RIM and Cisco Pursue Lateral Expansion

One of the more fascinating things I like to watch is large, established technology companies attempting to branch out into lines of business in which they have no history. I prefer to do this as a spectator, at some remove, since it so often goes so spectacularly wrong. Acquiring or merging with a company is never for the faint of heart even when both operate in the same space and have truly complementary products and services. I still remember how Nortel stumbled from one ill-conceived acquisition to another in management's attempt to transform Nortel into an "IP company".

There are two recent, though still rumoured and unconfirmed examples that caught my attention: RIM is allegedly in talks to acquire a mobile advertising firm, Millenial Media, and Cisco may be pursuing Skype. The former rumour is better substantiated in the press, and the story also passes the credibility test since RIM's key competitors -- Apple and Google -- are moving aggressively into mobile ads as a potential future revenue source. It is a stretch for Apple, but perhaps even more so for RIM which does not yet have much consumer sector success in either its products or services, especially expertise in consumer marketing and design. I was nevertheless amused to hear this rumour the day after posting my article describing RIM's challenge to finding a new recurring revenue source.

In Cisco's case the driver behind their move is less clear to me. It is no secret that they've wanted to get into people's homes for some time now, and that supposedly drove their acquisition of Linksys several years ago. Regardless of how successful that move may have been to revenue growth or profitability, it would be a stretch to claim that their brand awareness in the consumer space is much improved. Skype would change that situation dramatically. Of course Cisco has had a presence in consumer VoIP services for some time, starting years ago when their ATA products were distributed by Vonage and others to couple analogue phones to home broadband services, but Skype would be a big, big step up from that.

Unlike RIM, Cisco has a track record of making many successful acquisitions, and doing so at a rapid pace. They seem to have the practice down to a fine art. However, integrating Skype into their operations will be less routine because of its size and, most importantly, Skype's business being so very different from what Cisco now does. This is no small matter since it is one that has ground down many companies. Can Cisco do better? Perhaps. They should at least be able to do better at it than Ebay managed.

The reasons why many companies fail at this sort of lateral expansion into new businesses and market sectors are many. Unless there is a good strategic vision to justify the acquisition that is also executed exceptionally well, the acquisition usually just disrupts the operations and successes of both parties. In the end the company may once again be sold, passed onto a hopefully better parent, or kept and operated at arm's length as a separate subsidiary. The latter is fine if that is the original intent, but if not then it can be a distraction to senior management and confusing to shareholders even if the acquired company continues to grow and be profitable.

I would very much like to hear what Cisco would propose to do with Skype if they are really interested in the company, to somehow integrate it into their operations for some synergies (that was Ebay's stated reason, though they failed to even convince anyone that it made any sense), or simple as a marketing tool to raise their profile with consumers and drive sales of their current and future consumer products. That's the best justification I can come up with right now, and it is one that I do not find compelling. I eagerly await further news regarding this rumour.

Loblaw and President's Choice: Less for More

Last year I wrote a bit of a rant about bagels. I used that example from a then-recent grocery shopping expedition to how some companies lower the content of a product and keep the price unchanged, and then seek to hide what they've done. This is common marketing practice, with the idea being (as I see it) to choose what the companies see as the lesser evil over raising the price when their costs increase.

The bagels in question were a product of Weston Bakeries (a division of George Weston) which are sold in many supermarkets. At the time I gave Loblaw a bit of a pass since, as the retailer, they were presumably only passing along the supplier's products and pricing, with their usual mark-up so that they, too, can make a profit. That would be perfectly acceptable to me.

However I failed to note one very pertinent fact, of which I was unaware at the time, that Loblaw's major shareholders are George Weston Limited and W. Gaelen Weston, who together hold a majority ownership of Loblaw. That changed my thinking, but only slightly since Weston Bakeries' products are, as mentioned, sold in other stores. This alone does not make Loblaw a party to what I see as deceptive marketing. Unfortunately I now find that it does not stop there, and in fact turns my focus directly in Loblaw's direction.

Consider the picture below of what at first glance appear to be identical products: packages of President's Choice brand hummus. These were purchased a few weeks apart. The height, diameter and design are identical from a typical viewing angle, such as when cruising the aisles. If you look closely, there is one notable difference. Can you see it?

The answer is in the lower left of the label: the net weight of the contents. The older product held 454 grams (about one pound) and the newer one holds 400 grams. Of course the price was the same. If you study the packaging carefully you will notice a few more differences:

• The UPC (universal product code) is changed. Presumably this was legally necessary to disclose that this is a different product.
• The top of the contents is lower inside the container.
• The bottom of the container was flat but now sports a deep concave indentation.

You now get 12% less product for the same price as before the change, and a package designed to mislead the buyer to believe that nothing has changed. In my opinion this is very deceptive marketing even if it is technically legal under food packaging regulations.

It does not end with hummus. If you shop at Loblaw you may want to pay close attention to other President's Choice products. They are using the same trick with other PC-labelled products. My trust and even loyalty to the brand has been eroded to nothing. For this household, grocery dollars will begin to be spread among other stores. Regrettably, it is difficult to avoid Loblaw entirely since there are few price-competitive alternatives and products from other suppliers often use the same deceptive practice, and those products appear everywhere.

No matter the sector, consumer or business, I do my best to avoid giving my money to businesses that lie or deceive. If there were a store where I could reward them for not going down this route, I would, but it doesn't seem to exist. Further, I expect to see the practice used more frequently as costs increase, such as may occur when they sign a new contract with their employees' union.

More on Influencing the FCC

In my recent post on network neutrality and the Google-Verizon joint proposal to the FCC I mentioned some reasons why it is acceptable and even positive for industry players to take these actions. There is more to be said on this topic of industry meeting with and potentially influencing the FCC that go far beyond the narrow issue of network neutrality. It is a topic that extends beyond FCC, the US and the telecommunications industry, and is applicable to other government regulators. This makes it worth a brief discussion.

The first thing to understand is the structure of the FCC. At the top are five Commissioners, where the tradition is to have three, including the Chairman, affiliated with the party of the Administration, and the other two affiliated with the other party. This arrangement is easy to maintain in an effective two-party system, only requiring resignations, re-assignments and appointments soon after a presidential election. The departments are roughly aligned with the industry segments as defined with law or by regulatory regime, and these change from time to time as the law, policy and the industry itself changes over time. The bureau Chiefs which oversee each department are senior civil servants that are typically non-partisan (somewhat akin to a Deputy Minister in the Canadian government). Within each bureau, the staff is a mix of career civil servants and professionals who usually have a limited tenure in the agency. These professionals, often young lawyers with strong academic credentials, accept the lower public sector wages for the experience and the opportunity to build connections that will aid them in their careers beyond the FCC.

There are technology professionals in the FCC, as there must be, but although they are intelligent and have decent credentials their knowledge tends to gets stale over time since they are not actually building "stuff". Engineers within the FCC do important technology planning work and provide an internal knowledge base to enable the FCC to better understand the new technologies that frequently emerge, and the implications of the technology on the statutes and regulations. Even though the FCC is responsible for type acceptance of a wide range of electronics and transmission equipment, most of the testing itself is done in the private sector, leaving the FCC to set and manage the testing criteria.

The above description isn't completely accurate -- there are many exceptions to what I've said -- but it provides a glimpse into how the organization operates. It is based on my own past dealings with the FCC in both formal and informal interactions, and especially the many people I met there. I am happy to say that the quality of the people was always excellent. The politics and the rigid processes they must operate under can often make it seem that they are all a bunch of buffoons or lining their pockets with contributions from industry, but that is emphatically not what I saw. They have a tough job in navigating political and industry minefields that accompany every serious issue before them. Regrettably they need their large legal staffs since Congress and the Communications Act keep them on a tight and short leash, and because so many of their orders get appealed to the courts.

Although the FCC tries to keep its regulations technology neutral, that is not always possible; sometimes they must specify technical operations and specifications to remove ambiguity and to deal with current problems. For example, they will order that two carriers must interconnect their networks at a certain meet point, the responsibilities of each to do so, and what features or capabilities that they must provide to each other, but they will not specify which standards or protocols or physical layer technologies they must use. Despite this, without knowing what the technology is capable of, its longevity and cost, and each carrier's particular situation, even this level of description can be problematical.

This is one good reason among several for the FCC to not only listen to the industry but to invite that level their input. This is as true for network neutrality as it is for network interconnection, type approval, application throttling, provision of calling number identification, and a host of other important issues the FCC must deal with. Their own engineering staff can assess the input received to supplement their own research and hopefully make better decisions. Sometimes the politics overrides the technical discussion, such as happened with power-line broadband when the push for competitive alternatives had policy urgency, but can also come from industry lobbying of Congress. It's all fair game.

The FCC can also be flexible in cases where they want to promote new technologies but lack the rules for type acceptance or products are presented which fail to meet existing criteria. By approaching the FCC with good technical arguments they will loosely interpret the existing regulations or explicitly grant exceptions, provided that higher objectives such as "doing no harm" to the networks or other services can be maintained. I would classify this as a positive example of industry influence of the FCC (which is handy since I've done this more than once myself).

The following list summarizes what I believe are some of the good reasons for the industry to influence the FCC:

• Explain new technologies to the FCC, and apprise them of industry progress on standards and technology agreements, so that they are prepared to assess new products and speed approval (or rejection). If the technology meets a need, this benefits consumers in addition to the industry.
• Notify them when rules they propose would have undesirable consequences on carriers' networks or businesses, or their customers, and suggest specific alternatives that allow the FCC to still meet their policy objectives.
• Propose solutions to difficult policy objectives, including solutions that favour the company or industry sector making the proposal. The FCC is smart enough to discern good from bad proposals, and in any case they must put new rules proposals out to public comment. They will also invite opposing parties to make their views known so that there is balance; however, it must be acknowledged that if the political pressure is strong this may only be done for appearance sake).

Despite all this pleasant talk about the good aspects of industry input, bad regulations can still result, or good regulations with poor enforcement. As long as the process remains transparent, public oversight is possible, either directly or via their elected representatives. I do know that the FCC was always diligent in making sure that all presentation material in one-on-one meetings is on the public record; if you try to not provide written material they will demand it so that they do have something to place on the record, even if the actual discussion does happen to drift off in another direction. I think the process works quite well. When meetings and material are kept off the record, that is the point at which you may need to worry about industry influence.

Caveat Emptor: Going To Banks For Financial Advice

I have a small concern with the drive to restructure investment banks, intended to eliminate conflicts of interest. It isn't that I think that's a necessarily bad thing for governments to mandate, or that there haven't been serious and outrageous breaches in the banks' Chinese walls between the sell and buy sides of their businesses. For individual investors, sure, they need protection. But professionals? Do they need protection?

Individual investors since they can be badly outgunned and misled when they are sold investment products that are bad for them (or anyone!). This is especially true when the true value of the assets has been buried or stained with fictional ratings. This is something that has occurred far too often, and not just with multiply-repackaged and insured mortgage backed securities, which makes credible the need to protect these investors. Even rich individual investors are often no better than "Mom and Pop" in sifting through the nonsense they are presented with by a smooth and engagingly friendly investment representative of a large and supposedly-venerable institution. Rich does not mean astute in this area as they have often achieved won their wealth in businesses far removed from Wall Street and Bay Street.

I am still astounded that even now so many people I know don't understand that garden variety mutual funds they are sold by their banks have a sales and management structure that favours the bank's bottom line and not theirs; mutual funds are sold by commission (strong sales incentive by front line staff) and the management fees on the funds investment are charged without regard to the whether the investment appreciates in value. Investors go to the banks for advice, not just to purchase funds, and they deserve to be treated fairly, not advised to purchase funds which benefit the bank more than the investor. Those "investment managers" are frequently sales representatives with a fancy title. This situation reminds me of the old saying that one should not go to a snake oil salesman to learn about herpetology.

Therefore when it comes to protecting individual investors I am all for government intervention. We should not all need to be financial experts and do extensive research to determine if the pieces of paper being waved in our faces are nothing other than a way to fleece us of our money. Due diligence is always recommended -- I am not arguing for making investing idiot proof -- but the banks' worst and egregiously misleading and deceptive practices should be curtailed. Structural separations of the banks, or even breaking apart the conflicting lines of business into independent companies, may have its place, even if it's a blunt instrument when more careful measures may be preferable. As with all these matters, enforcement is key, and at least breaking apart the investment banks, by virtue of so crudely impeding method for the banks to benefit from conflicts of interest, does make downstream regulatory oversight easier.

However, and even vehemently, this should not be the case with professional money managers. If competent and not engaging in outright criminality, they should have the skills and resources to be wary of and see through the conflicts of interest of the banks they go to for advice. After all, many have previously worked for the banks, and they have completed and passed certification programs to ensure they are capable.

This struck me when I read this Business Week article about the seeming incompetence of municipal financial managers when it came to selling municipal bonds.

Underwriters have an incentive to raise the interest rates on the bonds to make it easier to resell them to investors, while officials want to borrow money at the lowest cost. A bank acting as a financial adviser may persuade a municipality to sell the securities in a negotiated sale or laden them with high-fee derivatives, steps that could make them more profitable but may not be in the best interest of taxpayers.

The article goes on to note that the banks must resign as advisors to the municipalities before selling the bonds because of how easy it is for the banks to benefit from those conflicts. But, again, remember that the banks' customers in this case are professional financial managers who should, and do, know better. There is something terribly wrong here, and it is not just the banks.

I suspect that one reason why this might happen is that there is another type of transaction that the municipalities and banks are engaged in, and that is with the buy/sell roles reversed. The state or municipal financial managers invest employees' pension funds with the same banks. This is a buy-side transaction (the opposite of the bond sales). It is perfectly reasonable to question whether there can be some inappropriate linkage between these two very different business deals between these parties, one where they each scratch the other's back.

As pure speculation I wonder if the municipal managers would accept a higher interest rate on bonds if the banks also promise higher returns on pension funds investments? If suitably rated, those investments would give the appearance of quality, and therefore give those managers the ammunition they need to promote the deal with their employers. I think this is a question worth asking now that those investments have gone sour, along with the rest of the asset-back commercial paper market, and the pension funds are in some distress, which impacts the quality of the bonds they sell through the banks.

No investors appeared to have been harmed. "New Jersey has never failed to pay a bond holder and never will," said Andrew Pratt, of the state Department of the Treasury. The state "aims to have the best bond disclosure in the nation and will continue to strive to achieve that goal," he said.

Whether the SEC uncovers simple incompetence (where the banks pulled the wool over the eyes of negligent municipal financial managers), bank malfeasance, or criminal collusion between the parties, there will be lessons to be learned. The ratings agencies, that are also under scrutiny, have played a role by putting their positive "opinions" on the paper that the municipalities bought. Even if we can eliminate banks and ratings agencies from involvement, there is some regrettable action on the part of states and their municipalities, not just their financial managers.

The funds are the largest of seven funds in the $66.9 billion New Jersey retirement system. Among other things, the SEC said, the state didn't disclose it had abandoned a five-year plan to fund the pension plans. The pension system covers 689,000 current employees and retirees.
...
[New Jersey] revalued its assets in 2001 to create the benefit funds but used values from 1999, at the height of the tech bubble.

Are the governments themselves or their financial managers, or perhaps both, acting with deliberation or incompetence? Incompetence is conceivable since, as civil servants, they earn less than in private industry -- the investment banks -- and that may be because they didn't make the cut. It could also give them an incentive
to act inappropriately when given an opening by the banks.

As a spectator in all of this I can only repeat a cliche about investing, which is to only invest in what you understand, and even then dig as deep as you can to find out the truth. This goes for professionals and individuals alike. Relying on the advice of the bank selling you mutual funds, GICs and other investments does not count as due diligence. As a final note I suggest, if at all possible (and it always is for the individual investor, though not so easily for large institutions), only invest in liquid instruments so that at the slightest whiff of nastiness you can get out, fast.

Conservative vs. Liberal Politics

The continuance or elimination of the long gun registry is not an issue on which I have a well-formed opinion. Neither do I have any reason to jump in on the issue of whether Cheliak is being removed from his role in managing the program for political or language reasons. Well, ok, except to note that the government knew about his (lack of) language skills when they appointed him 9 months ago.

What appeals to my sense of humour is the way the Liberal party is choosing to complain about the matter. This is laid out very nicely in this CBC article. See if you can spot the contradiction in the following lines from the article:

Speaking at a news conference Thursday to unveil a slideshow of the Conservatives' "enemies list" — Liberal MP Martha Hall Findlay said the Tories "want puppets, not professionals."

Ignatieff orders whipped vote

The House of Commons is considering Conservative MP Candice Hoeppner's private member's bill to scrap the registry...

I now have one more reason to continue my non-partisan ways by holding both of these federal political parties in the greatest contempt.

Is RIM Getting Torch'd?

RIM's stock price took a bit of a dive the past several days, although as you can see in the chart that it isn't, yet, a broken stock. As with any high profile technology stock there are always people willing to trot out problem after problem, most of which are just so much noise, though occasionally the problem proves significant. The most recent issues include: RIM's hold on the enterprise market and the latest foray into the consumer market with Torch, both with respect to competition from iPhone and Android (both of which are taking market share); whether Torch is a failure or if it's too soon to say; and, the caving in on government access to their enterprise customer email.

It does have to be said that BlackBerry is still growing its customer base, it's just that their market share versus other smart phones is declining. That is, they're winning a small share of a larger market. This is being taken as a sign by some that there is future trouble ahead. In the horse race mentality that prevails there can be only one winner, and if that winner isn't going to be RIM then you must sell your shares right now. In reality there can be more than one winner so this style of analysis is too simplistic. BlackBerry doesn't even have to have the panache of Apple's iPhone; Android, for example, has overtaken iPhone in the US and a lot of Android phone owners don't even know or care that their phones are Android based. Dull but competent can do very well.

Although it is impossible to know why RIM's stock is going down without asking every investor in the market for their reasons to buy, sell or short the stock, the sense I get is that it is due to Torch failing to excite either investors or potential customers. Apparently 150,000 units sold in the first three days is now a failure, if you compare these number to iPhone or even a few of the hotter Android models. With OS6 features at best catching up with iPhone and Android, and qualms about OS6 and Torch catching on and reversing BlackBerry's slide in market share, and analysts weighing in with their own doubts, a short term drop in the stock price is understandable. The question now is whether it bounces or breaks to new lows.

The other recent issue is RIM supplying some degree of access by various governments (perhaps not the same access in all cases) to their email servers so that enterprise email can be monitored for national security and other purposes. While there is widespread concern, for the most part it seems that no one is really quite sure if this is good or bad for RIM's future business prospects. On the one hand most people will accept (if reluctantly) that this is necessary.

While free-speech advocates have criticized the crackdowns, a number of BlackBerry users say they understand the governments' concerns.

“It's important for things to be traceable,” said Brad Kollur, 33, an IT consultant who lives in Rockaway, New Jersey, and often travels to India on business. “It's one of those things where you give up certain comforts for the greater good.”
...

These other devices, however, don't rely on the same type of sophisticated encryption that appears to have raised concerns, meaning they also don't offer the same level of security that many businesses find crucial.

On the other hand...well, what is on the other hand? After all, it isn't as if most people with other smart phones have any idea whether their email, corporate or email, can be monitored by governments or more local law enforcement agencies. This makes it difficult to know how RIM's competitive position is being impacted.

I can't say that I know the answer, however I do have an idea about how to formulate the question. Let's consider the smart phone business structures of Apple, Google and RIM. In all cases there are two broad categories of revenue for each of them: one-time revenue (the phone itself and related accessories) and recurring revenue (all types of follow-on sales of products and services that are dependent on the device sale). Ideally you want both in your business, with preference for recurring revenue since this is generally much more profitable over the long term, while high margins on hardware are unsustainable. Let's compare the three companies, doing so only qualitatively rather than quantitatively.

• Apple - Initially high margins on the phones appear to be declining as competition heats up. Even so they are able to sustain premium prices (and margins) on the phones and accessories. They are also showing that they can repeat this success by getting customers to buy new iPhone versions. On the recurring revenue side they distribute a large portfolio of apps, tunes and other media content. It has often been said that Apple focuses on the pull through sales these downloadable products, where they make the bulk of the iPhone-related profit.
• Google - They essentially sell no hardware and, unlike Microsoft, they charge no royalties for the Android platform. Their Android-related revenue is recurring, which comes almost entirely from advertising (they take no cuts from app sales). This is a very different business model from the other companies', but it certainly work well for them.
• RIM - Like Apple they sell phone and related paraphernalia. The bulk of their recurring revenue is from enterprise email, not from either apps or media content. This is their differentiator, the one that contributed so much to their success since their earliest days.

The smart-phone derived recurring revenue streams of Apple and Google are at this time under no real threat. For RIM the situation is not so good, and I believe that this is where they are vulnerable due to the granting of email server access to various governments, even if the reasons are justifiable. BlackBerry enterprise email is now looking a lot more like other email services, be it Google Mail or any other, all of which are accessible from any modern smart phone.

As the pressure mounts on IT departments across the corporate worlds to allow use of employees' existing or preferred smart phone rather than always BlackBerry, this loss of email security will make the arguments to open up more persuasive. In an earlier article I speculated that the encryption dispute RIM has with various governments was positive PR, but that distinction from competitors is quickly weakening.

I will also say that the current concerns of some governments over Blackberry email security will not only not harm RIM but will help them; it's great (and free) advertising that their encryption and security perimeter are so strong that even governments can't break it.

When (not if) RIM begins to see real erosion of their hold of the enterprise email market they could be in real jeopardy unless they can pull a rabbit out of the hat. The rabbit will have to be something to replace email service revenue, and it will likely have to be done by taking recurring revenue market share from Apple and Google. That means apps, but especially media and advertising. If it does come to this I don't yet believe RIM is up to the task. They will certainly try but it may be just too far from their core competencies, and the catching up they will need to do is far more difficult than what they've accomplished to date on the platform software and hardware.

It's a little soon to be ringing the death knell for RIM, but it could turn out that the loosening of email security will hurt them far more in the long run than Torch going down in flames.

Network Neutrality and Industry Influence of the FCC

There has been much discussion regarding the recent joint proposal to the FCC by Verizon and Google on network neutrality. Where there is dispute with the proposal, it is asymmetrical regarding the roles played by each company. Everyone expects established and large ex-monopolistic firms like Verizon to lobby hard, and the complaints over their continued lobbying efforts and the allegedly friendly ears in Washington that listen to them.

By contrast, Google is seen by many as the feisty upstart that ought to live by its "do no evil" motto, but where evil seems to be in the eye of the beholder, and in many of those eyes Google allying with Verizon in any way is evil.

While this tactic of pre-empting real consumer protections with lobbyist-written fluff is Verizon's usual modus operandi, it's an interesting shift for Google (at least in terms of neutrality). It's clear the search giant is now willing to shelve their previous principles in order to protect their lucrative Android relationship with Verizon.

However, this isn't terribly surprising since Google has an obligation to its owners, the shareholders, to maximize the value of their investment. This is what companies do and why they exist.

...Susan Crawford, a professor at the Benjamin N. Cardozo Law School and a longtime supporter of net neutrality. “A large private company is always going to operate in its own interest, and for anyone to believe otherwise would be naïve.”

Countering every company's efforts to maximize returns (sometimes at any cost) there is the country's people, through its elected representatives and the legislation they enact and regulatory agencies they establish, to put constraints on the operations of companies and enforce compliance. When the balance is right, companies thrive and bolster the country's economy and standard of living while also protecting the country against harm. It often goes wrong but that's the objective.

This goes for the telecommunications industry just as it does for industries as diverse as pharmaceuticals, resource extraction, transportation, among many others. Many of the constraints placed upon companies are specific to the industry's unique character, and that very much is the case with telecommunications and network neutrality.

It is perfectly natural to expect that a regulated company will lobby for lower restrictions on the company's operations. As a society we must also accept and affirm that this is perfectly okay, and even desirable. It would be unreasonable to unfairly restrict an industry from meeting with, informing and lobbying the regulator, whether they do so as individual companies, ad hoc groups of companies or industry associations. After all, so can you and I, and we should not accept favouritism when it comes to permitted communications with the government and its agencies.

But -- and this is a big "but" -- it is up to the regulator to choose whose input they rely upon to render decisions and formulate policy. We should demand that they act wisely in response to all input received and act purely with regard to their legislated objectives. In the present case that means they must accept the proposal from Google and Verizon in good faith even though they should be under no obligation to accept any part of it. Other parties are already weighing in on their proposal, both pro and con, and that, too, is to be encouraged.

While some would decry this joint position as either the co-opting of Google by Verizon (by oozing evil all over them?) or the selling out of Google for their own (evil?) ends, it is hardly unprecedented and is in fact the very sort of thing that the FCC welcomes. This is for a very good reason: if a compromise on a politically-sensitive issue such as network neutrality is reached independently of government action, the FCC can confidently refer to and even choose some aspects of it in their decisions without having to thread the needle entirely on their own. In the latter case any decision is sure to be attacked from all sides -- industry, the public and politicians on all sides of the issue -- and it will get certainly get dragged into federal court. This will delay a resolution, create enemies and imperil jobs within the FCC upper echelons.

From a personal perspective I don't really like the Google-Verizon proposal since I do not believe it is the right balance between consumer choice and industry's right to make a fair profit. It would not even be worth considering if there were more competition since competition is a superior path to ensure that incumbents' business practices would change, since they would have to in response to other companies' attempts to attract away their dissatisfied customers. As a non-American my opinion is of low worth. However I know that what happens in the US will create pressures in Canada to move in the same direction, therefore I can't help but be interested.

Although it is understandable that my opinion does not count, some Americans are wondering the same about their own views. There is a general fear (by those who are paying attention) that politicians are in cahoots and will happily screw the public -- whose diverse and largely uninformed views are unlikely to sway future elections -- in favour of their friends and election fund contributors among the carriers. (Notice how I switched the focus from the FCC to the politicians, which I did deliberately since the FCC has to be sensitive to the positions of their political masters who can have very different ideas about policy direction.)

There is another important reason why the FCC will listen to Google and Verizon. If their proposal is seen as a compromise whereby two major competitive forces both see it as a way to grow and be profitable, that is good for overall economic growth, global competitiveness and employment. Much of the public is paying no attention to the issue of network neutrality or understands it poorly, but if a policy can be seen as able to create jobs and increase public wealth, the FCC may see it as a convenient pass out of the controversy. With broad support from across industry and the political class, the FCC can weather criticism from other, contrary voices.

In conclusion, there will continue to be much heated debate about what is right and what is wrong, and what is or is not evil, all of which may accomplish very little of enduring significance. I would not blame the FCC if they are ultimately persuaded by the compromise position. It would be better if they were to encourage more competition, but unfortunately I see little prospect of this happening in the current political climate, partly due to the lessons learned from the pro-competition Telecom Act of 1996 where the end result was far from what was envisioned, and will dissuade the government from again enacting rules that seek to favour new entrants.

Without increased competition or a proactive government policy, compromise on network neutrality may be the best outcome.

Solving Windows Problems

This has been a busy week so I've let the blog slide a bit. Consider this a filler until I can find some time to write something a bit weightier. If nothing else, it proves that my sense of humour goes off the rails when I'm under pressure.

1.My Windows Vista PC keeps telling me that it has "found solutions" for my computer. Yet it never seems to find the two most obvious solutions: Mac and Linux. I'm beginning to think that Microsoft's advice may be influenced by their self interest.

2. With all the talk of Trojan exploits on Android mobile devices, the first thing that I thought when I read the headline for this article about a newly-discovered Trojan asteroid is that aliens have hacked our solar system. Perhaps we ought to prepare for the sun to rise in the west later this week.

Enough of that...back to work.

Whistleblower Bidding War

Crime can pay, but not always. It now seems that Americans in the financial industry, and who happen to be free of ethics, now have a new income opportunity: turning into whistle-blowers. On the surface it looks very simple in that all they need to do, if they participate in or become aware of illegal shenanigans in their firms, is tell the SEC and be richly rewarded.

The Securities and Exchange Commission is expecting a sharp increase in tip-offs from senior employees and third parties prompted by potential seven-figure bounties.

In practice I'm sure it won't actually be that simple, so we should wait until it actually occurs. Regardless, that isn't the part of this story that most interest me. What I see happening will be, in essence, a bidding war. On the one hand you have the SEC, the government's securities regulator, promising cash for information that will lead to arrests and fines against the whistle-blower's employer (at least that's the theory). On the other hand you have the immensely rich investment banking firm, the prospective whistle-blower's employer, waving a blank bonus cheque as an enticement to remain loyal to the company and do as they're told. What is a person in the know to do?

The bidding war for the employee's silence or squawking isn't actually quite fair since the SEC's rewards are going to be fairly predictable, and in particular there are going to be limits to the possible payouts. The bank knows that limit and they are well able to outbid the government. They will have to choose between avarice and "doing the right thing". Worse, word will get around so if they want to stay in the industry the whistle-blower had better be confident that the government award will support them for the rest of their working lives. They'll want to get the amount down in writing before agreeing to anything since governments everywhere can be quite negligent with actually paying their bills to those with even the slightest taint of guilt once they've gotten what they want. Investment banks pay their bonuses on time and to excess. Theirs are promises, if you will, that you can take to the bank.

Ethical or not, on balance I would advise potential whistle-blowers to wait for the proverbial s*** to get very close to the fan before running to the SEC and opening up. They had better run fast or hope that none of their co-workers got the same idea before them since there is unlikely to be any leftovers for those second or third in line, yet they will still be compelled to testify once they've stepped forward.

Of course for the truly unethical you can just make stuff up and hope for the best, especially those that are not in line for fat bonuses and see little future for themselves in the industry.

“Our only concern is if this were to encourage malicious whistleblowing – people making stuff up to cause trouble,” said the Association for Financial Markets in Europe.

It may very well turn out in this case that getting paid for unethical acts, real or imagined, is the better way to go. By upping the ante, all the SEC will have accomplished is to increase the bonuses paid to middle and lower-tier bank employees.

Perils of Protecting Privacy While Browsing

The software and services we all use every day, whether stand-alone or over the internet, are incredibly intricate and complex. It is one of those truths of software engineering that defects (or bugs if you prefer) grow in number faster, not in proportion, to the number of lines of software code. Windows often take the brunt of the bad public relations when things go wrong with our computers, probably because (for most people) it's right in front of them when trouble occurs. Yet the problems are to be found everywhere. No software vendor or open-source project is immune to exploits. Even when trouble is not due to a defect but some obscure though intended function, it is perceived by users as a defect.

Browsers are a case in point. Due to their complexity, interconnectedness with all sorts of local software, web sites and network services, and their rapid evolution in the face of competition and changing standards, they are frequently the vectors of malicious attacks. By attack I mean more than viruses and other malware: anything that flies under the radar to track, mislead or pry into my activities, online or offline, is an attack against my privacy. This includes cookies, browser history, and even remote tracking based on IP address.

It was therefore of no small interest to me to read about the latest exploits against the private browsing feature that most browsers now support. I can't say that I'm surprised to hear this news. The so-called sandbox that private browsing features create must by their nature be quite complex in how they must pick and choose communications paths to connect with or block among the multitude that all modern browsers contains. Recall what I said above about defects and complexity and you can see why I am not surprised.

For a long time now I have followed my own path to security and privacy, choosing to use many browsers. Each is set up and used to accomplish a specific function. My primary browser is Firefox, and I tend to use it to visit web sites I generally trust. Yet I use an assortment of plug-ins to protect my privacy, including an ad blocker, a cookie manager and a Shockwave Flash cookie manager. (You know about Flash cookies, don't you?) I use a completely different browser to visit untrusted and unknown web sites the first time, or even trusted web sites if I want to disrupt how they track my activities. Being human I do make the occasional bad decision when I'm in a hurry, and I have paid the price.

My reason for going this route -- although I have experimented with private browsing features -- is that I put a premium on privacy and security (that's one reason why this blog is anonymous). I expect private browsing to be a fragile and delicate thing due to its complexity. I therefore choose to address the problem with a sledgehammer rather than a scalpel; that is, brute force over finesse. On the second browser I have Javascript disabled by default and at the end of every session all private data is deleted. I deal with Flash cookies for all browsers via the Firefox plug-in BetterPrivacy. When I use that browser as my own little sandbox I do not impede cookies or other trackers. It isn't necessary, nor is private browsing, since it all gets flushed when I exit.

Countering this zealous slash-and-burn approach is the question of whether privacy itself is passing into history as we pass into a future of no privacy and complete transparency. Google CEO Eric Schmidt seems to lean in this direction, but then his company has a vested interest in following you around. Others without these commercial interests have also thought about the issue and come to the same conclusion. Some like author David Brin go so far as to argue that this is a good thing so get used to it and turn it to your advantage.

I am not ready to get used to it and perhaps I never will. To me privacy and anonymity occupy an important part in my life so I take steps to make it happen. Browsing privacy is just one piece of the puzzle. I will continue on this path even as it gets more treacherous as technology moves forward. There are interesting times ahead of us as privacy rights get increasingly mangled and redefined.

RIM's Hold on the Enterprise Mobile Phone Market

There is an enormous amount of angst among some Canadians regarding the future prospects of RIM. It seems that since the demise of Nortel they have been burdened with the title of Great Canadian Technology Hope. The worry goes further of course, since due to their size they have a large investor base and there are legitimate concerns with its ability to compete against technology darlings Apple and Google with their iPhone and Android mobile phones and eco-systems.

RIM does have a loyal market for Blackberry, and that market is growing. It's their market share that is at risk. Blackberry, iPhone and Android are each growing their market as they jockey for appeal to the disparate segments of the smart phone market. Blackberry primarily appeals to the enterprise market, and its attempts to become interesting to consumers have not always gone well.

But kids don’t want Blackberries. They want cheap phones that run instant messaging, SMS, and email. Need a keyboard? Get a MyTouch Slide. Want a big screen? Maybe an EVO 4G.

Perhaps the Torch and OS6 will get them there, or maybe not, but they will press on regardless. Similarly, Apple strives to reach out to enterprise market from the consumer market where they currently dominate so completely. They, too, have their challenges. Then there is Android which has a more diffuse base, though slanted more toward consumers; Google appears to be leaving it to the device manufacturers to decide which markets they want to address while they focus more on total numbers rather than who those users are.

Something I do feel confident predicting is that, ultimately, the smart phone market will be the same as the mobile device market, which is the expected end result of decreasing component prices and lower cost of fewer standard platforms; every phone will be a smart phone, and many mobile devices (tablets, netbooks, etc.) will utilize the same platforms. There is room in that future market for more than one platform, and indeed more than two, but perhaps not more than three (apart from niches). But for the present let's look at what it means that different platform appeal to different market segments.

Business users love their Blackberrys and they love their Blackberry email. I am not a Blackberry user so I always find it both fascinating and amusing to watch people in meetings constantly glancing at their devices. When they do pick up a message and respond, they do it with the speed and finesse of long experience. It is easy to see why even now when the platform is quite old as technologies go that Blackberry received the moniker Crackberry.

Another funny thing about dedicated Blackberry users, in particular those in the technology circles in which I operate, they love playing around with iPhones and Android phones. The touch screens, the colours, the apps, well most everything about them appeals to the engineer turned executive. But once they're done playing with a colleague's phone they feel a vibration or hear a quiet ping and they drop it, now completely forgotten, to check the latest incoming message on their Blackberry. It's almost uncanny how often I've witnessed this occur. These are not people that will easily abandon RIM products and services. To them, the newer generation smart phones are eye candy and nothing more.

Another aspect to this Blackberry attachment in the enterprise is its hold on the companies whose employees need email on the go, and its bizarre impact on their employees. Many times I have sat down to lunch or a coffee to discuss business with someone who will first pull their phones out and place on the table. This is done not only to watch for messages but because, light as they are, it is still a relief to detach the weight from their clothing when they can. However it's what often happens next that I find so interesting. After the Blackberry is on the table they pull out another phone and similarly place it on the table and, if you can believe, some will even pull out a third phone and do the same.

When this first starting happening I would stare at the person opposite with the unspoken question hanging in the air between us. They would then feel compelled to explain. The Blackberry is used only for email, not phone calls, since that is the mobile device approved by their IT department and integrated with the company's email system. While it can be used as a phone, and may indeed have a contract and number assigned, the person does not use it that way. Instead they have another phone for business calls. These are frequently sales people with a large network of contacts who feel a need to keep the same phone and number when they more among employers. To them it is vital that they keep their phone number sacrosanct so that everyone can always find them, and they often can't do this with the corporate Blackberry or, they worry, they may not be able to get their number back when they next change jobs.

The third phone, when there is one, is something like an iPhone which they use to play with and perhaps to stay in contact with friends and family. This isn't strictly necessary since smart phones can each do so much but they do it anyway. Perhaps it's the keyboard on the business phone (sometimes their first two phones are both Blackberrys) or perhaps it's the the social networking, apps and music on the personal phone that drives them to act this way. If you've ever watched a Blackberry user struggle to do something on their phones other than email you'll know why (at least pre-Torch and OS6) users do currently need another device for entertainment and general internet use. While I don't have a Blackberry I do carry two phone: a pretty basic feature phone that is just a phone, and an Android phone for internet, email, apps and much more.

The thing is that as smart phones become the norm and they all more-or-less support the same functionality there will be a change among enterprise users as they make use of the hardware varieties and new cloud phone services like Google Voice to eliminate the current ridiculous situation by reducing back down to one phone. That phone will have to support multiple numbers and possibly phone clients (including VoIP), and sport a keyboard for those unwilling to undertake the learning curve to become proficient on a soft keyboard. The big question is, which phone will that be?

Ponder that while RIM tries once more to make a splash with consumers. Will enterprise users drop their second and third phones if they can? Will enterprise IT departments loosen their choke hold on employees' phone and service choices, and in particular will they ever become truly comfortable with iPhone or Android devices? Until these questions are suitably resolved, many business people will continue to own more than one phone and dominance in the enterprise market will continue to be held by RIM.

Blackberry and RIM are a long, long way from becoming irrelevant. I will also say that the current concerns of some governments over Blackberry email security will not only not harm RIM but will help them; it's great (and free) advertising that their encryption and security perimeter are so strong that even governments can't break it. Users and their companies get the warm fuzzies just thinking about that fact.

BP Sells the Future to Fund Reparations

Back in June I suggested that BP could fund the (likely low ball) estimate of $20B to clean up its mess in the Gulf of Mexico and make reparations to those affected without unduly harming its future prospects. It appears that as the potential cost to BP will likely run higher, the ability to finance this out of dividend suspension, borrowing and operating profits -- which I addressed in my earlier post -- will prove insufficient.

BP has been selling assets, supposedly non-strategic assets, to raise additional funds. While they do their best to downplay the impact of those asset sales, that they are sacrificing future revenue potential, is unconvincing. The very fact that they've raised by billions that they have demonstrates the risk-adjusted future value of those petroleum-producing fields. Further, the sales that are being announced now must have been in negotiation for many weeks, perhaps going as far back as May. While the purchasers of those assets already have a stake or an very likely had an expressed interest in them, the negotiations and legalities had to take many weeks. We can conclude from this that BP believed early on that the costs of cleanup and reparations would be well above early estimates. They knew that they had to sacrifice at least part of the company's future prospects.

“I am delighted with the price we achieved for these assets,” BP Chief Executive Officer Tony Hayward, who steps down on Oct. 1, said in the statement. “It now makes sense for these assets to go to owners more willing than BP to invest in their future development.”

More likely what Hayward means is more able, not "more willing than BP to invest in their future development.” Regardless, even so this seems enough, for now, to provide some relief to shareholders, as evidenced in the strong reversal of the stock's free fall.

Probably BP's only true defense at this point against unlimited liability that would bankrupt the company is political: the US government is bound to take steps at some point to limit BP's liability, or make it easier for BP to spread the liability to others such as Transocean and Anadarko, so that British pension funds and shareholders are protected, which will be the cost of remaining on good terms with a key ally. That cost may ultimately fall of those most affected, the residents of the Gulf coast whose livelihoods have been impacted.