Manic-Depressive Technology Business

As I read this article about local (to Ottawa) technology firm Dragonwave, I couldn't help but empathize with their plight. It is a common one for small firms whose market is comprised of large companies, which in this case are the telecommunications carriers. Let's look at their difficult situation to understand it better.

During the dot-com boom, the two types of startup that always attracted attention were the web companies and the telecommunications product and service companies. Due to its engineering pedigree, Ottawa startups most often fell into the telecommunications product category. Entrepreneurs and investors knew that even a single sale, if you could achieve that critical milestone, could make everyone rich. The reason is simple: a modest investment would pay huge returns since any sale to a behemoth like a carrier promised a solid and lucrative revenue pipeline. That first sale could fund the company's operations for a long time and also attract the acquisitive eyes of a Cisco, Nortel or one of the other large equipment vendors.

After the dot-com bust, it once again became important to consider the ebb and flow of such a business since the carriers slowed their capital expenditures, the acquisitive stopped acquired and investors held tightly onto their money. In this more normal business environment, the challenges of selling to carriers could not be ignored. It was still true that a sale would be windfall, just not as wonderful since there were no exits. Startups had to get to work right away on the next sale.

In the public markets, small companies selling to large companies can lead investors on a frightening ride. Full quarters can pass without any significant revenue. The question then becomes whether the company can pull another one out of the hat. There is also that dreaded 10% rule, the one that states that a company that get more than 10% of its revenue from one customer is a high-risk investment. Dragonwave is in this very situation (Clearwire), and the one they have to pull out of the hat is Verizon or AT&T. The pressure is building, as represented by the reported 25% short position on their shares. These are investors betting against their ability to deliver that next sale, or at least not in the near future.

I've worked in this type of environment. Except in a startup (Dragonwave is beyond that, though still of modest size) that carrier can represent 90% or more of revenue. The discussion isn't public, but you can be sure that there are some tense meetings between management and the sales team, and between investors and management.

When the sale actually materializes, the company goes through a remarkable overnight transformation. While everyone is cheering and passing around cases of champagne it comes out that the company was mere weeks away from shuttering the doors; the bank account is empty and investors would not put up any more money. Now with the purchase order in hand, the bank will loan the company large sums to bridge the gap between P.O. and the first payment on product delivery, while investors and management are all smiles once more.

The company then hires more people to service the new customer's needs -- which tend to be large, in line with their size -- and money is freely spent. As the champagne loses its fizz, the sales team goes back to work because the clock is ticking again. Everyone knows that the next big sale is needed within a couple of quarters or trouble will again loom in the boardroom.

This manic-depressive cycle continues until there are enough customers that the revenue lumpiness is no longer a threat to the company's survival. Done right, that's the time to go public and pad the bank account. Dragonwave will likely survive their still very lumpy revenue, even though they are unlikely to do issue more stock, but their share price will continue its roller-coaster ride for some time.

It's no surprise that investors over the past decade have steered more towards web startups. Unlike telecom startups, these companies can get to revenue with less money up front and the revenue, while typically very small at the beginning, is not lumpy. Smooth revenue plots, both past and present, are great for giving investors confidence in the business prospects. Lumpy revenue, even when the lumps are very large, always makes investors feel as if they're in a casino, where the next spin of the wheel or pull on the arm will hit the jackpot.

The appetite for the casino approach to investing is long gone. Carrier-focused, telecom startups are therefore, not surprisingly, not ones that are likely to attract investors in either the private or public markets. Manic-depressive revenue cycles are no long acceptable.

Cable Wars Come To Canada

Regulators are at their best when they intervene in an industry to prevent harm, such as keeping unsafe food and drugs off the shelves, and preventing usurious interest rates. Not so good is when they attempt to coerce companies to offer products and services that they or their political masters, the government, desires. The latter approach is an unwarranted attack on the free market. I believe this is the proper way to judge the CRTC's action this week to say that cable companies must negotiate payment to the television stations to distribute their products to consumers.

Now, before we attack the CRTC -- whether justly or because of our personal beliefs -- we should spare some sympathy for the situation in which they find themselves. The government has to a degree left them to hang themselves by not being active in directing policy or modifications to the laws that dictate the CRTC's duties. It may be intentional, or it may be that they just want to focus on other important topics, of which there are many. Perhaps the government would prefer to watch the public stew on this for a bit before deciding on the most politically profitable approach.

The CRTC themselves have signalled that they would prefer the two sides would resolve this without the regulator's involvement. This stance is in the CRTC's self-interest, however it is also true that it would be best for everyone. By forcing the sides to negotiate, the CRTC hopes to deflect the attention focused on them. It isn't likely to work. They are in everyone's cross-hairs, as the large number of public statements from every side this week has shown. Let's look at some of these views before I come back to my own perspective of how the CRTC ought to act.

Let's start with John Doyle, writing for the Globe and Mail. I found his views to be particularly self-serving and wildly exaggerated. But he does get one thing partially right.

Both sides are treacherous, money-grabbing, hostile, egotistical forces.

The money-grabbing bit is certainly correct, although this is nothing dreadful; this is simply business, where the first priority is always to deliver a return on investment to its owners. It am continually amazed at how often some Canadians seem offended by the concept of profit, yet they live in a country whose affluence was created by free market, profit-seeking businesses. Without those profits, companies couldn't hire and pay salaries to people like John Doyle. Why is he not instead fuming at the networks who have squandered billions in pursuit of their own treacherous, money-grabbing, hostile, egotistical objectives?

Consumer greed for American popular culture disguised as a robust belief in the inherent integrity of the free market.

Ah, the customer is always wrong. So who is at fault here? Is it the networks who, rather than invest in Canadian content, live by the advertising placed alongside imported programs, and even lobby for blocking of similar content from US networks distributed by the cable companies? As Rogers Communications says:

"Endorsing Broadcaster-mandated blackouts of American shows is a new low point for the Commission," said Phil Lind. "In an age where consumers want to watch what they want when they want, the concept of denying content, which is available for free with an antenna or on the Internet, is so anti-consumer it's unimaginable."

Mr. Doyle's contempt for Canadians disgusts me. He wants to dictate how you and I should spend our money, whether through taxes or additional fees funneled back to the money-grabbing, and poorly run, networks.

The airwaves belong to the nation and the citizens are entitled to a say in the use of the airwaves. Broadband. Digital signals. That’s the airwaves, people. And nobody is entitled to a monopoly on the airwaves.

This is absolute nonsense. Access to the radio spectrum is justly regulated by the government -- not just the CRTC, but also Industry Canada -- since it is a scarce resource and there is large potential for interference between services. Cable, fibre and copper are not subject to the same scarcity and they do not make use a public resource other than access to rights-of-way. One of the important reasons cable is so successful is that it can support far more broadcast capacity than over-the-air broadcasters.

Let's move back to that press release from Rogers Communications. While I always cringe a bit when I read these sorts of self-serving items, I will say up front that, despite how much I despise this company as a customer of theirs, I sympathize with their position.

"The CRTC today has essentially placed a tax on all cable and satellite customers," said Phil Lind, Vice Chairman, Rogers Communications Inc. (RCI). "While the over-the-air broadcast sector has had financial challenges during a tough recession, the Commission has decided to penalize our customers and impose fees for services that are available free over-the-air for anyone with an antenna or on the Internet."

This is an important point, one that I touched on earlier. The cable companies have large profits and the networks are bleeding red ink. This fee, should it come about, is effectively an attempt by the CRTC, and the government by proxy, to play Robin Hood with a maple leaf by transferring wealth from the rich to the poor. They do this without regard to the reason why the poor became poor: their own incompetence. Have they forgotten Canwest?

It's become a Canadian tradition to transfer wealth around in the pursuit of egalitarianism. While this may make sense when it comes to government services, all the CRTC is doing is rewarding failing private enterprises by forcing the successful ones (or, more correctly, their shareholders) to pay them.

"As early as last year, the government signalled to the CRTC that it believed compensating the networks would be damaging to consumers. That message was interpreted by the industry as a sign cabinet may seek to overrule the regulator. "

"Private broadcasters lost $116-million before interest and taxes, wiping out an already meagre profit of only $8-million in 2008. However, they also spent more on foreign programming than ever before, a practice that was strongly criticized by the cable and satellite firms during the course of the debate."

Can you image the US government forcing Google to pay Yahoo! for the capital crime of successfully competing against them? This is why the government, and the regulator, should stay out of this battle: they do not want to rule on private business practices by, in effect, making one company responsible for the choices made by another company. Yet this is what the CRTC is proposing to do. They also display an unbelievable ignorance for the most fundamental dynamics of the cable business, and how they serve customers.

“They better be careful that they don’t impose it on the customer. Because the customer has an alternative that is free,” [von Finckenstein] said, referring to the ability of consumers to watch television on the Internet. “You work out the solution by which you keep your customers.”

Von Finckenstein is not a young man, yet he seems not to remember the 1970s when the cable industry came into its own after bleeding red ink for years from building their distribution networks from scratch. Originally, they did not care one whit about local programming. They only carried those signals because that is what customers wanted. It was a simple technical issue related to customer convenience: television sets only accepted one RF connection, and that could be connected to the cable feed or a roof antenna or rabbit ears. If the cable companies didn't carry local stations, customers would have to have to install switch boxes or manually change the connection at the backs of their sets. The cable companies' real business was to bring in distant stations, especially US networks, that the market hungered after. Carrying local networks was a purely technical solution to a customer problem.

If talks fell totally apart, the broadcasters would have to back up their position by unplugging their signal, which would not impress their advertisers much, or the cable companies would have to stop carrying the broadcaster’s feed, which would infuriate its customers.

Don Martin got it right. While it may come to this, as it recently did in the US, since the networks and the cable companies would both lose in the public's eyes, they would be wise to avoid doing this. Then again, maybe it would be a good thing. I already know people who have cut their cable service and gone back to receiving only over-the-air local stations. Many are finally realizing that TV is truly a wasteland, and a terribly expensive way to spend their leisure time.

With more and more people tuning out and going to the internet for their entertainment needs, especially the younger generations who are the most important audience to pursue, no amount of wealth transfer will save the networks. The cable companies will succeed regardless since they are in the driver's seat with respect to broadband. We will be hearing more about regulating Canadian content on the internet, but it will be smoke without fire since there is really no mechanism by which the CRTC can control this, and if they tried there would be such howls across the country that politicians would have to respond.

The networks will lose this battle. Maybe not this year or next year, or even the year after, but they will lose. In the meantime, if the CRTC insists on managing outcomes, well, let them focus on the CBC, a company created and funded by the government (for us). One of CBC's purposes -- why its existence is justified -- is to sponsor and distribute Canadian visual arts that may not reach an audience when the private media, or their customers, are not interested. As much as I like the CBC (and I really do, though only radio), the CRTC should stick to dictating content to this government-funded institution and not the private sector.

If the private sector can't earn a living by offering local programming or Canadian arts, let the market determine the result. It would be even more outrageous if they were to interfere more deeply by dictating that the cable companies not be able to raise rates to maintain their profits.

Palm In Distress (again)

Competition is hell. It is especially so when you're trying to revitalize your business by following the market into the already-crowded smart phone space. By all accounts, WebOS and the handsets based on this new mobile phone platform are really very good. Unfortunately for them, they aren't especially better in the eyes of consumers and their competitors -- Apple, RIM, Google and even Microsoft -- are formidable. There will be a shake-out in the platform wars and, as many predicted (including me), Palm would be the first to exit. This is becoming increasingly likely.

Their most recent quarterly report tells the bad news. They have excess inventory of handsets in the distribution channel, which clearly indicates that even their modest projections (given the size of the growing smart phone market) were too high, and has left them holding the large cost of building that inventory but without the revenue. They can always cut costs -- as they have been doing -- to stay profitable, but that won't save them. It's easy enough to fire a large part of your work force, if they are involved in production; except that in Palm's case, as in many technology firms, the company's future depends on the intellectual capital produced by those people. In short, while they remain optimistic, there is little enough to justify that optimism.

In theory, share price should be a multiple of earnings, and Palm's aren't bad, although that's usually only true if the business outlook is stable. Palm's outlook is very, very bad. It looks like next quarter's revenue will dive to something like one-half that of the previous quarter: from $350M down to $150M. Not only are they failing to grow or even stabilize their business, this is happening in a market that is growing by leaps and bounds. They are now entering what could very well up as a death spiral where they lose market share, cut costs, have less capacity to produce interesting products, and the competition widens the gap. Customers know this and become less willing to be a channel for products from a faltering supplier.

There was quite a reaction in the trade media to Canaccord Adams' reduction of Palm's share price outlook to $0. This is really kicking them when they're down. It's also a good call. Despite their current distress, the intellectual assets of WebOS and their handsets are worth something, but that may be only realizable, if at all, if they are acquired by a company with the financial capacity to put those assets to work. That may happen. If it does, I predict that the technology will still fail. The smart phone market is already crowded and even some good platforms -- including WebOS -- will fail.

The shake-out will not end with Palm. The next candidates for the chopping block are Symbian and Windows Mobile. Microsoft will pour money into their platform for some time into the future, so they will be around for some time, and could survive as a niche player. Symbian will probably hit crunch time in 2011; Nokia won't willingly let go of it, and although it will irk them no end I expect that they will choose to protect their handset business over the platform, and begin by offering a few devices with Android or, less likely, one of the less-popular Linux variants.

That leaves Android, iPhone and Blackberry as the most likely survivors of this competitive battle. Palm gave it a really good try, but WebOS is likely to only survive, if at all, as components adapted to other purposes by whichever company eventually acquires them. It's a heart breaker.

Signs of Almost Spring

Two years ago when we had that near-record breaking snowfall winter, I remember that about this time in March there were robins hopping around on the tops of snow drifts. With the recent extraordinary warm spell, the birds are not in the same predicament.

Now that spring is officially here -- the equinox occurred on Saturday -- it is time to go through my personal checklist to see if spring has truly arrived:

• Robins: check.
• Geese: check. Apparently, all they wait for is the retreat of snow cover, not warm weather or lots of green stuff to eat.
  
• Chipmunks: check.
• Groundhogs: all quiet around the burrows. I pass a lot of them on my frequent runs, but I've not seen even one poking its little head out and blinking the sleep out of its eyes.
• Midges: check. Clouds of these little pests can be seen all season long swirling in the sunlight doing their mating dance, but they usually wait until the weather spends more time above the freezing point. So far there are few of them, but they are here.
• Squirrels: check. Of course, that isn't saying anything since they're active all winter long.
• Motorcycles: check.
• NCC pathways: mostly clear.
• Flood warnings: nope. The creeks are running ice-free, and the snow melt looks inadequate to cause flooding. Looks like Glencairn is off the hook for now.
• Street sweeping: partial: On some streets the grit has been swept from the road onto the sidewalk, while on others the grit has been swept from the sidewalk onto the street. This battle of the sweepers is a yearly event.
• Mosquitoes: nope.
• Tree buds: nope. They're still tightly bundled up inside their little shells.
• Sap running: check.
• Performance sports cars out of storage and roaring down the roads: check.
• Neighbour's deck chairs out: check.

Well, this list can go on forever. I think we have enough signs that spring is well underway, and it is ahead of schedule in comparison to previous years. Of course we'll probably pay for this with another cool summer. And, no, none of this is a confirmation or a disproof of global warming.

Random Walks Near Dollar Par

Thursday's quiet market action and a dollar trading near par with the US dollar produced some good examples of how currency fluctuation affects stock prices. All we need to do is compare prices of stocks that with dual listings on both the TSX and one of the US markets. Today CAD traded between about 0.986 and 0.991 to USD during market hours, or about 0.9% to 1.4% below par. We should expect that TSX-traded stocks should have traded about that much below their US counterparts during the day.

I picked two companies for this comparison: Dragonwave (an Ottawa company) and Suncor. Suncor is the more liquid issue, trading many times more shares per day than Dragonwave. Since trades are discrete events (price is not a continuous function of time), pricing errors should be more common for Dragonwave. The two comparison charts for March 18, 2010 are shown on the right.

One thing that immediately pops out is how much more closely the stocks traded than the currency difference would indicate. The variation in all the stocks I monitored today were even greater, with some in near lock-step all day (0%), while others showed persistent differences of 2%. Interestingly, I saw better tracking in some low-priced shares, although I expected more variation since prices on the TSX on any stock over $1 are never fractional cents, while this is common on NASDAQ, which would add in variability due to rounding. There are of course many more reasons for the generally poor tracking of dual-listed stocks, though it is perhaps mostly due to order book fluctuations and accumulations on the bid and ask sides of the market which can cause episodic minor volume avalanches when a sale moves the market price.

It is interesting to speculate whether these pricing errors can be exploited by, say, buying when the price spread is high and selling a few minutes later when the gap is closed. Unfortunately this does not look like a profitable strategy. When you consider slippage risks and trading commissions, and the intensive effort involved, I have grave doubts whether this could ever be a dependable strategy. Still, it is an interesting topic to think about.

Mobile Phone Wars: iPhone vs. Android

In the media's ever-present search for horse races -- the often meaningless comparison of numbers that signify little -- we have the comparisons between Google's Android-powered mobile phones versus Apple's iPhone. As usual, they tend towards trying to paint the burgeoning competition in the smart phone space as a winner-take-all war. This is nonsense, but that doesn't stop the headlines or the (deliberate?) misunderstanding by journalists. The latest figures published by Flurry make a good example.

The figure shown here is from the referenced Flurry publication that compares early sales of iPhone, Motorola's Android-powered Droid and Google own Nexus One (manufactured by HTC). In the largely superficial treatment given to Flurry's figures in the media you might think that Android is an iPhone killer. But again, that's only if you believe there can only be one survivor. Besides, the numbers must not be taken at face value; as we will see, a bald comparison of the numbers do not properly describe what happened, even if one does accept that there is a war going on.

First, we need to note (and here we are exclusively looking at the US case) that iPhone is exclusively offered via AT&T while Droid is exclusively offered via Verizon. Google sells Nexus One direct-to-consumer, although it so far only works on T-Mobile's network. These carriers are not equivalent in the size of their businesses and in their business practices, and Apple, Motorola and Google also differ in their market strategies.

Consider subscriber counts: the Q4 2009 figures for AT&T and Verizon are 85.1 and 91.2 million, respectively. These numbers are close so you might figure that the sales figures should be comparable (1 million iPhones and 1.05 million Droids in the 74 days following launch) since they have similar addressable markets (each carrier has about the same number of possible customers for these devices). However, this is a poor comparison because the iPhone launched in 2007. At that time AT&T had 63.7 million subscribers, which is a far lower number. While much of the media overlooked this important data, Flurry's own analysis (from which the above figure was taken) is both balanced and accurate.

2. Relative Subscriber Bases: Droid launched on Verizon, a larger network with more subscribers than AT&T, especially when considering AT&T's 2007 size (63.7 million at the time of iPhone launch) versus Verizon's 2009 size (89 million at the end of Q3). Additionally, there was pent up demand among the Verizon subscriber base for an iPhone killer, which is exactly how Verizon positioned the Droid. Finally, Verizon backed the launch with advertising support of at least $100 million.

To put the sales figures in their proper light, we need to compare penetration into their respective addressable markets. Done this way, we see something quite different:

• AT&T and iPhone: 1.57% (1 million phones for a subscriber base of 63.7M)
• Verizon and Droid: 1.18% (1.05 million phones for a subscriber base of 89M)

Now we see a significant difference, where the iPhone can be said to have outsold Droid during their respective launches. Of course even this calculation has its drawbacks since we have to consider the impact of marketing by Apple/AT&T and Motorola/Verizon before and after launch, and that the iPhone was something quite novel in 2007 while the Droid was heavily marketed as an iPhone killer to a new smart phone-aware population.

Look at the numbers however you like if your objective is to pick a winner, but in too many respects we are comparing apples and oranges. Better, I believe, to recognize that both products (really, iPhone versus the whole line-up of Android-powered phones) are both successful products.

This brings us to Google's own branded phone the Nexus One. Despite some of the hype -- although it generally isn't coming from the traditionally marketing-averse Google -- it is little more than the newest generation of Android software and mobile device hardware. The software will soon be available on all Android phones and the chips are beginning to show up on devices running other platforms. Nexus One is not that special since it will soon be matched and surpassed by other devices, as is typical in the game of technology leap-frog with which we are all familiar.

Whether the Nexus One is a flop or not (135,000 phones in the comparable period) really depends on how one chooses to interpret Google's (non-)marketing strategy, but a strong case can be made that it was not their intention to try to compete in the mass market against those other devices.

Now that Nexus One is available in Canada, we can all do our own comparisons. I have a Nexus One on the way and I am looking forward to get some hands-on experience with this latest salvo in the mobile phone wars. If nothing else, I'll have something novel to pull out of my pocket when colleagues trot out their iPhones and Blackberrys at meetings. It'll be interesting to see their reactions.

Limits on Power

Many people, it seems, have a poor understanding of the dynamics of power and leadership. My guess is that the misunderstanding is a consequence of most people not being in leadership positions. That is, in most of our roles in life we are answerable to another person -- whether as children, students or employees -- and only rarely if ever are actually in a position of temporal power. There is some inevitability in this since power pretty much requires that there be more order-takers than order-givers; after all, that's close to being a definition of power: to coerce or pursue others to do what you want rather than what they might want.

Yet power is not some simple in its reality. We are assaulted daily by the media with stories of the powerful being brought low, whether they be politicians, CEOs, tycoons, generals or coaches. We may even feel a bit guilty by a sudden feeling of schadenfreude that washes over us, perhaps due to a latent resentment of our own lack of power. Power is mostly a temporary matter, unstable by our own natures and by the ambition of others who aspire to already-filled positions of power. Those who would keep their power quickly learn to rein it in since even for kings power is never absolute: it requires the acceptance of others. The delicate matter of gaining and maintaining power was starkly outlined many centuries ago by no lesser a figure than Niccolo Machiavelli in his classic, "The Prince".

Therein lies a challenge for the powerful: to use that power to achieve desired outcomes while maintaining power at least long enough to see the job through. We see this domestically as we wonder just how far Harper will push the so-called conservative agenda, since going too far or too fast could result in his loss of power. Wisely, he keeps his intentions vague enough that we are not even certain if that is what he actually intends. Then look south to the United States where many left-leaning activists are disappointed with Obama's apparent failure to reverse much of what they hated so much about the Bush era: Iraq, civil liberties, investment in science, and so forth. There is always that question about whether they have corrupted by power -- therefore acting in a way that is primarily intended to keep them in power -- or are being realistic about how much they can command changes to the status quo without threatening their hold on power -- and therefore their ability to, eventually, effect those changes.

Command and control has its limits. Even in the military, commanders who go too far in what they demand of their subordinates will lose that power, and often their lives. History is peppered with stories of mutinies and "fragging". In the political and business spheres, power is even more limited: the electorate can turn on governments in a moment (Mulroney), parties can turn on their leaders (e.g. Dion), and CEOs can be ousted by their companies' owner (e.g. Trump, Asper).

The body (corporation, party, etc.) which , organizes, channels and focuses is usually more powerful than those at the top and can reject them if the body itself is threatened by commands from the top. This is different from the threat from outside elements, in that it can be even more insidious. Remember the British comedy series "Yes, Minister"? Political power was treated humourously, but the program often cut right to the heart of the reality of power. In my own business life I have seen CEOs parachuted in from the outside to "shake things up" or to "set a new direction" or "reinvigourate" the company, only to have them spectacularly fail. When the organization is resistant to change -- and almost all are -- coming in with guns blazing will not work. These CEOs never learn what is really going on or how things work, and those they must rely on to effect change are part of the problem. Recall this famous quote by Harry S Truman, in speaking of incoming President, General Eisenhower:

"He'll sit here, and he'll say: 'Do this! Do that!' And nothing will happen. Poor Ike. It won't be a bit like the Army. He'll find it very frustrating."

For example, even as Nortel brought in one unsuccessful CEO after another, the middle layers of management stayed mostly the same, and those managers protected themselves at the expense of the company and of the various senior managers that passed through from time to time. It was through those managers that change needed to be effected, but they had more real power than those above them. Typically they sacrificed those even lower down the hierarchy, and the products and business for which they were responsible, when they were forced to get along with fewer resources.

This brings us to leadership: the ability to influence others to follow and change even where they are not compelled by power to do so. Those with power who are also good leaders tend to be the most successful. Nortel lacked good leaders. The United States has someone in Obama who shows signs of being a good leader, but is as yet unproven. If we look at the matter of health care, he can only go so far in ordering action since too many are unpersuaded. So he leads, but he also negotiates. Something I wonder is if his continuance of many Bush policies -- domestic security, bailing out Wall Street and support of private interests -- are elements of his negotiations to get health care passed; is he reducing general opposition to his administration (his power) while he focuses with laser precision on one specific and overarching objective. Despite the disappointment of many who worked hard to see him elected, this may simply be a matter of Obama understanding the true nature and limitations of his power, and he is therefore proceeding pragmatically. If true, and if he succeeds at this one task, others success initiatives will follow.

Absolute power is an ideal that does not exist, neither in the hands in whom we trust nor in the hands of those we are against. Power can only be partially successful, and only with a judicious combination of leadership and coercion. For those who doubt that command and control is the right and proper way to exercise power, try it by getting into a position of power and see how far you can go. This is a sure way to quickly learn a lesson in the limits of power.

Cisco and the CRS-3 Hype

If you follow the technology business, you would have noticed it when Cisco announced that they would be making saying something titanic the next day that would change the internet forever. When I saw that, my initial reaction was to re-read it a bit more slowly and then I thought: huh?

Don't get me wrong. I have immense respect for Cisco. There was even a period of some years where if someone (like an investor) understood that your company was planning to compete against Cisco, he would immediately bolt. They were scary good, and the respect and fear they instilled in others was well-earned.

Cisco is still a great company, but over the years since the dot-com boom and bust they have become quite a bit more uninteresting. They still produce great technology and do very well at pleasing their customer, but they are no longer quite so scary. Competing against Cisco is now perfectly acceptable and can be lucrative if you have the drive and business scale to take a serious run at them in any of the market segments in which they operate. Of course they continue to dominate in the core router business, and as the internet and all things IP has grown so have they. In short, their success has been earned.

The problem is that they have always found it challenging to break into new markets that are higher in the value chain, up beyond the basic routing of bits. They bought their way into many markets and muscled into others with brute force. Doing this has, for example, put them inside consumers' homes and made them a strong player in the enterprise and carrier VoIP market. All this highlights just how different the IP infrastructure market differs from the service and application markets. It's hard to be great at everything.

Maybe that explains why they took the hype route in announcing the CRS-3. It looks like a great product with excellent engineering, but revolutionary it is not. It is important to carriers since it allows them to evolve their existing base of Cisco routers without the higher costs (capital, operating, and manpower) of running more CRS-1 systems or switching to another vendor. I think Lightreading nailed it pretty well:

"...the CRS-3 is a CRS-1 outfitted for 100-Gbit/s interfaces...The 40-Gbit/s limit was a function of the switching fabric available on the CRS-1..."

It's an incremental improvement that I'm sure their customer have been demanding for some time. It is not a product that impacts carrier customer -- like you and me -- in the slightest. It isn't even that the capacity of the internet would choke with all those video streams to mobile smart phones, since there are alternatives that are perhaps more expensive or less convenient for the carriers. It am also quite certain that its announcement was not a surprise to any of the targetted carriers since you can be sure they've been promoting it as vapourware for a long time, if only to dissuade the carriers from switching to Juniper routers.

So it's great that they can now say "me too" when it comes to 100G Ethernet, and it's even better that they can do it by popping in faster switch cards and interfaces in the shelves of existing frames. They can even reduce the power budget, which is an increasingly burdensome expense in data centres.

Their claim that the CRS-3 cost them $1.5B in R & D is almost certainly bunk. They probably threw everything except the kitchen sink under that umbrella to add to the hype. Cisco does spend that and much more on R & D, but it is an investment that applies to many more products, both current and future.

Cisco remains a great company, especially a router company, and this is unlikely to change. They are very good at building the plumbing of the internet but, unfortunately for them, most people only notice the fixtures in their homes, not the plumbing that makes them work. Cisco's name isn't found on many fixtures.

Politician Salaries

Last week's federal budget proposes to freeze the salaries and budgets of federal politicians. It is not at all surprising that most Canadians support this, as is indicated in this Vision Critical survey:

"More than four-in-five Canadians endorsed the government’s proposal to freeze wages for MPs, cabinet ministers and senators (92%) and freeze the overall budgets for the offices of ministers, as well as departmental operating budgets (81%)."

However, beyond the soft glow many people feel when they see politicians interrupted in their seemingly-insatiable appetites for ever-greater compensation -- salaries, tax-free allowances, office budgets and pensions -- which they get to vote for themselves, there is a bigger question: what is the appropriate compensation for an elected politician?

This is not an easy question to answer for politicians, but then it isn't much easier to ask that question for the majority of us who are not politicians or civil servants. For the majority who are in the private sector, for the most part it is market forces that determine compensation. If the demand exceeds the supply, average wages for a profession or trade will tend to rise. Also, if the employer see a strong correlation between skill and business performance, wages will reflect that. Wages also rise with increasing skill and, especially for union members, seniority. While imperfect, for most in the private sector there is a strong correlation between market value and wages (plus non-wage benefits). Those of us in the technology field often get to take an ownership stake in the companies we work for (stock options) as one of those non-wage benefits.

Market forces recognize business value, but not often other sorts of value. For example, is it possible or even reasonable to compare the compensation of a banker and a carpenter? Some will take a position based on a set of morals, whether justified or not, that a skilled carpenter delivers more of value to society than a mediocre banker, yet the banker is paid more. In our society's economic system, regardless of so-called moral values, compensation is tied to business value, and therefore it is no surprise that bankers earn more.

Even this rough form of compensation justification flies out the window when it comes to the public sector, whether we are talking about politicians or workers. With no business metrics or the hard realities of actual money-in-hand to guide compensation, we are left with other, perhaps less-satisfying guidelines: comparisons with the private sector for equivalent work and, for politicians, opportunity costs.

Private sector comps are easy enough for most civil servants. If you're an engineer doing a particular type of work, offer a salary similar to that of an equivalent worker in the private sector. This assumes that the private sector salary is set by market forces and is therefore a reliable indicator. It is also important to maintain a good correlation for higher-skilled workers since it would otherwise be difficult to recruit and to retain staff. Despite this, public sector jobs tend to pay less, presumably with the compensating factors of higher job securities and pensions. For the ambitious there may also be less opportunity for advancement, but that's not a subject I want to tackle here.

Valuing the work of politicians is not so easy. They are doing real work and, despite the low esteem that many of us hold for them, that work deserves appropriate compensation. There are no easy comps with the private sector, and even if it were done the results would rankle many: CEOs and other high-level management staff in the private sectors can earn millions of dollars annually. Few Canadians would tolerate that level of compensation for our politicians, and the politicians know it.

The standard that is often used is that of opportunity cost: the private sector compensation the politician would forego while in office. Since many of them are highly-educated and come from high-paying professions, it is arguable that politicians should be paid accordingly, plus something extra for the risk of running (and losing!) and for the time needed to get a real job after they leave office, voluntarily or not. They also incur expenses that in a private sector position would be compensated with attendant expense claims. In a real business, there is always some boss, even for the CEO, that can refuse to sign off on expenses or remove an employee who persistently runs up large bills. Politicians in office don't have the same type of oversight so, to avoid the difficulty, they are granted expense budgets that they generally must stay within to avoid unwelcome scrutiny.

Putting aside expenses, which any worker in either sector must be compensated for, is opportunity cost a suitable mechanism for determining the base compensation for politicians? I am not so sure that it is a good measure. The reason is that it contains the assumption that politicians ought to receive compensation that fits comfortably within the career-long arc of compensation they expect for a person of their skill and education. That is, to provide compensation in line with the private sector work that most of them would reasonably expect. However, do we want politicians who see public office as simply as one job among many during their careers? Is that an attribute we want to see in our politicians?

It is often argued that without that level of compensation it would be difficult to attract many otherwise ideal candidates for public office, that if the money offered is too much lower that the quality of politicians would fall. In a way this is quite funny, since there is some valid question about the quality of our politicians; I don't think money improves the quality of the politicians vying for our votes.

Instead, I suggest that compensation be modest in comparison to current levels. That way, we get fewer politicians who are attracted by the money and more who are attracted to the idea of public service, and even with the idea of improving, or at least changing, society in line with their political leanings. To be fair, we already see this in many of our federal politicians -- I don't believe that either Harper or Ignatieff is in it for the money -- although at the provincial and city council levels one has to wonder. Regardless of the level of government, I would like to see the experiment done and then see who does or does not run for office. It wouldn't hurt and it might help; even if only to save us all a few of our tax dollars.

Growing the Wireless Market

With all of the competitive tactics being played out in the mobile wireless space recently, I surprised myself by saying mostly nothing about in this blog. Yet it is an interest of mine. The reason I have usually decided to give the topic a pass is because I find that most of the headline-making news is mostly smoke with little fire. That is, there's lots of activity but little of it has any long-term impact; it's just business as usual. Wednesday's throne speech caught my interest by mentioning a topic I did not expect the government to explicitly address: foreign ownership.

First, I should say that my prediction back in December was completely wrong. This is what I said then, in discussing Cabinet overriding the CRTC decision on Wind Mobile (Globalive).

"It will be interesting to see if this government opens up the law to amendment. I don't think it's a priority of theirs, so for the time being they may be content to deal with related issues ad hoc. I doubt that the government much cares for the sensibilities of the CRTC Commissioners and will think nothing of overruling them again in future."

We will have to wait for details, but that is exactly what the government intends to do. Perhaps they felt it necessary to answer the very-reasonable question from Public Mobile regarding just what the foreign-ownership threshold is, so that they can confidently pursue investors without having to guess how much they money they can take, and in what form, without incurring the wrath of the CRTC and the government. Ad hoc decisions may be helpful in a pinch, but companies need some degree of predictability to effectively function.

This takes me to the main topic of this post: the limits to growth in the carrier wireless market. There are many articles on this topic in the trade media, with most of them focused on ARPU: average revenue per user. As a wireless carrier you want to grow your subscriber base and grow your ARPU, presuming that it can be done profitably. The throne speech is relevant since increased competition typically means higher subscriber acquisition costs (advertising, phone subsidies, etc.) and lower ARPU (downward price pressure). Since the costs of providing service are not so easily reduced, profit is adversely affected, which turns shareholders of incumbent carriers against management and against the stock. The new entrants are less affected since their investors already expect that they must weather a period of low and negative margins to gain a foothold in the market.

Let's assume for the moment that there is equilibrium in the market, where there is some balance (or Mexican standoff) between competitors, so that ARPU and costs can be forecast with some confidence. In such a world, how do the carriers increase revenue and profit? This means increasing ARPU, net of inflation. It isn't as easy as increasing prices since if there is any real amount of competition, this tactic will only increase churn and therefore reduce revenue and increase marketing to recapture subscribers.

One tactic that works to a degree is the old frog-in-a-pot trick. This is often-told story of how to boil a live frog: turn up the heat slowly and the frog won't jump out of the water. If you gradually increase prices, and especially if you do it in obscure ways (various fees and surcharges), many subscribers won't jump into the arms of competitors. They even make it seem reasonable, for example by charging for heavy data usage. Eventually even the most inattentive subscriber will catch on and do something to bring their expenditure under control.

The game of turning up the heat cannot go on forever because we are not frogs. For a given bundle of services, we all have different price levels where we will jump, but we will jump. In other words, every subscriber has a fuzzy maximum revenue that the carrier can extract. When that level is reached, the subscriber will switch carriers, lower their service tier or cancel their contract entirely. Indeed, this is the reason why carriers offer a variety of bundles, knowing that not everyone has the same revenue potential. They can in any case start turning up the heat once you've signed a contract.

To successfully drive ARPU higher in a competitive market, the carrier has to increase the value perceived by the subscriber from additional services. Do you use SMS? Ok, we'll charge for SMS. Do you download lots of MP3 music, share photos and view videos? Charge for bandwidth. Since these are things that subscribers value over and above ordinary voice minutes, they will pay, both for the phones that make these services possible and for the ability to use those services.

Even that has a limit because many of those services are equally doable, usually more conveniently, from a PC+internet or a TV, which the subscriber is already paying for. What the carrier is offering is mobility and (device) personalization. Keep raising phone, broadband, cable TV and wireless prices, and eventually the subscriber will have to decide to reduce or eliminate one or more of these services. This happens when, for example, you ditch your home land-line phone in favour of the mobile phone (and, if necessary, switch from DSL to broadband cable). Therefore to grow ARPU, since subscribers have limits to these broader budget categories, the carrier must convince you to drop other, equivalent services you already use in favour of mobile wireless.

Unfortunately, the way the carrier gets revenue from most of these other services is by usage-based pricing for wireless data. It's unfortunate for the carrier since these limits (caps and overage charges) are generally at far higher levels on wired broadband services, and subscribers tend to see them as equivalent services that are not eligible for additional payment. There may be a higher cost to the carrier for an equivalent traffic volume, but their customers don't know or don't care. The mobility aspect may be convenient, but the small screen and keyboard reduce the perceived value, and they believe they have already paid for mobility in the basic service charge.

These marketing challenges make it difficult for carriers to grow ARPU and revenue. Since they can't convince their subscribers to pay more willingly, they attempt to get them to pay more unwillingly. That's where their weird fees, overages and ETFs come into play. This is coercion in lieu of increasing value to subscriber. This is where competition and regulation become important factors in controlling these legal though unsavoury tactics.

We should also mention application blocking which carriers also do, as a way to protect revenue. These include VoIP and tethering. On a bit-for-bit comparison, voice is far more lucrative than VoIP. As a (very) rough ballpark figure, 100 minutes of mobile voice (AMR codec) will consume less than 8 MB in each direction, yet the revenue (especially in Canada!) is substantial. For VoIP, which shifts this traffic to data, 8 MB is a drop in the bucket, contributing nothing to carrier data revenue.

Tethering is a problem since, as discussed above, to acquire many subscribers, those subscribers may want to drop or at least reduce their usage of wired broadband so that they can manage their total household expenses. In other words, if they can't tether they can't drop their wired broadband subscription, which pushes them over budget. By blocking tethering, the carriers are unable to increase ARPU for subscribers in this category. Of course, their real intention is to keep road warriors and similar subscribers from eating up network capacity without attendant data charges, but blocking tethering annoys both groups while still not achieving their objective.

The carriers are free to attempt to scrape every dollar they can from subscribers by any legal means, even if subscribers don't like how they do so. However, once they reach a subscriber's pain threshold every additional dollar has a heavy cost in customer loyalty and regulatory scrutiny, regardless of the availability of competitive alternatives. They have also reached a pain threshold on the cost side, by slowing network deployment and reducing customer service.

Ultimately, carriers will have to intelligently deal with the fact that there is only so much ARPU possible for a bundle of services. When the market is tapped out, stop trying to turn up the heat even more and start offering something new that the market will value.

End of the Credit Crisis

Just as the arrival of robins heralds the coming of spring, there are similar early signs to signal the end of the debt and credit crisis that began in 2008. It doesn't take any deep investigation or appeals to the prognostications of economists or retrospective economic indicators. It came unlooked-for in my mailbox on Monday morning.

Among the bills and junk mail (which is about all that snail mail is still used for) there were two envelopes of note. I didn't even have to open them to know what they meant. Both contained invitations from American Express to, you guessed it, sign up for an Amex credit card.

Enclosed in each was a thin faux plastic replica of a credit card with YOUR NAME HERE where the card holder's name would ordinarily appear. There were promises of air miles and other temptations. What was most noteworthy is that I have not gotten one of these once-regular mailing from Amex in a long time: not since before the credit crisis ramped up to maximum intensity. Apparently the credit card companies and their bank partners now believe that I am ready to lever up again with consumer debt. Six months ago they would have been tossing application forms into bonfires for fear that someone might find one and send it in for processing.

I have enough credit cards, and faux credit cards like those they sent me this week. I keep a few of the faux cards around because they have just the right combination of resilience and flexibility to slip the latches of locked doors for which the keys have been misplaced (yes, this really does work if you know what you're doing). Unfortunately I have more of these than I require so off to the trash they went. The envelopes and the rest of their contents went into the black box for recycling.

I don't trust politicians, bankers or economists that sing the praises of the economy. But when Amex comes knocking, that's when I believe.

By-election in Ottawa West-Nepean

With all the Olympics buzz for the past while it is almost too easy to forget about other less savoury matters, one of which is the by-election this week in Ottawa West-Nepean. It's been a quiet affair, with only a modest number of signs erected and just one leaflet apiece in my mailbox from three of the candidates. The election will not change the government and it won't impact on any policies, or at least not directly. The Liberal candidate, Bob Chiarelli, is supposedly the front runner despite the possibility of a protest vote against the government. I must admit that until the election got under way, Chiarelli was the only one of the candidates whose name I was familiar with.

One curiosity that popped out when I compared the Chiarelli and Graham (PC party) leaflets was that both candidates are running on the same issue: the performance of the Liberal government. They are also both focused on the government record on health care, which is perhaps sensible since it does consume about half of the provincial budget. That may sound surprising, but it is absolutely true that over the years the provincial government has morphed into a health care provider (a bit like an HMO in the US) with a diversity of other, relatively tiny portfolios. Other provinces are similar in this regard.

The difference in the health care focus of the leaflets is that the PC party pretty much scream: "E-health scandal! Throw the bums out!" It's true that the E-health project was a scandal, and it was not alone among other government agencies, including OLG. The Liberal leaflet, unlike the small-sized card from the PC party, is much larger and lists a bunch of health care investments made within the riding. The object would appear to dazzle us that none of this would have occurred under another party (i.e. PC) in government. The reality is that these investments would almost certainly been made regardless of the party in power, since if not done, the result would have been even more politically dangerous than a mere spending scandal.

I am unimpressed with the Liberal candidate and the present Liberal government, and I am definitely not impressed with the content of their leaflet. Chiarelli may win, however it will be have to be without my help. I am motivated in this by the matter of his record as Mayor of Ottawa. While he does work better with others than the current office-holder, his record is one that is endemic of all Ottawa councils: mismanaged budgets and policies. When I consider that Chiarelli could very well end up in cabinet if elected, well I just won't go there.

Then there's the PC candidate, Beth Graham. I understand she has a service record, but the leaflet talks to none of that. Presumably she or her party handlers think it unworthy of notice or worthy of remaining obscure. There is even some high comedy on her leaflet with its headline: "Time for change." Change? This is not a general election; if she is elected, she will be a member of the opposition, and the government will be precisely the same as before. I would rather hear how she proposes to be a good representative for us while seated in opposition. It's nice that she (or the PC central committee) wants to stop government misspending, but this election won't accomplish that.

Another hilarious item on the Graham leaflet is the reference to "the Toronto Liberals' E-Health scandal..." I'll give them kudos for proper use of the apostrophe, but just what is this Toronto Liberals creature? No matter which party forms the government, including the PC, it is expected that Toronto MPPs will feature prominently since the city contains a large percentage of the Ontario population. I could as easily claim that the previous Harris government was a cabal of Toronto Conservatives. Yet it is a fact that neither McGuinty nor Harris are from Toronto.

Those leaflets are motivating me to vote for neither of these two candidates. If not them, then who? It is highly unlikely that one of the others -- NDP or Green -- would win, although they are worth a look. Since this election will not change the government, it seems I can either tell the government that I do or do not support them. By choosing the latter I must select a candidate to receive my protest vote. This brings us to the third leaflet, which is from MacKenzie the Green Party candidate, whoever he is. Actually the leaflet does say something about who he is, which is very different from the approach taken in the Graham leaflet. There is even some mention of policy, something eschewed by the other two. This is a more positive approach to the electorate.

I have yet to make my choice except that it will be a protest vote. I reject the NDP for other reasons, so I am left with choosing Graham (PC) or MacKenzie (Green). Whatever way I do eventually vote, it will be uncorrelated with my vote in the next general election. That is, mine will be a one-time protest vote that speaks to the dynamics of the by-election and the ability of the candidates to communicate something (or anything) that has meaning to me or the riding. I do hope they all say more, publicly, over the next few days than what they have so far chosen to emphasize in their leaflets.