Observations on Election 2008
February 29, 2008
Betsy wrote:If you don't mind taking a little break from the market, what's your take on the presidential election? I don't like to reveal my voting inclinations, but I'll be happy to comment on the course of the election so far:- The curtain went down on Mrs. Clinton when Bill Clinton came out strong in January. Prior to that, people questioned whether a second Clinton administration would be a Hillary presidency or a Billary co-presidency, but had no answer.
When he hit the stumps and she started referencing things he said, the question was answered: it would be a co-presidency. Almost immediately, her numbers began to drop. - Mrs. Clinton's main opposition to Mr. Obama, that he's inexperienced, has fallen on deaf ears for two months and yet she hasn't changed it. As he said in response, on the most important foreign policy decision of recent times, whether or not to invade Iraq, he showed wisdom by opposing it. She did not.
Another obvious sign that he's better prepared to lead is the brilliance with which his campaign has been run, and the ramshackle operation that's been hers. No plan beyond Super Tuesday? Come on. Even the greenest of politicians would have prepared a back-up plan in case they hadn't won by then. She didn't. That shows a pretty limited view of the future, and turns to pap her claim that she'd be ready to lead on day one. - Mr. Obama's being black and Mrs. Clinton's being female are non-issues, exciting only to those who don't pay attention to history.
From the list of black leaders prior to Mr. Obama: Frederick Douglass; W. E. B. Du Bois; Martin Luther King, Jr.; and Nelson Mandela. From the list of female leaders prior to Mrs. Clinton: Corazon Aquino, Elizabeth I of England, Golda Meir, Angela Merkel, and Margaret Thatcher.
While the election of either Mr. Obama or Mrs. Clinton would provide a first for the U.S. presidency, it's hardly needed to show that blacks and women can lead. - Similarly, Mr. McCain's age is a non-issue. From the list of leaders who proved their mettle later in life: Konrad Adenauer, Winston Churchill, Charles de Gaulle, and Ronald Reagan.
One of Mr. Reagan's most famous quotes came from his second debate with Walter Mondale in 1984: "I will not make age an issue of this campaign. I am not going to exploit, for political purposes, my opponent's youth and inexperience." - We don't know much about the real platforms yet. Candidates usually stick closer to party lines during primary campaigns than they do in the general election.
The reason is simple. Primaries are for building a base constituency. The general election is when it becomes critical to nab people sitting on the fence, the independents and moderates that often decide the winner. So far, we've seen only preaching to the choirs on separate sides of the aisle.
What a Democrat tells a Democrat is different than what he tells an independent, and what a Republican tells a Republican is different than what he tells a libertarian.
Both Mr. Obama and Mr. McCain will likely move closer to the center after being officially nominated. Mr. Obama will not be able to talk as much about spending on new programs. Mr. McCain will not be able to talk as much about keeping taxes low for the wealthy. - New blood in the White House is needed. The 4-year cycle of Bush, Clinton, Clinton, Bush, Bush, and now Mrs. Clinton trying to keep it going has seen a severe drop in U.S. prestige around the world.
A fresh perspective is a start. Should Mr. Obama secure the nomination, we'll be guaranteed that new day in Washington regardless of whether he or Mr. McCain prevails.
Finally, I'd like to make the general comment that America is such an exciting, vibrant country!
Here in Japan, where almost every politician looks shipped straight from the morgue, more has been said about U.S. candidates than I ever heard about candidates in Japan. I asked several friends why and they said it's because nothing ever changes in Japan, and regular citizens don't vote on the prime minister, anyway. How depressing.
Appreciate the debates, the close media scrutiny, the variety of personalities, and the potential for change. It's not like that everywhere.
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The Kelly Letter
George Carlin on Optimism
February 28, 2008
From George Carlin's interview on Salon, here's a dose of optimism:I divorced myself from any stake in the human adventure or the American adventure. That sounds kind of pompous so let me just break that down. What I decided was that I didn't give a f*** about what happens on this planet to these people. I mean, I see the nice things in people, I see the good things, but I also see what a depraved, sick species we are, the only species that kills its own for personal gain.
I'll go back to square one on this: We squandered a lot of gifts. Human beings were given a lot of great gifts. We were given the ability to reason, this extra-large brain, walking erect, having binocular vision and the opposable thumb, and all of these things, and we had such promise, but we squandered it on goods and superstition. We gave ourselves over to the high priests and the traders, and they are the ones we allow to control us. I think that's a huge mistake and it's disappointing to me. Now, the corollary is, America was given great gifts, this ideal form of government, this most improved form of self-government that has ever come along up until that time, and we squandered it. And once again, on the same two things: gizmos and toys and gadgets -- goods, property, possessions -- and also this country is far too religious for its own good.
So at some point, I drifted away from feeling any allegiance. Abraham Maslow the psychologist once said, "The fully realized man does not identify with the local group." Boy, when I read that, I said, that's me. I don't identify with city, state, government, religion, association, county, organization or species, even. And what I realized was that this feeling of alienation from all that gave me a kind of emotional detachment that was very valuable artistically. To be able to look at things and not give a f***. To not have a rooting interest in the outcome. I don't really care what happens in this country. I'll be honest with you. I don't give a f*** what happens. I don't give a f*** what happens to this earth, because it's all temporal and it's all bulls***. Pass this along to your kids.
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The Kelly Letter
Newsflashr Debut
February 27, 2008
One of my readers is Gal Arav, founder of the hit investment site, InstantBull. Yesterday, he launched a brand new site called newsflashr. Prior to its public debut, I explored the site with a username and password Gal reserved for me, and found it lived up to its promise.
What is that promise? Straight from Gal:It aims to out-speed services such as Google News by offering a faster way to track headline news from all the most credible news sources. It includes an interactive set of features that hasn't been done on the Web before.
This time, I'm up against all the big internet companies, nevertheless I hope you'll see that newsflashr really does step it up a notch in terms of its speedy technology.
Here are the key advantages:- Hot topics are extracted from all the most credible news sources in order to display the "collective intelligence" of all the top news editors
- Results are displayed within a "hot topic news cloud" in order to transparently link matching news headlines at unprecedented client-side speed (competing services are slower due to their use of standard server-side retrieval operations)
- Mainstream news and blog categories can be easily compared while viewing each news source's independent traffic rankings (provided by Alexa, an Amazon, Inc. company)
- Search and track popular topics in news headlines up to 7 days old; search results are immediately displayed in a convenient summary matrix
- Customize the "freshness" of highlighted topics and corresponding headlines
- Access all headlines on one concise page in either "feeds view" or "topics view" including photos and images in the news that match selected topics
The freely accessible new service provides a time-saving news interface for journalists, bloggers and news-lovers alike. Check it out for yourself at newsflashr.com.
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The Kelly Letter
Peak Oil and Electric Cars
February 24, 2008
In last weekend's Kelly Letter, I published a report on Peak Oil that examined key points of a presentation three weeks ago to the Minnesota House of State Representatives by Matthew Simmons. From my report:Recently, two separate sources that are not peak oil adherents, the International Energy Agency (IEA) and former Saudi Aramco exploration and production chief Sadad Al-Husseini, suggested that the world will hit its first critical oil supply emergency in 2011. While that in itself is reason for concern, plenty of analysts say it's too optimistic and that we're going to have trouble earlier than that, including Charlie Maxwell (2008), Jim Kingsdale (2009), and David Strahan (non-OPEC in 2010).
Mr. Strahan, speaking at the World Energy Summit in Abu Dhabi on Feb. 7, said the consequences of peak oil will be a severe drop in the availability of conventional oil, a spike in oil prices, and a subsequent financial and social crisis that would far exceed current worries over sub-prime. This morning, I published a follow-up report on the state of electric cars that looks at the cost benefits of electric cars vs. gasoline cars, the environmental benefits, and a soon-to-be-released ultracapacitor battery that promises to be the holy grail for electric transportation. From that report:Let's look at the best case scenario. We'll choose 5 cents per KWH (the cheapest option), 200 miles driven per week, an SUV's 13 miles per gallon, and again $3 gas prices to get:
> Cost per year to drive the gas vehicle: $2,400
> Cost per year to drive the electric vehicle: $93.60
> Annual savings: $2,306.40
That's just the electricity vs. gasoline advantage. The maintenance on an electric car is also much cheaper than on a gas car because you never need to change the oil, replace the filter, get a new muffler, or have an emissions test.
As far as convenience, electric cars bypass gas stations entirely. Your fill-up happens at home via a standard electrical outlet. That sure beats getting your hands dirty at the pump once or twice a week.
Finally, the geopolitical benefit of electric cars is hard to overstate. Most of the international entanglements of U.S. foreign policy in the past 30 years have been about oil. We're literally fighting for an energy source that's proven to harm the planet. Currently, 95% of U.S transportation is fueled by oil, most of it imported, and a good percentage of it from hostile nations. Going electric would improve U.S. national security more than going to war does. If you would like to read these two reports in their entirety and gain access to the complete Kelly Letter archive, please sign up for my one-cent, one-month trial.
It will be a pleasure to welcome you!
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The Kelly Letter
My Google Docs Security Challenge
February 22, 2008
The most common reason cited for the difficulty of moving from local hard drive computing to online cloud computing is security. Developers think people are too afraid of storing their personal data online where it can be hacked and compromised more easily.
I think it's just a matter of time before people get comfortable with it. I remember when Amazon.com considered online security to be its greatest challenge. They used to have a "Why this is safe" link almost everywhere you went on their site. Now that millions of people have bought from Amazon.com many times and stored their financial details there with no trouble, few think of security as a reason for not shopping at Amazon.com.
Similarly, I moved my office operations to Google Docs and OpenOffice in the past year. I was hesitant at first, but now that we've used GDocs for real work from anywhere on the planet and I've seen how much easier it makes my business travels, I never think twice about whether my material is safe.
Should I? Let's test this out in the real world.
I just created and saved at Google Docs a document called "Hack Test" with a code phrase in it. I'll even give you the repository for my saved files: docs.jasonkelly.com. See if you or somebody you know can get into it and email me the code phrase. If so, we'll make big news together.
I'm betting, however, that it won't be done. I'll give a report later.Labels: GOOG
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The Kelly Letter
More About An Internet-Based OS
My recent articles on the Microsoft bid for Yahoo and what it means to Google have prompted numerous replies.
Visar takes exception to some of the Java comments made by a reader in Wednesday's article. Specifically, he points out that it is not possible to write one complex application in Java and have it work across all operating systems. "To be convinced," he wrote, "try and download a Java application and you will be prompted for the operating system you are going to use it on."
Actually, the Wednesday article mentioned that Java requires a virtual machine specific to each platform. That's why when you download a Java application, you must specify the operating system you'll be using it on.
That requirement doesn't take away Java's usefulness as a cross-platform development tool. Straight from Java.com comes this summary:Mature, extremely robust, and surprisingly versatile Java technology has become invaluable in allowing developers to:- Write software on one platform and run it on practically any other platform
- Create programs to run within a web browser and web services
- Develop server-side applications for online forums, stores, polls, HTML forms processing, and more
- Combine Java technology-based applications or services to create highly customized applications or services
- Write powerful and efficient applications for mobile phones, remote processors, low-cost consumer products, and practically any device with a digital heartbeat
Next, Visar wrote:While Java has made great headway into Enterprise Application development and solutions, Microsoft is rapidly catching up with its own multi-platform .NET Framework. I would encourage you to research recent surveys as to what the new development is going to be based on for many new development projects for all of the Fortune 500 companies. .NET is Java on steroids, it allows for multiple languages to be compiled and run into Microsoft's .NET Virtual Machine. And while Microsoft does not promote using .NET on non-Windows based platforms, there are open source movements which allow you to do so. About Java vs. .NET, Joe Fontana at Network World wrote, "There is a lot of overlap in the capabilities of these development tools and that is the precise intersection where developers will raise their swords in religious wars. Generally, however, Microsoft's .Net is more popular in rapid-application-development environments and Java finds its way into large scale enterprise projects, but even those lines are blurring rapidly."
The main point from the perspective of business history, however, is that Microsoft saw the cross-platform ambitions of Java and Netscape as a serious enough threat to its hegemony over computing to kill the Netscape browser and create an alternative development platform, focused building applications to run in a Windows environment. It even says that at the top of the .NET website: "The .NET Framework is a development and execution environment that allows different programming languages & libraries to work together seamlessly to create Windows-based applications that are easier to build, manage, deploy, and integrate with other networked systems." (Emphasis is mine.)
Microsoft doesn't want alternatives to its computing paradigm, which is the default around the world. That part is natural. What I've been pointing out is that precisely that instinct is what's behind the Yahoo bid. Microsoft says it's about advertising. In part, perhaps, but it's mainly about gathering as much firepower as it can to prevent the emergence of entirely internet-based operating systems and applications that require no Microsoft products. I've long contended that such alternatives are on the way from both Google and Yahoo, and then Microsoft made its bold move to buy Yahoo.
Visar concluded:Let's not forget the power of the status quo. How much training would it take to move to different platforms and software solutions? I would hate to live the day when I would have to re-train my parents to use a new operating system or Office Application suite, regardless of how similar they are to Microsoft's. I have seen many great solutions die due to user's attachment to older and much less efficient solutions. There's some truth to this, but I think it's not insurmountable. The changes going on are deeper than just how to do the same old stuff a different way. The very reason people turn on computers is changing. The old standbys of creating a letter to be printed, mail-merging and printing it, and then saving the file in a heirarchical directory are done less and less. Most people these days are turning on their computers mostly to get online. Increasingly, they're doing online what they used to do from their hard drives.
It won't take too many more years of that before the mass realization that online is more important than hard drive takes effect. By then, alternatives like the gOS and Google Documents will be even better and with more users, creating the very network effect that has locked Windows on top.
Also, free software leading to cheap computers is a pretty powerful incentive for change. If Visar's parents would like to communicate with their son long distance for free using Skype, maybe the $199 Everex gPC would be more compelling than a more expensive Windows machine. The machine was so popular that even Wal-Mart's legendary inventory management system couldn't keep it from selling out last fall.
About the gPC, CNET News.com's Erica Ogg wrote on January 24:It sounds simple, but most of what the average user wants to do with a computer these days can be done online: word processing, spreadsheets, e-mail, photo editing, and more, which means less storage is less of an issue. You want e-mail? Gmail and the included GTalk instant-messaging feature are free. And Google's Docs and Spreadsheets Web apps get all of your office productivity done online (though most of the three PCs have open-source versions of Microsoft Office). For watching videos, there's YouTube and Hulu.com. And rather than downloading a photo editing tool, anyone can upload their photos to Flickr and use Picnik's editing software right in the browser.
The success of devices like the gPC and Mirus Freespire--both are sold out at Wal-Mart and Sears.com, respectively--and even the more expensive and portable Eee PC, is a surprise to most.
"The success is, in part, driven by the fact that for people doing an increasing percentage of day-to-day tasks like e-mail in the context of software as a service, at that point it soon doesn't matter what operating system you have," said Redmonk's O'Grady. "If a majority of (computer) usage is browsing the Internet and doing things like that, (Linux) is perfectly credible, perfectly usable." Some readers pointed out to me the fact that the gOS is just a customized version of Ubuntu Linux, which is free to anybody. About this, Glenn wrote, "I fail to see what this has to do with Google or Yahoo. Google could come out with a Linux distribution that may appeal to the masses but how would it make money? I can tolerate advertisements on a Web page but not on my desktop background, menu bar, etc."
Many others said they, too, would balk at using a Google or Yahoo operating system that forced them to see ads every time they turned on their computers. I feel the same way. So far, though, Google has been pretty good about keeping ads from interfering with its other free services, such as Google Earth. I would imagine that just building the Google search function into a free operating system would provide Google with enough additional revenue from its existing search advertising business to more than off-set the development costs and server costs to provide the OS. Plus, there could be add-on sales or premium versions as profit centers. After paying $200 or $300 for Windows Vista (depending on the version), most people would not mind at all paying Google or Yahoo $50 for a deluxe version of their internet-based OS.
I don't know exactly how the revenue model would work, but there are ways other than advertising to extract profit from an operating system.Labels: GOOG
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The Kelly Letter
How We Avoided Sharper Image
February 21, 2008
The Kelly Letter began watching Sharper Image a little over a year ago when it traded at $10. It looked like a potential turnaround candidate, on the same path as RadioShack, then on its way to a six-month 100% gain from December to last June.
I wrote to subscribers on January 6, 2007:Sharper Image reported same-store sales on Thursday, and they weren't good on the face of it. They dropped 20% in December. That was after a widespread promotional campaign. However, it was less of a decline than the store saw in the previous three months: -27%, -31%, and -21%. That's small comfort, but is a move in the right direction. This is, after all, a turnaround candidate. It's a risky one, though, and I'm holding out for $9 as an entry at what looks like support on the chart. The stock never bottomed out as low as I was hoping for, and instead began a steady climb to more than $11.50 by April, a three-month gain of 20%. Chart readers pointed out that the stock's MACD reading issued a steady buy signal at the end of March, and that we'd missed our entry.
I wrote at the end of March:Sharper Image rose 6% this week, thanks to a new president being on the way. Its numbers are still lousy, though, and I imagine there's another bad quarter or two ahead of it before new management gets the arrows pointed up. . . . I moved our Sharper Image target price up to $9.50 from $9, but will strongly consider buying anywhere under $10. The stock dropped below $10 in mid-May, but still we didn't buy. Onlookers were upset when I wrote on May 19:Sharper Image ended the week at $9.87, and I lowered the target buy price to $9 from $10 as we've seen strong downward momentum in the past few weeks. Patience looks set to pay again. "Jason," wrote one exasperated subscriber, "you raise the target price when the stock goes up and lower it when the stock comes down. We never buy. When are we going to get onboard this train?"
You can imagine how upset people were when the stock bottomed out just three days later at $9.33, flashed an MACD buy signal the next day, and then ran up 52% to $14.16 by June 6. All the while, I maintained a $9 buy price target and kept repeating that I was not watching the stock as a trade but as a long-term recovery story. Unfortunately, that carries little weight to those who were champing at the bit to buy.
Then, however, a funny thing happened. The stock began to fall. On July 27, it finally broke through our $9 price target, but still we didn't buy. I wrote on July 28:Sharper Image fell 11% this week to $8.84, below our former target price of $9. Its chart shows a 34% dive lower from its $13.37 close on June 13. That's steep and should not be touched until it levels out.
There's not much sign of life at Sharper Image yet, and the currently weak market environment should contribute to shares getting even cheaper for us to buy for the eventual turnaround.
I've moved the target price down to $8. Three weeks later, on August 17, the stock closed 59% lower at $3.65. The following week, it rose 29%, thereby attracting the same crowd of angry emails that bounces earlier in the year had attracted. I wrote that weekend:Sharper Image dropped 48% last week and gained 29% this week. The bounciness smacks of pure price speculation and is of little interest to us. What we're looking to buy as cheaply as possible is fundamental improvement at the company. We haven't seen signs of it yet, so we'll keep waiting. "By the time you get it," wrote one reader, "the price will have anticipated the improvement and the massive early gains will be gone." I replied that, be that as it may, I was not willing to tell subscribers to buy stock in a company with such lousy numbers and low prospects. "I don't mind buying a distressed situation," I wrote, "but I refuse to buy an impossible situation that depends on market gyrations alone to create a profit. That's gambling."
The stock continued a gentle but steady downward trajectory until mid-October. I wrote on October 13:I'm sure you're glad that we've only been watching Sharper Image and not buying. The stock fell 44% this week.
The reason is that a federal judge rejected the company's proposed settlement to distribute $19 coupons to people who bought its air purifiers alleged to be defective in a class-action lawsuit.
In support of its proposal, Sharper Image made the impression that the settlement is the best customers should hope for because the company is on the verge of bankruptcy.
That's not good for investors to hear.
On the same day, the company reported that its sales fell 39% in September compared with a year ago. Same store sales fell 21%. Catalog sales fell 62%. Online sales fell 51%.
The company may be a goner, but it may also be an unbelievable value, the way Chrysler was when Warren Buffett bought it at $2 when it, too, was on the verge of bankruptcy. One big difference is that Chrysler had tangible assets. Sharper Image doesn't. It needs a whole new product line, evidently, and a management team with the skills necessary to build it and reshape the business.
I'm skeptical at this point, but interested enough to keep watching. I lowered to price target from $3 to $2. The plunge continued until SHRP had fallen 52% in one week to close October 16 at $1.81. Still, we held off buying even though it had fallen through yet another lowball price target. A week later, it was up 83% to $3.32, and it appeared that the letter had blown it again.
The stock moved sideways for six weeks, but news from headquarters offered little reason to hope during the holiday shopping season. I wrote on December 2:Sharper Image is still floundering, and my interest in the company will get a big update after we see how it fares this holiday season. It may just be finished. It may be the biggest turnaround potential we've been following in the past two years. It's too early to say much, so I won't. The familiar gentle but steady slide lower took over again, and the stock was down to $2 by the beginning of this month.
Then, yesterday, Sharper Image filed for bankruptcy and said it will close nearly half its stores. BusinessWeek wrote that "some analysts believe Sharper Image had unique troubles that contributed to its bankruptcy: deep reliance on a single product for most of its history and high costs due to expensive retail locations and catalog printing." That one product, an air purifier, accounted for 35% of sales. SHRP shares fell 71.5% to 41 cents yesterday on the news.
Were we silly to even have been watching so carefully for the last year? I don't think so. Many deep value turnarounds look precisely as troubled as Sharper Image looked. Had it diversified its product line-up, more aggressively closed various locations, and come up with a smart holiday campaign, there's a chance it might have regained its stride.
What then kept us out of the stock at so many points that looked good along the way to destruction? After all, it showed buy signals on the charts. Those weren't illusions. They were, however, short-term signals irrelevant to us for a long-term return to corporate health.
Some have pointed out that traders with quick instincts might have been able to benefit from the short-term buy signals. Maybe. I doubt it, though. Despite what you read, very, very few people are able to call short-term ups and downs. So few, in fact, that the ones who do are considered to be merely lucky by serious students of the subject. Why? Because they can't repeat the feat. Last week's hotshot is this week's dunce. So, I don't feel bad for missing those trades.
What I feel good about was having the discipline to wait for promising signs of fundamental improvement. We never got them, not even as much as one compelling idea for a turnaround. I visited Sharper Image stores and they paled next to Brookstone and others. Real world research counts, and Sharper Image just wasn't sharp anymore.
Luckily, some of the other stocks we watched for nearly as long finally hit our lowball price targets in January's sell-off. There's always a reason to be thankful.
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The Kelly Letter
Why Microsoft Must Win Yahoo
February 20, 2008
The reason Microsoft is willing to do whatever it takes to win Yahoo is that it must. From a Tuesday night Reuters story:Microsoft Corp will authorize a proxy battle for Yahoo Inc this week to convince the Web company's shareholders to agree on a takeover deal that the Yahoo board so far has rejected...
If Microsoft decides to launch a proxy fight, it would nominate a slate of directors to take control of Yahoo's board and support the company's proposal. The nominees would be voted on at Yahoo's annual shareholder meeting in June.
Microsoft would also risk alienating Yahoo's rank-and-file by taking a hostile tactic. Unlike manufacturing companies with fixed assets, a key Yahoo asset is its engineering talent, and a hostile approach by Microsoft could lead to an exodus of Yahoo talent to Google Inc or other Web rivals. A reader who is a cross platform developer, pointed out that this is not the first time Microsoft has worried about losing its monopoly position via the internet. He wrote:The browser wars were not about browsers, but were really about Java. When you installed Internet Explorer you installed the Microsoft version of the Java runtime and that version was meant to be a Java killer.
I have used a number of so called "cross platform" libraries, but none of them has really solved more problems than they have created. Java, on the other hand, was the best cross platform tool I have ever used. For the first time I could program considering only the problem to be solved and forget about the platform specific assumptions. Java works by using a virtual machine, or VM. The code for the VM is platform dependent, but the Java code that runs on it is exactly the same on a Mac, PC, Linux, Unix system, etc. Well, almost, that is: this is where Microsoft comes in.
The biggest barrier to the development of a new OS is that until the OS has significant market share the developer community will not write significant applications for it. The OS will not attain significant market share until there are significant applications for it; chicken and egg.
There was for a while a groundswell of Java based office productivity tools under development. What that meant to me as an OS developer was that if I write a Java VM for my platform, I would be able to offer Java based office suites (significant applications) until native applications that used my unique capabilities were developed. This was the real threat to Microsoft.
To combat the Java threat, Microsoft created its own version of the Java VM even though Sun had already produced one for the PC. The basic premise of Java is that the VM always looks the same to the Java code. The Microsoft VM was different from every other runtime and did not follow the Java specifications.
Microsoft added its proprietary ActiveX extensions to its VM and used their compiler tools to encourage Java code that heavily used the extensions, thereby rendering it completely dependent on Windows. As I said, when you installed IE, you got the Microsoft Java VM.
Microsoft may have lost some part of the browser wars in court, but by the time they lost, Java was dead as an application developers tool. The Java based office suites were all cancelled due to the uncertainty in the Java world. Microsoft was so successful in pursuing its real objective that it killed Java end user applications without it ever becoming an issue. Thus, you think this is the first time in history its OS and office businesses are vulnerable.
It's not. To make this fight even more exciting, remember that Google CEO Eric Schmidt was once the Chief Technology Officer at Sun and became the CEO of Novell in 1997.
In both cases, he was stopped cold in his tracks by Microsoft's shenanigans to keep open solutions from happening. It killed Java's potential as described above, and it killed Novell's NetWare by making many of its features standard parts of the dominant Windows OS. From Wikipedia's Novell entry:By 1999 Novell had lost its dominant market position, and was continually being out-marketed by Microsoft, which gained access to corporate data centres by bypassing technical staff and selling directly to corporate executives. Microsoft worked to make NetWare look second place with Windows 2000 features such as Group Policy. Does anybody doubt Mr. Schmidt's desire to see Microsoft's monopolistic grip on computing broken?
Regarding Mr. Schmidt, Microsoft CEO Steve Ballmer said in an incident a couple of years ago, "I'm going to bury that guy. I have done it before, and I will do it again. I'm going to kill Google. . . . Google's not a real company. It's a house of cards." Note that I paraphrased. To see the decidedly more graphic original, click here.
So, this bid for Yahoo has precious little to do with ads, as I mentioned last Friday. It's not hard to see where the motivations come from.
Microsoft has attained its heights by copying other ideas, then out-marketing the originators of them or making the originators irrelevant by giving away comparable function as features in its OS, which comes standard on all PCs. They did that to Google's CEO twice before in his career. In both cases, he was not in a position to fight back the same way because his company made money by selling the product that Microsoft was giving away.
What he needed was a source of revenue completely separate from Microsoft's bread and butter, that he could use to bankroll the development of a free alternative to Microsoft's bread and butter.
Now, he's got it and can finally fight the giant with the giant's methods. Microsoft could give away a standards-killing version of the Java VM because it didn't need revenue from Java to survive. It could give away some capabilities of NetWare because it didn't need to sell networking to survive.
Guess what? Google can give away an operating system and productivity applications because...it doesn't need to sell them to survive. Moreover, the way it makes money is through advertising, and there are ways to incorporate ads into an operating system or productivity suite that might make the free versions profitable to Google in the future, while still leaving Microsoft unable to sell either Windows or Office.
Lest you think Mr. Schmidt has forgotten that Microsoft killed Java by giving away Internet Explorer, remember that Google loves Mozilla Firefox. True, it's so much better than IE that it's basically the only browser any intelligent company would endorse, but more than that it's not Microsoft, and for Mr. Schmidt that's an essential part of the big picture.
Meanwhile, back in Ballmer Land with the flying chairs and roared expletives, priority number one has become beating Google at any cost. Apparently, that's literally the case as the price for Yahoo is rising by the week. The acquisition will not only be expensive financially, it may be very costly in terms of talent lost at Yahoo and time lost as the cultures attempt to mesh.
No matter, Yahoo must be absorbed into the Microsoft empire and focused wholly on putting Windows dependencies into all of its offerings. Remember that you read it here first when Yahoo Mail is functional only via Internet Explorer. Try using Google Firefox, er, Mozilla Firefox and you'll get an error. Same with Flickr. And so on.
Yet, as good as that sounds for Microsoft's situation, we're still not at the reason it's in a hurry to get better positioned against Google's inevitable OS release. That reason was sent to me by another reader named Jeffrey. Look at this:
 That's the gOS, the internet based OS I've been writing about for weeks now (but didn't know already existed) and predicting would be the way of the future. I had the time frame wrong, it seems. This operating system is available right now for free.
Look at the icons along the bottom. Every one of them is an internet application. You can use every one of them without ever touching a Microsoft product. Oh, and by the way, notice which browser is prominently featured on the left.
No wonder it's not safe to be in the same room as Mr. Ballmer these days. With Google Docs knocking at his door and gOS peeking in his windows (so to speak), he's bound to be irritable.
Disclosure:The Kelly Letter owns shares of MSFT and YHOO, and is looking for the right time to sell both and put the proceeds into GOOG for the long haul.Labels: GOOG
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The Kelly Letter
The Real Threat to Microsoft
February 15, 2008
I've written extensively about the threat Google and Yahoo pose to Microsoft. My premise is not that online advertising is the big concern, but that it's a revenue model that will provide initial profits to bankroll the development of internet-based alternatives to Microsoft's core business, namely the Windows and Office franchises.
The angle has been met with more skepticism than I expected. Based on what I'd heard through my circle of friends and contacts, I thought nearly everybody was rooting for a company to finally challenge Microsoft's iron grip on computing, and believed that Google and Yahoo were working on it.
Then came Microsoft's bid for Yahoo a couple of weeks ago. The press reported mostly what Microsoft stated as the reason for its interest in Yahoo: to create a stronger rival to Google's online advertising business. Here at The Kelly Letter, we never bought that idea.
Folks, Microsoft is in imminent danger. It's not worried about missing out on a big business opportunity (online ads); it's worried about remaining a necessary path to working with a computer (the OS and the productivity software). For the first time in its history, Microsoft is facing competition that has a chance to unseat it from the PC monopoly chair that it's occupied for so long.
I received a raft of email from people more computer savvy than I suggesting that I stick to investing and leave the technology forecasting to others. "It's obvious from your summmaries that you have no idea how the core parts of an operating system function," wrote one man.
He's right about my not knowing the guts of operating systems, but do I really need to know how they work to see an alternative way forming? Was it necessary to understand steam locomotion to notice that cars were becoming more popular than trains? Was it necessary to know how cassette tapes were made to see that CDs and DVDs and eventually MP3s would win out in the end? I don't think so.
Similarly, I may not know the process behind coding Windows Vista, Office, Yahoo Mail, or Google Docs. What I do know is that there are no more software stores where you buy computer software in a box, take it home, and install it from disks. Everything I get comes from the internet now, and it's probably the same for you. That's an actionable trend. As goes everything else digital, so will go operating systems and productivity software, and the same thing that happened to Egghead Software's profits could happen to Microsoft's.
Finally, I discovered that I'm not the only one who thinks the Microsoft bid for Yahoo is about more than ads. Rob Cox and Jeff Segal wrote at Breakingviews on Monday:What if the deal isn't just about online advertising? What if at stake in the battle is the very survival of Microsoft's core software business? Microsoft would never admit that so much is on the line. But there is a case to be made that acquiring Yahoo would go beyond rectifying Microsoft's online business to strengthening the moat protecting its franchise on desktops around the world.
Google sees a future where customers bypass Microsoft to use applications, like spreadsheets and word processors, which it offers for free on Google Docs. So far, Google Docs hasn't dented Microsoft's desktop dominance. But its growth is impressive. In November, unique users of Google Docs surged to 1.6m from 600,000 in June, according to Compete.com. And Google says 2,000 new companies start using its Google Apps subscription-based business software each day.
-- full article I think this view that the real reason for Microsoft's interest in Yahoo is the future of Windows and Office will gain popularity. As it does so, I expect people to conclude that Google has the upper hand because Microsoft will kill whatever progress Yahoo was making, leaving only Google as the alternative to Microsoft. More about that idea here.
If it comes down to who makes better online applications, Google or Microsoft, only a drunk would put his money on the latter.Labels: GOOG
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The Kelly Letter
More On An Internet-Based OS
February 13, 2008
Recent articles on the race to develop an internet-based operating system sparked a debate between Ben, who thinks it's inevitable, and Eric, who thinks there are major obstacles in the way.
This morning, I pass along the latest from Eric. It comes in response to Ben's points made last Thursday. You can follow the whole thread here.Security
Ben mentions banks having your social security number and financial information on file. Yes, that is what banks do. They not only have your social security number, but also your life savings in their hands. Luckily for us, banks are designed to be a safe house for such information. Their entire business operation is built upon protecting data, through layers of security. I'm not just talking about internet security, but also information management security. Banks are also FDIC insured for $100k. Will Google go to the same measures to provide the same type of security? Will they pay you $100k if they lose your data?
Data sensitivity extends past your personal information. Corporations and businesses have proprietary information that is worth millions, if not billions of dollars. I doubt GM executives are willing to store concept information pertaining to their next "big thing" on Google servers. The Department of Defense, one of Microsoft's biggest customers, will not store their classified information on Google servers.
Connectivity
Broadband access in the world has grown exponentially. The United States can proudly say most of their hotels provide internet access. But that isn't necessarily the case in other countries. Even if broadband is available, are you willing to pay $15/hr do work on your laptop at the airport?
Free OS
I state again: Nothing in this world is free. Wikipedia and online tech support boards are text based resources. Microsoft spends billions of dollars developing, testing, and maintaining their OS. The amount of dollars required to update patches, fix bugs, update drivers (just to name a few) will not be fulfilled by donations. Linux has been an open-source for years. Have you tried downloading Linux source-code from the internet? There is a reason why Linux companies like Red Hat exist.
Though Ben's arguments are logical, they represent the world of your teenage internet user. The reality is, what he disparages as "the average 40-55-year-old adult" is the group in position to make the decisions on where to spend IT funds. If you can't convince these hard headed people who just don't understand the miracles of technology, then there will not be an internet-based OS market, which means disappointing stock prices, and stock prices are what we care about here at The Kelly Letter. If you have any insight into the development of an internet-based operating system alternative to Windows and the Mac, please pass it along to me.Labels: GOOG
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The Kelly Letter
Don't Let The "January Barometer" Derail Your Long-Term Plan
February 11, 2008
Now that January is behind us, people are talking about what its performance portends for the rest of the year.
The Stock Trader's Almanac, which I've lambasted before for its focus on patterns that are too big-picture oriented to help people with practical timing decisions, claims that "as the S&P goes in January, so goes the year."
The Almanac states that, "The indicator has registered only five major errors since 1950 for a 91.1% accuracy ratio."
This January was the sixth worst on record, with the S&P 500 dropping 6% on the heaviest volume in a decade. While it's too early to say whether this will be another successful January barometer call for the year, some analysts are warning that we're in for a doozy.
I don't pay much attention to such signals.
First of all, even if we are in for a bad year, it doesn't mean a whole lot to longer-term goals. Bargains bought are bargains bought, period. Is a year too long to wait for something to start appreciating? Not if it eventually grows your money to meet your goal.
Warren Buffett has spoken on this subject. He's pointed out the obvious that for net buyers -- which almost everybody is until they reach retirement age -- low prices that stay low for long periods of time and then appreciate suddenly near the end of the time frame are ideal. They allow the gradual investor to put more money to work over the long time period when prices remain down.
If, for instance, the S&P Midcap 400 stays in its recent 760 to 820 trading range for the rest of the year, it will finish the year at -4.4% at the top of the range or -11.4% at the bottom of the range.
Those are both negative, and the January barometer adherents would claim a victory to have told you to get out way back at the beginning of the year. You would have "avoided the pain of 2008," they'd say.
Well, what's painful about buying as much as possible when prices are cheap? Unless you need to sell your portfolio this December to buy a lifetime supply of freeze-dried rations, you don't care all that much about the value of your shares come Christmas.
That's the first point to keep in mind.
Second, the January barometer may have a strong track record, but two big exceptions happened recently.
In 2001, the S&P 500 gained 3.5% in January but lost 13% for the year. In 2003, the S&P 500 lost 2.7% in January but gained 26% for the year.
What will 2008 bring? As I mentioned in the first Kelly Letter note of the year, a recession starting now would probably end sometime in summer. The stock market has its own track record of turning up before the economy. The market leads the economy, not the other way around.
Too, the Federal Reserve has been cutting rates aggressively and probably isn't done yet. That has always turned the market around in the past after a lag time. That lag time coincides well with the end of the recession, if we're in one.
Those two factors together, combined with the seasonally strong autumn time period, could well make the end of the year rewarding for those who put money to work in the weak months earlier on the calendar.
All told, I'd say the year doesn't look lost yet. More importantly, even if it is, it's just the go-ahead for plenty of buying in the next eleven months for the recovery to come, regardless of the dates it chooses.
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The Kelly Letter
Get With The Future
February 07, 2008
Recent articles about an internet-based operating system have generated heat.
Eric mentioned on Tuesday some challenges to the concept, which I addressed. His three points were that security concerns would keep people from trusting an internet-based OS, spotty broadband connectivity would make it hard to use in some places, and nothing in life is free.
This morning, I pass along to you a rebuttal to Eric's points, submitted by Ben:Eric represents the average 40-55-year-old adult who still doesn't realize how powerful technology has become. My dad is that age, and he just doesn't understand the capabilities of the Internet.
To Eric's points.
Security
We already send our information to other companies. Jason bills his [Kelly Letter] subscribers through PayPal. That company has Jason's credit card numbers as long as everyone remains a subscriber (Eric included) and Jason obviously trust PayPal. Online banks have all of their customers' social security numbers. These are companies too, and if Google or Yahoo would violate this security, they would be bankrupt in days. They don't want to go bankrupt, so I would have no problem trusting Google with my information. Why would Google look at its users' documents [stored on its servers] when they are meaningless to them and would cause them to go into bankruptcy?
Connectivity
Not more than a decade ago broadband was unheard of, and if you were lucky enough to have this "fast internet" you were blessed. Now, computers aren't even made with dial-up ports, and new computers such as the MacBook Air operate only on wireless technology. Let me repeat that: the newest computer on the market is able to connect to the internet only through wireless technology. I have no doubt that in less than a decade the entire world will be wireless, it just depends on which company's satellite in space you want to pay for to have the internet sent to your machine.
Free
Eric states that "nothing is free in this world." That is simply not true anymore. Of course, before the internet, things were materials. They took up physical space, and it cost something to manufacture them. But now, with the internet and with people who have way too much time on their hands, getting great things for free is possible.
Consider this real life example that happened to me. My computer was acting up a couple of months ago. I could have taken it to the store, waited a week, heard their excuse about why it wasn't fixed yet, driven to pick it up and paid them a ridiculous amount of money. Instead, I simply went to a computer message board, posted my problem, and 6 minutes later I received an answer from a computer engineer in Iowa. For free. In 6 minutes. A half hour later my problem was solved.
This is the power open-source software has. You or I might not have free time to help people out for free, but there are people all over the world who enjoy their field enough to help others out on message boards.
I can see Google creating an OS and then letting it be edited just like Wikipedia and running off of donations. Or just like Facebook is letting regular people develop applications. Wikipedia is quickly becoming the single best place to get information anywhere in the world. And guess what? It is free. Go to their website and look at how many people donate to the site. And if Google created an OS, people would donate, too.
Eric complains about possible ads on his background. How many ads do you see on Wikipedia?
If you still think that nothing is free, you are living in the past. Get with the times, or you will miss out on incredible opportunities in the technology market.
Then again, without people like Eric, Google would be around $1,800 instead of this dirt cheap $502 nonsense.
Thanks, Eric. Note that The Kelly Letter is currently looking to buy shares of Google on the cheap in anticipation of its eventually offering a free, downloadable, internet-based operating system that usurps Windows.
So, while dirt cheap yesterday's GOOG close of $502 may be, we would welcome an even dirtier cheaper price of, say, $400. Do what you can to help. Sell your GOOG shares in a panic during one of these downturns.Labels: GOOG
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The Kelly Letter
Not Out Of The Woods Yet
February 06, 2008
As I mentioned Sunday, the rally from Jan. 23 to Feb. 1 looks indeed to have been a bear market bounce. The S&P 500 rose to 1,396 last Friday but failed there, below its Nov. 26 low of 1,406. That's the new resistance line, and it held.
We're still in a down market.
I've been encouraging people to buy shares at bargain prices, and some have interpreted that to mean I'm bullish on the market. In the short term, I'm not. The Kelly Letter has been setting limit prices low to catch bargains on spikes down, and we still have buying to do. That means I'm expecting lower prices before we see higher, but I'm not worried that we'll never see higher.
Know what you want to buy, set a cheap price, and let the market wander its path.
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The Kelly Letter
Challenges For An Internet-Based Operating System
February 05, 2008
My article yesterday prompted excellent feedback. I'm lucky to count dozens of technology insiders among my readers.
What many pointed out is that an internet-based operating system would face major challenges, three of which were summed up well by a subscriber named Eric:Security
Moving critical functions online into the hands of a service provider (i.e. Yahoo or Google) would pose significant risks and the possibility of compromising data. People like to keep personal information private, and businesses rely on proprietary or sensitive information to give them an edge for success. Are people/businesses willing to put all this in the hands of Yahoo or Google? To me it doesn't matter which company is providing the service, I would be very reluctant to entrust a third party with my information. By the same token, the services providers would be reluctant to take on the responsibility of data losses and spillages.
Connectivity
While broadband is becoming prevalent across the world, it's not everywhere yet. I travel frequently for my job and have found the hotels, conventions, and local hotspots equipped with reliable internet connections. However, there have been times when I have been stranded without an internet connection due to circumstances beyond anyone's control. Sometimes, things just don't work (especially in less developed foreign countries). I can imagine being stuck in a situation where I cannot get to my files/data. The loss of productivity would be painful enough to pay whatever licensing fee for a standard desktop OS.
Free
Nothing is free in this world. I find it hard to believe the OS service providers would be happy to build out million-dollar server farms and not charge a dime for using them. My assumption is that fees and charges will be factored in later as the concept/technology develops (perhaps after they claim their market share). Or advertisements will be plastered all over the desktop workspace. Both options I find very annoying. While these are good points, I think what we'll find is not an entirely online operating system, but downloadable parts of an operating system that rely on the internet to create much of the functionality we get from our hard drives now.
For instance, say we download a packet of files that is the core of Google OS. It has drivers to print documents, run peripheral devices, and put a graphical user interface on the screen. However, familiar tasks could be done with internet support instead of entirely from the hard drive.
If I double click a document icon, for instance, up pops a window with my document in it exactly as if I opened a Word document in Windows. Instead of being a Word window, however, it's a Google Docs window. It doesn't matter to me. I get my work done, save, and print if I need a hard copy.
If I want to browse my files, I open a file explorer equivalent to the familiar heirarchical folder representation. Depending on how I set up my options, when I click to open a folder I'm either viewing locally stored files or peeking into the folder where it's stored online. Eric is right that we all have certain files that we don't want to throw online no matter how safe we're assured they'll be. Those we place in folders that we specify to be saved on our hard drive only.
None of this is a stretch so far. Google Docs works right now, and we already specify private and shared folders for services such as Limewire. Other Limewire users can get to the files in my shared folder, but not the ones that are not shared. Similarly, I could store some files online in my own private directory but where I might be skeptical of their really being safe, and others in the directory on my hard drive.
Some say Linux is already doing this. They accuse me of calling for a revolution where there's already been one. Well, the internet itself has been around since Sputnik, but according to Wikipedia, "the rapid growth of the internet was due primarily to the availability of commercial routers from companies such as Cisco Systems, Proteon and Juniper, the availability of commercial Ethernet equipment for local area networking and the widespread implementation of TCP/IP on the UNIX operating system." All of that didn't show up in meaningful quantities until the 1990s for your average end user.
Similarly, Linux may have been around for a while, but we have yet to see a tipping point where ordinary folks are using a freely downloaded operating system on their computers, and not caring what hardware they buy because the free OS runs on anything with a screen.
True, Linux is a free operating system alternative that anybody can download today, but just try setting it up on your personal computer. I have. It's complicated. First of all, there's no one place to get it. There's not even a standard interface. You have to navigate your way through KDE, GNOME, and Xfce among others. IT professionals may consider Linux to be a viable option, but for the masses it's strictly a concept for the time being.
It's done a lot of way paving, though, if mostly in the realm of showing ordinary folks a different way of computing is possible. Here in Japan, many people are not even aware of the existence of an operating system, per se. I asked a woman if she liked Windows and she wondered what I meant. When I explained to her, she said she always thought that was just what computers were.
The company that finally shows people there are simple alternatives to Windows available to everybody for the first time because of the agnosticism of the internet, stands to make a mint. That's what I was driving at yesterday. Apple has had a hard time of it until now because of compatibility issues, but those are disappearing, again courtesy of the internet.
As an aside, I think Apple will continue doing well precisely because more people can finally choose Mac over Windows. Both can get online, after all, and online is all that matters anymore.
I wrote in yesterday's article, "Google Docs is already pretty far along toward replacing Office..." and people wrote to tell me that's not true yet.
I'll clarify. I didn't mean GDocs has taken significant market share from Microsoft Office, I meant its capabilities are enough for most people. The majority of computer users never touches some 80% of the features in bloated office software. They just want to type a letter, paper, or other simple document and get page numbers in the right place. That describes most casual computer users and, for their purposes, GDocs is sufficient.
To experiment with that idea, I moved my business operation spanning two continents entirely to GDocs and Open Office last autumn, and it's been fine. It's been more than fine, in fact, it's been great. No more emailing attachments back and forth. Revisions are automatically tracked. No need for backups.
My goal was to run my business in such a way that if my laptop were stolen at an airport, I could rush to the nearest internet-connected computer running any operating system and keep working. You know what? I can do that, thanks to GDocs, our online database server, internet mail, PayPal, online banking, and so on. Try that with hard-drive based Windows and Office.
Eric mentioned that not everywhere is connected. Conceded, but what operating system would not include some kind of basic text editor for typing data in raw form until getting to a connected computer that can put the data where it belongs?
Almost anywhere in the world, I have access to every one of my business documents in editable, trackable, printable form at docs.jasonkelly.com. For free. Right now. No kidding.
Now, all of that said, there are some tasks that GDocs is not very good at handling yet, but it's improving all the time. Moreover, the reasons we create documents is changing as much as the way we create them. I would submit that a significant percentage of the capabilities of software like Word is irrelevant in a world that is creating most of its content for online usage. Take this article, for instance. Did I care one second about pagination, margins, font size, columns, or any of that hard copy stuff? Nope, I typed it online and it stays online.
As we progress, more and more of what Microsoft has developed over the years doesn't apply. It realizes this. That's why it's in a panic to buy its way to a longer future so it can figure out what to do when alternatives to its p |
