Category Archives: Business

Dr. Jekyll and Mr. Jobs – Is Apple Becoming Arrogant?

Let’s keep this short; the answer is “Yes”. Why do I say that? It’s an attitude thing.
Back in primitive times (the 1970s and 80s) there was a common expression in the Information Technology business; “no one ever got fired for buying IBM”. IBM was the safe, dependable choice for IT needs. Most people have forgotten that the US Dept of Justice filed an antitrust lawsuit against IBM in 1969. By 1982, when it was settled, it was already becoming irrelevant. IBM was beginning to see cracks in its business model. By the early 1990s, it was fighting for it’s life against competition that it never saw coming; commodity PCs and networks. Lou Gerstner came aboard as CEO and transformed the company from a maker of big iron mainframes to a provider of software and services. The company was humbled and then saved by his leadership.
In the 1980s and 90s, Microsoft was so preeminent that every other software company’s strategic plan had to account for Microsoft’s response to their product. Would Microsoft copy their idea, produce a competitor, and destroy the market? Would they withhold critical technical information, making it difficult or impossible to support the product? Would they issue a press release stating that they “planned” on entering the market with a similar product at some future date (known in the industry as “vaporware”) and create so much FUD that the market would stall? Microsoft was so distrusted in the industry that it was terrifying to even partner with them. They might just steal your ideas, make a poor imitation, include it in Windows and kill the market. Like IBM, Microsoft was sued by the Dept. of Justice for antitrust violations. In fact, you can mark the beginning of the implosion of the dotcom bubble to the date that the lawsuit was decided, April 3, 2000. At that point, the Nasdaq index was 10% below its all-time high. One week later it was 34% below the peak. The party was over.
Microsoft is still around and still very powerful. In a future blog entry, I will make the case that Microsoft’s days as a dominant force in the market are numbered, but for now here are just a few general points;
1) Their stock was $36.50 in June of 2001. Today it is at $25. Not a good investment, even with dividends.
2) When you hear “Windows”, is your initial reaction positive or negative? “Windows” is Microsoft’s most valuable trademark. Do you associate it with solid, trouble free computing or has it become something of a cultural joke?
3) How has Microsoft’s foray into online computing panned out? They started 15 years ago in 1995. Are they a player? Would you trust Microsoft with your personal or corporate information?
4) If you were a graduating computer science student and you had a choice to work for Google, Apple, some exciting new startup, or Microsoft, would you pick Microsoft? In the software industry, we believe that talent is our future (credit to Whitney Houston)..
5) Microsoft has made attempts to diversify into a dizzying array of products. Aside from a modest success with the XBox, how has that worked out? They just killed their latest mobile phone attempt (“Kit”) after just two months due to a total lack of demand. Ask yourself, would you rather have a Windows mobile phone, an iPhone, an Android based phone, or a Blackberry? Would you rather have an iPod or a Microsoft Zune? The only reason that Microsoft is still powerful is because they have a cash cow in Office and Windows, but knowledgeable people are beginning to discover that other products (like the free OpenOffice suite) meet their needs just fine. How long will it be before corporations catch on and stop paying Microsoft billions of dollars when instead they can either use free software or an application on the Web? Linux and the Mac run indefinitely with nary a crash and with little worry about viruses and spy ware. How many times have you reinstalled Windows on the same PC? What’s Microsoft’s competitive position on the Internet? In the mobile device field? Unless Microsoft can change public perception and move into hot new markets, they have peaked and will begin to decline. 5 years is an eternity in tech. I look forward to reviewing their position in 2015.
Why review the history of IBM and Microsoft? Because today, there is a new dominant tech company. It’s always hard to imagine how such dominant companies can lose their position. Companies like IBM, Microsoft, AT&T, GM. And Apple.
You know Apple. The scrappy underdog. The company that the brilliant Steve Jobs brought back from the dead and turned into a media darling. The company that can do no wrong. I own a MacBook Pro and an iPhone 3GS. I love Apple products. But Apple is changing. They are morphing from an underdog to a bully. They are beginning to become downright Microsoftian in attitude. To wit:

  • How many modern smartphones don’t allow you to use removable memory cards? Answer: one, the iPhone. This allows Apple to sell models differentiated only by the amount of storage. It also forces users to use iTunes to transfer music, video, or applications. Either use iTunes or get a different phone.
  • If your iPhone battery won’t keep a charge any more, you can’t replace it yourself (like any other phone). You have to go to www.apple.com, find the closest Apple Retail Store, bring your phone to them, and pay a technician to install a new battery for you. The closest store to where I am typing this entry is an hour and a half away. Traveling and short on time? Tough luck. Of course, you could mail your iPhone to Apple and they will replace the battery and mail it back. That’s not too much time, expense, and hassle just to change a battery is it? “Apple; it’s all about the user experience.”
  • If you are a developer who has created an iPhone or iPad app, Apple may or may not approve your application. There are certain no-nos that are well publicized. On the other hand, there are a whole lot of things that can disqualify you that you don’t know about and can’t determine in advance. It’s on a case-by-case basis, you know, more like guidelines than rules. So spend what little cash that you have on R&D and roll the dice. Your app might get accepted. Then again, it may not. Steve Jobs insists that Apple must have complete control over the user experience. Remember Apple’s most famous commercial? How ironic. By contrast, the Android OS is completely open, so as a developer or a user, you can deliver software any way that you’d like and run anything that you want. There are a lot of very good Android phones out there . . .
  • On the product front, Apple is starting to show some cracks in its armor. Go ahead and Google “MacBook trackpad click”. My MacBook trackpad now requires me to push when I click or it doesn’t register. Of course all vendors have occasional hardware issues, but check out how long people have been complaining about this. What has Apple’s response been? “Apple Store”.
  • It looks to me like the iPhone OS 4 saga may be the beginning of a story akin to Microsoft Vista. The Internet is rife with stories like mine. I have a 1 year old 32GB iPhone 3GS. I upgraded to OS 4.0 and the phone became almost unusable. Many times it just wouldn’t respond, and when it did it was sloooooow. It couldn’t connect to Wifi networks that I had been using for a year without any problems. It would drop Wifi connections and refuse to reconnect. There were at best some mild benefits to the vaunted new “multitasking” features, but not nearly enough to offset the really major issues. In short, it was a disaster. Worse yet, Apple provides no downgrade mechanism. Once OS 4 is installed, you are stuck with it. Apple actually wrote specific code into iTunes to prevent you from downgrading. Finally, after 2 days of my phone not working correctly, I used a complex hack that I found on the Internet to downgrade to OS 3.12 and it is working perfectly again. The Internet is filled with complaints, and most users are not software engineers.
  • Apple’s response to the iPhone 4’s external antenna flap is instructive. Their response can be summed up as “quit your whining”. Their only solution is to offer a free iPhone condom so that the user’s skin will not touch the external antenna and cause reception problems. I don’t want to be too forward, but would you mind undressing your new iPhone 4 so I can take a look?

Apple hasn’t blown it by any means, but the direction they’re taking is making me uncomfortable. Hubris has a way of biting tech companies in the ass (see IBM and Microsoft). Am I predicting the decline of Apple? Absolutely not. They are still the preeminent design and marketing company in tech. Apple has always had four major advantages; beautiful designs, great marketing, flawless execution, and fanatically loyal users. I don’t expect their designs and marketing to fall off, but for the first time in a long time there are questions regarding their execution. It remains to be seen how loyal their users will remain now that Apple has morphed from a scrappy little underdog to a borderline arrogant giant.
Stay tuned, this could get interesting.

Recession, Stimulus, and Keynesian Economics

A Short History

As we are all too well aware, the economy is now in the deepest recession since the Great Depression. Much has been written about irresponsible bankers, irresponsible borrowers, speculators, investors, regulation, deregulation, and ineffective government. But that is not the focus of today’s article. Today, we find ourselves in the midst of the greatest binge in government borrowing and spending in the history of civilization. One may or may not agree with our government’s actions, but it is fitting to examine the stated economic rationale behind the policies.

Prior to the mid 1930s, most economists believed that free markets were self balancing and would emerge from recessions if left to their own devices. They knew that capitalist economies were a balance between savings and investment. If there was a large expansion in savings, then there would be a large supply of money available. The law of supply and demand mandates that any commodity in great supply (in this case money) will become less expensive. In the case of capital, this is manifested by lower interest rates. As interest rates fall, it becomes less expensive for both consumers and businesses to borrow and invest. Consumers buy CDs, stocks and bonds (because we are talking about savings, not consumption, for the moment ignore purchases of consumable goods such as cars, TVs, and the like). Businesses find it cheaper to borrow money to expand manufacturing capability, invest in research and new product development, expand marketing, or move into other product lines and geographies. As investment ramps up, capital (savings) are absorbed and put to productive use, resulting in economic growth. In the shorter term, as capital is sopped up, there is a reduction in the money supply. Interest rates once again begin to climb, bringing the entire system back into balance.

At least that was the classical theory. But during the Great Depression, economists were stumped. It is generally agreed that the Federal Reserve contributed to the onset of the crisis by raising interest rates in the late 1920s in an effort to stem stock speculation, but that is a side issue. The great stock market crash occurred in 1929 and the economy was in a downward spiral.

Keynes provides an explanation

The depression went on for years. Why didn’t automatic mechanisms in the free market bring the economy back into balance? In 1936, John Maynard Keynes believed that he knew the answer, published in his masterpiece “The General Theory of Interest, Employment, and Money“. In it, Keynes argued that the basic problem of the Depression (or any deep, lasting recession) was that there was a lack of investment on the part of business in spite of low interest rates. If there is a general malaise, businesses surely are not going to risk taking on debt to expand into a future where there is uncertain demand for their products. Such a course is far too risky. And here we come to the crux of Keynesianism; Keynes’ solution was that the only recourse remaining was for government to step into the breach and spur investment by borrowing and spending. Government spending would guarantee (some) businesses economic activity, which would provide a market for other industries that serve those businesses, and so on. This would halt the downward slide and reverse the course of the economy. As business recovered, the government could withdraw and allow private enterprise to return to normal.

It should be noted that “The General Theory” was published in 1936, 3 years into Franklin Roosevelt’s first term. Under Roosevelt, government spending had already increased 50% by 1936 as compared to 1929 ($15B vs. $10B). Although private investment did increase somewhat, the unemployment rate fell to only 17% from 25%. In spite of government expenditures, it would rise once again (to 19% by 1939). This was hardly a vindication of Keynesianism. In his 1953 work, “The Worldy Philosophers“, Robert Heilbroner provides the most cogent explanation of this ineffectiveness, one which is eerily prescient of the current policy debate:

Nei­ther Keynes nor the government spenders had taken into account that the beneficiaries of the new medicine might con­sider it worse than the disease. Government spending was meant as a helping hand for business. It was interpreted by business as a threatening gesture.
Nor is this surprising. The New Deal had swept in on a wave of anti-business sentiment; values and standards that had become virtually sacrosanct were suddenly held up to skeptical scrutiny and criticism. The whole conception of “business rights,” “property rights,” and “the role of govern­ment” was rudely shaken; within a few years business was asked to forget its traditions of unquestioned preeminence and to adopt a new philosophy of cooperation with labor unions, acceptance of new rules and regulations, reform of many of its practices. Little wonder that it regarded the gov­ernment in Washington as inimical, biased, and downright radical. And no wonder, in such an atmosphere, that its ea­gerness to undertake large-scale investment was dampened by the uneasiness it felt in this unfamiliar climate.

Hence every effort of the government to undertake a program of sufficient magnitude to mop up all the unem­ployed–probably a program at least twice as large as it did in fact undertake–was assailed as further evidence of Socialist design. And at the same time, the halfway measures the gov­ernment did employ were just enough to frighten business away from undertaking a full-scale effort by itself. It was a sit­uation not unlike that found in medicine; the medicine cured the patient of one illness, only to weaken him with its side effects. Government spending never truly cured the econ­omy–not because it was economically unsound, but because it was ideologically upsetting.

Note that during World War II the federal budget peaked at $103B, fully 10 times the 1929 amount. This did result in full employment, but at the cost of rampant inflation, as would be expected when the government indulges in the wholesale expansion of the monetary base.

Keynes misunderstood

Many modern politicians invoke Keynes in the name of government expansion, but the fact was that Keynes was a great admirer of Edmund Burke. He believed that government activity in the economy should be targeted and temporary, should focus on stimulus and investment, and should be withdrawn as soon as the free market was once again healthy.

In a letter to the New York Times in 1934, Keynes wrote “I see the problem of recovery in the following light; How soon will normal business enterprise come to the rescue? On what scale, by which expedients, and for how long is abnormal government expenditure advisable in the meantime?“. [emphasis added]

Are current policies “Keynesian?”

Governments around the world, from China, to the European Union, to the United States, are passing “stimulus” bills. The idea is to spark economic activity in an effort to get business to once again invest. Given what we have learned, an effective stimulus should have the following attributes:

    • It should be large enough to have an effect. The 2007 Gross Domestic Product of the US economy was $14T. An $800B stimulus package is 5.7% of GDP. The 2007 federal budget was $2.8T. As explained above, in World War II, the U.S. government spent 10x the 1929 budget.
    • It should be immediate. If the government is going to borrow huge amounts of money to stimulate the economy, it needs to get that money into the system as quickly as possible. One way to do so is to fund projects that are already in the pipeline. The money should not be spent on programs that do not spur investment or spark economic activity in the private sector.
    • It should encourage private investment. No matter how much the government spends, if the private sector is not confident about the future, they will not invest. Therefore, the program should endeavor to make private investment as attractive as possible. Lower capital gains taxes encourage companies and individuals to take on more risk. Lower individual tax rates immediately provide an infusion of capital into the system, as well as incentivizing individuals to take more risk. If federal income tax, social security, medicare, state income tax, and property taxes add up to a tax rate of 65%, one can hardly expect an individual to risk their savings or livelihood in an effort to better their economic situation. They will be more reluctant to work harder for a bonus, more reluctant to join a start-up, more reluctant to relocate. In short, if you lower the rewards, then you have depressed the risk-taking activities that are the beating heart of a free market economy. Counter-productive in the best of times, policies that depress the investment climate are potentially catastrophic in the midst of a recession.

A word about the monetarists

Typically, one hears that the economic debate is between Keynesians and monetarists. Policy makers, rightly or wrongly, tend to invoke Keynes when arguing for more government involvement in the economy. Other policy makers invoke monetarists, principally Milton Friedman, to argue for a more laissez-faire approach to the free market.

What is monetarism? At it’s core, it is the belief that government can best tune the economy and prevent economic bubbles and recessions by controlling the supply of money and balancing the budget. By what mechanism? Primarily a central bank’s (for example the Federal Reserve) control of interest rates, as well as its sale (or withdrawal) of government bonds. As espoused by Milton Friedman, government should concentrate primarily on keeping prices stable. If there is too much money in the system, the result is inflation. Too little and there could be a lack of investment, causing a recession, and in severe cases a deflationary spiral. (Some ask why falling prices are a problem. Ask yourself what the result would be if businesses were incapable of making a profit).

Ben Bernanke, the current Chairman of the Federal Reserve, is generally thought to be non-ideological in his views of Keynesianism and monetarism. In his writings and actions, he seems to be a pragmatist, willing to use whatever tools are at the disposal of government to forestall a crisis or alleviate one.

Who is right?

In my (admittedly) uneducated opinion, neither school of economic thought is fully correct or incorrect. From a non-ideological viewpoint, we don’t live in world with a pure free market economy, free from all regulation and government interference. Nor do we live in a world with economies fully controlled in minute detail by government (unless you are one of the unfortunates residing in countries like Cuba or North Korea).

Was it a lack of regulation that caused the housing bust, as some claim? Were banks running wild? Did Alan Greenspan lower interest rates too much in the wake of the Internet bust and 9/11 (monetarism) in an effort to forestall a severe recession, thus contributing to the housing bubble?

What of government interfering in the housing market via the Community Reinvestment Act and the quasi-governmental entities, Fannie Mae and Freddie Mac? Most of us remember a time when a 20% down payment and a high credit rating were required to qualify for a mortgage. Was it deregulation of the banks that loosened lending standards, or was it that the CRA mandated that 50% of bank lending “meet the needs of the entire community”? (Note that this threshold was raised from 42% in 1999 by the Clinton administration). At the same time, Fannie Mae and Freddie Mac were mandated to meet housing goals set by the Department of Housing and Urban Development . As such, they bought and securitized trillions of dollars in sub-prime mortgages. One can hardly declare the failure of a “free market” that requires lenders to loan money to those that would otherwise be denied as poor credit risks, backstopped by GSEs (Government Sponsored Enterprises) holding trillions in risky mortgages; $6 trillion total, fully half of all mortgages written in the United States.

Modern economic systems are complex. Government regulation and intrusion only make them more so. Pure monetarism or Keynesianism is nearly impossible in such an environment. The best that we, as citizens, can do is to be watchful that government actors are invoking neither Milton Friedman nor John Maynard Keynes as a smokescreen in the pursuit of non-economic goals.

  • Does a “Keynesian” policy meet the test as summarized above? Will it be timely, targeted, temporary, and large enough to have an impact?
  • Keep an eye on incentives, as they are what drive a market economy. Will a proposed regulation throw sand in the gears of commerce at a time when we need as much economic activity as possible? Will a tax policy or law encourage investment by both business and individuals, or suppress it? Will it encourage risk taking and innovation or reduce the rewards of success to the point that investors aren’t willing to fund a venture and individuals are unwilling to go out on an economic limb?
  • How much of a policy is economic and how much is social engineering? Is a policy designed to get the economy growing, or to change our society?

One last note; whether one agrees or disagrees with a particular social policy, it is extremely dangerous to add more uncertainty to a market economy that is already rife with fear. That is simply bad policy, whether it originates on the left or the right.

Bought and Sold

About a week and a half ago, it was announced that the company that I work for was being purchased by a large multi-billion dollar firm.
Turnabout is fair play, I guess. I have been on both sides of acquisitions in my career, since 1997 exclusively in the role of the acquirer. What’s interesting is the perspective you have depending on your specific situation. Following is a subset of the infinite number of personal and business situations and a take on what might be the feelings of the acquired employees in each situation:
• Acquired company is in financial trouble; acquirer is known as a fast moving, exciting place to work: I still have a job! And a future!
• Acquired company is not in financial trouble; acquirer is known as a fast moving, exciting place to work: This may not be so bad. Maybe there will be even more upside.
• Acquired company may or may not be in financial trouble, acquirer has the same initials as the state of California: Woe be to all ye who venture forth. For I have brought the gates of Hades to the corporeal realm!
• Acquired company is in financial trouble, acquirer is a staid but respectable player in the industry: This may not be so bad. Let’s see how this plays out.
• Acquired company is not in financial trouble, acquirer is a staid but respectable player in the industry: This is an endgame? Anticlimactic. Guess I’ll take a “wait and see” attitude.
• Acquired company may or may not be in financial trouble, acquirer is the largest software company on the planet: I don’t want to live in Redmond! Who the hell can afford a house in Redmond! What about my kids, my family, my friends, my life! MY CODE!!!
You get the idea. There is an entire spectrum of emotions that one could experience depending on their specific situation. So given my situation, here are mine.
I’ve worked at my current place of employment for 6 years. When I came on board, we were a going concern, but by no means was our future assured. We had about 150 employees and we partnered with whichever industry players we could get to sign an agreement. It was kind of like being a cat migrating with a herd of elephants. One wrong move and you’re road kill. But damn, what a great feeling! It was exciting. People knew each other and everyone pulled together. We had what in military circles is known as “esprit de corps”. And you know what? We still do. Even though we now have over 1000 employees. I don’t know everyone in the company anymore, but it’s amazing how many people I get to interact with. And our start-up culture is now so ingrained that people who are too political or who avoid accountability are quickly discovered and marginalized. That’s not nearly as brutal as it sounds. Our culture is to have a great work/life balance and just about everyone buys into that; but we’re not the type of place where you can just show up in the morning, do nothing, and nobody will notice. If you truly take pride in your work, and you have some modicum of self-motivation, our company is a great place to work.
Now it’s 2007. We’re certainly not an industry titan, but we definitely have an impact; we make a difference. We have a respectable market share in certain segments, so other players have to pay attention to us. And we’re still growing. We’ve been successful, with a great management team that has deftly navigated some pretty tricky waters. We’ve avoided those elephants and even danced with a few of them. So I guess I knew that sooner or later a larger player would pull the trigger. I even thought I was ready if it happened. But the thing is; I had never been emotionally attached to a company before. It’s harder than I thought.
During the workday, I am moving forward. Work occupies my mind and nothing much has changed. I honestly doubt that much will change in the day to day life of the employees. But it is still the end of an era, and the greatest experience of my 28 year career.
If in the years to come my work is 1/2 as fulfilling as it has been in the last six, I will consider myself exceptionally lucky.

The Importance of People

I was out to dinner with some colleagues last week (if you are a regular reader, “out to dinner” has become a frequent phrase in this blog) and we began to exchange anecdotes about our careers. The attendees were software teams from two different companies with a range of experience from intermediate (6 to 8 years experience) to senior (27 years of experience; me).
Anyone familiar with high technology culture knows that cool technology is so important to engineers that they will pass up higher pay (within reason) to work on interesting projects. We love talking about all the cool stuff that we’ve done. When it was my turn, I dug back into the early 80s to describe the wireframe 3D rotation software that I worked on, a contact lens expert system in 1982, automated climate and lighting control of my house in 1986, photographic image display software written in hand-tuned Assembler in 1990, compression algorithms in 1991, neural networks in the 90s, etc, etc. In the process, my career trajectory has gone from a 3 person company, to my own business, to a series of startups, to a Fortune 500 software company, and finally to my current position with a company that began as a startup but now has over 1000 employees.
In the course of conversation, it occurred to me that my perspective has changed. I no longer feel that my career accomplishments are so strictly defined by technical achievements or shipping products. Engineering milestones age rapidly. It’s hard for today’s engineers to relate to the challenge of writing a 3D rotating wireframe model on a 20 MHz 16 bit processor when they are accustomed to playing virtual reality games on desktop computers with supercomputer chips on the graphics card.
At this point in my career, the accomplishments that really stand out to me are those that are related to the people that I’ve worked with. Entry level engineers that I have helped to learn proper software development processes, developers that have become successful managers or Software Architects, and line managers who have become executives. Identifying potential talent and mentoring and working with those people over the years, one hardly notices that the former novice now has an opinion of his own; more often than not an opinion that has become as educated and well thought out as yours. It’s not always fun to be bested in a debate, but there have been many times that I have suppressed a small smile of satisfaction when a former “student” one-ups his “teacher”. That’s validation that both of you have grown.
So my perspective has changed. The “cool” engineering accomplishments that I worked on in the past will eventually be forgotten. But the people who have achieved and accomplished success due to their own hard work, with just a little bit of push and guidance from me? Those are “accomplishments” that we share, that will be passed down to their future colleagues, and that will live on.