once you've spent about a minute getting the Otterbox Defender case onto your precious iPhone 4, you feel extremely secure that nothing will hurt your investment short of dropping it in the ocean or having it run over by a John Deere tractor. You would have no problem dropping it from eight feet onto a marble floor, or a regular sidewalk. Mission accomplished.

The only remaining question is whether you need all of this extreme protection. I vote in favor, but Otterbox also sells two cases of lesser protection for $35 and $20. I am not going to argue with anyone choosing either of those two because they will also provide protection superior to most other cases.

All responsible iPhone 4 owners should have a case that provides protection at least almost as good as as the Otterbox Defender. If you can't find it in the Apple store or from AT&T, you can always go to the source and order it from

Wednesday, July 21, 2010

Clearwire's Sweet Package

Engadget has published a story which has since traveled around the blogosphere, on the subject of Verizon introducing bandwidth caps on data usage.

There are two initial points to be made about this story:

No. 1. Verizon has already had a data cap for years. It's 5 gig per month, with overage charges.

AT&T recently lowered the cap for certain devices such as iPhone and iPad to 2 gig per month, but those devices are also charged less, typically $25 per month instead of $60 per month for the USB modems.

No. 2. Verizon started telegraphing this move already last December, and it is reasonably believed that this new pricing change will happen in time for the anticipated Nov. 15 launch of LTE.

Those two formalities aside, the main implication for investors from this anticipated move by Verizon is with respect to Clearwire. Clearwire is mostly associated with WiMax, a technology that has been losing momentum in the market for almost 18 months now, in favor of LTE. The main point I am making here is that it mostly doesn't matter for Clearwire whether it is offering service using LTE or WiMax.

Clearwire's main asset isn't WiMax technology per se. It's spectrum. Spectrum means capacity, the ability to offer service to more people doing more things, simultaneously.

Whether this is done using LTE or WiMax basically doesn't matter, at least for the time being given that these two technologies have similar performance.

Specifically, Clearwire has 120 MHz of spectrum on average across the major markets where it has launched, or will soon, be launching service. In comparison, Verizon has closer to 30 MHz worth of spectrum where it will be launching LTE.

In addition, Clearwire's spectrum is "un-paired" (referred to as TDD) whereas Verizon's is "paired" (referred to as FDD), which in practice means that Clearwire's spectrum can be utilized a lot more efficiently.

The bottom line on the spectrum is that Clearwire has approximately four times Verizon's spectrum, and it may be at least 50% more efficient, so that means six times. This makes all the difference in the world in terms of Clearwire's ability to compete and to do so with competitive pricing.

Practically speaking, the only thing you need to consider when judging Clearwire's ability to compete with Verizon, AT&T, T-Mobile and the others is: Can they offer more data for less money, or not? The answer to this question is very simple.

Clearwire is offering unlimited data for anywhere between $30 and $60 per month depending on the device you use. The competition is offering anywhere between 2 gig and 5 gig per month for $25 to $60 per month.

A laptop or iPad user doesn't care whether it's LTE or WiMax. The user only cares about getting the fastest amount of data, at the highest quantity, and at the lowest price. This isn't a close contest, folks. If I can get unlimited service for $30 or $60, instead of 2 gig or 5 gig for a similar price, why on Earth would I pick Verizon, AT&T or T-Mobile, instead of Clearwire?

If one brand of gas station offered you unlimited gasoline for $30 per month, would you shop there? Hmm, let me think.

Verizon will surely build the finest LTE network imaginable, given what's got in terms of limited spectrum. I have no doubt that it will perform as well as it as all possible. But if Verizon can't come close in terms of competing with Clearwire on a price-per-bit basis, I don't see why anyone would serve its laptop with a potentially much more expensive modem.

Nota Bene 1: Sprint owns approximately 55% of Clearwire.
Nota Bene 2: Clearwire offers service also under the Sprint, Comcast and Time Warner Cable brands.
Nota Bene 3: Google is an investor in Clearwire. Imagine what they have in mind.

Tuesday, July 13, 2010

iPhone 4 Recall: A Useless Idea

The rumors about an Apple iPhone 4 recall has to be one of the most useless ideas in recent technology memory. There is nothing about the design flaw that could be fixed in any recall, short of rebuilding the phone from scratch or redesigning a whole new phone, which would take one year or perhaps more. It would be totally counter-productive for Apple and its customers alike.

There is really only one solution which makes any remotest sense, and that's for each customer to do what each customer should ALWAYS do with ANY smartphone of value ANYWAY: Use it with a protective cover, such as Apple's own so-called bumper product, available at the Apple store for $30 apiece. Numerous other protective covers/sleeves should soon become available from many other companies, such as privately-held Otterbox, to pick the example of what's considered to be the best in the business.

So far, Apple has rejected the idea of giving away its $30 bumper for free, but with the journalistic drumbeat on high gear, free bumpers may just be inevitable. Interestingly, most consumers seem thrilled overall with the iPhone 4. Just ask any sample of your friends who are proud iPhone 4 owners. I can't find a single iPhone 4 owner with a serious complaint. They either avoid pressing the finger on the critical antenna spot, or they have a cover such as Apple's own bumper.

The people who had the phone from the very first moment it became available, before the widespread reports of the antenna issue never seemed to notice it until it became a big media story. Since then, it has become more of a party trick for those without a protective cover: "See, look at what happens if I put my finger right here."

It's something you would probably have seen in terms of a Hugh Hefner or Austin Powers party trick ca. 1967. In reality, it's simply not an issue for the way you're supposed to handle the product, and consumers are extremely happy with the product by all accounts.

Specifically, iPhone 4 consumers tend to report much better Internet speeds, particularly upload speeds. Let's say you take a photo or a video with the new high-resolution camera, and you want to upload it to some web site. This now goes much faster with the iPhone 4 than with the previous iPhone 3GS version, and for that matter many other smartphones. So much for an antenna reception problem!

Bottom line: Sensational journalism is often unfair. I feel for Apple. Let's all hope ambulance-chasing lawyers don't get their pound of flesh from this non-issue. We don't need another John Edwards.

Wednesday, July 7, 2010

RIM, BlackBerry: Pluses and Minuses

Research in Motion traded above $70 in early May; now it's below $50. This article seeks to accurately assess RIM's competitive position.

First, the pluses. As I see it, RIM has three primary pluses in the market today:

First, the vast majority of the world's handheld computer users do so on a pre-paid basis, unlike in the U.S. RIM offers its products on a pre-paid basis in many countries, unlike Apple and Google/Android. As long as the large majority of the world's consumers cannot buy iPhone or Android, RIM should do pretty well against its main competitor: Nokia. Once Google and Apple decide to attack this lion's share of the world-wide market, RIM becomes vulnerable.

Second, most U.S.-centric pundits and portfolio managers have spent the last couple of decades PC-savvy and web-centric. As a result, they believe that the average consumer primarily looks to the handheld computer purchase to replicate the PC desktop web experience. While this is true among one billion people, it's not true for another five billion people. For the majority of the world, there is no laptop or web browser as reference points, but rather a Nokia cell phone with SMS being the primary medium of communication.

In this context, the BlackBerry looks like the ideal step-up from that old-fashioned Nokia phone. It's the best SMS machine, available on a pre-paid basis, and in order to reduce SMS charges the BlackBerry offers its superior and proprietary BlackBerry Messenger app, which has proven to be very addictive around the world.

Third, RIM's focus on large enterprise and government is unlikely replicated by its less focused competitors, whether Google or Apple or any of the others. There is a reason RIM has a near-100% market share in government/military and nearly as large market share in the most demanding large enterprises such as the heavily regulated banks. It's almost as if RIM needs to be valued like two separate companies under one roof: One defense contractor, and one consumer-computer-mobile company.

While we can all agree that RIM has its competitive challenges in the consumer space, its superior focus on security should enable it to dominate the largest enterprises and the defense departments for years to come. Last time I checked, defense contractors tend to be very profitable businesses deserving of healthy valuations.

On the downside, RIM has three main things to worry about:

First, the operating system is far behind Apple and Google in terms of its fundamental elegance and capability. Just compare installing an app, and then view its richness, between these platforms. Installing an app on a BlackBerry often takes a long time and can be followed by all sorts of screens of approvals, agreements needed to be signed, after which it may crash and bring down the whole system.

Sometimes it works, sometimes it doesn't. For those of us who use multiple competing products based on different operating systems, these competitive discrepancies are obvious. Does anyone at RIM walk around comparing its products with iPhone and Android all day long? In a company such as RIM, literally thousands of employees should be forced to do this constantly.

Second, BlackBerries fail all the time, and they are a pain in the neck to restore. Half the time you need to do something, the device freezes or shows the horrific hour-glass for who-knows-how-long. This didn't use to be the case some 4-7 years ago, when most BlackBerries operated only the "core" apps such as email, but it has increasingly become a problem when consumers, despite the unfriendly app install process, start loading 30+ apps onto the devices.

In this process, every BlackBerry owner knows how to reboot the device, because you end up doing it almost every day -- which brings me to the next point: It's probably a sign of an unhealthy operating system if it takes 5 minutes to reboot, when an iPhone or even a Windows 7 laptop takes only 45 seconds.

Third, getting your BlackBerry to interact with the PC is a bureaucratic nightmare compared to an iPhone. The average consumer needs to run three separate processes: (1) Back-up, (2) Synchronize and (3) Media Sync (with iTunes). Due to its complexity and lack of intuition, most BlackBerry owners I know run only one of these three.

In contrast, getting "everything" done between your iPhone and iTunes requires only pressing a single button, once, upon which all backup, synchronization and media management occurs. Same thing for restoring your device -- one button click for iTunes/iPhone, whereas you need to take a day off from work, or sacrifice a weekend, in order to get your BlackBerry back into its original state with all the numerous apps you have downloaded and configured.

Conclusion: The tech support costs for BlackBerry are astronomical. Over the last eight years, I for one have spent on average two hours per week troubleshooting my BlackBerry for any of dozens of reasons, amounting to a small European vacation every year. Perhaps this is justified in The Department of Defense with its gigantic IT department, but the average consumer runs for the hills into the arms of the iPhone very quickly.

Bottom line: The sentiment surrounding RIM stock is as negative as I have ever seen it. This is part justified based on the problems resulting from the operating system and the various problems it causes. That said, RIM can thank the large pre-paid market consisting of people with no PC/browser experience, as well as its de-facto defense contractor status, for what will probably continue to be several prosperous quarters ahead. On balance, and in combination with the humble valuation and negative sentiment, this should prove for a strong rally in the stock as long as the new BlackBerry 6 operating system interface rolls out -- on time (by September), and assuming it's any good.

Thursday, June 3, 2010

Entering the Era of 3 Smartphones a Person

The thesis of this analysis is that there is a small but rapidly increasing group of Americans who will soon end up with not only two smartphones, but three. In most cases, this arsenal includes a Research In Motion Blackberry and an Apple iPhone or iPod Touch, and, starting tomorrow, the Sprint HTC EVO 4G as the Google Android tool of choice.

Let's first go down the smartphone memory lane. There have been three stages of smartphone evolution over the last 11 years:

1999-2004: Two devices! In the early days, employees were issued a Blackberry from their employer, but they still carried a separate cell phone. Yes, I know phone-enabled Blackberries didn't hit the market until March 2002, but it wasn't until late 2004 that Blackberry launched a competitive phone.

2005-2007: Consolidation. This was the time when people consolidated their cell phones and their Blackberries into one, and RIM saw record increases in its stock as a result. Blackberry came to totally dominate the smartphone landscape. The market effectively "regressed" to where it had been only a few years before, in the sense that people went back to carry one device -- except now it was a Blackberry instead of a Nokia or Motorola in 1999.

2008-current: The iPhone Revolution. Almost no professional can get rid of the Blackberry as the compliance-approved and superior text/email messaging device, but it became time to also carry the better entertainment device with iTunes and all the apps, the iPhone.

"Dual carry" has become almost the norm among many professionals.

Now now, in June 2010: We are beginning the "Tri-Carry" era and I will argue below that initially, this will mean that the third device will be Sprint's HTC EVO 4G for three reasons: (a) Unlimited 4G WiFi tethering, (b) the best Android experience to date and (c) a far lower monthly price than competitors.

U.S. mobile phone penetration is approaching 100%, but that is still low compared to a few other countries that are starting to approach 200% -- Hong Kong, Taiwan, Germany, Russia, Italy, the Baltic/Scandinavian countries and others. These being averages (and we know there are still many people without phone service at all), it means that many people already dispose of two or more handheld communications devices.

In most cases in the U.S. today, as I described above, this means a Blackberry -- often provided by an employer -- and an iPhone.

So what's next? Purely anecdotally speaking, at no point since the three iPhone launches in 2007, 2008 and 2009, have I spoken with so many people who are going to be in line for Sprint's HTC EVO 4G when it goes on sale tomorrow morning, June 4. Unlike the first-day buyers for a new iPhone, who already tend to be owners of a previous iPhone, the stated intended buyers of Sprint's HTC EVO 4G come from all walks of life. There are three primary reasons the demand for the Sprint HTC EVO 4G appears uniquely strong:

1. Unlimited 4G WiFi tethering for $30 per month. No other phone on the market has 4G tethering at all, and the price of $30 per month for unlimited service looks even lower today than it did before yesterday's AT&T announcement of metered pricing. People want to connect their iPod Touches, iPads and laptops with one wireless data subscription, and they strongly prefer unlimited service -- no 2 gig or 5 gig per month cap, above which overages must be paid. The Sprint HTC EVO 4G simultaneously connects eight such devices, and there is no worry about overage charges.

2. The only 4.3-inch Android smartphone on the market. With Blackberry a must-have, the iPhone being unavoidable as a result of the AppStore and the iTunes ecosystem, Android has firmly established itself as the "third OS" and many people feel they need to get first-hand experience on what this means. If you are going to make the jump, why not do it for a device with the largest screen size by far?

3. Price. The Sprint HTC EVO 4G has its service plan priced below almost all other smartphones. The $110 per month (plus tax) gives the user unlimited calling to other cell phones, unlimited SMS, unlimited data on the device and unlimited WiFi tethering to up to eight other devices such as iPod Touch, iPad and laptops. The only other 4G (WiMax) WiFi tetherable device on the market -- the Sierra Wireless Overdrive -- costs $60 per month, so this means that the $50 per month residual ($110 minus the imputed $60) buys you the biggest Android experience.

So $50 per month for the best Android device on the market? It's hard to resist, given that most smartphone plans cost more -- and they don't have unlimited 4G WiFi tethering.

Here is the bottom line: There is a stratum of the U.S. consumer who is already carrying two devices -- Blackberry and iPhone (or the WiFi-only iPhone experience in the form of the iPod Touch). Sprint's aggressive pricing of the ONLY 4G smartphone-capable of WiFi tethering to up to eight other devices with unlimited monthly service means that we will soon be seeing people carrying a third smartphone to satisfy the modern "iPad Generation" person's needs.

Watch Sprint sell out of the HTC EVO 4G fast tomorrow morning.

Wednesday, June 2, 2010

AT&T Metered Plan Good for RIM, Clearwire

In a somewhat stunning about-face from the recently implemented unlimited data plan for the iPad, AT&T announced the effective end to unlimited data. Gone are the days when you could stream Netflix to your cellular device such as Apple's iPhone or iPad 3G for a fixed monthly fee -- at least on the AT&T network.

You see, this pricing action by AT&T will now serve to highlight Clearwire's superior spectrum position, which enables it to offer unlimited data service for $60 a month when using the Sierra Wireless Overdrive "mobile WiFi hotspot" and $30 when using the equivalent functionality on the HTC EVO 4G, which launches in Sprint stores on Friday.

You want your iPhone or iPad with unlimited data? Just pair the iPhone iPad or iPod Touch, with either the Sierra Wireless Overdrive or the HTC EVO 4G, and you're covered. Not only do you have a plan that was better than the new expensive metered AT&T data plans, but your plan remains even better than AT&T's old plan, because there is no 5 GB cap per month.

This is the result of Clearwire's superior spectrum position, which means it has the capacity to offer users more data consumption without hitting the ceiling in terms of capacity. Think of Clearwire as offering a freeway with 10 lanes in each direction, compared with one lane in each direction offered by AT&T. There is just no remote comparison.

Eventually, of course, Clearwire and its 57% majority owner Sprint also will be forced into some form of a metered data plan, but this could take a year or two or more. It just takes a lot longer to fill up a 10-lane freeway than a one-lane freeway. In the meantime, this is a huge gift to the Sprint and Clearwire marketing departments.

The other main beneficiary of this AT&T pricing action is BlackBerry maker Research in Motion, whose devices use complex compression techniques to reduce the amount of data going across the network. Claims vary, but generally it is thought that a BlackBerry consumes three to five times less data to accomplish many tasks, compared with a device such as iPhone or Google's Android.

Practically, this means that a BlackBerry often consumes only 100 to 200 MB or so per month on average, whereas an iPhone or Android may consume around 500 MB to 1 GB per month. These are average numbers I have heard from many people in the cellular operator industry over the last six or so months. To the extent that the consumer understands this, including education by the carrier, this will be a huge boon to the sales of BlackBerry from the perspective of people paying less for data, compared with iPhone and Android.

No longer will everyone pay $30 a month. A BlackBerry user could pay less and not face overages, whereas other smartphone users may end up paying overages. Certainly many smartphone users consume more than 2 GB per month and almost none of those are BlackBerry users.

This AT&T pricing action also plays into what AT&T's chief consumer boss, Ralph De La Vega, said during his presentation at the CTIA trade show in March, when he talked about a new smartphone browser consuming some 2.5 times less data than current smartphones. It seems that what he was talking about was the new upcoming WebKit browser from BlackBerry, which could be unveiled as early as this month and be in stores no later than September.

Sunday, May 2, 2010

Eight Economic Problems and Eight Solutions

This was previously posted on on or before 2008-04-05:

In recent months, numerous people have asked me: What's wrong with the economy, and how can we turn it around? This essay I educate you, once and for all, about the eight main economic problems of today, and their eight solutions, so save this piece and forward to your friends - especially those who are running for office.

There are several problems with the economy. Some are short-term, others are long-term. Some have painful fixes, and some fixes are painless:

1. The falling value of the dollar. Long-term, the value of anything is a function of only three factors: supply, absolute demand, and relative demand to hold. In today's case, the two problems are with supply and relative demand to hold. The supply side is straightforward, with the US central bank simply creating too many dollars. It does so to finance the US Federal budget deficit as well as lending the money to banks and other credit institutions. Relative demand to hold (dollars) is a function of expectations of future economic and political developments. In brief, the market is believing that the US will suffer from higher taxes and more regulations, leading to less goods and services produces, and thus lower demand for dollars.

2. Higher prices on energy and other commodities. This is a similar case to the dollar, but in reverse: Supply is not growing much, but both real demand and relative demand to hold, are both going up. Supply is constrained because it's almost impossible to profitably increase the quantity of things such as energy. Regulations and litigation have caused the US to build not a single on-shore oil refinery or nuclear plant in about 30 years. Demand is growing because countries such as India, China and Russia are growing rich following low taxes, relatively low regulation in many areas, and privatization. Besides, didn't many Americans - including many environmentalists - argue for sharp increases in energy prices so that people would use less energy? At least according to them, $4/gallon gasoline must be a big improvement over 10 or 20 years ago, when the price was close to $1. You can't have it both ways...

3. Too high taxes. All sorts of businesses are leaving the US, incorporating anywhere from Macao to Ireland and Latvia because US taxes have become some of the highest in the world. US corporate income taxes are the second-highest in the world, after Japan. Many countries have zero capital gains taxes, whereas the US is at 15% and Hillbama proposing increases to 28% or 39.6%. The top income rax rates in Albania, Estonia, Hong-Kong and Russia are 10%, 13%, 15% and 17%. If you live in Manhattan, federal+state+local income tax is 49%. Small wonder the US economy is depressed with people fleeing abroad. Tax revenue has gone up for almost all of the last 67 years, with the biggest increases in the last 5 years. 70% of income taxes are paid by the top 5% of income earners. 50% of all taxes are paid by the richest 1% of taxpayers. In other words, the vast majority of taxes are paid by a few people at the top, who in some cases are in the process of moving their money abroad following the (recent and expected future) tax increases here at home, in combination with tax cuts abroad.

4. Too much government spending. As high as taxes have gone through the roof, they have not kept pace with spending. This year, the Federal budget is $3.1 trillion, or over over $10,000 per American. Of this amount, approx 20% goes to the department of defense. Most of the other 80% goes go social security, medicare and medicaid, plus gigantic government bureaucracies that make up new rules and new forms to fill out. The government employs literally millions of bureaucrats, whose jobs are to make it as difficult as possible to start and operate a business.

5. Too many regulations. Many US industries are very heavily regulated. It is illegal for FedEx and UPS to deliver first-class (i.e., regular) mail. Affirmative action laws add bureaucratic cost. Sarbanes-Oxley adds billions in cost and forcing companies to list their shares in London and Hong-Kong instead of NYSE and NASDAQ.

6. Too many lawsuits. US corporations spend more money on legal fees than on research and development. Do you think this is the case in India, China, Ireland and Lithuania? Of course not. A doctor's insurance is now over $300,000 per year. And you wonder why health care - and many other things - are expensive?

7. Too little savings. Americans save a very small portion of their income. Investment can only come from postponed consumption, so to make up for the difference we must borrow or receive direct investment from abroad. Americans don't save enough money because they believe that the big government welfare state will bail them out when they have a problem (social security, medicaid, medicare, disaster relief after a hurricane). In addition, we tax savings more than in other countries with higher rates on capital gains, interest and dividends. This party is all coming to an end as foreigners may become unwilling to lend to Americans or fail to invest here. Hence a key reason for the fall in the dollar's value.

8. Too much property owned by the government. Why is 92% of the land in America owned by various levels of government? Who owns most forests? Who owns 40 miles of beachfront between Orange County and San Diego? Who owns the three airports in New York? The US Post Office? The US is normally considered a capitalist country, and the US President is the leader of the free world, but fundamentally the US economy has more in common with the old Soviet Union and Red China under Chairman Mao, than most people realize. High taxes, high spending and high regulations are measurements of the degree to which a country is a socialist country, but so is the degree of government ownership of the most basic means of production: land.

The solutions to these eight problems are as follows:

1. How to stop the value of the dollar from falling? Print less dollars.

2. How to stop energy and other commodity prices from increasing? See (1) plus allow for new/more supply of energy by allowing people to build nuclear plants, oil refineries and drill for oil. But then again, some have been arguing for higher energy prices for decades, so...

3. How to deal with people and companies fleeing the country to lower-tax places? Cut taxes here at home. We should not have higher taxes than Albania, Estonia, Hong-Kong, Russia and Ireland. In addition to cutting taxes, make them simple by abolishing deductions and not more difficult to figure out than the tip on your restaurant bill.

4. How to deal with runaway government spending? Combine medicare, medicare and social security into one simplified - and much smaller - program called "welfare" which will be there to keep people from starving and perhaps freezing to death (simple solution: put people on buses to Florida, where it's warm and there are plenty of oranges growing on the trees). This would cut government spending by more than half, from $3.1 trillion to just under $1 trillion, cutting the tax burden on a family of four from $40,000 per year to approximately $12,000.

5. How to deregulate? Abolish all laws that don't interpret and enforce private property rights.

6. How to get rid of costly lawsuits? This one isn't lacking in complexity, but basically one key part of the solution is to have the losing party in a lawsuit pay for the other party's legal fees. That alone would probably cut over 90% of lawsuits.

7. How to get people to save and invest more? Cut taxes on saving and investments to zero. Also, by abolishing most forms of welfare programs, people would have a greater incentive to save. This would also attract foreign capital.

8. How to get rid of too much governmnent property? In the finest tradition of Margaret Thatcher and Boris Yeltsin, privatize! They turned two extremely poor economies into economic powerhouses not only by cutting taxes (which was extremely important) but also by selling/giving government property to the public. The US just privatized $20 billion worth of radio spectrum for wireless Internet in March 2008. Bravo! Now go sell most of the 92% of land it owns in this country, the US Post Office, airports, etc.

In summary, all of these cures to our eight economic ills are mainstream Economics 101. Generally, no serious economist disagrees with any of this. It's just that politics itself has its warped biases to do all the bad things. That's why so many economies around the world are operating at dramatically sub-par levels of performance. We may never get the optimal economic system installed - unless I am given dictatorial powers - but I still hope that someone will listen and do at least something in the right direction. The eight points above would do most of the trick.

How Socialism Is Anti-Green

This was previously posted on on or before 2008-04-02:

On the one hand, it is remarkable that despite the sharp increase in energy prices and the global warming concerns, the major candidates for the highest office are not proposing meaningful solutions. On the other hand, it's not surprising at all - this is the way almost all issues of seriousness are treated in Washington, DC.

Sometimes, the obsacles to renewable, cheaper and cleaner energy reside not in Washington, DC, but in state and local governments. Ted Kennedy's opposition to wind power on Martha's Vineyard is one famous example.

Another good example is solar power, at least in the state of California. It takes 69 signatures from 8 different state and local bodies in California, in order to be allowed to install a solar panel on one's roof. This process takes an absolute minimum of 6 months to complete. And solar power is an alleged top priority to the California government?

Installing a few solar panels on the roof should be a no-brainer decision for most people, but who can take 6 or more months off from work to chase down 69 bureaucratic signatures from 8 government bodies? The solution to this problem is of course to deregulate: No government permit or signature should be needed in order to put up a solar panel on the roof.

As Ronald Reagan said about the socialist prescription for the economy: "If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it."

Another thing that's been impossible to do for not only 6 months, but 30 years, is to build a nuclear plant in the U.S. It is widely known that nuclear energy is the most efficient technology available today on a sufficient scale to be able to substitute all coal-fired energy plants as fast as we can build them. We could build so many of them that we would make plug-in hybrid and all-electrical cars practical, reducing our dependence on oil dramatically.

But we haven't built a single one of them in 30 years. Why? Because the government has allowed people to file lawsuits against those interested in building them. In other words, the government has given the trial lawyers total veto power to prevent a cleaner environment and lower energy prices.

Again, the solution here is simple: The government needs to cease putting up this total obstacle against the building of clean energy. It needs to inform the trial lawyers that, sorry, a cleaner environment and the most rapid reduction in dependence on oil is a top national security priority, and you can't sue to stop it. In other words: John Edwards, you're out of business - go do something useful instead.

Interestingly, there are several very small U.S. communities, ranging from 50 to 5,000 people, who have continued to see nuclear plants being built to serve them, even in the last 30 years. They're called ships and submarines of the U.S. Navy. Speaking of 30 years, a U.S. aircraft carrier is not only 4.5 acres of sovereign U.S. territory, but its two nuclear plants can also operate for 30 years without refueling. They've been running like this for at least approximately 50 years now, and never an accident. And never a lawsuit.

Cleaner and cheaper energy should be a national security imperative. The ways to get there are to abolish the crazy socialist government policies of making it as difficult as possible to deploy solar power and nuclear power. In addition to lowering energy prices and improving the environment, this would have the additional side benefit of getting the Abdoullahs out of the Mercedes and onto the camel again.

Political speeches are filled with rhetoric about "hope" and "change" but never a sentence about abolishing the socialist obstacles to solar power and nuclear power. This is why it is so sad that the next President of the U.S. looks to be just another politician, as opposed to a businessman who has experience from the real world.

Oh, How Easy To Forget...And How Quickly Priorities Can Change

This was previously posted on on or before 2008-02-12:

Times go by, and even within a generation, people forget major events.

16 years ago, Yugoslavia was in the middle of a civil war that broke up the country into at least a half dozen countries.

26 years ago, the United Kingdom declared war on Argentina and sent the Royal Navy to war over The Falkland Islands.

36 years ago, Arab terrorists took the Israeli Olympic delegation at Munich hostage and proceeded to murder all of them. A year later, all of the countries surrounding Israel including Egypt and Syria, proceeded to attempt the invasion of Israel.

46 years ago, the US failed its attempted invasion of Cuba at The Bay of Pigs, which was followed by the Cuban Missile Crisis when the world came minutes away from total war.

56 years ago, the US and the UN were fighting a Chinese-assisted invasion by North Korea of South Korea, and General MacArthur threatened to drop a nuke on the enemy, at which point President Eisenhower fired him.

66 years ago, the US had just declared war on Germany, Japan and Italy, and proceeded to go all the way to victory after 450,000 Americans fell.

76 years ago, Adolf Hitler was leading the election campaign for the German National Socialist Workers' Party (Nationalsocialistische Deutsche Arbeiterpartei, or NSDAP), in which he won and became head of the government. The only major world leader who protested and warned that this was bringing destruction to the world was Winston Churchill, an obscure right-wing back-bencher.

86 years ago, the US was experiencing unprecedented economic growth, but the German government thought it was harmless to increase the money supply, so it started printing money, which generated hyperinflation, followed by a depression and 40% unemployment.

96 years ago, the US government was debating 3 new policies that were implemented the following year: (a) prohibition of pot/drugs, (b) introducing the income tax, which previously had not existed and (c) requiring the use of passports for international travel.

Sen. John McCain's very vigorous mom Roberta was born 96 years ago, when drugs were legal, there was zero income tax and passports didn't exist.

Many Americans have conveniently forgotten these historical events. What's more surprising is that some Americans now also see September 11, 2001 - only little over 6 years ago - as a fading memory.

In this context, you may have missed it in all the coverage of Super Tuesday, but Director of National Intelligence Mike McConnell gave his annual national security threat assessment to the Senate Intelligence Committee last week.

For anyone who still doubts that the United States and our allies are in a fight for our existence, Director McConnell's testimony should put those doubts to rest.

Here's part of what he said:

"Al Qaeda is improving the last key aspect of its ability to attack the U.S.: the identification, training, and positioning of operatives for an attack in the Homeland. While increased security measures at home and abroad have caused al Qaeda to view the West, especially the U.S., as a harder target, we have seen an influx of new Western recruits into the tribal areas since mid-2006. We assess that al Qaeda's Homeland plotting is likely to continue to focus on prominent political, economic, and infrastructure targets designed to produce mass casualties, visually dramatic destruction, significant economic aftershocks, and/or fear among the population.

We judge use of a conventional explosive to be the most probable al Qaeda attack scenario because the group is proficient with conventional small arms and improvised explosive devices and is innovative in creating capabilities and overcoming security obstacles. That said, al Qaeda and other terrorist groups are attempting to acquire chemical, biological, radiological, and nuclear weapons and materials (CBRN). We assess al Qaeda will continue to try to acquire and employ these weapons and materials -- some chemical and radiological materials and crude weapons designs are easily accessible, in our judgment."

What priorities will change after the next terrorist attack? Who will be blamed for failing to stop it? Will we blame our unguarded borders against Mexico and Canada? Will we blame the lack of biometric IDs? Will we blame the insufficient ability to wiretap suspected terrorists? Will there be calls to do what we did with the Japanese during World War 2? (internment camps)

I don't know what will be the precise dynamics in the media spin, but what I do know is that the political debate will shift dramatically at that point, and instantaneously, suddenly reminding us of 9/11 and various other turning points in history. We will be "shocked" to find out that we had become complacent and hadn't urgently addressed so many "obvious" holes in our security, such as our unguarded borders and lack of terrorist tracking.

The Greatest Generation vs. The Girlie Man Generation

This was previously posted on on or before 2008-02-10:

American tradition is steeped in the history of rugged individualism. In social life, kids were taught to not whine or complain, but to focus on serious things and work hard. In economic life, kids were taught that rewards would come to those who do the right thing, and that there was no government hammock for those who underperform. In national security, kids were taught that America will fight for freedom - not surrender to those who are plotting to kill or enslave us.

We used to call the combination of rugged individualism and common defense of our freedoms the hallmark of The Greatest Generation - those Americans who first went to war against Japan, Germany and Italy on December 8, 1941 and then built up the middle America we inherited several decades thereafter. This was possible for a combination of the three driving forces of modern American civilization: Social morality, economic freedom and defense of liberty against the its enemies.

And so it was that America became - by far - the cominant economic power in the decades following World War 2. In addition, we fought wars in Korea and Vietnam, trying to protect small countries who were on paths to freedom, against communist invasion, enslavement and genocide. A third war, following the Iraqi invasion of Kuwait in 1990, is seeing the second tail of clean-up work today.

Almost 67 years after we declared war on Japan, Germany and Italy, I am sensing that the stoic rugged individualism of The Greatest Generation is giving way to something very different. It has been brewing for years with "sensitivity training" at work and "political correctness" at school. Protected classes and subjects have been created, about whom you are not allowed to speak in a certain way for the fear of "offending" someone. Sort of like the Danish cartoons about Mohammed.

We see this most recently in the "celebrity"-crazed culture, where movie stars, singers and other entertainers are suddenly not only endorsing politicians - but also getting significant attention for it. In the past such endorsements would never have happened, and if they did, nobody would take them seriously or give them much attention.

It is a poor reflection of the state of American culture when instead of proposing substantive policies, contenders for the highest office in the land think they can win by surrounding themselves by the people who are featured in the tabloids normally found by the supermarket check-out counters. Supporters of such candidates seem rarely - if ever - capable of identifying any substance advocated by these candidates, but rather such specifics are clouded and cloaked in "change" and other similarly meaningless phrases.

It is a sad statement on the direction of our American civilization when the mentality of our political process has been transformed from the rugged individualism and non-whining of The Greatest Generation, to the whining political correctness - dressed in Hollywood celebrity garb - of this new Girlie Man Generation. So therefore, the biggest question determining the outcome of the 2008 election will be whether The Silent Majority of which Richard Nixon spoke so eloquently, has been transformed from Greatest Generation to Girlie Man.

Why the classics are classics

This was previously posted on on or before 2008-01-29:

Proper schooling includes the study of the things in life that have withstood the test of time. This includes objects of art (Leonardo da Vinci), literature (Shakespeare) and politics (the Declaration of Independence, the Constitution). These are items in life who are classical because they are each fundamental in their own disciplines.

With the most interesting political campaign in a generation in full swing, it is worth reflecting on the extent to which what is being discussed in these political debates will go down in history 25, 50, 100 or more years down the road as "classical" - or important in the eyes of history.

Let me suggest that at this point in the political season, as interesting as the fights may be from a multiplicity-of-candidates perspective, the actual content of the issue disagreements isn't fought in a particularly classic way. What do I mean by that?

First, let's define what is the classic debate in politics. It is pretty simple, actually. Everything that is done in the world, every dollar that is spent, is either done so by someone who is in charge of himself (or the family/children), or by someone who has taken the resource or forced it to be directed in any other (involuntary) way. That's the government, which taxes, spends and regulates. For this reason, the classical debate in politics is very simple: Should the government tax/spend and/or regulate something, or should it not? If the individual is in control of his property, it is capitalism, but if the government regulates it and/or taxes/spends it, the thing in question falls in the column of socialism.

Almost every viewpoint in politics can easily be analyzed in this manner - capitalism vs socialism. It used to be a big geopolitical struggle between the free world and The Soviet Union, but the geopolitical struggle has now been replaced by the desires of radical islam and of ever-growing government at home.

In this context, the current debate of taxes and spending is pretty pathetic. Let's start with Obama and Clinton. They are both in favor of raising Federal income taxes to well over 40%, raising the capital gains taxes from 15% to well over 40%, and probably also raising the corporate income tax from 35% to that over-40% rate. In other words, doing their best to make sure that the value of all companies on the stock exchanges will see their values tumble dramatically. By reducing corporate profits, and the share of those profits that go to their owners, it is a most basic corporate finance iron law 101 that the values must decline. Hence, a major reason for the stock market decline over the last couple of months. If there is a chance Obama or Clinton may actually raise those taxes in 2009, better sell those shares now before they go down another 20%. This is pretty simple - and prudent - risk management by those who own shares.

The most baffling point about the proposed Clinton/Obama tax hikes is their concurrent reaction to the recent market downturn and fears of recession. Both candidates are in favor of immediate tax breaks to avert a recession!

Hmmm, the economy is going South because of the fear of 2009 tax hikes, so therefore the same people who are proposing those tax hikes now want immediate tax cuts! Why doesn't anyone call these deeply self-contradictory candidates on this evident inconsistency? It should be the first question in every interview/debate.

Unfortunately, the current crop of Republicans are not doing too much better in these departments either. While they pay lip service to avoiding tax hikes, and in some cases propose some (mild) tax cuts - such as a cut in the Federal income tax rate from 39.6% to 30% - they are fairly silent on specifics with respect to overall government spending. This year, the Federal government spends approximately $3 trillion, or $10,000 for each of us 300 million Americans. That's up dramatically from 1962, when the Federal budget was $100 billion, or some $500 for each of approximately 200 million Americans.

None of the leading Republican contenders - McCain, Romney, Giuliani or Huckabee - have the courage to spell out specifically what - if anything material - they would cut from this giant $3 trillion bureaucracy. None of them has proposed abolishing a single government department, as far as I know. None of them points this out in socialism vs capitalism terms. All of them have bought into the principle that big government is here to stay, only that it should grow at perhaps 2% per year instead of 7% or whatever.

What we are left with here is therefore the cowardly Mexican standoff between Republicans and Democrats: Clinton/Obama are unwilling to accurately describe their plans for taxing and spending as a step into a future of socialism, and McCain/Romney/Giuliani/Huckabee are unwilling to admit that they are unwilling to change the status quo by anything but a rounding error.

There is therefore nothing classical about this fight at all.

Rather, the current in-fighting in the two parties focus almost exclusively on personalities and resumes - not actual policies in the context of the eternal struggle between capitalism and socialism. Someone is for "hope" and "change", whereas someone else is for "experience" and "judgment." But is someone willing to take a stand for and against socialism and capitalism?

Not any of the leading candidates, that's for sure. With some degrees of difference in general direction, they have all basically bought into the model of big government, and the debate is about fine-tuning its size. Granted, it is important for the future of the stock market, economic growth and prosperity whether taxes are at 8%, 28% or 48%, but it doesn't address the issue of the very fat $3 trillion annual Federal budget.

There is only voice pointing out that the Emperors have no clothes in terms of the narrow scope of the debate: Ron Paul. He points out that almost all of our $3 trillion budget is unconstitutional and socialist. The original constitution spells out that the only legitimate functions of the Federal government are the maintenance of a judiciary and a defense against foreign enemies. If we had a constitutional government today, it would cost somewhere well below $1 trillion, or well below $3,333 for each of us 300 million Americans.

Example in point: The framers of the constitution had as a key objective to make sure that the government does not get its hands on the education of our children. "Public" (socialist) schools didn't exist until all of the founders of our constitution had died, in 1848, coincidental with Karl Marx's publication of Das Kapital. I'm not a conspiracy theorist, but I couldn't help noticing...

Yet today, the Republican candidates for President (except for Ron Paul) don't propose the abolition of "public" schools. Same thing for other big budget items such as social security, medicaid and medicare. All these things are, in fact, socialist programs and therefore not-so-coincidentally unconstitutional.

So there you have it - today's political debates have been reduced from comparing the classical differences between socialism and capitalism, to emotional nonsense such as whether we need a President who is for "change" and claims to be able to "unite the country." How do you "unite" the views of the person who will see a huge tax hike to pay for some government program with the bureaucrats and the alleged beneficiaries of such a program?

America needs a cold shower of hard and fundamental choice: Should we follow the constitution and dramatically deflate the size of the government budget and its millions of regulations, or should we march forward into full-fledged socialism? We know where Obama/Clinton stand, although they dare not say it. Unfortunately, we also know that McCain/Romney/Giuliani/Huckabee aren't proposing much more than "holding the line."

The stock market has been voting in recent months, and its verdict isn't all that rosy, as it starts to discount the probability of a leap into more socialism in 2009 and beyond. In the meantime, the rest of us can also vote our conscience - Ron Paul.