Tim Oren's Due Diligence

Note From A Friend in Mexico City

An e-mail from an acquaintance south of the border includes the following:

"Information is confusing and not helping at all. If we extrapolate the (real) cases we know of and the information we are getting it does not make sense. We should have more cases registered."

That fits with what I've been guessing: The only way to reconcile the apparent lethality of the swine flu outbreak in Mexico with the lack of same outside the borders is if there are a lot more unreported minor cases in Mexico. The official Mexican statistics suggest a 1/10 fatality rate, but they seem to be based on patients who present themselves at hospitals or other medical facilities, as opposed to those who spend a miserable few days stuck at home. Otherwise, you've got to believe the virus somehow magically becomes less virulent when it crosses the border.

On the good side, that suggests an actual mortality rate much less than 1/10. On the bad side, it also suggests there's a much larger disease pool in Mexico than reported, with correspondingly lower changes of controlling its spread - if those chances ever existed.

(A couple of good blogs for following the flu outbreak are Effect Measure and Aetiology.)

Range Report: %$#*@!!!

One hobby I don't post about very much is shooting. One of the firearms I own is a Kel-Tec SU-16B, a .223 semi-automatic rifle. With a short and light barrel, it's not exactly a tack driver, but it's fun to shoot and works well for the tactical rifle matches that I was shooting before my accident. The rifle is light in part because it has a lot of plastic components, and that's what leads to this story.

I've gotten to a recovery stage where running around and throwing myself prone on the ground, firing a few shots, hopping up and doing it again sounds feasible - that's the essence of a tactical match. I thought I'd take the little rifle out to the range and put a few rounds through it to get reacquainted before trying a match again.

After I'd fired a few shots I leaned over to check the results via my spotting scope, whereupon the rifle folded up in my hands. That alone is not too alarming. The SU-16 is designed to fold for shipping and storage. The upper action and lower stock parts are held in place with an assembly pin, which has been known to work its way loose.

But when I checked for that problem, I found something else:

The back of the plastic upper had broken away, exposing the rear of the bolt carrier, and shearing off the connection to the assembly pin that should be holding everything together - you can see the jagged bits that shouldn't be there in the photo. This wasn't a dangerous accident - the pressure from cartridge detonation is confined forward of the bolt - but I was obviously done for the day, leading to this post's title. Rifles, like guns, should not go limp in the middle of the action!

So now I'll find out what Kel-Tec's lifetime warranty is actually worth. And I'll post a report here for the benefit of other shooters who may want to know the answer, courtesy of Google.

The Double Nickel

No, I am not talking about speed limits, I'm talking about my age. Yesterday was my 55th birthday.

It's the age at which I'd always envisioned pulling back on work, and spending more time seeing the world while I can. My misadventure of last year provided some pointed emphasis to that 'while I can'.

And it's certainly an interesting time to be contemplating the issue. If you count up the economic outlook, the commoditization of computing, the sorry state of venture capital, the apparent desire of the Obama administration to penalize those who succeed anyway, my disgust with the California government, and the more than occasional desire to chuck it and 'go Galt', some days it seems like all the arrows point in the same direction. But then again, I get bored rather quickly, so the odds of bowing out completely aren't very high. It will be an interesting year.

Microsoft's Netbook Dilemma

So Microsoft's put out a crippled 'Starter Edition' of Windows 7 that can only run three apps at a time, intended for 'netbooks'. Cost to the netbook OEM: $15. While some think this is not too big a deal from the user's point of view, a look at the market dynamics behind this announcement reveals serious problems for Microsoft. Consider the issues from the viewpoints of Microsoft, the netbook OEM, and the end user:

Microsoft

Microsoft gets $15 for a copy of the crippled Windows 7. We don't know what pricing it negotiates with big OEMs for full versions, but we can make an informed guess. Here's some 2007 pricing for the so-called 'OEM bundles' of Vista that leak out of the manufacturer channel and into the end user market. Take the 'Home Basic' version then at $99 and cut it in half to reflect markup along the way from leaky OEM to final buyer. That suggests that MSFT might be getting a little less than $50 per copy of the most limited Vista from its OEMs. Call it $45 to make the math come out neat.

So Microsoft is taking a 3x haircut when moving from Vista on a full laptop to 7 on a netbook. It may have no choice - see below - but Redmond simply can't afford to let the netbook price point erode what it can extract from the makers of full laptop and desktop PCs. There must be some sort of functionality differentiator between them. Limiting the number of launches is simple and doesn't involve the compatibility and regression testing issues of limiting the APIs or other gross functionality.

The OEM

While I've not seen the BOM cost analysis on a netbook, I have to imagine it's brutal. Every netbook product manager is fighting a deflating market on one side, and tough parts supplier negotiations on the other. Given the current economy, you know which is winning, but there is a hard limit to what you can squeeze out of a supplier. Each has a real cost of goods (COGS) because it produces a physical product. They might be willing to price below cost at the start of a big contract in the expectation of cost reductions due to volume and experience. But if the parts manufacturer finds itself running at no or negative margins, the OEM will find its supply channel drying up unexpectedly.

On the other hand, Microsoft is known to have essentially zero COGS in its product. After development costs are sunk, each incremental copy of Windows is essentially free. Under heavy market pressure, the product manager will turn to Microsoft and try to take advantage of this essential difference between virtual and real goods, knowing that MSFT will not go upside-down on its costs.

Whereupon the differing market expectation for netbooks cuts against Microsoft. By its very definition, the device is to provide portable access to the net, not necessarily a full Windows capability or 'experience'. The "it's not a real PC without Windows" boogieman already has one foot out the door. Linux or another embedded platform is a realistic option for a netbook. Given the open source option, and the presence of its own legacy XP product, Microsoft is likely having to accept close to a real market price for its OS. As this astute observer notes: "Windows only commands a $15 premium over free software on low end PCs." That's the market price for device-based compatibility with the conventional PC world.

The User

It's user expectations that are driving this situation, and where Microsoft's dilemma is most clearly exposed. In the past I've discounted the aspirations of 'almost PC' products to knock the Wintel world off its perch. See my trashing of the ludicrous OLPC for an example.

One of the heads from that old post is appropriate here: "Cheap Means Vanilla". Cheap is obvious - netbooks are nothing if not cheap compared to a conventional design. 'Vanilla' represents the default choice, the low-cost perennial volume leader at the ice cream parlor. Vanilla has heretofore meant Wintel.

The evolution of the word 'netbook' from a product name to a generic term shows that there's a new vanilla in town. We have a rough market consensus around a medium-size portable device whose function is primarily access to Internet based services, as opposed to local functionality.

In the new ice cream parlor, the price uplift for chocolate chips - device based Windows compatibility - is $15. The old ice cream stand - Wintel - is still in town, but what it can charge is now going to be limited by the competitor. Microsoft is fighting a rear guard action against that change, with all it implies for revenues and margins. Fire-walling against erosion by crippling netbook Windows functionality makes sense in this context, the first horn of the dilemma.

Reducing functionality, however, has the side effect of making the new ice cream flavor even more distinct. If it's a PITA to run extra apps on the client device, then it will be a natural tendency to push that functionality into the network as well. One of the ambitions of platform providers has always been to control the 'user experience' or, if you want it to put it more charitably, to be seen to deliver the most value on the device. The mere existence of netbooks shows that Microsoft is in retreat on this front. Crippling Win7 on netbooks represents Microsoft deliberately reducing its share of value and user experience even further.

This obviously leaves room for Google and others to provide the functionality that would have come from the 4th app and onwards via the browser - making the new vanilla even more tasty. And it further shifts the model for interaction with the Wintel world from device compatibility to data compatibility implemented on the net, weakening the total Windows and Office franchise.

This is the second horn of the dilemma, the one that will now gore Microsoft: Hastening the further differentiation of netbooks from the Wintel world.

(Update: See also this nice analysis, which arrives at similar conclusions for the Windows franchise through different but consistent reasoning.)

The Roving Eye: Facebook's Down Round, Print Cartel?, Rants of the Week, Government Or Mob?

Did MSFT get a ratchet? After peddling shares to Microsoft at a $15b valuation, the growing but still money-losing Facebook needs more funding to keep the boilers stoked. Problem is, the best valuation they're being offered is $2 billion.

Party like it's 1978. Newspaper employment of reporters is back down to 1978 levels, another way in which we've returned to the Carter years. (HT: American Digest) Meanwhile, a bunch of the MSM's best and brightest have founded Journalism Online, yet another attempt to wring micro-payments from the Web, this time by getting the press to move all of their content behind one pay wall. As I recall from econ, that's called a cartel, and it's got a few known problems with defections when there's an actual surplus of the commodity in question. OTOH, having publicly called for the extinction of the propagandizing MSM by market forces, I applaud this latest effort. You go!

Tell us what you really think Dept. Presented without further comment: Bill Whittle. Nick Gillespie. And this older rant from Andrew Klavan has become a catchphrase around our household as we've watched the MSM and political class react to the Tea Parties. Shut up!

Chilling effects? And speaking of our beloved media, last week featured CNN 'reporter' Susan Roesgen debating and insulting Tea Party protesters in Chicago, in a performance captured by both the network's own cameras and those of the 'Founding Bloggers' crew. It was of course YouTube'd immediately, and became the subject of derision and embarrassment to both the reporter and the network. Their reply: Shut up! Err, actually it was to to issue DMCA takedown notices against the clips. Having blatantly dropped its pose of 'reporting' on the story, and become part of it, CNN has little grounds to claim that their material is not subject to fair use as part of the debate. Patterico's article challenges CNN to sue him - that could be an interesting case if a reasonable judge doesn't throw it out immediately.

Welcome to the Family. A bit back I suggested that banks repaying TARP money would be a good thing. Not so fast! You have to have a talk with Guido Tim Geithner first. It becomes more and more obvious that this is about government power, not saving the banks. I loved this comment in response to a post I wrote at Wind of Change about what's missing from the Tea Parties:

"...i'd love to see the WF [Wells Fargo] chairman call a press conference and just turn it into a huge check signing ceremony. Thank the government (thanks for nothin) and announce it a big victory on the road to economic recovery. Then make a little aside saying the cynics believe the government might not want the money back and might use audits as a punishment, but he doesn't believe it and will happily keep the public informed of how business is going."

Any bank with the cojones to do that will make me a customer for life.

ORCL + JAVA < IBM + JAVA

So after I wrote favorably about a possible Sun acquisition by IBM, it's Larry Ellison and Oracle that actually consummate the deal. How about them apples? The technical fit-togethers are fairly obvious, but it's the market and business model issues that are going to be problematic. Looking at the major components of Sun's portfolio:

Hardware

Sun had been pushed into a niche building high-end servers at a low volume, not a sustainable position. IBM has other hardware lines, and has a long track record at being able to juggle their customer bases and arrange convergences or divergences to suit. Oracle has no other hardware business, and in its hands the business remains isolated, still beset by solutions built on arrays and clouds of lesser, but high volume servers. Oracle has software in its bones and that line of business will not be compromised to sustain a hardware line. Conclusion: Sun's server line dies a lingering death.

Solaris

Oracle has no existing operating system line, aside from its occasional desire to have no OS at all. Solaris' revenue opportunity is tied strictly to Sun's hardware, and there is no possibility to widen that footprint given the presence of Linux. Conclusion: Solaris dies a lingering death as well.

Java

In spite of changing its stock symbol to JAVA, Sun never figured out how to directly extract revenue from its "dangerous watering hole". Oracle, Sun and IBM were of course all part of the 'Rebel Alliance' that pushed a combination of net-based services and browser-based clients as the antidote to Microsoft. Large portions of that vision are winning, and even the 'network computer' is coming back in other guise as 'netbooks'. Java failed as the client side part of the alternative platform, but found a solid niche in applications on the server side. That role is synergistic with Oracle's server side database and applications position, and it will now have a stronger voice in Java's direction. That begs the question that Java's users will now be asking: Will the semi-stable détente among Sun, IBM and other Java supporters remain stable when Oracle takes over the Sun position, or will Java become a strategic weapon between IBM and Oracle. Conclusion: Outcome unclear, but a few upside bets on Python and Ruby might be warranted.

MySQL

Here is the heart of the matter. Oracle's mainstream database business has long been threatened by price and margin erosion, first from Microsoft and later by open source alternatives, particularly mySQL. IBM faced the same threat to DB2 (and other parts of its software business) and responded by shifting much of its revenue model to services, a business that remains fairly healthy today, in spite of recession (PDF). Oracle, too, has been working to establish a services model, but according to its 2008 10-K:

"Our services business, which represented 20%, 21% and 20% of our total revenues in fiscal 2008, 2007 and 2006, respectively, has significantly lower margins than our software business."

But where has Oracle's strategic weight actually been applied? From the same filing:

Over the last four fiscal years, we have invested billions of dollars, including $9.4 billion in fiscal 2008, to acquire a number of complementary companies, products, services and technologies such as BEA Systems, Inc. in fiscal 2008, Hyperion Solutions Corporation in fiscal 2007, Siebel Systems, Inc. in fiscal 2006 and PeopleSoft, Inc. in fiscal 2005. We believe our acquisition program supports our long-term strategic direction...

Oracle has tried to 'thicken' its application layer, moving from raw database to applications servers to fully configured solutions, and this effort has overbalanced its services initiatives.

The market conflict between high-margin, high-capabilty software and high-volume, commodity and OSS based solutions still exists, and Oracle has now brought that conflict in house by acquiring MySQL. If Oracle has become serious about shifting its strategic base from one side to the other, this is a good first move. The more usual outcome is that an acquisition which threatens a long established business model of the buyer is encysted and eliminated by the corporate immune system (remember Sun and Cobalt?) - to the detriment of the customers. MySQL is of course a strategic element of the famous OSS LAMP stack. If it is compromised, room will be left for an alternative, but its necessity would be a detriment to the open systems side.

(Update) To summarize: Solaris, SPARC and Sun's hardware are toast in the long run. To keep them alive Oracle would have to become competitive - simultaneously - with Intel, Microsoft, Dell and all their buddies, plus the Linux community. Ain't gonna happen.

The acquisitions of Java and MySQL are good for Oracle. What remains to be seen is whether they are good for the respective communities and existing users. Some prudent hedging is in order until Oracle's trajectory is clear.

San Mateo Tea Party

The big action in California today was up in Sacramento where 5-6,000 demonstrators roasted the RINO governator along with the Democrat legislature. 350-500 gathered in the belly of the beast, San Francisco, where a grand total of four counter-protestors showed up.

Having just been on a long drive, we opted for the local demo in front of San Mateo's Hillsdale mall along El Camino. It was scheduled for 1-7pm, which might have been too much of a good thing. We turned up for the commute hour, which seemed to be the peak of both participants and passersby.

With the crowd strung out down the sidewalk it was tough to get a good crowd shot. I counted about 200 participants at peak, just after 5PM. One police officer said he'd not made a formal count, but that sounded about right. There was steady coming and going, so total participation may have been 300+. (There were half a dozen San Mateo police present, who seemed mostly bemused, and just kept the crosswalk clear. Probably the most excitement they've had all week.)

I chatted with a few protestors, and found that almost all were either from San Mateo county or work here. Most had learned about the Tea Party at one place or another on the net, with a couple mentioning hearing about it on the radio.

No provocateurs or counter-protesters were spotted, and if any astroturfing was going on it was either supremely stealthy or ineffective: signs were mostly handmade and quite eclectic.

San Mateo residents certainly have plenty to protest. On top of the Federal pork, bailouts, and record deficits, we've got the state government raising taxes in the face of a recession, driving out businesses and residents, meanwhile spending their time on important things like making sure we can't buy the TVs we want.

Today the local Daily Post printed a report showing that 1,229 San Mateo County employees made over $100,000 in 2008. Meanwhile, census records show the median income in the county is $36,000. If there's a class war here, it's between the tax payers, and the tax eaters. And to add insult to the injury, the county has an unfunded pension deficit of over half billion dollars, due to sweetheart deals between the public employees' union and the Democrat-controlled board of supervisors. Yes, it's time for a Tea Party.

Back From Vacation

We took advantage of the Easter break at my wife's school for a short trip to the Carson Valley area in Nevada, for some backroading, geocaching, and looking at potential retirement locations. It was still too early for wildflower hikes there; there were even a few snow flurries.

For the Easter weekend we came back over the Sierra to the Shenandoah Valley wine region near Plymouth, which we've visited a number of times since the early 90s. Big reds, no tasting fees, and no tour buses. We did well on the wine front (Story, Bray), and the wildflowers were out in profusion in the west Sierra foothills.

We drove back on Monday, our usual move to miss the Sunday ski slope traffic, and spent yesterday shoving the travel mess back into its usual spots. This afternoon we'll be attending a Tax Day Tea Party in San Mateo. Field report to follow.

The Roving Eye: Buh-Bye SGI, Giving Back, Life Among The Ruins, Tea and New Media

A Victim of Moore's Law. To no one's surprise, SGI declared Chapter 11 and its assets were purchased by Rackable Systems. Yet another object lesson on the fate of those who end up making specialty computing hardware. SGI was of course formerly Silicon Graphics, king of CGI before that was swallowed up by renderfarms of commodity hardware. It made a stab at transitioning to a server company in the mid-90s (their brochures were awesome!), but didn't have the well-tested software platform of Sun. If open source had been as powerful then as now, the story might have ended differently, but SGI ended up slowly squeezed into a high-performance niche selling to government agencies among others, and then out entirely. SGI leaves a legacy of graphics pioneering, and some pretty nice office buildings north of 101.

Out from under the TARP. Unsurprisingly, good banks that took bailout money from the government have started giving it back, now that the strings attached are apparent. If you're an investor, not a borrower, that's good news as it's now obvious that TARP banks are not run for the benefit of depositors, or stock or bond holders, but for polticians and their mob appeal. Let's hope this sets a trend.

Political Legacies. Zimbabwe: Grubbing for gold to survive. Detroit: 50% illiteracy. Urban prairies. Human-built cages for the human spirit. Just the saddest thing in the world.

It's the revolutionaries that need the new media. Mapping the Tax Day Tea Parties. Simon & Garfunkel meet the Founding Fathers. (HT: Michelle Malkin)